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IAC/InterActiveCorp (IACI)

Q2 2007 Earnings Call

July 31, 2007 11:00 am ET

Executives

Tom McInerney - Executive Vice President and CFO

Doug Lebda - President and COO

Barry Diller - Chairman and CEO

Analysts

Justin Post - Merrill Lynch

Jeetil Patel - Deutsche Bank Securities

Aaron Kessler - Piper Jaffray

Anthony Noto - Goldman Sachs

Mark Mahaney - Citigroup

Brian Pitz - Banc of America Securities

Robert Peck - Bear Stearns

Jeffrey Lindsay - Sanford Bernstein

Jeff Shelton – Bleichroeder

Doug Anmuth - Lehman Brothers

Imran Khan - JP Morgan

Presentation

Operator

Welcome to the IAC Q2 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Tom McInerney, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Tom McInerney

Thank you, operator and thank you, everyone for joining us today. During this call, we may discuss our outlook for future performance. These forward-looking statements are typically preceded by words such as, we expect, we believe, we anticipate, or similar statements. Also, you are aware that there are risks and uncertainties associated with these forward-looking statements. Our results can be materially different from the views expressed today. Some of these risks have been set forth in our earnings release filed earlier today with the SEC and our other publicly filed reports.

We will also discuss certain non-GAAP measures. I refer you to our press release and the investor relations sections of our website for all comparable GAAP measures and full reconciliations.

I will highlight a few items in our financial results before turning it over to Doug and Barry. By now, I'm sure you have all seen our press release with the results clearly laid out so I won't be repetitive, and I will only highlight a few items. While the Q2 consolidated results were not what we had hoped, they were directionally what we expected, with a couple of exceptions. As anticipated, we saw year-over-year profit declines at HSN, LendingTree, excluding an accounting change at BDN Advertising.

However, unexpectedly, we also saw a much weaker domestic concert industry and Ticketmaster was comping against a strong year-ago quarter. We continue to see very good results at Interval, Match and Service Magic. Our consolidated results also reflect the completion of our Retailing International sale and the reporting of that operation as a discontinued operation. This cost us $0.01 in adjusted EPS.

Turning first to our retailing sector where at HSN, we remain in the midst of a turnaround and Doug will speak to our efforts there in just a bit. For the quarter, excluding the results of America's Store, HSN grew revenue 3%. Profits were impacted by a 290 basis point decline in gross margins year over year, the drivers of which largely mirrored those of Q1, namely excessive inventory leading to increased markdown and liquidation activity and to a lesser extent, mix effects and lower initial mark-ups in certain product categories.

While we anticipated the year-over-year gross margin pressure and hence, profit impact, the magnitude exceeded our expectations entering in the quarter. We've been fighting this inventory issue since the beginning of the year, when we bought to an over aggressive sales plan. It wasn't until the back half of the second quarter that we really felt we had made progress addressing the issue. Excessive inventory leads to a multitude of issues in this business, including the need for increased air time devoted to clearance activities, markdowns, higher reserves as inventory ages, and reduced inflow of new products as purchases are cut to get back in balance. All of these issues have to be managed and strategies for addressing them developed down to the item level.

Where are we on fixing this? At the end of the first quarter, we carried gross inventories which were $49 million or 25% above the prior year Q1 amount. At the end of Q2, gross inventories were only $18 million, or 8% above prior year Q2 levels. We ran a number of dedicated clearance days, reduced purchases and took other actions to make substantial progress, although we still view inventory as too high in certain areas. As such, we expect Q3 gross margins to again be down year over year, albeit to a lesser extent than in Q2.

As we strive to invigorate sales, we are also reducing operating costs for the remainder of the year. We now enter the second half of 2007 with the expectation that operating expenses will be slightly lower than in the same period last year. The combination of these efforts to fix the gross margin issue and reduce operating costs, in combination with the top line initiatives Doug will discuss, leave us optimistic for improved, although still down year-over-year profits in Q3, and what we hope will be a better holiday season in Q4. Obviously, we will update you more on that next quarter.

Turning now to LendingTree. Results in the quarter continued to be impacted by many of the same trends witnessed in Q1, namely lower close rates and a shift to lower margin conforming loans. Rapidly increasing interest rates during the period compounded the problem even further. As a result, revenue declined due to fewer loans closed and sold, mostly in the home equity category, as well as lower average revenue per loans sold. In addition, we saw our average cost per loan increase due to lower close rates and stricter underwriting criteria.

We told you we would take action here to bring costs in line with current realities. We did just that in the quarter, reducing the LendingTree work force by 20%, which resulted in a $3.7 million charge. Absent the charge, profits would have risen 72% sequentially. We will continue to monitor the cost structure of this business to ensure it is in alignment with its operating environment.

Now to Ticketmaster, where ticket volumes during the quarter were softer than we expected and a lower mix of concert ticket sales led to a modest decline in the average revenue per ticket. In all, tickets sold increased slightly, reflecting a 17% increase internationally, but a 7% decline domestically. The recipe for success in this business over multiple years has been to leverage our continued investment in products and technology into very strong competitive performance and hence, increased volumes. This has allowed to us share an increasing percentage of our revenue with our clients, while simultaneously increasing our own profit margins.

