People Incorporated (PPLI) Earnings Call Transcript

Good morning, everyone. I'm John Blackledge, Internet analyst at TD Cowen. We're pleased to have Chris Halpin, CFO of IAC here. Thanks for joining today.

Thank you for having me.

For our fireside chat. Maybe I'll kick off, just more broadly, to kind of start the year, strong start. I think Joey said in the 4Q shareholder letter that you guys are going to try to get back to basics this year, focus on profitability, the big margin beat in the first quarter, led by several important segments, Angi, which we'll get into in a bit, Dotdash Meredith ex onetime item. So how do you feel that management is kind of executing on the goals in 2023?

Well, you never want to let us great ourselves. That's sort of a setup. But it's a good start. We talked a lot in, I guess, the Q3 shareholder letter about the mistakes we broadly made in the portfolio and particularly in the really heady days of the pandemic and when capital was free just in terms of business plans and initiatives. We spent a lot of time rationalizing that, but we're very focused in the fourth quarter letter on what we call Back to Basics. And we said that was the theme of our executive off-site, but it's really permeated financial planning, prioritization and really a ruthless approach to what's needle-moving, what matters. Ignore the junk. Angi will talk more about -- we've got 4 key prongs there, 2 of them rationalizing services and improving the overall cost structure. We've made good progress on. You can see that in the profitability and margins. Care, which is part of the emerging and other category, clearly generating strong profit as evidenced by the numbers there. And Dotdash Meredith, Q1 is always the seasonal low in terms of revenue and, as a result, profitability, but we feel good about how we position that cost structure and where we'll be for the year. But again, it's early. We feel like we're in the right spot, but we still are as vigilant as ever on performance.

Makes sense. Maybe we'll pivot to Dotdash Meredith. The -- maybe you can give an update on kind of how the macro has impacted the digital business thus far this year. And just remind us how you think top line could trend as we get through 2Q and in the back half.

Definitely. When you think about last year, which you have to look at relative to the color I'll give on performance this year, Q1 was extremely strong in '22. It was the full momentum coming out of the pandemic lockdown, all the digital behaviors that have overhung a number of e-commerce and other digital players. Extremely strong on both advertiser demand, traffic and pricing. It stayed that way until around mid-May of last year, and we always look to the Target and Walmart earnings in mid-May of last year. We're following their warnings, home, CPG, retail, a number of ad categories just froze and, in some cases, declined 50% year-over-year when you got to June. June was our worst month of digital advertising performance at Dotdash Meredith on a year-over-year basis, continue to be weak through the summer, started to actually strengthen in back-to-school in the October program or -- and when I say strengthen be less negative, sort of second derivative positive, first derivative negative. And then the market was terrible in the second half of November and December period, and that was consistent with what advertisers saw. This year, because of those trends, we expected for Q1 to be a tough comp. And with the term that we have used to describe the advertising market year-to-date is stable weakness, where it's not as bad as it was in the holiday period in '22, it's down, down against tough comps. And you see it both in premium advertising direct demand but also in programmatic pricing, and we sort of say the programmatic market. We have pretty good insight is down about 10% in aggregate on pricing year-over-year. We expect that to continue. And then we should see stability on a year-over-year basis right about now. And for a couple of reasons we'll talk about, June has always been our -- in our mind moment of truth, key inflection point. And then on the rest of the year, without the ad market improving significantly, we would expect things to be okay through the rest of the summer and the fall, it's really a tale of different sectors that are having strength that are having tailwinds obviously travel, but beauty elements of home are starting to show some strength. You've got other categories that are totally more abound tech, telecom, wireless advertising, things like that, TV, streaming, all very poor. Finance has been very tough when you compare the strength of brokerage services and insurance a year ago. Banking and interest rate products are coming on, but still a lot to make up. So we just think it will be without some significant exogenous shock one way or the other from a macro basis, kind of stable weakness, but our comps get easier. And on the traffic side, which we'll talk about, we expect to grow throughout the year.

Yes. Maybe that's a good segue there, just to update on the integration of the Meredith business. I think you're 7 months or more post kind of migration of the various brands. Could you talk about the traffic and the engagement, the good and maybe where some brands could -- we could see some improvement?

