LendingTree, Inc. / Tree.com, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The filing registrant is Tree.com, Inc., parent of LendingTree, LLC. Continuing operations include lending, auto, education and home services; the former RealEstate.com business and LendingTree Loans are reported as discontinued operations.
Financial performance and liquidity
- Revenue: Q3 revenue was $41.3 million, up 11% from $37.3 million. Nine-month revenue was $123.5 million, up 20% from $102.8 million.
- Profitability: Q3 operating income was $0.6 million versus $0.2 million; continuing-operations net income was $0.6 million. Including a $0.2 million discontinued-operations loss, net income was $0.4 million, compared with a $0.2 million net loss in Q3 2013. For nine months, continuing operations had a $2.6 million loss and total net loss was $6.3 million, versus 2013 net income of $4.1 million, which included a $10.1 million gain on sale of discontinued operations.
- Margins and adjusted EBITDA: Q3 operating margin was approximately 1.3%, versus 0.6% a year earlier. Adjusted EBITDA, a non-GAAP measure, was $5.8 million in Q3, up from $5.4 million; nine-month Adjusted EBITDA was $15.8 million, up from $12.8 million.
- Cash flow: Continuing-operations operating cash flow was $1.0 million for nine months, down from $3.4 million. Investing activities provided $0.6 million; financing activities used $6.4 million. Total cash used in continuing operations was $4.8 million. Cash and cash equivalents declined to $83.6 million from $91.7 million at year-end.
- Liquidity and debt: Restricted cash was $21.9 million, compared with $26.0 million at year-end. The company said cash and operating cash flows should be sufficient for operating needs for the next 12 months and beyond. The balance sheet does not show material borrowings; interest expense was $1,000 for the nine-month period.
- Balance sheet: Total assets were $142.0 million, total liabilities $62.7 million and shareholders’ equity $79.3 million at September 30, 2014. Current liabilities include $31.8 million attributed to discontinued operations.
Changes versus prior comparable periods
- Lending revenue rose 8% in Q3 and 21% for nine months. Q3 mortgage revenue declined $1.0 million, offset by a $3.9 million increase in non-mortgage lending products. For nine months, mortgage revenue increased $9.5 million, mainly from purchase products, while non-mortgage revenue increased $9.9 million.
- Matched consumers on the lending exchange increased 53% in Q3 and 48% for nine months, while average revenue per matched consumer fell 29% and 18%, respectively. Management attributed the lower yield partly to a greater mix of purchase and non-mortgage products and lower mortgage revenue per match.
- Q3 selling and marketing expense increased 9% to $27.2 million; nine-month expense rose 22% to $83.6 million, driven largely by online advertising. Nine-month total costs and expenses rose faster than revenue, and continuing operations remained loss-making for the period.
- Mortgage-market conditions were challenging: MBA data cited by management showed mortgage origination dollar volume down 36% in Q3 and 44% for nine months year over year, largely due to lower refinancing. The company’s Q3 2014 average mortgage rate was 4.14%, below Q3 2013’s 4.44%.
Outlook, risks and unusual items
- Management provided no specific revenue or earnings guidance. It said marketing spending would continue to be adjusted to revenue-producing opportunities. In June 2014, LendingTree launched My LendingTree, a consumer platform offering comparison shopping and credit-related tools.
- Legacy LendingTree Loans exposure remains significant. The loan-loss reserve was $28.4 million, against an estimated remaining-loss range of $16.3 million to $29.4 million; approximately $19.3 million was held in escrow for certain contingent liabilities. Management cautioned actual losses could differ significantly.
- Litigation and regulatory matters include a $2.2 million probable NexTag attorneys’ fee award, a $2.8 million reserve for a West Virginia class-action award (some or all may be insured), and a Massachusetts regulatory matter with estimated possible loss of $0.5 million to $6.5 million and a $0.5 million reserve. The FTC issued a civil investigative demand; the filing states no specific wrongdoing or penalties were alleged and the company was cooperating.
- Q3 litigation settlements and contingencies expense was $2.3 million; the nine-month amount was $10.4 million. Management expected legal expenses related to the Zillow patent litigation to decline significantly, while continuing appeal-related costs.
- Risks include exposure to mortgage rates and housing-market cycles, lender competition and non-exclusive lender relationships, third-party technology and online-security risks, and uncertainty in legal and legacy loan obligations. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether continued revenue growth can offset declining revenue per matched consumer and higher marketing and product-development costs.
- The performance and monetization of purchase and non-mortgage products, and the costs and results of the My LendingTree launch.
- The adequacy of the $28.4 million discontinued-operations loan-loss reserve, the $19.3 million escrow balance and the status of related settlements and guarantees.
- Final outcomes and cash exposure from the NexTag, West Virginia, Massachusetts and FTC matters, including insurance recoveries where applicable.
- Cash-flow trends and the amount of cash actually available after restrictions, legacy obligations, share repurchases and employee tax-withholding payments.