- Interactive corp reported its Q4 2014 results after market hours on February 3, 2014.
- The company beat analyst estimates on topline as well as bottomline, driven by broad based growth across segments.
- We expect 25% upside in IACI stock price over the next one year. Our positive long term outlook is reflected in our IACI stock analysis.
InterActive Corp (NASDAQ:IACI) earnings for Q4 2014 were reported after market hours on February 3rd. The stock has been among our top stock picks for over a year and has returned 19% since its addition to our top stock picks. The latest earnings report was another strong earnings report, with InterActive Corp beating analyst estimates on topline as well as bottomline. The company saw broad based growth across its operating segments. However, IACI stock price fell by 6% in the regular trading session on February 4, following the earnings release. We today update our outlook on the IACI stock taking into consideration the latest earnings report.
IACI Beats Analyst Q4 2014 Consensus
IACI beat analyst estimates on both topline as well as bottomline. The company reported a huge 15% earnings surprise accompanied by revenue beat of 4%.
IACI Q4 Earnings Summary
IACI revenue growth accelerated in Q4 2014, as the topline grew by 15% YoY compared to an average 1% revenue contraction through the first 3 quarters of 2014. The revenue growth failed to translate into earnings growth as the company reported a 4% YoY decline in Non-GAAP EPS. The Q4 2014 revenue and earnings numbers are summarized below.
|Earnings summary||Q4 2013||Q3 2014||Q4 2014||QoQ change||YoY change|
The earnings decline was driven by profit margin contractions across gross, operating as well as net profit levels.
IACI Profit Margin Analysis
The decline in EPS was fueled by expense growth ahead of revenue growth. The operating expenses registered a growth of 28% YoY, led by a 22% YoY growth in selling and marketing expense and a 35% growth in general and administrative expenses.
The growth in expenses led to a 220 basis points contraction in net income margin and a 1.4% decline in the adjusted EBITDA margin to 19.3% in the quarter. The profit margins are summarized in the table below.
|Q4 2013||Q3 2014||Q4 2014||QoQ change||YoY change|
|Operating profit margin||15.6%||12.9%||13.3%||0.4%||-2.3%|
|Net Income margin||10.6%||41.8%||8.4%||-33.3%||-2.2%|
|Adjusted Net Income margin||12.6%||10.5%||10.8%||0.3%||-1.8%|
|Adjusted EBITDA margin||20.7%||20.2%||19.3%||-0.9%||-1.4%|
Source: IACI earnings release
The decline in EBITDA margins was largely driven by a 300 basis points contraction in the Match segment EBITDA margins.
IACI Future outlook
The management stated in the conference call that Tinder monetization is behind schedule by a couple of months. However, going by the original time line, Tinder should be ready for a global rollout sometime in Q1 2015. Tinder saw strong growth in monthly active users (MAU), registering a 100% YoY growth. The monetization of Tinder will drive revenue growth over the longer term, with a significant accretive impact to the bottomline. The delay in Tinder rollout, increased marketing expense and major losses from the non-dating business businesses will lead to a significant decline in the match group EBITDA margin for Q1 2015. However, the management re-stated its FY 2016 target of $500 million EBITDA from match group, implying a 36% average annual growth rate from $272 million in FY 2014.
The management also expects to topline pressure in its ‘search and applications segment’ due to lower revenue from Ask.com, which was hit by changes to Google ad platform. The segment EBITDA margin is also expected to contract in Q1 2015, owing to higher marketing spends to generate longer term growth.
IACI currently trades at a last twelve months (LTM) PE ratio of 31.8 (adjusted for the tax benefits in Q3 2014), based on the February 4th closing price. The LTM price to sales ratio, at 1.72 is attractive compared to most internet conglomerates. The stock, though appearing pricey based on the PE ratio, is attractive compared to most internet companies. Moreover the current analyst consensus is for the company to report EPS of $3.27 on revenue of $3.32 billion. Using these estimates and conservative valuation multiples, we estimate IACI one year target price of $74.8, implying an upside of 25% over the last closing price expansions in the coming quarters. We reiterate our long term positive outlook on the stock, which is reflected in our IACI stock analysis.
IACI Earnings Preview
-- IACI Q4 2015 Earnings Preview (published on January 26, 2015)
- InterActive Corp is scheduled to report its Q4 2014 earnings estimate before market hours on Feb 11.
- The analyst consensus is for the company to report earnings per share of 87 cents on revenue of $799 million.
- Growth in the Search and applications segment along with Tinder monetization could lead to another earnings surprise from IACI in Q4.
IACI is scheduled to report its Q4 2014 earnings on February 11, before the market open. The stock has been among our top stock picks for over a year and has returned 25% since its addition to our top stock picks. Updates on the Tinder monetization and search and applications segment growth will be key numbers to watch out for in the upcoming InterActive earnings release.
Management Q4 Expectations
The management expects to return to growth in Q4, as stated in the Q3 earnings conference call. This will be a huge relief following four quarters of flattish and declining revenues.
The management expects the transition to the newer Chrome has been completed and monetization on the new chrome version will gain traction over the coming quarters, driving growth in search and applications segment. The revival of growth in this segment will significantly drive InterActive revenue, as the segment is a major revenue segment, accounting for 52% of the last twelve months (LTM) revenues.
IACI Q4 Analyst Expectations
The current analyst estimates for Q4 2014 imply a 10% revenue growth while expecting IACI earnings to decline by 16%.
|Q4 2013||Q4 2014 Analyst estimate||Implied growth|
IACI earnings decline will be driven by profit margin contraction, as stated by the management in the Q3 2014 conference call. The margin contractions will be driven by costs related to the closure of ValueClick acquisition and other recent acquisitions.
IACI Earnings History
The company has had a mixed earnings history, beating analyst earnings estimates in 7 out of the last 9 quarters with an average earnings beat of 12%. However, the company has missed revenue estimates in 4 out of the last 9 quarters, delivering an average miss of 0.4%. The quarterly earnings history over the last two years is summarized in the table below.
|Quarter||Revenue||EPS ($)||Revenue||EPS ($)||Revenue beat||Earnings surprise|
In conclusion, the revival of growth in the Search and applications revenue will drive InterActive revenue growth in Q4. However, the recent acquisitions will lead to margin contraction, driving a decline in earnings, which is in-line with management expectations. The strong dynamics of the search segment and Tinder monetization and the management’s balance between profitability and growth could lead to another earnings beat in Q4. Our IACI stock analysis assigns the InterActive stock a buy rating.