Elliot Turner Managing Director, RGA Investment Advisors IAC/InterActiveCorp (NASDAQ: IAC)
Prepared for Wide-Moat Investing Summit 2018, Hosted by MOI Global
by Elliot Turner, CFA Managing Director RGA Investment Advisors, LLC E: [email protected] P: (516) 665-1942 @ElliotTurn Disclaimers and Disclosures
RGA Investment Advisors LLC (hereinafter “RGAIA”) is registered as an investment advisor in the state of Connecticut. Jason Gilbert and Elliot Turner are both managing members of RGAIA and receive compensation directly by RGAIA. As of the publication date of this report, RGAIA, the principals of RGAIA, the clients of RGIAA, and others that we have shared our research with (collectively, the “Authors”) have long positions in and may own options on the stock of the company covered herein (IAC) and stand to realize gains in the event that the price of the stock increases. Following publication of the report, the Authors may transact in the securities of the company covered herein.
Investing involves substantial risk. The Authors make no guarantees or other promises as to any results that may be obtained from the substance of this report. No reader of this report should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing the prospectus and other public filings of the issuer (IAC). To the maximum extent permitted by law, we and our respective affiliates disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in this report prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. This report is not a solicitation or offers to buy or sell any securities.
The subject matter of this report, commentary, analysis, opinions, advice and recommendations herein represent the personal and subjective views of the editorial group, and are subject to change at any time without notice. The information provided in this report is obtained from sources which the Authors believe to be reliable. However, neither the Authors nor RGAIA has independently verified or otherwise investigated all such information. Neither the Authors, RGAIA, nor any of their respective affiliates guarantees the accuracy or completeness of any such information. Neither the Authors nor RGAIA, nor any of their respective affiliates is responsible for any errors or omissions. Such information is presented “as is”, without warranty of any kind – whether express or implied.
RGAIA, its clients, its principles, and the Authors may purchase and sell these securities without notice to readers of this report and may take a position that is inconsistent with the recommendations herein. About RGA Investment Advisors
We’re an RIA and invest client assets with a Growth at a Reasonable Price (GARP) bias, with rigorous research into the fundamental drivers of a business.
We take a long-term focus to investing and aim to maximize In diversification, our primary after-tax returns. Our target aim is to expose portfolios to time-frame is 3-5 years as many disparate factors of though we aim for the “over” both risk and reward as and hope for more. possible. Our equity portfolio consists of approximately 25 positions, with higher conviction ideas given 5% allocations, average positions 3% and more volatile ones 2%. Cash is typically our largest one holding. Intro
“With scale, these businesses are able to redefine the user experience, remove friction, drive product innovation and deliver enduring value to market participants. When we evaluate businesses, we look to see if scale improves the product, not just the price. In other words, the 10,000th customer on the platform improves the product for the 1,000th customer. That’s the playbook.”1 – Joey Levin, CEO
1- http://ir.iac.com/static-files/6a3fb336-07b7-49d6-a521-b788cedd0e5e 4 Pitches Rolled Into 1
• Diversification lowers risk and correlations, plus within the business I’m going to present it lowers the cost of capital, creating a competitive advantage in a competitive field with asymmetric upside.
• You can manufacture your exposure to any or all of the four pitches to the degree you like the constituent parts:
1. IAC 2. The IAC Stub 3. Match Group, Inc. 4. ANGI Homeservices Barry Diller – Chairman, Founder, Largest Owner
• Diller owns 8.2% of he outstanding stock and his wife, fashion designer Diane von Furstenberg owns 5%. With a dual class voting structure, collectively the two control 72.7% of the voting power at IAC.
• Diller rose from the mailroom of William Morris agency to the top of the entertainment business. Starting in 1974, He ran Paramount as Chairman and CEO for a decade before moving to the same title/position at Fox for the next decade.
• Diller created IAC out of Silver King Communications, where he combined the assets of Silver King Broadcasting, Home Shopping Network and Savoy pictures to create HSN in 1996.
• After several name changes, asset dispositions and sales IAC forged a coherent strategy and demonstrable competitive advantage that is the spirit of the company today.
