ANGI Homeservices Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 14, 2018. This is an annual filing, not a standalone Q4 report. ANGI Homeservices combined IAC’s HomeAdvisor business with Angie’s List on September 29, 2017 and began trading publicly on October 2, 2017. Accordingly, 2017 results include Angie’s List only from the combination date, and comparisons with 2016 are not fully like-for-like.
Business context
The company operates home-services marketplaces and related businesses across North America and Europe, including HomeAdvisor, Angie’s List, HomeStars, MyHammer and MyBuilder. It reported two segments: North America and Europe. At year-end, HomeAdvisor had approximately 181,000 paying service professionals and generated 18.1 million service requests in 2017; Angie’s List had approximately 45,000 advertising service professionals.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $736.4 million | $498.9 million |
| Operating income (loss) | $(147.9) million | $24.1 million |
| Net income (loss) | $(104.5) million | $10.6 million |
| Net income (loss) attributable to ANGI shareholders | $(103.1) million | $13.1 million |
| Diluted earnings (loss) per share | $(0.24) | $0.03 |
| Adjusted EBITDA | $39.2 million | $44.5 million |
| Operating cash flow | $41.8 million | $47.9 million |
| Capital expenditures | $26.8 million | $16.7 million |
Revenue grew 48%. Marketplace revenue increased 36% to $581.4 million; North America revenue grew 47% to $678.9 million, while Europe revenue rose 55% to $57.5 million, including acquisition contributions. Operating margin was approximately (20.1)% and net margin approximately (14.2)%. Cost of revenue was 5% of revenue. Adjusted EBITDA margin declined to approximately 5% from 9%.
Q4 2017 revenue was $223.2 million, operating loss was $33.9 million, and net loss was $58.2 million. Q4 included after-tax stock-based compensation expense of $15.6 million and combination-related costs of $13.8 million, including $7.6 million of deferred-revenue write-offs.
At December 31, 2017, cash and cash equivalents were $221.5 million and current assets were $262.4 million, compared with current liabilities of $171.0 million. The resulting current ratio was approximately 1.5. The company had $275 million principal outstanding under a term loan, plus $2.8 million related-party debt; cash was below total principal debt by approximately $56 million. The term loan bears variable interest, at 3.38% at year-end, and matures November 1, 2022.
Material changes and unusual items
- Revenue growth reflected higher service requests and paying professionals, acquisitions, and the addition of Angie’s List. HomeAdvisor service requests rose 37% to 18.1 million and paying professionals rose 26% to 181,000.
- Operating results were significantly affected by $149.2 million of stock-based compensation, including $122.1 million related to the combination, higher amortization following acquisitions, and $44.1 million of combination-related transaction, integration, severance and retention costs.
- Adjusted EBITDA was down 12% despite revenue growth, as increased marketing, compensation, combination expenses, bad debt and deferred-revenue write-offs offset the higher revenue. Europe Adjusted EBITDA loss widened to $11.0 million.
- The company recorded a $49.1 million income tax benefit overall, including a $33.0 million tax expense from remeasuring deferred tax assets after the U.S. corporate tax rate reduction. The filing says certain Tax Act amounts remained provisional.
- Cash from operations decreased to $41.8 million. Investing used $93.2 million, including $66.3 million for acquisitions and $26.8 million of capital expenditures; financing provided $235.3 million, including the $275 million term loan borrowing.
Outlook, risks and contingencies
Management said existing cash and expected positive operating cash flow should fund normal operating needs for the foreseeable future. It expected 2018 capital expenditures to be approximately 70% higher than 2017, partly for software development and a new headquarters, and expected $10–$20 million of remaining combination-related expenses, including deferred-revenue write-offs. Stock-based compensation arising from the combination was expected to be approximately $70 million in 2018. The filing does not provide a formal revenue or earnings forecast.
Key risks include competitive pressure and reliance on paid search and marketing; uncertain consumer and professional adoption of online marketplaces; integration and synergy execution; cybersecurity, privacy and evolving regulation, including the forthcoming GDPR; international and foreign-exchange exposure; variable-rate debt and loan covenants; and IAC’s control and related-party arrangements. IAC held approximately 86.9% of the economic interest and 98.5% of voting power at year-end. The company disclosed a putative HomeAdvisor service-professional class action alleging deceptive lead and charge practices; class certification remained unresolved, and management said it would defend the case. Management did not identify pending litigation expected to have a material adverse effect, but noted outcomes are uncertain.
Most important facts for investors to verify
- Assess the underlying trend in revenue and profitability separately from the partial-year Angie’s List inclusion, acquisitions and one-time combination costs.
- Review the reconciliation of Adjusted EBITDA to GAAP results and the extent to which elevated stock compensation and integration costs persist.
- Verify 2018 capital-spending, transaction-cost and stock-compensation expectations against subsequent filings and actual results.
- Check cash generation, debt amortization, variable interest exposure, covenant headroom and the potential cash cost of employee equity-award withholding taxes.
- Monitor integration progress, service-professional retention, marketplace request growth, the class-action litigation and IAC’s continuing voting control.