ANGI Homeservices Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed August 9, 2018. The company operates digital home-services marketplaces and related brands, including HomeAdvisor and Angie’s List, across North America and Europe. IAC held 86.4% of economic interest and 98.5% of voting interest at quarter-end.
Financial highlights
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $294.8 million | $180.7 million | $550.1 million | $331.5 million |
| Operating income (loss) | $23.3 million | $(2.8) million | $12.5 million | $(1.4) million |
| Adjusted EBITDA | $67.0 million | $15.0 million | $103.6 million | $25.2 million |
| Net earnings attributable to ANGI shareholders | $22.9 million | $0.3 million | $14.0 million | $26.9 million |
| Operating cash flow | Not separately presented | Not separately presented | $73.6 million | $31.0 million |
Q2 operating margin was about 7.9%, versus negative 1.6% a year earlier; Adjusted EBITDA margin was 22.7%, versus 8.3%. For the first half, operating margin was about 2.3% and Adjusted EBITDA margin 18.8%. Adjusted EBITDA is a non-GAAP measure that excludes stock compensation, depreciation and acquisition-related amortization and impairments.
- Q2 revenue increased 63%; marketplace revenue grew 31%, with service requests up 30% to 6.8 million and paying service professionals up 23% to 202,000. North America accounted for 94% of revenue; Europe revenue rose 14%.
- First-half revenue increased 66%; marketplace revenue grew 30%. First-half net earnings were lower year over year, in part because 2017 included a substantially larger income-tax benefit.
- At June 30, cash and cash equivalents were $255.6 million, current assets $354.0 million and current liabilities $172.0 million. Total debt carrying value was approximately $267.1 million, including $251.7 million of third-party debt and $1.6 million related-party debt net of issuance costs. The term loan principal was $268.1 million, due November 2022, at 4.36% interest.
- First-half investing cash outflow was $11.0 million, including $21.4 million of capital expenditures and $10.4 million of proceeds from the sale of Angie’s List’s campus. First-half financing cash outflow was $28.3 million, including $21.4 million of withholding taxes on net-settled equity awards and $6.9 million of term-loan repayments.
Material changes and comparability
Growth comparisons are materially affected by the September 2017 combination with Angie’s List, which was included for a full period in 2018 but not in the 2017 reported results. Angie’s List contributed $58.5 million of Q2 revenue and $116.4 million for the first half, including deferred-revenue write-offs of $1.8 million and $4.6 million, respectively. Comparisons also reflect acquisitions, including HomeStars and MyBuilder. Reported 2017 figures were combined historical statements, so periods are not fully like-for-like.
Q2 growth also reflected HomeAdvisor marketplace expansion and improved selling and marketing expense as a percentage of revenue. Operating income included higher stock-based compensation and acquired-intangible amortization. Adoption of the new revenue standard capitalized certain sales commissions, increasing operating income by $2.1 million in Q2 and $8.2 million for the first half; the adoption added $25.6 million to opening retained earnings.
Outlook, commentary and risks
- Management said existing cash and expected positive operating cash flow should fund foreseeable operating needs, debt service, capital spending and commitments. No revenue or earnings forecast was provided.
- 2018 capital expenditures were expected to be about 80% higher than in 2017, reflecting software investment and office expansion. Remaining 2018 transaction-related expenses, including deferred-revenue write-offs, were estimated at approximately $2 million. Combination-related stock compensation was expected to be about $30 million for the remainder of 2018, $40 million in 2019 and $25 million in 2020.
- The term loan requires a maximum consolidated net leverage ratio of 4.5-to-1.0 and minimum interest coverage of 2.5-to-1.0. The company reported no related financing limitations at June 30. Debt is secured by substantially all assets of the company and specified guarantors.
- Management cited competition, online-market adoption, economic conditions, service-professional relationships, marketing effectiveness, technology and cybersecurity, acquisition integration, litigation, IAC-related matters and indebtedness as risks. IAC’s voting control may affect financing decisions.
- HomeAdvisor faces putative service-professional class litigation alleging deceptive practices; class certification remained unresolved. A related separate putative class action was filed in July 2018. The company disputes the allegations and says it will defend the cases. Management stated that no pending proceeding was expected to have a material adverse effect, while noting contingencies carry uncertainty.
- The company recorded income-tax benefits of $1.8 million in Q2 and $5.7 million for the first half despite pre-tax income, primarily due to excess tax benefits from equity awards. Tax Act estimates remained provisional. Management expected the federal corporate tax-rate reduction to benefit future liquidity.
Important facts for investors to verify
- Assess organic marketplace growth separately from Angie’s List inclusion, acquisitions, currency effects and the revenue-standard change.
- Review Adjusted EBITDA reconciliations and the scale, timing and cash consequences of combination-related stock compensation and equity-award withholding.
- Monitor cash conversion, receivables and capitalized commissions, alongside planned capital spending and debt-service requirements.
- Track term-loan covenant headroom, interest-rate exposure and IAC’s control over corporate and financing decisions.
- Follow developments in the HomeAdvisor service-professional litigation, tax audits and provisional Tax Act accounting.