In a quarter like this, where volumes surprised us negatively, really for the first time in many quarters, the leverage worked the other way and profits declined in the quarter despite revenue gains. Income was also negatively impacted by a $7 million increase in certain legal expenses.

The outlook for Q3 domestic concert volume is better. While this has never been a true backlog business with great visibility, July volumes were solid. This definitively does not ensure that they will remain so for the full quarter. Tours and shows get added and dropped in this business on short notice all the time. So all we can do is tell you that we don't think that Q2 is indicative of the rest of the year.

We've also taken action to reduce investment spending at Ticketmaster for the back half of year and expect a resumption profit growth in the third quarter.

Now to areas of the business that continue to exhibit positive momentum. Interval, ServiceMagic and Match all had strong quarters. ServiceMagic continues to exhibit truly exceptional results, with over 50% growth in revenue and operating income before amortization. In the second half of the year, we will open a new call center in Kansas City and continue to test offline advertising. As such, profit growth will remain strong, but we cannot expect to sustain the level of growth achieved in the first half of the year.

Steady as a rock Interval continued its long trajectory of more than solid performance. They had very balanced growth in the quarter, with double-digit top line and income growth. Top line growth benefited from membership growth, transactional volume, higher average fees, and the acquisition of Resort Quest Hawaii. We have a number of initiatives underway here to bring increasing value to our developer clients, looking to ensure that the levels of growth Interval has enjoyed continues into the future.

Finally, our media and advertising business benefited from continued growth in queries in our syndicated search business, as well as query and revenue for query growth at Fun Web Products. Though lighthearted in nature, our Fun Web Products business is no small endeavor financially and constitutes an increasing percentage of our media and advertising business.

Segment profits improved modestly during the quarter, reflecting a $7 million reduction in the current year expense related to the capitalization of certain cost per acquisition toolbar distribution expenses which began April 1, 2007. Excluding that benefit, profits would have declined as expected, impacted by higher costs associated with marketing, Ask.com and higher revenue share payments to third parties.

Our emerging business results were positively impacted by an $8.2 million non-recurring gain from our previous investment in Revoli.

Free cash flow for the first six months of the year was $194 million. This was down from $292 million last year, due to lower operating profits, lower cash collected from clients at Ticketmaster and higher taxes paid. The latter two factors are largely timing-related and not unexpected. Because of our retail businesses and EPI, we tend to be back-half weighted in terms of free cash generation, and other than lower than initially expected profits, we are generally on plan in terms of cash generation through the first half.

The Q2 effective tax rate was lower than normal, due to benefits from foreign tax credits and state taxes that were unique to the quarter. We therefore expect effective tax rates in the back half of the year to return to more usual levels.

To summarize, Q2 results were largely as expected, with the exception of Ticketmaster domestic volumes and the fact that HSN gross margin pressures were more significant than anticipated. Challenges remain at HSN and LendingTree and we are addressing them head on. Just one example, these two operations eliminated approximately 600 jobs in the second quarter.

Our balance sheet is solid and our cash flow is strong. While addressing our drags, we will continue our strategic agenda of investing in our businesses, old, new and emerging, to foster future growth. Given the challenges of the first half, it's a virtual certainty that we won't tally the year at the double-digit rate we aspire so. We said earlier in the year we would be devastated if this were the case and that sentiment prevails. But we are simultaneously focused and optimistic for a better back half and growth for 2008. We anticipate flat profit growth with the resumption of year-over-year growth in the fourth. But more important than this aggregation of results is continuing the long-term positive growth at Ticketmaster, Interval and Match and setting the stage for sustained profitable growth in some of our newer businesses.

With that, I will turn it over to Doug.

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Doug Lebda

I will begin with operational detail onto the financial results. Beginning with retailing; while we are obviously disappointed with HSN's bottom line and gross margin declines that Tom discussed, top line growth of 3%, excluding America's Store was modestly encouraging. We are focusing on improving our margins and our core merchandise strategy the same as we've discussed previously and we are making progress. We have created a differentiated brand identity, reduced reliance on some older core brands and suppliers and increased the quality of both product and process.

During the quarter, our active customer base was relatively flat and declined less than 1%, which is the lowest level of decline since December 2005. We are retaining more of our repeat customers and our moderate to heavy users have increased 3.5%. You are seeing this modest improvement in customer trends because we are executing on the strategy we laid out almost a year ago. The merchandising team has broadened the assortments across all categories and the number of unique items aired during the period increased 10% over the same period last year. The way we attract and retain vendors has fundamentally improved and personalities like Emeril Lagasse and Tori Spelling have introduced new products on air in addition to our existing partners introducing new product lines. The success on HSN continues and has spawned several standouts like Ghost Smile, Dior and T3.

