October 28, 2010
N. Canal Street, Suite 1101 Chicago, IL 60606
IACI/InterActiveCorp. / (IACI – NASDAQ) / $27.74Note: More details to come; changes are highlighted. Except where highlighted, no other section of this report has been updated.
Reason for Report: Flash Update: 3Q10 Earnings Update
Prev. Ed.: August 11, 2010; 2Q10 Earnings Update
Flash News Update [Earnings Update to Follow]
On October 28, 2010, IACI reported its 3Q10 financial results. The Company reported total revenue of $421.7million, versus net sales of $336.6 million in 3Q09.
Net Income as reported by the Company was $34.8 million in 3Q10versus $46.3 million in 3Q09.
Earnings per share (EPS) were $0.32 versus $0.34 in 3Q09.
MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON IACI.
Portfolio Manager Executive Summary[Note: only highlighted material has been changed]
IAC/InterActiveCorp (IACI − NASDAQ) operates as an interactive commerce company worldwide. It operates a portfolio of brands in retailing, transactions, media, and advertising, along with membership and subscription sectors.
Of the eighteen firms covering the stock, nine firmsconferred positive ratings, seven provided neutral ratings, and one firm assigned a negative rating. One firm did not rate the stock. Price targets range from $20.00 to $31.00. The firms with the highest target price provided apositiveoutlook and the firm with the lowest target price did not rate the stock. Various valuation methods used by the firms to arrive at their respective target prices include sum-of-the-parts analysis, DCF valuation, a P/E multiple or EV/EBITDA multiple.
The outlook of the firms toward IACI is dealt with in the following paragraphs:
Positive or equivalent (52.9% or 9/18 firms): The target prices range from $28.00 to $31.00. The bullish firms believe businesses at IACI are supported by solid net cash on the balance sheet as well as ownership of a strategic search asset. Renewed focus on online businesses with advertising and subscription-based revenue models, new site redesigns at Ask and CitySearch, and a strong net cash position are positive catalysts for IACI.
These firms believe the economy is stabilizing, and as a result it is unlikely that acquisition prices will decline materially from current levels. Given the company's stated disciplined approach to acquisitions, the likelihood is reduced.Moreover, IACI will allocate significant capital to strategic acquisitions in the coming quarters; and hence, if the profitability increases, the company will repatriate cash to shareholders through share repurchases.
Neutral or equivalent (41.2% or 7/18 firms): Target prices are in the range of $24.00 to $28.00 per share. These firms believe thatIACI has a number of valuable online properties that are well diversified across online advertising, eCommerce, and subscription revenue. In particular, these firms are positive on the company's leadership positions in online ticketing, personals, and timeshare exchanges, as well as continued innovation at Ask.com.
The firms believe that while IACI shares are appealing from a valuation perspective, the shares remain range bound as the company looks to refine its digital strategy, including a possible sale of ask.com, and expand into content strategies. The firms’ concern is tied to IACI lacking a leadership position in many of the markets,where its products serve, except dating.
These firms remain cautious as IACI witnessed some signs of slowing consumer spending. Significant competition in the search market and online dating space from new and existing competitors and macro headwinds will likely have a negative effect on all segments, but particularly in ServiceMagic and Emerging Businesses.
Negative or equivalent (5.9% or 1/18 firms): One firm provided a target price of $25.00. The firm assigns a negative rating because 1) Ask, ServiceMagic, and emerging businesses are likely to be pressured by the economy; and 2) an acquisition of a large sizewould likely be perceived negatively by the Street that wants access to the cash.
Apart from the above factors, a few other things should be taken into consideration before coming to an investment decision:
(1)IAC/InterActiveCorp operates worldwide. Among its competitors, the direct one is ValueVision Media Inc. (VVTV). Other competitors are Yahoo!, AOL(AOL Inc.), and Google.
(2)IAC/InterActiveCorp is heavily dependent on advertising to drive traffic to its various Web properties. While the company advertises across a variety of traditional media, it also relies on online portals to drive traffic to its sites. Hence, the company may be subject to price inflation risk in the market for paid search.
(3)The company’s lending and real estate businesses could be negatively impacted by interest rate fluctuations and the growing inventory of homes available for sale. When interest rates increase, mortgage refinancing transactions tend to slow down, which could adversely impact the business.
