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IACI > SEC Filings for IACI > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for IAC/INTERACTIVECORP

Form 10-K for IAC/INTERACTIVECORP


26-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 and Vimeo. Focused in the areas of search, applications, online dating, local and media, IAC's family of websites is one of the largest in the world, with more than a billion monthly visits across more than 100 countries. Sources of Revenue
Substantially all of the revenue from our Search & Applications segment is derived from online advertising. This revenue is primarily attributable to our services agreement with Google Inc. ("Google"). The revenue earned from our Match segment is derived primarily from subscription fees for its subscription-based online personals services; Match also derives revenue from online advertising. Our Local segment consists of HomeAdvisor and Felix. HomeAdvisor's revenue is derived from fees paid by members of its network of home services professionals for consumer leads and from subscription sales to service professionals as well as from one-time fees charged upon enrollment and activation of new home services professionals in its network. Felix's revenue is derived from online advertising. The revenue earned by our Media segment is derived from advertising, media production and subscription fees. The revenue earned by our Other segment is derived principally from merchandise sales and subscription fees.
Strategic Partnerships, Advertiser Relationships and Online Advertising Spend A significant component of the Company's revenue is attributable to a services agreement with Google, which expires on March 31, 2016. For the years ended December 31, 2013, 2012 and 2011, revenue earned from Google was $1.5 billion, $1.4 billion and $970.4 million, respectively. This revenue is earned by the businesses comprising the Search & Applications segment.
We market and offer our products and services directly to consumers through branded websites and subscriptions, allowing consumers to transact directly with us in a convenient manner. We have made, and expect to continue to make, substantial investments in online and offline advertising to build our brands and drive traffic to our websites and consumers and advertisers to our businesses.
We pay traffic acquisition costs, which consist of payments to partners who distribute our B2B customized browser-based applications, integrate our paid listings into their websites or direct traffic to our websites. We also pay to market and distribute our services on third party distribution channels, such as internet portals and search engines. In addition, some of our businesses manage affiliate programs, pursuant to which we pay commissions and fees to third parties based on revenue earned. These distribution channels might also offer their own products and services, as well as those of other third parties, which compete with those we offer.
The cost of acquiring new consumers through online and offline third party distribution channels has increased, particularly in the case of online channels as internet commerce continues to grow and competition in the markets in which IAC's businesses operate increases.
Factors Affecting Results
In 2013, we delivered 8% revenue growth, 21% Operating Income Before Amortization growth and 32% Operating Income growth. Results were primarily driven by our Search & Applications and Match segments. The results of our Search & Applications segment benefited from a full year contribution from The About Group, which was acquired on September 24, 2012; and CityGrid Media, which has been moved from the Local segment to the Search & Applications segment, effective July 1, 2013, following its reorganization. The results at our Match segment benefited from increased subscribers; which is due, in part, to recent acquisitions, the most significant being Twoo, which was acquired on January 4, 2013.
Other events affecting year-over-year comparability are (i) the closure of the Newsweek print business and subsequent sale of Newsweek in August 2013 (reflected in the Media segment); (ii) the sale of the Rezbook assets in July 2013 (reflected in the Local segment); and (iii) the acquisition of Tutor.com, acquired December 14, 2012 (reflected in the Other segment).


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Results of Operations for the Years Ended December 31, 2013, 2012 and 2011

Revenue
                                                      Years Ended December 31,
                     2013         $ Change      % Change        2012         $ Change      % Change        2011
                                                       (Dollars in thousands)
Search &
Applications     $ 1,604,950     $ 139,155           9  %   $ 1,465,795     $ 425,288          41 %    $ 1,040,507
Match                788,197        74,748          10  %       713,449       195,422          38 %        518,027
Local                277,466       (45,161 )       (14 )%       322,627        19,209           6 %        303,418
Media                193,734        28,910          18  %       164,824        94,660         135 %         70,164
Other                159,493        24,938          19  %       134,555         6,490           5 %        128,065
Inter-segment
elimination             (853 )        (536 )      (170 )%          (317 )         420          57 %           (737 )
Total            $ 3,022,987     $ 222,054           8  %   $ 2,800,933     $ 741,489          36 %    $ 2,059,444

