IAC/InterActiveCorp Q4 2007 Earnings Call Transcript

Feb. 7.08 | About: IAC/InterActiveCorp (IAC)

IAC/InterActiveCorp (IACI) Q4 2007 Earnings Call February 6, 2008 11:00 AM ET

Executives

Tom McInerney - CFO

Barry Diller – CEO

Analysts

Jeetil Patel - Deutsche Bank

Justin Post - Merrill Lynch

Robert Peck - Bear, Stearns & Co.

Mark Mahaney - Citigroup

Douglas Anmuth - Lehman Brothers

Jennifer Watson - Goldman Sachs

Jeff Schulten - Netexas

Imran Kahn - JP Morgan

Aaron Kessler - Piper Jaffray

Jeffrey Lindsay - Sanford Bernstein

Scott Devitt - Stifel Nicolaus

Heath Terry - Credit Suisse

Presentation

Operator

Good morning ladies and gentlemen, and thank you for standing by. Welcome to the IAC fourth quarter earnings conference call. (Operator Instructions) This conference is being recorded, Wednesday, February 6, 2008. I would now like to turn the call over to Tom McInerney, Chief Financial Officer. Please go ahead sir.

Tom McInerney

Thank you operator, and thank you everyone for joining us today. Joining me on the call is our Chairman and CEO, Barry Diller. During this call we may discuss our outlook for future performance. These 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 Q4 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 sections of our website, for all comparable GAAP measures and full reconciliations.

We're now very much in a transitional phase as we plan and execute the spin-off transactions. I will update you on these efforts in just a few moments, but first I want to touch on the operating results for the fourth quarter. I'll go through this by focusing on each of the five companies to be established by the spin-offs.

First to retailing. Turnaround at HSN is in full force, with revenue growing 8% in Q4, excluding America's Store, and profits growing proportionately. Drivers of the turnaround remain the same, as improved sales efficiency across the majority of product categories. Gross margins were down a quarter of a point, due almost exclusively to pressure on that shipping revenue, as costs continued to rise, and we offered more shipping promotions to drive customer engagement. We continued our progress in managing margin and inventory levels. We enter 2008 optimistic, albeit of course a bit cautious, given the macroeconomic environment, but we believe we are better positioned than last year to see our strategies take hold, and realize top and bottom-line growth.

Catalogs business had a challenging fourth quarter. This was a combination of specific merchandising and execution issues at certain titles, plus a very different macro environment for retailers, particularly in the home category. Overall, sales were up slightly, but profits were down materially as margin rates were negatively impacted by heavy promotional activity, given the environment, and operating expenses were slightly higher due to investments we made before the environment worsened. We're spending the first quarter completely recalibrating our 2008 plans for this business. Inventory purchases and expenses have been reduced, capital spending plans have been cut by one-third, and merchandising and mailing strategies are being revisited. It's premature at this stage to translate these actions to figures, but I think at least the first six months of the year will be a challenge in this business, and we'll evaluate from there.

Now to Ticketmaster which once again posted record worldwide ticket volumes. Revenue for the quarter grew 27% on international ticket sales growth of 30%, and domestic ticket sales growth of 7%. Concert tickets represented 51% of the ticket mix, relative to 49% in the year-ago period.

Operator

Ladies and gentlemen, one moment please, we are experiencing technical difficulties. The conference call will resume momentarily.

Tom McInerney

..market, by closing the Paciolin acquisition in January. This last month, we also announced the acquisition of TicketsNow in the US, and GET ME IN! in the UK. Additionally, Ticketmaster recently signed secondary market deals with the NFL, NBA and NHL, and extended its contract in the primary market with MLB.

I said on our last call that while it would be unreasonable to expect to replace the Live Nation volume we will lose in 2009 with any one action, it would be a multi-pronged effort. We think these actions, coupled with our ongoing efforts to extend Ticketmaster's lead on a global basis, puts us in a strong position for 2008 and beyond. We do, however, expect Q1 to be our toughest comp of the year. As you'll recall, it was a very strong quarter a year ago, pulling some volume from the second quarter. As such, with visibility into one month of the quarter, growth in the first quarter is unlikely, but we will have better comps after Q1.

Turning now to LendingTree. The business continues to operate in a difficult mortgage environment, and the fourth quarter we took a $476 million non-cash charge related to the write-down of goodwill and intangible assets for the lending business. For the quarter, revenue declined 58%, with the drivers of this the same as they have been all year. Profit declines reflect 11 million in restructuring costs, and an 8 million provision for losses on previously sold loans. In 2007, we shrunk the LendingTree workforce by 57%, removing over 110 million in annual non-marketing expenses. We also reduced marketing expenses substantially.

Breakeven is the near-term goal while we await better market conditions, and in Q1, we expect to be closer to that point. Fed has cut rates 175 basis points since our last call in October, and we are seeing some encouraging signs on the refi side. In January, refi QF volume increased year-over-year, and we had a number of days of record refi QF growth. We proceed towards the spin under the assumption that at the time of the transaction, the lending business will be fully stable and ready to chart its course as a stand-alone public company, having positioned itself to capitalize on the inevitable turn in the macro market.

Turning now to Interval. As we prepare for the spin-offs, we are excited about Interval's prospects as a separate public company. In Q4, Interval grew revenue and operating income before amortization 35% and 12%, respectively, with the inclusion of the acquired ResortQuest Hawaii in the current period, but not in the year-ago period. The primary reason for profits growing less quickly than revenue. Still on Interval, I want to spend a moment to explain an accounting adjustment we made during the quarter, which is set out in detail in the earnings release. Prior to the fourth quarter, Interval improperly recorded renewal revenue and certain directly-related costs, beginning in the month a member renewed his membership, rather than beginning at the actual start date of the renewal period. Accordingly, revenues and profits were overstated from Q3 2002 through Q3 2007. While we were extremely disappointed this mistake was made, it impacts in no way the value of the business. This is timing only, cash flow was exactly as recorded, and there is no customer impact at all.

