IAC/InterActiveCorp Business Update Call Transcript

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 |  About: IAC/InterActiveCorp (IAC)
by: SA Transcripts

IAC/InterActiveCorp (IACI)

Business Update Call

June 24, 2008 11:00 am ET

Executives

Eoin Ryan – Vice President Investor Relations

Tom McInerney — IAC Executive Vice President, Chief Financial Officer

Craig Nash – ILG Chairman, Chief Executive Officer

John Galea – ILG Chief Financial Officer

Analysts

Justin Post – Merrill Lynch

Analyst for Jeetil Patel — Deutsche Bank Securities

Analyst for Doug Anmuth – Lehman Brothers

George Askew – Stifel Nicolaus

Michael Millman – Soleil Securities

Analyst for Mark Mahaney – Citigroup

[Eldi Gilheldred] – Waterstone Capital

Kelly Conners – King Street Capital

Operator

Good morning ladies and gentlemen, thank you for standing by, welcome to the Interval Leisure Group kickoff conference call. (Operator instructions) I would now like to turn the conference over to Eoin Ryan, Vice President of Investor Relations for IAC. Please go ahead sir.

Eoin Ryan

Thanks operator and thank you everyone for joining us again today for the Interval kickoff conference call, the second in a series of four conference calls to introduce management of IAC companies being spun off and to provide an opportunity for the investment community to learn more about each company’s operations, competitive position and strategic objectives.

On the call with me today is IAC Executive Vice President and CFO Tom McInerney, Interval Chairman and CEO Craig Nash and Interval CFO John Galea. Tom will give you a brief update on spin timing, process and capital structure before turning it over to Craig and John for a discussion of the Interval business.

But first let me remind you that during this call we will discuss Interval’s 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 Interval’s actual results could differ materially from the views expressed today. Some of these risks have been set forth in the slide presentation accompanying this call as well as in Interval’s form 10 filed with the SEC.

We will also discuss certain non-GAAP measures. I refer you to the appendix of the accompanying slide presentation for all comparable GAAP measures and full reconciliations. And with that, I will turn it over to Tom.

Tom McInerney

Thanks and good morning everyone. First as I mentioned yesterday but for those of you that are new with us today on the call, let me give you a quick update on timing for the spinoffs. In general we’re making good progress on the timeline we’ve discussed previously.

As you know we filed the form 10s in May, have received comments from the SEC and expect to file amended documents in the coming days. And in those documents you’ll receive additional insight into the capital structure of each spinoff company and while I don’t want to spend a lot of time on this subject today, I will say that we’re intending to initially capital Interval, Ticketmaster and HSN with net debt and dividend the proceeds up to IAC pre-spin, which along with Lending Tree will end up with net cash.

As it relates to Interval, we anticipate the company will have initially, approximately $450 million in debt and approximately $125 million of cash. The process of securing this capital for Interval as well as the other spinoff companies is well underway and we’d hope to complete it during the month of July. And of course we’ll keep you updated as the plans crystallize.

Then subject to final SEC and Board review and approval, we expect to satisfy all our conditions for the spinoff sometime mid to late July and conclude the spinoffs in early August. With that, let me turn it over to Craig and John who have a short presentation for you and then we’ll take your questions. Craig.

Craig Nash

Thank you Tom and Eoin and good morning to everyone. I’m going to speak to you today about Interval Leisure Group, consisting of our two principle businesses, Interval International and ResortQuest Hawaii. Interval International represented approximately 88% of Interval Leisure Group’s revenue in 2007 which primary service is vacation exchange which affords consumers the ability to exchange the use and occupancy of their resort time for alternate accommodations.

Exchange is a key benefit of vacation ownership and Interval membership. ResortQuest Hawaii was acquired in May 2007 and is a provider of vacation rental and property management services for vacationers and vacation property and hotel owners across Hawaii.

ILG and its predecessor companies were founded in 1976 and over the past 32 years it has grown into one of the premier vacation services companies. And now with the acquisition of ResortQuest Hawaii last year, we have the second largest independent position in the Hawaiian vacation rental and property management industry.

