Marketing Weighs on InterActiveCorp

Barry Diller fails to quell Wall Street's fears about a jump in spending.
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InterActiveCorp

(IACI)

swung to a first-quarter profit Monday, but Wall Street focused instead on the e-commerce titan's marketing costs.

CEO Barry Diller spent part of a midday conference call seeking to quell the cost-based concerns, saying marketing spending will slip this year from previously projected levels. But the shares slid 4.4% in afternoon trading anyway.

The selloff came even after InterActiveCorp said its home shopping and travel segments helped juice a 6% sales gain over last year's charge-soaked period.

For the first quarter ended March 31, the Internet commerce conglomerate earned $38 million, or 5 cents a share, compared with a year-ago loss of $110 million, or 23 cents a share. The year-ago period included a $245 million charge related to the company's holding in Vivendi Universal Entertainment. Revenue rose to $1.47 billion from $1.19 billion last year.

Adding back big expenses for noncash compensation and amortization primarily related to its repurchase of former publicly traded subsidiaries, InterActiveCorp earned $141.4 million, or 18 cents a share, in the latest quarter. On that basis, analysts were expecting earnings of 16 cents a share on revenue of $1.44 billion.

The 6% revenue growth at IAC was actually 23% on an adjusted, comparable basis, since the company has started reporting revenue from its Hotels.com on a net basis, rather than last year's gross revenue basis. That means, to use a hypothetical example, that if a customer books a $200 hotel room stay through Hotels.com, IAC is recording as revenue only its, say, $50 cut from that hotel bill, as opposed to its prior practice of recognizing the $200 that the customer shelled out, to be offset by $150 in costs of good sold.

Using that format, IAC's travel unit -- which also includes Expedia and Hotwire -- reported a revenue gain of 41% to $494 million. IAC's electronic commerce segment, which includes the HSN home shopping service -- reported a revenue gain of 11% to $588 million. IAC's Ticketmaster ticketing revenue rose 4% to $202 million; revenue at its personals unit, including Match.com, rose 19% to $48.8 million; and revenue from its local marketing segment, which includes Citysearch, rose 282% to $32.1 million.

Operating income before amortization -- the cash-flow measure emphasized by IAC and followed by its analysts -- rose 14% from $174 million a year ago to $198 million in the first quarter.

"We've had a fine start to the year," Diller said on a Monday call with analysts.

But that view wasn't universally shared among analysts and shareholders.

In a morning note, Piper Jaffray analyst Safa Rashtchy wasn't quite so approving of the company's results. Characterizing the company's results as "a weak quarter," Rashtchy said travel revenue and margins were below his expectations and dropping faster than expected.

In Monday afternoon trading, IAC's shares were down $1.43 to $30.82.

A chief concern dogging the company -- one addressed by Diller on the call -- is the company's selling and marketing expenses, which grew to $309.4 million from $189.4 million a year ago.

Diller, on the call, talked about the importance of building market share to IAC, and emphasized that the marketing expenditures -- and their effect on the company's operating margins -- were within the company's control. "This is a choice of ours that we are following electively," Diller said.

To underscore that point about the optional nature of that spending, Diller said the company would be spending "substantially" less on marketing this year than the $900 million

IAC had previously forecast.

Separately, IAC said it was reaffirming a 2004 OIBA estimate for a range of $1 billion to $1.2 billion, with operating income in the range of $415 million to $615 million.