HSN.com, under the leadership of William Lynch who joined HSN seven months ago, is showing real progress. Total visits to the site increased 7% in Q2 year-over-year and sales grew at a low double-digit rate. Today we've relaunched the site, incorporating our extraordinary wealth of video content to create a new and truly unique online shopping experience. If you haven't seen it yet, I encourage you to check it out.

Finally, as many of you know, HSN celebrated its 30th birthday in July, during which we witnessed some key successes in all categories, amidst renewed customer energy. We increased productivity in both our core and new brands and had numerous product sell-outs in our new launches during the month.

In fact this past week, our worldwide launch of our new Thermalon Cookware sold out 24,000 units in just four hours. Our July Fourth and Christmas in July events both produced double-digit growth in net sales versus the same events last year. A turnaround in retailing never moves on a set schedule and it is very much an iterative trail-and-error process, constantly adjusted to learn from successes and failures. We are in the middle of that process right now and we will continue to have challenges, but I do believe we are making real progress.

At LendingTree, macro economic factors continue to impose their will on the sector. Lenders have lowered their appetite for risk and shifted attention to conforming products, squeezing margins across all loan types. Interest rates rose precipitously during the period, jumping close to 60 basis points from the beginning of April through mid-June, making it even tougher to grow our loan pipeline, and liquidity in the secondary market remains tight. Continued stagnation in housing prices means that many customers would want to refinance simply can't.

These challenges are all reflected in LendingTree's numbers. Revenue and OIBA were approximately $100 million and $2 million respectively, and key operating metrics continue to soften. Rates and close rates dipped 17% and 32% respectively, below where they were two years ago. Revenue margins per loan sold have declined 18% year over year.

Under our new CEO, CD Davies, we have a revamped management team and a plan is in place to address this market. There are several key initiatives that we are aggressively tackling. Following a 20% workforce reduction, we've realigned our sales teams at LendingTree Loans to focus more on conforming loan products, shifting away from home equity and sub-prime. But we will continue to test the waters on those products as appetites in the market returns. We have also delayed spending on all but the most critical technology products until profit margins stabilize. But we are investing in sales force automation technology that we expect to implement by year end.

LendingTree's marketing remains a brought spot. We continue to shift dollars in real time to our most profitable products, while testing new creative and increasing site conversion significantly. Going forward, we are working hard to improve automation, streamline our processes, improve how leads are transmitted to the lender network and keep our costs low. We are now better positioned for sustained profitability throughout the remainder of the year, albeit at current modest levels. As margins return to normal, we can grow again as a much leaner operation.

Turning now to Ticketmaster, which faced difficult comps in the quarter compared to the prior year period and followed a record quarter for ticket sales in Q1, partly due to some summer concerts going on sale earlier than normal. Ticketmaster remains the premier destination for tickets, with over 40 million registered users on the site. Additionally, the development and rollout of our Auction and Ticket Exchange products continue to gain traction.

12 national tours enabled Ticket Exchange for the majority of their event dates, including The Police, Keith Urban, Kenny Chesney and Justin Timberlake. We ended this quarter with 263 venues participating in Ticket Exchange, up from five a year ago. We have added more than 165 since the end of 2006. Volume of tickets sold via Ticket Exchanged in Q2 '07 was nearly triple that of Q1 '07. The number of auctions conducted this quarter grew 41% versus the same period last year.

Recently, we announced our intention to acquire Paciolin, a ticketing software and services company, providing a ticketing solution to those clients wishing to manage and distribute their own tickets. This would provide a new avenue for future growth for Ticketmaster, particularly in collegiate sports, and enable us to offer an entirely new array of customers and a wider variety of ticketing services.

Still in the transaction sector, our real estate business is making real progress in a difficult market. Company-owned brokerage continues to expand its footprint in its nine markets. 108 more agents joined the business during the quarter to work on 20% more leads than in Q1. Agents and house hunters alike are warming rapidly to the model.

Meanwhile, ServiceMagic's success is building on itself, with customers and contractors increasing nicely. Service requests increased 51% and the number of service professionals grew 21%. Repeat usage and the average spend per service professional continued to grow during the quarter, expanding 67% and 29% respectively. A real testament to the service this business provides.

In our membership and subscription sector; Interval once again posted excellent results. Marketing programs and inventory gains drove an 8% increase in transaction volume among Interval's members.

At Match, solid revenue and OIBA was driven primarily by a 10% increase in revenue per subscriber. Overall subscriber growth remains low with domestic declines resulting from price increases late last year. In Q2, our first marketing campaign promoting Chemistry.com drove substantial growth for this business. Previously, 80% of Chemistry subscribers came from cross-selling to existing Match.com traffic. Now two-thirds of Chemistry's subscribers are coming directly to Chemistry, making the right trade-off between subscriber growth and pricing, along with constant product and service innovation has been the recipe for success in this business and we're working to ensure we continue to strike the right balance.

Our media and advertising sector grew revenue over 30% this quarter, driven largely by growth in our syndicated search and Fun Web Products businesses. The latter continues to demonstrate explosive growth. Zwinky.com now has over eight million registered users, spending on average 64 minutes on the site each session. The recent April launch of the Zwinky Virtual World, Zwinktopia, has led to over 15 million transactions using the Zwinky virtual currency called Z-Bucks. In addition to monetizing through search, there are clearly e-commerce opportunities with Zwinky, as well.

