IAC/InterActiveCorp Q4 2005 Earnings Conference Call (IACI)
February 8, 2006
Tom McInerney, Chief Financial Officer
Barry Diller, Chairman and CEO, Chairman and CEO, Chairman and CEO
Doug Lebda, President and COO
Michael Savner, Bank of America, Analyst
Justin Post, Merrill Lynch, Analyst
Mark Mahaney, Citigroup Smith Barney, Analyst
Anthony Noto, Goldman Sachs, Analyst
Imran Khan, JP Morgan, Analyst
Sofil Rashi, Piper Joffry, Analyst
Jeetil Patel, Deutsche Bank, Analyst
Heath Terry, Credit Suisse First Boston, Analyst
Robert Peck, Bear Stearns, Analyst
Paul Keung, CIBC World Markets, Analyst
Good morning ladies and gentlemen and welcome to the IAC 4th Quarter earnings conference call. At this time, all participants are in the listen-only mode. Following today’s presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the * followed by the “0”. As a reminder this conference is being recorded today, Wednesday, February 8, 2006. I would now like to turn the conference over to Tom McInerney, Executive Vice President and Chief Financial officer.
Tom McInerney, Chief Financial Officer
Thank you and good morning. Joining me on this call is Barry Diller, Chairman and CEO, Chairman and CEO, Chairman and CEO and Doug Lebda, President and COO. As you know, we may during this call discuss our outlook for future performance. These forward-looking statements are typically preceded by words such as we expect, we predict, we believe or similar statements. Also, you are aware that there are risks and uncertainties associated with these forward-looking statements and our results could be materially different from the views expressed today.
Some of these risks have been set forth in our earnings release, filed earlier with the SEC and our other publicly filed reports. We’ll also discuss certain non-GAAP measures and I refer you to our press release and the investor relations section of our website for all comparable GAAP measures and full reconciliations.
After I highlight our financial results, Barry will make comments about our 2006 priorities and we’ll then take questions.
IAC finished 2005 with another quarter of solid results with a good contribution from our established and new businesses bringing to a close a very strong year of performance.
For the quarter, revenue increased 45% to $1.8 billion and operating income before amortization grew by 67% to $276.4 million, with margins increasing by 200 basis points to a record 15.4%. For the full year, revenue increased 37% to $5.8 billion and operating income before amortization grew by 59% to $668 million.
Excluding the results of AskJeeves and Cornerstone, both of which we did not own in the year ago period and excluding spin-off related expenses, Q4 revenue increased 17%, operating income before amortization grew by 38% and operating income was $169 million versus a loss in the prior year period. The full year on this basis, revenue and operating income before amortization grew by 18% and 44%, respectively. While operating income increased to $315 million from a year ago loss.
On a GAAP basis, as outlined in the release, I’ll remind you that the year ago quarter included a $185 million impairment charge related to teleservices goodwill and this benefited the year over year GAAP comparisons. Additionally, full year 2005 GAAP net income benefited from after tax gains totaling $392 million related to the sale of our interests in UVEA and VUE.
Adjusted EPS was $.52 for the quarter, compared to $.41 in the year ago period, while GAAP EPS was $.33, compared to a loss of $.13 in Q4 2004. GAAP EPS growth also benefited from the prior year impairment charge that I just mentioned.
For the 12 months ended December 31st, free cash flow increased 102% to $702 million, from the year ago period. We were extremely pleased with this result, which reflects strong cash generation by our businesses and lower taxes than we anticipated earlier in the year, other than the taxes on the VUE gain, which are not reflected in free cash flow.
Going forward what we think the essential characteristics of our operations will remain generally the same, continued investment in our businesses and what we expect to be materially higher cash tax payments in 2006, will make growing free cash flow off of this level a challenge in the near term.
To briefly highlight the operations:
Our retail results reflect the inclusion of Cornerstone, which we purchased in April 2005 and accordingly is not reflected in the year ago results. After a somewhat stronger Q3, HSN’s overall topline growth in Q4 was a disappointing 4%. This 4% does not reflect the impact of a revenue recognition change, whereby we conformed HSN’s policy to recognize revenue at the time that shift, rather than at the point credit is authorized. After giving effect to this change, which essentially works out to about 2 days’ worth of sales, revenue growth was 2.4%, which is what’s included in our reported figures.
2005 is a period of change for our retailing business in which operational distractions were made evident by the choppiness of quarterly revenue growth. For the full year, HSN grew revenue by 5% or 4.5% after giving effect to the policy change I just mentioned; compared to 8% growth for the full year 2004. While this was below our expectations, nothing has changed fundamentally in the industry that should prevent us from returning to higher rates of growth over time.
That said, first quarter trends thus far have not improved and when you couple this with a seasonal slow quarter for Cornerstone, overall retail margins in Q1 are likely to be closer to what we saw in the middle of 2005.
Services was the biggest drive of our growth with revenue up 46% and operating income before amortization up 73%.