• People speak about the “coaching trees” of Bill Parcells and Bill Walsh in football. In media and Internet business you can do the same w/ Diller. The Constants
• A diverse portfolio of businesses at various stages of maturity, some of which bring in cash flow, others which drive growth by recycling the flowing cash
• A rock solid balance sheet with ample liquidity and a lush capital base for future investments
• A track record of beating the market. IAC has beaten the market by “2.5x since Barry Diller assumed control in 1995, and also outperformed the market in each of the past 5, 10, and 20 year periods by at least 2.5x.” A Philosophy and Engrained Culture
• “Regardless, we’ll continue to look for new areas where interactive technology can transform an industry, where scale will improve the product, not just the price, and where we believe we can help a company grow to reach that scale.”1 • “Our thesis has been consistent: we combine operating control, investment discipline and capital markets expertise with specific category experience, a permanent balance sheet and a long-term investment horizon to build great companies. We de-risk our bets in a number of ways. We recruit, guide and help entrepreneurs avoid the mistakes that we have made ourselves, and provide them enormous incentive on the upside performance. We encourage and reward ambition. Operators get more leverage because they can use our balance sheet and deal experience, and don’t have to worry as much about the mundane finance, accounting, or other back office functions. Our breadth is wide enough that we see lots of opportunities, and our scale affords us a cheaper cost of capital than smaller companies who may compete in a particular category. Most importantly, unlike many investors, we have permanent capital, allowing us to operate and invest without a fixed timeline, and the ability (though rarely exercised) to print our own currency.”2
1-http://ir.iac.com/static-files/65370bef-6e60-41c3-9cd7-e66bd4518ab6 2-http://ir.iac.com/static-files/1fb1c3ff-d062-4c5b-ab7e-2f8dc346ede0 History of Successful Incubation and Value Creation • “As many know from our actions over the last 20 years, I'm not a believer in simply agglomerating assets in perpetuity. I've long felt that as entities grow into size and maturity it's healthy to give them separation and independence from a mother church”1 -- Barry Diller
• “Many companies and management teams will hold on to their biggest businesses, when those businesses are clear leaders in their categories, growing nicely and operating at scale. We have generally chosen instead to do the opposite – consistently giving those businesses directly to our shareholders, run by their own highly capable management teams and Boards, and in the process shrinking our job here at IAC. IAC may not maintain an ongoing stake in those businesses, but our shareholders continue to own each of them.”2 – Joey Levin
1-https://www.prnewswire.com/news-releases/iac-announces-intent-to-pursue-ipo-of-the-match- group-300104753.html 2-http://files.shareholder.com/downloads/IACI/2199328897x0x889889/8E4DCC2D-13E3-4535-BB85- 70C6D3CBD05C/Q1_2016_Shareholder_Letter.pdf Invest in Growth (New or Young Business)
Strong Cash from old High Quality business Balance Growth Asset Sheet
Divest part with optimized balance sheet at subsdiary
Full Spin The Playbook: How to use cash
• Invest organically to grow the portfolio businesses
• Buy partial or full ownership interests in businesses
• Repurchase shares—only strategically when shares are cheap, in large chunks
• Home grown incubation A Shared History and Shared Resources
• “We’ve spent nearly $4 billion on Google and Facebook in the last decade with a meaningfully positive return. We’ve built proprietary software (and generated vast amounts of performance data) that enables us to run millions of ad campaigns simultaneously, targeted to reach audience for our specific products across the globe and down to the neighborhood. On the other side, we’ve generated nearly $12 billion in revenue (over $700 million in 2017) with Google since we first began syndicating their search advertisements on our sites, without hiring a single salesperson to speak to their advertisers. As other forms of “plug-and-play” revenue have emerged such as programmatic ads, we seamlessly embed these solutions into our products. All of this platform expertise can be repeatedly deployed and transferred, so that the next business we build or buy can ramp faster and more effectively.”1
1-http:://ir.iac.com/static-files/1fb1c3ff-d062-4c5b-ab7e-2f8dc346ede0 • It’s a holding company with some operating assets. Is some discount justified?
