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

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Form 10-Q/A for IAC/INTERACTIVECORP


1-Feb-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

Management Overview

IAC operates more than 50 leading and diversified Internet businesses across 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.

For a more detailed description of the Company's operating businesses, see the Company's annual report on Form 10-K for the year ended December 31, 2010.

Results of Operations for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010

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 three and nine months ended September 30, 2011 and 2010 (dollars in thousands).

                               Three Months Ended September 30,           Nine Months Ended September 30,
                                 2011         Growth       2010*           2011          Growth       2010*
Revenue:
Search                       $     273,345         33 %   $ 205,075    $      774,385         29 % $   601,230
Match                              132,328         25 %     106,197           360,354         23 %     292,433
ServiceMagic                        55,061         14 %      48,397           157,458         12 %     140,128
Media & Other                       56,384          4 %      54,029           171,431         12 %     153,158
Inter-segment elimination             (234 )       68 %        (732 )          (1,127 )       28 %      (1,561 )

Total                        $     516,884         25 %   $ 412,966    $    1,462,501         23 % $ 1,185,388

                   Three Months Ended September 30,          Nine Months Ended September 30,
                    2011          Growth        2010*         2011         Growth       2010*
Operating
Income
(Loss):
Search           $     45,023          56 %   $  28,872    $    144,420         58 %  $   91,546
Match                  36,677          (4 )%     38,126         101,105         31 %      77,318
ServiceMagic            7,041          13 %       6,205          19,088         33 %      14,349
Media & Other          (3,717 )       (32 )%     (2,824 )       (10,680 )      (11 )%     (9,662 )
Corporate             (38,284 )       (17 )%    (32,695 )      (111,626 )       (9 )%   (102,309 )

Total            $     46,740          24 %   $  37,684    $    142,307        100 %  $   71,242


                   Three Months Ended September 30,          Nine Months Ended September 30,
                    2011          Growth        2010*         2011          Growth       2010*
Operating
Income Before
Amortization:
Search           $     45,848          57 %   $  29,268    $    145,802          57 %  $  92,852
Match                  40,207           2 %      39,354         107,530          29 %     83,264
ServiceMagic            7,425          11 %       6,692          20,224          29 %     15,676
Media & Other          (3,216 )       (49 )%     (2,161 )        (9,719 )       (35 )%    (7,175 )
Corporate             (16,101 )         0 %     (16,109 )       (46,282 )        (6 )%   (43,492 )

Total            $     74,163          30 %   $  57,044    $    217,555          54 %  $ 141,125


*
In the fourth quarter of 2010, IAC exchanged (on a tax-free basis) our Evite, Gifts.com and IAC Advertising Solutions businesses and cash for substantially all of Liberty Media Corporation's ("Liberty") equity stake in IAC and InstantAction ceased operations. Accordingly, the results of these businesses, which were all previously reported in IAC's Media & Other segment, are excluded from the tables above and are presented as discontinued operations.

Refer to Note 10 to the consolidated financial statements for reconciliations of Operating Income Before Amortization to operating income
(loss) by reportable segment.

Consolidated Results

Revenue

For the three months ended September 30, 2011 compared to the three months ended September 30, 2010

Three Months Ended September 30, 2011 % Change 2010

(Dollars in thousands)

Revenue $ 516,884 25% $ 412,966

Revenue in 2011 increased $103.9 million from 2010 primarily as a result of revenue increases of $68.3 million from Search, $26.1 million from Match, $6.7 million from ServiceMagic and $2.4 million from Media & Other. The increase in revenue from Search reflects strong growth from Mindspark's B2B operations and destination websites as well as growth from Mindspark's B2C operations and CityGrid Media. The increase in revenue from Match reflects growth from its Core operations (consisting of Match.com U.S., People Media and Chemistry.com) as well as from the impact of Meetic, consolidated beginning September 1, 2011, and OkCupid, acquired January 20, 2011. The increase in revenue from ServiceMagic came from growth in both its domestic and international operations. The increase in revenue from Media & Other was driven by growth at Shoebuy, Electus, Vimeo and CollegeHumor, partially offset by a decline at Pronto.

A substantial portion of the Company's revenue is attributable to online advertising. Most of the Company's online advertising revenue is attributable to a paid listing supply agreement with Google Inc. ("Google"), which expires on March 31, 2016. For the three months ended September 30, 2011 and 2010, revenue earned from Google was $242.9 million and $176.8 million, respectively. The majority of this revenue was earned by the businesses comprising the Search segment.

