InterActive Corp (NASDAQ: IACI) yesterday announced a management restructure which was followed by an immediate increase in its stock price. The stock closed the last trading session (December 19th) at $68.49, registering a one day gain of almost 14%. 14% in a single day could be huge, but why is the market upbeat about something which isn’t related to the financials or in particular the earnings which the company generates? To understand the financial implication and the positive response of the market, we take a look at different segments, particularly the match.com segment over the last two years in comparison to the company’s overall performance.
It is interesting to note that the value which InterActive Corp (IAC) consistently generates is more often out of acquisitions and divestitures rather than building businesses from scratch. The company currently comprises of over 150 brands, and following the latest reshuffle the company has combined the core match.com businesses, tutor.com, dailyburn and Skyllzone to create the new Match Group. The current IAC CEO Greg blatt will step down from his current position to take up the role of Chairman of the Match Group, reporting to IAC chairman Barry Diller. This essentially means Greg Blatt will focus his attention on the Match business rather than the overall IAC group. The Match CEO, Sam Yagan will report to Greg Blatt the new chairman of Match group.
The reshuffle just boils down to one decision. The management has decided to consolidate parts of its business in order to increase focus on the new Match group. The move gives the new Match group a more decentralised operating environment. We shall now take a look at the match segment performance against the overall IAC group performance. The chart below shows the segment contribution to the group’s overall revenue and profits.
It can be clearly seen that the match businesses have been a significant contributor to the overall group, accounting for 26.57% of the topline and over 50% of the bottom line. It is easy to deduct that the match segment enjoys significantly higher margins which has resulted in the more than proportionate contribution to the IAC group profits. The chart below compares the operating profit margins of the segment vis-à-vis the overall operating margins of the IAC group.
The segment margins have on average been close to 15% points higher than the IAC group margins. However the segment has lagged the overall IAC group in terms of revenue growth in three out of the last 4 quarters. We now look at the Match segment Y/Y revenue growth against the overall revenue growth of the IAC group.
The Match segment has registered an average Y/Y growth rate of 11.37 % in the last twelve months (LTM) against the company’s overall growth rate of 16.4% over the same period. However, the segment revenues saw improved growth rate in Q2 and Q3 2013 while the overall revenue growth of IAC slowed down.
The decentralised structure following the latest management restructure could be an effort to boost the revenue growth of the segment in an effort to better capitalise on its higher profitability in order to boost earnings over the coming quarters. Also the decentralised business structure could be an indication of the management to prepare the segment for a divestiture, which is nothing new for IAC. While it is yet to be seen if Greg Blatt can turn around the segment growth, the market’s sentiment seems justified. IAC has, in the past, often created value through divestitures and acquisitions.
However the latest rise in the stock price seems to have pushed the stock to expensive valuations and any shortfall in growth over the following quarters could lead to an almost certain pullback in the price. IACI stock has been on among our top stock picks and has returned over 35% since our first coverage of the stock on May 22nd. Keep reading for our latest coverage of the internet industry stocks.
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