IAC Inc. ($IAC)

Good afternoon, everyone. Thanks for joining. We're happy to have Chris Halpin, COO and CFO of IAC and Tim Quinn, CFO of People Inc. here for a fireside chat. I'll leave a little bit of time at the end for if people have questions. But to kick off, Chris, maybe -- and Tim, if you could talk about the recent corporate actions, the consolidation, the rebrand and the management transition, maybe a good place to start.

Yes, certainly, and thanks for having us, John. So we announced in late April headed into Q2 -- Q1 earnings, I should say, a corporate consolidation, which was really a continuation of what we've been doing to simplify IAC to distill down value in the portfolio and shrink what we perceive as a large discount in our share price. It continues what we've talked about previously of noncore asset divestitures. Most notably, we sold Care.com, which we talked about previously, but we closed that in the first quarter, raising about $300 million of cash. And we continue -- we have a game plan to continue to liquidate assets. And we've said we'd prioritize the capital allocation out of the $1 billion of cash now on our balance sheet and what we hope to build and also the cash flow that People Inc. generates, as Tim will talk about, we'll prioritize that to IAC stock, and we bought back 13% of the company over the last 5 quarters to MGM stock. We bought 1 million shares there last -- each of the last 2 quarters as well as to strategic M&A at People Inc. One of the key parts, and we had been scoping this out for a while, was as you get down to the core operating business, which is People Inc. plus the MGM shares, you don't need 2 levels of corporate. And it was a clear cost-saving opportunity. We talked a lot with investors of how we were rationalizing IAC corporate, but the big step would be really collapsing the 2. And then eliminating duplicative functions, retaining those activities such as Investor Relations, internal audit, SEC reporting and consolidation, et cetera, retain those that are in IAC corporate that don't exist at People Inc., but really eliminate the rest. And our -- we scoped it out. We worked with Neil Vogel, CEO at People Inc. and Tim Quinn, my partner as CFO, aligned it and then got Board approval and we announced it. It is not a rapid consolidation. It is really like 2 businesses merging through a merger. And we also want to be thoughtful about maintaining mission-critical services, software platforms, et cetera. But it will be -- all be done by February of '27 is our goal. We've talked about we expect to generate $40 million plus of OpEx cash savings relative to the corporate expense at IAC, which was running at about $85 million. We also expect to save $20 million to $25 million of stock-based comp on an ongoing basis. And that will -- the first clean quarter will be the second quarter of 2027. but we expect to fully see those -- that improvement in free cash flow dilution, et cetera, at that point. So every employee of corporate is either staying a small subset or leaving on a specific date. Our Chief Legal Officer, Kendall Handler and I are going to stay through Q2 earnings. And then the expectation is hand off to Neil and Tim. And we think it's going to produce a leaner, faster, more efficient IAC, which will also be rebranded People Incorporated to the benefit of shareholders. Anything you'd add?

No, I think that's well said. People Inc. today has about 3,600 employees. So we do have the infrastructure to absorb it. As Chris said, we're being really thoughtful about how we do that, and there are definitely some functions that we are picking up IR tax and other areas that we don't have the competency, but feel pretty confident that we can do this thoughtfully and seamlessly.

Okay. Great. Let's move to PeopleDigital revenue, the 3 line items. I just want to drill into each one to start. And so we'll start with advertising. That grew 1% year-over-year in 1Q. It's a little under 60% of total PeopleDigital revenue. Can you talk about the strengths and offsets in the quarter and how things may trend for the advertising line over the rest of the year?

