SYS-CON MEDIA Authors: Liz McMillan, Plutora Blog, Trevor Parsons, Elizabeth White, Pat Romanski

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IAC Reports Q2 2014 Results

NEW YORK, July 30, 2014 /PRNewswire/ -- IAC (Nasdaq: IACI) released second quarter 2014 results today.

 










SUMMARY RESULTS


$ in millions (except per share amounts)













Q2 2014

Q2 2013

Growth




Revenue


$            756.3

$            799.4

-5%












Adjusted EBITDA


141.4

157.9

-10%




Adjusted Net Income


3.2

82.9

-96%




Adjusted EPS


0.04

0.95

-96%












Operating Income


95.7

106.7

-10%




Net (Loss) Income 


(18.0)

58.3

NM




GAAP Diluted EPS 


(0.22)

0.67

NM












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















  • Consolidated revenue declined 5% year-over-year, as solid growth at The Match Group and HomeAdvisor and strong growth at Vimeo were more than offset by declines at Search & Applications, the closure and sale of Newsweek print and digital and the restructuring of CityGrid Media.
    • The Match Group revenue increased 8% as Dating paid subscribers grew 10% to 3.5 million globally.
    • In the Media segment, Vimeo grew revenue over 45% versus the prior year and reached nearly 500,000 paid subscribers.
    • Search & Applications revenue declined 7% driven by lower Applications revenue.  Websites revenue increased 1% and page views grew 8% to 8.5 billion.
  • Consolidated Adjusted EBITDA declined 10% versus the prior year notwithstanding modest growth at The Match Group, primarily due to the revenue decline at Search & Applications and increased investment at Media.
  • Net loss and Adjusted Net Income in the current year reflect the $66.6 million after-tax effect of the write-downs of certain investments.  These write-downs negatively impacted GAAP Diluted EPS and Adjusted EPS by $0.80 and $0.75, respectively.
  • IAC increased its quarterly cash dividend over 40% to $0.34 per share; the dividend is payable on September 1, 2014 to IAC stockholders of record as of the close of business on August 15, 2014.

DISCUSSION OF FINANCIAL AND OPERATING RESULTS








Q2 2014

Q2 2013

Growth

Revenue

$ in millions



Search & Applications 

$                395.7

$                427.4

-7%


The Match Group

214.3

198.0

8%


Media

36.7

57.5

-36%


eCommerce

109.9

116.6

-6%


Intercompany Elimination

(0.3)

(0.1)

-187%



$                756.3

$                799.4

-5%

Adjusted EBITDA





Search & Applications 

$                  91.3

$                102.4

-11%


The Match Group

69.4

67.7

2%


Media

(8.9)

(1.0)

-789%


eCommerce

4.5

4.5

1%


Corporate

(14.8)

(15.6)

5%



$                141.4

$                157.9

-10%

Operating Income (Loss) 





Search & Applications 

$                  77.8

$                  89.3

-13%


The Match Group

61.2

53.1

15%


Media

(9.8)

(2.0)

-382%


eCommerce

0.0

(4.6)

NM


Corporate

(33.5)

(29.1)

-15%



$                  95.7

$                106.7

-10%

Search & Applications
Websites revenue increased 1% due to growth at About.com, the acquisition of the "Owned & Operated" website businesses of ValueClick, Inc. (acquired January 10, 2014) and the contribution of CityGrid Media, partially offset by a decline in revenue at Ask.com.  Applications revenue decreased primarily due to lower queries in B2B (our partnership operations), partially offset by query growth in B2C (our direct to consumer downloadable applications business).  Adjusted EBITDA decreased primarily due to lower revenue and the impact of the write-off of $4.3 million of deferred revenue in connection with the April 1, 2014 acquisition of SlimWare, partially offset by the contribution of the ValueClick businesses and CityGrid Media

The Match Group
Dating revenue grew 7% driven by 6% growth in North America1 and 8% growth in International2.  Non-dating3 revenue grew 84%.  The growth in revenue was driven by increased subscribers.  Adjusted EBITDA increased 2% due to higher revenue, partially offset by higher marketing expense at Dating and DailyBurn.  Operating income increased 15% as the prior year was negatively impacted by a $4.2 million contingent consideration fair value adjustment and the current year benefited from a $3.4 million year-over-year decrease in amortization of intangibles.