Ticketing ended its record year firing on all cylinders as concert and sports ticket sales remained strong. In Q4 worldwide ticket sales increased 24% and international revenue grew 49%, excluding the impact of foreign exchange. International acquisitions accounted for 15% of ticketing’s overall revenue growth. So as you can see, there’s substantial organic growth in this business.
The obvious question is, can Ticketmaster sustain this level of growth? We’ve always said that predicting growth in this business is a challenge. But all we can say directionally is that while we don’t think the level of growth seen in 2005 is likely to continue, the live event industry feels healthy, both home and abroad, so the underlying drivers feel good.
Lending continued to experience strong front door consumer demand, as transmitted QFs increased 50% over the prior year period. This flow of demand enabled us to achieve improved economics through closing loans in our own name, while at the same time driving more highly valuable leads to our lender partners.
Lending’s Q4 operating income before amortization was $13.9 million, up 87% from the year ago period. This reflected both typical seasonality, a seasonally low quarter, which we called out for you on our 3rd quarter call, as well as a $5.8 million charge we took for patent-related litigation in the business.
Going forward, it appears the overall mortgage market faces some headwinds. And we intend to grow, despite them, by continuing to gain share as we did in 2004’s contracting market. We’re investing additional marketing dollars in the first quarter, which will impact Q1 margins in order to drive volume which should benefit us over the balance of the year.
I also want to highlight an accounting reclassification in lending that we affected during the period. Previously, direct loan origination expenses and other processing costs associated with sold loans were reported as operating expenses. The new treatment, which we believe more appropriate, will force these costs as a reduction in loan origination fee revenue. There is no impact on operating income before amortization now or in the future, but as a result of the change, revenue in the first 3 quarters of 2005 has been reclassified to conform to this new presentation. We’ve included a table on page 5 of the release which details the change.
In media and advertising, this was the first quarter that AskJeeves’ full quarter numbers are reflected in our results. On a pro forma basis, AskJeeves grew its revenue by 9%, largely attributable to search query growth in North America, which was partially offset by declines in the United Kingdom and a decrease in revenue per query due to traffic mix and the reduced monetization initiatives that began in August.
Switching to membership and subscriptions, vacations results are improved sequentially with revenue up 6% and operating income before amortization up 25%. Personals continued its strong momentum; revenues grew by 34% and operating incomes before amortization grew by 113% in Q4. Worldwide subscribers increased 21% as the business continues to effectively leverage its strength globally. In 2005 we spent a lot of marketing in the early part of the year, relative to consumer behavior in this business. This was effective and we have started to follow a similar pattern in 2006. So you should expect to see very little profit in the personals business in the first quarter, with better profits in the 2nd quarter and even stronger profitability into the 3rd and 4th quarters.
Turning to the balance sheet, during the quarter, we repurchased approximately 14.3 million shares at an average price of $26.34. We exhausted our most recent authorization in the first week of the new year, buying 826,000 shares between January 1st and January 5th at an average price of $28.76. Additionally, our board has authorized IAC to repurchase up to an additional 42 million shares of common stock. With regard to future buy backs, we will do as we have always done, which is to be opportunistic. We have not and will not buy back stock to support our stock price. But rather, when we think repurchases represent the best possible use of our cash at any given time.
We finished the cash with cash and securities of $2.6 billion and pro forma net cash and securities of $1.6 billion. So our balance sheet continues to be very strong. With that, Barry will make some remarks.
Barry Diller, Chairman and CEO, Chairman and CEO, Chairman and CEO
Good morning everyone. Results for the quarter and the year are better than good and superb execution is the principal reason. At the risk of repeating myself, and in contrast to every other online or interactive public entity, our strategy is to establish leading brands across the spectrum of consumer interactivity. We’re now with 60 brands and a worldwide monthly audience of more than 260 million people. This is a conglomerate with many distinct transactional, subscription and advertising business models. But ours is a conglomerate that operates a whole slew of businesses only in the interactive and online sector. This gives us the ability, I think it’s a unique ability, to use our growing expertise and our best practices across our landscape in ways no one else can. As internet bandwidth grows and convergence increases our scale, expertise and ensemble of brands and business models ought to give us the real competitive advantage.
Last quarter, we told you we intend to invest aggressively in our businesses because their potential for the long term far outweighs any impact in the near term. Not to say that we’re not going to grow this year, we will and handsomely. But with so much opportunity ahead of us, with much greater operational focus, with rich resources in the bank, we started the new year executing the investment initiatives I’m going to now briefly describe.
In retailing, after several consecutive quarters of gaining share, HSN’s momentum slowed this past year. After we acquired Cornerstone, it’s integration lead to distractions and we did have a gap in our merchandising leadership. We did make some strides. For example, five different Cornerstone brands are now selling live on HSN. We’re going to aggressively accelerate our singular, multi-channel approach to retailing. We’re going to use our 89 million television households and multiple catalogs to talk to our fast growing internet sites. HSN.com is increasing sales by 24%. And Cornerstone has now got about 40% online with 3 of its catalogs. So for 2006 this is what we’re doing:
We’ve acquired Shoebuy as our entry into virtual inventory. It’s a model we’re going to expand into other retail categories.
