Business context and reporting period
This is IAC/InterActiveCorp’s Form 10-K for the fiscal year ended December 31, 2014, filed February 27, 2015—not a standalone Match Group, Inc. filing. The Match Group was one of IAC’s four reporting segments and included dating, education and fitness businesses. The filing also reports IAC’s unaudited fourth-quarter results, but does not provide clear fourth-quarter financial results specifically for The Match Group.
IAC’s portfolio included Match, OkCupid, Tinder, Meetic, The Princeton Review, Tutor.com and DailyBurn within The Match Group. At year-end, IAC reported approximately 3.5 million dating subscribers.
Key financial metrics
Amounts below are U.S. dollars. Full-year figures are for IAC consolidated unless identified as The Match Group.
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $3.110 billion | $3.023 billion | +3% |
| Operating income | $378.7 million | $426.2 million | -11% |
| Operating margin | 12.2% | 14.1% | Down 1.9 percentage points |
| Adjusted EBITDA | $544.1 million | $598.3 million | -9% |
| Adjusted EBITDA margin | 17.5% | 19.8% | Down 2.3 percentage points |
| Earnings from continuing operations | $234.6 million | $281.8 million | -17% |
| Diluted EPS from continuing operations | $2.71 | $3.27 | -17% |
| Net earnings attributable to IAC shareholders | $414.9 million | $285.8 million | Includes substantial discontinued-operations tax benefit in 2014 |
| Operating cash flow from continuing operations | $424.0 million | $411.0 million | +3% |
| Cash and cash equivalents | $990.4 million | $1.100 billion | Down $110.0 million |
| Marketable securities | $160.6 million | $6.0 million | Up $154.6 million |
| Long-term debt | $1.080 billion | $1.080 billion | No change |
The Match Group generated 2014 revenue of $897.2 million, up 11%, and Adjusted EBITDA of $264.7 million, down 1%. Its operating income was $240.9 million, up 6%. Dating revenue increased 6%; North American and international paid subscribers rose 5% and 4%, respectively. Non-dating revenue increased 254%, principally reflecting the August 2014 acquisition of The Princeton Review.
IAC’s fourth-quarter 2014 consolidated revenue was $830.8 million, operating income $110.4 million, earnings from continuing operations $68.0 million, and net earnings attributable to IAC shareholders $70.2 million. Diluted EPS was $0.78 from continuing operations and $0.78 overall. The filing does not provide a clear Q4 Match Group segment revenue or profit value.
Material changes versus the prior comparable period
- IAC revenue grew 3%, but operating income and Adjusted EBITDA fell 11% and 9%, respectively; increased selling and marketing costs were a key pressure.
- The Match Group’s revenue growth reflected higher dating subscribers and acquisitions, including The Princeton Review and FriendScout24. Acquisition-related deferred revenue write-offs contributed to segment losses: $11.8 million for The Princeton Review and FriendScout24 combined.
- Search & Applications revenue declined 1% as lower B2B application queries outweighed growth in Websites; segment Adjusted EBITDA declined 6%. IAC also recorded an $11.0 million deferred-revenue write-off associated with SlimWare.
- Media revenue declined 5%, and its Adjusted EBITDA loss widened to $36.7 million, largely reflecting increased Vimeo investment and lower revenue following the Newsweek divestiture.
- Cost of revenue fell 12% to $883.2 million, or 28% of revenue versus 33% in 2013. Selling and marketing rose 18% to $1.124 billion, or 36% of revenue versus 32%.
- Continuing-operations earnings declined despite the lower tax provision: 2014 included a $66.6 million impairment of cost-method investments and a $19.4 million gain on the sale of Urbanspoon. The effective tax rate was 13%, benefiting substantially from the expiration of federal tax statutes for 2001–2009.
- Investing cash outflow increased to $439.8 million, primarily reflecting $259.4 million of acquisitions and net purchases of marketable debt securities. Financing cash outflow was $81.0 million, including $97.3 million of dividends and $33.2 million to purchase noncontrolling interests.
Outlook, risks and unusual items
- Management expected 2015 capital expenditures to exceed 2014’s $57.2 million and stated that cash, marketable securities, operating cash flow and the undrawn $300 million revolving facility should fund foreseeable operating needs and commitments. No specific revenue or earnings guidance was provided in the supplied filing text.
- Google is a material concentration risk: IAC reported Google-related revenue of $1.4 billion in 2014, and its services agreement was scheduled to expire March 31, 2016. Renewal terms and replacement economics are uncertain.
- At year-end, debt comprised $500 million of 4.875% notes due 2018, $500 million of 4.75% notes due 2022, and $80 million of 5% Liberty Bonds due 2035. No revolver borrowings were outstanding; IAC reported compliance with its 3.0-to-1.0 leverage covenants.
- Other principal risks include competition and changing user behavior, reliance on third-party traffic and distribution partners, mobile monetization, privacy and cybersecurity, acquisition integration and impairment risk, and international and regulatory exposure.
- Management said ordinary-course litigation was not expected to have a material impact, while acknowledging that contingencies are uncertain and an unfavorable outcome could be material. The IRS was auditing federal returns for 2010–2012; other jurisdictions were also open to examination.
- Unusual tax items materially affected reported earnings: the expiration of statutes of limitations resulted in recognition of $374.8 million of previously unrecognized tax benefits, including interest, with benefits allocated between continuing and discontinued operations. The $174.7 million of 2014 discontinued-operations earnings was principally attributable to this reserve release.
- IAC reported approximately $1.8 billion of goodwill and $405.2 million of indefinite-lived intangible assets. No material impairment was identified in the 2014 annual assessment; management noted that Search & Applications’ estimated fair value exceeded carrying value by about 15%.
- Barry Diller held approximately 42.5% of IAC’s voting power. This governance concentration may influence shareholder votes and corporate actions.
Important facts for investors to verify
- Confirm that the investment being analyzed is IAC’s 2014 reporting, not a standalone Match Group, Inc. 10-K; obtain segment-specific quarterly data if Q4 Match Group performance is the focus.
- Review the sustainability and economics of Match Group’s subscriber growth, including acquisition contributions and the deferred-revenue write-offs.
- Assess Google agreement renewal prospects and the potential impact on IAC’s substantial search-advertising revenue.
- Separate continuing-operations earnings from the large discontinued-operations tax benefit when evaluating 2014 earnings and EPS.
- Evaluate rising marketing costs, investment needs, acquisition integration, and the sensitivity of goodwill and intangible valuations to forecasts.
- Check debt covenant headroom, future capital spending, dividends and repurchases, and the status of open tax audits and other contingencies.