For the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

Nine Months Ended September 30, 2011 % Change 2010

(Dollars in thousands)

Revenue $ 1,462,501 23% $ 1,185,388


Revenue in 2011 increased $277.1 million from 2010 primarily as a result of revenue increases of $173.2 million from Search, $67.9 million from Match, $18.3 million from Media & Other and $17.3 million from ServiceMagic. The increases in revenue from these businesses are primarily due to the factors described above in the three month discussion. The revenue from Media & Other was also impacted by a decrease in revenue from The Daily Beast which, following the formation of The Newsweek/Daily Beast Company joint venture with Harman Newsweek on January 31, 2011, has been accounted for as an equity method investment and the inclusion in 2010 of revenue associated with profit participations related to our former interest in Reveille.

For the nine months ended September 30, 2011 and 2010, revenue earned from Google was $679.1 million and $522.6 million, respectively.

Cost of revenue

For the three months ended September 30, 2011 compared to the three months

     ended September 30, 2010

                                          Three Months Ended September 30,
                                           2011         % Change      2010
                                               (Dollars in thousands)
          Cost of revenue               $   188,642       28%       $ 147,933
          As a percentage of revenue         36%         67 bp          36%


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

Cost of revenue consists primarily of traffic acquisition costs. Traffic acquisition costs consist of payments made to partners who distribute Mindspark's customized browser-based applications, 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 Shoebuy's 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 2011 increased $40.7 million from 2010 primarily due to increases of $32.6 million from Search and $3.9 million from Media & Other. The increase in cost of revenue from Search was primarily due to an increase of $29.2 million in traffic acquisition costs related to the increase in revenue. Cost of revenue from Media & Other increased primarily due to an increase of $1.4 million in the cost of products sold at Shoebuy resulting from increased sales. Also contributing to the increase in cost of sales from Media & Other are increases from Electus and Vimeo, partially offset by a decrease from The Daily Beast, which has been accounted for as an equity method investment since January 31, 2011 as described above.

For the nine months ended September 30, 2011 compared to the nine months

     ended September 30, 2010

                                          Nine Months Ended September 30,
                                           2011         % Change      2010
                                               (Dollars in thousands)
          Cost of revenue               $   542,832       29%       $ 419,720
          As a percentage of revenue         37%         171 bp         35%

Cost of revenue in 2011 increased $123.1 million from 2010 primarily due to increases of $92.6 million from Search and $22.4 million from Media & Other. The increase in cost of revenue from both Search and Media & Other are primarily due to the factors described above in the three month discussion. As a percentage of revenue, traffic acquisition costs at Search increased over the prior year


period due to an increase in the proportion of revenue from customized browser-based applications and other arrangements with third parties who direct traffic to our websites.

Selling and marketing expense

For the three months ended September 30, 2011 compared to the three months

     ended September 30, 2010

                                           Three Months Ended September 30,
                                            2011         % Change      2010
                                                (Dollars in thousands)
        Selling and marketing expense    $   153,296       29%       $ 118,800
        As a percentage of revenue            30%         89 bp          29%

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 Mindspark's downloadable applications, and offline marketing, principally television and radio advertising.

Selling and marketing expense in 2011 increased $34.5 million from 2010 primarily due to increases of $17.6 million from Search, $13.0 million from Match and $5.0 million from ServiceMagic. The increase in selling and marketing expense from Search is due to an increase of $17.8 million in advertising and promotional expenditures due to increased online marketing related to its destination websites and new product launches at Mindspark since the year ago period. Selling and marketing expense at Match increased primarily due to the acquisition of Meetic and an increase in offline marketing associated with the OurTime.com website. The increase in selling and marketing expense from ServiceMagic is primarily due to an increase of $5.5 million in advertising and promotional expenditures associated with online marketing.

