LendingTree, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. LendingTree operates an online marketplace matching consumers seeking loans and other credit products with lenders. This filing covers the quarter and nine months ended September 30, 2016; LendingTree Loans is reported as discontinued operations.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $94.6m | $69.8m | $283.6m | $175.9m |
| Operating income | $14.2m | $7.8m | $38.7m | $20.3m |
| Net income from continuing operations | $7.3m | $7.4m | $23.2m | $19.2m |
| Net income, including discontinued operations | $6.6m | $6.1m | $20.2m | $16.0m |
| Adjusted EBITDA | $18.5m | $11.0m | $50.9m | $28.8m |
| Operating margin | 15.0% | 11.1% | 13.7% | 11.5% |
Revenue increased 35% in Q3 and 61% for the nine-month period. Mortgage revenue rose 21% and 39%, respectively; non-mortgage revenue rose 60% and 107%. Q3 continuing-operations net income was roughly flat year over year despite higher operating income, principally alongside a much higher income tax expense. Diluted net income per share was $0.52 for Q3 and $1.58 for the nine months, versus $0.49 and $1.29, respectively.
Margins and costs. Selling and marketing expense increased 28% in Q3 and 62% year to date, reflecting higher advertising and promotional spending. Advertising expense was $58.2m in Q3 and $179.1m year to date. Cost of revenue was 4% of revenue in Q3, up from 3%; it remained 4% year to date.
Cash, liquidity and debt
- Cash and cash equivalents were $176.9m at September 30, 2016, down from $207.0m at year-end 2015; restricted cash was $4.1m.
- Nine-month continuing-operations cash from operations was $33.2m, investing cash outflow $10.1m, and financing cash outflow $45.9m. Total cash decreased $30.1m, including $7.2m of operating cash use from discontinued operations.
- The company repurchased $48.5m of shares during the first nine months. Approximately $48.7m remained authorized for repurchases at quarter-end.
- No borrowings were outstanding under the $125m senior secured revolving credit facility at September 30. The company reported covenant compliance and said cash, operating cash flows and the revolver should be sufficient for operating needs for the next twelve months and beyond.
- Total liabilities were $54.3m, including $12.0m of current liabilities related to discontinued operations. The filing reports no other material off-balance-sheet arrangements beyond operating leases and surety-bond commitments.
Changes, outlook and notable matters
- Growth reflected higher lender participation, marketing and consumer inquiries, as well as a small acquisition. SimpleTuition, a student-loan marketing platform, was acquired in May for $5.0m cash consideration; $0.5m was held back for potential claims.
- Management expected more moderate year-over-year growth in Q4 mortgage and non-mortgage revenue than in the first three quarters. It expected Q4 personal-loan revenue to decline year over year, with growth in other non-mortgage products. Management cited strong long-term prospects for non-mortgage products but warned that a significant industry-wide contraction in lending capital could hurt revenue.
- Management described mortgage demand as sensitive to interest rates, home sales and lender demand. It also noted seasonality and limited historical data for predicting cyclicality in newer products.
- Q3 discontinued-operations loss was $0.7m; nine-month loss was $3.0m. Legacy loan-loss reserves were $6.3m against an estimated range of $4.4m–$7.9m. The company said actual losses could vary significantly and that it lacks precise exposure data for certain sold loans.
- Legal matters include ongoing claims involving legacy mortgage loans, a trade-secret and contract dispute with NextAdvisor, and Massachusetts regulatory allegations. The company recorded estimated liabilities, but stated that possible losses or ranges cannot be estimated for some matters. A preliminary injunction in the NextAdvisor case restricts certain credit-card marketing activity pending further proceedings.
- The effective tax rate was 48.0% in Q3 and 39.4% year to date, versus 5.0% and 4.8% a year earlier. The filing attributes the 2016 rates to state tax effects, research tax-credit benefits year to date, and the prior-year valuation allowance, most of which was released in Q4 2015.
- A material risk disclosed was revenue concentration: in each of 2013–2015, two network lenders separately represented 11%–13% of revenue. Losing or reducing business from either could materially affect results.
Investor verification points
- Check whether Q4 revenue growth moderated as management expected, particularly in mortgage and personal loans.
- Assess whether higher marketing spend continues to generate profitable consumer and lender activity; compare revenue growth with selling and marketing expense.
- Monitor lender concentration and the availability of capital to non-mortgage lenders.
- Track cash use, share repurchases, and compliance with the secured revolver’s financial covenants.
- Review developments in the legacy loan-loss reserve and litigation, including the NextAdvisor restrictions and mortgage-related claims.
- Reconcile reported earnings with the unusually high 2016 effective tax rate and the company’s non-GAAP Adjusted EBITDA measure.