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IACI > SEC Filings for IACI > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for IAC/INTERACTIVECORP


8-Aug-2013

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 Ask.com, About.com, Match.com, HomeAdvisor.com and Vimeo.com. Focused in the areas of search, applications, online dating, local and media, IAC's network of websites is one of the largest in the world, with more than a 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, 2012.

Results of Operations for the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012

Revenue
                             Three Months Ended June 30,                             Six Months Ended June 30,
                     2013        $ Change     % Change      2012           2013         $ Change     % Change       2012
                                                            (Dollars in thousands)
Search &
Applications      $ 427,449     $  78,687       23%      $ 348,762     $   824,641     $ 132,681       19%      $   691,960
Match               194,320        15,902        9%        178,418         383,182        30,489        9%          352,693
Local                84,734           229        -%         84,505         159,679        (1,945 )     (1)%         161,624
Media                58,014        19,646       51%         38,368         103,329        49,050       90%           54,279
Other                35,005         4,376       14%         30,629          71,050        10,215       17%           60,835
Inter-segment
elimination            (111 )         (41 )    (58)%           (70 )          (221 )         (42 )    (23)%            (179 )
Total             $ 799,411     $ 118,799       17%      $ 680,612     $ 1,541,660     $ 220,448       17%      $ 1,321,212

For the three months ended June 30, 2013 compared to the three months ended June 30, 2012

Search & Applications revenue increased 23% to $427.4 million, reflecting strong growth from both Applications (which includes our direct to consumer downloadable applications business (B2C) and our partnership operations (B2B), as well as our Ask.com and Dictionary.com downloadable applications) and Websites (which includes Ask.com, About.com and Dictionary.com). Applications revenue grew 26% to $224.6 million, driven by increased contributions from existing and new B2B partners and B2C products. Websites revenue grew 19% to $202.9 million, reflecting the contribution from The About Group, acquired September 24, 2012, which had revenue of $36.7 million.

Match revenue increased 9% to $194.3 million driven by increases in subscribers. Core revenue (which consists of Match.com in the U.S., Chemistry and People Media), Meetic revenue and Developing revenue (which includes OkCupid, DateHookup, Twoo and Match's international operations, excluding Meetic) increased 6% to $116.1 million; 4% to $54.8 million; and 44% to $23.4 million, respectively. Developing revenue benefitted from the contribution of Twoo, acquired January 4, 2013.

Local revenue was flat primarily reflecting the contribution of Felix, a pay-per-call advertising service acquired August 20, 2012, and an increase from HomeAdvisor's operations, offset by a decrease from CityGrid Media.

Media revenue increased 51% to $58.0 million primarily due to strong growth from Electus and Vimeo, as well as the contribution from News_Beast (formerly The Newsweek/DailyBeast Company), consolidated beginning June 1, 2012 following the Company's acquisition of a controlling interest.

Other revenue increased 14% to $35.0 million primarily due to the contribution from Tutor.com, an online tutoring solution acquired December 14, 2012.


A substantial portion of the Company's revenue is derived from online advertising. Most of the Company's online advertising revenue is attributable to our services agreement with Google Inc. ("Google"), which expires on March 31, 2016. For the three months ended June 30, 2013 and 2012, revenue earned from Google was $405.8 million and $335.8 million, respectively. This revenue was earned by the businesses comprising the Search & Applications segment.

For the six months ended June 30, 2013 compared to the six months ended June 30, 2012

Search & Applications revenue increased 19% to $824.6 million, reflecting strong growth from both Applications and Websites. Applications revenue grew 19% to $432.1 million, driven by the factors described above in the three month discussion. Websites revenue grew 19% to $392.5 million, reflecting the contribution from The About Group, acquired September 24, 2012, which had revenue of $68.1 million.

Match revenue increased 9% to $383.2 million driven by increases in subscribers. Core revenue, Meetic revenue and Developing revenue increased 5% to $229.8 million; 8% to $109.8 million; and 32% to $43.6 million, respectively. Developing revenue was also impacted by the factor described above in the three month discussion. Meetic revenue in 2012 of $101.3 million was negatively impacted by the write-off of $5.2 million of deferred revenue in connection with its acquisition.

Local revenue decreased 1% to $159.7 million, primarily reflecting a decline from CityGrid Media and HomeAdvisor, partially offset by the contribution of Felix. HomeAdvisor domestic revenue was negatively impacted by a 13% decrease in accepted service requests due primarily to the domain name change.

Media and Other revenue increased 90% to $103.3 million and 17% to $71.1 million, respectively, primarily due to the factors described above in the three months discussion.

For the six months ended June 30, 2013 and 2012, revenue earned from Google was $781.9 million and $664.7 million, respectively.

