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IAC/InterActiveCorp (NASDAQ:IACI)

Q3 2007 Earnings Call

October 31, 2007 11:00 am ET

Executives

Thomas J. McInerney - Executive Vice President, Chief Financial Officer

Douglas R. Lebda - President, Chief Operating Officer

Analysts

Justin Post - Merrill Lynch

Anthony Noto - Goldman Sachs

Jeetil J. Patel - Deutsche Bank

Imran Khan - JP Morgan

Mark Mahaney - Citigroup

Robert Peck - Bear Stearns

Brian Pitz - Banc Of America

Douglas Anmuth - Lehman Brothers

Aaron Kessler - Piper Jaffray

Jeffrey Shelton - Natexis Bleichroeder

Heath Terry - Credit Suisse

Jeffrey Lindsay - Bernstein Research

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the IAC Q3 earnings conference call. (Operator Instructions) Now I would like to turn the conference over to Mr. Tom McInerney, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thomas J. McInerney

…forward-looking statements typically are preceded by words such as “we expect”, “we believe”, “we anticipate”, or similar statements. These forward-looking statements are subject to risks and uncertainties and our actual results could differ materially from the views expressed today.

Some of these risks have been set forth in our Q3 2007 press release and our periodic reports filed with the SEC. We will also discuss certain non-GAAP measures. I refer you to our press release and the investor relations section of our website for all comparable GAAP measures and full reconciliations.

Joining me on the call today is our President and COO, Doug Lebda. Barry Diller had a conflict and was unable to join us today, but in addition to today’s call, where Doug and I can answer your questions about Q3 and current performance, just like we did last year, we’ll have another Q4 call in the coming weeks with our full management team to talk about the going forward strategy of the company and our 2008 agenda.

Let me make a few observations about our results and I will turn it over to Doug. We are pleased with the quarterly results. While the overall growth rate is not what we aspire to, we had strong double-digit growth in enough of our businesses that we were able to post slight overall operating income before amortization growth for the quarter, despite a sharp decline in LendingTree’s profits.

At HSN, we made the progress we had hoped for when we last spoke to you. For the quarter, HSN grew revenue 5% with very consistent growth in each month of the quarter. While gross margins were down 140 basis points year over year, for largely the same reasons we told you last quarter, this was significantly better than Q2, where we saw more than twice that rate of decline.

We also made progress on the inventory issue, which has plagued us all year, as we finished Q3 carrying $6 million more inventory than the prior year. This figure is down from $49 million in Q1 and $18 million in Q2. We do still have some aged inventory but we’ll continue to work through that in the fourth quarter so that we can enter 2008 as clean as possible.

In Q4, we expect continued steady growth in the top line and further improvement in narrowing the year-on-year declines in gross margin percentage, which we halved in Q3, as I have already mentioned. If progress continues at its current rate, we expect to see flattish OIBA in Q4.

Now to LendingTree, where mortgage market conditions continued to deteriorate during the quarter, narrowing the focus of the business to where it’s almost exclusively low-margin prime conforming loans.

As was the case in the first half of the year, a decline in house values and more stringent lender underwriting criteria, which resulted in lower close rates, fewer loans closed and sold, and lower average revenue per loan sold, all impacted results.

Additionally, lower close rates led to an increase in our average cost per loan. Profit declines included a gain of $6.7 million after netting the combination of a favorable legal settlement, an increase in legal reserves, and a restructuring charge.

We continued to reduce costs in the quarter and year-to-date, we have shrunk the LendingTree workforce by 40% while reducing marketing spend by 24% and total operating expenses by 33%. Obviously we’ve been chasing our tail a bit as this market has continued to deteriorate, but our focus over the balance of the year is positioning the business to achieve at least break-even results in 2008 and for as long as this environment lasts. Obviously we also expect to capitalize on any upturn when that should occur, as the business will come out of this leaner and more competitive.

Switching gears, Ticketmaster recovered nicely from the aberrational second quarter, as worldwide ticket sales increased 11% and revenue increased 13%. International ticket sales grew 28% while domestic ticket sales rose a modest 3%. It was a good performance in the face of tough year-over-year comparisons from an exceptionally strong concert season last year. During the quarter, domestic concert ticket sales declined 2 percentage points to 54% of the overall domestic ticket mix.

Ticketmaster grew operating income before amortization 9%, slower than revenue as we’re still absorbing the operating costs increases which impacted Q2, but a solid number given the investments we are making on a global basis.

Ticket volume in the fourth quarter has thus far been solid, but year-over-year comps will remain difficult, with the results in the year-ago period reflecting a very strong concert season. You will also recall that we highlighted the benefit of some non-recurring items in our Q4 ticketing OIBA figures a year ago, so for the quarter, we are expecting profit to be flat to up slightly versus the year-ago period.

Briefly on ServiceMagic, revenue grew 33% but profits declined due to a ramp-up in operating expenses as we opened a second sales center in Kansas City and experimented with offline advertising during the quarter.

The fundamentals of this business remain excellent, and given the company’s dominant position in the home services segment of the local market, we think these investments make a lot of sense and will pay dividends in 2008 and beyond.

Media and Advertising, Interval and Match all had strong quarters. The Media and Advertising business has benefited from continued growth in queries in our syndicated search business, as well as query and revenue per query growth at our Fun Web products business, and query growth at Ask. Doug will speak more about our results and initiatives in this segment in just a moment.