Query growth over at Ask.com was slower than we would like due in part to less effective marking spend in the period, comping against the successful March 2006 rebrand and relaunch of Ask.com. Queries did grow but revenue per query declined slightly because the new Ask 3-D, launched in June, is a much better experience and most users click on the paid links fewer times than before. Early indications are that users love the Ask 3-D experience and Ask's Net Promoters score has risen 32 points following the launch.

Abandonment rates have declined 25% and users are using the zoom feature and increasingly using the right pane in the search results where our new morph algorithm serves up videos, images and related content for every query. User retention and search frequency are up 8% and 5% respectively since the launch, which in the long run will more than offset RPQ decline.

Before I close, I would like to highlight a couple examples of our continued integration efforts across IAC. As mentioned on the last call, we were collapsing our CPM advertising spend on to a single platform. We've made fast progress here and have successfully migrated 97% of our buying to the platform with the rest to follow shortly. On the sell side, we expect to be fully migrated to a new platform by early 2008. We have also started a pilot on behavioral targeting, leveraging the common data across IAC properties. We think this will enable us to better serve up content, services and ads that are directly relevant to the user.

Finally, leveraging both our deep pools of content across our many verticals and our significant experience in search, we continue to build out specialized toolbars. The latest example of this is our Ticketmaster Insider Toolbar, which launched late in June, and features services and content from Ticketmaster, LiveDaily, Ask, EcoMusic, Gifts.com and more. Currently, this toolbar is available for download on Ticketmaster but we will look for other avenues of distribution as well.

We will soon launch a local services toolbars featuring content from CitySearch, RealEstate.com, ServiceMagic and Pronto, distributed on CitySearch. By the end of the year, we will release six or seven more such toolbars which will help to leverage our huge audience to drive Ask.com share.

With that, let me turn it over to Barry for some final thoughts.

Barry Diller

Good morning, everyone. You've heard from my colleagues about the numbers and the trends for the businesses. This has not been a good quarter and you will not have any defensiveness from me. I do understand that there's no productivity in making upbeat promises for future quarters. They will reveal themselves as they occur. While I do believe our growth is temporarily stalled and that the basics of our business and our strategies are sound, and that under any circumstances that I can foresee, we'll produce plenty of positive cash flow this year; the balance of the call should be to give you the most time for us to answer your questions.

I only want to add that while we didn't repurchase any shares during this period, not having done so doesn't change anything. We have been and will continue to be net buyers of our shares over the long term. You should not read into our long-term intentions based upon short-term inactivity. We've brought in a ton of stock over the last years and quarterly activity or non-activity just isn't indicative of much. You won't find us wavering from our policy of not commenting on any aspect of our share repurchases until after the fact and in the official reporting periods, other than continuing to say that (1) we're long-term net buyers, and (2) we purchase stock opportunistically.

With that, operator, let's please go to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Justin Post - Merrill Lynch. Please go ahead.

Justin Post - Merrill Lynch

Tom, can you talk a little bit more about Ticketmaster trends, really the variance in the quarter? If you look at where the quarters laid out, how much of the 2Q sales do you think might have happened in 1Q? Can you quantify that versus last year? Can you give us a growth rate in July?

Tom McInerney

Sure, Justin. It is hard to quantify it precisely. As I said earlier, the domestic business is really the weakest external market we have seen since probably Q3 2004. We have had ten straight quarters of uninterrupted favorable environment. We did have a very good March. I think some of the Q2 volume may have pulled into Q1, but I don’t want to overstate it. I think it was just a light quarter, and it is hard to know exactly what that was. We were comping against a very good quarter a year ago. We’ve analyzed it up, down in sideways. They weren’t the same magnitude of big blockbusters, but was also deeper. Some of the sales for summer and outdoor venues were light.

So it was really just a domestic volume industry, and was also a mix issue, because as we didn’t have the concert volume, last year we were 64% of our domestic volume was in concerts. This year it was only 58%. So our domestic convenience and processing per ticket was also off. So when the volume is not there, you kind of get the triple whammy: first the loss of ticket obviously, then because it wasn’t there in music you get the negative pricing mix. Then we compounded our own problems by investing very heavily, perhaps inadvisably so in hindsight, hindsight is always 20-20, but operating expenses were up sharply in the quarter notwithstanding some of the one-time items we had in the quarter.

All three of those things came together and there is a lot of operating leverage in this business and so, when the volume is not there, and you compound your worries, you get the double whammy. July was solid. We grew year-over-year, it’s early, this is not a backlog business, we have been saying that quarter after quarter for years. So, all we can say is we are guardedly optimistic about Q3 and the rest of the year. We don’t think this was any kind of permanent sea change in the trend line.