Part of being a great company is having continuity in management. I’ve been with the company for 26 years, starting as Director of Regulatory Affairs and working on the legislation that helped create the industry.

Our Chief Operating Officer, Jeanette Marbert has been with the company for 24 years and was former General Counsel as was I. Our EVP Resort Sales and Marketing for Interval, David Gilbert has been with us for 21 years. John Galea, our CFO has been working with the company for eight years. Kelvin Bloom, President of ResortQuest Hawaii has been with them for ten years and has worked in the industry for 30.

And the list goes on and on, both in senior positions and those in the field. Today ILG is a global business with 29 offices in 17 countries and 2,900 employees worldwide. So when we look at an overview of ILG, the largest business is Interval International which represented about 88% of total revenues last year. Interval’s business model is comprised of membership products, confirmed vacations and other services.

Interval generates revenue from membership fees, transaction fees and other services we provide to both our developers and consumer members. Key drivers to the success of Interval are the total membership base, the number of confirmed vacations and the revenue per member we can realize.

With respect to ResortQuest Hawaii, which we acquired last May, it provides marketing, reservations and owner services throughout the Hawaiian Islands and as I mentioned is the second largest independent vacation rental and property management company in Hawaii.

ResortQuest Hawaii generates revenue in a variety of ways but is primarily fee based for services it provides to its clients. The company manages approximately 5,000 units across the Hawaiian Islands, 62% are condominiums and 38 are hotels. Key drivers are leisure, travel demand and inventory availability. As you can see, the business drives attractive financials which I will discuss later in the presentation.

ILG is truly a global company with 29 offices throughout the world. Of those, 14 are customer contact centers from which we provide service to Intervals nearly 2 million consumer member families. We also provide materials about our many benefits and services in 23 languages.

As I’ll mention in more detail later in the presentation, continued emphasis on international expansion is one of the company’s key objectives to support future growth. For those of you who have access to the slides over the webcast, this slide explains Interval’s mission and constituencies.

Interval is one of the world’s leading membership services companies in a highly concentrated industry. We provide value added services to our resort developer clients on the one hand and create an exchange marketplace for our vacation ownership members on the other.

Together this is a business model that allows us to generate consistently high operating margins and we have the scale to continue to expand both domestically and internationally with modest infrastructure investment.

Interval provides a compelling value proposition for both developers and consumers. As you can see on this slide, a one year membership constitutes less than one-half-of-one-percent of the sales price of a vacation ownership interest. When you consider that the ability to exchange within a global network is a major motivating factor to purchase, you can really see how compelling the exchange feature is.

The desire for flexibility coupled with the relatively low cost of membership results in an attractive value proposition for the customer. Of course the other half of the equation is having a superior membership base and we do. Interval’s strategy from the outset has been to focus on the higher quality segment of the industry that attracts higher-end demographics.

The typical Interval member in the US has a household income of about $140,000, about 75% higher than the RCI member. In addition, the average home value of an Interval household is $439,000. 35% of our member base owns a second home, excluding their vacation ownership interest and on average own 1.8 weeks of time sharing.

We are right in the sweet spot of the favorable and improving demographics, selling to not only Baby Boomers but Gen Xers and other demographic segments who are now becoming a force in the marketplace.

When you look at the industry, sales growth has been nothing short of spectacular, which makes vacation ownership one of the fastest growing segments in the hospitality industry. Between 1990 and 2007, US industry sales had grown from $1.2 billion to $10.6 billion last year or an almost 15% compound annual growth rate over the period.

At the same time, the average unit price has gone from approximately $13,000 to just over $19,000 since 2002, about an 8% growth rate over that period. The industry growth is forecasted to continue as a result of attractive economics to resort developers. In fact, vacation ownership is profitable for both independent developers and the branded lodging businesses, contributing 22% and 19% of the 2007 pretax profit of Starwood and Marriott respectively as examples.

According to the State of the Vacation Timeshare Industry US study for this year, there are 8,000 units slated for construction and more than 30,000 which have firm commitments to be built from 2009 and beyond.

