IAC Reports Q2 2015 Results

Jul 28, 2015, 16:15 ET from IAC

NEW YORK, July 28, 2015 /PRNewswire/ -- IAC (NASDAQ: IACI) released second quarter 2015 results today and published management's prepared remarks on the Investors section of its website at www.iac.com/Investors.

SUMMARY RESULTS

($ in millions except per share amounts)

Q2 2015

Q2 2014

Growth

Revenue

$       771.1

$       756.3

2%

Adjusted EBITDA

108.7

141.4

-23%

Adjusted Net Income

74.6

3.2

2246%

Adjusted EPS

0.85

0.04

2287%

Operating Income

62.8

95.7

-34%

Net Income (Loss)

59.3

(18.0)

NM

GAAP Diluted EPS 

0.68

(0.22)

NM

See reconciliations of GAAP to non-GAAP measures beginning on page 10.

Q2 2015 HIGHLIGHTS

  • On June 25, 2015, IAC announced its intent to pursue an initial public offering of less than 20% of the common stock of The Match Group. The initial public offering is expected to be completed during the fourth quarter of 2015.
  • The Match Group revenue increased 19%, or 25% excluding the effects of foreign exchange, driven by contributions from The Princeton Review and FriendScout24 as well as 18% growth in Dating paid subscribers to over 4.1 million globally.
    • On July 14, 2015, The Match Group announced that it had entered into a definitive agreement to purchase PlentyOfFish for $575 million in cash. The transaction is expected to close early in the fourth quarter of 2015.
  • Within Search & Applications, Applications queries increased 8% driven by 20% B2C growth. B2C revenue increased 18% versus prior year.
  • In the Media segment, Vimeo grew paid subscribers 25% to nearly 630,000.
  • In the eCommerce segment, HomeAdvisor domestic revenue and service requests increased 41% and 49%, respectively, while overall HomeAdvisor revenue grew 26%, or 29% excluding the effects of foreign exchange.
  • IAC declared a quarterly cash dividend of $0.34 per share, payable on September 1, 2015 to IAC stockholders of record as of the close of business on August 15, 2015.

DISCUSSION OF FINANCIAL AND OPERATING RESULTS

Q2 2015

Q2 2014

Growth

Revenue

$ in millions

Search & Applications 

$         351.4

$         395.7

-11%

The Match Group

254.7

214.3

19%

Media

36.2

36.7

-1%

eCommerce

129.0

109.9

17%

Intercompany Elimination

(0.1)

(0.3)

62%

$         771.1

$         756.3

2%

Adjusted EBITDA

Search & Applications 

$           72.9

$           91.3

-20%

The Match Group

64.8

69.4

-7%

Media

(15.5)

(8.9)

-73%

eCommerce

2.7

4.5

-41%

Corporate

(16.3)

(14.8)

-10%

$         108.7

$         141.4

-23%

Operating Income (Loss) 

Search & Applications 

$           68.6

$           77.8

-12%

The Match Group

51.4

61.2

-16%

Media

(13.8)

(9.8)

-41%

eCommerce

(1.0)

0.0

NM

Corporate

(42.5)

(33.5)

-27%

$           62.8

$           95.7

-34%

Search & Applications Websites revenue decreased 20% due primarily to a decline in revenue at Ask.com and certain legacy businesses, partially offset by strong growth at About.com.  Applications revenue decreased 2% due to lower revenue in B2B (our partnership operations), partially offset by 18% growth in our B2C business driven by higher queries from our desktop search applications and the contribution from mobile applications (via our acquisition of Apalon on November 3, 2014).  Adjusted EBITDA decreased 20% due primarily to the lower revenue.  Operating income in the current year benefitted from a $6.3 million contingent consideration fair value adjustment.