Sure. So we had another solid quarter in Q1 at People Inc. I think it was a 10th consecutive or 11th consecutive quarter of growth, grew total digital revenue about 8%, as you said, John. Advertising grew 1%. There are 2 kind of countervailing trends that are underlying that 1% growth. On the one hand strong performance by our premium sales team selling capabilities, selling off platform, what we call off-platform advertising. I'd say the ad market is solid, not spectacular, but solid sector specific, but strong -- and that's counteracting the softness we're seeing from traffic to our owned and operated sites or traffic to I'll call it dot-coms today to distinguish. And so -- that has been a headwind for the last 1.5 years or so. It's something we've seen. It's something we underwrote in our financial models this year. but it's something that we're kind of contending with right now. And so the combination of those 2 things have advertising roughly flat or up a little bit in Q1.

Okay. And then performance marketing, grew mid-teens. It's about 1/4 of people Digital revenue. 25% of that was monetized via off-session views. Will that mix shift continue within Performance marketing? And how should we think about the key growth drivers for that segment.

Yes, it will continue, as you suggest, with performance marketing is basically specifically the largest pieces referring users, consumers to retailer sites using our guys, ratings and reviews and other techniques that we have. We think it's a valuable service to consumers. It is certainly a valuable service to the retailers themselves we drive over $1.5 billion at retail to the likes of Amazon, Walmart, Nordstrom, Wayfair and so forth. That business has the same -- some of the same drivers of the advertising business in the sense that 3 years ago, the predominance of that business was search-based referrals to our dot-coms. We've been able to diversify that business to a more distributed content model getting those same or similar call to actions to consumers around retail products to Apple News and Discover and e-mail and off-platform marketing and all those types of things. So that's what you're picking up in that. that is in the noncession-based revenue. It's been a really strong performer for us the performance marketing line. I think Q2 will continue to be strong. Back half of the comps get quite a bit harder, but we still continue to expect.

Okay. And then licensing had another great quarter, and that's about 15% of the mix. Could you talk about the key drivers and your partners there that's driving super strong growth?

Yes. As you say, licensing has been particularly strong for us. It had a really good quarter in Q1 -- the way to think about the licensing in a these sort of subsets to it. There's content licensing, which is the biggest and fastest growing. That's where we distribute our content across different platforms. Again, Apple News, Meta, Facebook, even Yahoo!, MSN, all those types of guys, I think we have an advantage there because we're continuing to make high-quality branded content that's resonating and the economics certainly support that, and the revenue supports that. Second line within licensing is our AI licensing our data licensing -- that's where you'll see the OpenAI deal or the growth this year is coming from the Meta deal, to a little lesser extent, a smaller Microsoft AI deal that we have there. So that's contributing. And then the third piece is sort of more standard product and brand licenses and the biggest of which in that category, revenue category is our Walmart BHG license, which is 1 of the largest kind of private label brands in Walmart and you can think about that as growing roughly in line with Walmart. So e-commerce strong in-store, not as strong, but kind of a flattish to modest growth piece business.

Okay. That's super helpful. And I know you touched on this, but let's maybe dig a little further into the traffic and monetization. So if you can just kind of talk about the flow of the traffic with the advent of AI and chatbots and people has pivoted to growing off-platform views amidst the Google search traffic declines with the introduction of AI overviews and AI mode.

