Date: April 10th, 2014 Ross O’Toole, CFA rsotoole@gmail.com Stock: IAC/Interactive Corp. (IACI) –| Buy at $68.37 with a two-year target price of $94 - $121 Business Description: IAC owns an attractive collection of over 150 media and internet brands. Its family of websites is one of the largest in the world with more than a billion monthly visits across 100 countries. IAC organizes these brands in five reporting segments: 1) Search & Applications, 2) Match, 3) Local, 4) Media and 5) Other. Although the operating businesses each have their own end markets, growth rates and margins, the businesses are either subscription-based or revolve around content, need little fixed asset investment and either create or have the potential to create substantial free cash flow. Quick Thesis: IAC’s disparate businesses make determining its intrinsic value less straightforward, thus creating an opportunity for an enterprising investor. The company is an attractive investment for several reasons: A. Match and its other personals properties have “franchise” characteristics and are undervalued B. The Search & Application business model’s resiliency is underappreciated C. IAC’s has several early-stage businesses, in particular Vimeo, Tinder, and Aereo (minority-stake), that provide tremendous optionality going forward D. Chairman Barry Diller (controls ~43% of voting stock) has a superb record of creating shareholder value These key investment highlights are addressed in greater detail below under the section extended thesis. In short, there are multiple ways to “win.” The following sum-of-the-parts analysis shows a range of possible outcomes, most of which illustrate a company that is undervalued. IAC's Current Stock Price: $68.37 OPERATING BUSINESS Match Search & Applications
Rev 1,107,360 2,021,712
OPERATING BUSINESS Local Media Other
Rev 300,000 300,000 175,000
Other IAC's NY Headquarters Corporate and lease back Cash Debt Shares
88,600
2016 OIBA 488,751 404,342
Margin 44.1% 20.0%
2016 OIBDA
Margin
Usable Square Feet 130,000 (105,450)
OIBA Multiple Enteprise Value Low Mid High Low Mid High 8.0x 10.0x 12.0x 3,910,007 4,887,509 5,865,011 3.0x 5.0x 7.0x 1,213,027 2,021,712 2,830,397
Value Per Share Low Mid High $44 $55 $66 $14 $23 $32
Revenue Multiple Low Mid High 1.0x 2.0x 3.0x 2.0x 3.0x 4.0x 0.75x 1.25x 1.75x
Value Per Share Low Mid High $3 $7 $10 $7 $10 $14 $1 $2 $3
Price per Square Foot Low Mid High 2,500 3,000 3,500 6.0x 7.0x 8.0x
Low 300,000 600,000 131,250
325,000 (632,700)
Enteprise Value Mid High 600,000 900,000 900,000 1,200,000 218,750 306,250
390,000 (738,150)
Value Per Share Low Mid High 455,000 $4 $4 $5 (843,600) ($7) ($8) ($10)
1,106,000 (1,080,000)
$12 $12 $12 ($12) ($12) ($12) Target Price:
$66 -3%
$94 $121 37% 77%
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VALUATION COMMENTS Key Points: Operating Income before Amortization (OBIA) is a more conservative estimate of pre-tax owners’ income since it excludes depreciation. Therefore, it is a better proxy of pre-tax free cash flow (assuming depreciation and capex are offsetting). Since most companies choose to use EBITDA, this valuation is somewhat understated relative to the comparables. Management has been increasingly more bullish regarding the personals business prospects over the past several quarters. On the Q’13 conference call, CEO Greg Blatt laid out his thinking about the medium-term economic potential of the business. The Match Group nearly doubled monthly active users and conversion rates over the past year. Blatt said, “If over the next three years we increase users and conversion by the same amount we have over the last year, we’d be generating about $120m of OIBA from these products in 2016.” These businesses currently have no monetization engine. He went on to say “if you take the 2016 OIBA number just referenced and then extrapolate the traditional businesses at historical growth rates, you get around $500m of OIBA in 2016, nearly double the current levels.” 3-Year CAGR 17.5% 19.7% 21.9% 24.0% 26.0%
$55 425,000 450,000 475,000 500,000 525,000
8.0x $38 $41 $43 $45 $47
Match Group 2016 OIBA Multiple 9.0x 10.0x 11.0x $43 $48 $53 $46 $51 $56 $48 $54 $59 $51 $56 $62 $53 $59 $65
12.0x $58 $61 $64 $68 $71
13.0x $62 $66 $70 $73 $77
The Search & Applications 2016 OIBA assumes a 2.6% 3-year CAGR, well below management’s guidance for double-digit growth. Moreover, the valuation analysis assumes margins compress > 200 bp in the next three years. It is worth noting that S&A margins have actually increased by 300 bp over the past three years.