Cost of revenue

For the three months ended June 30, 2013 compared to the three months ended

June 30, 2012
                                  Three Months Ended June 30,
                             2013     $ Change   % Change     2012
                                    (Dollars in thousands)
Cost of revenue            $272,822   $35,518      15%      $237,304
As a percentage of revenue   34%                              35%

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 media 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 2013 increased from 2012 primarily due to increases of $24.6 million from Search & Applications, $7.2 million from Media and $3.1 million from Other. The increase in cost of revenue from Search & Applications was primarily due to an increase of $18.4 million in traffic acquisition costs driven by increased revenue from our B2B operations. As a percentage of revenue, traffic acquisition costs at Search & Applications decreased compared to the prior year due to an increase in the proportion of revenue from Websites which resulted from the acquisition of The About Group. Cost of revenue from Media increased primarily due to increased production costs at Electus related to the increase in its revenue, partially offset by decreased expenses at News_Beast as it transitioned to a digital only publication in 2013. The increase in cost of


revenue from Other is due to an increase in the cost of products sold at Shoebuy resulting from increased sales and Tutor.com, acquired December 14, 2012.

For the six months ended June 30, 2013 compared to the six months ended June 30,

2012
                                   Six Months Ended June 30,
                             2013     $ Change   % Change     2012
                                    (Dollars in thousands)
Cost of revenue            $528,671   $68,067      15%      $460,604
As a percentage of revenue   34%                              35%

Cost of revenue in 2013 increased from 2012 primarily due to increases of $35.2 million from Search & Applications, $26.6 million from Media and $7.6 million from Other. The increases in cost of revenue from Search & Applications and Other are primarily due to the factors described above in the three month discussion. Cost of revenue from Media increased primarily due to production costs at Electus related to the increase in its revenue and News_Beast, consolidated beginning June 1, 2012.

Selling and marketing expense

For the three months ended June 30, 2013 compared to the three months ended

June 30, 2012
                                     Three Months Ended June 30,
                                2013     $ Change   % Change     2012
                                       (Dollars in thousands)
Selling and marketing expense $247,153   $35,901      17%      $211,252
As a percentage of revenue      31%                              31%

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 2013 increased from 2012 primarily due to increases of $20.7 million from Search & Applications, $7.2 million from Match and $5.7 million from Local. The increase from Search & Applications is primarily due to increases of $14.3 million and $2.9 million in online marketing and compensation and other employee-related costs, respectively. The increase in online marketing from Search & Applications is primarily related to new B2C downloadable applications and the inclusion of The About Group, acquired on September 24, 2012. Selling and marketing expense at Match increased primarily due to an increase of $4.0 million in offline marketing spend. The increase from Local is primarily due to an increase of $4.1 million in marketing spend related to the re-branding of the HomeAdvisor domain name.

For the six months ended June 30, 2013 compared to the six months ended June 30,

2012
                                      Six Months Ended June 30,
                                2013     $ Change   % Change     2012
                                       (Dollars in thousands)
Selling and marketing expense $490,067   $60,029      14%      $430,038
As a percentage of revenue      32%                              33%

Selling and marketing expense in 2013 increased from 2012 primarily due to increases of $34.3 million from Search & Applications, $11.7 million from Match, $8.0 million from Local and $5.4 million from Media. The increases from Search & Applications, Match and Local are primarily due to the factors described above in the three month discussion. Selling and marketing expense at Media increased primarily due to an increase of $3.0 million in online marketing spend at Vimeo.


General and administrative expense

For the three months ended June 30, 2013 compared to the three months ended

June 30, 2012
                                         Three Months Ended June 30,
                                     2013     $ Change   % Change    2012
                                            (Dollars in thousands)
General and administrative expense $103,515   $13,876      15%      $89,639
As a percentage of revenue           13%                              13%

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 2013 increased from 2012 primarily due to increases of $5.3 million from Media, $4.5 million from Local, $4.2 million from Match, $2.9 million from Search & Applications and $2.5 million from Other, partially offset by a decrease of $5.6 million from corporate. The increase in general and administrative expense from Media resulted primarily from the inclusion of News_Beast, consolidated beginning June 1, 2012. General and administrative expense from Local increased primarily due to the inclusion of $4.2 million in employee termination costs associated with the CityGrid Media restructuring. The increase in general and administrative expense from Match is due to an acquisition-related contingent consideration fair value adjustment that arose from the acquisition of Twoo in the first quarter of 2013. The increase in general and administrative expense from Search & Applications is primarily due to the inclusion of The About Group, acquired on September 24, 2012. General and administrative expense from Other increased primarily due to the inclusion of Tutor.com, acquired on December 14, 2012. The decrease in general and administrative expense from corporate is primarily due to a decrease of $7.0 million in non-cash compensation expense as certain awards fully vested in the fourth quarter of 2012 and the number of awards forfeited increased from the prior year, partially offset by an increase in professional fees.

