Angi Inc. Q4 FY2022 Earnings Call

Thank you. Good morning, everyone. Christopher Halpin here. And welcome to the IAC and Angi, Inc. fourth quarter earnings call. Joining me today is Joey Levin, CEO of IAC and CEO and Chairman of Angi, Inc. Similar to last quarter, supplemental to our quarterly earnings releases, IAC has also published its quarterly shareholder letter, which is currently available on the investor relations section of IAC's website. We will not be reading the shareholder letter on this call. In addition, Angi has published an earnings deck this quarter, which is currently available on the investor relations section of both IAC and Angi's respective websites. I will shortly turn the call over to Joey to make a few very brief introductory remarks and then walk through Angi's earnings deck. We will open it up to Q&A. Before we get to that, I'd like to remind you that, during this presentation, we may discuss our outlook and future performance. These forward-looking statements typically may be preceded by words such as we expect, we believe, we anticipate or similar statements. These forward-looking views are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in IAC's and Angi, Inc.'s fourth quarter releases and our respective filings with the SEC. We will also discuss certain non-GAAP measures, which, as a reminder, include adjusted EBITDA, which we'll refer to today as EBITDA for simplicity during the call. I'll also refer you to our releases, the IAC shareholder letter, the Angi deck, and again to the Investor Relations section of our respective websites for all our comparable GAAP measures and full reconciliations for our material non-GAAP measures. Now, let’s jump right into it. I will turn it over to Joey who will walk through the Angi earnings deck.