The Match Group Dating revenue grew 7% due primarily to 12% growth in North America driven by increased paid subscribers, partially offset by 2% lower International revenue due to foreign exchange effects, despite an increase in paid subscribers.  Excluding foreign exchange effects, total Dating revenue would have increased 14% and International revenue would have increased 18%.  Non-dating1 revenue, which benefited from the acquisition of The Princeton Review, acquired on August 1, 2014, grew 370%.  Adjusted EBITDA decreased 7% due primarily to $9.0 million of costs in the current year period related to the ongoing consolidation and streamlining of our technology systems and European operations at our Dating businesses.  Operating income in the current year period was negatively impacted by a $4.2 million year-over-year increase in amortization of intangibles.

Media Revenue was down 1% versus last year, despite the contribution from IAC Films and strong growth at Vimeo, due to lower revenue from Electus driven by the timing of certain projects.  The Adjusted EBITDA loss was larger than the prior year due primarily to increased investment in Vimeo.  Operating income in the current year benefitted from a $2.4 million contingent consideration fair value adjustment.

eCommerce Revenue increased 17% due to significant growth at HomeAdvisor.  Adjusted EBITDA decreased 41% primarily due to increased sales and marketing investment at HomeAdvisor.

Corporate The Corporate Adjusted EBITDA loss increased due primarily to higher compensation costs.  Corporate operating loss reflects an increase of $7.1 million in stock-based compensation expense due primarily to the issuance of equity awards since the prior year.

OTHER ITEMS

Q2 2014 Earnings from continuing operations before income taxes included $68.4 million ($66.6 million after-tax) of write-downs of certain investments.

The Q2 2015 income tax benefit of $12.0 million from continuing operations was primarily due to the realization of certain deferred tax assets in the current period.  The effective tax rate for Adjusted Net Income was 4% in Q2 2015, lower than the statutory rate due primarily to the realization of certain deferred tax assets in the current period.  The effective tax rates for continuing operations and Adjusted Net income were 251% and 94%, respectively, in Q2 2014.  The Q2 2014 effective rates for continuing operations and Adjusted Net Income were higher than the statutory rate due primarily to the unbenefited loss associated with the write-downs of certain investments; excluding the effect of the write-downs, the tax rates for continuing operations and Adjusted Net Income in Q2 2014 would have been 40% and 38%, respectively, and were higher than the statutory rate due to state taxes and interest on tax reserves, partially offset by foreign income taxed at lower rates.   

Note 1: Includes The Princeton Review, Tutor.com and DailyBurn.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2015, IAC had 82.7 million common and class B common shares outstanding.  As of July 24, 2015, the Company had 5.6 million shares remaining in its stock repurchase authorization.  IAC may purchase shares over an indefinite period on the open market and in privately negotiated transactions, depending on those factors IAC management deems relevant at any particular time, including, without limitation, market conditions, share price and future outlook. 

As of June 30, 2015, IAC had $889.9 million in cash and cash equivalents and marketable securities as well as $1.1 billion in long-term debt, of which $80 million is scheduled to be redeemed on September 1, 2015.  The Company has $300 million in unused borrowing capacity under its revolving credit facility.

OPERATING METRICS

Q2 2015

Q2 2014

Growth

SEARCH & APPLICATIONS (in millions)

Revenue

Websites (a)

$        164.8

$        205.2

-20%

Applications (b)

186.5

190.5

-2%

Total Revenue

$        351.4

$        395.7

-11%

Websites Page Views (c) 

5,448

7,731

-30%

Applications Queries (b)

5,501

5,076

8%

THE  MATCH GROUP

Dating Revenue (in millions)

North America (d)

$        155.0

$        138.1

12%

International (e)

67.9

69.5

-2%

Total Dating Revenue

$        222.9

$        207.6

7%

Dating Paid Subscribers (in thousands)

North America (d)

2,691

2,430

11%

International (e)

1,439

1,070

34%

Total Dating Paid Subscribers

4,130

3,500

18%

HOMEADVISOR (in thousands)

Domestic Service Requests (f)

2,804

1,887

49%

Domestic Accepts (g)

2,978

2,118

41%

International Service Requests (f) 

298

266

12%

International Accepts (g) 

454

538

-16%

 

(a)

Websites revenue is principally composed of Ask.com, About.com, CityGrid, Dictionary.com, Investopedia, PriceRunner and Ask.fm.

