Good day, and welcome to the ANGI Homeservices reports Second Quarter 2019 results. At this time, I would like to turn the conference over to our CFO of IAC, Glenn Schiffman. Please go ahead, sir..

Thank you, Operator. Good morning, everyone. Glenn Schiffman here, and welcome to ANGI Homeservices Second Quarter Earnings Call. Joining me today is Joey Levin, Chairman of ANGI Homeservices and CEO of IAC; and Brandon Ridenour, CEO of ANGI Homeservices. Joey and I will address any questions you may have on IAC's second quarter results.

Similar to last quarter, supplemental to our quarterly earnings releases, IAC has also published its quarterly shareholder letter. We will not be reading the shareholder letter on this call. It is currently available on the Investor Relations section of our website.

I will shortly turn the call over to Joey to make a few brief introductory remarks, and then we'll open it up to Q&A. Before we get to that, I'd like to remind you that during this call, we may discuss our outlook and future performance.

These forward-looking statements typically may be preceded by words such as we expect, we believe, we anticipate or similar such statements. These forward-looking views are subject to risks and uncertainties, and our actual results could differ materially from the views expressed here today.

Some of these risks have been set forth in both IAC and ANGI Homeservices' second quarter press release and our reports filed with the SEC. We will also discuss certain non-GAAP measures, which as a reminder, include adjusted EBITDA, which we'll refer to today as EBITDA for simplicity during the call.

I'll also refer you to our press releases, the IAC shareholder letter and, again, to the Investor Relations section of our website for all comparable GAAP measures and full reconciliations for all material non-GAAP measures. We also may conclude the call a bit early.

We've heard from a lot of you, that it's a busy morning with a lot of potentially conflicting reports out there. Of course the management team is available today, tomorrow and thereafter to address any other questions. With that, I'll turn it over to Joey..

Thanks Glenn. Thanks everybody for joining us again in aggregate, another good quarter for IAC though flawless this time. Everyone saw the management letters, I'm sure and you can see it's just the absolute rocketship there and not just the stock price reaction yesterday, which was of course very strong.

But really what's exciting us is what's underlying Match right now. They're really delivering in almost every area we hope. The team has really come together, but the product is doing a phenomenal thing for the world, which is making people happy. And when there's so much going on, so many forces it feels like pulling people apart.

It's nice to be part of the business that's really bringing people together and doing that globally. And we saw for the first time this quarter Match had more subs internationally than domestically. And that's, I think a harbinger of things to come up.

In terms of the underlying metrics, I mean, they've got accelerating revenues, they're expanding margins, they're turning everything into true free cash flow and best part is they're still investing for the future. So Match is really in a phenomenal place. In terms of ANGI, well we didn't love the quarter. We still love the business.

There's something to fix, but I think our biggest problem there, it might've been just bad forecasting. The business is growing 20% year-over-year. We're adding service professionals, we're adding homeowners, we got to get customer acquisition costs up in line, which I think is a problem that we've addressed before in many of our businesses.

And I'm confident we will address going forward and we're really excited about these pre-priced services and the promising future there. Dotdash had another fantastic quarter.

I would challenge anyone to find a digital publisher who is doing what that Dotdash is doing right now, really growing, accelerating margin, building brands also investing for the future. It's an exciting place to be with an exciting team. Vimeo also saw accelerating revenues and the rest of the businesses are stable and feeling good.

Of course, the news that was also in our beliefs here, which we said those are not really news, is that we've begun to more seriously consider spins both Match and ANGIand you know we talk about this every quarter and we think about this all the time, but we have advanced our thinking a little bit, above the perpetual consideration and we're going to start evaluating that more seriously from here and just wanted to let everybody know that's where we are in our process.

I suspect we'll get a bunch of questions on that. We won't be able to answer all the questions because it's early and it's a work in progress. But we'll do the best we can with the questions there.

So let's start with the first, Operator?.

Thank you. [Operator Instructions] Our first question will come from Eric Sheridan with UBS. Q - Eric Sheridan Thanks so much for taking the question and of course I'll follow up on the potential spin-off hopefully, but I'll try to come at it from a different angle.

I know you're not going to tell us sort of the end result, but can you just walk us through what the thought process might be? What are you looking for when you examine the businesses of where they're ready to be spun-off from IAC? Just so we can better understand maybe some of the guard rails you'll be going through as the Board thinks through the process.

And then second, I thought it was really interesting in the letter, Joey that you laid out the framework by which you invested in Turo and you also took a minority interest without necessarily a path to control, that seemed like a pretty big sea change for the company, want to know if I get a lot more granularity there on whether that's a shift in your investment strategy and how we should think about that versus your broader investment approach, especially given the cash on the balance sheet now after all the recent corporate actions.

Thanks everyone..

Thanks, Eric. On the spin, I think we always say that there's not one particular formula. There's not one particular moment.

I think one thing that has historically been a catalyst among others and is relevant now, is the sides of math relative to IAC that one starts to look like a proxy for the other and in a very good and healthy way, but casts a shadow over the rest of IAC. And that really was sort of the starting point of our recent thinking.

And of course you start thinking about the management and then that leads to, okay, we’ll then do, often think about managing spin and we were thinking about those and as we were preparing for earnings and said, given that these are both public companies and we could cross some disclosure thresholds in one way or another.

