InterActive's Fall Isn't Finished

The most shocking number, though, occurred in the international travel segment. In that division, international gross travel bookings dropped 11%, to $560 million in the second quarter from $630 million in the prior quarter. IAC finance chief Dara Khosrowshahi talked about the second quarter being a "tough quarter" in Europe, but neither he nor anyone else offered any details as to why Europe was tough.

This just doesn't add up. There hasn't been an economic slowdown in Europe, and there have been no international events to reduce the desire to travel. One therefore must assume that it was a tough quarter primarily because the online travel players are fighting like crazy for market share, and because online travel as a whole has stopped growing as fast as it was. Neither conclusion bodes well for IAC.

One way in which IAC has tried to gain share is by splurging on marketing -- something it was criticized for in the first quarter. True, second-quarter marketing spending retreated from first-quarter levels. But it fell only slightly -- to $301 million, or 20% of revenue, from $309 million, or 21% of revenue, in the previous period. Moreover, there is a good chance that second-quarter bookings and revenue would have been a lot lower without strong marketing spending in both quarters.

Low-Hanging Fruit

Investors must grasp one very important wrinkle to the IAC story -- that it has achieved sweet margins in the past by taking cut-price room inventory from hotels when demand to travel slumped, due to terrorism and war.

In the aftermath of 9/11, Hotels.com scarfed up cheap rooms, and IAC did so again in the run-up to the Iraq War of 2003. IAC bears always used to point to this important contribution to profitability, and bulls would routinely downplay it. However, on the call, Diller emphasized this factor when explaining why IAC wasn't able to get so many attractively priced rooms in 2004, vs. 2003, when the war was looming or actually happening.

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In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to [e-mail].