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| IACI > SEC Filings for IACI > Form 10-Q on 9-May-2012 | All Recent SEC Filings |
9-May-2012
Quarterly Report
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, Match, Local and Media & Other segments; 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, 2011.
Results of Operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011
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 months ended March 31, 2012 and 2011.
Three Months Ended March 31,
2012 Growth 2011*
(Dollars in thousands)
Revenue:
Search $ 343,198 47 % $ 233,851
Match 174,275 56 % 111,597
Local 77,119 9 % 70,931
Media & Other 46,117 4 % 44,133
Inter-segment elimination (109 ) 64 % (299 )
Total $ 640,600 39 % $ 460,213
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Three Months Ended March 31,
2012 Growth 2011*
(Dollars in thousands)
Operating Income (Loss):
Search $ 73,490 51 % $ 48,621
Match 29,906 28 % 23,429
Local 3,789 (35 )% 5,834
Media & Other (8,383 ) (59 )% (5,283 )
Corporate (36,037 ) (2 )% (35,265 )
Total $ 62,765 68 % $ 37,336
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Three Months Ended March 31,
2012 Growth 2011*
(Dollars in thousands)
Operating Income Before Amortization:
Search $ 73,500 50 % $ 48,900
Match 37,328 49 % 24,988
Local 3,950 (37 )% 6,301
Media & Other (7,799 ) (56 )% (5,004 )
Corporate (15,707 ) (3 )% (15,231 )
Total $ 91,272 52 % $ 59,954
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Refer to Note 8 to the consolidated financial statements for reconciliations of Operating Income Before Amortization to operating income (loss) by reportable segment.
Consolidated Results
Revenue
Revenue in 2012 increased from 2011 primarily as a result of increases of $109.3 million from Search and $62.7 million from Match. The increase from Search reflects strong growth from destination websites and Mindspark's B2B and B2C operations. The increase from Match reflects growth from its Core operations (consisting of Match.com in the U.S., Chemistry and People Media) as well as from the impact of Meetic, which has been consolidated since September 1, 2011 following Match's acquisition of a controlling interest and is, therefore, not in the prior year period.
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 March 31, 2012 and 2011, revenue earned from Google was $328.9 million and $214.9 million, respectively. This revenue was earned by the businesses comprising the Search segment.
Cost of revenue
Three Months Ended March 31,
2012 $ Change % Change 2011
(Dollars in thousands)
Cost of revenue $223,571 $50,853 29% $172,718
As a percentage of revenue 35% (263) bp 38%
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bp = basis points
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Cost of revenue in 2012 increased from 2011 primarily due to increases of $43.0 million from Search and $5.0 million from Match. The increase from Search was primarily due to an increase of $42.2 million in traffic acquisition costs primarily related to an increase in Mindspark's B2B operations. As a percentage of revenue, traffic acquisition costs at Search decreased slightly compared to the prior year period due to an increase in the proportion of revenue from destination websites that resulted from increased online marketing. The increase from Match is due to the acquisition of Meetic, which was not in the prior year period.
Selling and marketing expense
Three Months Ended March 31,
2012 $ Change % Change 2011
(Dollars in thousands)
Selling and marketing expense $219,838 $79,588 57% $140,250
As a percentage of revenue 34% 384 bp 30%
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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 advertising.
Selling and marketing expense in 2012 increased from 2011 primarily due to increases of $44.5 million from Search and $32.1 million from Match. The increase from Search is primarily due to an increase in online marketing related to its destination websites and from existing products at Mindspark. Selling and marketing expense at Match increased due to the acquisition of Meetic, which was not in the prior year period.
General and administrative expense
Three Months Ended March 31,
2012 $ Change % Change 2011
(Dollars in thousands)
General and administrative expense $91,788 $15,497 20% $76,291
As a percentage of revenue 14% (225) bp 17%
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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 2012 increased from 2011 primarily due to increases of $8.5 million from Match, $3.8 million from Local and $2.8 million from Media & Other. The increase from Match resulted primarily from the acquisition of Meetic, which was not in the prior year period, and an increase in compensation and employee-related expenses. General and administrative expense
Product development expense
Three Months Ended March 31,
2012 $ Change % Change 2011
(Dollars in thousands)
Product development expense $23,482 $5,760 33% $17,722
As a percentage of revenue 4% (19) bp 4%
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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 2012 increased from 2011 primarily due to an increase of $4.3 million from Match, which is primarily due to an increase in headcount and the acquisition of Meetic, which was not in the prior year period.