Barry Diller

With Ticketmaster, it is not a business where you can really look quarterly except if you wanted to hone in on share, because that’s really the relevant factor; share and expenses. Share for the quarter was not affected, and Tom talked about expenses. But given that we are totally dependent on upon selling tickets to concert events during this period -- not totally, but to a large degree – they will come and they will play or they will not play. They are not timing their appearance to our quarterly time periods, reporting periods; awkwardly said. Do you have a follow up?

Justin Post - Merrill Lynch

I guess you are going to give us the July, maybe you could tell us if it is double digits or not? On the balance sheet, we did see loans available for sale really come down quarter over quarter and then the cash was down, maybe you could comment on those two things and I will let someone else ask the questions.

Tom McInerney

Loans available for sale is, obviously to some extent, an indication of going forward production and as Doug outlined in his remarks and I did as well, there was no question of rate rise in the beginning part of the quarter continued impact what has been a negative trend line in this business. That obviously only applies to LendingTree Loans, not to be entirety of our LendingTree business and I don’t want to over interpret the data, it’s not a straight line by any extrapolation from that figure to revenue for the business for lots of reasons that are too complicated to get into in this call. But there is no question, the environment has been very difficult and production in our captive brokerage operation is down in response to that environment.

Justin Post - Merrill Lynch

Any cash, net cash down at that quarter-over-quarter?

Tom McInerney

Sorry, Justin. Can you just repeat that again?

Justin Post - Merrill Lynch

I think your net cash was down quarter over quarter a couple hundred million. What drove that?

Tom McInerney

We made a number of investments. We were free cash flow positive, pretty good considering the seasonality issues I mentioned in terms of free cash flow for the quarter. We did make a number of investments in the quarter that press releases have gone out on and none that are overly major, but I think some of that timing drove that.

Justin Post - Merrill Lynch

Thank you.

Operator

Our next question comes from the line of Jeetil Patel - Deutsche Bank Securities.

Jeetil Patel - Deutsche Bank Securities

You had mid single-digit volume growth in ‘06 in the ticketing business, it looks like similar maybe this year given the good performance in Q1, tougher numbers in Q2. Just can you give us a sense of in aggregate, if you’re looking at mid single-digit growth in aggregate in the business on volume, can you just breakdown domestic versus international? On top of that, when does Asia Pac start to impact numbers on the positive front as you potentially look at expanding there, especially with the Olympics coming up, and then I have a quick follow-up.

Tom McInerney

If I understand your question, Jeetil, I think through time we have gotten to, despite our historical success, good volume growth both domestically and internationally. Certainly, because of the acquisitions we have made and the fact that some of these are more emerging, less developed live event markets than in the US, we would certainly expect over time the international volume growth to outstrip that domestically.

I don’t have a good volume estimate domestically for the year. I just said Q1 is very strong, Q2 was down 7% in terms of volume and we are guardedly optimistic for the back half of the year. How that adds up we will see, but certainly the domestic market we’re not going to extrapolate from one quarter to anything more permanent although we do expect international will grow faster over an extended period of time.

In terms of Asia Pacific, I think that’s a longer term strategy. Certainly the Olympics and some other activities we have going on there are a good catalyst for that. I think it’s not in the financial planning horizon in terms of the next several quarters or year out, but I think longer term it should be a good opportunity. In-between, we have lots of other opportunities including investments we’ve made in various European markets.

Jeetil Patel - Deutsche Bank Securities

In general, if you look at the ticketing business, the number of acts on a year-on-year basis flat or up, would you say for the industry as a whole?

Barry Diller

It’s down very significantly. Again, it’s a function of when people releases their records and follow up the tours and it’s going to ebb and flow. Next question please.

Operator

Your next question comes from Aaron Kessler - Piper Jaffray.

Aaron Kessler - Piper Jaffray

On the Ask business, can you give us a sense for when do you expect increased frequency and retention at Ask to result in market share gains? And the marketing campaign, how are you measuring the success on the marketing campaign thus far? Thanks.

Tom McInerney

On frequency and retention in terms of market share that’s going to happen over time. As you know, the business is related to driving new users, obviously frequency and retention we have seen good improvements in frequency and retention, but it’s offset by not having the growth in new users on the Ask.com business. The driver there will be the new marketing, but I think the frequency and retention gains should start to kick in more Q4 later in the year, albeit they are small as I laid out, small but certainly encouraging.

In terms of the marketing, we can very scientifically look at the marketing spend in the US and relate that to new user growth and so the way to measure it is by new users showing up at the side and we’re not seeing it with this marketing campaign, the way we have seen it with prior marketing campaigns. What we’re doing on that front is retooling the marketing campaign, making it a much stronger call to action and much more product demo spots for later in the year and we hope that will have some effect.

Aaron Kessler - Piper Jaffray

Great. And just quickly in the lending business what kind of exposure does LendingTree have to lower quality, or higher risk loans versus the industry average? Or is it pretty comparable?

Doug Lebda

It depends on the lender you would look at, but versus overall we have a very low exposure to sub prime and lower quality loans and now even less so because we have really aggressively moved out of those products. That said, we will move back into them once margins stabilized and improved.