HSN is going to step up it’s investment in interactive technology that will allow customers to shop whenever, wherever, and however fits their lifestyle.
And Cornerstone will add distribution channels, both direct and store-based, as well as launching new brands using our existing infrastructure.
With ticketing, we had a record year, extending our global leadership position, selling nearly 120 million tickets. Really remarkable for a business entering it’s fourth decade.
Auctions are flourishing. One example. We facilitated 26 individual auctions for ColdPlay. We launched ticket exchange, which has expanded our business in the growing secondary market for tickets. Our international business, which now represents close to 1/3 of ticketing’s revenue and has reached about 50% online penetration, is going to push further as we enter Germany.
In lending, there are indications that the mortgage market is slowing, but Lending Tree continues to grow. Its market share increased form .8% in 2004 to 1.2% this last year. Lending Tree has 83% awareness among consumers. We’re going to increase marketing and we’re going to drive the acceptance of online adoption just as we’ve done in so many other categories. Online mortgage activity is a tiny fraction of the trillion of mortgage activity that goes on in this country.
In real estate, it’s still very early stage. But we’ve now got 1.4 million listings through Realestate.com, that’s 40% more than last year. So we’re going to proceed vigorously in investing and enhancing the site, honing our marketing and establishing cost-efficient, technology-centered, on-the-ground brokerage services.
In home services, service magic doubled its revenue in the last quarter. This is a fantastic business but it’s only got a fraction of the more than 1 million potential service providers enrolled. So this year, we’re going to dramatically grow our sales force. And, by the way, did you know that IAC has about 1,900 sales people directly soliciting an endless array of businesses and consumers throughout all of IAC? Think if you will, what sharing best practices is going to create in competitive edge for our sales forces.
Intelliservices PRC has gotten back its energy with significantly improved results and finally an aggressive plot for the future, which is going to take additional infrastructure investment to achieve. But, that investment comes from their very own cash generation.
At Ask Jeeves, its share of US search queries was 6.3% in December. That’s up 20% annually and it’s growing fastest on a percentage basis among the major search engines. Reduced monetization on Ask continues to show favorable impact on usage. Not only did Ask show the largest increase in general search quality, according to a recent study by Keynote Systems, but the metrics say it all: users, retention and frequency are all up, year over year, and quarter over quarter. But we’ve just begun and we have an ambitious, very tough task ahead. We’re not looking to grow profits this year, but rather to make the necessary investments that will help Ask gain more share over the short and long hauls. We believe that large revenues will follow.
Later this quarter, we’re going to relaunch Ask’s brand. We’ll continue to innovate around differentiating our core search with features and tools that people actually use. If you’re watching television, you’ll soon begin to see, hear and I think emotionally understand our new message. We’re going to enter new areas such as mobile. We’re going to relaunch I-1 and develop new toolbar applications. We’ve already started to integrate content from our other verticals, including Ticketmaster, CD Search and Gifts.com. This is going to provide users with deeper penetration into the web with each query. It will be more streamlined; you’ll get more actionable results such as immediate links to buy tickets, local reviews and tailored gift suggestions. And, we’re going to invest in the UK and elsewhere overseas, particularly Germany, France, Spain, Italy and the Netherlands.
E-vite, now under the operating management of Ask is really a small pillar. Unique visitors, events and invitations all increased by more than 30% year over year and one of the things we most look at, page views, increased by nearly 60%. With Citisearch, we’ve nearly tripled the traffic over the last year; up to 27 million unique users. It’s delivering its 10th consecutive quarter of sequential pay for performance revenue growth and its first ever year of profits. This business is finally, truly getting it right. As measured against all internet yellow page sites, Citysearch is ranked number one ahead of yellow pages, white pages, super pages and the local directory sites of AOL, Yahoo, MSN and Infospace.
Q2, we’re going to hugely grow our sales force. Given our enormous audience, we’ve simply got to accelerate the number of merchants in our system as fast as we can.
Another of our local businesses, entertainment publications, struggled this past season. Due to its disappointing performance in fundraising sales. That was only partially offset by strong online results. The fundraising part of the business needs to be fixed. I promise you, it’s being addressed aggressively.
With Vacations, despite 2 straight years of hurricane disruptions and an ongoing tight supply for rental inventory, Interval delivered very impressive margin expansion, which is in part due to its 22% online penetration.
In personals, Match had a simply outstanding year, raising subscriptions month by month to record levels, strengthening its leadership in the US and achieving the leadership position in Europe. In 2006, we’re going to invest in our Dr. Phil partnership and we’re going to fully roll out our new premium service, Chemistry.com.
I don’t think there’s any question that the last year was great for IAC’s growth. What’s amazing to me and my colleagues is that so much tectonic change took place in tandem with that growth. Under the hood, we were executing the spin-off of Expedia, completing the windup of the NBC/Vivendi partnership and reorganizing the entire structure of the company from a holding to an operating company and doing all this as our ever larger car was moving forward smoothly in almost every area of our operation.
