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

Show all filings for IAC/INTERACTIVECORP

Form 10-Q for IAC/INTERACTIVECORP


8-Nov-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 nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012

Revenue
                         Three Months Ended September 30,                       Nine Months Ended September 30,
                    2013        $ Change    % Change      2012           2013         $ Change     % Change       2012
                                                           (Dollars in thousands)
Search &
Applications     $ 407,291     $ 37,064       10%      $ 370,227     $ 1,231,932     $ 169,745       16%      $ 1,062,187
Match              201,069       22,879       13%        178,190         584,251        53,368       10%          530,883
Local               62,805      (21,509 )    (26)%        84,314         222,484       (23,454 )    (10)%         245,938
Media               50,974       (1,762 )     (3)%        52,736         154,303        47,288       44%          107,015
Other               35,085        6,021       21%         29,064         106,135        16,236       18%           89,899
Inter-segment
elimination           (352 )       (291 )    (482)%          (61 )          (573 )        (333 )    (139)%           (240 )
Total            $ 756,872     $ 42,402        6%      $ 714,470     $ 2,298,532     $ 262,850       13%      $ 2,035,682

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

Search & Applications revenue increased 10% to $407.3 million, reflecting growth from Websites (which includes Ask.com, About.com, CityGrid Media and Dictionary.com) and 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). Websites revenue grew 17% to $214.9 million, reflecting the contribution from The About Group, acquired September 24, 2012, which had revenue of $33.7 million, and CityGrid Media, which has been moved from the Local segment and included in the Search & Applications segment, effective July 1, 2013, following its reorganization in the second quarter of 2013. Applications revenue increased modestly to $192.4 million.

Match revenue increased 13% to $201.1 million driven by increases from Core, Meetic and Developing subscribers of 9%, 9% and 99%, respectively. 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 7% to $118.8 million; 11% to $56.3 million; and 58% to $26.0 million, respectively. Developing revenue further benefited from the contribution of Twoo, which was acquired January 4, 2013.

Local revenue decreased 26% to $62.8 million due to the move of CityGrid Media, from the Local segment to the Search & Applications segment, effective July 1, 2013, following its reorganization in the second quarter of 2013, partially offset by Felix, a pay-per-call advertising service acquired August 20, 2012, which is not in the full prior year period.

Media revenue decreased 3% to $51.0 million reflecting the impact from the closure of the Newsweek print business in December 2012, partially offset by strong growth from Electus and Vimeo.


Other revenue increased 21% to $35.1 million primarily due to the contribution from Tutor.com, an online tutoring solution which was acquired December 14, 2012, and increased sales at Shoebuy.

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 September 30, 2013 and 2012, revenue earned from Google was $369.9 million and $357.2 million, respectively. This revenue is earned by the businesses comprising the Search & Applications segment.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Search & Applications revenue increased 16% to $1.2 billion, reflecting strong growth from both Websites and Applications. Websites revenue grew 18% to $607.5 million, reflecting the $101.8 million contribution from The About Group, acquired September 24, 2012. Applications revenue grew 14% to $624.5 million, driven by increased contributions from existing and new B2C products and B2B partners.

Match revenue increased 10% to $584.3 million driven by the increases in subscribers as described above in the three month discussion. Core revenue, Meetic revenue and Developing revenue increased 6% to $348.6 million; 9% to $166.1 million; and 40% to $69.6 million, respectively. Meetic revenue in 2012 of $152.2 million was negatively impacted by the write-off of $5.2 million of deferred revenue in connection with its acquisition.

Local revenue decreased 10% to $222.5 million, primarily reflecting the move of CityGrid Media to the Search & Applications segment and a decline from HomeAdvisor, partially offset by the contribution of Felix. HomeAdvisor domestic revenue was negatively impacted by a 12% decrease in accepted service requests due primarily to its domain name change.

Media revenue increased 44% to $154.3 million primarily due to strong growth from Electus and Vimeo.

Other revenue increased 18% to $106.1 million primarily due to the factors described above in the three months discussion.

For the nine months ended September 30, 2013 and 2012, revenue earned from Google was $1.2 billion and $1.0 billion, respectively.

