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IACI > SEC Filings for IACI > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for IAC/INTERACTIVECORP

Form 10-Q for IAC/INTERACTIVECORP


31-Jul-2014

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 and Vimeo. Focused on the areas of search, applications, online dating, media and eCommerce, IAC's family of websites is one of the largest in the world, with over a billion monthly visits across more than 100 countries.

During the first quarter of 2014, IAC realigned its reportable segments as follows:
The Company created a new segment called The Match Group that includes Match, which was previously reported as its own separate segment, and DailyBurn and Tutor, which were previously in the Media and Other segments, respectively.

The businesses within the Local segment (HomeAdvisor, Felix and, for periods prior to July 1, 2013, CityGrid Media) were moved to the eCommerce segment, formerly called the Other segment.

There were no changes to the Search & Applications segment.

In addition, the Company introduced Adjusted EBITDA, a new non-GAAP financial measure, beginning with the first quarter of 2014. We believe Adjusted EBITDA is a useful measure for analysts and investors as this measure allows a more meaningful comparison between our performance and that of our competitors. Moreover, our management uses this measure internally to evaluate the performance of our business as a whole and our individual business segments. 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, 2013.

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. Our services agreement requires that we comply with certain guidelines promulgated by Google. Subject to certain limitations, Google may unilaterally update its policies and guidelines, which could require modifications to, or prohibit and/or render obsolete certain of our products, services and/or business practices, which could be costly to address or otherwise have an adverse effect on our business, financial condition and results of operations. For the three months ended June 30, 2014 and 2013, revenue earned from Google is $349.5 million and $405.8 million, respectively. For the six months ended June 30, 2014 and 2013, revenue earned from Google is $704.6 million and $781.9 million, respectively. This revenue is earned by the businesses comprising the Search & Applications segment.

Results of Operations for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013

Revenue
                           Three Months Ended June 30,                             Six Months Ended June 30,
                   2014        $ Change     % Change      2013           2014         $ Change     % Change       2013
                                                          (Dollars in thousands)
Search &
Applications    $ 395,716     $ (31,733 )     (7)%     $ 427,449     $   793,751     $ (30,890 )     (4)%     $   824,641
The Match Group   214,314        16,327        8%        197,987         425,501        34,639        9%          390,862
Media              36,656       (20,839 )    (36)%        57,495          73,011       (29,479 )    (29)%         102,490
eCommerce         109,949        (6,642 )     (6)%       116,591         204,791       (19,097 )     (9)%         223,888
Inter-segment
elimination          (320 )        (209 )    (187)%         (111 )          (492 )        (271 )    (123)%           (221 )
Total           $ 756,315     $ (43,096 )     (5)%     $ 799,411     $ 1,496,562     $ (45,098 )     (3)%     $ 1,541,660


For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
Search & Applications revenue decreased 7% to $395.7 million reflecting a decline from Applications (which includes our direct to consumer downloadable applications operations (B2C), our partnership operations (B2B) and SlimWare), partially offset by a slight increase from Websites (which principally includes Ask.com, About.com, CityGrid Media, Dictionary.com, Investopedia.com and PriceRunner.com). Applications revenue decreased 15% to $190.5 million, despite query growth from our B2C operations, primarily due to lower queries from our B2B operations. Websites revenue grew 1% to $205.2 million due to the acquisition of the ValueClick "Owned & Operated" ("O&O") website businesses on January 10, 2014, the contribution of CityGrid Media, which had been moved from the eCommerce segment to the Search & Applications segment, effective July 1, 2013, and growth from About.com, partially offset by a decline in revenue at Ask.com.

The Match Group revenue increased 8% to $214.3 million driven by a 7% increase in Dating revenue. Dating North America revenue (which includes Match.com, Chemistry, People Media, OkCupid and other dating businesses operating within the United States and Canada and is referred to as "North America") and Dating International revenue (which includes all dating businesses operating outside of the United States and Canada and is referred to as "International") increased 6% to $138.1 million and 8% to $69.5 million, respectively. These businesses are collectively referred to as "Dating". Non-dating revenue (consisting of DailyBurn and Tutor) increased 84%. The growth in revenue was driven by increased subscribers across the segment. North America and International paid subscribers increased 11% and 6%, respectively.

Media revenue decreased 36% to $36.7 million primarily due to the impact of the closure of the Newsweek print business and the sale of the Newsweek digital business in August 2013 as well as the timing of Electus projects, partially offset by continued strong growth at Vimeo.

eCommerce revenue decreased 6% to $109.9 million primarily due to the move of CityGrid Media from the eCommerce segment to the Search & Applications segment, partially offset by increases from HomeAdvisor and Shoebuy.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
Search & Applications revenue decreased 4% to $793.8 million reflecting a decline from Applications, partially offset by an increase from Websites. Applications revenue decreased 11% to $384.8 million, while Websites revenue grew 4% to $408.9 million. The decrease in Applications revenue and the increase in Websites revenue are primarily due to the factors described above in the three month discussion.

