People Incorporated (IAC) Earnings Call Transcript & Summary

All right. Ready to go. Finally. Well, thanks for joining us this evening for a fireside chat with Chris Halpin, CFO and COO of IAC. For those of you who don't know Chris, he joined IAC in Jan of 2022. Prior try to IAC, he has a very solid career at the NFL, where he led strategy and growth, and he pioneered and [ head ] the expansion into the international markets as well as online sports betting. Prior to the NFL, he was at Providence Equity for over 13 years and did a number of transactions in the U.S. and in Asia. So great experience to bring to the table. And a graduate of Princeton University and very active with a lot of different charitable organizations, including the Children's Scholarship Fund and Good Sports New York. Chris, thanks for being here. Before we get started, I know you've got the best job in the world right now, but your experience at the NFL must have been something.

It was an extraordinary experience. Thank you for having me. And I recognize all of you -- we're standing between you and the end of the day, so we'll try to keep it interesting as we go. It was a phenomenal experience. It was great to be part of something that is so meaningful to so many people and also big. So -- and then the exposure to media, digital, all of that, that came with it was great.

See if we can save some questions in the end for that. But just to set the table, we've all read Joey's letter to the shareholders. I thought it was humble, authentic, on point. From your perspective, what does Back to Basics mean?

It means a few things. And if you think about just the year -- a little more than a year that I've been in the seat at IAC, the market and market expectations, market valuation metrics have changed so much in a good and healthy way, where cash has gone from, essentially, earning 0 return to 5.5%, depending on where you put it, so that there's just a fundamentally higher discount rate hurdle expectation. That manifests itself in terms of if you look across companies' initiatives that might have made no sense or may have made sense when things are purely valued on a revenue basis don't make sense in that environment, long-term returns that might be 4 or 5 years out don't make sense. But also, there's greater focus when cash has greater value on being profitable, all of which this audience knows well. So for us, it's about relentless prioritization to focus on the factors that will drive real equity value. It's also on very high-quality management teams, and people who, you'd say, okay, we'll keep them in that role that -- our companies might keep someone in a role who's underperforming, this is the time you want best-in-class performance. You also need to be very clear on your initiatives, that they have clear plans to ROI, that they do advance the business and that they're meaningful, and it should translate to free cash flow. And IAC has always been a free cash flow-oriented company in tech and digital. Just -- this is a market where that's put even greater premium on.

That makes a lot of sense, especially there's been times like this where the strong companies get stronger coming out of the downturn. So why don't we kind of go into each of the companies now, if that's okay?

Sure.

So Joey has been in the seat as CEO of Angi's for a few months now. How do you see the opportunity? Like how is Angi's position in a multibillion-dollar opportunity? And how do you think the future looks like in terms of capturing that opportunity?

Yes. I mean the positives and strengths of Angi and its opportunity are very clear and inarguable, which is excellent brand, massive customer -- consumer traffic of home services demand, the industry-leading footprint of service professionals and very good matching technology in a highly underpenetrated market. Now investors have been through a multiyear journey, where all of that potential has not necessarily been manifested. And there have been moments where there was great performance. There's been required shifts in strategy. COVID was a real disruption to the business, but we view it now as -- and it ties to the Back to Basics. But there are opportunities in front of the company of improving user acquisition, and some of these opportunities were created through mistakes Joey highlighted in the last letter that we made historically. But looking forward, clear opportunities in customer acquisition, clear opportunities to improve the consumer experience flow-through through prioritization and real opportunities to improve profitability and free cash flow through rationalizing services and better cost management.

Actually, on that point, on rationalizing services, you're moving away from complex services to simpler services while improving the customer experience. Can you give us a few examples of each and talk to us about the strategy and why, how it's going to position you, especially from a consumer and a service provider perspective, to reduce friction and increase usage of the platform?