Interval continued its long track record of growth in Q3, growing revenue and operating income before amortization 35% and 24% respectively. I will point out that Q3 numbers include a full quarter of results from Resort Quest Hawaii, which we acquired on May 31st this year, and this acquisition affect is solely responsible for the margin contraction in the quarter. Excluding Resort Quest Hawaii, Interval grew revenue 9% and OIBA 12%, with growth coming from both increased membership dues and increased transaction volume.

At Match, results benefited from an 11% increase in revenue per subscriber and double-digit international subscriber growth. Robust profit growth during the quarter benefited somewhat from a shift in marketing spend to later in the year. In Q4, we will increase our year-on-year spend in marketing in international and domestic markets to strengthen the core brand, bring greater awareness to Chemistry.com, which continues to grow strongly, and build momentum going into the pivotal first quarter. As such, we expect profits in the quarter will be flat to the year-ago levels.

I will end the discussion about our segments with a quick comment on our Entertainment business, which improved in earnings through Q3 compared to the year-ago period, but much of this is timing related, and for the full year, we expect results to be on par with the year-ago period.

Turning now to the balance sheet, which remains strong, we ended September with $1.8 billion in cash and securities and pro forma net cash and securities of $956 million. During the period, we repurchased 8 million shares at an average price of $27.54, bringing our year-to-date spend on share repurchases to $509 million.

Free cash flow for the first nine months of the year was $293 million, $60 million lower than the same period last year, due to lower operating profits and higher cash taxes paid.

To conclude, this felt like a bit of a turning point for us after what has been a difficult year. We have opportunity and of course challenges a plenty, but we feel we are surviving the turmoil of the mortgage industry, riding the ship at HSN, and have much more positive momentum in the rest of the portfolio.

Regardless of the final 2007 tally, we are obviously looking to finish the year with the right momentum heading into 2008, and with that, I will turn it over to Doug.

Douglas R. Lebda

Thanks, Tom. I will spend a few minutes adding some operational details of the financial results, beginning with retailing. At HSN, we are seeing definite signs of progress financially and operationally. The business now has a clear and differentiated brand identity and the work continues to increase the pace, newness, and variety of products on-air and online.

Q3 included exciting events like HSN’s 30th birthday celebration and fall fashion week, as well as HSN’s first national advertising campaign since 2002, all of which were unmitigated successes.

Fall fashion week was sponsored by Elle Magazine, featuring tips and trends from their key editors on air every evening and resulted in the sale of over 42,000 Elle subscriptions, far exceeding our expectations.

In addition to Elle, we are expanding our print coverage in the fourth quarter to include sponsorships from Gourmet Magazine to feature our chefs and Allure for our expanding beauty category.

We are also seeing increased momentum in new vendors wanting to become part of HSN’s success. We recently launched entertainment guru Colin Cowie and Dr. Robert Rey, a.k.a. Dr. 90210. Colin Cowy did over $2 million in sales during his two-day visit with 25 sellouts. Dr. Rey sold over 13,000 units in one hour.

Other product successes during the quarter included the worldwide exclusive launch of GE’s new digital camera on HSN, in which 10,000 units were sold in just three-and-a-half hours, while Chef Todd English sold 320,000 units of his new non-stick cookware in only 12 hours of airtime.

This truly phenomenal production highlights the immense distributive power of this medium when we strike the correct balance between product and presentation. We have more exciting launches and programming concepts planned throughout the fourth quarter.

Most importantly, success is showing up in our customer metrics. During the quarter, our core customers grew 7% and on average spent 4% more with us. For the quarter, the total 12-month active customer file was relatively flat, increasing slightly for the first time since December 2005.

HSN.com continued to grow at a double-digit rate following the site’s relaunch on July 31st. Sales and margin were up in almost every category. Traffic grew 7% compared to last year and conversion was up 20 basis points.

The new site includes virtual host and personalities, original content, interactive blogs, and over 8,000 video product demonstrations.

Turning now to LendingTree, where macroeconomic challenges persist. During the quarter, an already difficult interest rate environment was exacerbated by perhaps the worst credit crunch in history, which saw liquidity all but dry up in August.

The operating metrics continued to soften, with transmit rates, close rates, and margins all dropping precipitously from where they were a year ago.

I want to take a moment though and remind you about LendingTree's business model, as I know this has been an area of investor concern. Principally, we are a lead generator selling leads through our network of lender partners.

At LendingTree loans, we are a correspondent mortgage originator, which means we close loans in our name and sell those loans to a number of large lenders, who in turn securitize the loans or hold them in their portfolios.

As you have seen from our press release, we increased our loan loss provision in the quarter, but our business model and risk profile are very different from those lenders that you see taking large write-downs in this environment.

Simply put, our exposure is limited to losses from changes in the market value of loans we hold for a very short time and loans we have sold that are put back to us as a result of early payment defaults, underwriting, or compliance issues, as well as fraud.

We typically do not hold these loans for more than 30 days, nor do we hold a portfolio of loans for investment. While it’s difficult to maintain profits in this business in the current environment, our losses are much lower and of a very different nature than much of the industry.

With that in mind, we have implemented a strategy to better position the business in today’s mortgage environment. First and foremost, as Tom mentioned, we are reducing costs. Second, we are implementing new automated sales force technology to streamline the process from lead to close. Third, we have increased prices on the exchange and broadened our pricing into 64 segments, which allow us to be much more granular in how we set pricing going forward. Finally, we’ve reduced our marketing spend significantly but we still maintained our pro consumer brand positioning with the recently launched campaign to educate consumers how to make smart borrowing decisions, even if that means not taking out a loan. This consumer advocacy approach is the correct one and will benefit us as the market improves.

