People Inc Q2 FY2023 Earnings Call

Welcome to the IAC and Angi Second Quarter 2023 Earnings Conference Call. After today’s opening remarks, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Christopher Halpin, Executive Vice President, CFO and COO of IAC. Please go ahead.

Thank you, and good morning, everyone. Christopher Halpin here, and welcome to the IAC and Angi Inc. Second 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. I will shortly turn the call over to Joey to make a few brief introductory remarks, and we'll then 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 second quarter earnings releases and our respective filings with the SEC. We'll 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 earnings releases, the IAC shareholder letter, our public filings with the SEC and again, to the Investor Relations section of our respective websites for all comparable GAAP measures and full reconciliations for all material non-GAAP measures. Now I will turn it over to Joey.

Thanks, Chris. I appreciate everyone taking the time with us this morning and appreciate all the people across IAC companies who are working hard for our customers. I want to share part of a note I shared with employees yesterday, which I think is relevant to some of the decisions we made in Q2. We win by building exceptional differentiated products that take the hard work off our customers' plates. We do it so they don't have to. Angi does the work to find the right pro to fix your garbage disposal while doing the work to help that pro grow his business. Dotdash Meredith does the research so you can choose the right product, plan the right trip or make a great meal. Dotdash Meredith also does the work to help advertisers find the right customers. That's what D/Cipher is. Care does the work to help families find caregivers and caregivers find jobs. Vivian does the work so burned-out clinicians can discover their dream opportunity and does the work for hospitals to get clinicians helping patients faster. The better, more efficient, and seamless we are at doing the heavy lifting across IAC, the more time we can give back to our customers, and the more they appreciate and depend on us. But every day, every quarter, every year, we have to set the bar higher for ourselves, and we have to constantly do a better job for our customers. That's what this past quarter was about, and that's how we win. Let's go to questions. Operator, first question?

Our first question comes from Cory Carpenter with JPMorgan.

On Angi, could you expand on what drove the larger-than-expected revenue decline in 2Q and how this impacts your outlook for the rest of the year? And then secondly, you were a bit less active deploying capital this quarter. How much of that was due to business terms versus other considerations?

Yes. I'll do the second one first quickly, and then I'll go to the first. As you know, we buy back stock periodically, we deploy capital periodically, and we haven't historically, and aren't likely in the future, to have a consistent pattern on that other than buying shares when we think it's the most attractive use of our cash in the period. We deployed a lot of cash in the first five months of the year, and we thought that was an attractive time to do it. We took a breather these past few months and will continue to evaluate that as we always do on opportunities for deploying our cash, whether it's buying back shares in IAC or Angi or any other opportunities in front of us. On the first question, I've been saying for a while that there were areas where I thought Angi had focused on optimizing for shorter-term revenue over the longer-term health of the business and our customer experience, and that we were going to make changes along those lines. For the past few quarters, we've been doing that. In the second half of this past quarter, we saw a further opportunity to do that, and I made the call to make that change, which I have no doubt was the right call in the business. The impact of that call, which was really restructuring some demand channels, ramping down channels pretty quickly over the course of the quarter. This was revenue in the quarter, and it was also profitable revenue in the quarter. We ramped that down pretty quickly, and the impact of that would be most pronounced in Q2. I think we're already seeing July better from a profit perspective. I think we'll see the benefit of some of the changes we made in Q2 over the coming quarters. So that impact was most pronounced. The substance of it was turning off channels of demand or reducing channels of demand that we thought could deliver the ideal customer experience. In exchange for that, what we're going to drive is longer-term retention of pros and a better homeowner experience on our platform.

Our next question comes from John Blackledge with TD Cowen.

What are you seeing in terms of revenue trends at DDM Digital exiting Q2 and thus far in 3Q? And the performance marketing growth was good to see. How does that momentum play in the back half for DDM Digital rev trajectory? And then just on the margins, what type of cadence could we see in the back half?

