IAC(IAC) - 2020 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Combined Financial Statements The combined financial statements detail New IAC's historical financial position, operations, and cash flows, showing a significant operating loss and asset growth Combined Balance Sheet Summary (Unaudited) | Account | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :--- | :--- | :--- | | Total Current Assets | $2,481,450 | $1,229,256 | | Goodwill | $1,816,723 | $1,616,867 | | Total Assets | $5,591,246 | $4,097,408 | | Total Current Liabilities | $663,279 | $585,322 | | Long-term debt, net | $228,643 | $231,946 | | Total Liabilities | $1,224,354 | $1,082,264 | | Total Parent's Equity | $4,396,852 | $3,005,146 | | Total Liabilities and Parent's Equity | $5,591,246 | $4,097,408 | Combined Statement of Operations Summary (Unaudited) | Account | Three Months Ended March 31, 2020 (In thousands) | Three Months Ended March 31, 2019 (In thousands) | | :--- | :--- | :--- | | Revenue | $684,124 | $641,220 | | Total operating costs and expenses | $996,462 | $675,403 | | Goodwill impairment | $211,973 | $0 | | Operating loss | ($312,338) | ($34,183) | | Net loss | ($330,571) | ($13,673) | | Net loss attributable to IAC/InterActiveCorp equity | ($328,199) | ($14,247) | Combined Statement of Cash Flows Summary (Unaudited) | Activity | Three Months Ended March 31, 2020 (In thousands) | Three Months Ended March 31, 2019 (In thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $39,171 | $2,594 | | Net cash (used in) provided by investing activities | ($518,610) | $5,660 | | Net cash provided by (used in) financing activities | $1,671,816 | ($63,947) | | Net increase (decrease) in cash | $1,189,480 | ($55,368) | Note 1—The Company and Summary of Significant Accounting Policies This note details the upcoming Separation from Match Group, the combined financial statement basis, and the material adverse effects of the COVID-19 pandemic on operations and asset values - IAC entered into a Transaction Agreement to separate the businesses of Match Group (MTCH) from the remaining businesses of IAC. The transaction will result in two separate public companies: "New Match" (the current MTCH business) and "New IAC" (the company this report covers), which will be renamed IAC/InterActiveCorp. The separation is expected to be completed in the second quarter of 2020[22] - The COVID-19 pandemic has materially and adversely affected the business. ANGI Homeservices saw a decline in demand, and ad-supported businesses experienced a meaningful decrease in advertising rates (as much as 30% YoY)[29][30] - Due to the effects of COVID-19, the company identified and recorded several impairments as of March 31, 2020: - $212.0 million goodwill impairment (Desktop reporting unit) - $21.4 million intangible asset impairment (Desktop reporting unit) - $51.5 million impairment of certain equity securities - $7.5 million impairment of a note receivable and a warrant[31][32] - Effective January 1, 2020, ANGI's Handy business and HomeAdvisor's pre-priced product offerings changed their revenue accounting from a net to a gross basis. This change increased reported revenue by $15.2 million for the three months ended March 31, 2020[52] - A significant portion of the company's revenue is attributable to a services agreement with Google. For Q1 2020, total revenue from Google was $138.9 million, representing 20% of combined revenue, down from 31% in Q1 2019[57] Note 2—Income Taxes This note explains the company's standalone income tax computation, effective tax rate, and expected benefits from the CARES Act - The company expects to benefit from the CARES Act by carrying back a 2019 net operating loss for five years to receive a tax refund, utilizing accelerated depreciation, and deferring 2020 employer social security payroll taxes[68][72] - The effective income tax rate for Q1 2020 was 11% (a $41.4 million benefit), lower than the 21% statutory rate. This was primarily due to the non-deductible portion of the Desktop goodwill impairment and other unbenefited losses, partially offset by a revaluation of net operating loss deferred taxes due to the CARES Act[69] - Unrecognized tax benefits decreased from $20.3 million at year-end 2019 to $16.7 million at March 31, 2020, mainly due to the settlement of prior year tax