Moving to Ticketmaster, which posted solid results in Q3; concert ticket sales picked up towards the back half of the quarter, with acts like Hannah Montana, Van Halen, and Bruce Springsteen. Client sales and retention activity continues to be strong and Ticketmaster renewed or signed 306 accounts and lost only eight.

The development and rollout of our auction and ticket exchange products continued to gain traction, with 19 national tours enabling ticket exchange for the majority of their event dates. We ended this quarter with 541 venues agreeing to participate in ticket exchange, up from 30 a year ago, and 263 at the end of Q2.

Meanwhile, the number of auctions conducted this quarter grew 57% versus the same period last year, with an average increase over the starting bid of 82%.

Still in the transaction sector at our real estate business, the company-owned brokerage business continues to expand within its nine markets, and now boasts over 650 agents with 102 more agents added this quarter alone. In Q3, we saw a 20% increase over the prior quarter in closed transactions from realestate.com generated leads that were sent to those agents.

This business will open three or four new offices on the East Coast by year’s end, as it continues its march towards profitability.

In our membership and subscription sector, Interval predictably posted another quarter of solid gains, including the acquisition of Resort Quest Hawaii for the first full quarter. Interval recently launched two initiatives for continued growth.

First, we have a new lead generation website for Interval’s developer clients called vacationsource.com. Over time, we think that this will add real value for Interval’s clients and add a new revenue stream for Interval.

Second, we’ve entered into a long-term strategic alliance with Preferred Hotel Group to create Preferred Residences, which will be a new exchange and membership program for luxury fractional resorts and private residence clubs.

Our Media and Advertising sector grew revenue 40% this quarter, driven largely by growth in our syndicated search and Fun Web products businesses.

Now with over 10 million registered users, zwinky.com’s momentum remains impressive. In April, we launched Webfetti, a free downloadable application allowing users to customize their social network pages and blogs. The site now has over 4 million uniques, up from 2.8 million at the end of Q2. These two products, along with our past successes with smileys, illustrate how this team can invent, test, deploy and scale new customer applications in a very short period of time.

Q3 was the first full quarter of the new Ask 3D experience and it’s been received positively by critics and consumers alike. In August, Ask posted the largest gains in consumer satisfaction as measured by the American Consumer Satisfaction Index. The next step beyond the changes to the user interface is to rebuild and redeploy the infrastructure of the core search engine and we are in the midst of that now.

Over the next few months and quarters, expect to see search results on Ask that are more relevant, more complete, and fresher than anything Ask has produced before.

Of note in Q3, we saw usage of Ask Mobile continue to rise and Bloglines released a very well-received new version of its service, and we continued the rollout of Ask 3D, adding content and categories like maps, real estate, local, movies, music, and health.

Ask rolled out a new advertising campaign in mid-September with direct product demonstration spots highlighting the uniqueness of our product. This campaign positively impacted queries late in Q3 and continues to do so in Q4. We are taking a very similar approach in the U.K. market as well.

We’ve spoken in the past about IAC's advertising strategy on the buy side, and this quarter I would like to speak to you about the sell side, which also holds great promise for the company.

Our advertising solutions business, the unit that sells ads on behalf of all the IAC sites, is achieving strong double-digit increases in CPMs, more effectively monetizing previously unsold inventory, and is doing larger deals in larger categories with larger advertisers. This increased scale has helped us attract a diverse mix of significant advertisers like AT&T, Ford, American Express, Universal Pictures, and Target.

This is happening because of a new team and a strategy put in place beginning in late 2006. Initiatives included reorganizing our sales team, migrating ad serving onto a single platform, and continued optimization of the Ask sponsored listings network.

It’s still early but in 2008 and beyond, we expect continued improved results from advertising on our site, as our technology investment, operational improvements, and early forays into things like video ads and behavioral targeting begin to bear fruit.

And with that, let’s get to your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Justin Post with Merrill Lynch. Please go ahead.

Justin Post - Merrill Lynch

Thank you for taking my question. Could you get into a little bit about the lending provision? It was $8.2 million this quarter. Did you up that for some of the loans that you had done prior to this quarter? And how comfortable are you with that provision? And then one quick follow-up on Ask.

Thomas J. McInerney

The quick answer is generally yes. I mean, it does mention -- our business here is essentially originating loans and closing them and getting them off the books, and the only cases where we have losses generally speaking is where there is an early default, usually in the first or second month, something like that, or there is a fraud, there is a problem in the file and you get into all sorts of specifics in terms of those contracts.

So the losses in the business historically have been I think it’s fair to say astronomically low, kind of in numbers, 4 million cumulatively of incurred losses over five years, which is 1.5 basis points of the total $26 billion in production at LendingTree Loans over that period.

So it’s really -- it’s a very different animal than anything else you are reading about in the papers. That said, in this environment, we are seeing, because of all of the unrest and dislocation with the investor community and the people that have bought the loans, A, there are some increased early defaults on those first or second months, and B, people are scrubbing when they do have a problem, they are scrubbing those loan files more closely than before and so we have seen people coming to us with one or the other of those problems, with a greater frequency.

The majority of this is related to either no documentation or low documentation loans, or second mortgage positions and we’ve stopped originating those roughly in the second quarter, but there is going to be a trailing -- there’s going to be a trailing flow to that a bit, so we are comfortable with the reserve. We’ve scrubbed it very hard.

Historically, because of what I was talking about earlier, the loan loss provision in any given period might be $1 million or something like that. This is obviously materially higher than that, but we think it’s a bit of a catch-up and unless something changes again, which is always possible, we think we have the right number.

