People Incorporated (IAC) Earnings Call Transcript & Summary

Yes. We haven't given guidance on overall forward profitability. We have said we expect to return to revenue growth in '24. Clearly, Ads and Leads is the largest source of profit. The gross margins there are exceptional. We've talked about the margin dilution we've had there from the step-backs in -- steps back in SEO due to the rebranding. As we return that to growth, the incremental margins there are very high. And so that -- we'd expect that to be a profit driver and an accretive element. We feel good about where we've gotten on gross margins, contribution margins and overall profitability at Services. And that is a continued -- we think as we scale that, we will see a positive feedback loop in terms of profitability there. And then we'll continue to look for opportunities to optimize fixed costs, SG&A, et cetera. We talked about with the sales force -- the pro-facing or supply-facing sales force, they're -- in the deep dives Joey has done, there was a recognition that, given the size of our -- what our sales force had been, there were people who had to keep themselves busy, who were calling what you basically knew at the outset were low-value pros to acquire them, who would then churn and be dilutive to the overall results. Shrinking the sales force, which reduces cost load, actually will also improve retention in those dynamics. And one of those dynamics where I think activity was being confused with progress, we'll continue to look for those opportunities.

Okay. Turning to Dotdash Meredith. Obviously, you did the acquisition. You're aiming after what you believe the digital advertising opportunity is for Dotdash Meredith medium to long term. Talk a little bit about the macro impacts we're seeing in the business now against the broader efforts, which are integration, realignment of assets and capturing the digital opportunity and a bit about the journey you're on with Dotdash Meredith.

Definitely. The -- last year, and this has been well documented and we were very forward in the letters, there were two headwinds last year for the business. The ad market, which was chugging along, really fell out of bed in late May, particularly in retail, CPG, home, which are big categories for us. And then it was kind of an up-and-down pattern through the rest of the year, where certain things would come back a little and then another would fall out of bed due to inflation or supply chain. And then basically starting late November, nobody bought anything. And December was definitely a winter for the digital ad market as has been well documented. The second factor was the integration, which the combination closed December 1 of '21. The original plan was to get all the properties migrated over by -- shortly after the Fourth of July. That was too aggressive, partly due to an assumption that we'd be able to bring on a lot of short-term resources to manage that migration. And the reality was in the job market, nobody was jumping up and down to do that. So it got extended. There were also some unexpected complexities that got worked through. But it really didn't get done until -- the integration and moving the Meredith properties over to the Dotdash platform really didn't get done until late October, November. That's all behind us. We feel very good about the integration, where we are from an ad tech stack, from performance of the Meredith sites. And we've been consistent in saying we see the improvement -- the Meredith brands are even better than what we thought we bought. And we see the improvements on those properties when you apply the Dotdash playbook and just give consumers a better experience. The ad market continues to be choppy. And we feel like we're holding serve, but -- and in some cases, versus open CPMs, outperforming on a year-over-year basis. But we're not expecting things to dramatically turn around and are just focused on taking share. What has been a real positive and was a core thesis of the acquisition is performance marketing and particularly, e-commerce integrations and the performance marketing. That's a major strength of Dotdash. And the belief was if you brought Dotdash's best-in-class e-commerce integrations, performance marketing relationships, et cetera, to the Meredith brands, be it Better Homes & Gardens, Southern Living, Food & Wine, you could unlock major revenue stream. We talked about how strong performance marketing has been. And we think we missed the holiday season for many of this last year because of the delay in the integration. We feel bullish about where we will be and the share will take going forward.

So maybe just to follow up with one just to tease that out, so in terms of the broader ad environment, that's outside of your control of when that might get better. In terms of a mixture of integration and execution and strategy, are you pretty much with all the pieces in place to see that come through once the ad environment improves? Or is there still some work on strategy and integration that are still ahead of us?

Integration, we don't. Talent was a bit of a headwind in the merger, where we thought we would get leaders out of the -- from Meredith in certain areas. And statistically speaking, if one thing is 2.5x the size of the other, you expect that something will shake out there. That didn't play out. We got some great people in Mike Riggs and others in different areas that have done well. But broadly, we've really been forced to -- it's really the Dotdash executives that are running across the board. And then we brought in additional talent. So we got delayed on that. We feel solid about the team. We'll always look to augment, integrating the sales forces, some stops and starts. But we feel good about where we're going to market there. So it's really not about integration. It's about hand-to-hand combat selling. That's where we think D/Cipher is -- which is our intent-based campaign management platform, is a differentiator. It's about content and continuing to produce fresh, differentiated, premium content. And that is the nature of the business. And it's about continuing to optimize product, ad performance, performance marketing, all those dynamics.

Okay. And just last one on the Dotdash Meredith. Just remind folks what your messaging has been around profitability goals for that division. As you look out over the medium to long term, what should people be keeping in mind in terms of margin structure?

So we reaffirmed guidance of $250 million to $300 million of adjusted EBITDA for 2023. That is pro forma or excludes $45 million noncash lease impairment that occurred in Q1 that related to the commercial real estate markets. On a forward basis, we've been pretty clear, the incremental Digital margins in this business long term, we'd say, are 55%, 60%. But near term, given the degradation in Digital revenues over the last year and also where we have the cost structure, we think we'll be in the 80% range. And you can see it in Q1 to Q2. You can all see it in the step-down from -- seasonally from Q4 to Q1. And we expect to see continuing profit scale and margin scale as we bring on Digital revenues. We think we -- on a Digital basis -- Print is its own animal. But on a Digital basis, we can get to 35%-plus annualized EBITDA margins as we get Digital revenue to $1.3 billion in that zone.

