Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009, for Tree.com, Inc. (operating as LendingTree). The company was spun off from IAC/InterActiveCorp in August 2008. Operations are organized into three segments: LendingTree Loans (residential mortgage origination), Exchanges (online lead generation networks), and Real Estate (brokerage and lead generation). The company operates solely in the United States.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $57.3 million | $70.2 million |
| Net Income (Loss) | $3.2 million | ($9.8 million) |
| Operating Income (Loss) | $3.2 million | ($9.5 million) |
| Gross Margin | $39.1 million (68%) | $49.1 million (70%) |
| EBITDA | $7.9 million | ($3.5 million) |
| Cash and Cash Equivalents | $81.4 million | $52.5 million |
| Warehouse Lines of Credit (Outstanding) | $72.2 million | $76.2 million |
| Loans Held for Sale | $85.1 million | $87.8 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 18% year-over-year. The Exchanges segment saw a 49% decline due to reduced consumer loan requests and lower lender demand for leads. The Real Estate segment declined 31% due to negative market conditions. Conversely, LendingTree Loans revenue increased 12% driven by lower mortgage rates and higher refinance activity.
- Profitability Turnaround: The company returned to profitability with a net income of $3.2 million, compared to a net loss of $9.8 million in Q1 2008. This was driven by a 54% reduction in selling and marketing expenses and improved gross margins in the LendingTree Loans segment.
- Cost Reductions: Selling and marketing expenses dropped $16.1 million (54%) primarily due to reduced online and broadcast advertising. General and administrative expenses decreased 19% due to workforce reductions and lower professional fees.
- Restructuring: Restructuring expenses increased to $0.8 million in Q1 2009 from $0.4 million in Q1 2008, primarily related to employee termination costs in the Real Estate and Corporate segments.
Outlook, Risks, and Contingencies
- Liquidity and Credit Facilities: The LendingTree Loans business is highly dependent on two $50 million warehouse lines of credit. One line expired in April 2009 and was replaced; the second expires in December 2009, with the lender indicating it is exiting the warehouse business. Management is in discussions with other institutions but notes that adverse market conditions could affect credit availability or pricing.
- Market Risks: The company faces significant exposure to interest rate fluctuations affecting the fair value of loans held for sale and interest rate lock commitments (IRLCs). A 100 basis point increase in rates would decrease the aggregate fair value of derivatives and hedged items by $0.8 million.
- Loan Loss Obligations: The company maintains a reserve of $9.8 million for losses on previously sold loans. Historical data indicates continued losses on vintages from 2005–2008, though no losses were experienced on loans sold in Q1 2009.
- Legal Proceedings: The company settled three class action lawsuits regarding employment practices for $2.4 million in April 2009. Management believes other pending litigation will not have a material impact on financial condition.
- Guidance: The filing does not provide specific forward-looking financial guidance for the full year 2009, stating that Q1 results are not necessarily indicative of future performance.
Investor Verification Checklist
- Verify the renewal status and terms of the second warehouse line of credit expiring December 30, 2009, given the lender's exit from the business.
- Monitor the trend in "Match fees" and "Closed loan fees" within the Exchanges segment to assess if the 49% revenue decline stabilizes.
- Review the aging of the loan loss reserve for previously sold loans, specifically the exposure from 2006–2008 vintages.
- Assess the impact of the $2.4 million legal settlement paid in April 2009 on Q2 liquidity.
- Confirm compliance with financial covenants (tangible net worth, liquidity ratios) under the new warehouse credit facility.