InterActiveCorp (IACI) is a global media and Internet information provider with over 50 Internet businesses focused in the core areas of search, applications, online dating and media. It is the seventh largest site network in the world with website visits of more than 1.1 billion every month and 100 million plus mobile applications downloaded. The company reports revenue under five segments:
? Search and Applications: Under this segment, it owns websites including Ask.com, Dictionary.com and the recently acquired About.com. This segment contributes more than 50% to the total revenue of the company.
? Match: The match segment deals with dating and personals websites including Match.com for pairing couples all around the world. It contributes approximately 25% to the total revenue of InterActiveCorp.
? Local: Websites like HomeAdvisor.com and CityGrid.com help homeowners to meet contractors that belong to this segment. It contributes around 10% to the total revenue for the company.
? Media: Contributing more than 5%, this segment owns websites like Vimeo.com, which is one of the competitors to Vevo.com and Google's (GOOG) YouTube.
? Other: The segment has websites like ''Shoebuy.com'' and the newly acquired ''Tutor.com'' under its portfolio that contributes around 10% to the company's revenue.
Revenue is also generated through advertising, distribution fees, subscription fees, listing fees and direct sales of goods and services.
Let's find out what revenue generating opportunities the company is creating in its wide business segments and huge operating portfolio.
Policy changes affecting revenue
The share price for InterActiveCorp plunged to $39.43 per share on Jan 24, 2013, after reaching a high of $55 per share on Oct 16, 2012. This 28% downside in the span of three months was observed due to impact of changes in Google's advertising policies on InterActiveCorp's search engine ''Ask.com'' and search toolbar "Mindspark."
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Source: Yahoo! Finance
InterActiveCorp signed an agreement with Google in 2007 for $3.5 billion for five years; this deal was renewed in 2011 for another five years. Under the agreement Google distributes ''AdWords ads'' and other services to all InterActiveCorp's network sites. But in September 2012, Google made 60 amendments in advertising policies. Major changes included amendments in AdWords and software policies. The effects of the same are explained below:
? Amendments in the AdWords policy were related to changes in the trademark keywords due to customer complaints about the trademarks used as AdWords. These amendments directly affected Ask.com, which is in the search arbitrage business with Google. In a search arbitrage business, when a user searches on Google paid ads from Ask.com are displayed among the search results. Clicking on these ads redirects the user to another search result page on Ask.com. InterActiveCorp purchases keywords at a cheaper cost per click, or CPCs, from Google's AdWords auction and sells them to its advertisers for a higher price that results in revenue for the company. The changes in the AdWords policy mainly affected the CPC rate, which was lowered due to removal of trademark keywords.
? The downside was also due to the amendments in the software policies directly affecting the company's search toolbar ''Mindspark." This toolbar is compatible with users who have security against infectious websites and advertisements. With the help of Mindspark, when users conduct searches, they receive organic results and ads from the back-end by Google. However, customers were complaining about toolbars being automatically installed on their computers, which resulted in the need for uninstallation.
These Google policy amendments affected InterActiveCorp's revenue and ultimately its share price. In the first quarter of 2013, the search business reported $397.1 million compared to $403.6 million in the fourth quarter of 2012. Going forward, the company is expecting the CPCs to return to a normal level and the toolbars to comply with the policy changes. The search segment of the company accounts for more than 50% total revenue. The majority of the segment's revenue comes from Ask.com and more than 90% of it comes from Google display ads that appear on Ask.com. Based on the changes, the management expects the search segment to generate $1.7 billion in fiscal year 2013, which was $1.4 billion in fiscal year 2012.
The company will observe a rebound of the stock and regain the confidence of investors. With estimated EBITDA of $493 million for the current year, an enterprise value of $5.02 billion, and current EV/EBITDA multiple of 5.6 times, the share price will reach $57.02 by the end of this year compared to $47.59 traded on July 5, 2013.
Consistency in dividend distribution
InterActiveCorp has been consistent in declaring dividends to its shareholders, reflecting stability in the business. Despite the drop in revenue due to the Google advertising policy changes, the company declared a quarterly dividend of $0.24 per share during the first quarter of 2013, which it paid to stockholders on March 1, 2013. This was possible due to the free cash flow it generated during the quarter amounting to $37.3 million compared to $-12.39 million in the previous quarter. Moreover, in May 2013, InterActiveCorp declared a quarterly cash dividend of $0.24 per share, which was paid on June 1, 2013.
