LendingTree, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. LendingTree operates an online marketplace connecting consumers with financial-services providers. The former LendingTree Loans business is reported as discontinued operations.
Financial performance
Amounts are in millions, except per-share data. Comparisons are with the corresponding 2019 period.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $220.3 | $310.6 | $687.7 | $851.4 |
| Operating income (loss) | $(16.1) | $31.2 | $(2.9) | $41.7 |
| Net income (loss) from continuing operations | $(24.8) | $24.5 | $(14.4) | $38.0 |
| Net income (loss), including discontinued operations | $(24.6) | $4.3 | $(40.0) | $16.0 |
| Adjusted EBITDA | $21.7 | $63.0 | $97.4 | $152.3 |
| Cash from continuing operating activities | Not presented quarterly | Not presented quarterly | $96.2 | $110.9 |
Q3 operating margin was approximately negative 7.3%, versus positive 10.0% a year earlier; Adjusted EBITDA margin was approximately 9.8%, versus 20.3%. Interest expense was $16.6 million in Q3 and $26.4 million for the first nine months, including a $7.8 million loss on extinguishment of debt in Q3. Nine-month discontinued operations used $66.2 million of operating cash.
At September 30, 2020, cash and cash equivalents were $187.3 million; total assets were $1.204 billion and shareholders’ equity was $361.0 million. Balance-sheet long-term debt was $603.5 million (net carrying value); the company had no revolving-facility borrowings. The 2025 Notes had $575.0 million principal and the remaining 2022 Notes had approximately $169.7 million gross carrying amount. The $500 million secured revolver had approximately $499.8 million available, excluding a $0.2 million letter of credit.
Business trends and changes
- Q3 revenue declined 29%. Consumer revenue fell 68% to $48.4 million, while Home rose 2% to $78.9 million and Insurance rose 24% to $92.5 million. The Other category fell 92% to $0.5 million.
- For the first nine months, Consumer revenue declined 49%, Home increased 9%, and Insurance increased 16%. Consumer segment profit fell 67% in Q3 and 50% year to date; Insurance segment profit rose 23% and 13%, respectively.
- COVID-19-related contraction in lender demand sharply affected credit cards, personal loans, student loans and small-business lending. Management reported approximately 70% lower near-term lender demand for Consumer products. Credit-card revenue fell 88% and personal-loan revenue fell 72% in Q3.
- Low mortgage rates supported refinance activity, but Home segment profit declined 10% in Q3 as marketing costs and competition increased. Insurance growth reflected more consumers seeking coverage, with increased marketing expense partly offsetting revenue gains.
- Marketing expense fell 23% in Q3, primarily reflecting lower advertising spend aligned with reduced marketplace demand. The company ceased reselling online advertising in Q1 2020.
Liquidity, financing, and outlook
- In July, LendingTree issued $575 million of 0.50% convertible notes due 2025. Proceeds funded a repurchase of approximately $130.3 million principal of 0.625% convertible notes due 2022, convertible-note hedge and warrant transactions, and other financing needs. The company stated its intent to settle note principal in cash, subject to note terms.
- The revolver amendment temporarily replaced its leverage covenant with a requirement to maintain at least $200 million of specified U.S. cash plus permitted undrawn revolver availability, through the quarter ending June 30, 2021 unless ended earlier. LendingTree reported covenant compliance at September 30.
- Management expected cash, operating cash flows and the revolver to fund operating needs for the next twelve months and beyond, while warning that recession conditions could reduce operating cash flow. No specific revenue or earnings guidance was provided.
- Management said Consumer-product performance had improved from Q2 lows, but the timing and pace of recovery remained difficult to predict. Lenders remained cautious, and Consumer unit economics could stay constrained. Management described the Home and Insurance outlook as comparatively stronger.
Unusual items, contingencies, and risks
- Discontinued-operations legal matters generated substantial cash outflows. The company paid $36.0 million to settle HLC-related claims and $26.5 million to ResCap in Q3; a further $6.4 million ResCap payment was made in October. The company anticipated $7.5 million of reimbursement from the HLC bankruptcy estate by Q1 2021. Timing and actual recovery remain relevant.
- HLC’s Chapter 7 bankruptcy and related litigation remain important. A separate claim by Lehman Brothers against LendingTree sought to impose liability for an allowed bankruptcy claim of $13.3 million; the company said it believed the claims lacked merit and intended to defend them. A $0.5 million settlement offer was accrued.
- Contingent consideration expense was $6.7 million in Q3, mainly from remeasurement of the QuoteWizard earnout. The September 30 estimated contingent-consideration liability was $35.2 million; QuoteWizard payments could range from zero to $46.8 million.
- The company invested $80 million in Stash Financial in February 2020. It carried the investment at cost and reported no impairment or observable market adjustment through September 30.
- COVID-19, interest-rate and mortgage-market changes, lender demand, competition, and the company’s dependence on third-party providers may affect results and liquidity. Management noted that COVID-19 effects and economic recovery were uncertain.
Important facts for investors to verify
- Whether Consumer lender demand and revenue recover, particularly in credit cards, personal loans and small-business products.
- Whether mortgage refinancing, lender capacity and traffic-acquisition costs support sustainable Home-segment margins.
- Cash-flow effects of discontinued-operation settlements and the amount and timing of HLC bankruptcy-estate reimbursements.
- Convertible-note terms, the company’s cash-settlement capacity, potential dilution, and the temporary revolver liquidity covenant through June 2021.
- Future QuoteWizard earnout remeasurements and payments, and the valuation and performance of the $80 million Stash investment.
- Adjusted EBITDA is a non-GAAP measure; assess its reconciliation to GAAP results alongside the substantial Q3 operating and net losses.