Thank you, John. I'll address those questions one at a time. In June, we reached an important milestone in integrating and performing the combined Dotdash and Meredith assets. At the start of the year, we aimed to achieve stable Digital revenues and traffic, and we succeeded in both. We even experienced a 1% growth in Digital revenue in June, driven by strong performance marketing. We managed to stabilize sessions and traffic across the Digital portfolio during June, primarily led by the former Meredith assets. We're optimistic about the migration and growth plans for those assets and will continue to optimize them. We're focused on maintaining momentum for InStyle, although we anticipate inherent volatility in the entertainment category. This positions us well for the second half of the year. In the third quarter, we expect to be around flat, potentially slightly negative. This is due to a mixture of ups and downs, continued growth in many Meredith properties, and stability in certain Dotdash properties. While we saw strong performance during Amazon Prime Day, there were also some softer traffic trends in the entertainment category and with some partner sites. For Q3, we anticipate sequential growth, but year-over-year, we expect revenue to remain flat or slightly decrease, although we foresee a strong performance in Q4. We feel confident about our current position, supported by performance marketing tailwinds which we couldn't fully implement for Meredith properties last holiday season, as well as backing from D/Cipher. Performance marketing was a key aspect of the acquisition, and we are actively integrating Dotdash e-commerce into the best Meredith brands. It was encouraging to see a 12% growth in the quarter, and we are dedicated to further improvements and expect accelerating growth going forward, with many opportunities ahead. Regarding margins, we expect incremental EBITDA margins to be in the 80% range or higher, reflecting our cost structure and the efficiencies we've achieved. You can observe this in the sequential growth of Digital revenue and EBITDA improvements that meet or exceed expectations. We anticipate continued margin improvements both year-over-year and sequentially in Q3. Q4 typically represents a significant period for Dotdash and Meredith, not only for advertising and performance marketing revenues but also for margin scaling, and we're forecasting strong growth in the fourth quarter.

Our next question comes from Eric Sheridan with Goldman Sachs.

Maybe two on Angi, if I could. First, following up on Cory's question from earlier, you really stuck out to us in the letter that you talked about lost revenue and used a phrase like good riddance. Can you talk a little bit about how much of this process of mix shift on revenue is inside your control versus outside your control and where we might be in the evolution of getting the type of revenue you want in the Angi business? And then the second along the same lines, it was interesting to see a paragraph on international and Angi in the letter. Can you talk about some of the key learnings from international? I think you've used the phrase that it's a good leading indicator for the trajectory the U.S. might eventually take, and maybe give us a little bit of color on that trajectory?

Thank you, Eric. When implementing changes at Angi, we prioritized addressing the most straightforward issues first. I can categorize our revenue into three segments. The first segment consists of revenue associated with zero or negative earnings, which is relatively easy to eliminate, particularly if it results in a poor customer experience. We made significant progress on this in Q4 and Q1, particularly by discontinuing managed projects and other unprofitable services. The second segment, where we brought service professionals onto the platform but they weren’t effectively integrated and didn’t cover their sales costs, is also mostly addressed, albeit not entirely. While these professionals generated some revenue, they typically failed to be profitable over their lifetimes due to high turnover. The third segment, where we’re currently seeing some challenges, involves generating revenue and demand that could lead to increased churn among service professionals or homeowners, ultimately affecting long-term customer value. Our focus in the second half of Q2 was to improve this aspect. The core of our decision-making revolves around delivering a stellar and sustainable customer experience that allows for platform growth and increased revenue. We’re closer to achieving a healthier operational state, and while we may still consider adjustments in revenue or demand channels, we've completed the cleanup of negative and zero earnings revenue. We’ve made significant progress in the second and third segments, though some work remains. On the international front, we've been able to experiment with various models with limited external scrutiny. In our primary markets like the U.K., France, Germany, and the Netherlands, we started with different models and technologies, allowing us to learn and select the most effective elements. Our successes in Europe, particularly in improving service professional enrollment and quickly adapting demand channels, provide us with optimism for the future. Additionally, we’ve enhanced the homeowner experience with a double opt-in system, facilitating a mutual selection between homeowners and professionals. We're not certain if we’ll implement this fully in the U.S., but it’s performing well in Europe. Finally, we’re progressing on our integration efforts, having merged three of the four platforms, which will lead to more efficient operations with reduced costs and a more innovative platform.