The Match Group revenue increased 9% to $425.5 million driven by an 8% increase in Dating revenue and a 68% increase in non-dating revenue. North America revenue and International revenue increased 7% to $272.6 million and 10% to $140.0 million, respectively, driven by the factors described above in the three month discussion.

Media and eCommerce revenue decreased 29% to $73.0 million and 9% to $204.8 million, respectively, primarily due to the factors described above in the three month discussion.

Cost of revenue
For the three months ended June 30, 2014 compared to the three months ended June

30, 2013
                                                Three Months Ended June 30,
                                        2014       $ Change     % Change       2013
                                                  (Dollars in thousands)
Cost of revenue (exclusive of
depreciation shown separately below)  $211,100    $(61,722)      (23)%       $272,822
As a percentage of revenue              28%                                    34%

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.


Cost of revenue in 2014 decreased from 2013 primarily due to decreases of $45.9 million from Search & Applications and $13.4 million from Media. Cost of revenue from Search & Applications decreased primarily due to a decrease of $50.4 million in traffic acquisition costs driven primarily by lower revenue from our B2B operations and Ask.com, partially offset by the acquisition of the ValueClick O&O website businesses and the move of CityGrid Media to the Search & Applications segment. The decrease in cost of revenue from Media was primarily due to lower production costs at Electus resulting from the timing of projects.

For the six months ended June 30, 2014 compared to the six months ended June 30,

2013
                                    Six Months Ended June 30,
                             2014      $ Change    % Change     2013
                                     (Dollars in thousands)
Cost of revenue            $420,294   $(108,377)    (20)%     $528,671
As a percentage of revenue   28%                                34%

Cost of revenue in 2014 decreased from 2013 primarily due to decreases of $83.1 million from Search & Applications, $18.9 million from Media and $13.0 million from eCommerce, partially offset by an increase of $7.7 million from The Match Group. The decreases in cost of revenue from Search & Applications and Media are primarily due to the factors described above in the three month discussion. Cost of revenue from eCommerce decreased primarily due to the move of CityGrid Media to the Search & Applications segment, partially offset by an increase in traffic acquisition costs
from Felix and an increase in the cost of products sold at Shoebuy resulting from increased sales. The increase in cost of revenue from The Match Group is primarily due to increases in hosting fees and customer acquisition costs.

Selling and marketing expense
For the three months ended June 30, 2014 compared to the three months ended June

30, 2013
                                     Three Months Ended June 30,
                                2014     $ Change   % Change     2013
                                       (Dollars in thousands)
Selling and marketing expense $272,786   $25,633      10%      $247,153

As a percentage of revenue 36% 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 2014 increased from 2013 primarily due to increases of $14.8 million from Search & Applications and $8.9 million from The Match Group. Selling and marketing expense from Search & Applications increased primarily due to a $16.1 million increase in online marketing spend, which was primarily related to our B2C downloadable applications, the acquisition of the ValueClick O&O website businesses and an increase in compensation and other employee-related costs, partially offset by a decrease in television advertising at Ask.com. The increase in selling and marketing expense from The Match Group was primarily due to an increase of $8.7 million in both offline and online marketing spend at Dating and DailyBurn.
For the six months ended June 30, 2014 compared to the six months ended June 30,

2013
                                      Six Months Ended June 30,
                                2014     $ Change   % Change     2013
                                       (Dollars in thousands)
Selling and marketing expense $571,498   $81,431      17%      $490,067
As a percentage of revenue      38%                              32%


Selling and marketing expense in 2014 increased from 2013 primarily due to increases of $61.8 million from Search & Applications and $22.5 million from The Match Group, partially offset by a decrease of $4.1 million from eCommerce. The increases in selling and marketing expense from Search & Applications and The Match Group are primarily due to the factors described above in the three month discussion. Search & Applications was further impacted by the move of CityGrid Media to the Search & Applications segment. Selling and marketing expense from eCommerce decreased primarily due to the move of CityGrid Media to the Search & Applications segment, partially offset by increases in offline marketing spend and compensation and other employee-related costs at HomeAdvisor.