There are currently over 1,600 resorts representing over 180,000 units in the US. The logos on this slide depict just a few of the independent and branded developers Interval is proud to call our clients.

One of the keys to being highly successful in this business is relationships with developers that are forged over many years, dealing with the same management team. We believe this is one of the main differentiators between Interval and RCI.

And the vacation ownership industry has been historically resilient to economic downturns, particularly compared to the lodging industry. Looking at the comparative growth rates since 1993, you’ll see that the vacation ownership industry has consistently outgrown the lodging industry. And when looking at specific cycles or one-off events, our industry continued to do well.

I mentioned at the beginning of the presentation that Interval had a leading position in a highly concentrated industry. In fact 99% of US based resorts are affiliated with either Interval or RCI or both. There are a number of independent developers and branded hospitality companies that offer alternate use programs as well.

So while Interval and RCI provide exchange services to 99% of the US based resorts, about 13% have some type of program in addition to their external exchange affiliation that are self administered.

The chart on the right shows an exhibit depicting the relative size of Interval and RCI. And while RCI is larger in the aggregate, our focus has always been on the quality segment.

Additionally one of the key metrics I’d like to point out is Interval’s percentage of confirmed vacations which have grown online from 14% in 2003 to 26% at the end of 2007.

Interval is a business that has a predictable and recurring revenue stream with almost 2 million households and a high and consistent member retention rate in excess of 80%. In 2007 Interval confirmed approximately 1 million vacations to a membership base of almost 2 million.

In fact since 2003, more than 87% of Interval’s revenue is generated from recurring activities, supported by strong underlying fundamentals. Nothing speaks to success of a business more than consistent revenue and earnings growth and ILG has had both. Our revenues which were about $200 million in 2003 have grown to $360 million last year, a 15% compound annual growth rate.

EBITDA which was about $60 million in 2003 has grown at a 25% compound annual growth rate to about $142 million. So we are very proud of our achievements and the commitment that each and every one of our more than 2,900 employees make every day on a worldwide basis to contribute to our success.

Turning to the newest member of our family, ResortQuest Hawaii, we acquired RQH in May of 2007 because Hawaii is one of the premier leisure destinations in the world and we liked RQH’s business model and the fact that they hold the top two leadership position among independents in the vacation rental and property management market.

Similar to Interval, strong relationships with property owners are reflected in their average contract tenure of 15 years. So when we take a look at the benefits of the acquisition beyond those I’ve already stated, we thought that RQH would provide a cross selling opportunity to gain high demand inventory for Interval’s customer base and leverage the activity desks at the various properties for lead generation purposes and both of these have been borne out.

And lastly, it provided an opportunity to gain a foothold in another form of specialty lodging as room supply in the market has been impacted by redevelopment. This slide illustrates that very point. As you can see, while there is projected to be 9% total increase in rooms between 04 and 2010, there’s actually a 4% estimated reduction in hotel rooms, while growth in condos and timeshare is projected to increase by 35% and 58% respectively. We believe RQH is well positioned to capitalize on this supply growth.

You’ve heard about the strong growth in the vacation ownership industry which drives our core business. In addition, we look to diversify our business and explore further opportunities in specialty lodging. Another area that we are focusing on is the luxury fractional and private residence club market. Preferred Residences that have been jointly developed with Preferred Hotel Group is a different business model. It’s a royalty based model rather than solely a fee based model and it’s our entry into this market.

We’re also expanding our online presence through additional development and emphasis on ResortQuestHawaii.com and lead generation programs such as VacationSource.com. We are focused on maintaining a compelling value proposition for our developer clients in order to foster strong relationship and generate ancillary revenue.

Interval also supports and encourages member usage on IntervalWorld.com through promotions, expansion of product offerings online and improving site usability. We are continuously looking at new and better ways to serve our consumer member’s needs and increase wallet share.

As an example, Interval Platinum will be rolled out in 2009 and will provide a higher level of benefits as well as incremental revenue generation. We will aggressively look to expand our international presence, Asia and Dubai being two recent examples of expansion into markets or regions we believe can and will be a source of significant future growth for the industry and Interval.

