People Incorporated (IAC) Earnings Call Transcript & Summary

Hey, good morning, everyone. I'm John Blackledge, Internet analyst here at Cowen. We're pleased to be doing a fireside chat with Chris Halpin, CFO at IAC. Thanks for doing it.

Thanks for having me.

Appreciate it.

Maybe we'll kick it off on the Dotdash Meredith side. There's a lot of macro headwinds out there, inflation, interest rates, supply chain, war in Ukraine. Just curious kind of what you guys are seeing? And in particular, kind of performance marketing or direct response, how is that holding up relative to brand advertising?

Sure. I think some of those headwinds have been in place for a while. Clearly, supply chain impacted the business fourth quarter, other times, on the ad side, but nothing massive. I think relative to the -- it's been a rapid arc this year of expectations of rapid growth and rising interest rates then inflation and the Ukraine war and now people are very worried about recession. It is still early. We are very focused on trying to see signs of any economic softness and where they manifest themselves. But it's still early. You've got some segments that are strong, some that are soft, but that's the nature of an advertising portfolio. One of the things, you go to performance marketing, one of the things that's great about Dotdash is that it is a lot of high ROI transparent opportunities in a company's advertising and marketing budget. So we expect the fourth quarter -- the second half of the year is always bigger part, with the fourth quarter is the biggest weighting of the year. We expect to continue to take share just because of sort of specific things to us, including the first year of the integration and improving things at the Meredith digital properties. We also believe in any environment, things that have transparent ROI like performance marketing, e-commerce, et cetera, will outperform. But we're monitoring closely, but too early to say right now on the broader macro changes.

That makes sense. And so you mentioned the integration, maybe we can talk about that. How it's tracking versus your expectations? How the migration of some of the brands to the Dotdash digital platform is tracking? And just like if you can talk about the cadence, like when all the brands may be ported over, how we should think about that as we get through the year?

Sure. So there are four key elements to the Dotdash Meredith merger and integration. Digital print, sales force and corporate or overall cost integration. Digital, the -- we've talked about this a lot, but the fundamental element as Joey, our CEO, likes to say, Meredith was a digital business shrouded in print, and they had a very print-centric mindset. Taking those digital properties, putting them onto the Dotdash platform, which allows for much better site speed, integration of advertising, e-commerce integrations, calling content, which was something they didn't really do much, but we're talking, in some cases, eliminating 50% of the dead content on sites, all of it to a better user experience, that's core. We talked in the letter about the migration of Health.com. That was the first site that we moved on to the Dotdash platform from Meredith. We were -- that's a big moment. We didn't know what was going to happen. We didn't -- we knew it would be better, but when -- what do you learn as you do it? Neil, the CEO, talked about how happy they were that basically ad equivalency. We took down ad volumes on a page by 30% and through performance improvements, rates made up for that 30% decline and got to equivalency in 1 week. Dotdash has been doing this a lot of times on different platforms. That's the first time it's ever been that fast. You can say why? It probably speaks to the nonoptimized page approach, ad approach, et cetera, that existed at Meredith where it was a very old school, just put as much up as possible. From here through the site improvements, we're talking about sites that are 6x, 7x as fast through better content, we expect to see traffic growth. That takes longer, but you -- or just through pretty inarguable virtuous cycle, we expect to see traffic growth in the coming months for that property. From there, it's fairly modular of moving other digital properties over. The first one you, figure out the traps, the pitfalls and you go from there. So what we've said on timing of the other digital properties is we expect to give a substantive update on the status on our August earnings call, and we feel good about both the process and then also toward the thesis of the combination, the improvements that are generated. Print, that was one where we moved quickly, getting rid of essentially no margin subscribers on the print side where they were just mailing out the magazine to say they had as many subs as possible. Closing, as we like to say, converting to 100% digital subtitles that really had no reason to still be printed, reducing frequency and page count and others. And then the third set, actually investing in the print titles, improving paper quality, improving content. The -- some of our travel categories, food categories, others, these magazines are actually performing extremely well. It's really just optimizing the portfolio. The bulk of that, we announced February 9. We continue to execute there. And our program is keep -- make sure that has sustainable level of profitability, and we feel good about that. And then the highly strategic print magazines that advance the digital properties keep them strong, keep them in place and continue to optimize the portfolio. Sales force, Neil talked about this a lot on the earnings call. We've combined the two sales forces. What we feel very good about is the performance ROI, transparent selling digital solutions mindset of Dotdash being brought to the deep brand relationships of Meredith. And the feedback there has been positive -- very positive from both the agencies and clients, where if you're selling a magazine -- if you're leading with magazines historically, it's going to be a fairly brand-oriented sale because you can't really provide transparent metrics on print of how total impressions is more estimates. Leading with digital, leading with performance marketing, and also in this environment, telling brands you can advertise in context without third-party cookies, outside of a major tech platform is being met with [ well ]. But bringing those sales force together, continue to fine-tune. And then finally, cost savings, feel very good about that. And we feel, in some way -- in many ways, we're ahead of plan there.

Okay. Yes. Maybe just on the content, which you kind of alluded to. Just in this environment, having brands, say, quality content, how attractive is that to advertisers? And I think you could argue that the Meredith brands are more well known than Dotdash brands. And so how has that been relative to expectations?

