IACI Q3 2014 Earnings Review

  • Interactive corp reported its Q3 2014 results before the market hours on October 28.
  • The company beat analyst estimates on topline as well as bottomline, driven by improvements in its search and applications business and accelerated growth in the Match group revenue.
  • The upcoming monetization of Tinder, revival of growth in the search and applications segment and improving monetization on its dating properties will be key value drivers over the coming quarters.
  • Our IACI stock analysis assigns a buy rating to the stock, re-iterating our long term positive outlook on the stock

IACI Q3 2014 earnings review

Interactive corp (NASDAQ:IACI) released its Q3 2014 results on Oct 29. The stock has been among our top stock picks for over a year and has returned 33% since its addition to our top picks. The latest earnings report was a testimony to our long term outlook on the stock, with the company reporting a huge beat on the topline as well as bottomline. The stock has gained 3% in the last two trading sessions following the earnings announcement. We today update our outlook on the IACI stock and review the latest numbers reported in the company’s Q3 2014 earnings release.

InterActive corp Q3 2014 earnings summary

IACI returned to topline growth in Q3 2014, with a YoY revenue growth of 3.4% compared to a 0.3% YoY and 5.4% YoY revenue deceleration in Q1 and Q2 2014 respectively. The revenue growth failed to translate into earnings growth as the company reported a 28% YoY decline in Non-GAAP EPS. The Q3 2014 revenue and earnings numbers are summarized below.

Q3 2013

Q2 2014

Q3 2014

QoQ change

YoY change

Revenue ($, in millions)

756.87

756.32

782.23

3.4%

3.4%

Adjusted EPS ($)

1.29

0.04

0.92

2473.0%

-28.6%

IACI Q3 2014 cost and profit margin analysis

The decline in EPS was fueled by expense growth ahead of revenue growth, which came in at 7.3% YoY. The growth in expenses was led by a 42% YoY growth in general and administrative expenses and 13% growth in product development expense. As stated on the conference call, the investments were mainly in the Match group, which saw margin contractions at the segment impacting overall profitability. On an aggregate level, InterActive corp saw Net Income margin expansion of 29%, which was positively impacted by $264 million tax benefits. Adjusting for these, the Net income margin contracted 4.2% YoY while the adjusted EBITDA margin decreased 1.4% to 20.2% in the quarter. The profit margins are summarized in the table below.

Q3 2013 Q2 2014 Q3 2014 QoQ change YoY change
Operating profit margin

16.1%

12.7%

12.9%

0.3%

-3.2%

Net Income margin

12.8%

-2.4%

41.8%

44.2%

29.0%

Adjusted Net Income margin

14.7%

0.4%

10.5%

10.1%

-4.2%

Adjusted EBITDA margin

21.6%

18.7%

20.2%

1.5%

-1.4%

IACI analyst estimates v/s actual performance

IACI topped analyst estimates on both topline and bottomline. The company reported a 4% revenue beat accompanied by a 46% earnings beat. The huge beat was impacted by the tax gains mentioned above. Adjusting for the impact of these tax gains, the Non-GAAP EPS was 0.78, implying an earnings surprise of 24%.

Analyst estimate

Actual

Beat/Surprise

Revenue ($, in millions)

752.71

782.23

3.9%

Non-GAAP EPS ($)

0.63

0.92

46.0%

Future outlook

The management stated in the conference call that Tinder businesses monetization is on the cards. The product has seen explosive growth in terms of MAU’s, growing 7X in the last twelve months. The monetization of Tinder will drive revenue growth over the coming quarters, with a significant accretive impact to the bottomline. The current investment in Tinder has dragged down profit margins, once the platform is monetized and the impacts of its huge scale come into play. The management re-stated its FY 2016 $500 million EBITDA target for Mach group, implying a 37% average annual growth rate from $267 million for FY 2014.

The management also expects to revive growth in the ‘search and applications segment’ which has remained stagnant for close to four quarters. The transition to new chrome version, a sore spot over the last few quarters has been overcome and monetization on the new chrome version will gain traction over the coming quarters. However, the segment EBITDA margin in Q4 could be hit due to costs related to recent acquisitions and closing of some assets brought from ValueClick earlier in the year.

IACI valuation

IACI currently trades at a last twelve months (LTM) PE ratio of 37.6 (adjusted for the tax benefits in Q3 2014), based on the October 29th closing price. The LTM price to sales ratio, at 1.83 is attractive compared to most internet conglomerates. The stock may appear pricey based on the PE ratio. However, the expected revival of growth in the key segments of ‘match group’ and ‘search and applications’ and the upcoming monetization of Tinder could lead to profit margin expansions in the coming quarters. The net impact on earnings will be accretive, driving the earnings growth in FY 2015 and FY 2016, confirming our long term positive outlook on the stock. Our IACI stock analysis assigns a buy rating to the stock.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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