Now to what will remain following the spins. The New IAC, which will contain our Media & Advertising businesses, Match, ServiceMagic, Entertainment and our emerging businesses. Overall, New IAC results in the fourth quarter were significantly impacted by challenges in our Entertainment business, as well as transaction expenses and certain non-recurring items in our corporate expense line. We think this belies the real growth in New IAC.

For example, for the full-year 2007, revenue and OIBA grew at a strong double-digit rate. By business within New IAC: Media & Advertising grew revenue 42%, and OIBA 55% in Q4, on the strength in our Fun Web products business, Ask.com, our distributed toolbar and advertising businesses, and Citysearch.

The quarter was not impacted by our new Google contract, which was effective January 1 of this year. One note on this contract which I mentioned when we announced the arrangement, but I wanted to highlight again. The contract provides us with better economics, while simultaneously better aligning our interests in this syndication area with Google. This means that over the course of 2008, a greater percentage of our revenues will come from the higher margin proprietary side of the business, and a lesser percentage from the lower margin syndication business. Net-net, this will be good for profit growth, but it will lead to optically unimpressive overall revenue growth for the coming year, with this effect beginning in Q1, and being fully effective in Q2. We'll walk you through it each quarter after we report, but we didn't want anybody to be surprised by this.

Turning to Match, which grew revenue 14% in Q4. As we told you on our last call, we shifted marketing spend from Q3 into Q4, while also increasing the amount we traditionally spend at the end of the fourth quarter in domestic and international markets. As a result, OIBA for the quarter was flat, but we completed a very successful full year, with OIBA growth of 24% in 2007. We expect OIBA to increase only slightly at Match in Q1, as we continue to market our Match and Chemistry brands aggressively on a global basis in this seasonally important quarter.

At ServiceMagic, revenue grew robustly, up 43% year-over-year, but profits declined as we continue to invest in sales-force expansion, and experiment with offline advertising to drive better awareness of this business. During the quarter, ServiceMagic did experience some of the effects of a housing and consumer spending slowdown, with slower growth in non-essential home repairs and improvements requests. As a somewhat new business, it's difficult to say at this point how economically sensitive the business is. It's clear that it's of great consumer value and has strong long-term growth prospects, and as such, we'll continue to invest in it, which may lead to profit declines in Q1, if current macro trends persist.

Our Entertainment Business remains challenged, and experienced declines in the core fundraising channels during the quarter. As a result, we've taken a $57 million charge on this business relating to goodwill and intangible assets, and are exploring all strategic alternatives to the business.

One note on our emerging businesses, which includes Gifts.com, Pronto, CollegeHumor, GarageGames, Primal Ventures and a number of our other early-stage companies. We continue to see attractive long-term opportunities we believe worth funding, but we expect our 2008 losses in this area to approximately double from the $12 million in 2007, as these are early-stage.

Corporate expense increased during the quarter, reflecting $4.1 million in spin-off transaction expenses, and a $2.7 million increase in payroll tax payments related to the exercise of options during the period. 2008 will be a transitional year for us as it relates to corporate expense. We will have transaction-related expenses flowing through that line, and we'll have significant resources devoted to the spin-off. Past those transactions and beyond, we'll seek a reduction in corporate expense consistent with the smaller footprint of New IAC, but it's premature to quantify at this time.

I will remind you that in 2007, we made a number of minority investments in early-stage businesses, which are in investment mode, and are likely to adversely impact the below-the-line figures. These investments were made subsequent to Q1 '07, and will thus affect the year-over-year numbers in Q1 '08 by a few million dollars. Those investments include our stakes in Frontline, the HealthCentral Network, Medem, and our joint venture with Dow Jones, called FiLife.

Turning now to the balance sheet. We entered the year with $1.9 billion in cash and securities, and pro forma net cash and securities of $1.1 billion. We did not repurchase any shares during the quarter, but did repurchase 6 million shares at $24.25 per share in a private transaction from one large holder in January. Additionally, the previously announced acquisitions of Paciolin, TicketsNow and GET ME IN!, and our investment in the HealthCentral Network, all of which have closed or are expected to close in Q1, represent an aggregate use of cash totaling approximately $450 million.

Free cash flow for the year was $428 million, $136 million lower than in 2006, due to lower operating profits and higher cash taxes paid. You'll recall from earlier comments that a portion of this delta was related to the timing of certain tax payments. Effectively we were able to defer approximately $43 million of tax payments from 2006 into 2007. Adjusting for this timing effect, free cash flow was still down, albeit slightly less than OIBA, as we were able to reduce some capital spending and manage working capital.

I mentioned Q1 trends a handful of times today, and as a result of some of these discrete issues, it's not expected to be a real growth quarter for us. As we look into Q2 and beyond, we expect a resumption of double-digit growth. In particular, we look for our Media & Advertising, Ticketmaster, Match, and Interval businesses to have good growth, and of course, we'll begin to comp against prior year quarters in lending and real estate, which reflected market realities.

We remain generally on schedule for the spin-off transactions, and are deep in the planning and execution stages of the process. The timing remains roughly consistent, as we have previously discussed, and we'd expect to complete them in late in the second or in the third quarter.

And with that, I'll turn it over to Barry.

Barry Diller

Good morning. We had a tough fourth quarter with both good and bad news for a mix of reasons that’s already been covered by Tom. For those of us who work in the company, what the quarter was primarily about was intensive planning for the spins, their organization and their strategies. That work’s gone extremely well. We are doing every right thing in pursuing the course of splitting IAC into five parts. These companies and their managements will be far better served being solely focused with independent boards that can directly supervise their progress.