(b)

Applications includes B2C, including SlimWare and Apalon, and B2B.

(c)

Websites page views include Ask.com, About.com, CityGrid, Dictionary.com, Investopedia and PriceRunner.  

(d)

North America includes Match, Chemistry, People Media, OkCupid, Tinder and other dating businesses operating within the United States and Canada.

(e)

International includes Meetic, Tinder and all dating businesses operating outside of the United States and Canada.

(f)

Fully completed and submitted customer service requests on HomeAdvisor.

(g)

The number of times service requests are accepted by service professionals.  A service request can be transmitted to and accepted by more than one service professional.

 

DILUTIVE SECURITIES

IAC has various tranches of dilutive securities.  The table below details these securities as well as potential dilution at various stock prices (shares in millions; rounding differences may occur).

Avg. 

Exercise

As of 

Shares

Price

7/24/15

Dilution at:

Share Price

$81.69

$85.00

$90.00

$95.00

$100.00

Absolute Shares as of 7/24/15

82.9

82.9

82.9

82.9

82.9

82.9

RSUs and Other

4.9

4.9

4.7

4.5

4.3

4.1

Options

7.2

$51.49

2.7

2.8

3.1

3.3

3.5

Total Dilution

7.5

7.5

7.5

7.6

7.6

% Dilution

8.3%

8.3%

8.3%

8.4%

8.4%

Total Diluted Shares Outstanding

90.5

90.5

90.5

90.5

90.5

 

CONFERENCE CALL

IAC will audiocast a conference call to answer questions regarding the Company's second quarter 2015 results and management's published remarks on Wednesday, July 29, 2015, at 8:30 a.m. Eastern Time.  This call will include the disclosure of certain information, including forward-looking information, which may be material to an investor's understanding of IAC's business.  The live audiocast will be open to the public at, and management's remarks have been posted on, www.iac.com/Investors.

 

GAAP FINANCIAL STATEMENTS

 

IAC CONSOLIDATED STATEMENT OF OPERATIONS

($ in thousands except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014

Revenue

$              771,132

$              756,315

$            1,543,644

$          1,496,562

Operating costs and expenses:

Cost of revenue (exclusive of depreciation shown separately below)

183,276

210,730

374,829

419,964

Selling and marketing expense

319,397

272,490

677,063

571,089

General and administrative expense

129,349

109,897

244,143

204,986

Product development expense

46,430

38,845

91,687

77,661

Depreciation

15,500

15,257

31,068

30,075

Amortization of intangibles 

14,411

13,406

26,966

25,385

Total operating costs and expenses

708,363

660,625

1,445,756

1,329,160

Operating income 

62,769

95,690

97,888

167,402

Interest expense

(15,214)

(14,046)

(29,278)

(28,110)

Other (expense) income, net

(1,638)

(69,750)

5,350

(71,708)

Earnings from continuing operations before income taxes 

45,917

11,894

73,960

67,584

Income tax benefit (provision)

11,968

(29,889)

5,788

(51,274)

Earnings (loss) from continuing operations 

57,885

(17,995)

79,748

16,310

Loss from discontinued operations, net of tax

(153)

(868)

(28)

(1,682)

Net earnings (loss)

57,732

(18,863)

79,720

14,628

Net loss attributable to noncontrolling interests

1,573

867

5,990

3,261

Net earnings (loss) attributable to IAC shareholders

$                59,305

$              (17,996)

$                 85,710

$               17,889

Per share information attributable to IAC shareholders:

   Basic earnings (loss) per share from continuing operations

$                    0.72

$                  (0.21)

$                     1.03

$                   0.24

   Diluted earnings (loss) per share from continuing operations

$                    0.68

$                  (0.21)

$                     0.98

$                   0.22

   Basic earnings (loss) per share

$                    0.72

$                  (0.22)

$                     1.03

$                   0.22

   Diluted earnings (loss) per share

$                    0.68

$                  (0.22)

$                     0.97

$                   0.20

Dividends declared per common share

$                    0.34

$                    0.24

$                     0.68

$                   0.48

Stock-based compensation expense by function:

