People Incorporated (IAC) Earnings Call Transcript & Summary

Okay. Understood. I want to turn to Dotdash Meredith, maybe start with digital. Can you talk about the growth opportunity that sits ahead of Dotdash digital and how you would characterize the current ad environment coming back to your comments on broader macro?

Sure. At the end of the day, at Dotdash Meredith, on the digital side, we have 3 main revenue line items, advertising, performance marketing and licensing. On advertising at the end of -- at its core is price and quantity, monetization and audience. Both of those are growing well. Last quarter, we talk about core sessions, which are over 80% of our total traffic and are the properties that we are investing behind like people, Better Homes & Garden, Travel and Leisure, food and wine, et cetera. We had 9% organic traffic growth in the second quarter, and we said it accelerated so far across this quarter. We know we are taking share in terms of audience. We're taking it in our categories, especially versus other publishers and information sources who cannot invest at the level we are in content and experience. And we expect to continue to drive audience there. That traffic then falls into two buckets, as you guys know, premium/direct or programmatic. We are 2/3 premium, 1/3 programmatic. We love that ratio. And we think that highlights the value of our content and our audiences. Premium is solid. It's not -- Neil Vogel, I encourage anybody to listen to -- he was on a competitor's conference last Friday, but his energy and the way they drive this business is a credit to them and a sign of the opportunity here, but he talks about that market. And the Ad macro is fine. It's not great, depending on the month, your comps are easier, et cetera. Also, when you get into categories, we can talk about those, there's a lot of idiosyncratic things going on that might make something look fine, but it's off a very low base. But the market is okay. And in that, we've been able to drive premium. And then we talked about in the letter, our programmatic growth has been exceptional. And that's a credit to the way they've built the ad tech stack out, our integrations to programmatic and how well our inventory performs. So we've been growing high teens on digital performance advertising. Performance marketing has been growing strongly the last couple of years. We've had a dip this year due to some headwinds in financial services brokerage insurance, we'll get through that. Performance marketing for goods, going to your macro question of people buying e-commerce has been solid. And we had a good Prime Day in July, and we think our product, our integrations, our differentiation there is pretty singular. And then licensing, and we'll talk about OpenAI, Apple News is doing very well for us. That has been a growth driver there. And then last quarter, we had our first revenues from our OpenAI partnership, and we'll look to add more to that.

Well, let's pivot there. We've gone over 10 minutes at a technology conference, and I'm going to talk about AI. So let's pivot to that. I think I'd like to ask it from a 2-sided dynamic. I think we get a lot of questions about the potential for AI to impact the publishing businesses inside Dotdash Meredith, but then you also have a partnership with OpenAI around your content and licensing. Talk a little bit about the nature of AI and how it might impact the businesses going forward?

Definitely, there's probably three elements to the AI -- generative AI conversations that we have. The first is training of models and access to content. That, if you go through the arc of that since OpenAI rolled out ChatGPT 3 at the end of '22, we think it is getting to a much more reasonable place. And Joey said this 2 letters ago, where we think anybody building a large language model is going to have to come and get licenses for content from differentiated providers of information and entities that are respected as a source of truth, both for training and verification of those models. And where a given LLM developer is in accepting that is sort of how are they going through the 5 stages of brief of the reality of fair use only gets you so far and doesn't get you to where I think people thought it did. That's one. Two is disruption of search, and we talked about the -- in the last shareholder letter, about 40% of our DDM digital traffic is from serve pages on Google. That we saw a penetration rate of about 15% of AI overview answers for relevant searches for our categories. And we saw a minor impact on click-through rates. We're going to watch it like a hawk. But that's where it is so far. It will probably grow. I think everyone has seen how Google has adapted the AI overviews they serve up as they're continuing to go. And trying to, I think, avoid over cluttering the consumer experience. But to date, we've seen a de minimis impact on our traffic from these broader generative AI offerings. And then finally, use of generative AI in our business, and we haven't -- I haven't talked about the Cipher, which we think is truly one of the differentiators for Dotdash Meredith against most other advertising options for brands, especially endemic to our category. But we are really excited about in our AI partnership -- OpenAI partnership, what they bring to D/Cipher and the ability to scale up the reach across the Internet and the ability to model predictive analytics around the performance of third-party inventory. We've done some, but they can also -- using OpenAI do it on video, on images, not just text to say, what is an individual looking at and what's the optimal ad to serve to them even on third-party content. They've been good partners. Neil talked about it on Friday. We expect -- we are having conversations and over time, expect more generative AI partnerships, and they all have their own different flavors and then probably some will be harder to wrestle into the boat, but we think they'll get there.

Okay. Just quickly, maybe touch upon the Print side of the house at Dotdash Meredith. How should investors thinking about managing that for cash flow versus growth? And where it fits inside the portfolio for Dotdash Meredith.

Yes. Neil and team went in and when we acquired Meredith, and we're highly disciplined and focused around reducing the number of print titles to what we call the Magnificent 7 of core titles that have -- that stand on their own. And our profitable have real subscriber bases that -- and real advertisers, and that led to a lot of restructuring costs out of the box, but that has played out very well. And the Print category or Print segment has outperformed our expectations surprisingly since we bought it. The titles we have are excellent, Southern Living, Travel and Leisure, People, et cetera. We will continue to manage that portfolio for profit. They are additive to the digital experience. They are complementary. We feel like we can manage cost structure frequency, et cetera. And our goal, as we've said, is to use the adjusted EBITDA out of Print to offset the corporate costs that sit at Dotdash Meredith in their structure, and we feel good about continuing to do that. We'll continue to prune, rationalize frequency, et cetera, but it's been a nice story.

