ANGI Homeservices Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. This is an annual report, not a standalone Q4 filing. The filing also provides unaudited fourth-quarter results. ANGI operates North America and Europe home-services marketplaces and directories, including HomeAdvisor, Angie’s List, Handy and Fixd Repair. IAC controlled approximately 84.1% of ANGI’s economic interest and 98.1% of its voting power at year-end.
Key financial results
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $1,326.2 million | $1,132.2 million | +17% |
| Operating income | $38.6 million | $63.9 million | -40% |
| Net earnings attributable to ANGI shareholders | $34.8 million | $77.3 million | -55% |
| Diluted earnings per share | $0.07 | $0.15 | Lower |
| Adjusted EBITDA (non-GAAP) | $202.3 million | $247.5 million | -18% |
| Operating cash flow | $214.2 million | $223.7 million | Lower |
Operating margin was approximately 2.9% in 2019 versus 5.6% in 2018; net margin was approximately 2.7% versus 6.8%. Adjusted EBITDA margin was 15% versus 22%. These margins are calculated from reported figures.
- Revenue mix and activity: Marketplace revenue rose 27% to $985.2 million, led by consumer connection revenue up 30% to $913.5 million. Marketplace service requests increased 17% to 27.4 million; paying service professionals grew 3% to 220,000. Advertising & Other Revenue declined 8% to $264.7 million, principally following the Felix sale, partly offset by Fixd Repair.
- Segment results: North America revenue grew 18% to $1,249.9 million, while operating income fell to $49.0 million and Adjusted EBITDA declined 18% to $208.2 million. Europe revenue increased 9% to $76.3 million; its operating loss narrowed to $10.3 million and Adjusted EBITDA loss to $5.9 million.
- Costs and profitability: Selling and marketing expense rose 35% to $733.2 million, or 55% of revenue versus 48%. Management cited higher online and television advertising, less favorable Google traffic mix and more expensive paid service requests. Bad debt expense increased to $64.3 million from $47.2 million. Depreciation rose 64% to $39.9 million, reflecting software development and office improvements.
- Liquidity and debt: Cash and equivalents were $390.6 million at year-end, up from $337.0 million; no marketable securities remained. Term-loan principal was $247.5 million, due November 2023, at a 3.25% variable rate at year-end. The $250 million revolving facility was undrawn. The company reported compliance with debt covenants and said available cash, revolver capacity and expected operating cash flows should fund foreseeable operating needs.
- Capital allocation: Capital expenditures were $68.8 million, compared with $47.0 million in 2018. The company repurchased approximately 7.3 million shares for $57.9 million during 2019. Shareholders’ equity was $1,323.6 million and total assets were $1,921.6 million.
Quarterly results and material changes
In Q4 2019, revenue was $321.5 million versus $279.0 million in Q4 2018. Operating income was $6.2 million versus $17.9 million; net earnings attributable to ANGI shareholders were a loss of $0.1 million versus earnings of $36.7 million. Q4 2018 included a $10.0 million after-tax gain related to the Felix sale.
Full-year net earnings fell despite revenue growth, reflecting lower Adjusted EBITDA and higher depreciation, partly offset by lower stock-based compensation and amortization. Adjusted EBITDA declined primarily due to higher marketing costs, increased bad debt expense and investments in Handy and Fixd Repair. The 2018 comparison included costs related to the Combination and Handy acquisition, which partially offset the year-over-year EBITDA decline.
Outlook, risks and unusual items
- Management expected 2020 capital expenditures to be approximately 10% below 2019’s $68.8 million, mainly due to lower leasehold-improvement spending. It expected the year-over-year increase in marketing expense to be more modest in 2020, particularly in the second half, as new processes took effect. No specific revenue or earnings guidance is provided in the filing.
- Effective January 1, 2020, revised Handy terms and certain HomeAdvisor pre-priced offerings require gross revenue presentation rather than net presentation. This changes reported revenue presentation; for pre-priced jobs, revenue recognition is generally later, when the service professional performs the job.
- Key risks include intense competition and reliance on Google and other third-party traffic sources; economic sensitivity of home projects and service-professional advertising; service quality and review integrity; privacy, cybersecurity and regulatory compliance; and possible reclassification of Handy providers from independent contractors to employees. The filing describes ongoing proceedings challenging contractor classification.
- IAC’s voting control, related-party service and tax arrangements, and potential conflicts of interest limit the influence of other shareholders. Variable-rate debt exposes ANGI to interest-rate risk: a 100-basis-point LIBOR change would alter annual term-loan interest expense by approximately $2.5 million.
- A putative service-professional class action alleging deceptive HomeAdvisor lead and fee practices remained in discovery, with motions to dismiss certain claims pending. Management said it believed the claims lacked merit and did not expect pending litigation to have a material effect, while noting outcomes remain uncertain.
- Other notable items: the company adopted lease accounting in 2019, recording $69.4 million of right-of-use assets and lease liabilities at adoption; no goodwill or indefinite-lived intangible impairment was recorded. Ernst & Young gave an unqualified opinion on the financial statements and internal controls; stock-based compensation was identified as a critical audit matter.
Investor verification priorities
- Track whether marketing efficiency and paid-service-request profitability improve, particularly given the 35% rise in selling and marketing expense and the Google traffic shift.
- Assess whether Marketplace growth converts into stronger operating profit and cash generation, including the effects of rising bad debt and accounts receivable.
- Reconcile future reported revenue and margins for Handy and pre-priced jobs after the 2020 gross-presentation and recognition changes.
- Review term-loan covenant headroom, variable-rate exposure, scheduled principal payments and the availability of the undrawn revolver.
- Monitor contractor-classification proceedings, the HomeAdvisor service-professional litigation, and privacy or digital-services-tax developments.
- Evaluate IAC’s control, related-party arrangements and potential equity dilution, including awards and share-repurchase activity.