We're better-off, just disclosing that now that we're thinking about those things. I do think that, as I said in the letter, anything is possible from here. I think that matches with perhaps the original catalyst and is probably the more obvious candidate on typical metrics that that one might consider.

The other thing that factors into the thinking is the focus of the team. How – where to put your energy, how to make smaller and best method, how to make out of focus on building little things bigger and all those things will go into the mix. But again, I think important to convey that, any of the alternatives are possible from here.

As it relates to Turo, it is a shift – it is different from what we've done historically. I would say it is not a fundamental shift in philosophy. It is a perhaps a new openness. In other words, I wouldn't expect us to use our cash balance from here exclusively or significantly or majority wise on minority investments.

But we're open to it and we're open to it in ways where we think that we can impact the outcome of the business where we think that we can be really helpful and where we believe we have a chance to increase our ownership over time.

And that may not be explicit right to control, but it would be with again desire to just aggregate ownership and aggregate shares, we think there's an opportunity and when things are working.

And Turo was just – when we looked at it is a really interesting business in terms of having lots of analogies to things we've seen in the past., this aggregated supply, this aggregated demand, a marketplace in the middle that solves the problem for why the supply and demand can come together and make those things much easier.

It's an asset by business and those are sort of general things that appeal to us and at the same time and within this category that's fundamentally transforming, which is urban mobility.

And we look at all the ways that that's happening and all the companies that are playing in there and most of them are very expensive and less clear in terms of margin and profitability, profit potential. And we just saw Turo there and this is kind of a hidden gem and got really excited about getting involved in. And this was the way we could do it..

In terms of Turo, don't forget to put it in your some of the parts, which is to put some numbers around the size, which we said around the sizing of our businesses relative to IAC as a whole. We talked about this in shareholder letters, but again, just to get real granular, we own 226 million shares of Match.

So for every IAC share, based on the share price last night, Match represents $240 odd of an IAC share. And then ANGI, we own 422 million shares of ANGI, so for every IAC share we get about 4.8 shares embedded in that – in your share of IAC of ANGI.

And even in the aftermarket trading on the ANGI – with the ANGI stock price movement, that's another $50 of value. So between the two pieces, you're at $290 per share of IAC and that ignores all the other businesses that Joey mentioned and our excess cash no-debt..

Thanks, so much guys. Operator Our next question will be from Jason Helfstein with Oppenheimer..

Thanks. I want to ask two about ANGI, and I'll go back in the queue for maybe another strategic question. So, at ANGI, it seems missing at Google algo undergoing pricing change is a rookie mistake and your team is not rookie. So, I guess what have you done from either a headcount or a systems change to prevent it doesn't happen in the future.

And then in the letter you're talking about moving into manage fulfillment at ANGI, similar to the Porsche[ph] model where a consumer purchases and schedule the job from you, then you hire the problem pocket a difference.

Can you talk about how the economics differs in that model versus the traditional lead model that you've had? And then how deep can this go because this doesn't really work for biddable projects which have been a big part of the home advisor model. Thanks..

Sure. I'll start and then I'll turn it to Brandon on some of that. In terms of how this happened, I agree an avoidable mistake I think start by saying that, Brandon certainly and team has the full support of IAC in working through this issue and we have absolute confidence that they will deliver that.

I think what happened here is, we did a significant acquisition and a significant integration and we are really focused on the things that we needed to get done in that acquisition and integration. And other things got ignored, that's not a good excuse. It is probably the most likely thing.

And in particular, in our customer acquisition where we had so much demand coming into the business that we took our eye off that ball on demand and we were focused on things like the supply side and other components around integration.

So we didn't naturally force these issues to the top or have to, but I think the good news is they ought to be fixable. And as it relates to the business model, I think you're right. This will not apply to all of the service requests in our network on home adviser.

I think there's still a significant portion of the business that will continue for a bit of jobs and things like that where the model can help. But there are lot of jobs that we both see today and match, a lot of jobs we see today don't match, and a lot of job we don't see today because the process is too annoying.

And that's what we're trying to solve here with pre-priced services and I think we can, it is a different from take rate. So to speak in the sense and I might have indicated in my [indiscernible], but the really exciting part about that is, instead of the service professional paying us, we paid service professionals and I think that works.

I would say it's different than maybe some of the other things you've mentioned or referred to in the sense that we have a marketplace today. We have a marketplace of service professionals and we're still operating in the middle of that marketplace, bringing those things together.

We're just simplifying some of the tools so that both sides don't need to hustle in the same way as they may have hustle historically. With that I'll turn to Brandon..

Yes, I think on the first question, I would agree with Joey that, with the focus on the merger and integration last year we probably had decreased focus on customer acquisition and didn't make some of the investments that we should've made. Separately on the manage fulfillment.

And the question of how far can you go and where does it work and where it does not.

I think the first thing you have to realize is we have, tens of billions of dollars of unfulfilled demand in categories and project types that you would think of as both easy to fit in this model, maybe a little more difficult to fit in this model and some that perhaps won't fit in this model in the long run.

There's a lot of room to grow and provide fulfilled services where it makes sense. And I think in some of the categories where you might think it's harder because they are traditionally bidded projects; I think you might be surprised at what the future could look like there.

