Business Context and Reporting Period
Company: Tree.com, Inc. (f/k/a Lendingtree, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Tree.com operates three primary segments: LendingTree Loans (direct mortgage origination and sale), Exchanges (online lead generation networks connecting consumers with lenders and service providers), and Real Estate (brokerage and lead generation). The company was spun off from IAC/InterActiveCorp in August 2008.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total Revenue | $198.2 million | $216.8 million | (9%) |
| Net Loss | $(17.6) million | $(24.5) million | Improvement |
| Operating Loss | $(18.1) million | $(24.3) million | Improvement |
| Adjusted EBITDA | $10.1 million | $14.2 million | (29%) |
| Cash and Cash Equivalents | $68.8 million | $86.1 million | (20%) |
| Restricted Cash | $10.7 million | $12.0 million | (11%) |
| Warehouse Lines of Credit (Outstanding) | $100.6 million | $78.5 million | 28% |
| Warehouse Lines of Credit (Capacity) | $150.0 million | $125.0 million | 20% |
Note: The filing text does not provide a specific "Gross Margin" percentage for the consolidated entity, though segment gross margins are disclosed in the notes. Operating loss improved primarily due to reduced operating expenses and lower litigation settlement costs compared to 2009.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 9% to $198.2 million. The Exchanges segment saw a 15% decline due to fewer loan requests and closed loans. The Real Estate segment revenue dropped 50% to $14.1 million due to fewer transactions and lower home prices. LendingTree Loans revenue increased slightly (6%) to $124.2 million, driven by higher pricing per loan despite a 2% decrease in loan volume.
- Impairment Charges: The company recorded $10.8 million in asset impairments in 2010, primarily related to goodwill ($1.3 million) and trademarks ($9.0 million) in the Real Estate segment, and $0.5 million in trademarks for the Exchanges segment. This compares to $6.1 million in impairments in 2009.
- Cost Reductions: Cost of revenue decreased 22% to $58.1 million. Selling and marketing expenses increased 20% to $74.1 million (37% of revenue) as the company increased advertising to offset lower organic traffic. General and administrative expenses decreased 16% to $54.7 million.
- Stock Repurchases: The company repurchased approximately 453,000 shares in Q4 2010, including a Dutch auction tender offer for 312,339 shares at $7.75 per share.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management anticipates continued adverse market conditions in the mortgage and real estate sectors. The company plans to align cost structures with reduced revenue opportunities, including closing unprofitable Real Estate brokerage markets (5 closed in early 2011, 2 more anticipated). Mortgage rates are expected to rise in 2011, potentially dampening refinancing activity.
- Acquisition: In November 2010, the company agreed to acquire assets of SurePoint Lending for an initial $6 million cash payment plus contingent consideration, with a total cap of $23 million. Closing is projected for March 2011.
- Material Weakness in Internal Controls: The company identified a material weakness in internal controls over financial reporting related to income taxes. Specifically, there were ineffective controls over the oversight of work performed by third-party tax advisors. Remediation is in progress but not yet complete.
- Liquidity and Debt: The LendingTree Loans segment relies heavily on two committed warehouse lines of credit totaling $150 million. One line expires June 29, 2011, and the other October 28, 2011. Management intends to renew these lines but notes that failure to do so would materially adversely affect operations.
- Legal Proceedings: The company is involved in various litigation matters, including class actions regarding a 2008 data security breach (mostly dismissed or settled), mortgage broker licensing disputes (South Carolina, Wisconsin), and patent infringement suits against competitors (e.g., Zillow). A $1.2 million settlement with the Arizona Attorney General was reached in October 2010.
- Regulatory Risks: The company faces significant regulatory uncertainty due to the Dodd-Frank Act and potential changes in mortgage lending and real estate brokerage regulations.
Key Facts for Investor Verification
- Warehouse Line Renewals: Verify the status of the renewal for the $50 million and $100 million warehouse lines of credit expiring in mid-to-late 2011, as these are critical for the LendingTree Loans segment.
- Real Estate Segment Restructuring: Monitor the progress of closing unprofitable brokerage markets and the impact on the Real Estate segment's profitability.
- Internal Control Remediation: Confirm the timeline and effectiveness of the remediation plan for the material weakness in tax-related internal controls.
- Loan Loss Reserves: Review the adequacy of the $17.3 million reserve for losses on previously sold loans, given the company's estimate of remaining possible losses ranging from $12 million to $21 million.
- Customer Concentration: Note that three secondary market investors (JPMorgan Chase, Bank of America, Wells Fargo) represented approximately 60% of consolidated revenue in 2010.