I can’t imagine a better scenario for shareholders and let me tell you specifically why. HSN has definitely turned the corner in operating with consistent skill over the last month in every area of its operations. Mindy Grossman is a superb executive fully capable of leading a public retailing company.

Ticketmaster as Tom just told you has just completed the quarter with record worldwide ticket sales. It’s just announced a very strategic acquisition of tickets now, which is the number two player in secondary ticketing. It has a critical number of initiatives its undertaking as the live event industry evolves and has some fine management team under Sean Moriarty its CEO.

LendingTree, now back under the direct operation of Doug Lebda, its founder, it's slimmed its business down to meet the demands of the turbulent mortgage and real estate markets and I have no doubts – none – that LendingTree is going to emerge from the current mortgage mess. Its brand has lost no equity it still gets a huge number of loan requests and as I’ve said to Doug, whatever it comes out at as a public company is going to provide a lot of wealth creation for those that have invested.

Interval is a jewel of a company; it’s executed flawlessly for 30 years and will continue to do so with Craig Nash as its leader.

And now let me talk about what we call New IAC. Last week we had an all day planning meetings for the strategy of New IAC. It was nothing but exciting and that’s because of our much naturally integrated 30 brands, a good amount of cash and tremendous enthusiasm for all the future opportunities, known and unknown.

With the continued growth of queries at Ask, big increases in distributed tool bars, more subscribers at Match and abundant promise from ServiceMagic and our emerging businesses IAC is going to be a very compelling, high growth company for investors. As for the litigation it is of course an unfortunate situation. We organized the process in such a way where no harm would’ve come to Liberty prior to the court resolving our dispute. So, I do wish Liberty hadn’t raised the roof on this in such an aggressive way, but they have and while the court decides this matter, I’m going to do everything I can not to let it become a significant distraction in the running of the businesses. During this period we will operate the company with as much focus as possible and I do believe we will prevail as the course we’ve been recommending is in the best interest to shareholders.

Responding to the many false allegations in the litigation is just a pointless exercise. All the directors including Liberty's approved the spin concept and nothing that has happened or is likely to happen ought to deter that very right course. So with that operator let’s now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeetil Patel with Deutsche Bank, please go ahead

Jeetil Patel - Deutsche Bank

Thanks, a couple of questions here. Can you talk about on the Proxy battle with Liberty, have you pushed out your timing by any couple of weeks or months in terms of the timing of the spin, and I guess can you discuss the timing of the court ruling when they could actually come to a decision. Is there a time frame that they’re looking at, or you’re looking at or you think you’ll get some perspective back? And then second you have EPN LendingTree that have still been major underperformers and it looks like EPI, you’ve been trying to sell for some time, I guess can you update us on how those conversations are going? Do you think it is dead in the water, and also in LendingTree are you wedded to this business or could you actually shut it down in general or try to sell it off as well, in light of the current environment that doesn’t seem to be getting any better and I have a quick follow-up.

Barry Diller

A follow up after all that.

Jeetil Patel, Deutsche Bank

Yep.

Barry Diller

Let me take the first one, which is the litigation. It appears we’re scheduled at least to go to the trial on March 10th and you probably think that a few weeks later, as these things go, given that it's somewhat expedited by all the things we wish to do, that we could get an initial decision.

Our planning is continuing just as it was. Realistically this could push us back, could push us back quite sometime, but it could push us back technically by, I don’t know, about a month or so, something like that, but we don’t know. At this point we just don’t know. I think the next question Tom you’ll do, I’ll do the one after it and then we’ll wait for the follow-up.

Tom McInerney

Okay on EPI, obviously it's been a disappointment, but the very seasonal business we had better expectations for Q4, which were not realized. We do think there is still real value in this business despite the decline, it was still earnings and cash flow positive for the year. Albeit obviously at a reduced rate than prior years. Given the nature of its seasonality and kind of the nature of its business, its fit within the New IAC is not good. So we are considering every alternative because there’s real value there we’re sure we’ll find one. In the meantime while it's hurting us in terms of this quarter or that quarter from an overall resource perspective cash flow positive for the year etc…it’s not hurting us in any real way.

Barry Diller

It has the most effective course in the fourth quarter. As far as LendingTree let me talk about that a minute. LendingTree has relatively little exposure to actual loans defaults, but what it has had and what was pronounced in the fourth quarter is that it's been slimming, it built up its business, this is a cyclical business as you all know, it built up its business during all of the previous two years of refi, really more than two years, but three years of refi, and it slimmed itself down, which involved restructuring costs and the like, and its now mostly at the end of that period. Now given the rate cuts, refi looks as if it probably is coming back. As an indication, it set – LendingTree had more than 9,000 refinance requests on the day following the 75 basis point rating cut and it set an all-time record for actually those requests. So, I don’t have any doubt with the brand in tact, which it definitely is and with them having slimmed their business down, their expenses down that LendingTree while its still going to have to come out of that mortgage mess period but I think LendingTree has excellent prospects for the future.

Jeetil Patel - Deutsche Bank

It sounds like it’s hard to tell at the bottom, but on the acquisitions you made of Paciolin, Tickets Now, Get Me In, can you just give us a sense of the revenue in OIBA contribution. That for 2008 on an annual basis I know they closed at different times and I guess is that enough to off-set the impact from Live Nation as you look into ’09?

Tom McInerney

Yeah, we’re still working through a lot of the synergies and integrations plans and stuff like that, but I’d say it’s very substantial, maybe 20 millionish combined with kind of a lot detailed work. So, while we laid down certainly what we would call real capital there’s real immediate return from that and more importantly real strategic value going forward, so I think I said earlier and a couple of these remarks may have been cut off cause I know there was a technical glitch there, that you don’t replace Live Nation in one move – I said that last quarter, again today. We think these acquisitions the league deals we’ve done the NFL, ML Baseball events, advanced media, the NHL, etc… and just very significant work going on that we really don’t have time to get into in detail but around the globe expanding TicketMaster's footprint, all of that puts us in good position to work through that ’09 transition and grow and beyond so that’s kind of the update.