For the nine months ended September 30, 2011 compared to the nine months

     ended September 30, 2010

                                           Nine Months Ended September 30,
                                            2011         % Change      2010
                                                (Dollars in thousands)
        Selling and marketing expense    $   426,764       16%       $ 367,487
        As a percentage of revenue            29%        (182) bp        31%

Selling and marketing expense in 2011 increased $59.3 million from 2010 primarily due to increases of $29.0 million from Search and $27.8 million from Match. The increase in selling and marketing expense from Search is primarily due to the factors described above in the three month discussion, partially offset by a decrease in bad debt expense at CityGrid Media. The increase in selling and marketing expense from Match is due to an increase of $20.3 million in advertising and promotional expenditures primarily related to an increase in offline marketing due to the factors described above in the three month discussion, as well as an increase in online advertising spend associated with an agreement entered into during the second quarter of 2010 with Yahoo!. Selling and marketing expense from Match in 2011 was further impacted by the acquisition of Meetic. As a percentage of revenue selling and marketing expense decreased from 2010 primarily due to an increase in the proportion of revenue that results in the payment of traffic acquisition costs.


General and administrative expense

For the three months ended September 30, 2011 compared to the three months

     ended September 30, 2010

                                              Three Months Ended September 30,
                                              2011         % Change        2010
                                                   (Dollars in thousands)
      General and administrative expense    $   84,628        13%        $ 74,757
      As a percentage of revenue                16%        (173) bp         18%

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 2011 increased $9.9 million from 2010; however, as a percentage of revenue general and administrative expense decreased primarily due to operating expense leverage. The increase in general and administrative expense was due to an increase of $7.7 million from Match which resulted primarily from the acquisition of Meetic, as well as an increase in professional fees due, in part, to $2.5 million in transaction fees associated with the Meetic acquisition, and operating expenses from OkCupid, which was not in the prior year period.

For the nine months ended September 30, 2011 compared to the nine months

     ended September 30, 2010

                                              Nine Months Ended September 30,
                                               2011         % Change      2010
                                                   (Dollars in thousands)
      General and administrative expense    $   241,472        8%       $ 223,638
      As a percentage of revenue                 17%        (236) bp        19%

General and administrative expense in 2011 increased $17.8 million from 2010 primarily due to increases of $10.1 million from Match and $7.2 million from corporate. The increase in general and administrative expense from Match is primarily due to the factors described above in the three month discussion. General and administrative expense from corporate increased primarily due to higher compensation and other employee-related costs including an increase of $4.5 million in non-cash compensation expense related to equity grants issued subsequent to the third quarter of 2010, the reassessment made in the fourth quarter of 2010 of the number of performance based restricted stock units that will ultimately vest and the impact of the cancellation and acceleration of certain equity awards during the second and third quarters of 2011, respectively. As a percentage of revenue general and administrative expense decreased from 2010 primarily due to operating expense leverage.

Product development expense

For the three months ended September 30, 2011 compared to the three months

     ended September 30, 2010

                                          Three Months Ended September 30,
                                          2011         % Change        2010
                                               (Dollars in thousands)
         Product development expense    $   21,556        28%        $ 16,892
         As a percentage of revenue          4%          8 bp            4%

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 2011 increased $4.7 million from 2010 primarily due to an increase of $2.5 million from Match resulting primarily from an increase in compensation and other employee-related costs due, in part, to an increase in headcount.

For the nine months ended September 30, 2011 compared to the nine months

     ended September 30, 2010

                                           Nine Months Ended September 30,
                                           2011         % Change       2010
                                               (Dollars in thousands)
          Product development expense    $   56,558        23%       $ 46,053
          As a percentage of revenue          4%         (2) bp          4%

Product development expense in 2011 increased $10.5 million from 2010 primarily due to increases of $4.2 million from Match and $2.2 million from Search. The increase in product development expense from Match is primarily due to the factor described above in the three month discussion. Contributing to the increase in product development expense at Search is a decrease in costs being capitalized in the current year period, partially offset by lower compensation and other employee-related costs due, in part, to staff reductions that took place during the fourth quarter of 2010.

Depreciation

     For the three months ended September 30, 2011 compared to the three months
     ended September 30, 2010

                                          Three Months Ended September 30,
                                          2011         % Change        2010
                                               (Dollars in thousands)
          Depreciation expense          $   17,484        20%        $ 14,598
          As a percentage of revenue         3%         (15) bp          4%

Depreciation in 2011 increased $2.9 million from 2010 primarily due to the write-off of $4.9 million in capitalized software costs associated with the planned exit from the Company's direct sponsored listings business.

For the nine months ended September 30, 2011 compared to the nine months

     ended September 30, 2010

                                          Nine Months Ended September 30,
                                          2011         % Change       2010
                                              (Dollars in thousands)
          Depreciation expense          $   43,373       (8)%       $ 47,016
          As a percentage of revenue         3%        (100) bp         4%

Depreciation in 2011 decreased $3.6 million from 2010 primarily due to the write-off of certain assets in the prior year period, as well as a decrease in depreciation in the current year period resulting from the write-off of certain capitalized software costs in the fourth quarter of 2010 and lower capital expenditures, partially offset by the write-off of $4.9 million in capitalized software costs described above.


