Document
Table of Contents
As filed with the Securities and Exchange Commission on March 1, 2019

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
 
Commission File No. 001-38220
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12751467&doc=15
ANGI HOMESERVICES INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
 
82-1204801
(I.R.S. Employer Identification No.)
14023 Denver West Parkway, Building 64, Golden, CO
 (Address of principal executive offices)
 
80401
 (Zip Code)
(303) 963-7200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class 
 
Name of exchange on which registered 
Class A Common Stock, par value $0.001
 
The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x    No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x   No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o

 
Smaller reporting
 company o
 
Emerging growth
company o
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o  
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x
As of February 1, 2019, the following shares of the Registrant's Common Stock were outstanding:
Class A Common Stock
82,920,740

Class B Common Stock
421,118,101

Class C Common Stock

Total outstanding Common Stock
504,038,841

The aggregate market value of the voting common stock held by non-affiliates of the Registrant as of June 30, 2018 was $998,509,373. For the purpose of the foregoing calculation only, all directors and executive officers of the Registrant are assumed to be affiliates of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's proxy statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III herein.



TABLE OF CONTENTS
 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
Item 1.    Business
OVERVIEW
Who We Are
ANGI Homeservices connects millions of homeowners to home service professionals through its portfolio of digital home services brands, including HomeAdvisor®, Angie's List® and Handy. Combined, these leading marketplaces have collected more than 15 million reviews over the course of 20 years, allowing homeowners to research, match and connect on-demand to the largest network of service professionals online, through our mobile apps or by voice assistants. ANGI Homeservices owns and operates brands in eight countries.
As used herein, "ANGI Homeservices," the "Company," "we," "our," "us" and similar terms refer to ANGI Homeservices Inc. and its subsidiaries (unless the context requires otherwise).
The Company has two operating segments: North America (United States and Canada) and Europe. North America primarily includes the operations of HomeAdvisor, Angie’s List, Handy, mHelpDesk and HomeStars. Europe includes Travaux, MyHammer, MyBuilder, Werkspot and Instapro.
History
We were incorporated in the State of Delaware on April 13, 2017 as Halo TopCo, Inc., a wholly-owned subsidiary of IAC/InterActiveCorp ("IAC"), and changed our name to ANGI Homeservices Inc. on May 4, 2017. We are a publicly traded holding company that was formed to facilitate the combination of IAC’s HomeAdvisor business and Angie’s List, Inc. (the "Combination"), which was completed on September 29, 2017. For information regarding the Combination, see "Note 4-Business Combinations" to the consolidated and combined financial statements set forth in "Item 8-Consolidated and Combined Financial Statements and Supplementary Data."
We acquired Handy Technologies, Inc. ("Handy"), a leading platform in the United States for connecting individuals looking for household services (primarily cleaning and handyman services) with top-quality, pre-screened independent service professionals, on October 19, 2018. Prior to its sale on December 31, 2018, we also operated Felix, a pay-per-call advertising service business, which was included in our North America segment.
DESCRIPTION OF OUR BUSINESSES
Marketplace
Overview
The HomeAdvisor digital marketplace service ("HomeAdvisor") connects consumers with service professionals nationwide for home repair, maintenance and improvement projects. HomeAdvisor provides consumers with tools and resources to help them find local, pre-screened and customer-rated service professionals, as well as instantly book appointments online. HomeAdvisor also connects consumers with service professionals instantly by telephone, as well as offers several home services-related resources, such as cost guides for different types of home services projects. Handy connects individuals looking for household services (primarily cleaning and handyman services) with top-quality, pre-screened independent service professionals.
Together, we refer to the HomeAdvisor and Handy businesses in the United States as the "Marketplace." We provide all Marketplace matching services, related tools and directories to consumers free of charge.
As of December 31, 2018, the Marketplace had a network of approximately 214,000 service professionals, each of whom had an active network membership and/or paid for consumer matches (in the case of HomeAdvisor service professionals) or completed a job sourced through the Handy platform (in the case of Handy service professionals) in December 2018. Collectively, these service professionals provided services in more than 500 categories and 400 discrete markets in the United States, ranging from cleaning and installation services to simple home repairs and larger home remodeling projects. The Marketplace generated approximately 23.5 million service requests from over 13 million households during the year ended

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December 31, 2018. Service requests consisted of fully completed customer service requests submitted to HomeAdvisor and completed jobs sourced through the Handy platform.
Consumer Services
Consumers can submit a service request for a service professional directly through HomeAdvisor platforms, as well as indirectly through certain paths on some of our other branded platforms and various third-party affiliate platforms. In the case of service requests submitted through HomeAdvisor and third-party affiliate platforms, consumers are generally matched (through our proprietary algorithms) with up to four service professionals from the HomeAdvisor network of service professionals based on several factors, including the type of services desired, location and the number of service professionals available to fulfill the request. In the case of service requests submitted through our other branded platforms, consumers are generally matched (through our proprietary algorithms) with a combination of HomeAdvisor service professionals and service professionals from the relevant branded platform (as and if available for the given service request).
Service professionals may contact consumers with whom they have been matched directly and consumers can review profiles, ratings and reviews of presented service professionals and select the service professional whom they believe best meets their specific needs. Consumers are under no obligation to work with any service professional(s) referred by or found through any of our branded or third-party affiliate platforms.
In addition to (or in lieu of) submitting service requests, consumers can also search for service professionals, as well as access service professional ratings and reviews and obtain quotes, directly through the HomeAdvisor online directory. Consumers can rate and review service professionals with whom they have been connected, as well as those listed in the HomeAdvisor online directory.
HomeAdvisor also provides several on-demand services, including Instant Booking and Instant Connect (patent-pending). Through Instant Booking, consumers can schedule appointments for select home services with a HomeAdvisor service professional instantly across certain HomeAdvisor platforms. Through Instant Connect, consumers can connect with a HomeAdvisor service professional instantly by phone, as well as through digital voice assistant platforms. In certain markets, HomeAdvisor also provides Same Day Service and Next Day Service for certain home services.
In addition to matching and on-demand services, consumers can access the online HomeAdvisor True Cost Guide, which provides project cost information for more than 400 project types nationwide, as well as a library of home services-related content, which consists primarily of articles about home improvement, repair and maintenance, tools to assist consumers with the research, planning and management of their projects and general advice for working with service professionals.
Through the Handy platform, consumers can select the service they need and specify when (date and time) they want the service to be provided; this information is then used to match consumers with Handy service professionals. In certain markets, consumers can also submit a request to book a specific Handy service professional for a given job. In both cases, the service is then scheduled and paid for directly through the Handy platform. In addition, consumers who purchase furniture, electronics, appliances and other home-related items from select third-party retail partners online (and in certain markets, in store) can simultaneously purchase assembly, installation and other related services to be fulfilled by Handy service professionals. The service is then paid for directly through the applicable third-party retail partner platform and scheduled through the Handy platform. Consumers can also search for service professionals by zip code on the Handy platform and contact them through the Handy platform.
Service Professional Services
We primarily offer and sell HomeAdvisor memberships and related products and services to service professionals through our sales force (described below). The basic HomeAdvisor annual membership package includes membership in the HomeAdvisor network of service professionals, as well as access to consumer matches through HomeAdvisor platforms and a listing in the HomeAdvisor online directory and certain other affiliate directories. Membership also includes a business profile page on HomeAdvisor.com, a mobile application and access to various online tools designed to help service professionals more effectively market to, and manage and connect with, consumers with whom they are matched. In addition to the membership subscription fee, HomeAdvisor service professionals pay fees for consumer matches. In the case of Handy, we provide service professionals who self-register on the Handy platform with access to a pool of consumers seeking service professionals. When a service is scheduled through the Handy platform, the related payment is processed and we charge the service professional a booking fee.


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We also offer certain other subscription products, primarily to HomeAdvisor service professionals, through mHelpDesk, a provider of cloud-based field service software for small to mid-size businesses. Through mHelpDesk, we provide (among other products and services) mobile office management software that allows service professionals to complete several job-related tasks (such as scheduling, managing job flow, creating and distributing estimates and invoices and processing payments) real time while on the go. We also provide custom website development and hosting services.
Angie’s List
Overview
Angie’s List connects consumers with service professionals for local services through a nationwide online directory of service professionals in over 700 service categories, as well as provides consumers with valuable tools, services and content (including verified reviews of local service professionals), to help them research, shop and hire for local services. We provide consumers with access to the Angie’s List nationwide online directory and related basic tools and services free of charge.
Consumer Services
Through most Angie’s List platforms, consumers can currently register and search for a service professional in the Angie’s List nationwide online directory and/or be matched with a service professional.
Consumers who register can access ratings and reviews and search for service professionals, as well as access certain promotions. Free registration is required in order to access the directory and related basic tools and services. For a fee, we offer two premium membership packages, which include varying degrees of online and phone support, access to exclusive promotions and features and the award-winning Angie’s List print magazine. When consumers choose to be matched with a service professional, they will generally be matched (through our proprietary algorithm) with a combination of HomeAdvisor service professionals and selected certified service professionals (described below) from the Angie’s List nationwide online directory (as and if available for the given service request).
Consumers can rate service professionals listed in the Angie’s List nationwide online directory on an "A" to "F" grading scale based on a variety of criteria, including overall experience, availability, price, quality, responsiveness, punctuality and professionalism and other criteria, depending on the type of service provided. Ratings on each applicable criterion are weighted across all reviews submitted for the service professional to produce such professional’s grade on Angie’s List. Consumers can also provide a detailed description of (and commentary regarding) their service experience. Ratings and reviews cannot be submitted anonymously and there are processes in place to prevent service professionals from reporting on themselves or their competitors, as well as to detect fraudulent or otherwise problematic reviews.
Service Professional Services
Angie’s List provides service professionals with a variety of services and tools. Generally, service professionals with an overall member grade below a "B" are not eligible for certification. Service professionals must satisfy certain criteria for certification, including retaining the requisite member grade, passing certain criminal background checks and attesting to proper licensure requirements.
Once eligibility criteria are satisfied, service professionals must purchase term-based advertising from us to obtain certification. As of December 31, 2018, we had approximately 36,000 certified service professionals under contract for advertising. If a certified service professional fails to meet any eligibility criteria during the term of his or her contract, refuses to participate in our complaint resolution process or engages in what we determine to be prohibited behavior through any of our service channels, we suspend any existing advertising and exclusive promotions and the related advertising contract is subject to termination.
Certified service professionals rotate among the first service professionals listed in directory search results for an applicable category (together with their company name, overall rating, number of reviews, certification badge and basic profile information), with non-certified service professionals appearing below certified service professionals in directory search results. Certified service professionals can also provide exclusive promotions to members. When consumers choose to be matched with a service professional, our proprietary algorithm will determine where a given service professional appears within related results.

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Our International Businesses
We also operate several international businesses that connect consumers with home service professionals. These international businesses include: (i) Travaux, MyHammer and Werkspot, the leading home services marketplaces in France, Germany and the Netherlands, respectively, (ii) MyBuilder, HomeStars and Instapro, leading home services marketplaces in the United Kingdom, Canada and Italy, respectively, and (iii) the Austrian operations of MyHammer. We own controlling interests in MyHammer, MyBuilder and HomeStars and wholly-own Travaux, Werkspot and Instapro. The business models of our international businesses vary by jurisdiction and differ in certain respects from the HomeAdvisor and Handy business models.
Revenue
Our revenue is primarily derived from: (i) consumer connection revenue, which consists of fees paid by HomeAdvisor service professionals for consumer matches (regardless of whether the service professional ultimately provides the requested service) and booking fees from completed jobs sourced through the Handy platform, and (ii) membership subscription fees paid by HomeAdvisor service professionals. Consumer connection revenue varies based upon several factors, including the service requested, product experience offered and geographic location of service. Revenue is also derived from: (i) sales of time-based website, mobile and call center advertising to service professionals by Angie's List and (ii) membership subscription fees from consumers.
Marketing
We market our various products and services to consumers primarily through digital marketing (primarily paid search engine marketing, display advertising and third-party affiliate agreements) and traditional offline marketing (national television and radio campaigns), as well as through e-mail. Pursuant to third-party affiliate agreements, third parties agree to advertise and promote HomeAdvisor products and services (and those of HomeAdvisor service professionals) on their platforms. In exchange for these efforts, these third parties are paid a fixed fee when visitors from their platforms click through and submit a valid service request through HomeAdvisor, or when visitors submit a valid service request on the affiliate platform and the affiliate transmits the service request to HomeAdvisor. We also market our products and services to consumers through relationships with select third-party retail partners and, to a lesser extent, through partnerships with other contextually related websites and direct mail.
We market subscription packages and related products and services to service professionals primarily through our Golden, Colorado based sales force, as well as through sales forces in Denver and Colorado Springs, Colorado, Lenexa, Kansas, New York, New York, Indianapolis, Indiana and Chicago, Illinois. We also market these products and services through paid search engine marketing, digital media advertising and direct relationships with trade associations and manufacturers. We market term-based advertising and related products to service professionals primarily through our Indianapolis based sales force.
We have made, and expect to continue to make, substantial investments in digital and traditional offline marketing (with continued expansion into new and existing digital platforms) to consumers and service professionals to promote our products and services and drive visitors to our various platforms and service professionals.
Technology
Each of our brands and businesses develops its own technology to support its products and services, leveraging both open-source and vendor supported software technology. Each of our various brands and businesses has dedicated engineering teams responsible for software development and the creation of new features to support our products and services across a full range of devices (desktop, mobile web, native mobile applications and digital voice assistant platforms). Our engineering teams use an agile development process that allows us to deploy frequent iterative releases for product and service features.
Competition
The home services industry is highly competitive and fragmented, and in many important respects, local in nature. We compete with, among others: (i) search engines and online directories, (ii) home and/or local services-related platforms, (iii) providers of consumer ratings, reviews and referrals and (iv) various forms of traditional offline advertising (primarily local in nature), including radio, direct marketing campaigns, yellow pages, newspapers and other offline directories. We also compete with local and national retailers of home improvement products that offer or promote installation services. We believe our biggest competition comes from the traditional methods most people currently use to find service professionals, which is by word-of-mouth and through referrals.

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We believe that our ability to compete successfully will depend primarily upon the following factors:
the size, quality, diversity and stability of our network of service professionals and the breadth of our online directory listings;
the functionality of our websites and mobile applications and the attractiveness of their features and our products and services generally to consumers and service professionals, as well as our continued ability to introduce new products and services that resonate with consumers and service professionals generally;
our ability to continue to build and maintain awareness of, and trust in and loyalty to, our various brands, particularly our Angie’s List, HomeAdvisor and Handy brands;
our ability to consistently generate service requests and jobs through the Marketplace and leads through our online directories that convert into revenue for our service professionals in a cost-effective manner; and
the quality and consistency of our service professional pre-screening processes and ongoing quality control efforts, as well as the reliability, depth and timeliness of customer ratings and reviews.
Intellectual Property
We regard our intellectual property rights as critical to our success generally, with our trademarks, service marks and domain names being especially critical to the continued development and awareness of our brands and our marketing efforts.
We protect our intellectual property rights through a combination of trademarks, trade dress, domain name registrations, trade secrets and patent applications, as well as through contractual restrictions and reliance on federal, state and common law. We enter into confidentiality and proprietary rights agreements with employees, consultants, contractors and business partners, and employees and contractors are also subject to invention assignment provisions.
We have several registered trademarks in the United States (the most significant of which relate to our Angie’s List and HomeAdvisor brands), as well as other trademarks in Canada and Europe and several pending trademark applications in the United States and certain other jurisdictions. We have also registered a variety of domestic and international domain names, the most significant of which relate to our HomeAdvisor and Angie’s List brands. In addition, we have one patent in the United States that expires in May 2019 and six patent applications pending in the United States.
Government Regulation
We are subject to laws and regulations that affect companies conducting business on the Internet generally and through mobile applications, including laws relating to the liability of providers of online services for their operations and the activities of their users. As a result, we could be subject to actions based on negligence, various torts and trademark and copyright infringement, among other actions.
In addition, because we receive, transmit, store and use a substantial amount of information received from or generated by consumers and service professionals, we are also impacted by laws and regulations governing privacy, the storage, sharing, use, processing, disclosure and protection of personal data and data breaches, primarily in the case of our European operations and the handling of personal data of consumers and service professionals located in the European Union. As a result, we could be subject to various private and governmental claims and actions, including under the General Data Protection Regulation, a comprehensive European Union privacy and data protection law that became effective in May 2018 (the "GDPR"). The GDPR, which applies to companies that are organized in the European Union or otherwise provide services to (or monitor) consumers who reside in the European Union, imposes strict standards regarding the sharing, storage, use, disclosure and protection of end user data, as well as significant penalties (monetary and otherwise) for non-compliance. The GDPR will continue to be interpreted by European Union data protection regulators, which may require that we make changes to our business practices, and could generate additional risks and liabilities. The European Union is also considering an update to its Privacy and Electronic Communications Directive to impose stricter rules regarding the use of cookies. In addition, the potential exit from the European Union by the United Kingdom could result in the application of new and conflicting data privacy and protection laws and standards to our operations in the United Kingdom and our handling of personal data of users located in the United Kingdom. Lastly, there are number of privacy and data protection laws and regulations recently passed or under consideration by the U.S. Congress, as well as in various U.S. and foreign jurisdictions in which we do business, including the California Consumer Privacy Act of 2018, which becomes effective January 1, 2020.

