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Financial Analysis of ION Media Networks -
February 11th, 2011
ION Media Networks (formerly known as Paxson Communications) is an American television broadcasting company that owns and operates over 60 television stations in most major American markets. It is now a privately owned company.
IAC/InterActiveCorp (NSQ: IACI) is an Internet conglomerate that owns a series of websites and other media properties including Ask.com, Match.com and Service Magic. On August 2008, IAC launched a divestiture and spun-off four of its bigger segments - HSN, Interval Leisure Group (IILG), Ticketmaster, |Interval Leisure Group (ILG) and Tree.com due to deteriorating financial performances in these operations. Following this restructuring, IAC recorded total revenues of $1.4 billion in 2008 and had been posting net profits for the four quarters ended in 31 October 2009. The new IAC includes its media and subscription-related businesses such as Ask.com search engine, Match.com dating service, online video site Vimeo and virtual would Zwinky. ICA plans to expand its emerging Internet businesses and invest part of its $1.8 billion cash pile in new media production segment in the face of fierce competition in the search business.
1 Company Overview
2 Business Financials
3 Business Segments
3.1 Media & Advertising (53.2% of 2008 revenues, 63% of 2008 operating income before amortization)
3.2 Match (8% of 2008 revenue, 41% of 2008 operating income before amortization)
3.3 Service Magic (4% of revenue, 12% of 2008 operating income before amortization)
3.4 Emerging Businesses (13% of revenue, -16% of 2008 operating income before amortization)
4 Trends and Forces
4.1 Spinning off major segments in a return to its core business
4.2 Acquisitions continue to capitalize the growth of online markets
4.3 Integrating Around Ask.com
4.4 Internet Advertising and E-commerce Strong During a Recession
IAC operates in the internet businesses that focuses on the following segments - media & advertising, online dating services, online matching services for consumers and home service professionals and other emerging businesses that provide online content/services. Since inception, IAC has grown from a media and electronic retailing company into an internet conglomerate through a series of acquisitions. In August 2008, IAC spun-off HSN, TicketMaster, Interval Leisure Group and Tree.com in hope to refocus on its core business. After the divestiture, IAC re-categorizes its business segments to media & advertising, Match, ServiceMagic and emerging businesses. Under the media & advertising segment, IAC operates Ask.com that provide search and related advertising services plus toolbars and applications. Other sites include Citysearch, an online local city guide and Evite, an online social planning website. For the Match segment, the company offers subscription-based online dating services through company-owned websites like Match.com. ServiceMagic provides services by matching consumers' home service requests with home service professionals. Other emerging businesses consist of Pronto.com, a comparison search engine that allows users to compare prices for various products offered by online retailers and Shoebuy.com, an online footwear and related apparel and accessories retail.
Figures shown above do not include divisions which were spun-off in August 2008 as they are recognized under discontinued operations. 
IAC's revenues were approximately $1.45 billion in 2008, recording an increase of 5% from 2007. Operating income in 2008 stood at $100,098 million, a 24% increase as compared to $80,484 million in 2007. The increase in revenues is primarily attributable to strong revenue growth at Pronto and Shoebuy in the emerging businesses. On top of that, revenues in Media & Advertising also improved due to improved revenue per query on proprietary search properties. ICA's search engines' results are powered by Google through a paid listing supply agreement. ServiceMatch also received a 27% increase in search requests driven by its marketing effort throughout the year.
However, the 24% growth in operating income before amortization in 2008 is much lesser versus in 2007, where operating income increased by 127% from 2006. This is due to the operating expenses IAC incurred in the restructuring of its Emerging Businesses, as well as operating expenses associated with a number of nascent businesses like InstantAction.com, RushmoreDrive.com and Connected Ventures. The result was further impacted by an additional $37.9 million expenses associated with the Spin-off in August 2008.
IAC 2007 10-K
Media & Advertising (53.2% of 2008 revenues, 63% of 2008 operating income before amortization)
IAC's Media & Advertising segment consists of IAC Search & Media, Citysearch, and Evite. The Search & Media division is the focus of this segment, as it includes Ask.com, which provides information search services, consumer applications, and targeted advertising. A substantial amount of its search business revenues are derived from paid listings like advertisements powered by Google.
In 2008, ICA's search business earned $778,809, only a 2.7% increase compared to the prior year. Despite the small growth in revenue in this segment, operating income before amortization increased 58% to $139.6 million, primarily due to the drop in traffic acquisition costs that amounted $43.7 million.
Since its acquisition of Ask.com in 2005, the company has significantly increased its focus - and spending - on its information searching and online advertising businesses. Despite heavy investment in its younger businesses, IAC faces strong competition from established providers such as Google (GOOG), Yahoo! (YHOO), and MSN, and is running Ask.com at a loss to gain market share and awareness amongst consumers.
