Wednesday, February 5, 2014

IACI: Reports mixed FY '13 results; maintain 'neutral' and value it at $60/sh

IAC (IACI) reported mixed FY '13 results.  The risk that we have discussed many times regarding IACI's Search & Application segment (along with other companies', such as BCOR) came to fruition as that segment's revenues missed expectations big time.  Apparently it took the Street by surprise as IACI declined 5.5% on Wednesday, closing at $65.04.  As a reminder, we acknowledged that IACI was approaching what we thought was the Company's fair value back in Nov. '13, and labeled the stock as a 'neutral'.  Around that time, we also cited that Blucora (BCOR) is facing the same risk and labeled it a 'neutral'.  BCOR will likely report FY '13 results next week.  The stock is back down below $25/sh (from above $30/sh in Nov. '13), which may have improved the likelihood of its Infospace becoming an acquisition target.  However, after the IACI disappointment, future initial bids possibly placed on BCOR's Infospace might disappoint, as that EV/EBITDA multiple of 6, which we thought might be appropriate, is likely to be discounted.  

We adjusted our model slightly; more detail provided below.  The end result was a change in our total EBITDA estimate to $705.5MM (which incl. ValueClick) from $677.1MM.  However, the lower net cash balance on IACI's balance sheet as of the end of FY '13, and a slightly higher diluted share count pushed our valuation of the Company down to $60.00/sh, from $61.35/sh.    

Overall Results
Total revenues of $3,023.0MM were lower than our $3,055.9MM estimate and the Street's $3,040.0MM, mainly due to a miss in Search & Applications.  OIBA (operating income before amortization) margin was at 17.8%, in-line with our 18.1% estimate.  However, due to lower revenues, OIBA of $539.4MM was lower than our $545.3MM estimate.  EBITDA of $598.3MM was also below our $605.5MM.  IACI ended FY '13 with $20.4MM in net cash.

Search & Applications

Revenues for the Search & Applications segment came in at $1,604.9MM, compared with our $1,641.7MM estimate.  As expected, top-line growth in this segment was nowhere near what IACI experienced in FY '12, mainly due to Google's (GOOG) change in pricing.  However, the negative impact was slightly more than we had assumed.  The Company did a good job of addressing deceleration in revenue growth as OIBA margin in this segment was 22.9%, slightly above our 22.3%.  

Management expects modest top and bottom-line growth in this segment in FY '14.  We note that this is mainly due to the acquisition of ValueClick assets, which we applauded and said was necessary.  

We now expect Search & Applications revenues of $1,781.4MM in FY '14, accompanied by slight margin expansion to 23.7%, or OIBA of $422.9MM.  Initially, we had $1,773.0 and $399.3, respectively.


This segment generated revenues of $788.2MM compared with our $784.7MM estimate.  OIBA of $262.2 was below our $271.0MM as the Company increased its marketing to try and monetize some of the assets, including Tinder.  We were pleasantly surprised that 1) management finally highlighted Tinder on the call, and 2) analysts showed some interest.  We discussed Tinder back in early Nov. '13.

Although this segment's OIBA margin was approximately 170bps higher than in FY '12, it did come in 120bps below our 34.5% assumption.  We expected IACI to begin its marketing blitz and asset monetization attempts this year.  

With additional revenues coming in from assets that were in 'development' stages last year, we expect a 16% Y/Y revenue growth for the Match segment, resulting in revenues of $914.3MM.  However, margin will likely remain at 33.3%, equivalent to OIBA of $304.2MM.  Initially, we had $902.4 and $298.1, respectively.  We note that the increase in our revenue estimate is driven mainly by monetization of newer sites, and that is why we do not expect margin expansion.  We think the Company is already facing pricing pressure.  As we have said this before, this business can get commoditized very quickly.

Local, Media, & Other

The remaining segments reported total revenues of $630.7MM, pretty much in-line with our $630.0MM estimate.  OIBA loss of $21.3MM in these segments was slightly better than our OIBA loss estimate of $24.0MM.  Simply put, Vimeo has a potential and HomeAdvisors continues to disappoint, especially in the US.  We did not make any adjustments to our FY '14 top or bottom-line estimates for these segments.  We expect $693.8MM in revenues and OIBA loss of $20.0MM.  The 10% revenue growth will be driven mainly by the growth and hopefully successful monetization of Vimeo.

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