Wednesday, July 30, 2014

IACI: Q2 numbers missed expectations; still value it at $60/sh

IACI reported Q2 results this morning missing on the top and bottom-line.  Revenues came in $40MM short of the Street's estimates.  We remain 'neutral' on the stock and value it at $60/sh.

As we mentioned yesterday, based on Google's traffic acquisition costs (TAC), search & applications revenues for companies such as IACI and Blucora (BCOR) have slowed down and will slow down further.  IACI search & application revenues were down 7% Y/Y.  

Its Match Group revenues were up 8% Y/Y.  We hope the Company either begins to monetize Match Group's assets (such as Tinder) more quickly or acquires additional ones (as it did earlier this month with HowAboutMe), which is what IACI is known for.  Also, on this morning's call, management certainly displayed uber-optimism and excitement regarding the possibility of monetizing Tinder.  We hope the Company can monetize Tinder successfully, but we note that the monetization of Tinder could cannibalize revenues and cash-flow generated from 

Media and eCommerce segment revenues were down nearly 16% mainly due to the Company's sale of Newsweek and placing its CityGrid Media into the search & applications segment.  We note that excluding CityGrid Media from last year's figures, IACI's eCommerce (mainly HomeAdvisor) revenues were up 12% Y/Y. 


Assuming the best-case scenario, where Tinder can add as much as $200MM to the bottom-line annually in terms of EBITDA, and no other acquisitions, we think IACI's Match Group could be worth around $5.50bil, based on 10x EBITDA.  Of course, the Company has not yet 'decided' on how to monetize Tinder.  The worst-case scenario, assuming Tinder cannot be monetized, could result in a mere $2.03bil valuation (7.5x EBITDA) of The Match Group.  So, we think the valuation of The Match Group could be the mid-point of this range, or approx. $3.77bil (9x EBITDA).  

The search & applications segment, which continues to decline, is worth around $1.75bil, or 5x EBITDA.  Ignoring the other segments (which combined are in the red and will likely remain there), IACI's EV could be around $5.51bil.  After including the latest net debt on its balance sheet, IACI's market cap would be approx. $5.50bil; or ~ $60/sh.  We still view IACI as a 'neutral' stock.  

In our opinion, even-though the potential of Match Group IPO or spin-off is already priced in, we sense the hesitancy from sell-side analysts to downgrade this stock as they'd like to be part of the IPO or spin-off 'process'.  Some things never change. After being down as much as 6% earlier today, IACI is now up 1%. 

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