For the six months ended June 30, 2013 compared to the six months ended June 30,

2012
                                           Six Months Ended June 30,
                                     2013     $ Change   % Change     2012
                                            (Dollars in thousands)
General and administrative expense $199,239   $21,128      12%      $178,111
As a percentage of revenue           13%                              13%

General and administrative expense in 2013 increased from 2012 primarily due to increases of $11.9 million from Media, $6.6 million from Search & Applications, $5.7 million from Local, $4.8 million from Other and $4.3 million from Match, partially offset by a decrease of $12.3 million from corporate. The increases in general and administrative expense from Media, Search & Applications, Local, Other and Match and the decrease from corporate are primarily due to the factors described above in the three month discussion.

Product development expense

For the three months ended June 30, 2013 compared to the three months ended

June 30, 2012
                                  Three Months Ended June 30,
                             2013     $ Change   % Change    2012
                                    (Dollars in thousands)
Product development expense $34,052    $7,141      27%      $26,911
As a percentage of revenue    4%                              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 2013 increased from 2012 primarily due to increases of $5.5 million from Search & Applications and $1.9 million from Media. The increase in product development expense from Search & Applications is primarily due to a decrease in costs being capitalized in the current year period as well as an increase in compensation and other employee-related costs associated with the inclusion of The About Group, acquired on September 24, 2012. The increase from Media is primarily due to News_Beast, consolidated beginning June 1, 2012.

For the six months ended June 30, 2013 compared to the six months ended June 30,

2012
                                   Six Months Ended June 30,
                             2013     $ Change   % Change    2012
                                    (Dollars in thousands)
Product development expense $69,169   $14,137      26%      $55,032
As a percentage of revenue    4%                              4%

Product development expense in 2013 increased from 2012 primarily due to increases of $10.8 million from Search & Applications and $3.1 million from Media. The increases in product development expense from Search & Applications and Media are primarily due to the factors described above in the three month discussion.

Depreciation

For the three months ended June 30, 2013 compared to the three months ended
June 30, 2012
                                 Three Months Ended June 30,
                            2013     $ Change   % Change    2012
                                   (Dollars in thousands)
Depreciation               $17,036    $4,811      39%      $12,225
As a percentage of revenue   2%                              2%

Depreciation in 2013 increased from 2012 resulting from the write-off of $2.7 million in capitalized software costs at The About Group primarily related to projects which commenced prior to its acquisition, the incremental depreciation associated with capital expenditures made subsequent to the second half of 2012 and various acquisitions, partially offset by certain fixed assets becoming fully depreciated.

For the six months ended June 30, 2013 compared to the six months ended June 30,

2012
                                  Six Months Ended June 30,
                            2013     $ Change   % Change    2012
                                   (Dollars in thousands)
Depreciation               $31,052    $6,712      28%      $24,340
As a percentage of revenue   2%                              2%

Depreciation in 2013 increased from 2012 primarily due to the factors described above in the three month discussion.


Operating Income Before Amortization
                                 Three Months Ended June 30,                          Six Months Ended June 30,
                         2013        $ Change    % Change      2012          2013        $ Change    % Change      2012
                                                             (Dollars in thousands)
Search & Applications $  96,007     $ 21,928       30%      $  74,079     $ 189,656     $ 42,077       29%      $ 147,579
Match                    67,608        4,963        8%         62,645       113,911       13,938       14%         99,973
Local                     1,968       (9,864 )    (83)%        11,832           967      (14,815 )    (94)%        15,782
Media                    (3,522 )      3,267       48%         (6,789 )     (11,896 )      1,294       10%        (13,190 )
Other                    (3,418 )     (1,663 )    (95)%        (1,755 )      (5,917 )     (2,764 )    (88)%        (3,153 )
Corporate               (17,741 )     (1,451 )     (9)%       (16,290 )     (33,069 )     (1,072 )     (3)%       (31,997 )
Total                 $ 140,902     $ 17,180       14%      $ 123,722     $ 253,652     $ 38,658       18%      $ 214,994

For the three months ended June 30, 2013 compared to the three months ended June 30, 2012

Search & Applications Operating Income Before Amortization increased 30% to $96.0 million, benefiting from the higher revenue noted above, partially offset by increases of $20.7 million in selling and marketing expense, $18.4 million in traffic acquisition costs, $5.5 million in product development expense and $2.9 million in general and administrative expense. The increase in selling and marketing expense is driven primarily by increased online marketing expenditures related to new B2C downloadable applications and the inclusion of The About Group, acquired on September 24, 2012. The increase in traffic acquisition costs is primarily due to increased revenue from our B2B operations. The increase in both product development expense and general and administrative expense is primarily due to an increase in compensation and other employee-related costs related to the inclusion of The About Group. Product development expense was also impacted by a decrease in costs being capitalized in the current year period. Search & Applications Operating Income Before Amortization was further impacted in the current year by the write-off of $2.7 million in capitalized software costs at The About Group primarily related to projects which commenced prior to its acquisition.