And the ability to actually calculate a real-time bid and offer somebody a fixed price up front, people more and more are moving towards a desire for extremely low friction, digitally fulfilled solutions in ways that wouldn't have made sense traditionally.

And, I think our move in this direction offers a near-term, high confidence growth in the project types where we have a tremendous amount of total demand and where this works, as well as the opportunity to evolve. Like I said, in ways that may be surprising in terms of where this might apply..

And just, we talked about the letter and Brandon alluded to it, but we're starting out, with our pre-priced services on the 40% of our SRs that go unmonetized, we've already paid for them. They're already coming through the system.

So that obviously would be accretive to margins for sure and accretive to unit economics and then as Joey said, the take rates are a little better. And with all the products things that we're doing here, we're attacking three very important things for the health of the business and go-forward revenue and EBITDA margins.

One repeat rate, try and increase it; two, zero excess accepts, trying to decrease it, and three, SP retention, obviously trying to increase it. Our solution works for hundreds of thousands of SPs extraordinarily well and tens of millions of consumers extraordinarily well.

And this is about making it work better for those people and work for more and more homeowners and SPs..

Thanks and I will jump back in queue..

Thank you. Our next question will come from John Blackledge from Cowen..

Great, thanks.

So just two questions on ANGI, first for the top line, can you just further explain how the marketing issues impacted the 2Q revenue shortfall and how we should think about top line trajectory in 2020 and beyond? Just relative to your prior comments about ability to do 20% to 25% annual top line growth and then second, given the lower 2Q EBITDA and lower fiscal 2019 EBITDA guide, will the higher Google marketing costs persist into 2020 and more broadly, how should we think about the 2020 margin profile and then longer term, can you adjust to kind of mitigate some or all of the Google pricing impact over time.

Thank you..

Yes. Thanks. So in Q2 we actually started out the quarter well and consistent with our expectations. I think April came in at 23% year-over-year growth. However, in May we began to see significant costs, acceleration or continuation of – or pattern of significant costs acceleration.

And in our efforts to rein that in, applying some of the tactics that we used last year to optimize margin, we lost volume temporarily.

And overall May ended up coming in quite disappointing at I think 15% year-over-year, subsequent to that we sort of undid those changes and drew the conclusion that in fact, if you will, the entire environment has seen cost inflation. In other words, the price of doing business there in home services has simply gone up.

And so we have a lot of activities underway that obviously intend to fix that. And then there are a number of ways we can do that, including promising technologies on the sort of bidding engine front for SEM.

In terms of the rest of the year July was I think our best month of the year so far and we still expect growth to accelerate from the first half to the back half..

And in terms of the margin, we do still stand by and expect that 35% long-term margin targets that we articulated at the – when we announced the Angie's List deal. We think that'll probably take longer.

And we have to get this market, the marketing under control, which as Brandon, said we are – as we said in the letter marketing had stabilized here and our guide obviously reflects that. Even in this year just to talk about the margin profile of this business.

Even this year, we created – if you put marketing aside and you put our discreet investments that we made, we've talked about them before. It's handy. It's fixed. Its discrete investments in product of which Brandon spoke about, we created an incremental margin on everything, but marketing.

We created incremental margin in G&A, in product, in operations and in sales, and that incremental margin that allowed us to grow marketing. And marketing as a percentage of revenue was a lot higher this year obviously than it was last year, but actually it was the same as it was in 2017.

So we actually skipped a year in terms of our progress on margin. In terms of 2020, obviously we're working through this marketing issue. We think we have it scoped out, we can stabilize and we think we have a clear path to getting back under control. But I wouldn't expect material margin improvements next year either.

As we continue to work through the marketing issues and as we continue to roll out our pre-priced offering here. And like we always do, you may see us invest into – invest in success here, which we're excited to do. I talked earlier about repeat rates, zero accepts and SP retention.

And just to give you a good heuristic around it, if we increase any – if we increase those 10% and that's our repeat rate going from 1.8 to 2.0 and if we increase our zero – we get better on our zero accepts by 10% going from 40% to 36%. And we increased our SP retention 10%, that alone drives 6 margin points in terms of long-term margin.

So these are very powerful levers that we have at our disposal and everything we're doing on product is to get there..

Thank you..

Thank you. Our next question will be from Doug Anmuth with JP Morgan..

Hi, this is Cory Carpenter on for Doug. Thanks for the question.

Two, if I can, maybe first on ANGI, could you talk a bit about the service pro supply issue that you saw in the quarter? Maybe your level of confidence and being able to address that and how it could impact SP growth in the second half of the year? And then on Dotdash and Vimeo, could you talk about just what's driving the revenue acceleration at those businesses, in Vimeo specifically any update on the integration with Magisto? Thanks..

Sure. Thanks. I'll address the service pro question. First of all we made a change, I would say close to a year ago that really incentivize our sales force to focus on higher value, higher capacity service providers.

And you've seen that decision and the result in actions flow through in the form of a decelerating, sort of a nominal growth but accelerating spend per SP, over the last several quarters.

We are interested in SPs with higher capacity, but of course we also want nominal growth and we are in the midst of making additional changes that will hopefully give us both sides of that and will reignite nominal growth, particularly as we head into the remainder of the year and next year.

We will be focusing on bringing in small SPs and large SPs, those with higher capacity and those tend to operate in some of the categories where the businesses are smaller.

