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IACI > SEC Filings for IACI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for IAC/INTERACTIVECORP

Form 10-Q for IAC/INTERACTIVECORP


8-Nov-2012

Quarterly Report


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

GENERAL

Management Overview

IAC is a leading media and internet company comprised of more than 150 brands and products, including Match.com, Ask.com, CollegeHumor.com, and CityGrid Media. Focused in the areas of search, personals, local and media, IAC's family of websites is one of largest in the world, with 1.2 billion monthly visits across more than 30 countries.

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 and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

Revenue
                            Three Months Ended September 30,                       Nine Months Ended September 30,
                      2012        $ Change     % Change      2011           2012         $ Change     % Change       2011
                                                             (Dollars in thousands)
Search &
Applications       $ 370,227     $ 111,352       43%      $ 258,875     $ 1,062,187     $ 331,133       45%      $   731,054
Match                178,190        45,862       35%        132,328         530,883       170,529       47%          360,354
Local                 84,314         4,190        5%         80,124         245,938        14,473        6%          231,465
Media                 52,736        34,044       182%        18,692         107,015        55,204       107%          51,811
Other                 29,064         2,041        8%         27,023          89,899         1,457        2%           88,442
Inter-segment
elimination              (61 )          97       62%           (158 )          (240 )         385       62%             (625 )
Total              $ 714,470     $ 197,586       38%      $ 516,884     $ 2,035,682     $ 573,181       39%      $ 1,462,501

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011

Revenue in 2012 increased from 2011 primarily as a result of increases of $111.4 million from Search & Applications, $45.9 million from Match and $34.0 million from Media.

Search & Applications revenue increased 43% to $370.2 million, reflecting strong growth from both Websites (which includes Ask.com, Pronto and Dictionary.com, excluding downloadable applications related to the aforementioned sites) and Applications (which includes our direct to consumer applications business (B2C) and our partnership operations (B2B), as well as downloadable applications related to Ask.com and Dictionary.com). Websites revenue grew 49% to $183.0 million, reflecting strong query gains of 52%. Applications revenue grew 38% to $187.2 million, driven by 20% query growth and year over year monetization gains driven by increased contributions from existing and new partners and products.

Match revenue increased 35% to $178.2 million benefiting from the full quarter contribution of $50.9 million from Meetic as compared to the prior year period contribution of $11.1 million, and growth within our Core operations (consisting of Match.com in the U.S., Chemistry and People Media). Meetic revenue in the prior year period (consolidated with effect from September 1, 2011) was negatively impacted by the write-off of $9.6 million of deferred revenue in connection with its acquisition. Core revenue increased 8% to $110.8 million driven by an 8% increase in subscribers.

Media revenue increased 182% to $52.7 million primarily due to the impact of The Newsweek/Daily Beast Company ("Newsweek Daily Beast"), consolidated beginning June 1, 2012 following the Company's acquisition of a controlling interest,


as well as strong growth from Electus and Vimeo.

A substantial portion of the Company's revenue is derived from 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, 2012 and 2011, revenue earned from Google was $357.2 million and $242.9 million, respectively. This revenue was earned by the businesses comprising the Search & Applications segment.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Revenue in 2012 increased from 2011 primarily as a result of increases of $331.1 million from Search & Applications, $170.5 million from Match, $55.2 million from Media and $14.5 million from Local.

Search & Applications revenue increased 45% to $1.1 billion. Applications and Websites revenue increased 48% and 43%, respectively, to $548.8 million and $513.3 million, respectively, due primarily to the factors described above in the three month discussion. Websites revenue grew more slowly than queries due to the prior year period benefiting from $21.5 million of revenue related to our direct sponsored listings business, which was sold in 2011, and modest revenue growth at Pronto and Dictionary.com.

Match revenue increased 47% to $530.9 million benefiting from the contribution of Meetic and growth within our Core operations, partially offset by a decrease in Developing revenue. Core revenue increased 12% to $329.1 million driven by an increase in subscribers. Meetic revenue in 2012 and 2011 of $152.2 million and $11.1 million, respectively, were negatively impacted by the write-off of $5.2 million and $9.6 million, respectively, of deferred revenue in connection with its acquisition. Revenue from Developing (which includes OkCupid, DateHookup and Match's non-Meetic international operations) decreased 11% to $49.5 million, despite strong growth from OkCupid, due to lower subscription revenue from Singlesnet. Excluding the results of Meetic, revenue grew 8% to $378.7 million.