The only thing I would add is that the second quarter of last year marked a peak for both low-calorie revenues and higher churn rates among professionals. This is evident in the graphs depicting service professional retention; following that period, there were significant drops in retention rates. Additionally, roofing reached its peak revenue in the second quarter last year, and although it is still not at our desired levels, it has significantly affected the overall year-over-year revenue declines for Angi.

Our next question comes from Jason Helfstein with Oppenheimer.

I have a couple of questions. First, just a little more color on Dotdash Meredith. Are you seeing any competition for engagement given the massive increase in short video Reels, TikTok, YouTube shorts, etc.? And then you did kind of talk about your outlook, but maybe go into some detail on categories, what you're seeing in the second quarter and what you're looking at for the third. And second question just on MGM. Obviously, a very timely investment there. I think there were thoughts originally behind it to get exposure to online sports betting and iGaming while obviously participating in the rebound in Vegas. Is there a way to parlay that into a more direct play on online sports betting or iGaming?

I'll go first, and I'll turn it to Chris. Just quickly on the social media side, we compete for attention with any other form of media, and we compete for advertisers with any other form of media. I'm not sure that we could attribute anything that we're seeing directly to things like TikTok or taking share from the content consumption that we drive, the sort of content consumption that we drive. But we compete with all media in that context. On MGM, we have spent quite a bit of time looking at opportunities in this space. We came close on one but have learned a lot in our investment with MGM regarding gaming, gambling, and opportunities there and what's working. I think that's an area that is interesting, but nothing immediately on the horizon there. We continue to be excited about the progress that MGM and BetMGM are making, which is very impressive.

In building on Joey's point, relative to the demographics we have and where we excel, we don’t see losing any traffic to those sites. In fact, they are revenue and lead generation opportunities given that many of these top Meredith brands have limited social media presence. Neil Vogel and team have been very focused on building the social media integrations as a channel for a lot of these brands, also expanding our video presence there. We've got good infrastructure to do it but increasing the short-form and medium-form video that is produced off of our properties for YouTube, TikTok, and Instagram and other channels. We don’t view it as much of a threat and more of an opportunity. Macro-wise, we'd say the market is still soft from a premium demand side in brand, but it is a second derivative positive where if the programmatic market is down 5% to 10% as we said in the letter, that's definitely an improvement over what it looked like in Q1 and parts of Q2. Categories that are strong include retail, beauty and style, travel, and auto, as we said in the letter. Some of that growth is due to straight absolute growth in those categories, and some is due to how soft the second quarter was for them last year, whether it be supply chain or retailer backup. Weakness continues to be seen in finance, which is trying to find its footing in a higher interest rate environment and lapping aggressive comps from a year ago. Telecom shows little spending outside of one or two players, with big players still trying to figure out their positioning. Lastly, we think entertainment and streaming are both categories to watch. Streaming operators are focused on their model going forward and profitability, while entertainment is facing concerns related to strikes, which could lead to reduced advertising and increased churn. In summary, we expect the comps to improve even if absolute strength in the market does not, but it's a step-by-step approach in today's ad market.

Our next question comes from Stephen Ju with Credit Suisse.

So Joey, I had a question on D/Cipher. So guess versus the environment in which we were still using cookies, how do you think advertiser ROIs compare before and after? Wondering if there's an opportunity for you to capture more wallet share as a result of this move? And looking a bit longer term, I think Google has been working to also move to a cookie-less world with an implementation target, I guess, sometime next year. So should we be thinking that this potentially shields you from potential sort of external risk?

Yes. Thanks, Stephen. That's exactly the goal with D/Cipher. Dotdash Meredith has data now that says intent outperforms cookies in a like-to-like comparison. It’s not surprising to us. I mean, we've been an advertiser across billions of dollars across many products, and we see the same trend. Google has historically delivered intent and has outperformed every other channel for us, including demographic-targeted and cookie-targeted channels. Intent is a meaningful signal, and D/Cipher successfully maps intent. We're now proving that for advertisers. The key for us is to get advertisers to give it a try, and then we can improve ROI. Yes, that is also very important right now on the cookie-less platforms like iOS and Google, which they plan to move away from cookies in 2024. So we should be well-positioned for that, and we’re going to keep building the kind of content that drives intent, mapping that content, and proving that content with demonstrating ROI for advertisers.

