ANGI Homeservices Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Filed November 7, 2019. ANGI connects consumers with home-service professionals through brands including HomeAdvisor, Angie’s List and Handy. IAC held 83.7% of ANGI’s economic interest and 98.1% of its voting interest at quarter-end.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $357.4 million | $303.1 million | $1,004.7 million | $853.2 million |
| Operating income | $24.7 million | $33.5 million | $32.5 million | $46.0 million |
| Adjusted EBITDA | $58.9 million | $77.7 million | $147.5 million | $181.3 million |
| Net earnings attributable to ANGI shareholders | $18.0 million | $26.6 million | $34.9 million | $40.6 million |
| Diluted earnings per share | $0.04 | $0.05 | $0.07 | $0.08 |
- Q3 revenue rose 18% year over year. North America revenue increased 18% to $339.1 million and Europe revenue increased 10% to $18.2 million.
- North America Marketplace revenue grew 27% in Q3 to $270.5 million; consumer connection revenue rose 29%. Marketplace Service Requests increased 19% to 7.6 million. Marketplace Paying Service Professionals reached 226,000, up 10%.
- Q3 operating margin was approximately 6.9%, compared with 11.1%; Adjusted EBITDA margin was approximately 16.5%, compared with 25.6%. Selling and marketing expense increased 43% to $195.5 million, or 55% of revenue versus 45% a year earlier.
- For the first nine months, operating margin was approximately 3.2% versus 5.4%, and Adjusted EBITDA margin was approximately 14.7% versus 21.3%.
- Operating cash flow for the first nine months was $182.1 million, compared with $153.7 million. Investing activities used $26.6 million and financing activities used $89.9 million. Cash, cash equivalents and restricted cash totaled $404.7 million at September 30.
- Term Loan principal was $250.9 million; the company had no revolver borrowings under its $250 million facility. The term loan’s stated interest rate was 3.53%. Separately, operating lease liabilities totaled $130.9 million.
Changes, outlook and risks
- Revenue growth reflected higher Marketplace activity, including contributions from Handy, acquired in October 2018. Advertising and Other revenue fell 7% in Q3, primarily due to Felix’s sale, partly offset by Fixd Repair, acquired in January 2019.
- Despite revenue growth, Adjusted EBITDA fell 24% in Q3. Management cited higher marketing costs as a share of revenue, investments in Handy and Fixd Repair, and higher bad debt expense. Management said Google-related changes reduced free-search requests and made paid-search requests more expensive; it expected the trend to continue through the rest of 2019, but the year-over-year increase in paid-search cost to be more modest in 2020, in part due to recent changes.
- No specific revenue or earnings forecast was provided in the filing. Management expected 2019 capital expenditures to be approximately 50%–55% above 2018’s $47.0 million, mainly for software development and office improvements. It said existing cash, available credit and expected operating cash flows should fund foreseeable requirements.
- Debt covenants include maximum consolidated net leverage of 4.5-to-1.0 and minimum interest coverage of 2.0-to-1.0. The filing reported no covenant-related restrictions on liquidity at quarter-end. Debt and covenant terms, as well as IAC’s control over financing decisions, remain relevant considerations.
- Risks include competition and marketing efficiency, demand for home services, service-professional relationships and classification (including Handy contractors), cybersecurity and privacy, acquisitions, international operations, and dependence on IAC. A HomeAdvisor service-professional class action alleges deceptive practices concerning leads and charges; ANGI disputed the allegations and said it would defend the case. Management did not identify pending litigation it believed would individually or collectively have a material adverse effect, while acknowledging uncertainty around contingencies.
- Other notable items: ANGI repurchased 4.2 million shares for approximately $34.2 million during the first nine months and repurchased about 1.1 million more through November 1. The company adopted lease accounting in 2019, recognizing right-of-use assets and lease liabilities. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Marketplace growth and service-request trends continue, and how much growth reflects Handy versus underlying business trends.
- Whether increased paid-search costs, marketing intensity and bad debt pressure ease as management anticipated, and whether revenue growth can translate into improved margins.
- Cash conversion and capital requirements, including elevated planned capital expenditures, lease obligations, employee-award withholding costs and share repurchases.
- Term-loan covenant headroom, repayment schedule and the effect of interest-rate or operating changes on leverage and liquidity.
- Developments in the HomeAdvisor class action, tax audits and other contingencies, and any changes in IAC’s ownership or plans regarding ANGI.