Barry Diller

I’m just going to add on marketing on Ask, the strategy that we used at the beginning of the year and for the first six months was brand related more to make people understand that there was a different brand, Ask.com, as against the Googlization of the world and this was really a set-up to a more direct product oriented campaign which we are now just finishing the buying process for and we will begin a little bit later, I think a little bit later in this month, but predominantly September, October, November.

We think that it was effective, but not necessarily effective on day counts of additional users for queries for Ask or new users, but it certainly was effective in repositioning Ask and introducing Ask X, which is the new Ask. There is no question given the product and its use, that we do have a compelling product. You have got to be more direct in telling people about it which is our plan for the balance of the year. Next question please.

Operator

Our next question comes from the line of Anthony Noto - Goldman Sachs.

Anthony Noto - Goldman Sachs

Thank you very much. I had three questions, Barry and I will ask them in succession. My sense is that you won’t answer the first one, but I have to ask. Last call you had mentioned that you had not bought back stock because you were in the process of potentially pursuing some type of transaction or being involved in a transaction. Just wondering if you would comment if that’s again the same reason this quarter?

Barry Diller

Well, that’s a pause. I thought you were going to go do all three questions and give me the opportunity to be not responsive cumulatively.

Anthony Noto - Goldman Sachs

Yes sir.

Barry Diller

I won’t answer it. As I say, you just can’t get into the area other than when we’re so to speak, blocked from doing so. So, I guess the absence of a comment is a comment.

Anthony Noto - Goldman Sachs

That’s helpful. Second question, you’ve talked in the past about the fact you’re paying higher cash taxes this year than previously and that it may be beneficial to shareholders to protect some of the pre-tax income through leverage. Obviously the credit spread and the credit market have widened, making the cost of debt greater.

Barry Diller

Same as that of Expedia as you may know.

Anthony Noto - Goldman Sachs

Correct. Has your view on that changed given the credit market and obviously different capital structure and free cash flow characteristics of IACI?

Barry Diller

Well, the cash flow characteristics of IACI are similar to those of Expedia. So, these are both companies with very large cash flows and we do not have leverage. What will happen with Expedia, which is that when we set out and we made our announcement that we’re out for a tender offer for $3.5 billion, every thing, every respect said to us that getting the money on decent terms was the easiest trick and the initial discussions were exactly what we would expect.

What happened is then every day for about three weeks it literally changed where at the end, there was and is a credit freeze up. It will abate, more than likely, it certainly will abate at some point and when it does you would see us doing both for Expedia and for IACI sensible leverage in the companies, which we know makes sense, we’re desirous of doing it, you can’t do it during a credit freeze; not literally freeze, but it’s pretty cold.

So, that’s our intention and no extraneous reason, I mean other than some really reason extraneous reason, will deter it.

Anthony Noto - Goldman Sachs

Then the last question is Home Shopping Network continues to obviously be a challenge. You have the right people there. I was just wondering if you could comment, is the opportunity to an asset swap with HSN still a possibility or is that dead in the water?

Barry Diller

I don’t know if it is dead in the water. I mean, the issue is that I believe we have very good management at HSN. I think we are beginning to see the sign of that management after a relatively short time, of what is much clearer; I mean just look at HSN and look at the new products we are introducing, and some of the very big days, and we had a $13 million day on Sunday or Saturday. When the product is there and it is getting there with more and more frequency, the early teething problems that come with having a new group of people are working their way through the system. It is not going to be overnight, but we are very confident that as time goes that HSN is going to be very competitive.

Now relative to an asset swap at Liberty and the discussions we have with them. As you all know, discussions between particularly maybe these parties can go on endlessly, and they probably will continue at some point whether or not it’ll ever be in our interest to do so or in their interest I can’t really tell you.

Operator

Your next question comes from Mark Mahaney - Citigroup.

Mark Mahaney - Citigroup

I wanted to ask two questions related to the Ask business first. Any update or new thoughts on the Google relationship, and the potential for substituting away from that?

Secondly, as a strategy for bringing in new users, any thoughts on using points or contest with prizes as a way to attract new users like Microsoft has been doing with Windows Live Club Search?

Barry Diller

We have looked at prizes and ways of incentivizing. We still look at them. We really think the best approach is the direct one. Our product is compelling, it is definitely differentiating, than other search products. Over time we think it is going to get adoption, we will use any trick we can to get there. If we ever find a good scheme on points, rewards or prizes we will certainly use it.

As it relates to building our very long association with Google which expires on December 31, we are in a position we had hoped we would be when we originally got into this and purchased this Ask company, which is that we have interesting discussions from the three ad networks. That interest level is good enough for us to believe that whatever happens with this we’re going to be in a very good position in ‘08 for our ad businesses. I think that’s kind of a full answer. Let’s see anybody else here wants to add anything.

Operator

Our next question is from the line of Brian Pitz - Banc of America Securities.

Brian Pitz - Banc of America Securities

Can you provide a little more color with respect to Ask margins in the quarter, as well as the longer-term outlook there? As a follow-on to a previous question, do you expect the Ask marketing spend going forward to be as heavy as it was in the second quarter? Just with respect to the OIBDA margins for the Ask business in the quarter, can you give us a little more color as to what was driving those margins and then some outlook going forward in terms of improvement on that side? Thanks.

