Business context and reporting period
ANGI Homeservices Inc. filed this Form 10-K on March 1, 2019, covering the fiscal year ended December 31, 2018. The company operates digital marketplaces connecting homeowners with service professionals, including HomeAdvisor, Angie’s List and, following its October 2018 acquisition, Handy. It reports North America and Europe segments. Comparisons are affected by the September 2017 combination with Angie’s List and by acquisitions; 2018 also includes Handy from October 19.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $1,132.2 million | $736.4 million | +54% |
| Operating income (loss) | $63.9 million | $(147.9) million | Improved $211.8 million |
| Net income (loss) attributable to ANGI shareholders | $77.3 million | $(103.1) million | Return to profit |
| Diluted earnings (loss) per share | $0.15 | $(0.24) | — |
| Adjusted EBITDA, non-GAAP | $247.5 million | $39.2 million | +532% |
| Cash from operating activities | $223.7 million | $41.8 million | +$181.9 million |
| Capital expenditures | $47.0 million | $26.8 million | +$20.1 million |
FY 2018 operating margin was approximately 5.6%, net margin approximately 6.8%, and Adjusted EBITDA margin approximately 21.9%. Adjusted EBITDA is a non-GAAP measure and excludes stock-based compensation, depreciation and acquisition-related amortization and impairments.
Fourth-quarter 2018 revenue was $279.0 million, operating income $17.9 million, net income $36.8 million and diluted EPS $0.07. The quarter included an after-tax gain of $10.0 million from the Felix sale.
At year-end, cash and cash equivalents were $337.0 million and marketable securities $24.9 million. Current assets were $474.1 million versus current liabilities of $201.2 million. Term-loan principal was $261.3 million, with $13.8 million classified as current; the company also reported $1.0 million of related-party debt. No amounts were drawn on its $250 million revolving facility. The term loan carried a 3.98% variable rate at year-end and matures November 5, 2023.
Material changes versus the prior comparable period
- Marketplace revenue grew 33% to $774.5 million, supported by 30% growth in service requests to 23.5 million and an 18% rise in paying service professionals to 214,000.
- Advertising & Other revenue rose to $287.7 million, primarily reflecting a full year of Angie’s List in the comparison and the inclusion of other businesses; 2018 included $36.9 million of Felix revenue before its sale.
- North America revenue increased 56% to $1,062.2 million; Europe revenue increased 22% to $70.1 million. Europe remained loss-making, with a $6.5 million Adjusted EBITDA loss.
- Operating results improved as revenue scaled and combination-related costs and stock-based compensation declined from 2017 levels. Selling and marketing expense rose in dollars but fell to 48% of revenue from 63%.
- Operating cash flow increased substantially, although growth in accounts receivable used $47.7 million of cash. Investing included $47.0 million of capital spending; financing included $13.8 million of term-loan principal repayments and $29.8 million of employee tax withholding payments on net-settled awards.
Outlook, commentary, risks and unusual items
- Management said existing cash, marketable securities, available revolving-credit borrowings and expected operating cash flows should fund normal requirements for the foreseeable future. 2019 capital expenditures were expected to be 30%–35% above 2018, driven partly by software development. No specific revenue or earnings guidance was provided.
- Handy was acquired for approximately $165.5 million, primarily in ANGI shares; purchase accounting remained preliminary. Felix was sold on December 31, 2018, generating a reported $13.2 million gain.
- The 2018 income tax benefit was $7.5 million despite pre-tax income, primarily due to excess tax benefits from stock-based awards. Operating cash flow and net income also reflect significant noncash stock-based compensation and amortization.
- Key risks include intense competition and marketing-cost efficiency; consumer and professional adoption of online services; Handy service-provider worker-classification litigation; privacy, cybersecurity and regulatory requirements; and economic sensitivity of home-improvement demand.
- IAC held approximately 83.9% of economic interest and 98.1% of voting power at year-end, creating substantial control and potential related-party conflicts. Debt is variable-rate, secured by substantially all company and guarantor assets, and subject to financial and operating covenants. A 100-basis-point rate change would alter annual term-loan interest expense by about $2.6 million.
- A putative class action alleges deceptive practices affecting HomeAdvisor service professionals; the company disputes the allegations and stated it would defend the case. Management did not consider pending proceedings likely to have a material adverse effect, but outcomes remain uncertain.
- The board authorized repurchases of up to 15 million shares on February 6, 2019. The company did not repurchase shares during Q4 2018 and did not expect to pay dividends in the near future.
Important facts for investors to verify
- How much of the 2018 earnings improvement is sustainable operating performance versus tax benefits, the Felix gain, lower combination costs and noncash compensation effects.
- Whether marketplace request growth and service-professional economics can support revenue growth without proportionate increases in marketing expense and bad debt.
- Handy’s post-acquisition performance, integration progress and final purchase-price allocation.
- Cash conversion and receivables quality, given the $47.2 million bad-debt expense and $47.7 million operating cash outflow from receivables growth.
- Debt covenant headroom, floating-rate exposure, share-based award settlement and withholding cash requirements, and the effects of IAC’s voting control.
- Developments in the service-professional class action and worker-classification matters, as well as compliance costs and exposure under privacy and data-protection laws.