Analysis of IACI's 10-K (IACI, L)

Stifel Nicolaus analyst Scott Devitt analyzes IACI's (Nasdaq: IACI, research) 10-K filing. Note that Liberty Media Corporation (L) owned approximately 14.8% of IAC's outstanding common stock and 100% of IAC's outstanding Class B common stock:

Broadcast Distribution. As of year-end 2005, HSN had affiliation agreements with 1 full-time, full power television station, 16 part-time, full power television stations and 96 low power television stations to carry the HSN and/or America's Store television networks. IAC owns 27 of the 96 low power television stations that carry the HSN and/or America's Store networks on a full-time basis.

HSN Distribution Agreements. Some of the current distribution and affiliation agreements with major pay television operators are set to expire over the course of 2006. HSN currently has renewed or is seeking to renew and/or further negotiate with the relevant pay television providers.

Online Ticketmaster Sales. In 2005, a majority of the tickets sold by Ticketmaster were sold online and Ticketmaster expects that this will continue to be the case in the future. Ticketmaster continues to develop and introduce new initiatives to further the sale of additional tickets, such as auctions, fan clubs and ticket exchanges.

Liberty Media Ownership Stake. As of February 3, 2006, Liberty Media Corporation, including companies owned jointly by Liberty and Barry Diller, owned approximately 14.8% of IAC's outstanding common stock and 100% of IAC's outstanding Class B common stock. Assuming conversion of all of the outstanding shares of Class B common stock to common stock, as of February 3, 2006, Liberty would have owned approximately 21.6% of IAC's outstanding common stock.

Voting Control. Barry Diller has an irrevocable proxy to vote shares of IAC common stock and IAC Class B common stock held by Liberty. As such, Mr. Diller is effectively able to control the outcome of all matters submitted to a vote or for the consent of IAC's shareholders. As of February 3, 2006, Mr. Diller (through companies owned jointly by Liberty and Mr. Diller, his own holdings and holdings of Liberty) controlled approximately 55.4% of the outstanding total voting power of IAC.

Ask Revenues. Ask recently changed its corporate name to IAC Search & Media, Inc. which is not expected to have any impact on its various brand names. A material portion of the revenues of the Media & Advertising sector is derived from advertising. In the case of IAC Search & Media, the substantial majority of its advertising revenues are attributable to a paid listing supply agreement with Google, which expires, unless renewed by mutual agreement, on December 31, 2007.

Revenue Contributors. For the years ended December 31, 2005 and 2004, the Retailing and Services sectors were IAC's largest financial contributors. In Retailing, most of the revenue, operating income and EBITA are derived from the sale of merchandise promoted through television programming, catalogs, via telephone or via the Internet. IAC takes ownership of and maintains inventory of most of the products sold through the Retailing sector. The ticketing segment was the largest financial contributor to the Services sector for the years ended December 31, 2005 and 2004. The ticketing business is primarily an agency business that sells tickets for events on behalf of clients and retains a convenience charge and order processing fee for services.

Customer Acquisition Costs. Management noted that the cost of acquiring new customers through online and offline third-party distribution channels has increased, particularly in the case of online channels as Internet commerce continues to grow and competition in the segments in which IAC's businesses operate increases. As a result, the company expects sales and marketing expense as a percentage of revenue to continue to increase. While sales and marketing expense as a percentage of revenue increased to approximately 16% in 2005 from approximately 14% in 2004, EBITA ("OIBA") margin increased to 12% in 2005 from 10% in 2004.

International. As a percentage of total IAC revenue (excluding revenue related to discontinued operations), IAC's international operations represented approximately 14%, 16% and 15% in 2005, 2004 and 2003, of the business, respectively. International revenue grew approximately 24% in 2005 from 2004, and the decrease in international revenue as a percentage of total IAC revenue is due to domestic revenue growing at an even faster rate during this time period.

Search Segment Results. Comparing IAC Search & Media's results on a stand-alone, full year-over-year basis, revenue increased 42% in 2005 compared to the prior year period. This growth was primarily driven by acquisitions made in the second half of 2004 and increased volume through syndication partnerships, as well as an increase in search queries in North America, partially offset by declines in non-search advertising revenue. Initiatives such as the reduced number of sponsored links on Ask.com launched in August 2005 had an adverse impact on revenue growth and operating income in the second half of 2005, as anticipated, and management expects this to continue to adversely impact revenues and margins in the near term. IAC Search & Media profit margins were also adversely impacted by increased marketing expense and higher revenue share payments to third-party traffic sources.

Investments in Search. The company expects to make significant investments in IAC Search & Media in order to enhance its competitive position. This includes advertising and marketing expense, product development expense, and technology and infrastructure to support Ask.com and its other Web properties, as well as the development of an expanded advertising sales infrastructure. IAC Search & Media does not expect to grow profits in 2006 as it is making these investments.

Share Repurchase. During 2005 and 2004, IAC purchased 50.6 million and 7.9 million shares of IAC common stock for aggregate consideration of $1.8 billion and $426.9 million, respectively. At December 31, 2005, IAC had approximately 1.0 million shares remaining in its authorization. These shares were repurchased in January 2006 for an aggregate price of $23.8 million. Additionally, on February 8, 2006, IAC announced the authorization for the repurchase of up to 42 million shares of common stock.

Increased Capex. Management anticipates that the company will need to make capital and other expenditures in connection with the development and expansion of its overall operations. Capex is expected to increase primarily due to the construction of IAC's new corporate headquarters, which will allow for the improvement and expansion of technology infrastructure, including data centers.

Seasonality. During 2005, IAC's consolidated results were heavily weighted to the back half of the year, particularly 4Q, particularly as a result of the seasonal nature of the Retailing segment. Heavy marketing spending at the Personals and Lending segments in the early part of the year also contributed to increased profitability in the later half of 2005. IAC expects that these trends will continue into 2006. In addition, the reduction in the number of sponsored links and related initiatives on the Ask Web sites and the significant investments in IAC Search & Media that are anticipated in 2006 are also expected to contribute to higher profitability in the second half of 2006 as compared with the first half of the year.