Sure. I'll tell a quick story. Kristen, I and a bunch of other folks, Neil and others were in Las Vegas in Q4 of 2022 the week that Sam Hultman launched Jets BT. So we saw sort of like the version 1.0 as in before it was market. And I think like probably all of us the first time we saw we were like, this is a totally different paradigm, right? It's going to -- this is going to change sort of everything. We were literally looking behind the curtain to see -- and so even back then, we started to think like the business is going to change. It's going to have to evolve the way people are going to consume media research topics to all those types of things are going to be very different. And we started then to lean into our brands. We organized, first and foremost, 1 leader in charge of each brand. And basically, that leader had the mandate to publish content or create content for the magazine for the dot-com maybe the same, maybe different content for YouTube or TikTok or Instagram. What that allowed us to do is start to grow, create native content and grow audiences off platform, again, not within our owned and operated or within our dot-com. It's been, what, 3.5 years since then, it's been kind of slow to emerge and then fast quickly came upon us. And so we have, again, counter trends within our business. Our owned and operated .com traffic is in decline and has been for several quarters, we're down 16%, 17% in Q1. We expect that to maybe get little bit worse even in Q2. We have the other side of the house, the off-platform views, the off-platform audiences grew nearly 40% on a kind of 2-year CAGR in Q1. What we've gotten really good at is monetizing those off-platform audiences through any number of means. We have events. We have sponsorships. We're creating original programming -- and so to frame this out for everyone now with that context, 60% of our revenue comes from a visit is derived from a visit to 1 of our dot-coms to 1 of our branded sites that grew or shrank rather 1%. It was basically flat in Q1. 40% of our revenue grew 24% in Q1, and that's -- revenue that was derived from all other sources, anything that is not traffic to our dot com. So we really think that, that's a good mental model for the future of the business. We need to hold serve on the dot-coms sort of accept and acknowledge the reality of the current environment, continue to grow and lean into the brand-led experiences that are off platform.

Makes sense. And I mean, to that -- to that point, will there be a point where the traffic from Google Search stabilizes? Is that -- do we.

That's the debate we always have. So asymptotic In tonic to something -- the way I would think about it is there are brands that are out the other side of it already. They have literally no exposure, de minimis exposure, less than $1 million, say, of exposure to search-based traffic. In style is a fast-growing site in our portfolio that has virtually no search exposure. By contrast, there are certainly brands that do have some exposure, and we'll have to go through sort of the same transformation that InStyle has done. And I think those are the ones that you'll see some traffic headwinds on. And the kind of the most obvious example I can give right now is our recipe traffic. I think we probably get collectively recipe-based audiences or traffic than anybody in media. And while that is 50% penetrated by our estimates with AI overviews, there's still ways to go there. Now we think that -- that's not the ideal use case for AI, but Google and others may have a different view. And so we'll see. So it's really a portfolio approach. We certainly do think it levels off. We think we're closer to the other side of this than the beginning. But we're not totally out of the other side yet either. Yes. And I think keep me honest, but there's a cohort in the middle of brands where they are now at pretty much max potential 95% AI overview frequency. So they have gone through that. And whereas in style may be getting 0 search partly because of the changing behaviors of their users, those that there are those that have gotten and they are still getting some search. So that's the... It's sort of these 3 groups. And the debate is that third group I'm saying, -- is there some baseline of search that top brands will get even when you pound the user with AI mode, we're not so aggressive as to assume that will happen, but that is -- it is very logical to assume it's asymptotic to something, but we're not going to make any predictions.

On the -- just going back to the -- sticking with the traffic and the views, engagement. On the off traffic views, -- just remind us like the key platforms, number one, but -- and I think you mentioned them, but just -- and then are there some platforms that you don't have relationships like scales that you don't have relationships with that.

I mean we try to be anywhere where a consumer wants to consume content, right? And we tried to modify our content formats to those platforms. The biggest of which today are Apple News, Meta Instagram, TikTok, for sure, YouTube. Each 1 has 0 monetization ecosystem none of which we control, unfortunately, like we did our dotcoms, but we have figured out ways and each 1 is different. And so we have figured out ways, I think, very clever ways and successful for brands, ways to monetize those audiences off platform. So yes, that's the play. I don't think there's specifically places that we aren't at or aren't in or having a lot of success today. And as new entrants emerge were pretty quick to get involved. And I would say, Tim has talked about it, but I forget if it's the parable or ESPs fable of the and and the grasshopper about who gets ready for winter and who doesn't how they perform, but it is really true and that they massively pivoted their strategy in the '23 period. We were talking about it, but investments in video investments in developing content for these new platforms. And the reps to customize the content by platform for optimal performance. And this isn't like old SEO. This is actually -- is it video? How is it structured? -- sentence length, all these things and then to sell against it, as Tim said. So it is I don't know if it's too late, it's too strong, but it's probably too late for so many of the competition to make this pivot and be able to do it, and it is reflected in our numbers and Tim's performance relative to many other content producers and engagement dependent web platforms.

