LendingTree, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
LendingTree operates an online marketplace connecting consumers seeking loans and other financial products with lenders and providers. This unaudited filing covers the three and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods. The former LendingTree Loans business is reported as discontinued operations.
Unless noted otherwise, dollar amounts below are in millions. The company reported one segment. It continued to diversify beyond mortgages, including through the June acquisition of Ovation Credit Services and July acquisition of Student Loan Hero.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $197.1 | $171.5 | $562.2 | $456.8 |
| Operating income | $20.3 | $17.5 | $53.8 | $33.3 |
| Net income from continuing operations | $28.4 | $10.1 | $109.1 | $25.9 |
| Net income including discontinued operations | $25.7 | $9.1 | $99.8 | $23.3 |
| Adjusted EBITDA (non-GAAP) | $45.3 | $34.7 | $114.1 | $85.6 |
| Operating margin (approx.) | 10.3% | 10.2% | 9.6% | 7.3% |
Q3 revenue rose 15%; nine-month revenue rose 23%. Non-mortgage revenue grew 45% in Q3 and 47% year to date, while mortgage revenue fell 25% and 6%, respectively. Q3 diluted EPS was $1.86 versus $0.66; nine-month diluted EPS was $6.98 versus $1.71.
- Non-mortgage growth was led by personal loans, credit cards, small-business loans, student loans and home equity. Q3 personal-loan revenue was $38.6 million, up 52%; credit-card revenue was $42.7 million, up 9%.
- Mortgage weakness reflected lower refinancing demand and lower revenue per consumer amid rising rates. Q3 30-year mortgage rates averaged 4.57%, compared with 3.89% a year earlier.
- Q3 selling and marketing expense increased 5% to $124.4 million; nine-month expense increased 17% to $374.4 million. General and administrative expense rose 28% in Q3 and 70% year to date, in part due to headcount and executive equity compensation.
- Net income benefited substantially from tax benefits for employee stock-option exercises and restricted-stock vesting: $14.3 million in Q3 and $75.2 million year to date. The resulting reported tax benefit was $10.5 million for Q3 and $63.7 million year to date; these gains should not be treated as ordinary operating performance.
Cash flow, balance sheet and debt
- Continuing-operations operating cash flow was $60.2 million for the first nine months, versus $65.1 million a year earlier. Investing cash outflow was $79.8 million, including $57.4 million for Student Loan Hero and Ovation and $10.6 million of capital expenditures. Financing cash outflow was $80.5 million, primarily reflecting contingent-consideration payments and $57.0 million of share repurchases.
- Cash and cash equivalents were $265.2 million at September 30, down from $368.6 million at December 31, 2017. Total assets were $743.6 million; current assets were $361.3 million and current liabilities $108.4 million.
- Long-term debt carrying value was $247.7 million, representing $300.0 million principal of 0.625% convertible notes due 2022, net of discount and issuance costs. The notes’ estimated fair value was $382.1 million. No borrowings were outstanding under the $250 million revolving facility at September 30; the company reported covenant compliance.
- After quarter-end, the revolver was expanded to $350 million. The October 31 QuoteWizard acquisition cost $300 million in cash, with potential additional consideration up to $70.2 million; it was funded with $175 million of cash and a $125 million revolver draw. Management stated that cash and operating cash flows should meet needs for the next 12 months and beyond.
Outlook, risks and unusual items
- No specific quantitative earnings or revenue guidance is provided. Management expects continued non-mortgage growth and anticipated additional insurance revenue from QuoteWizard, alongside higher future operating costs, including marketing, cost of revenue, general and administrative expense, product development and amortization.
- Management described mortgage demand as sensitive to rates, housing conditions and lender lead demand. It noted that rising rates had reduced refinance activity and mortgage revenue; the filing also identifies seasonality in mortgage, personal-loan, credit-card, deposit and student-loan products.
- The company adopted ASC 606 on January 1, 2018. It accelerated recognition of certain non-mortgage closing and approval fees; the reported revenue increase attributable to adoption was $0.7 million in Q3 and $1.6 million year to date. 2017 comparative revenue remains on the prior accounting basis.
- Discontinued operations generated losses of $2.6 million in Q3 and $9.3 million year to date, primarily from litigation and related legal costs. The LendingTree Loans loan-loss reserve was $7.6 million, against an estimated exposure range of $4.3 million to $7.8 million.
- A discontinued-operations lawsuit by Residential Funding Company went to trial in October 2018; the plaintiff seeks $44 million plus attorney fees. The company accrued $7 million for this matter and intends to defend it. It also recorded a $1 million estimated liability for a separate Lehman Brothers matter.
- Acquisition earnouts are measured using estimates and could vary with business performance and other assumptions. Contingent consideration expense was $2.1 million in Q3 and $1.2 million year to date in 2018.
Important facts for investors to verify
- Underlying earnings and cash generation excluding the unusually large employee stock-compensation tax benefits, non-cash compensation, acquisition effects and discontinued-operation losses.
- Whether non-mortgage growth can offset continued pressure on mortgage revenue, and whether marketing spending remains productive as lender demand and rates change.
- QuoteWizard’s post-acquisition performance, integration costs, contingent consideration exposure, and the effect of the $125 million revolver borrowing on liquidity and debt covenants.
- Resolution and potential costs of the Residential Funding and Lehman litigation, and whether the LendingTree Loans reserve adequately reflects remaining loan repurchase and indemnification obligations.
- Final purchase-price allocations for the 2018 acquisitions and the assumptions underlying contingent-consideration valuations.