-1.6% 0.7% 2.8% 4.9% 7.0%
$23 350,000 375,000 400,000 425,000 450,000
2.0x $8 $8 $9 $10 $10
Search & Applications 2016 OIBA Multiple 3.0x 4.0x 5.0x 6.0x $12 $16 $20 $24 $13 $17 $21 $25 $14 $18 $23 $27 $14 $19 $24 $29 $15 $20 $25 $30
7.0x $28 $30 $32 $34 $36
Relevant Comps: YouTube was acquired by Google for $1.65 billion when the company had 34 million unique monthly visitors. Today YouTube’s estimated worth is between $10-15 billion. Vimeo already has an audience north of 100m uniques, which it is not monetizing and 400k subscribers, which is expected to grow +25% in 2014. Vimeo is embedded within Media with our best-case scenario valuation of $1.2 billion.
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MARKET CAP
TICKER PRICE S/O Search & Applications Comps PERI $10.80 13,003
CASH
DEBT
ENTERPRISE VALUE
REVENUES 2012
2013
EBITDA 2012
EPS 2012
2013
2013
$140,432
$23,364
$6,550
$123,618
$61,206 2.0x
$104,628 1.2x
$13,994 8.8x
$25,469 4.9x
$0.99 10.9x
$1.54 7.0x
AVG
$19.41
54,710
$1,061,921
$42,349
$97,231
$1,116,803
$355,966 3.1x
$407,113 2.7x
$130,878 8.5x
$167,413 6.7x
$1.40 13.9x
$2.16 9.0x
BCOR
$19.29
43,480
$838,729
$333,705
$302,679
$807,703
$406,919 2.0x
$573,980 1.4x
$80,439 10.0x
$114,241 7.1x
$1.70 11.3x
$2.25 8.6x
AOL
$42.84
82,000
$3,512,880
$207,300
$111,700
$3,417,280 $2,191,700 $2,319,900 1.6x 1.5x
$412,600 8.3x
$480,700 7.1x
$11.21 3.8x
$1.13 37.9x
Comp Average
1.7x
6.4x
15.6x
*IAC acquired Investopedia.com and PriceRunner assets from ValueClick in Q4'13 for an attractive run-rate pre-tax income of 5x Local (HomeAdvisor) Comps ANGI $12.24 58,231
$712,747
$55,858
$14,918
$671,807
$155,799 4.3x
$245,642 2.7x
($45,300)
($18,900)
($0.57)
($0.92)
Match Group Comps NTRI $14.92 28,287
$422,042
$19,391
$0
$402,651
$396,878 1.0x
$358,086 1.1x
$27,330 14.7x
$31,617 12.7x
$0.18 82.9x
$0.40 37.3x
$9,668,795 $4,030,300 $4,771,300 2.4x 2.0x
$802,900 12.0x
$878,700 11.0x
$1.67 41.9x
$2.16 32.4x
52,413 $62,376,711 $6,752,714 $1,893,978 $57,517,975 $5,260,956 $6,793,306 $1,972,905 $2,681,504 10.9x 8.5x 29.2x 21.4x
$31.28 38.0x
$41.72 28.5x
EXPE
PLCN
$69.96 139,593
$1,190.10
$9,765,926 $1,346,543 $1,249,412
Comp Average Comp Average ex. PLCN
3.9x 1.6x
15.1x 11.9x
32.7x 34.8x
EXTENDED THESIS A. Match and its other personals properties are undervalued What I like: IAC’s personals business is the undisputed global leader in dating with more than 30 million users and 3.4m million paying subscribers at year-end 2013. In 2013, revenue, PMC and OIBA grew +12%, +19% and +21%. As subscribers have grown ~10% per year over the past six years, core margin have improved by ~1,000 bp over the past few years (Q4 2013 Call). Management sees long-term double-digit growth across the platform led by its dynamic pricing initiatives (in other words, pricing power). CEO Greg Blatt made the following comment on the Q3’13 call: “Match is heading into 2014 with lots of strength, more than it’s ever had before, driven by strong core performance in the portfolio strategy we began putting in place almost five years ago.” The US market alone has more than 100 million singles with a recent survey indicating 50% are open to online dating. IAC’s US personals business is the largest by far, yet only has ~1.7m subscribers or 3% of the addressable market. The stigma of meeting online is losing relevance and secular trend such as more singles over thirty are quite favorable. The personals eBay-like network effects (large moat) are likely to grow stronger over time. In fact, the personals business cracked 3m subscribers in Q1’13, up 2x in the past four years. Management believes reaching 5-6m subscribers by 2016 is reasonable (13-19% CAGR). 3
Here are a few examples that underscore IAC’s personals dominance:
