Match Group, Inc. annual report, FY2013

Business context and reporting period

This filing is IAC/InterActiveCorp’s Form 10-K for the fiscal year ended December 31, 2013, filed February 26, 2014. It reports IAC as a whole, not Match Group as a standalone public company; Match is one of IAC’s five reporting segments. IAC’s businesses span search and applications, online dating, local services, media, and e-commerce.

IAC’s Match segment operated subscription-based and ad-supported dating services, including Match.com, OkCupid, Tinder, PeopleMedia, and Meetic. The segment reported approximately 3.4 million subscribers at year-end.

Financial results and key metrics

Revenue increased 8%; operating income increased 32%. Cost of revenue was 33% of revenue versus 35% in 2012, implying gross margins of approximately 67% and 65%, respectively. Operating margin was approximately 14% versus 12%. Management’s non-GAAP Operating Income Before Amortization was $539.4 million, up 21%, or approximately 18% of revenue versus 16% in 2012.

Match segment revenue was $788.2 million, up 10%. Core, Meetic, and Developing subscribers increased 9%, 6%, and 141%, respectively. Segment operating income was $245.6 million, compared with $205.5 million. These segment figures are IAC’s reported Match results, not standalone Match Group financial statements.

Fourth-quarter 2013 consolidated revenue was $724.5 million, operating income $113.0 million, earnings from continuing operations $78.8 million, and diluted EPS from continuing operations $0.88. The filing does not provide a clear fourth-quarter Match segment revenue value in the supplied text.

Material changes versus the prior comparable period

• Search & Applications revenue rose 9%, supported by a full-year contribution from About Group and the segment transfer of CityGrid Media.
• Match revenue grew 10%, with subscriber growth across Core, Meetic, and Developing operations; Twoo, acquired in January 2013, contributed to Developing growth.
• Local revenue fell 14%, partly reflecting CityGrid Media’s transfer to Search & Applications and a decline in HomeAdvisor domestic accepted service requests, which management attributed primarily to a domain-name change.
• Media revenue increased 18%, mainly from Electus and Vimeo. The Newsweek print business had closed in December 2012 and Newsweek was sold in August 2013.
• Interest expense rose to $33.6 million from $6.1 million, primarily following issuance of $500 million of 4.875% notes in November 2013 and the prior-year issuance of $500 million of 4.75% notes.
• Other income included a $35.9 million pretax gain on sales of long-term investments; a $5.0 million write-down of a cost-method investment partly offset it.

Liquidity, debt, outlook, and risks

At year-end, IAC had $1.1 billion of cash and cash equivalents, $6.0 million of marketable securities, and $1.08 billion of debt. Debt consisted principally of $500 million of 4.875% notes due 2018, $500 million of 4.75% notes due 2022, and $80 million of Liberty Bonds due 2035. No borrowings were outstanding under the $300 million revolving credit facility, which expires in 2017. Operating cash flow increased year over year; investing activities used $80.0 million, while financing activities provided $17.9 million. IAC stated that liquidity and expected operating cash flows were sufficient for foreseeable operating needs and commitments.

Management expected 2014 capital expenditures to be lower than 2013, but gave no specific revenue or earnings guidance. IAC declared annual dividends of $0.96 per share in 2013 and announced a further $0.24 quarterly dividend in February 2014. The company repurchased 4.5 million shares for $229.1 million during 2013 and had approximately 8.6 million shares remaining under its authorization at year-end.

Key risks include reliance on Google for a substantial share of revenue—$1.5 billion in 2013—with the services agreement expiring March 31, 2016; competition and changes in online advertising, search traffic, and mobile usage; dependence on third-party traffic and distribution arrangements; privacy, data-security, regulatory, and tax exposure; and acquisition integration and impairment risk. The filing reported $408.8 million of unrecognized tax benefits including interest and noted ongoing tax examinations. Six of eight reporting units had fair values significantly above carrying values at the annual impairment assessment; Tutor and Felix were approximately at carrying value.

After year-end, IAC acquired the remaining publicly traded Meetic shares for approximately $72 million and announced the acquisition of ValueClick’s Owned and Operated businesses for $80 million. These are subsequent events, not 2013 operating results. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.

Investor verification priorities

• Confirm the filing entity and scope: this is IAC’s 10-K, and Match is a segment rather than a separately reported issuer here.
• Assess the durability and renewal economics of the Google agreement and the concentration of search-related revenue.
• Review Match subscriber definitions, acquisition contribution, retention, and segment profitability—especially the rapid growth in Developing subscribers.
• Reconcile reported cash with debt, including the location of cash: $313.4 million was held by foreign subsidiaries, and repatriation could incur U.S. taxes.
• Evaluate the recurring earnings impact of investment-sale gains, asset-sale gains, non-cash compensation, acquisition-related amortization, and other unusual items.
• Track HomeAdvisor lead volumes and the effects of its subscription-package changes, and monitor the tax contingency balance and resolution of audits.