Understood. Maybe just go through quickly, we'll try to hit some of the other businesses inside IAC. Care just had a recent leadership change. Can you talk a little bit about that leadership change and what it means for strategy and vision for Care as an asset?

Certainly. So Care, we acquired, closed early 2020. The focus out of the gate post acquisition was improvement in the core platform that had been heavily underinvested in and was a suboptimal -- you couldn't really do what you need to do from a care seeker or a caregiver perspective with where it was. Improve trust, background checks, all those activities and really standardize that, improve discoverability, matching technologies. And then there was a huge tailwind that occurred post pandemic in the enterprise business. For those who don't know, Care is roughly half consumer, direct-to-consumer and then, say, about 1/3 direct relationships with enterprise, where they contract to provide backup care services, some of your employers are probably Care customers, to employees if they need a sitter on an emergency basis. And there's a variety of models there. The enterprise business pulled forward probably a couple of years of growth coming out of the pandemic in '21 as everyone was trying to get back to office. What we -- where we are now is platform is a much better space. We need to improve marketing. That has been suboptimal. We just hired a new CMO there. And we need to continue to improve the user interface, consumer product, all of that, especially to move into the -- expand our performance in the Instant Book category, where you want a babysitter or a caregiver on a 2-hour or 4-hour, 6-hour basis rather than a long-term relationship. With where the product -- with where the company was, we really wanted someone who is deep in both marketplaces, which is obviously a two-sided marketplace. And both subscription and transactional digital businesses, when we met Brad Wilson, who's the new CEO, he used to run HBO Max, deep experience at Expedia, Disney streaming, Travelocity, LendingTree, et cetera, he was absolutely perfect and has hit the ground running. And it's really around improving marketing. And he brought on John Buchanan as the new CMO, improving consumer product and taking advantage of what is still an early-stage massive market opportunity, where they are the leader.

Understood. Switching to Search, you actually moved Tim Allen from Care to Search. You talked about Search trends being -- I don't know if the word came out, sort of stabilizing on the last earnings was the way I interpreted it. Talk a little bit about the Search business going forward and that management change there and what it means for strategy.

Definitely. Tim has deep experience across the IAC portfolio, did a nice job post acquisition of Care and repositioning that business. And then before that, across Mosaic and applications and others. Search, you really need to go a level down when you look at the historical financials. The desktop business was wound down. As we cut marketing there, had a large runoff of revenues, which was hugely accretive from a profit and cash flow perspective but we knew was going to be asymptotic to 0. That's happening. The core Search business, we feel solid with where it's been with -- and you can see that in some of the trends on the Q2 results. That's a business that you're always -- they're always going to have to reinvent certain parts of it, find new opportunities. They've been excellent at it throughout our ownership. And it's a constantly evolving footprint. They're very good at it. And we think Tim is the ideal leader to manage the base, innovate, figure out new ways to optimize and continue what has been a free cash flow machine.

Okay. And then rounding it out, you've got some sizable minority equity investments in two areas, MGM and Turo. Number one, love to understand a little bit of an update on those investments and how you're thinking about them for the medium to long term. And then maybe a second parter to bring us home would be, I don't think you and I have ever had a conversation that doesn't involve capital allocation. So I'll squeeze that in at the end as how does that give you an indication of how we should be thinking about broader capital allocation within IAC? Because I think those stakes, in particular, always strike investors as sort of interesting within the broader portfolio.

Certainly, I'll try to do that in 4 minutes if you give me any time. So MGM has been great. It's a great relationship between Chairman Paul Salem, Bill Hornbuckle, the CEO, Jonathan Halkyard, the CFO, all of that, very close relationship. And Barry and Joe are actively involved there. We are thrilled with the performance of the properties. Las Vegas really continues to only take share and presence in the national consciousness and global view of entertainment and hospitality. And it's the best portfolio going there. The digital opportunities, both BetMGM and also what we've done through the LeoVegas acquisition, we feel great about. And then Macau, post the relaxation of the zero-COVID policy in China, is reminding people it was the biggest gaming population in -- market in the world. And this is after the -- we got through relicensing and the regulatory overhang that was there. That business, we are excited about and view as a long-term value creator. Turo, obviously, has an amended S-1 file. There's speculation about an IPO. We love that business. It is -- Andre and team have continued to perform. And we are very excited about the opportunities in front of it. We can't say a lot, given what's there. And we'll be supportive of the company whichever way they go with their capital structure and IPO listing, et cetera, and are the largest shareholder there. Capital allocation, we love to control things. Where we have minority stakes, it's -- there are a few important dynamics: one is believe in the base business; two, believe that there is a digital disruption conversion opportunity, where IAC's knowledge and skills fit and will be value-added; three, if you're going to do a minority deal, you have to believe in the management team because you're not able to make the change, so have a strong confidence in management; and four, something where we can be the largest shareholder and have the kind of influence that we humbly like to have. MGM was sort of a serendipity in terms of those things coming together. Turo, we're the largest shareholder. I think broadly, we'd always prefer control. And the dislocations or disruptions that have occurred post pandemic and with rising cost of capital create smaller companies, create roll-up opportunities, create mid-cap public companies, et cetera, that present opportunities, we'll look to add to the portfolio. And it's just a challenge of wrestling fish into the boat with volatile broader valuations. Finally, I'd just say we always look at our own share price as well as Angi's in any capital allocation and where do we expect the highest return. You can see we bought back, for us, a considerable amount of shares in the first quarter going into the second quarter, most we bought back in about 7 years. And we'll continue to analyze that in the current market environment.

Understood. Well, really appreciate the time. Please join me in thanking the IAC team for being part of the conference this year.

Thank you, Eric.