General and administrative expense
For the three months ended June 30, 2014 compared to the three months ended June

30, 2013
                                          Three Months Ended June 30,
                                     2014     $ Change   % Change     2013
                                            (Dollars in thousands)
General and administrative expense $109,719    $6,204       6%      $103,515

As a percentage of revenue 15% 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 2014 increased from 2013 primarily due to increases of $7.1 million from Search & Applications and $3.6 million from Corporate, partially offset by decreases of $2.1 million from eCommerce and $1.4 million from The Match Group. The increase in general and administrative expense from Search & Applications is primarily due to the move of CityGrid Media from the eCommerce segment and the acquisition of the ValueClick O&O website businesses. General and administrative expense from Corporate increased primarily due to an increase of $5.0 million in non-cash compensation expense, partially offset by lower salary expense and professional fees. The increase in non-cash compensation expense is primarily due to higher forfeitures in the prior year and the issuance of equity awards since the second quarter of 2013. The decrease in general and administrative expense from eCommerce is primarily due to the inclusion in the prior year of $4.2 million in employee termination costs associated with the CityGrid Media restructuring and the move of CityGrid Media to the Search & Applications segment, partially offset by an increase in compensation and other employee-related costs at HomeAdvisor and Shoebuy due, in part, to increases in headcount. General and administrative expense from The Match Group decreased primarily due to a decrease of $3.5 million in acquisition-related contingent consideration fair value adjustments, partially offset by higher professional fees.
For the six months ended June 30, 2014 compared to the six months ended June 30,

2013
                                           Six Months Ended June 30,
                                     2014     $ Change   % Change     2013
                                            (Dollars in thousands)
General and administrative expense $204,535    $5,296       3%      $199,239

As a percentage of revenue 14% 13%

General and administrative expense in 2014 increased from 2013 primarily due to increases of $11.1 million from Search & Applications and $3.9 million from Corporate, partially offset by decreases of $4.6 million from eCommerce, $3.0 million from The Match Group and $2.2 million from Media. The increase from Search & Applications and the decreases from eCommerce and The Match Group are primarily due to the factors described above in the three month discussion. General and administrative expense from Corporate increased primarily due to increases in professional fees and compensation and other employee-related costs. The decrease in general and administrative expense from The Match Group was further impacted by a $3.9 million benefit recorded in the first quarter of 2014 related to the expiration of the statute of limitations for a non-income tax matter, partially offset by an increase in compensation and other employee-related costs at our Dating businesses due, in part, to an increase in headcount. General and administrative expense from Media decreased primarily due to the closure of the Newsweek print business and the sale of the Newsweek digital business in August 2013, partially offset by an increase in compensation and other employee-related costs due to increased headcount at Vimeo.


Product development expense
For the three months ended June 30, 2014 compared to the three months ended June

30, 2013
                                  Three Months Ended June 30,
                             2014     $ Change   % Change    2013
                                    (Dollars in thousands)
Product development expense $38,357    $4,305      13%      $34,052

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 2014 increased from 2013 primarily due to an increase of $3.4 million from Search & Applications. The increase in product development expense from Search & Applications is primarily related to an increase in compensation and other employee-related costs due, in part, to the acquisition of the ValueClick O&O website businesses.
For the six months ended June 30, 2014 compared to the six months ended June 30,

2013
                                   Six Months Ended June 30,
                             2014     $ Change   % Change    2013
                                    (Dollars in thousands)
Product development expense $77,373    $8,204      12%      $69,169

As a percentage of revenue 5% 4%

Product development expense in 2014 increased from 2013 primarily due to increases of $5.9 million from Search & Applications and $1.2 million from The Match Group. The increase in product development expense from Search & Applications is primarily due to the factors described above in the three month discussion. The increase from The Match Group is primarily due to an increase in compensation and other employee-related costs.

Depreciation
For the three months ended June 30, 2014 compared to the three months ended June
30, 2013
                                 Three Months Ended June 30,
                            2014     $ Change   % Change    2013
                                   (Dollars in thousands)
Depreciation               $15,257   $(1,779)    (10)%     $17,036
As a percentage of revenue   2%                              2%

Depreciation in 2014 decreased from 2013 resulting from the inclusion in the prior year of 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 and from certain fixed assets becoming fully depreciated, partially offset by incremental depreciation associated with capital expenditures made throughout 2013 and various acquisitions.
For the six months ended June 30, 2014 compared to the six months ended June 30,

2013
                                  Six Months Ended June 30,
                            2014     $ Change   % Change    2013
                                   (Dollars in thousands)
Depreciation               $30,075    $(977)      (3)%     $31,052
As a percentage of revenue   2%                              2%


Depreciation in 2014 decreased from 2013 primarily due to the factors described above in the three month discussion.

