Technology

IAC's Diller Thinks Ask Is the Answer


The media powerhouse is betting on Ask.com to both broaden the success of its established businesses and conquer online search

IAC/InterActiveCorp is making a bet that in the future, Internet users will flock to its tools to find just about everything online. But last quarter, it did pretty well off people who were just looking for love and entertainment. IAC properties Match.com and Ticketmaster were a big reason why the media powerhouse said sales rose 11% to $1.6 billion in the third quarter. Per-share earnings rose from 32 cents to 35 cents.

The news pleasantly surprised Wall Street analysts who were predicting per-share earnings of 33 cents. Behind the conservatism was an expectation that IAC's (IACI) established businesses such as ticketing and matchmaking are facing stronger competition from a slew of startups such as ticket resale site Stubhub.com and dating service eHarmony.com. Turns out that of all the industries in which IAC's two dozen Web sites compete, the more established sectors were among the best performers.

Solid Strategy

In ticketing, for example, profits rose 18%, to $50.5 million, on $265.5 million in sales. Analysts had expected slower growth at Ticketmaster amid accelerating competition. "Ticketing continues to really beat our forecasts," says Merrill Lynch (MER) analyst Justin Post. "Ticketmaster's growth has been sustainable longer than people originally expected."

Similarly, revenue in personals grew 22%, to $80.2 million, and operating income grew 20%, to $19 million. Scott Kessler, an equity analyst at Standard & Poor's, which like BusinessWeek.com, is owned by McGraw-Hill, said people had questioned the long-term viability of Match.com as more matchmaking services and niche dating sites entered the market. Those questions have been answered. "They have gotten the strategy right and the competition has waned," says Kessler.

After the announcement, IAC's stock jumped 3.9%, to $30.98. Some of that enthusiasm was a reward for the better-than-expected quarter. But most of it was fueled by hints that 2007 would be both a good year for search site Ask.com and a safe year for investors who have worried about the long-term prospects of some of IAC's recent purchases.

The Backbone

Since buying Ask in 2005, the company has overhauled the search engine, rebranding it without the trademark butler, and focusing on new tools to make search faster and less cluttered (see BusinessWeek.com, 10/5/06, "A Gaggle of Google Wannabes"). For example, it added tools that allow users to see a picture of a link's homepage without actually clicking and loading the page itself.

Revenue for the company's media and advertising division, which includes Ask.com as well as popular local search site Citysearch.com and invitation site Evite.com, grew 62%, to $135.5 million. The unit, however, has yet to turn a profit, in part due to marketing efforts to promote the new Ask and a deliberate decrease in the amount of advertising on the site in order to make searching more enjoyable for customers.

In a statement, IAC CEO Barry Diller suggested that Ask would become the backbone of the company next year, driving advertising growth and traffic to its other businesses. Just how remains to be seen, but it is conceivable that Ask could prominently feature links to the other IAC sites and perhaps serve up results drawn from the larger IAC network—say, providing Citysearch or Match.com results to someone using Ask to get ready for a hot date.

Future Driver

It could also deliver more search-related advertising on IAC properties through tool bars integrated with these properties. "We have three interrelated strategies: one, the growth of each of our businesses; two, Ask.com as the connecting thread; and three, all our cross-company efforts, which allow us to leverage our audience scale and diversified expertise," said Diller.

Kessler expects that Ask will flourish next year. "Right now I don't think Ask is a major driver of the good stuff that is going on in the business," says Kessler. "I think Ask is going to be a 2007 story for two reasons: They are still in the process of tweaking and retooling Ask, and it will only start to drive a lot of what the company is talking about next year."

Perhaps most promising for wary investors, however, was IAC's promise that it would use free cash to buy back up to 60 million shares, says Merrill Lynch's Post. The buyback puts investors at ease because it means the company won't be using free cash to acquire more companies—a strategy that has had mixed results. IAC's LendingTree, a site acquired in May, 2003, and related lending sites, saw falling sales and an operating income loss. Post called the buyback big news. "In the past, one of the concerns for the stock has been management's acquisition activity," says Post. "They have had some good successes and some acquisitions that have not done so well. We think it is a wise use of cash at these prices."

If Ask turns out to be the driver Diller is hoping for, the stock may not stay there for long.

Holahan is a writer for BusinessWeek.com in New York.

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