Match (8% of 2008 revenue, 41% of 2008 operating income before amortization)
This segment serves 1.3 million customers through its subscription-based online personal services that provides a private and convenient environment for single adults to meet other singles. The brands and businesses within our Match segment are dating sites such as Match.com, uDate.com, and Chemistry.com. Revenues for this segment in 2008 were $365.5 million, recording an increase of 5% from 2007. However, operating income before amortization grew 16% to $91.3 million, increasing at a faster rate than revenue due to lower traffic acquisition costs.
Service Magic (4% of revenue, 12% of 2008 operating income before amortization)
Service Magic is an online marketplace that helps connect consumers with pre-screened and customer-rated home service professionals. Revenues contribution to IAC from this segment was up by 33% to $123.9 million. The growth is mainly attributable to a more active service provider and a 27% increase in service requests. As of December 31, 2008, Service Magic has more than 56,000 home service professionals providing home services in more than 500 categories.
Emerging Businesses (13% of revenue, -16% of 2008 operating income before amortization)
Emerging Businesses segment consists mainly of Shoebuy, an Internet retailer of footwear and related apparel and accessories and Pronto, a merchandise price comparison search engine. Other sites include Gifts.com, Connected Ventures, InstantAction.com, VeryShortList.com, RushmoreDrive.com, Life123.com and The Daily Beast, among other nascent businesses that provide online content and/or services. Emerging Businesses recorded total revenue of $196.6 million in 2008, up by 35% since 2007. Shoebuy and Pronto contribute majority of the revenue growth, primarily due to improved customer acquisitions and monetization. On the contrary, operating loss before amortization increased to -$35.5 million in 2008, which is up 348% compared to the prior year. The increased in losses was caused by an increased in expenditures in relation to the company's decision to restructure its interests in its business ventures. Also, the jump in operating losses was also due to an increased in expenses associated with various early state businesses like InstantAction.com, RushmoreDrive.com and Connected Ventures.
Trends and Forces
Spinning off major segments in a return to its core business
Tough times in IAC's larger operations such as HSN, TicketMaster, Lending Tree and Interval led to a divestiture by the company in 2008. Diller's plan to meld an array of online assets into a cohesive Internet-based business never quite happened. HSN had been suffering from poor merchandising decisions - it ordered too many products which led to excess inventory and larfer shipping and handling costs. Ticketmaster also encountered rising ticketing royalty rates and advertising expenses. The situation worsened when the ticketing service provider lost one of its biggest customers, Live Nation (LYV). LendingTree.com was hit badly by the slumping US market. By shrinking the company down to a core of Internet businesses, IAC hopes to better capitalize its resources on the Web media and services.
Sales breakdown in 2007 among the five segments were as follows:
'New' IAC 25%
Ticket Master 19%
Lending Tree 3%
Acquisitions continue to capitalize the growth of online markets
IAC operates in a variety of markets online. In most of these markets, such as online retailing, the internet is already widely accepted as a means for commerce. However, the company has also made investments in developing markets, which are in their early stages of growth. In April 2009, IAC bought UrbanSpoon, a restaurant recommendation service. Although terms of the deal were not disclosed, it is believed that the acquisition was worth within the millions of dollars range.
Integrating Around Ask.com
After acquiring Ask.com in 2005, IAC has started to integrate its other offerings around the search site. By adding Ask.com toolbars and applications to other sites owned by IAC, it can drive higher search volumes and generate more revenues from targeted advertisements. Also, Ask.com can use its targeted results to help push traffic to other IAC sites. While this strategy depends on Ask.com gaining popularity and market share, it will help expose the site to users of IAC's other products, which are often already strong brands. A distribution partner of Google, Ask.com is ranked the fourth largest search engine and has a market share of approximately 4%, despite Google's dominance.
Internet Advertising and E-commerce Strong During a Recession
Even though total advertising spending had declined due to the US economic slow down, internet advertising and e-commerce have proven to be surprisingly robust. Online sales went up 17% in the first quarter of 2008, driven by targeted search ads that have helped online stores outperform their physical counterparts. Online ad prices are believed to be moving to an upward trend after it bottomed in January 2009. Rebounding ad-prices, together with its partnership with Google will benefit IAC in terms of revenue growth and search traffics.
Media & Advertising: The focus of IAC's Media & Advertising segment is its Ask.com search service, which competes with established providers such as Google (GOOG), Yahoo! (YHOO), and MSN. Ask.com currently represents about 2.3% of the query market share in the United States. Other competitors include:
Match: The Match and Entertainment businesses compete in fragmented industries, although Match does have some large competitors:
Yahoo! (YHOO) Personals