Thank you, Chris, and also congratulations, Chris, on the new responsibilities. Hopefully, everyone saw, Chris has the new responsibility of transitioning from Chief Operating Officer to Chief Financial Officer, an incredible addition to the team since he’s been here and we’re excited about the new responsibilities. We changed up the format a little bit here to walk through this Angi deck. So, hopefully, everyone has access to the deck in front of them and I'll take you through page by page. What we wanted to accomplish here is, give you a sense of how things are going there and where the focus is since I have moved over to Angi a few months ago, to my responsibility. So, I'm going to start with Page 3 here, past the title page and past the Safe Harbor statement. We're on Page 3, which is, I think the most important slide we have. What you see here is the importance of One Angi. This gets to our history, how we got here, and what we offer to our customers. And our customers are both the consumers and the service professionals. We've been in this business now for over 20 years. Starting with Angi's List, which was a directory that provided the consumer with all the information on service professionals in a category, along with the ratings and reviews as a trusted source for that information. We also had a home advisor which matched homeowners with service professionals based exactly on what the homeowner wanted to get done and what the service professional was capable of doing. Then we added Handy, which allowed a homeowner to book and pay for a job online and let the platform do the rest of the work. That is the collection of work or the collection of things that a homeowner could do in the life cycle of trying to get a job done for their home. And now that’s all available in one platform. Also, it’s all available in one brand called Angi and one product called Angi. The same is true on the Service Professionals side. Service Professionals, we've learned, want to engage with our platform and homeowners in different ways. Some just want an online presence that we help them manage where they can manage their ratings and reviews, pay a fixed price per year, and just get a steady flow of customers without variability. That's historically the Angi's List product and now that's a fixed annual contract product. There are also pros who say, I only want to pay for a very specific job and a very specific kind of customer. That was historically the home advisor product and they can do that variable no commitment product now with Angi. Then there are those who may not be great at selling or aren't really interested in selling. They just want to do jobs, and that's the historical Handy product, also now available at Angi, where they can get fully paid for fully scoped jobs. We schedule it, we book it, they just show up and get the job done. No one else offers that full suite of products. The ability for a homeowner to do all those things in one place, and a service professional to buy all those products in one place, is a very unique and special offering, and that’s what One Angi does and is going to do going forward. If I turn to the next page, you can see that this collection of offerings makes us the biggest in the category by a pretty wide margin. It’s not just our revenue where we're the biggest, which is shown on this page; it's also in brand awareness even with the new brand. Our brand is much better recognized than any other pure play brand in the category, and that's a real asset that we have. That scale in revenue is also really important to the customer experience. Liquidity is the most important thing in this category. When I say liquidity, I mean the ability for a homeowner to find a pro likely to be able to complete the job. It means for a pro to find homeowners who can fill their book of business. That liquidity is essential to engagement on the platform, and the scale of revenue is evidence of that. It’s also crucial for innovation. Having this much revenue allows us and this much scale with homeowners and service professionals to innovate and experiment with new products. You saw us do a lot of that in 2022. Not all that experimentation works, but we are constantly innovating here, and having such a large surface area for innovation is also a real asset. If I go to Page 5, I just want to show you how we are organized now. We're doing this to show clarity on how the business works, clarity on where we're investing, and also indicative of how we manage the business. You can see here that ads and leads is, I'm going to focus on two segments here primarily: ads and leads and services. Ads and leads make up a vast majority of the revenue and more than all of the profit. That's a great business with great potential, which we'll get into. The second piece is to focus on services. While shown here on a net basis, which is comparable to the ads and leads business, it's a smaller portion of the business, but a very important part of the business and future. We invested a tremendous amount in that business over the course of 2022 and prior to 2022. We are now past the peak investment but will still invest a little bit in that product and deliver what we think is a compelling customer experience. The fundamental difference between ads and leads and services is on the ads and leads side, the service professionals pay us to find customers. On the services side, we pay the service professionals. We find the customers, we collect the money from the customers, and then we pay the service professionals to get the jobs done. Again, some pros want the ads and leads products, some want the services product. We want all of them to be able to work on our platform. If I go through the rest quickly, you see Roofing was a substantial investment in 2022. We really lost an embarrassing amount of money in Roofing last year that will not continue. We've made that business profitable now and we expect that to be profitable going forward. Corporate is our overhead that will be an expense area for the indefinite future, not quite as much as we spent in 2022, but there is corporate overhead in that business. I'll only briefly touch on international to say that it continues to provide real option value for us. It’s too small to matter today, but we do have a leader in each of the countries that we’re in. We've been consistently moving that onto a common platform and getting efficiency out of that business. That gets us to total Angi earnings. I'll now go to the next slide, Slide 6, to focus on ads and leads for a moment. Ads and leads is a profitable business and we think it continues to have real upside. You can see in 2021, the business was declining as a result of the rebrand where we lost a lot of free traffic, audience, and marketing efficiency. We’ve gotten back to growth over the course of 2022 and expect to continue growing. A big impact in that business during the pandemic was a significant demand disruption. If you're selling ads and leads meaning you're helping service professionals find new customers when there’s a reduction in service professionals due to the pandemic while you have an increase in homeowners looking for work to get done, selling advertising is not the best place to be. But we're now past that, and the supply and demand has come more into balance. The growth trajectory in profit for this business looks promising, and we expect that to continue as we drive marketing and other efficiencies through this business. Switching to services on Page 7, we really experienced the opposite in demand as we absorbed incremental homeowner demand with price and found service professionals to get the job done. We grew this business through tremendous investment and significant exposure on the site. You see that 2021 was exceptional growth that continued in 2022. There are a few changes that we're making to this business that will change this growth trajectory. We’re moving out of the complex services. In our services business, we have lower average order value services, which will continue and operate as a nice profitable business, and we've been struggling to generate profit in the more complex services. We’ve moved out of that business. You can see on the right side, profit; we started to pull back on some investments towards the end of 2022, and most of that will come out in 2023. Q4 was an anomaly with some one-time expenses, but you can see that the losses in this area have been carrying over the course of the second half of the year. Now going to Page 8, the question we ask ourselves internally and externally is, why engage in the services business? Is this a good business? Is it important to the future? The answer is yes, absolutely essential for the future. Here's why. Starting on the left side of the page, 100% of services going forward will be priced online. That is what a homeowner wants. When homeowners begin their search, they want to know how much it will cost. With our services that we are now focused on and the categories we focus on, all the prices can be available online. The repeat rate is also crucial. We see a 2x repeat rate in services, being able to drive customers into this experience indicates that they are satisfied because they return more often. You can see that same thing on the next item, the net promoter score, which is greater than 50. You don't see net promoter scores greater than 50 in this category. We can deliver that when we get a services job done, which reflects in the repeat rate. The last is mobile transition. It's vital for us to drive repeat rates. We see a 5x increase in that mobile transition when delivering services. The other key question is can you deliver all these wonderful things profitably? The answer is yes. Starting with the value per job of $230 in Q4, we can see we have a positive contribution margin. As we exit complex services, while the mix changes, the contribution margin will increase over 2023. Another important aspect is that we're touching millions of customers with this product, scaling this experience is key in delivering this customer experience broadly on Angi. Going to Page 9, we have multiple growth levers in the business and we're trying to frame how we think about upside and growth from here. The changes we've made to the brand had a big impact. We believe it is possible to recover a lot of that value and we’re working towards that. We can improve SEO and increase our SEM profit. There's a reality that some service professionals must try our platform, which does not work for everyone. However, for the service professionals that it does work for, which is about 1 in 4, they stay for a very long time, averaging 4.5 years, currently comprising 60% of the service professionals on our platform. We're focused on making that group of customers happier. As we transition to Page 10, we still have real opportunities for efficiency across the organization. You can see how it has already impacted some of our key metrics. If you look at our reduced headcount in sales, our Q4 headcount was down 21% year-on-year, while transacting service professionals were down 12% year-over-year. We’ve been reducing our spending to get the right service professionals onto the platform. Effectively targeting service professionals who are a better match for our platform increases revenue per transacting service professional year-over-year. Similar opportunities are noted with advertising expenses. Our ad expenses as a percent of our total ads and leads revenue rose to 45% in 2021 due to the rebrand, improving slightly to 44% in 2022. We believe we have real room for improvement to achieve previous efficiencies. Moving to Page 11 on cost savings, we’ve also cut costs throughout, as shown on this page, significantly in the second half of 2022. You’ll see real savings on the cost side throughout 2023, bringing us to Page 12, our outlook from here. I'll take a breath and turn it to Chris and then jump back in.