Cost of revenue

$                     294

$                     459

$                      539

$                    451

Selling and marketing expense

3,119

657

4,842

853

General and administrative expense

20,039

13,707

34,637

21,659

Product development expense

2,497

1,729

4,842

3,202

Total stock-based compensation expense

$                25,949

$                16,552

$                 44,860

$               26,165

 

 

IAC CONSOLIDATED BALANCE SHEET

($ in thousands)

June 30,

December 31,

2015

2014

ASSETS

 Cash and cash equivalents 

$           656,409

$            990,405

 Marketable securities 

233,523

160,648

 Accounts receivable, net 

223,106

236,086

 Other current assets 

209,724

166,742

 Total current assets 

1,322,762

1,553,881

 Property and equipment, net 

297,158

302,459

 Goodwill 

1,778,830

1,754,926

 Intangible assets, net 

472,082

491,936

 Long-term investments 

131,385

114,983

 Other non-current assets 

72,841

56,693

 TOTAL ASSETS 

$        4,075,058

$         4,274,878

 LIABILITIES AND SHAREHOLDERS' EQUITY 

 LIABILITIES 

 Current portion of long-term debt 

$             80,000

-

 Accounts payable, trade 

79,434

81,163

 Deferred revenue 

232,673

194,988

 Accrued expenses and other current liabilities 

322,750

397,803

 Total current liabilities 

714,857

673,954

 Long-term debt 

1,000,000

1,080,000

 Income taxes payable 

24,768

32,635

 Deferred income taxes 

432,688

409,529

 Other long-term liabilities 

59,182

45,191

 Redeemable noncontrolling interests 

28,177

40,427

 Commitments and contingencies 

 SHAREHOLDERS' EQUITY 

 Common stock 

254

252

 Class B convertible common stock 

16

16

 Additional paid-in capital 

11,452,662

11,415,617

 Retained earnings 

354,099

325,118

 Accumulated other comprehensive loss 

(130,295)

(87,700)

 Treasury stock 

(9,861,350)

(9,661,350)

 Total IAC shareholders' equity 

1,815,386

1,991,953

 Noncontrolling interests 

-

1,189

 Total shareholders' equity 

1,815,386

1,993,142

 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 

$        4,075,058

$         4,274,878

 

IAC CONSOLIDATED STATEMENT OF CASH FLOWS

($ in thousands)

Six Months Ended June 30,

2015

2014

Cash flows from operating activities attributable to continuing operations:

Net earnings

$                      79,720

$                      14,628

Less: loss from discontinued operations, net of tax

(28)

(1,682)

Earnings from continuing operations

79,748

16,310

Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities attributable to continuing operations:

Stock-based compensation expense

44,860

26,165

Depreciation

31,068

30,075

Amortization of intangibles

26,966

25,385

Impairment of long-term investments

500

64,281

Excess tax benefits from stock-based awards

(36,465)

(32,889)

Deferred income taxes

7,260

5,849

Equity in losses of unconsolidated affiliates

477

8,785

Acquisition-related contingent consideration fair value adjustments

(16,946)

500

Other adjustments, net

8,369

5,362

Changes in assets and liabilities, net of effects of acquisitions:

Accounts receivable

2,710

(5,718)

Other assets

(6,458)

(19,238)

Accounts payable and other current liabilities

(33,231)

(31,242)

Income taxes payable

(63,304)

29,299

Deferred revenue

40,407

25,851

Other changes in assets and liabilities, net

(182)

(4)

Net cash provided by operating activities attributable to continuing operations

85,779

148,771

Cash flows from investing activities attributable to continuing operations:

Acquisitions, net of cash acquired

(43,286)

(103,380)

Capital expenditures

(26,816)

(26,557)

Proceeds from maturities and sales of marketable debt securities

14,613

998

Purchases of marketable debt securities

(93,134)

(78,380)

Purchases of long-term investments

(12,840)

(14,701)

Other, net

8,599

2,187

Net cash used in investing activities attributable to continuing operations

(152,864)

(219,833)

Cash flows from financing activities attributable to continuing operations:

