Welcome to morning number one at the RBC TMT Conference. I'm Brad Erickson. I cover internet here. Very pleased to be joined by Chris Halpin today, CFO of IAC. Chris, nice to see you.
Thank you for having me.
Down, down the street for you.
Yes
We appreciate it.
It's a home game.
So I have a list of questions, obviously. We'll run through. But if anybody does have questions, feel free to raise your hand, and we'll try to get all those in. Maybe just to start out, just to kind of level set, you guys just printed, obviously. Just to maybe just spend a minute or two, kind of, you know, what happened from your perspective, and maybe just some of the key questions. I'm sure we'll get to them.
Sure.
But some of the primary common questions you were getting coming out of that print.
Yeah, definitely. I think it was sort of a solid quarter. The feedback we've gotten, as expected, generally with probably a little bit better profitability. You know, big picture, we did $100 million of Adjusted EBITDA across our consolidated businesses in Q3. Two big ones, Angi, which we'll talk a lot about today, you know, we're still in the midst of the turnaround that Joey is driving as CEO. Revenue still declined. I think the good news there was, Adjusted EBITDA outperformed. We've very much turned the free cash flow nature of the business around in the last year, and full credit to Joey and team there, mainly by improving margins, but also rationalizing what was just an excessive capitalized software effort.
And then also, we sold the roofing business, which has just, you know, relative to a small acquisition, has been a major source of headaches, as you know, over time, and we feel like it's in great hands and will be a good customer. Across the rest of the portfolio, Dotdash Meredith continues to execute and turn even in a kind of up-and-down ad market, execute on the opportunities in front of them, and, well, we really believe in that opportunity. And then the rest of the portfolio is solid. So we're just heads down, as Joey said in the shareholder letter, continuing to execute.
Got it. Cool. So let's start with Angi, 'cause, yeah, I think that's the bulk of the conversation, certainly in the investor questions we get. So I guess it was not this quarter, but the second most recent quarter where Joey called out the need to reduce some of these, call it, lower quality channels. And I guess, you know, this quarter sounds like those weren't actually gone, they just kind of are taking maybe a little bit longer to rebound. What's involved with getting those channels or working those channels to rebound more?
Yeah, and for framing it, there were three main actions that Joey and team drove on the revenue side in the interest of long-term improved margins and also higher LTVs and better value. First two are relatively easy. One, were paid marketing channels that had either been in place for a long time or where the underlying economics had diminished so that they were essentially zero margin. As Joey says, "very low or no-calorie revenue streams." So that's something where we'd be, you know, SEM acquiring traffic, and when you fully loaded it for cost to fulfill bad debt, credits, et cetera, we're making no money.
But for whatever reason, they'd sort of inertia builds, and those revenue streams continue. We got rid of those through raising return requirements on certain paid marketing. The second, which we'll talk about on the service provider side, was in looking at our service provider sales, and this, to be fair, was an outcome of the pandemic when professionals had so much offline demand that they couldn't possibly satisfy it. So, there were reductions in the insane demand highs of that period.
Pros reduced their spend, partly just because they didn't need it and couldn't fulfill it even if they wanted it, and we ended up chasing lower quality pros. Now, one of the observations that the team made was, a factor in that was our sales force was too big. So it's sort of confusing activity with progress, where you had a bunch of people who have to sell.
If that's your job, then you just sell to whomever you can. And there was a recognition that by shrinking the sales force, which would also drive margin, and prioritizing who they go after, we would also improve SP quality. And that has worked very well. It leads to a, you know, nominal reduction in sales, but when you look at the improvement in bad debt, and also the dialogue on cohort retention and others in the shareholder letter, we feel great about that.
The third is what you're asking about, which is marketing channels where we identified just lower either pro-win rates or lower quality leads, and you'd get that feedback through either pro-win rates or pro complaints or pro requests for credits. And we just saw that there were clear. This is, this is going channel by channel, this is third party, SEM, outbound, inbound, outbound call center, etc . There were clear gaps in lead quality between different partners, different providers and we could optimize.
