Match Group, Inc. quarterly report, Q3 FY2016

Business context and reporting period

This November 9, 2016 Form 10-Q is filed by IAC/InterActiveCorp, not Match Group, Inc. It reports IAC’s consolidated results for the quarter and nine months ended September 30, 2016, including Match Group as a reportable segment. Match Group is a separate public company, and IAC states it cannot freely access Match Group’s cash.

Financial performance

For Q3, revenue declined 9%, operating income declined 2%, and Adjusted EBITDA declined 2% year over year. Adjusted EBITDA margin was 18% versus 17%. For the first nine months, revenue was down 2%, while Adjusted EBITDA grew 4% and its margin was 14% in both periods. The nine-month operating loss primarily reflects a $275.4 million Publishing goodwill impairment.

Match Group segment revenue was $316.4 million in Q3, up 18%, and $902.8 million for nine months, up 20%. Segment Adjusted EBITDA was $110.7 million in Q3, up 34%, and $275.4 million for nine months, up 54%. Dating growth reflected higher average paid member counts, notably at Tinder and from PlentyOfFish, partly offset by an 8% decline in ARPPU. HomeAdvisor also grew strongly; Applications and Publishing contracted.

Cash flow, liquidity and debt

• Continuing-operations operating cash flow was $161.6 million for the first nine months, compared with $184.1 million a year earlier. Investing used $106.4 million and financing used $337.6 million; cash and cash equivalents declined $291.7 million to $1.190 billion.
• Cash and marketable securities totaled $1.368 billion at September 30. Long-term debt, net of issuance costs and discounts, was $1.641 billion. IAC and Match Group had $300 million and $500 million revolving facilities, respectively, with no borrowings outstanding.
• Match Group held $231.2 million of cash, which IAC says is not freely available to it. The filing reports $390 million of variable-rate Match Group term-loan principal and $400 million of 6.375% Match Group notes issued in June to refinance part of that loan. IAC repurchased $247.3 million of its shares and redeemed or repurchased $126.3 million of IAC senior notes during the period.

Material changes and management commentary

• Publishing revenue fell 58% in Q3 and 36% year to date, principally reflecting the new Google services agreement effective April 1, 2016, lower paid-search traffic, traffic trends and monetization challenges. The agreement runs through March 31, 2020, with an IAC termination option effective March 31, 2019. Google revenue was $172.0 million in Q3 2016 versus $332.0 million in Q3 2015.
• Applications revenue declined 26% in Q3 and 23% year to date, including declines in Partnerships and consumer desktop search revenue. Match Group and HomeAdvisor growth partly offset these pressures.
• The Publishing impairment followed a reassessment of forecast cash flows and fair value; the full $275.4 million goodwill balance was impaired, and $11.6 million of certain trade names and trademarks was also impaired.
• Management expected 2016 capital expenditures to be 25%–35% above 2015, driven mainly by Match Group headquarters and data-center projects and HomeAdvisor sales-center expansion. It said available liquidity and expected operating cash flow should fund normal requirements for the foreseeable future.
• After quarter-end, HomeAdvisor’s acquisition of a controlling interest in German marketplace MyHammer closed on November 3, 2016; a tender offer for remaining publicly held shares was intended. IAC also sold PriceRunner for a $12.0 million pretax gain and ASKfm for a $3.8 million pretax loss during 2016.

Risks, contingencies and unusual items

• Dependence on Google creates exposure to changes in its policies, contract terms and search traffic; Google revenue remains a material concentration for Publishing and Applications.
• Debt covenants constrain distributions and other actions under specified circumstances. Match Group’s cash is structurally separate from IAC’s, and the Match Group term loan carries floating-rate exposure.
• IAC reported $24.0 million of foreign-currency gains for the first nine months, primarily related to U.S.-dollar positions at a subsidiary with a GBP functional currency after the Brexit-related pound decline. The company historically has not hedged foreign-currency exposures.
• A putative securities class action against Match Group and certain officers, directors and IPO underwriters alleges omissions concerning the Non-dating business. Defendants moved to dismiss on November 8, 2016; IAC and Match Group say they will defend the case. Management also cautioned that legal and tax contingencies are inherently uncertain.
• IAC reported disclosure controls effective at period-end and no material changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

• Confirm the filing entity and whether the analysis sought is IAC consolidated or Match Group standalone; the supplied filing is IAC’s 10-Q.
• Review the persistence and financial impact of Google-related traffic and monetization declines, particularly in Publishing and Applications.
• Assess Match Group’s member growth, ARPPU trends, debt terms and the limits on transfers of its cash to IAC.
• Evaluate the assumptions behind the Publishing impairment and whether further impairment or restructuring charges may arise.
• Check actual capital spending, cash generation, debt service and the outcome of the Match Group securities litigation and MyHammer tender offer.