Sure. Services done right present a fantastic solution for both consumers and pros, where -- and if you've never done an Angi service -- I'm not just talking my own book. You really should, as an experience. Because it is excellent, where a simple, repeatable service that's at a lower AOV, say, $150, $200 is booked with certainty of getting done, scheduled around your calendar with a highly rated pro and is completed. We know those experiences are one of the biggest drivers of lifetime value for our users, drives repeat rate, and also for pros, allows them a high-volume source of traffic and jobs that provide very little customer management. That's it at its best, so everything from hanging the TV to small operations around the house, handyman services, lawn care, et cetera. That model -- this is -- as Joey said, we were testing, we were trying different things, but continued to expand where very large projects were being completed and done on a fixed-price basis, where Angi would make the commitment and line up a pro to build a deck or do a large project. The reality is the economics of Services are one where -- if you just go off where we were before gross revenue, you had a gross margin that was 15% to 35% of gross revenue. And then you had a series of semi-variable costs that got to a contribution margin that was anywhere in the mid-single digits to, in some cases, negative. And then you had fixed costs to manage the pros and make sure that the projects were completed. That model just doesn't work, right? And it was one that drove us, in certain cases, in June, as we got in there and analyzed it, to say we need higher take rates, which worked in a number of cases, but also rationalized cost structure. The net answer is the big projects don't scale. The model of trying to be the country's general contractor, there's almost no economies of scale at that level. And if anything, you're dealing with inefficiencies. So Joey made the clear decision to shut down what we called managed projects, which are large, long-term, fixed-price services and really focus on the high velocity ones where we've got good margins and very good customer LTV. And they also, from the pro experience, fit better with our broader Ads and Leads product.

And you probably got the best data in the industry, right?

Yes.

Years and years of data to help you kind of hone the model, right, and figure out and create the revolution to the simpler services and see what works and does not work.

Absolutely. And there's also sort of -- it's one of those things where data works well, data actually fits with your intuition when you think about it, which is instant -- or fixed price, fast booking, fits with short-term, high-frequency services. Whereas something that requires a site visit, some negotiation, customization is far better as an ad or a lead, where we hand off to the pro. They interface, make pitches, look at their own pricing mechanisms, and it's just progress in the business.

Right. So we're talking about growth opportunities. How do you see within each product, whether it's Leads, Ads or Services, where are the growth opportunities? What do you see?

Yes. So the Ads and Leads, we got them back to strong growth. And at the end of the day, for those who followed Angi, we had loss of profitability across '21. Part of that was the disruption of COVID. And I hate when everyone blames everything on COVID, but it's pretty inarguable in some of these circumstances, where everyone sat in their house and said, "I hate this about my house. I want to fix this." And so you had this enormous spike in home services demand. As a supply side, 2-sided marketplace, that is not good for Angi's Ads and Leads marketplace, where, when there was more consumer demand than pros could possibly satisfy, the value of a lead provided by Angi was diminished. We then exacerbated that issue by driving the rebranding in March of '21, which, long term, is the right answer, have a centralized brand formally. For those who don't know, we had Angi's List and HomeAdvisor, consolidated marketing behind the brand Angi. But to kind of do it to the patient at that point was quite severe. And we lost significant SEO traffic, and we ended up paying to buy that traffic back. What Joey said in the third quarter shareholder letter was about $100 million hit to EBIT. We had a slide down in profitability, driven by Ads and Leads. And Ads and Leads, frankly, declining growth. We returned to growth last year, and there are a few factors there in both Ads and Leads, better consumer -- or better sales, better demand from pros as their direct traffic, and overall demand in the market abated. The value of our Leads improved, and they increased their budgets. Also, we see a real tailwind long term through driving -- through better SEO, SEM and a return to TV. We pulled out of TV during some of the friction of the rebranding that we can just get more marketing efficiency and capture more traffic directly that we've been paying for. So Ads and Leads should be a strong grower. If anything, in COVID, we probably thought the business was not as strong as it is, and now it's clear, the strength there. And then Services, once we normalize the base, we've gotten rid of gross revenue, we can just keep executing and taking share there, I mean, barely penetrated.

That makes sense. So when you think about -- we live in interesting times, right? And using the example during COVID, the service providers, they need you as much. Now it's probably the flip, right? Service providers need you a lot more than ever before. What's the outlook for 2023? And as you think about the long term, like it's a classic marketplace model, right, and it's pretty underpenetrated. How do you kind of see the margins kind of trending long term?

