LendingTree, Inc. — Q1 2019 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2019, with comparisons to Q1 2018. LendingTree operates an online marketplace matching consumers seeking financial products with lenders and other providers. The company reports one segment. LendingTree Loans is classified as discontinued operations; unless noted, results below are continuing operations.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $262.4 million | $181.0 million | Up 45% |
| Operating income (loss) | $(1.8) million | $15.4 million | Down $17.2 million |
| Net income from continuing operations | $0.6 million | $35.9 million | Down 98% |
| Net income (loss), including discontinued operations | $(0.5) million | $31.5 million | Down $32.0 million |
| Adjusted EBITDA (non-GAAP) | $43.0 million | $31.7 million | Up 36% |
| Operating cash flow | $23.3 million | $17.7 million | Up $5.6 million |
Revenue grew as non-mortgage products rose 101% to $216.4 million, more than offsetting a 37% decline in mortgage revenue to $46.0 million. Insurance contributed $67.1 million, principally following the QuoteWizard acquisition; credit-card revenue was $54.5 million and personal-loan revenue was $32.5 million. Operating margin was approximately negative 0.7%, versus 8.5% a year earlier. Adjusted EBITDA margin was approximately 16.4%, versus 17.5%.
Total costs and expenses rose 59% to $264.2 million. Major increases included selling and marketing, up $48.8 million to $174.9 million, and intangible amortization, up $9.5 million to $13.4 million. The company recorded $14.6 million of net contingent-consideration expense, primarily from the QuoteWizard earnout revaluation. Net interest expense increased to $5.5 million from $3.0 million.
Balance sheet, liquidity and cash flow
- Cash and cash equivalents were $64.6 million at March 31, 2019, down from $105.1 million at year-end 2018.
- Revolving-credit borrowings were $185.0 million, up from $125.0 million at year-end, with a reported weighted-average rate of 3.99%. The $350 million facility matures in November 2022; the company reported covenant compliance. It reported $155 million drawn as of April 26, 2019.
- Convertible notes had a $300 million principal balance and a $254.2 million net carrying value. The notes bear 0.625% coupon interest and mature in June 2022. Holders could convert during Q2 2019 under the stated stock-price condition.
- Cash provided by continuing operations was $23.3 million. Investing activities used $110.4 million, largely for the $105.4 million ValuePenguin acquisition and $5.0 million of capital expenditures. Financing activities provided $49.4 million, primarily from net revolver proceeds.
- Management said cash, operating cash flows and the revolving facility should be sufficient for operating needs for the next twelve months and beyond. Current assets were $219.0 million versus current liabilities of $350.3 million.
Material changes and management commentary
- ValuePenguin was acquired in January for approximately $106.1 million in cash at closing. It contributed $5.4 million of Q1 revenue and $1.9 million of continuing-operations net income. Purchase accounting remained preliminary.
- Management attributed mortgage revenue weakness to reduced consumer demand and revenue per consumer, particularly for refinancing, amid mortgage-market conditions. Thirty-year mortgage rates averaged 4.37% in Q1 2019, versus 4.27% in Q1 2018; management cited industry projections for rates to remain relatively consistent through year-end.
- Advertising expense increased 38% to $162.6 million as the company sought to meet partner demand. Management said it dynamically adjusts marketing spending to expected revenue opportunities and viewed non-mortgage markets as under-penetrated, while warning that reduced capital availability could hurt those revenues.
- The company adopted lease accounting on January 1, 2019, recognizing $8.8 million of additional assets and liabilities at adoption. At quarter-end, operating-lease right-of-use assets were $11.2 million and lease liabilities were $13.0 million.
- The company agreed to sell its two Charlotte office buildings for $24.5 million, subject to adjustments, with closing expected in Q2 2019.
Risks, contingencies and unusual items
- A discontinued-operations lawsuit concerning legacy mortgage loans resulted in a $28.7 million jury verdict. The court awarded $14.1 million of pre-verdict interest; as of April 26, post-verdict, pre-judgment interest was estimated at $3.3 million. The plaintiff also sought up to $28.7 million in attorneys’ fees. The company estimated potential losses of $0 to $74.8 million, recorded a $7.0 million liability, and said it intended to appeal.
- A separate legacy mortgage matter brought by Lehman Brothers involved alleged claim amounts of $40.2 million; the company recorded a $1.0 million liability and said it would defend the action.
- For legacy LendingTree Loans, the estimated remaining loan-loss obligation range was $4.3 million to $7.9 million, with a $7.6 million reserve. The company said actual losses could vary significantly and it lacks precise access to current loan performance data.
- Acquisition earnout liabilities totaled $49.4 million at quarter-end. Potential future payments include up to $70.2 million for QuoteWizard, $8.75 million for Ovation and $6.0 million for SnapCap, plus remaining DepositAccounts payments. Fair-value changes depend on estimates and could materially affect operating income.
- Other disclosed risks include sensitivity of mortgage demand and lead economics to interest rates and housing conditions, competition from direct and online channels, dependence on third-party technology providers, and potential contraction in non-mortgage credit availability. The filing reported no material changes to the prior annual report’s risk factors.
Investor facts to verify
- Whether non-mortgage growth can offset mortgage-market weakness, and how much growth reflects acquisitions versus underlying performance.
- The sustainability of marketing spending and Adjusted EBITDA performance relative to GAAP earnings and cash generation.
- Debt, interest costs, liquidity and covenant headroom following acquisition-related borrowing; the filing does not state a specific remaining availability figure after other facility commitments.
- Final purchase accounting and performance of ValuePenguin and other recent acquisitions, along with the size and timing of earnout payments.
- Developments in the RFC litigation, including judgment, attorneys’ fees, interest and appeal outcome, and changes to legacy loan-loss reserves.
- Completion and net proceeds from the planned office-property sale, and whether management’s liquidity outlook remains appropriate.