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We are particularly sensitive to laws and regulations that adversely impact the popularity or growth in use of the Internet and/or online products and services generally, restrict or otherwise unfavorably impact the ability or manner in which we provide our products and services, regulate the practices of third parties upon which we rely to provide our products and services and undermine open and neutrally administered Internet access. For example, in December 2017, the U.S. Federal Communications Commission (the "FCC") adopted an order reversing net neutrality protections in the United States, including the repeal of specific rules against blocking, throttling or "paid prioritization" of content or services by Internet service providers. To the extent Internet service providers take such actions, our business, financial condition and results of operations could be adversely affected.
As a provider of products and services with a membership-based element, we are also subject to laws and regulations in certain U.S. states and foreign jurisdictions in which we do business that apply to membership payment models with auto-renewal provisions. Accordingly, we are sensitive to the adoption of any law or regulation affecting our ability to periodically charge for recurring membership or subscription payments, which could adversely affect our business, financial condition and results of operations. For example, the European Union Payment Services directive, which became effective in 2018, could impact the ability of our businesses to process auto-renewal payments for, as well offer promotional or differentiated pricing to, users who reside in the European Union. Similar new legislation or regulations, or changes to existing legislation or regulations governing subscription payments, are being considered in many U.S. states.
We are also sensitive to the adoption of new tax laws. The European Commission and several European countries have issued proposals that would change various aspects of the current tax framework under which we are taxed, including proposals to change or impose new types of non-income taxes (including taxes based on a percentage of revenue). For example, the United Kingdom has proposed a Digital Services Tax applicable to revenues of social media platforms, online marketplaces and search engines linked to users residing in the United Kingdom, which would likely apply to certain of our business. If enacted, one or more of these or similar proposed tax laws could adversely affect our business, financial condition and results of operations.
We are also subject to laws governing marketing and advertising activities conducted by/through telephone, e-mail, mobile devices and the Internet, including the Telephone Consumer Protection Act of 1991, the Telemarketing Sales Rule, the CAN-SPAM Act and similar state laws, as well as federal, state, and local laws and agency guidelines governing background screening.
Employees
As of December 31, 2018, we had approximately 4,500 employees worldwide, the substantial majority of which provided services to our brands and businesses located in the United States. We believe that we generally have good relationships with our employees.
Additional Information
Company Website and Public Filings
We maintain a website at www.angihomeservices.com. Neither the information on this website, nor the information on the websites of any of our brands and businesses, is incorporated by reference into this annual report, or into any other filings with, or into any other information furnished or submitted to, the U.S. Securities and Exchange Commission ("SEC").
We also make available, free of charge through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (including related amendments) as soon as reasonably practicable after they have been electronically filed with (or furnished to) the SEC.
Code of Ethics
Our code of ethics applies to all of our employees (including our principal executive officer, principal financial officer and principal accounting officer) and directors and is posted on our website at http://ir.angihomservices.com under the heading "Code of Ethics." This code of ethics complies with Item 406 of SEC Regulation S-K and the rules of The Nasdaq Stock Market LLC. Any changes to this code of ethics that affect the provisions required by Item 406 of Regulation S-K (and any waivers of such provisions of the code of ethics for our executive officers, senior financial officers or directors) will also be disclosed on our website.

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RELATIONSHIP WITH IAC
Equity Ownership and Vote
We have two classes of capital stock outstanding, Class A common stock and Class B common stock, with one vote and ten votes per share, respectively. Our shares of Class B common stock are convertible into shares of Class A common stock on a share for share basis. As of February 1, 2019, IAC owned 421,118,101 shares of Class B common stock, representing 100% of our outstanding Class B common stock, and did not own any shares of our Class A common stock. As of that date, IAC’s Class B common stock holdings represented approximately 83.5% of our total outstanding shares of capital stock and approximately 98.1% of the total combined voting power of our outstanding capital stock.
Intercompany Agreements
In connection with the Combination, we and IAC entered into certain agreements to govern our relationship following the Combination. These agreements include the following:
Contribution Agreement
Under the contribution agreement: (i) we agreed to assume all of the assets and liabilities related to the HomeAdvisor business and indemnify IAC against any losses arising out of any breach by us of the contribution agreement or any other transaction related agreement described below and (ii) IAC agreed to indemnify us against losses arising out of any breach by IAC of the contribution agreement or any other transaction related agreement described below.
Investor Rights Agreement
Under the investor rights agreement, IAC has certain registration, preemptive and governance rights related to us and the shares of our capital stock it holds. The investor rights agreement also provides certain governance rights for the benefit of stockholders other than IAC.
Services Agreement
The services agreement currently governs services that IAC has agreed to provide to us through September 29, 2019, with automatic renewal for successive one-year terms, subject to IAC’s continued ownership of a majority of the total combined voting power of our voting stock and any subsequent extension(s) or truncation(s) agreed to by us and IAC. Services currently provided to us by IAC pursuant this agreement include: (i) assistance with certain legal, M&A, human resources, finance, risk management, internal audit and treasury functions, health and welfare benefits, information security services and insurance and tax affairs, including assistance with certain public company and unclaimed property reporting obligations; (ii) accounting, controllership and payroll processing services; (iii) investor relations services and (iv) tax compliance services. The scope, nature and extent of services may be changed from time to time as we and IAC may agree.
Tax Sharing Agreement
The tax sharing agreement governs our and IAC’s rights, responsibilities and obligations with respect to tax liabilities and benefits, entitlements to refunds, preparation of tax returns, tax contests and other tax matters regarding U.S. federal, state, local and foreign income taxes. Under the tax sharing agreement, we are generally responsible and required to indemnify IAC for: (i) all taxes imposed with respect to any consolidated, combined or unitary tax return of IAC or its subsidiaries that includes us or any of our subsidiaries (to the extent attributable to us or any of our subsidiaries, as determined under the tax sharing agreement) and (ii) all taxes imposed with respect to any consolidated, combined, unitary or separate tax returns of us or our subsidiaries.
Employee Matters Agreement
The employee matters agreement addresses certain compensation and benefit issues related to the allocation of liabilities associated with: (i) employment or termination of employment; (ii) employee benefit plans and (iii) equity awards. Under the employee matters agreement, our employees participate in IAC’s U.S. health and welfare plans, 401(k) plan and flexible benefits plan and we reimburse IAC for the costs of such participation. In the event IAC no longer retains shares representing at least 80% of the aggregate voting power of shares entitled to vote in the election of our board of directors, we will no longer participate in IAC’s employee benefit plans, but will establish our own employee benefit plans that will be substantially similar to the plans sponsored by IAC.

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In addition, under the employee matters agreement, we are required to reimburse IAC for the cost of any IAC equity awards held by our current and former employees, with IAC electing to receive payment either in cash or shares of our Class B common stock. This agreement also provides that IAC may require stock appreciation rights granted prior the closing of the Combination and equity awards in our subsidiaries to be settled in either shares of our Class A common stock or IAC common stock. To the extent shares of IAC common stock are issued in settlement of these awards, we are obligated to reimburse IAC for the cost of those shares by issuing shares of our Class A common stock in the case of stock appreciation rights granted prior to the closing of the Combination and shares of our Class B common stock in the case of equity awards in our subsidiaries.
Item 1A.    Risk Factors
Cautionary Statement Regarding Forward-Looking Information
This annual report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as "anticipates," "estimates," "expects," "plans" and "believes," among others, generally identify forward-looking statements. These forward-looking statements include, among others, statements relating to: our future business, financial condition, results of operations and financial performance, our business strategy, trends in the home services industry and other similar matters. These forward-looking statements are based on the expectations and assumptions of our management about future events as of the date of this annual report, 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, the risk factors set forth below. Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward-looking statements discussed in this annual report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of our management as of the date of this annual report. We do not undertake to update these forward-looking statements.
Risk Factors
Risks Related to Our Business and Industry
Our brands and businesses operate in an especially competitive industry.
The home services industry is competitive, with a consistent and growing stream of new products, services and entrants. Some of our competitors may enjoy better competitive positions in certain geographical areas, with certain consumer and service professional demographics and/or in other key areas that we currently serve or may serve in the future. For example, we compete with search engines, online marketplaces and social media platforms that have the ability to market their products and services online in a more prominent and cost-effective manner than we can. Any of these advantages could enable these competitors to offer products and services that are more appealing to consumers and service professionals than our products and services, respond more quickly and/or cost effectively than we do to evolving market opportunities and trends and/or display their own integrated or related home services products and services in search results and elsewhere in a more prominent manner than our products and services, which could adversely affect our business, financial condition and results of operations.
In addition, since most home services products and services are offered to consumers for free, consumers can easily switch among home services offerings (or use multiple home services offerings simultaneously) at no cost to them. And while service professionals may incur additional or duplicative near-term costs, the costs for switching to a competing platform over the long term are generally not prohibitive. Low switching costs, coupled with the propensity of consumers to try new products and services generally, will most likely result in the continued emergence of new products and services, entrants and business models in the home services industry. Our inability to compete effectively against new products, services and competitors could result in decreases in the size and level of engagement of our consumer and service professional bases, any of which could adversely affect our business, financial condition and results of operations.
Our success will depend, in substantial part, on the continued migration of the home services market online.
We believe that the digital penetration of the home services market remains low, with the vast majority of consumers continuing to search for, select and hire service professionals offline. While many consumer demographics have historically been (and remain) averse to finding service professionals online, others have demonstrated a greater willingness to embrace the online shift (for example, millennials). Service professionals must also embrace the online shift, which will depend, in substantial part, on whether online products and services help them to better connect and engage with consumers relative to

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traditional offline efforts. The speed and ultimate outcome of the shift of the home services market online for consumers and service professionals is uncertain and may not occur as quickly as we expect, or at all. The failure or delay of a meaningful number of consumers and/or service professionals to migrate online and/or the return of a meaningful number of existing participants in the online home services market to offline solutions, could adversely affect our business, financial condition and results of operations.
Our brands and businesses are sensitive to general economic events or trends, particularly those that adversely impact consumer confidence and spending behavior.
We have historically been, and will continue to be, particularly sensitive to events and trends that result in consumers delaying or foregoing home services projects and/or service professionals being less likely to pay for Marketplace subscriptions and consumer matches. Any such event or trend (for example, a general economic downturn or sudden disruption in business conditions, consumer confidence, spending levels and access to credit) could result in decreases in Marketplace service requests and directory searches. Any such decreases could result in turnover at the Marketplace and/or any of our directories, adversely impact the number and quality of service professionals at the Marketplace and our directories and/or adversely impact the reach of (and breath of services offered through) the Marketplace and our directories, any or all of which could adversely affect our business, financial condition and results of operations.
Lastly, we have historically been, and will continue to be, sensitive to events and trends that could result in decreased marketing and advertising expenditures by service professionals. Adverse economic conditions and trends could result in service professionals decreasing and/or delaying membership subscriptions, fees paid for consumer matches and/or time-based advertising spend, any or all of which would result in decreased revenue and could adversely affect our business, financial condition and results of operations.
We must establish and maintain relationships with quality service professionals.
We must continue to attract, retain and grow the number of skilled and reliable service professionals who can provide services that consumers want in a timely manner across our various brands and businesses. If we do not offer innovative products and services that resonate with consumers and service professionals generally, as well provide service professionals with an attractive return on their marketing and advertising investments (quality matches and leads that convert into jobs), the number of service professionals affiliated with our various brands and businesses could decrease. Any such decrease would result in smaller and less diverse networks and directories of service professionals, and in turn, decreases in service requests and directory searches, which could adversely affect our business, financial condition and results of operations.
Our success will depend, in substantial part, on our ability to maintain and/or enhance our various brands.
We own and operate two of the leading home services brands in the United States (Angie’s List and HomeAdvisor), as well as leading brands in several foreign jurisdictions. We believe that our success depends, in substantial part, on our continued ability to maintain and enhance our established brands, as well as build awareness of (and loyalty to) new and emerging brands. Events that could negatively impact our brands and brand-building efforts include (among others): product and service quality concerns, service professional quality concerns, consumer and service professional complaints, actions brought by consumers and service professionals, ineffective advertising, inappropriate and/or unlawful acts perpetrated by consumers and service professionals, actions or proceedings commenced by governmental or regulatory authorities, data protection and security breaches and related bad publicity. Any factors that negatively impact the Angie’s List and/or HomeAdvisor brand(s) could materially and adversely affect our business, financial condition and results of operations.
In addition, trust in the integrity and objective, unbiased nature of the ratings and reviews found across our various brands contributes significantly to public perception of these brands and their ability to attract consumers and service professionals. If consumer reviews are perceived as not authentic in general, the reputation and strength of the relevant brand could be materially and adversely affected. While we use, and will continue to use, filters (among other processes) to detect fraudulent reviews, the accuracy of consumer reviews cannot be guaranteed. If fraudulent or inaccurate reviews (positive or negative) increase and we are unable to effectively identify and remove such reviews, the overall quality of the ratings and reviews across our various brands could decrease and the reputation of affected brands might be harmed. This could deter consumers and service professionals from using our products and services, which in turn could adversely affect our business, financial condition and results of operations.



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Marketing efforts designed to drive traffic to our brands and businesses may not be successful or cost-effective.
Attracting consumers and service professionals to our brands and businesses involves considerable expenditures for online and offline marketing. We have made, and expect to continue to make, significant marketing expenditures, primarily for digital marketing (primarily paid search engine marketing, display advertising and third-party affiliate agreements) and traditional offline marketing (national television and radio campaigns). These efforts may not be successful or cost-effective. Historically, we have had to increase marketing expenditures over time to attract and retain users and service professionals and sustain our growth.
Our ability to market our brands on any given property or channel is subject to the policies of the relevant third-party seller, publisher of advertising (including search engines and social media platforms with extraordinarily high levels of traffic and numbers of users) or marketing affiliate. As a result, we cannot assure you that these parties will not limit or prohibit us from purchasing certain types of advertising, advertising certain of our products and services and/or using one or more current or prospective marketing channels in the future. If a significant marketing channel took such an action generally, for a significant period of time and/or on a recurring basis, our business, financial condition and results of operations could be adversely affected. In addition, if we fail to comply with the policies of third-party sellers, publishers of advertising and/or marketing affiliates, our advertisements could be removed without notice and/or our accounts could be suspended or terminated, any of which could adversely affect our business, financial condition and results of operations.
In addition, our failure to respond to rapid and frequent changes in the pricing and operating dynamics of search engines, as well as changing policies and guidelines applicable to keyword advertising (which may unilaterally be updated by search engines without advance notice), could adversely affect our paid search engine marketing efforts (and free search engine traffic). Such changes could adversely affect paid listings (both their placement and pricing), as well as the ranking of our brands and businesses within search results, any or all of which could increase our marketing expenditures (particularly if free traffic is replaced with paid traffic). Any or all of these events could adversely affect our business, financial condition and results of operations.
Evolving consumer behavior (specifically, increased consumption of media through digital means) can also affect the availability of profitable marketing opportunities. To continue to reach and engage consumers and service professionals and grow in this environment, we will need to continue to identify and devote more of our overall marketing expenditures to newer digital advertising channels (such as online video and other digital platforms), as well as target consumers and service professionals via these channels. Since newer advertising channels are undeveloped and unproven relative to traditional channels (such as television), it could be difficult to assess returns on marketing investments in newer channels, which could adversely affect our business, financial condition and results of operations.
Lastly, we also enter into various arrangements with third parties to drive visitors to our HomeAdvisor platforms. These arrangements are generally more cost-effective than traditional marketing efforts. If we are unable to renew existing (and enter into new) arrangements of this nature, sales and marketing costs as a percentage of revenue would increase over the long-term, which could adversely affect our business, financial condition and results of operations. In addition, the quality and convertibility of leads generated through third-party arrangements are dependent on many factors, most of which are outside our control. If the quality and/or convertibility of leads do not meet the expectations of HomeAdvisor service professionals, they could leave the Marketplace and/or decrease their budgets for consumer matches, any or both of which could adversely affect our business, financial condition and results of operations.
Our ability to communicate with consumers and service professionals via e-mail (or other sufficient means) is critical to our success.
Historically, one of our primary means of communicating with consumers and service professionals and keeping them engaged with our products and services has been via e-mail communication. Through e-mail, we provide consumers with service request updates and service professionals with updates regarding memberships and consumer matches, as well as present or suggest new products and services (among other things) and market our products and services in a cost-effective manner. As consumers increasingly communicate via mobile and other digital devices and messaging and social media apps, usage of e-mail (particularly among younger consumers) has declined and we expect this trend to continue. In addition, deliverability and other restrictions could limit or prevent our ability to send e-mails to consumers and service professionals. A continued and significant erosion in our ability to communicate with consumers and service professionals via e-mail could adversely impact the overall user experience, consumer and service professional engagement levels and conversion rates, which could adversely affect our business, financial condition and results of operations. We cannot assure you that any alternative means of communication (for example, push notifications) will be as effective as e-mail has been historically.

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Our success depends, in part, on our ability to develop and monetize versions of our products and services for mobile and other digital devices.
As consumers increasingly access our products and services through mobile and other digital devices (including through digital voice assistants), we will need to devote significant time and resources to ensure that our products and services are accessible across these platforms (and multiple platforms generally). If we do not keep pace with evolving online, market and industry trends (including changes in the preferences and needs of consumers and service professionals generally), offer new and/or enhanced products and services in response to such trends that resonate with consumers and service professionals, monetize products and services for mobile and other digital devices as effectively as our traditional products and services and/or maintain related systems, technology and infrastructure in an efficient and cost-effective manner, our business, financial condition and results of operations could be adversely affected.
In addition, the success of our mobile and other digital products and services depends on their interoperability with various third-party operating systems, technology, infrastructure and standards, over which we have no control. Any changes to any of these things that compromise the quality or functionality of our mobile and other digital products and services could adversely affect their usage levels and/or our ability to attract consumers and service professionals, which could adversely affect our business, financial condition and results of operations.
Our success depends, in part, on the integrity, quality, efficiency and scalability of our systems, technology and infrastructure, and those of third parties.
We rely on our systems, technology and infrastructure to perform well on a consistent basis. From time to time in the past we have experienced (and in the future we may experience) occasional interruptions that make some or all of this framework and related information unavailable or that prevent us from providing products and services; any such interruption could arise for any number of reasons. We also rely on third-party data center service providers and cloud-based, hosted web service providers, as well as third-party computer systems and a variety of communications systems and service providers in connection with the provision of our products and services generally, as well as to facilitate and process certain payment and other transactions with users. We have no control over any of these third parties or their operations.
The framework described above could be damaged or interrupted at any time due to fire, power loss, telecommunications failure, natural disasters, acts of war or terrorism, acts of God and other similar events or disruptions. Any event of this nature could prevent us from providing our products and services at all (or result in the provision of our products and services on a delayed or intermittent basis) and/or result in the loss of critical data. While we and the third parties upon whom we rely have certain backup systems in place for certain aspects of our respective frameworks, none of our frameworks are fully redundant and disaster recovery planning is not sufficient for all eventualities. In addition, we may not have adequate insurance coverage to compensate us for losses from a major interruption. When such damages, interruptions or outages occur, our reputation could be harmed and the competitive positions of our various brands and businesses could be diminished, any or all of which could adversely affect our business, financial condition and results of operations.
We also continually work to expand and enhance the efficiency and scalability of our framework to improve the consumer and service professional experience, accommodate substantial increases in the number of visitors to our various platforms, ensure acceptable load times for our various products and services and keep up with changes in technology and user preferences. If we do not do so in a timely and cost-effective manner, the user experience and demand across our brands and businesses could be adversely affected, which could adversely affect our business, financial condition and results of operations.
There may be adverse tax, legal and other consequences if the contractor classification or employment status of the service professionals who use our Handy platform is challenged.
The service professionals who provide services through our Handy platform are treated as independent contractors (as opposed to employees) for all purposes; accordingly, we do not withhold federal, state and local income or other employment related taxes, make federal or state unemployment tax or Federal Insurance Contributions Act payments or provide workers’ compensation insurance with respect to such service professionals. Handy is involved in various legal proceedings and investigations challenging the classification of its service professionals as independent contractors, and may become involved in other proceedings and investigations in the future. In addition, legislative, judicial or regulatory authorities in one or more jurisdictions could introduce proposals (or assert interpretations of existing statutes, rules and regulations) that would require us to change our classification of Handy service professionals. In the event of such a reclassification, we could be exposed to various liabilities and additional costs, including exposure (for prior and future periods) under federal, state and local tax laws, and workers’ compensation, unemployment benefits, labor, and employment laws, as well as potential liability for penalties and interest, any or all of which could adversely affect our business, financial condition and results of operations.