Match Operating Income Before Amortization increased 8% to $67.6 million, primarily due to the higher revenue noted above, partially offset by an increase of $7.2 million in selling and marketing expense related to an increase in offline marketing spend.

Local Operating Income Before Amortization decreased 83% to $2.0 million reflecting increases of $5.7 million in selling and marketing expense and $4.5 million in general and administrative expense. The increases in selling and marketing expense and general and administrative expense are primarily due to marketing costs related to the re-branding of the HomeAdvisor domain name and $4.2 million in employee termination costs associated with the CityGrid Media restructuring, respectively.

For the six months ended June 30, 2013 compared to the six months ended June 30, 2012

Search & Applications Operating Income Before Amortization increased 29% to $189.7 million primarily due to the factors described above in the three months discussion. Match Operating Income Before Amortization increased 14% to $113.9 million due to the higher revenue noted above and operating expense leverage. Local Operating Income Before Amortization decreased 94% to $1.0 million primarily due to the factors described above in the three month discussion.


Operating income (loss)

                                Three Months Ended June 30,                          Six Months Ended June 30,
                         2013        $ Change    % Change      2012         2013        $ Change    % Change      2012
                                                             (Dollars in thousands)
Search & Applications $  89,346     $ 15,279       21%      $ 74,067     $ 176,329     $ 28,772       19%      $ 147,557
Match                    58,387        1,288        2%        57,099        99,346       12,341       14%         87,005
Local                    (3,958 )    (15,628 )      NM        11,670        (7,361 )    (22,820 )      NM         15,459
Media                    (4,028 )      3,277       45%        (7,305 )     (12,856 )      1,118        8%        (13,974 )
Other                    (4,097 )     (1,915 )    (88)%       (2,182 )      (7,319 )     (3,423 )    (88)%        (3,896 )
Corporate               (28,954 )      6,919       19%       (35,873 )     (56,892 )     15,018       21%        (71,910 )
Total                 $ 106,696     $  9,220        9%      $ 97,476     $ 191,247     $ 31,006       19%      $ 160,241

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 June 30, 2013 compared to the three months ended June 30, 2012

Operating income in 2013 increased from 2012 primarily due to the increase of $17.2 million in Operating Income Before Amortization described above and a decrease of $8.6 million in non-cash compensation expense, partially offset by increases of $12.3 million in amortization of intangibles and $4.2 million in acquisition-related contingent consideration fair value adjustments. The decrease in non-cash compensation expense is primarily a result of certain awards fully vesting in the fourth quarter of 2012 and the number of awards forfeited increased from the prior year. The increase in amortization of intangibles is primarily related to the acquisition of The About Group and a $3.4 million impairment charge associated with an indefinite-lived intangible asset related to the CityGrid Media restructuring. The acquisition-related contingent consideration fair value adjustment arose from the acquisition of Twoo in the first quarter of 2013.

At June 30, 2013, there was $105.0 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 2.6 years.

For the six months ended June 30, 2013 compared to the six months ended June 30, 2012

Operating income in 2013 increased from 2012 primarily due to the increase of $38.7 million in Operating Income Before Amortization described above and a decrease of $17.4 million in non-cash compensation expense, partially offset by increases of $19.4 million in amortization of intangibles and $5.7 million in acquisition-related contingent consideration fair value adjustments. The decrease in non-cash compensation expense and increases in amortization of intangibles and acquisition-related contingent consideration fair value adjustments are due to the factors described above in the three month discussion.

Equity in losses of unconsolidated affiliates

For the three months ended June 30, 2013 compared to the three months ended

June 30, 2012
                                                Three Months Ended June 30,
                                        2013       $ Change     % Change       2012
                                                  (Dollars in thousands)
Equity in losses of unconsolidated
affiliates                            $(1,078)     $17,931        94%       $(19,009)

Equity in losses of unconsolidated affiliates in 2013 decreased from 2012 primarily due to the inclusion in 2012 of a pre-tax non-cash charge of $18.6 million related to the re-measurement of the carrying value of our investment in News_Beast to fair value in connection with our acquisition of a controlling interest in May 2012.

For the six months ended June 30, 2013 compared to the six months ended June 30, 2012


                                                 Six Months Ended June 30,
. . .
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