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IACI > SEC Filings for IACI > Form 10-K/A on 1-Feb-2012All Recent SEC Filings

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Form 10-K/A for IAC/INTERACTIVECORP


1-Feb-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT OVERVIEW

IAC is a leading internet company with more than 50 brands serving consumer audiences across more than 30 countries…our mission is to harness the power of interactivity to make daily life easier and more productive for people all over the world. IAC includes the businesses comprising its Search segment; its Match and ServiceMagic segments; the businesses comprising its Media & Other segment; as well as investments in unconsolidated affiliates.

Results

    Set forth below are the contributions made by our various segments and
corporate operations to consolidated revenue, operating income (loss) and
Operating Income Before Amortization (as defined in IAC's Principles of
Financial Reporting) for the years ended December 31, 2010, 2009 and 2008
(dollars in thousands).

                                                Years Ended December 31,
                                 2010       Growth        2009       Growth        2008
  Revenue:
  Search                      $   837,134        23 %  $   681,781        (9 )% $   753,075
  Match                           400,723        17 %      342,598        (6 )%     365,505
  ServiceMagic                    181,423        16 %      155,813        26 %      123,914
  Media & Other                   219,896        30 %      168,787        (7 )%     182,116
  Inter-segment elimination        (2,361 )      (3 )%      (2,284 )      84 %      (14,532 )

  Total                       $ 1,636,815        22 %  $ 1,346,695        (4 )% $ 1,410,078

                                                Years Ended December 31,
                                 2010      Growth         2009        Growth        2008
   Operating Income (Loss):
   Search                     $  112,867        NM    $   (980,231 )       NM    $  106,085
   Match                         115,367        36 %        84,655         12 %      75,490
   ServiceMagic                   16,448        23 %        13,383        (44 )%     23,983
   Media & Other                 (47,539 )    (115 )%      (22,061 )       50 %     (44,180 )
   Corporate                    (147,348 )     (10 )%     (133,733 )       35 %    (205,632 )

   Total                      $   49,795        NM    $ (1,037,987 )   (2,246 )% $  (44,254 )

                                                    Years Ended December 31,
                                     2010       Growth       2009       Growth        2008
Operating Income Before
Amortization:
Search                             $ 125,549         37 %  $  91,615        (37 )% $  144,940
Match                                122,057         30 %     94,124          3 %      91,266
ServiceMagic                          18,165        (15 )%    21,286        (19 )%     26,244
Media & Other                        (12,009 )       39 %    (19,699 )       22 %     (25,334 )
Corporate                            (64,183 )        2 %    (65,465 )       46 %    (120,942 )

Total                              $ 189,579         56 %  $ 121,861          5 %  $  116,174


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Refer to Note 14 to the consolidated financial statements for reconciliations by segment of Operating Income Before Amortization to operating income (loss).

Sources of Revenue

Substantially all of the revenue from our Search segment is derived from online advertising, with the majority of this revenue attributable to our paid listing supply agreement with Google Inc. ("Google"). The revenue earned from our Match segment is derived from subscription fees for its subscription-based online personals services and online advertising. ServiceMagic's revenue is derived from fees paid by members of its network of service professionals for consumer leads, regardless of whether the service professional that receives the lead ultimately provides the requested service, as well as from one-time fees charged upon enrollment and activation of new service professionals in its network. The revenue earned by the Media & Other segment includes merchandise sales, online advertising and content production.

Strategic Partnerships, Advertiser Relationships and Online Advertising Spend

Our various businesses provide supplier partners with important customer acquisition channels and we believe that the ability of our supplier partners to reach a large qualified audience through our services is a significant benefit. While we aim to build and maintain strong relationships with our supplier partners, we may not succeed in these efforts and there is always the risk that certain supplier partners may not make their products and services available to us in the future.