I would like to turn it over to John Galea, our Chief Financial Officer for the financial overview.

John Galea

Thank you Craig. Let me explain our business model for the vacation ownership segment. Membership revenue represents total active members times the annual membership fee. Confirmed vacations or transaction revenue is a percentage of transactions against our total active members times the average transaction fee.

We refer to these as recurring revenue. These two along with ancillary member revenue component equals our member revenue and relates to our metric, average revenue per member which represents approximately 95% of our Interval segment revenue.

Regarding our operating metrics, you can see our total active members has a kegger of 5.3% for the period of 2003 through 2007. Total confirmed vacations a kegger of 5.6% during the period while average revenue per member has a kegger of 6.6%.

You’ll note on the year over year growth in confirmed vacations, 2.3% in 2005. This is the year of hurricanes Katrina and Wilma which impacted our transaction volumes. While average revenue per member in 2005 was also impacted as confirmed vacations is a component part of this number.

For RQH we will be disclosing available room nights and rev PAR. A summary of some financial metrics, you’ll see our revenue has increased at a kegger of 11.8% for the years prior to the RQH acquisition and 15% including the RQH acquisition year. While EBITDA has grown at a kegger of 26.4% for the years prior to RQH acquisition and 24.5% including the RQH acquisition year.

You’ll note that EBITDA margins have been good with a slight dip in 2007 due to the acquisition of RQH and the accounting anomaly that is part of the business model. That is, pass through revenues with an equal and offsetting expense for salaries of those employees that service the properties which reduces consolidated margin in the range of about 300 basis points.

Our free cash flow has been strong and is shown for those years of cash flow presented in the form 10 filing. You can see our cap ex has not been high and as percentage of revenue has been in the range of 2.3-3.5% during the 2004 to 2007 years while as a percentage of EBITDA has been in the range of 5.6-8.5% since 2004.

With that being said I’ll turn you back over to Craig.

Craig Nash

Thank John. As we look at the key attributes of the Interval Leisure Group and compare these against some of the other sectors, interestingly, ILG compares more favorably to the security exchanges than to time share, lodging or online travel. Interval is a marketplace, just like the NYSE and NASDAQ are marketplaces.

We both create an ability for our members and clients and third-parties to realize value. In fact, had it not been for the development of the marketplace that the exchange companies created over 30 years ago, time sharing as we know it today would probably not exist. In addition, all of us have high margins and at least in the case of Interval and your typical security exchange, we have modest working capital requirements.

As you start to study ILG, try to make a determination for comparative purposes in what kind of business we are and where we fit in the spectrum of those businesses and industries I mentioned to you, realize that we are not at all capital intensive, similar to most lodging and timeshare companies, but rather a technology based marketplace that provides value added services to both our developer clients and member households.

And along with the great team at interval, many of whom have been with the company for more than 20 years, I spent almost my entire professional life working to build Interval into what it is today, are excited and enthusiastic about the prospects going forward.

We’re targeting the sweet spot of demographics and our business model has stood the test of time. We know that if we focus on the things that we do really well as we’ve been doing for over three decades, value creation will follow. Thank you very much, now we’ll open it up for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Justin Post – Merrill Lynch.

Justin Post – Merrill Lynch

Maybe you could comment a little bit on what you think is the perfect economic environment for Interval as you look out the next 12 months, would you want things to be really well or what you’re seeing currently and then secondly, as you think about demographic trends over the next two or three years, what do you think is the biggest change in demographics and how do you think that’ll effect your business as you look out?

Craig Nash

On the first question, it’s always good to have good economic times. While the industry and our business has done well during downturns, it’s always good to have consumers who have a lot of money. So clearly we’d prefer that if we had a choice. But saying all that, our model works well in all kinds of economic conditions.

On the second question, Boomers are the demographic which are the main owners of timeshares, but we see increasing interest from Gen Xers and a variety of other demographic groups. So we think that the sweet spot of being in the high income part of that particular demographic is very good for our future prospects.

Justin Post – Merrill Lynch

Are you seeing any impact from higher airfares on the propensity of people to travel at this point and do you expect any going forward?