Adjusted EBITDA
                            Three Months Ended June 30,                           Six Months Ended June 30,
                    2014        $ Change     % Change      2013          2014        $ Change     % Change      2013
                                                         (Dollars in thousands)
Search &
Applications     $  91,258     $ (11,162 )    (11)%     $ 102,420     $ 173,329     $ (26,605 )    (13)%     $ 199,934
The Match Group     69,368         1,683        2%         67,685       116,798         1,207        1%        115,591
Media               (8,911 )      (7,908 )    (789)%       (1,003 )     (16,775 )      (9,592 )    (134)%       (7,183 )
eCommerce            4,523            56        1%          4,467         7,327         2,137       41%          5,190
Corporate          (14,806 )         825        5%        (15,631 )     (31,152 )      (2,324 )     (8)%       (28,828 )
Total            $ 141,432     $ (16,506 )    (10)%     $ 157,938     $ 249,527     $ (35,177 )    (12)%     $ 284,704

As a percentage
of revenue           19%                                    20%           17%                                    18%

For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
Search & Applications Adjusted EBITDA decreased 11% to $91.3 million, primarily due to the lower revenue noted above and an increase in selling and marketing expense, partially offset by the contribution from the acquisition of the ValueClick O&O website businesses and the move of CityGrid Media to the Search & Applications segment. The increase in selling and marketing expense is primarily due to an increase in online marketing spend, which was primarily related to our B2C downloadable applications, partially offset by a decrease in television advertising of Ask.com. Partially offsetting the increase in selling and marketing expense is a decrease in cost of revenue, primarily due to a decrease in traffic acquisition costs driven primarily by lower revenue from our B2B operations and Ask.com.
The Match Group Adjusted EBITDA increased 2% to $69.4 million, primarily due to the higher revenue noted above, partially offset by higher selling and marketing expense. The increase in selling and marketing expense is primarily due to an increase in both offline and online marketing spend at Dating and DailyBurn. Media Adjusted EBITDA loss increased $7.9 million to a loss of $8.9 million primarily due to the favorable effect in the prior year of certain items related to the Newsweek print closure in the second quarter of 2013, and increased investment in Vimeo in the current year. eCommerce Adjusted EBITDA increased 1% to $4.5 million primarily due to the inclusion in the prior year of $4.2 million in employee termination costs associated with the CityGrid Media restructuring and the move of CityGrid Media to the Search & Applications segment, partially offset by increased investment in the current year at both HomeAdvisor and Shoebuy.
Corporate Adjusted EBITDA loss decreased 5% to a loss of $14.8 million primarily due to lower salary expense and professional fees.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
Search & Applications Adjusted EBITDA decreased 13% to $173.3 million, primarily due to the factors described above in the three month discussion.
The Match Group Adjusted EBITDA increased 1% to $116.8 million, primarily due to the higher revenue noted above, partially offset by higher selling and marketing expense, cost of revenue and product development expense. The increase in selling and marketing expense is primarily due to the factors described above in the three month discussion. The increase in cost of revenue is primarily due to increases in hosting fees and customer acquisition costs. The increase in product development expense is primarily due to an increase in compensation and other employee-related costs. Partially offsetting these increases in expense is a $3.9 million benefit recorded in general and administrative expense in the first quarter of 2014 related to the expiration of the statute of limitations for a non-income tax matter.
Media Adjusted EBITDA loss increased $9.6 million to a loss of $16.8 million primarily due to the factors described above in the three month discussion, partially offset by a decrease in cost of revenue driven by lower production costs at Electus resulting from the timing of projects.


eCommerce Adjusted EBITDA increased 41% to $7.3 million primarily due to the factors described above in the three month discussion.
Corporate Adjusted EBITDA loss increased 8% to a loss of $31.2 million primarily due to higher professional fees and an increase in compensation and other employee-related costs.

Operating income (loss)

                           Three Months Ended June 30,                          Six Months Ended June 30,
                   2014       $ Change     % Change      2013          2014        $ Change     % Change      2013
                                                        (Dollars in thousands)
Search &
Applications    $ 77,771     $ (11,575 )    (13)%     $  89,346     $ 148,108     $ (28,221 )    (16)%     $ 176,329
The Match Group   61,198         8,069       15%         53,129       101,001        10,513       12%         90,488
Media             (9,794 )      (7,761 )    (382)%       (2,033 )     (18,360 )      (9,170 )    (100)%       (9,190 )
eCommerce              8         4,611        NM         (4,603 )      (1,553 )       7,543       83%         (9,096 )
Corporate        (33,493 )      (4,350 )    (15)%       (29,143 )     (61,794 )      (4,510 )     (8)%       (57,284 )
Total           $ 95,690     $ (11,006 )    (10)%     $ 106,696     $ 167,402     $ (23,845 )    (12)%     $ 191,247

As a percentage
of revenue         13%                                    13%           11%                                    12%


________________________

NM = not meaningful
Refer to Note 8 to the consolidated financial statements for reconciliations of Adjusted EBITDA to operating income (loss) by reportable segment. . . .
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