Thanks, Joey. As you will have seen in the shareholder letter, we have resumed providing annual profitability guidance. On Page 12, you can see our outlook for Angi. Adjusted EBITDA of 60 million to 100 million. I'd note at the high-end of that range that's more than twice 2022 adjusted EBITDA. We also have given the reductions that we've driven in efficiency to drive free cash flow and CapEx. Our CapEx guidance for 2023 is 40 million to 60 million, which again is pretty much down 50% year-over-year. As discussed, we’re also switching to net revenue reporting due to changes in the terms and conditions in agreements with customers. To assist in forecasting the business, we wanted to provide first quarter guidance on revenue of 370 million to 400 million. At the midpoint of that range, with services net, that is basically flat year-over-year. Please refer to the grids and metrics section of our earnings release for good pro forma data that lays out 2021 and 2022 quarterly revenues and financials for Angi on a net revenue basis if services had been presented at net historically. With that, I will turn it back to Joey.

Thank you. Let's go right to questions. Operator?

Yes, sir. Today's first question comes from Jason Helfstein with Oppenheimer. Please proceed.

Thanks. Hey, guys. Good morning. So, Joey, everybody likes sequels because consumers know what they're getting, and studios can usually predict the returns of sequels better than the original. So, I'm not sure what the sequel is now with Angi, kind of reboot number 3 or maybe 4, given this. How are you thinking about the long-term opportunity? It seems like we maybe need to consider a smaller TAM since you're reducing focus on the big services. Just help us think about your long-term revenue and margin opportunity for the newly rebooted Angi. Thanks.

Yes. I could challenge a few things, and I don’t really think this is a reboot of Angi. Let me engage on the TAM first and then come back to the other part. The TAM for Angi remains the same as it has been for quite some time. Some people estimate the U.S. market is 400 billion or 600 billion, but let’s just stick with 400 billion as the home services market, including simple services and all the way to more complex services. We're servicing the more complex services, just not through our services product; we’re doing that through our ads and leads product, which is a phenomenal channel. There’s revenue recognition difference, which is if you stick with the 400 billion. Pick what percentage you think is spent on marketing, some say between 10% and 20%. That's still the area we’re playing in, just booked now as 40 billion to 80 billion instead of the 400 billion. We’re still actively working. The revenue recognition differences can transform our operations, but our aim remains the same. In terms of reboot and where we're going with Angi overall, there is no question we overspent in 2022. There is no question we tried a lot of things, some of which did not work. We shouldn’t take from that lesson to avoid new things; instead, we should be diligent and efficient with our capital. Importantly, I said this in the shareholder letter and have emphasized it internally; while doing this innovation, new things, we cannot lose sight of the basics. We did lose sight of some basics around SEO, SEM, and fundamental cost management, allowing our growth mindset to drift away from efficiency focus. It's feasible to achieve both balance, that’s what we’re striving for now, but 2023 is an adjustment relative to that 2022.

