Business context and reporting period
Tree.com, Inc., parent of LendingTree, LLC, reported unaudited results for the quarter and six months ended June 30, 2013. Continuing operations comprise mortgage and non-mortgage comparison-shopping businesses. RealEstate.com and LendingTree Loans are reported as discontinued operations; LendingTree Loans was sold to Discover in June 2012.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $37.4 | $17.0 | $65.5 | $30.2 |
| Operating loss | $(2.0) | $(2.8) | $(2.3) | $(8.0) |
| Adjusted EBITDA | $3.4 | $(0.3) | $7.4 | $(2.9) |
| Net loss from continuing operations | $(2.0) | $(1.8) | $(2.3) | $(5.0) |
| Net income, including discontinued operations | $7.1 | $25.8 | $4.4 | $39.9 |
| Net income per share | $0.64 | $2.41 | $0.39 | $3.76 |
Q2 operating margin was approximately (5.5)% versus (16.3)% a year earlier; first-half margin was approximately (3.5)% versus (26.6)%. Adjusted EBITDA is a non-GAAP measure. Revenue growth primarily reflects leads becoming available for sale through the mortgage exchange after the LendingTree Loans sale, rather than being directed to the company’s former lending business. Discontinued-operations income included a $10.0 million additional Discover purchase-price payment in 2013; prior-year income included the original sale gain.
- Mortgage revenue rose 194% in Q2 to $33.5 million and 189% in the first half to $59.0 million. Consumers matched with network lenders increased 131% and 101%, respectively; revenue per matched consumer increased 29% and 45%.
- Non-mortgage revenue fell 27% in Q2 to $3.3 million and 35% in the first half to $5.8 million, mainly reflecting education-client marketing changes and the discontinuation of printed home-services directories.
- Selling and marketing expense rose to $26.4 million in Q2 from $11.0 million, including increased advertising and a new national brand campaign. Litigation settlements and contingencies were $2.9 million in Q2 and $3.9 million in the first half, primarily patent-litigation legal fees.
Cash, liquidity, and obligations
- At June 30, cash and cash equivalents were $85.3 million, up from $80.2 million at December 31, 2012. Restricted cash was $30.1 million, including $18.1 million held in escrow relating to the LendingTree Loans sale.
- Continuing-operations operating cash flow was positive $1.1 million for the first half, compared with negative $6.6 million in 2012. Capital expenditures were $1.2 million; continuing-operations investing cash use was $1.9 million and financing cash use was $2.6 million.
- The balance sheet reported $67.4 million total liabilities, including $32.1 million of current liabilities of discontinued operations. No continuing-operations borrowings are shown; the former LendingTree Loans warehouse credit lines terminated in July 2012.
- Legacy loan-loss reserve was $28.7 million, within management’s estimated loss range of $18 million to $37 million. Tree.com also guaranteed certain obligations related to loans sold to two investors; the filing notes one investor’s original principal balance was approximately $1.8 billion.
Outlook, commentary, and risks
Management stated that available cash and operating cash flows should be sufficient for operating and other needs for the next twelve months and beyond. No specific company revenue or earnings guidance was provided. Management cited rising mortgage rates: the average 30-year rate reached 4.07% in June 2013. The filing cites the Mortgage Bankers Association’s projection that originations would decline 38% in the second half of 2013 versus the first half. Results remain exposed to mortgage rates, housing-market cycles, lender demand, and seasonality.
- Disclosure controls were deemed ineffective at June 30, 2013 because a material weakness in oversight of third-party tax-advisor work remained unremediated. Management warned that tax-account misstatements and reporting or regulatory consequences were possible.
- Legacy loan repurchase and indemnification claims remain uncertain; the company said actual losses could differ significantly from its reserve and estimated range. Approximately $18.1 million of sale proceeds remains escrowed.
- A Massachusetts regulatory matter had an estimated possible loss range of $0.5 million to $6.5 million; a $0.5 million reserve was recorded. The company also disclosed ongoing patent and other litigation, including a new Money Suite patent suit.
- The company is restricted from originating, funding, or selling mortgages in the United States until June 2015, subject to specified exceptions. It also disclosed a prior-period share-count and EPS error, which it concluded was not material to previously issued financial statements; share counts were revised prospectively.
Important facts for investors to verify
- Whether mortgage-exchange growth and improved operating results persist as rates rise and the cited market contraction develops.
- The adequacy and timing of the $28.7 million legacy loan-loss reserve, related guarantees, and release of escrowed sale proceeds.
- Progress remediating the tax-control material weakness and readiness for the required 2013 auditor attestation.
- Potential cash costs and outcomes from litigation and the Massachusetts regulatory matter, including amounts beyond recorded reserves.
- Comparability of reported earnings: continuing operations remained loss-making, while net income depended materially on discontinued-operation sale gains.