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Here’s the entire text of the prepared remarks from InterActiveCorp’s (ticker: IACI) Q3 2005 conference call. The Q&A is in a separate article. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Tom McInerney, Chief Financial Officer
Barry Diller, Chairman and CEO

Analysts:

Michael Savner, Banc of America Securities, Analyst
Justin Post, Merrill Lynch, Analyst
Mark Mahaney, Citigroup Smith Barney, Analyst
Anthony Noto, Goldman Sachs, Analyst
Michael Millman, Soleil-Millman Research, Analyst
Imran Khan, JP Morgan, Analyst
Jeetil Patel, Deutsche Bank, Analyst
Heath Terry, Credit Suisse First Boston, Analyst
Douglas Anmuth, Lehman Brothers, Analyst
Robert Peck, Bear Stearns, Analyst
Paul Keung, CIBC World Markets, Analyst
Scott Kessler, Standard & Poor's, Analyst

[Tom McInerney, Chief Financial Officer]

Thank you, and good morning. Joining me on this call is Barry Diller, Chairman and CEO. As you know, we may during this call, discuss our outlook for future performance. Also, you are aware that there are risks and uncertainties associated with these forward-looking statements and our results could be materially different from the views expressed today. These risks have been set forth in our public reports filed with the SEC.

We will also discuss certain non-GAAP measures. And I refer you to our press release and the Investor Relations section of our website for all comparable GAAP measures and full reconciliations.

With that, Barry will make some comments, after which I will go through some additional items before going to your questions. Barry?

[Barry Diller, Chairman and CEO]

Good morning. Today we're reporting excellent figures, the fourth consecutive quarter we have done so since announcing the spinoff of Expedia last December. Revenue increased 55%, operating coming before amortization by 103%; both growing faster than in quarter two. Each one of our sectors performed well and margins expanded for most, which reflects the scalability of our operations, even while many are in earliest stages of growth.

We don't expect the hyperlevels of growth to occur every period. For the next year, we're going to invest even more in our businesses. Their prospects are great and they deserve to be pushed aggressively. That may produce short-term anomalies quarter-to-quarter, but we don't want to run our businesses quarterly. We're here for the long-term and we won't sacrifice a nickel of appropriate investment in order to make a number. Contrary to the flavor of the day, IACs actual advantage is that we are a conglomerate of multibusinesses, online and offline. And we're building scale and expertise all over the place, where our content ranges from products to services to information to search.

Here's an astounding fact. Well, at least it's astounding to me. I just learned from the most recent comScore data -- comScore being an independent group that tallies traffic on the internet -- that IAC had an audience of 258,856,072 coursing through our sites in September. I can't vouch for this precise number, but give or take whatever millions, it's an extraordinary audience. An audience that is composed of people looking to buy, learn, search and explore. Make whatever you will of it, but every day, we're making the inner relationships that can only be accomplished in the very much interrelated conglomerate of IAC.

Now, some highlights about our segments. In Retailing, HSN improved over the second quarter. And while that's still not anywhere near the growth we want, it's got many aggressive and innovative initiatives of building. Our Cornerstone acquisition brings instant breadth and depth to our merchandise mix. Bringing these great brands on air is a key part of our strategy for next year. And HSN.com continues to outpace online retail industry growth rates, increasing sales by more than 30%.

In Ticketing, it's been a great concert year. Everywhere at Ticketmaster are other initiatives to drive sales. Our 'sell more tickets better' program that delivers incremental sales, accounted for 9% of our domestic ticketing revenue. We also sold 110,000 tickets via TeamExchange, our online marketplace where season ticket holders can sell tickets they're unable to use. Last year, we had 23 teams enrolled, today it's 34.

Over the next few weeks, Ticketmaster is launching a great new product going beyond sports to single ticket buyers in concerts, arts and family events. TicketExchange will provide event buyers a secure place to shop for guaranteed primary and secondary market tickets, while leveraging Ticketmaster's efficient TicketFast online delivery. It's TicketFast that allows customers to print the tickets instantly on the personal computer. It's a technology that's been adopted by more than 2,000 venues, 37% more than we had last year. We began installing the scanning equipment about three years ago. A real innovation in ticketing. Now, it's our own internet turnstile for developing new markets.

Our Lending business closed nearly $10 billion in loans in the quarter, with revenue in mortgage, re-fi and home equity loans all up. LendingTree's brand has 80% awareness. And with all the groundwork intricately now laid, we're bullish about our ability to increase share, even in an environment of rising interest rates. Online mortgage is still a pitifully tiny percentage of the market, which gives us enormous runway to grow.

In Real Estate, we're still laying track for the online transition that is inevitable. We have now got 1.5 million listings available through RealEstate.com. With ServiceMagic, we have the nation's leading online marketplace which connects home owners with home service professionals. It's continuing to grow and innovate with the new online directory for small and medium-sized home builders.

Ask Jeeves' priority is to gain share and we are doing just that. 6.4% of queries in September which is up 25% since January's 5.1%. And we estimate that Ask posted the largest annual and sequential gain and retention among the major search engines in September. Now, one month is hardly indicative of much, but we'll take it each month until we have reached parody with the larger players.