(4) Ask and IAC's other search-related properties contribute roughly 45% of revenue. While the search space has always been competitive, the landscape continues to shift (e.g., the recently announced Microsoft/Yahoo! search transaction). IAC/InterActiveCorp may lose market share in the search market due to these new competitive dynamics.
August 11, 2010
Recent Events [Note: only highlighted material has been changed]
On July 28, 2010, IACI announced its 2Q10 earnings results.
- In 2Q10, total revenue was $402.9 millionversus $340.0 million in 2Q09.
- In 2Q10, adjusted net income was $27.5 millionversus adjusted net income of $3.3 million in 2Q09.
- In 2Q10, adjusted EPS was $0.24versus $0.02 in 2Q09.
Overview[Note: only highlighted material has been changed]
Brokerage firms identified the following factors as critical to evaluating the investment merits of IACI:
Key Positive Arguments / Key Negative ArgumentsCompelling Fundamentals: IAC/InterActiveCorp.is uniquely positioned to grow regardless of any change in the macroeconomic environment, a fact that distinguishes it from most of its peers.
Competitive Position: The company owns businesses that directly benefit from the transaction of commerce and advertising on the Internet.
Internal Factors: IAC/InterActiveCorp. is one of the few Internet stocks that fit well into a reasonable price (GARP)-driven portfolio, with potential to exist in many of its operating segments to generate faster operating income before amortization (OIBA) growth than revenue growth over the next few years. / Competitive Threats: IAC/InterActiveCorp. faces growing competition in each of its key operational markets, especially in its core travel services business. It is heavily dependent on advertising to drive traffic to its various Web properties, and may be exposed to inflation risk in paid search. The domestic merchant hotel business continues to face stiff competition.
Pricing: The company’s primary travel business areas are likely to continue to encounter an increasingly difficult pricing environment.
External Factors: The bulk of IACI’s operating revenue is derived from consumer spending, which is now subject to macroeconomic uncertainties, given the US housing downturn, the rising interest rates and increasing inflation, and the aging economic recovery.
Product Risk:IAC/InterActiveCorp.’s products could become obsolete due to technology or changes in government.
InterActiveCorp (NASDAQ − IACI) was founded in 1986 and is headquartered in New York. IACI/InterActiveCorp operates as an Internet company with consumer businesses worldwide. The company operates through four segments: Search– the segment includes Ask.com, Fun Web Products, Dictionary.com, and Citysearch, Match– the segment includes Match.com and PeopleMedia, ServiceMagic– the segment represents the operations of ServiceMagic and ServiceMagic International, Media & Other– the segment includes Shoebuy, Pronto.com, InstantAction.com, College Humor, Vimeo, Life123.com, The Daily Beast, Electus, and Evite.
IAC/InterActiveCorp. provides products and services through a portfolio of brands in transactions; media and advertising; and interactive sectors. The company also offers information search and related services through a network of local city guide websites and a social planning website; and offers downloadable consumer applications with Web search functionalities and display, search, and contextual advertising services through Ask.com. In addition, it offers relevant entertainment and local and social media content to mobile Web visitors and wireless subscribers adopting SMS, applications, and location-based services. InstantAction is a website for gamers, combining popular videogame consoles with the best offerings on the Internet. InstantAction was created by GarageGames, an operating business of IACI. Launched in 1998, Evite is headquartered in Los Angeles and is a wholly-owned, operating business of IACI. With almost 20 million registered users, Evite is the leading online invitation and social event planning service on the Web. Match.com pioneered online personals when it launched on the Web in 1995 and is an operating business of IACI
Additional information can be obtained from the company’s website IAC/InterActiveCorp.’s fiscal year ends on December 31.
During 4Q09, IACI renamed and realigned certain segments. IACI's Media & Advertising segment was renamed "Search," and IAC's Emerging Business segment was renamed "Media & Other."
August 11, 2010
Revenue[Note: only highlighted material has been changed]
As per the company, total revenue in 2Q10 was $402.9 million, up 18.0% from $340.0 million in 2Q09.