Now, the short-term effect of moving, if you shut down one partner and move that to another partner, you've got a dip, and then you have to ramp back up to, y ou know, if you double the amount of spend with a high-quality partner, it is not instantaneous that they can recalibrate their settings and drive.
Similarly, if you move to an entirely new partner in a channel, they've got to sort of recalibrate their targeting, their ROI metrics, and allow their performance to bake. So it's coming back. Depending on the channel, it's kind of a gradual dip or a V and coming back, some of them taking longer than we thought, but we have full confidence they'll all be back.
Yeah. What, what would you say you're doing to be able to hopefully, move that along? Is it, is it, you know, product development, marketing? I imagine it's all of it, but what are the things you feel like are in your control there to drive that rebound?
Yeah, a lot of it is in our control. It's, it's, you know, across dashboards, seeing the ROI and, seeing that, that the partner is, you know, producing the, the leads and, opportunities that we would expect in the channels we'd expect, and then sort of, moving the dials to, to optimize between them. There's also some technology elements of, you know, how they communicate information to us that you've got to get up, especially with a, with a new one, but it's just blocking and tackling, and, we've made progress. We will continue to, and, you know, nothing has changed our view of, of where it's gonna end up.
Got it. Okay. And then, I mean, the killer question we get, obviously, from people is, are you done, right? Have you identified all of these channels? What's your, maybe just speak to your confidence level around that.
I'd love to say we're done, but, you know, Joey has said repeatedly he wants the optionality to prune around the edges if he finds things. To his credit and the teams, sorry, take this back. It's increasingly nuanced or targeted, where it's more you're pursuing a plan to optimize a channel, and then you find low ROI activities or suboptimal execution in a certain channel, and you tweak. I would think anything big is behind us, and as CFO, that's my hope. But, you know, we have said we'll continue to prune where we think it's in the best interest of shareholders long term.
Got it. Okay. And then just maybe another one, 'cause you mentioned it related to SEM specifically. What have you seen in terms of ROI there lately? Your largest partner has made some fairly meaningful SEO changes. Seems like they're making SEO changes more often than they used to. What have you been seeing kind of directionally in ROIs on that channel?
Yeah, you know, SEO has been, it is always a sort of journey with ups and downs as Google tries different things. It seems like they have put out, you know, more core changes and tweaks to the algorithm second half of this year than normal in cadence. Nothing that we've seen that's a massive swing, especially, you know, back to 2019, which predates me, but when Angi was hit hard.
They are always playing around, you know, but relative to broader trends, though, I think they'll always try to, you know, steer more activities to their own channels and play around with the number of things on the SERP page, but there's nothing we'd highlight in SEO that's been significant.
Got it. Okay. And then anything to call out just in terms of Google's competitive offering, right? 'Cause they, I think as we think about 2019, right, that, that coincided with them maybe getting a little bit more aggressive on go-to-market with their own products.
Yeah.
How, maybe just any sort of competitive update or changes you've noticed there lately?
Yeah, I wouldn't say much. We think their conversion and matching is poorer than ours and given the data we have history of matching, you know, they've got liquidity as well. But, you know, we're always humble, and especially when talking about someone like Google, but we feel good about the ROI we provide to pros versus them. And they can, you know, price it differently, I guess, but nothing we would highlight in terms of, you know, their capabilities in ads and leads.
Got it.
Then services, you know, they're not in that, and the longer we're in it, now we went too far with services at one point, but relative to other competitors, we definitely think having ads, leads, and services as arrows in your quiver is by far the best way to serve both pros and consumers on job types.
Got it. Okay. And then, I don't know if there were any. Did I see a hand? No. One of the other comments I think Joey made on the earnings call was just around some price optimization. I think he said something to the effect of, you know, maybe certain categories had gotten a little ahead of themselves in terms of price. Talk about, is that, again, is that more of like a one-time or I know the idea of price optimization is ongoing by definition, but were these maybe some more major changes that needed catching up on, and now we're back to kind of a baseline, or is this, this is kind of the norm here going forward?