Purchase of treasury stock 

(200,000)

-

Dividends

(56,729)

(40,086)

Issuance of common stock, net of withholding taxes 

(20,656)

(13,823)

Excess tax benefits from stock-based awards

36,465

32,889

Purchase of noncontrolling interests

(15,338)

(30,000)

Funds returned from escrow for Meetic tender offer

-

12,354

Acquisition-related contingent consideration payments

(5,705)

(7,630)

Other, net

430

(141)

Net cash used in financing activities attributable to continuing operations

(261,533)

(46,437)

Total cash used in continuing operations

(328,618)

(117,499)

Total cash used in discontinued operations

(243)

(157)

Effect of exchange rate changes on cash and cash equivalents

(5,135)

4,538

Net decrease in cash and cash equivalents

(333,996)

(113,118)

Cash and cash equivalents at beginning of period

990,405

1,100,444

Cash and cash equivalents at end of period

$                    656,409

$                    987,326

 

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES   

 

IAC RECONCILIATION OF OPERATING CASH FLOW FROM CONTINUING OPERATIONS TO FREE CASH FLOW

($ in millions; rounding differences may occur)

Six Months Ended June 30,

2015

2014

Net cash provided by operating activities attributable to continuing operations 

$                     85.8

$                   148.8

Capital expenditures

(26.8)

(26.6)

Tax refunds related to sales of a business and an investment

(1.9)

(0.4)

Free Cash Flow 

$                     57.0

$                   121.9

 

For the six months ended June 30, 2015, consolidated Free Cash Flow decreased $64.8 million due to lower Adjusted EBITDA and higher income tax payments.

 

IAC RECONCILIATION OF GAAP EPS TO ADJUSTED EPS

(in thousands except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014

Net earnings (loss) attributable to IAC shareholders

$                 59,305

$               (17,996)

$                 85,710

$                 17,889

Stock-based compensation expense

25,949

16,552

44,860

26,165

Amortization of intangibles 

14,411

13,406

26,966

25,385

Acquisition-related contingent consideration fair value adjustments 

(9,950)

527

(16,946)

500

Gain on sale of VUE interests and related effects

-

986

-

1,954

Discontinued operations, net of tax

153

868

28

1,682

Impact of income taxes and noncontrolling interests

(15,234)

(11,161)

(27,616)

(18,768)

Adjusted Net Income

$                 74,634

$                   3,182

$               113,002

$                 54,807

GAAP Basic weighted average shares outstanding

82,416

83,178

82,932

82,833

Options and RSUs, treasury method

4,674

-

4,989

5,150

GAAP Diluted weighted average shares outstanding

87,090

83,178

87,921

87,983

Options and RSUs, treasury method not included in diluted shares above

-

5,579

-

-

Impact of RSUs

434

308

380

295

Adjusted EPS weighted average shares outstanding

87,524

89,065

88,301

88,278

GAAP Diluted earnings (loss) per share

$                     0.68

$                   (0.22)

$                     0.97

$                     0.20

Adjusted EPS

$                     0.85

$                     0.04

$                     1.28

$                     0.62

 

For Adjusted EPS purposes, the impact of RSUs on shares outstanding is based on the weighted average number of RSUs outstanding, including performance-based RSUs outstanding that the Company believes are probable of vesting.  For GAAP diluted EPS purposes, RSUs, including performance-based RSUs for which the performance criteria have been met, are included on a treasury method basis.

 

IAC RECONCILIATION OF SEGMENT NON-GAAP MEASURE TO GAAP MEASURE

($ in millions; rounding differences may occur)

For the three months ended June 30, 2015

Adjusted EBITDA

Stock-based compensation expense

Depreciation

Amortization of intangibles

Acquisition-related contingent consideration fair value adjustments 

Operating income (loss)

Search & Applications 

$                 72.9

$                    -

$                      (3.7)

$                      (6.9)

$                              6.3

$                   68.6

The Match Group

64.8

(2.1)

(6.6)

(5.9)

1.2

51.4

Media

(15.5)

(0.1)

(0.2)

(0.4)