Depreciation
Three Months Ended March 31,
2012 $ Change % Change 2011
(Dollars in thousands)
Depreciation expense $12,115 $(1,324) (10)% $13,439
As a percentage of revenue 2% (103) bp 3%
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Depreciation in 2012 decreased from 2011 resulting primarily due to the write-off of certain capitalized software costs at Search in 2011.
Operating Income Before Amortization
Three Months Ended March 31,
2012 $ Change % Change 2011
(Dollars in thousands)
Operating Income Before Amortization $91,272 $31,318 52% $59,954
As a percentage of total revenue 14% 122 bp 13%
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Operating Income Before Amortization in 2012 increased from 2011 primarily due to increases of $24.6 million from Search and $12.3 million from Match, partially offset by increased losses of $2.8 million at Media & Other. The increase from Search is primarily due to higher revenue and operating expense leverage. The increase from Match is primarily due to higher Core revenue and the acquisition of Meetic, which was not in the prior year period. Increased losses from Media & Other is primarily due to increased expenses at CollegeHumor and Vimeo.
Operating income
Three Months Ended March 31,
2012 $ Change % Change 2011
(Dollars in thousands)
Operating income $62,765 $25,429 68% $37,336
As a percentage of revenue 10% 169 bp 8%
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At March 31, 2012, there was $135.2 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 2.4 years.
Other income (expense)
Three Months Ended March 31,
2012 $ Change % Change 2011
(Dollars in thousands)
Equity in losses of unconsolidated
affiliates $ (5,901 ) $ (4,022 ) (214 )% $ (1,879 )
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Equity in losses of unconsolidated affiliates in 2012 increased from 2011 primarily due to the inclusion in 2011 of earnings related to our investment in Meetic, which was accounted for as an equity method investment prior to September 1, 2011, the date we achieved control.
Three Months Ended March 31,
2012 $ Change % Change 2011
Other income, net in 2012 increased from 2011 primarily due to gains related to the sale of certain securities.
Income tax provision
Three Months Ended March 31,
2012 $ Change % Change 2011
(Dollars in thousands)
Income tax provision $ (27,120 ) $ (11,079 ) NM $ (16,041 )
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In 2012, the Company recorded an income tax provision for continuing operations of $27.1 million, which represents an effective income tax rate of 47%. The 2012 effective rate is higher than the statutory rate of 35% due principally to an increase in reserves for and interest on reserves for income tax contingencies and state taxes, partially offset by foreign income taxed at lower rates. In 2011, the Company recorded an income tax provision for continuing operations of $16.0 million, which represents an effective income tax rate of 44%. The 2011 effective rate is higher than the statutory rate of 35% due principally to interest on reserves for income tax contingencies and state taxes, partially offset by foreign income taxed at lower rates.
At March 31, 2012 and December 31, 2011, the Company has unrecognized tax benefits of $360.7 million and $351.6 million, respectively. The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax provision. Included in income tax provision for continuing operations and discontinued operations for the three months ended March 31, 2012 is a $1.9 million expense and a $5.1 million benefit, respectively, net of related deferred taxes of $1.2 million and $3.1 million, respectively, for interest on unrecognized tax benefits. At March 31, 2012 and December 31, 2011, the Company has accrued $107.8 million and $111.2 million, respectively, for the payment of interest. At March 31, 2012 and December 31, 2011, the Company has accrued $2.8 million and $2.5 million, respectively, for penalties.
In addition to the discussion of consolidated results above, the following is a discussion of the results of each segment.
Our Search segment includes Mindspark, a digital consumer products business consisting of our B2C operations, through which we develop, market and distribute downloadable applications, and our B2B operations, through which we provide customized browser-based applications for software and media companies; destination websites, including Ask.com and Dictionary.com, through which we provide search and additional services; and Pronto, a comparison shopping engine.
Revenue increased 47% to $343.2 million, reflecting strong growth from destination websites and Mindspark's B2B and B2C operations. The revenue growth in destination websites reflects strong query gains driven primarily by increased marketing and content optimization. The revenue growth in Mindspark's B2B operations was driven by increased contribution from both existing and new partners. The increase in Mindspark's B2C revenue was driven primarily by growth from existing and new products.
Operating Income Before Amortization increased 50% to $73.5 million, benefiting from the higher revenue noted above and a decrease of $2.9 million in depreciation, partially offset by increases of $44.5 million in selling and marketing expense and $42.2 million in traffic acquisition costs. The decrease in depreciation is due to the write-off of certain capitalized software costs in 2011. The increase in selling and marketing expense is primarily due to an increase in advertising and promotional expenditures, driven primarily by increased online marketing related to our destination websites and existing products at Mindspark. The increase in traffic acquisition costs is primarily due to an increase in Mindspark's B2B operations.