Segment Details as per the Zacks Digest Model
- Search: Revenue increased 18.0% to $197.2 million versus $166.6 million in 2Q09.The result reflects an increase in proprietary queries and the continued growth in distributed toolbar.Increased traffic acquisition efforts and enhancements associated with proprietary toolbars led to an increase in proprietary queries. Higher distributed toolbars revenue was primarily a result of increased revenue from existing partners and addition of new partners, partially offset by a decline in revenue per query associated with changes in traffic mix with distributed toolbars. Citysearch’s revenue declined, primarily reflecting lower proprietary advertising and traffic, partially offset by an increase in advertising and traffic from network partners. CityGrid Media revenue increased primarily due to increased advertising from new resellers.
- Match: Revenue reported a growth of 10.0% to $97.0 million from $88.3 million in 2Q09, primarily attributable to strength in domestic business, including contributions from People Media and Singlesnet. However, International revenue declined due to the sale of Match Europe to Meetic on June 5, 2009, partially offset by the positive impact of the newly formed venture with Meetic in Latin America. Excluding the results of Match Europe, PeopleMedia and Singlesnet acquisition, revenue grew 4% y-o-y during the quarter driven by an8% y-o-y increase in U.S. subscribers. The increase in subscriber was mostly attributable to growth in domestic businesses, partially offset by decline in international businesses.
One firm (J.P. Morgan) expects Match to continue to benefit from the Yahoo! deal as the transition period of Match is extended from mid-May to mid-July.
- ServiceMagic: Revenue increased 17.0% y-o-yto $49.5 million in 2Q10 from $42.4 million in 2Q09. The segment revenue benefited from 21% growth in domestic service requests and 25.0% growth in accepted service request, driven primarily by increased marketing efforts, and a 30% growth in domestic service providers.
- Media & Other: Revenue was $59.6 million versus $44.5 million in 2Q09, registering a growth of 34.0%. The revenue increase reflects growth at Pronto, driven by continued improvements in customer acquisition and monetization, as well as growth at Gifts.com and CollegeHumor.
Outlook
One firm (Stifel Nicolaus) increased revenue estimates for FY10 and FY11 to reflect 2Q10 results and expectation of continued growth.
One firm (Goldman) believes that the integration of Yahoo! Personals subscribers strengthens Match’s
leadership position in dating.Moreover, it believes that having a larger platform should attract more subscribers and improve scale.
One firm (BofA Merrill Lynch) raised revenue estimate for FY10 based on higher Search, Match, and Media & Other growth rates and slightly higher margin assumptions.
Margins[Note: only highlighted material has been changed]
Segment Details
As per the company, OIBA (operating income before amortization)increased 93.0% to $49.8 million in 2Q10 versus $25.7 million in 2Q09. Following are the segment results:
- Search: OIBA was $32.0 million in 2Q10 versus $15.9 million in 2Q09, an increase of 102.0%. The increase was due to higher revenue and lower marketing costs and compensation related expenses, partially offset by higher traffic acquisition costs as a percentage of revenue.
- Match: OIBA increased 2.0% to $29.1 million versus $28.5 million in 2Q09,reflecting the net impact of Match Europe, PeopleMedia and Singlesnet acquisition.
- ServiceMagic: OIBA decreased9.0% y-o-y to $6.1 million in 2Q10. The y-o-y decrease in OIBA was due tohigher marketing costs, higher operating expenses, primarily associated with the expansion of the sales force. Profits benefited from the reversal of a $0.9 million provision for contingent consideration related to the 2009 acquisition of Market Hardware.
- Media & Other: OIBA was ($3.2) million versus ($9.2) million in 2Q09.
Operating profit in 2Q10 was $23.7 million versus$3.9 million in 2Q09in1Q10.
Outlook
One firm (Canaccord) increased OIBA estimates for FY10 and FY11 to reflect improving cost controls and lower marketing spend.
One firm (BofA Merrill Lynch) raised OIBA estimate for FY10 based on higher Search, Match, and Media & Other growth rates and slightly higher margin assumptions.
Earnings per Share[Note: only highlighted material has been changed]
In 2Q10, adjusted net income for the quarter came in at $27.5 million or $0.24 per share versus $3.3 million or $0.02 per share in the prior period last year. GAAP net income came in at $13.6 million or $0.12 per share versus $40.8 million or $0.28 per share. Net income and GAAP EPS in the current year were favorably impacted by a reduction in the income tax provision by $5.3 million and $0.05, respectively, due to foreign tax credits.