Okay. Just a quick follow-up. If you're not going to build, I mean, the whole reason you were trying to get into the services where you were the general contractor was because you basically thought you could get a better take rate, right? Because when you provide ads and leads, there’s a diminishment because the service provider has to compete to close with other service providers. You agree with that thesis? If the bulk of the business is going to be in ads and leads, do we have to consider a lower conversion rate of that 10% to 20% of advertising over time? Thanks.

No, that's not the case. What initiated our venture into the services business was to drive a better customer experience, to offer homeowners more options to get reputable service providers. In a service professional area with supply and demand imbalance, advertising becomes less effective. What we try to present through services is a platform that enables us to facilitate better experiences. Homeowners, particularly younger ones, prefer doing less work, trusting platforms to deliver fair prices—this scenario leads to improved margins. However, we aim to maintain a compelling customer experience without jeopardizing financial feasibility. Our focus on delivering these experiences is crucial. Long-term, we anticipate this business should yield double-digit growth. In 2023, it may be choppy, but we foresee a return to steady double-digit growth and improved margins thereafter.

Thank you. I wanted to stick with Angi. I had two questions there. First, just hoping you could expand a bit on your expectations around revenue trends beyond Q1 this year, but not long-term. In the nonprofit, you mentioned Roofing has turned profitable. So, I’m hoping you could talk about where else you're expecting leverage to come from in 2023 across the different segments. Thank you.

Yes, sure, Cory. Thank you. We provided guidance of 370 to 400 million in Q1, net revenue with services, and the midpoint would be flat year-over-year. I think it’s fair to assume similar trends for the rest of the year with services on a net basis, but with growth in ads and leads and some declines in aggregate services revenue due to the closure of several complex, money-losing service lines throughout the year. We do expect gross profit to grow mid-single-digits across the overall Angi business this year due to favorable mix between ads and leads and services. As Joey said, we expect a return to consistent net revenue growth in 2024. On the EBITDA front, we anticipate continued scale and margins, driven by cost savings, marketing efficiencies, and fixed cost leverage inherent in ads and leads, which has a high gross margin profile. Meanwhile, when examining segment reporting, we find that our adjusted EBITDA losses from both Services and Roofing in 2022 for various documented reasons should improve. We expect both of those to improve. Joey referenced in the presentation the continued contribution margin scale per job in services that will drive profitability, and we've optimized the Roofing business and executed on post-storm volumes, leading to solid performance. A variety of factors will help improve growth in adjusted EBITDA and reduce CapEx, which will ultimately drive free cash flow.

Great. Thanks. Maybe pivoting over to Dotdash Meredith, two questions. First one, just thoughts on the 2023 revenue and EBITDA trajectory. And then second question, could you discuss the recent traffic trends across some of the key brands I think you highlighted in the letter? And then how traffic should trend as we get through 2023? Thank you.

