Business Context and Reporting Period
Company: Tree.com, Inc. (operating as LendingTree, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: The Company operates three primary segments: LendingTree Loans (origination and sale of residential mortgages), Exchanges (online lead generation for lending, education, and autos), and Real Estate (brokerage and lead generation). The Company was spun off from IAC/InterActiveCorp in August 2008.
Key Financial Metrics (Six Months Ended June 30, 2010)
| Metric | 2010 (YTD) | 2009 (YTD) | Change |
|---|---|---|---|
| Total Revenue | $93.8 million | $118.2 million | (21%) |
| Net Loss | $(6.9) million | $3.9 million (Income) | Turned to loss |
| Operating Loss | $(5.8) million | $4.4 million (Income) | Turned to loss |
| Adjusted EBITDA | $4.2 million | $17.4 million | (76%) |
| Cash & Equivalents | $62.9 million | $86.1 million (Dec 31, 2009) | (27%) |
| Warehouse Debt Outstanding | $91.1 million | $78.5 million (Dec 31, 2009) | 16% |
| Net Cash Used in Operating Activities | $(30.3) million | $(8.0) million | Worsened |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 21% year-over-year. LendingTree Loans revenue fell 26% due to a 24% decline in the dollar value of loans closed, driven by tight secondary credit markets. Real Estate revenue dropped 36% due to negative market conditions and office consolidations. Conversely, Exchanges revenue increased 21%, primarily due to higher inter-segment sales of leads to LendingTree Loans.
- Profitability Shift: The Company reported a net loss of $6.9 million compared to net income of $3.9 million in the prior year. Operating loss widened significantly due to revenue declines and increased restructuring charges ($3.0 million in 2010 vs. a benefit of $0.2 million in 2009).
- Expense Management: Cost of revenue decreased 31% due to lower loan originations and agent commissions. However, Selling and Marketing expenses increased 34% as the Company increased online advertising spend to drive lead volume in a competitive environment.
- Cash Flow: Net cash used in operating activities increased to $30.3 million, largely driven by a $12.8 million payment for litigation settlements and a decrease in accounts payable.
Guidance, Outlook, Risks, and Contingencies
- Liquidity and Debt: The LendingTree Loans segment relies heavily on two warehouse lines of credit totaling $125.0 million. One line ($50 million) was renewed through June 2011; the second ($75 million) expires in October 2010. A third $40 million line expired and was not renewed. Management believes current lines are adequate but notes that losing one line would force reduced capacity, and losing both would have a material adverse effect.
- Loan Loss Obligations: The Company maintains a reserve for loan loss obligations on previously sold loans. As of June 30, 2010, the total liability was $17.1 million. Management estimates remaining possible losses (excluding a specific $2.4 million settlement) to be between $12 million and $20 million.
- Restructuring: Ongoing restructuring charges relate primarily to continuing lease obligations for call center facilities. A liability of $3.4 million remains for future payments.
- Market Risk: The Company is exposed to interest rate risk regarding loans held for sale and interest rate lock commitments. A 1% increase or decrease in interest rates would decrease the aggregate fair value of hedged items by approximately $1.0 million to $1.1 million.
- Stock Repurchase: The Company has a $10 million stock repurchase program. As of June 30, 2010, approximately $6.5 million remained available.
Investor Verification Checklist
- Warehouse Line Renewals: Verify the renewal status of the $75 million warehouse line expiring October 29, 2010, and the terms of the renewed $50 million line.
- Loan Loss Reserve Adequacy: Assess the $17.1 million loan loss reserve against the management-estimated range of $12 million to $20 million for future losses on sold loans.
- Marketing Efficiency: Monitor the return on investment for the increased marketing spend (up 34% YTD) given the overall decline in loan closing volumes.
- Litigation Exposure: Confirm the status of the $2.4 million remaining settlement payment and any new litigation developments.
- Real Estate Segment Turnaround: Evaluate the impact of office consolidations and market conditions on the Real Estate segment's ability to return to profitability.