Tom McInerney

I will take the first part. We don’t break Ask out specifically, but we have been investing in Ask.com with both product and technology investments, as well as marketing investments as we’d indicated previously was heavy in Q3. We saw some query growth in the U.S. business. But we’re still at the very early stages of adoption and promotion of Ask 3D, which is what we’re calling the new product and we also had negative year-over-year revenue per query impact in the Ask business. We think that is the good news in a sense because as users we are using the new product, they were clicking on the paid links more and interacting with the algorithmic links more. We think that is a favorable user experience, we saw retention increases and frequency increases as a result of that, but it does have that kind of a short-term impact on revenue until you buildup that user base further.

So all kind of a long preamble, but the Ask business remains a continuing investment business for us, it was in the quarter we expect it to be going forward. The good news is as we see it in our aggregate media and advertising results, we are getting very strong performance both top line growth and profit margin growth, in our Fun Web products business, our syndication network businesses are very strong. So we have the luxury of being able to invest in Ask.com while still doing just fine from an overall media and advertising perspective.

Doug Lebda

To the point of marketing spend I think it will continue and the reason is, we have now got an absolutely fantastic product that consumers are reacting to very, very well. It is truly differentiated in the market and we got to tell people about it so that we can grow shares. We’re going to do that smartly, and we are going to do that and expect to get share gains.

,The other point to what Tom said is all of this toolbar business and consumer applications business also helps to not only significant OIBDA for the company that we can reinvest in advertising, but also it gets the Ask brand out there on millions and millions of desktops.

Tom McInerney

Particularly with young people.

Doug Lebda

Absolutely. Those products are all targeted at young people because if you turn them that certainly helps.

Barry Diller

When people begin their habits rather than having already been hardwired to Google it is a very good opportunity for us.

Operator

Our next question is from the line of Robert Peck - Bear Stearns.

Robert Peck - Bear Stearns

Just sticking along the same current theme, could you comment a little bit about Ask, what you’re seeing as far as click through rates, I guess they are down, but we would have guessed they would have been offset by CPCs.

Secondly, Barry, could you also talk about, with all of the products on Ask, are there any barriers to entry there to prevent Yahoo!, or Google et cetera from replicating it?

The last question, Tom, Fun Web products. Could you tell us what percent of media and advertising Fun Web is?

Tom McInerney

First one, I don’t want to go through the metrics in specificity. We don’t divulge them, but just generally, coverage was down as we saw a continuing trend towards less commercial enquiries. We were getting CPC rates up, but not enough with the coverage decline and click through rate decline, so that the overall was down on Ask specifically in the low-single-digits.

We’ve seen this before, when you change the product you get very different monetization impact and there are very subtle changes you can make that will change that and skew that. We don’t worry at all about short-term blips in monetization. As I said, retention was up 3%, frequency was up 4% on Ask in the quarter. As long as people are using it, we can tweak the monetization and the underlying ad networks’, Google’s performance has being just fine, we’ll make our money. Your second question?

Barry Diller

The second question was about the barriers to entry. There are none. One thing that I think has been consistently true over the last few yeas, which is the group at Ask has continued to innovate and continue to be on the leading edge, I think of search innovation. I think they are going to continued to be. The differences between search engines are profound, meaning Ask as against everyone else. Because Ask searches with expert community rather than simply popularity allow us to do a whole series of things. Our answers, it allows us to easily expanding and narrowing your search, it gives you much better context. I’m not saying people can’t copy that, they can but I doubt that the other search engines are going to do so because their whole concepts are different than ours.

Tom McInerney

The Fun Web business is approaching 20% of the search in media revenue. The media and advertising number we report also includes City Search, so it will be down into the mid teens, I guess as a reported segment, but it’s been growing very quickly and again at good and healthy margin, that’s probably all I will say about that.

Operator

Your next question comes from Jeffrey Lindsay - Sanford Bernstein.

Jeffrey Lindsay - Sanford Bernstein

Hello, we wanted to ask you little bit about Match.com. Overall, Match.com’s revenue growth at 1% and international growth 13%, does this imply that the domestic business shrank, and if so, by how much?

Secondly we note that the marketing expense was up in the international group. Is it the case that marketing expenses were up because of the growth in international business? Thank you.

Tom McInerney

The North American business was off slightly on a subscriber count basis, but it grew on a revenue basis. We implemented a pricing change at the end of last year, and we really try and optimize, although certainly you want a very healthy subscriber growth base, at least for the liquidity of the service, and the quality to service market by market. We are constantly tweaking with prices and packages and things like that, and try and optimize the business from a revenue perspective. So that’s kind of our first test, and we grew quite nicely in mid-single digits in our North American business, year-over-year in the quarter.

