Business Context and Reporting Period
Company: Tree.com, Inc. (Lendingtree, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Tree.com operates three primary segments: LendingTree Loans (residential mortgage origination and sale), Exchanges (online lead generation networks for lending), and Real Estate (brokerage and lead generation). The company was spun off from IAC/InterActiveCorp in August 2008.
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (6 Months) | 2008 (6 Months) |
|---|---|---|
| Total Revenue | $118.2 million | $130.2 million |
| Net Income (Loss) | $3.9 million | ($172.7 million) |
| Operating Income (Loss) | $4.4 million | ($186.2 million) |
| Gross Margin | $78.7 million (66.6%) | $88.1 million (67.7%) |
| Adjusted EBITDA | $17.0 million | ($6.7 million) |
| Cash and Cash Equivalents | $83.7 million | $73.6 million (Dec 31, 2008) |
| Warehouse Lines of Credit (Outstanding) | $93.1 million | $76.2 million (Dec 31, 2008) |
| Net Cash Used in Operating Activities | ($8.0 million) | ($5.2 million) |
Material Changes vs. Prior Period
- Profitability Turnaround: The company returned to profitability with a net income of $3.9 million, a stark contrast to the $172.7 million net loss in the prior year period. This improvement is primarily driven by the absence of the massive $164.3 million asset impairment charges recorded in 2008.
- Revenue Mix Shift: While total revenue declined 9% year-over-year, the LendingTree Loans segment grew 26% due to a surge in refinancing activity driven by low interest rates. Conversely, the Exchanges segment revenue fell 41% due to reduced lender demand for leads.
- Expense Reduction: Selling and marketing expenses decreased 52% to $27.7 million, reflecting significant cuts in advertising spend. General and administrative expenses also declined 5%.
- Impairment Charges: A $3.9 million impairment charge was recorded in Q2 2009 related to definite-lived intangible assets in the Real Estate segment, compared to $164.3 million in 2008.
Guidance, Outlook, and Risks
- Market Conditions: Management notes that the LendingTree Loans business is highly dependent on warehouse lines of credit. One of the two primary lenders has indicated it is exiting the warehouse lending business, though it will honor the contract through its term (December 2009).
- Liquidity: The company believes its current cash, warehouse lines, and access to capital markets are sufficient to fund operations for the foreseeable future. However, the inability to renew or replace credit lines could materially adversely affect operations.
- Loan Loss Obligations: Provisions for previously sold loans increased significantly to $5.9 million for the six months ended June 30, 2009, reflecting higher loss trends on loans sold in 2006 and 2007.
- Real Estate Segment: The segment continues to face headwinds from the broader housing market, resulting in a $3.9 million impairment charge and negative operating income.
Investor Verification Checklist
- Credit Facility Renewal: Verify the status of discussions with financial institutions to replace the warehouse line expiring in December 2009.
- Loan Loss Reserves: Monitor the trend of provisions for previously sold loans, which rose sharply in 2009 due to vintage loan performance.
- Refinance Volume Sustainability: Assess whether the 46% increase in refinance volume is sustainable as interest rates stabilize.
- Real Estate Restructuring: Track the impact of management changes and operational shifts in the Real Estate segment on future profitability.
- Derivative Valuation: Review the fair value measurements of Interest Rate Lock Commitments (IRLCs) and forward delivery contracts, which significantly impact reported revenue.