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We may not be able to protect our systems, technology and infrastructure from cyberattacks and cyberattacks experienced by third parties may adversely affect us.
We are regularly under attack by perpetrators of malicious technology-related events, such as the use of botnets, malware or other destructive or disruptive software, distributed denial of service attacks, phishing, attempts to misappropriate user information and account login credentials and other similar malicious activities. The incidence of events of this nature (or any combination thereof) is on the rise worldwide. While we continuously develop and maintain systems designed to detect and prevent events of this nature from impacting our systems, technology, infrastructure, products, services and users, have invested (and continue to invest) heavily in these efforts and related personnel and training and deploy data minimization strategies (where appropriate), these efforts are costly and require ongoing monitoring and updating as technologies change and efforts to overcome preventative security measures become more sophisticated. Despite these efforts, some of our systems have experienced past security incidents, none of which had a material adverse effect on our business, financial condition and results of operations, and we could experience significant events of this nature in the future.
Any event of this nature that we experience could damage our systems, technology and infrastructure and/or those of our users, prevent us from providing our products and services, compromise the integrity of our products and services, damage our reputation, erode our brands and/or be costly to remedy, as well as subject us to investigations by regulatory authorities, fines and/or litigation that could result in liability to third parties. Even if we do not experience such events firsthand, the impact of any such events experienced by third parties could have a similar effect. We may not have adequate insurance coverage to compensate for losses resulting from any of these events. If we (or any third-party with whom we do business or otherwise rely upon) experience(s) an event of this nature, our business, financial condition and results of operations could be adversely affected.
If personal, confidential or sensitive user information that we maintain and store is breached or otherwise accessed by unauthorized persons, it may be costly to mitigate and our reputation could be harmed.
We receive, process, store and transmit a significant amount of personal, confidential or sensitive user information and, in certain cases, enable users to share their personal information with each other. While we continuously develop and maintain systems designed to protect the security, integrity and confidentiality of this information, we cannot guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information. When such events occur, we may not be able to remedy them and it may be costly to mitigate and to develop and implement protections to prevent future events of this nature from occurring. When breaches of security (ours or that of any third-party we engage to store information) occurs, the reputation of our brands and business could be harmed, which could adversely affect our business, financial condition and results of operations.
Credit card data security breaches or fraud that we or third parties experience could adversely affect our business, financial condition and results of operations.
We accept payments (including recurring payments) from service professionals and members, primarily through credit and debit card transactions. The ability to access payment information on a real-time basis without having to proactively reach out to service professionals and members to process payments is critical to our success.
When we or a third-party experience(s) a data security breach involving credit card information, affected cardholders will often cancel their credit cards. In the case of a breach experienced by a third-party, the more sizable the third-party’s customer base, the greater the number of accounts impacted and the more likely it will be that our service professionals and members would be impacted by such a breach. If our service professionals and members were affected, we would need to contact affected service professionals and members to obtain new payment information. It is likely that we would not be able to reach all affected service professionals and members, and even if we could, new payment information for some may not be obtained and pending payments may not be processed, which could adversely affect our business, financial condition and results of operations.
Even if our service professionals and members are not directly impacted by a given data security breach, they may lose confidence in the ability of providers of online products and services to protect their personal information generally, which could cause them to stop using their credit cards online and choose alternative payment methods that are not as convenient for us or restrict our ability to process payments without significant effort.


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If we fail to prevent fraudulent credit card data security breaches and fraudulent credit card transactions, we could face litigation, governmental enforcement action, fines, civil liability, diminished public perception of our security measures, higher credit card-related costs and substantial remediation costs, or credit card processors could cease doing business with us, any of which could adversely affect our business, financial condition and results of operations.
The processing, storage, use and disclosure of personal data could give rise to liabilities and increased costs.
We receive, transmit and store a large volume of personal information in connection with the provision of our products and services and related payment transactions. The manner in which we share, store, use, disclose and protect this information is determined by the respective privacy and data security policies of our various businesses, as well as federal, state and foreign laws and regulations and evolving industry standards and practices, which are changing, and in some cases, inconsistent and conflicting and subject to differing interpretations. In addition, new laws, regulations, standards and practices of this nature are proposed and adopted from time to time.
For example, a comprehensive European Union privacy and data protection reform, the General Data Protection Regulation (the "GDPR"), became effective in May 2018. The GDPR, which applies to companies that are organized in the European Union or otherwise provide services to (or monitor) consumers who reside in the European Union, imposes significant penalties (monetary and otherwise) for non-compliance. The GDPR will continue to be interpreted by European Union Data protection regulators, which may require that we make changes to our business practices, and could generate additional risks and liabilities. The European Union is also considering an update to its Privacy and Electronic Communications Directive to impose stricter rules regarding the use of cookies. In addition, the potential exit from the European Union by the United Kingdom could result in the application of new and conflicting data privacy and protection laws and standards to our operations in the United Kingdom and our handling of personal data of users located in the United Kingdom. In addition, there are a number of privacy and data protection laws and regulations recently passed or under consideration by the U.S. Congress, as well as in various U.S. states and foreign jurisdictions in which we do business, including the California Consumer Privacy Act of 2018, which becomes effective January 1, 2020.
While we believe that we comply with applicable privacy and data protection policies, laws and regulations and industry standards and practices in all material respects, we could still be subject to claims of non-compliance that we may not be able to successfully defend and/or significant fines and penalties. Moreover, any non-compliance or perceived non-compliance by us (or any third-party we engage to store or process information) or any compromise of security that results in unauthorized access to (or use or transmission of) personal information could result in a variety of claims against us, including governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties and adverse publicity. When such events occur, our reputation could be harmed and the competitive positions of our various brands and businesses could be diminished, which could adversely affect our business, financial condition and results of operations.
Lastly, ongoing compliance with existing (and compliance with future) privacy and data protection laws worldwide could be costly. The devotion of significant costs to compliance (versus to product development) could result in delays in the development of new products and services, us ceasing to provide problematic products and services in existing jurisdictions and us being prevented from introducing products and services in new and existing jurisdictions, which could adversely affect our business, financial condition and results of operations.
We may experience risks related to acquisitions.
We have made numerous acquisitions in the past and we continue to seek to identify potential acquisition candidates to expand our business generally in the future. If we do not identify suitable acquisition candidates or complete acquisitions on satisfactory pricing or other terms, our growth could be adversely affected. Even if we complete what we believe to be suitable acquisitions, we may experience related operational and financial risks. So, to the extent that we continue to grow through acquisitions, we will need to:
properly value prospective acquisitions, especially those with limited operating histories;
successfully integrate the operations, as well as the various functions and systems, of acquired businesses with our existing operations, functions and systems;
successfully identify and realize potential synergies among acquired and existing business;
retain or hire senior management and other key personnel at acquired businesses; and

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successfully manage acquisition-related strain on our management, operations and financial resources.
We may not be successful in addressing these or any other acquisition-related challenges. In addition, acquisition-related cost savings, growth opportunities, synergies or other anticipated benefits may not be realized. Also, future acquisitions could result in increased operating losses, dilutive issuances of equity securities and the assumption of contingent liabilities. Lastly, the value of goodwill and other intangible assets acquired could be impacted by unfavorable events and/or trends, which could result in significant impairment charges. The occurrence of any these events could adversely affect our business, financial condition and results of operations.
We face additional risks in connection with our international operations.
We currently operate businesses under various regional brands in Canada, France, Germany, Austria, the United Kingdom, the Netherlands and Italy and intend to seek to expand our international presence, both through acquisitions and organic growth.
Operating abroad, particularly in jurisdictions where we have limited experience, exposes us to additional risks, including:
operational and compliance challenges caused by distance, language barriers and cultural differences;
difficulties in staffing and managing international operations;
differing levels (or lack) of social and technological acceptance of online services generally, as well as online home services offerings specifically;
slow or lagging growth in the commercial use and acceptance of the Internet (particularly via mobile devices);
foreign currency fluctuations;
restrictions on the transfer of funds among countries and back to the United States and related repatriation costs;
differing and potentially adverse tax laws;
compliance challenges;
competitive environments that favor local businesses;
limitations on the level of intellectual property protection; and
trade sanctions, political unrest, terrorism, war and epidemics or the threat of any of these events.
The occurrence of any or all of the events described above could adversely affect our international operations, and in turn, our business, financial condition and results of operations.
We may fail to adequately protect our intellectual property rights or may be accused of infringing the intellectual property rights of third parties.
We rely heavily upon trademarks, trade dress and related domain names and logos to market our brands and businesses and to build and maintain brand loyalty and recognition, as well as upon trade secrets and patents.
We rely on a combination of laws and contractual restrictions on access to and use of proprietary information with employees, customers, suppliers, affiliates and others to establish and protect our and their various intellectual property rights. For examples, we have generally registered and continue to apply to register and renew, or secure by contract where appropriate, trademarks and service marks as they are developed and used, and reserve, register and renew domain names as we deem appropriate. We also generally seek to apply for patents or for similar statutory protections as and if we deem appropriate, based on then current facts and circumstances, and will continue to do so in the future. No assurances can be given that these efforts will result in adequate trademark and service mark protection, adequate domain name rights and protections, the issuance of a patent or adequate patent protection against competitors and similar technologies. Third parties could also create new products or methods that achieve similar results without infringing upon patents we own.

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Despite these measures, challenges to our intellectual property rights could still arise, third parties could copy or otherwise obtain and use the intellectual property without authorization and/or laws regarding the enforceability of existing intellectual property rights could change in an adverse manner. The occurrence of any of these events could result in the erosion of our various brands and limitations on our ability to control marketing online using our various domain names, as well as impede our ability to effectively compete against competitors with similar technologies, any of which could adversely affect our business, financial condition and results of operations.
We depend on our key personnel.
Our future success depends upon our ability to identify, hire, develop, motivate and retain highly skilled individuals, particularly in the case of senior management. Competition for well-qualified employees across our various businesses is intense and we must attract new (and retain existing) employees to compete effectively. While we have established programs to attract new (and retain existing) employees, we may not be able to attract new (and retain existing) key and other employees in the future. In addition, if we do not ensure the effective transfer of knowledge and smooth transitions (particularly in the case of senior management) across our various businesses, our business, financial condition and results of operations generally, could be adversely affected.
We will continue to incur some increased costs and devote substantial management time as a result of operating as a relatively new public company.
The obligations of being a relatively new public company will continue to require new expenditures, place new demands on our senior management and require the hiring of additional personnel. While IAC continues to provide us with certain corporate and shared services related to corporate functions for negotiated fees, we also expect that we will need to continue to implement additional systems and hire additional personnel, primarily related to public reporting obligations, to adequately function as a mature public company. We cannot precisely predict the amount and timing of these significant expenditures. See "-Risks Related to Our Ongoing Relationship with IAC-The services that IAC provides to us may not be sufficient to meet our needs."
Risks Related to Our Relationship with IAC
IAC controls our company and will have the ability to control the direction of our business.
As of February1, 2019, IAC owned all of our outstanding Class B common stock, representing approximately 83.5% of our total outstanding shares of capital stock and approximately 98.1% of the total combined voting power of our outstanding capital stock. For so long as IAC owns shares of our capital stock that represent a majority of the combined voting power of our outstanding capital stock, it will be able to control any corporate action that requires a stockholder vote, regardless of the vote of any other stockholder (subject to certain limited exceptions for certain class votes). As a result, IAC has (and we expect will continue to have) the ability to control significant corporate activities, including:
the election of our board of directors (subject to certain provisions of the investor rights agreement between us and IAC) and, through our board of directors, decision-making with respect to our business direction and policies, including the appointment and removal of our officers;
acquisitions or dispositions of businesses or assets, mergers or other business combinations;
issuances of shares of our Class A common stock, Class B common stock and Class C common stock and our capital structure generally;
corporate opportunities that may be suitable for us and IAC, subject to the corporate opportunity provisions in our amended and restated certificate of incorporation (as described below);
stock repurchases;
our financing activities, including the issuance of debt securities and/or the incurrence of other indebtedness generally;
the payment of dividends; and
the number of shares available for issuance under our equity incentive plans.

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This voting control will limit the ability of other stockholders to influence corporate matters and, as a result, we may take actions that stockholders other than IAC do not view as beneficial. This voting control may also discourage transactions involving a change of control of our company, including transactions in which holders of shares of our Class A common stock might otherwise receive a premium for their shares.
Even if IAC owns shares of our capital stock representing less than a majority of the total combined voting power of our outstanding capital stock, so long as IAC owns shares representing a significant percentage of our total combined voting power, IAC will have the ability to substantially influence these significant corporate activities.
In addition, pursuant to the investor rights agreement between us and IAC, IAC has the right to maintain its level of ownership in us to the extent we issue additional shares of our capital stock in the future and, pursuant to the employee matters agreement between us and IAC, IAC may receive payment for certain compensation expenses through the receipt of additional shares of our capital stock. For a more complete summary of our various agreements with IAC, see "Note 14-Related Party Transactions with IAC" to the consolidated and combined financial statements included in "Item 8-Consolidated and Combined Financial Statements and Supplementary Data."
Until such time as IAC no longer controls or has the ability to substantially influence us, we will continue to face the risks described in this "Risk Factors" section relating to IAC’s control of us and the potential conflicts of interest between us and IAC.
Our amended and restated certificate of incorporation could prevent us from benefiting from certain corporate opportunities.
Our amended and restated certificate of incorporation has a "corporate opportunity" provision that requires us to renounce any interests or expectancy in corporate opportunities for both us and IAC. This provision also includes a disclaimer that states that we recognize that: (i) any of our directors or officers who are also officers, directors, employees or other affiliates of IAC or its affiliates (except that we and our subsidiaries are not considered affiliates of IAC or its affiliates for purposes of this provision) and (ii) IAC itself, will have no duty to offer or communicate information regarding such corporate opportunities to us. Generally, neither IAC nor any of our officers or directors who are also officers or directors of IAC or its affiliates will be liable to us or any of our stockholders for breach of any fiduciary duty by reason of the fact that any such person pursues or acquires any corporate opportunity for the account of IAC or any of its affiliates, directs or transfers such corporate opportunity to IAC or any of its affiliates or does not communicate information regarding such corporate opportunity to us. This corporate opportunity provision may exacerbate conflicts of interest between us and IAC because the provision effectively permits any of our directors or officers who also serves as a director or officer of IAC to choose to direct a corporate opportunity to IAC instead of us.
IAC's interests may conflict with our interests and the interests of our other stockholders. Conflicts of interest between us and IAC could be resolved in a manner unfavorable to us and our other stockholders.
Various conflicts of interest between us and IAC could arise. As of the date of this report, four of our eleven directors are current directors or executive officers of IAC. Ownership interests of these individuals and IAC in our capital stock and ownership interests of our directors and officers in IAC capital stock, or service by an individual as either a director and/or officer of both companies, could create or appear to create potential conflicts of interest when such individuals are faced with decisions relating to us. These decisions could include:
corporate opportunities;
the impact that operating or capital decisions (including the incurrence of indebtedness) relating to our business may have on IAC's consolidated financial statements and/or current or future indebtedness (including related covenants);
business combinations involving us;
our dividend and stock repurchase policies;
management stock ownership; and
the intercompany agreements and services between us and IAC.

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Potential conflicts of interest could also arise if we decide to enter into new commercial arrangements with IAC in the future or in connection with IAC's desire to enter into new commercial arrangements with third parties. Additionally, IAC may be constrained by the terms of agreements relating to its indebtedness from taking actions, or permitting us to take actions, that may be in our best interest.
Furthermore, disputes may arise between us and IAC relating to our past and ongoing relationships, and these potential conflicts of interest may make it more difficult for us to favorably resolve such disputes, including those related to:
tax, employee benefit, indemnification and other matters arising from the Combination;
the nature, quality and pricing of services IAC agrees to provide to us;
sales or other disposals by IAC of all or a portion of its ownership interest in us; and
business combinations involving us.
We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable to us than if we were dealing with an unaffiliated third-party. While we are controlled by IAC, we may not have the leverage to negotiate amendments to our various agreements with IAC (if required) on terms as favorable to us as those we would negotiate with an unaffiliated third-party.
We rely on exemptions from certain NASDAQ corporate governance requirements that provide protection to stockholders of other companies.
Because IAC owns more than 50% of the combined voting power of our outstanding capital stock, we are a "controlled company" under the Marketplace Rules of The Nasdaq Stock Market, LLC (the "Marketplace Rules"). As a "controlled company," we are exempt from compliance with certain Marketplace Rules related to corporate governance, including the following requirements:
that a majority of our board of directors consists of "independent directors" (as defined in the Marketplace Rules); and
that we have a nominating/governance committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
Accordingly, for so long as we are a "controlled company" and avail ourselves of these exemptions, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Marketplace Rules.
IAC’s desire to maintain flexibility with respect to its ability to distribute the shares of our capital stock it holds on a tax-free basis to its stockholders, and its desire to preserve the ability to maintain tax consolidation for U.S. federal income tax purposes, may prevent us from pursuing opportunities to raise capital, acquire other businesses or provide equity incentives to our employees, or otherwise impact our ability to manage our capital structure.
 