Note 1:  Includes Match.com, Chemistry, People Media, OkCupid and other dating businesses operating within the United States and Canada.
Note 2: Includes all dating businesses operating outside of the United States and Canada.
Note 3: Includes DailyBurn and Tutor.com.

Media
Revenue decreased due to the impact of the closure of the Newsweek print business and the sale of the Newsweek digital business as well as timing of Electus projects, partially offset by continued strong growth at Vimeo.  The Adjusted EBITDA loss was larger than the prior year due to the favorable effect of certain items related to the Newsweek print closure in the prior year and increased Vimeo investment in the current year.

eCommerce
Revenue decreased due to the move of CityGrid Media to the Search & Applications segment.  Excluding the impact of CityGrid Media, revenue grew 12% driven mainly by HomeAdvisor.  Adjusted EBITDA increased slightly as the prior year included $4.8 million in severance costs related to the restructuring of CityGrid Media, partially offset by increased investment in the current year at HomeAdvisor.  Operating income increased $4.6 million, primarily due to a $3.5 million decrease in amortization of intangibles due principally to an impairment at CityGrid Media related to the restructuring in the prior year.

Corporate
Corporate Adjusted EBITDA loss decreased due to lower compensation costs and professional fees.  Corporate operating loss reflects an increase of $5.0 million in non-cash compensation expense due to higher forfeitures in the prior year and the issuance of equity awards since the prior year.  

OTHER ITEMS

Earnings from continuing operations before income taxes includes $68.4 million of write-downs of certain investments.

Interest expense increased due the issuance of the 4.875% Senior Notes due 2018 in November 2013.

The effective tax rates for continuing operations in Q2 2014 and Q2 2013 were 251% and 40%, respectively, and the effective tax rates for Adjusted Net Income in Q2 2014 and Q2 2013 were 94% and 37%, respectively.  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. 

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2014, IAC had 83.4 million common and class B common shares outstanding.  As of July 25, 2014, the Company had 8.6 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, 2014, IAC had $1.1 billion in cash and cash equivalents and marketable securities as well as $1.1 billion in long-term debt.  The Company has $300 million in unused borrowing capacity under its revolving credit facility.

OPERATING METRICS












Q2 2014

Q2 2013

Growth








SEARCH & APPLICATIONS (in millions)





Revenue





   Websites (a)


$        205.2

$        203.6

1%

   Applications (b)


190.5

223.8

-15%

   Total Revenue


$        395.7

$        427.4

-7%






Websites Page Views (c) 


8,535

7,916

8%

Applications Queries (d)


5,076

6,161

-18%






THE  MATCH GROUP





Dating Revenue (in millions)





   North America (e)


$        138.1

$        130.0

6%

   International (f)


69.5

64.4

8%

   Total Dating Revenue


$        207.6

$        194.3

7%






Dating Paid Subscribers (in thousands)





   North America (e)


2,430

2,188

11%

   International (f)


1,070

1,008

6%

   Total Dating Paid Subscribers


3,500

3,196

10%






HOMEADVISOR (in thousands)





   Domestic Service Requests (g)


1,887

1,785

6%

   Domestic Accepts (h)


2,118

2,088

1%






   International Service Requests (g)


281

274

2%

   International Accepts (h)


362

345

5%






(a) Websites revenue is principally composed of Ask.com, About.com, CityGrid Media, Dictionary.com, Investopedia.com and PriceRunner.com.
(b) Applications revenue includes B2C, B2B and SlimWare.
(c) Websites page views include Ask.com, About.com, CityGrid Media, Dictionary.com, Investopedia.com and PriceRunner.com.
(d) Applications queries include B2C and B2B.
(e) North America includes Match.com, Chemistry, People Media, OkCupid and other dating businesses operating within the United States and Canada.
(f) International includes all dating businesses operating outside of the United States and Canada.
(g) Fully completed and submitted customer service requests on HomeAdvisor.
(h) 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


7/25/14

Dilution at:












