ANGI Homeservices Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 10, 2018. ANGI operates digital marketplaces connecting homeowners with home-service professionals, including HomeAdvisor and Angie’s List. The September 2017 combination means year-over-year comparisons include a full quarter of Angie’s List in 2018 but not in Q1 2017, and are not fully comparable.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $255.3 million | $150.7 million | Up 69%; includes $57.9 million from Angie’s List and growth in existing marketplaces and Europe. |
| Operating income (loss) | $(10.8) million | $1.4 million | Operating margin approximately (4.2%), versus 0.9%. |
| Net income (loss) | $(9.1) million | $25.9 million | 2017 included a $25.9 million income tax benefit; 2018 tax benefit was $4.0 million. |
| Net income (loss) attributable to ANGI shareholders | $(8.9) million; $(0.02) per share | $26.6 million; $0.06 per share | Per-share results reflect weighted average shares of 478.3 million in 2018 and 414.8 million in 2017. |
| Adjusted EBITDA | $36.6 million | $10.2 million | Up 259%; margin approximately 14.3%, versus 6.8%. Non-GAAP measure excluding stock compensation, depreciation and acquisition-related amortization/impairment. |
| Cash from operating activities | $11.1 million | $8.1 million | Positive operating cash flow despite GAAP net loss. |
| Cash and cash equivalents | $228.7 million | $221.5 million at Dec. 31, 2017 | Quarter-end balance. |
| Debt | $271.6 million term-loan principal; $2.4 million related-party debt | $275.0 million term-loan principal at Dec. 31, 2017 | Term loan due November 2022; reported debt is subject to scheduled amortization and covenants. |
Liquidity and cash flow: Investing activities provided $1.5 million, including $10.4 million of proceeds from the sale of Angie’s List’s Indianapolis campus, partly offset by $8.9 million of capital expenditures. Financing activities used $5.4 million, including a $3.4 million term-loan principal payment and $2.9 million for employee award withholding taxes. Management said cash, cash equivalents and expected operating cash flows should fund normal operating needs, debt service and planned investment for the foreseeable future.
Material changes and operating performance
- North America revenue rose 71% to $236.0 million; Europe revenue rose 52% to $19.3 million. Marketplace revenue increased 28% to $165.6 million, while Advertising & Other revenue increased to $70.4 million, largely reflecting Angie’s List.
- Marketplace service requests increased 38% to 5.0 million, and Marketplace Paying Service Professionals increased 24% to approximately 194,000. The company reported approximately 41,000 advertising service professionals.
- Adjusted EBITDA improved substantially, but GAAP operating results declined to a loss. Management attributed the difference principally to higher stock-based compensation (including $19.1 million related to the combination), acquisition-related intangible amortization and depreciation.
- Selling and marketing expense was $137.9 million, or 54% of revenue, versus $95.9 million, or 64%. General and administrative expense was $76.3 million, or 30% of revenue, versus $36.7 million, or 24%; product development expense rose to $15.8 million from $5.6 million.
- Operating cash flow included substantial noncash adjustments, while working capital absorbed cash, including a $17.7 million increase in accounts receivable and a $13.7 million increase in other assets, partly offset by higher deferred revenue.
Outlook, unusual items and risks
- Management expected 2018 capital expenditures to be approximately 65% above 2017, driven partly by Denver headquarters and Indianapolis office investments and product software development.
- Management estimated approximately $5 million of remaining 2018 transaction-related expenses, including deferred-revenue write-off effects. Combination-related stock-based compensation was expected to be approximately $50 million for the remainder of 2018, $40 million in 2019 and $25 million in 2020.
- Adoption of ASC 606 in January 2018 capitalized qualifying sales commissions instead of expensing them immediately. It increased Q1 operating results by $6.1 million and net income by $4.6 million versus the prior revenue standard; the company expected to reduce 2018 commission expense by approximately $13–17 million.
- The company cited risks including competition, market adoption of online home services, demand and consumer spending, service-professional relationships, marketing effectiveness, technology and cybersecurity, acquisitions, litigation, indebtedness and dependence on IAC. IAC held 86.8% of economic interest and 98.5% of voting interest at quarter end.
- The term loan requires a maximum consolidated net leverage ratio of 4.5 to 1.0 and minimum interest coverage ratio of 2.5 to 1.0, and is secured by substantially all assets of the company and guarantors, subject to exceptions.
- A putative service-professional class action against HomeAdvisor alleges deceptive practices regarding leads and charges. Class certification remained unresolved; the company stated it would defend the case. Management did not identify pending legal proceedings it believed would individually or collectively have a material adverse effect, while noting litigation outcomes remain uncertain.
- If all vested and unvested converted stock appreciation rights outstanding at March 31 were exercised, the company estimated it could issue 17.4 million Class A shares and remit $236.1 million in employee withholding taxes, assuming a 50% withholding rate.
Important facts for investors to verify
- How much of reported revenue growth and Adjusted EBITDA improvement reflects the Angie’s List combination versus organic growth, and the continuing comparability effects of acquisitions.
- The recurring operating cost base and the effect of combination-related stock compensation, amortization and integration spending on GAAP profitability.
- Whether service requests and paying-professional growth translate into durable revenue, collections and cash generation, given rising receivables and bad-debt expense.
- Capital expenditure plans, term-loan covenant headroom and potential cash needs from net-settled equity awards.
- Developments in the HomeAdvisor class action, tax uncertainties and the company’s relationship with controlling shareholder IAC.