People Incorporated (IAC) Earnings Call Transcript & Summary

All righty. We'll go ahead and get started. Welcome to morning #1 at the RBC TIMT Conference. I'm Brad Erickson. I cover Internet here. Very pleased to be joined by Chris Halpin today, CFO of IAC. Chris, nice to see you.

Thank you for having me.

Down the street for you, so we appreciate it.

Yes, it is. It's a home game.

So I have a list of questions, obviously, we'll run through. But if anybody does have questions, feel free to raise your hand, and we'll try to get all those in.

Maybe just to start out, just to kind of level set, you guys just printed obviously. Just maybe just spend a minute or 2 kind of what happened from your perspective. And maybe just some of the key questions, I'm sure we'll get to them, but some of the primary common questions you were getting coming out of that print.

Yes, definitely. I think it was sort of a solid quarter. The feedback we've gotten, as expected, generally with probably a little bit better profitability. Big picture, we did $100 million of adjusted EBITDA across our consolidated businesses in Q3. Two big ones, Angi, which we'll talk a lot today. We're still in the midst of the turnaround that Joey is driving as CEO. Revenue still declined. I think the good news there was adjusted EBITDA outperformed. We've very much turned the free cash flow nature of the business around in the last year, and full credit to Joey and team there, mainly by improving margins, but also rationalizing what was just an excess of capitalized software effort. And then also we sold the Roofing business, which has just -- relative to a small acquisition, has been a major source of headaches, as you know, over time. And we feel like it's in great hands and will be a good customer. Across the rest of the portfolio, Dotdash Meredith continues to execute and turn even in a kind of up-and-down ad market, execute on the opportunities in front of them and what we really believe in that opportunity. And then the rest of the portfolio is solid. So we're just heads down, as Joey said in the shareholder letter, continuing to execute.

Got it. Cool. So let's start with Angi because, yes, I think that's the bulk of the conversation certainly in the investor questions we get. So I guess it was not this quarter, but the second most recent quarter where Joey called out the need to reduce some of these, call it, lower-quality channels. And I guess this quarter sounds like those weren't actually gone. They just kind of are taking maybe a little bit longer to rebound. What's involved with getting those channels or working those channels to rebound more?

Yes. And for framing it, there were 3 main actions that Joey and team drove on the revenue side in the interest of long-term improved margins and also higher LTVs and better value. First 2 are relatively easy. One were paid marketing channels that had either been in place for a long time or where the underlying economics had diminished so that they were essentially 0 margin, as Joey says, lower no-calorie revenue streams. So that's something where we'd be SEM acquiring traffic. And when you fully loaded it for cost to fulfill, bad debt, credits, et cetera, we're making no money. But for whatever reason, they sort of -- inertia builds and those revenue streams continue. We got rid of those through raising return requirements on certain paid marketing. The second, which we'll talk about on the service provider side, was in looking at our service provider sales, and this, to be fair, was an outcome of the pandemic when professionals had so much off-line demand that they couldn't possibly satisfy it. So there were reductions -- in the insane demand highs of that period, pros reduced their spend partly just because they didn't need it and couldn't fulfill it even if they wanted it. And we ended up chasing lower-quality pros. Now one of the observations that the team made was a factor in that was our sales force was too big. So it's sort of confusing activity with progress where you've got a bunch of people who have to sell. If that's your job, then you just sell to whomever you can. And there was a recognition that by shrinking the sales force, which would also drive margin, and prioritizing who they go after, we will also improve SP quality, and that has worked very well. It leads to a nominal reduction in sales. But when you look at the improvement in bad debt and also the dialogue on cohort retention and others in the shareholder letter, we feel great about that. The third is what you're asking about, which is marketing channels where we identified just lower either pro win rates or lower-quality leads. And you get that feedback through either pro win rates or pro complaints or pro requests for credits. And we just saw that there were clear -- and this is going channel by channel, this is third-party SEM, inbound/outbound call center, et cetera, there were clear gaps in lead quality between different partners, different providers, and we could optimize. Now the short-term effect of moving, if you shut down one partner and move that to another partner, you've got a dip and then you have to ramp back up. If you double the amount of spend with a high-quality partner, it is not instantaneous that they can recalibrate their settings and drive. Similarly, if you move to an entirely new partner in the channel, they've got to sort of recalibrate their targeting, their ROI metrics and allow themselves -- their performance to bake. So it's coming back. Depending on the channel, it's kind of a gradual dip or a V in coming back. Some of them, it's taking longer than we thought, but we have full confidence they'll all be back.

Yes. What would you say you're doing to be able to hopefully move that along? Is it product development? Marketing? I imagine it's all of it, but what are the things you feel like are in your control there to drive that rebound?

Yes, a lot of it is in our control. It's across dashboards, seeing the ROI and seeing that the partner is producing the leads and opportunities that we would expect in the channels we'd expect and then sort of moving the dials to optimize between them. There's also some technology elements of how they communicate information to us that you've got to get up, especially with a new one. But it's just blocking and tackling. And we've made progress, we will continue to, and nothing has changed our view of where it's going to end up.

