People Incorporated (IAC) Earnings Call Transcript & Summary

Okay. I think we're live. Good morning, everyone, and thank you for joining us at the Truist Fourth Annual Internet growth Summit. I also want to thank Chris Halpin, Chief Financial Officer of IAC, for being with us for this conversation. Good morning, Chris.

Thank you, Youssef.

Excellent. So maybe at a high level and to level set this conversation, how do you guys look at the set of operating assets today in terms of your strategic rationale and positioning within the respective markets for IAC. I guess this is really all the more relevant now that you guys announced earlier this week that you're exploring the Angi spin-off.

Sure. I think, we are proud to have a collection of assets that are leaders in their respective spaces. Dotdash Meredith is the biggest digital publisher in the world, and we think proving out its advantages across content, technology, ad sales, a variety of capabilities versus really the existing competitors and then also approaching the digital platforms out there for user experience and monetization. Angi is the #1 home services site with great liquidity of 180,000 Pros and an excellent brand and loyal consumers that come there to fix really anything around their home or improve it. Care is the #1 site to line up care for humans and pets, be it children, seniors and then growing businesses in daycare and pet care. Joey talked about the metrics there of 7,000 to 10,000 jobs posted a day and hundreds of thousands of interactions due to our strong base of caregivers. MGM is the premier integrated resort company, we think, in the world with a true leadership position in Las Vegas that continues to move from strength to strength as the center of leisure and entertainment globally. Turo is the #1 site for car sharing and is, we think, really taking share against the legacy rental market and then also incremental use cases that only Turo and its host can serve and on down the chain to Vivian, searching the Beast. So we feel good about the positioning. We've been very focused on execution for the last few years and really rightsizing certain things that may have gotten overinvested in or pandemic froth in certain areas of the business. And we've been focused on simplifying the portfolio. We sold 2 businesses, BlueCrew and Mosaic over the last couple of years. We're exploring the spin of Angi as we announced a couple of days ago. And we've also said -- as we've said, there's no business that's destiny as they are part of IAC forever, that if there is a better home for a business within our portfolio, we will find it, and we're happy to explore different avenues there. But we have said right now, Dotdash Meredith and MGM are the core of the portfolio.

All right. Well, let's double click on the topic du jour Angi. So I think a number of investors were a bit surprised by the move by the announcement, especially considering that, that business is still in turnaround mode. How would the proposed spin actually be helpful to that turnaround and to maybe prospective investors? Kind of what's the pitch now for Angi as an independent entity?

Look, it's been a long journey on Angi for investors and for us, we know that. And the -- Joey went in as CEO just over 2 years ago and started to rationalize the business, give it focus. We've taken, as investors know, a lot of revenue out while improving profitability. That's an unusual interrelation in a business of shrink revenue, grow profit, but it speaks to the state that Angi was in a couple of years ago. And then Jeff has continued that strategy, bringing with him significant experience in really all elements of the business, having run and built Europe for Angi. And he's brought greater focus, real expertise on product and flow and user experience, consumer and Pro. And we feel good about where the business is. We narrowed and raised the midpoint of our profitability range for Angi this year to $140 million to $145 million of adjusted EBITDA. Cash flow is strong, balance sheet is excellent with $400 million of cash and $500 million of incredibly attractively priced bonds. So the business is in great spot. We also have said even with guidance towards revenue declines in Q4 and Q1 and a little bit throughout the year, we expect to maintain whole dollar profit next year for Angi of $140 million to $145 million. And the business is in a solid focus on execution and performance. As we've said we're exploring a spin of Angi. We do that any time we're thinking about potentially spinning a company and spinning has been a core element of IAC's strategy for decades. When we think about it, it's a scale business that's already publicly traded with about a 15% public float. Profitability and margins are solid and improving. The road map forward, we can talk about TCPA and the FCC rule change and the short-term impact there. But the forward game plan and the improvements we're seeing in metrics like Pro retention, NPS, those things which will lead towards demand growth and solidity of supply and paying Pro base are there. And we think it could be a good time for the business to be on its own with its own liquid currency. We've had investors tell us in the past that they would like to participate in Angi, but given the low float and lack of liquidity given the size of our ownership is a real factor in preventing them. And the thesis would be it's the right time for Jeff and the Board of Angi to go off and drive their own strategy, including on capital allocation versus IAC's priorities as part of a diversified conglomerate or anticonglomerate conglomerate is as Joey would say. So that's where we are. We're exploring it, and we will continue to discuss with our Board.