Craig Nash

The beauty of our model is that we have an exchange system that has accommodations all over the world, in drive to locations as well as fly to. You will see, I’m sure, changes in behavior which will impact certain accommodations being booked more than others, but we have not seen anything thus far in our core business that would be reflective of any decline due to those things.

Operator

Your next question comes from Jeetil Patel — Deutsche Bank Securities.

Analyst for Jeetil Patel — Deutsche Bank Securities

This is actually Herman calling in, a couple of questions. I guess the first question is how big do you think I guess you talked about the specialty lodging growth as one of the areas that you guys were going to grow into, how big do you think the luxury and private resident club market opportunity is and second question is what kind of pricing leverage do you think you guys have on the subscription program with your memberships?

I know you guys kind of raised membership fees last year, and was wondering kind of plans going forward and given that there’s only about two companies out there, was wondering what kind of pricing dynamics you guys sort of see out there?

Craig Nash

On the high end fractionals and private residence clubs, that’s a long term view. We really view that market as a substitute for vacation homes. So I don’t have any specific numbers that I can give you for forward-looking and how we’d look at that market, but we think it’s a market that’s here to stay and will grow over time as second homes in those high demand luxury markets have gotten beyond the affordability of many segments.

As it relates to pricing leverage, what we try to do is balance growth with our customers and make sure that our pricing is in line with the marketplace. So we do periodically increase our membership and transaction fees. We’ll continue to do that but I can’t give you any specific dates on that.

Analyst for Jeetil Patel — Deutsche Bank Securities

Could you remind us the last time you guys raised your subscription pricing and transaction pricing and how much that was?

Craig Nash

Our membership fee one year membership fee I believe was back in 2004. And our transaction fees on exchange, I’m talking about US right now, US exchange fee was about a year and a half ago, January of 07 and the pricing went up from $135 to $139 and $149, $154 on the international. Domestic, from $135 to $139 and international $149 to $154.

Analyst for Jeetil Patel — Deutsche Bank Securities

Just in terms of I guess you guys have been around for a while and you know 30 years or so, was wondering how historically an economic downturn impacted the timeshare business historically.

Craig Nash

If you take a look at one of the charts there it shows growth during the period of time and even after 9/11 when occupancy at the hotels was in the single digits, the timeshare business fared well. I think it’s a function of two things, there’s new sales into the market as well as usage of existing customers.

If you take a look at existing customers, the real benefit of having a product which is prepaid in nature is that there’s an incentive to use it and people continue to use it. So I think that the industry has fared a lot better than other industries during economic downturns because of that structure.

Analyst for Jeetil Patel — Deutsche Bank Securities

Just a very quick question, was wondering if on the proceeds of the debt that you guys are receiving on the parent IAC, I guess collectively we assume two times for HSN, you guys will probably get about $1.7 billion on that side, have you guys thought about a potential special dividend for shareholders out there?

Tom McInerney

That’s not our intent, I think we’ll discuss HSN and Lending specifics next week but I think when you go through that as you’re doing even if you make some assumptions, I think remember we still have roughly $800 and some odd million of debt at the IAC level.

And we have a tender offer out there, whether that’s accepted or not, in either case we’ll be paying off that debt or the debt will remain. So on a net, IAC would end up with a net cash position, we’ll quantify that probably a little bit further next week, but it’s not such a significant amount of net cash relative to the earlier stage assets of IAC that it would call for that time of dividend.

Operator

Your next question comes from Doug Anmuth – Lehman Brothers.

Analyst for Doug Anmuth – Lehman Brothers

This is actually Brian Fenske on the line for Doug. A few quick questions if you don’t mind, I know you’ve talked about Dubai for development, are there other emerging markets where you might see some opportunity, perhaps India or China if you could talk about that.

And then I guess if you could elaborate a little bit on the cross selling opportunities with ResortQuest properties, I know you mentioned the activity desks are good lead generators but I guess where else might we see some synergies. And finally since the housing market has really contracted over the last year or so, how have you seen this directly materialize in your business? Have new leads slowed, that sort of thing.