There’s no question to me that broadband inevitably forces video, audio and text to converge. It’s going to disrupt historic distribution paths and patterns and I don’t think there’s any question that search in all its amazingness is going to help people navigate through this endless number of options that are available.
Understand that ours is a company that’s got about 30 vertical search enterprises. Ask and its global search expertise, we’ve got more than 2,500 technologists coursing through our veins and we need to perform our own internal convergence in how we leverage all of this in the coming years. Streaming the best of the best practices across our five dozen brands has begun to produce real benefits in call center utilization, sourcing, technology, and search engine optimization.
This year, we’re going to work to leverage that further in marketing in infrastructure, in the development of custom search toolbars, and a loyalty program that’s got personalized offers and discounts.
Joining us for the first time today is Doug Lebda, our newly-named president and COO. As many of you know, Doug founded Lending Tree and he built it internet brick by brick into the powerhouse that it is today.
Recently, I ask him to join me and my colleagues in the office of the chairman. I did this because everything I’ve just said is dependent upon executing this big agenda of ours, which I don’t think can be done without having a great manager overseeing all of our business operations. You know, this is the 10th anniversary since we began with the server king stations. I doubt we’re ever going to get everything right, I doubt anyone ever does. But I sure am damn proud of what the people in this company have already accomplished. And I do know how keenly ambitious and energized they all are about our future. And with that, let’s take questions.
Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the * followed by the 1 on your push-button phone. If you would like to decline from the polling process, press the * followed by the 2. You will hear a 3 tone prompt acknowledging your selection. If you are using speaker equipment, you will need to life the handset before pressing the numbers. IAC would like to accommodate as many people as possible on this call and requests each questioner to please limit their questions to just one or two maximum. Thank you.
The first question is from Anthony Noto with Goldman Sachs. Please go ahead.
Thank you very much and good morning Barry and Tom. Tom, I was wondering if you could give us a sense of what the organic revenue growth for the company was this quarter? I know you’d mentioned it last quarter. And then Barry, as we look at the lending business, the growth rate there has been very strong, well over 100%, about 120% this quarter. If I break that out into two components, one is sort of unit growth so QF and loan closing growth and the second is revenue per unit, as you’re going through 2006, do you think you still have additional growth in revenue per unit, revenue per translated QF is up 50%, year over year and revenue per closing is also up quite dramatically. It looks like they both could be topping off. Thanks.
Yeah Anthony, it’s Tom. On the first question, as I said on the call, excluding Cornerstone and Ask, the two big acquisitions for the year, Q4 revenue was up 17%. And if you look at it on a full year basis in the same way, it was up 18%. So year over year, very strong growth both for the quarter and the year topline; in fact, even if you add up all of the smaller deals, in that quarterly number it might take another point or so off that growth rate, so still about 16%.
And on the lending side, what I would be looking at overall is a return to the normal business model of Lending Tree, which is what is our customer acquisition cost to drive a new customer and what’s the revenue per customer? And it really then boils down to market share in that business. The margins per QF and the revenue per QF and per closing are obviously very strong and clearly we’re always going to want to continue to focus on that. But the big mover in the lending business is absolutely market share and lending penetration, which really comes down to doing more effective advertising and higher conversion rates over time.
Our next question comes from Justin Post of Merrill Lynch. Please go ahead.
It looks like if you look at the comscore data, MyWay is driving a lot of the search traffic on Ask Jeeves. Can you talk about your growth outlook for that going forward and do you think as a total share of your total searches, Ask Jeeves is going to grow?
Well, yes, I’ll answer the latter first. I do think that search traffic, search queries are going to grow. That’s the essential purpose that under lied buying Ask. We believe that the fight for growth is a damned good one. It’s going to take us time; it’s not going to happen overnight. But you’ll see February 27th a so-to-speak relaunch of Ask and I think you’ll see about a week, 10 days after that, a very large media push; the purpose of which is to get people to use the product because we believe that if people use the product that they’re going to say, we think this is better. We think this is actually enough differentiation to make the experience worthwhile. And we think that by that, share is going to growth. As far as My Way and all of the other properties that Ask has, we’re quite happy to grow search and queries from anyplace. I don’t really think that MyWay is going to be the big engine of growth. I think the brand, Ask.com, is going to be where the growth is going to come from.
Thank you. Our next question is from Michael Savner of Bank of America. Please go ahead.
Thanks very much. Two questions. First on HSN, you know obviously as you mentioned the growth has been relatively anemic recently and I think you articulated why that was the case this year. But could you maybe give us some very specific examples of what initiatives are in place that are going to get that turned around? Whether they’re at the management level of product init8iatives that will help spur growth in ’06. Kind of more granularity toward that would be great. And second, maybe Doug could lend some insight on Lending Tree. You know, margin’s down relatively significantly on a sequential basis, even when you adjust for the one time charge and certainly the rising interest rate in selling homes, in the new home sales environment, makes it more difficult. So, even with your market share growing is it a function of your market sharing growing but the pie is getting smaller during the part of the cycle and it’s kind of the margins we’re seeing this quarter may be more indicative of what margins are going to look like, at least in the near-term as you’re reinvesting and the market is somewhat slower. Thanks.