• Voting control resides almost entirely with 1 person
• Many shareholders & analysts want full spins of the publicly traded subsidiaries today, but management wants to wait.
• Timeframe mismatch: management is thinking long-term while a lot of the market focuses short-term
• In February of 2018, amidst market volatility, the value of the stub dropped precipitously.
What’s in the stub:
• Video: • Vimeo • Applications: • Apalon • SlimWare • Publishing: • Dotdash • Investopedia • Ask • Daily Beast • New Investments: • BlueCrew • Honcker • JoyRun Note the power law distribution here: Google at #1 is ~2x Facebook who is ~2x Yahoo. Vimeo holds strong thereafter. • Has evolved from a pure sharing marketplace to a differentiated, niche product aimed at creatives and structured as a SaaS offering.
• “We focused on attracting a community of professionals, outside the constraints of the traditional media ecosystem, by building a platform that ensured a beautiful video viewing experience with cutting edge technology. We avoided interruptive advertising, not simply because of its impact on the viewing experience, but because it encumbered the creative process. We also provided a set of cloud-based tools for creators to manage their work (hosting, collaboration, sharing, and selling) and interact directly with their audience. Instead of figuring out how to serve a pop-up or interstitial ad at the optimal level of annoyance, we focused on professional features like encryption, integrations with other platforms, private sharing, commenting and analytics”1
1-http://ir.iac.com/static-files/7a47b3c6-7879-4fa7-a58a-95d194148be2 • “Pro and Business solutions account for 27% of customers and provide nearly 50% of revenue.”
• SaaS offering plays into the marketplace by bringing high quality content to customers.
• Software suite has been enhanced via acquisition: can now create a channel with no upfront cost and stream live by pushing a button.
1-http://ir.iac.com/static-files/7a47b3c6-7879-4fa7-a58a-95d194148be2 • “Vimeo made terrific progress this quarter growing organic bookings 29%, the highest in 14 quarters, with market share still in the single digits.” <--Q1 2018, big acceleration from the mid-teens it had accelerated to at the end of last year. Real traction is happening now with the SaaS product.1
• “We are now able to deliver about $2 in gross margin lifetime value (subscription revenue less hosting, bandwidth, and credit card fees) for every $1 we spend on marketing”2
• Company estimates a $15b TAM for SaaS video creator services, up from $10b estimates last year3 • This year will cross $100m revenue mark on the SaaS business.
1- http://ir.iac.com/static-files/165fea50-d0d2-4715-906c-265f782f29c2 2- http://ir.iac.com/static-files/7a47b3c6-7879-4fa7-a58a-95d194148be2 3- http://ir.iac.com/static-files/1fb1c3ff-d062-4c5b-ab7e-2f8dc346ede0 ttp://ir.iac.com/static- files/6a3fb336-07b7-49d6-a521-b788cedd0e5e
• Stake in MTCH accounts for ~68% of IAC’s market cap
• First acquired Match.com itself in 1999. Subsequently tucked in OkCupid, PlentyOfFish, Meetic, Pairs
• Tinder, the major growth engine, was incubated within IAC/MTCH as a native mobile app. The virality and sensation of swiping left or right is something entirely new to online dating.
• Each of the brands caters to different demographics. Tinder is especially popular with younger demos.
• Most customers in online dating use multiple services, for various reasons. Per MTCH, the average user is on 3 dating sites.
• Large TAM with ~600m “unattached singles with Internet/smartphone access ex-China.”1
1- http://ir.mtch.com/static-files/4969f909-5c91-4efe-9489-e533adbc4d3e • The paid service at Tinder debuted in March 2015. Added features offer unlimited swipes (vs restrictions in the free version), no ads, super likes, more visibility in who looked at you & capability to control the options you see.
• Most users don’t pay, but paying itself is a differentiator in online dating. The dating pool views free users as less serious than those who pay. Combined with added features, it’s a potent force driving revenues.
• The challenge inherent to dating is “success” leads someone to drop out of the dating pool. Virality of Tinder is a major differentiator with how it lowers the CAC relative to other options.
