LendingTree, Inc. — Q1 2018 Form 10-Q
Business context and period. Results cover the three months ended March 31, 2018, compared with Q1 2017. LendingTree operates an online marketplace matching consumers seeking credit and deposit products with lenders. LendingTree Loans, sold in 2012, is reported as discontinued operations.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $181.0 million | $132.5 million |
| Operating income | $15.4 million | $6.9 million |
| Net income from continuing operations | $35.9 million | $7.8 million |
| Net income, including discontinued operations | $31.5 million | $6.9 million |
| Adjusted EBITDA (non-GAAP) | $31.7 million | $23.8 million |
| Cash provided by continuing operations | $17.7 million | $17.2 million |
- Revenue rose 37% year over year. Mortgage revenue increased 17% to $73.5 million; non-mortgage revenue increased 55% to $107.6 million. Growth was led by credit cards, personal loans and home equity products.
- Operating margin was approximately 8.5%, compared with 5.2% a year earlier. Adjusted EBITDA margin was approximately 17.5%, versus 18.0%.
- Selling and marketing expense increased 35% to $126.0 million, including advertising expense up 33% to $118.0 million. General and administrative expense nearly doubled to $22.8 million, substantially reflecting higher compensation and equity-award expense.
- Continuing-operations cash flow from operations less capital expenditures was approximately $14.2 million, versus $15.3 million. Investing used $3.5 million; financing used $33.6 million, mainly for acquisition earnouts and share repurchases.
- Cash and cash equivalents were $346.5 million at quarter-end, down from $368.6 million at December 31, 2017; restricted cash was $4.1 million. Long-term debt carrying value was $241.3 million. The company had no borrowings under its $250 million revolving facility and reported covenant compliance.
Material changes and unusual items
- The $23.5 million of acquisition-related contingent consideration paid during the quarter included $22.5 million for CompareCards and $1.0 million for DepositAccounts. The company expected to pay the remaining $22.5 million CompareCards earnout in Q2 2018.
- The income tax benefit was $23.5 million, producing a 189.3% effective tax benefit rate. It primarily reflected $27.2 million of excess tax benefits from employee stock awards and exercises; therefore, reported net income substantially exceeds pretax income of $12.4 million.
- Stock-based compensation was $11.1 million, versus $2.2 million. Management said G&A expense is expected to rise in future periods due to compensation expense from equity awards.
- ASC 606 adoption accelerated recognition of certain non-mortgage closing and approval fees. It increased Q1 2018 revenue by $0.2 million and continuing-operations net income by $0.1 million; management did not expect a material ongoing annual effect.
- Discontinued operations generated a $4.3 million net loss, primarily from legal matters and related fees. The quarter-end balance sheet included an $8.0 million litigation settlement accrual in discontinued operations.
Outlook, risks and contingencies
- Management expects cash, operating cash flows and the undrawn revolver to fund operating needs for the next 12 months and beyond. No specific revenue or earnings guidance is provided.
- Management plans to adjust marketing spending dynamically with lender demand and revenue opportunities, and cited non-mortgage products as an area with long-term growth potential.
- Mortgage marketplace demand is sensitive to interest rates and housing conditions. The company noted rising mortgage rates and seasonal patterns; it also cited constrained housing inventory and projected a slight 2018 decline in existing-home sales.
- Legacy LendingTree Loans exposure remains uncertain. The estimated remaining loan-loss range was $4.3–$7.8 million, with a $7.6 million reserve; the company said actual losses could vary significantly and it lacks precise access to current loan performance data.
- In the RFC litigation, the plaintiff sought $61.0 million; LendingTree included a $7.0 million estimated liability. A separate Lehman matter had a $1.0 million estimated liability. The company said it could not estimate possible losses or ranges for certain non-monetary remedies.
- Convertible notes have $300 million principal, a 0.625% coupon and June 2022 maturity. Holders could convert during Q2 2018 under the specified stock-price condition; conversion and related warrants could dilute shareholders. The company stated its intent to settle principal in cash.
Important facts for investors to verify
- Whether growth in non-mortgage products and revenue per consumer persists relative to increased marketing costs.
- The sustainability of earnings excluding the unusually large stock-compensation tax benefit, and the future impact of equity awards on expenses and dilution.
- Cash requirements and final amounts for acquisition earnouts, including the expected Q2 CompareCards payment.
- Developments in legacy loan repurchase and indemnification claims, litigation exposures, and adequacy of related reserves.
- Convertible-note conversion status, potential dilution, and continued compliance with revolving-credit covenants.