Match Group, Inc. quarterly report, Q3 FY2012

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Business context and reporting period

Important scope note: The supplied filing is IAC/InterActiveCorp’s Form 10-Q, filed November 8, 2012, for the quarter ended September 30, 2012—not a standalone Match Group filing. Match.com and related businesses are reported within IAC’s Match segment; consolidated figures below are for IAC.

IAC reported across Search & Applications, Match, Local, Media and Other. In 2012, it also realigned segment reporting. Unless noted otherwise, amounts are in U.S. dollars.

Financial performance and position

  • Revenue: Third-quarter revenue was $714.5 million, up 38% from $516.9 million. Nine-month revenue was $2.036 billion, up 39% from $1.463 billion.
  • Profit and margins: Q3 operating income was $78.0 million versus $46.7 million; operating margin was about 10.9% versus 9.0%. Nine-month operating income was $238.3 million versus $142.3 million; margin was about 11.7% versus 9.7%. Q3 net earnings attributable to IAC shareholders were $40.7 million ($0.43 diluted EPS), down from $65.0 million ($0.69); nine-month earnings were $118.5 million ($1.28 diluted EPS), versus $125.5 million ($1.32).
  • Non-GAAP segment measure: Operating Income Before Amortization was $106.6 million in Q3, up 44%, and $321.6 million for nine months, up 48%. IAC cautions this measure excludes non-cash compensation and amortization, among other items, and is not a substitute for GAAP results.
  • Cash flow: Nine-month cash from continuing operations was $323.6 million, compared with $269.6 million. Continuing investing activities used $387.6 million, principally reflecting acquisitions; continuing financing activities used $138.9 million. Cash and cash equivalents declined $202.4 million from year-end to $501.8 million.
  • Liquidity and debt: At September 30, cash and cash equivalents were $501.8 million and marketable securities were $138.9 million. Debt totaled $95.8 million, including $15.8 million of current maturities; the filing identifies Senior Notes due January 2013 and $80.0 million of Liberty Bonds due 2035. Management said available liquidity and expected operating cash flow should fund foreseeable operating needs, capital expenditures, repurchases, dividends and commitments. IAC had no revolving credit facility.
  • Shareholder returns: IAC repurchased 9.1 million shares in the first nine months for $434.0 million and paid $43.7 million in dividends. A $0.24-per-share quarterly dividend was declared October 23, payable December 1, 2012. The company reported 9.5 million shares remaining under its repurchase authorization at September 30.

Material changes versus the prior comparable period

  • Growth drivers: Q3 revenue rose in Search & Applications (43% to $370.2 million), Match (35% to $178.2 million), Local (5% to $84.3 million), and Media (182% to $52.7 million). Search & Applications and Match were the largest contributors to operating income growth.
  • Match segment: Q3 Match operating income was $56.1 million versus $36.7 million; Operating Income Before Amortization was $60.0 million versus $40.2 million. Revenue benefited from a full-quarter Meetic contribution and 8% growth in Core revenue, with Core subscriber growth of 8%. For nine months, Match revenue increased 47% to $530.9 million and Operating Income Before Amortization rose 49% to $160.0 million. Developing revenue fell 11% for the nine-month period, partly due to lower Singlesnet subscription revenue.
  • Costs and margins: Q3 selling and marketing expense rose 54% to $236.8 million, reaching 33% of revenue versus 30%, largely due to Search & Applications marketing and Match spending. Cost of revenue rose 39% to $261.9 million; as a share of revenue it was 37% versus 36%. Nine-month selling and marketing expense rose 57% to $669.7 million.
  • Reported earnings comparison: Q3 continuing-operations earnings declined to $46.2 million from $68.0 million, despite higher operating income. The prior-year quarter included a $32.0 million income tax benefit, principally from reversal of a deferred tax liability related to Match Europe and Meetic. In 2012, the quarter had a $27.6 million tax provision. For nine months, continuing-operations earnings were $125.4 million versus $133.8 million, with the year-over-year comparison also affected by tax items and acquisition-related charges.
  • Acquisitions and portfolio: IAC completed its $300 million cash purchase of The About Group on September 24; its results were to be included beginning October 1, so Q3 reported revenue excluded the business. Newsweek/Daily Beast had been consolidated from June 1, 2012 and contributed to Media revenue growth and higher Media losses. IAC’s segment realignment and acquisition activity affect year-over-year comparability.

Outlook, commentary, risks and unusual items

  • Management expected 2012 capital expenditures to exceed 2011 and stated it believed cash, securities and anticipated operating cash flows would be adequate for foreseeable needs. The filing does not provide numerical earnings or revenue guidance.
  • IAC depends substantially on online advertising and its Google paid-listing supply agreement. Google revenue was $357.2 million in Q3 2012 and $1.0 billion for the first nine months; the agreement expires March 31, 2016. Changes in Google’s relationship or policies, advertising demand, competition, technology, customer behavior, acquisitions and international expansion were identified as risks.
  • Tax contingencies are significant: the financial statements report $479.7 million in income taxes payable, and the tax note reports $485.8 million of unrecognized tax benefits including interest. The company said unrecognized tax benefits could decrease by $68.9 million within twelve months, but outcomes and timing remain uncertain. Tax audits were ongoing.
  • Other legal matters were described as not expected by management to have a material effect, though outcomes are uncertain. A previously disclosed lawsuit arising from the sale of PRC was settled in September 2012, with claims released without payment.
  • Acquisition accounting increased goodwill and intangibles; preliminary About Group purchase-price allocations remained subject to revision. Nine-month equity-method losses included a $21.6 million non-cash remeasurement charge related to Newsweek/Daily Beast.
  • Management reported disclosure controls were effective at period-end and no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

  1. Confirm the intended issuer: this is an IAC consolidated filing, and Match is a segment rather than the reporting company.
  2. Assess how much Match’s reported growth reflects Meetic consolidation versus organic growth; review Core, Developing and Meetic performance separately.
  3. Evaluate the sustainability and concentration of Search & Applications revenue tied to Google, including the agreement’s March 2016 expiry.
  4. Reconcile GAAP earnings with the non-GAAP Operating Income Before Amortization measure and the effects of tax benefits, acquisition accounting and non-cash charges.
  5. Review cash deployment, upcoming debt maturities, repurchases, dividends, acquisition spending and the substantial tax-contingency balances.
  6. Track Media losses, the About Group integration and final purchase-price allocation, and the impact of IAC’s segment reclassifications on comparisons.