positions with the IRS related to research credits[75] Note 3—Business Combination This note details IAC's acquisition of Care.com for $627.5 million, including its preliminary purchase price allocation and financial contribution - IAC acquired 100% of Care.com on February 11, 2020, for a total purchase price of $627.5 million, including $587.0 million in cash consideration[76] Preliminary Purchase Price Allocation for Care.com | Asset/Liability | Fair Value (In thousands) | | :--- | :--- | | Goodwill | $416,869 | | Intangible assets | $145,300 | | Cash and cash equivalents | $57,873 | | Other net assets | ($32,267) | | Net assets acquired | $586,975 | - The acquisition of Care.com is considered complementary to New IAC's other marketplace businesses. A significant portion of the purchase price was attributed to goodwill due to expected financial performance[80] Note 4—Goodwill and Intangible Assets This note details the company's goodwill and intangible assets, highlighting significant impairments related to the Desktop reporting unit due to COVID-19 Goodwill Changes by Segment (Q1 2020) | Segment | Balance Dec 31, 2019 (in thousands) | Additions (in thousands) | Impairment (in thousands) | Balance Mar 31, 2020 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | ANGI Homeservices | $884,296 | $0 | $0 | $879,428 | | Vimeo | $219,374 | $0 | $0 | $219,336 | | Applications | $504,748 | $0 | ($211,973) | $292,641 | | Emerging & Other | $8,449 | $416,869 | $0 | $425,318 | | Total | $1,616,867 | $416,869 | ($211,973) | $1,816,723 | - The effects of COVID-19 were an indicator of possible impairment, leading to a $212.0 million impairment of goodwill and a $21.4 million impairment of indefinite-lived intangible assets, both related to the Desktop reporting unit[88] - The fair value of the Mosaic Group reporting unit approximates its carrying value, and the aggregate carrying value of goodwill for which the excess of fair value over carrying value is less than 20% is approximately $709.4 million, indicating heightened risk of future impairments[88][89] Note 5—Financial Instruments and Fair Value Measurements This note details the company's financial instruments, including marketable debt securities and impairments on equity securities due to COVID-19 - During Q1 2020, the company recorded unrealized impairments of $51.5 million related to certain equity securities without readily determinable fair values, primarily due to the impact of COVID-19[99] Fair Value of Financial Instruments (Recurring Basis) | Instrument Type | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Assets (Mar 31, 2020) | | | | | | Money market funds | $1,597,511 | $0 | $0 | $1,597,511 | | Treasury notes & deposits | $0 | $162,691 | $0 | $162,691 | | Marketable securities | $0 | $49,912 | $0 | $49,912 | | Warrant | $0 | $0 | $6,489 | $6,489 | | Liabilities (Mar 31, 2020) | | | | | | Contingent consideration | $0 | $0 | ($636) | ($636) | - The company has one outstanding contingent consideration arrangement with a remaining maximum payment of $30.0 million. The fair value of this liability was $0.6 million at March 31, 2020[111][113] Note 6—Long-term Debt This note details the company's long-term debt, consisting of the ANGI Term Loan, and its available undrawn revolving credit facilities Long-Term Debt Summary | Debt Instrument | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :--- | :--- | :--- | | ANGI Term Loan | $244,063 | $247,500 | | Less: current portion | (13,750) | (13,750) | | Less: unamortized debt issuance costs | (1,670) | (1,804) | | Total long-term debt, net | $228,643 | $231,946 | - The ANGI Term Loan bore interest at 2.28% at March 31, 2020. It requires quarterly principal payments of $3.4 million through 2021, increasing thereafter until maturity in 2023[118] - The company has access to two undrawn revolving credit facilities as of March 31, 2020: a $250 million facility for ANGI and a $250 million facility for IAC Group[121][124] Note 8—Segment Information This note provides financial performance by segment, highlighting ANGI Homeservices' revenue contribution and the Applications segment's significant operating loss due to impairment Revenue by Reportable Segment (Unaudited) | Segment | Q1 2020 (In thousands) | Q1 2019 (In thousands) | | :--- | :--- | :--- | | ANGI