ANGI Homeservices Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 8, 2020. ANGI connects consumers with home-service professionals through its North America and Europe businesses. IAC held 84.9% of ANGI’s economic interest and 98.3% of its voting interest at quarter-end. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $343.7 million | $303.4 million |
| Operating loss | $16.3 million | $3.6 million |
| Adjusted EBITDA | $34.4 million | $37.2 million |
| Net income (loss) attributable to ANGI shareholders | $(9.0) million | $10.0 million |
| Diluted earnings (loss) per share | $(0.02) | $0.02 |
| Cash from operating activities | $55.9 million | $26.7 million |
- Revenue rose 13%. North America increased 15% to $324.1 million; Europe declined 9% to $19.5 million. Marketplace revenue increased 17% to $258.8 million.
- Gross margin was approximately 90% versus 97% in the prior-year quarter, reflecting primarily the change to gross revenue presentation for Handy and HomeAdvisor pre-priced jobs, with related service-provider costs recorded in cost of revenue. The accounting change added $15.2 million to reported revenue; it also changed the timing of revenue recognition for pre-priced jobs.
- Operating loss widened to $16.3 million. Adjusted EBITDA, a non-GAAP measure, fell 7%; its margin was 10% of revenue versus 12%. North America Adjusted EBITDA rose 4% to $41.4 million, while Europe’s loss widened to $7.0 million.
- Net loss attributable to shareholders was $9.0 million, compared with earnings of $10.0 million. The 2020 result included a $9.0 million income-tax benefit; the prior-year quarter included a $14.2 million benefit.
Cash, debt and liquidity
- Cash and cash equivalents were $384.2 million at March 31, down from $390.6 million at year-end. Cash, cash equivalents and restricted cash totaled $385.3 million.
- Term Loan principal was $244.1 million; reported long-term debt, net of current portion and issuance costs, was $228.6 million. The loan matures in November 2023 and bore interest at 2.28% at quarter-end. A $250 million revolving facility had no borrowings outstanding.
- Operating cash flow was $55.9 million. Investing activities used $12.5 million, including $13.2 million of capital expenditures; financing activities used $48.3 million, including $38.5 million for treasury-stock purchases and $3.2 million to buy redeemable noncontrolling interests.
- Management said existing cash, available revolver capacity and expected operating cash flows should fund normal requirements for the foreseeable future. Debt agreements require a maximum 4.5-to-1.0 consolidated net leverage ratio and minimum 2.0-to-1.0 interest coverage ratio; the filing reported no limitations on repurchases or distributions under these covenants at quarter-end.
Changes, outlook and risks
- COVID-19 had begun to reduce demand for home-service requests, especially non-essential work and in harder-hit regions. The company cited consumer reluctance to allow in-home visits and weaker confidence and discretionary income. COVID-19 also contributed to higher expected credit losses and bad-debt expense. Management said the impact was uncertain and made forecasting more difficult.
- The pandemic’s effects were not fully reflected in the quarter because they emerged late in Q1; the filing cautioned that Q1 impact was not indicative of the remainder of 2020. No specific revenue or earnings guidance was provided.
- Management expected 2020 capital expenditures to be approximately 25%–30% below 2019’s $68.8 million, mainly because of lower leasehold-improvement spending. It said the company believed it had ample access to capital to navigate economic pressures.
- Operating expenses increased: cost of revenue rose to $33.2 million from $10.0 million, principally due to gross presentation; selling and marketing increased 8%; general and administrative expense increased 12%, including higher stock compensation and bad debt; depreciation increased 73%.
- Stock-based compensation was $25.6 million versus $19.3 million. Q1 included a $5.9 million adjustment for previously modified HomeAdvisor awards, including a forfeiture estimate update and an expense-attribution correction; management said the prior-period effect was immaterial.
- ANGI repurchased 5.1 million shares during the quarter at an average $7.40 per share and bought a further 2.5 million shares through May 5 at an average $6.18. Approximately 20.1 million shares remained authorized for repurchase as of May 5.
- Risks highlighted include prolonged COVID-19 effects, consumer demand and discretionary spending, service-professional availability and classification, paid-search acquisition costs, cybersecurity and privacy, international operations, indebtedness, and ANGI’s dependence on IAC. The company reported no pending legal proceeding it believed would have a material adverse effect; a HomeAdvisor service-professional class action remained pending, and ANGI said it would defend the claims.
Important facts for investors to verify
- How COVID-19 affected service requests, conversion, cancellations, bad debts and revenue after March 31, and whether demand recovered or deteriorated.
- How much reported revenue growth reflects underlying activity versus the $15.2 million gross-presentation change, and the related impact on costs and revenue timing.
- Whether North America’s Adjusted EBITDA growth can offset worsening European performance and higher operating costs.
- Liquidity, covenant headroom and cash use, particularly continued share repurchases, debt service and potential employee-award tax withholding.
- Potential outcomes of the HomeAdvisor litigation and tax audits, and the consequences of IAC’s voting control.