ServiceMagic 2014 Annual Report Download - page 51

Table of Contents
IAC'S PRINCIPLES OF FINANCIAL REPORTING
IAC reports Adjusted EBITDA as a supplemental measure to U.S. generally accepted accounting principles ("GAAP"). This measure is one
of 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. This non-GAAP measure 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 measure presented by providing the
comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive
the non-GAAP measure. We encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measure, which we
discuss below.
Definition of IAC's Non-GAAP Measure
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 this measure is useful 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 EBITDA has certain limitations in that it does not take into account the impact to IAC's statement of operations of certain expenses.
Non-Cash Expenses That Are Excluded From IAC's Non-GAAP Measure
Non-cash compensation
expense consists principally of expense associated with the grants, including unvested grants assumed in acquisitions,
of stock options, restricted stock units ("RSUs") 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 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). Upon the exercise of certain
stock options and vesting of RSUs 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.
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