For the year ended December 31, 2013 compared to the year ended December 31, 2012
Search & Applications revenue increased 9% to $1.6 billion, reflecting strong growth from Websites (which includes Ask.com, About.com, Dictionary.com and Citysearch.com (among other properties)) and Applications (which includes our direct to consumer downloadable applications operations (B2C) and our partnership operations (B2B)). Websites revenue grew 11% to $786.9 million, reflecting the contribution from The About Group, acquired September 24, 2012, 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. The About Group revenue increased $108.4 million to $138.6 million in 2013, as it was not in the full prior year period. Applications revenue grew 8% to $818.0 million, driven by increased contributions from existing and new B2C products.
Match revenue increased 10% to $788.2 million driven by increases from Core, Meetic and Developing subscribers of 9%, 6% and 141%, respectively. Core revenue (which consists of Match.com in the U.S., Chemistry and People Media), Meetic revenue and Developing revenue (which includes OkCupid, SpeedDate, DateHookup, Twoo, Tinder and Match's international operations, excluding Meetic) increased 6% to $464.3 million; 9% to $225.0 million; and 48% to $98.9 million, respectively. Meetic revenue in 2012 of $206.7 million was negatively impacted by the write-off of $5.2 million of deferred revenue in connection with its acquisition. Developing revenue further benefited from the contribution of Twoo, which was acquired January 4, 2013.
Local revenue decreased 14% to $277.5 million due to the move of CityGrid Media from the Local segment to the Search & Applications segment, effective July 1, 2013, following its reorganization, and a decline at HomeAdvisor. Partially offsetting these declines is the contribution from Felix, a pay-per-call advertising service acquired August 20, 2012. HomeAdvisor domestic revenue was negatively impacted by an 11% decrease in accepted service requests due primarily to its domain name change at the end of 2012.
Media revenue increased 18% to $193.7 million primarily due to strong growth from Electus and Vimeo, partially offset by the closure of the Newsweek print business in December 2012.
Other revenue increased 19% to $159.5 million primarily due to the contribution from Tutor.com, an online tutoring solution acquired December 14, 2012, and increased sales at Shoebuy.
For the year ended December 31, 2012 compared to the year ended December 31, 2011
Search & Applications revenue increased 41% to $1.5 billion, reflecting strong growth from both Applications and Websites. Applications revenue grew 39% to $759.7 million, driven by 16% query growth and year over year monetization gains, which were driven by increased contributions from existing and new partners and products. Websites revenue grew 43% to $706.1 million, reflecting 21% query growth driven primarily by increased marketing and site optimization. The growth in Websites revenue also reflects the contribution from The About Group, acquired September 24, 2012, which had revenue of $30.1 million. Match revenue increased 38% to $713.4 million benefiting from the full year contribution of Meetic, which was consolidated beginning September 1, 2011, and growth within our Core operations, partially offset by a decrease in Developing revenue. Core revenue increased 10% to $439.9 million driven by an increase in subscribers. Revenue at Meetic was $206.7 million and $46.1 million in 2012 and 2011, respectively; revenue was negatively impacted by the write-off of $5.2 million and $32.6 million, respectively, of deferred revenue in connection with its acquisition. Developing revenue decreased 9% to $66.9 million, despite strong growth from OkCupid, due to lower subscription revenue from our Latin America venture and Singlesnet. Excluding Meetic in both years, revenue grew 7% to $506.8 million.


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Local revenue increased 6% to $322.6 million, primarily reflecting growth from HomeAdvisor's operations. HomeAdvisor domestic revenue grew due to higher average lead acceptance fees. HomeAdvisor international revenue grew due to a 25% increase in accepted service requests and higher average lead acceptance fees. Local revenue further benefited from the contribution of Felix, a pay-per-call advertising service acquired August 20, 2012, and higher reseller revenue from CityGrid Media, partially offset by a decline in direct sales revenue.
Media revenue increased 135% to $164.8 million primarily due to the contribution from News_Beast, consolidated beginning June 1, 2012 following the Company's acquisition of a controlling interest, as well as strong growth from Electus and Vimeo.

Cost of revenue

                                          Years Ended December 31,
                  2013      $ Change    % Change     2012     $ Change    % Change     2011
                                           (Dollars in thousands)
Cost of
revenue        $1,000,101    $9,304        1%      $990,797   $236,908      31%      $753,889
As a
percentage of
revenue           33%                                35%                               37%

Cost of revenue consists primarily of traffic acquisition costs, which 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.
For the year ended December 31, 2013 compared to the year ended December 31, 2012
Cost of revenue in 2013 increased from 2012 primarily due to increases of $16.9 million from Other, $10.1 million from Search & Applications and $7.2 million from Match, partially offset by a decrease of $23.2 million from Local. The increase in cost of revenue from Other was primarily due to an increase in the cost of products sold at Shoebuy resulting from increased sales and content acquisition costs from Tutor.com, which was acquired December 14, 2012. Cost of revenue from Search & Applications increased primarily due to an increase in content acquisition costs resulting from the acquisition of The About Group and the inclusion of CityGrid Media in the Search & Applications segment, effective July 1, 2013, partially offset by a decrease of $7.7 million in traffic acquisition costs driven primarily by decreased revenue from Ask.com. The increase in cost of revenue from Match is primarily due to recent acquisitions. The decrease in cost of revenue from Local is principally due to the move of CityGrid Media to the Search & Applications segment, partially offset by an increase in traffic acquisition costs from Felix. As a percentage of revenue, cost of revenue in 2013 decreased from 2012 primarily due to the transition of Newsweek from a print business to a digital only publication in December 2012 (which was subsequently sold in August 2013) and a decrease in traffic acquisition costs due to an increase in the proportion of revenue from Websites that resulted from increased online marketing.
For the year ended December 31, 2012 compared to the year ended December 31, 2011
Cost of revenue in 2012 increased from 2011 primarily due to increases of $125.8 million from Search & Applications,$82.7 million from Media and $17.4 million from Match. The increase in cost of revenue from Search & Applications was primarily due to an increase of $122.0 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 that resulted from increased online marketing. Cost of revenue from Media increased primarily due to News_Beast, consolidated beginning June 1, 2012, and increased production costs at Electus related to the increase in its revenue. The increase from Match is due to Meetic, which was included for only part of the prior year, partially offset by a decrease in customer acquisition costs.