Under current laws, IAC must retain beneficial ownership of at least 80% of our combined voting power and 80% of each class of our non-voting capital stock (if any is outstanding) in order to effect a tax-free distribution of our shares held by IAC to its stockholders. IAC has advised us that it does not have any present intention or plans to undertake such a tax-free distribution. However, IAC does currently intend to use its majority voting interest to retain its ability to engage in such a transaction. In addition, IAC must maintain ownership of at least 80% of our outstanding capital stock in order to maintain tax consolidation with us for U.S. federal income tax purposes. IAC has advised us that it currently intends to take such actions, or cause the Company to take such actions, as may be necessary in order to preserve tax consolidation. Each of these intentions may cause IAC not to support transactions that we wish to pursue that involve issuing shares of our capital stock, including for capital-raising purposes, as consideration for an acquisition or as equity incentives to our employees, or otherwise impact our overall capital management strategy. Our inability to pursue such transactions, or any reduced flexibility in the management of our capital structure,  may adversely affect our business, financial condition and results of operations.




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Our agreements with IAC will require us to indemnify IAC for certain tax liabilities and may limit our ability to engage in desirable strategic or capital-raising transactions.
Pursuant to our tax sharing agreement with IAC, we generally will be responsible and will be required to indemnify IAC for: (i) all taxes imposed with respect to any consolidated, combined or unitary tax return of IAC or its subsidiaries that includes us or any of our subsidiaries to the extent attributable to us or any of our subsidiaries (excluding certain taxes attributable to Angie’s List and its subsidiaries for taxable periods (or portions thereof) ending on or before the completion of the Combination), as determined under the tax sharing agreement, and (ii) all taxes imposed with respect to any consolidated, combined, unitary or separate tax returns of ours or any of our subsidiaries. To the extent IAC fails to pay taxes imposed with respect to any consolidated, combined or unitary tax return of IAC or one of its subsidiaries that includes us or any of our subsidiaries, the relevant taxing authority could seek to collect such taxes (including taxes for which IAC is responsible under the tax sharing agreement) from us or our subsidiaries.
IAC does not have a present plan or intention to undertake a tax-free spin-off of its interest in us. Under the tax sharing agreement, we generally will be responsible for any taxes and related amounts imposed on IAC or us (or our respective subsidiaries) that arise from the failure of a future spin-off of IAC’s retained interest in us to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Section 368(a)(1)(D) and/or Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"), to the extent that the failure to so qualify is attributable to: (i) a breach of the relevant representations and covenants made by us in the tax sharing agreement (or any representation letter provided in support of any tax opinion or ruling obtained by IAC with respect to the U.S. federal income tax treatment of such spin-off), (ii) an acquisition of our equity securities or assets or (iii) any other action or inaction by us after any such spin-off.
To preserve the tax-free treatment of any potential future spin-off by IAC of its interest in us, the tax sharing agreement restricts us and our subsidiaries, for the two-year period following any such spin-off (except in specific circumstances), from: (i) entering into any transaction pursuant to which shares of our capital stock would be acquired above a certain threshold, (ii) merging, consolidating or liquidating, (iii) selling or transferring assets above certain thresholds, (iv) redeeming or repurchasing stock (with certain exceptions), (v) altering the voting rights of our capital stock, (vi)  actions and inactions that are inconsistent with representations or covenants in any tax opinion or private letter ruling document or (vii) ceasing to engage in any active trade or business as defined in the Code. The indemnity obligations and other limitations under the tax sharing agreement could have an adverse effect on our business, financial condition and results of operations.
Future sales or distributions of shares of our capital stock by IAC could depress the price of our Class A common stock.
IAC has the right to sell or distribute to its stockholders all or a portion of the shares of our capital stock that it holds. Although as of the date of this report IAC has advised us that it does not have any present intention or plans to undertake such a sale or distribution, sales by IAC in the public market or distributions to its stockholders of substantial amounts of our capital stock (shares of Class B common stock or Class A common stock) could depress the price of our Class A common stock. In addition, IAC has the right, subject to certain conditions, to require us to file registration statements covering the sale of the shares of our capital stock it holds or to include such shares in other registration statements that we may file. If IAC exercises these registration rights and sells all or a portion of the shares of our capital stock it holds, the price of our Class A common stock could decline.
The services that IAC provides to us may not be sufficient to meet our needs.
We expect IAC to continue to provide us with significant corporate and shared services related to corporate functions, such as executive oversight, risk management, information technology, accounting, audit, legal, investor relations, tax, treasury and other services in exchange for the fees specified in the services agreement between us and IAC. Since IAC is obligated to provide these services in the same manner as those provided to the HomeAdvisor business during the twelve-month period prior to the Combination, we may not be able to modify these services in a manner desirable to us as a standalone public company. Further, if we no longer receive these services from IAC due to the termination of the services agreement or otherwise, we may not be able to perform these services ourselves and/or find appropriate third parties to do so at a reasonable cost (or at costs at or below those charged by IAC), which could adversely affect our business, financial condition and results of operations.




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Risks Related to Our Indebtedness
Our current and future indebtedness could affect our ability to operate our business, which could have a material adverse effect on our financial condition and results of operations.
As of December 31, 2018, we had total debt outstanding of approximately $261.3 million under our term loan agreement and borrowing availability of $250 million under our revolving credit facility. The indebtedness outstanding under our term loan agreement is (and indebtedness under our revolving credit facility will be) guaranteed by our wholly owned material domestic subsidiaries and secured by substantially all of our assets and those of our guarantors, subject to certain exceptions. Our term loan agreement and revolving credit facility contain several covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:
create liens on certain assets;
incur additional indebtedness;
make certain investments and acquisitions;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
sell certain assets;
pay dividends on (or make distributions in respect of) our capital stock or make restricted payments or stock repurchases;
enter into certain transactions with our affiliates; and
place restrictions on distributions from subsidiaries.
Any of these restrictions could limit our ability to plan for or react to market conditions and could otherwise restrict how we operate our business. Any failure to comply with these covenants could result in a default under the term loan agreement, which if not waived, could cause our lenders to foreclose on the assets we pledged to secure our term loan indebtedness and force us into bankruptcy or liquidation. In addition, a default under our term loan agreement could trigger a cross default under other current of future agreements (including our revolving credit facility).
In addition to the restrictions that limit our flexibility in operating our business, the terms of our indebtedness could:
limit our ability to obtain additional financing to fund working capital needs, acquisitions, capital expenditures, other debt service requirements or for other purposes;
limit our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service our indebtedness;
limit our ability to compete with other companies who are not as highly leveraged;
restrict us from making strategic acquisitions, developing properties or exploiting business opportunities; and
limit our ability to react to changing general economic conditions and market conditions in our industry.
Subject to certain restrictions, we and our subsidiaries may incur additional unsecured and secured indebtedness. If additional indebtedness incurred in compliance with these restrictions is significant, the risks described above could increase.
We may not be able to generate sufficient cash to service all of our indebtedness.
Our ability to satisfy our debt obligations will depend upon, among other things:
our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control; and

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our future ability to borrow under our revolving credit facility, the availability of which will depend on, among other things, compliance with the covenants governing our indebtedness.
We may not be able to generate sufficient cash flow from our operations and/or borrow under our revolving credit facility in amounts sufficient to meet our scheduled debt obligations. If so, we could be forced to reduce or delay capital expenditures, sell assets or seek additional capital in a manner that complies with the terms (including certain restrictions and limitations) of our current indebtedness. If these efforts do not generate sufficient funds to meet our scheduled debt obligations, we would need to seek additional financing and/or negotiate with our lenders to restructure or refinance our indebtedness. Our ability to do so would depend on the condition of the capital markets and our financial condition at such time. Any such financing, restructuring or refinancing could be on less favorable terms than those governing our current indebtedness and would need to comply with the terms (including certain restrictions and limitations) of our existing indebtedness.
Our variable rate indebtedness subjects us to interest rate risk.
As of December 31, 2018, we have $263.1 million of indebtedness outstanding under our term loan, which bears interest at variable rates. Indebtedness under our term loan is (and any indebtedness under our revolving credit facility will be) at variable interest rates, which exposes us to interest rate risk. For details regarding interest rates applicable to the indebtedness outstanding under our term loan as of December 31, 2018, see "Item 7A-Quantitative and Qualitative Disclosures About Market Risk."
Risks Related to Ownership of Our Class A Common Stock
The multiclass structure of our capital stock has the effect of concentrating voting control with IAC and limiting the ability of holders of our Class A common stock to influence corporate matters.
Each share of our Class B common stock has ten votes per share and each share of our Class A common stock has one vote per share. As of February 1, 2019, IAC owned all of the shares of our outstanding Class B common stock, representing economic and voting interests in us of approximately 83.5% and 98.1%, respectively. Due to the ten-to-one voting ratio between our Class B common stock and Class A common stock, IAC (and any future holders of our Class B common stock, collectively) will continue to control a substantial majority of the combined voting power of our capital stock. This concentrated control will significantly limit the ability of holders of our Class A common stock to influence corporate matters.
The difference in the voting rights of our Class B common stock and Class A common stock may harm the value and liquidity of our Class A common stock.
This difference in voting rights between our Class B common stock and Class A common stock could harm the value of our Class A common stock to the extent that any investor or potential future purchaser of our Class A common stock ascribes value to the right of the holders of our Class B common stock to ten votes per share. The existence of two classes of common stock with different voting rights could result in less liquidity for our Class A common stock than if there were only one class of common stock, which could adversely affect the price of our Class A common stock.
We do not expect to pay any cash dividends in the foreseeable future.
Currently, we have no plans to pay cash dividends on our Class A common stock and/or Class B common stock. Instead, we currently anticipate that all of our future earnings will be retained to support our operations and finance the growth and development of our business. Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including:
our historic and projected financial condition, liquidity and results of operations;
our capital levels and needs;
tax considerations;
any acquisitions that we may consider;
statutory and regulatory prohibitions and other limitations;

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the terms of any credit agreement or other borrowing arrangements that restrict our ability to pay cash dividends, including our term loan agreement and revolving credit facility;
general economic conditions; and
other factors deemed relevant by our board of directors.
We are not obligated to pay dividends on our Class A common stock or Class B common stock. Consequently, investors may need to rely on sales on their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
The Delaware General Corporation Law and certain provisions in our amended and restated certificate of incorporation and bylaws may discourage, delay or prevent a change of control of our company and/or changes in our management.
The Delaware General Corporation Law (the "DGCL") and our amended and restated certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company and/or changes in our management that our stockholders may deem advantageous, including provisions that: (i) authorize the issuance of "blank check" preferred stock, which our board of directors could issue to discourage a takeover attempt; (ii) limit the ability of our stockholders to call special meetings of stockholders; and (iii) provide that our board of directors is expressly authorized to make, alter or repeal our bylaws.
Any provision of the DGCL or our amended and restated certificate of incorporation and bylaws that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a related premium for their Class A common stock and could also affect the price that some investors are willing to pay for our Class A common stock.
The choice of forum provision in our amended and restated bylaws could limit the ability of our stockholders to obtain the judicial forum of their choice for certain disputes.
Our amended and rested bylaws provide that unless we consent in writing to the selection of an alternative forum, a state court within the State of Delaware (or, if no state court located within Delaware has jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for all of the following actions: (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim for (or based on breach of) fiduciary duty owed by any of our current or former directors, officers or other employees to us or to our stockholders, (iii) any action asserting a claim against us or any of our current or former directors, officers or other employees pursuant to the DGCL, our certificate of incorporation or our bylaws, (iv) any action asserting a claim relating to or involving us that is governed by the internal affairs doctrine or (v) any action asserting an "internal corporate claim" (as defined under the DGCL). This choice of forum provision may limit the ability of our stockholders to bring claims in a judicial forum that they find favorable for disputes with us or our current or former directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find our choice of forum provision to be inapplicable or unenforceable in an action, we could incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition.
Our Class A common stock is currently ineligible for inclusion in certain stock market indices.
Policies adopted by certain operators of U.S. stock market indices exclude equity securities of companies with multiple classes of outstanding publicly traded equity securities and/or companies with outstanding classes of publicly traded equity securities that have no voting rights (or "low" voting rights relative to another outstanding class of equity securities) from their stock indices and similar policies may be implemented by other operators of stock market indices in the future. Given the multiclass structure of our capital stock and IAC’s control over us, our Class A common stock is not currently eligible for inclusion in the S&P Composite 1500 (and its three component indices) and any indices managed by FTSE Russell. Exclusion from these stock market indices (and any others in the future) could reduce the liquidity of and demand for our Class A common stock, which could adversely affect the price of our Class A common stock.
Item 1B.    Unresolved Staff Comments
Not applicable.

23


Item 2.    Properties
We believe that the facilities for our management and operations are generally adequate for our current and near-term future needs. Our facilities, most of which are leased in the United States and abroad, consist of executive and administrative offices, sales offices and data centers. We do not anticipate any future problems renewing or obtaining suitable leases for us or any of our businesses. We currently lease approximately 127,000 square feet for our corporate headquarters in Golden, Colorado, which also houses offices for our HomeAdvisor business. Commencing in March 2019, our corporate headquarters and offices for our HomeAdvisor business will be housed in an approximately 152,000 square feet of leased executive, administrative and sales office space in Denver, Colorado.
Item 3.    Legal Proceedings
Overview
In the ordinary course of business, the Company and its subsidiaries are (or may become) parties to litigation involving property, personal injury, contract, intellectual property and other claims, as well as stockholder derivative actions, class action lawsuits and other matters. The amounts that may be recovered in such matters may be subject to insurance coverage. Although the results of legal proceedings and claims cannot be predicted with certainty, neither the Company nor any of its subsidiaries is currently a party to any legal proceedings the outcome of which, we believe, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, financial condition or results of operations.
Rules of the Securities and Exchange Commission require the description of material pending legal proceedings (other than ordinary, routine litigation incident to the registrant’s business) and advise that proceedings ordinarily need not be described if they primarily involve damages claims for amounts (exclusive of interest and costs) not exceeding 10% of the current assets of the registrant and its subsidiaries on a consolidated basis. In the judgment of Company management, none of the pending litigation matters which we are defending, including the one described below, involves or is likely to involve amounts of that magnitude. The litigation matter described below involves issues or claims that may be of particular interest to our stockholders, regardless of whether this matter may be material to our financial position or operations based upon the standard set forth in the rules of the Securities and Exchange Commission.
Service Professional Class Action Litigation against HomeAdvisor
In July 2016, a putative class action, Airquip, Inc. et al. v. HomeAdvisor, Inc. et al., No. l:16-cv-1849, was filed in the U.S. District Court for the District of Colorado. The complaint, as amended in November 2016, alleges that our HomeAdvisor business engages in certain deceptive practices affecting the service professionals who join its network, including charging them for substandard customer leads or failing to disclose certain charges. The complaint seeks certification of a nationwide class consisting of all HomeAdvisor service professionals since October 2012, asserts claims for fraud, breach of implied contract, unjust enrichment and violation of the federal RICO statute and the Colorado Consumer Protection Act ("CCPA"), and seeks injunctive relief and damages in an unspecified amount. In December 2016, HomeAdvisor filed a motion to dismiss the RICO and CCPA claims. In September 2017, the court issued an order granting the motion and dismissing those claims. In October 2017, HomeAdvisor filed an answer denying the material allegations of the remaining claims in the complaint. In May 2018, the plaintiffs filed a motion for leave to file a second amended complaint that would add nine new named plaintiffs, five new defendants (including ANGI Homeservices), and 55 new claims, most of them for various alleged violations of the laws of nine separate states. In June 2018, HomeAdvisor opposed the motion on grounds including that it was filed more than one year after the court’s deadline to amend pleadings.
In July 2018, the plaintiffs’ counsel filed a separate putative class action in the U.S. District Court for the District of Colorado, Costello et al. v. HomeAdvisor, Inc. et al., No. 1:18-cv-1802, on behalf of the same nine proposed new plaintiffs in the Airquip case, naming as defendants HomeAdvisor, ANGI Homeservices and IAC (as well as an unrelated company), and asserting 45 claims largely duplicative of those asserted in the proposed second amended complaint in the Airquip case. In November 2018, the judge presiding over the Airquip case issued an order consolidating the two cases to proceed before him under the caption In re HomeAdvisor, Inc. Litigation.
In January 2019, the plaintiffs filed a motion for leave to file a second amended complaint. On February 15, 2019, the defendants filed their opposition to the motion on various grounds. Discovery in the case is well under way, and the issue of class certification remains to be litigated. The Company believes that the allegations in this lawsuit are without merit and will continue to defend vigorously against them.

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Item 4.    Mine Safety Disclosures
Not applicable.
PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Registrant's Common Equity and Related Stockholder Matters

Our Class A common stock is quoted on The Nasdaq Global Select Market ("NASDAQ") under the ticker symbol "ANGI." There is no established public trading market for our Class B common stock.



As of February 1, 2019, there were ten holders of record of our Class A common stock. Because the substantial majority of the outstanding shares of our Class A common stock are held by brokers and other institutions on behalf of shareholders, we are not able to estimate the total number of beneficial shareholders represented by these record holders. As of February 1, 2019, there was one holder of record and beneficial shareholder of our Class B common stock.

Dividends
We do not currently expect that any cash or other dividends will be paid to holders of our Class A or Class B common stock in the near future. Any future cash dividend or other dividend declarations are subject to the determination of the Company's Board of Directors.
Unregistered Sales of Equity Securities

The Employee Matters Agreement dated as of September 29, 2017, by and between us and IAC (the "Employee Matters Agreement"), provides, among other things, that we will reimburse IAC for the cost of any IAC equity awards held by our current and former employees and that IAC may elect to receive payment either in cash or shares of our Class B common stock.

Pursuant to the Employee Matters Agreement, 137,623 shares of Class B common stock were issued to IAC on December 31, 2018 as reimbursement for shares of IAC common stock issued in connection with the exercise of IAC stock options held by our employees. This issuance did not involve any underwriters or public offerings and we believe that such issuance was exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(a)(2) of such act.