Non-traditional products within Match have seen phenomenal growth–up 90% Y/Y to over 16.5m monthly users as of Q3’13 In the past five years active users have increased 500% and paying subscribers are up 150%. OkCupid has increased its monthly active users +250% and its revenues by 700% since 2009 as of Q2’13 Match-US monthly active users are up 60% since 2009 According to a company survey, 1/3 of all relationships in 2012 began on-line up from 20% in 2010 and 10% a few years ago
Furthermore, relative to the size of the market, the personals business has a small paying subscriber base. The company is in the early innings of applying "big data" analytics with dynamic pricing to drive more subscribers and more revenue per subscriber.
This year (Q3’13) alone new user conversation to payers is up double-digits The business is increasingly finding ways to charge for products with conversion to payers up 75% Y/Y and total payers up 230% Y/Y as of Q3’13 Management is in the early innings of dynamic pricing. On OkCupid, which is a free site, one single paid over $1,800 in three months for add-on products/services. The most a Match, which is a subscription site, single can pay in three months is $150 even if the user is willing to pay more [Q3 2013].
The personals business works extremely well in a mobile environment. 50% of all communications on Match-US are from mobile devices 60%of OkCupid's communication occurs via mobile devices Tinder a 100% mobile product. The personals business has margins in the low-30% range and the opportunity to move them closer to 40% as properties like the hyper-growing Tinder begin to be monetized. Moreover, the growth requires little capital investment (strong FCF). Match was first launched in 1995 when there probably was some risk of online dating being a fad. However, IAC’s personals business is rapidly approaching the $1 billion revenue mark with the key metrics of user and subscriber growth pointing in the right direction. The risk of online dating being a fad has faded. There are two risks to the personals business. In the US, the risk is the personals business dominate share comes under attack by a new entrant such as Facebook. Outside the US, where the business is less dominate, there is the risk that local competition is entrenched and Match B. The Search & Application business model’s resiliency is underappreciated The consensus is the Search & Applications business is non-defensible, lacks a clear mobile strategy and is overly dependent on Google for its revenues (a price-taker). The conclusion: the business has little value. Yes, Google does drive the majority of revenues for IAC’s Search & Applications business. In fact, over the past three years, Google has accounted for ~94% of the segments total revenues. The paid listings displayed in search results are supplied to IAC under a service agreement with Google that expires on March 31, 2016.
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However, it’s important to differentiate between the applications business and the websites business when addressing the consensus viewpoint. Let’s first look at the applications business: The applications business, which accounts for ~50% of segment revenues, is dependent (risk) on Google’s policy and pricing choices. Google is constantly tweaking its policies (to protect consumers) and pricing (to better match what advertisers are paying with the value being delivered). This directly impacts applications growth and profits so investors are right to be concerned. Here are a few examples that illustrate the applications business volatility:
Management saw “an expected modest decline in unit economics” in its applications business, but also “an unexpected drop in distribution at some of its B2B partners” in Q3’13. On the Q4’13 call, management tempered its 2014 revenue guidance and margins as the company works through recent Google policy changes. Applications queries grew 15% in 2013 led by double-digit growth in B2C (owned and operated) Management said, “The competitive landscape in B2C has tilted on our favor, and we’re seeing increases in marketing opportunities and efficiencies we haven’t seen before” on the Q3’13 call.