Barry Diller

Next question please.

Operator

Our next question comes from Justin Post with Merrill Lynch please go ahead.

Justin Post - Merrill Lynch

Hi, I see a lot of press speculation that you’ve had a lot of maybe private equity or other people interested in all of your divisions. I guess if you could walk through you philosophy on potentially liquidating them is there a potential problem with Liberty approving such a deal? Are there tax consequences and as you look at the some of parts what can you say about the evaluations you’re seeing about the where these four or five businesses that you have prior to the spin off?

Barry Diller

I’ll take the first part and then Tom you can come in. Yes. We’ve had a lot of interest. Understand we have no interest in selling an asset in its entirety prior to the spin and so the discussions we have been having for are really what’s called a responsive spins or a minority investment by third parties who would just join in the public spin process. And we continue to have them as it relates to Liberty, all of this depends on the litigation as we said that would be resolved certainly before we take any action with regard to any of these so I think that we’re going to just continue on our pace as we said. We’re going to make our plans and we will again if probably one or two, could be three, but I think it's really one or two of our businesses are possible for others to join with us as they become public entities. Tom you want to add to that or any other part?

Tom McInerney

No, well the only thing I have to add is we view it as a pure optionality. We’ve had a lot of interest. We’ve said from the very first day we’ve announced our intentions that we were open to anything but we’re going to be very tax conscious which immediately as Barry said limits outright sales and we’re engaged in these discussions and we’ll look at the benefits of that versus not doing it.

Next question please

Operator

Our next question comes from Robert Peck with Bear Stearns please go ahead

Robert Peck - Bear, Stearns & Co.

I was wondering if you could comment a little bit about one of the largest transformational things in our industry which occurred Friday. The potential acquisition of Yahoo by Microsoft. How does that impact New IAC going forward could you give us your view on that and then also have you reached out at all to Jerry Yang? And then Tom I have a quick follow up.

Barry Diller

Yeah, I don’t think it’s appropriate to talk about any conversations in the whole situation regarding Microsoft’s bid. Look, what I think is the following: I think that if Microsoft does acquire Yahoo I think that it certainly will strengthen competition in terms of having at least two players that are strong and probably enduring. One of the problems has been in the past is that it's very difficult to compete with Google on distribution or in being anyone’s partner other than Google in advertising. We’ve had extensive conversations over the last year with Microsoft and with Yahoo, both of them were very desirous with having Ask's business. After all Ask is, I think, Google’s biggest outside partner and as much as they wanted to they simply did not have the ability and they had the ability to deficit it but they didn’t have the commercial ability to bid for us. I think that if they combine I think that they would have that’s one part of this.

The second part of it is, is that if it does happen given that Ask has unquestionably been almost most innovative in terms of product and I do think innovation is going to count, it has counted. We gain queries, we haven’t gained much share, but we’ve certainly gained queries. That if this happens I think for at least a couple years the integration challenges and all of the things - I think it’s already probably happening, and that I doubt that many people at Yahoo can concentrate fully on innovation at the moment, and I think probably the same is true in the, at least contemplated upheavals at Microsoft. I think this gives us an advantage.

At least contemplate upheavals of Microsoft I think this gives us an advantage and so long as we continue innovate and so long as there are two players, two strong players and I think this is both pro-competitive and I think its very good for all both short and long term.

Robert Peck - Bear, Stearns & Co.

Hey Tom, a quick follow up for you. We were somewhat surprised by the strength of HSN and which is somewhat of a recessionary environment right now. Can you give us anymore color around that and where you see it playing out if we do enter into a more global recession in 2008.

Tom McInerney

HSN the thing that benefits particularly contrasted to the catalogue business for example is its very broad merchandise assortment. SO whereas the home fashion soft side of the home and a power war week which is what really hurt the catalogue business. HSN’s productivity in those areas was down but it was able to more than compensate it through strength in other areas.

So that wrath of kind of business mix is an advantage in this kind of environment. And, the second thing is the absence of the service itself. The fact that it’s so compelling through your screen into your house allows it to a degree and you never know for sure, but to a degree to transcend some of that macro stuff. The host and the guests and everyone else coming through that screen to talk to you the individual consumer.

It’s just a more engaged type of interaction than a catalogue being mailed to your house, or do I get in the car and drive to the store. We’ve always thought and history would suggest, that we will be more subject to our own efforts there, good bad and otherwise and obviously now good than what’s going on macro site. Were guardedly optimistic but you can’t ignore what’s going on until it plays out.

Barry Diller

One indication is that certain sectors are extremely strong, last Saturday I think it was we had a computer sale day and it was huge volume, I think it was $12 million or something. The business is still there to be gotten; I think it will probably be somewhat choppy and spotty in different categories.

But Mindy Grossman we spent sometime yesterday talked to me about this. Mindy Grossman’s plans for the future include now, I can extend I think, 48 straight hours in terms of the product mix over the next couple of months. In a sense counter-punch this spottiness of what’s happening in retail and peoples concerns and things like that.

The one thing that’s just great about is this a team now has certainly gone through a rough period in getting things together last year. But is now absolutely necessary in this kind of business it is working in perfect synchronicity. I have tremendous confidence in this team. Next.

Operator

Our next question comes from Mark Mahaney with Citi. Please go ahead.

Mark Mahaney - Citigroup

Two quick questions please. Tom, I think you referred to 20 million ish related to the ticketing what were you referring to revenue or OBA. Secondly, can you talk about where you think long-term over the next three years where the media in advertising segment margins can go. You made some comments about maybe muted revenue growth are optically, muted revenue growth next year but there should be some nice market expansion. Where can those margins go, do you think best case? Thank you.