Cost of revenue

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

September 30, 2012
                                Three Months Ended September 30,
                             2013     $ Change    % Change     2012
                                     (Dollars in thousands)
Cost of revenue            $248,856   $(13,419)     (5)%     $262,275
As a percentage of revenue   33%                               37%

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 decreased from 2012 primarily due to decreases of $12.8 million from Local and $6.1 million from Media, partially offset by an increase of $3.7 million from Other. The decrease in cost of revenue from Local is due to the move of CityGrid Media to the Search & Applications segment, effective July 1, 2013. Cost of revenue from Media decreased primarily due to reduced expenses related to the transition of Newsweek to a digital only publication in January 2013 (and was subsequently sold in August 2013), partially offset by increased production costs at Electus related to the increase in its revenue


and the write-off of certain capitalized production costs at College Humor. 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, which was acquired December 14, 2012.

For the nine months ended September 30, 2013 compared to the nine months ended

September 30, 2012
                                Nine Months Ended September 30,
                             2013     $ Change   % Change     2012
                                    (Dollars in thousands)
Cost of revenue            $777,527   $54,648       8%      $722,879
As a percentage of revenue   34%                              36%

Cost of revenue in 2013 increased from 2012 primarily due to increases of $36.2 million from Search & Applications, $20.5 million from Media and $11.3 million from Other, partially offset by a decrease of $13.4 million from Local. The increase in cost of revenue from Search & Applications was primarily due to an increase of $17.2 million in traffic acquisition costs driven by increased revenue from our B2B operations and the inclusion of CityGrid Media in the Search & Applications segment, effective July 1, 2013. Further impacting cost of revenue at Search & Applications is an increase in content acquisition costs due to the acquisition of The About Group. 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, partially offset by decreased expenses related to Newsweek. The increase from Other and the decrease from Local are primarily due to the factors described above in the three months discussion.

Selling and marketing expense

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

September 30, 2012
                                  Three Months Ended September 30,
                                2013     $ Change   % Change     2012
                                       (Dollars in thousands)
Selling and marketing expense $248,282   $13,152       6%      $235,130
As a percentage of revenue      33%                              33%

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 $8.8 million from Match, $3.1 million from Media and $2.2 million from Search & Applications. The increase in selling and marketing expense from Match is primarily due to increases of $5.8 million and $2.4 million in advertising and promotional expenditures and compensation and other employee-related costs, respectively. The increase in compensation and other employee-related costs is primarily due to an increase in headcount at Meetic. Selling and marketing expense at Media increased primarily due to an increase of $1.4 million in online marketing spend at Vimeo. The increase in selling and marketing expense from Search & Applications is primarily due to the inclusion of The About Group, which was acquired on September 24, 2012, and an increase of $2.8 million in compensation and other employee-related costs, partially offset by a decrease in both online and offline marketing spend at Ask.com.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012


Nine Months Ended September 30, 2013 $ Change % Change 2012
(Dollars in thousands)
Selling and marketing expense $738,349 $73,181 11% $665,168 As a percentage of revenue 32% 33%

Selling and marketing expense in 2013 increased from 2012 primarily due to increases of $36.5 million from Search & Applications, $20.6 million from Match, $8.6 million from Media and $6.4 million from Local. The increase from Search & Applications is primarily due to increases of $22.9 million and $11.2 million in online marketing spend 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, which was acquired on September 24, 2012. Selling and marketing expense from Match and Media increased primarily due to the factors described above in the three month discussion. The increase from Local is primarily due to an increase of $11.1 million in advertising and promotional expenses, partially offset by a decrease of $3.6 million in compensation and other employee-related costs. The increase in advertising and promotional expenses from Local is due to $6.9 million in marketing spend primarily related to the re-branding of the HomeAdvisor domain name and the inclusion of Felix, which is not in the full prior year period. The decrease in compensation and other employee-related costs at Local is primarily due to staff reductions associated with the CityGrid Media reorganization that took place in the second quarter of 2013.

