Business context and reporting period
Filing identity: The supplied 10-Q is for IAC/InterActiveCorp, not Match Group, Inc. It reports IAC’s consolidated results, including Match Group, for the three months ended March 31, 2017, compared with the same 2016 period. Amounts below are IAC consolidated unless identified by segment. The filing states interim results are not necessarily indicative of full-year performance.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / prior date | Change |
|---|---|---|---|
| Revenue | $760.8 million | $819.2 million | Down 7% |
| Operating income | $37.1 million | $21.4 million | Up 73%; operating margin about 4.9%, versus 2.6% |
| Adjusted EBITDA | $102.0 million | $85.9 million | Up 19%; margin about 13.4%, versus 10.5% |
| Net earnings attributable to IAC shareholders | $26.2 million | $8.3 million | EPS: $0.29 diluted, versus $0.09 |
| Operating cash flow | $67.8 million | $39.4 million | Up $28.4 million |
| Cash capital expenditures | $11.2 million | $16.1 million | Derived operating cash flow less capex: $56.6 million, versus $23.3 million |
| Cash and cash equivalents | $1.397 billion | $1.329 billion at Dec. 31, 2016 | Marketable securities were $34.0 million, down from $89.3 million |
| Debt carrying value, including current portion | About $1.577 billion | About $1.602 billion at Dec. 31, 2016 | Current portion $5.0 million |
Operating costs totaled $723.8 million. Cost of revenue fell 25% to $146.0 million, while selling and marketing declined 9% to $350.4 million. General and administrative expense rose 9% to $143.6 million. The reported $23.9 million income tax benefit included $26.8 million of excess tax benefits from stock-based awards under a newly adopted accounting standard; pre-tax earnings were $4.6 million. Other expense was $7.7 million, compared with $15.9 million of other income in Q1 2016.
Cash and cash equivalents plus marketable securities totaled $1.431 billion. The company had no borrowings under its $300 million IAC revolving facility or Match Group’s $500 million revolving facility. Match Group held $436.2 million of cash, which IAC says it cannot freely access; Match Group generated $90.0 million of operating cash flow. Consequently, consolidated cash is not all available to IAC’s parent-company operations.
Material changes versus prior period
- Revenue declined $58.3 million, principally reflecting an $87.9 million Publishing decline and a $42.5 million decline in Other, partly offset by growth in Match Group ($38.4 million) and HomeAdvisor ($39.3 million).
- Match Group revenue grew 15% to $298.8 million and Adjusted EBITDA increased 28% to $86.2 million. Growth reflected higher paying-member counts; international ARPPU declined 2% amid mix shift to lower-priced brands.
- HomeAdvisor revenue rose 35% to $150.7 million and Adjusted EBITDA more than doubled to $11.1 million. Domestic paying service professionals increased 34% to 156,000, and service requests increased 34% to 3.7 million.
- Publishing revenue fell 53% to $78.1 million and Adjusted EBITDA fell from $11.4 million to $1.2 million, primarily associated with the new Google services agreement and lower paid-search traffic.
- Other revenue fell 64%, largely following the sales of ShoeBuy and PriceRunner. Video revenue decreased 8%; Applications revenue was nearly flat.
- Operating cash flow improved, while investing cash flow was positive $89.6 million, including $97.5 million of net sale proceeds, primarily from The Princeton Review, partly offset by $52.4 million used for the HomeStars and MyBuilder acquisitions. Financing cash outflow was $93.5 million, including share repurchases and debt repurchases.
Outlook, commentary, risks and unusual items
- Management expected 2017 capital expenditures to be about 10%–15% above 2016, driven partly by corporate spending and HomeAdvisor expansion. It said existing liquidity and expected operating cash flows should fund foreseeable normal requirements, while noting liquidity could be pressured by lower demand, debt constraints, or unavailable or unfavorable financing.
- Management said the Google agreement’s year-over-year impact on Publishing revenue should no longer be negative for the balance of 2017, as the new agreement had been in place for a full year by April 1. Google generated $187.8 million, or 25% of consolidated revenue, in Q1 2017, down from $284.6 million, or 35%, a year earlier. The agreement runs through March 31, 2020, with an option for IAC to terminate effective March 31, 2019; Google can change policies unilaterally.
- After quarter-end, IAC announced an agreement to combine HomeAdvisor and Angie’s List into publicly traded ANGI Homeservices Inc.; IAC expected to own approximately 87%–90% at closing, expected in Q4 2017. The agreement and transaction remained subject to completion.
- Unusual items included the $26.8 million stock-award tax benefit, $3.4 million of investment impairment charges, $2.7 million of mark-to-market expense on a subsidiary-denominated award, and $2.6 million of net foreign-exchange losses. The 2016 comparison included a $13.5 million PriceRunner sale gain.
- Contingent acquisition payments had a maximum potential amount of $121.1 million across five arrangements and a reported fair value of $21.8 million. IAC described routine litigation and disclosed a pending Delaware shareholder action concerning a proposed Class C share issuance and a Match Group securities class action; management said it believed the claims were without merit. Tax audits and uncertain tax positions also remain, with $40.1 million of unrecognized tax benefits, including interest and penalties.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing identifies forward-looking risks including dependence on Google and other distribution partners, advertising and dating-market conditions, cybersecurity and privacy, acquisitions, foreign exchange, and potential Match Group ownership dilution.
Important facts for investors to verify
- Confirm the intended issuer: this is IAC’s 10-Q, not a standalone Match Group 10-Q; Match Group segment figures are not a substitute for Match Group’s own filings.
- Review whether Match Group’s revenue and paying-member growth, and HomeAdvisor’s growth, can offset continuing Publishing pressure and rising investment needs.
- Assess dependence on Google, including its share of consolidated revenue and the high share of Applications and Publishing revenue attributed to Google.
- Separate underlying operating performance from the stock-award tax benefit, sale-related comparison items, investment impairments, and other non-operating effects.
- Evaluate cash availability by legal entity: Match Group’s cash is not freely accessible to IAC, and debt agreements impose restrictions and financial covenants.
- Monitor the HomeAdvisor–Angie’s List transaction, projected capital spending, debt maturities and repurchases, and the outcomes of disclosed litigation and tax matters.