Okay. And I guess, secondarily on Angi, reading between the lines on the shareholder letter, it sounds like you're looking to play a little more offense in 2024. You've cleaned up and shed some empty calories there. What do you think still needs to be done from a product perspective?

Yes. We talked about a lot of the work we've done on the pro side. Obviously, the work is never done on either side in terms of product. We're very encouraged by the progress we've made on the pro side, improving the pro experience. The most evident progress is in pro retention that we showed in the letter. The second half of the year will focus on the homeowner side, of course. We're looking to launch more innovation from the product experience on the homeowner side over the second half of this year to set us up for offense in 2024. There are a bunch of things we're working on there, but probably the most noteworthy change is something I mentioned last quarter or the quarter before, where we start to surface the directory earlier. This means that homeowners will be able to come to our platform and find and interact with pros more quickly on our platform. We think that has a great opportunity for the pros on our platform. We think that has a great opportunity for homeowners to drive engagement and conversion. What will matter on the homeowner side is similar to what we’ve done on the pro side: driving retention and repeat rates. That's what we're aiming for, and we are working hard to achieve that to establish a healthy platform to drive future growth.

Next question comes from Brad Erickson with RBC Capital Markets.

Just two follow-ups on Angi. Talking a lot about the pros this morning, I guess, and some of the pruning you're doing there. Angi has always had a tough time on fulfillment rates, for example, with the demand that was coming into HomeAdvisor. How do you kind of balance this approach on pros or reconcile it strategically longer-term as you look to have the right SPs but also having enough to support growth? That's the first question. And then second, on Angi Services, where do you stand from a category perspective? Do you feel like you're kind of fully baked in terms of the range of services you offer, or do you still need to bring on new categories that can be a vector of growth over time?

Thanks, Brad. It's a great question and something that we are very focused on. On fulfillment, we've been improving, notwithstanding the lower nominal service professional account. We look at something which is a horrible internal acronym: ZACBR, which stands for zero accept contact or booking rate. This tracks how often we offer no solution. We have been shrinking how often we offer no solution, and that segues into services. One of the offerings is matching with a lead pro or an ad pro. We can offer the opportunity to get projects done through our services platform. Not everyone will convert into services, but offering that can provide significant value and drive up repeat rates. Sometimes customers are looking for pricing, and they can find pricing there. Others may not be ready to make a decision but want to see the options. Providing a fulfilling experience with the opportunity to get a service done can encourage customers to return to our platform. We believe that services holds substantial value and is a competitive advantage. Regarding your second question, we absolutely believe we can continue to expand services. We have scaled back services this year as we initially grew it too quickly, but we see great potential to grow services. Currently, we are focused on service categories we can price accurately remotely and can generate good margins. Expanding from here involves identifying new categories that meet these criteria, which we have candidates for. However, we are not rolling that out this year; that will be a future endeavor.

Our next question comes from Ross Sandler with Barclays.

On Dotdash Meredith, as we look into '24, what are the puts and takes that would allow the business to grow faster or slower than the overall digital ad market? How do we think about that? And then on the SEO impact from these new AI search pages, one of your peers recently stated that SEO traffic to their premium properties, many of which are like Meredith sites, is seeing a nice benefit from changes since earlier this year with SEO traffic increasing a couple of orders of magnitude faster than the baseline. What are you guys seeing? As Google now adds hyperlinks to these new search generative experience pages, what are you expecting to see, if anything, from that SEO downstream traffic?

You can take the first one and I will follow.

In terms of '24 or thinking about the rest of '23, there are three main digital revenue streams: advertising, both premium and programmatic sales; performance marketing, e-commerce; and services execution; and then licensing. There's good reason to project growth for all three going into 2024. On the advertising side, we’ve worked through the toughest pandemic-elevated comps. I feel like we’ve got the sales force structured and unified executing across categories. With D/Cipher, we think we can gain share in both premium and programmatic over time at attractive monetization rates. Performance marketing has moved from strength to strength; we expect it to continue growing and creating more content, more integrations, and fine-tuning them in a better way. There’s no reason it shouldn’t continue to be a strong source of growth moving into '24. Licensing has passed some of its tougher comps, also, and we should see growth there. On the audience side, we expect both the historic Dotdash and Meredith sites to be increasing traffic. I will turn it over to Joey now.

