Business context and reporting period
Important scope note: The supplied filing is IAC/InterActiveCorp’s consolidated Form 10-Q, not a standalone Match Group filing. It covers the three months ended March 31, 2020, compared with the first quarter of 2019; Match Group (MTCH) is one of IAC’s reportable segments. IAC held 80.4% of MTCH’s economic interest and 97.4% of its voting interest at quarter-end. The filing was signed May 8, 2020.
IAC operated Match Group, ANGI Homeservices, Vimeo, Dotdash, Applications and Emerging & Other. A separation of Match Group from IAC was expected in the second quarter of 2020, subject to shareholder approvals and other conditions. The proposed transaction included $3.00 per MTCH share in cash or additional New Match shares for eligible shareholders.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $1,228.8 million | $1,105.8 million |
| Operating income (loss) | $(177.8) million | $79.9 million |
| Net income (loss) | $(182.6) million | $113.0 million |
| Net income (loss) attributable to IAC shareholders | $(211.0) million | $88.7 million |
| Basic and diluted EPS attributable to IAC shareholders | $(2.49) | $1.06 basic; $0.91 diluted |
| Adjusted EBITDA (non-GAAP) | $163.3 million | $190.6 million |
| Cash from operating activities | $81.0 million | $102.9 million |
Revenue grew 11% year over year. Operating margin was approximately negative 14%, versus positive 7% in Q1 2019; Adjusted EBITDA margin was approximately 13%, versus 17%. Results included a $212.0 million Desktop goodwill impairment, $26.0 million of indefinite-lived intangible impairments ($21.4 million at Desktop and $4.6 million at Match Group), $51.5 million of equity-security impairments, and $7.5 million of impairments on a note receivable and warrant. Other expense was $49.9 million, principally reflecting investment impairments. The $89.9 million income tax benefit reflected, among other items, stock-award tax benefits and CARES Act-related tax effects.
Match Group segment: Revenue was $544.6 million, up 17%; operating income was $134.7 million, up 13%; and Adjusted EBITDA was $171.5 million, up 11%. Direct revenue growth reflected higher average subscribers: North America rose 5% to 4.6 million and International rose 26% to 5.3 million. Total ARPU increased 1%. Management attributed growth primarily to Tinder and Hinge, with Pairs contributing internationally.
Other segment highlights: ANGI revenue increased 13% to $343.7 million, but Adjusted EBITDA fell 7% to $34.4 million. Vimeo revenue rose 31% to $57.0 million. Dotdash revenue rose 30% to $44.1 million. Applications revenue fell 27% to $104.1 million, principally due to Desktop. Emerging & Other revenue increased 16% to $135.3 million, including Care.com and NurseFly contributions.
At March 31, 2020, IAC had $2,822.7 million of cash and cash equivalents, $69.9 million of short-term investments and marketable securities, and $3,625.0 million of long-term debt net of discounts and issuance costs. Debt principal totaled $4,036.6 million; the fair value of long-term debt was estimated at $4,017.8 million. Cash, cash equivalents and restricted cash decreased $316.4 million during the quarter. Investing activities used $586.0 million, including $532.9 million for acquisitions, principally Care.com; financing activities provided $194.7 million, including $500.0 million from MTCH’s new senior notes. No borrowings were outstanding under IAC, MTCH or ANGI revolving credit facilities at quarter-end. IAC reported that it expected available liquidity and operating cash flows to fund normal requirements for the foreseeable future, while noting COVID-19 could weaken liquidity.
Material changes versus the prior comparable period
- Revenue growth was led by Match Group and ANGI, while Applications declined sharply. Consolidated revenue from Google was $138.9 million, or 11% of revenue, versus $195.8 million, or 18%, a year earlier; Desktop revenue was particularly affected by lower queries, monetization challenges and advertising rates.
- The operating loss and lower Adjusted EBITDA reflected COVID-related impairment charges and weaker Applications and ANGI results, as well as increased Corporate and Emerging & Other losses.
- Interest expense increased 44% to $44.9 million, mainly because average debt was higher. Long-term debt net increased from $3,121.6 million at year-end 2019 to $3,625.0 million.
- MTCH issued $500 million of 4.125% senior notes due 2030, intended to fund part of the separation-related cash consideration. MTCH also repriced and extended its term loan and increased and extended its revolving credit facility.
- Operating cash flow declined to $81.0 million. Cash used in acquisitions was substantially higher, principally due to Care.com. IAC reported $500 million of MTCH notes proceeds and repurchases of MTCH and ANGI shares during the quarter.
- Effective January 1, 2020, Handy and HomeAdvisor pre-priced jobs shifted from net to gross revenue presentation, adding $15.2 million to reported Q1 revenue.
Outlook, risks, contingencies and unusual items
- COVID-19: ANGI saw reduced home-services demand, especially for non-essential work; advertising rates across properties fell meaningfully, by as much as 30% year over year; and Match Group reported improved engagement but fewer new users and paying subscribers. Vimeo reported subscriber and revenue growth as organizations moved more activity online. Management emphasized that the duration and financial effects were uncertain and difficult to forecast.
- Capital spending: IAC expected 2020 capital expenditures to be approximately 10%–20% below 2019’s $136.7 million, with higher MTCH investment partly offset by lower Corporate and ANGI spending. This was an expectation, not a full-year earnings forecast.
- Separation and financing: Completion was expected in Q2 2020 but depended on shareholder approvals and other conditions. A May 6 registration statement contemplated sales of up to $1.5 billion of IAC Class M or New Match shares, with proceeds transferred to New IAC at separation and IAC shareholders’ New Match share allocation reduced accordingly.
- Legal and tax matters: Tinder optionholder plaintiffs sought at least $2 billion plus punitive damages; IAC and Match Group said they believed the claims were without merit. The filing also described a Tinder age-tiered pricing class action and an FTC matter concerning Match.com practices. Management said resolution of claims was not expected to materially affect the company, but noted outcomes were uncertain. Tax audits and unrecognized tax benefits remained subject to uncertainty.
- Other risks: The filing highlighted dependence on search platforms and Google policies, advertising conditions, consumer demand, app-store fees, data privacy and security, foreign exchange, indebtedness, and the execution, timing and effects of the separation. IAC reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm whether the separation closed as planned, its final consideration and share allocation, and the effect of the proposed share offering.
- Track Match Group’s new-user and paying-subscriber trends, engagement, ARPU and post-separation debt and cash position.
- Assess whether COVID-19-related demand and advertising weakness persisted, and whether further impairments or credit losses occurred.
- Review Desktop performance, Google agreement economics and policy changes, and the valuation headroom of goodwill and indefinite-lived assets identified as having limited cushion.
- Monitor cash generation, acquisition spending, debt service and covenant capacity, and developments in the Tinder litigation and other disclosed legal matters.