The applications business, however, is more defendable than the current consensus believes. There are 1.5 billion site visits per month across Mindspark’s portfolio of more than 70 digital applications resulting in over 100 million downloads in 195 countries. In the past, CEO Greg Blatt has said IAC pays Google more in search fees than any other partner. IAC is an important eyeball aggregator for Google. Turning our attention to websites, IAC is quietly building a portfolio of quality content sites. This business is underappreciated. Let’s review a few of IAC’s key website properties: Ask.com: Reaches 100m uniques per month making the website the sixth largest property on the internet. The brand has a defendable niche with a combination of algorithmic and human answers to questions as 45% of queries at Ask.com are phrased as a question compared to just 8% of queries on Google. According to comScore, Ask.com has stable 3.5% share of domestic queries and a growing 1.6% share of international queries. There have been more than 3m downloads of the mobile application with mobile page views growing 32% in Q3’13 accounting for 35% of all page views. Ask’s CEO notes consumers who download the app ask 2-3x as many questions as the average user and answer 4x as many. Ask queries (searches) grew 25% in 2013 About.com: Reaches 89m uniques per month–more than 25% of the US population, which is more users than Pandora, Twitter, LinkedIn and Netflix. The website attracts more men than ESPN, more women than HGTV and more teens that MTV. About.com has the largest body of expert content on the internet with ~1,000 experts writing on a variety of different topics. Since its acquisition in August’12, About.com has grown revenues per page over 20%. IAC properties are now sending 30 million pages to About.com on a monthly basis that didn’t exist before the acquisition. This had led to a 35% increase in revenues since the acquisition. Urbanspoon, Dictionary.com, Investopedia.com and PriceRunner: Urbanspoon is a leading online local restaurant guide that aggregates reviews from professional food critics, bloggers and diners. There are over 1 million restaurants listed on the site and more than 30 5
million uniques per month rely on Urbanspoon’s content to make restaurant choices. The restaurant booking function is powered by Opentable.com. Dictionary.com is the world’s leading, definitive digital resource for everything word related with 50 million global monthly users and 80 million downloaded applications. Invetopedia.com is a top consumer destination for investing education with 13 million monthly uniques and a top 25 free app on iTunes. PriceRunner is the #1 comparison shopping destination for consumers in the UK, Sweden and Denmark offering expert reviews, video reviews and user reviews/ratings across different consumer service and product categories.
Like the applications business, websites has experienced its share of price (CPC) volatility recently. However, the longer-term trend remains quite positive:
On the Q3’13 call, Greg Blatt said despite CPCs on Ask.com being down meaningful from August highs that they were “still nearly 2x what they were two years ago.” Moreover, he said “over the last three years, we’ve had month-to-month CPC swings of greater than 10%, eleven times and greater than 15%, five times with roughly 1/3 of those swings in the negative” direction.
The point is IAC has absorbed Google policy and prices changes in the past effectively. Management reiterated its expectation that the Search & Applications operating business can grow revenues in the double-digit range over the next multi-year period. And if history is a guide, there is reason to feel optimistic. Search & Applications has grown revenues and OIBA at a 4-year CAGR of +18% and +31%, respectively. In 2013, Search & Applications reported EBITDA of ~$400m, EBITDA margins of 25% and capital investment of only $22m. C. IAC’s has several early-stage businesses, in particular Vimeo, Tinder, and Aereo (minority-stake), that provide tremendous optionality going forward Vimeo is a premier video site for uploading and sharing high-quality video content for the creative community. The rapid growth in visitors means Vimeo is now the #2 dedicated video sharing property to YouTube (~1/8th the size), larger than Yahoo!, Dailymotion, Amazon, Hulu and Microsoft. The primary business model to-date has been charging a subscription to content creators for the uploading of their videos. The business has not yet monetized the viewing of videos like other sites have. Here are some additional key data points:
Vimeo has over 130 million unique monthly visitors, which is growing 60% per year Mobile uniques are up 200% in the past year and now represent 45% of total Vimeo has 400,000+ subscribers with revenues growing over 60% to reach $37m driven by subscriber growth and revenue per subscriber. The revenue is understated due to the deferral component. Vimeo’s growth is expected to accelerate in 2014 with the addition of over 100,000 new subscribers Management has not yet marketed the product in a meaningful way and plans to begin to monetize the audience over the next couple of years
Tinder was founded in 2012 and has become of the fastest growing social start-ups and mobile apps of all time. Tinder anonymously finds people nearby that like each other and connects them if they are both interested.
