Business context and reporting period
ANGI Homeservices Inc. connects consumers with home-service professionals through brands including HomeAdvisor, Angie’s List and Handy. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019, compared with the same 2018 periods. IAC held 83.1% of ANGI’s economic interest and 98.0% of its voting interest at quarter-end.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $343.9 million | $294.8 million | $647.3 million | $550.1 million |
| Operating income | $11.4 million | $23.3 million | $7.8 million | $12.5 million |
| Net earnings attributable to ANGI shareholders | $7.0 million | $22.9 million | $16.9 million | $14.0 million |
| Diluted EPS | $0.01 | $0.05 | $0.03 | $0.03 |
| Adjusted EBITDA | $51.4 million | $67.0 million | $88.6 million | $103.6 million |
| Operating cash flow | Not separately provided | Not separately provided | $103.0 million | $73.6 million |
Q2 revenue rose 17%; Marketplace revenue increased 27%, while Advertising & Other revenue declined 11%, principally reflecting the sale of Felix. Marketplace service requests rose 17% to 7.9 million. For the first half, revenue grew 18%, Marketplace revenue rose 29%, and service requests increased 16% to 13.7 million.
Profitability weakened despite revenue growth. Q2 operating margin was approximately 3% versus 8% a year earlier; Adjusted EBITDA margin was 15% versus 23%. First-half operating margin was approximately 1% versus 2%, and Adjusted EBITDA margin was 14% versus 19%. Q2 net earnings fell largely alongside lower operating income and a swing from a tax benefit to a tax provision. First-half net earnings increased, aided by a $12.0 million income tax benefit, primarily from excess tax benefits on equity awards.
First-half cash from operations increased to $103.0 million, with working-capital movements including a $61.9 million increase in accounts receivable. Investing cash use was $11.0 million, including $39.1 million of capital expenditures and $20.3 million related principally to the Fixd Repair acquisition, offset by $25.0 million from securities maturities and $23.6 million of Felix sale proceeds. Financing cash use was $48.6 million, including employee award withholding taxes, an $11.4 million tax-sharing payment to IAC and term-loan repayments.
At June 30, cash and cash equivalents were $380.6 million, with no marketable securities. Current assets were $500.9 million and current liabilities $226.1 million. Term-loan principal was $254.4 million; the $250 million revolving facility was undrawn. The company reported $132.8 million of lease liabilities following adoption of the new lease standard.
Changes, outlook and management commentary
- Q2 Adjusted EBITDA fell 23% and first-half Adjusted EBITDA fell 14%, mainly because selling and marketing costs rose as a share of revenue, bad-debt expense increased, and the company invested in Handy and Fixd Repair. These pressures more than offset revenue growth and the absence of certain 2018 Combination-related costs.
- Selling and marketing expense rose 38% in Q2 and 33% in the first half. Management attributed increased advertising spend partly to weaker free-search traffic and more expensive paid-search activity, and expected this trend to continue in the near term.
- Bad-debt expense rose $6.7 million in Q2 and $11.6 million in the first half, partly associated with higher Marketplace revenue.
- ANGI acquired Fixd Repair in January 2019. Purchase accounting for the October 2018 Handy acquisition remained preliminary; the company expected to finalize it by the fourth quarter of 2019.
- Management expected 2019 capital expenditures to be approximately 60%–70% above 2018’s $47.0 million, mainly for capitalized software development and leasehold improvements. It stated that cash, available revolver capacity and expected operating cash flows should fund foreseeable requirements. No clear full-year revenue or earnings guidance is provided in the filing text.
- On August 7, 2019, IAC disclosed it was exploring a possible distribution of its ANGI stake to IAC shareholders; no decision had been made whether or how to proceed.
Risks, contingencies and unusual items
- The $12.0 million first-half tax benefit materially supported reported earnings. Q2 instead recorded a $2.3 million tax provision, with a 24% effective rate. The company was included in IAC’s tax group and was subject to ongoing tax audits; management said outcomes were uncertain but did not expect a material impact based on its current assessment.
- ANGI identified the HomeAdvisor service-professional class action in Colorado, alleging deceptive practices involving leads and charges. The company disputed the allegations and said there had been no material developments since its prior quarterly filing. Management stated that no pending proceeding was then expected to have a material adverse effect, while noting that contingencies carry uncertainty.
- Debt agreements require a maximum 4.5-to-1.0 consolidated net leverage ratio and minimum 2.0-to-1.0 interest coverage ratio, and restrict certain actions. The company reported no such limitations at June 30, 2019. Debt is secured by substantially all assets of the company and specified guarantors.
- Management cited risks including competition, demand and economic conditions, cost-effective customer acquisition, Handy contractor classification, cybersecurity and data privacy, acquisition execution, international operations, IAC control and indebtedness.
- Combination-related stock-based compensation was $8.2 million in Q2 and $17.8 million in the first half; management expected approximately $15 million more for the remainder of 2019 and $20 million in 2020. The Handy-related indemnification claim generated a $1.1 million mark-to-market charge in other income.
Most important facts for investors to verify
- Whether Marketplace growth can continue while paid-search costs, bad-debt expense and marketing intensity weigh on margins and Adjusted EBITDA.
- How much of the first-half earnings increase depends on equity-award tax benefits, and whether those benefits recur.
- Cash collection trends and accounts-receivable quality, given the significant increase in receivables and bad-debt expense.
- Actual capital spending versus the stated 60%–70% increase expectation, and the returns from software, Handy and Fixd Repair investments.
- Debt covenant headroom, cash needs for employee equity-award withholding, and the potential impact of IAC’s possible share distribution.
- Developments in the HomeAdvisor litigation, tax audits and final purchase accounting for Handy.