A significant component of the Company's revenue is attributable to a paid listing supply agreement with Google, which expires on December 31, 2012. The termination of the paid listing supply agreement by Google or the failure of Google to perform its obligations under the agreement would have an adverse effect, which could be material, on our business, financial condition and results of operations. In addition, our inability to obtain a renewal of our agreement with Google with substantially comparable economic and other terms upon the expiration of our current agreement could have an adverse effect, which could be material, on our business, financial condition and results of operations. If any of these events were to occur, we may not be able to find another suitable alternate paid listings provider (or if an alternate were found, the economic and other terms of the agreement and the quality of paid listings may be inferior relative to our arrangements with, and the paid listings supplied by, Google) or otherwise replace the lost revenue, which could have a material adverse effect on our business, financial condition and results of operations. For the years ended December 31, 2010, 2009 and 2008, revenue earned from Google was $727.9 million, $561.9 million and $610.7 million, respectively. The majority of this revenue is earned by the businesses comprising the Search segment.

We market and offer our products and services directly to consumers through branded websites and membership programs, allowing consumers to transact directly with us in a convenient manner. We have made, and expect to continue to make, substantial investments in online and offline advertising to build our brands and drive traffic to our websites and consumers and advertisers to our businesses.

We pay traffic acquisition costs which consist of payments made to partners who distribute our toolbars, integrate our paid listings into their websites or direct traffic to our websites. We also pay to market and distribute our services on third party distribution channels, such as internet portals and search engines. In addition, some of our businesses manage affiliate programs, pursuant to which we pay commissions and fees to third parties based on revenue earned. These distribution channels might also offer their own products and services, as well as those of other third parties, which compete with those we offer.


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The cost of acquiring new consumers through online and offline third party distribution channels has increased, particularly in the case of online channels as internet commerce continues to grow and competition in the segments in which IAC's businesses operate increases.

Results of Operations for the Years Ended December 31, 2010, 2009 and 2008

Consolidated Results

Revenue

                                      Years Ended December 31,
                        2010      % Change      2009      % Change      2008
                                       (Dollars in thousands)
           Revenue   $1,636,815     22%      $1,346,695     (4)%     $1,410,078

Revenue in 2010 increased $290.1 million from 2009 primarily as a result of revenue increases of $155.4 million from Search, $58.1 million from Match, $51.1 million from Media & Other and $25.6 million from ServiceMagic. Revenue reflects double digit growth across all segments. The increase from Search reflects growth in queries from distributed and proprietary toolbars and destination websites. The increase in revenue from Match reflects strong growth from the domestic business, including the combined contribution from People Media, acquired July 13, 2009, and Singlesnet, acquired March 2, 2010, partially offset by a decrease in revenue due to the sale of Match Europe to Meetic, on June 5, 2009. Also contributing to the increase in revenue from Match is the impact of Match's venture with Meetic in Latin America, which was formed March 10, 2010. The increase in revenue from Media & Other was driven by the contribution from Notional and Electus, which were not in the full prior year period, and growth at Pronto, Shoebuy, CollegeHumor and Vimeo. The increase in revenue from ServiceMagic was primarily due to an increase in accepted domestic service requests driven primarily by increased marketing efforts and a more active service provider network.

Revenue in 2009 decreased $63.4 million from 2008 primarily as a result of revenue decreases of $71.3 million from Search and $22.9 million from Match, partially offset by an increase of $31.9 million from ServiceMagic. The decrease from Search was driven by a sharp decline in network revenue, resulting from the discontinuation of relationships with certain partners that took place during 2008 in conjunction with the renewed Google agreement. Partially offsetting this decline is the continued growth in partners and queries at the toolbar business and the favorable impact in 2009 from the acquisition of Lexico, which includes Dictionary.com and Thesaurus.com, on July 3, 2008. The decrease in revenue at Match was driven by the sale of Match Europe to Meetic, partially offset by the favorable impact from the acquisition of People Media and solid growth in the U.S. business. The increase in revenue from ServiceMagic was primarily due to a more active service provider network resulting in a 25% increase in the number of times service requests were accepted by a service professional and a shift in the mix of requests to higher value service requests driven, in part, by increased marketing efforts.


