Match Group, Inc. quarterly report, Q2 FY2010

Business context and reporting period

This is IAC/InterActiveCorp’s Form 10-Q for the quarter and six months ended June 30, 2010, filed July 29, 2010. The filing is for IAC, not Match Group as a standalone public company; Match is one of IAC’s operating segments. Segment figures below therefore are not Match standalone financial statements.

Financial performance

Q2 operating margin was approximately 5.9%, versus 1.1% a year earlier; cost of revenue was 36% of revenue versus 31%. Six-month operating margin was approximately 3.5%, compared with a negative 4.3% in 2009. IAC’s supplemental non-GAAP Operating Income Before Amortization was $49.8m in Q2 (+93%) and $79.0m for six months (+250%).

Match segment

Match revenue was $97.0m in Q2 (+10%) and $186.2m for six months (+4%). Segment operating income was $25.5m in Q2 (down 10%) and $39.2m for six months (up 3%); Operating Income Before Amortization was $29.1m (+2%) and $43.9m (+14%), respectively. Management attributed revenue growth to the domestic business and acquisitions of People Media and Singlesnet, plus the Latin American venture with Meetic; the sale of Match Europe reduced comparability. Excluding Match Europe from the prior period and the acquired/venture businesses from the current period, Match said Q2 revenue grew 4% and subscribers 8%; six-month revenue grew 6%.

Cash flow, liquidity and debt

For the first six months, operating cash flow from continuing operations was $130.6m, investing cash flow was $(89.8)m and financing cash flow was $(367.9)m. Cash and cash equivalents declined $330.8m to $915.2m; marketable securities were $551.8m. Long-term debt was $95.8m, comprising $80.0m of Liberty Bonds due 2035 and $15.8m of 7% Senior Notes due 2013. IAC reported total current assets of $1.725bn and current liabilities of $326.8m.

IAC repurchased 17.1m shares for $383.5m during the six months and repurchased another 1.0m shares for $22.2m through July 23. About 12.2m shares remained under the authorization at that date. Capital expenditures were $25.6m in the first half; management expected 2010 capital expenditures to exceed 2009.

Material changes, outlook and risks

• Consolidated revenue rose 18% in Q2 and 17% for six months. Search was the largest segment contributor to growth; Match and ServiceMagic also grew.
• Reported earnings comparisons were affected by 2009’s $116.8m gain on the sale of Match Europe. In 2010, six-month results included an $18.3m impairment of the HealthCentral investment and $26.6m of equity-method losses.
• Google generated $174.1m of Q2 revenue and $345.7m for six months. The paid-listing agreement expires December 31, 2012; dependence on Google and potential changes to its terms or policies are material risks.
• IAC reported $474.3m of unrecognized tax benefits, including interest, and $461.9m in non-current income taxes payable. Tax audits and outcomes could materially affect results or cash flows. Management said unrecognized tax benefits could decrease by $18.5m within twelve months, but other changes could not be estimated reliably.
• Management said cash, anticipated operating cash flow and capital-market access were sufficient for operating needs and commitments for the foreseeable future. No specific revenue or earnings guidance was provided.
• Other disclosed risks include advertising-market conditions, traffic acquisition and partner dependence, acquisition integration, privacy and data security, technology and competition, foreign currency exposure, and potential goodwill impairment. Management identified certain reporting units whose fair values approximated carrying values.

Investor verification points

• Confirm the intended issuer and scope: this filing reports IAC consolidated results, with Match only as a segment.
• Review Match’s organic growth and subscriber trends separately from acquisitions, the Latin America venture and the Match Europe divestiture.
• Assess the sustainability of Search growth and margins given higher traffic acquisition costs and the Google agreement’s 2012 expiration.
• Reconcile cash decline and substantial share repurchases with planned capital expenditures, acquisitions and liquidity needs.
• Examine tax reserves, audit developments and potential cash settlement exposure, along with the HealthCentral impairment and other investment losses.