Got it. Okay. And then, I mean, the killer question we get, obviously, from people is, are you done? Right? Have you identified all of these channels? What's your -- maybe just speak to your confidence level around that.

I'd love to say we're done. But Joey has said repeatedly, he wants the optionality to prune around the edges if he finds things. To his credit and the team's, there are -- it's increasingly -- sorry, take us back, it's increasingly nuanced or targeted where it's more you're pursuing a plan to optimize the channel and then you find low ROI activities or suboptimal execution in a certain channel and you tweak. I would think anything big is behind us. And as CFO, that's my hope. But we have said we'll continue to prune where we think it's in the best interest of shareholders long term.

Got it. Okay. And then just maybe another one because you mentioned it related to SEM specifically. What have you seen in terms of ROI there lately? Your largest partner has made some fairly meaningful SEO changes. Seems like they're making SEO changes more often than they used to. What have you been seeing kind of directionally in ROIs on that channel?

Yes. SEO has been -- is always a sort of journey with ups and downs as Google tries different things. It seems like they have put out more core changes and tweaks to the algorithm second half of this year than normal in cadence. Nothing that we've seen that's a massive swing, especially back to 2019, which predates me, but when Angi was hit hard. They are always playing around the -- but relative to broader trends, I think they'll always try to steer more activities to their own channels and play around with the number of things on the surf page, but there's nothing we'd highlight in SEO that's been significant.

Got it. Okay. And then anything to call out just in terms of Google's competitive offering, right? Because they -- I think as we think about '19, right, that coincided with them maybe getting a little bit more aggressive on go-to-market with their own products. How -- maybe just any sort of competitive update or changes you've noticed there lately.

Yes, I wouldn't say much. We think their conversion and matching is poorer than ours. And given the data we have, history of matching, they've got liquidity as well, but our -- we're always humble and especially when talking about someone like Google, but we feel good about the ROI we provide to pros versus them. And they can price it differently, I guess, but nothing we would highlight in terms of their capabilities in ads and leads. And then services, they're not in that. And the longer we're in it, and we went too far with services at one point, but relative to other competitors, we definitely think having ads, leads and services as arrows in your quiver is by far the best way to serve both pros and consumers on job types.

Got it. Okay. And then one of the -- I don't know if there were any -- did I see a hand? No. One of the other comments I think Joey made on the earnings call was just around some price optimization. I think he said something to the effect of maybe certain categories had gotten a little ahead of themselves in terms of price. Talk about, is that -- again, is that more of like a onetime -- or I know the idea of price optimization is ongoing by definition. But were these maybe some more major changes that needed catching up on and now we're back to kind of a baseline? Or this is kind of the norm here going forward?

Yes. I would distinguish between constant optimizations that occur, and this is the value of data and return-path information, but constant optimizations that are occurring in price based on category, geography, what liquidity looks like, macro, that's part of the business. Joey was particularly talking about there was some sloppy increases in pricing that were aggressive in the '22 time frame that -- in certain categories, that just are not conducive to overall long-term platform engagement, et cetera. So elements of recalibrating some of those. And it's really a broader theme of what's the service provider experience. So what is it like when we onboard a pro? We've gone very much to a crawl-walk-run onboarding where before, they would get tons of leads, all these new products, et cetera, and they'd get overwhelmed. And that drives attrition, obviously, bringing higher-quality pros or avoiding low-quality pros. Controls and tools that we're giving them, especially smaller pros related to how they get leads and the cadence of that. So simple things like set it to when they're in the office versus when they're in the truck because if you're a small pro, the worst thing is if you're -- if you paid for a lead that comes in while you're actually out doing your job and you can't respond to it and you get charged for that. So all of those things improve pro experience. And clearer ROI, this is giving them better ROI by rationalizing price on certain things to drive LTV.

Got it. And you just mentioned, too, some of these price optimizations where you're keeping an eye on ROI as a function of data. Can you give a little bit more on that? Because I think you guys do some unique things in the industry to understand really what your ROI is. How do you guys do that?

Yes, there's -- you've got a couple of elements, which are win rate. So I'm a pro, I buy a number of leads. What is actually the rate relative to the leads that I come in that I win? And what -- how do you do differentiated pricing on the front end of those leads in a predictive way that would tie to win rates? So it's like the movie Glengarry Glen Ross, right? There's different quality leads that come in that you bring in, in any setting. So we map pricing to the expected quality and win rate of those leads and then constantly calibrate it. It's in a smooth way to pros, but the virtuous cycle of their experience will benefit them and also lead them to want to pay more. But it is very much what's their frequency of winning; what's their frequency of being able to interact with the customers, so they know that they're getting ad bats for the leads they're paying for; and what's the ratio of what they're paying relative to the probability of the fee associated with that job type.

Right. And I guess part of what I meant, too, was how do you get that feedback loop?