I want to emphasize that those platforms operate within a robust Internet ecosystem, primarily focusing on directing traffic to various areas of the Internet. They have indicated their intention to maintain and even enhance this aspect annually. It's conceivable that they will discover ways to use these tools to increase traffic to other online destinations. This is central to their business model, and there's significant value in the fact that these platforms acknowledge that the technology is currently not fully reliable or accurate. As a result, they may generate snippets or responses that users will seek validation for from brands like ours. We believe these platforms will refer traffic to us for verification, which could be beneficial for us.

Our next question comes from Brian Fitzgerald with Wells Fargo.

We want to ask about the Care leadership change there. Given the new phase of the business and the leadership change, does that imply anything about how you're planning to invest around Care.com?

Yes. Thanks, Brian. I don’t think that changes anything along those lines. Brad is very much focused on continuing the existing strategy, which means executing against Instant Book and getting that product working and fundamentally growing the caregiver and family bases in ways that delight both sides. There is no fundamental shift in the core business strategy nor from IAC's perspective, capital allocation up or down from there.

We like the margins in that business. It scales well as it grows. The incremental gross margins are very solid. We look to drive organic growth. As always with IAC, if there are M&A or inorganic opportunities, we'll pursue them as they arise and make sense.

Our next question comes from Youssef Squali with Truist Securities.

Maybe just a follow-up to Brian's question on Care. Can you talk about how large the transactional book offering is today? And how should we think about that opportunity relative to subscriptions? And at Dotdash, are there any common traits causing some of the titles like Parents, InStyle, Shape to trail in terms of traffic? What are you doing to reverse that?

I don't think we'll disclose a specific breakdown of revenue with Care. I want to correct how you're thinking about it: I actually view transactions as a long-term driver of subscriptions. We can offer users a transaction on booking, but the ultimate goal is to show the value of transactions, the platform, and subscriptions to the product. If we're successful in that, I'd like to see transactions drive more subscriptions and improve retention.

Regarding the properties that we'd characterize as laggards in the Meredith portfolio, each has its own situations. InStyle is a good property that was struggling when we bought it, and has had many empty or low-calorie impressions that were driving clickbait-type activities. Management has looked to clean that out, and are excited by the new editor we've brought on there, just repositioning it. We feel good about InStyle, but it's currently behind the curve relative to some of the others, and we believe in its future. Parents is in a family category with high traffic patterns a year ago, but we have an action plan in place to improve it. Shape is a small property, Neil and the team would like to remove it because it's non-core, but we keep it for completeness. Each of them has their unique situations, but we’re optimistic about the opportunities for two of them.

Our next question comes from Brent Thill with Jefferies.

Joey, on Angi, when do you believe it can return to a growth asset? Ultimately, what do you think it will take? What are the pieces required for that recovery?

We said we think we'll get back to growth in 2024. There are several elements to that. The margin aspect is easier. Currently, we’ve generated $55 million of cash flow year-to-date, which is an increase of $110 million per year. I don’t want that to be overlooked amid the narrative around our current situation. However, I assume your question is focused mostly on revenue growth, which is fair, and a focus of ours for 2024. One component of this is SEO, or traffic, regarding audience and top-of-funnel growth. Currently, Angi.com is experiencing healthy growth, while homeadvisor.com is declining. The magnitude of that continues to get better over time. Into 2024, that becomes easier to manage. The other component we’ve discussed is pro retention. We're bringing a pro base into 2024 that is healthier and retaining longer, which will help. The other factor is driving conversion and repeat rate on the homeowner side, a focus for the second half of this year. If we deliver on all the initiatives we're working on, that could lead to revenue growth. Finally, the services aspect offers meaningful competitive differentiation, plus a product with high customer satisfaction and repeat rate. We have to find ways to drive more demand into that product because it does lack visibility right now. If we succeed in doing that, it could significantly influence future growth.