Okay. And last one, just you've talked a lot about margin potential at Dotdash Meredith from the point in time in which you acquired the asset. And obviously, the asset has been on a bit of a journey since that point because of some of the macro dynamics. But do a check-in for us on where we are on long-term structural margins with respect to Dotdash Meredith?

We continue to feel good about 50% plus incremental margins. We are investing right now, and that is really product of the opportunities we see. So we are actively investing in D/Cipher. We are actively investing in content where we can break out and get ahead of very credible competitors in our segments who we think are constrained and just serve the customers better. We're also very focused on acquiring more direct traffic and traffic through new channels, specially video, that the opportunity in video for the Dotdash Meredith brands has only increased in our mind since we've owned it and understood the performance we see there. So we are investing. We guided to sort of 30% incremental margins in the second quarter. We beat that through better monetization. I think we would guide people towards 50% incremental margins on a go-forward basis, and we just got to keep executing.

Okay. You also have a search business inside IAC, maybe I'll skip ahead to that and just ask how investors should be thinking about the growth versus margin profile of that business looking out over the medium term?

Yes. I mean it is -- I think the business that everyone expected to go away for a long time and has kind of -- has hung around. They have continued to reinvent themselves and come up with new opportunities in the Google ecosystem and Bing ecosystems and search. It's been a tough 12 months. There have been a number of changes in the areas it operates, and you can see that in the revenue side and profitability. Our guidance is sort of a lower baseline of profitability. I wouldn't think about growth in the near term there. And it's profit we use to offset corporate costs and other activities.

Okay. Typically, as a company, don't find yourself with minority positions in equity investments. But you do with respect to MGM and Turo. Maybe talk a little bit how those fit into your broader philosophy about owning businesses, operating businesses, making investments, allocating capital and what the update is about sort of Joey and IAC's broader view about MGM and Turo?

Sure. So IAC has clearly always been a control organization that's Barry and Joey's instincts and what they like to have. I think what is -- data points that are important on Turo, where we invested in a private setting and then MGM, where we bought public shares in that setting. We are, by far, the largest shareholder in both. So we are about 32% in Turo post exercise of our warrant and we are 21% shareholders of MGM and neither is close. And we're active on the Board to have substantial, a significant influence on both and view them as long-term holdings that we see value. Taking them one at a time, Turo is a real disruptor in the car rental, car sharing market. Andre Haddad, the CEO and his team have done an incredible job on that product and making the NPS and retention and repeat rate for Turo are exceptional, especially when you compare it to rental car competitors. And the opportunity is there. The biggest thing is awareness where you guys can do your own scan. But roughly, if you go to a dinner table, roughly 1/5 of people have heard of Turo, they overwhelmingly love it, would love to use it and 80% haven't. That is a big opportunity, but that also requires brand marketing awareness and is the big point of focus. We're very excited about the partnership announced between Uber and Turo last week. It is a great combination of the traffic and user base -- sorry, Uber has with the product and network of hosts that Turo has. And we also thought you should read in that Uber tried the car sharing business through their acquisition in Australia and have pivoted out of it. And I think that reflects the -- how good Turo is at what is not an easy business. It took a long time to figure out insurance, took a long time to figure out post experience and opportunities there. And so we are very focused on them taking advantage of what's in front of them, acquiring more consumers and giving them an incredible experience. MGM, we think it is undervalued by the market. The Las Vegas properties are iconic and one of a kind. They have continued to perform the international opportunity. We're very excited about, be it MGM China, which has been doing very well and our European digital assets, which we started with LeoVegas. And then BetMGM and #3 player, it's a big year for them in terms of delivery of new product capabilities through our partner at Entain, and they've got to get back to stabilizing and taking share in the -- they are a great performer in iGaming. They got to get back on sports betting. But we think the market is greatly undervaluing MGM's assets.

Okay. We only have a few minutes left, but probably the topic I ask you about the most on public earnings calls and probably the section of the shareholder letter I go right to is capital allocation. So you always have an array of choices in front of you investing in businesses, committing to M&A, returning capital to shareholders. Give us a current snapshot of your capital allocation priorities inside the company? And how should we think about some of the key messaging that Joey has been trying to send through the shareholder letter as the year has progressed?

Yes. The core message is we feel it is a very important time. We talked about 2.5 years ago, it was sort of adding to and building the -- the strategy was building the IAC portfolio. Now is the time to do it. We've gotten Dotdash Meredith to a great place. Angi stabilized, and we expect to continue to maintain profit and margins irrespective of the revenue profile. The other -- we've cleaned up the portfolio. Now it's about going on offense and finding a great business that we can add to the collection to create value for shareholders and also elements we can add to our existing business. So we have been aggressively focused on M&A. It's tough to wrestle efficient to the boat. We do think the market will improve and a lot of parties that were sort of not fully committed to a transaction, things need to start happening there. We also have been buying back shares at Angi. We continue to think about the value that's embedded in our IAC shares. And as I'd like to say, if you like MGM, every time you buy an IAC share, you get 3/4 of a share of MGM, if you like Dotdash Meredith, you get a lot of that for theoretically free and you can go on down the list. So we continue to analyze it. We've got cash. We're producing cash, which is great. We get when we get DDM to below 4x covenant EBITDA, we can start bringing cash flow out [indiscernible] and that is the cash flow engine in IAC right now. So we're on offense and excited about the opportunities.

All right. I think we're going to have to leave it there, but please join me in thanking IAC for being part of the conference this year.

Thanks Eric.