IAC Inc. (NASDAQ:IAC) Q4 2022 Earnings Call Transcript

IAC Inc. (NASDAQ:IAC) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Welcome to the IAC and Angi Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, 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.

Christopher Halpin: 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 brief introductory remarks, and then walk through that Angi 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 press 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 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 hand it over to Joey, and he will walk through the Angi earnings deck.

Joseph Levin: Thank you, Chris. And also congratulations, Chris on the new responsibilities. Hopefully, everyone saw Chris has the new responsibility of Chief Operating Officers Chief Financial Officer, and he’s been 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’ve moved over to Angi, a few were added I should say Angi a few months ago to my responsibility. So I’m going to start with Page 3 here.

That’s the title page and pass 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. Let’s get 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 which gave you the consumer all the information of service professionals in a category and the ratings and reviews and a trusted source for that information. We also had Home Advisor which matched homeowners with service professionals based on exactly what the homeowner wanted to get done and exactly what the service professional was capable of doing.

And 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 that a — or the collection of things that a homeowner could do in the life cycle of trying to get the job done for their home. And now that’s all available on one platform. Now, that’s also all available in one brand called Angi, and one product called Angi. Same is true on the service professional side. Service professionals, we’ve learned why we want to engage with our platform and with homeowners in different ways. Some just want a presence online, that we help them manage, where they can manage their ratings and reviews, and to pay a fixed price per year and just get a steady flow of customers from that, and they don’t want the variability.

And that’s what was historically the Angie’s List product. And now that’s a fixed annual contract product. There’s also the Pros to tell, I only want to pay for a very specific kind of job and a very specific kind of customer that was historically the Home Advisor products. And they can do that variable, no commitment product now with Angi. And then there’s the folks who maybe aren’t great at selling or who aren’t really interested in selling, they just want to do jobs. And that’s the historical Handy products now also 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 that’s what one Angi is going to do going forward. If I turn to the next page, you can see that that collection of things also makes us the biggest in the category, by a pretty wide margin. And it’s not just on revenue, where were the biggest which, 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 pureplay 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. And when I say liquidity, I mean the ability for a homeowner to find a pro who’s likely to be able to get the job done. And I mean for a pro to find homeowners who can tell their book of business.

That liquidity is essential to engagement on the platform. And that’s the scale of revenue is evidence of that. It’s also really important for innovation. To have this much revenue allows us and this much scale with homeowners and service professionals allows us to innovate and experiment with new products, you saw us do a lot of that in 2022. Not all that experimentation works. Not all that innovation 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 both to show clarity on how the business works, clarity on where we’re investing, and also indicative of how we manage the business. So you can see here that ads and leads is I’m going to focus on two segments here primarily ads and leads and services.

You can see here ads and leads is a vast majority of the revenue and more than all the profits. That’s a great business with great potential, which we’ll get into. And the second piece is the focus on services. This 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 it is a very, very important part of the business, a very important part of the customer experience and a very important part of our future. We invested a tremendous amount in that business over the course of 2022 and prior to 2022, we are now past that peak investment, but we are still going to invest a little bit in that product and deliver what we think is a very 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. And 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 job done. Again, some pros want the ads and leads product some of the services product, we want all of them to be able to work on our platform. Then within ads and leads, as I mentioned previously, some service professionals pass on a variable basis, meaning with no commitment per lead and some payouts on a fixed basis with an annual commitment. And again that works — each of those products works for some professionals and not for others but are essential to the overall mix. 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 got 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 to that with this business. And international offsets, I only briefly to say that that continues to provide real option value for us sort of too small to matter today, but we do have a leader in each of the countries that were in. And 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 flip to the next slide now, Slide 6, to focus on ads and leads for a moment.

Ads and leads is a profitable business, and we think continues to have real upside. You can see 2021, the business was declining, that was a result of most significantly, the rebrand where we lost a lot of free traffic and free audience and loss of marketing efficiency. We lapped that we got back to growth over the course of 2022 and expect to be able to continuing to grow. There was also a big impact in that business in the pandemic where we had a significant demand. But if you’re selling ads and leads, meaning you’re offering to help homeowners — or you’re offering to help service professionals, find new customers in a time when there’s a reduction in service professionals because some stopped doing business through the pandemic, and you have a growth in homeowners looking for work to get done.

Selling advertising is not the best place to be. But we’re now also past that. The supply demand has come more into balance. And again, you can see that through the revenue. On the profit, on the right side of the page of adjusted EBITDA, we’re digging our way out from the declines in free traffic. And you can see that growth trajectory in profit on this business looks very nice. And again, we expect that to continue as we drive marketing and other efficiencies through this business. Switching to services, which has now Page 7. We really experienced the opposite and the demand brought in this business in that we could absorb that incremental homeowner demand and — with price and find service professionals to go get the job done. And so that — we also grew this business through tremendous investment and significant exposure on the site.