Sure. So 2023, one of the big changes we made is that we're now going to be reporting revenue for Services net due to change in our terms and conditions. It's the right way to think about the business. From an overall profitability perspective, there's no impact, just basically significantly reduces revenues that we contributed to -- or we passed on to the pro previously. So it's going to be an odd year to look at overall revenue. We're guiding to essentially flat like-to-like net revenue. And if you look in our grids and metrics, you can see the bridge from historical gross to net. But it's a year where, Services, we're also rationalizing what we offer. So that will be a drag. Ads and Leads should keep growing. We've guided to $60 million to $100 million of adjusted EBITDA this year and a significant decrease in CapEx, which should aid in -- which will drive free cash flow. Longer term, we've said we should get the business back to low double-digit growth as well as driving continually increasing margins. Joey is still early in his tenure, so we're not providing specific long-term guidance. But as we firm that up, we will [indiscernible].

Makes sense. Should we switch gears to Dotdash then?

Sure.

So online advertising is the first to get pulled back, right, during a downturn because, easy, you can split the switch and you can put -- turn it off, right, unlike other forms of advertising, but also the first to come back. What are you seeing in the current advertising, the macro environment? Are you seeing that dynamic kind of play out as first quarter, second quarter? And what's the outlook?

Yes. So when we think about what the year should look like -- I'll just go back to last year because that'll be the denominator when you think about trends, exceptional first quarter last year. Frankly, a lot of advertisers weren't able to spend in late '21 all their money, so it flowed over into '22. Then really, in mid-May, sorry, when -- right around when Walmart and Target reported their earnings, there was a big step-down that you can draw a pretty clear line of sight to, particularly in retail, CPG, home, those areas. Really tough June, we were down 18%. Some of that was specific to our migration, but you could just see, in big categories, a real freeze. Soft summer. It started to firm up again in post-Labor Day, pretty decent in October. And then we were hoping for a good holiday period for advertising and the brands really threw on the brakes in the mid-November, and December was terrible. Coming into January, and this is everything from direct sales or basically nobody was booking premium direct sales to programmatic, where we had pretty good insight that our experience matched the market of down 10% to 15% on programmatic CPMs. What we said in the -- our earnings call is that, so far, this year, it's been stable weakness so that it's no longer second derivative negative like it was in December. You're down, but it's kind of rationale that you're down versus extraordinary strength last January, February. You're seeing advertisers return to the market who were totally out of it in December. And then as the year goes on, the comps will get easier, particularly end of May, June, July, you won't have retailers, and those folks totally out of the market like you did this year. And then as you get to the back end of the year, it'll be a lot easier. And I said to some accounts today, it's really hard to imagine not being up as a market in December since almost nothing was transacted this past year.

Sounds like your crystal ball is working.

I don't know.

I hope it is.

It's a magic [indiscernible] ball.

I mean that's a big question, right? When does advertising come back? People expecting second half recovery, and hopefully, the retailers will come back, right, as you get into the summer season and back-to-school and then Q4.

Yes. The whole time it really has been an industry category-by-category phenomenon, where retail has got to spend to compete for share. CPG, food had a very tough time last summer and fall with inflation, that should abate, input costs, those factors. Electronics is just bad, right? Electronics, streaming, those guys who were workhorses in late '21, early '22, that's been flipped on its head. So you'll have these patterns, but we feel great about travel, pretty good right now about retail, food, beauty, those categories. And -- but assuming -- it's hard to predict where the economy goes, but assuming stability, you should see back-end strength.

That's great. So talk to -- you made a big acquisition, Meredith. Talk to us about the rationale and how has the integration gone towards the acquisition?

