Wednesday, May 1, 2013

IACI: Mixed Q1 Results; the Future Continues to Look Bright

As we mentioned yesterday, IACI reported Q1 earnings on Tuesday and beat on the bottom-line but missed revenue estimates.  Total revenues of $742.3MM were below the $757.3MM consensus.  Non-GAAP EPS of $0.83 were significantly higher than the Street's $0.69.  Even with the revenue miss, IACI reported impressive margin expansion and we believe this will continue going forward.  However, we did slightly lower our 2013 adj. EBITDA estimate due to the revenue miss.  We would rather remain conservative, although we do believe management and the Company will get back on track in Q2 and going forward.  More detail regarding revenues is provided below.  We upped our valuation to $54.00/sh (from $52.00/sh) due to a lower share count at the end of Q1.  IACI repurchased 1.4MM shares in Q1 at an average price of $42.96.  So we do see that price level as a floor, especially given that the IACI Board authorized the Company to purchase another 10MM.  The Company currently has 11.7MM shares in its stock repurchase plan. 

IACI closed up 1.1% on Wednesday at $47.57.  It has increased 17.7% since we first suggested it in late Jan. '13, compared to S&P 500's 5.0% increase.  As a reminder, IACI's $0.24/sh quarterly dividend is yielding around 2%.
  • Revenue miss was due to slightly lighter than expected search & applications revenues, along with Y/Y decline in Local revenues. 
  • While search & apps revenues were up 16% Y/Y, we note that excluding $31.3MM from The About Group (which was acquired last Sept.), growth was 7%, slightly below our 8% assumption, but significantly lower than the Street's estimate.
  • In addition, the change in Google's policies, to which management stated IACI has adjusted going into Q2 and beyond, drove down average revenue per query (excl. About queries and revenues) compared to Q1 '12.  Growth in queries remained impressive at 17% Y/Y.
  • Excluding About, we did see margin expansion, which is very good news given GOOG's latest policies.  Operating margin in that segment increased 50bps Y/Y to 21.9%.  The About Group's operating margin is 40%+.  We could see a slight margin decline search & apps in Q2 as the Company plans to increase marketing.  
  • Match segment revenues came in better than other analysts' expectations, but below ours.  We thought that revenues from the non-Internet events would have a better impact on that segment's total revenues.  In addition, we expected a 10% Y/Y increase in Match's Core division; however the Company reported an 8% growth. 
  • Total subscribers in Core, Meetic, and Developing divisions were up 11% Y/Y.  Developing led the way with a 45% growth.  We note that the subscriber count in Developing is only about a fifth of Core's.  
  • Average revenue per sub in the quarter declined to $60.16 from $61.79.  We believe this was due to stronger growth in Developing which does generate slightly less revenues per subscriber.
  • Match segment operating margin increased to 21.7% from 17.2%.  
  • According to management, Local revenue decline was due to domain name change of HomeAdvisor.  This was evident as domestic service requests and acceptances declined 25% and 20% Y/Y, respectively. 
  • Media revenues increased 185% Y/Y, mainly due to acquisitions made in May of last year.  However, it did experience operating loss of $8.8MM, slightly more than last year's $6.7MM.  Discontinuation of Newsweek will likely help this segment's margins going forward.

Overall, management sounded a bit more optimistic than the last earnings call.  For 2013, it expects double-digit top-line growth and OIBA growth of around 30%.  We remain conservative with our projected 2013 OIBA representing 26% growth, and can be translated into 24% growth in adj. EBITDA and a 20% adj. EBITDA margin.  Our $54.00/sh valuation remains based on 7.5x 2013 adj. EBITDA and net cash of approx. $100MM. 

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