Share Price





$66.50

$ 70.00

$ 75.00

$ 80.00

$ 85.00












Absolute Shares as of 7/25/14

83.4




83.4

83.4

83.4

83.4

83.4












RSUs and Other

4.6




4.6

4.4

4.1

3.9

3.7

Options

7.1


$39.17


2.9

3.1

3.4

3.6

3.9












Total Dilution





7.5

7.5

7.5

7.5

7.6

   % Dilution





8.2%

8.3%

8.3%

8.3%

8.3%

Total Diluted Shares Outstanding





90.9

90.9

90.9

90.9

90.9












 

CONFERENCE CALL

IAC will audiocast its conference call with investors and analysts discussing the Company's Q2 financial results on Wednesday, July 30, 2014, 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 www.iac.com/investors.htm.

GAAP FINANCIAL STATEMENTS

IAC CONSOLIDATED STATEMENT OF OPERATIONS







($ in thousands except per share amounts)
















Three Months Ended June 30,


Six Months Ended June 30,



2014

2013


2014

2013















Revenue


$              756,315

$              799,411


$            1,496,562

$          1,541,660

Operating costs and expenses:







Cost of revenue (exclusive of depreciation shown separately below)


211,100

272,822


420,294

528,671

Selling and marketing expense


272,786

247,153


571,498

490,067

General and administrative expense


109,719

103,515


204,535

199,239

Product development expense


38,357

34,052


77,373

69,169

Depreciation


15,257

17,036


30,075

31,052

Amortization of intangibles 


13,406

18,137


25,385

32,215

Total operating costs and expenses


660,625

692,715


1,329,160

1,350,413








Operating income 


95,690

106,696


167,402

191,247








Equity in losses of unconsolidated affiliates


(6,850)

(1,078)


(8,785)

(1,169)

Interest expense


(14,046)

(7,658)


(28,110)

(15,321)

Other (expense) income, net


(62,900)

(4)


(62,923)

1,654

Earnings from continuing operations before income taxes 


11,894

97,956


67,584

176,411

Income tax provision


(29,889)

(39,416)


(51,274)

(65,162)

(Loss) earnings from continuing operations 


(17,995)

58,540


16,310

111,249

Loss from discontinued operations, net of tax


(868)

(1,068)


(1,682)

(2,012)

Net (loss) earnings 


(18,863)

57,472


14,628

109,237

Net loss attributable to noncontrolling interests


867

818


3,261

2,690

Net (loss) earnings attributable to IAC shareholders


$              (17,996)

$                58,290


$                 17,889

$             111,927















Per share information attributable to IAC shareholders:







   Basic (loss) earnings per share from continuing operations


$                  (0.21)

$                    0.71


$                     0.24

$                   1.36

   Diluted (loss) earnings per share from continuing operations


$                  (0.21)

$                    0.69


$                     0.22

$                   1.31








   Basic (loss) earnings per share


$                  (0.22)

$                    0.70


$                     0.22

$                   1.33

   Diluted (loss) earnings per share


$                  (0.22)

$                    0.67


$                     0.20

$                   1.29








Dividends declared per common share


$                    0.24

$                    0.24


$                     0.48

$                   0.48








Non-cash compensation expense by function:







Cost of revenue


$                     459

$                     681


$                      451

$                 1,301

Selling and marketing expense


657

794


853

1,180

General and administrative expense


13,707

9,427


21,659

20,207

Product development expense


1,729

918


3,202

1,795

Total non-cash compensation expense


$                16,552

$                11,820


$                 26,165

$               24,483








 

IAC CONSOLIDATED BALANCE SHEET




($ in thousands)