Sure. Thanks, John. I'll start and then Joey will jump in. I'll blend those two questions probably together as I answer. Obviously, we're disappointed with the declines in the fourth quarter in digital revenue at Dotdash Meredith. I would say in the later portions of the quarter, particularly December, it reflected broader market conditions. We feel positive about where we are through the integration and that our platform is performing well as opposed to the trends we saw in the summer and early fall. To achieve revenue stability, which is our goal, we need both aggregate traffic volumes and ad pricing to stabilize. Aggregate traffic volumes across the portfolio are still down around 5% to 6%, mainly due to weaknesses in several historical Dotdash sites that had large booms during the pandemic, like Investopedia and The Spruce. We feel encouraged about the migrated Meredith sites as detailed in the chart in the shareholder letter. As the year progresses, we expect traffic to stabilize sometime in the second quarter before potentially growing in the second half. This projection is predicated on the continued momentum we’ve seen with migrated Meredith sites, easier comparisons as we move past the pandemic, and general operational improvements. Currently, we are observing the ad market being stable, albeit weak. If you recall, the market first started to decline after Walmart and Target earnings in May and June last year. While it firmed up in the back-to-school interval, it froze in November and December on both the premium/direct and programmatic sides, leading to minimal spend through the end of the year. Since the beginning of the year, the market seems relatively firmer compared to the end of 2022, but it remains below last year’s peaks and we are working against tough comparisons in January and February, especially in categories like health and finance with higher activity during the pandemic. Thus, for the first quarter, we anticipate continued weakness from both the advertising market conditions and tough comparisons. That's going to impact our margins at Dotdash in the first quarter, traditionally the lowest quarter for revenue. However, as we move past the less favorable market and improve our CPMs, we expect to drive performance further in the second half of the year. Overall for the year, we aim for both traffic and revenues to stabilize in the second quarter, experience growth in the latter half, and drive overall growth and profitability through several factors, including our cost actions and recent reorganization which we've put into place.

Hey, guys. One more on Dotdash Meredith and then a quick follow-up on Angi. So, just high level, we've seen all this explosion of new tools like Chat GPT, and Generative AI coming out, and I'm just wondering how that might impact Dotdash Meredith. On one hand, you could potentially produce content much more efficiently in the future. On the other hand, SEO traffic might be negatively affected. So, just could you walk us through how you're thinking about that and overall impact down the road? And then on Angi, there was a stat about service provider retention being 25% after year one. So, kind of surprised it’s that low. How can you improve that SP retention stat? And how does that play into the salesforce efficiency you mentioned?

Sure. Starting with AI, every new technology presents both a threat and an opportunity, and we certainly consider them in both ways. In the context of generative AI and Chat GPT, I’m very glad we did the combination with Meredith. The reason is because brand and trust matter significantly; voice matters. You can ask a bot questions, and it effectively answers those questions, but it lacks a recognizable voice, experience, and supporting brand backing those results. In sectors like taste-making, particularly with food and in travel and home, differentiating content is very important. New trends create exciting opportunities, as there are chances to work on cost improvements in content production. This situation can enhance efficiency at both Dotdash Meredith and even Angi. For example, service professionals can utilize tools to improve profiles and marketing without necessarily needing to engage an agency. That said, we are mindful of the evolving landscape, and we will adapt accordingly. Regarding the service provider retention, I’m not overly concerned because churn primarily happens in the first 30, 60, or 90 days. We understand many factors negatively impact retention in that early window, and we are committed to fixing these. For example, our pricing may not be entirely straightforward, but we are working to enhance transparency and predictability in the pricing structure. Additionally, ensuring we bring the right professionals into our platform is critical. By matching supply, demand, and pricing, we can better align expectations. Improving this aspect can substantially raise retention rates, which is indeed a major focus for us. Certainly, we see higher retention in certain products, reflecting a much better experience. By improving our onboarding processes and simplifying our product offerings, we can ensure our service professionals know what to expect, directly impacting their retention. We believe there’s significant leverage in enhancing retention and we’re focused on that as a key area for improvement.

Thanks, guys. From the Shareholder Letter, the decreased focus on service requests suggests that you may be forfeiting some near term revenue in exchange for improvements in SEM and SEO. Can you discuss expected scale or timing associated with this, and any broader changes to your SEM and SEO strategy?