Operating Income Before Amortization

     For the three months ended September 30, 2011 compared to the three months
     ended September 30, 2010

                                               Three Months Ended September 30,
                                               2011         % Change        2010
                                                    (Dollars in thousands)
     Operating Income Before Amortization    $   74,163        30%        $ 57,044
     As a percentage of total revenue            14%          54 bp          14%

Operating Income Before Amortization in 2011 increased $17.1 million from 2010 primarily due to increases of $16.6 million from Search reflecting higher revenue and operating expense leverage.

For the nine months ended September 30, 2011 compared to the nine months

     ended September 30, 2010

                                               Nine Months Ended September 30,
                                                2011         % Change      2010
                                                    (Dollars in thousands)
     Operating Income Before Amortization    $   217,555       54%       $ 141,125
     As a percentage of total revenue             15%         297 bp         12%

Operating Income Before Amortization in 2011 increased $76.4 million from 2010 primarily due to increases of $53.0 million from Search and $24.3 million from Match. The increase in Operating Income Before Amortization from Search is primarily due to the factors described above in the three month discussion. The increase in Operating Income Before Amortization from Match is primarily due to higher revenue, partially offset by increased advertising and promotional expenditures and general and administrative expense.

Operating income

For the three months ended September 30, 2011 compared to the three months

     ended September 30, 2010

                                          Three Months Ended September 30,
                                          2011         % Change        2010
                                               (Dollars in thousands)
          Operating income              $   46,740        24%        $ 37,684
          As a percentage of revenue         9%         (8) bp           9%

Operating income in 2011 increased $9.1 million from 2010 primarily due to an increase of $17.1 million in Operating Income Before Amortization described above, partially offset by increases of $5.8 million in non-cash compensation expense and $2.2 million in amortization of intangibles. The increase in non-cash compensation expense is primarily related to equity grants issued subsequent to the third quarter of 2010, the reassessment made in the fourth quarter of 2010 of the number of performance based restricted stock units that will ultimately vest and the acceleration of certain equity awards during the third quarter of 2011. The increase in amortization of intangibles is principally due to the acquisition of Meetic.

At September 30, 2011, there was $134.7 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.


For the nine months ended September 30, 2011 compared to the nine months
     ended September 30, 2010

                                          Nine Months Ended September 30,
                                           2011         % Change      2010
                                              (Dollars in thousands)
          Operating income              $   142,307       100%      $ 71,242
          As a percentage of revenue         10%         372 bp         6%

Operating income in 2011 increased $71.1 million from 2010 primarily due to an increase of $76.4 million in Operating Income Before Amortization described above and a decrease of $1.0 million in amortization of intangibles, partially offset by an increase of $6.4 million in non-cash compensation expense. The increase in non-cash compensation expense is primarily due to the factors described above in the three month discussion as well as the impact of the cancellation of certain equity awards during the second quarter of 2011.

Other income (expense)

For the three months ended September 30, 2011 compared to the three months

     ended September 30, 2010

                                                   Three Months Ended September 30,
                                                    2011           % Change      2010
                                                        (Dollars in thousands)
Equity in losses of unconsolidated affiliates    $    (15,078 )     2,656%      $ (547 )
Other income, net                                $      4,308        426%       $  819

Equity in losses of unconsolidated affiliates in 2011 increased $14.5 million from 2010 primarily due to the inclusion of a loss of $11.7 million related to marking down the carrying value of Match's 27% equity method investment in Meetic to fair value (i.e., the tender offer price of 15.00 per share) upon achieving control. Also contributing to the equity in losses of unconsolidated affiliates is the inclusion in 2011 of losses related to the Company's investment in The Newsweek/Daily Beast Company, partially offset by earnings from our investment in Meetic through August 31, 2011.

Other income, net in 2011 increased $3.5 million from 2010 primarily due to a foreign currency exchange gain of $3.3 million related to the funds that were held in escrow for the Meetic tender offer.

For the nine months ended September 30, 2011 compared to the nine months

     ended September 30, 2010

                                                   Nine Months Ended September 30,
                                                    2011         % Change      2010
. . .
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