Local revenue increased 6% to $245.9 million, reflecting growth from HomeAdvisor's (formerly ServiceMagic) domestic and international operations. HomeAdvisor domestic revenue grew due to higher average lead acceptance fees. HomeAdvisor international revenue grew due to an increase in service request accepts and higher average lead acceptance fees. CityGrid Media revenue increased due to the contribution of Felix, a pay-per-call advertising service that was acquired in August 2012, and higher reseller revenue, partially offset by a decline in revenue from direct sales.

Media revenue increased 107% to $107.0 million primarily due to the factors described above in the three month discussion.

For the nine months ended September 30, 2012 and 2011, revenue earned from Google was $1.0 billion and $679.1 million, respectively.

Cost of revenue

For the three months ended September 30, 2012 compared to the three months ended

September 30, 2011
                               Three Months Ended September 30,
                             2012     $ Change   % Change     2011
                                    (Dollars in thousands)
Cost of revenue            $261,932   $73,290      39%      $188,642
As a percentage of revenue   37%                  16 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 our B2B 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, production costs related to digital content produced by Electus and other businesses within our Media segment, content acquisition costs, 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.

Cost of revenue in 2012 increased from 2011 primarily due to increases of $36.0 million from Media and $31.7 million from Search & Applications. Cost of revenue from Media increased primarily due to Newsweek Daily Beast, consolidated beginning June 1, 2012, and increased production costs at Electus related to the increase in its revenue. The increase in cost of revenue from Search & Applications was primarily due to an increase of $32.4 million in traffic acquisition costs primarily related to the increased revenue from our B2B operations. As a percentage of revenue, traffic acquisition costs at Search & Applications decreased compared to the prior year period due to an increase in the proportion of revenue from Websites that resulted from increased online marketing.

For the nine months ended September 30, 2012 compared to the nine months ended

September 30, 2011
                                Nine Months Ended September 30,
                             2012     $ Change   % Change     2011
                                    (Dollars in thousands)
Cost of revenue            $722,193   $179,361     33%      $542,832
As a percentage of revenue   35%                 (164) bp     37%

Cost of revenue in 2012 increased from 2011 primarily due to increases of $107.7 million from Search & Applications, $53.2 million from Media and $12.2 million from Match. The increases from Search & Applications and Media are primarily due to the factors described above in the three month discussion. The increase from Match is due to the acquisition of Meetic, which was not in the full prior year period, partially offset by a decrease in customer acquisition costs.

Selling and marketing expense

For the three months ended September 30, 2012 compared to the three months ended

September 30, 2011
                                  Three Months Ended September 30,
                                2012     $ Change   % Change     2011
                                       (Dollars in thousands)
Selling and marketing expense $236,763   $83,467      54%      $153,296
As a percentage of revenue      33%                  348 bp      30%

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 B2C downloadable applications, and offline marketing, which is primarily television advertising.

Selling and marketing expense in 2012 increased from 2011 primarily due to increases of $61.0 million from Search & Applications and $23.1 million from Match. The increase from Search & Applications is primarily due to an increase in online marketing related to Ask.com and from existing B2C downloadable applications. Selling and marketing expense at Match increased primarily due to the acquisition of Meetic, which was not in the full prior year period, and an increase in offline marketing spend.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011


Nine Months Ended September 30, 2012 $ Change % Change 2011
(Dollars in thousands)
Selling and marketing expense $669,671 $242,907 57% $426,764 As a percentage of revenue 33% 372 bp 29%

Selling and marketing expense in 2012 increased from 2011 primarily due to increases of $161.1 million from Search & Applications and $78.8 million from Match. The increases from Search & Applications and Match are primarily due to the factors described above in the three month discussion.

General and administrative expense

For the three months ended September 30, 2012 compared to the three months ended

September 30, 2011
                                      Three Months Ended September 30,
                                    2012     $ Change   % Change    2011
                                           (Dollars in thousands)
General and administrative expense $94,876   $10,248      12%      $84,628
As a percentage of revenue           13%                (309) bp     16%

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 $4.1 million from Media and $3.9 million from Local, partially offset by a decrease of $2.4 million from Match. The increase from Media resulted primarily from Newsweek Daily Beast, consolidated beginning June 1, 2012, and Electus. The increase in general and administrative expense from Local is primarily due to higher compensation and employee-related expenses at HomeAdvisor as well as an increase in bad debt expense. General and Administrative expense from Match decreased primarily due to lower professional fees due, in part, to the inclusion in the prior year period of $2.5 million in transaction fees associated with the Meetic acquisition. As a percentage of revenue, general and administrative expense decreased from 2011 primarily due to operating expense leverage at Corporate and Search & Applications.