Justin Post - Merrill Lynch

Great, and then a follow-up on Ask; you’re seeing a reacceleration in growth. Are you benefiting from some of the network initiatives at Yahoo! and Google? How do you feel about the core Ask website? Are you seeing an acceleration of queries on some of your recent changes?

Douglas R. Lebda

We definitely continue to be helped by Google’s monetization. They do a really great job optimizing the ads that they serve and that has certainly helped. We’ve obviously got our own initiatives, which have helped do that as well, particularly our own Ask sponsored listings business, which continues to grow in the number of advertisers competing for those listings, and we can slot those in and that absolutely helps as well.

On the Ask.com site, I mentioned that we are definitely very pleased with Ask.com. We are pleased with the growth in queries. We are pleased with the product and the infrastructure, we love the interface and next up is the infrastructure, as I mentioned. As the infrastructure improvements are continuously rolled out and the responses and the search results are much fresher and more accurate, we expect to continue to grow share in queries.

Operator

Our next question comes from the line of Anthony Noto with Goldman Sachs. Please go ahead.

Anthony Noto - Goldman Sachs

Thank you very much. The acceleration in the Media and Advertising line, a 40% year-over-year growth from about 32% last quarter, I was wondering if we could actually switch the perspective on that growth, as sequentially it’s up 9%, which is a meaningful acceleration versus the seasonality of the September ’06 quarter.

My question is, do you think that you get a one quarter step-up due to improved monetization in September and then you go back to the normal seasonal trend? Or do you think there’s continued benefits that can impact the sequential growth rate seasonally over the next several quarters?

Thomas J. McInerney

Anthony, it’s an incredibly -- as you can imagine, it’s a very complex equation which I think gives us, to a sense, a degree of low visibility on it. Because you have a number of moving parts in here. You have obviously what’s going on, kind of on Ask.com proper, in terms of site launches, in terms of marketing initiatives and the like. You have all of the moving pieces in the syndication side of it, both kind of distribution of Ask as well as our syndication businesses. You have all of the initiatives in the toolbar area, and as Doug said, we continue to drive a lot of innovation there and we are getting very good growth.

And then, of course, we’re a bit of a taker in terms of what happens on the monetization side across all of those businesses under the Google agreement.

So as we add all of that up and parse it in a million different ways, kind of judging its quarter to quarter and acceleration or deceleration in any given quarter a trend is kind of virtually impossible. All we can say is we’ve got good and balanced growth in that business across all of those things I just mentioned and we hope and expect it will continue.

Anthony Noto - Goldman Sachs

I appreciate those four variables and basically that’s what we’re trying to dig through, so I appreciate the challenge.

The second question as my follow-up is the Olympics in Beijing, there was obviously a fair amount of press today about the collapse of the ticketing system. I was wondering if you could just comment on that and whether or not that could have a direct impact on costs as you go into the December quarter, and if you could provide any high level color on the December quarter like you had in the past. Thanks.

Thomas J. McInerney

I think on the overall cost and profit impact, that will be immaterial. Obviously this is something we didn’t want to happen, but -- and we have done significant testing in advance at all sorts of levels of expected demand that we anticipated to be very high, and demand just was significantly higher than anything that we had tested against. The team there on the ground is working through that and they’ve got the situation well in hand, but the overall operational and financial result is immaterial.

Operator

Our next question comes from the line of Jeetil Patel with Deutsche Bank. Please go ahead.

Jeetil J. Patel - Deutsche Bank

Great, thanks. A quick question on the HSN turnaround that’s continuing here; can you guys talk about with the positive comp of 5%, do you think that it was more of a function of easier comparisons or just the underlying metrics improving? Is it more product selection or just you are seeing better frequency in your customer base?

Follow-up to that, what is your strategy -- what is the optimal mix you would like to see in the growth rate of the business from a user standpoint versus a -- call it a frequency, customer purchasing activity standpoint?

Thomas J. McInerney

It’s categorically, in your alternatives, categorically the latter. I don’t think there is really a comp issue at play here. You all have kind of been with us through this ride of 2007. We have changed a lot of things with a significant merchandising overall, a lot of team changes, and we’ve had a combination of issues that relate to that, and when you are trying to in a sense completely reprogram the network from a merchandising perspective, it takes a while to get all the gears to mesh.

And so as we look at the metrics now, we have strength generally speaking. There are a couple of pockets of weakness, but generally speaking, across all key merchandising lines and divisions, we are getting very good performance out of our core customer and as Doug said, the customer file has stabilized really for the first time in over a year.

All of the metrics, both new, weekdays, weekend, no matter how you slice it and dice it, it is good and balanced growth at that 5% figure and we think it is essentially the changes are working and the execution, the day-to-day execution, which is the nature of this business, is better.

I think in terms of the second part of your question in terms of the optimal long-term, I guess it is trite and cliché to say, but you always would like both. We would love to see customer count grow and obviously you want to get more dollars per customer.

I think at the end of the day, it’s hard to say what that mix will be. We know that in that 4.5 million customers that there’s a heck of a lot more buying power than what we are currently taking from them. They buy in our competitors, they buy in other Internet and direct channels, they buy in stores, and so I’ll answer it this way -- if that never grew, we could still do just fine. Obviously we hope we get it both ways.

Jeetil J. Patel - Deutsche Bank

And you’ve been making quite a few changes on the inventory selection side. Can you discuss -- you’ve obviously been winding down old inventory and ramping up with a new selection. Can you talk about what percentage of your transformation in that area is complete at this point?