Craig Nash

In terms of new markets, you mentioned India. We have previously not really gotten a foothold in that market because accommodations in the early years were not of a high enough quality for us. But we are definitely looking at that market again as everything has grown. China we have a supply side office in Beijing. We’re continuing to try to develop that market.

But we see Asia in general, the Tai market and actually Pacific where Australia and New Zealand which has always been a pretty good market, that whole region there has had growth for us and we continue to focus on Asia. Dubai which I mentioned on many occasions is one of those big box kind of markets that we believe one day could rival the Orlando’s and Las Vegas’ of the world. So we’re bullish on Dubai.

In terms of ResortQuest Hawaii cross marketing, I had mentioned that we are renting inventory from ResortQuest Hawaii to Interval International members and so we’re doing that.

We’re also on the activity desk, lead generation for our developer clients in the timeshare world, Interval International side, that’s been a great opportunity and synergy. And we’re also going to roll out the ability for the condominium owners in Hawaii to be able to exchange their accommodations through the Interval International network. So that’s another piece that we’re doing. What was your third question?

Analyst for Doug Anmuth – Lehman Brothers

Just if you’ve seen the housing contraction in housing market values, if you’re seeing that impact your ability to get new leads or developer’s ability to sell inventory, has it materialized in the numbers yet?

Craig Nash

I think that’s mixed, some developers are finding some difficulties and some are not. So I don’t have a total beat on that. But one of the things it’s important to know is timesharing grew out of the real estate recession of the mid 70’s. And what that did was it provided supply to developers in which to convert to vacation ownership product.

And we think that opportunity is there as well today. One of the things that has been happening over the last few years with the escalation in real estate prices, developers have had a tough time getting deals at pencil in high demand locations. We think that availability of inventory will open up a bit.

Analyst for Doug Anmuth – Lehman Brothers

You mentioned you were renting some of the properties from ResortQuest Hawaii is that, how is that accounted for? So is that revenue for ResortQuest Hawaii and a cost for the Interval side of the business?

Craig Nash

It’s both, both sides are getting revenue and the expense side is on the Interval International side.

Operator

Your next question comes from George Askew – Stifel Nicolaus.

George Askew – Stifel Nicolaus

You’ve mentioned roughly 26% of your confirmations are online. Is it in the company’s interests to move more confirmations online or is the value of the customer touch point via your telesales system so important that it offsets the efficiency of more online transactions?

Craig Nash

That’s a good point, yes it’s cheaper, clearly to transact online. But it is a balance that we must strike between the opportunity to gain more revenues through cross selling on the telephone which is definitely more effective than online.

But we think that the tool enables our customers to have a superior experience and not only is that 26%, that 26% is just what’s booked online, you know the website is used for shopping that a transaction will ultimately occur over the phone. So you said it right, I mean we have to balance these things and we try to do that by having the call center capability there as well.

George Askew – Stifel Nicolaus

Is there a goal of where that 26% could go over time?

Craig Nash

We push, we have a variety of initiatives that drive online bookings for certain accommodations at different times a year. We are thinking about some web pricing for some other things that we would be rolling out in a few months.

But we don’t really have a specific number that we’re looking at, we just know that adoption of the internet as a medium from our consumer base is going to increase over time. Certain transactions will occur more online than others and international markets take a little more time to adopt.

George Askew – Stifel Nicolaus

Secondly, clearly the resilience of your model is evident, but can you just talk specifically, what happened in say 2001, 2002 during the recession period there? Did you see renewal rates for example decline? Did you see the absolute number of confirmations go down? I mean obviously your revenues were up but as far as some of the unit economics, what happened during that period?

Craig Nash

Right after 9/11, business was very bad for about a month. And then it came back and 2002 was a very good year. So I would say that because of the prepaid nature of the product that during these periods of time we still have consumer engagement.

And I know that the developers after 9/11 did very well too. The nature of the product being generally low rise family oriented, it was an emotional buy and an emotional appeal and did very well after 9/11.

George Askew – Stifel Nicolaus

Have you guys disclosed the amount of debt that you’ll be taking on prior to the spin?