Tom, why don’t you start?
Yeah, let me start Michael with HSN. I think Barry touched on this but…there’s a couple of factors that we think have caused the slow down in the topline growth. We’ve been down a chief merchant, which in this business is obviously critical as a merchandise-lead retail business. Not having that position filled for some period of time and finding the right person, we think we’ve identified that person and we expect to have a solution to that problem very shortly with an announcement on that soon. So that’s the first step. I think beyond that, the focus is very much going to be on kind of daily execution. I think we had some distraction this year both because of the management gap and the Cornerstone acquisition; not uncommon to have some integration woes. It’s not an excuse, just a reality. And, I think part of the management focus is back to daily execution. Beyond that, the topline growth strategies remain as they have in the past. Which are, very much focused on driving new lines of business, new merchandise lines of business, broadening out our brands, our classifications, building bigger businesses form a merchandising classification perspective, than where we are today. And, very much leveraging the strength of Cornerstone, now that we’re kind of over the toughest part of the integration, which are those brands both on television and on .com. and then finally, continuing to grow HSN.com as well as the web components of Cornerstone. HSN.com had another strong Q4. It’s become a very big web retail business. Our overall web business, counting both the HSN.com and the Cornerstone properties is up over a quarter of our business now and we think that creates all sorts of opportunities to enhance marketing and drive cross channel. So, it’s all of that execution that we’re laser-focused on.
On the lending margin question, it’s somewhat complex but I’ll try to boil it down. First off, you should know obviously in Q3 we had very, very high margins in the lending business. Q4, obviously, they’re lower. However, it’s a comparison over Q3. The reason is really this. When you peel apart margins in the lending business, it basically drives back to the core math between your customer acquisition costs and your revenue. And, in Q4, what was happening is we were investing incremental marketing dollars against the home loan product. When you do that, your cost to get every new qualification form goes up overall because of that. Now that revenue shows up once those loans are actually closed and once they’re actually funded. And obviously, there’s a lag there of call if 3-4 months. So you would typically expect some of that to show up in the next quarter. However, Q1 is also a big marketing quarter for the lending business, as well. So you see marketing higher in Q1 and then you see closings higher in Q2. All of that…so it really comes down to again, putting marketing dollars against your core home loan products. And we can do that or not do that, to drive share. And obviously, share is the real focus. When we look at the core margins in the business in terms of what is the margins of loans that we’re actually selling to the secondary market, those were actually quite strong in 2005. And, we hope they’re strong in 2006. We haven’t seen a lot of margin compression there yet, but obviously, given a shrinking market, you could see it. All that said, the margins in that business are still very high and then the market share overwhelms all of that as you move from 1% to 2% to 3% etc.
Next question please.
Thank you. Our next question is from Mark Mahaney with Citigroup. Please go ahead.
Great. Thank you very much. Just one question. It has to do with the Ask Jeeves performance in the UK market. Could you talk about that in a little bit more detail? I think you’re saying that Ask Jeeves revenue is down, year over year in the UK. That seems like a surprising result. What would have caused that and what’s your sense about the growth of that market for Ask Jeeves going forward? Thank you.
What happened in the UK is that because we had contracts. We didn’t get into the de-monetization process until fairly late. The way that works is that you reduce the number of sponsored links and you’re going to get a hit but your queries are going to grow, etc. so we did it very late and so we got a particular 4th quarter impact. I don’t think that, again, I think it’s just simply this evolution of Ask and what we’re planning to do with Ask which is, again, to get it so that it looks like, in terms of sponsored listings with three or four sponsored links at the most. And then, good solid, great web search. So, getting all that mix right just takes some time and that’s what happened to us in the UK. And we would expect that … there’s no fundamental reason for anything not to be less than on a growth mode in the UK as well as the year goes on.
Thank you. Our next question is from Robert Peck with Bear Stearns. Please go ahead.
Yeah, hi Barry. I was wondering if you could give us a little more color on Ask Jeeves as well. Maybe talk a little bit about the integration of Askewest across the various IAC properties and how that’s going. And also, could you talk a little bit more about … 2006 appears to be more of an investment type year in a lot of the properties for IAC. When do you see the fruits of those labors sort of being taken?
I think you saw the fruits of a lot of those labors coming through in ’05. I think they’re going to continue to come through in ’06. I mean, ’06 is going to certainly…we look to ’06 to be a very solid earnings year. But we should make investments in these businesses. The investments that we’re making in these businesses are not in any way defensive. They’re all offensive, as Doug talked earlier. The truth is, investing in Lending Tree, which has got this huge awareness but the category itself still is very, very small in online adoption. Getting that category to grow and then Lending Tree is going to be the principal recipient. That’s the big, big, direction of the marketing for the first part of the year. That’s strategic for us and we profoundly think that that’s in our interest. So…it’s not like what we’re going to do is simply dump investment and crater our earnings. But it is true that where there’s stuff for us to go after aggressively, we are going to go after it aggressively. And so you can’t talk to necessarily the neatness of quarters or other things like that. But you can certainly talk to the building of growing values. As far as Ask is concerned, the integration with the IAC properties is definitely proceeding. It’s on almost all of our sites. But, it’s very early. We’ve got so much tinkering to do. What we’re trying to do here is to take this enormous traffic that we have, this huge audience we’ve got, and begin the early steps to link these things up and we’re doing the plumbing work. But I don’t think you’re going to really see the results of Ask for certainly some time. I hope you’ll certainly see growth in queries. I think you’ll see growth in hopefully, market share. And we believe, as I don’t think would surprise anybody, that if you…if we grow market share, the money will follow. There’s no question about that. So we really do know what our task is and I can tell you that the amount of time that is spent getting marketing right, getting the site right, doing all these things…again, debuting on number 27, is quite large.