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Selling and marketing expense

                                         Years Ended December 31,
                 2013      $ Change    % Change     2012     $ Change    % Change     2011
                                          (Dollars in thousands)
Selling and
marketing
expense        $964,131     $69,586       8%      $894,545   $277,347      45%      $617,198
As a
percentage of
revenue           32%                               32%                               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.
For the year ended December 31, 2013 compared to the year ended December 31, 2012
Selling and marketing expense in 2013 increased from 2012 primarily due to increases of $42.7 million from Search & Applications, $16.8 million from Match and $9.4 million from Media. The increase in selling and marketing expense from Search & Applications is primarily due to increases of $28.3 million and $13.8 million in online marketing spend and compensation and other employee-related costs, respectively. The increase in online marketing spend from Search & Applications is primarily related to new B2C downloadable applications and the inclusion of The About Group beginning September 24, 2012. Selling and marketing expense from Match increased primarily due to increases of $11.0 million and $5.3 million in advertising and promotional expenditures and compensation and other employee-related costs, respectively. The increase in advertising and promotional expenditures is primarily due to an increase in offline marketing spend. The increase in compensation and other employee-related costs is primarily due to an increase in headcount at Meetic and recent acquisitions. The increase in selling and marketing expense from Media is primarily due to increases of $5.7 million in online marketing spend at Vimeo and $1.4 million in TV spend at DailyBurn.
For the year ended December 31, 2012 compared to the year ended December 31, 2011
Selling and marketing expense in 2012 increased from 2011 primarily due to increases of $187.8 million from Search & Applications and $80.4 million from Match. The increase in selling and marketing expense from Search & Applications is primarily due to an increase of $180.6 million in online marketing related to Ask.com and existing B2C downloadable applications. Selling and marketing expense at Match increased primarily due to Meetic, which was included for only part of the prior year, and an increase in offline marketing spend.

General and administrative expense

                                              Years Ended December 31,
                       2013     $ Change    % Change     2012     $ Change   % Change     2011
                                               (Dollars in thousands)
General and
administrative
expense              $372,470   $(13,618)     (4)%     $386,088   $65,026      20%      $321,062
As a percentage of
revenue                12%                               14%                              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.
For the year ended December 31, 2013 compared to the year ended December 31, 2012
General and administrative expense in 2013 decreased from 2012 primarily due to decreases of $25.3 million from Corporate, $8.9 million from Local and $4.4 million from Media, partially offset by increases of $12.4 million from Search & Applications, $6.4 million from Match and $6.2 million from Other. General and administrative expense from Corporate decreased primarily due to a decrease of $25.5 million in non-cash compensation expense related primarily to the vesting of certain awards and an increase in the number of awards forfeited as compared to the prior year. 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 the Rezbook assets in July 2013. General and administrative expense from Media decreased primarily due to the inclusion in the prior year of $7.0 million in restructuring costs related to the transition of Newsweek to a digital only publication and a $6.3 million gain related to the subsequent sale of Newsweek in August 2013, partially offset by increases in compensation and other employee-related costs related to the growth in Vimeo and DailyBurn. The increase in general and administrative expense from Search &