Issuer Purchases of Equity Securities

The Company did not purchase any shares of its Class A common stock during the quarter ended December 31, 2018. On February 6, 2019, the ANGI Homeservices Board of Directors authorized the Company to repurchase up to 15 million shares of its common stock. The Company may purchase shares pursuant to this repurchase authorization over an indefinite period in the open market and in privately negotiated transactions, depending on those factors our management deems relevant at any particular time, including, without limitation, market conditions, share price and future outlook.
Item 6.    Selected Financial Data
The consolidated and combined statement of operations data set forth in the table below for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 and the consolidated and combined balance sheet data as of December 31, 2018, 2017, 2016 and 2015 have been derived from our audited consolidated and combined financial statements. The combined balance sheet data as of December 31, 2014 has been derived from the consolidated financial statements and accounting records of IAC/ InterActiveCorp. This selected financial data should be read in conjunction with the consolidated and combined financial statements and accompanying notes included herein.

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Years Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(In thousands, except per share data)
Statement of Operations Data:(a)
 
 
 
 
 
 
 
 
 
Revenue
$
1,132,241

 
$
736,386

 
$
498,890

 
$
361,201

 
$
283,541

Net earnings (loss)
77,507

 
(104,527
)
 
10,631

 
(3,996
)
 
(2,220
)
Net (earnings) loss attributable to noncontrolling interests
(189
)
 
1,409

 
2,497

 
2,671

 
457

Net earnings (loss) attributable to ANGI Homeservices Inc. shareholders
77,318

 
(103,118
)
 
13,128

 
(1,325
)
 
(1,763
)
Per share information attributable to ANGI Homeservices Inc. shareholders:
 
 
 
 
Basic earnings (loss) per share
$
0.16

 
$
(0.24
)
 
$
0.03

 
$
(0.00
)
 
$
(0.00
)
Diluted earnings (loss) per share
$
0.15

 
$
(0.24
)
 
$
0.03

 
$
(0.00
)
 
$
(0.00
)
 
December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(In thousands)
 
 
 
 
 
 
 
 
 
(unaudited)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
1,808,027

 
$
1,467,262

 
$
295,517

 
$
203,576

 
$
200,630

Long-term debt:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
13,750

 
13,750

 

 

 

Long-term debt, net
244,971

 
258,312

 

 

 

Long-term debt—related party, including current portion
1,015

 
2,813

 
49,838

 
16,350

 
16,350

________________________________________________________________
(a) 
We recognized items that affected the comparability of results for the years 2018, 2017 and 2016, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."


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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT OVERVIEW
ANGI Homeservices Inc. ("ANGI Homeservices," the "Company," "ANGI," "we," "our," or "us") connects millions of homeowners to home service professionals through its portfolio of digital home service brands, including HomeAdvisor®, Angie’s List® and Handy. Combined, these leading marketplaces have collected more than 15 million reviews over the course of 20 years, allowing homeowners to research, match and connect on-demand to the largest network of service professionals online, through our mobile apps, or by voice assistants. ANGI Homeservices owns and operates brands in eight countries.
The HomeAdvisor digital marketplace service connects consumers with service professionals nationwide for home repair, maintenance and improvement projects. HomeAdvisor provides consumers with tools and resources to help them find local, pre-screened and customer-rated service professionals, as well as instantly book appointments with those professionals online or connect with them by telephone. Effective September 29, 2017, the Company also owns and operates Angie’s List, Inc. ("Angie's List"), which connects consumers with service professionals for local services through a nationwide online directory of service professionals in over 700 service categories and provides consumers with valuable tools, services and content, including verified reviews, to help them research, shop and hire for local services. On October 19, 2018, the Company acquired Handy Technologies, Inc. ("Handy"), a leading platform in the United States for connecting individuals looking for household services (primarily cleaning and handyman services) with top-quality, pre-screened independent service professionals. We refer to the HomeAdvisor and Handy businesses in the United States as the ("Marketplace"). We also own and operate mHelpDesk and CraftJack. Prior to its sale on December 31, 2018, we also operated Felix.
The Company has two operating segments: (i) North America (United States and Canada), which includes HomeAdvisor, Angie's List, Handy, mHelpDesk and HomeStars, and (ii) Europe, which includes Travaux, MyHammer, MyBuilder, Werkspot and Instapro.
The Company markets its services to consumers through search engine marketing, television advertising and affiliate agreements with third parties. Pursuant to these affiliate agreements, third parties agree to advertise and promote Marketplace products and services and those of Marketplace service professionals on their platforms. In exchange for these efforts, the Company generally pays these third parties a fixed fee when visitors from their platforms click through to one of our platforms and submit a valid service request through the Marketplace, or when visitors submit a valid service request on the affiliate platform and the affiliate transmits the service request to the Marketplace. The Company also markets its services to consumers through email, digital display advertisements, partnerships with other contextually related websites and, to a lesser extent, through relationships with certain retailers, direct mail and radio advertising. The Company markets subscription packages and time-based advertising to service professionals primarily through its sales force, as well as through search engine marketing, digital media advertising and direct relationships with trade associations and manufacturers. We have made, and expect to continue to make, substantial investments in digital and traditional advertising (with continued expansion into new and existing digital platforms) to consumers and service professionals to promote our products and services and to drive traffic to our various platforms and service professionals.
Operating Metrics:
In connection with the management of our businesses, we identify, measure and assess a variety of operating metrics. The principal metrics we use in managing our businesses are set forth below:
Marketplace Revenue includes revenue from the HomeAdvisor and Handy domestic marketplace service, including consumer connection revenue for consumer matches, membership subscription revenue from HomeAdvisor service professionals and revenue from completed jobs sourced through the Handy platform. It excludes revenue from Angie's List, mHelpDesk, HomeStars and Felix.
Advertising & Other Revenue includes Angie’s List revenue (revenue from service professionals under contract for advertising and membership subscription fees from consumers) as well as revenue from mHelpDesk, HomeStars and Felix.
Marketplace Service Requests are fully completed and submitted domestic customer service requests to HomeAdvisor and completed jobs sourced through the Handy platform.
Marketplace Paying Service Professionals ("Marketplace Paying SPs") are the number of HomeAdvisor and Handy domestic service professionals that had an active subscription and/or paid for consumer matches or completed

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a job sourced through the Handy platform in the last month of the period. An active HomeAdvisor subscription is a subscription for which HomeAdvisor was recognizing revenue on the last day of the relevant period.
Advertising Service Professionals are the total number of Angie’s List service professionals under contract for advertising at the end of the period.
Components of Results of Operations
Revenue
Marketplace Revenue is primarily derived from (i) consumer connection revenue, which comprises fees paid by HomeAdvisor service professionals for consumer matches (regardless of whether the service professional ultimately provides the requested service) and booking fees from completed jobs sourced through the Handy platform, and (ii) membership subscription fees paid by HomeAdvisor service professionals. Consumer connection revenue varies based upon several factors, including the service requested, product experience offered and geographic location of service. Effective with the Combination (described below), Advertising & Other Revenue is primarily derived from Angie's List (i) sales of time-based website, mobile and call center advertising to service professionals and (ii) membership subscription fees from consumers.
Operating Costs and Expenses:
Cost of revenue - consists primarily of traffic acquisition costs, credit card processing fees, costs associated with publishing and distributing the Angie's List Magazine and hosting fees. Traffic acquisition costs include amounts based on revenue share arrangements.
Selling and marketing expense - consists primarily of advertising expenditures, which include online marketing, including fees paid to search engines, offline marketing, which is primarily television advertising, and partner-related payments to those who direct traffic to our brands, compensation expense (including stock-based compensation expense) and other employee-related costs for our sales force and marketing personnel, and facilities costs.
General and administrative expense - consists primarily of compensation expense (including stock-based compensation expense) and other employee-related costs for personnel engaged in executive management, finance, legal, tax, human resources and customer service functions, fees for professional services (including transaction-related costs related to acquisitions and the Combination), bad debt expense, software license and maintenance costs and facilities costs. Our customer service function includes personnel who provide support to our service professionals and consumers.
Product development expense - consists primarily of compensation expense (including stock-based compensation expense) and other employee-related costs that are not capitalized for personnel engaged in the design, development, testing and enhancement of product offerings and related technology, software license and maintenance costs and facilities costs.
Non-GAAP financial measure
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") is a non-GAAP financial measure. See "Principles of Financial Reporting" for the definition of Adjusted EBITDA and a reconciliation of net earnings (loss) attributable to ANGI Homeservices Inc. shareholders to operating income (loss) to consolidated and combined Adjusted EBITDA for the years ended December 31, 2018, 2017, and 2016.
The Combination
On September 29, 2017, IAC/InterActiveCorp's ("IAC") HomeAdvisor business and Angie's List combined under a new publicly traded company called ANGI Homeservices Inc. (the "Combination"). At December 31, 2018, IAC owned 83.9% and 98.1% of the economic and voting interest, respectively, of ANGI Homeservices.
During the years ended December 31, 2018 and 2017, the Company incurred $3.6 million and $44.1 million, respectively, in costs related to this transaction (including severance, retention, transaction and integration related costs). In addition, the Company had deferred revenue write-offs of $5.5 million and $7.8 million during the years ended December 31, 2018 and 2017, respectively.

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The Company also incurred $70.6 million and $122.1 million in stock-based compensation expense during the years ended December 31, 2018 and 2017, respectively, related to the modification of previously issued HomeAdvisor equity awards and previously issued Angie's List equity awards, both of which were converted into ANGI Homeservices' equity awards in the Combination, and the acceleration of certain converted equity awards resulting from the termination of Angie's List employees in connection with the Combination. Stock-based compensation expense arising from the Combination is expected to be approximately $35 million in 2019 and $20 million in 2020.
2018 Developments
On December 31, 2018, ANGI sold Felix, which was included in our North America segment.
On November 5, 2018, ANGI entered into a five-year $250 million revolving credit facility (the "Credit Facility") and the term loan facility (the "Term Loan") was amended and restated, and is now due on November 5, 2023.
On October 19, 2018, ANGI acquired Handy, which is included in our North America segment.
2018 Consolidated Results
In 2018, the Company delivered $395.9 million, or 54%, revenue growth, which was primarily driven by Marketplace Revenue growth of $193.1 million, or 33%; the contribution from Angie’s List; and growth in Europe of $12.6 million, or 22%. Operating income increased $211.8 million to $63.9 million from a loss of $147.9 million in the prior year due primarily to an increase in Adjusted EBITDA of $208.3 million, or 532%, and a decrease of $52.2 million in stock-based compensation expense due primarily to a decrease in the modification and acceleration charges of $51.4 million related to the Combination, partially offset by increases of $39.0 million in amortization of intangibles principally due to the Combination and $9.8 million in depreciation. Adjusted EBITDA increased primarily due to the increase in revenue of $395.9 million, a decrease of $40.5 million in costs related to the Combination (including severance, retention, transaction and integration related costs) and lower selling and marketing expense as a percentage of revenue, partially offset by higher compensation expense due, in part, to increased headcount following the Combination, increases of $21.7 million in cost of revenue, $19.7 million in bad debt expense, $15.2 million in software license and maintenance costs and $9.4 million in facilities costs. Operating income and Adjusted EBITDA in 2018 benefited from a reduction in sales commissions expense of $4.9 million due to the adoption of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers on January 1, 2018. As a result of the adoption of ASU No. 2014-09, certain sales commissions, which represent the incremental direct costs of obtaining a service professional contract, are now capitalized and amortized over the estimated life of a service professional; these costs were expensed as incurred prior to January 1, 2018.
In addition to the Combination, other events affecting year-over-year comparability that occurred prior to 2018 include the acquisitions of controlling interests in MyBuilder Limited ("MyBuilder") on March 24, 2017 (reflected in the Europe segment) and HomeStars Inc. ("HomeStars") on February 8, 2017 (reflected in the North America segment).

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Results of Operations for the Years Ended December 31, 2018, 2017 and 2016
Revenue
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Amounts in thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketplace:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer connection revenue
$
704,341

 
$
182,860

 
35%
 
$
521,481

 
$
139,015

 
36%
 
$
382,466

Membership subscription revenue
66,214

 
10,079

 
18%
 
56,135

 
12,562

 
29%
 
43,573

Other revenue
3,940

 
142

 
4%
 
3,798

 
971

 
34%
 
2,827

Total Marketplace Revenue
774,495

 
193,081

 
33%
 
581,414

 
152,548

 
36%
 
428,866

Advertising & Other Revenue
287,676

 
190,193

 
195%
 
97,483

 
64,502

 
196%
 
32,981

North America
1,062,171

 
383,274

 
56%
 
678,897

 
217,050

 
47%
 
461,847

Europe
70,070

 
12,581

 
22%
 
57,489

 
20,446

 
55%
 
37,043

Total Revenue
$
1,132,241

 
$
395,855

 
54%
 
$
736,386

 
$
237,496

 
48%
 
$
498,890

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of Total Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
94
%
 
 
 
 
 
92
%
 
 
 
 
 
93
%
Europe
6
%
 
 
 
 
 
8
%
 
 
 
 
 
7
%
Total Revenue
100
%
 
 
 
 
 
100
%
 
 
 
 
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
2018
 
Change
 
% Change
 
2017
 
Change
 
% Change
 
2016
 
(Amounts in thousands)
Operating metrics:
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketplace Service Requests
23,488

 
5,359

 
30%
 
18,129

 
4,921

 
37%
 
13,208

Marketplace Paying SPs
214

 
33

 
18%
 
181

 
38

 
26%
 
143

Advertising Service Professionals
36

 
(9
)
 
(20)%
 
45

 
            NA
 
NA
 

________________________
NA = Not applicable
For the year ended December 31, 2018 compared to the year ended December 31, 2017
North America revenue increased $383.3 million, or 56%, due to increases in Marketplace Revenue of $193.1 million, or 33%, and Advertising & Other Revenue of $190.2 million, or 195%. The increase in Marketplace Revenue is due to an increase in consumer connection revenue of $182.9 million, or 35%, which was driven by a 30% increase in Marketplace Service Requests to 23.5 million and an increase in membership subscription revenue of $10.1 million, or 18%, due to a 18% increase in Marketplace Paying SPs to 214,000. The increase in Advertising & Other Revenue was driven by the contribution from Angie's List, which reflects the write-off of deferred revenue due to the Combination of $5.5 million in 2018 compared to $7.8 million in 2017.
Europe revenue grew $12.6 million, or 22%, driven by the acquisition of a controlling interest in MyBuilder on March 24, 2017, as well as growth across other regions. Europe revenue also benefited from the weakening of the U.S. dollar relative to the Euro.
For the year ended December 31, 2017 compared to the year ended December 31, 2016
North America revenue increased $217.1 million, or 47%, due to increases in Marketplace Revenue of $152.5 million, or 36%, and Advertising & Other Revenue of $64.5 million, or 196%. The increase in Marketplace Revenue is due to an increase in consumer connection revenue of $139.0 million, or 36%, which was driven by a 37% increase in Marketplace Service

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Requests to 18.1 million and an increase in membership subscription revenue of $12.6 million, or 29%, due to a 26% increase in Marketplace Paying SPs to 181,000. Advertising & Other Revenue in 2017 includes Angie's List since the date of the Combination, which reflects the write-off of deferred revenue due to the Combination of $7.8 million.
Europe revenue grew $20.4 million, or 55%, driven by the acquisitions of controlling interests in MyHammer on November 3, 2016 and MyBuilder, as well as organic growth across other regions.
Cost of revenue
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Dollars in thousands)
Cost of revenue (exclusive of depreciation shown separately below)
$55,739
 
$21,666
 
64%
 
$34,073
 
$8,215
 
32%
 
$25,858
As a percentage of revenue
5%
 
 
 
 
 
5%
 
 
 
 
 
5%
For the year ended December 31, 2018 compared to the year ended December 31, 2017
North America cost of revenue increased $21.5 million, or 66%, driven by increases of $7.2 million in traffic acquisition costs, $6.9 million in credit card processing fees due to $3.5 million from the inclusion of Angie's List and higher Marketplace Revenue, $3.7 million in costs associated with publishing and distributing the Angie's List Magazine and $2.6 million in hosting fees, principally from the inclusion of Angie's List.
For the year ended December 31, 2017 compared to the year ended December 31, 2016
North America cost of revenue increased $7.2 million, or 28%, driven by increases of $4.2 million in credit card processing fees due to higher Marketplace Revenue and $1.4 million from the inclusion of Angie's List, and $2.1 million in hosting fees, of which $1.3 million was from the inclusion of Angie's List, partially offset by a reduction in traffic acquisition costs of $0.4 million.
Europe cost of revenue increased $1.0 million, or 383%, driven by an increase of $0.9 million in hosting fees.
Selling and marketing expense
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Dollars in thousands)
Selling and marketing expense
$541,469
 
$77,429
 
17%
 
$464,040
 
$157,327
 
51%
 
$306,713
As a percentage of revenue
48%
 
 
 
 
 
63%
 
 
 
 
 
61%
For the year ended December 31, 2018 compared to the year ended December 31, 2017
North America selling and marketing expense increased $73.5 million, or 17%, but declined as a percentage of revenue. The increase in North America selling and marketing expense was driven by increases in advertising expense of $53.0 million, reflecting the impact from the inclusion of Angie's List, compensation expense of $11.8 million and facilities costs of $4.0 million. The increase in advertising expense is due primarily to increased investments in online marketing and television spend. Compensation expense increased due primarily to growth in the sales force, partially offset by a decrease in stock-based compensation expense of $22.4 million and the inclusion of $7.4 million in severance and retention costs in 2017 related to the Combination. The decrease in stock-based compensation expense reflects decreases of $13.3 million in expense due to the modification of previously issued HomeAdvisor equity awards, which were converted into ANGI Homeservices' equity awards ($1.6 million in 2018 compared to $14.8 million in 2017), and $9.0 million in expense related to previously issued Angie's List equity awards, including the acceleration of certain converted equity awards resulting from the termination of Angie's List employees in connection with the Combination ($0.6 million in 2018 compared to $9.6 million in 2017). Compensation expense in 2018 also reflects a reduction in sales commissions expense of $4.9 million due to the adoption of ASU No. 2014-09. As a percentage of revenue, North America selling and marketing expense declined due, in part, to accelerated revenue growth driven by capacity expansion efforts combined with marketing optimization efforts.