Tom McInerney

The reference was to OBA in the question was kind of on a full year proform of basis. We’ve closed the pact deal and transaction. We’ve not yet closed the tickets now transaction. Obviously we’re still working through some of those plans. Particularly in this pact deal inside where a lot of the post close integration couldn’t be done because it was a reviewed on a regulatory basis. We’re still going through that work.

But the point being that these are real businesses with real revenue and real OBA from day one. We’ve put real capital against that, we’ll get some return now and obviously it is a big strategic benefit is longer term. I’m sorry Mark your second question was with respect to which business.

Mark Mahaney - Citgroup

The Media in advertising segment margins.

Barry Diller

On Media in advertising in the future.

Tom McInerney

There’s two pieces of it. There’s what’s been going on generally and what’s been kind of the result of our new sponsored listings arrangement with Google. I think its premature to put a exact, specific figure there, we have a new leadership team as you know were going through strategic planning with them etc. But I think in part because of the arrangement which better aligns are incentives with Google to focus on the proprietary side of the business, which have naturally much versus the syndication side of the business that don’t.

So there will be mixed effect there and I think in general were looking to scale through continued strong revenue growth across all of the business in that segment. Were looking to scale the investments and the fixed expenses we have there. What I would say without specific matrixes, we’re categorically looking for good OBA growth from that business.

This year we’re looking for margin expansion, this year and the trends are real and I’m hoping to expect they’ll continue.

Barry Diller

Next question please.

Operator

Our next question comes from Jennifer Watson with Goldman Sachs. Please go ahead.

Jennifer Watson - Goldman Sachs

Thank you, can you provide more detail on the year over year growth trends in the fourth quarter versus the third quarter in terms of the paid lead growth in pricing per liter. Specifically I’m just trying to get a sense if you’re seeing any changes in consumer behavior in terms of their searching and clicking activity given the macro economic environment.

Tom McInerney

The short answer to your question is no, we’re not seeing the data tends to move around, we’ve looked at this pretty closely including through January. There’s nothing we can see right now that we can trace back to the economy. Modernization in the fourth quarter was very strong generally.

The mix of that when you go through quick through rates and coverage and all that stuff was I would say muddled, because we were experiencing with new technology there that did take (inaudible) serve us sponsored listing serving and the like. It’s a little bit hard to trace that through exactly what was going on one piece or the other.

But modernization through Q4 and through January, appear very much to be tracking in line with what we saw earlier last year and what you’d expect.

Jennifer Watson - Goldman Sachs

Great, thank you.

Barry Diller

Next question please.

Operator

Our next question comes from Douglas Anmuth with Lehman Brothers. Please go ahead.

Douglas Anmuth - Lehman Brothers

Thank you, I wanted to ask about the retailing business and in particular Cornerstone and its now been a few years since you had Cornerstone and I was hoping you can talk about some of the benefits that your seeing if there are any with HSN. Whether you really think cornerstone is a core business that you need to own going for with HSN. Thank you.

Barry Diller

When we bought cornerstone, we did think that there would be some obvious natural benefits for integration with HSN. Particularly in the home area. We’ve been disappointed in that, we’ve not seen that integration. I don’t think its not because that people either haven’t tried, or its not because the environment was wrong or any of those things.

I think that actually in truth catalogue business is the kind of business it is, really not rhythmically relatable much to HSN. The truth is that on the sourcing area which is where we thought we’d get real benefit. I think HSN sourcing has now improved so much that its really not needed. All of that is really to say, the answer is no, we do not think that cornerstone is a core asset of the company we don’t think it’s a core asset necessarily of HSN going forward.

When HSN spends itself out with cornerstone, I think it will probably improve because I think its going to get much more strength and attention from management. But at the same time, if there is a good opportunity I think that its probably wont be core to HSN but HSN will be able to determine it on its own after its been spun out.

Douglas Anmuth - Lehman Brothers

Ok, thank you.

Barry Diller

Next question please.

Operator

Our next question comes from Jeff Schulten with Netexas. Please go ahead.

Jeff Schulten – Netexas

Thanks a follow up question on industry consolidation for Barry, Barry in the past you’ve expressed interest in AOL if it were for sale. I was wondering if you felt the same way given some deterioration in that business.

Barry Diller

Well I don’t know. I don’t really feel the same way now. I’m not saying that AOL isn’t a good business. Its is obviously continued to be a good earnings business. But I do think that the concept of portals, I don’t think there going away. I don’t believe that portals, I didn’t believe it by the way a while ago either; I didn’t think the future for AOL was in the continued development for portals.

I did think is that they did have such as strong audience in such absolute ties to their audience that in fact you could really move them into all sorts of various profitably and they did line up a lot a lot of things we were doing etc. I just think its less true now.

I think we would much like to concentrate on what we’re doing in search and advertising and in the combination of all of our audience that natural audience that I spoke about earlier. It will represent the new IAC. That really is our strategy for the future. If AOL came down on price to something really ridiculous we probably would look at it. I doubt that is really gonna happen.

Therefore, I just doubt we have very much interest in it. I think the areas that we’re in rather than fixing something and dealing with the legacy of something. I think the areas that we’re in have unlimited runway in the future. SO I much prefer to do that.

Jeff Schulten - Netexas

Thanks, follow up question for Tom. The network growth that you saw at the ask.com in ’07, how much of that was related to channels you’ll no longer be serving in ’08?

Tom McInerney

It’s a complicated question but I think a good percentage. We do see network growth in a variety of areas, I think as a new IAC we have to take a step back and look at all of this nomenclature and disclosure to clarify some of this stuff. In the network business we’re in a number of businesses you consider network. Including the distribution of our own Ax sponsored listings where we seen very good growth and that’s been an interesting business for us.

