LendingTree, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the same 2018 periods. Amounts below are in millions unless stated otherwise. LendingTree operates an online marketplace matching consumers with financial-services providers. LendingTree Loans is reported as discontinued operations.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $278.4 | $184.1 | $540.8 | $365.1 |
| Operating income | $12.3 | $18.1 | $10.5 | $33.5 |
| Net income from continuing operations | $13.0 | $44.8 | $13.5 | $80.7 |
| Net income, including discontinued operations | $12.2 | $42.5 | $11.7 | $74.1 |
| Adjusted EBITDA (non-GAAP) | $46.3 | $37.1 | $89.3 | $68.8 |
| Operating margin | 4.4% | 9.8% | 1.9% | 9.2% |
Revenue rose 51% in Q2 and 48% in the first half, while operating income declined 32% and 69%, respectively. Adjusted EBITDA increased 25% and 30%. Net income comparisons were materially affected by large, unusually favorable tax benefits in both years, principally excess tax benefits from employee stock awards; these benefits were lower in 2019.
Revenue mix and material changes
- Non-mortgage revenue grew 91% in Q2 to $223.8 million and 96% for the first half to $440.2 million. Insurance revenue was $71.9 million in Q2 and $139.0 million year to date, primarily reflecting the QuoteWizard acquisition. Credit-card revenue increased 45% in Q2; personal-loan revenue increased 14%.
- Mortgage revenue declined 18% in Q2 to $54.6 million and 28% for the first half to $100.6 million. Management cited lower revenue per consumer and fewer completed consumer requests in certain mortgage products.
- Selling and marketing expense increased 55% in Q2 to $191.6 million, primarily from higher advertising to meet marketplace demand. Total costs and expenses increased 60% in both the quarter and first half, outpacing revenue growth.
- Amortization of intangibles increased substantially following acquisitions. First-half contingent-consideration expense was $17.4 million, including $16.9 million for QuoteWizard; these fair-value changes reduced GAAP operating income.
Cash flow, debt and liquidity
- Cash from continuing operations was $67.9 million for the first half, versus $15.3 million in 2018. The filing attributes the increase primarily to higher revenue and changes in working capital; accounts receivable consumed $48.4 million of cash.
- Investing used $90.8 million, including $105.6 million for ValuePenguin net of cash acquired and $9.8 million of capital expenditures, partly offset by $24.1 million of net proceeds from the office-property sale. Financing used $24.7 million, including $10.0 million of net revolver repayments.
- Cash and cash equivalents were $51.3 million at June 30, down from $105.1 million at year-end. The revolving facility had $115.0 million drawn against its $350.0 million capacity; management reported covenant compliance. The filing states cash, operating cash flows and the facility should fund operating needs for the next twelve months and beyond. At July 26, revolver borrowings were $100.0 million.
- Long-term debt, net, was $257.6 million, representing the convertible notes; combined with revolver borrowings, reported debt was approximately $372.6 million. The $300 million principal amount of 0.625% convertible notes is due in 2022. The notes’ estimated fair value was $628.3 million at June 30; conversion could dilute shareholders, although the company stated its intent to settle principal in cash.
- Current assets were $205.8 million and current liabilities $308.1 million. The company also had $20.6 million of operating lease liabilities and $50.2 million of acquisition-related contingent consideration.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects liquidity to be sufficient for operating needs over the next twelve months and beyond, and says it will adjust marketing spending to anticipated revenue opportunities.
- Management noted mortgage revenue sensitivity to interest rates and real-estate conditions. Mortgage rates declined during the first half; the filing also identifies dependence on partner demand, online competition, third-party technology, security and credit-fraud risks, and possible contraction in non-mortgage credit availability.
- Material subsequent event: On July 21, 2019, Home Loan Center, Inc. (HLC), a subsidiary associated with discontinued LendingTree Loans operations, filed for Chapter 11. This followed a June 21 judgment of $68.5 million against HLC in the ResCap litigation. HLC had approximately $11.4 million in assets; the bankruptcy filing automatically stayed enforcement, and HLC intended to appeal. LendingTree expected to deconsolidate HLC beginning in Q3, potentially recording a gain or loss.
- HLC asserted potential claims against LendingTree, LLC and its former director relating to a $40 million dividend declared in 2016. LendingTree disputes the claims, had begun settlement discussions and may contest them; any settlement would require bankruptcy-court approval. The filing warns that other HLC creditors could also assert claims against non-debtor entities.
- At June 30, discontinued operations included a $7.6 million reserve for legacy loan-loss obligations, with an estimated range of $4.3 million to $7.9 million, and $8.0 million of litigation accruals. Actual exposure could differ; HLC’s potential ResCap loss range was disclosed as $0 to $68.5 million, with a $7.0 million liability accrued for that matter.
Most important facts for investors to verify
- Whether acquired-business growth, especially insurance, can translate into durable operating-profit and cash-flow improvement after marketing and acquisition-related costs.
- The future cost and payment timing of QuoteWizard and other earnouts, and the assumptions behind their fair values.
- Developments in HLC’s bankruptcy, the ResCap appeal, dividend-related claims, possible creditor claims and the Q3 deconsolidation impact.
- Mortgage-market sensitivity, accounts-receivable collection and working-capital needs, revolver borrowings, covenant headroom and convertible-note dilution or settlement choices.
- The effect of unusually large stock-compensation tax benefits on reported earnings; GAAP results and Adjusted EBITDA are not interchangeable.