The reason for that is that we have customers coming to us for a broad range of services, including things like handyman services, cleaning services, and these tend to be smaller companies in general and we don't want to neglect them..

And you've seen obviously on some of the metrics around, our SP population, revenue per SP was up 14% to a record 1,161 this quarter. So our migration to quality and our focus on bigger budget SPs obviously is coming through.

I think, I mentioned once before that our 2018 cohort of SPs was the highest from a lifetime value perspective and it looks like in 2019 we're beating that..

I will cover Dotdash and Vimeo revenue acceleration.

On Dotdash, a lot of things that we've been working on for a long time, optimizing monetization, so again, staying the lowest ad density on the page and relative to competition, but having more effective ads and we're seeing that play out with repeat rate among advertisers, spending more and each of them spending more individually because of the ad performance.

We have a really simple, but I think somewhat unique thing among publishers at Dotdash right now, which is we'd say to the advertisers, just come and try the product and if the product works, spend more money and if it doesn't, don't, and we find that that's a very effective way to get people onto our platform and get people to stay on our platform because we encourage them to evaluate us as a publisher against any other publisher where they want to put ads and just look at the relative performance against the metrics that they want and it works.

And the reason it works is because the content that we have has intense embedded into it. It's not just news.

We don't really do news there, its content with intent and therefore that that is going to end up performing with the advertisers provided, we understand that intend, we can share that intend with the advertiser and by the way, that delivers a more compelling experience for the reader because they're getting something that's consistent with what they're trying to accomplish at that time.

So the more content we now put in there, the more we can grow that business and we're continuing to grow the content base, continuing to grow that more and invest more into that business, which shows up on the revenue acceleration side. On Vimeo, Magisto is going well. I think we're only two months into that.

So we haven't really done the integration, meaning where we're actually cross-selling to Vimeo user to Magisto or Magisto user to Vimeo that will happen I think relatively soon. Right now, the only thing that's happening is Magisto on its own is growing very nicely. It's going according to plan again, two months in.

I would hope so but it's going according to plan. The biggest driver of revenue growth on Vimeo, excluding the acquisition is the enterprise business that continues to grow very nicely and accelerate and we have big hopes for the enterprise business there.

We just rolled out a new product on that side where we're really starting to integrate some of the things that we've purchased previously, like Livestream and VHX, that's now on a very neat product called Vimeo Enterprise.

And, we had sales people there that of course helps drive growth, but really the product is resonating and seems to be bringing in bigger customers, spending more money and, happier. So it's a combination of things, but all the things that we think have a lot more gaps in the tank..

Thanks, Cory..

The next question will be from Ben Schachter with Macquarie..

Yes, I have a couple on ANGI's and then one on Match.

Can you quantify what percentage of service requests come from Google? And assuming Google does not reverse that change, where do you focus your efforts to increase non-Google driven requests? And then related to that change, are there issues with what Google did or is doing that that you think could or should be looked at by the regulators? And then separately on Match, they changed the payment flow on android and it's obviously really helping gross margin dollars.

I'm wondering if there are any other IAC businesses that could potentially see lower app fees. Thanks..

So I'll take the first part of that question, in terms of quantifying, our reliance on Google, just about 40% of our customer acquisitions come through Google. About a quarter of that 40% is actually people who are directly seeking at our brands response to either previous experience with us or perhaps some of our branded marketing and TV marketing.

So I think you can look at it as perhaps 30% reliance on finding new customers. Our long-term strategy has been to diversify our source of customer acquisition broadly. And we have over the years made that a priority.

And even though we're still at 30% reliance, that's way down from where it's been historically, but it's clear we have more work to do if we want to control our own destiny.

And so we will continue to not only get better and put more investment into mastering Google because it's an important place to find customers, but we will continue to make it a priority to diversify where we're putting dollars to work and where we're finding customers. And both of those things will remain important to us.

Separately, we also need – if we're going to sort of achieve our aspirations here, we need to become effectively a direct destination brand. And Glenn alluded to this in terms of repeat use, but what I would say is we need to form stronger bonds with our customers, add a more loyal relationship and see them come back directly to us more frequently.

The path to get there is essentially mostly through product and product innovation. And we have a lot of things in the pipeline that we will bring to market over the coming months that we think will make a very large difference there. Separately, while we talk a lot about the cost of acquisition and how it's gone up, which obviously is important.

Our strategy around fixed price sales can make a very large difference. First it positions us well with emerging consumer expectations. I think Joey said it well on the letter where people now expect solutions with the click of a button, not just information, particularly with millennials.

The expectation that you can transact digitally, even home services is going to become more and more prevalent. And our early experience integrating handy really already shows the level of engagement interest from a sales and conversion rates standpoint with our customers at home advisor.

Aside from that, the great thing about offering, essentially buy-it-now feature is that for this 40% of SRs or Service Requests, where we have not been able to match that consumer with a service provider, we will now have a solution broadly available for those folks, that does a couple of things, obviously improves the quality of the experience for those people in a dramatic way, but it also – these are service requests that we paid for.

And to have 40% of the service requests we paid for go unmonetized and unserved is obviously harmful to our unit economics. And if we can make great headway in monetizing those requests, all of a sudden the acquisition cost that we're paying don't look so prohibitive. And our buying power obviously as you understand would increase pretty dramatically.

