LendingTree, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also presents unaudited fourth-quarter results. LendingTree operates an online marketplace that matches consumers and small businesses with lenders and other financial-service providers; it does not originate loans in its continuing business.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $617.7 million | $384.4 million | Up 61% |
| Operating income | $33.1 million | $52.1 million | Down 36% |
| Income from continuing operations | $19.4 million | $31.2 million | Down 38% |
| Net income, including discontinued operations | $15.6 million | $27.5 million | Down 43% |
| Adjusted EBITDA | $115.1 million | $69.8 million | Up 65% |
| Cash from continuing operating activities | $103.5 million | $64.2 million | Up $39.3 million |
- Revenue comprised mortgage products of $275.9 million, up 25%, and non-mortgage products of $341.8 million, up 108%. Credit-card revenue rose to $147.0 million from $39.4 million; personal-loan revenue was $88.2 million, up 33%.
- Operating margin was approximately 5.4% versus 13.6%; continuing-operations net margin was approximately 3.1% versus 8.1%. Adjusted EBITDA margin was approximately 18.6% versus 18.2%. Adjusted EBITDA is a non-GAAP measure.
- Selling and marketing expense increased 66% to $432.8 million, including $410.8 million of advertising. General and administrative expense rose 92% to $71.5 million.
- At year-end, cash and cash equivalents were $368.6 million, restricted cash was $4.1 million, total assets were $693.5 million and total liabilities were $398.6 million. Current assets were $438.0 million and current liabilities were $147.5 million.
- The company issued $300 million of 0.625% convertible senior notes due 2022. Their balance-sheet carrying value was $238.2 million after debt discount and issuance costs. The $250 million secured revolving facility was undrawn at year-end; the company reported covenant compliance.
Fourth-quarter snapshot
Q4 2017 revenue was $161.0 million. Operating loss was $0.2 million, income from continuing operations was a loss of $6.5 million, and net loss including discontinued operations was $7.7 million. The quarter included a $10 million contribution to the LendingTree Foundation and a $9.1 million net tax expense associated with the Tax Cuts and Jobs Act.
Material changes and notable items
- Growth reflected higher mortgage revenue and a sharp increase in non-mortgage revenue, including the full-year contribution from CompareCards, acquired in November 2016. LendingTree also acquired DepositAccounts, MagnifyMoney and SnapCap during 2017.
- Despite revenue growth, operating and net income declined. Significant items included $23.9 million of expense from changes in estimated acquisition earnout values, higher advertising, $13.0 million of intangible amortization, higher interest expense and increased stock-based compensation.
- Operating cash flow improved, while investing activities used $74.4 million, primarily for the 2017 acquisitions and capital expenditures. Financing activities provided $253.1 million, largely reflecting the convertible-note and warrant transactions, partly offset by note-hedge costs and share repurchases.
- Adjusted EBITDA excludes, among other items, stock compensation, acquisition-related costs and contingent-consideration changes; compare it with GAAP results when assessing performance.
Outlook, risks and contingencies
- Management expected significant non-mortgage revenue growth in 2018, but not at 2017’s 108% rate, and more moderate year-over-year mortgage revenue growth.
- Management cited rising mortgage rates and limited housing inventory as industry considerations. Mortgage lead demand, lender appetite and revenue can vary with interest rates, housing activity, credit availability and the economy. Product revenue is also seasonal.
- Key risks include dependence on lender relationships and a concentrated share of revenue from major lenders; reliance on paid and organic digital traffic; competition; regulatory and licensing requirements; data security and privacy; and the execution and integration of acquisitions.
- Acquisition-related contingent consideration totaled $57.3 million at year-end, including $44.3 million for CompareCards. The company paid a $22.5 million CompareCards earnout in February 2018 and anticipated another potential $22.5 million payment in the first half of 2018.
- Legacy LendingTree Loans obligations remain in discontinued operations. The recorded loan-loss reserve was $7.6 million, against an estimated remaining-loss range of $4.3 million to $7.8 million; approximately $4.0 million remained in escrow. Litigation includes claims relating to previously sold loans, including a $61 million claim by Residential Funding Company; the company recorded a $3.0 million liability for that matter and $1.0 million for a Lehman-related matter.
- The notes became convertible at holders’ option from January 1 through March 31, 2018 under the applicable market-price condition. A conversion could affect cash, liquidity or share dilution, depending on settlement elections and terms.
- Management expected additional general and administrative expense from leadership equity awards, potentially materially reducing future GAAP net income. The TCJA tax accounting was provisional and subject to adjustment within the permitted measurement period.
Important facts for investors to verify
- How much revenue growth and lender demand are sustainable, especially in credit cards and personal loans, and how much depends on acquisitions and marketing spend.
- Whether acquisition earnouts, integration costs and acquired-business performance develop as assumed, including remaining CompareCards payments.
- The cash, dilution and working-capital consequences of convertible-note conversion, alongside the note’s carrying value and market value.
- Whether legacy mortgage litigation and repurchase obligations remain within recorded reserves and escrow.
- How 2018 GAAP earnings are affected by leadership stock awards, tax-law adjustments and the timing of revenue recognition changes.
The independent auditor reported that the consolidated financial statements presented fairly in accordance with GAAP and that internal control over financial reporting was effective as of December 31, 2017.