June 30,

December 31,



2014

2013

ASSETS








 Cash and cash equivalents 


$           987,326

$         1,100,444

 Marketable securities 


81,611

6,004

 Accounts receivable, net 


223,436

207,408

 Other current assets 


185,059

161,530

 Total current assets 


1,477,432

1,475,386





 Property and equipment, net 


291,289

293,964

 Goodwill 


1,720,650

1,675,323

 Intangible assets, net 


470,361

445,336

 Long-term investments 


119,487

179,990

 Other non-current assets 


88,259

164,685

 TOTAL ASSETS 


$        4,167,478

$         4,234,684





 LIABILITIES AND SHAREHOLDERS' EQUITY 




 LIABILITIES 




 Accounts payable, trade 


$             58,569

$              77,653

 Deferred revenue 


184,423

158,206

 Accrued expenses and other current liabilities 


344,738

351,038

 Total current liabilities 


587,730

586,897





 Long-term debt 


1,080,000

1,080,000

 Income taxes payable 


420,408

416,384

 Deferred income taxes 


327,957

320,748

 Other long-term liabilities 


52,419

58,393





 Redeemable noncontrolling interests 


24,137

42,861





 Commitments and contingencies 








 SHAREHOLDERS' EQUITY 




 Common stock 


251

251

 Class B convertible common stock 


16

16

 Additional paid-in capital 


11,358,763

11,562,567

 Accumulated deficit 


(14,846)

(32,735)

 Accumulated other comprehensive loss 


(9,906)

(13,046)

 Treasury stock 


(9,661,350)

(9,830,317)

 Total IAC shareholders' equity 


1,672,928

1,686,736

 Noncontrolling interests 


1,899

42,665

 Total shareholders' equity 


1,674,827

1,729,401

 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 


$        4,167,478

$         4,234,684





 


IAC CONSOLIDATED STATEMENT OF CASH FLOWS




($ in thousands)










Six Months Ended June 30,



2014

2013





Cash flows from operating activities attributable to continuing operations:




Net earnings


$                14,628

$                109,237

Less: loss from discontinued operations, net of tax


(1,682)

(2,012)

Earnings from continuing operations


16,310

111,249

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




Non-cash compensation expense


26,165

24,483

Depreciation


30,075

31,052

Amortization of intangibles


25,385

32,215

Impairment of long-term investments


64,281

-

Excess tax benefits from stock-based awards


(32,889)

(23,547)

Deferred income taxes


5,849

(6,737)

Equity in losses of unconsolidated affiliates


8,785

1,169

Acquisition-related contingent consideration fair value adjustments


500

5,707

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




Accounts receivable


(5,718)

(9,754)

Other assets


(19,238)

(14,789)

Accounts payable and other current liabilities


(31,242)

23,438

Income taxes payable


29,299

45,529

Deferred revenue


25,851

(203)

Other, net


5,358

8,451

Net cash provided by operating activities attributable to continuing operations


148,771

228,263

Cash flows from investing activities attributable to continuing operations:




Acquisitions, net of cash acquired


(103,637)

(36,913)

Capital expenditures


(26,557)

(47,819)

Proceeds from maturities and sales of marketable debt securities


998

12,502

Purchases of marketable debt securities


(78,380)

-

Proceeds from sales of long-term investments


2,803

310

Purchases of long-term investments


(14,701)

(25,259)

Other, net


(616)

(1,443)

Net cash used in investing activities attributable to continuing operations


(220,090)

(98,622)

Cash flows from financing activities attributable to continuing operations:




Principal payments on long-term debt


-

(15,844)

Purchase of treasury stock 


-

(162,660)

Dividends


(40,086)

(38,880)

Issuance of common stock, net of withholding taxes 


(13,823)

(868)

Excess tax benefits from stock-based awards


32,889

23,547

Purchase of noncontrolling interest


(30,000)

-

Funds returned from escrow for Meetic tender offer


12,354

-

Acquisition-related contingent consideration payment


(7,373)

-

Other, net


(141)

(3,634)

Net cash used in financing activities attributable to continuing operations


(46,180)

(198,339)

Total cash used in continuing operations


(117,499)

(68,698)

Total cash (used in) provided by discontinued operations


(157)

2,335

Effect of exchange rate changes on cash and cash equivalents


4,538

(4,889)

Net decrease in cash and cash equivalents


(113,118)

(71,252)

Cash and cash equivalents at beginning of period


1,100,444

749,977

Cash and cash equivalents at end of period


$              987,326

$                678,725





 

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,



2014

2013

Net cash provided by operating activities attributable to continuing operations 


$                148.8

$                228.3

Capital expenditures


(26.6)

(47.8)

Tax refunds related to sales of a business and an investment


(0.4)

-

Free Cash Flow 


$                121.9

$                180.4

 

For the six months ended June 30, 2014, consolidated Free Cash Flow decreased $58.6 million primarily due to lower Adjusted EBITDA and higher interest payments, partially offset by lower capital expenditures.      