Thomas J. McInerney

It’s well underway. I mean, if you look at the businesses, and there is no easy way to summarize it and you get into line by line, but if you looked at the 10, 15, 20 businesses that we were in say a year ago, where we said it should be smaller -- it may be great business. It may be good business for our customer. It’s just it’s been over-rotated, overexposed and pushed beyond its natural limits, and that should be smaller.

I would say in all of those cases that has happened and to a material degree. And so we are well on that way.

That’s the very tough part because as you pull out some of that tried and true and you are trying to replace it with new, it’s hard to find the new that works at high enough productivity levels that you have year-on-year sales growth.

So where are we in that? Look, until we are consistently quarter in and quarter out growing at sales growth rates, ideally in excess of even the five and at gross margin rates that are flat or better year over year, then we still have plenty of work to do but we think the consistency is there month after month now, and we’ve gotten a good start into that.

Douglas R. Lebda

And the only thing I would add on HSN is just the success of the dot-com. I mentioned earlier about the relaunch of that. We’ve also changed the merchandising strategy of dot-com to have much more dot-com only merchandise and to really widen the assortments there, so we can use it not only as a vehicle for keeping our existing customers but also attracting new customers, and as that site gets continually enhanced and new features are added to it, we’re just seeing great performance on the dot-com side.

Operator

Our next question comes from the line of Imran Khan with JP Morgan. Please go ahead.

Imran Khan - JP Morgan

Thank you for taking my questions. I have two questions, one related to HSN and one related to Ask. HSN, it seems like the ASP was up 5%. I was wondering how sustainable that is and what drove this ASP growth rate?

Secondly, relative to Ask, our analysis shows that your take rate from the Google deal is around the high 70s, closer to 80. As the deal is coming up for renewal and alternatives, other search engines, can you give us some color how confident you are that you can get better rev share? Thank you.

Thomas J. McInerney

We’ll take them in order. On the price point issue, the blended price point -- we struggle with this because it is hard to summarize. At the end of the day, it’s an amalgamation of so many factors that it tends not to be something that is particularly meaningful.

The way we manage the business is first of all, average price points kind of division line by division line, so whether it’s fine gold, gem stones, whatever it may be within the jewelry category et cetera, through the other classifications. And then also, looking at the number of entry-level price points we have in given lines of business. If the average goes up, that’s fine.

The key question is in those categories where we know they are good drivers of new customers, new names, are we giving them enough selection at lower price points because you are more likely to get a new customer until that trust is established.

And on all of those metrics in terms of percentage of time devoted to lower price points, number of products with below $50 price points, what we call perceived price point, which is the percentage of air time devoted to that, actually sold -- all of that, all of those metrics are saying we are giving the customer more variety at those entry level price points.

And as long as we are doing that, the average will go where the average will go.

On the second question, as people know, our sponsored listings deal expires at the end of the year. Discussions are in process and we expect to have a favorable resolution soon and that’s about all we can say at this point.

Imran Khan - JP Morgan

Thank you.

Operator

Our next question comes from the line of Mark Mahaney with Citigroup. Please go ahead.

Mark Mahaney - Citigroup

Thanks. Tom and Doug, I wanted to ask about the Ticketmaster business and earlier in the quarter, you made public statements to the effect that you did not expect a continuation of the Live Nation and the House of Blues deals when they terminate at the end of ’08 and beginning of ’09. Any update on that? Any thoughts on your abilities to substitute what could be a material 15% to 18% of your ticketing business?

And are there any signs that you are seeing in the marketplace to date that indicates that customers of Ticketmaster are already thinking about potentially Live Nation as a new company to work with, or i.e., seeing greater competition potentially in churn rates or anything in the marketplace? Thank you.

Douglas R. Lebda

On Live Nation specifically, there is no update there. To your broader question, we are absolutely continuing to make progress on a number of fronts at Ticketmaster and we remain -- we think that next year and beyond, that Ticketmaster's business will be absolutely just fine.

When you look at all the changes that we’ve instituted and all the new strategic relationships, the success that we’ve got in secondary marketing, to continue, as you put, you asked about client churn, the continued ability to sign up and renew clients despite the fact this is a very competitive industry, we are very successful at signing new clients. We’ve got much greater adoption of the secondary ticketing initiatives, much greater adoption of auctions. We’ve continued to add acquisitions, continue to expand internationally, continue to bring in new product lines like Echo Music and others, and to work very closely with our clients and artists, et cetera. And all of that is working and continues to expand, so we remain very confident on Ticketmaster.

Thomas J. McInerney

The business, if you step back and think about it, the business every single day is increasingly more balance. You obviously don’t replace, I know we get that question a lot, a client or a ticket volume or revenue stream. You don’t replace that with one thing.

But the business is more balance. Just this quarter for the first time ever, one of our top 10 events came from Australian. We did acquisitions in Spain and Turkey. As Doug said, I think we retained or signed new nearly 1,000 clients and lost a handful, a small handful. So we are getting new revenue streams in multiple places. This will play out over one to two years and as it does, we are going to grow all of these revenue streams and obviously at the right times, we’re going to have to quantify this a bit more for you, but it’s a bit premature in that regard.

And just to put an exclamation point on the last part of your question, no, we’ve not really seen any change in the competitive environment in any way at all. I think Ticketmaster's position remains as it was.

Operator

Our next question comes from the line of Robert Peck with Bear Stearns. Please go ahead.

Robert Peck - Bear Stearns

A quick question on the balance sheet; we noticed you had no acquisitions this quarter and previously you had a couple of acquisitions in Q1 and Q2. Are you scaling back a little bit on the acquisition front, or is it more of just a timing of potential acquisitions you may be doing?

