IAC - IAC Inc. Is Not Up To Expectation (Rating Downgrade)

2023-08-15 21:03:54 ET

Summary

• IAC reported declining sales in almost all of its segments. Although revenue growth is not the current focus, the acceleration of decline is unexpected.
• Profitability did improve, but that is through 'good riddance'. The product improvements are slow. Many professionals left the platform.
• Dotdash Meredith is facing increasing competition from social media and generative AI. It is not easy to stay as a dominate player in its content category.
• The lack of major moves from the management are disappointing.

As the digital landscape continues to evolve, companies like IAC Inc. ( IAC ) must navigate the complex currents of change, innovation, and consumer behavior. IAC's recent quarterly report revealed how the company deal with market challenges. In the following article, I will delve into the details and shed light on why I was disappointed by IAC's recent developments.

Business update

In a year-over-year comparison , IAC total revenue has decreased, dropping from $1.36B to $1.1B, a reduction of 18%. Each segment within IAC experienced declines: Dotdash Meredith ((DDM)) revenue fell from $489.5M to $414M, a 15% decrease; Angi slipped from $515M to $375M, dropping 23%; Search revenue declined from $177M to $198.2M, a 11% fall; and Emerging & Other segment reduced slightly from $161M to $147.9M, a 8% decline. Despite the drop in revenue across segments, all segments were profitable, and the total adjusted EBITDA rose to $70M, a remarkable 85% growth. This growth in profitability is in part attributed to a reduction in SG&A costs, which dropped from 66.91% of total revenue to 70.73% last year. Additionally, IAC's strategic share buyback of $165M for IAC and $3.3M for Angi has reduced the share count from 86M to 83M.

Overall, there is nothing exciting for this quarter. These numbers signal a period of consolidation for IAC, as the management had noted in the last call:

Throughout 2023, we expect to generate less revenue, more profit, and better relationships with our customers. The turn to profitability has happened, and we expect customer happiness and revenue to follow in 2024.

Good riddance is good, but not enough

The decline in revenue across IAC's segments, particularly with Angi, has been more rapid than anticipated, mainly as Angi continues to shed underperforming sales. This situation raises concerns due to a strategy overly reliant on 'good riddance'. While focusing on what works and eliminating what doesn't is generally a positive approach, there's little evidence of organic growth and innovation within the offerings Angi has decided to retain.

The loss of professionals is particularly concerning, with transacting service professionals down to 207K from 264K last year, a 22% decrease. This reduction appears to be a high price to pay, especially when considering that Angi's SG&A share of revenue has actually risen to 82.6% from 75% the previous year. Adding to the uncertainty is a lack of clarity about how much it will cost Angi in customer acquisition to regain these professionals. The company can no longer attribute these problems to macroeconomic factors, as evidenced by Nextdoor (a platform with similar professional-finding functions) seeing a 13% YoY increase in weekly active users. Positive signs may be that professional retention has notably improved, and third-party data shows that ANGI's website visitation grew by approximately 9% from April to June. However, these improvements are overshadowed by lingering disappointment in Angi's overall performance.

Joey Levin has been in charge of ANGI for over three quarters and has repeatedly emphasized enhancing customer experience, yet substantial improvements in product offerings remain elusive. Given that ANGI was founded in 1995, the continuing struggle to create an outstanding product that draws people in casts doubt on whether it ever will achieve that goal. Overall, the current situation presents a picture of missed opportunities and unrealized potential. As the management said in the call:

We’re far from our aspirational future steady state at Angi and Dotdash Meredith.

The DDM business doesn’t look unique anymore

With regard to DDM, the initial narrative seems to have shifted. The promises of premium content, iconic brands, broad scale, diversity, and high growth and margins were appealing when IAC first took ownership. Nevertheless, the ambitious vision of digitizing DDM hasn't manifested as robustly as anticipated. Despite management's frequent references to a general downturn in the general ad market, a 23% drop in revenue does not align with a business wielding strong pricing power.

The allure of social media and advancements in generative AI is continually drawing people's attention, casting doubt on how DDM's content can secure a substantial market share and continue to fortify its competitive edge. While strategies like D/cipher and performance marketing seem promising, they're far from unique, with many competitors exploring similar offerings. Consequently, envisioning how DDM will achieve durable growth becomes a complex and uncertain task.

Bottom line

IAC still possesses a treasure trove of value within its diversified portfolio. Neither ANGI nor DDM are facing bankruptcy, they will continue to function and perform. Additionally, Care.com harbors considerable growth potential if executed well, and both Turo and MGM stand as valuable assets capable of generating returns for shareholders. The company's balance sheet remains robust, displaying ample liquidity that could fuel another acquisition.

However, in the wake of this quarter, IAC's strategic direction seems somewhat ambiguous. The management's focus appears to be on reviving two declining businesses that, so far, lack winning products or platforms. This is a challenging feat and raises questions about IAC's future prospects. Given the abundance of other investment opportunities, it's worth pondering whether continuing to monitor this particular enterprise remains a worthwhile endeavor. Therefore, I decided to pursue other opportunities and change the rating to hold.

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