Thank you. Next question please.
Operator: Thank you. The next question is from Scott Devit with Stefo-Nicholas. Go ahead.
Thank you .I just had a question about the buy back and the authorization. $42 million is a huge number; I think it’s 12% of the outstanding shares. And noting the commentary on page 9, I was wondering if you can just give any clarity as to your thoughts on timing or as to when you may be aggressive in terms of acquiring those shares. Thanks.
What we’ve done is we’ve authorized. We haven’t remarked on this and we will never discuss it. It makes utterly no sense for us to discuss timing. It’s there; you know what we’ve done in the past. You know what our capitalization is and the rest we’ll report next quarter, if anything has happened.
Our next question is from Sofil Rashi with Piper Joffry. Please go ahead.
Good morning Barry, Tom, Doug. Good quarter. A couple of questions. First, Barry could you give us your thoughts on where you want to go with the content business that appears to be created with bringing up Michael Jackson and how will that tie in with the existing businesses? And, how big a role do you envision for that division? And second, just picking up on the questions about 2006, it is a little bit surprising that you need to have the level of investment that I believe if I heard Tom right would essentially mean that there would be no growth in free cash flow. Given that ’05 was a big year of acquisitions; could you give us some more detail or color on where these investments will go and why it will be at such a level that would prohibit kind of fast growth in earnings or cash flow? Thank you.
Thanks. Tom, why don’t you do the question about investment and cash flow first and then I’ll follow up with the other question.
Yeah, it’s tom. The free cash flow issue really is not in investment but the real driver there is taxes. When we completed the spin, we were looking for free cash flow; we kind of expected by our estimates somewhere around mid 300’s, maybe 400 if we were lucky, for 2005. And obviously, coming in at $700 million plus, we were thrilled with. I think there’s a lot of good work to kind o manage capital investment, manage working capital and the other elements of it, but the thing that we really got upside surprise on were number of tax items, to the point where we really were not a cash payer of taxes in 2005. And, that’s a function and well-utilization of some option deductions and some other items that just all added up to very substantial tax yield. So, as we look to ’06, we just wanted to call out that kind of the…you think of free cash flow on kind of a pre-tax basis; we expect to see real growth in that, kind of consistent with our income growth. But because of the tax thing, the tax bite of becoming a full cash tax payer, we’re just about through the NOLs. Obviously, Expedia has some of those now and we have a little bit left from Ask, but we’re basically through that and we don’t have the big option deductions in ’06. So that big tax bite will just impact that number and I just wanted to call that out.
Don’t misunderstand the emphasis in investment. As I say, we think it is good for us to investment money offensively, aggressively in our businesses. But we’re still going to have growth. I shouldn’t’ say still, we ARE going to have growth. I don’t want some big alarm bell to ring that in fact what we’re going to do is plunge in some extremely large amount of individual investment. There are areas for investment and there are areas for us where in fact the areas of investment come back right away. So, I do want to be sure that there’s some nuance there. As it relates to content, this is very embryonic. This is just beginning. And it’s not…don’t anybody, also in this area, don’t think we’re going back into the movie business or into the entertainment business, we are not. But what we are going to do is with Michael Jackson, there are areas where this convergence is taking place and it’s taking place…there is video and other things. It’s not that we’re going into the internet video business but there are lots of areas of pure content that are worth us exploring as the world gets more and more digital and as this convergence continues. So this is very, very early first stage, just minimal development. You may see some products coming out from us in this area probably in the middle or latter part of the year. Does that give you some clarity to what is currently relatively unclear about content?
Yes it does, it’s very helpful. Thanks, Barry.
Yeah, thank you very much. Next question please.
Thank you. Our next question is from Paul Keung with CIBC World Markets. Please go ahead.
Thank you. Greetings Tom, Greetings Barry. I’m trying to get a better handle on three of your retail units. I guess if we exclude the recent success of integrating cornerstone with HSN, what kind of organic growth did you see in the catalog business in the 4th quarter? And taking that figure, how should we think about the catalog business in ’06 and longer term such that, how big is the incremental that your doing by making it a multi-channel strategy?
