Business Context and Reporting Period
This summary covers the Form 10-Q filed by IAC/InterActiveCorp (IAC) for the quarterly period ended September 30, 2006. IAC operates a diversified portfolio of internet-based businesses across four primary sectors: Retailing (including HSN and Cornerstone Brands), Services (including Ticketmaster and LendingTree), Media & Advertising (including IAC Search & Media), and Membership & Subscriptions (including Match.com and Expedia's former travel businesses, now largely spun off or discontinued). The filing notes the recent spin-off of Expedia in August 2005 and the cessation of operations for Quiz TV Limited in Q2 2006, both treated as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2006 | Three Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2005 |
|---|---|---|---|---|
| Net Revenue | $1,603.0 million | $1,444.4 million | $4,762.6 million | $3,948.6 million |
| Gross Profit | $749.4 million | $658.3 million | $2,231.0 million | $1,759.3 million |
| Gross Margin | 47% | 46% | 47% | 45% |
| Operating Income | $109.5 million | $19.2 million | $264.3 million | $139.9 million |
| Net Earnings (Common Shareholders) | $74.9 million | $68.1 million | $175.9 million | $755.1 million |
| Diluted EPS (Net Earnings) | $0.24 | $0.20 | $0.54 | $2.12 |
| Cash and Cash Equivalents | $1,068.9 million | $987.1 million (Dec 31, 2005) | N/A | |
| Total Debt (Short & Long Term) | $1,215.9 million | $1,334.7 million (Dec 31, 2005) | N/A |
Note: 2005 Net Earnings and EPS figures are significantly impacted by discontinued operations (Expedia and EUVIA sales) and one-time gains not present in 2006.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 11% year-over-year for the quarter and 21% for the nine-month period. Growth was driven by the Media & Advertising sector (up 62% QoQ, 270% YoY nine-month) due to the full quarter inclusion of IAC Search & Media, and the Services sector (up 13% QoQ) driven by Ticketmaster.
- Operating Income Surge: Operating income increased 469% for the quarter and 89% for the nine-month period. This dramatic improvement is largely attributable to a $67.0 million non-cash stock option modification charge recorded in 2005 related to the Expedia spin-off, which was absent in 2006.
- Discontinued Operations: The 2005 period included significant income from discontinued operations ($34.4 million for the quarter, $213.0 million for nine months), primarily from Expedia and EUVIA. In 2006, discontinued operations contributed only $5.8 million for the quarter, mainly due to a tax benefit.
- Segment Performance:
- Retailing: U.S. revenue grew 3% (quarter) and 12% (nine-month), aided by the Shoebuy acquisition, though HSN faced margin pressure from higher return rates.
- Lending: Revenue declined 3% in the quarter due to difficult mortgage market conditions and lower refinance activity, though purchase loan revenue grew.
- Personals: Revenue grew 22% in the quarter, driven by increased paid subscribers and higher average revenue per subscriber.
Guidance, Outlook, and Risks
- Outlook: Management anticipates mid-single-digit revenue growth with flat margins for Ticketmaster in Q4 2006. For Retailing U.S., profits are expected to decline in the high single-digits compared to the prior year due to distribution costs and margin pressure at HSN, despite modest top-line improvement. Lending profitability is expected to grow in Q4 compared to the prior year, which included an adverse legal judgment accrual.
- Subsequent Events: On November 3, 2006, IAC announced an agreement to sell its Teleservices subsidiary, PRC, for approximately $287 million, expected to generate an after-tax gain of $14.4 million. PRC will be treated as a discontinued operation effective Q4 2006.
- Capital Allocation: The company repurchased 12.4 million shares in Q3 2006. On October 31, 2006, the Board authorized an additional repurchase of up to 60 million shares.
- Risks:
- Market Conditions: Continued volatility in the mortgage market impacts the Lending segment. The Retailing sector faces seasonality and return rate risks.
- Legal Proceedings: Pending securities class action litigation regarding 2004 financial disclosures and shareholder derivative suits remain pending. Consumer class actions against Ticketmaster regarding fee disclosures are ongoing.
- Accounting Changes: The company is assessing the impact of FASB Interpretation No. 48 (FIN 48) regarding uncertainty in income taxes, effective January 1, 2007.
Investor Verification Checklist
- Non-GAAP Reconciliation: Verify the reconciliation of "Operating Income Before Amortization" to GAAP Operating Income, noting the exclusion of significant non-cash compensation and intangible amortization.
- Discontinued Operations Impact: Confirm that 2005 comparative figures are adjusted for the spin-off of Expedia and the sale of EUVIA to ensure accurate year-over-year trend analysis of continuing operations.
- HSN Performance: Review specific metrics regarding return rates and margin compression at the Home Shopping Network (HSN) segment, as management flagged this as a negative trend.
- Convertible Notes: Monitor the conversion activity of the Ask Zero Coupon Convertible Subordinated Notes, which impacts share count and debt levels.
- PRC Sale Closing: Track the regulatory approval and closing of the PRC (Teleservices) sale to confirm the expected $14.4 million gain and reclassification of results.