Business Context and Reporting Period
This summary covers the Form 10-Q filed by IAC/InterActiveCorp (IAC) for the quarterly period ended June 30, 2006. IAC operates a diversified portfolio of internet-based businesses across four primary sectors: Retailing (U.S. and International), Services (Ticketing, Lending, Real Estate, Teleservices, Home Services), Media & Advertising, and Membership & Subscriptions (Vacations, Personals, Discounts). The reporting period follows the August 2005 spin-off of Expedia and the June 2005 sale of IAC's interest in EUVIA. Results for Expedia and EUVIA are presented as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2006 | Six Months Ended June 30, 2006 |
|---|---|---|
| Net Revenue | $1,612.3 million | $3,159.7 million |
| Gross Profit | $756.1 million | $1,481.6 million |
| Operating Income | $81.2 million | $154.7 million |
| Net Earnings (Common Shareholders) | $53.8 million | $101.0 million |
| Diluted EPS (Net Earnings) | $0.17 | $0.31 |
| Cash and Cash Equivalents | $1,060.7 million (Balance Sheet) | N/A |
| Operating Cash Flow (Continuing Ops) | N/A | $371.4 million |
| Total Debt (Short & Long Term) | $1,229.5 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 18% ($240.5 million) for the quarter and 26% ($655.5 million) for the six months compared to the prior year. Growth was driven primarily by the inclusion of IAC Search & Media (formerly Ask Jeeves) in the Media & Advertising sector, which saw revenue surge 1,041% for the quarter. The Services sector grew 20% (quarter) and 23% (six months), led by Ticketing and Lending.
- Profitability: Operating income increased 24% for the quarter and 28% for the six months. However, this growth was partially offset by significant increases in non-cash expenses, including stock-based compensation (up 71% for the quarter) and amortization of intangibles (up 11% for the quarter).
- Discontinued Operations: The prior year period included significant income from discontinued operations (Expedia and EUVIA), totaling $133.0 million for the quarter and $178.6 million for the six months. In 2006, discontinued operations resulted in a loss of $5.3 million (quarter) and $5.9 million (six months), primarily due to the cessation of Quiz TV Limited.
- Segment Performance:
- Media & Advertising: Revenue grew significantly due to the IAC Search & Media acquisition, though the segment reported an operating loss of $11.3 million (quarter) due to high amortization and non-cash marketing expenses.
- Lending: Revenue grew 26% (quarter) and 41% (six months), but operating income declined 37% (quarter) and 12% (six months) due to increased marketing spend in a difficult mortgage market.
- Retailing: U.S. revenue grew 4% (quarter) and 18% (six months), while International revenue declined 17% (quarter) and 11% (six months) due to fulfillment delays and lower sales.
Guidance, Outlook, and Risks
- Outlook: Management expects single-digit revenue growth for the Lending segment for the remainder of 2006, with profitability down year-over-year but improving sequentially. The Retailing sector faces margin pressure from distribution costs and higher return rates, though top-line performance is expected to improve in the second half of the year. Media & Advertising is expected to continue significant investment in marketing and technology.
- Seasonality: Results are heavily weighted to the second half of the year, particularly the fourth quarter, due to the seasonal nature of the Retailing and Discounts segments. Ticketing revenues are typically highest in the second quarter.
- Risks and Contingencies:
- Legal Proceedings: Ticketmaster is defending two class-action lawsuits in Illinois and California regarding fee disclosures. The California case was remanded to state court in March 2006.
- Market Risks: The company faces interest rate risk on its debt and loans held for sale, as well as foreign currency exchange risk from international operations. A 100 basis point increase in interest rates would decrease the fair value of fixed-rate debt by approximately $32.7 million.
- Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) effective January 1, 2006, and is assessing the impact of FIN 48 (Accounting for Uncertainty in Income Taxes), effective January 1, 2007.
Investor Verification Checklist
- Non-GAAP Reconciliation: Verify the reconciliation of "Operating Income Before Amortization" to GAAP Operating Income, noting the significant impact of non-cash stock compensation ($28.7 million for the quarter) and intangible amortization ($45.7 million for the quarter).
- Discontinued Operations: Confirm that prior year comparisons exclude Expedia and EUVIA, which materially inflated 2005 earnings.
- Lending Segment Margins: Review the specific drivers of the decline in Lending operating income despite revenue growth, focusing on marketing efficiency and loan close rates.
- Debt Covenants: Review the terms of the $1.25 billion warehouse lines of credit used by LendingTree Loans, noting that $0.5 billion expires August 31, 2006.
- Share Repurchases: Note the company's active share repurchase program, having purchased 17.3 million shares in Q2 2006, with approximately 15.7 million shares remaining under authorization as of late July 2006.