General and administrative expense

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

September 30, 2012
                                       Three Months Ended September 30,
                                    2013     $ Change    % Change    2012
                                            (Dollars in thousands)
General and administrative expense $75,977   $(17,097)    (18)%     $93,074
As a percentage of revenue           10%                              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 decreased from 2012 primarily due to decreases of $10.9 million from Local, $8.0 million from Corporate and $4.5 million from Media, partially offset by increases of $2.9 million from Match and $2.6 million from Search & Applications. The decrease in general and administrative expense from Local is primarily due to the inclusion of an $8.4 million gain on the sale of Rezbook assets in July 2013. General and administrative expense from Corporate decreased primarily due to a decrease of $7.4 million in non-cash compensation expense related primarily to the vesting of certain awards. The decrease in general and administrative expense from Media is primarily due to the inclusion of a $6.3 million gain related to the sale of Newsweek in August 2013. The increase in general and administrative expense from Match is primarily due to an increase in compensation and other employee-related costs due in part to recent acquisitions. General and administrative expense from Search & Applications increased primarily due to the inclusion of The About Group, which was acquired on September 24, 2012.

For the nine months ended September 30, 2013 compared to the nine months ended

September 30, 2012
                                        Nine Months Ended September 30,
                                     2013     $ Change   % Change     2012
                                            (Dollars in thousands)
General and administrative expense $275,216    $4,031       1%      $271,185
As a percentage of revenue           12%                              13%


General and administrative expense in 2013 increased from 2012 primarily due to increases of $9.2 million from Search & Applications, $7.4 million from Media and $7.2 million from Match, partially offset by a decrease of $20.3 million from Corporate. The increase in general and administrative expense from Search & Applications and the decrease from Corporate are primarily due to the factors described above in the three month discussion. Non-cash compensation expense from Corporate was further impacted by an increase in the number of awards forfeited as compared to the prior year. The increase in general and administrative expense from Media resulted from the inclusion of News_Beast, which was consolidated beginning June 1, 2012, and increases in compensation and other employee-related costs at Electus and Vimeo, partially offset by a $6.3 million gain related to the sale of Newsweek in August 2013. General and administrative expense from Match increased primarily due to $6.3 million in acquisition-related contingent consideration fair value adjustments that arose from the acquisition of Twoo in the first quarter of 2013.

Product development expense

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

September 30, 2012
                               Three Months Ended September 30,
                             2013     $ Change   % Change    2012
                                    (Dollars in thousands)
Product development expense $35,232    $7,636      28%      $27,596
As a percentage of revenue    5%                              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 an increase of $5.3 million from Search & Applications. The increase in product development expense from Search & Applications is primarily due to an increase in compensation and other employee-related costs associated with the inclusion of The About Group, which was acquired on September 24, 2012, and an increase in headcount related to new B2C products.

For the nine months ended September 30, 2013 compared to the nine months ended

September 30, 2012
                                Nine Months Ended September 30,
                              2013     $ Change   % Change    2012
                                     (Dollars in thousands)
Product development expense $104,401   $21,773      26%      $82,628
As a percentage of revenue     5%                              4%

Product development expense in 2013 increased from 2012 primarily due to increases of $16.2 million from Search & Applications and $4.6 million from Media. The increase in product development expense from Search & Applications is primarily due to the factors described above in the three month discussion. Product development expense from Media increased primarily due to News_Beast, which was consolidated beginning June 1, 2012.

Depreciation

For the three months ended September 30, 2013 compared to the three months ended
September 30, 2012
                              Three Months Ended September 30,
                            2013     $ Change   % Change    2012
                                   (Dollars in thousands)
Depreciation               $13,489     $339        3%      $13,150
As a percentage of revenue   2%                              2%


Depreciation in 2013 increased from 2012 resulting from the incremental depreciation associated with capital expenditures made subsequent to the third quarter of 2012 and various acquisitions, partially offset by certain fixed assets becoming fully depreciated.

For the nine months ended September 30, 2013 compared to the nine months ended

September 30, 2012
                               Nine Months Ended September 30,
                            2013     $ Change   % Change    2012
                                   (Dollars in thousands)
Depreciation               $44,541    $7,051      19%      $37,490
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 and the write-off of $2.7 million in capitalized software costs at The About Group during the second quarter of 2013 primarily related to projects that commenced prior to its acquisition.