Outlook
One firm (J.P. Morgan) increased EPS estimate for FY10 and FY11 to reflect strong topline and OIBA performance.
One firm (Deutsche Bank) increasedits 3Q10 EPS estimates to reflect 2Q10 results.
One firm (BofA Merrill Lynch) raised EPS estimate for FY10 based on higher Search, Match, and Media & Other growth rates and slightly higher margin assumptions.
Target Price/Valuation[Note: only highlighted material has been changed]
Of the eighteenfirms covering the stock, nine firms conferredpositive ratings, seven assigned neutral ratings, and one provided a negative rating on the stock. One firm did not rate the stock. The Zacks Digest average price target is $27.35 ($2.54 from the previous report; 9.8% upside from the current price). Price targets range from $20.00 (19.7% downside from the current price) (Morningstar Equity Research) to $31.00 (24.4% upside from the current price) (Goldman). The firm (Morningstar Equity Research) with the lowest target price did not provide any valuation metric while the firm (Goldman) with the highest target price based its valuation on DCF, SOP, and P/E-to-normalized growth analyses.Various valuation methods used by other firms to arrive at their respective target prices include sum-of-the-parts analysis, DCF valuation, a P/E multiple or EV/EBITDA multiple.
Following the earnings release, 9 firms raised their target prices.
Ratings DistributionPositive / 52.9%
Neutral / 41.2%
Negative / 5.9%
Avg. Target Price / $27.35
Median Target price / $28.00
Digest High / $31.00
Digest Low / $20.00
Analysts with Target Price/Total / 17/18
Risks to the target price include: (1) a general slowdown in Internet advertising, (2) a general slowdown in e-commerce, (3) potential partner losses, (4) loss of key management, and (5) competitive pressure from industry incumbents.
Details regarding management effectiveness are as follows:
Metric (TTM) / Company / Industry / S&P 500Return on Assets(ROA) / -21.9% / 8.1% / 5.2%
Return on Investments(ROI) / -23.8% / 10.2% / 6.6%
Return on Equity(ROE) / -27.5% / 11.4% / 14.6%
Capital Structure/Solvency/Cash Flow/Governance/Other[Note: only highlighted material has been changed]
Balance Sheet
As of June 30, 2010,IACI had approximately $915.2million in cash and cash equivalents compared with $1,608.4million at the end of June 30, 2009. Accounts receivablewere $104.9 million versus $90.2 million at the end of June 30, 2009. Total current assets were $1,725.1 million versus $2,151.7 million at the end of June 30, 2009.
Accounts payablewere $42.9 million versus $49.6 million at the end of June 30, 2009. Long-term debt was $95.8 million, unchanged from 2Q09 levels. Total shareholders’ equity was $2,746.5million versus $4,402.9 million at the end of June 30, 2009.
Cash Flow
In 2Q10, net cash (used in) provided by operating activitiesattributable to continuing operations was ($2.9) millionversus $12.7 million in 2Q09. Net cash (used in) provided by investing activities was ($89.8) million versus ($170.5) million in 2Q09. In 1Q10,net cash used in financing activities was ($367.9) million versus ($74.1) million in 2Q09.
Share Repurchase
During 2Q10, IACI repurchased 6.0 million shares at an average price of $22.82 per share. As of June 30, 2010, IAC had 105.6 million common and class B common shares outstanding.
Product Launches and Updates
- Search:Dictionary.com reached 13 million mobile downloads; Mindspark launched 5 proprietary toolbars on a new scalable platform and acquired a majority stake in DailyBurn.com; active toolbars increased 51% yearoveryear to 88 million.
- Local: CityGrid Media (formerly Citysearch) added AT&T Interactive to its reseller network; Urbanspoon launched Urbanspoon RezBook; ServiceMagic grew its service provider network 30% yearoveryear to 77,000 professionals.
- Personals: Match.com became the exclusive online dating service on Yahoo!; subscribers grew 8% organically.
- Media: Electus and DumbDumb launched a digital partnership with Orbit Gum; CollegeHumor partnered with PepsiCo's SoBe to launch SoBe Studios; Vimeo announced its first-ever festival and awards; InstantAction debuted its online video game distribution service, which enables game publishers to embed video games anywhere on the Web.
August 12, 2010