That makes sense. So maybe sticking with the AI kind of theme -- but from the content creation perspective, just how is people leveraging AI across the major brands.

Yes. I think I mentioned earlier, we're making more content today than we ever have before. It's all human made. We'll always -- always has been, will always be human made -- at a lower cost per unit than we've ever had before. That is definitely accruing to our benefit. We talked about the licensing line but across the entire business. We are aggressively using and have for now a year plus AI tools and got more efficient using AI tools to help us write that content. So anything from topic selection, brief writing workflows. Now again, there's still a human on the other side, writing something that is specifically kind of curated and picked by them. But that's helped a lot. And we have there's that ability at scale. I think there are certainly other applications, many applications, obviously, for AI within the business. The next largest of which is ad targeting. We have always commanded a premium in the marketplace for our ads. Our ads perform. We can use that intelligence to make the targeting even better, both on platform and off platform. I think that the buy side is getting more sophisticated in finding the value in our inventory and paying more for it. And so again, these are advantages that are, I think, pretty unique to us. and certainly unlocked with AI. So we debate honestly, internally at this point, is there more risk to AI than downside on the traffic side. It's like some days, it feels like, yes, there's more upside than some days, maybe a little less so, but there's certainly a much more balanced view of sort of what AI brings to our company today than 2 years ago.

Okay. That's great. Just maybe pivoting to margins. The People Digital, the EBITDA in 1Q was better than expected. I think it was like 45% incremental margins, which is higher than we had. So just curiously call out on key drivers there and how to think about 2Q and the rest of the year for people?

Yes. I mean we've always been and continue to be hyper focused on being smart and prudent with our capital says ruthless, in some respects, yes, ruthless with what we continue to do versus what we stop doing and reinvest in other areas. We've had -- we had particular strength in Q1, as you noted, 200 basis points of improvement in margin -- as a result of the strength we're seeing primarily in licensing and these off-platform advertising products, both of which -- I mean licensing has exceptionally strong margins. The input is the content creation we just talked about, which we're doing very efficiently. And the off-platform advertising also has extremely strong margins. So those 2 things are that collection of lots of little things, but we're putting buckets we're able to offset the headwinds from traffic, which has a margin deterioration -- deteriorating margin impact. So we feel really good about the discipline we brought to the table, the mix of businesses we have, the brand environments that support a premium. We think Q2 should continue to be solid in terms of margins. And we think the year will at least comparable to last year, if not a little bit of margin expansion. So we're on the right track.

Maybe zooming out to total company margins. I think the guide for of total IC $210 million to $260 million EBITDA this year. How should we think about free cash flow conversion? And looking into '27, I know Chris mentioned the savings. -- that will be worked in as the year goes on next year. But yes, just free cash flow conversion with the nice kind of EBITDA generation.

Yes, you want to talk about people.

People Inc. has very, very strong free cash flow characteristics. We would expect at least 50% of our EBITDA to drop through to free cash flow, if not more -- we're delevering pretty quickly at this point. And so we've said kind of publicly at least $150 million of that guide of the broader IAC guide is people Inc. and or that would in fact, we had a very strong cash generative quarter in Q1. Yes. And then overall, IAC, I mean, clearly, people link is the free cash flow machine. We guided corporate to about 96 to 105, I think, which is doesn't reflect the savings. It actually reflects the onetime cost. We'll have about $15 million of onetime costs across the year associated with severance, some retention bonuses, related costs, et cetera. And many of the exits are back-end weighted in the year. So you don't get the full impact that will pull down a little bit. One other note, you talked about AI-generated content. Unfortunately, the AI bots came out and said we missed earnings last quarter because care became a discontinued op. So only believe people created content, not a facility content. But we will have -- care is now discontinued up since we sold that, and then we have wound down our search business, which will also be reflected as a discontinued op. I would note, we are looking to sell the domains that underlie that search business -- and we've started that process, and we know we have some quite valuable ones, including as.com that maybe in the current market context could be even more valuable. But we shall see what the market will bear. So the numbers will be cleaner of People Inc. and then our emerging and other where both businesses are free cash flow generative and profitable both the Daily Beast and Vivien. And then as you get into Q2 of next year, we'll be chugging along at hopefully $45 million of corporate costs.