 

IAC RECONCILIATION OF GAAP EPS TO ADJUSTED EPS







(in thousands except per share amounts)
















Three Months Ended June 30,


Six Months Ended June 30,



2014

2013


2014

2013

Net (loss) earnings attributable to IAC shareholders


$                (17,996)

$               58,290


$                 17,889

$               111,927

Non-cash compensation expense


16,552

11,820


26,165

24,483

Amortization of intangibles 


13,406

18,137


25,385

32,215

Acquisition-related contingent consideration fair value adjustments 


527

4,249


500

5,707

Gain on sale of VUE interests and related effects


986

1,013


1,954

2,017

Discontinued operations, net of tax


868

1,068


1,682

2,012

Impact of income taxes and noncontrolling interests


(11,161)

(11,702)


(18,768)

(22,748)

Adjusted Net Income


$                    3,182

$               82,875


$                 54,807

$               155,613








GAAP Basic weighted average shares outstanding


83,178

83,609


82,833

83,912

Options and RSUs, treasury method


-

2,954


5,150

3,058

GAAP Diluted weighted average shares outstanding


83,178

86,563


87,983

86,970

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


5,579

-


-

-

Impact of RSUs


308

510


295

399

Adjusted EPS weighted average shares outstanding


89,065

87,073


88,278

87,369















Diluted (loss) earnings per share


$                    (0.22)

$                   0.67


$                     0.20

$                     1.29








Adjusted EPS


$                      0.04

$                   0.95


$                     0.62

$                     1.78








 

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, 2014


Adjusted
EBITDA

Non-cash
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























For the three months ended June 30, 2013


Adjusted

EBITDA

Non-cash
compensation
expense 

Depreciation

Amortization of

intangibles

Acquisition-related

contingent

consideration fair

value adjustments 

Operating

income (loss)

Search & Applications

$               102.4

$                    -

$                      (6.4)

$                      (6.7)

$                                 -

$                   89.3

The Match Group

67.7

(0.4)

(4.8)

(5.1)

(4.2)

53.1

Media

(1.0)

(0.2)

(0.5)

(0.3)

-

(2.0)

eCommerce

4.5

-

(3.0)

(6.1)

-

(4.6)

Corporate

(15.6)

(11.2)

(2.3)

-

-

(29.1)

Total

$               157.9

$              (11.8)

$                    (17.0)

$                    (18.1)

$                             (4.2)

$                 106.7

 


IAC RECONCILIATION OF SEGMENT NON-GAAP MEASURE TO GAAP MEASURE


($ in millions; rounding differences may occur)



























For the six months ended June 30, 2014


Adjusted
EBITDA

Non-cash
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























For the six months ended June 30, 2013


Adjusted

EBITDA

Non-cash

compensation

expense 

Depreciation

Amortization of

intangibles

Acquisition-related

contingent

consideration fair

value adjustments 

Operating 

income (loss)

Search & Applications

$               199.9

$                    -

$                    (10.3)

$                    (13.3)

$                                 -

$                 176.3

The Match Group

115.6

(0.2)

(9.5)

(9.6)

(5.7)

90.5

Media

(7.2)

(0.4)

(1.0)

(0.5)

-

(9.2)

eCommerce

5.2

-

(5.6)

(8.7)

-

(9.1)

Corporate

(28.8)

(23.9)

(4.6)

-

-

(57.3)

Total

$               284.7

$              (24.5)

$                    (31.1)

$                    (32.2)

$                             (5.7)

$                 191.2








 

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) non-cash 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) non-cash 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 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.

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

Non-cash 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 which, for stock options and restricted stock units are included on a treasury method basis, and for performance-based RSUs are included on a treasury method basis once the performance conditions are met.  We view the true cost of our restricted stock units and performance-based RSUs as the dilution to our share base, and such units 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.

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 30, 2014, 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 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. 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.

IAC
555 West 18th Street, New York, NY 10011 (212) 314-7300 Fax (212) 314-7309 http://iac.com 

SOURCE IAC

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