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Cost of Revenue

                                                  Years Ended December 31,
                                      2010     % Change     2009     % Change     2008
                                                   (Dollars in thousands)
 Cost of revenue                    $593,816     38%      $429,849     (6)%     $456,950
 As a percentage of total revenue     36%       436 bp      32%      (49) bp      32%


--------------------------------------------------------------------------------
bp = basis points

Cost of revenue consists primarily of traffic acquisition costs. Traffic acquisition costs consist of payments made to partners who distribute our toolbars, integrate our paid listings into their websites or direct traffic to our websites. These payments include amounts based on revenue share and other arrangements. Cost of revenue also includes the cost of products sold and shipping and handling costs, as well as expenses associated with the operation of the Company's data centers, including compensation and other employee-related costs (including stock-based compensation) for personnel engaged in data center functions, rent, energy and bandwidth costs, and content acquisition costs.

Cost of revenue in 2010 increased $164.0 million from 2009 primarily due to increases of $121.6 million from Search, $27.7 million from Media & Other and $10.3 million from Match. The increase in cost of revenue from Search was primarily due to an increase of $108.5 million in traffic acquisition costs related to an increase in revenue. As a percentage of revenue, traffic acquisition costs increased over the prior year due to an increase in the proportion of revenue from distributed toolbars and other arrangements with third parties who direct traffic to our websites, as well as a shift in partner mix to partners carrying higher traffic acquisition costs. Cost of revenue from Media & Other increased due to Notional, which is not in the full prior year period, The Daily Beast and an increase of $6.0 million in the cost of products sold at Shoebuy due to increased sales. The increase in cost of revenue from Match was primarily due to the acquisitions of People Media and Singlesnet and the formation of the Latin America venture, partially offset by the sale of Match Europe to Meetic.

Cost of revenue in 2009 decreased $27.1 million from 2008 primarily due to decreases of $20.7 million from Match and $6.5 million from Media & Other. The decrease in cost of revenue from Match was primarily due to a decrease of $20.0 million in traffic acquisition costs resulting primarily from the sale of Match Europe and the impact of more favorable economic terms under agreements with certain distribution partners. Cost of revenue from Media & Other decreased primarily due to the sale of ReserveAmerica on January 31, 2009, partially offset by The Daily Beast, as well as an increase of $3.0 million in the cost of products sold at Shoebuy due to increased sales.

Selling and marketing expense

                                                  Years Ended December 31,
                                      2010     % Change     2009     % Change     2008
                                                   (Dollars in thousands)
 Selling and marketing expense      $492,206      6%      $463,439      4%      $444,571
 As a percentage of total revenue     30%      (434) bp     34%       288 bp      32%

Selling and marketing expense consists primarily of advertising and promotional expenditures and compensation and other employee-related costs (including stock-based compensation) for personnel engaged in sales, sales support and customer service functions. Advertising and promotional expenditures include online marketing, including fees paid to search engines and third parties that distribute our proprietary toolbars, and offline marketing, including television and radio advertising.


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Selling and marketing expense in 2010 increased $28.8 million from 2009 primarily due to increases of $21.0 million from ServiceMagic, $15.1 million from Match and $7.0 million from Media & Other, partially offset by a decrease of $13.4 million from Search. The increase in selling and marketing expense from ServiceMagic is due to increases of $14.0 million and $7.0 million in marketing and compensation and other employee-related costs, respectively. The increase in compensation and other employee-related costs from ServiceMagic is primarily due to the expansion of its sales force. The increase in selling and marketing expense from Match is primarily due to an increase of $13.3 million in advertising and promotional expenditures related primarily to a new advertising agreement entered into during the second quarter of 2010 with Yahoo! Inc. ("Yahoo"), as well as from the impact of the acquisitions of People Media and Singlesnet and the formation of the Latin America venture, partially offset by the sale of Match Europe to Meetic. Selling and marketing expense from Media & Other increased primarily due to higher online marketing costs at Pronto and advertising and promotional expenditures related to Vimeo's 2010 video festival. Partially offsetting these factors is a decrease from Search primarily due to lower advertising and promotional expenditures of $7.2 million, as the prior year included expenditures associated with the NASCAR partnership and an ad campaign to rebrand the Ask Jeeves UK website, as well as a decrease in compensation and other employee-related costs at CityGrid Media, due in part, to a decrease in average headcount.