And then lastly, and this also goes to the question of SB capacity, this – we have a plenty of problem here, which is – there is more consumer demands each year then that’s growing in balance with our ability to bring capacity to the market from the provider standpoint.

Obviously we've grown our service provider network dramatically, but it does not keep pace with the really unbelievable amount of consumer demands around home services. So, our traditional model works well, but with fix rate services we'll be able to complement that.

And the beautiful thing about it is, we'll be able to go to service providers and instead of asking them to pay us for an advertising product, we'll be able to take a job to them for which we will be paying them, and that's a powerful concept and I think a powerful tool to help us really bring a lot more provider capacity to the marketplace to serve all this underserved demand.

The question of regulators, look, we get increase from regulators all the time, as you would imagine, that is not our strategy, that is not our plan on how to address the issues that we have in this business, I think everything Brandon said is exactly right and is exactly the strategy.

The – if I say to make it really simple, we have to deliver a better product so that people come to us directly always, and there is blueprints for this. I think eBay did a nice job in this over time, I think Amazon is the ultimate, done a nice job over this.

It has to be that – and on today I believe that is absolutely true, our product is unequivocally better than the product of going to Google or going through Google to us, coming to us directly is the best solution in the marketplace right now.

But I also think we can make that meaningfully better, and meaningfully better than the alternative and we can deliver that, then we'll get the customers directly and that's our biggest strategic focus right now for sure.

In terms of your last question, lower app fees, I don't think it's a meaningful driver elsewhere in IAC, I mean, Mosaic does pay app fees and that business is entirely well split of iOS and Android. But I don't think that there is a meaningful untapped opportunity in those businesses right now. Next question..

Thank you. Our next question will be from Ross Sandler with Barclays..

Just a general question, around like the investment philosophy. So the release mentioned the Pinterest stake, which I think you've been asked about before, now we're talking about it.

So, can I guess you – can you talk about the history of that investment and what kind of return you guys realized? And then, as it relates to Turo and this is probably a much larger bet, where you don't have a controlling stake, Soft Bank ask in terms of, it being a later stage company and a minority investment.

So can you just talk about the overall thinking around the investment strategy going forward as it relates to controlling and non-controlling? And then maybe, what your play is on Turo specifically? Thank you..

Sure. Hi, good question. Ross, I answered a little bit the Turo on there. But I'll go a little bit deeper on that. In terms of Pinterest, we – I think we ballpark [indiscernible] frankly, we turned 2 million into 200 million something like that in that neighborhood..

We got 4.6 million net shares right now and you'll see it, our cash balance of 2.7 includes marketable securities of which the value of Pinterest at 630 is in that number..

Yes. Of course, we'd like to do that exclusively from now on. But I don't think that's going to be our strategy. We are – that actually originated with a woman named Shannon Fisher, who we back, who used to work for IAC and we backed with a pool of capital to make early stage investments and she did just a phenomenal job on that.

And Pinterest was a grand slam of course and there were other great ones there too. And so overall I think she’s just done a phenomenal job. She now has her own fund and I think continues to do a phenomenal job on that.

That is – now, I think spreading around minority investments and see big investments is not really a core function of IAC, it's not something you'll see us do.

A lot of – there will always be exceptions where we find something that makes sense for whatever reason either strategically, where we think we can learn something or we're – so in love with something, it's the only way in, but we're not focused on becoming a venture fund or significantly expanding venture investments.

I think that Turo, earlier it’s unique, it was a business that, so we thought fit with a lot of the themes that we've succeeded in historically, we've been helpful in historically and that we thought had great potential and this was the only way in that.

So we are open to those opportunities, but we are not fundamentally shifting towards pursuing that from him. We’ve significantly favor majority acquisitions, significantly favor majority deals or deals where there is a clear path to control and that will be our priority, just we will be open to alternatives.

Does that answer the question, Ross?.

Yes. Super hopeful..

Okay..

Thank you. Our next question will be from Dan Salmon with BMO Capital Markets..

Hi, good morning everyone. Maybe one for Joey/Brandon, I'll let you guys dive into the first one and maybe just a quick one for Glenn at the end.

But, just – Brandon, I appreciate the mea culpas on the marketing missteps, if we put those aside, could you maybe just step back a little bit and talk about the broader competitive environment for Angie right now? In particular, some of the bigger vertical internet players, or excuse me, horizontal players, I look at it like a Facebook marketplace where you're a partner obviously, but the Amazon Home Services, how are you viewing sort of what the big guys are doing in your space these days? And if there are any other major competitive changes you'd talk about.

And Joe, I'd love to hear your thoughts on that as well, since it does touch on the big guys and you're always thoughtful on that.

And then lastly, just for Glenn, I think, the last line of Joey's letter confirms this, but I just want to be clear on the timing here that it sounds like you will have an update on the Match and Angie stake process by this time next quarter..

Great, Brandon, why don’t you start?.

Sure. So I think in terms of competitive landscape in particular with the big platform players, obviously anytime they get involved in something, you want to keep an eye on it. But it's not, I guess from my perspective – it’s not materialized as a significant threat.

I think Amazon's efforts have mostly to-date focused on product installation and product support, which makes a ton of sense. I think Home Decor has always had that kind of service, so that's not really particularly new.

