MTCH

Business Context and Reporting Period

Company: IAC/InterActiveCorp (IAC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: IAC is a leading internet company operating over 50 brands across more than 30 countries. Following a major restructuring in 2008 (the "Spin-Off"), the company focuses on four primary segments: Search (Ask.com, Citysearch), Match (online personals), ServiceMagic (home services marketplace), and Media & Other (Shoebuy, The Daily Beast, etc.).

Key Financial Metrics

Note: Operating Income Before Amortization excludes non-cash compensation, amortization of intangibles, and goodwill impairments.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 5% to $1.38 billion. The Search segment declined 10% due to the discontinuation of certain partner relationships and lower revenue per query. The Match segment declined 6% primarily due to the sale of Match Europe. ServiceMagic grew 26% driven by a more active service provider network.
• Significant Impairment Charges: The massive operating loss was driven by a $916.9 million goodwill impairment and a $128.3 million intangible asset impairment related to the Search segment (IAC Search & Media). These charges reflect lower growth projections for the business.
• Segment Performance:
  • Search: Reported an operating loss of $990.1 million (vs. $97.5 million profit in 2008) due to impairments. Operating Income Before Amortization fell 40% to $81.7 million.
  • Match: Operating income increased 12% to $84.7 million despite revenue declines, aided by cost reductions following the sale of European operations.
  • ServiceMagic: Operating income decreased 44% to $13.4 million due to increased marketing spend to drive growth.
• Other Income: Included a $132.2 million gain from the sale of Match Europe to Meetic, partially offset by a $58.1 million write-down of a contingent value right related to the insolvency of Arcandor AG (ARO).

Guidance, Outlook, and Risks

• Capital Allocation: The company repurchased 32.1 million shares of common stock in 2009 for $554.2 million. On February 26, 2010, the Board authorized an additional repurchase of up to 20 million shares.
• Liquidity: IAC maintains a strong liquidity position with $1.2 billion in cash and cash equivalents and $487.6 million in marketable securities. Management believes these resources are sufficient to fund operations and commitments for the foreseeable future.
• Key Risks:
  • Google Dependency: A substantial majority of Search revenue is derived from a paid listing supply agreement with Google, which expires in 2012. Adverse changes in this relationship could materially harm operations.
  • Advertising Sensitivity: Revenue is highly sensitive to general economic conditions and advertising spending trends.
  • Goodwill Impairment: Significant goodwill balances remain in the Search, Match, and Media & Other segments. Future impairments could occur if operating results vary significantly from projections.
  • Concentrated Control: Barry Diller controls approximately 57% of the total voting power, which could discourage potential change-of-control transactions.

Investor Verification Checklist

• Impairment Methodology: Verify the assumptions used in the discounted cash flow analysis for the $1.04 billion impairment charge in the Search segment.
• Google Contract Terms: Review the specific terms and renewal conditions of the paid listing supply agreement with Google expiring in 2012.
• Match Europe Transaction: Confirm the valuation and accounting treatment of the 27% stake in Meetic received in exchange for Match Europe.
• ServiceMagic Growth Sustainability: Assess whether the 26% revenue growth in ServiceMagic is sustainable given the increased marketing costs that reduced operating income.
• Tax Contingencies: Review the $462.9 million in unrecognized tax benefits and the potential impact of ongoing IRS and state audits.