Okay. So -- and just to add something to -- I think in the letter you guys talked about how that business is on a path to resume growth. And I think, Jeff, on the earnings call, talked about 2026 as a year where he believes Angi should start showing positive growth, right?

Yes. So there's a few countervailing factors going on here, which we can get into. So Joey initially and Jeff has continued the theme of stripping out either low-margin revenues or revenues that are dilutive to consumer or Pro experience. And we've gone very much down this path of prioritizing spend on the marketing side and then also continuing to fine-tune the quality of the leads that we bring in and that we sell to our Pros to ensure that there is a clear consumer request for a job that's properly scoped, properly matched and what Jeff called consumer choice on the call, where the consumer is saying, "I want this specific Pro or Pros to reach out to me." That has manifested itself in better win rates, better pro experience, better pro ROI and also our consumer base that is less overwhelmed with inbounds from Angi and also being contacted by Pros that they want to have contacted. We had really chiseled out a lot of the suboptimal lead flows. There was one bucket that was left, which is when we buy leads from third parties, which you can call affiliates. And parts of that, we had improved and some of these date back to '23 and actions there that took out revenue. But there was a portion that we were still thinking about the best way to proceed on and would have narrowed down. And then the FCC has instituted the rule change, which is to TCPA, which prohibits any company from contacting a consumer using an auto-dialer unless they have one-to-one consent from that consumer for that specific company to contact them. This is going to have significant implications for credit cards, mortgages, insurance, those types of things where there's a massive lead generation element. For us, there are leads that we acquire from third parties where -- in a number of scenarios, you really couldn't get that one-to-one consent because when you're buying the lead, you don't know necessarily, which professional you will end up selling it to or professionals. So there's a step in there. What we've decided to do is really pivot away on this portion from buying those leads. There's a number of variables that can ameliorate the impact of this rule change on us. The most significant is the broader affiliate market is going to be less competitive in SEM and other channels to acquire leads that they would then sell on because those leads will be less valuable. Additionally -- and sorry, a bunch of that traffic, we think, will flow directly to folks like ourselves who have the existing Pro network that you don't need a step. You can directly match at that point. And then the actual enforcement and their judicial challenges to the rule change or legal challenges, it's uncertain how it will play out. We decided to be conservative in how we forecast its impact and to apply it when it goes into effect in January as written, and we'll monitor it. The impact of that is built into the guidance we've given of Q1 being down roughly the same as this past third quarter, sort of 15%, 16%, but it may be better, and we'll see what the organic impact is. On a go-forward basis, that decline in Q1, part of that is just continuing to anniversary actions previously taken and then a piece of it is TCPA impact. As we go throughout the year, we expect to be second derivative positive on revenue at Angi, and that's what gives us confidence that we will get to revenue stability and growth in '26. But could it happen earlier? It's really a Monte Carlo simulation of all the different factors and what happens to consumer demand as TCPA goes into -- the rule change on TCPA goes into enforcement. So it's a bit murky, but we have confidence about getting to growth in '26 and regular improvement across the next year.

All right. That makes sense. So maybe just staying with Angi for a little more. So you've been able to maintain margins, double digits, even in the face of lower revenues by taking a bunch of costs out. Are there any more opportunities to take additional costs out in the system or now as you -- to your point, as you may be asymptote towards that stability by the end of the '25 and into 2026, you start turning back to growth and you need to reinvest in the business.