2.4

(13.8)

eCommerce

2.7

(0.4)

(2.1)

(1.2)

-

(1.0)

Corporate

(16.3)

(23.3)

(2.9)

-

-

(42.5)

Total

$               108.7

$              (25.9)

$                    (15.5)

$                    (14.4)

$                            10.0

$                   62.8

For the three months ended June 30, 2014

Adjusted EBITDA

Stock-based compensation expense 

Depreciation

Amortization of intangibles

Acquisition-related contingent consideration fair value adjustments 

Operating income (loss)

Search & Applications

$                 91.3

$                    -

$                      (5.1)

$                      (8.4)

$                                 -

$                   77.8

The Match Group

69.4

(0.2)

(5.6)

(1.7)

(0.7)

61.2

Media

(8.9)

(0.2)

(0.2)

(0.7)

0.2

(9.8)

eCommerce

4.5

-

(1.9)

(2.6)

-

0.0

Corporate

(14.8)

(16.2)

(2.5)

-

-

(33.5)

Total

$               141.4

$              (16.6)

$                    (15.3)

$                    (13.4)

$                             (0.5)

$                   95.7

 

 

IAC RECONCILIATION OF SEGMENT NON-GAAP MEASURE TO GAAP MEASURE

($ in millions; rounding differences may occur)

For the six months ended June 30, 2015

Adjusted EBITDA

Stock-based compensation expense 

Depreciation

Amortization of intangibles

Acquisition-related contingent consideration fair value adjustments 

Operating income (loss) 

Search & Applications 

$               151.8

$                    -

$                      (7.3)

$                    (13.9)

$                              2.3

$                 132.9

The Match Group

90.7

(2.7)

(13.7)

(9.8)

12.2

76.8

Media

(30.0)

(0.3)

(0.4)

(0.8)

2.4

(29.1)

eCommerce

(0.5)

(0.8)

(4.1)

(2.5)

-

(7.9)

Corporate

(28.2)

(41.1)

(5.6)

-

-

(74.8)

Total

$               183.8

$              (44.9)

$                    (31.1)

$                    (27.0)

$                            16.9

$                   97.9

For the six months ended June 30, 2014

Adjusted EBITDA

Stock-based compensation expense 

Depreciation

Amortization of intangibles

Acquisition-related contingent consideration fair value adjustments 

Operating  income (loss)

Search & Applications

$               173.3

$                    -

$                      (9.5)

$                    (15.7)

$                                 -

$                 148.1

The Match Group

116.8

(0.2)

(11.4)

(3.5)

(0.7)

101.0

Media

(16.8)

(0.3)

(0.5)

(1.0)

0.2

(18.4)

eCommerce

7.3

-

(3.6)

(5.2)

-

(1.6)

Corporate

(31.2)

(25.7)

(5.0)

-

-

(61.8)

Total

$               249.5

$              (26.2)

$                    (30.1)

$                    (25.4)

$                             (0.5)

$                 167.4

 

IAC'S PRINCIPLES OF FINANCIAL REPORTING

IAC reports Adjusted EBITDA, Adjusted Net Income, Adjusted EPS and Free Cash Flow, all of which are supplemental measures to GAAP.  These measures are among the primary metrics by which we evaluate the performance of our businesses, on which our internal budgets are based and by which management is compensated.  We believe that investors should have access to, and we are obligated to provide, the same set of tools that we use in analyzing our results.  These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results.  IAC endeavors to compensate for the limitations of the non-GAAP measures presented by providing the comparable GAAP measures with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measures.  We encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures, which are included in this release.  Interim results are not necessarily indicative of the results that may be expected for a full year.

Definitions of Non-GAAP Measures

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) is defined as operating income excluding: (1) stock-based compensation expense; (2) depreciation; and (3) acquisition-related items consisting of (i) amortization of intangible assets and goodwill and intangible asset impairments and (ii) gains and losses recognized on changes in the fair value of contingent consideration arrangements.  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.  The above items are excluded from our Adjusted EBITDA measure because these items are non-cash in nature, and we believe that by excluding these items, Adjusted EBITDA corresponds more closely to the cash operating income generated from our business, from which capital investments are made and debt is serviced.

