Tree.com, Inc. (LendingTree) — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013; filed March 17, 2014. The issuer is Tree.com, Inc., parent of LendingTree, LLC. Results below are for continuing operations unless noted; LendingTree Loans and RealEstate.com are presented as discontinued operations.
Business context
Tree.com operates a performance-marketing marketplace, matching consumer inquiries for loans and other services with providers and generally earning fees for delivered leads. Lending is its sole reportable segment; auto, education, and home services are included in “Other.” The company’s strategy is to grow non-mortgage offerings while operating its core lending marketplace.
Financial and operating performance
| Metric | FY 2013 | FY 2012 | Change / context |
|---|---|---|---|
| Revenue | $139.2 million | $77.4 million | Up 80%; lending revenue rose 109% to $128.0 million, while Other revenue fell 27% to $10.6 million. |
| Operating expenses | $140.3 million | $80.3 million | Selling and marketing was $91.1 million, up 86%; advertising was $80.7 million, nearly double prior year. |
| Operating loss | $(1.1) million | $(2.9) million | Operating margin improved to approximately (0.8)% from (3.7)%. |
| Net loss from continuing operations | $(0.7) million | $(2.2) million | Continuing operations remained loss-making. |
| Net income, including discontinued operations | $3.9 million | $46.6 million | 2013 included $4.6 million income from discontinued operations; 2012 included $48.9 million, including a $24.4 million after-tax sale gain. |
| Adjusted EBITDA | $18.7 million | $3.8 million | Non-GAAP measure; lending contributed $32.6 million, offset by corporate costs of $13.9 million. |
| Cash from continuing operating activities | $10.2 million | $(4.7) million | Improved primarily through earnings adjustments and working-capital inflows. |
| Cash and cash equivalents | $91.7 million | $80.2 million | Restricted cash was $26.0 million, down from $29.4 million. |
| Debt | No material continuing-operations debt disclosed | — | LendingTree Loans’ warehouse lines had terminated in 2012; they are not current operating borrowings. |
LendingTree matched 1.4 million consumers in 2013, up 89%; average revenue per matched consumer increased 11%. The company attributed lending growth to greater lender sales capacity, expanded marketing, and leads placed on the marketplace after the 2012 LendingTree Loans asset sale. Other revenue declined mainly because of education-sector client marketing changes associated with increased regulation.
Material changes, outlook, risks, and unusual items
- Market conditions: Average 30-year mortgage rates rose to 3.98% in 2013 from 3.66% in 2012. Management cited an MBA estimate that mortgage origination dollar volume declined 14% year over year, with a 27% quarter-over-quarter decline in Q4. MBA projected lower originations in Q1 2014 before recovery toward Q4 2013 levels; this is an industry forecast, not company guidance.
- Spending and profitability: Increased advertising supported lead growth, including a national brand campaign launched in Q2. Management said it would adjust marketing spending to expected revenue opportunities. Litigation expense was $9.0 million in 2013, mainly patent-litigation legal fees; the filing expects materially higher litigation expense in Q1 2014 from the trial.
- Liquidity outlook: Management expected cash, cash equivalents, and operating cash flows to fund operating and other needs for the next 12 months. Cash was the company’s only material source of liquidity identified in the filing.
- Legacy loan obligations: The company remains liable for certain representations-and-warranties, repurchase, indemnification, and premium-repayment claims tied to loans sold by LendingTree Loans. The recorded reserve was $28.5 million, with an estimated remaining-loss range of $17 million to $31 million. Approximately $21.2 million was held in escrow for contingent liabilities; the company stated that maximum exposure could not be determined precisely.
- Legal developments after year-end: In March 2014, a jury found two LendingTree patents invalid for inventorship defects and found no infringement by Zillow, Adchemy, and NexTag. The company was considering its options, including appeal, and said the verdict would not prevent it from offering current products. Associated trial legal fees were expected to materially affect Q1 2014 operating results.
- Other contingencies: A West Virginia class action received adverse summary-judgment rulings on certain class claims; the company estimated possible losses of $0.6 million to $1.95 million, with some or all potentially insured. A proposed Massachusetts regulatory settlement remained under negotiation; estimated possible loss was $0.5 million to $6.5 million. The filing also identifies exposure to mortgage-market and interest-rate swings, lender concentration, regulation, consumer-data security, and reliance on online marketing channels.
- Unusual reporting matter: Prior share counts and per-share figures were corrected for double-counted restricted shares; management concluded the errors were not material to previously issued financial statements. The CEO repaid a $0.4 million excess special-dividend payment in 2013.
Key facts investors should verify
- How much of the 80% revenue increase reflects the post-sale change in lead accounting and volume versus sustainable organic growth.
- Whether lending lead economics remain profitable after the sharp increase in advertising and marketing expense.
- The ultimate settlement, appeal, or payment outcome for the $28.5 million legacy loan-loss reserve and associated escrow.
- The status and financial impact of the patent verdict, West Virginia litigation, and Massachusetts regulatory matter.
- How the newer personal-loan, reverse-mortgage, credit-card, auto, education, and home-services offerings perform and diversify revenue.
- That reported net income includes discontinued-operation gains and should not be confused with the continuing-operations loss; also assess Adjusted EBITDA alongside GAAP results.