Operating Income Before Amortization
                               Three Months Ended September 30,                     Nine Months Ended September 30,
                         2013        $ Change     % Change      2012          2013        $ Change    % Change      2012
                                                              (Dollars in thousands)
Search & Applications $  94,647     $  25,455       37%      $  69,192     $ 284,303     $ 67,532       31%      $ 216,771
Match                    68,447         8,467       14%         59,980       182,358       22,405       14%        159,953
Local                    12,417         4,600       59%          7,817        13,384      (10,215 )    (43)%        23,599
Media                    (7,984 )       4,252       35%        (12,236 )     (19,880 )      5,546       22%        (25,426 )
Other                    (1,880 )         379       17%         (2,259 )      (7,797 )     (2,385 )    (44)%        (5,412 )
Corporate               (15,614 )         284        2%        (15,898 )     (48,683 )       (788 )     (2)%       (47,895 )
Total                 $ 150,033     $  43,437       41%      $ 106,596     $ 403,685     $ 82,095       26%      $ 321,590

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

Search & Applications Operating Income Before Amortization increased 37% to $94.6 million, benefiting from the higher revenue noted above, partially offset by increases of $5.3 million in product development expense, $2.6 million in general and administrative expense and $2.2 million in selling and marketing expense. 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 an increase in headcount related to new B2C products. The increase in selling and marketing expense is driven by the inclusion of The About Group, which was acquired on September 24, 2012, and an increase of $2.8 million in compensation and other employee-related costs, partially offset by a decrease in both online and offline marketing spend at Ask.com.

Match Operating Income Before Amortization increased 14% to $68.4 million, primarily due to the higher revenue noted above and operating expense leverage.

Local Operating Income Before Amortization increased 59% to $12.4 million primarily due to the inclusion of the $8.4 million gain on the sale of Rezbook assets in July 2013.

Media Operating Income Before Amortization loss decreased 35% to a loss of $8.0 million primarily due to the inclusion of a $6.3 million gain related to the sale of Newsweek in August 2013.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012


Search & Applications Operating Income Before Amortization increased 31% to $284.3 million, benefiting from the higher revenue noted above, partially offset by increases of $36.5 million in selling and marketing expense, $36.2 million in cost of revenue, $16.2 million in product development expense and $9.2 million in general and administrative expense. The increase in selling and marketing expense is primarily due to new B2C downloadable applications and the inclusion of The About Group, which was acquired on September 24, 2012. The increase in costs of revenue is primarily due to an increase in traffic acquisition costs driven by increased revenue from our B2B operations and the inclusion of CityGrid Media in the Search & Applications segment, effective July 1, 2013 and an increase in content acquisition costs due to the acquisition of The About Group. The increase in both product development expense and general and administrative expense is primarily due to the factors described above in the three month discussion. 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 that commenced prior to its acquisition.

Match Operating Income Before Amortization increased 14% to $182.4 million due to the factors described above in the three month discussion.

Local Operating Income Before Amortization decreased 43% to $13.4 million reflecting the decrease in revenue noted above and an increase of $6.4 million in selling and marketing expense and $4.2 million in employee termination costs associated with the CityGrid Media reorganization that took place in the second quarter of 2013. The increase in selling and marketing expense is primarily due to marketing costs related to the re-branding of the HomeAdvisor domain name and the inclusion of Felix, which is not in the full prior year period. Partially offsetting the decrease in Operating Income Before Amortization is the inclusion of the $8.4 million Rezbook gain described above in the three month discussion.

Operating income (loss)

                              Three Months Ended September 30,                     Nine Months Ended September 30,
                         2013        $ Change     % Change      2012         2013        $ Change    % Change      2012
                                                             (Dollars in thousands)
Search & Applications $  87,756     $  18,720       27%      $ 69,036     $ 264,085     $ 47,492       22%      $ 216,593
Match                    64,823         8,745       16%        56,078       164,169       21,086       15%        143,083
Local                     9,853         2,510       34%         7,343         2,492      (20,310 )    (89)%        22,802
Media                    (8,475 )       4,703       36%       (13,178 )     (21,331 )      5,821       21%        (27,152 )
Other                    (2,529 )         156        6%        (2,685 )      (9,848 )     (3,267 )    (50)%        (6,581 )
Corporate               (29,424 )       9,137       24%       (38,561 )     (86,316 )     24,155       22%       (110,471 )
Total                 $ 122,004     $  43,971       56%      $ 78,033     $ 313,251     $ 74,977       31%      $ 238,274

Refer to Note 9 to the consolidated financial statements for reconciliations of . . .

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