And so you see, 2021 was really exceptional growth and that continued in 2022. There’s a few changes that we’re making to this business that will change this growth trajectory. One, we’re moving out of the complex services. So in our services business, we had to lower average order value services, which will continue and is a nice profitable business. And we had the more complex services, which we’ve had trouble generating profit in. And it’s hard to touch a lot of consumers in the more complex services business. And so 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 now most of that will come out of in 2023. Q4 was an anomaly with some one time expenses, but you can see that the losses in this area have been faring over the course the second half of the year.

I’m now going to Page 8, where the question that we asked ourselves internally and we certainly gotten externally is why do the services business at all? Is this a good business? Is this important to the future? And again, the answer on services is yes, absolutely essential to the future. And here’s why, starting on the left side of the page. 100% of services now, this is not true in 2022, but going forward 100% of services will be priced online. That is what a homeowner wants. When homeowners begin their search, when they begin to explore whether they want to get a job done, the first question on their mind is how much will it cost. And with the services that we are now focused on in the categories we are now focused on 100% of those can be priced online.

Second thing is repeat rate. And this is a theme for the remaining items on the page. All these metrics are ones where we’ve been trying to move them for years and years on the ads and leads business. And when we deliver the right experience and services, we know we can deliver them in aggregate. And on the on repeat rate, we see a 2x repeat rate in services. That is a phenomenal thing to be able to drive, if we can drive more customers into this experience. That means that they are getting a good experience because they’re coming back more often. And you can see that same thing on the next item, which is the Net Promoter Score greater than 50. You don’t see Net Promoter Score is greater than 50. In this category, we’re able to deliver this when we get a services job done, we are able to deliver that kind of Net Promoter Score.

And again, that shows up back and repeat rates are. And the last is mobile transition. Very important for us in driving repeat rate and driving customer satisfaction in owning the customer experience and bringing the customer back and not having to buy the customer repeatedly. Driving mobile install is very important. And we are seeing a 5x increase in that mobile transition when we deliver services. The next question we get to is okay, but can we deliver all these wonderful things profitably? And the answer to that question is yes, if you look at the right side of the page, in terms of the value per job, starting with a value per job of $230 in Q4, after the variable costs, you can — see we have a positive contribution margin. As we exit complex services, and the mix shift changes that value per job will come down, but actually the contribution margin because of the relative profitability, the contribution margin will come up over the course of 2023.

The other thing that’s important to mention here and relevant to our focus on services here and focusing on the less complex services, the lower average order value, is we are touching here, millions of customers with this product. And in the more complex services, we were touching thousands or tens of thousands of customers. We can touch millions of customers with this product and scaling that is really important 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 sort of how we think about upside and how we think about growth from here. If you focus on the left side, the changes we made to the brand. We’ve talked about a lot had a big impact on the business.

We believe that it is possible to get a lot of that back, and we tried to frame the size of that. On SEO, we could go 75% from here. If we get back to our pre rebrand levels of SEO presence may not be able to get all that back, may be able to get more than all that back, but just in framing it that’s a big upside. In SEM profit, we can close to double from here, if we get back to where we were. I do believe that one more in our graph to accomplish and is just executing on some fundamentals which we’ll get into. And brand awareness. Obviously, the new brand is new. It is a variation on the old brands. So it takes some benefit from historic brands, but we can get back to that. And beyond that, that brand awareness which we previously had, and that flows through and efficiency really to all the tails.

The other thing that really excites me as I dug in deeper and Angi is the right side of the page. I’ll actually go from the bottom up. There’s the reality that a lot of service professionals have to try out our platform and it doesn’t work for everybody. That’s been true forever and will be true forever. But the service professionals that it does work for which is about one in four reached a one year milestone. Those service professionals that it does work for, stay for a very long time. They stay for on average, four and a half years. And they now comprise 60% of the service professionals on our platform. Those are folks who know how our system works, know how to make it successful for them and can grow their business and have grown their business on our platform.

And we are very focused on that group of customers and making that group happier. Well, we like to get more than one in four through the end of the funnel through the one year yes, of course, but I think that we can grow that business by growing the service professionals for whom the product we know works. Now going to Page 10, we still have real opportunities for efficiency throughout the organization. And that’s going to impact some of our key metrics so you can see how it has already impacted some of our key metrics. I’m starting with the upper left here. We’ve been reducing headcount in our sales, so headcount in Q4 was down 21%, year-on-year. If you look at the chart below that, transacting SPs was down 12%, year-over-year. So while we are declining transaction service professionals, we are spending less to get them.