I don't think Facebook is really active in this space anymore, and obviously Google has competitive products, which perhaps compete with us from an acquisition standpoint. But I think in summary in the long run, there is a real desire for a vertically focused deep solution by homeowners.

And you're just not going to get the same depth of experience and the same focus from people that are doing this part time as they’re going to get from a team that's focused on this day in and day out. I think that's probably my view on the strategic front..

Yes, I agree with all that, I guess I add – it is – some of these businesses have some fundamental advantages for sure, distribution would be the biggest, Google has a massive distribution network, of course by far the biggest and Amazon does on the back of some other things.

But they don't have a fundamental product advantage and they don't have what we have, which is very hard, very labor intensive, very capital intensive which is the service professional network.

And we've spent a lot of time, a lot of capital and a lot of learnings on getting that right and how to satisfy a service professional and how to deliver them the thing that they want in the form that they want it.

These platforms, given their scale have generally been able to force people into the format that they already have and that isn't going to work for all service professionals. And we are focusing – focused on delivering this. We have to deliver the best products in the category, I'm confident we have, by far the best product in the category today.

And I'm also confident that things that we built, the service professional network in particular, but all the things we built around products that allow us to build that next generation of product and be that destination here.

And you see really in – particularly in the mobile landscape with apps, people like a dedicated solution for a dedicated problem. And I think we can be that solution and will be that solution so long as we stay ahead on products, which I'm confident we can do.

Was there another question there?.

Yes, just timing.

Will we reach a conclusion by the next earnings call?.

I think that's our target augments, not our guarantee lock that we’ll be there Dan, but that's certainly our goal..

And Dan, in terms of competition, as Match has proven over the last 18 months, as long as you continue to delight your customers, given the best product experience and invest in your brands, you can persevere through the so-called threats..

Right, thank you all..

Thanks, Dan..

Thank you. Our next question will be from Kunal Madhukar from Deutsche Bank..

Hi, thanks for taking the question, two for me. One, with regard to the service professional spend on marketing.

So on their budget, how much does Angie's list get today or Angie Home Services as a whole kind of gets today? How much of that do they spend on Google search and on other sources of traffic? And then on the spin, with regard to the debt, does that – and as you look at it and as you evaluate that spend process, do the – does the debt move with the spin-off companies or will that debt stay with IAC? Because if that does, then the lift would be significantly higher.

Thanks..

I lost a bit of that at the end. I'll cover the last bit and then go back to Brandon. We have the flexibility to move the exchangeable securities to either subsidiaries, that was part of the – I think that's through of all three different buckets of our exchangeable securities.

So that is something that goes into the consideration set in terms of how we might do a transaction. To the extent we pursue one or both, how we might do it? Those are things that will go into the consideration set..

Yes, Kunal, as we saw, we have $2.7 billion of cash, well in excess of our debt and each of our three financing entities Match, IAC and Angie have significant depth capacity there..

And then in terms of the service – share of service provider advertising budget, we're getting. The research is a little rough around that, but our best numbers today we're getting around a third for the providers that are part of our network. But of course, we also only have a small portion of the overall providers in the economy.

So there is both room on more share of wallet from an advertising budget standpoint, but also just getting more penetration into that market..

Thank you..

Thank you. Our next question will be from Brent Thill with Jefferies..

Thanks, good morning. One of the questions for investors is on the Match potential spin. Given that it has one of the highest operating margins in the industry.

What does that mean for your overall profitability? And are you effectively considering a big margin reset, given that hit?.

I don't think I followed the question. Are we – is Match, sorry, there is the math of Match’s margin relative to all the other businesses and one doesn't change the other, but yes, if we take a higher margin thing out of a total and what's left behind is smaller than a smaller margin. Does that answer your question or maybe I don't understand it..

Yes. Just the overall profitability hit Joey, how you think about managing the business, given that is one of the best performing stories that you've had and effectively the profitability is among the highest in the industry..

Got it. Look, we have a – one is that translates into course cash, Match’s operating margins translate into a course cash flow of IAC. There is – IAC is currently very well capitalized to the extent we pursue this, we can further well capitalize IAC in that, and there are ways to accomplish that through spin-offs and things like that.

So that, we can organize cash, we can organize the cask into different places and that's something that we think about and we’ll continue to think about. So it's a question really, there is one question, if – will each business be okay from a balance sheet perspective? And the answer to that is, we have lots of flexibility there.

When we talk about each individual business, it's a different story. Each individual business has a different margin profile, both short-term and long-term.

I think you're seeing now with Dotdash, where, I mean I said it earlier, I think, that Neil Vogel has just done a phenomenal job, we're starting to generate real margins there and that business is their perspective to generate cash flow, as we think great potential. Vimeo, Anjali Sud has done a very nice job at that business.

She is – we’re growing very nicely, we have I think margin potential there, that's not – I'm sure margin potential there, that's not short-term, that's longer-term. But that business as a recurring task business can have great margin potential, the Applications business delivers real margin, but each one of those things is different.

We'll have businesses generating margin, we'll have businesses consuming margin, and being in their investment stage like Vimeo is right now and that's all okay, that's not dissimilar from frankly where we were in 2008, when as we did four spins, we were really generating any cash flow or margin of note, we had lots of things in investment mode earlier in their stage – earlier in their life.

And we build things up to generate that margin and that cash flow..

