ANGI Homeservices Inc. — Q2 2020 Form 10-Q
Business context and reporting period. The company operates home-services marketplaces and related advertising and subscription businesses through brands including HomeAdvisor, Angie’s List and Handy. This unaudited quarterly report covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods; it was filed August 10, 2020. IAC held 85.1% of ANGI’s economic interest and 98.3% of its voting interest at quarter-end.
Financial performance
Amounts below are in millions, except per-share data. Adjusted EBITDA is a non-GAAP measure.
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Revenue | $375.1 | $343.9 | $718.7 | $647.3 |
| Operating income | $17.6 | $11.4 | $1.3 | $7.8 |
| Net earnings attributable to ANGI shareholders | $12.7 | $7.0 | $3.7 | $16.9 |
| Diluted EPS | $0.02 | $0.01 | $0.01 | $0.03 |
| Adjusted EBITDA | $57.9 | $51.4 | $92.3 | $88.6 |
| Operating cash flow | Not separately provided | Not separately provided | $127.8 | $103.0 |
- Revenue and mix: Q2 revenue grew 9%; North America rose 10% to $357.4 million, while Europe declined 10% to $17.6 million. H1 revenue increased 11%, with North America up 12% and Europe down 9%. The United States generated 94% of revenue in both periods.
- Margins: Q2 operating margin was approximately 4.7%, versus 3.3% in 2019; Adjusted EBITDA margin was approximately 15.4%, versus 15.0%. H1 operating margin was approximately 0.2%, versus 1.2%; Adjusted EBITDA margin was approximately 12.8%, versus 13.7%.
- Cash flow and investment: H1 capital expenditures were $24.7 million, compared with $39.1 million. Operating cash flow less capital expenditures was approximately $103.1 million, versus $63.9 million in H1 2019; this is a simple calculation, not a company-reported non-GAAP measure. Financing outflows included $54.4 million of share repurchases, $11.5 million of stock-award withholding taxes and $6.9 million of term-loan principal payments.
- Liquidity and debt: June 30 cash and equivalents were $421.0 million, versus $390.6 million at year-end 2019. Current assets were $534.3 million and current liabilities $255.3 million. Term-loan principal was $240.6 million; $13.8 million was current, with the remainder due by November 2023. The $250 million revolving facility was undrawn. The company reported compliance with its debt covenants and no covenant-based restrictions on repurchases or distributions at quarter-end.
Material changes versus the prior period
- Marketplace service requests increased 18% to 9.4 million in Q2, but monetized transactions rose only 2% to 4.5 million. H1 service requests increased 11%, while monetized transactions increased 1%.
- Effective January 1, 2020, Handy and HomeAdvisor pre-priced jobs shifted from net to gross revenue presentation. This added $15.3 million to Q2 revenue and $30.5 million to H1 revenue, with related costs also increasing; reported growth therefore is not directly comparable without considering this presentation change. Revenue recognition for HomeAdvisor pre-priced jobs also generally occurs later, upon job completion.
- Q2 operating income and Adjusted EBITDA improved, but H1 operating income declined 83% and net earnings attributable to shareholders fell to $3.7 million from $16.9 million. H1 2020 included a $5.9 million income-tax benefit, principally from a deferred-tax adjustment and foreign loss carryforwards; H1 2019 included a $12.0 million tax benefit, largely related to stock-based awards.
- Cost of revenue rose sharply because of gross presentation. Bad-debt expense increased, including expected credit losses associated with COVID-19 and anticipated losses from Angie’s List advertising professionals. Depreciation also increased, while interest expense decreased as rates and average loan balances fell.
- Europe remained challenged: H1 operating loss widened to $6.7 million from $5.5 million, and Adjusted EBITDA loss widened to $4.1 million from $2.7 million.
Outlook, management commentary and risks
- Management provided no specific revenue or earnings guidance in the supplied filing text. It expected 2020 capital expenditures to be approximately 25%–30% below 2019’s $68.8 million, principally due to lower leasehold-improvement spending.
- Management said cash, available borrowing capacity and expected operating cash flows should fund normal requirements for the foreseeable future, while noting that COVID-19 or other factors could reduce liquidity. It characterized access to capital as ample but cautioned that financing might not be available on favorable terms or at all.
- COVID-19 effects were mixed: March demand weakened, particularly for discretionary indoor projects, and Q2 service requests rebounded above pre-pandemic growth levels. Labor and materials constraints among service professionals limited the company’s ability to monetize requests. A U.S. resurgence beginning in June could weaken demand and/or monetization; uncertainty also impeded forecasting.
- Other stated risks include competition, search-engine traffic and marketing costs, service-professional supply and contractor classification, cybersecurity and data privacy, international operations, acquisitions, and dependence on IAC. IAC’s control of voting power gives it influence over financing decisions.
- The company disclosed ordinary-course litigation and highlighted a HomeAdvisor service-professional class action alleging deceptive lead and charge practices. ANGI said it believes the allegations are without merit and will defend the case; it reported no material developments. Management stated that no pending proceeding was believed likely to have a material adverse effect, while acknowledging litigation and contingencies carry uncertainty.
- The company repurchased approximately 7.6 million shares in H1 for about $53.4 million on a trade-date basis and had 20.1 million shares remaining under its authorization at June 30. Separately, it disclosed $100.4 million of unrecognized equity-award compensation cost expected to be recognized over a weighted-average 2.3 years.
Most important facts for investors to verify
- How much of reported revenue growth reflects underlying demand and monetization versus the net-to-gross accounting change.
- Whether service professionals’ labor and materials constraints ease, allowing the company to convert elevated service requests into paid transactions.
- Trends in credit losses, including the allowance for credit losses and anticipated losses from advertising professionals.
- Whether COVID-19 resurgence, European platform migration and currency effects continue to pressure results.
- Debt covenant headroom, future cash needs for debt service and equity-award withholding taxes, and the pace of share repurchases.
- Developments in the HomeAdvisor litigation, tax audits and unrecognized tax benefits.