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IAC/InterActive Still Searching for Respect

Its Ask unit is on fire, but the search sector's oversized expectations restrain the shares.

Is Diller happier without Jeeves?

For a while, it was the Internet's oddest of couples: Barry Diller, the hard-bitten, no-nonsense yet compulsive dealmaker, taking in the servile and efficient Jeeves. But when



snapped up Ask Jeeves last July, the transaction, in a way, made sense: Diller's scattered empire of useful dot-coms needed a compelling search product to help stitch it together.

However, something about the deal didn't feel right. A lot of people never quite took to the digital fantasy of having their very own Jeeves cater to their online whims. I'd bet a good pile of money that Diller was one of them. So, in late February, Jeeves got the heave-ho. Ask Jeeves, from that point on, would simply be Ask. It was the Internet's version of the Soviets airbrushing from photos the apparatchiks who had fallen out of favor.

So, has IAC flourished without Jeeves? Oh, yes. But here's the kicker: Wall Street hasn't fully realized it yet. Perhaps if the hired help of the richest fund managers were stock-savvy enough to whisper tips into the ears of their employers, the market wouldn't be overlooking this undervalued Internet stock.

IAC's $5.8 billion in revenue last year was nearly equal to


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$6.1 billion and above



$5.3 billion. But its $9.7 billion market cap is a tiny fraction of Google's $120 billion and Yahoo's $45 billion. So unsurprisingly, IAC's forward P/E ratio, at 22, is less than half of Google's 55 and Yahoo's 59.

In 2006, IAC shares are up 5%, compared with a 6% decline for Google and a 17% decline for Yahoo! (Google would be a little worse off if it weren't for its recent inclusion in the

S&P 500

.) But when you consider that the


is up 6% this year, you start wondering: Has IAC been dragged down by the deflation of oversized expectations of the two search giants?

The answer, by many indications, is that it has. Even better for bargain hunters, IAC's stock took a hit last week after the company's CFO, Thomas McInerney, said at an investor conference that customers of the company's Home Shopping Network hadn't been inspired by its New Year's themes of health, wellness and home improvement.

Who would've thunk that the same couch potatoes that get sucked into the amphetaminelike pitches of HSN could avoid being seduced by the idea of fixing up their homes and their incorrigibly flabby bodies? Yes, it was a bit of a marketing boner, but fortunately, HSN is making up a smaller and smaller portion of IAC's revenue and profit. And therein lies an instructive tale for investors.

IAC doesn't dwell on how much of its revenue comes from the HSN channel, and looking at the numbers between the lines, for good reason. Revenue from all retailing operations rose 36%, but from the HSN channel it rose about 6%. And that's including a 4% price increase. Volume grew only 3%.

But throw in revenue from HSN's online counterpart,, and Cornerstone Brands, the catalog and Internet retailer that IAC bought a year ago, and IAC's retail revenue rose 36% to $3.05 billion. In 2005, IAC said in its 2005 annual report, "gross margins at HSN declined 60 basis points principally due to increased shipping and handling promotions." But overall gross margins rose 46%.

In fact, revenue in other non-HSN areas is also growing at impressive rates: in 2005, revenue grew 24% at Ticketmaster, 131% at LendingTree, 89% at real estate sites like iNest, 26% at and other personals sites, and 601% for advertising and media, which includes CitySearch, Evite and the purchase last July of Ask Jeeves.

Ask has proved to be a good move for IAC. Some investors have been critical of Diller's strategy of building a conglomerate of online properties without having any plans to integrate them into a coherent whole. One of the reasons for buying Ask Jeeves was to help with that integration. Judging from the across-the-board double- or triple-digit growth in most of these properties, that strategy seems to be working.

More surprising is that it's helping Ask itself. According to a Bear Stearns report citing data from ComScore, searches performed on Ask grew 33% in the fourth quarter of 2005, four times as fast as the industry rate and faster even than Google's 25% gain. In February, Ask's search growth remained strong, rising 28% from a year ago, vs. Google's 29%.

Ask's market share was only 6.6% at the end of 2005, but it also was the only search engine to show market-share gain besides Google.



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MSN and

Time Warner's


AOL all saw their share of the search market decline throughout last year.

Ask also is winning over new and influential fans in the search arena. Earlier this week,

Wall Street Journal

technology reviewer Walt Mossberg gave it a strong thumbs-up. "Ask Jeeves, a largely failed search service, has been overhauled and renamed," Mossberg wrote. "In terms of relevant results and ease of use, Ask holds its own with Google, and even beats the champ on some searches."

At this point, Ask's biggest challenge is to be seen in a world in which Google has been stealing all the thunder. Diller often complains that Google makes the front page by merely sneezing, while IAC's new features go ignored. That proved true enough last week, when Google made a long-expected update to its local search feature, prompting the usual frenzy of speculation and instant analysis in the press and on blogs.

Meanwhile, IAC took the wraps off its new product, -- a software program that sends instant alerts as a user shops online: Click on a retailer's product, and Pronto displays a message showing other retailers offering a better deal on the product. Still in beta, Pronto will have to assuage users that their privacy is secure, but the idea itself is original enough that it should have caught some attention. But aside from a column in

The New York Times

, Pronto was greeted with stony silence.

That's not great news for Diller, but every piece of good news from IAC that gets overlooked is another opportunity for sharp-sighted investors. Who knows, with the free time on his hands, Jeeves himself may be among them.