And number two is Barry has historically talked about increasing the leverage on the balance sheet. Could you give us an update there on where you stand on that and maybe what would be catalysts or drivers to have you make some moves there? Thanks.

Thomas J. McInerney

On acquisitions, the answer is no. I mean, we’re not -- sorry, we’re not scaling back. There’s always going to be timing elements to this and I think, as best one could say, and we always caveat it by you never know when opportunity presents, but as best one could predict, the type of activity you’ve seen really over the last two years now, I think since the Ask deal, which was now more than two years old, we’ve been in these kind of smaller to modest sized acquisitions that either establish an interesting position for us in some new space or add to what we have. There’s been a number of them last year. This year, the fact that there’s nothing in Q3 I think is more timing than anything else. We’d expect it to continue as it has.

On the balance sheet, as you all know, it’s never something where we can move towards a specific or established goal. We’ve said and I think hopefully have shown by this quarter’s action and previous quarters, we view ourselves as over-capitalized. We are moving in the direction of shrinking that capital. It won’t come at a predicted pace and it won’t move to an established end line, but actions speak louder than words. We bought back $1 billion of stock last year. We bought back $500 million worth of stock this year.

We had a very strong cash flow year last year and cash flow this year, despite some of the [earnings pressures], have continued to be good. So we are buying stock back and yet we remain quite capitalized, and I think that general environment and general aspiration remains without any specific moves contemplated or specific goals articulated.

Operator

Our next question comes from the line of Brian Pitz with Banc Of America.

Brian Pitz - Banc Of America

Thanks. First a question on the media business; any color on your decision to switch from DoubleClick to Atlas for your media properties and thoughts on monetization, relative to previous levels?

And then, a second follow-up on LendingTree; any view on potentially moving towards a CPM or cost-per-click based model, rather than a primarily lead gen based model? Thanks.

Douglas R. Lebda

Sure, I can take both of those. First off, on the DoubleClick versus Atlas, we actually didn’t switch from DoubleClick to Atlas. We basically did a company-wide RFP where we talked to DoubleClick, Atlas and some others about getting on one platform both the buy side and the sell side. Several of our businesses had used Atlas, a couple of our businesses had used DoubleClick as well. We look at all the pros and cons of both, going back almost a year now and thought Atlas was the right answer for both the buy side and the sell side.

The buy side has been implemented, as I’ve talked about in the past, and the sell side is in process now. We’ve got several sites converted over with several more launching in the first quarter.

In terms of monetization, the key benefit of monetization that we’ve seen so far on advertising has come from a couple of things. One is our own ability to go sell and be much more effective at selling and, as we get more scale in advertising, we can attract more advertisers in, we can raise the prices.

In addition to that though, we’ve also seen the operational effectiveness really improve. We are better at the sell-through and measuring that. We are better at figuring out which advertiser you put in a given slot when they might actually overlap, and all of that has helped to improve the CPMs on the site.

On LendingTree, the CPM versus lead fee, I don’t think we’d move to a CPM on LendingTree. And at the end of the day, the way lenders look at this and the way that ServiceMagic’s clients do and all of our other businesses that are in lead gen, they look at it on a cost per funded transaction, and they try to get an attractive marketing cost. So whether we are on a CPM or a lead fee or a closing fee, none of that -- at the end of the day, they are going to look at it on the all-in cost.

Now, what we have done is as we increased the pricing on the LendingTree network about 10%, we’ve also shifted a lot of the revenue, a lot more of the revenue to an up-front fee as opposed to the back-end fee. The reason there is it obviously reduces our risk, brings in more of the revenue upon transmitting a lead as opposed to actually closing, and it also is an effective price decrease for your best closing lenders, because they buy fewer leads to get every closing and it helps to thus get you more aligned with your best partners and really puts a price increase on your worst-performing lender.

So what we are doing is gradually moving the pricing more towards the up-front. With our Get Smart product, it’s 100% up-front, but I don’t see us moving it to a CPM-based model.

Operator

Our next question comes from the line of Doug Anmuth with Lehman Brothers. Please go ahead.

Douglas Anmuth - Lehman Brothers

Thank you. Tom, first can you just clarify in terms of the outlook for the fourth quarter -- I know you went through the various divisions on what your outlook is for OIBA in 4Q.

Secondly, now that we are seeing better top line growth in both HSN and in Ask, can you talk about when we are going to see more of an emphasis on the bottom line, what the key initiatives are there and when we can expect to see that more in the numbers? Thank you.

Thomas J. McInerney

Sure. Obviously we are not going to do detailed guidance, but if you think about Q4 and I almost think about it relative to Q3, in Q3 we had a very steep decline, as I said I think in my remarks, on lending and that was in a sense offset by very positive year-over-year results at Match. That’s just kind of how I think about it, and we got whatever we got from the rest of the businesses.

When you go into Q4, because we shifted some marketing spend and we want to invest in some of those domestic and international personal sites in the fourth quarter to set us up for a very strong Q1, and Q1 is kind of the game in personals to set you up for the year, as we’ve seen year after year now, we’re going to be, depending on where Lending -- we made $17 million in Lending a year ago, and so with the loss of that, with whatever the final tally of Lending ends up being, that’s going to be a very steep mountain to climb to then get back to any kind of growth position for IAC overall.

If you go through the businesses, again, we’re hoping to have a flat to slightly up quarter at HSN. We described roughly the same at Ticketmaster. There are some real comp issues in the Ticketmaster quarter a year ago and you can go back to the Q4 release of a year ago and see that spelled out.

