Business Context and Reporting Period
Company: Tree.com, Inc. (Lendingtree, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Overview: Tree.com operates three primary segments: LendingTree Loans (mortgage origination), Exchanges (lead generation for lending and education), and Real Estate (brokerage and lead generation). The company was spun off from IAC/InterActiveCorp in August 2008. The reporting period reflects a strategic realignment of operating segments completed in Q1 2009.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenue | $50.7 million | $168.9 million |
| Net Loss | $(7.4) million | $(3.5) million |
| Operating Loss | $(7.4) million | $(3.0) million |
| Adjusted EBITDA | $(3.5) million | $13.4 million |
| Cash and Cash Equivalents | $86.9 million | $86.9 million (Balance Sheet) |
| Net Cash from Operating Activities | N/A | $24.4 million |
| Warehouse Lines Outstanding | $67.1 million | $67.1 million (Balance Sheet) |
| Total Assets | $287.2 million | $287.2 million (Balance Sheet) |
Material Changes vs. Prior Period
- Revenue: Total revenue increased 1% year-over-year for the quarter ($50.7M vs. $50.3M) but decreased 6% for the nine-month period ($168.9M vs. $180.4M).
- LendingTree Loans: Revenue increased 21% (quarter) and 25% (nine months) driven by lower mortgage rates and higher loan closing rates, offset by increased provisions for previously sold loans.
- Exchanges: Revenue decreased 7% (quarter) and 32% (nine months) due to tighter credit standards and fewer matched loan requests.
- Real Estate: Revenue decreased 18% (quarter) and 24% (nine months) due to declining home sales and transaction volumes.
- Profitability: Operating loss improved significantly to $(7.4) million for the quarter from $(22.5) million in the prior year. For the nine months, the loss narrowed to $(3.0) million from $(208.7) million. The 2008 prior period was heavily impacted by $164.3 million in asset impairment charges (goodwill and intangibles), which were absent in 2009.
- Expenses: Selling and marketing expenses decreased 25% (quarter) and 44% (nine months) due to reduced advertising spend. General and administrative expenses decreased 23% (quarter) and 12% (nine months), aided by lower non-cash compensation compared to the spin-off related charges in 2008.
- Impairments: The company recorded a $3.9 million impairment charge in Q2 2009 related to definite-lived intangible assets in the Real Estate segment, compared to no such charge in Q3 2009.
Outlook, Risks, and Management Commentary
- Liquidity and Credit Facilities: The LendingTree Loans segment is highly dependent on warehouse lines of credit. As of September 30, 2009, the company had $100 million in committed capacity. A third line of $75 million was secured on October 30, 2009, bringing total capacity to $175 million. One existing $50 million line expires December 29, 2009, and the lender has indicated it is exiting the warehouse lending business.
- Loan Loss Obligations: The company estimates a range of $11 million to $18 million in potential losses due to representations and warranties on previously sold loans. The provision for these losses increased significantly in 2009 ($4.2M in Q3 vs. $0.8M in Q3 2008).
- Market Conditions: Management notes that revenue is subject to cyclical trends in the U.S. housing market. While refinancing activity increased due to low rates, purchase mortgages declined. The Exchanges segment faces headwinds from tight credit standards and reduced lender demand for leads.
- Legal Proceedings: The company is involved in various litigation matters, including patent disputes and employment-related lawsuits. Management believes an unfavorable resolution is not probable to have a material impact on liquidity, though uncertainties remain.
Investor Verification Checklist
- Warehouse Line Renewals: Verify the status of the $50 million warehouse line expiring December 29, 2009, and the company's ability to replace it given the lender's exit from the business.
- Loan Loss Reserves: Monitor the trend in provisions for previously sold loans, which rose from $0.9 million in the first nine months of 2008 to $10.1 million in the same period of 2009.
- Segment Performance: Assess the sustainability of the LendingTree Loans revenue growth against the backdrop of rising interest rates and potential credit tightening.
- Real Estate Impairments: Review future impairment risks for the Real Estate segment, particularly regarding the new homes referral service business which triggered a $3.9 million charge in Q2 2009.
- Cash Flow Sustainability: Confirm that operating cash flows ($24.4M for nine months) remain sufficient to cover operating costs and debt service without additional equity raises.