Ex-Dividend Date | Cash Amount |
5/13/2013 | $0.24 |
2/13/2013 | $0.24 |
11/13/2012 | $0.24 |
8/13/2012 | $0.24 |
5/11/2012 | $0.12 |
2/13/2012 | $0.12 |
11/10/2011 | $0.12 |
Taking the dividend distribution history shown in the table above into consideration, InterActiveCorp has paid a dividend in every quarter since the last quarter of 2011. The doubling of a paid dividend from the third quarter of 2012 onwards signifies the consistency the company has been showing the past two years. I assume it will continue with the trend based on the performance of its business segments, which will generate additional cash flow. It is estimated that it will generate free cash flow of $326 million in fiscal year 2013 and $365 million in fiscal year 2014.
Share repurchase
InterActiveCorp is among the top 372 companies in the Internet content and information industry to repurchase a high number of stocks. In the first quarter of 2013, it repurchased 1.4 million shares at an average price of $42.96 per share with a total amount of $60.1 million. The company has 1.7 million shares remaining under its repurchase plan. The management recently announced that it will further repurchase additional 10 million shares.
Q1 2012 | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 | |
Shares Repurchased | 4.9 million | 2.9 million | 1.3 million | 6.4 million | 1.4 million |
Average Purchase Price | $45.50 | $47.53 | $47.12 | $45.69 | $42.96 |
InterActiveCorp has repurchased 15.5 million shares during last year as shown in the table above. In case it repurchases the remaining 1.7 million and an additional 10 million shares during this year, it will only have 71.9 million shares outstanding by the end of the year. The shares outstanding as of March 2013 stood at 83.6 million. Taking into consideration the expected net earnings of $246 million in fiscal year 2013. The EPS of the company will reach $3.45 in fiscal year 2013 compared to $2.77 in the previous fiscal year.
Strong merger and acquisition strategy
InterActiveCorp has acquired more than six companies from the Internet industry including Expedia and TripAdvisor since its inception. In January 2013, it acquired ''Tutor.com," an online service that pairs students with educational professionals who offer additional guidance to students. Tutor.com has paired more than 3,000 education professionals with students. Approximately 90 percent of Tutor.com's revenue is generated from contracts with institutions like schools, universities and libraries.
Tutor.com will be included in the company's media segment, where it owns websites including ''Vimeo.com." InterActiveCorp will revamp the site's user interface and will increase marketing activities. It will use its expertise from websites like Match.com, which pairs couples, and ''HomeAdvisor.com," which pairs homeowners to contractors. The company is expecting to reach millions of education professionals and students based on the increased marketing activities and expertise in the field of pairing. The company's media segment reported $164 million in revenue in fiscal year 2012 and this acquisition will aid the company in generating $211 million in revenue for fiscal year 2013.
Before the acquisition of Tutor.com, in August 2012, InterActiveCorp acquired The About Group from The New York Times Company (NYT) for $300 million. The About Group owns websites including ''About.com'' and operates nearly 90,000 topics with more than 3 million unique articles. 100 million unique users visit About.com every month, reflecting the popularity of the website. The New York Times Company reported an operating loss of $143.6 million in the second quarter of 2012. One of the reasons for the loss was an 8.7% drop in revenue, to $25 million, from About.com. This drop was due to a decrease in the number of users in the U.S. visiting the website which declined by 16.4%, to 52.3 million, from January 2012 to June 2012.
InterActiveCorp has merged the About Group with its Ask.com search engine. With the vast number of topics and unique articles, Ask.com gained access to additional topics and now has an added advantage over its peers. Ask.com's expertise in search technology has enhanced the ''discoverability'' of existing content on About.com, due to which InterActiveCorp has observed an increase in number of unique visitors. In contrast to the losses, The About Group contributed $61.4 million in the first quarter of 2013 and the last quarter of 2012. This allowed the search and application segment to collectively generate $800 million in the past two quarters. Looking at the future prospect of this deal, I think the company will accelerate marketing activities to increase the number of unique visitors and advertisers. This will also support InterActiveCorp's search and application segment to generate $1.7 billion in fiscal 2013 compared to $1.4 billion in fiscal year 2012.
Conclusion
I believe InterActiveCorp has a strong base to make investors happy in the upcoming years. Its various initiatives and very strong merger and acquisition strategies will support revenue growth. The strong performance of its business segments will help it to generate cash flow that will allow the company to maintain its dividend distribution and share repurchase ability.
Google's policy changes have affected its market price and revenue, but I forecast that it will recover quickly from this downside this year. This will suppress the concerns investors and shareholders had in regard to the policy changes. The company's efforts to become compliant with the amendments to the policy will regain the confidence of consumers and advertisers.
Therefore, I recommend a buy on this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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