Yeah, I would distinguish between constant optimizations that occur, and this is the value of data and return path information but constant optimizations that are occurring in price, based on category, geography, what liquidity looks like.
Yeah.
Macro, that's part of the business. Joey was particularly talking about, there was, you know, some sloppy increases in pricing that were aggressive in the 2022 timeframe that, you know, in certain categories that just are not conducive to overall long-term platform engagement, etc . So, elements of recalibrating some of those, and it's really a broader theme of what's the service provider experience.
Yeah.
So, what is it like when we onboard a pro? We've gone very much to a crawl, walk, run onboarding, where before they would get tons of leads, you know, all these new products, etc , and they'd get overwhelmed, and that drives attrition. Obviously, bringing higher quality pros or avoiding low-quality pros. Controls and tools that we're giving them, especially smaller pros, related to how they get leads and the cadence of that. So simple things like set it to when they're in the office versus when they're in the truck.
Yeah.
Because if you're a small pro, the worst thing is if you've paid for a lead that comes in while you're actually out doing your job, and you can't respond to it, and you get charged for that. So all of those things improve pro experience and, you know, clearer ROI. This is giving them better ROI by rationalizing price on certain things to drive LTV.
Got it. And you just mentioned, too, you know, some of these price optimizations where you're keeping an eye on ROI as a function of data. Can you give a little bit more on that? Because I think you guys do some unique things in the industry to understand really what your ROI is. How do you guys do that?
Yeah, there's, you know, you've got a couple elements which are win rate. So I'm a pro, I buy a number of leads. What is actually the rate relative to the leads that come in that I win? And, what, how do you do differentiated pricing on the front end of those leads in a predictive way that would tie to win rate? So, you know, it's like the movie Glengarry Glen Ross, right? There's different quality leads that come in and that you bring in in any setting. So we map pricing to the expected quality and win rate of those leads and then constantly calibrate it.
It's in a smooth way to pros, but the virtuous cycle of their experience will benefit them and also lead them to want to pay more. But it is very much what's their frequency of winning, what's their frequency of being able to interact with the customer, so they know that they're getting, you know, at bats for the leads they're paying for, and what's the ratio of what they're paying relative to the probability of the fee associated with that job type.
Right. And I guess part of what I meant, too, was how do you get that feedback loop?
Well, it's through pro relationships, through also our services, activities in certain areas help as well, where we are, we have the pricing data and understand, you know, we also have a good sense of what, cost of goods sold, margins, those types of things are. So it's a variety of channels that we're compiling to try to frame the whole pro experience. Now, you're never gonna get there in every single category between Boise and Boston and the difference in economics, but we think we have the most information to be able to price in the most thoughtful way.
Got it. Okay. And then maybe just a quick one on the macro. We didn't really talk about that. Stable macro environment. Let's, let's just say that for argument's sake, in the next year. That feels like a reach, but we'll, we'll go with it.
We'll take it if you get it.
What happens to the business? Because from our perspective, and I think from investors' perspective, right, you've had the combination of demand has been a little bit tough. Obviously, part of that's the brand transition and some of the big changes you guys have made. And then you've also got generally low service provider capacity. And I don't mean just on the Angi platform, I just mean in general, right? It's an industry that just lost a lot of participants through COVID and have never really made it back. So stable macro, supply and demand, how does the business respond?
Yeah. So I think, you know, there's a few answers there. First of all, 60% of the requests on the platform are non-discretionary. So, they are not tied to moving homes, upgrading homes, those types of things. It's, "I've got a leak, my sink is broken," etc. That is, obviously, you know, inelastic to, to macro, trends either way or, or fairly inelastic.