Sure. So there have been 3 to 4 main areas where we have taken costs out, one, clearly on marketing. And this was a major issue when Joey took over the business, and there have just been continued cycles of improvement where, we've talked about this before, we were buying things [indiscernible] or expected returns that were essentially 1:1 or 0, marginless activities. We also were sort of pursuing some antiquated channels of marketing that just wasn't the ROI and also dilutive to Pro experience and lead quality. We've continued to chip away on that. We've also been focused on managing brand spend to the channels that we can see impact and that we can take advantage of driving awareness versus just a scattershot approach, that's one. Two is the sales force, and we've talked about this that there were these additions to the sales force because theoretically, they would bring in Pros, when the reality was the large sales force would bring in Pros, they'd just be very low quality, and we had a churn issue. And that was pronounced in the second half of '22, where we were -- they were doing their job, they were bringing in Pros, but they were not going to be successful within the Angi system and also the spend was not [indiscernible] of the activity. So we have shrunk the sales force, target them on higher-quality Pros and also had better Pro onboarding, that's driven cost efficiency, but also improved bad debt, churn retention and is arguably better. The third would be just general OpEx and cost savings, and we've continued to get more efficient on that, and that goes all the way down to the capitalized software line, which would be below the EBITDA line, but get to cash flow, and we have just continued to be more efficient. And then the last big bucket was all the wasted money and services that existed that was dilutive to margins and general profit. On a forward-looking basis, we can continue to optimize those. The one area that Jeff has talked about and builds on his experience in Europe is platform consolidation and efficiency. And so as he talks about going to a single product, which is really merging the existing ads and leads products, which have their roots in Angi's list and HomeAdvisor respectively. You can bring those together, have efficiencies in platform, not have to run 2 systems, also have 2 different sales forces and be more efficient in your matching and utilization of your lead flow. So that's a big example of further ROI and margin improvement. Longer term, you can't have revenue decline and profit go up forever. That is a finite strategy, which you need to have had a lot of inefficiency historically to have that option on your menu. But we've gotten the margins to 12%, 13% with growth. We can definitely see them getting to 20% and that includes 20% with good investment to drive further growth. And so we see opportunity through consolidation onto One Pro product and other efficiencies. And then longer term, it's about revenue growth.

Have you quantified the magnitude of maybe the potential savings from the integration of the platforms?

We have not. And it's -- there's -- we'll be giving more information on that as we go down the path and continue to fine-tune the rollout of the combination of ads and music.

Okay. That's fair. All right. Now shifting to DDM. The integration is now in the rearview mirror. Can you maybe talk about the trends you're seeing in that segment? Obviously, we saw growth accelerate, which was great to see. It seems like you're growing faster than the overall digital advertising. Maybe talk about the interplay between brand, DR and any reason why you should be growing either slower or faster than the broader digital ad market, say, I don't know, 10% for the next year or 2?

So on a normalized run rate basis, we would think we will grow faster than -- definitely than the open web and the broader, we think, digital advertising market. We feel good about the -- at the end of the day, it's -- put aside performance marketing, although that's correlated to traffic, but it's price times quantity. So quantity of traffic audience growth, impression growth, we call them sessions, which are impressions are a subset of. And then price, which is monetization. And that's both direct sales as well as programmatic. One of the good things for us at IAC. At DDM, we look at a lot of M&A of other publishers. We are roughly -- in digital advertising, we do about $630 million to $640 million of trailing digital advertising. We're 2/3, 1/3 direct/premium versus programmatic. A lot of the other publishers out there are 70% programmatic. So we feel very good about that. And we have made major investments in our ad tech stack and our programmatic capabilities and integrations since the Meredith acquisition. And we've had a very virtuous cycle of continued programmatic improvements and steps forward and outperformance, and it speaks to how well DDMs's inventory performs broadly. So when we think about it, the simple math would be on a future state, 5% traffic growth, 5% monetization improvements, the former because we really think we are just outrunning other content producers in terms of scale, in terms of product, in terms of capabilities, knowledge of where consumers are going, and that is leading to share gains across our categories of food, health, travel, home, finance, et cetera. And then monetization should keep improving as we broaden the accessibility, understanding and use of decipher, which we really view as -- we can talk about view as our game-changing product. And then our programmatic just does it better than anybody else. And then performance marketing was a great driver of growth for us last year, has underperformed this year, heavily driven by real weakness in the finance categories, insurance, brokerage, et cetera. We think we're lapping the worst of that and then also maybe we'll get a boost in brokerage and crypto and those things coming out of the current euphoria. But commerce has continued to be strong. That's the biggest part of performance marketing. We're feeling good going into the holiday period. We've got great partnerships, Amazon, Walmart, other retailers. And then the last element of our digital growth is licensing, which comprises a few elements, but the growth there has been Apple News, where we think we are tops or if not, one of the top couple publishing families on Apple News and our licenses for AI, like our OpenAI deal, and we feel great about that partnership and expect to have more over time.

All right. So I want to go back and double click a little bit on D/Cipher. That seems like really kind of a game changer for DDM. Talk about the opportunity to improve targeting and ROS for advertisers, maybe not just on the DDM platform, but off DDM. And just how long do you think you need to kind of make the vision be reflected in P&L, if you know what I mean?