Filing summary
Entity clarification: The supplied filing is IAC/InterActiveCorp’s Form 10-K, not a standalone Match Group 10-K. Match Group results are included as an IAC segment. The filing covers the fiscal year ended December 31, 2016, with quarterly results including the quarter ended December 31, 2016; it was filed February 28, 2017.
Business context and reporting period
IAC operates a portfolio of internet and media businesses, including Match Group, HomeAdvisor, Video, Applications and Publishing. At year-end, IAC held 82.5% of Match Group’s economic ownership and 97.9% of its voting interest. Dating services are a major Match Group business; IAC also operates home-services marketplaces, Vimeo and other video properties, applications, and digital publishing and search businesses.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $3.140 billion | $3.231 billion |
| Operating income (loss) | $(32.6) million | $179.6 million |
| Net income (loss) attributable to IAC shareholders | $(41.3) million | $119.5 million |
| Diluted EPS | $(0.52) | $1.33 |
| Adjusted EBITDA, non-GAAP | $501.2 million | $485.8 million |
| Operating cash flow from continuing operations | $292.4 million | $349.4 million |
| Cash and cash equivalents | $1.329 billion | $1.481 billion |
| Marketable securities | $89.3 million | $39.2 million |
| Total debt, including current portion | $1.602 billion | $1.767 billion |
Operating margin was approximately negative 1% in 2016, versus 6% in 2015; Adjusted EBITDA margin was 16%, versus 15%. Cost of revenue was 24% of revenue in both years. Year-end current assets were $1.843 billion and current liabilities $713.4 million. IAC reported $1.419 billion of cash and marketable securities, but Match Group is a separate public company and its cash is not freely available to IAC. IAC and Match Group had no borrowings outstanding on their respective revolving credit facilities at year-end.
Fourth-quarter 2016 revenue was $811.2 million, compared with $848.7 million in fourth-quarter 2015. Fourth-quarter operating income was $112.8 million, compared with an operating loss of $5.4 million; net income attributable to IAC shareholders was $102.1 million, compared with a loss of $31.8 million. Quarterly diluted EPS was $1.18 versus $(0.38).
Material changes versus the prior comparable period
- Consolidated revenue declined 3%, as steep declines in Publishing and Applications outweighed growth in Match Group and HomeAdvisor. Publishing revenue fell 41%, Applications fell 21%, Match Group grew 20%, HomeAdvisor grew 38%, and Video grew 7%.
- Match Group revenue growth reflected increased paid members, including growth at Tinder and the contribution from PlentyOfFish; Dating revenue increased 23%. ARPPU declined 6%, primarily from a mix shift toward lower-priced brands. Match Group Adjusted EBITDA rose 45% to $404.0 million.
- HomeAdvisor growth reflected a 41% increase in domestic paying service professionals and a 34% rise in domestic service requests. Its Adjusted EBITDA increased to $48.5 million from $18.5 million.
- Publishing’s Adjusted EBITDA shifted to a $7.6 million loss from $87.8 million of earnings. Applications Adjusted EBITDA fell 28% to $132.3 million.
- Operating results included a $275.4 million Publishing goodwill impairment, compared with a $14.1 million ShoeBuy goodwill impairment in 2015. IAC nevertheless reported 3% growth in Adjusted EBITDA, a non-GAAP measure.
- Operating cash flow declined by $57.0 million. Investing cash flow was positive $12.9 million, including proceeds from asset sales; financing cash flow was negative $451.1 million, reflecting share repurchases, debt repayments and other items.
Outlook, management commentary, risks and unusual items
- Management said existing cash, marketable securities and expected operating cash flows should fund normal operating needs for the foreseeable future. IAC expected 2017 capital expenditures to be approximately 5%–10% above 2016, partly due to corporate spending and HomeAdvisor expansion.
- IAC suspended its quarterly dividend in February 2016 and did not expect comparable dividends to resume in the near future. During 2016 it repurchased 6.3 million IAC shares for approximately $315.3 million; approximately 9.3 million shares remained authorized for repurchase at year-end.
- Google-generated revenue was $824.4 million, or 26% of consolidated revenue, compared with $1.3 billion, or 40%, in 2015. The new services agreement took effect April 1, 2016, runs through March 31, 2020, and may be terminated by IAC effective March 31, 2019. Changes to Google’s terms, policies or economics pose a material risk.
- Other notable items included $37.5 million and $12.0 million pretax gains on the ShoeBuy and PriceRunner sales, respectively; a $3.8 million pretax loss on the ASKfm sale; and $34.4 million in foreign-exchange gains, primarily associated with sterling weakness after the Brexit vote. Publishing and Applications recorded $18.3 million of restructuring costs related to declines in revenue, including the effects of the new Google contract.
- Match Group issued $400 million of 6.375% senior notes and repaid $450 million of its term loan during 2016; its remaining $350 million term loan carried a 4.20% rate at year-end and is variable-rate debt. Total contractual obligations were $2.484 billion, including $2.155 billion of scheduled debt payments and interest.
- Match Group agreed in January 2017 to sell The Princeton Review; the transaction was expected to close in the first half of 2017.
- Key risks include reliance on Google and app-store distribution, competition and changing consumer behavior, privacy and cybersecurity exposure, foreign exchange, acquisition and integration risks, and debt service. IAC disclosed a Delaware class action challenging a proposed Class C share issuance; IAC agreed not to effect the issuance while the case was pending. Match Group also faced a securities class action concerning alleged IPO disclosure omissions; defendants had moved to dismiss, and the company said it intended to defend the claims.
- IAC reported that its financial statements received an unqualified audit opinion and that management and the auditor concluded internal control over financial reporting was effective as of December 31, 2016.
Important facts for investors to verify
- Confirm the security and issuer being analyzed: this filing reports IAC consolidated results, not Match Group standalone financial statements.
- Review the causes and potential persistence of Publishing and Applications declines, including the effect of Google’s 2016 contract and changes to search traffic and monetization.
- Assess cash availability separately for IAC and Match Group, their debt and covenant terms, and the effects of variable interest rates.
- Reconcile GAAP operating losses and earnings with Adjusted EBITDA, including the substantial Publishing impairment and other nonrecurring gains, losses and restructuring charges.
- Track the Princeton Review sale, the Class C litigation and Match Group securities litigation, along with any subsequent updates to the stated outlook and risks.