Lendingtree, Inc. quarterly report, Q1 FY2013

Business context and reporting period

Tree.com, Inc., the parent of LendingTree, LLC, reported results for the three months ended March 31, 2013. Continuing operations comprise its mortgage and non-mortgage comparison-shopping businesses. RealEstate.com and LendingTree Loans are presented as discontinued operations; LendingTree Loans was sold to Discover in June 2012.

Financial results and liquidity

Mortgage revenue was $25.5 million, while non-mortgage revenue was $2.6 million. The company reported a 0.9% operating loss margin, compared with a 39.9% loss margin in Q1 2012. These approximate margins are calculated from reported revenue and operating loss.

At March 31, 2013, cash and cash equivalents were $73.3 million and restricted cash was $29.0 million. Total assets were $140.8 million and total liabilities were $59.3 million, including $32.9 million of current liabilities of discontinued operations. The filing does not report material continuing-operation borrowings; LendingTree Loans’ warehouse credit lines had terminated in 2012. Continuing operations used $0.2 million in investing cash flow and $0.7 million in financing cash flow.

Material changes versus the prior comparable period

• Revenue increased 112%, primarily as mortgage leads formerly supplied to LendingTree Loans became available for sale to network lenders through the mortgage exchange. Mortgage matched consumers increased 87%, and revenue per matched consumer rose 54%.
• Non-mortgage revenue declined 43%; matched consumers fell 18% and revenue per matched consumer fell 39%, principally reflecting weakness in education. Home services and auto closing revenue partly offset the decline.
• Selling and marketing expense rose 62% to $17.3 million, but fell to 61% of revenue from 80%. Management attributed this improvement to marketing efficiencies and greater mortgage revenue.
• Net results swung from income to loss largely because discontinued operations contributed $17.4 million of income in Q1 2012 but a $2.4 million loss in Q1 2013. The 2012 result included LendingTree Loans activity before its sale.

Outlook, commentary, risks and unusual items

• Management expected cash and operating cash flows to fund operating needs for the next 12 months and beyond. It provided no specific earnings or revenue guidance and cautioned that interim results are not necessarily indicative of full-year results.
• Mortgage demand and lead pricing are exposed to interest-rate movements, lender qualification standards, housing-market conditions, seasonality, and competition from lenders’ direct channels. Management noted mortgage rates rose modestly during the quarter but remained below the prior-year level.
• Former LendingTree Loans obligations remain a significant contingency. The estimated range of future loan-loss obligations was $18 million to $37 million; the recorded reserve was $28.4 million. The company noted actual losses could differ materially. A $17.1 million sale-related escrow remained restricted, and Discover’s indemnification claim was settled in May 2013 for a $1.5 million credit against future services.
• Other legal matters include patent litigation and mortgage-related cases. A tentative settlement in the Boschma matter was reached in Q2 2013; its impact was described as not material. The filing gives a $0.5 million to $6.5 million possible-loss range for a Massachusetts regulatory matter and reports a $0.5 million reserve as of year-end 2012.
• Disclosure controls were deemed ineffective because a material weakness in oversight of third-party income-tax advisors remained unremediated. Management was pursuing remediation and warned it might not be adequate or timely.
• The company revised prior-period share counts and earnings per share after identifying double-counted vested restricted shares, all issued to the CEO. Management concluded the errors were not material to previously issued statements. The errors also led to an approximately $0.4 million excess special-dividend payment to the CEO, recorded as a receivable, and a $0.2 million excess dividend accrual at year-end 2012.
• Q1 included a $0.9 million discretionary cash bonus to employee stock-option holders and $1.0 million of litigation settlements and contingencies expense, primarily related to patent litigation. Adjusted EBITDA excludes the bonus and certain other items and is a non-GAAP measure.

Important facts for investors to verify

• Whether mortgage-exchange growth and improved marketing efficiency persist, particularly as interest rates, lender demand, and lead supply change.
• Developments in the $18 million–$37 million former-loan loss estimate, the $28.4 million reserve, and the restricted sale escrow.
• Progress remediating the income-tax control weakness and whether it affects reporting reliability or compliance.
• Outcomes and potential costs of disclosed litigation and regulatory matters, including the Discover settlement and pending cases.
• The composition and accessibility of reported cash, given restricted balances and discontinued-operation liabilities.