Sure. The -- we feel good about where the Meredith brands are now. And we've talked a lot about what the curves look like. They dip after you migrate a brand -- a digital property onto the Dotdash platform. Get back to even in the, say, 4 plus/minus months in and then start to grow. We feel solid on the Meredith brands. And we're even getting to the point -- at some point soon, we should stop talking about them as the Meredith versus Dotdash brands because if I'm an investor, I don't really care if my left leg is running really fast and my right leg is slow. I'll just go in circles. They're going to say, are you making progress in aggregate. But in terms of proving out the thesis of the acquisition and also really specific to IAC growth driver, the Meredith brands are performing well, very consistent with the chart we had in the shareholder letter, seeing strong sessions growth across Southern Living, Better Homes & Gardens, Travel + Leisure, those properties. People, we had is -- which has been very strong we had as green/yellow. My wife laughs every time I say this, but that's really because of the -- it's the only reason it's yellow is because of the Will Smith slap followed by the Johnny Depp trial last year. I'm very happy to report we are on the 1-year anniversary of the Johnny Depp judgment today. So we will be moving past that major moment in American history and also for traffic. But all underlying trends, metrics at people are strong. We feel great about where that property is. And the Dotdash properties are a mixed bag, but we're passing what were sort of brutal traffic comps in the first quarter and early and expect to get them to stability and grow. You asked about properties that are underperforming. The reds in style was 1 where we have struggled to get the right positioning. We have a new editor there that we -- and it's a full digital property now, but digital letter. We feel good about where it is. There's also -- there were a lot of very low calorie impressions basically Clickbait in the historical comps that we're moving past. But we are down on impressions, and we want to be transparent with investors on that. So we've got to execute there. It's a great brand, just got, just need to keep the -- improve the game plan there. Parents has been sort of a journey, so to speak. We feel better about where we are there and getting it to growth. Shape is one that we just keep on there for completeness. But at a noise -- Neil and team at Dotdash that we have it on there. It's a tiny property, and we just have it on there. So not a big deal. We feel good about where we are. And that traffic growth throughout the year is why between that and ad comps getting easier, why we have confidence about getting to revenue stability at some point this month and then growing in the second half.

Yes. Okay. That's definitely encouraging. Maybe let's pivot to the last one on DDM, there's a couple here. But the profitability, as we kind of get through the year, so you painted the picture for the top line, if you can talk about the cadence of progression of EBITDA and margins? And then I just have one follow-up.

Sure. So obviously, revenue down mid-teens, digital revenue down, which is -- I'll talk predominantly about digital. Print, just to do it quickly, we manage that. So our print EBITDA roughly offsets our corporate costs, and you'll see that in the segments. On the digital side, we knew Q1 would be tough, mid-teens -- down mid-teens in aggregate. . There are some elements of there. Advertising was weak in that area. The e-commerce side or what we call performance marketing was actually flat for the quarter, and that reflects the strength, and this is a key part of the Dotdash strategy and the acquisition of Meredith really rolling out the Dotdash native performance marketing integrations into the Meredith brands, and that has performed extremely well. We talked about up 30%, 40% in aggregate on goods-based e-commerce. The reason we're flat is because services-based e-commerce, brokerage accounts, insurance, those things were down appreciably. That comp will soften as it did last year throughout the year. So we feel good about momentum there. And then licensing is in a trough but will grow. As we get into Q2, we would expect -- we expect overall digital revenue to be negative, but less negative. And we expect to get to stability or flat revenue at some point this month, and I feel good about the trend we're on there. And then in Q3, through both sessions growth and stability on ad sales and pricing of some degree, we expect to see revenue growth in Q3 and then stronger in Q4. And then the holiday period was so poor last year on the digital advertising side. And then also because of the migration delays, we did not have our full suite of e-commerce activations on the Meredith sites that we feel pretty good. Even without significant ad market improvement as long as it just sort of stays where it is, we feel pretty good about driving growth in the fourth quarter. As a result of that, plus seasonality, which is basically every quarter on a seasonal basis increases on the prior one in both Dotdash and Meredith. That's why we feel good about our guidance of $250 million to $300 million of adjusted EBITDA, excluding the -- that's with the lease impairment being added back, mind you, is noncash lease impairment. But it leads to a back-ended year, but that's what we'd expect. So we reaffirmed our guidance of $250 million to $300 million and feel good about growth in the second half.

And then any thoughts on longer term? Like we exit the year, say, as you guys expect, any way to frame kind of longer-term top line growth and/or kind of margin profile?

Yes. So how we think about the margin profile, steady state, if we were in an equilibrium environment on a revenue basis, it's about a 55% to 60% incremental margin on a dollar of digital revenue. Where we are right now, given the depression in digital revenues and then also the costs that we've taken out of the DDM cost structure, we would be in the marginal dollars well about 80% drop down to contribution and adjusted EBITDA. Based on that, our view is we've talked about long term, especially to get to $450 million of adjusted EBITDA, which was target at the time of the acquisition. You're talking about $1.3 billion of digital revenue and mid- to high 30s EBITDA margins to get there. We still feel very good that, that model is intact. If anything, we've identified cost improvements while still being able to drive the business. And it's just about getting digital revenue to stability and then growing it we feel excellent about the performance marketing opportunity that's been borne out beautifully. We just wish we could have gotten there sooner, but the integration is behind us, and it is what it is, and that we will drive towards those profitability goals.