Homeservices | $343,650 | $303,443 | | Vimeo | $56,968 | $43,581 | | Dotdash | $44,120 | $33,961 | | Applications | $104,148 | $143,549 | | Ask Media Group | $100,948 | $100,057 | | Emerging & Other | $34,357 | $16,691 | | Total | $684,124 | $641,220 | Operating (Loss) Income by Reportable Segment (Unaudited) | Segment | Q1 2020 (In thousands) | Q1 2019 (In thousands) | | :--- | :--- | :--- | | ANGI Homeservices | ($16,296) | ($3,641) | | Vimeo | ($14,589) | ($17,784) | | Dotdash | $2,411 | $3,047 | | Applications | ($218,588) | $25,356 | | Ask Media Group | $6,729 | $10,830 | | Emerging & Other | ($26,574) | ($13,350) | | Corporate | ($45,431) | ($38,641) | | Total | ($312,338) | ($34,183) | Adjusted EBITDA by Reportable Segment (Unaudited) | Segment | Q1 2020 (In thousands) | Q1 2019 (In thousands) | | :--- | :--- | :--- | | ANGI Homeservices | $34,397 | $37,179 | | Vimeo | ($11,408) | ($16,200) | | Dotdash | $7,011 | $7,150 | | Applications | $10,151 | $29,688 | | Ask Media Group | $6,831 | $10,975 | | Emerging & Other | ($23,811) | ($13,070) | | Corporate | ($31,386) | ($20,220) | Note 10—Contingencies This note details the Tinder Optionholder Litigation, where plaintiffs seek at least $2 billion in damages, and Match Group's indemnification agreement - The company is a defendant in a lawsuit filed by former Tinder employees who allege IAC and Match Group wrongfully interfered with a 2017 valuation of Tinder, resulting in underpayment for their stock options. The plaintiffs are seeking at least $2 billion in compensatory damages plus punitive damages[152] - IAC and Match Group believe the allegations in the Tinder lawsuit are without merit and intend to defend vigorously against it[154] - Under the Transaction Agreement for the Separation, Match Group has agreed to indemnify the company for matters relating to Match Group's business, including costs related to the Tinder optionholder litigation[155] Note 11—Related Party Transactions This note describes transactions with related parties, including corporate cost allocations from IAC and agreements with ANGI and Expedia - For Q1 2020, IAC allocated $24.0 million in corporate costs (accounting, legal, tax, etc.) to New IAC[157] - New IAC has agreements with its majority-owned subsidiary ANGI for services, tax sharing, and employee matters, which will be assigned from IAC to New IAC upon Separation. In Q1 2020, ANGI was charged $1.2 million for services by IAC[165][167] - New IAC and Expedia, which are under common control, have a 50/50 ownership interest in two aircraft and share related operational costs[170] Note 13—Subsequent Event This note discloses IAC's filing of a registration statement for a potential $1.5 billion stock offering, with proceeds to be transferred to New IAC post-Separation - On May 6, 2020, IAC filed a registration statement for an offering to sell up to $1.5 billion of what will become New Match common stock. Net proceeds from any such sale will be transferred to New IAC upon the closing of the Separation[184] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2020 performance, noting revenue growth offset by a significant operating loss due to goodwill impairment and strong liquidity COVID-19 Update The COVID-19 pandemic materially impacted the business, causing demand declines, reduced advertising rates, and over $290 million in asset impairments - ANGI Homeservices experienced a decline in demand for home services, particularly for non-essential projects, due to consumer unwillingness to have service professionals in their homes and lower consumer confidence[206] - Ad-supported businesses experienced a meaningful decrease in advertising rates, with some properties seeing rates fall as much as 30% year-over-year[206] - The effects of COVID-19 triggered impairment tests that resulted in write-downs of: - $212.0 million for Desktop goodwill - $21.4 million for Desktop intangible assets - $51.5 million for certain equity securities - $7.5 million for a note receivable and a warrant[207][208] Results of Operations Q1 2020 revenue grew 7% driven by ANGI, Vimeo, and Dotdash, but a significant operating loss resulted from goodwill and intangible asset impairments in Applications - Revenue growth was strong in several segments: ANGI (+13%), Vimeo (+31%), and Dotdash (+30%). However, Applications