Selling and marketing expense in 2009 increased $18.9 million from 2008 primarily due to an increase of $25.1 million from ServiceMagic, partially offset by a decrease of $10.2 million from Match. The increase in selling and marketing expense from ServiceMagic is primarily due to an increase of $19.8 million in advertising and promotional expenditures associated with online marketing and an increase of $5.2 million in compensation and other employee-related costs due primarily to the expansion of its sales force. The growth in service requests during the year from paid channels outpaced the growth in free requests as a result of the increase in online marketing. Partially offsetting these increases in selling and marketing expense is lower advertising and promotional expenditures of $7.8 million from Match. This decrease is due primarily to the sale of Match Europe, partially offset by an increase in online marketing.

General and administrative expense

                                                   Years Ended December 31,
                                       2010     % Change     2009     % Change     2008
                                                    (Dollars in thousands)
General and administrative expense   $316,500     12%      $282,393    (19)%     $346,623
As a percentage of total revenue       19%      (163) bp     21%      (361) bp     25%

General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in executive management, finance, legal, tax and human resources, facilities costs and fees for professional services.

General and administrative expense in 2010 increased $34.1 million from 2009 primarily due to increases of $12.4 million from corporate, $10.5 million from Media & Other, $5.6 million from ServiceMagic and $5.5 million from Search. General and administrative expense from corporate increased primarily due to an increase of $10.3 million in non-cash compensation expense and $5.3 million of transaction expenses in the current year related to the exchange of substantially all of Liberty Media Corporation's ("Liberty") equity stake in IAC, partially offset by lower salary expense. On December 1, 2010, the Company entered into a stock exchange agreement with Liberty. Under the agreement, Liberty agreed to exchange with IAC 4.3 million shares of common stock and 8.5 million shares of Class B common stock, which were valued at $364.2 million based on the closing price of IAC common stock on December 1, 2010, for Evite, Gifts.com and IAC Advertising Solutions and


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$217.9 million in cash (referred to herein as the "Liberty Exchange"). The increase in non-cash compensation expense is primarily related to an increase in expense attributable to awards granted subsequent to the second quarter of 2009, partially offset by awards having become fully vested. The increase in general and administrative expense from Media & Other is principally due to Electus and Notional, which were not in the full prior year period, as well as increased operating expenses associated with Vimeo, partially offset by the cost savings related to certain businesses that have been sold or shutdown. General and administrative expense at ServiceMagic increased primarily due to higher compensation and other employee-related costs. The increase in general and administrative expense from Search is primarily due to an increase in compensation and other employee-related costs at our toolbar business and employee termination costs associated with the Ask.com restructuring, partially offset by a decrease in litigation related expenses.

General and administrative expense in 2009 decreased $64.2 million from 2008 primarily due to a decrease of $66.1 million from corporate. The decrease from corporate is primarily due to the inclusion in 2008 of $42.0 million in expenses related to the Spin-Off, as well as a decrease in the current year in compensation and other employee-related costs, including stock-based compensation. The decrease in non-cash compensation of $16.4 million reflects the impact in 2008 of the acceleration and modification of certain equity awards associated with the Spin-Off.

Product development expense

                                                  Years Ended December 31,
                                       2010     % Change    2009     % Change    2008
                                                   (Dollars in thousands)
   Product development expense        $65,097     13%      $57,843     (9)%     $63,817
   As a percentage of total revenue     4%      (32) bp      4%      (23) bp      5%

Product development expense consists primarily of compensation and other employee-related costs (including stock-based compensation) that are not capitalized for personnel engaged in the design, development, testing and enhancement of product offerings and related technology.

Product development expense in 2010 increased $7.3 million from 2009 primarily due to increases of $3.3 million from Match and $2.3 million from Search. Contributing to the increase in product development expense at Match is an increase in compensation and other employee-related costs driven by growth in headcount related to recent acquisitions. The increase in product development expense from Search is primarily due to the inclusion in the current year of employee termination costs associated with the Ask.com restructuring.

