Business context and reporting period
This November 3, 2014 Form 10-Q is filed by IAC/InterActiveCorp, not Match Group, Inc. It covers the quarter and nine months ended September 30, 2014. The Match Group is one of IAC’s four reportable segments and includes dating, education and fitness businesses. IAC reorganized its segments in Q1 2014; comparisons may be affected by these changes.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $782.2 | $756.9 | $2,278.8 | $2,298.5 |
| Operating income | $101.0 | $122.0 | $268.4 | $313.3 |
| Adjusted EBITDA | $134.6 | $163.5 | $384.1 | $448.2 |
| Operating cash flow from continuing operations | Not separately stated | Not separately stated | $294.7 | $324.3 |
| Net earnings attributable to IAC shareholders | $326.8 | $96.9 | $344.7 | $208.9 |
- Q3 operating margin was 12.9%, versus 16.1% a year earlier; nine-month operating margin was 11.8%, versus 13.6%. Adjusted EBITDA margin was 17% in Q3 and 9M, compared with 22% and 20%, respectively.
- Q3 diluted EPS was $3.68, including $1.98 from discontinued operations; diluted EPS from continuing operations was $1.70. Nine-month diluted EPS was $3.91, including $1.98 from discontinued operations; continuing-operations diluted EPS was $1.93.
- At September 30, cash and cash equivalents were $931.7, marketable securities $119.0, and long-term debt $1,080.0. Current assets were $1,455.3 and current liabilities $653.7. Debt comprised $1,000.0 of senior notes and $80.0 of Liberty Bonds; the $300.0 revolving facility was undrawn. IAC reported covenant compliance.
- Cash declined $168.7 from year-end to $931.7. Continuing-operations investing cash use was $399.2, including $244.5 for acquisitions and $39.0 of capital expenditures; financing cash use was $58.8, including $68.5 of dividends.
Material changes and segment performance
- Consolidated Q3 revenue grew 3%, but nine-month revenue declined 1%. Q3 operating income fell 17% and Adjusted EBITDA fell 18%; nine-month operating income and Adjusted EBITDA fell 14% each.
- The Match Group’s Q3 revenue rose 12% to $230.2, while Adjusted EBITDA declined 11% to $61.4. Dating revenue benefited from subscriber growth: paid subscribers increased 10% in North America and 7% internationally. Non-dating revenue rose sharply, principally following the August acquisition of The Princeton Review. Acquisition-related deferred-revenue write-offs contributed to losses at Princeton Review and FriendScout24.
- Search & Applications Q3 revenue fell 3% to $394.7 and Adjusted EBITDA fell 5% to $93.1; lower Ask.com and B2B applications revenue weighed on results. The segment generated $351.4 of Q3 revenue from Google, compared with $369.9 a year earlier.
- eCommerce Q3 revenue increased 14% to $107.8, driven by HomeAdvisor; its Adjusted EBITDA declined to $3.9, partly because the prior-year period included an asset-sale gain. Media revenue was approximately flat in Q3, while its Adjusted EBITDA loss widened to $7.7.
- Nine-month other expense included $64.2 of impairment charges on cost-method investments. Nine-month equity-method losses included a separate $4.2 impairment charge.
Outlook, commentary and risks
- Management said existing cash, expected operating cash flows and available borrowing capacity should fund normal operating needs, capital expenditures, dividends, share repurchases and investments for the foreseeable future. It expected 2014 capital expenditures to be lower than 2013. No specific revenue or earnings guidance was provided.
- The Board declared a $0.34-per-share quarterly dividend on October 28, payable December 1, 2014. No shares were repurchased during Q3; 8.6 million shares remained authorized for repurchase at quarter-end.
- Q3 results included a significant tax-related benefit: expiration of federal tax statutes of limitations for 2001–2009 led to recognition of $374.8 of previously unrecognized tax benefits, including interest. The resulting benefit to continuing and discontinued operations was $88.2 and $175.7, respectively. This materially boosted reported earnings and is not an indication of recurring operating performance. The IRS was auditing 2010–2012 federal returns; the company said tax-reserve changes or audit outcomes could be material.
- IAC identified dependence on Google advertising and its services agreement, which expires March 31, 2016, as a risk. Other disclosed risks include online-advertising and market changes, competition, acquisitions, international expansion, consumer acceptance and regulatory changes. Management said ordinary-course legal matters were not expected to have a material impact, while acknowledging possible uncertainty.
Important facts for investors to verify
- Confirm the filing entity: this is IAC/InterActiveCorp’s consolidated filing, and Match Group figures are segment information, not standalone Match Group financial statements.
- Assess earnings excluding the exceptional tax benefits and discontinued-operations contribution; compare continuing-operations results with reported net income.
- Review the sustainability of Match Group subscriber and revenue growth against its lower Adjusted EBITDA, including acquisition effects and deferred-revenue write-offs.
- Track Search & Applications performance and exposure to Google, including renewal terms and policy changes under the agreement expiring in 2016.
- Monitor acquisition spending, investment impairments, cash generation, debt covenants and the company’s stated capital-return plans.