Tom McInerney

We said at the outset but if you missed it, Interval, approximately, these could move a little bit, but approximately $450 million of debt and $125 million of cash.

Operator

Your next question comes from Michael Millman – Soleil Securities.

Michael Millman – Soleil Securities

It seems to be the growth is in points and you’re not in points yet. I guess one of your major customers, Marriott seems to be moving in that direction. Could you talk about where you’re going or why you’re not in points?

Craig Nash

We work with a vast number of developers who are points based clubs and when you say we’re not in points I don’t understand the question. We do exchanges for consumers who have bought vacation ownership interests that have some kind of points based currency tied to them.

Marriott has had the ability to go within Marriott hotels through their rewards program for many years. We’ve worked with Marriott very closely. So is there any way you could clarify the question?

Michael Millman – Soleil Securities

It was one of those slides that whipped by that showed your exchanges were based upon weeks and RCI was based upon points and weeks.

Craig Nash

RCI has a program called RCI points which is a program that people can exchange points through their system. We just do it in a different way.

Michael Millman – Soleil Securities

And regarding RCI, has their renaissance, I think it’s RCI renaissance had any impact on your business?

Craig Nash

I don’t know what RCI renaissance is.

Michael Millman – Soleil Securities

I think they’re trying to move higher end.

Craig Nash

You mean the registry collection?

Michael Millman – Soleil Securities

Maybe it’s the registry collections, yes.

Craig Nash

Registry collection is a fractional program. Interval International, our demographics are far superior in terms of our household income and the quality of the network as a consequence and we have put fractional resorts into the Interval International system to have a standalone system for fractionals, high end fractionals, we determined to not pencil the business model, did not, was not satisfactory in terms of return on investment for us.

That’s why we took a look at that segment and partnered with Preferred Hotel Group to create Preferred Residences which is a high end fractional program that we just launched this year that the business model is different. There’s a royalty based fee, compensation which makes that model work. Otherwise it doesn’t work profitably.

Michael Millman – Soleil Securities

Could you talk about what percentage of your subscription fees paid by developers and what the trends are? Hello?

Craig Nash

Yes I’m trying to understand your question.

Michael Millman – Soleil Securities

I guess mostly fees come from exchanges and from subscriptions and I was wondering and often cases developers pay the subscription fee. I was wondering what percentage of your subscription fees are paid by developers and what the trends are.

John Galea

What you’re trying to understand is, of the membership fee that is paid, how much of that is actually being paid by the developer, if I’m understanding correctly?

Michael Millman – Soleil Securities

Correct.

John Galea

First there are two component parts that I’ll speak about relative to that question. First, we have certain types of memberships which the developer will pay to us the membership fee but they charge that membership fee to the members through annual maintenance. That’s a type of membership they call a corporate membership.

And corporate membership contributions as far as a percentage of the total type of members would be the 25% range are corporate members and then the remainder being the traditional members. So that’s one way in which a developer is paying, although it’s directly from the developer, it’s kind of really from the member because it’s through the maintenance.

The other part that comes into play is the part where when we spoke about the value proposition, we talked about the value of a membership relative to the sale of a vacation ownership and that’s the initial membership term which is paid for by the developer and that’s our new member segment.

And so on a yearly basis I would say that the amount of new, the percentage of what we would call developer contributions and it’s more account rather than dollar value, dollar value would be kind of different, I’d say somewhere around 10-15%.

Michael Millman – Soleil Securities

Of total subscriptions? Of the number?

John Galea

Of our total subscriptions.

Michael Millman – Soleil Securities

Given that RCI I guess is probably underperformed lately, do you see any changes that they’re making and how that’s effective the business generally?

Craig Nash

RCI is a formidable competitor and I don’t know about their underperformance.

Operator

Your next question comes from Mark Mahaney – Citigroup.

Analyst for Mark Mahaney – Citigroup

This is James Sanford for Mark Mahaney. On competition, are you seeing any competition from vacation ownership sort of companies like VRBO.com in the online space or are any of the online travel agencies looking into this sector? And secondly, following the spinoff, have you thought about the kinds of metrics you’ll be talking about, I believe you mentioned or talked about EBITDA as a key financial metric, is that something that you’ll provide some outlook for going forward? Thank you.