For the nine months ended September 30, 2012 compared to the nine months ended

September 30, 2011
                                        Nine Months Ended September 30,
                                     2012     $ Change   % Change     2011
                                            (Dollars in thousands)
General and administrative expense $278,895   $37,423      15%      $241,472
As a percentage of revenue           14%                 (281) bp     17%

General and administrative expense in 2012 increased from 2011 primarily due to increases of $13.3 million from Match, $12.0 million from Media and $10.0 million from Local. The increase from Match is primarily due to the acquisition of Meetic, which was not in the full prior year period, partially offset by a decrease in professional fees due, in part, to the inclusion in the prior year period of $3.7 million in transaction fees associated with the Meetic acquisition. The increases from Media and Local are primarily due to the factors described above in the three month discussion.

Product development expense

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011


Three Months Ended September 30, 2012 $ Change % Change 2011
(Dollars in thousands)
Product development expense $24,504 $2,948 14% $21,556 As a percentage of revenue 3% (74) 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 2012 increased from 2011 primarily due to an increase of $2.5 million from Match related to an increase in headcount and the acquisition of Meetic, which was not in the full prior year period.

For the nine months ended September 30, 2012 compared to the nine months ended

September 30, 2011
                                Nine Months Ended September 30,
                             2012     $ Change   % Change    2011
                                    (Dollars in thousands)
Product development expense $71,101   $14,543      26%      $56,558
As a percentage of revenue    3%                 (37) bp      4%

Product development expense in 2012 increased from 2011 primarily due to increases of $10.7 million from Match and $2.7 million from Other. The increase from Match is primarily due to the factors described above in the three month discussion. The increase from Other is primarily due to increased investment in Hatch Labs.

Depreciation

For the three months ended September 30, 2012 compared to the three months ended
September 30, 2011
                              Three Months Ended September 30,
                            2012     $ Change   % Change    2011
                                   (Dollars in thousands)
Depreciation expense       $13,150   $(4,334)    (25)%     $17,484
As a percentage of revenue   2%                 (154) bp     3%

Depreciation in 2012 decreased from 2011 resulting primarily from the write-off of $4.9 million in capitalized software costs associated with the exit of the Company's direct sponsored listings business in 2011, partially offset by an increase in depreciation from Match, which is primarily due to the acquisition of Meetic, which was not in the full prior year period.

For the nine months ended September 30, 2012 compared to the nine months ended

September 30, 2011
                               Nine Months Ended September 30,
                            2012     $ Change   % Change    2011
                                   (Dollars in thousands)
Depreciation expense       $37,490   $(5,883)    (14)%     $43,373
As a percentage of revenue   2%                 (112) bp     3%

Depreciation in 2012 decreased from 2011 resulting primarily from the factors described above in the three month discussion.


Operating Income Before Amortization
                              Three Months Ended September 30,                    Nine Months Ended September 30,
                         2012        $ Change    % Change      2011         2012        $ Change     % Change      2011
                                                             (Dollars in thousands)
Search & Applications $  69,192     $ 22,912       50%      $ 46,280     $ 216,771     $  71,029       49%      $ 145,742
Match                    59,980       19,773       49%        40,207       159,953        52,423       49%        107,530
Local                     7,817           50        1%         7,767        23,599          (237 )     (1)%        23,836
Media                   (12,236 )     (9,585 )    (362)%      (2,651 )     (25,426 )     (15,125 )    (147)%      (10,301 )
Other                    (2,259 )       (920 )    (69)%       (1,339 )      (5,412 )      (2,442 )    (82)%        (2,970 )
Corporate               (15,898 )        203        1%       (16,101 )     (47,895 )      (1,613 )     (3)%       (46,282 )
Total                 $ 106,596     $ 32,433       44%      $ 74,163     $ 321,590     $ 104,035       48%      $ 217,555

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011

Operating Income Before Amortization in 2012 increased from 2011 primarily due to increases of $22.9 million from Search & Applications and $19.8 million from Match, partially offset by increased losses of $9.6 million from Media.

Search & Applications Operating Income Before Amortization increased 50% to $69.2 million, benefiting from the higher revenue noted above and a decrease of $6.5 million in depreciation, partially offset by increases of $61.0 million in selling and marketing expense and $32.4 million in traffic acquisition costs. The decrease in depreciation is due to the write-off of $4.9 million in capitalized software costs associated with the exit of the Company's direct sponsored listings business 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 Ask.com and existing B2C downloadable applications. The increase in traffic acquisition costs is primarily due to increased revenue from our B2B operations.