And just to put another number around it, IAC, x-Match, x-Angie in 2018 had $1 billion for revenue, so there's a lot of opportunity embedded there..

And by the way, I skipped over applications and Ask Media business, which are two cash flow machines, I mean Tim Allen and Katie Van Den Bos who run those businesses are cash flow machines..

Okay. Just a quick clarification on ANGI. You don't believe this is anything external in terms of competitive forces. This was more internal and related to Google..

Yes. And actually, I think it's really specifically cost inflation from the search engine environment. And obviously, Google is the largest of those. And I know we spend a lot of time talking about, obviously, the impact of that, which, near term, is a headwind.

But the real opportunity for us is to address the other side of the ledger, which is we need to have breakthrough repeat use from our customers, so we're not having to acquire them, particularly multiple times through places like Google. And we need to bring more provider capacity to the problem of our 40% of unfulfilled demand.

And if we can do that, the – honestly, the acquisition cost will be somewhat irrelevant..

Great. Thank you..

Thank you. Our next question will come from Robert Coolbrith with Wells Fargo Securities..

Great. Good morning, thanks for taking my questions. couple of follow-ups on ANGI. First, on the Google issue, just wanted to maybe understand the cost inflation pay that did better.

Do you understand that to be a relevant assessment applying to aggregators versus the local SPs or a private issue across everyone in the category? Anything more you can tell us about that? And then going back to the 40% of SRs, the result in 0 Match is today, I imagine that's had a limitation on ad budget capacity or actual work capacity.

Out of that 40%, just wondering if you have a thesis on how that can be attributed across budget capacity – ad budget capacity versus actual work capacity among the SPs, now you're thinking about the opportunity to drive down that percentage with 0 Match SRs with the on-demand offering. Thank you..

Yes, great question. So with regard to cost inflation, just to put a number on it, we were seeing acquisition costs that were above – greater than 30% year-over-year, sometimes quite a bit above that. And so obviously, that's material.

In terms of why that's happening, our original assumption was that this was something that was within our control and that we could manage the margin back down without losing volume. Unfortunately what we found was it looks like it's just broad-based increasing cost and price, at least for Homeservices.

And we were not able to bring the price back down without losing substantial volume. In terms of what's causing it and whether it's targeted towards aggregators versus local SPs, no one knows. They don't – there's no visibility in there or transparency into that question or answer to that question.

However, I would highly doubt that we're paying a different price than your local SPs. It just doesn't seem reasonable.

I think that there are a bunch of factors, which are driving increased competition, including changes to the structure of the page, competition from other Google products to the traditional SEM product and, honestly, just more participants participating in the auctions. The cost there do typically go up every year, which isn't surprising.

What is exceptional is, just this year, volume of appreciation that's occurred this year. On the 40% of unfulfilled SRs, those are evenly distributed across all the project types that we service. Homeservices are an amazingly fragmented and hyper-local type of problem to solve.

And so the reason why we have so many that are unfulfilled is a combination of factors. Sometimes, we don't have a provider who does that service in that location. Often times, we do have a provider, but they're simply at Match capacity.

And in other times, we'll have a provider, but perhaps they have already spent all their advertising budget, again, largely because of the imbalance of too much consumer demand for the amount of provider capacity we can bring to bear.

And I think, fundamentally, obviously, our traditional model here continues to grow nicely, but unable to keep up with the growth in consumer demand.

So we have, I think, as our obviously top priority, is figuring out how to productize this demand and take it to market, take it to market, take it to providers in new and more compelling ways that complements our traditional service.

So offering a buy-it-now feature, either when we don't have anybody at all, or perhaps alongside local providers, will give us – will, one, give consumers, homeowners the option to choose the experience of their preference and for those that want a purely digital solution with standardized upfront pricing, they will have that option.

And then it gives us the opportunity, when someone does purchase, to take that demand, take that project out to a much broader set of providers, perhaps those for whom our traditional product isn't appealing.

Or maybe, those who are in our traditional product would have additional capacity and can take a job where they're going to get paid for it rather than having to pay us..

The one thing I'd add is I do believe that Google does not favor "aggregators." I don't love that term. Certainly, it referenced us. But – and I think that's a mistake on their part and that's an advantage on our part.

We add a lot of value in matching the right consumer with the right service professional, which takes a lot of technology and takes a lot of, to some extent, manual labor. And that delivers a – we think, a more compelling experience for the consumer, a better price for consumer because we can help the consumer through that process.

And when you go to the – without the aggregators, the consumer is somewhat left on their own. And I don't think Google's solution solves that for the consumer.

I actually think that solution, without players like us, makes it – I really believe, this makes it worse for the consumer that they end up with generally the highest price provider or a provider who's working their ecosystem in a way that may not be optimal for the consumer, the homeowner..

And our confidence in fixed price is borne of observable inputs from two very important learnings that we've had over the last year. One is the Handy experience. And for certain tasks, that's just the better experience with all the collateral benefits of repeat rate and customer satisfaction.

And Brandon was the architect and the driving force behind that acquisition.

And then Brandon invented a product last year, the opt-in product, which also taught us that the SP's capacity is actually a lot higher than his budgeted or her budgeted capacity, and that if we give someone a specific job, which the opt-in product is a path to fixed price, if we get them on a specific job, they react differently better.