On the discretionary piece, we call it a bit of a natural hedge, where when consumer macro wanes, pros need us more, and when, demand increases, pros need us less, but you can sort of sit there in the middle. The worst environment, frankly, was the post-pandemic environment, where demand just blows away supply, and, we can't satisfy it, but also pros are terribly capacity constrained.
Right now, you know, we have obviously taken proactive actions on demand that are reducing it, but we feel like if we had greater demand, we could definitely be able to service it, including on what Joey said, you know, the services segment, which is profitable. We love where that business is now. We can definitely serve greater demand through there, which is also a sign of access to pros and liquidity there. I think the ideal market for Angi, it's a, it's a two-sided platform where supply pays.
So it's, it's sort of one where supply slightly outstrips demand, and then they both grow f rom there. Stable macro, we feel good about. The question we get a lot, we actually got the opposite sides of the questions back to back in two different investor meetings. What happens if there's a terrible recession, and then what happens if the housing market rips back? I think with the natural hedge, we're sort of in the middle. There's play.
There's enough that's endogenous to us, and that we are doing to improve our performance and our customer and pro experience, and that we've seeded to the market through the rebranding on SEO as well as through this, you know, cut to go backwards to go forwards activities earlier this year, that I feel good about our ability to grow and take share in any market once we get the other side of these actions.
Got it. Okay. And then you mentioned the user experience. Just financially, when we think about the investments you've made and are making, because Joey said there's still work to be done in terms of getting the user experience where you want. How should we think about that going forward in terms of kind of the run rate of what you're spending from a product standpoint?
Yeah, I would not think about that as a financial investment. There's not, you know, we have the people, i f anything, we've been making our product and tech operations more efficient, whether it's improvements in OpEx or reduction to capitalized software. But I wouldn't think about improvement of the consumer experience and the product as requiring incremental dollars. There are versions of the sort of experience of the future that the team is testing and trialing, continuing to optimize. It's, you know, the advantages of a digital product that you can A/B test and run, but there, that's not a cost outlay or incremental cost outlay. That's a get it right activity.
Got it. Okay. And then just on the buyback, you talked about the 14 million shares. Maybe just talk about any limitations you have related to that or how you think about that.
I think, I mean, the biggest limitation is there's just the lower average daily trading volumes in the stock. So, both, you know, statutory and also reasonable person limits you'd have in terms of the % of the trailing float and daily purchase, there's just not a lot of stock that trades. So, we'll have. We said we'd have, you know, value and percentage of volume limitations in the plan. But, you know, we'll just chug along a nd plan is to chug along and buy as makes sense.
Got it.
Yeah.
And then moving to Dotdash, maybe just talk about, you know, the ad environment. I think it's pretty well known. It's been a little bit more challenging lately. You know, again, the question always being, how much of the business is just, for better or worse, susceptible to that? And then what are the things that you can control as you think about growing into next year?
Yeah, I'd say the ad market has been in some sort of kind of form of recession since mid-May 2022, and in our estimate, when Target and Walmart came out and had terrible earnings and I think dropped 18% and 25% respectively. But if you look at that overall, it's not a monolith of what's happened in that period. It's actually been a series of different sectoral declines, as clearly, retail and home froze up at that point. Later on, CPG and food got hit hard by inflation and supply chain and pulled back on spending. Last December, you know, pretty much all ad digital advertising froze, both premium and programmatic.
And then, you know, more recently, media and telecom have really frozen due to a variety of factors, and entertainment got hit by both streaming pressures as well as the strikes. And then things come back, and retail came back, and, you know, we're bouncing along.
September was pretty good, and we felt, you know, you definitely see the momentum curve to what were pretty easy comps in the second half of November and December. October, and this is widely stated, you know, through earnings across the market, October froze up a bit. You could see, you know, people pushing pause on premium campaigns and some rapid programmatic CPM softening. And then, you know, since early November, it's been solid again. And y ou're in a massive period for digital advertising in the over the next four weeks.