Match Operating Income Before Amortization increased 49% to $60.0 million, primarily due to the positive contribution from Meetic in the current year period and higher Core revenue noted above. Operating Income Before Amortization in 2011 was negatively impacted by the write-off of $9.6 million of deferred revenue in connection with Meetic's acquisition. Operating Income Before Amortization, excluding Meetic, was impacted by increases in product development expense and selling and marketing expense, partially offset by a decrease in general and administrative expense. The increase in product development expense is primarily due to an increase in compensation and other employee-related costs due, in part, to an increase in headcount. Selling and marketing expense increased from 2011 primarily due to an increase in offline marketing spend. The decrease in general and administrative expense is primarily due to lower professional fees due primarily to the inclusion in the prior year period of $2.5 million in transaction fees associated with the Meetic acquisition.

Media Operating Income Before Amortization loss increased by $9.6 million to a loss of $12.2 million reflecting the consolidation of Newsweek Daily Beast beginning June 1, 2012.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Operating Income Before Amortization in 2012 increased from 2011 primarily due to increases of $71.0 million from Search & Applications and $52.4 million from Match, partially offset by increased losses of $15.1 million from Media.

Search & Applications Operating Income Before Amortization increased 49% to $216.8 million, benefiting from the higher revenue noted above and a decrease of $11.4 million in depreciation, partially offset by increases of $161.1 million in selling and marketing expense and $109.1 million in traffic acquisition costs. The decrease in depreciation and the increases in selling and marketing expense and traffic acquisition costs are primarily due to the factors described above in the three month discussion.

Match Operating Income Before Amortization increased 49% to $160.0 million, primarily due to the acquisition of Meetic and the higher Core revenue noted above. Operating Income Before Amortization, excluding Meetic, was impacted by


increases in product development expense and selling and marketing expense, partially offset by decreases in cost of revenue and general and administrative expense. The increases in product development expense and selling and marketing expense and the decrease in general and administrative expense are primarily due to the factors described above in the three month discussion. The decrease in cost of revenue is primarily to lower customer acquisition costs.

Media Operating Income Before Amortization loss increased by $15.1 million to losses of $25.4 million due to the factor described above in the three month discussion.

Operating income
                             Three Months Ended September 30,                    Nine Months Ended September 30,
                         2012       $ Change    % Change      2011         2012        $ Change    % Change      2011
                                                            (Dollars in thousands)
Search & Applications $ 69,036     $ 23,528       52%      $ 45,508     $ 216,593     $ 71,813       50%      $ 144,780
Match                   56,078       19,401       53%        36,677       143,083       41,978       42%        101,105
Local                    7,343           19        -%         7,324        22,802          318        1%         22,484
Media                  (13,178 )    (10,341 )    (365)%      (2,837 )     (27,152 )    (16,607 )    (157)%      (10,545 )
Other                   (2,685 )     (1,037 )    (63)%       (1,648 )      (6,581 )     (2,690 )    (69)%        (3,891 )
Corporate              (38,561 )       (277 )     (1)%      (38,284 )    (110,471 )      1,155        1%       (111,626 )
Total                 $ 78,033     $ 31,293       67%      $ 46,740     $ 238,274     $ 95,967       67%      $ 142,307

Refer to Note 9 to the consolidated financial statements for reconciliations of Operating Income Before Amortization to operating income (loss) by reportable segment.

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011

Operating income in 2012 increased from 2011 primarily due to the increase of $32.4 million in Operating Income Before Amortization described above, partially offset by increases of $0.7 million in amortization of intangibles and $0.5 million in non-cash compensation expense.

At September 30, 2012, there was $102.8 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, 2012 compared to the nine months ended September 30, 2011

Operating income in 2012 increased from 2011 primarily due to the increase of $104.0 million in Operating Income Before Amortization described above and a decrease of $0.8 million in non-cash compensation expense, partially offset by an increase of $8.9 million in amortization of intangibles. The increase in amortization of intangibles is primarily due to the acquisition of Meetic.

Equity in losses of unconsolidated affiliates

For the three months ended September 30, 2012 compared to the three months ended

September 30, 2011
                                             Three Months Ended September 30,
                                        2012       $ Change     % Change       2011
                                                  (Dollars in thousands)
Equity in losses of unconsolidated
affiliates                            $(3,298)     $11,780        78%       $(15,078)

Equity in losses of unconsolidated affiliates in 2011 includes a pre-tax non-cash charge of $11.7 million related to the


re?measurement of 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) in connection with our acquisition of a controlling interest. Also contributing to the equity in losses of unconsolidated affiliates in 2011 is the losses related to the Company's investment in Newsweek Daily Beast, partially offset by earnings from our investment in Meetic through August 31, 2011.

For the nine months ended September 30, 2012 compared to the nine months ended

September 30, 2011
                                              Nine Months Ended September 30,
                                        2012       $ Change     % Change       2011
                                                  (Dollars in thousands)
. . .
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