Distribution of toolbars, other than our own fun web products type toolbars. In so we have seen good growth on the network side, but a big percentage of it has been in lines of business that have been deemphasized from this new arrangement. Again being fully compensated for that on the other side of that arrangement.

Barry Diller

We’re going to be left in the arbitrage business than we are in the business of getting out and getting audience and then putting that audience against this new Google deal, in creating all sorts of new products to do that very same thing.

Jeff Schulten - Netexas

So when u say optically, lower revenue growth in ’08 versus ’07 it could be as low as single digits but you guys still be 50% plus away with that growth.

Tom McInerney

The revenue growth and the revenue impact is if there is a lot of moving pieces, so I don’t want to make a precise forecast, but we do want to be heard clearly, which is that it will be materially impacted by this effect. When you in that pure arbitrage business as Barry said, there’s a lot of revenue at thin margin.

So there will be a material impact will get part of that impact in Q1, we’ll get a lot of it probably most of it or all of it in Q2 and beyond, each quarter will break it down for you. We do expect not withstanding that to see a real and substantive OBA growth we can’t quantify that at this point and time.

Barry Diller

We’re also gonna develop new revenue schemes to offset that in of all these other areas, where we actually provide real service rather than simply arbitraged. Next question please.

Operator

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

Imran Kahn - JP Morgan

Hi, two questions. One on ticketing what would be the impact of increased secondary market on your ticketing revenue and margins and secondly on the match.com (inaudible) purely because of the cost delegation how should we think about the match.com long-term markets?

Tom McInerney

If I can understand you question right Imran. Margins are a funny question in this business, because we don’t really manage to give on a raw margin basis. We’re really focused on dollar and percentage labor growth.

If we were purely focused on margins we wouldn’t look to expand a business in certain international markets where that percentage margin isn’t there or certain adjacent markets in the US. There is no question as we move

Barry Diller

That’s a hell of a lot less than technology

Tom McInerney

We’ve invested in all over the place. We would have a smaller business in our revenue and OBA basis with a higher percentage margin. We don’t think that’s obviously the right strategy. It’s really been an consistent strategy go back and trace these numbers for six or seven years, they move around quarter to quarter.

There’s no question as we’ve done some of these arrangements as we’ve moved into this secondary market and now with this acquisition it impacts margins. You see it in Q4 although I think that effect is particularly pronounced for a variety of reasons that are not probably worth getting right into this second. I don’t think it will as dramatic as it was in Q4 but I do think the trend will generally continue and our focus is on OBA growth.

Barry Diller

Management the thing is, Ticketmaster is going to evolve into a much broader and larger business. Ticketmaster is not going to be in just the primary ticketing business its going to be in the secondary ticketing business and actually as time goes on in fact variable pricing in those things then all of it, I think, is going to evolve and change. It's also going to be in the music business (in touring) a sensible way because music and live events now relate very directly to its business. It's going to be in the fan merchandise business because that is an area – there's no question but while I don’t think what we're going to do is be in the "360 business" because I don’t think what we're going to do is go out and buy somebody, some superstar at wildly inflated to ever realizable return amounts of commitment.

What we are going to do is widen the business, and at the same time we're deepening it. The tools that we provide, the abilities that we have to serve clients are getting enhanced, and I think that the result is going to be, and certainly per group at Ticketmaster, the results are going to be a larger business participating in live events all over the world. And I think that that is one area that's not going to be dis-intermediated by anything that I can ever see. Maybe somebody else can see something in terms of holograms and things, but I think people are going to want to go to live events and Ticketmaster is unquestionably a leading profit company in the live area, without any question, and in real terms. And it's going to invest now and extend that so that as this world turns and evolves, it's going to be the leader in live eventing.

I want to add one thing, so people do not get concerned about this. What we are not going to do is we are not going to get into the promotion business in a way that is "with the structure, infrastructure, expenses, low margins, etcetera" of the largest player in that area. Imran, could you just repeat your second question on Match?

Imran Khan – JP Morgan

Yes, on Match.com I think in the call you said that the cost was – you shift some Q3 cost to Q4. So trying to think about the Match.com's margins, how should we think about the long-term Match.com margins?

Tom McInerney

I think if you look at Match for the full year for '07, because we're always moving figures around from quarter to quarter and there are spurts and things like that. But I think if you look at it for a full year in '07, I think that would be roughly indicative of what we'd expect it to be going forward. At times when we can get good volume growth on a global basis there should be some natural operating leverage in the business, but as the category leader on a global basis, and in the US, we're very much driving that category growth. So you have to spend behind it. So, I think if you look at '07 on a go-forward basis, it’s a reasonable proxy.

Imran Khan – JP Morgan

Thanks Tom and Barry

Tom McInerney

Next question please.

Operator

Your next question comes from Aaron Kessler with Piper Jaffray. Please go ahead.

Aaron Kessler – Piper Jaffray

Just a couple of questions. First, IAC obviously operates in a number of different business segments with a lot of exposure to the consumer, so you are a pretty good macroeconomic indicator. And some of the data yesterday in the ISM index suggests a weakening from Q4 into Q1. I'm just trying to get a sense across your consumer businesses, have you seen any noticeable changes going into the new year? And then one follow up question.

Barry Diller

We really haven’t. I mean again, you can see a little bit of choppiness at the retail business on HSN. The choppiness has actually had with it net gains year-over-year, and it's been compensated for by the very large appeal of products you can't really get a big bead on it. Cornerstone you can, to the extent that it's so exposed to the home, solely. ServiceMagic has had some exposure to this. Little exposure to (generic), so exposed to the home. Obvious stuff. But the actual figures of everything else we just don’t see provable metrics. Tom?