Certainly. So Dotdash buying Meredith was a bit -- it's not the minnow swallowing the whale, but sort of the Orca swallowing the blue whale, where you have a smaller, much faster, more aggressive sort of set of killers. And Dotdash acquiring the preeminent publisher -- and when I say publisher, really think about this as digital. As Joey likes to say, Meredith was a digital business obscured by Print. The idea was taking Meredith's leading consumer brands, many of which were the premier brand in categories where Dotdash had exceptional strength, bring them together, like run what we call the Dotdash playbook, move the Meredith sites over, fine-tune them and drive them to a new level. The -- I'd say, overall, the -- and then the Print category business, they have run them well, closed some of them that should have been closed years ago, and then the real workhorse is managed efficiently. Overall, the Meredith brands are even better than we thought in terms of their strength, their resonance, their performance digitally, performance on social media. The opportunity from where the Meredith digital assets were is as strong as we thought at their sites, speeding up the slides, reducing ad clutter, improving ad performance, refreshing content, driving opportunities on search engines and others, clear opportunity to drive relevant share, et cetera. Our integration plan was too aggressive. The pace of -- I was assumed of migrating the Meredith sites onto the Dotdash platform. We've talked about this a number of times, was too rapid and too cookie cutter. It was a grind. We got it all done by October. And now we're on the other side of that. Integrating the sales force is a lot of good, some headaches getting there. I feel good about the sales force now. And so we're through it. And now it's about executing, and we feel very good about the combination.

That's great to hear. And [ so on your site ], the way we look at it is very differentiated from some of the other sites in the categories, right? How do you kind of -- do you think you're positioned? And what are the key points of differentiation?

Sure. So the -- what advertisers can get out of Dotdash-Meredith is large-scale ad buys in -- especially for endemic advertisers in major categories across a number of segments in a brand-safe environment. So we're not relying on third-party data and cookies. We know intent if you are on the Better Homes & Gardens painting section or you're looking at lawn care or you're on recipes -- Allrecipes, there is significant intent that we don't need either privacy, unfriendly tactics or the like, and you can buy at scale, right? That thesis was confirmed from the major accounts across the board, and they like it. Frankly, if there wasn't a major ad recession going on, we are quite confident we'd be able to show it, but we're just -- looking forward, we will show it going forward. That is -- that's a powerful combination. And so the categories we're in, we are clear leaders. And we've got a number of stacked properties that reach different segments, from The Spruce to Better Homes & Gardens, with Southern Living and a variety of other complementary assets across home, food, travel, finance, et cetera.

Especially in this environment, having very contextually strong sites really drives a lot of ad revenue, right? I mean the CPM rates were premium, better quality, and you can't use the cookies anymore, so it's going to be very different looking forward.

Yes. When I came into it from the NFL, something that struck me of the ability to sell instant relevance and knowledge of intent without having to know the individual is very compelling for a lot of advertisers.

Can you talk about OpenAI, ChatGPT, Jasper.ai? I mean how is it going to impact publishing, especially you've got some of the best sites in the world, right?

Yes. It's -- we got a lucky head start, which was -- Sam Altman was actually the keynote. He was interviewed by Barry at our annual planning meeting in December. We had no idea they were launching ChatGPT that week. We just got d*** lucky. But he spoke for an extended period of time to us and also demoed it and started us thinking this was to all our teams. So if you start with Dotdash-Meredith, there's a few elements that are relevant. The simplest is content generation. And that would be -- there are going to be opportunities, which we're already going to start testing. But to use this generative AI as a outline tool, as a rough draft tool, we actually -- we had a long Board discussion about it. And Board members indicated that's already starting in other industries as well. But there's no way -- and Neil said this recently at the IAB. There's no way the article -- the machines are going to write articles at the quality we expect. They're not accurate enough. They're not creative enough. And there's just such an element of first-class writers associated with first-class product. But there will be cost savings, efficiency, speed ups from generative AI. From the threat perspective, one is would be just a wholesale shift in search traffic. And advertising model is around it. That one, I think, is more -- is vaguer, is going to take longer. And there will still be -- premium content will still be valued. And frankly, a lot of these tools -- this has continued for a while. Consumers are just distrustful of unbranded, Internet-sourced information right now, whether it's fake reviews, content farms. So we actually like the positioning of premium brands and surfacing the best content. We've been dealing with Google and others commoditizing commodity content for decades. If anything, premium brands producing premium content will benefit. The third is the plagiarism risk, and that's one which -- there's been -- they've both been around. There's been multiple iterations of this issue across technology. I think the players here, Google, Microsoft, others, are going to want good relationships with top publishers. And [ Dave and others ] have said this, they're going to need to respect content and also drive traffic to the sites that generate them.

Absolutely, copyright. And I think it opens a new revenue stream, right, for copyrighted material. You can use that for maybe creating content, but you get paid for it.

That's right.