And we should get some good results in other places, but that LendingTree loss from a year ago makes it a very tough mountain. We start to get much more favorable comps in Q1 and beyond. Until then, it’s just very hard to grow overall.

I think on your second question, I think more to come from us on that, in a sense. We are not really ready to address that. As I said earlier, we are getting good growth across the search and media properties and generally have continued to invest in that back in the core search engine, Ask.com.

In given quarters, and in fact even in this year, we’ve gotten good profit growth, so it certainly is a net contributor and profits this year will be up materially in the Media and Advertising business and the search businesses collectively. What the mix on that is and what that long-term balance is, I think more to come on that. It’s premature to articulate it.

Operator

Our next question comes from the line of Aaron Kessler with Piper Jaffray. Please go ahead.

Aaron Kessler - Piper Jaffray

A couple of questions here; first, can you give us the demographics of maybe the typical Fun Web products user? Also, how sticky are these products and how are you gaining traffic here -- is it more viral marketing, SEO, or something else? And one follow-up.

Douglas R. Lebda

The demo on Fun Web products will differ by the product. For Zwinky, it’s predominantly teenagers, would skew more female than male, and then now in terms of stickiness, we find them to be very sticky. We’ve seen the time on site improving dramatically, particularly as we launch the virtual world part of Zwinky, where people are increasingly hanging out and doing different things in this virtual world. We’ve had virtual concerts. We now have merchandise, we have licensing and we see we now have the opportunity to have a little home on Zwinky and to customize that, so the more of those things you add, the stickier it gets.

In terms of how you get traffic on those, it’s been predominantly viral and the reason is these things also, in addition to being in the virtual world, Zwinky as well as Smileys have great viral components to them. You can put them on social networking pages, you can put these things on blogs. People obviously put smileys in their e-mails and in order to then see them, you download many times the toolbar on the other side in order to send something on. So all of these things have great viral elements to them.

In addition to that, we spent a lot of money on online marketing in that business, particularly through ad networks. It’s for the most part, a very large most part, it is all CPA based advertising and the team there is fantastic at it and that’s how we’ve been driving traffic.

Aaron Kessler - Piper Jaffray

And one follow-up; how are you viewing the current state of the real estate market? Obviously it’s a negative but are you viewing that as an opportunity to pick up share, maybe to acquire some properties that are distressed right now? How should we think about that going forward?

Douglas R. Lebda

As always with acquisitions, we don’t comment specifically on that. Let me just give some broader comments though about real estate. The real estate market nationwide is obviously experiencing challenges but it is particularly acute in five key states. We do hope to gain share in real estate. However, we are being cautious here. We have a lot of great success in the revenues business but we have not yet proven fully that we can attract leads at a very low cost of getting leads to grow that business, and that our conversion rates are where they need to be yet to really scale the business, where you would go at this much more aggressively than we have.

So we’ve made some very, very small acquisitions in years past. We are adding offices and we are adding agents very aggressively, because they are not employees, and we are increasing our marketing spend in local areas, but we are being cautiously -- I would say cautiously aggressive but not yet at the point where you would really want to step on the gas.

Operator

Our next question comes from the line of Jeffrey Shelton with Natexis. Please go ahead.

Jeffrey Shelton - Natexis Bleichroeder

Thanks. Can you talk a little more about the branding for Ask.com? I think earlier this year there were comments made about $100 million being spent in branding. Do you think -- are you in line with that for this year, under, over?

Douglas R. Lebda

Tom’s looking up the specific number. Just in terms of the overall though, our Q3 spend was much less than it has been in prior quarters. However, with that, we’ve still seen great results from the advertising. We know that product demo spots work and the more we can highlight the great tools and features of Ask.com, the better we see that working.

We have increased, particularly in the online space, where we can get a very direct result between running a product demo online spot and seeing a direct result to click-throughs, so that’s one area that we increased.

And on the specific number --

Thomas J. McInerney

In general, I would say our commitments are along the lines of what we’ve previously indicated. The year has been an evolution in trying to find what works. Earlier in the year, we had the algorithm campaign. We’ve move it more to a call to action featuring the site, and we’ve been shifting around a bunch of the online spending.

I think the investment is there and I think again, more to come on this, but as we look towards 2008, the focus will be not necessarily on spending more money but on spending comparable amounts of money, and don’t take that too literally. I don’t know if it’s up a penny, down a penny, but continue to invest in the brand but I think we’ve learned a lot this year and we’ll be much more efficient at it as we go forward.

Jeffrey Shelton - Natexis Bleichroeder

Are you guys still seeing increased retention and frequency that you talked about last quarter?

Douglas R. Lebda

Absolutely. The new 3D experience has moved those numbers nicely. It still doesn’t approach yet where the Googles of the world would be, but those numbers are certainly doing better.

Thomas J. McInerney

People like the site.

Jeffrey Shelton - Natexis Bleichroeder

Do you think at this point you are poised to take some market share?

Douglas R. Lebda

Excuse me?

Jeffrey Shelton - Natexis Bleichroeder

Do you think you are poised to take some market share then in terms of queries?

Thomas J. McInerney

We are poised to grow our business strongly. Market share, just as an editorial side not, is becoming an extremely complicated calculation because ComScore’s changed their definitions of it, more and more they are including searches that originate on distributed sites, affiliated sites, and under some definitions that they report, even under non-traditional search sites. So I think that the definition of that is becoming complicated.

