Business Context and Reporting Period
Company: Tree.com, Inc. (Lendingtree, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Tree.com operates three primary segments: LendingTree Loans (residential mortgage origination), 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 2008.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenue | $53.2 million | $147.0 million |
| Net Income (Loss) | $1.8 million | $(5.1) million |
| Operating Income (Loss) | $1.9 million | $(3.9) million |
| Adjusted EBITDA | $5.5 million | $9.8 million |
| Cash and Cash Equivalents | $57.3 million | $57.3 million (Ending Balance) |
| Warehouse Lines of Credit Outstanding | $140.1 million | $140.1 million (Ending Balance) |
| Loans Held for Sale | $164.5 million | $164.5 million (Ending Balance) |
Material Changes vs. Prior Period
- Revenue: Total revenue increased 5% year-over-year (YoY) for the quarter to $53.2 million, driven by a 44% surge in LendingTree Loans revenue due to low interest rates and increased refinancing activity. Conversely, Exchanges revenue declined 18% and Real Estate revenue dropped 60% YoY due to reduced closings and a challenging housing market.
- Profitability: The company reported a net income of $1.8 million for the quarter, a significant turnaround from a net loss of $7.4 million in the same period in 2009. Operating income improved from a loss of $7.4 million to a profit of $1.9 million.
- Expenses: Selling and marketing expenses increased slightly (2%) for the quarter but rose 22% for the nine-month period as the company increased online marketing spend to offset a lack of organic traffic growth seen in 2009. General and administrative expenses decreased 20% for the quarter due to reduced litigation costs and headcount.
- Cash Flow: Net cash used in operating activities was $81.0 million for the nine months ended September 30, 2010, compared to $24.4 million provided in the prior year. This shift was primarily due to funding $77 million more in loans and holding loans longer before sale due to investor capacity constraints.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates continuing to adjust selling and marketing expenditures based on revenue opportunities. The company expects to remain compliant with Nasdaq listing requirements regarding independent board members by April 29, 2011, following a recent resignation.
- Unusual Items:
- Restructuring: $3.4 million in restructuring charges were recorded for the nine months ended September 30, 2010, primarily related to continuing lease obligations for call centers.
- Litigation: $1.6 million in litigation settlements were recorded for the nine-month period. A $12.8 million liability from the prior year was paid in 2010.
- Settlements: A $4.5 million settlement regarding limited documentation second lien loans was finalized in January 2010, with payments spread throughout the year.
- Risks:
- Credit Market Dependence: The LendingTree Loans segment is highly dependent on warehouse lines of credit. The company has $125 million in committed capacity (increased to $150 million in October 2010) and $140.1 million outstanding. Inability to renew these lines would materially adversely affect operations.
- Loan Loss Obligations: The company estimates remaining possible losses on previously sold loans (excluding specific settlements) to be between $11 million and $16 million.
- Legal Proceedings: The company filed a patent infringement lawsuit against Zillow, Inc., and others in September 2010. Additionally, a settlement of $1.2 million plus fees was reached with the Arizona Attorney General regarding marketing of payment option ARM loans.
Investor Verification Checklist
- Warehouse Line Renewals: Verify the status of the $125 million committed warehouse lines of credit, specifically the renewal terms effective October 29, 2010, and the expiration dates in 2011.
- Loan Loss Reserves: Review the adequacy of the $16.3 million total liability for losses on previously sold loans against the estimated range of $11 million to $16 million in remaining possible losses.
- Real Estate Segment Performance: Monitor the Real Estate segment, which saw a 60% revenue decline in the quarter, to assess the impact of office consolidations and market conditions on future profitability.
- Marketing Efficiency: Analyze the return on increased marketing spend (up 22% for the nine months) given the decline in matched loan requests in the Exchanges segment.
- Nasdaq Compliance: Confirm the appointment of a new independent director to regain compliance with Nasdaq Rule 5605 by the April 2011 deadline.