Our next question comes from Ygal Arounian with Citigroup.

I want to go back to the gen AI question for a second. Two points on that. First, in terms of content creation, are you guys utilizing generative AI? Has it been beneficial at all? What are your thoughts around that? Following up on the search and LLM training piece, there’s been much discussion about pushback from publishers and media lines regarding how they use your content or publisher content to inform their AI. Any thoughts on that and how you're approaching that?

Sure. I'll start, and Chris can add. We’re using generative AI in many places across all our businesses. Specifically, at Dotdash Meredith, we're doing things that are back-office related with generative AI, such as content briefs. In that area, we're starting to put together outlines to streamline our production process and have begun to see increased productivity from doing so. We're experimenting with user personalization, which has been a historical strength for us at the top of the funnel, providing answers to users’ questions. However, we haven't been as successful in retaining them and navigating them through the platform. We believe generative AI can help by identifying related questions and utilizing our content to effectively answer those questions. We're in the early stages of experimenting with these tactics and are optimistic about their potential. Another area is the ad side where we can customize and infinitely test creatives for our advertisers to discover better ad copy and find better targeting. That is another area we’re excited about. Regarding the LLM training piece, we have a clear position on this issue. Ultimately, this will be resolved with some approach, but fair use is a standard we recognize. We differ in our interpretation of fair use compared to those who develop LLMs. We believe that our content cannot be repurposed for the commercial use we rely on by others freely. We will protect our intellectual property rights in this regard. I do think productive conversations are taking place within the ecosystem, as it’s clear that if those who develop LLMs remove the economic incentive for content, it won’t be a sustainable model for anyone.

Thanks, Joey. The only thing I’d add is that we’re currently having a two-day AI summit with our CTOs. With the varied collection of companies we have, it is interesting to see how diverse the applications are. As noted, we’re applying generative AI in areas such as application development, customer service, and onboarding functions, helping enhance engagement with potential customers or clients. We see applications that enable better access to the depth of our databases. Additionally, many of our businesses have utilized AI and machine learning for years, and that capability continues to evolve as generative AI opens up further applications and intentions across advertising and content development. Having the opportunity to identify productivity enhancements alongside some potential deflationary cost impacts to businesses will be essential. This trend is continuously evolving, and it's exciting to see how different applications will be integrated across our companies.

Our next question comes from Tom Champion with Piper Sandler.

Joey, on Angi, how important is getting SPs back to growth? It was flattish sequentially this quarter. It sounds like better retention, but how are you thinking about the gross add side of the equation?

We're definitely going to need to get gross adds going at some point. It hasn't been our focus recently. However, ultimately, we need gross adds too. The services area dealt with many challenges, leading to substantial losses. A lot is going through the service professionals’ math, and we still value dollar value more important than nominal count. Still, we need nominal count to grow as well. I believe it’s achievable in 2024, likely more toward late 2024.

Our last question comes from Kunal Madhukar with UBS.

A couple, if I could. One housekeeping item based on the Q and the shares reported, you had about 85 million and change in the number of shares. But in the press release, the shares outstanding as of August 4 was around 82-point something. Have you bought back more shares since the quarter ended? That's the housekeeping one. And then one on gen AI: in trying to understand how big and competitive content will be kind of shaped as the AI develops; they may not need to learn from multiple different sites. If they choose a specific partner, a couple of partners to learn from and pay for the copyright and for the learning experience, where does that position your properties in that larger framework?

I can answer both, and Joey can add. The delta in share counts is related to the shares associated with the CEO grant to Joey, which are not counted because of performance triggers associated with those shares. That accounts for the difference between the 85 million and the 82 million. Concerning your second question, there is an inherent philosophical question about having the best content online versus a subset of content from those who are learning and developing models. One crucial element of search and the Internet has been efficiently identifying the best content and providing it rapidly to users. If only some content is selected to train these models, it will lead to inferior output with a narrower knowledge base, leading to a potential increased risk of inaccuracies. This could reverse many positive developments in the dissemination of information. Thank you, operator. Thank you all for the questions, and have a good day.

Thanks, everybody. So long.

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