Sure. I think you're right that we are open to trade-offs. It’s unclear that it will turn into a trade-off, but if it does, we are willing to accept it. The directory experience aids us in servicing customers throughout their journey. Some customers may not be ready to transact immediately and need some research first. The directory or elements of it can help with that stage, allowing us to engage customers and assist them in forming a relationship with us instead of trying to attract transactions from them too quickly. I view that as a long-term positive for lifetime value and revenue retention. Whether it results in an immediate revenue trade-off, we don’t know, but we plan to relaunch this product within this year. This has the potential to meaningfully increase traffic, and if we execute well, that should balance out. Regarding SEO and SEM, we have focused efforts extensively on optimizing these areas. There’s a certain decline we noticed in a specific field; we instructed the SEM team to investigate and find solutions, and they did remarkable work identifying that a tracking pixel issue slowed down page loading times. Fixing that resulted in significant increases in conversion rates. This type of foundational work, while perhaps less glamorous, can produce real results, and I expect to see improvement in our key metrics across the year in SEO and SEM.

Hey, thanks. Good morning. Joey, concerning EMG, you discussed it more in the shareholder letter. If we think about your narrow focus in services, can you talk a little bit more about differentiating that offering? Are there creative ways to win in this more narrowed focus backed by the new TV brand campaign? Is your outlook for both margins and revenue still as aggressive as previous targets?

Yes, it’s a great question. Everything starts with providing a delightful customer experience. What’s happening in services currently is because we’ve directed all our customers through the service request, many never see the opportunities available in the service offerings because they come after the request. We can improve this by showing services products to customers earlier in their journey and matching them to categories where we can execute. Getting customers to try it is pivotal because once they do and complete a task, they tend to be very satisfied and come back more often. By enhancing clarity around the products we offer and not forcing everyone through a singular funnel, we can improve financial performance while delivering a better overall customer experience.

As for Dotdash Meredith, the fundamental belief in long-term profitability remains strong despite the challenges faced in 2022. The acquisition brought significant changes with substantial digital revenue implications. While integration took longer than anticipated, it’s important to remember that the market impacts hit hard post-acquisition. However, as we grow revenue, primarily through e-commerce, we believe it remains highly accretive to our profitability framework. The long-term margins and revenue expectations have not changed, and we remain optimistic about the trajectory.

Thank you. I have a question on Dotdash and maybe a clarification on Angi. On Dotdash, obviously a lot has happened since the acquisition. As you look beyond 2023, should we assume that the digital side will grow in tandem with overall digital advertising? Historically, you made a case for growing faster due to content strength and better exposure. Has that changed? Could you clarify the revenue recognition transition from gross to net? Who is the merchant of record? My understanding is that you’re still receiving payment from the customer and paying the service professional for these less complex services. Doesn’t this imply a need for gross recognition?

Regarding Dotdash Meredith’s long-term growth, we still expect it to grow faster than the digital advertising market. We're in a good position given that all our content is clean, safe, and produced internally, enabling us to monetize effectively without depending on personally identifiable information. The clear intent and performance aspects of our content further affirm our position. As for revenue recognition, we are currently collecting payment from the homeowner and subsequently paying the service professional, but based on the terms and conditions, we’re recognized as not being the principal so on a net basis.

That’s correct. The current classification aligns with the principles laid out concerning how services operate. We facilitate connections and manage the overall experience. However, we formally transition to a net basis based on how service agreements have been structured.

Hey, good morning. Joey, I appreciate the detail around Angi and the work you’ve put in there. It sounds like you’re committed to running the business indefinitely. Just curious to update us on your thoughts there. The letter contains interesting comments about M&A; could you elaborate a bit on those? Any thoughts there would be appreciated.

Sure. We’re not actively searching for a CEO at Angi right now, but that doesn’t imply I intend to be in the role forever. Our goal is to achieve stable growth, upon which we can identify the right leader, either internally or externally. We’re making significant hires to improve operational leverage and also have Chris and others stepping up at the corporate level to cover additional responsibilities. Currently, I’m enjoying the work at Angi, and I think we’re making great strides. Regarding M&A, I’m still spending time considering opportunities for Angi or IAC generally. We’re not in a rush; the pricing environment is where it is, and we aren’t rushing because pricing isn’t going to suddenly move away from us. We see opportunities priced attractively and while some are not interested in transacting, as the market stabilizes, we anticipate a greater willingness to negotiate. Markets are currently volatile, but I believe this environment is conducive to more transactions as previous mindsets shift. Happy Valentine’s Day, everybody. Thanks for spending your morning with us, and we will see you next quarter.

Thanks, everyone.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.