Tom McInerney

I think that's right. Continuation of the Q4 trends not in terms of linear extrapolation from the results of Q4 to Q1 or anything like that, but that the macro trends for businesses that were feeling impact in Q4 continue to, those that weren’t, have not.

Aaron Kessler – Piper Jaffray

Great, and then one follow-up, can you expand a little on the getting out of the arbitrage business for the Ask search, was this more of Google's initiative to try and clean up its partner base or was this part of your initiative to clean up your partner base as well. I'm just trying to get at some of the rational for getting out of that arbitrage business.

Tom McInerney

Yeah, it was one part of the arrangement with Google. When we sat down with them, we understood their objectives in a renewal. They understood ours. There were many issues on the table. It wasn’t just about rev share this or that. And there were a host of things and so it was what came out. We think its better in this situation to be as closely aligned to them as possible while doing a good economic deal for us and we think both of those things happened.

Barry Diller

Yeah, there's no secret here in the fact that nobody could like for their partners to "arbitrage" what they pay and what is true in the syndication business. I mean, that's true. At the same time, the deal that we've made with Google is so advantageous for us and as I say we're going to I think more than make up for this revenue overtime in the, what I would consider to be much more solid businesses for us, which is building sites and being engaged in distribution where we gain viewers, we gain audience, and then with all of our tools, more perfectly modified. Next question please.

Operator

Your next question comes from Jeffrey Lindsay with Sanford Bernstein. Please go ahead.

Jeffrey Lindsay – Sanford Bernstein

Hello. Two questions. One specific and then one more general. We wanted to ask if the weak performance by Cornerstone is a short-term phenomenon, or is it more an indication of structural weakness in the catalogue business, and loss of sales to online players such as Amazon who have recently expanded their product categories. And then secondly, in the undoubtedly unlikely but possible event that the Liberty Media view were to prevail in the courts, could you comment on what kind of contingency plans you would have, what that would mean for Interactive Corp, and would Mr. Diller stay as CEO?

Barry Diller

As to the – first question was what? Cornerstone, sorry. On Cornerstone, I think the catalogue; it's not a comment on the catalogue business. Catalogue business is going to be the online business, it's already. A lot of catalogues are in excess of 50% of RSR and some are in excess of 75%. Over the next several years it's going to be probably less a paper based business like most things and much more an online business. So I don’t think that this relates to the category of catalogues.

As to the litigation itself, there's no way really for us to o contingency planning here. If Liberty does prevail, either one or the two separate pieces of litigation, it's going to obviously have consequences. We don’t think that's going to happen, but if it does there will be of course consequences. As far as IAC goes, as an operating company I cant see – well I shouldn’t even comment on it, it's ridiculous, it is a country too far and one that I don’t think we are going to get into.

And again, I know this is difficult for people, it's difficult for people in the company, but I do believe that everybody here believes in what we are doing. I think everybody here absolutely believes in the concept of the spin. Liberty agrees with the concept of the spin. They approved it fully at our director's meeting when we initially proposed it. But, we'll get through this period. I don’t think it will last very long, I really don't. I think at the most it's probably a couple of months and we're ploughing forward both to operate our businesses, and to conceptualize, continue to conceptualize and organize the companies when they go out publicly and stand on their own.

So, that's about all I have to say about that unless there's anything further from anybody at the table. Okay, next question please.

Operator

Your next question comes from Scott Devitt with Stifel Nicolaus. Please go ahead.

Scott Devitt – Stifel Nicolaus

Hi, thank you for taking my question. There have been a lot of acquisitions here over time and LendingTree Entertainment and Cornerstone specifically were all acquired businesses for IAC. So I was wondering if you could just talk through qualitatively how the company approaches acquisition targets from a return on capital standpoint, as well as how inquisitive, or maybe not so, the five entities will be post spin. Thanks.

Barry Diller

Well, we can layout all of our acquisitions over time, without any question the weighing machine would say that there's been tremendous value created. I think LendingTree is a true moment in time. It is a cyclical business. We knew it when we bought it. I don’t think any of us, god knows I could say any of us certainly almost every single financial institution in the world predicted what has happened with the mortgage business and the great product of loans and all of that that has caused so much suffering in so many different areas.

One thing about LendingTree is it was a low-risk player. It never contemplated taking risk on loans and participated relatively little in these more obscure products. And it has had very little loss on loans. We bought it for its brand. We bought it for its brand and the fact that it was only 3% online. Now I guarantee one thing. The brand is solid. I don’t need to guarantee it to you, it really honestly is, by any measure, the brand has come through this with consumer confidence and great familiarity attached to it, and that's the most important thing.

The second part of this is that it is probably going to enter a new period of refinance which is where LendingTree did extremely well. I believe - I don’t think its going to happen this year, and I probably don’t think its going to happen next year – but I think that LendingTree is going to earn back for IAC investors and anyone else, everything that was invested in it. I think it will take time but I am absolutely confident on this. I told Doug Lebda, I think that of the companies that we have, going out, LendingTree is certainly one I probably will invest more than the stock that I'll receive in the spinout, because I think it's such a good opportunity.

I want to just categorize it. Entertainment Publications was a mistake. It was a very good idea in the business of discounts. We thought, and still believe that discounts can be online. They've made real progress in getting discounts online, but the base business we bought, fell apart, that's the – how we characterize it as the Charitable Fundraising Channel, has had a really tough period over the last couple of years. Nevertheless, its not core to us. And the third business that you mentioned was Cornerstone. Cornerstone's in terms of value is solid. I think it’s a business that has been steady for a very long period of time. I think it remains steady. I mean other than the issues of the home business and so I think we'll receive value for that.

In any event, I just tried to rift through the ones that you said. I'm not being defensive about them and they are their own reality. And for a comprehensive look at all our acquisitions, it's all on the table. All of the acquisitions will be paid for them. All the stats for it are there for anybody to analyze. Does anybody else have anything to add on that?