Okay. Great. Super helpful color there. Maybe let's pivot to Angi, stronger quarter than we were expecting and raised the EBITDA outlook for the segment for the year. Just talk about the progress you guys are making there.

Yes. So Joey's now about 7 -- 8 months, 7 months into the role as CEO of Angi. And in the fourth quarter shareholder letter, he laid out 4 key priorities: improve the user experience for both consumers and pros. As a reminder, we have a 2-sided marketplace where you have service professionals on one side and consumers on the other. The second is improved SEO, SEM, what we can talk about why that improvement opportunity exists. The third was rationalized services, where we've been overinvested in and had a bit taken our eye off the ball from a margin and free cash flow perspective. And the fourth was improve overall cost structure, where we had, had the hypothesis that there were significant fixed costs and G&A that had crept into the cost structure and if anything, it exceeded what we thought going in. Where we are right now is 3 and 4, we feel very good about where we -- where it stands. Services went in. And we had the road map through work we did last summer and in the fall, but rationalized what works, what doesn't, improve the pricing and cost structure and we've gotten that business to essentially breakeven and feel good about the long-term growth trajectory. Overall cost structure found significant opportunities. And by the way, I think about it on an EBIT basis in terms of capitalized software found a lot of rationalization and broader product development and a lot of which was capitalized, so that, as Joey talked about in the letter, we've significantly improved free cash flow across the board. The priorities now are improving user experience, improving the platform, the flow for consumers and pros and improving our SEO and SEM. Game plans in place for both. When we talk about revenue declines this year of 5% to 10% with Q2 at the higher end of that, the very high end of that in Q3 and Q4 at the lower end of that, it really is about -- we saw revenues that were embedded in the base within Angi that had sort of built up over time. Some of them were initiatives that were launched that didn't work that well, but nobody shut down. Others were activities that the market had changed -- and then some of them were just low-margin activities. There were a lot of low-calorie revenue through optimizing marketing spend, through reducing selling to low-value pros and a number of other similar paths we're on. We are rationalizing the revenue profile, and it really sets us up to grow long term. There's some attendant things in there like we've shrunk the sales force. Sales force had really grown large during the pandemic. In full credit or defense to management, where in the pandemic, it was very hard to acquire pros because everyone in the world was having discretionary work done on their house. So if you're a service professional and you have a discrete amount of capacity, you don't need to be on Angi or any other platform if the fish are jumping into the boat offline. That's good news for us is that's rationalized and pros need our platform more but also, we don't need a huge sales force chasing small pros that grew up during the pandemic. So rationalizing those sales revenues, getting rid of low-margin acquired traffic, a lot of which produced poor customer experience, where we might not have pros to serve those regions or high discounts and credits. It's just working through and improving the portfolio -- improving the overall revenue picture of the portfolio at Angi. We feel good about margins. We've said we upped guidance to $100 million to $130 million of adjusted EBITDA. We're free cash flow positive, and we expect to continue to expand on that. And we just got to head down and execute, get the revenue picture to where we want it and then grow from there.

What -- in terms of -- just maybe one more question -- that was great on Angi. On the SEO and SEM kind of fixing that, how long is that process going to be? And...

Yes. It's -- SEM, there's a few elements. I'll do them both quickly, but SEM, the key elements there are improving site speed, improving conversion. We definitely were underperforming there. That we're making progress on. We've also relaunched TV and brand, and there's clear flow-through of SEM conversion when you have brand campaigns in place that support awareness and recognition. That one, I'd be optimistic will happen sooner in the next couple of quarters. We're already seeing it, but Joe talked about in the letter. We're already seeing it, and we'll continue to execute. SEO, we talked about cleaning out the corpus, improving the content and in a number of other performance issues. We feel good about where we are. That one is a probably more like a 12-month journey to get to where we want. But we know what the footprint looked like or what the landscape looked like before we did the rebranding. That was in March of '21. An we talked about how we lost $80 million to $100 million of EBITDA through the rebranding, all really SEO traffic that we lost to third parties and had to buy back. We know sort of what the prize looks like. We've got to execute. IAC is very good at SEO, SEM. So we know what we need to do. We've got new leadership there, which is great, but it's just head down and execute.