LendingTree, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. LendingTree operates an online marketplace matching consumers seeking loans and other credit products with lenders. LendingTree Loans is reported as discontinued operations. The company reported one segment, Lending activities, following organizational changes during the quarter. Dollar figures below are in millions except per-share data.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Revenue | $50.9 | $40.0 | Up 27% |
| Mortgage revenue | $37.0 | $34.2 | Up 8% |
| Non-mortgage revenue | $13.9 | $5.8 | Up 141%; personal loans were the primary growth driver |
| Operating income (loss) | $5.7 | $(5.8) | Operating margin 11.2%, versus negative 14.6% |
| Net income (loss) from continuing operations | $5.4 | $(5.8) | $0.48 diluted continuing-operations EPS |
| Consolidated net income (loss) | $5.2 | $(6.4) | Includes discontinued-operations losses of $0.2 and $0.6, respectively |
| Adjusted EBITDA | $8.9 | $4.5 | Non-GAAP measure; up about 99% |
| Operating cash flow, continuing operations | $5.3 | $0.2 | Improved; working capital used $3.2 in Q1 2015 |
| Cash and cash equivalents | $88.5 | $86.2 at Dec. 31, 2014 | Restricted cash was an additional $18.6 |
Selling and marketing expense was $32.8 million, up 20%, including advertising expense of $29.7 million, up 20%. Total costs and expenses were $45.2 million, down 1%. The filing does not present a conventional gross-margin figure. No interest-bearing debt is shown on the balance sheet; total liabilities were $46.4 million, including $12.1 million of current discontinued-operations liabilities.
Liquidity, cash flow, and capital
Cash from continuing operations was $5.3 million. Investing activities used $1.1 million, mainly capital expenditures of $1.2 million; financing activities used $1.8 million, mainly employee tax withholding on equity awards and $0.2 million of share repurchases. Cash increased by $2.3 million during the quarter. Management stated that cash and operating cash flows should fund operating and other needs for the next twelve months and beyond. It identified no material liquidity sources beyond cash and $12.1 million of restricted cash expected to be released from escrow in December 2015. That escrow is not currently available for general use.
Material changes and management commentary
- Revenue growth reflected a 90% increase in consumers matched on the lending marketplace. Average revenue per matched consumer fell 32%, mainly because non-mortgage products contributed a larger share and mortgage revenue per matched consumer declined.
- Personal-loan growth was attributed to greater product awareness, more marketplace lenders, higher revenue per matched consumer in that product, and increased marketing. Mortgage growth was primarily refinance-related; purchase-product revenue declined.
- Lower mortgage rates supported refinance activity: the average 30-year fixed rate was 3.72% in Q1 2015 versus 4.36% in Q1 2014. Management cited MBA projections for rates to rise during the remainder of 2015 and for the refinance share of originations to decline. These are industry projections, not company guidance.
- The 2014 comparison included $7.7 million of litigation settlements and contingencies, largely related to the Zillow patent trial. The comparable Q1 2015 expense was $0.3 million. Advertising spending increased to generate leads in response to lender demand; management said marketing expenditures would be adjusted dynamically to anticipated revenue opportunities.
Outlook, risks, and contingencies
The filing provides no specific company revenue or earnings guidance. Management cautioned that results for the quarter are not necessarily indicative of full-year results. Risks include mortgage-rate and housing-market changes, seasonal demand, competition from lenders and other online channels, nonexclusive lender relationships, reliance on third-party technology, online security and fraud, and legal and regulatory proceedings. The filing reported no material changes to the risk factors in the 2014 Form 10-K.
- Continuing-operations litigation: A $3.0 million litigation accrual was recorded at March 31, 2015. The Massachusetts Division of Banks matter had an estimated possible loss range of $0.5 million to $6.5 million, with a $0.5 million reserve. The Zillow appeal remained stayed; the company had reached an oral settlement with NexTag, not yet reflected in a signed agreement at quarter-end. Subsequent to quarter-end, AlphaCap litigation was settled and dismissed in April 2015.
- Discontinued LendingTree Loans obligations: The recorded loan-loss reserve was $8.75 million, within an estimated range of $6.5 million to $11.6 million. The company noted actual losses could vary significantly because it lacks precise access to performance data for previously sold loans. Of $16.1 million held in escrow, $12.1 million was expected to be released in December 2015, subject to the transaction terms and remaining obligations.
- Other: Restructuring expense was immaterial, and management did not expect significant additional restructuring costs. The company was evaluating the impact of the forthcoming revenue-recognition standard; the proposed effective-date deferral had not yet been adopted.
Facts investors should verify
- Whether marketplace growth and personal-loan expansion can continue while average revenue per matched consumer remains lower.
- How higher mortgage rates, changing refinance demand, and housing-market conditions affect lead volume, lender demand, and revenue mix.
- Actual timing and amount of the expected $12.1 million escrow release, and developments in discontinued-loan repurchase and indemnification claims.
- Resolution and potential financial impact of continuing litigation and the Massachusetts regulatory matter, including amounts beyond recorded reserves.
- Whether operating cash flow and marketing investment convert revenue growth into sustained GAAP profitability; Adjusted EBITDA is a non-GAAP measure.