MTCH

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2008, for IAC/InterActiveCorp (IAC). The reporting period is defined by a major corporate restructuring: on August 20, 2008, IAC completed a "Spin-Off" separating its operations into five independent public companies. The post-spin-off IAC retained the Media & Advertising, Match, ServiceMagic, and Emerging Businesses segments. Results for the spun-off entities (HSN, Interval Leisure Group, Ticketmaster, and Tree.com) and previously sold units (Entertainment Publications, Inc.) are reported as discontinued operations.

Key Financial Metrics

Note: Revenue increased 8% year-over-year. The Net Loss was driven primarily by losses from discontinued operations ($316.5 million) and significant impairment charges, partially offset by gains on the sale of long-term investments.

Material Changes vs. Prior Period

• Corporate Structure: The most significant change was the August 2008 Spin-Off, which removed major revenue and asset contributors (Ticketmaster, HSN, etc.) from the consolidated balance sheet, reclassifying them as discontinued operations.
• Debt Reduction: Long-term debt decreased by approximately 88% to $95.8 million. This was achieved by repurchasing $456.7 million of Senior Notes and exchanging $277.4 million of Senior Notes for debt of the spun-off Interval Leisure Group.
• Investment Activity: IAC recorded a $381.1 million gain on the sale of long-term investments, primarily from the sale of its 30% stake in Jupiter Shop Channel Co., Ltd. Conversely, it recorded a $166.7 million impairment charge on its investment in Arcandor AG (ARO) shares.
• Segment Performance:
  • Media & Advertising: Revenue grew 3% to $778.8 million; Operating Income Before Amortization surged 58% to $139.6 million due to lower traffic acquisition costs.
  • Match: Revenue grew 5% to $365.5 million; Operating Income Before Amortization increased 16% to $91.3 million.
  • ServiceMagic: Revenue grew 33% to $123.9 million; Operating Income Before Amortization increased 26% to $26.2 million.
  • Emerging Businesses: Revenue grew 35% to $196.6 million, but the segment reported an Operating Loss of $56.0 million, worsened by a $15.0 million impairment charge at Connected Ventures.

Guidance, Outlook, and Risks

Management Commentary: Management anticipates that the current economic downturn will continue to adversely impact results, particularly in advertising (Media & Advertising) and home services (ServiceMagic), as consumers cut discretionary spending. However, they believe enhancements to search properties and growth strategies will offset some of these headwinds.

Key Risks and Contingencies:

• Google Dependency: A substantial majority of Media & Advertising revenue is derived from a paid listing supply agreement with Google, which expires in 2012. Adverse changes in this relationship pose a material risk.
• Concentrated Control: Barry Diller controls approximately 64.8% of the total voting power of IAC, which could discourage potential takeover transactions.
• Legal Proceedings: IAC is defending against securities class action litigation and shareholder derivative suits related to pre-announcement statements regarding its former travel businesses (Expedia). Management believes these claims lack merit.
• Goodwill Impairment: The company faces potential future impairment charges if the fair value of reporting units (specifically IAC Search & Media and InstantAction.com) declines further due to economic conditions.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the reported Net Loss is driven by discontinued operations ($316.5 million loss) versus continuing operations ($137.0 million earnings).
• Google Agreement Terms: Review the specific terms and renewal risks of the paid listing supply agreement with Google, which drives the majority of search revenue.
• Investment Valuation: Assess the remaining carrying value of the Arcandor AG (ARO) investment ($23.8 million) and the potential for further impairment given the volatility of the German stock market.
• Spin-Off Expenses: Confirm the one-time nature of the $37.9 million in Spin-Off related expenses included in Corporate operating costs.
• Debt Covenants: Review the governance agreement provisions that grant Barry Diller and Liberty Media consent rights if the debt-to-EBITDA ratio exceeds 4:1.