Operating income increased 51% to $73.5 million, principally due to the increase in Operating Income Before Amortization described above.
Revenue increased 56% to $174.3 million benefiting from growth within its Core operations and the contribution of Meetic, which has been consolidated since September 1, 2011 following Match's acquisition of a controlling interest and is, therefore, not in the prior year period, partially offset by a decrease in Developing revenue. Core revenue increased 17% to $108.9 million driven by an increase in subscribers. Revenue from Developing, which consists of OkCupid, Singlesnet, mobile-only products and Match's non-Meetic international operations, decreased 8% to $16.8 million, despite strong growth from OkCupid, due to lower subscription revenue from Singlesnet, due to reduced marketing. Meetic revenue of $48.6 million was negatively impacted by the write-off of $5.2 million of deferred revenue in connection with its acquisition. Excluding the results of Meetic, revenue grew 13% to $125.6 million.
Operating Income Before Amortization increased 49% to $37.3 million, primarily due to the higher Core revenue noted above and the acquisition of Meetic, which was negatively impacted by the write-off of $5.2 million of deferred revenue described above. Operating Income Before Amortization, excluding Meetic, was impacted by increases in product development expense and general and administrative expense. Product development expense and general and administrative expense both increased from 2011, primarily due to increases in compensation and other employee-related costs.
Operating income increased 28% to $29.9 million, primarily due to the increase in Operating Income Before Amortization described above, partially offset by increases of $5.0 million in amortization of intangibles and $0.9 million in non-cash compensation expense related to the Meetic acquisition.
Our Local segment includes ServiceMagic and CityGrid Media.
Revenue increased 9% to $77.1 million, reflecting strong growth from ServiceMagic's domestic and international operations. ServiceMagic domestic revenue grew due to higher average lead acceptance fees and a 5% increase in service request accepts. Service request accepts benefited from an 18% increase in service requests, partially offset by lower accepts per service request. ServiceMagic International revenue grew due to higher average lead acceptance fees and a 14% increase in service request accepts. A service request can be transmitted to more than one service professional and is deemed accepted upon transmission. CityGrid Media revenue increased slightly as the growth from resellers was offset by a decline from direct sales.
Operating Income Before Amortization decreased 37% to $4.0 million, despite the higher revenue noted above, primarily due to increases in general and administrative expense, selling and marketing expense and cost of revenue.
Operating income decreased 35% to $3.8 million, principally due to the decrease in Operating Income Before Amortization described above.
Revenue increased 4% to $46.1 million primarily reflecting strong growth at Vimeo and Electus.
Operating Income Before Amortization loss increased by $2.8 million to a loss of $7.8 million. Losses increased primarily due to increased expenses at CollegeHumor and Vimeo.
Operating loss increased by $3.1 million to $8.4 million, principally due to the increase in Operating Income Before Amortization loss described above.
At March 31, 2012, the Company had $624.1 million of cash and cash equivalents, $151.5 million of marketable securities and $95.8 million of long-term debt, including current maturities of $15.8 million. Domestically, cash equivalents primarily consist of AAA rated treasury and government agency money market funds and commercial paper rated A2/P2 or better. Internationally, cash equivalents primarily consist of AAA prime and government money market funds and time deposits. Marketable securities primarily consist of short-to-intermediate-term debt securities issued by states of the U.S. and subdivisions thereof and investment grade corporate issuers. The Company only invests in marketable securities with active secondary or resale markets to ensure portfolio liquidity and the ability to readily convert investments into cash to fund current operations or satisfy other cash requirements as needed. From time to time, the Company may invest in marketable equity securities as part of its investment strategy. Long-term debt, including current maturities is comprised of $15.8 million in Senior Notes due January 15, 2013 and $80.0 million in Liberty Bonds due September 1, 2035.
At March 31, 2012, $176.2 million of the $624.1 million of cash and cash equivalents and none of the $151.5 million of marketable securities were held by the Company's foreign subsidiaries. No U.S. federal or state income taxes have been provided on the permanently reinvested earnings of any of the Company's foreign subsidiaries that hold this cash and cash equivalents. If needed for our operations in the U.S., most of the cash and cash equivalents held by the Company's foreign subsidiaries could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income taxes. However, the Company's intent is to permanently reinvest these funds outside of the U.S. and, currently, the Company does not anticipate a need to repatriate them to fund our U.S. operations.
In summary, the Company's cash flows attributable to continuing operations are as follows:
Three Months Ended
March 31,
2012 2011
. . .
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