Thursday, February 7, 2013

IACI: Solid Q4 Results and Strong FY '13 Guidance

IAC/InterActiveCorp (IACI) reported what we believe was a strong Q4 '12.  Management's confidence going forward was evident, as for the first time the Company provided more color or guidance regarding how it expects to perform in FY '13.  We now value IACI at $52.00/sh.  Our valuation of the Company is $0.50/sh lower mainly due to a higher share count as of the end of FY '12.  Given our conservative 15% FY '13 top-line growth projection, which we think will result in margin expansion and EBITDA Y/Y growth of 28%, we are applying an EV/EBITDA of 7.5, slightly higher than the 7.0 that we mentioned in our first post.  The stock had moved up approx. 6% since we mentioned it eight days ago.  After the release of Q4 results, shares of IACI were down only a penny in AH trading.  With quarterly dividends of $0.24/sh, IACI's dividend yield is 2.23%, which makes the stock more attractive and more of a value play. 
  • Total Q4 revenues of $765.3MM, which represented Y/Y and Q/Q growth of 28.1% and 7.1%, respectively, were above the Street's $758.1MM expectation.  FY '12 revenues of $2,800.9MM were up 36% Y/Y.
  • Q4 GAAP EPS of $0.40; adj. EPS of $0.70.  Adj. EPS were below the Street's $0.78 for two reasons: 1) $11.5MM in restructuring charges, and 2) effective tax rate of 41% compared to 35% in the model.  Although restructuring charges were unexpected, we do consider them as part of operations as they are not related to any discontinued operations.  GAAP and adjusted EPS, including the restructuring charges but with a 35% tax rate, would have been $0.52 and $0.78, respectively; in-line with expectations.  Of course, if one decides to exclude those restructuring charges from the adj. net income calculation, IACI's adj. EPS would be much higher.
  • Adj. EBITDA (excl. non-cash compensation expense) for the year were $497.3MM, up 36% Y/Y.  As a percentage of revenues, EBITDA remained flat compared to FY '11.  Again, we think EBITDA margin will expand in FY '13.  Such expansion will be driven mainly by higher margin in Match and significantly lower operating loss in Media & Other.  We expect the Company to successfully cross-sell and up-sell more revenue generating services at lower costs to its current and future Match users going forward. 
  • Management stated it will continue its share buy-back program, if necessary.  Between Oct. '12 and Feb. '13, it bought back 6.4MM shares at an average price of $45.69.   
  • In terms of FY '13 guidance, management expects "double-digit" revenue and operating income before amortization (OIBA) growth within the Search & Applications segment; "low double-digit" revenue and "high double-digit" OIBA growth in Match; "modest double-digit" revenue and OIBA growth in Local; and "solid double-digit" revenue growth accompanied by OIBA loss of $25MM - $30MM in Media & Other segment.  Again, this was guidance for the full year. 
  • Q1 will likely be the weakest quarter.  For example, approx. 40% of Media & Other's full-year expected OIBA loss will be in Q1.  In addition, Search & Applications revenue growth will be stronger in Q2 - Q4 than what is expected in Q1. 
  • We believe interpretation of management's 'guidance' will vary.  We did not make significant changes to our projections.  For FY '13 we expect revenues of $3,212.0MM and adj. EBITDA of $636.0MM, or Y/Y growth rates of 15% and 28%, respectively.

Overall, we think IACI reported a solid Q4 and we remain confident regarding its performance in FY '13.  Surprisingly, this was supported by management providing guidance for the first time on the earnings call.  Our conservative valuation represents a 22% upside from where the stock closed at on Wednesday.  Lastly, given the average price at which the Company repurchased its shares the last time around, the share buyback program could provide a floor at $35 - $40 per share, limiting the downside a bit.  

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