Business context and reporting period
This is IAC/InterActiveCorp’s Form 10-K for the fiscal year ended December 31, 2017, filed March 1, 2018—not a standalone Match Group 10-K or a report solely for 2017 Q4. Match Group is a major IAC segment; figures below distinguish IAC consolidated results from Match Group segment results where available. Amounts are U.S. dollars.
IAC operates online dating, home-services marketplaces, video, applications and publishing businesses. At year-end, IAC held 81.2% of Match Group’s economic interest and 97.6% of its voting interest. Match Group’s portfolio includes Tinder, Match, PlentyOfFish and OkCupid.
Financial results and key metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| IAC revenue | $3.307 billion | $3.140 billion |
| Operating income (loss) | $188.5 million | $(32.6) million |
| Net earnings (loss) attributable to IAC shareholders | $304.9 million | $(41.3) million |
| Diluted EPS attributable to IAC shareholders | $3.18 | $(0.52) |
| Adjusted EBITDA (non-GAAP) | $575.3 million | $501.2 million |
| Net cash from operating activities | $416.7 million | $344.1 million |
| Capital expenditures | $75.5 million | $78.0 million |
| Cash and cash equivalents | $1.631 billion | $1.329 billion |
| Long-term debt, net of discounts and issuance costs | $1.979 billion | $1.582 billion |
IAC’s reported operating margin was approximately 5.7% in 2017; Adjusted EBITDA margin was approximately 17.4%. Net income was materially affected by a $291.1 million income tax benefit, including the accounting treatment of stock-based compensation tax benefits. The filing reports $2.1 billion of gross debt at year-end. Cash exceeded gross debt by approximately $471.5 million on a consolidated basis, but IAC says it cannot freely access cash held by Match Group and ANGI Homeservices.
Match Group segment revenue was $1.331 billion, up 19%; operating income was $360.5 million and Adjusted EBITDA was $468.9 million, up 16%. Direct revenue increased $213 million: international direct revenue rose 38% and North America direct revenue rose 10%. Average subscribers increased 33% internationally and 9% in North America, while total ARPU increased 1%.
For Q4 2017, IAC reported revenue of $950.6 million, operating income of $94.4 million, net earnings attributable to IAC shareholders of $32.8 million and diluted EPS of $0.37. Comparable Q4 2016 figures were $811.2 million, $112.8 million, $102.1 million and $1.18, respectively.
Material changes versus the prior comparable period
- Consolidated revenue rose 5%, principally from Match Group growth and the addition of Angie’s List to ANGI Homeservices; sales of The Princeton Review, ShoeBuy and PriceRunner reduced year-over-year comparisons.
- Match Group revenue rose 19%, supported by subscriber gains, particularly at Tinder. Cost of revenue increased, mainly because of higher app-store fees tied to Tinder’s growth.
- ANGI Homeservices revenue rose 48% to $736.4 million, including $58.9 million from Angie’s List following the September 29 combination. Adjusted EBITDA fell to $37.9 million from $45.9 million, reflecting investment and combination-related costs.
- Applications revenue declined 4% and Publishing revenue declined 11%. Both remained exposed to Google-supplied paid listings; Publishing revenue was also affected by paid-traffic declines.
- Operating results improved significantly from 2016, when IAC recorded a $275.4 million Publishing goodwill impairment. The 2017 improvement also reflected higher Adjusted EBITDA and lower amortization, partly offset by higher stock-based compensation.
Liquidity, debt and financing
- Year-end cash and cash equivalents were $1.631 billion; marketable securities were $5.0 million. Current assets were $2.125 billion and current liabilities were $799.7 million.
- Gross debt was approximately $2.102 billion: $1.275 billion at Match Group, $275 million at ANGI Homeservices and $552.4 million at IAC. IAC and Match Group each had an undrawn revolving facility—$300 million and $500 million, respectively.
- Match Group issued $450 million of 5.00% senior notes due 2027 and redeemed its 6.75% notes. IAC issued $517.5 million of 0.875% exchangeable notes due 2022 and redeemed $361.9 million of 4.875% notes. ANGI Homeservices borrowed $275 million under a five-year term loan.
- IAC generated $416.7 million of operating cash flow, but working capital included a $115.2 million increase in accounts receivable. Management attributed this partly to slower settlement of Match Group app-store revenue and ANGI Homeservices growth.
- Cash within Match Group and ANGI Homeservices is not freely available to IAC; both are separate public companies with debt-related distribution restrictions. The filing states that no such distribution restrictions were triggered at year-end.
Outlook, commentary, risks and unusual items
- Management expected 2018 capital expenditures to increase approximately 20%–25% from 2017, mainly for product software at Match Group and ANGI Homeservices and ANGI Homeservices’ new headquarters.
- IAC expected to remain outside the position of a full U.S. federal cash income-tax payer until 2021. Management said existing cash and expected operating cash flows should fund normal operating needs for the foreseeable future.
- The ANGI combination generated $44.1 million of 2017 transaction, severance, retention and integration costs, plus a $7.8 million deferred-revenue write-off. IAC expected another $10–$20 million of combination-related expenses in 2018 and approximately $70 million of combination-related stock compensation in 2018.
- A $291.1 million income tax benefit was recorded in 2017, substantially influenced by $361.8 million of excess tax benefits from stock-based awards. The Tax Act also produced a provisional $62.7 million transition-tax expense; the filing says net operating losses mean IAC will not have to pay the one-time transition tax. The estimate remained subject to refinement.
- Google accounted for $740.7 million, or 22% of consolidated revenue, in 2017. The Google services agreement expires March 31, 2020, with an option for IAC to terminate effective March 31, 2019. A change or loss of this relationship could materially affect Applications and Publishing.
- Other key risks include competition and user acquisition costs; reliance on app stores and Facebook authentication; data security and privacy regulation, including the GDPR effective May 2018; foreign exchange exposure; and leverage. Variable-rate Match Group and ANGI term loans had year-end rates of 3.85% and 3.38%, respectively.
- Match Group faces a securities class action relating to its 2015 IPO and a Tinder age-tiered pricing case. A California appellate court reversed dismissal of the Tinder case in January 2018; Tinder said it intended to seek review by the California Supreme Court. Management disputed the claims.
Most important facts an investor should verify
- Confirm the reporting entity: this filing is IAC’s consolidated 10-K, and Match Group figures shown here are segment disclosures, not a complete standalone Match Group financial statement.
- Review the quality and sustainability of Match Group’s subscriber growth, ARPU, and margins, including the impact of app-store payment fees and Tinder-related equity awards.
- Assess Google revenue concentration, contract terms and the trajectory of Applications and Publishing traffic and monetization.
- Reconcile reported earnings with the unusually large stock-compensation tax benefit and determine how much of the 2017 tax benefit affects cash taxes and future periods.
- Evaluate gross debt, variable-rate exposure, subsidiary-level cash restrictions, and the planned increase in 2018 capital spending.
- Track ANGI integration costs, expected synergies and the operating contribution of Angie’s List, alongside the disclosed 2018 expense expectations.
- Monitor the Match Group litigation and the provisional Tax Act accounting estimate, both of which could change subsequent results or disclosures.