Adjusted Net Income generally captures all items on the statement of operations that have been, or ultimately will be, settled in cash and is defined as net earnings attributable to IAC shareholders excluding, net of tax effects and noncontrolling interests, if applicable: (1) stock-based compensation expense, (2) acquisition-related items consisting of (i) amortization of intangibles and goodwill and intangible asset impairments and (ii) gains and losses recognized on changes in the fair value of contingent consideration arrangements, (3) income or loss effects related to IAC's former passive ownership in VUE, and (4) discontinued operations.  We believe Adjusted Net Income is useful to investors because it represents IAC's consolidated results taking into account depreciation, which management believes is an ongoing cost of doing business, as well as other charges that are not allocated to the operating businesses such as interest expense, income taxes and noncontrolling interests, but excluding the effects of any other non-cash expenses.

Adjusted EPS is defined as Adjusted Net Income divided by fully diluted weighted average shares outstanding for Adjusted EPS purposes.  We include dilution from options and warrants in accordance with the treasury stock method and include all restricted stock units ("RSUs") in shares outstanding for Adjusted EPS, with performance-based RSUs included based on the number of shares that the Company believes are probable of vesting.  This differs from the GAAP method for including RSUs, which are treated on a treasury method, and performance-based RSUs, which are included for GAAP purposes only to the extent the performance criteria have been met (assuming the end of the reporting period is the end of the contingency period).  Shares outstanding for Adjusted EPS purposes are therefore higher than shares outstanding for GAAP EPS purposes.  We believe Adjusted EPS is useful to investors because it represents, on a per share basis, IAC's consolidated results, taking into account depreciation, which we believe is an ongoing cost of doing business, as well as other charges, which are not allocated to the operating businesses such as interest expense, income taxes and noncontrolling interests, but excluding the effects of any other non-cash expenses.  Adjusted Net Income and Adjusted EPS have the same limitations as Adjusted EBITDA, and in addition, Adjusted Net Income and Adjusted EPS do not account for IAC's former passive ownership in VUE.  Therefore, we think it is important to evaluate these measures along with our consolidated statement of operations.

IAC'S PRINCIPLES OF FINANCIAL REPORTING - continued

Free Cash Flow is defined as net cash provided by operating activities, less capital expenditures.  In addition, Free Cash Flow excludes, if applicable, tax payments and refunds related to the sales of certain businesses and investments, including IAC's interests in VUE, an internal restructuring and dividends received that represent a return of capital due to the exclusion of the proceeds from these sales and dividends from cash provided by operating activities.  We believe Free Cash Flow is useful to investors because it represents the cash that our operating businesses generate, before taking into account non-operational cash movements.  Free Cash Flow has certain limitations in that it does not represent the total increase or decrease in the cash balance for the period, nor does it represent the residual cash flow for discretionary expenditures.  For example, it does not take into account stock repurchases.  Therefore, we think it is important to evaluate Free Cash Flow along with our consolidated statement of cash flows.  

Non-Cash Expenses That Are Excluded From Our Non-GAAP Measures

Stock-based compensation expense consists principally of expense associated with the grants, including unvested grants assumed in acquisitions, of stock options, restricted stock units and performance-based RSUs.  These expenses are not paid in cash, and we include the related shares in our fully diluted shares outstanding using the treasury stock method; however, performance-based RSUs are included only to the extent the performance criteria have been met (assuming the end of the reporting period is the end of the contingency period).  We view the true cost of stock options, restricted stock units and performance-based RSUs as the dilution to our share base, and such awards are included in our shares outstanding for Adjusted EPS purposes as described above under the definition of Adjusted EPS.  Upon the exercise of certain stock options and vesting of restricted stock units and performance-based RSUs, the awards are settled, at the Company's discretion, on a net basis, with the Company remitting the required tax-withholding amount from its current funds.

Depreciation is a non-cash expense relating to our property and equipment and is computed using the straight-line method to allocate the cost of depreciable assets to operations over their estimated useful lives.