Citysearch is now IAC's second most trafficked site, in part by doing a great job in online marketing. There is no company that has as much expertise across dozens of sites in optimizing search results. Just one of the benefits of being a multibusiness enterprise and we're extending every best practice we have throughout our system.

Evites unique users are up 30% to 4.4 million, page views are up 43% to 452 million. Not bad for a little business that people everywhere love using. And it's practically never spent a dime on advertising.

On Vacations, we launched Live It Up, an online travel and a lifestyle membership club with a full-range of travel offerings and benefits, from specially priced travel packages to 24 hours a day, seven days a week, personal assistance, identity theft assistance, discounts in IAC products and services and the ability to earn and redeem points.

In Personals, we now have a new record of 1,200,000 subscribers. To those who say this catagory is saturated and stagnant, you should know that during it's first year of operation, Match.com registered 60,000 new members. Now, every day we register more than 60,000 new people on Match properties. We're number one in the U.S., the UK, Spain and Europe overall. Match is growing two times faster year-to-date than the 9% growth rate predicted for the industry by Forester. And we've just launched Chemistry.com, a new premium site which has begun testing in four cities.

The results we're showing today continue to validate our multibusiness concept, which I have certainly been underscoring this morning. It's all still in the early days, as is the internet way of accessing information, goods and services and I can't imagine both not growing a pace. Now, Mr. McInerney.

[Tom McInerney, Chief Financial Officer]

Thank you, Barry. To reiterate, IAC's third quarter results were very strong, driven by solid operating performance across all sectors of the Company. As you all know, we acquired Ask Jeeves and spun-off Expedia over the summer. Accordingly, results for Ask Jeeves are included in IACs Q3 results from July 19; while Expedia's results prior to the August spin-off are treated as discontinued operations.

For the quarter, revenue increased 55% to $1.5 billion. And operating income before amortization grew by 103% to $156 million. Excluding results from Ask Jeeves, Cornerstone, which we own for the first quarter and not in the year-ago quarter, and spinoff expenses of $2.1 million, revenue increased 28% and operating income before amortization grew by 83%.

IACs GAAP operating income was adversely impacted by a one-time, non-cash compensation charge of $67 million, which relates to the treatment of vested options in connection with the spin-off, resulting from adjustments made to preserve the value of IAC options post spin. To be clear, this was entirely mechanical in nature. No incremental value was given to any option holder and this charge is not expected to occur. The accounting rules dictate a charge because of the spinoff-related adjustment.

Adjustment EPS was $0.32 for the quarter compared to $0.19 in the year-ago period. While GAAP EPS was $0.19 compared to $0.24 in Q3 '04. In addition to the non-cash charge just mentioned, GAAP EPS was impacted by a lower contribution from discontinued operations. Expedia and other discontinued operations were included for the full quarter a year ago and not the in the current year.

For the nine months ending September 30, free cash flow increased 3% from the year-ago period to $223 million. Free cash flow grew more slowly than operating income before amortization, due primarily to higher cash taxes paid, capital expenditures and working capital requirements. In general, Q3 is not a strong cash flow quarter for us, as we build inventories in our re-selling and discounts businesses in anticipation of Q4 and remit cash to ticketing clients for event sales in Q2.

I also want to point out that this quarter made two slight modifications to our definitions of non-GAAP measures, which can be found on page 16 of our earnings release. Adjusted net income now excludes non-cash income or expense relating to changes in fair value of derivatives, or what the accounting rules call derivatives, created as a result of the spin. What this means is that we have an obligation to deliver IAC and Expedia shares to holders of the convertible debt we assumed in the Ask Jeeves transaction. Per an agreement between us, Expedia has an obligation to deliver their portion of this, but due to the specifics of the technical counting, each quarter we have to mark to market our obligation to the convertible holders because of this construct. In this quarter, it was actually a gain in our GAAP numbers. But regardless, we believe it's appropriate to exclude this non-cash item from adjusted net income.

The second change is that free cash flow now excludes taxes paid on the gain from the sale of our VUE interests. This is completely a technical adjustment to the definition. We don't include any of the proceeds or gain from the sale in pretax flow, so it would be totally distortive to include the cash taxes owed.

With that, let me comment on financial items from the businesses, beyond what is included in the press release. Our Retailing sector reflects the inclusion of Cornerstone this quarter but not in the year-ago period. HSN US had improved performance after a sluggish Q2, with revenue growing by more than 8% and operating margins up slightly. Gross profit margin was down in the quarter, due primarily to discounting of inventories which accumulated after the slow Q2, but we were able to offset this with a host of operating efficiencies affecting both our variable and fixed costs.

Cornerstone delivered double-digit top-line growth on a proforma basis, with solid contributions from Ballard Designs and TravelSmith. From integration perspective, we're making progress. Bringing the great Cornerstone brands to life on HSN requires many elements; having the right inventories, the right sets, the right on-air guests, to name but a few of these. We have been experimenting since the close of the transaction, all the while laying the track for deeper integration going forward. We're on track with the real benefit yet to come.