If you look at the catalog business, obviously they’re only in our numbers for 9 months, but for the full year they were a double digit grower on both the top and the bottom line and that, in fact, has been the case over the last several years. So the organic growth, and that’s all been organic in that catalog business. The organic growth there has been higher than we’ve recently seen over the last several years at HSN and I think, obviously, that group is getting bigger. Whether we can sustain kind of the mid-double-digit topline growth at Cornerstone going forward off of a higher base, remains to be seen. But there is very good organic growth. There’s real competency and scale in that business. We develop new titles, spin-off titles, etc. and I think by leveraging both the Cornerstone and the HSN assets, we’ll have the ability to rollout even new retailing efforts, be they derivative titles or whatnot, even faster. So I think over time that kind of the one plus one equals two and a half. I think we should see better growth from our overall retailing business because Cornerstone is parked above them.
Once we get into, and we are getting into the rhythm of it certainly in the latter part of the 4th quarter as we started bringing Cornerstone a big more into HSN. And, HSN on air this year has got a very ambitious program with Cornerstone to put almost all the properties on HSN. We really believe this multi-channel approach, which is from catalogs to on-air to online, and that the circle is something that has got great promise for us. And, while I think it also calls for a bit of a retail slowdown or slowdown…not as good growth as we would have hoped for, thought we would have, etc. I think that bringing those things together, which is never without sausage-making, is going to be for this year, next year, an extremely good thing. I think our retail operations…we just acquired ShoeBuy…it’s a great, really interesting model; a jewel of a business we think. And we think there are all sorts of things we can roll out around that virtual model. And again, we’re going to bring all of these things into this concept of catalog. Catalogs will be, as you know, online. They’ll be much, much more interactive than they have been in the past with broadband. On-air and then the vertical online systems. We think it’s a really, really good strategy.
Okay and a quick follow up question, Barry. The acquisition environment right now, what’s it like today versus…the last time we spoke on a call was probably three quarters ago. Where do you see the best opportunities now and what type of…in other words in the acquisition environment, where’s the good stuff and where’s the bad stuff from a valuation perspective today?
Well, you’re certainly not going to hear me deal with that. But what I will tell you is that, you’ve watch us. Our acquisitions have slowed to a less than crawl. The only acquisition we’ve made in the last 6-10 months has been ShoeBuy.
Shoe Buy and that’s very small.
Which is tiny. So, I don’t…look, you do certainly not need to hear it from me. Prices are in this area wildly overhot. Particularly things that are going from their venture funding into the either public markets or as buyouts. So I think that we’re…if something comes along that we think is a good opportunity for us and it’s got a rational price, we’ll do it. If it doesn’t, we won’t. And right now, almost nothing does. And we don’t need it by the way, because we’ve got a big, big plate here. And you certainly see what that growth produced this last year. So, that would be my feeling about acquisitions in general and specifically for us.
Thank you our next question is from Imran Kahn with JP Morgan. Please go ahead.
Yeah, Tom and Barry. Two questions. In terms of HSN, return rates went up sequentially and year over year. I’m trying to get a better sense of if it booked in the US and internationally and if so, why the return rate went up and what are you doing to reduce the return rate? And secondly, going back to Lending Tree site, you have 83% awareness, but still you’re increasing your marketing dollar. So, I’m just trying to better understand the rationalization you have conversion rate or what’s driving the increase in marketing expenditures?
On the first question, I think you were asking about the return rate, I had a little trouble picking some of that up.
Yes, return rate on the HSN site, yes.
Those as we look at them by category, and we kind of disclose the aggregate to give you the overall picture, but as we look at them by classification…whether it’s domestically or internationally, they’re roughly constant. So we don’t think there’s anything going on there of any material note at all. And the other thing I want to point out and I don’t know if it was part of your question but it’s relevant, in our international retail business, we had a 2% year over year quarter, but that reflected a significant FX impact, which was helping us earlier in the year; it went the other way in Q4. And on a local currency basis it was up about 12%. So, it’s still early days, but I think we have some increasing momentum in our German business principally and we’re looking to continue that in 2006 and beyond.
And on the Lending Tree site on the marketing expense…Lending Tree, like many of our businesses are really direct marketing businesses. So you spend a certain amount of dollars to get a person to come to your site and to fill out a form and then you are able to monetize that effectively at the back end. Simultaneously what you want to do is drive up your conversion rates and your revenue for every one of those visitors and be able to find new ways to reach customers. Barry hit on the challenge of market penetration. So increasing marketing spend is really a growth opportunity at Lending Tree and we’re not seeing any negative trends at all on conversion rates. The challenge on marketing is to grow the category and grow our share. Barry touched on the fact that that business has over 80% brand awareness, but the percentage of loans that are done online is about 4%. We’d obviously like to increase that by talking to consumers about why Lending Tree’s great and why the category’s great. So there’s a direct marketing business and opportunity to go out and drive more customers in, because we’ve now got a very, very profitable core business model, makes a lot of business sense.
One of the strategies that we followed and that has been followed in so many of our businesses as we get into the transformation from offline to online is to promote so to speak the category going online, the ease of online, etc. when you’ve got a leadership position, it’s a great investment for us. Can you imagine given the giganticness of the mortgage market in the trillions that if we could pump that by a quarter of a point much less a point – it will go by the way, there is no question. It is not going to remain at a single digit level for the next five years. It’s going to grow. The sooner we can get it to grow, the better for us because we are profoundly the leader in the area.