We are having a smaller sales force to be able to get service professionals onto the platform. That means we’re focused on getting the right service professionals onto their platform, service professionals for whom the product is more likely to work, who can spend money who can deliver great customer experience. And you can see that spending money and revenue per transacting SP, which is up meaningful year-over-year. If we shift to the right side of the page, I think we have similar opportunities for efficiency on advertising expenses. You can see here, our advertising expenses as a percent of our total adds and leads revenue in 2021, that went high to 45% that was the year we did the rebrand, which means we got the least efficiency out of our ad dollars, then improved a little bit in 2022, down to 44%, but we think we have real room for improvement to get to the levels that we’ve seen previously in this business.

Now going to Page 11 on cost savings. It’s not just in sales, and just in advertising where we think we have opportunities for efficiency. We’ve also cut costs throughout. What you can see on this page is our product development expenses and capital expenditures. We’ve cut that down meaningfully over the course of the second half of 2022. And you’ll see real savings on the cost side over the course of 2023. And that brings us to Page 12, which is our outlook from here, which maybe I’ll take a breath and turn to Chris and then jump back in.

Christopher Halpin: Thanks, Joey. As you 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 $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 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. And then, as we’ve discussed, and I’m sure we’ll discuss more services, is switching to net revenue reporting, because of changes in the terms and conditions in those agreements with customers. To help you in forecasting the business, we wanted to get 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. We would point you to the grids and metrics section of our earnings release, wherein you’ll see good pro forma data that lays out 2021 and ’22 quarterly revenues and financials for Angi on a net revenue basis if services had been present as both net historically. With that, I will turn it back to Joey. Thank you.

Joseph Levin: Let’s go right into questions. Operator, let’s go to the queue.

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Q&A Session

Operator: Yes, sir. We will now begin the question-and-answer session. Today’s first question comes from Jason Helfstein with Oppenheimer. Please.

Jason Helfstein : Thanks. Hey, guys. Good morning. So Joey, everybody likes to seek well — everybody likes to seek well, because consumers know what they’re getting. And the studios usually can predict the returns of sequels better than the original. So I’m not sure what the sequel is now with Angie kind of reboot number three, maybe four. Just given this, like how are you thinking about the long term opportunity? It seems like we maybe need to think about a smaller TAM, since you know you’re kind of reducing the focus on the big services. But just maybe help us think how you’re thinking about the long term revenue and margin opportunity of the new — of the rebooted Angi. Thanks.

Joseph Levin: Thanks. Yeah, I could challenge a few things. And I don’t really think this is a reboot of Angi. But let me engage on the TAM first and then come back to the other part. The TAM for Angi is the same that it’s been and has been the same for quite some time. Some people say the U.S. market is $400 billion or $600 billion, but let’s just stick with $400 billion is the home services market. And that includes the simple services and all the way to the more complex services. We’re still servicing the more complex services, we’re just not doing that through our services products, we’re doing that through our ads and leads. And that’s a really actually phenomenal channel for our ads and lead product, because those leads are very valuable to contractors.

And we can make real money on that and continue to and have a great customer experience where a homeowner comes to our platform, looks for a service professional who can deliver in those complex services. And we help find them a service professional who can deliver in those more complex services. And we’re paid on that on either on a weekly basis or on a fixed annual contract basis from the service professional. That’s a great place for us to be. Again, there’s a there’s a revenue recognition difference, which is — if you stick with the $400 billion, think what percentage do you think is spent on marketing, some say between 10% and 20%, is spent on marketing call that $40 billion to $80 billion, that’s still the area that we’re playing in, it’s just booked.

Now it’s $40 billion to $80 billion instead of the $400 billion. So we are still in that we’re still in that, we’re still in that with a product that services that customer. We are just not in that example, doing the kitchen or the remodel ourselves or being in the middle of that transaction, where we’re in the middle of the transaction is when it’s the smaller less complex jobs. 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 lessons and not try new things. We should take from that lesson too, when you’re trying new things to be more diligent and efficient on capital. And really importantly, and I said this in the shareholder letter, and I’ve been saying it a lot internally and we will say it till I’m blue in the face, you can’t when you’re doing this innovation, new things lose sight of the basics.

And we did lose sight of some of the basics around SEO, SEM, fundamental cost management and things like that. Because we were in this this growth mindset, and that growth orientation got away from some of the efficiency orientation. And I think you can and should accomplish a balance of both and that’s what we’re trying to accomplish now. But 2023 is an adjustment, certainly relative to that. 2022.