Our win rates are higher for our SPs, and that also gives us a lot of room on the take rates..

All right. Next question..

Thanks..

Thank you. The next question will be from Mike Ng with Goldman Sachs..

Hi. Thank you very much for the question. Just had a few. First, in the letter, you said the majority of the guidance reduction for ANGI was because of higher marketing.

Can you talk a little bit about your decision to spend more marketing instead of dedicating even more to accelerate the rollout of the pre-priced services given the attractiveness there? And then on the higher marketing, is that simply a function of cost inflation? Or are you actually trying to increase reach and frequency and experiment with new channels? Thanks..

I think we turn it to Brandon. It’s a very good question, one that we have talked about quite a bit..

What was it again?.

Well, the first one is what is – why are you spending on marketing as against?.

Yes. So on the first question, we – we're going to do both. We are spending on marketing to continue to drive growth, to bring consumers to our service providers.

That might seem silly on the surface when we spend most of the time talking about lack of capacity, but the issue is that the nature of the business and the marketplace is extremely hyperlocal. And most of our advertising is on a national or, at least, regionally broad basis.

And so unfortunately, we have, in order to get the service request and customers and the demand from them that feed our service providers when we do have capacity, you also get a lot of request for which we don't. And there's really no easy way or no effective way to target at that level from a marketing perspective.

So we think, continuing to grow our marketplace, continuing to feed our growing network of providers needs to be a priority. All that said, part of the change here is to give ourselves the flexibility to radically accelerate our efforts around fixed price. We are going to move quickly. The goal is to expand as fast as it's possible.

That will largely not be governed by investment limitations, but will be governed by our ability to fulfill services at a high level of quality in a way that is satisfying to our customers. One thing we know for sure is that it's easy for us to sell these. We've launched – I think we refer to this earlier, but we recently expanded the business.

We've been operating several categories for most of the year. Traditional Handy categories, we recently expanded to 19 new categories where we're seeing very good customer engagement and conversion. So we know we can sell these services. What will be our limiting factor here is ensuring that we can scale and fulfill very reliably.

And I think we have more to learn there..

I think the answer to your second question, although I might have hopped on it, was that we see a comp. We do think that ecosystem has gotten more expensive and we do think we've had some [indiscernible] where our costs were not in control in ways where we've now brought them or in the process of bringing them under control. And I think we'll go.

We're almost out of time. We'll go on maybe until we can squeeze two more questions, but this may be the last question.

Operator?.

Thank you. Our next question will be from Ygal Arounian from Wedbush Securities..

Thanks guys. So feels like there's two kind of distinct but very closely related issues with Google. One is the algorithm issue you've talked about extensively. And then the other is that Google is just giving more of its real taste on its own products.

And so it's – what's your view on – does this change the overall dynamics of SP growth, how much you're consistently spending more on marketing? If consumers are going to Google and just looking – even if it's not a strong service and they're not getting the best experience that they might not know that, if they're clicking on the first couple of weeks, can that have a long-term impact on the actual SR growth trajectory? And that July was a really strong month.

I'm just curious what – if your outlook on the year on SR growth has changed at all. Thanks..

Yes, so we mentioned earlier that about 30% – 40% overall, but 30% that could be affected by these types of changes of our customer acquisition comes from Google, so we're really well diversified. And of course, we're still going to continue to push on that.

But we're also – we certainly believe that we can continue to be successful in the Google ecosystem. In fact, we have to be. It's too important of a place to find new customers. And so we are ramping up our investment and our focus and have some promising initiatives and technologies in the pipeline that we think are going to make a difference.

Longer term, we need to acquire our customers and keep them, as I mentioned earlier. Our focus – and fixed price is part of this, but there are other things as well. Our entire focus is to create a much stickier experience with the homeowners, such that we acquired them once and then they come back to us, time and time and time again.

I think, for us, that is the breakout change that will really transform the business in a number of different ways, both in terms of the quality of the service and the experience for homeowners, but also, obviously, in terms of the economic profile and margin profile. We've got a lot coming on that front.

You'll see a lot of changes over the coming year – coming 12 months that go directly to that opportunity..

And the 30% from Google on branding sense, I don't think there's new consumers discovering Google today in America and they're increasingly going to Google for this. And I'm certain that with a product that Google is offering there that there's not – they're not more likely just started to go to Google to see that product.

Will the 30% be more challenging? I think, yes. I expect that to be more challenging for eternity. But we're going to – we still got work to do in there. I think we can improve what we're doing in there for sure. And we've got the other 70% that's – the world is our oyster, and we feel – we're excited about the things that we're rolling out there.

And so to your last question, which is the last question we can answer is that the service request forecast, I don't – we’re 15% last quarter. 17% this quarter, we don’t think it’s going to materially increase from there, high-teens, maybe 20% on a go-forward basis.

But you know what, there is lot of volatility in the ecosystem for sure, and we just have a lot of different levers. Remember, you have revenue per SR as well here. And then as we continue to get more successful on fixed price, that could change the underlying metrics as well.

But it all supports, obviously, our 20% to 25% revenue growth on a go-forward basis..

All right. Thank you, everybody, very much for the quarter, for your questions. And we'll speak to you again in 90 days..

Okay. Thank you, ladies and gentlemen, this concludes today's teleconference. You may now disconnect..