Business context and reporting period
The supplied filing is IAC/InterActiveCorp’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014, filed July 31, 2014. It is not a standalone Match Group filing. IAC’s newly organized Match Group segment includes Match and also DailyBurn and Tutor; comparative segment results reflect the realignment.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| IAC revenue | $756.3 million | $799.4 million | $1,496.6 million | $1,541.7 million |
| Operating income | $95.7 million | $106.7 million | $167.4 million | $191.2 million |
| Net income attributable to IAC shareholders | $(18.0) million | $58.3 million | $17.9 million | $111.9 million |
| Operating cash flow from continuing operations | Not separately stated | Not separately stated | $148.8 million | $228.3 million |
| Adjusted EBITDA, non-GAAP | $141.4 million | $157.9 million | $249.5 million | $284.7 million |
For Q2, revenue fell 5% and operating income fell 10% year over year. Net loss included substantial investment impairment charges and a high effective tax rate. Q2 operating margin was approximately 12.7%, versus 13.3% a year earlier. The filing presents Adjusted EBITDA as a supplemental non-GAAP measure, not a substitute for GAAP results.
Match Group segment
Q2 segment revenue was $214.3 million, up 8% year over year; six-month revenue was $425.5 million, up 9%. Q2 operating income was $61.2 million, up 15%, and six-month operating income was $101.0 million, up 12%. Adjusted EBITDA was $69.4 million in Q2, up 2%, and $116.8 million for the six months, up 1%.
Dating revenue rose 7% in Q2. North America revenue increased 6% to $138.1 million and international revenue increased 8% to $69.5 million. Paid subscribers grew 11% in North America and 6% internationally. Non-dating revenue, including DailyBurn and Tutor, increased 84% in Q2.
Financial position and liquidity
At June 30, 2014, IAC reported cash and cash equivalents of $987.3 million, marketable securities of $81.6 million, current assets of $1.477 billion, and current liabilities of $587.7 million. Long-term debt was $1.080 billion, unchanged from year-end 2013. The company had no borrowings under its $300 million revolving credit facility and reported compliance with debt covenants. Cash and marketable securities were approximately $1.069 billion, slightly below reported debt.
For the six months, continuing-operations cash flow was $148.8 million provided by operations, $220.1 million used in investing, and $46.2 million used in financing. Cash declined by $113.1 million to $987.3 million. Investing outflows included $103.6 million for acquisitions and $26.6 million for capital expenditures; financing included $40.1 million of dividends and $30.0 million to purchase a noncontrolling interest.
Material changes, outlook and risks
- Other expense included $64.2 million of impairment charges on cost-method investments; equity-method investment losses included a further $4.2 million impairment. These charges contributed to Q2’s loss from continuing operations of $18.0 million.
- The six-month effective tax rate was 76%, with management attributing the elevated rate primarily to investment write-down losses that were largely unbenefited, tax-contingency interest and state taxes. Following the July 1 expiration of federal tax statutes for 2001–2009, IAC expected to recognize $374.8 million of previously unrecognized tax benefits in Q3 2014, including stated benefits to continuing and discontinued operations. This expected recognition is not a Q2 result.
- Management said it expected 2014 capital expenditures to be lower than 2013 and believed cash, expected operating cash flow and available borrowing capacity would fund normal needs for the foreseeable future. No specific earnings or revenue guidance was provided in the supplied text.
- IAC declared a quarterly dividend of $0.34 per share on July 29, 2014, payable September 1. No shares were repurchased during Q2; 8.6 million shares remained authorized for repurchase.
- Google-related revenue was $349.5 million in Q2 and $704.6 million for the first half, all within Search & Applications. The services agreement expires March 31, 2016, and Google may change policies that affect IAC’s products or practices.
- Other risks cited include advertising-market changes, competition, technology and consumer shifts, acquisition execution, international expansion, tax audits and contingencies, and potential litigation. Management said it did not expect pending legal matters to materially affect results, liquidity or financial condition, while noting outcomes remain uncertain.
- Management reported effective disclosure controls at period-end and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and scope: this is IAC’s consolidated filing, and Match Group segment figures include DailyBurn and Tutor under the 2014 realignment.
- Review the drivers and potential recurrence of the $64.2 million investment impairment and the separate $4.2 million equity-method impairment.
- Track the Q3 accounting and cash-tax implications of the expected $374.8 million tax-benefit recognition, and the status of the IRS and other tax examinations.
- Assess the Match Group’s subscriber growth against increased marketing, hosting and customer-acquisition costs.
- Evaluate IAC’s dependence on Google and the risks surrounding the agreement’s 2016 expiration and policy changes.
- Monitor operating cash flow, acquisition spending, debt and liquidity, as well as the company’s future dividend and repurchase decisions.