Tom McInerney

The only thing I would add to your question about how we approach it is very much look at the nature of the acquisition and bucket it in its appropriate place. So for add on acquisitions within our existing businesses, we're very much focused on operational integration, how the thing will be run, how it will strategically enhance what we've got and we'll pay an appropriate price relative for the endemic growth of what we're buying. So if it’s a geographic expansion play in Ticketmaster, we've expanded Ticketmaster around the world. I think it was 40% of revenue with overseas in this most recent period, which was up substantially over the last several years.

Barry Diller

And I'd say five years ago it was zero.

Tom McInerney

And that's largely been done by buying companies in-country at single-digit multiples. For more strategic plays in new spaces, obviously you are going to have to pay more for the growth. So, it doesn’t lend itself to simple explanation, but it's something we spend a lot of time on.

Barry Diller

As far as the companies that, once they're spun out, I think that other than Ticketmaster, generalization is difficult here, but other than Ticketmaster I don’t think that there's going to be any great big planning in terms of acquisitions for the spun-out companies. Don't think so, but can't really predict it. Pardon me Tom?

Tom McInerney

I was just going to say, why don’t we take two more questions?

Operator

Your next question comes from Heath Terry with Credit Suisse

Heath Terry – Credit Suisse

Thank you. I was just wondering if you could give us an idea of the 17% growth that we saw in Ticketmaster revenues over the course of this past year, what percentage of that would you attribute to ticket volume versus pricing or new businesses. And when we look out to 2008 and you look over the, at least what we know about the tour schedule at this point, what kind of expectations do you have for ticket volume increases?

Tom McInerney

Yeah, I don't have the full year breakdown in front me, but throughout the year, you can go back to the quarterly statements, or we can get it to you supplementally, we've seen a very good and balanced mix between volume growth and pricing; meaningful contributions towards that 17%, so it's probably mid-single digits on the volume side, mid-single digits on the pricing side; we have been helped by FX all year, that's probably a couple point, and there's probably a couple points of acquisitions. That would be a rough order of magnitude, and so it's been good and balanced growth with the investments, as we mentioned earlier, impacting the OIBA side.

In terms of going forward, it's a funny business. I've been involved in this business since 1999, and you do not have the visibility one would expect. Tours go on sale at the last minute, often they go on sale with ten shows, and then the number of shows gets doubled, depending on what the response has been, and lots of other factors come into play. So, the visibility is measured in weeks, not months; I would say we certainly are aware of many high profile acts on the music side, that we think could be very well received, and we've seen no red signals. Q1 is a top comp for us, you can go back and look at last year, and we have an extraordinary Q1 with a lot of volume in March pulled from Q2, so I don't think it will be reflected there so much, but as we get in the back half of the year, we're optimistic.

Barry Diller

Next question.

Operator

Our next question comes from Brian Pitz with Banc of America. Please go ahead.

Brian Pitz - Banc of America

Thanks. Looking ahead in terms of your online advertising opportunity, do you think you may be able to better leverage ad networks or exchanges in terms of the monetization of that inventory on your sites. And also, any thoughts on how the balance sheet might be split up between the spin-offs and maybe you could comment on the ideal capitalization you're really looking for on each of these spin-off businesses. Thanks.

Tom McInerney

Let me do the second one first. We really can't comment on it. We're spending a lot of time on it, as Barry mentioned, doing all of the right things. And I think it's something we're studying closely, inside resources, outside resources, and the like, and all of the analysis we're doing is what you would expect us to do, looking at the business prospects, the cash flow needs, etc. of each of the spin co.'s and obviously New IAC, looking at the capital markets, etc. So I won't bore you do death about process, but it's premature, and obviously, when we've made a determination, we'll walk you through that.

And can I ask you to repeat the first one, because I don't think I got it?

Brian Pitz - Banc of America

Yeah, just in terms of the outlook for online advertising and your ability to better leverage ad networks or exchanges to better monetize your inventory.

Tom McInerney

You're referring to the sell side?

Brian Pitz - Banc of America

Yeah.

Tom McInerney

We're actually building an ad network now. The display advertising side is not a place where we have been a major player. We've had a nice business there, but it's not been a major revenue stream for the company, and because of the margin characteristics, it's definitely something where we think there's opportunity. We spent all of last year getting on one back end platform, which is the operational step that one needs to do, and we obviously have a lot of properties with a lot of inventory, and we do think there's an opportunity to grow that business over the long term.

Barry Diller

One of the great opportunities I think for New IAC is to much, much more relate now these naturally related sites to each other to build up really aggressive, strong and probably very niche advertising operations for each of the appeals of these things, all served by kind of a master back room and with efficiencies, etc. I think what we can do is absolutely sell advertising more effectively, and I think we can sell it at less operational cost over time, and it's one of the things that we are really going to get intensively engaged in.

It does not mean we are going to buy, like others have done, an outside advertising tool operation, because we're not going to do that. What we're going to concentrate on doing, for which we've had really great success over the years, is audience. And we're going to take, and continue to build audience, all of the stuff we're doing in emerging businesses deals with audience building, of which we have dozens of prospects at relatively low capital cost, certainly less than others are paying for sites that have got lots of audience and no revenues. We tend to get involved in things that have business models and that have audience and revenues attached to them. And that's really going to be what we're operating on, those opportunities.

So, I think that this world of advertising, which is absolutely making its crossover to online, and it's going to continue to do so, over probably forever, that's a very, very deep mine for us to play in.

So with that, thank you all very much, we appreciate your attention. We'll be back with you next quarter, when I suspect we'll have a good amount of news and hopefully progress. Thank you. Operator Ladies and gentlemen, this does conclude the IAC fourth quarter earnings conference call. You may now disconnect, and we thank you for using ACT conferencing.

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