There is no question the international business is growing faster on both a sub basis and a revenue basis, and as we look at those markets and it varies market by market, you know they can be anywhere from one to three years behind where the U.S. market is in terms of development and we have pretty good share in a number of countries, we are certainly the largest pan-European competitor, so we think that’s healthy for the business.

Barry Diller

While we take share in some places we are going to be really aggressive every place where we can compete, we should compete much more strongly in certain market where we are late entrants and haven’t been as strong, so that we will see certainly the next year or so. Next question please.

Operator

Our next question comes from the line of Jeff Shelton – Bleichroeder.

Jeff Shelton – Bleichroeder

How much of softness in the Ask.com revenue was related to international versus domestic?

You indicated that traffic acquisition costs for you guys was going up, have we reached a point where that stabilized or do they continue to inch up?

Finally there were some cross talk when you were talking about the OIBA expectations for the remainder of the year. I was hoping you could mention what those are again? Thanks.

Doug Lebda

Let me take the first and the third and I may ask you to repeat the second one, unless my colleagues got it. First of all there was no softness in the media and advertising line. We had a very strong revenue quarter there, up over 30% and in the UK business which is its smaller piece of our over all business there, we don’t break it out separately, it is not growing as quickly, it has been a very competitive market for us and we are rolling out the same products and marketing strategy that were doing here in the US. But certainly it didn’t negatively impact the aggregate segment because it is a small piece of the aggregate segment.

On the third question and then I will turn it over to my colleague on the second. The only thing I said earlier with that as it related to Q3, we were looking for a flat operating income before amortization quarter year-over-year, obviously plenty of moving pieces to that, but that was what our target was.

Tom McInerney

On the traffic acquisition costs I wouldn’t read much into that in any quarter to quarter swing. At the end of the day that business which has been doing very well and continues to, is managed for OIBA and managed for OIBA growth and they are doing a great job signing up new deals. some of those deals coming in at higher margins, some of them come in at lower margins in terms of TAC but what’s great about that business is not only to do we have very good syndication business with the Goggle link, but in addition our own Ask sponsored listings businesses is doing very well. It is adding thousands of new advertisers and its growing and its doing just fine in certain key verticals.

Operator

Our next question comes from the line of Doug Anmuth - Lehman Brothers.

Doug Anmuth - Lehman Brothers

Can you provide an update on the LA on air distribution for HSN?

Secondly Tom, can you comment on how we should we think about the legal expenses for Ticketmaster, if these are really one quarter in nature or if we should think about them as little bit more ongoing. Thank you.

Tom McInerney

We are still not back on our analog distribution, we have digital carriage in LA. For those who don’t recall the history, we have agreed to work with Time Warner on some capacity issues they have there related to the acquisition they did, and we agreed to temporarily give up our analog distribution at their request with the expectation that it will return. , I don’t know have a precise estimate on it, but that continues to be our understanding with them.

On the Ticketmaster legal, yes, it was one-time and that’s probably all I need to say.

Operator

Our final question comes from the line of Imran Khan - JP Morgan.

Imran Khan - JP Morgan

Media advertising business has seen strong growth from syndication business. If you look at your competitors, their syndication on network business growth rate decelerated significantly. I am just trying to get your perspective on what kind of confidence level you have on the growth of that business?

Secondly, the return rate for Home Shopping Network was high, I think highest since Q1 of 2002. What are you doing to reduce the return rate and why do you think the return rate was so high? Thank you.

Tom McInerney

On the first of your questions, the growth has been very strong. You see it in the metrics and it’s been an increasing percentage of the mix. It is like a lot of things. It’s hard to predict that it will sustain at these levels, but this market is growing explosively. What we are finding is that not withstanding that as we work with various partners, notwithstanding that it is competitive and there are other people in there. We approach clients with customized solutions, in certain cases things maybe competitors won’t to do, focus on service, focus on meeting their needs, and we win some attractive business, sometimes at a higher TAC rate than we prefer but it’s still profitable. The business has been a very nice driver of our results there.

Can it continue at these levels? I don’t know. There is a lot of business though, we don’t see anything that says it necessarily is going to slow, we’ll just have to see how it plays out.

On the HSN return rate question, we have been seeing higher return rights for the last several quarters. We have analyzed it top, down and sideways, and our best bet, and it’s an instinct, more than something we can prove absolute , because it tends to cut across a number of different product categories, is that it relates to changes we have made that actually made the product easier to return for customers phased in. It was basically in the back half of last year. This is an easy return thing where you can , pick off the label and put it on. It’s much easier to get the product back. We think by doing that we have encouraged -- and again, this is one of the things, again, once you comp it, comp the year, when that was implemented that should benefit you. If you’re doing the right thing by the customer, ultimately you’ll be fine.

Every other possible cause in terms of product quality, complaints, everything else is not something that we can put our finger on it. So, we’re hoping that is it and that it will change once we comp that and ultimately lead to increased loyalty.

Barry Diller

With that, we thank you all and we look forward to talking to you next quarter. We’re hopeful that that quarter is going to certainly solidify from this quarter’s poor performance. Nothing that we see today thus far would make us feel otherwise. So, thank you all and we will talk with you soon.

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