But it, you know, it's. We've said November's been solid, and it keeps chugging. Relative to our monetization and revenue trends, first is traffic, which we disclosed the new metric around sessions this quarter, and it's how to think about the sessions are, you know, visits and engagement on the platform. We broke out core from non-core because core is growing rapidly. We said core was 67% of sessions, third quarter of 2022. It's now 79% of sessions this past quarter, and will just keep rising.
You've got some things in non-core, you know, legacy sites, as well as third-party sites that are diminishing rapidly. We expect traffic to be a tailwind. It's a credit to the Dotdash team of what they're doing with the Meredith sites and the room to run on those brands. Core was up 5% in the quarter, and that was with people in our entertainment sites pulling it down with the strikes in place on traffic. So, we expect to be in a good spot on traffic. On monetization per session, that's really premium and programmatic, and then e-commerce and performance marketing.
Premium, you know, we'll continue to work hard, and we feel good about what we're offering. We just need some stability in the ad market and some confidence in brands. Programmatic, we feel we think we're outperforming the market in terms of CPM increases, but we should be, because we've demonetized the Meredith sites that were, you know, had too much ad load, so viewability goes up, performance goes up, and CPM goes up. But that'll be, that should be a tailwind. And then, performance marketing's been great.
That was a core thesis of buying Meredith, was optimizing what they do on e-commerce. We've gone, you know, 0 +12, +22 in terms of year-over-year performance marketing, and that's with finance being a real drag. And we wanna keep that going.
Got it. Okay. And then last question, and we've got a few lightning rounds for you. We call it the. What is it? Trader view, less than 13-word answers.
Okay.
Just marginal profitability on the whole business, and maybe if you wanna unpack Angi from the rest of it, or Dotdash, or what have you. But just as we think about growth, what should the business be dropping in terms of incremental margins?
Yeah, Angi, we can continue to improve margins. We do not expect to go backwards in profitability from where we are right now. If anything, you know, we view more margin opportunity on that business. Even, that's even with declining, you know, revenues. Dotdash, we've said we expect 80%+ incremental Adjusted EBITDA margins. If you look at the last two quarters, it's north of that. That should continue for a bit. The cost structure is very efficient. We don't need to add much to the cost structure, and we survived a lot of the worst of the labor market and those activities.
Eventually, it'll normalize in the 60% incremental margins, but we've got some room to run on that. Care, you know, we don't disclose margins, but good gross margins, good, you know, Adjusted EBITDA. We'll break that out likely as a segment at some point when it's ready. And, you know, then we've got our smaller companies.
Got it. Okay. And then, all right, lightning round.
Sure.
So under 13-word answers, if you can. I know this is hard. So everybody saved money on cloud in the last year, generally speaking. You know, the vendors were coming to companies and saying: Hey, let's figure out how we can help you save. Is that over, or are there still opportunities for those types of savings in 2024? And I'm not even asking necessarily, you know. Chris, Chris, the CFO here, but just what are your thoughts on that?
I think there will be opportunities, as there are. You know, the big three attack each other and try to take share.
Got it. And then just a quick one on GenAI. We didn't talk about GenAI. You knew we had to. Most interesting use case, like actual practical use case for GenAI, that not enough people are talking about.
I would say Tier 1 customer service. I think that is like gonna be for consumers, going to the ATM rather than going to the bank teller.
Got it.
And never go back.
Okay. Then I'm asking you to put your Chris CFO hat back on now.
Okay.
It's off, it's on. Hardest decision you have to make with the business in the next three years?
Next three years? Yeah, too early to tell. I think we will continue. This is gonna be more than 13 seconds.
That's all right.
IAC has been, I think, very good in predating me at figuring out how to extract value from our portfolio. It's been an operational period, but, over those three years, we will definitely not want to sit still on figuring out how to drive value out of the pieces.
Got it. Cool. I think we're out of time. Chris, thanks for being here.
Thank you for having me.
Really appreciate it. Good to see you.