MTCH

Business Context and Reporting Period

This Form 10-K covers IAC/InterActiveCorp (IAC) for the fiscal year ended December 31, 2006. IAC operates a diversified portfolio of internet and offline businesses organized into four primary sectors: Retailing (HSN, Cornerstone Brands), Services (Ticketmaster, LendingTree, Real Estate, Home Services), Media & Advertising (IAC Search & Media, Citysearch), and Membership & Subscriptions (Interval, Match.com, Entertainment Publications). The company completed the spin-off of its travel businesses into Expedia, Inc. in August 2005. As of December 31, 2006, IAC employed approximately 20,000 people globally.

Key Financial Metrics

Material Changes Versus Prior Period

• Revenue Growth: Net revenue increased 16% to $6.28 billion, driven by a 155% increase in Media & Advertising (due to the full-year inclusion of IAC Search & Media), 8% growth in Retailing, and 15% growth in Services.
• Operating Income Decline: Operating income decreased 26% to $253.4 million. This decline was primarily due to a $189.1 million goodwill impairment charge and a $25.4 million intangible asset impairment charge related to the Discounts segment (Entertainment Publications), as well as increased amortization of non-cash marketing.
• Net Earnings Volatility: Net earnings dropped significantly from $868.2 million in 2005 to $192.6 million in 2006. The 2005 figure included a $523.5 million pre-tax gain on the sale of VUE interests, which was absent in 2006. Excluding discontinued operations and one-time items, the company's core profitability remained relatively stable, though impacted by the impairment charges.
• Cash Flow Improvement: Operating cash flow swung from a use of $82.5 million in 2005 to a generation of $814.3 million in 2006, aided by higher non-cash expenses and the absence of large tax payments related to the 2005 VUE sale.

Guidance, Outlook, and Risks

• Outlook: Management expects Retailing U.S. profits to increase in 2007, with HSN profits expected to be close to flat. Corporate and Other expenses are expected to be approximately $25 million per quarter in 2007. Capital expenditures are expected to be similar to 2006 levels.
• Discounts Segment: The company does not anticipate an immediate recovery for the Discounts segment (Entertainment Publications) and does not expect 2007 results to be significantly better than 2006 due to the deterioration of core fundraising channels.
• Key Risks:
  • Third-Party Relationships: Significant reliance on Google for paid listing supply (agreement expires Dec 31, 2007) and Live Nation for ticketing supply (agreement expires Dec 31, 2008).
  • Regulatory: Extensive regulation in Lending and Real Estate sectors (RESPA, state licensing) and potential changes in laws regarding ticketing fees and broadband network discrimination.
  • Concentration: Dependence on key personnel, specifically Chairman and CEO Barry Diller, who controls approximately 59% of the voting power.
  • Market Conditions: Sensitivity to interest rate fluctuations affecting the Lending segment and general economic downturns affecting consumer discretionary spending in Retailing and Ticketing.

Investor Verification Checklist

• Verify the renewal status of the paid listing supply agreement with Google, which expires December 31, 2007, as it represents a material portion of Media & Advertising revenue.
• Monitor the performance and potential further impairment of the Discounts segment (Entertainment Publications) given the significant goodwill write-down in Q4 2006.
• Assess the impact of the Lending segment's exposure to interest rate changes and the secondary mortgage market, including the status of warehouse lines of credit expiring in 2007.
• Review the renewal of HSN's distribution agreements with major pay television operators, some of which expired in 2005 and 2006.
• Confirm the status of pending securities class action litigation regarding the 2004 travel business disclosures and Ticketmaster consumer class actions regarding delivery fees.