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Applications is primarily due to the inclusion of The About Group beginning September 24, 2012. General and administrative expense from Match increased primarily due to recent acquisitions and an increase in professional fees due, in part, to transaction fees related primarily to the Meetic tender offer. The increase in general and administrative expense from Other is primarily due to the inclusion of Tutor.com, which was acquired December 14, 2012. As a percentage of revenue, general and administrative expense in 2013 decreased from 2012 primarily due to the gain on the sale of the Rezbook assets in July 2013 and the inclusion in the prior year of restructuring costs related to Newsweek and the gain related to its subsequent sale in August 2013.
For the year ended December 31, 2012 compared to the year ended December 31, 2011
General and administrative expense in 2012 increased from 2011 primarily due to increases of $29.9 million from Media, $13.4 million from Local, $11.2 million from Match and $7.7 million from Search & Applications. As a percentage of revenue, general and administrative expense in 2012 decreased from 2011 primarily due to operating expense leverage. The increase in general and administrative expense from Media resulted primarily from the inclusion of News_Beast, consolidated beginning June 1, 2012, which includes $7.0 million in restructuring costs related to its transition to a digital only publication, as well as an increase in operating expenses at Electus. General and administrative expense from Local increased primarily due to higher compensation and employee-related expenses at both HomeAdvisor and CityGrid Media, the inclusion of Felix, which was acquired on August 20, 2012, and an increase in bad debt expense at HomeAdvisor. The increase in compensation and employee-related expenses at CityGrid Media was primarily due to employee termination costs associated with a reduction in workforce. The increase in general and administrative expense from Match is primarily due to Meetic, which was included for only part of the prior year, partially offset by a decrease in professional fees due, in part, to the inclusion in the prior year of $4.0 million in transaction fees associated with the Meetic acquisition. General and administrative expense from Search & Applications increased primarily due to the acquisition of The About Group, and increases in compensation and other employee-related costs and professional fees.

Product development expense

                                             Years Ended December 31,
                       2013     $ Change   % Change     2012     $ Change   % Change    2011
                                              (Dollars in thousands)
Product development
expense              $141,330   $23,647      20%      $117,683   $26,926      30%      $90,757
As a percentage of
revenue                 5%                               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.
For the year ended December 31, 2013 compared to the year ended December 31, 2012
Product development expense in 2013 increased from 2012 primarily due to increases of $16.3 million from Search & Applications and $4.9 million from Media. 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 beginning September 24, 2012, and an increase in headcount related to new B2C products. Product development expense from Media increased primarily due to News_Beast, consolidated beginning June 1, 2012.
For the year ended December 31, 2012 compared to the year ended December 31, 2011
Product development expense in 2012 increased from 2011 primarily due to increases of $12.6 million from Match, $6.5 million from Search & Applications and $4.2 million from Media. The increase in product development expense from Match is primarily due to an increase in compensation and other employee-related costs due, in part, to an increase in headcount and Meetic, which was included for only part of the prior year. Product development expense from Search & Applications increased primarily due to the acquisition of The About Group on September 24, 2012. The increase from Media is primarily due to News_Beast.


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Depreciation
                                           Years Ended December 31,
                    2013     $ Change    % Change    2012     $ Change    % Change     2011
                                            (Dollars in thousands)
Depreciation      $58,909     $6,428       12%      $52,481   $(4,238)      (7)%     $56,719
As a percentage
of revenue           2%                               2%                                3%

For the year ended December 31, 2013 compared to the year ended December 31, 2012
Depreciation in 2013 increased from 2012 resulting from the incremental depreciation associated with capital expenditures made subsequent to 2012, various acquisitions 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, partially offset by certain fixed assets becoming fully depreciated.
For the year ended December 31, 2012 compared to the year ended December 31, 2011
Depreciation in 2012 decreased from 2011 resulting primarily from certain fixed assets becoming fully depreciated in 2011 and 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, primarily related to Meetic, which was included for only part of the prior year.
Operating Income Before Amortization

                                                       Years Ended December 31,
                       2013        $ Change      % Change        2012        $ Change      % Change       2011
                                                        (Dollars in thousands)
Search &
Applications        $ 367,674     $ 54,528          17  %     $ 313,146     $ 108,166          53  %   $ 204,980
Match                 262,159       36,394          16  %       225,765        69,491          44  %     156,274
Local                  13,023      (11,909 )       (48 )%        24,932        (3,352 )       (12 )%      28,284
Media                 (28,157 )     16,670          37  %       (44,827 )     (28,982 )      (183 )%     (15,845 )
Other                  (6,138 )        (43 )        (1 )%        (6,095 )      (3,596 )      (144 )%      (2,499 )
Corporate             (69,167 )     (1,210 )        (2 )%       (67,957 )      (5,170 )        (8 )%     (62,787 )
Total               $ 539,394     $ 94,430          21  %     $ 444,964     $ 136,557          44  %   $ 308,407

As a percentage of
revenue                 18%                                       16%                                      15%

For the year ended December 31, 2013 compared to the year ended December 31, 2012
Search & Applications Operating Income Before Amortization increased 17% to $367.7 million, benefiting from the higher revenue noted above, partially offset by increases of $42.7 million in selling and marketing expense, $16.3 million in product development expense, $12.4 million in general and administrative expense and $10.1 million in cost of revenue. The increase in selling and marketing expense is primarily due to new B2C downloadable applications and the inclusion of The About Group, beginning September 24, 2012. 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 . . .

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