Services grew operating income before amortization 91% this quarter, which certainly exceeded our expectations. Ticketing had another excellent quarter, thanks to the strong summer concert season, as well as increased sports event sales, primarily from baseball, where five of this year's post season teams were ticketmaster clients. We sold 28% more tickets worldwide as compared to the prior-year period, driving revenue higher by 25%. International acquisitions accounted for 5 points of this growth. So it was a strong organic growth quarter. At the same time, international ticketing revenue is now 25% of total ticketing revenue.

Moving to Lending. To increase transparency for the first time this quarter, we've broken out Lending and Real Estate as separate reporting segments. These businesses continue to benefit from very close coordination under Doug Lebda's leadership, but they certainly have their own dynamics. And we thought it would aid in your understanding to show them separately.

Lending continued to pose strong growth with many of our key growth initiatives bearing fruit. Our strategy in Lending is simple; to drive ever-increasing numbers of high-equality leads through our service and provide these leads to either participating lenders in our exchange or close them in our own name; in the latter case, immediately selling the loan. The strategy is mutually re-enforcing as we make more money on the loans we close in our own name, allowing us to increase on and offline advertising dollars to increase the number of consumers we can drive toward our service. This strategy is working.

Critical enabling pieces of this include first, having a great consumer front-end and a recent redesigned and simplification of the site that has improved conversion. Second, we are working closely with our network lenders to ensure they get the right leads in predictable and growing volumes. Finally, we have a myriad of initiatives to grow our purchase mortgage business, which quite naturally, has been slow to develop, given the predominance of re-fi volume over the past few years. And this, too, is working.

In addition to breaking Lending out as a segment, we have added a new metric to our release, which is Transmitted QFs, which increased year-over-year by 52%. QF's are the number of customer qualification forms placed with at least one lender which we think is the best single indicator of unique growth in our overall lending business. It's also important to point out that there are some seasonality in the consumer lending business, so while we expect very strong year-over-year growth for our lending business in Q4, and that of course is what's key, sequential results might be more flattish.

I also want to take a moment to highlight our Home Services segment. We estimate the advertising market for Home Services categories to be at least $10 billion, spread over many traditional forms of media. ServiceMagic is simply inventing a better way to match home service professionals with consumers in need of service. Service professionals pay for highly targeted leads in the service categories and precise geographies in which they're interested. We have a clear leader in a catagory which is in the early stages of development. Like with Lending, we've historically seen some seasonality in this business, as home owners turn their attention away from repair and remodeling in the fourth quarter. Sequential results may reflect this, while we expect year-over-year growth to remain strong.

In Media and Advertising, Barry highlighted Ask Jeeves market share trends. I would only add that progress from the reduction in the number of paid advertising links on the site is at or slightly better than hoped for. We told you last quarter that we expected the change to reduce year-over-year revenue growth at Ask Jeeves to the low double-digit range in the short-term and Ask came in at 15% top-line growth in the third quarter.

Switching to Membership and Subscriptions. Vacations grew revenue by only 4%, but operating income before amortization grew by 18%. This is the same general pattern we saw in Q2 and the underlying causes, a tight supply environment and migration to the internet, remain the same.

Personals reported a record quarter. Revenues grew by 33%, while operating income before amortization grew by 271%. This significantly enhanced second-half profitability as expected, as we have aggressively moved our marketing span to the first half of the year to fit the more natural seasonality of the business. This trend should continue in general in the fourth quarter, although we don't expect the effect to be quite the same degree, since we increased marketing post-labor day after being quiet in the summer.

Turning to our balance sheet. During the quarter, we repurchased an approximately 9.9 million shares at an average price of $25.10. Subsequently, from October 1st to October 28, we repurchased an additional 8.2 million shares, bringing the total amount of shares repurchased since the beginning of the third quarter to 18.1 million and leaving the total authorized amount of shares to be repurchased at an approximately 7 million shares. We finished the quarter with net cash and securities of $1.4 billion.

Proforma for taxes to be paid in connection with our previous sale of the VUE interest, the maturity of the senior notes this fall, share buybacks through October 28th, and excluding LendingTree loan debt that non-recoursed to IAC, we will have $1.3 billion in net cash and securities. Given these moving pieces, for clarity we added a table to our press release on page 8, which will walk you from our actual net cash to our proforma net cash.

In closing, I would like to reiterate that our results this quarter, in combination with the growth initiatives, some of which we touched on today, reflect our continuing committment to both driving near-term results, while constantly investing in and focusing on our longer-term strategies. As we're fond of saying, we most emphatically don't manage our quarter-to-quarter results. And we certainly would like to believe our discipline of operating allows us to take both near and long-term opportunity as it allows. We're equally proud this quarter of our strong year-over-year growth, and the fact that we have just launched, or are about to launch, exciting new services in many of our principle businesses.

At this point, I would like to open it up for questions. As always, we would like to accommodate as many people as possible on this call, so we would ask each questioner to please limit their questions to one or two max. Operator?

Proceed to the Q&A.

Source: Full Transcript of InterActiveCorp’s 3Q05 Conference Call - Prepared Remarks (IACI)
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