Amortization of intangible assets and goodwill and intangible asset impairments are non-cash expenses relating primarily to acquisitions.  At the time of an acquisition, the identifiable definite-lived intangible assets of the acquired company, such as content, technology, customer lists, advertiser and supplier relationships, are valued and amortized over their estimated lives.  Value is also assigned to acquired indefinite-lived intangible assets, which comprise trade names and trademarks, and goodwill that are not subject to amortization.  An impairment is recorded when the carrying value of an intangible asset or goodwill exceeds its fair value.  While it is likely that we will have significant intangible amortization expense as we continue to acquire companies, we believe that intangible assets represent costs incurred by the acquired company to build value prior to acquisition and the related amortization and impairment charges of intangible assets or goodwill, if applicable, are not ongoing costs of doing business.

Gains and losses recognized on changes in the fair value of contingent consideration arrangements are accounting adjustments to report contingent consideration liabilities at fair value.  These adjustments can be highly variable and are excluded from our assessment of performance because they are considered non-operational in nature and, therefore, are not indicative of current or future performance or ongoing costs of doing business.

Income or loss effects related to IAC's former passive ownership in VUE are excluded from Adjusted Net Income and Adjusted EPS because IAC had no operating control over VUE, which was sold for a gain in 2005, had no way to forecast this business, and did not consider the results of VUE in evaluating the performance of IAC's businesses. 

Free Cash Flow

We look at Free Cash Flow as a measure of the strength and performance of our businesses, not for valuation purposes.  In our view, applying "multiples" to Free Cash Flow is inappropriate because it is subject to timing, seasonality and one-time events.  We manage our business for cash and we think it is of utmost importance to maximize cash – but our primary valuation metrics are Adjusted EBITDA and Adjusted EPS. 

OTHER INFORMATION

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This press release and our conference call, which will be held at 8:30 a.m. Eastern Time on July 29, 2015, may contain "forward‑looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  The use of words such as "anticipates," "estimates," "expects," "intends," "plans" and "believes," among others, generally identify forward-looking statements.  These forward-looking statements include, among others, statements relating to: IAC's future financial performance, IAC's business prospects and strategy, anticipated trends and prospects in the industries in which IAC's businesses operate and other similar matters.  These forward‑looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.  Actual results could differ materially from those contained in these forward‑looking statements for a variety of reasons, including, among others: changes in senior management at IAC and/or its businesses, changes in our relationship with, or policies implemented by, Google, adverse changes in economic conditions, either generally or in any of the markets in which IAC's businesses operate, adverse trends in the online advertising industry or the advertising industry generally, our ability to convert visitors to our various websites into users and customers, our ability to offer new or alternative products and services in a cost-effective manner and consumer acceptance of these products and services, operational and financial risks relating to acquisitions, changes in industry standards and technology, our ability to expand successfully into international markets and regulatory changes. Certain of these and other risks and uncertainties are discussed in IAC's filings with the Securities and Exchange Commission ("SEC").  Other unknown or unpredictable factors that could also adversely affect IAC's business, financial condition and results of operations may arise from time to time.  In light of these risks and uncertainties, these forward‑looking statements may not prove to be accurate.  Accordingly, you should not place undue reliance on these forward‑looking statements, which only reflect the views of IAC management as of the date of this press release.  IAC does not undertake to update these forward-looking statements.

About IAC

IAC (NASDAQ: IACI) is a leading media and Internet company. It is organized into four segments: The Match Group, which consists of dating, education and fitness businesses with brands such as Match.com, OkCupid, Tinder, The Princeton Review and DailyBurn; Search & Applications, which includes brands such as About.com, Ask.com, Dictionary.com and Investopedia; Media, which consists of businesses such as Vimeo, Electus, The Daily Beast and CollegeHumor; and eCommerce, which includes HomeAdvisor and ShoeBuy.  IAC's brands and products are among the most recognized in the world reaching users in over 200 countries.  The Company is headquartered in New York City and has offices worldwide. To view a full list of IAC companies, please visit www.iac.com.

SOURCE IAC



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