And if you analogize to our personals business, that’s the story in 2005. As the clear leader in that business – great marketing, great product execution can really move the category.
Because most people thought, by the way, that the category was dead last year. I shouldn’t say it as aggressively as it sounds, but I can’t help it. So, most people believed that the personals category had flattened, there was no growth in it, etc., etc. what had happened was it had simply lost it’s marketing sensibility and it got a little confused. And with Jim Safka and the work that was done in Match.com, they have truly revived it. We’ve had record days that are higher than anything we’ve had since we got into the personals business. And our subscriptions are now about a 1,200,000. They’re growing faster than I’ve ever seen them grow in the history of being in the business. So I think it goes to smart marketing – and by the way we’re getting the returns; match.com’s earning quite well. So, enough said on all that. Now let’s probably do 2 more questions and then we’ll get out of your day.
Operator: Thank you. The next question is from Jeetil Patel with Deutsche Bank. Please go ahead.
Thank you. Two questions. One, can you talk about on the HSN side, are there any cable distribution deals? I k now kind of going back to an issue or kind of area that hasn’t been talked about in a while. But if you could talk about cable distribution deals coming up. As you look at 2006 are you fairly solid on the almost 90 million homes passed or do you see any variability in that number? Second, you’ve got some good ad exposure with the AskJeeves platform. Obviously, the valuations still seem to be very high in the industry. Are your metrics changed any in the past year, given the rise in the overall multiples in the industry or are you kind of sticking to the knitting here; I think you were historically 13 times EBITDA?
On the first question in terms of cable distribution, I think we put a lot of our distribution agreements in place after we sold the stations a few years ago and we said that the ‘05/’06 period was a big period of renewal. If you lump ’05 and ’06 together, we’re probably roughly a quarter of the way through that. It’s a process we’re working through. We have great partners with both the cable MSOs as well as the DBS providers. We bring a lot of value to them; obviously they bring distribution to us. And we’ll continue plugging that through and we expect our distribution to remain where it is and growing will be slowly, because we’re pretty fully penetrated as it is.
Certainly we don’t see risk there. And, as far as the valuations…I’m not going to get into multiples or valuations. The only thing I’m going to say…I’m certainly also not going to talk about internet valuations or search enterprise valuations with a G. The only thing I’d say is that there’s no question, advertising is moving onto the internet. Everybody knows it and it’s going to continue. It’s going to get more sophisticated. There’s going to be much more contextual things that will go on. All these things we are diving into and we have a very, very good platform for it. So it will be what it will be. But we’re certainly in a vein that is not thinning out. It’s going to get richer.
So I guess we’ll do one more question. Did we do the two? We have one more.
The final question is from Heath Terry with Credit Suisse. Please go ahead.
Great. Thank you. I was wondering if you could talk a little bit about…as you’re talking about the kind of de-monetization of AskJeeves, Yahoo is spending a lot of time talking about improving monetization within their search category. Obviously, I'm not asking you to talk about their business, but to the degree that you can kind of talk about where the balance is for AskJeeves and page monetization. Specifically, what the steps that you’re taking are to kind of find that balance.
Yeah, let me be clear. First of all we’re not de-monetizing the business. What happened was that Ask, in order to meet its quarterly goals, packed the site with 10 sponsored links. Well, the result of that was they were getting fewer queries because people didn’t like that experience. That’s not a very good consumer experience. What we did is we said there shouldn’t be any more than 3 links, not max 4, but 3 links. So we took it down to 3 links. We did it with a lot of research backup which said to us, if we do that, that queries will rise and take that difference between say 10 to 3 and more than compensate for it in the rise of queries. That has proven true. That graph has been followed since we’ve done this; it’s now in our 10th-11th month of doing this. And queries have risen. So, the goal here is certainly to gain revenue, not lose revenue. But we’ve got to get the site to be competitive. So that’s done; that’s in-hand in the US. We still are going through the motions, not motions, but we’re still working through it in the UK. But every other new site that we do in the rest of the world is going to have the right balance of ads and the right balance of web search. I do think, I invite you all, we won’t be with you until that moment has passed, we’ll be with you 2 months after that I guess when we do the 1st quarter. But I do invite you to go into the site. You can go into it now and do a search comparable to, I think better than comparable to the competition. It is differentiated. It does have these tools that we think people really use. And, take another look at it. March 1st, March 15th, something like that and you’ll make your own judgments. We feel very good about it, obviously. But by the way, this is not the biggest part of our company. It’s a very big effort for us. The biggest part of our company is what you have seen in terms of our performance in this last year and all the aggressive things that we’re doing in this year.
So with that, on behalf of my colleagues, thank you for being with us and we look forward to seeing you – we won’t be seeing you unless there’s some new x-ray vision that the internet’s going to birth – but we’ll be talking to with you in three months. So, have a nice day.
Ladies and gentlemen, this concludes the IAC 4th quarter earnings conference call. You may now disconnect and thank you.