LendingTree, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. LendingTree operates an online marketplace connecting consumers with financial and insurance providers. The figures below reflect continuing operations unless noted; its former LendingTree Loans business is reported as discontinued operations.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $184.3 million | $278.4 million | $467.4 million | $540.8 million |
| Operating income (loss) | $(7.5) million | $12.3 million | $13.2 million | $10.5 million |
| Net income (loss) from continuing operations | $(8.6) million | $13.0 million | $10.4 million | $13.5 million |
| Net income (loss), including discontinued operations | $(29.8) million | $12.2 million | $(15.4) million | $11.7 million |
| Adjusted EBITDA | $30.8 million | $46.3 million | $75.7 million | $89.3 million |
| Operating cash flow from continuing operations | Not separately stated for the quarter | Not separately stated for the quarter | $87.9 million | $67.9 million |
Q2 revenue fell 34% year over year; six-month revenue declined 14%. Q2 Adjusted EBITDA margin was approximately 16.7% of revenue, versus approximately 16.6% a year earlier, despite lower EBITDA. The filing does not present a conventional gross margin measure.
- Q2 revenue by segment: Home $74.1 million, up 3%; Consumer $37.1 million, down 71%; Insurance $72.9 million, up 1%; Other $0.2 million.
- Cash and liquidity: Cash and cash equivalents were $101.8 million at June 30, compared with $60.2 million at December 31, 2019. Current assets were $204.6 million and current liabilities $309.4 million; current liabilities include discontinued-operation liabilities.
- Debt: At June 30, the company had $130.0 million outstanding on its revolving facility and $271.4 million carrying value of convertible notes, totaling approximately $401.4 million in these reported borrowings. The revolving facility had a $500 million commitment and matured in December 2024.
- Investing and financing: Six-month investing cash outflow was $89.1 million, including the $80.0 million Stash equity investment and $9.1 million of capital expenditures. Financing provided $45.3 million, mainly from net revolver borrowings.
Material changes and management commentary
- The largest operating pressure was COVID-19-related contraction in Consumer lending. Credit-card revenue fell 87% in Q2 and personal-loan revenue fell 79%; management reported near-term lender demand for Consumer services down more than 70%.
- Home revenue benefited from refinancing activity amid lower mortgage rates, while purchase mortgage and home-equity revenue weakened. Management said Q2 Home unit marketing costs were unusually low and expected them to return to pre-Q2 levels in Q3 2020.
- Insurance revenue increased, but reduced search traffic remained a modest headwind. Management cited growth through non-search channels and record-high activity from insurance agents.
- Selling and marketing expense declined 41% in Q2, broadly reflecting lower demand and the company’s practice of adjusting variable marketing spend to revenue opportunities. Segment profit fell 15% in Q2 overall, with Consumer declines partly offset by Home growth.
- Six-month operating cash flow rose to $87.9 million from $67.9 million, primarily due to working-capital changes, including accounts receivable. Management cautioned that recession conditions could reduce future operating cash flow.
Debt, contingencies, outlook and risks
- In July, LendingTree issued $575 million of 0.50% convertible notes due 2025, receiving estimated net proceeds of $559.8 million. It used about $234 million to repurchase approximately $130.3 million principal amount of its 2022 notes and about $63 million for note-hedge transactions. It also repaid $130 million of revolver borrowings.
- A temporary July amendment replaced the facility’s debt-to-EBITDA covenant with a minimum $200 million liquidity covenant through the quarter ending June 30, 2021, and increased borrowing margins and commitment fees. As of August 4, the company reported no revolver borrowings and $499.8 million of remaining capacity.
- Management said cash, operating cash flows and revolving capacity were expected to fund operating needs for the next 12 months and beyond, while noting that the pandemic could negatively affect cash flows. The filing provides no numerical revenue or earnings guidance.
- Discontinued-operation litigation drove a Q2 loss of $21.1 million, net of tax. In June, the company agreed to a $58.5 million ResCap settlement, reduced by amounts recovered through HLC bankruptcy; in Q2 it also agreed to a $36.0 million HLC settlement. Both were paid in July, with a $26.5 million ResCap payment and $36.0 million payment to the HLC bankruptcy trustee reported.
- Q2 continuing-operations expenses included a $9.2 million charge from changes in acquisition earnout fair value. The six-month income tax benefit included a $6.1 million CARES Act benefit. These items affect period-to-period comparability.
- Key risks include continued COVID-19 effects on consumer credit availability and marketplace demand, mortgage-rate and housing-market changes, lender concentration of demand, litigation and HLC-related claims, and uncertainty in acquisition earnout valuations. The company reported compliance with revolving-facility covenants at June 30.
Investor verification priorities
- Track whether Consumer lender demand and credit-card and personal-loan revenue recover, and whether management’s stated trough assessment proves accurate.
- Verify the effects of July’s 2025-note issuance, 2022-note repurchase, hedge transactions and temporary revolver covenant amendment on total debt, cash costs and dilution.
- Review payments, bankruptcy recoveries and any remaining exposure related to the $58.5 million ResCap settlement and $36.0 million HLC settlement.
- Compare future Home results with management’s expectation that unit marketing costs would return to pre-Q2 levels, and assess mortgage refinancing and purchase-market trends.
- Monitor cash generation, revolver availability, acquisition earnout remeasurements and the assumptions underlying management’s liquidity outlook.