IAC/Interactive Feels the Mortgage Chill

The Internet conglomerate posted a stronger profit Thursday, but investors appeared to be put off by weakness at LendingTree and HSN

IAC/InterActiveCorp (IACI) managed to improve profits during recent months, but disappointed investors sold the stock on May 3 nonetheless. The New York Internet conglomerate's sales suffered as the subprime mortgage meltdown kept some customers away.

Net income grew 31.6% year over year to $62.1 million during the three months ended March 31. The company's 33 cents earnings per share came out in line with the consensus estimate.

But the troubles in the mortgage market hit sales in the company's lending related business. Revenue at its website LendingTree, which IAC acquired in May 2003, dropped 12% year over year to $100.0 million during the quarter. Consumers who use the website can choose loan offers from banks, but fewer loans were sold into the secondary market or closed at the exchange during recent months. Meanwhile the lenders began focusing on offering mainly traditional mortgage products, which contributed to lower profits and revenue per loan sold.

Not helping matters for IAC, the company closed the Home Shopping Network's spin-off America's Store in recent months. Excluding this closure, HSN's sales grew a paltry 1% year over year during the first quarter. Overall retailing revenue increased only by 2% year over year to $787.6 million.

"The HSN and LendingTree units continue to disappoint," Standard & Poor's equity analyst Scott Kessler said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) "We are not confident about the prospects for near-term turnarounds."

Investors sold IAC's stock 6.5% to $36.10 per share on the Nasdaq May 3.

But it wasn't all bad. Ticketmaster's sales rose 26% year over year to $309.9 million during the quarter. Domestic revenue increased 20%, thanks to things like the ticket sales from concerts including The Police and Kenny Chesney. International revenue grew 36%, excluding the effects of foreign exchange, amid factors such as growing sales in the U.K. and Canada. Overall the company wound up earning $1.6 billion in revenue during the March quarter, a 10% rate of growth over the prior year.

Another plus: 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, gained 43% year over year to $168.1 million during the quarter. 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. After promotional efforts dented the media and advertising unit's profits by $6.4 million in the first quarter of 2006, the business actually earned $10.5 million during the March quarter this year.

But free cash flow generated during the first quarter amounted to $72.6 million, down $2.3 million compared to the prior year. IAC's team had promised wary investors last fall that they would use free cash to buy back up to 60 million shares. At the time, analysts had taken the news as a reassuraing sign that Barry Diller & Co. wouldn't spend on more acquisitions (see BusinessWeek.com, 11/1/06, "IAC's Diller Thinks Ask Is the Answer"). S&P's Kessler says IAC didn't buy back as many shares during the first quarter as hoped "due to discussions related to a material transaction that was not consummated." The analyst kept a hold opinion on the company's stock.

Catherine Holahan contributed to this report

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