Craig Nash

If you take a look at the two different parts of our business, you’ve got Interval International which is a vacation ownership business. We don’t see any competition from those particular companies. Those are vacation rental businesses. We have a closed membership group base and we market our accommodations to them at very appealing prices which are not really, with the online people, outside of our member base, can’t compete with really.

On the other side, the RQH, clearly that is a competitor to the vacation rental business and I don’t have any specific numbers to point to as to impacting them, but they’re clearly a competitor. But in the case of the online travel, RQH utilizes and distributes a decent amount of their inventory through the online travel agents.

John Galea

On the question on the metrics, the metrics that we plan to use going forward are the total active members, the total confirmed vacations and the average revenue per member which I said represents about 95% of the Interval segment. While with the RQH business, we’ll be disclosing available room nights and rev PAR.

Operator

Your next question comes from [Eldi Gilheldred] – Waterstone Capital.

[Eldi Gilheldred] – Waterstone Capital

In the form 10 it was disclosed that each of the spun businesses has a fairly large receivable from IAC as of yearend not as of first quarter end. How is that going to be treated in the spins?

Tom McInerney

All the, we have a variety of intercompany accounts that go back and forth for taxes and cash sweeps and things like that and all of the intercompany accounts essentially get eliminated at the time of the spin. So in the case of Interval, Interval’s starting capitalization will be the approximately $450 million third-party debt, $125 million of cash and there will be no material intercompany receivables or payables back and forth to IAC post spin.

[Eldi Gilheldred] – Waterstone Capital

So does this make sense that the cash, the $450, the majority of the proceeds after the fees are going to be dividended up to IAC, so will IAC turn around and pay that cash back to Interval to pay for the net payable that they had?

Tom McInerney

No, basically through a series of steps that involve various mechanics, but the mechanics are not important, Interval will go out with $450 again approximate, the target but subject to the execution of this, $450 million of debt that will owe that money third-party to some combination of banks and or bond holders, it’ll have $125 million of cash and it will owe IAC zero and be owed by IAC zero.

[Eldi Gilheldred] – Waterstone Capital

So then it will be a non-cash thing so that will settle that payable? The receivable I should say?

Tom McInerney

Essentially yes.

Operator

Your next question comes from Kelly Conners – King Street Capital.

Kelly Conners – King Street Capital

I was just going to ask if there was any update on the financing for Lending Tree and then how much they need to fund there?

Tom McInerney

We’re going to do a Lending Tree call that’s a general update next week, but Lending Tree, we’re not contemplating any borrowings or anything like that under Lending Tree. So there’s nothing major there but we’ll discuss Lending Tree on a separate call next week.

Operator

Your final question is from George Askew – Stifel Nicolaus.

George Askew – Stifel Nicolaus

Are there opportunities to monetize your high end member base, 2 million strong through third party offers? My sense is under prior corporate ownership you’ve tried, there’s been an attempt to do some cross selling and what not. But looking forward, is that something you would consider doing, rental car offers or flight coupons or things to your membership base as an incremental source of revenue?

Craig Nash

We do that now.

George Askew – Stifel Nicolaus

Okay, so that’s part of the other services?

Craig Nash

Yes it is.

George Askew – Stifel Nicolaus

Okay, how material is that to your revenue?

John Galea

Let me just say that earlier when I was talking about the Interval segment and I indicated that 95% of that member revenue basically represents the Interval segment, that tells you that there’s a 5% component coming from elsewhere.

And the component part that represents the member revenue, of that 95% that I spoke about, I would say about 92-93% of that is really the membership and vacation transactions. And the remaining part comes from that that Craig just spoke to.

Operator

There are no further questions.

Craig Nash

I want to thank everybody for attending the call and your interest in Interval Leisure Group. We clearly look forward to speaking with you on a more regular basis post spinoff. Thank you again and we look forward to speaking to you in the future.

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