And then of course, Google is just so big that what they do is obviously moving the market. I think where the market share calc rolls up, I don’t know. I’d say we feel very good about our ability to continue to grow the volume of the business, the monetization of the business, and its financial health overall.

Douglas R. Lebda

One small note, but indicative of how you continue to innovate here, one of the recent launches we made was the ability to skin -- call them skins -- to be able to have a customized background on the Ask.com page. We are now getting the home page about 10% of users are starting to use those and we see much higher retention and frequency as people do that. So you can just imagine making Ask.com your own over time, and as you become an engaged customer, you stick around and use the service more frequently.

Thomas J. McInerney

Why don’t we take one or two more and then we’ll let you all go?

Operator

Our next question comes from the line of Heath Terry with Credit Suisse. Please go ahead.

Heath Terry - Credit Suisse

Thank you. I was just wondering if you could give us an update on the strategy for Match. We actually saw for the first time in four years paid subs decline. Is there anything behind that other than just how you are dealing with marketing spend, or is there something else that we should be thinking about with regard to the personals business?

Douglas R. Lebda

You’re referring obviously to the domestic places where the subs have leveled off, declined a little bit this quarter?

Heath Terry - Credit Suisse

Sure.

Douglas R. Lebda

Two things; one is we really try and optimize the business for revenue, and late last year, we took a price increase in different packages and things like that, and so revenue in the domestic business is up nicely.

We could drive subs tomorrow by cutting that price and it’s always that optimization game, and we don’t think -- you think about it differently in different businesses, obviously. In this business, we don’t think having sub growth at a certain level is a strategic issue.

Now, if it declined materially, we might change our mind on that, but within the ranges of what we are talking about, we think the guiding philosophy of revenue optimization is the way to manage the business.

The second thing is, and we bought this business that had $6 million of revenue in 1999. If you go back and chart it, subs have always grown in some sort of stair step function. It’s always been a business where you have to drive category growth. And if you think about it, there’s only really two branded players domestically that are out there to educate the customers and bring them to the category, ourselves plus EHarmony, and it’s always been a function of coming up with clever and creative product innovation and married to very effective marketing campaigns, offline and online. And historically again, when you get that magic right, the category can jump, will grow, and at times it’s leveled out. And this has been going on for eight years and our best guess is we will grow again soon, and the category is still very under-penetrated relative to the 80 million singles who are out there eligible for the service.

Thomas J. McInerney

Why don’t we take one more question, if there is one?

Operator

Our next question comes from the line of Jeffrey Lindsay with Sanford Bernstein. Please go ahead.

Jeffrey Lindsay - Bernstein Research

Thanks, Tom and Doug, for taking my question. We just wanted to ask about two things. Basically, qualified forms at LendingTree seem to be down by 29%. Could you give us some sense of the prospects for improvement? Could you change the mix or could you change the product set here to restimulate growth?

And then second, in Ticketmaster we noted that the take rate is down. Would that imply that you are discounting to preserve share, or is it a mix shift and how should we think about this going forward?

Douglas R. Lebda

I’ll take the first one and Tom will take the second one. On QFs, volume of qualification forms at LendingTree is related to advertising spend. The good news and bad news of this business is that those two are very highly correlated and LendingTree targets its ad spend in areas where it is profitable. As profits have declined on a per customer basis, your marketing in certain channels and certain placements goes negative and then you just cut ad spend as a result of that.

So the way to stimulate QF demand would be to spend more and obviously we are not going to do that because we want to make sure that our marketing is profitable. What you can do though, you can shift it to a much stronger call to action, and we’ve done some of that and you’ll see us do that in the new spots that we run, and we run more online rather than offline, and you’ll see that mix continue to happen.

You’ll see us over time probably accentuate some of the products that are less recognized on LendingTree today as the mortgage business is taken off. For example, we have an auto business, a credit card business, a personal loan business, student loans, et cetera. So there is opportunity in some of those markets. We can leverage the Get Smart brand on a so-called short form lead.

So there are definitely things you can do to boost it, but in this environment, you really want to be conscious that you don’t overspend on marketing, so we are going to err on the side of keeping marketing spend low and letting volume be what it will be, as opposed to trying to drive volume.

Thomas J. McInerney

Jeff, I’m sorry, could you repeat your second question?

Jeffrey Lindsay - Bernstein Research

On Ticketmaster, we noted that the take rate is down, and so we wanted to ask you is this a conscious policy of discounting to preserve share, or is it a mix shift and how should we think about this going forward?

Thomas J. McInerney

You’re talking about revenue, kind of revenue per ticket, if you will?

Jeffrey Lindsay - Bernstein Research

Yeah.

Thomas J. McInerney

No, it’s mix shift. It’s absolutely not the performer or discount or anything like that. Pricing generally is controlled by our clients, first of all, so we don’t set those prices. And the handling fees, that’s our revenue per ticket, in a sense are negotiated in and generally are tied to the base value of the client.

But in the quarter, concerts, and I mentioned it was a very good concert season in Q3 a year ago, were 2% lower -- accounted for 2% fewer of our business than in the year-ago quarter. And music tickets tend to have higher face value tickets and higher convenience fees.

So if you adjusted for mix, and also a bit for international growth, international convenience fees tend to be a bit lower and we are growing faster international, so those two mix issues drive the overall segment-by-segment, country-by-country. There’s nothing changing or going down.

Thank you all for joining us today and we will talk to you soon.

Operator

Ladies and gentlemen, this concludes the IAC Q3 earnings conference call. Thank you for your participation and you may now disconnect and have a pleasant day.

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