IAC/InterActiveCorp (NASDAQ:IACI) makes up the largest position in my portfolio, so I was very interested in what the company had to say at a recent Bear Stearns media conference. Although for the most part the conference was business as usual, with no major fireworks or red flags, the company did offer some interesting statistics and comments on its cornucopia of businesses.
Quick snapshot
The company behind operations such as the Home Shopping Network, Match.com, Ticketmaster.com, Lendingtree.com, and a host of other sites is like a Jackson Pollock painting. Some people think it's an incredible and eclectic display of chaotic synergy, while others think it looks as though a child randomly pieced it together. Either way, it's clear that IAC's tentacles now reach into most crevices of the Internet. The company, in totality, is the sixth-largest property on the Web, and IAC says that one-third of the entire U.S. population visits one of its sites at least every month.
Some of the major players
One of the key pieces to the IAC puzzle is Ask.com. Management believes that the search engine will help tie its other properties, including Citysearch, Ticketmaster, and RealEstate.com, together. Since buying Ask 18 months ago, IAC also believes it has made strong headway with the frequent search-engine user, although it still hasn't gained traction with the casual searcher, who is more likely to use Google (NASDAQ:GOOG) or Yahoo! (NASDAQ:YHOO) for search.
Meanwhile, the Home Shopping Network division was a drag in 2006 -- a drag that will continue for a bit. However, management has been revamped, and the company believes it's proper execution, rather than structural problems, that needs to be addressed to get things back on track here.
IAC also touched a bit on Ticketmaster, which has been the company's biggest growth engine. Ticketmaster has a significant competitive advantage thanks to network effects. According to IAC's CFO, Tom McInerney, Ticketmaster won 97% of its client opportunities in 2006 and also signed or renewed more than 1,100 clients, versus only three dozen or so lost clients. It also regained some formerly lost clients.
On the other hand, IAC needs to catch up in the ticket auction resale segment, where it competes fiercely for market share with veterans such as Stubhub.com. This area remains a work in progress, although IAC believes it's starting to gain traction. In addition, the international markets remain ripe for Ticketmaster, and the 2008 Beijing Olympics will mark Ticketmaster's entry into China.
A slow market continues to hurt LendingTree. Customer-acquisition costs increased because of the mortgage and housing slump, causing IAC to realign its cost structure. However, ServiceMagic and Match.com have fared much better, with ServiceMagic capturing a unique service niche with strong top-line and bottom-line growth. In terms of Match.com, IAC believes that online dating has great potential. Current market penetration is only 10% of the potential singles market in the U.S., and IAC believes that its one-third market share should grow as the market expands.
I think the growth potential for online dating is big. It's a much more efficient way of getting a date than, for example, heading to a club or going on a blind date. If you're at a club, going up to a desired person usually involves goading from friends or perhaps a round of tequila, and the ordeal often ends in face-to-face rejection. But online, if you like or don't like someone, you simply click a few times ... voila, done deal. The only problem with online dating is that for certain generations, it still carries a stigma, but I believe that will slowly vanish over time.
The Foolish bottom line
I believe that IAC gets little credit for being cash flow-oriented. Because IAC is a conglomerate of about 60 different companies, mostly via acquisition, I understand the perception that it's an undisciplined capital allocator. However, I believe this company is run to maximize long-term cash flow and was built with a vision of synergy and of digging a substantial economic moat. In 2006, IAC produced $814 million in operating cash flow and spent slightly less than $1 billion on share buybacks (leaving the company with about $1.1 billion in net cash), so I'm a believer that the company has a watchful eye on its return on invested capital.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He owns shares of IAC/InterActiveCorp. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.