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Europe selling and marketing expense increased $4.0 million, or 11%, driven by $3.6 million of increased expense from the inclusion of MyBuilder, principally related to advertising, and increases in compensation expense of $1.0 million and facilities costs of $1.0 million, partially offset by a decrease in advertising expense of $2.5 million.
For the year ended December 31, 2017 compared to the year ended December 31, 2016
North America selling and marketing expense increased $142.8 million, or 50%, driven by an increase in advertising expense of $73.3 million, of which $5.3 million was from the inclusion of Angie's List, an increase of $62.4 million in compensation expense, of which $24.4 million was from the inclusion of Angie's List, as well as $2.5 million of expense from the acquisition of HomeStars. The increase in advertising expense is due primarily to increased organic investments in online marketing and television spend. Compensation expense increased due primarily to an increase of $24.9 million in stock-based compensation expense, of which $9.8 million was from the inclusion of Angie's List, an increase in the sales force and the inclusion of $7.4 million in severance and retention costs related to the Combination. The increase in stock-based compensation expense reflects $14.8 million of expense in 2017 due to the modification of previously issued HomeAdvisor equity awards, which were converted into ANGI Homeservices' equity awards, and $9.6 million of expense in 2017 related to previously issued Angie's List equity awards, including the acceleration of certain converted equity awards resulting from the termination of Angie's List employees in connection with the Combination.
Europe selling and marketing expense increased $14.5 million, or 65%, driven by organic growth of $4.9 million in advertising expense and $2.5 million in compensation expense due, in part, to an increase in the sales force, as well as $7.0 million of expense from the acquisitions of MyHammer and MyBuilder.
General and administrative expense
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Dollars in thousands)
General and administrative expense
$323,462
 
$23,029
 
8%
 
$300,433
 
$190,340
 
173%
 
$110,093
As a percentage of revenue
29%
 
 
 
 
 
41%
 
 
 
 
 
22%
For the year ended December 31, 2018 compared to the year ended December 31, 2017
North America general and administrative expense increased $24.9 million, or 9%, due primarily to an increase of $19.5 million in bad debt expense due, in part, to higher Marketplace Revenue, increases of $9.4 million in software license and maintenance costs and $3.7 million in facilities costs, both reflecting the impact from the inclusion of Angie's List, and an increase in customer service expense of $3.4 million, partially offset by a reduction in transaction and integration-related costs principally related to the Combination of $21.1 million. North America general and administrative expense also includes an increase in compensation expense of $1.0 million. The increase in compensation expense is due primarily to an increase in headcount following the Combination and existing business growth as well as $3.8 million from the inclusion of Handy, almost entirely offset by a decrease of $24.9 million in stock-based compensation expense and a decrease of $9.2 million in severance and retention costs related to the Combination ($2.7 million in 2018 compared to $11.8 million in 2017). The decrease in stock-based compensation expense reflects decreases of $12.9 million in expense due to the modification of previously issued HomeAdvisor equity awards, which were converted into ANGI Homeservices' equity awards ($52.9 million in 2018 compared to $65.7 million in 2017), and $9.6 million in expense related to previously issued Angie's List equity awards, including the acceleration of certain converted equity awards resulting from the termination of Angie's List employees in connection with the Combination ($8.1 million in 2018 compared to $17.7 million in 2017), and the inclusion in 2017 of a modification charge related to a HomeAdvisor equity award, partially offset by acceleration of expense related to certain equity awards in the fourth quarter of 2018 in connection with the chief executive officer transition and the issuance of new equity awards since 2017.
Europe general and administrative expense decreased $1.9 million, or 7%, due primarily to a reduction in facilities costs and the inclusion in 2017 of $0.8 million of transaction-related costs primarily related to the acquisition of MyBuilder, partially offset by $1.1 million of increased expense from the inclusion of MyBuilder.
For the year ended December 31, 2017 compared to the year ended December 31, 2016
North America general and administrative expense increased $181.8 million, or 200%, due primarily to higher compensation expense of $129.4 million, of which $38.4 million was from the inclusion of Angie's List, and $24.3 million in

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costs related to the Combination including transaction related costs of $14.3 million and integration related costs of $10.0 million. The increase in compensation expense is due principally to an increase of $100.7 million in stock-based compensation expense, of which $18.0 million was from the inclusion of Angie's List, an increase in headcount from business growth and the inclusion of $11.8 million in severance and retention costs in 2017 related to the Combination. The increase in stock-based compensation expense reflects $65.7 million of expense in 2017 due to the modification of previously issued HomeAdvisor equity awards, which were converted into ANGI Homeservices' equity awards, and $17.7 million of expense in 2017 related to previously issued Angie's List equity awards, including the acceleration of certain converted equity awards resulting from the termination of Angie's List employees in connection with the Combination, as well as a modification charge related to a HomeAdvisor equity award in 2017. North America general and administrative expense also includes increases of $9.3 million in bad debt expense due to higher Marketplace Revenue, $3.9 million in customer service expense and $3.1 million in software license and maintenance costs, as well as $2.5 million of expense from the inclusion of HomeStars.
Europe general and administrative expense increased $8.5 million, or 45%, due primarily to $7.3 million of expense from the inclusion of MyHammer and MyBuilder and an increase of $1.3 million in compensation expense due, in part, to increased headcount.
Product development expense
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Dollars in thousands)
Product development expense
$61,143
 
$13,236
 
28%
 
$47,907
 
$27,311
 
133%
 
$20,596
As a percentage of revenue
5%
 
 
 
 
 
7%
 
 
 
 
 
4%
For the year ended December 31, 2018 compared to the year ended December 31, 2017
North America product development expense increased $8.1 million, or 19%, due primarily to an increase in software license and maintenance costs of $3.8 million, reflecting the impact from the inclusion of Angie's List, and an increase in compensation expense of $2.8 million. The increase in compensation expense is due primarily to increased headcount, partially offset by a decrease of $6.1 million in stock-based compensation expense resulting from a lower modification charge related to the Combination.
Europe product development expense increased $5.1 million, or 116%, due to an increase of $1.5 million in compensation expense due, in part, to increased headcount, $1.1 million of increased expense from the inclusion of MyBuilder and increases in facilities costs of $0.7 million and software license and maintenance costs of $0.6 million.
For the year ended December 31, 2017 compared to the year ended December 31, 2016
North America product development expense increased $25.6 million, or 142%, due primarily to an increase in compensation expense of $23.2 million, of which $6.8 million was from the inclusion of Angie's List, and $1.0 million of expense from the inclusion of HomeStars. The increase in compensation expense is due to an increase of $14.5 million in stock-based compensation expense principally due to the modification charge related to the Combination and increased headcount.
Europe product development expense increased $1.7 million, or 66%, due to an increase of $1.9 million in compensation expense from the inclusion of MyHammer and MyBuilder.
Depreciation
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Dollars in thousands)
Depreciation
$24,310
 
$9,767
 
67%
 
$14,543
 
$6,124
 
73%
 
$8,419
As a percentage of revenue
2%
 
 
 
 
 
2%
 
 
 
 
 
2%

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For the year ended December 31, 2018 compared to the year ended December 31, 2017
North America depreciation increased $8.6 million, or 65%, of which $2.2 million was from the inclusion of Angie's List and the remaining increase was due primarily to continued growth, including internally developed capitalized software. Europe depreciation increased $1.1 million.
For the year ended December 31, 2017 compared to the year ended December 31, 2016
North America depreciation increased $5.2 million or 66%, and Europe depreciation increased $0.9 million, or 207%, due primarily to increased depreciation related to continued corporate growth, including acquisitions.
Operating income (loss)
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Dollars in thousands)
North America
$
78,102

 
$
206,585

 
NM
 
$
(128,483
)
 
$
(160,947
)
 
NM
 
$
32,464

Europe
(14,196
)
 
5,192

 
27%
 
(19,388
)
 
(10,982
)
 
(131)%
 
(8,406
)
Total
$
63,906

 
$
211,777

 
NM
 
$
(147,871
)
 
$
(171,929
)
 
NM
 
$
24,058

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As a percentage of revenue
6%
 
 
 
 
 
(20)%
 
 
 
 
 
5%
________________________
NM = Not meaningful
For the year ended December 31, 2018 compared to the year ended December 31, 2017
North America operating income increased $206.6 million to $78.1 million from a loss of $128.5 million in 2017 due primarily to an increase in Adjusted EBITDA of $203.8 million described below, and a decrease of $51.5 million in stock-based compensation expense, partially offset by increases of $40.0 million in amortization of intangibles and $8.6 million in depreciation. The decrease in stock-based compensation expense was due primarily to a decrease of $51.4 million in modification and acceleration charges related to the Combination and the inclusion in 2017 of a modification charge related to a HomeAdvisor equity award, partially offset by acceleration of expense related to certain equity awards in the fourth quarter of 2018 in connection with the chief executive officer transition and the issuance of new equity awards since 2017. The increase in amortization of intangibles was principally due to the Combination.
Europe operating loss decreased $5.2 million, or 27%, due primarily to a reduction in Adjusted EBITDA loss of $4.6 million described below and decreases of $1.1 million in amortization of intangibles and $0.7 million in stock-based compensation expense, partially offset by an increase of $1.1 million in depreciation.
At December 31, 2018, there is $130.0 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is expected to be recognized over a weighted average period of approximately 2.0 years.
For the year ended December 31, 2017 compared to the year ended December 31, 2016
North America operating income decreased $160.9 million to an operating loss of $128.5 million in 2017 as compared to operating income of $32.5 million in 2016, despite an increase of $0.1 million in Adjusted EBITDA described below, primarily due to an increase of $140.4 million in stock-based compensation expense, an increase of $15.3 million in amortization of intangibles and an increase of $5.2 million in depreciation. The increase in stock-based compensation expense was due primarily to modification and acceleration charges of $122.1 million related to the Combination and the inclusion in 2017 of a modification charge related to a HomeAdvisor equity award. The increase in amortization of intangibles was due principally to the Combination.
Europe operating loss increased $11.0 million, or 131%, primarily due to an increase in Adjusted EBITDA loss of $5.5 million described below, an increase of $4.8 million in amortization of intangibles and an increase of $0.9 million in depreciation, partially offset by a decrease in stock-based compensation expense of $0.1 million.

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Adjusted EBITDA
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Dollars in thousands)
North America
$
253,963

 
$
203,781

 
406%
 
$
50,182

 
$
94

 
—%
 
$
50,088

Europe
(6,457
)
 
4,562

 
41%
 
(11,019
)
 
(5,477
)
 
(99)%
 
(5,542
)
Total
$
247,506

 
$
208,343

 
532%
 
$
39,163

 
$
(5,383
)
 
(12)%
 
$
44,546

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As a percentage of revenue
22%
 
 
 
 
 
5%
 
 
 
 
 
9%
For a reconciliation of net earnings (loss) attributable to ANGI Homeservices Inc. shareholders to operating income (loss) to consolidated and combined Adjusted EBITDA, see "Principles of Financial Reporting." For a reconciliation of operating income (loss) to Adjusted EBITDA for the Company's reportable segments, see "Note 12—Segment Information" to the consolidated and combined financial statements included in "Item 8. Consolidated and Combined Financial Statements and Supplementary Data."
For the year ended December 31, 2018 compared to the year ended December 31, 2017
North America Adjusted EBITDA increased $203.8 million, or 406%, due primarily to the increase of $383.3 million in revenue, a reduction in transaction and integration-related costs principally related to the Combination of $38.3 million and lower selling and marketing expense as a percentage of revenue, partially offset by higher compensation expense due, in part, to increased headcount following the Combination and, as described above, increases of $21.5 million in cost of revenue, $19.5 million in bad debt expense, $14.8 million in software license and maintenance costs and $8.0 million in facilities costs.
Europe Adjusted EBITDA loss decreased $4.6 million, or 41%, due primarily to the increase of $12.6 million in revenue, of which $6.9 million was from MyBuilder, and the decrease in advertising expense of $2.5 million, partially offset by $5.8 million of expense from the inclusion of MyBuilder primarily related to advertising, higher compensation expense of $3.6 million primarily due to increased headcount and an increase in facilities costs of $0.7 million. Additionally, Europe Adjusted EBITDA loss in 2017 includes $0.8 million of transaction-related costs primarily related to the acquisition of MyBuilder.
Adjusted EBITDA in 2018 benefited from a reduction in sales commissions expense of $4.9 million for North America due to the adoption of ASU No. 2014-09 on January 1, 2018.
For the year ended December 31, 2017 compared to the year ended December 31, 2016
North America Adjusted EBITDA increased $0.1 million, despite the significant increase of $217.1 million in revenue, due primarily to an increase in advertising expense of $73.3 million, higher compensation expense due, in part, to increased headcount, the inclusion in 2017 of $44.1 million in costs related to the Combination (including severance, retention, transaction and integration related costs) and increases of $9.3 million in bad debt expense due to higher revenue, $3.9 million in customer service expense and $3.1 million in software license and maintenance costs. Adjusted EBITDA in 2017 was further impacted by write-offs of deferred revenue related to the Combination of $7.8 million and the acquisition of HomeStars of $0.7 million.
Europe Adjusted EBITDA loss increased $5.5 million, or 99%, driven primarily by our European expansion strategy including an increase in advertising expense of $10.7 million and higher compensation expense of $10.5 million both due primarily to the inclusion of MyHammer and MyBuilder. The increase in compensation expense was also due to increased organic headcount.
Interest expense
Interest expense—third-party relates to interest on the Term Loan, which commenced on November 1, 2017 and commitment fees on the undrawn Credit Facility, which commenced on November 5, 2018.
Interest expense—related party includes interest charged by IAC and its subsidiaries on related party notes, which were primarily related to acquisitions. All related party notes were settled prior to the Combination, with the exception of a promissory note payable to a foreign subsidiary of IAC. For a detailed description of long-term debt—related party, see "Note

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15—Related Party Transactions with IAC" to the consolidated and combined financial statements included in "Item 8. Consolidated and Combined Financial Statements and Supplementary Data."
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Dollars in thousands)
Interest expense—third-party
$11,623
 
$9,858
 
559%
 
$1,765
 
$1,765
 
NA
 
$—
Interest expense—related party
118
 
(5,853)
 
(98)%
 
$5,971
 
5,077
 
568%
 
894
Other income (expense), net
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Dollars in thousands)
Other income (expense), net
$17,859
 
$15,885
 
805%
 
$1,974
 
$2,673
 
NM
 
$(699)
Other income, net in 2018 includes a gain of $13.2 million related to the sale of Felix and third-party interest income of $4.8 million.
Other income (expense), net in 2017 and 2016 is principally net foreign currency exchange gains (losses).
Income tax benefit (provision)
 
Years Ended December 31,
 
2018
 
$ Change
 
% Change
 
2017
 
$ Change
 
% Change
 
2016
 
(Dollars in thousands)
Income tax benefit (provision)
$7,483
 
$(41,623)
 
NM
 
$49,106
 
$60,940
 
NM
 
$(11,834)
Effective income tax rate
NM
 
 
 
 
 
32%
 
 
 
 
 
53%
In 2018, the income tax benefit, despite pre-tax income, is due primarily to excess tax benefits generated by the exercise and vesting of stock-based awards.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act implemented a number of changes that took effect on January 1, 2018, including but not limited to, a reduction of the U.S. federal corporate tax rate from 35% to 21% and a new minimum tax on global intangible low-taxed income earned by foreign subsidiaries. The Company was able to make a reasonable estimate of the impacts of the Tax Act in the fourth quarter of 2017 as described below. In the third quarter of 2018, the Company finalized its calculations related to the impacts of the Tax Act with no adjustment in 2018 to the Company’s previously recorded provisional tax expense.
In 2017, the effective income tax rate is lower than the statutory rate of 35% due primarily to the effect of the Tax Act, largely offset by adopting the provisions of the Financial Accounting Standards Board issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, on January 1, 2017. The Tax Act required a remeasurement of U.S. net deferred tax assets due to the reduction in the corporate income tax rate from 35% to 21%, resulting in a tax expense of $33.0 million. The Company was not subject to the one-time transition tax because it has cumulative losses from its international operations. Under ASU No. 2016-09, excess tax benefits generated by the settlement or exercise of stock-based awards of $35.8 million for the year ended December 31, 2017 are recognized as a reduction to the income tax provision rather than as an increase to additional paid-in capital.
In 2016, the effective income tax rate is higher than the statutory rate of 35% due primarily to unbenefited losses in separate jurisdictions and state taxes, partially offset by research credits.
For further details of income tax matters, see "Note 3—Income Taxes" to the consolidated and combined financial statements included in "Item 8. Consolidated and Combined Financial Statements and Supplementary Data."

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PRINCIPLES OF FINANCIAL REPORTING
We report 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. We endeavor 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 Non-GAAP Measure
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 amortization of intangible assets and impairments of goodwill and intangible assets, if applicable. 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. The above items are excluded from our Adjusted EBITDA measure because these items are non-cash in nature. Adjusted EBITDA has certain limitations in that it does not take into account the impact to our consolidated and combined statement of operations of certain expenses.
The following table reconciles net earnings (loss) attributable to ANGI Homeservices Inc. shareholders to operating income (loss) to consolidated and combined Adjusted EBITDA:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
Net earnings (loss) attributable to ANGI Homeservices Inc. shareholders
$
77,318

 
$
(103,118
)
 
$
13,128

Add back:
 
 
 
 
 
Net earnings (loss) attributable to noncontrolling interests
189

 
(1,409
)
 
(2,497
)
Income tax (benefit) provision
(7,483
)
 
(49,106
)
 
11,834

Other (income) expense, net
(17,859
)
 
(1,974
)
 
699

Interest expense—related party
118

 
5,971

 
894

Interest expense—third-party
11,623

 
1,765

 

Operating income (loss)
63,906

 
(147,871
)
 
24,058

Stock-based compensation expense
97,078

 
149,230

 
8,916

Depreciation
24,310

 
14,543

 
8,419

Amortization of intangibles
62,212

 
23,261

 
3,153

Adjusted EBITDA
$
247,506

 
$
39,163

 
$
44,546

For a reconciliation of operating income (loss) to Adjusted EBITDA for the Company's reportable segments, see "Note 12—Segment Information" to the consolidated and combined financial statements included in "Item 8. Consolidated and Combined Financial Statements and Supplementary Data."
Non-Cash Expenses That Are Excluded from Non-GAAP Measure
Stock-based compensation expense consists principally of expense associated with the grants, including unvested grants assumed in acquisitions (including the Combination), of stock appreciation rights, restricted stock units, or RSUs, stock options 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. Performance-based RSUs are included only to the extent the applicable performance condition(s) have been met (assuming the end of the reporting period is the end of the contingency period). To the extent that stock-based awards are settled on a net basis, the Company remits the required tax-withholding amount from its current funds.