Product development expense in 2009 decreased $6.0 million from 2008 primarily due to a decrease of $4.9 million in compensation and other employee-related costs from Search which is due in part to a decrease of 7% in average headcount at IAC Search & Media and an increase in costs being capitalized in 2009 related to IAC Search & Media's product offerings and related technology.

Depreciation

                                                  Years Ended December 31,
                                       2010     % Change    2009     % Change    2008
                                                   (Dollars in thousands)
   Depreciation                       $63,897      4%      $61,391     (9)%     $67,716
   As a percentage of total revenue     4%      (65) bp      5%      (24) bp      5%


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Depreciation in 2010 increased $2.5 million from 2009 primarily due to the write-off of certain capitalized software costs associated with the Ask.com restructuring.

Depreciation in 2009 decreased $6.3 million from 2008 primarily due to certain fixed assets becoming fully depreciated, partially offset by the incremental depreciation associated with capital expenditures made during 2009 and 2008.

Operating Income Before Amortization

                                                   Years Ended December 31,
                                       2010     % Change     2009     % Change     2008
                                                    (Dollars in thousands)
Operating Income Before
Amortization                         $189,579     56%      $121,861      5%      $116,174
As a percentage of total revenue       12%       253 bp       9%       81 bp        8%

Operating Income Before Amortization in 2010 increased $67.7 million from 2009 primarily due to increases of $33.9 million and $27.9 million from Search and Match, respectively, and reduced losses of $7.7 million at Media & Other. The increase in Operating Income Before Amortization reflects higher revenue across these segments, as well as lower marketing costs from Search, a reduction in acquisition related expenses from Match and cost savings related to certain businesses that have been sold or shutdown and the profit participations related to our interests in Reveille from Media & Other.

Operating Income Before Amortization in 2009 increased $5.7 million from 2008 primarily due to a decrease of $55.5 million in corporate expenses due in part to the inclusion in 2008 of $42.0 million in expenses related to the Spin-Off and a decrease in compensation and other employee-related costs. Partially offsetting these increases in Operating Income Before Amortization is a decrease of $53.3 million from Search resulting primarily from lower overall revenue and higher traffic acquisition costs as a percentage of revenue.

Operating income (loss)

                                                Years Ended December 31,
                                2010     % Change       2009        % Change      2008
                                                 (Dollars in thousands)
Operating income (loss)        $49,795      NM      $(1,037,987)    (2,246)%    $(44,254)
As a percentage of total
revenue                          3%         NM         (77)%       (7,394) bp     (3)%

Operating income in 2010 increased $1.1 billion from 2009 primarily due to a decrease of $888.8 million in goodwill impairment charges described below and an increase of $67.7 million in Operating Income Before Amortization described above. Further contributing to the increase in operating income are decreases of $16.8 million in amortization of intangibles, exclusive of the impairment charges noted below, and $15.9 million in amortization of non-cash marketing, partially offset by an increase of $14.2 million in non-cash compensation expense. The decrease in amortization of intangibles is primarily due to a decrease at Search, partially offset by an increase at Match relating to the acquisition of Singlesnet and its venture formed with Meetic in Latin America. The amortization of non-cash marketing referred to in this report consists of non-cash advertising credits secured from Universal Television as part of the transaction pursuant to which Vivendi Universal Entertainment, LLLP ("VUE") was created, and the subsequent transaction by which IAC sold its partnership interests in VUE. The increase in non-cash compensation expense is primarily related to an increase in expense attributable to awards granted subsequent to the second quarter of 2009, partially offset by awards having become fully vested.


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As of December 31, 2010, there was $137.9 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is expected to be recognized over a weighted average period of approximately 2.2 years.

In connection with the Company's annual impairment assessment in the fourth quarter of 2010, the Company identified and recorded impairment charges at the Media & Other segment related to the write-down of the goodwill and intangible assets of Shoebuy of $28.0 million and $4.5 million, respectively, and at the Search segment related to the write-down of an indefinite-lived intangible asset of IAC Search & Media of $11.0 million. The goodwill and indefinite-lived . . .

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