ANGI Homeservices Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 9, 2019. ANGI connects consumers with home-service professionals through brands including HomeAdvisor, Angie’s List and Handy. IAC owned 83.3% of ANGI’s economic interest and 98.0% of its voting interest at quarter-end. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $303.4 million | $255.3 million; up 19% |
| Operating income (loss) | $(3.6) million; (1)% of revenue | $(10.8) million; (4)% of revenue |
| Net earnings (loss) attributable to ANGI shareholders | $10.0 million; $0.02 per share | $(8.9) million; $(0.02) per share |
| Adjusted EBITDA (non-GAAP) | $37.2 million; 12% of revenue | $36.6 million; 14% of revenue |
| Cash from operating activities | $26.7 million | $11.1 million |
| Cash and cash equivalents | $345.4 million | $337.0 million at December 31, 2018 |
| Long-term debt, net of issuance costs | $241.7 million, plus $13.8 million current portion | $245.0 million, plus $13.8 million current portion, at December 31, 2018 |
North America revenue was $282.0 million, up 19%; Europe revenue was $21.4 million, up 11%. Operating cash flow was offset by $31.8 million of financing outflows, including $16.5 million in employee award withholding taxes and an $11.4 million tax-sharing payment to IAC. Investing activities provided $13.0 million, including proceeds from the Felix sale and marketable-security maturities, partially offset by the Fixd Repair acquisition and capital expenditures.
At March 31, ANGI had no borrowings under its $250 million revolving credit facility. Term-loan principal was $257.8 million before issuance costs and current classification; its interest rate was 4.00%. The company also reported $111.4 million in lease liabilities following adoption of the new lease standard. Management stated that lease liabilities do not affect the debt agreement’s leverage calculation.
Material changes and drivers
- Marketplace revenue rose 33% to $219.9 million, with consumer connection revenue up 35% to $201.6 million. Marketplace Service Requests increased 15% to 5.8 million, and Marketplace Paying Service Professionals increased 14% to 221,000.
- Advertising & Other revenue fell 12% to $62.1 million, principally because Felix was sold on December 31, 2018. The 2018 comparison included $8.5 million of Felix revenue.
- Adjusted EBITDA grew only 1% despite 19% revenue growth. Management cited higher selling and marketing expense as a share of revenue, increased bad-debt expense, and investment in Handy and Fixd Repair. Selling and marketing expense rose 27% to $175.3 million, or 58% of revenue versus 54%.
- Operating loss narrowed by $7.1 million, largely reflecting lower stock-based compensation and intangible amortization. The company acquired Fixd Repair in January 2019; Handy was acquired in October 2018. Handy purchase accounting remained preliminary.
Outlook, risks and unusual items
- Management expected 2019 capital expenditures to be approximately 40%–50% higher than in 2018, partly for capitalized software development. It said cash, available credit and expected operating cash flow should fund foreseeable operating requirements and commitments. No specific revenue or earnings guidance was provided.
- Net income benefited from a $14.2 million income-tax benefit, producing a 326% effective tax rate, primarily due to excess tax benefits from stock-award exercises and vesting. The benefit materially affects comparison of reported net income with operating performance.
- The company identified risks including competition, consumer demand and economic conditions, attracting and retaining service professionals, marketing efficiency, technology and cybersecurity, data protection, acquisitions, international operations, Handy contractor-classification challenges, IAC control and indebtedness.
- HomeAdvisor faces consolidated service-professional class-action litigation alleging deceptive lead and charge practices. Discovery was underway and class certification remained unresolved. Management said it believed the claims were without merit; it also noted that an adverse outcome in one or more contingencies could materially affect the company.
- The term loan and revolving facility include leverage and interest-coverage covenants and restrictions on debt, dividends and distributions. Management reported no related limitations at quarter-end. A February 2019 authorization permits repurchase of up to 15 million shares; none had been repurchased in Q1.
- Adoption of lease accounting on January 1, 2019 added $69.4 million of right-of-use assets and related liabilities at adoption, with no cumulative earnings adjustment. The March 31 balance-sheet right-of-use asset was $91.7 million.
Important facts for investors to verify
- Whether marketplace growth and higher service requests translate into durable revenue and improved Adjusted EBITDA margins.
- How much revenue and operating performance came from Handy and Fixd Repair, and the effect of Felix’s sale on comparable results.
- The sustainability of reported net earnings given the unusually large, stock-award-related tax benefit.
- Cash conversion and working-capital trends: accounts receivable increased $39.7 million during the quarter, which management attributed mainly to revenue growth and timing of collections.
- Capital expenditure plans, debt covenant headroom, employee-award cash withholding requirements, and the company’s exposure to IAC-controlled decisions.
- Developments in the HomeAdvisor litigation and the pending completion of Handy purchase accounting.