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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, or, in the case of leasehold improvements, the lease term, if shorter.
Amortization of intangible assets and impairments of goodwill and intangible assets are non-cash expenses related primarily to acquisitions (including the Combination). At the time of an acquisition, the identifiable definite-lived intangible assets of the acquired company, such as service professional and contractor relationships, technology, memberships, customer lists and user base, and trade names, 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. 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.

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FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Position
 
 
December 31,
 
 
2018
 
2017
 
 
(In thousands)
Cash and cash equivalents:
 
 
 
 
United States
 
$
328,795

 
$
214,803

All other countries (a)
 
8,189

 
6,718

Total cash and cash equivalents
 
336,984

 
221,521

Marketable securities (United States)
 
24,947

 

Total cash and cash equivalents and marketable securities
 
$
361,931

 
$
221,521

 
 
 
 
 
Long-term debt
 
 
 
 
Term Loan due November 5, 2023
 
$
261,250

 
$
275,000

Less: current portion of Term Loan
 
13,750

 
13,750

Less: unamortized debt issuance costs
 
2,529

 
2,938

Total long-term debt, net
 
$
244,971

 
$
258,312

 
 
 
 
 
Long-term debt—related party
 
$
1,015

 
$
2,813

Less: current portion of long-term debt—related party
 

 
816

Total long-term debt—related party, net
 
$
1,015

 
$
1,997

_________________________________________________________________________
(a)
If needed for U.S. operations, the cash and cash equivalents held by the Company's foreign subsidiaries could be repatriated without significant tax consequences.
For a detailed description of long-term debt, see "Note 7—Long-term Debt" and for a detailed description of long-term debt—related party, see "Note 15—Related Party Transactions with IAC" to the consolidated and combined financial statements included in "Item 8. Consolidated and Combined Financial Statements and Supplementary Data."
Cash Flow Information
In summary, the Company's cash flows are as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
223,700

 
$
41,823

 
$
47,896

Investing activities
(57,591
)
 
(93,177
)
 
(32,309
)
Financing activities
(49,021
)
 
224,733

 
28,974

Net cash provided by operating activities consists of earnings adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include stock-based compensation expense, amortization of intangibles, bad debt expense, depreciation, gain from the sale of a business, and deferred income taxes.
2018
Adjustments to earnings consist primarily of $97.1 million of stock-based compensation expense, $62.2 million of amortization of intangibles, $47.2 million of bad debt expense and $24.3 million of depreciation, partially offset by $13.2 million in gain from the sale of Felix and $8.4 million of deferred income taxes. The deferred income tax benefit primarily

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relates to amortization of intangibles and stock-based compensation expense, partially offset by the utilization of net operating losses. The decrease from changes in working capital consists primarily of an increase in accounts receivable of $47.7 million and an increase in other assets of $13.0 million. The increase in accounts receivable is primarily due to revenue growth in North America. The increase in other assets is due to increases in capitalized sales commissions and prepaid marketing.
Net cash used in investing activities includes capital expenditures of $47.0 million, primarily related to investments in the development of capitalized software to support the Company's products and services, leasehold improvements and computer hardware, and purchases (net of maturities) of marketable debt securities of $24.7 million, partially offset by $10.4 million in net proceeds from the sale of Angie's List's campus located in Indianapolis and $3.7 million in cash from the acquisition of Handy, net of cash consideration paid.
Net cash used in financing activities includes $29.8 million for the payment of withholding taxes on behalf of employees for stock-based awards that were net settled, $13.8 million in principal payments on the Term Loan and $6.1 million for the purchase of noncontrolling interests, partially offset by $4.7 million in proceeds from the exercise of stock options.
2017
Adjustments to earnings consist primarily of $149.2 million of stock-based compensation expense, $27.5 million of bad debt expense, $23.3 million of amortization of intangibles and $14.5 million of depreciation, partially offset by $48.4 million of deferred income taxes. The deferred income tax benefit primarily relates to the modification charge for the conversion and acceleration of stock-based awards related to the Combination, the net operating loss created by the exercise of HomeAdvisor stock-based awards and the one-time charges related to the Combination. The decrease from changes in working capital consists primarily of an increase in accounts receivable of $33.2 million, partially offset by an increase in deferred revenue of $11.0 million. The increase in accounts receivable is primarily due to revenue growth in North America. The increase in deferred revenue is due to growth in subscription sales and time-based advertising to service professionals.
Net cash used in investing activities includes $66.3 million of cash used for the acquisitions of MyBuilder, Angie's List, and HomeStars, and capital expenditures of $26.8 million, primarily related to investments in the development of capitalized software to support our products and services and computer hardware. The cash used for the acquisition of Angie's List includes $61.5 million that the Company loaned to Angie's List to fund the repayment of Angie's List debt outstanding immediately prior to the Combination.
Net cash provided by financing activities includes proceeds from borrowings under the Term Loan of $275.0 million, proceeds from borrowings of related party debt of $131.4 million, including $61.5 million in borrowings from IAC used by the Company to fund the repayment of Angie's List debt immediately prior to the Combination, and cash transfers of $24.2 million from IAC pursuant to IAC's centrally managed U.S. treasury management function, partially offset by principal payments on related party debt of $181.6 million, the purchase of noncontrolling interests of $12.8 million and $10.1 million for the payment of withholding taxes on behalf of employees for stock-based awards that were net settled. The principal payments on related party debt include repayment of $61.5 million in borrowings from IAC used by the Company to fund the repayment of Angie's List debt immediately prior to the Combination.
2016
Adjustments to earnings consist primarily of $17.4 million of bad debt expense, $8.9 million of stock-based compensation expense, $8.4 million of depreciation and $3.2 million of amortization of intangibles, partially offset by $3.7 million of deferred income taxes. The deferred income tax benefit primarily relates to stock-based compensation expense. The increase from changes in working capital consists primarily of an increase in accounts payable and other liabilities of $14.9 million, an increase in income taxes payable and receivable of $6.9 million and an increase in deferred revenue of $6.9 million, partially offset by an increase in accounts receivable of $23.9 million and an increase in other assets of $3.0 million. The increase in accounts payable and other liabilities is due to the timing of payments and an increase in employee-related accruals. The increase in income taxes payable and receivable is due to current year income tax accruals in excess of current year income tax payments. The increase in deferred revenue is primarily due to the growth in subscription sales to service professionals. The increase in accounts receivable is primarily due to revenue growth in North America. The increase in other assets is due to an increase in prepaid marketing.
Net cash used in investing activities includes $15.6 million of cash used for the acquisition of MyHammer and capital expenditures of $16.7 million, primarily related to a new sales center and investments in the development of capitalized software to support our products and services.

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Net cash provided by financing activities includes $44.8 million in proceeds from borrowings of related party debt principally used to fund the acquisition of MyHammer, partially offset by the refinancing of an $11.4 million promissory note, and cash transfers of $4.3 million to IAC pursuant to IAC’s centrally managed U.S. treasury management function.
Liquidity and Capital Resources
In periods prior to the Combination, the Company received funding from IAC, including loans from certain IAC foreign subsidiaries, the proceeds of which were primarily used to fund acquisitions.
All outstanding long-term debt—related party amounts due between certain IAC subsidiaries and the HomeAdvisor business were settled prior to the completion of the Combination, with the exception of a promissory note payable to a foreign subsidiary of IAC, the principal amount of which at December 31, 2018 was €0.9 million ($1.0 million).
On November 1, 2017, the Company borrowed $275 million under a five-year term loan facility ("Term Loan"). On November 5, 2018, the Term Loan was amended and restated, and is now due on November 5, 2023. Interest payments are due at least quarterly through the term of the loan and quarterly principal payments of 1.25% of the original principal amount in the first three years from the amendment date, 2.50% in the fourth year and 3.75% in the fifth year are required. At December 31, 2018, the Term Loan bears interest at LIBOR plus 1.50%, or 3.98%, which is subject to change in future periods based on the Company's consolidated net leverage ratio.
On November 5, 2018, the Company entered into a five-year $250 million revolving credit facility (the "Credit Facility"). The annual commitment fee on undrawn funds is currently 25 basis points and is based on the consolidated net leverage ratio most recently reported. Borrowings under the Credit Facility bear interest, at the Company's option, at either a base rate or LIBOR, in each case plus an applicable margin, which is determined by reference to a pricing grid based on the Company's consolidated net leverage ratio. At December 31, 2018, there were no outstanding borrowings under the Credit Facility.
Both the Term Loan and Credit Facility borrowings are guaranteed by the Company's wholly-owned material domestic subsidiaries and are secured by substantially all assets of the Company and the guarantors, subject to certain exceptions. The terms of the Credit Facility and the Term Loan require ANGI to maintain a consolidated net leverage ratio of not more than 4.5 to 1.0 and a minimum interest coverage ratio of not less than 2.0 to 1.0. There are additional covenants under both the Term Loan and the Credit Facility that limit the ability of the Company and its subsidiaries to, among other things, incur indebtedness, pay dividends or make distributions.
On February 6, 2019, the Board of Directors of ANGI Homeservices authorized the Company to repurchase up to 15 million shares of its common stock.
In connection with the Combination, previously issued stock appreciation rights related to the common stock of HomeAdvisor (US) were converted into ANGI stock appreciation rights that are settleable, at the Company's option, on a net basis with ANGI remitting withholding taxes on behalf of the employee or on a gross basis with the Company issuing a sufficient number of Class A shares to cover the withholding taxes. In addition, at IAC's option, these awards can be settled in either Class A shares of ANGI or shares of IAC common stock. If settled in IAC common stock, ANGI reimburses IAC in either cash or through the issuance of Class A shares to IAC. Assuming all of the stock appreciation rights outstanding on February 1, 2019 were net settled on that date, ANGI would have issued 13.0 million Class A shares (either to IAC as reimbursement or to award holders) and ANGI would have remitted $219.6 million in cash for withholding taxes (assuming a 50% withholding rate). If the Company decided to issue a sufficient number of shares to cover the $219.6 million employee withholding tax obligation, 13.0 million additional Class A shares would be issued by ANGI. The Company's cash withholding obligation on all other ANGI net settled awards outstanding on February 1, 2019 is $38.5 million (assuming a 50% withholding rate), which is the equivalent of 2.3 million shares.
In addition, prior to the Combination in 2017, IAC issued a number of IAC denominated PSUs to certain ANGI employees. Vesting of the PSUs is contingent upon ANGI's performance. Assuming all of the PSUs outstanding on February 1, 2019 were net settled on that date, ANGI would have issued 0.7 million Class A shares (either to IAC as reimbursement or to award holders) and ANGI would have remitted $12.0 million in cash for withholding taxes (assuming a 50% withholding rate).
The Company believes its existing cash, cash equivalents, marketable securities, available borrowings under the Credit Facility and expected positive cash flows generated from operations will be sufficient to fund its normal operating requirements, including capital expenditures, debt service, the payment of withholding taxes on behalf of employees for any stock-based awards that may be net settled, and investing and other commitments, for the foreseeable future. The Company's

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2019 capital expenditures are expected to be higher than 2018 by approximately 30% to 35%, driven, in part, by higher capital expenditures related to the development of capitalized software to support the Company's products and services. The Company's liquidity could be negatively affected by a decrease in demand for its products and services.
The Company’s indebtedness could limit its ability to: (i) obtain additional financing to fund working capital needs, acquisitions, capital expenditures or debt service or other requirements; and (ii) use operating cash flow to make certain acquisitions or investments, in the event a default has occurred or, in certain circumstances, if its leverage ratio (as defined in the Credit Facility and Term Loan) exceeds the ratios set forth in the Term Loan. There were no such limitations at December 31, 2018.
At December 31, 2018, IAC held all Class B shares of ANGI which represent 83.9% of the economic interest and 98.1% of the voting interest of ANGI. As a result, IAC has the ability to control ANGI’s financing activities, including the issuance of additional debt and equity securities by ANGI or any of its subsidiaries, or the incurrence of other indebtedness generally. While ANGI is expected to have the ability to access debt and equity markets if needed, such transactions may require the approval of IAC due to its control of the majority of the outstanding voting power of ANGI’s capital stock and its representation on the ANGI board of directors. Additional financing may not be available on terms favorable to the Company or at all.


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CONTRACTUAL OBLIGATIONS
 
 
Payments due by period
Contractual Obligations(a)
 
Less than
1 year
 
1 to 3
years
 
3 to 5
years
 
More than
5 years
 
Total
 
 
(in thousands)
Long-term debt(b)
 
$
25,170

 
$
48,095

 
$
236,882

 
$

 
$
310,147

Long-term debt—related party(c) 
 

 
1,186

 

 

 
1,186

Operating leases(d)   
 
15,039

 
42,371

 
37,964

 
75,703

 
171,077

Purchase obligations(e)   
 
3,004

 

 

 

 
3,004

Total contractual obligations   
 
$
43,213

 
$
91,652

 
$
274,846

 
$
75,703

 
$
485,414

______________________________________________
(a)
The Company has excluded $1.9 million in unrecognized tax benefits from the table above as we are unable to make a reasonably reliable estimate of the period in which these liabilities might be paid. For additional information on income taxes, see "Note 3—Income Taxes" to the consolidated and combined financial statements included in "Item 8. Consolidated and Combined Financial Statements and Supplementary Data."
(b)
Long-term debt consists of contractual amounts due including interest on a variable rate instrument. Long-term debt at December 31, 2018 consists of the $261.3 million Term Loan, bearing interest at LIBOR plus 1.50%, or 3.98%, at December 31, 2018. The Term Loan interest rate is subject to change in future periods based on the Company's consolidated net leverage ratio. The amount of interest ultimately paid on the variable rate debt may differ based on changes in interest rates. For additional information on long-term debt, see "Note 7—Long-term Debt" to the consolidated and combined financial statements included in "Item 8. Consolidated and Combined Financial Statements and Supplementary Data."
(c)
Long-term debt—related party consists of a promissory note of €0.9 million ($1.0 million at December 31, 2018) payable to a foreign subsidiary of IAC, which bears interest at a fixed rate. For additional information on long-term debt—related party, see "Note 15—Related Party Transactions with IAC" to the consolidated and combined financial statements included in "Item 8. Consolidated and Combined Financial Statements and Supplementary Data."
(d)
We lease office space, data center facilities and equipment used in connection with our operations under various operating leases, the majority of which contain escalation clauses. For additional information on operating leases, see "Note 13—Commitments and Contingencies" to the consolidated and combined financial statements included in "Item 8. Consolidated and Combined Financial Statements and Supplementary Data."
(e)
Purchase obligations primarily consist of software licenses and advertising commitments.
Off-Balance Sheet Arrangements
Other than the items described above, the Company does not have any significant off-balance sheet arrangements as of December 31, 2018.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following disclosure is provided to supplement the descriptions of ANGI Homeservices' accounting policies contained in "Note 2—Summary of Significant Accounting Policies" to the consolidated and combined financial statements included "Item 8. Consolidated and Combined Financial Statements and Supplementary Data" in regard to significant areas of judgment. Management of the Company is required to make certain estimates, judgments and assumptions during the preparation of its consolidated and combined financial statements in accordance with GAAP. These estimates, judgments and assumptions impact the reported amount of assets, liabilities, revenue and expenses and the related disclosure of contingent assets and liabilities as of the date of the consolidated and combined financial statements. Actual results could differ from these estimates. Because of the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a more significant impact on our consolidated and combined financial statements than others. What follows is a discussion of some of our more significant accounting policies and estimates.
Allowance for Doubtful Accounts and Revenue Reserves
The Company makes judgments as to its ability to collect outstanding receivables and provides allowances when it has determined that all or a portion of the receivable will not be collected. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected. The allowance for doubtful accounts is based upon a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history and the specific customer’s ability to pay its obligation to the Company. The term between the Company issuance of an invoice and payment due date is not significant. The Company also maintains allowances to reserve for potential credits issued to service professionals or other revenue adjustments. The amounts of these reserves are based primarily upon historical experience. The carrying value of the allowance for doubtful accounts and revenue reserves is $16.6 million and $9.3 million at December 31, 2018 and 2017, respectively. Bad debt expense was $47.2 million, $27.5 million and $17.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Business Combinations
Acquisitions are an important part of the Company’s growth strategy. The Company invested $167.8 million (including the value of ANGI Homeservices Class A common stock issued in connection with the acquisition of Handy), $819.0 million (including the value of ANGI Homeservices Class A common stock issued in connection with the Combination) and $19.7 million in acquisitions for the years ended December 31, 2018, 2017 and 2016, respectively. The purchase price of each acquisition is attributed to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, including identifiable intangible assets that either arise from a contractual or legal right or are separable from goodwill. The fair value of these intangible assets is based on valuations that use information and assumptions provided by management. The excess purchase price over the net tangible and identifiable intangible assets is recorded as goodwill and is assigned to the reporting unit(s) that is expected to benefit from the combination as of the acquisition date.
Recoverability of Goodwill and Indefinite-Lived Intangible Assets
Goodwill is the Company’s largest asset with a carrying value of $894.7 million and $770.2 million at December 31, 2018 and 2017, respectively. Indefinite-lived intangible assets, which consist of the Company’s acquired trade names and trademarks, have a carrying value of $171.5 million and $153.4 million at December 31, 2018 and 2017, respectively.
Goodwill and indefinite-lived intangible assets are assessed annually for impairment as of October 1, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit or the fair value of an indefinite-lived intangible asset below its carrying value. In performing its annual assessment, the Company has the option to qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.
For the Company’s annual goodwill test at October 1, 2018, a qualitative assessment of the North America and Europe reporting units' goodwill was performed because the Company concluded it was more likely than not that the fair value of these reporting units was in excess of their respective carrying values. In the aggregate, ANGI Homeservices' October 1, 2018 market capitalization of $10.7 billion exceeded its carrying value by approximately $9.6 billion. The primary factor that the Company considered in its qualitative assessment for its Europe reporting unit were valuations performed during 2018 that indicated fair value in excess of the carrying value. The fair value of the valuation that was most proximate to, but not as of, October 1, 2018 exceeded the carrying value of the Europe reporting unit by $102.7 million. The primary factors that the Company considered in its qualitative assessment for its North America reporting unit were the strong operating performance of the North America reporting unit and the significant excess of the estimated fair value of the North America reporting unit over

