LendingTree, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. LendingTree operates an online marketplace matching consumers seeking credit products with lenders. LendingTree Loans is reported as discontinued operations.
Financial performance
- Revenue: $132.5 million, up 40% from $94.7 million. Mortgage revenue rose 14% to $62.9 million; non-mortgage revenue increased 75% to $69.6 million.
- Profit: Operating income fell 42% to $6.9 million from $11.8 million; operating margin declined to about 5.2% from 12.5%. Continuing-operations net income rose 13% to $7.8 million. Net income including discontinued operations was $6.9 million, or $0.58 per basic share ($0.51 diluted), versus $5.7 million, or $0.48 basic ($0.44 diluted).
- Adjusted EBITDA: $23.8 million versus $15.8 million; margin was about 18.0% versus 16.7%. This is a non-GAAP measure and excludes specified expenses, including contingent consideration changes.
- Costs and unusual items: Selling and marketing expense rose 43% to $93.3 million, driven largely by a $28.4 million increase in advertising. The company recorded $8.7 million of expense from remeasuring CompareCards acquisition earnouts and $2.6 million of intangible amortization, versus $25,000 a year earlier.
- Cash flow: Continuing-operations operating cash flow was $17.2 million, up from $10.4 million. Capital expenditures were $1.9 million. Cash increased $14.3 million during the quarter to $105.4 million; restricted cash was $4.1 million.
- Liquidity and debt: The company had no borrowings under its $125 million revolving credit facility and reported compliance with its covenants. Total liabilities were $108.8 million and shareholders’ equity was $241.4 million at March 31, 2017.
Material changes versus Q1 2016
- Credit-card revenue increased $24.6 million to $33.8 million, primarily reflecting the November 2016 CompareCards acquisition. Personal-loan revenue declined 3% to $17.0 million; home-equity revenue increased $4.7 million.
- Mortgage revenue increased $7.9 million, primarily from purchase mortgages. Management cited increased lender demand and marketing efforts.
- Higher advertising and acquisition-related amortization and earnout remeasurement contributed to lower operating income despite revenue growth. A $3.8 million excess stock-compensation tax benefit helped produce a $1.1 million income-tax benefit, compared with $4.8 million of tax expense in Q1 2016.
- Continuing-operations cash flow from financing was a $0.1 million use, compared with a $43.1 million use in Q1 2016, which included $40.5 million of share repurchases.
Outlook, risks and contingencies
- Management expects cash, cash equivalents and operating cash flows to fund needs for the next 12 months and beyond. It expects personal-loan revenue to increase in each remaining 2017 quarter versus the comparable 2016 quarter; no consolidated numeric guidance is provided.
- Management said marketing spending would be adjusted dynamically to anticipated revenue opportunities. It described mortgage activity as sensitive to interest rates, housing conditions, seasonality and lender demand; rising mortgage rates can change the mix of refinance and purchase activity.
- CompareCards earnout payments may total up to $45 million, based on 2017 and 2018 performance. Their estimated fair value was $31.8 million at quarter-end; changes in assumptions or actual performance could affect earnings.
- Discontinued LendingTree Loans retains mortgage repurchase, indemnification and premium-repayment exposures. The estimated remaining loan-loss range was $4.3 million–$7.8 million, with a $7.6 million reserve; management cautioned actual losses could vary significantly. A $4.0 million escrow from the 2012 sale remains restricted.
- Litigation includes the Next Advisor trade-secret and contract case, a Massachusetts regulatory matter (estimated possible loss $0.5 million–$6.5 million; $0.5 million accrued), and legacy discontinued-operations loan litigation. The filing says the company cannot estimate potential losses for certain non-monetary remedies. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of continued revenue growth and profitability depends on CompareCards, and how its results compare with the earnout assumptions.
- Whether increased advertising translates into sustainable revenue and operating-margin improvement.
- Performance and funding conditions in personal lending, mortgage markets and other non-mortgage products.
- Future revisions to the discontinued-loan loss reserve and developments in the disclosed litigation and regulatory matters.
- Cash generation, contingent consideration payments and any changes in credit-facility borrowings or covenant compliance.