Yes. Yes. Neil and team would say a few things. One, they have done -- they've sort of converted water into wine on a lot of okay brands or turn those into great brands like The Spruce and through the Dotdash history. This is the first time they have A+ brands that they can run the playbook on. The second thing they'd say, which was a hypothesis of the acquisition, but they feel even better about is how strong the Meredith brands are today. And that's from brand positioning, that's from algorithmic feedback and also from advertisers. All of those point to people want these brands to be strong and serve the content and the information that consumers want and brands feel exceedingly comfortable advertising in them. So that has been one of a real upside surprise. Also, the extensions that we've got to get through the integration, port the digital sites over, but once they're over, the extensions that we can do with these brands, new areas of content, new offerings, once they're on the Dotdash platform or even -- we think, greater than you thought at the time.

Okay. That's helpful. You talked about the cost measures that you're taking. And I think, Joey, said on the last call, $300 million bogey, EBITDA bogey for 2022. That's -- albeit there are some restructuring items that will impact the reported number. You're so confident about achieving that level.

Yes. From 2 weeks ago? We still feel pretty good.

Yes. You never know in this environment.

We said above $300 million.

Above $300 million, okay. And then at the time of the deal, there was the $450 million in EBITDA for 2023. You still -- also you're still comfortable with that based on kind of the information you have now?

Yes, sure. So just so everyone's on the same page, we said adjusted EBITDA for Dotdash Meredith, normalized for the restructuring charges, we expect to be above $300 million. I feel very good about that. The runways there, the cost savings and also just the seasonality and margin scale as we go. And other factors, I mean, when you look at the -- especially the fourth quarter, some of the comps are easier. And we've got -- we're going to have organic growth from owning the Meredith properties for almost a year. On the $450 million, we -- that is still our target. The things that are specific to us and that we can control, we feel good about. And then the broader macro environment when you're looking at the full year at that point, people ask a lot of questions. We can't answer those, but we are still definitely targeting $450 million of digital EBITDA next year.

Okay. Helpful. Maybe we'll move on to Angi and I think Oisin was at a conference last week, so we'll just do a couple of questions on Angi. Maybe just high level thoughts on Angi, perhaps discuss the rebrand and the strength of the services business, which has been hyper growth.

Yes. So there's really two elements to the Angi business. You've got ads and leads where the rebrand applies, the historical foundation of Angi and home advisor, that March of last -- second half of March last year, we rebranded all of it under the Angi brand. Took a hit in terms of algorithmic ranking and a variety of other traffic measures, but long term being behind a single brand for efficiency, customer awareness, single app, et cetera. That, we said in the earnings call, you can see in the April numbers. March was the midyear of ads and leads revenue growth. We saw stability in April, and we feel good about that. There are still -- we're still going to be gaining ground on an overall basis back to where we were. We said it could be 16, 18 months at the time of the rebranding to get back there. But feel very solid about the trends and where we are in the Angi brand is now bigger than the Home Advisor brand. On services, growing quickly. And one of the things that struck me coming into it and definitely questions I get from investors, it is not an either/or. It is not ads and leads or services and it's not a concept that services is going to be the entire business someday. It is a key arrow in our quiver, along with ads and leads of how to best serve Pros, how to best serve consumers and also certain categories fit very well with services. And in others, they fit very well with leads. Very simplistically, we bought the roofing business, that has done well for us. We also -- there are certain -- that is a very consistent job type, square footage of the roof, what type of -- are you -- 1 of the 3 different materials that your roof is made up, you can quickly do math of how many days that's going to take. Weather, et cetera, price it works well for a fixed price. Getting your kitchen repaired or get renovated probably a lot of site visits, change orders, highly customized, unpredictable. That can be a better leads business, where you give leads to Pros who then go and interface. So we feel excellent about the services portfolio, the growth rate there. And we feel really good about having -- scaling up to a full suite of ads, leads and services that we think is industry-leading.

That's helpful. And then on the margin side, I think you guys disclosed at 1Q that you're kind of past the peak investments as we kind of round through the year. So any thoughts on kind of near and longer-term margin bogeys? I think the services business gross margin profile is a little bit lower than...

A fair bit. Yes. I mean -- and we said 15% to 35% gross margins on services. Now you're also capturing way more revenue than on a single job than you would on a lead. So it's a bit apples and oranges, but we wanted to convey that to the market. The point on past peak investment, it's a question we got, and how do we think about the path on services? Conceptually, what we wanted the market to understand is you've got revenue per job anywhere from $60 for house cleaning or small lawn cut, up to $50,000-plus for a large -- very large project. But you've got the gross margin 15% to 35%. And that -- there's seasonality to that business. It is also organically growing. Q1 is the weakest or the smallest quarter. So you're going to see gross profit dollars scale throughout the year as seasonality and volumes pick up. And then below that, you have the fixed cost infrastructure that the company has been investing in to be able to render services. And it is different than ads and leads because you're going all the way to the end consumer, unlike ads and leads, and you have to line up a Pro, onboard the Pro, make sure that the jobs are being processed in time and have a much bigger customer service element. Oisin and team have now built up both the people side, which is the customer service and also the technology side, which was a learning for me that there is -- there are important elements of automation and product user interface so that if I go on and say, I want someone to come and cut my lawn or care for my yard, you can -- on a fixed -- if you're putting forward a fixed price quote, you can put in a series of questions like other digital products that massively reduce the risk that the Pro gets there. And it was quoted as a 2-hour job and they get there and I have a farm, and I didn't put that down and that blows up the fix price quote. That's an extreme example. So the investments in R&D, the investments in product and customer service and in Pro onboarding, we feel have reached critical mass. And now it's just a matter of gross profit dollars, scaling over those in the services business, and that's why we can say we're past the peak investment.