That's great. We -- I have some more questions. And you kind of touched on the capital allocation a bit. And so this will take us into kind of MGM and turron other areas. But I don't know if anyone has in the audience has a question or if anyone has a question on MGM I don't know if we have a mic, but I'll repeat the question.

Happy to answer. I think for those not in the room, the question is really I think how do we think about MGM Japan for the Osaka project for the value of our MGM holding where we own 26% of MGM Resorts and then talk through the dynamics at play in the GM.

Okay. We got it. We got it.

No, no, I'm saying I got it. We're just -- so what I'll say about MGM Osaka is this. It is an incredible opportunity to build what will be the only legally licensed gaming integrated resort in Japan. And we've seen what's happened in Macau and Singapore -- where legalized gaming is brought to cultures where there is a high propensity to wager and also high incomes. And this will be in Japan. It will also benefit from international travel, and they are building with our partner, Orix, MGM is building an extraordinary first-class facility. You raised questions about currency. You can go through the game theory is it better to have which way the yen moves versus the dollar when you're building versus when you're moving money out all of that MGM Resorts has been very thoughtful around hedging, although it is a very long-dated project. So if anybody knows currency hedging, you start going out 8 years, the ball kills you. So you can't really do that, but very thoughtful about hedging around locally local financing and also on tax structuring. We are strong believers in the project. MGM management continues to work well and refine it. And when we look at the projected yields and the opportunity to own and manage with ORIX, the single integrated resort in a market like Japan, we think it's incredibly attractive and investors as we get closer to the launch date of autumn of 2030, we'll realize that even more.

Maybe 1 more. Well, 2 more quick. Yes. Turo, just stake and...

Yes. We own 32% of Turo. We very much like the business. It was a huge pandemic winner and by their own admission, but probably in the tail end of it, didn't seize on all the momentum they could -- there also were headwinds in the rental car sector, and there just wasn't enough awareness of those who hadn't experienced it. The team, they've hired a great CMO, who's focused on all the right actions. They've improved the marketplace dynamics, as we said in earnings, they are back to double-digit growth, and we see further momentum. Their EBITDA and free cash flow positive. Barry said -- I think you said on the call, I wouldn't expect to own it in 4 years, but he sees real continued room to run. And they have a great market opportunity in front of them.

Maybe last talked about Google during this discussion, and then there's this lawsuit as a potential monetization event. Can you just talk about the timing and how you guys have discussed the size of the potential event?

Yes. We think it will take the entirety of this year into next year to resolve optimistically. I think there's a chance, of course, could settle, but that doesn't usually seem to be Google's way. We believe we -- for the benefit of the room, Google was found to be -- have used this monopolistic power to disadvantage advertisers and suppliers, publishers in the ad tech space. We think -- and we are -- that we can rely on the government's findings and the ruling -- and then we're really talking about, at this point, damages. And the debate for the next several quarters will be about how far the look back is and what size damages, we think as people link predecessors, dash, Meredith, the time defined properties, we are among the largest plaintiffs in this action. And we've said publicly hundred million plus, and we think it could be meaningfully more than that, but we'll have to wait and see.

And the only thing I'd add because we've gotten this question, the appeal Google made of the finding on the search monopoly end of last week -- this week is not related to this case. It is related to the overall search behavior/world. This is the ad tech case, the old double-click, Google 360, all that, they are not.