According to comScore (Feb 2014), Tinder’s mobile monthly minutes per user was 211 minutes just below 3rd place Twitter at 232 minutes and ahead of Pinterest (190), Snapchat (181) and LinkedIn (29) Snapchat was the subject of a $3 billion takeover offer reportedly from Facebook. Twitter, Pinterest and LinkedIn have $1 billion plus valuations as well 6
IAC plans to look at ways of monetizing Tinder’s incredibly large user base–500 million profile ratings per day and 600 million matches in 2013 in 2014 and beyond.
Aereo allows consumers to download over-the-air television to any device to stream or save your favorite shows for later. The company has been involved in several high-profile court cases and so far has been determined legal. IAC recently increased its minority-stake in the company. D. Chairman Barry Diller (controls ~43% of voting stock) has a superb record of creating shareholder value Diller has a long record of unlocking value either through returning capital via dividends and significant share repurchases and/or spin-offs and asset sales. Dividends – IAC paid out $79.2m, $68.2m and $10.7m in cash dividends in 2013, 2012, and 2011. Share Repurchases – over the past three years, IAC has purchased 33.6m shares or ~25% of total shares outstanding for $1,463.8 million. IAC has 8.6m shares or ~10% of current shares outstanding left on its current authorization. The company has purchased shares in 17 of the past 19 quarters. Management has said it intends to continue with its aggressive share repurchase activity. Spin-offs August 2008 – IAC separates into five publicly-traded companies: IAC, HSN, Interval Leisure Group, Ticketmaster, and Tree.com August 2009 – IAC spins its travel business into an independent public-company, Expedia. Expedia’s chairman, Barry Diller, spins TripAdvisor into an independent publicly-traded company in December 2011 December 2010 – IAC exchanges the stock of wholly-owned subsidiary that held Evite, Gifts.com, its Advertising Solutions Group and $218m in cash for Liberty Media’s equity stake in IAC Recent News Events: In December 2013, IAC reorganized its senior leadership with CEO Gregg Blatt becoming the Chairman of the newly created Match Group, which consists of IAC’s Match businesses, Tutor.com, DailyBurn and IAC’s investment in Skyllzone (fast-growing fantasy sports platform focused on daily or weekly matches played for free for money). In the process, Blatt is stepping down as CEO of IAC, a position that will not be replaced. This announcement is an indication that IAC may spin its Match Group to unlock value for shareholders in the relevant future. The stock was up +14% on the announcement and continued to add another 14% to reach $78.35 on March 4th, before falling back to the $69-71 range. If Match reaches the CEO’s goal of $500m in OIBA in 2016, it would add ~$25 in value. Despite the stock pricing moving higher, the Match Group in particular remains undervalued. CONCLUSION In the past three years the IAC’s stock price has nearly doubled, while operating profits have also risen by ~180%. So while the multiple has expanded somewhat, the market is not fully recognizing the power of the Personals business (growing with time) or the sustainability of the Search & Applications business. In fact, ROIC has tripled since 2010 from ~5% to ~17%. Moreover, IAC has generated over $950m in FCF in the past three years with the expectation the company will generated at least $1 billion more over the next three years.