• Continue to improve the product with additions like video, location-matching, messaging.
• Phenomenon is global, not just unique to the US. Subscribers keep downloading x ARPU is growing nicely, with multiple levers for Tinder to pull = Hockey stick growth • The biggest users of Facebook skew older than those of Tinder. It can be argued Facebook is pursuing dating to get more engagement from younger demos.
• Leveraged FB for login, but most people have moved off of that.
• People are sensitive about their data w/r/t dating & keep it separate from social. Young millennials don’t want their dating life tied to the site Grandma spends half her day on, even if in a standalone app. • Tinder has led to accelerating revs & expanding margins
• FCF conversion consistently over 80%
• Repurchasing shares aggressively at MTCH level after FB day hit
• Debt/EBITDA continues to go down, driven by EBITDA growth & cash accretion • IAC bought into the homeservices marketplace business in 2004. Today this accounts for 49% of IAC’s marketcap.
• HomeAdvisor slowly and steadily added consumers and service professionals to create a two-sided marketplace
• IAC spent years pursuing ANGI but would not budge from its price. They first offered $512m in 2015, then again in 2016, ultimately acquiring the company in 2017 for cash and stock at just north of $500m.
http://ir.iac.com/static-files/c5a36b20-9722-4559-a247-9fad776433de • Service Professionals bring customers & customers bring SPs
• The real acceleration & evidence of network effect started in 2016
http://ir.iac.com/static-files/c5a36b20-9722-4559-a247-9fad776433de http://ir.iac.com/static-files/83419f11-9215-4916-9e3b-a0602d74829c • Angie’s List is transitioning from a user-paid to a marketplace take-rate monetization model. The user-paid model was seeing declining revenue.
• Instant connect and instant booking are product innovations bringing more users to the marketplace.
• “The SP’s we keep generally receive much more from the system than they put in. Every SP pays around $300 for an annual subscription and targets spending, on average, an additional $300/month for leads. The average job size on HomeAdvisor is just over $3,000 and ranges from as low as $500 to nearly $1 million. Frequently, one job won can justify an SP’s entire annual budget with us.”1
• “Consumer requests (i.e., demand) for Service Professionals (“SP’s”) are growing like gangbusters – so much so that we’re hitting some constraints on the capacity of our SP network (i.e., supply) to absorb that demand.”2
1- http://ir.iac.com/static-files/83419f11-9215-4916-9e3b-a0602d74829c 2- http://ir.iac.com/static-files/165fea50-d0d2-4715-906c-265f782f29c2 • ANGI is being managed to drive growth, not EBITDA. EBITDA is growing and margins are increasing by virtue of the powerful business model.
• For revenue growth, “…we expect to be in that 20% to 25% range in the future. Remember, Jason, there is just the simple math of we have the declining Angie's List business which we bought that needs to stabilize. The other business continues to grow and will continue to grow. And as that kind of math works its way through the system, then you'll start to get to that accelerating growth after this year.” • Collection of really good businesses
• A strong management team with aligned interests
• A culture, philosophy and process with proven results
• Tools at management’s disposal to create value at the holding company level. • Management has been explicit in their unhappiness with the market’s implied value. While not essential for the thesis to work, IAC will eventually take steps to close the stub discount.
• The 1st step will be a tax-free spinoff of MTCH, though the Facebook setback potentially pushed that out a little into the future. This is advantageous for MTCH can repurchase large chunks of shares at the subsidiary level, increasing IAC’s ownership stake before the eventual spin.
• 2nd will be a spinoff of ANGI, though given where the company is in its growth curve this could be farther out into the future.
• Continue to highlight the burgeoning value of Vimeo with more meaningful KPIs
• All the while, IAC can repurchase shares in itself. IAC/InterActiveCorp (NASDAQ: IAC)
Prepared for Wide-Moat Investing Summit 2018, Hosted by MOI Global
by Elliot Turner, CFA Managing Director RGA Investment Advisors, LLC E: [email protected] P: (516) 665-1942 @ElliotTurn