LendingTree, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. LendingTree operates an online marketplace matching consumers seeking loans and other credit products with lenders. LendingTree Loans is reported as discontinued operations.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $69.8 million | $41.3 million | $175.9 million | $123.5 million |
| Operating income (loss) | $7.8 million | $0.6 million | $20.3 million | $(2.7) million |
| Continuing-operations net income (loss) | $7.4 million | $0.6 million | $19.2 million | $(2.6) million |
| Consolidated net income (loss), including discontinued operations | $6.1 million | $0.4 million | $16.0 million | $(6.3) million |
| Adjusted EBITDA | $11.0 million | $5.8 million | $28.8 million | $15.8 million |
| Operating margin | 11.1% | 1.3% | 11.5% | (2.2)% |
Revenue rose 69% in Q3 and 42% for the nine-month period. Mortgage revenue grew 38% and 17%, respectively; non-mortgage revenue grew 176% and 155%. Personal loans were the primary non-mortgage growth driver, with credit cards also contributing. Marketplace matches increased 73% in Q3 and 82% year to date, while average revenue per matched consumer fell 1% and 21%, respectively, partly reflecting the greater contribution from lower-yielding non-mortgage products.
Selling and marketing expense increased 80% in Q3 and 42% year to date, mainly from higher advertising spending to generate leads. Advertising expense was $45.5 million in Q3 and $108.9 million for the nine months. Litigation settlements and contingencies were $0.1 million of expense in Q3 versus $2.3 million in Q3 2014; for the nine months, the company recorded $0.7 million of income versus $10.4 million of expense in 2014, primarily reflecting reserve adjustments related to patent litigation.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $106.3 million, restricted cash was $18.6 million, and total assets were $174.8 million. Total liabilities were $62.0 million, including $14.5 million of current liabilities of discontinued operations.
- Continuing-operations operating cash flow was $31.1 million for the first nine months, compared with $1.0 million in 2014. Investing cash outflow was $4.2 million, principally capital expenditures; financing cash outflow was $6.0 million.
- The company reported no borrowings under a credit facility at September 30. On October 22, 2015, it entered a $125 million, five-year secured revolving facility; it had no borrowings under it as of October 26. The facility is subject to financial and other covenants and is secured by substantially all assets of the borrower and guarantors.
- Management said cash and operating cash flows should fund operating needs for the next 12 months and beyond. It expected $12.1 million of restricted cash to be released from escrow in December 2015.
Changes, outlook and risks
- Growth was driven by expansion in non-mortgage products and increased mortgage refinance revenue. Mortgage revenue benefited from lower year-over-year rates in Q3; the filing notes mortgage rates had generally risen since January 2015 and describes market forecasts, not company guidance.
- Management said it would continue to adjust marketing spending dynamically to anticipated revenue opportunities. The filing provides no specific company revenue or earnings guidance.
- Discontinued LendingTree Loans obligations remain a significant uncertainty. The company recorded an $8.8 million loan-loss reserve, against an estimated obligation range of $6.0 million to $10.2 million. It cautions that actual losses could differ significantly; it lacks precise current loan-performance data for loans sold before the 2012 business sale.
- Of $16.1 million in escrow related to the LendingTree Loans sale and loan-loss obligations, $12.1 million was expected to be released in December 2015. A separate $0.6 million settlement with an investor was completed in October 2015.
- Other legal matters include an appeal in the Zillow patent case; a Massachusetts regulatory matter with estimated possible loss of $0.5 million to $6.5 million and a $0.5 million reserve; and discontinued-operations litigation and loan-indemnity claims. The filing states that some potential litigation losses cannot be estimated clearly.
- Mortgage marketplace revenue is exposed to interest rates, housing-market conditions, lender demand and competition. The company also identifies dependence on third-party technology, online security and fraud risks. Its new credit facility adds covenant and collateral-related risks.
Important facts for investors to verify
- Whether revenue growth and marketplace match volume continue, and whether revenue per matched consumer stabilizes as product mix changes.
- Whether higher advertising spending produces sufficient revenue and profitability, and how management adjusts marketing investment.
- The timing and amount of the expected $12.1 million escrow release and the ultimate cost of remaining loan-loss obligations.
- Developments and potential exposure in the disclosed litigation and regulatory matters, including the Zillow appeal and Massachusetts proceeding.
- Compliance with the revolving facility’s covenants and the effect of any future borrowing on liquidity and financial flexibility.