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its carrying value. The fair value of the North America reporting unit was estimated by subtracting the fair value of the Europe reporting unit, from the valuation described above, from the October 1, 2018 market capitalization of the Company; the estimated fair value of the North America reporting unit exceeded its carrying value by approximately $9.5 billion.
The annual quantitative test of the recovery of goodwill involves a comparison of the estimated fair value of the Company reporting unit that is being tested to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of a reporting unit exceeds its estimated fair value, an impairment equal to the excess is recorded.
The fair value of the Company's Europe reporting unit is determined using both an income approach based on discounted cash flows ("DCF") and a market approach when it tests goodwill for impairment, either on an interim basis or annual basis as of October 1 each year. Determining fair value using a DCF analysis requires the exercise of significant judgment with respect to several items, including the amount and timing of expected future cash flows and appropriate discount rates. The expected cash flows used in the DCF analyses are based on the Company's most recent forecast and budget and, for years beyond the budget, the Company's estimates, which are based, in part, on forecasted growth rates. The discount rates used in the DCF analyses are intended to reflect the risks inherent in the expected future cash flows of the respective reporting units. Assumptions used in the DCF analyses, including the discount rate, are assessed based on the reporting units' current results and forecasted future performance, as well as macroeconomic and industry specific factors. The discount rate used in determining the fair value of the Company's Europe reporting unit was 15.0% in 2018. Determining fair value using a market approach considers multiples of financial metrics based on both acquisitions and trading multiples of a selected peer group of companies. From the comparable companies, a representative market multiple is determined which is applied to financial metrics to estimate the fair value of a reporting unit. To determine a peer group of companies for our respective reporting units, we considered companies relevant in terms of consumer use, monetization model, margin and growth characteristics, and brand strength operating in their respective sectors. While a primary driver in the determination of the fair values of the Company's reporting units is the estimate of future revenue and profitability, the determination of fair value is based, in part, upon the Company's assessment of macroeconomic factors, industry and competitive dynamics and the strategies of its businesses in response to these factors.
While the Company has the option to qualitatively assess whether it is more likely than not that the fair values of its indefinite-lived intangible assets are less than their carrying values, the Company’s policy is to determine the fair value of each of its indefinite-lived intangible assets annually as of October 1. The Company determines the fair value of indefinite-lived intangible assets using an avoided royalty DCF valuation analysis. Significant judgments inherent in this analysis include the selection of appropriate royalty and discount rates and estimating the amount and timing of expected future cash flows. The discount rates used in the DCF analyses are intended to reflect the risks inherent in the expected future cash flows generated by the respective intangible assets. The royalty rates used in the DCF analyses are based upon an estimate of the royalty rates that a market participant would pay to license the Company’s trade names and trademarks. Assumptions used in the avoided royalty DCF analyses, including the discount rate and royalty rate, are assessed annually based on the actual and projected cash flows related to the asset, as well as macroeconomic and industry specific factors. The discount rate used in the Company’s annual indefinite-lived impairment assessment ranged from 11.5% to 27.5% in 2018 and 11.5% to 18.5% in 2017, and the royalty rate used ranged from 1.5% to 5.5% in 2018 and 1.0% to 6.0% in 2017.
The 2018, 2017 and 2016 annual assessments of goodwill and indefinite-lived intangible assets identified no impairments.
Recoverability and Estimated Useful Lives of Long-Lived Assets
We review the carrying value of all long-lived assets, comprising property and equipment and definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is deemed not to be recoverable, an impairment loss is recorded equal to the amount by which the carrying value of the long-lived asset exceeds its fair value. In addition, the Company reviews the useful lives of its long-lived assets whenever events or changes in circumstances indicate that these lives may be changed. The carrying value of property and equipment and definite-lived intangible assets is $203.7 million and $228.4 million at December 31, 2018 and 2017, respectively.
Income Taxes
The Company is included within IAC’s tax group for purposes of federal and consolidated state income tax return filings. In all periods presented, current and deferred income tax benefit and provision have been computed for the Company on an as if standalone, separate return basis. The Company’s payments to IAC for its share of IAC’s consolidated federal and state tax

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return liabilities have been reflected within cash flows from operating activities in the accompanying consolidated and combined statement of cash flows. The tax sharing agreement between the Company and IAC governs the parties’ respective rights, responsibilities and obligations with respect to tax matters, including responsibility for taxes attributable to the Company, entitlement to refunds, allocation of tax attributes and other matters. Any differences between taxes currently due or receivable under the tax sharing agreement and the current tax provision computed on an as if standalone, separate return basis for GAAP are payable to or receivable from IAC and are reflected as adjustments to additional paid-in capital. The portion of the December 31, 2018 deferred tax assets that will be payable to IAC pursuant to the tax sharing agreement, upon realization, is $54.7 million.
The Company accounts for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided if it is determined that it is more likely than not that the deferred tax asset will not be realized. At December 31, 2018 and 2017, the balance of the Company's net deferred tax asset is $37.0 million and $45.1 million, respectively.
The Company evaluates and accounts for uncertain tax positions using a two-step approach. Recognition (step one) occurs when the Company concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustainable upon examination. Measurement (step two) determines the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. De-recognition of a tax position that was previously recognized would occur when the Company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible outcomes. At December 31, 2018 and 2017, we have unrecognized tax benefits of $2.4 million and $1.5 million, respectively. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustment and which may not accurately anticipate actual outcomes. Although management currently believes changes to reserves from period to period and differences between amounts paid, if any, upon resolution of issues raised in audits and amounts previously provided will not have a material impact on liquidity, results of operations, or financial condition of the Company, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
The ultimate amount of deferred income tax assets realized and the amounts paid for deferred income tax liabilities and unrecognized tax benefits may vary from our estimates due to future changes in income tax law, state income tax apportionment or the outcome of any review of our tax returns by the various tax authorities, as well as actual operating results of the Company that vary significantly from anticipated results.
The Company regularly assesses the realizability of deferred tax assets considering all available evidence including, to the extent applicable, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, tax filing status, the duration of statutory carryforward periods, available tax planning and historical experience. As of December 31, 2018, the Company is in a three-year cumulative loss position because of costs incurred in connection with the Combination. The Company’s most significant net deferred tax asset relates to U.S. federal net operating loss ("NOL") carryforwards of $58.1 million. Based upon current forecasts of future profits, the Company does not expect to be in a three-year cumulative loss position as of December 31, 2019. The Company expects to generate future taxable income of at least $276.7 million prior to the expiration of these NOLs between 2027 and 2037 to fully realize this deferred tax asset.
Stock-Based Compensation
Stock-based compensation expense reflected in our consolidated and combined statement of operations consists of expense related to the Company's stock appreciation rights, stock options and RSUs, equity instruments denominated in shares of subsidiaries, and IAC denominated stock options and PSUs held by ANGI Homeservices employees.
The Company recorded stock-based compensation expense of $97.1 million, $149.2 million and $8.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. Included in stock-based compensation expense in 2018 and 2017 is $70.6 million and $122.1 million, respectively, related to the modification of previously issued HomeAdvisor equity awards and previously issued Angie's List equity awards, both of which were converted into ANGI Homeservices' equity awards in the Combination, and the acceleration of certain converted equity awards resulting from the termination of Angie's List employees in connection with the Combination. The Company estimates the fair value of stock appreciation rights (including those modified in connection with the Combination) and stock options, including equity instruments denominated in shares of subsidiaries, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, the most significant of which include expected term, expected volatility of the underlying

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shares, risk-free interest rates and the expected dividend yield. In addition, the recognition of stock-based compensation expense is impacted by our estimated forfeiture rates, which are based, in part, on historical forfeiture rates. For stock appreciation rights and stock options, including equity instruments denominated in shares of subsidiaries, the grant date fair value of the award is recognized as an expense on a straight-line basis, net of estimated forfeitures, over the requisite service period, which is the vesting period of the award. The impact on stock-based compensation expense for the year ended December 31, 2018, assuming a 1% increase in the risk-free interest rate, a 10% increase in the volatility factor and a one-year increase in the weighted average expected term of the outstanding awards would be an increase of $1.3 million, $3.0 million and $1.3 million, respectively. For RSUs, the value of the instrument is measured at the grant date as the fair value of the underlying ANGI Homeservices common stock and expensed as stock-based compensation expense over the vesting term.
Prior to the Combination, the majority of stock-based compensation expense is related to HomeAdvisor (US) denominated stock appreciation rights and the common stock of certain other entities comprising the HomeAdvisor business. These awards were settleable in shares of IAC common stock having a value equal to the difference between the exercise price and the fair market value of the common stock of the relevant entity of the HomeAdvisor business. Upon completion of the Combination, the stock appreciation rights that related to the common stock of HomeAdvisor (US) were converted into awards that are settleable in Class A shares of our common stock, or in shares of IAC common stock at IAC's election. The equity awards that are denominated in the shares of certain subsidiaries comprising the HomeAdvisor business are also settleable in Class A shares of our common stock, or in shares of IAC common stock at IAC’s election. To the extent shares of IAC common stock are issued in settlement of these awards, the Company will reimburse IAC for the cost of those shares by issuing additional Class A shares of its common stock to IAC. For IAC equity awards held by employees of ANGI Homeservices, the Company will reimburse IAC for the cost of those shares by issuing to IAC, at IAC’s election, either cash or additional Class B shares of its common stock.
Marketable Debt Securities
The Company invests in marketable debt securities with active secondary or resale markets to ensure portfolio liquidity to fund current operations or satisfy other cash requirements as needed. Marketable debt securities are adjusted to fair value each quarter, and the unrealized gains and losses, net of tax, are included in accumulated other comprehensive income (loss) as a separate component of shareholders' equity. The specific-identification method is used to determine the cost of debt securities sold and the amount of unrealized gains and losses reclassified out of accumulated other comprehensive income (loss) into earnings. We review our debt securities for impairment each reporting period. The Company recognizes an unrealized loss on debt securities in net earnings when the impairment is determined to be other-than-temporary. Factors we consider in making such determination include the duration, severity and reason for the decline in value and the potential recovery and our intent to sell the debt security. We also consider whether we will be required to sell the security before recovery of its amortized cost basis and whether the amortized cost basis cannot be recovered because of credit losses. If an impairment is considered to be other-than-temporary, the debt security will be written down to its fair value and the loss will be recognized within other income (expense), net. The carrying value of marketable debt securities at December 31, 2018, is $24.9 million and consist of treasury discount notes.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see "Note 2—Summary of Significant Accounting Policies" to the consolidated and combined financial statements included in "Item 8. Consolidated and Combined Financial Statements and Supplementary Data."

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
At December 31, 2018, the $261.3 million outstanding balance on the Company's Term Loan bears interest at LIBOR plus 1.50%. As of December 31, 2018, the rate in effect was 3.98%. If LIBOR were to increase or decrease by 100 basis points, then the annual interest expense on the Term Loan would increase or decrease by $2.6 million.
Foreign Currency Exchange Risk
We conduct business in certain foreign markets, principally in the European Union, and, as a result, are exposed to foreign exchange risk for both the Euro and British Pound ("GBP").
For the years ended December 31, 2018, 2017 and 2016, international revenue accounted for 7%, 9% and 8%, respectively, of our consolidated and combined revenue. The Company's primary exposure to foreign currency exchange risk relates to investments in foreign subsidiaries that transact business in a functional currency other than the U.S. dollar. As a result, as foreign currency exchange rates fluctuate, translation of the statement of operations of the Company's international businesses into U.S. dollars affects year-over-year comparability of operating results. The average GBP and Euro exchange rates strengthened against the U.S. dollar by approximately 4% and 5%, respectively, in 2018 compared to 2017.
Foreign currency exchange gains and losses included in the Company's earnings for the years ended December 31, 2018, 2017 and 2016 are (losses) gains and of $(0.2) million, $0.9 million and $(1.1) million, respectively. Historically, foreign currency exchange gains and losses have not been material to the Company. As a result, historically, we have not hedged any foreign currency exposures. Our continued international expansion increases our exposure to foreign exchange rate fluctuations and as a result, such fluctuations could have a significant impact on our future results of operations.

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Item 8.    Consolidated and Combined Financial Statements and Supplementary Data


Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of ANGI Homeservices Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of ANGI Homeservices Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated and combined statements of operations, comprehensive operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-09
As discussed in Note 11 to the consolidated and combined financial statements, the Company changed its method of accounting for stock compensation in 2017 due to the adoption of ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2017.

New York, New York
March 1, 2019


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ANGI HOMESERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
 
December 31,
 
2018
 
2017
 
(In thousands, except par value amounts)
ASSETS
 
 
 
Cash and cash equivalents
$
336,984

 
$
221,521

Marketable securities
24,947

 

Accounts receivable, net of allowance and reserves of $16,603 and $9,263, respectively
27,263

 
28,085

Other current assets
84,933

 
12,772

Total current assets
474,127

 
262,378

 
 
 
 
Property and equipment, net of accumulated depreciation and amortization
70,859

 
53,292

Goodwill
894,709

 
770,226

Intangible assets, net of accumulated amortization
304,295

 
328,571

Deferred income taxes
40,837

 
50,723

Other non-current assets
23,200

 
2,072

TOTAL ASSETS   
$
1,808,027

 
$
1,467,262

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
LIABILITIES:
 
 
 
Current portion of long-term debt
$
13,750

 
$
13,750

Current portion of long-term debt—related party

 
816

Accounts payable
20,083

 
18,933

Deferred revenue
61,417

 
62,371

Accrued expenses and other current liabilities
105,987

 
75,171

Total current liabilities
201,237

 
171,041

 
 
 
 
Long-term debt, net
244,971

 
258,312

Long-term debt—related party, net
1,015

 
1,997

Deferred income taxes
3,808

 
5,626

Other long-term liabilities
16,846

 
5,892

 
 
 
 
Redeemable noncontrolling interests
18,163

 
21,300

 
 
 
 
Commitments and contingencies


 


 
 
 
 
SHAREHOLDERS' EQUITY:
 
 
 
Class A common stock, $0.001 par value; authorized 2,000,000 shares; 80,515 and 62,818 shares issued and outstanding
81

 
63

Class B convertible common stock, $0.001 par value; authorized 1,500,000 shares; 421,118 and 415,186 shares issued and outstanding
421

 
415

Class C common stock, $0.001 par value; authorized 1,500,000 shares; no shares issued and outstanding

 

Additional paid-in capital
1,333,097

 
1,112,400

Accumulated deficit
(18,797
)
 
(121,764
)
Accumulated other comprehensive (loss) income
(1,861
)
 
2,232

Total ANGI Homeservices Inc. shareholders' equity
1,312,941

 
993,346

Noncontrolling interests
9,046

 
9,748

Total shareholders' equity
1,321,987

 
1,003,094

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   
$
1,808,027

 
$
1,467,262

The accompanying Notes to Consolidated and Combined Financial Statements are an integral part of these statements.

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ANGI HOMESERVICES INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands, except per share data)
Revenue
$
1,132,241

 
$
736,386

 
$
498,890

Operating costs and expenses:
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
55,739

 
34,073

 
25,858

Selling and marketing expense
541,469

 
464,040

 
306,713

General and administrative expense
323,462

 
300,433

 
110,093

Product development expense
61,143

 
47,907

 
20,596

Depreciation
24,310

 
14,543

 
8,419

Amortization of intangibles
62,212

 
23,261

 
3,153

Total operating costs and expenses
1,068,335

 
884,257

 
474,832

Operating income (loss)
63,906

 
(147,871
)
 
24,058

Interest expense—third-party
(11,623
)
 
(1,765
)
 

Interest expense—related party
(118
)
 
(5,971
)
 
(894
)
Other income (expense), net
17,859

 
1,974

 
(699
)
Earnings (loss) before income taxes
70,024

 
(153,633
)
 
22,465

Income tax benefit (provision)
7,483

 
49,106

 
(11,834
)
Net earnings (loss)
77,507

 
(104,527
)
 
10,631

Net (earnings) loss attributable to noncontrolling interests
(189
)
 
1,409

 
2,497

Net earnings (loss) attributable to ANGI Homeservices Inc. shareholders
$
77,318

 
$
(103,118
)
 
$
13,128

 
 
 
 
 
 
Per share information attributable to ANGI Homeservices Inc. shareholders:
 
 
Basic earnings (loss) per share
$
0.16

 
$
(0.24
)
 
$
0.03

Diluted earnings (loss) per share
$
0.15

 
$
(0.24
)
 
$
0.03

 
 
 
 
 
 
Stock-based compensation expense by function:
 
 
 
 
 
Cost of revenue
$

 
$
19

 
$

Selling and marketing expense
3,368

 
25,763

 
863

General and administrative expense
84,028

 
107,662

 
6,804

Product development expense
9,682

 
15,786

 
1,249

Total stock-based compensation expense
$
97,078

 
$
149,230

 
$
8,916


The accompanying Notes to Consolidated and Combined Financial Statements are an integral part of these statements.


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ANGI HOMESERVICES INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENT OF COMPREHENSIVE OPERATIONS
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
Net earnings (loss)
$
77,507

 
$
(104,527
)
 
$
10,631

Other comprehensive (loss) income:
 
 
 
 
 
Change in foreign currency translation adjustment
(4,862
)
 
4,968

 
(657
)
Change in unrealized gains and losses on available-for-sale debt securities
3

 

 

Total other comprehensive (loss) income
(4,859
)
 
4,968

 
(657
)
Comprehensive income (loss)
72,648

 
(99,559
)
 
9,974

Components of comprehensive loss (income) attributable to noncontrolling interests:
 
 
 
 
 
Net (earnings) loss attributable to noncontrolling interests
(189
)
 
1,409

 
2,497

Change in foreign currency translation adjustment attributable to noncontrolling interests
766

 
(1,015
)
 

Comprehensive loss attributable to noncontrolling interests
577

 
394

 
2,497

Comprehensive income (loss) attributable to ANGI Homeservices Inc. shareholders
$
73,225