revenue fell 27% due to a 44% decline at Desktop, driven by browser policy changes and COVID-19's impact on ad rates[212] - Operating loss increased by $278.2 million, primarily due to a $212.0 million goodwill impairment and a $21.4 million intangible asset impairment at the Desktop business, both driven by the impact of COVID-19[223] - Adjusted EBITDA decreased by $43.7 million to a loss of $8.2 million. Key drivers were a $19.5 million decrease from Applications, an $11.2 million increase in Corporate loss (including $7.6M in Separation costs), and a $10.7 million increase in Emerging & Other loss (including $13.5M in Care.com transaction costs)[202][227][229][231][232] - Other expense, net, surged to $57.4 million from $5.4 million, primarily due to $51.5 million in impairments of equity securities and $7.5 million in impairments of a note and warrant, all related to the impact of COVID-19[234] Financial Position, Liquidity and Capital Resources The company maintains a strong financial position with $2.1 billion in cash and marketable securities, bolstered by a $1.1 billion IAC cash contribution, ensuring sufficient liquidity Financial Position Summary | Account | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :--- | :--- | :--- | | Total cash, cash equivalents, and marketable securities | $2,098,983 | $839,796 | | Total long-term debt, net | $228,643 | $231,946 | - Net cash provided by financing activities was $1.7 billion, primarily from cash transfers from IAC as part of its centrally managed treasury function, in preparation for the Separation[255] - During Q1 2020, ANGI repurchased 5.2 million shares of its common stock for $38.5 million. It has 20.1 million shares remaining in its repurchase authorization as of May 5, 2020[255][263] - Upon consummation of the Separation, New IAC will receive a cash contribution of approximately $685 million from the proceeds of the "Match loan"[274] Quantitative and Qualitative Disclosures about Market Risk The company's market risk exposures include interest rate risk from its variable-rate ANGI Term Loan and foreign currency risk from international operations - The company is exposed to interest rate risk through the ANGI Term Loan. A hypothetical 100 basis point (1%) increase or decrease in LIBOR would change the annual interest expense by $2.5 million[280] - The company has foreign currency exchange risk, as international revenue accounted for 21% of combined revenue in Q1 2020, down from 24% in Q1 2019. The primary exposures are to the Euro and British Pound[281][282] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[287] - No changes were made to the company's internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[288] PART II - OTHER INFORMATION Legal Proceedings This section details the Tinder Optionholder Litigation, where former employees seek at least $2 billion in damages, with Match Group indemnifying New IAC - The company is a defendant in a lawsuit filed by former Tinder employees who allege IAC and Match Group wrongfully interfered with a 2017 valuation of Tinder, resulting in underpayment for their stock options. The plaintiffs are seeking at least $2 billion in compensatory damages plus punitive damages[293] - Pursuant to the Transaction Agreement, Match Group has agreed to indemnify the Company for costs related to this litigation[297] Risk Factors This section outlines key risks including the Match Group Separation, COVID-19 impact, platform dependencies, and cybersecurity threats, directing readers to Form S-4 for details - The report contains forward-looking statements that are subject to significant risks and uncertainties[298] - Key risks include: (i) risks from the Separation of MTCH, (ii) impact of the COVID-19 outbreak, (iii) dependence on search engines and app stores, (iv) relationship with Google, and (v) cybersecurity risks[299] - For a more detailed discussion of risks, investors are directed to the company's Registration Statement on Form S-4 (Registration No. 333-236420)[301] Exhibits This section lists filed exhibits, including the Transaction Agreement for Separation, corporate governance documents, and officer certifications - The exhibits filed include the Transaction Agreement for the Separation, corporate governance documents, and required CEO/CFO certifications[305]