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As the valuation table (Page 1) clearly shows, Match is worth at least 80%+ of the current enterprise value. At current prices, an investor enjoys the optionality of the emerging businesses–Vimeo, Tinder, Aereo and others for free. Furthermore, by investing alongside Barry Diller, an investor can feel confident that this value will be unlocked. SUPPLEMENTAL INFORMATION – REPORTING SEGMENTS Search & Applications – The segment is sub-divided into two businesses–websites and applications. Websites include Ask.com, About.com, Dictionary.com, Investopedia.com, CityGrid Media, Urbanspoon and PriceRunner among others properties. The business drivers include search queries, pricing for paid listings, advertisements on websites, and syndication of search results generated from Ask-branded search websites. Although IAC does not breakout the margins, the websites subgroup most likely has margins in the 28-30% range. Applications include Mindspark, the company’s direct-to-consumer downloadable applications operations (B2C) and partnership operations (B2B). Mindspark builds and markets “toolbars” for online audiences. It works as follows: A consumer downloads a free toolbar application, for example, emoticons to their browser. In the process, the consumer also installs Ask.com as their default search engine (the consumer has a choice to optout). IAC then generates high-margin search revenue, which is shared with its marketing and/or search partners (primarily Google). Again, IAC does not break out the margins, but because of traffic acquisition costs (TAC), the applications business likely has margins in the 15-20% range. Match – The segment was recently re-organized around three broad, primarily subscription-based lifestyle categories: dating, health & fitness and education. Dating is further segmented into three categories: 1) Core, 2) Meetic, and 3) Developing. 1) Core includes the flagship Match-US property, Chemistry.com and People Media, which operates 28 different targeted online dating communities. OurTime.com, BlackPeopleMeet.com and SingleParentMeet.com are #1 in their respective verticals. These properties have over 1.9m subscribers. 2) Meetic is the European leader in online dating with the best-known brands and the biggest audience share of all dating sites in Europe. Meetic has over 815k subscribers. 3) Developing includes Match’s non-US properties and emerging dating sites like OkCupid, SpeedDate, DateHookUp, Twoo, Tinder and the company’s 20% stake in China-based Zhenai, which is the second largest of three dating services in China with 30 million users. Developing has over 575k subscribers, which grew over 140% in 2013. Health & Fitness is primarily DailyBurn, which provides a variety of personalized workout videos that stream directly to your TV, computer, tablet and smart phone. DailyBurn also offers nutrition, diet plans and nutritional supplements and has over 2.5 million users. Education is primarily Tutor.com, which is the world’s largest and highest-rated online learning service. The operating business’ 3,000 experts have delivered over 10 million one-to-one tutoring sessions in its online classroom. IAC intends to convert the business from a service directed toward schools, colleges and libraries to a subscription-based service primarily targeting consumers. Local - This segment holds IAC’s operating businesses, HomeAdvisor and Felix. 8
HomeAdvisor is a network of home service professionals and consists of more than 80,000 professionals in the US providing services in more than 500 categories with more than 2 million verified reviews. The company also has a presence in France, the Netherlands and the UK. The business does well over $200m in sales. After a disruptive rebranding process and strategy shift to a tiered-subscription service, HomeAdvisor has experienced positive momentum in the past couple quarters:
Lead acceptance improved in Q4 sequentially Service provider network has grown for two consecutive quarters Nearly 20% of all service providers now enrolled in subscription plan
The local OIBA margins were ~14% in 2011 and fell to ~5% in 2013 in part because of the rebranding the change in pricing model. In time, margins should “revert” back to the double-digit levels as IAC grows the network and markets the service to consumers. Felix is a pay-per-call advertising service previously operating within CityGrid Media (now a part of Search & Applications). TechCrunch reported that Felix generated $30m in 2012 sales and was likely profitable. Media and Other includes a hodgepodge of different emerging businesses. Media including Vimeo, which is a video sharing website; the Daily Beast, which is dedicated to breaking news and sharp commentary; Notional, which is a production company, Electus, which is a next-generation studio of premium content creators; and CollegeHumor Media, a multi-media, multi-platform studio comprised of three websites, a long-form TV development division and a film production company. Other is primarily ShoeBuy, an innovative virtual inventory model focused on categories of footwear and related apparel with 4m monthly uniques and over 1,300 manufacturing partnerships.
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