ANGI Homeservices Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; filed November 9, 2018. ANGI operates digital home-services marketplaces across North America and Europe, including HomeAdvisor and Angie’s List. IAC held 86.3% of ANGI’s economic interest and 98.4% of its voting interest at quarter-end.
Financial results and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $303.1 million | $181.7 million | $853.2 million | $513.2 million |
| Operating income (loss) | $33.5 million | $(112.5) million | $46.0 million | $(114.0) million |
| Net income (loss) attributable to ANGI shareholders | $26.6 million | $(71.8) million | $40.6 million | $(44.9) million |
| Diluted earnings (loss) per share | $0.05 | $(0.17) | $0.08 | $(0.11) |
| Adjusted EBITDA | $77.7 million | $(2.3) million | $181.3 million | $22.9 million |
| Operating cash flow | Not separately provided | Not separately provided | $153.7 million | $55.9 million |
Q3 operating margin was approximately 11%; net margin was approximately 9%, and Adjusted EBITDA margin was approximately 26%. For the nine months, those margins were approximately 5%, 5%, and 21%, respectively. Adjusted EBITDA is a non-GAAP measure and excludes stock-based compensation, depreciation, and specified acquisition-related items.
At September 30, cash and cash equivalents were $279.5 million, with $34.9 million of marketable securities; current assets were $420.6 million and current liabilities $180.6 million. Term-loan principal was $264.7 million, plus $1.0 million of related-party debt. Nine-month investing cash outflow was $57.3 million, including $32.9 million in capital expenditures and $34.8 million in marketable-security purchases; financing cash outflow was $37.8 million.
Changes and comparability
- Reported revenue rose 67% in Q3 and 66% for the first nine months. Much of the increase reflects Angie’s List, which combined with HomeAdvisor in September 2017; therefore, reported year-over-year growth is not a like-for-like comparison.
- Marketplace revenue increased 36% in Q3 and 32% year to date. Q3 marketplace service requests rose 28% to 6.4 million and paying service professionals rose 19% to 206,000. Europe revenue grew 13% in Q3 and 25% year to date.
- Q3 operating results improved substantially from 2017, when large Combination-related stock compensation and other costs contributed to losses. Total stock-based compensation was $22.5 million in Q3 2018 versus $104.0 million in Q3 2017. Management also cited lower Combination-related costs and selling and marketing expense as a percentage of revenue.
- Adoption of the new revenue standard capitalized certain sales commissions. Management said this reduced 2018 sales-commission expense by about $8.0 million; the nine-month reported operating-income benefit was $8.0 million. The standard also added $25.6 million to opening retained earnings, net of tax.
Outlook, commentary, and risks
- The filing provides no specific revenue or earnings guidance. Management expected 2018 capital expenditures to be approximately 80% higher than 2017, driven partly by software development and office expansion. It expected Combination-related stock compensation of about $20 million for the remainder of 2018, $35 million in 2019, and $20 million in 2020.
- Management believed cash, securities, and expected operating cash flow would fund foreseeable operating needs, capital expenditures, debt service, and investments. The company also disclosed that net settlement of outstanding stock appreciation rights could require $320 million in cash withholding, assuming a 50% withholding rate, or additional share issuance; other outstanding awards could require $20.3 million of withholding cash.
- Subsequent to quarter-end, ANGI acquired Handy, issuing approximately 8.6 million Class A shares. IAC received approximately 5.1 million Class B shares under the Angie’s List merger adjustment. After these transactions, IAC’s estimated economic and voting interests were approximately 84.9% and 98.3%. On November 5, ANGI entered a $250 million revolving facility and extended the term loan maturity to November 2023.
- Debt covenants include a maximum net leverage ratio of 4.5 to 1.0; the amended facilities also require minimum interest coverage of 2.0 to 1.0. The term loan is secured and bears variable interest. The filing identifies risks including competition, demand and economic conditions, service-professional relationships, marketing efficiency, technology and data security, acquisition integration, IAC’s control, and indebtedness.
- HomeAdvisor faces putative class actions alleging deceptive practices toward service professionals. The company says it believes the claims are without merit and is defending them; class certification and related motions remained unresolved. Management said ordinary-course litigation and contingencies could still have an adverse outcome.
Most important facts to verify
- Assess growth on a comparable basis, separating Angie’s List and other acquired-business contributions from underlying marketplace trends.
- Track service requests, paying professionals, bad-debt expense, and accounts receivable as the marketplace expands.
- Review Handy integration, share issuance, and the effects of the new credit facility and amended term-loan covenants.
- Evaluate the timing and potential cash or dilution impact of stock-award withholding obligations.
- Monitor the service-professional lawsuits, including class-certification decisions and potential exposure.