LendingTree, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. LendingTree operates an online marketplace matching consumers seeking loans and other financial products with lenders. LendingTree Loans is reported as discontinued operations.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $184.1M | $152.8M | $365.1M | $285.3M |
| Operating income | $18.1M | $9.0M | $33.5M | $15.9M |
| Operating margin | 9.8% | 5.9% | 9.2% | 5.6% |
| Continuing-operations net income | $44.8M | $8.0M | $80.7M | $15.8M |
| Net income, including discontinued operations | $42.5M | $7.3M | $74.1M | $14.2M |
| Adjusted EBITDA (non-GAAP) | $37.1M | $27.0M | $68.8M | $50.8M |
- Revenue mix: Q2 mortgage revenue fell 6% to $66.9M, while non-mortgage revenue rose 44% to $117.2M. For the first half, mortgage revenue increased 4% to $140.4M and non-mortgage revenue increased 49% to $224.7M.
- Growth drivers: Management attributed non-mortgage growth chiefly to personal loans, home equity and credit cards. Q2 personal-loan revenue rose 77% to $36.2M; credit-card revenue increased 5% to $38.7M. Mortgage refinance revenue declined amid rising rates and lower refinance demand; purchase mortgage revenue improved.
- Margins and costs: Q2 selling and marketing expense increased 14% to $123.9M, including $116.4M of advertising expense. General and administrative expense more than doubled to $24.8M, reflecting higher compensation, equity awards and a $1.6M fixed-asset write-off. Stock-based compensation was $11.2M for Q2 and $22.3M for the first half.
- Cash flow: Continuing-operations operating cash flow was $15.3M for the first half, down from $48.2M. Investing cash outflow was $18.4M; financing cash outflow was $71.9M. Total cash, cash equivalents and restricted cash declined $79.3M to $293.4M during the half.
- Liquidity and debt: Cash and cash equivalents were $293.3M at June 30, versus $368.6M at year-end 2017. Convertible notes had $300.0M principal and a $244.5M net carrying value; the notes bear 0.625% interest and mature in 2022. The $250M revolving facility was undrawn, and the company reported compliance with its covenants.
Changes, outlook and notable items
- Reported revenue grew 21% in Q2 and 28% in the first half year over year. ASC 606 adoption increased reported 2018 revenue by $0.7M in Q2 and $0.9M in the first half; management said it did not expect a material ongoing effect on annual revenue or continuing-operations net income.
- Net income benefited substantially from excess tax benefits on employee stock awards: $33.7M in Q2 and $60.9M in the first half. The resulting income-tax benefits were $29.7M and $53.2M, respectively; reported earnings growth should be viewed in this context.
- First-half operating cash flow was reduced by a $21.9M CompareCards earnout payment classified as operating cash flow. The company also paid $47.1M for share repurchases and $25.6M in contingent consideration payments across acquisitions.
- Management said cash, operating cash flows and the revolving facility should be sufficient for operating needs for the next 12 months and beyond. No specific financial guidance was provided. Management expects to adjust marketing spending in response to lender demand and revenue opportunities and sees long-term growth potential in non-mortgage products.
- Mortgage rates and seasonal demand are key variables. The company reported average 30-year mortgage rates of 4.54% in Q2 2018 versus 3.99% a year earlier; refinance origination volume declined 20% year over year. Higher rates generally reduce refinancing activity, while also changing lender demand for marketplace leads.
- Acquisitions: Ovation Credit Services was acquired June 11 for $12.2M upfront, with potential earnouts of up to $8.75M. After quarter-end, Student Loan Hero was acquired July 23 for $60.7M cash.
- Legacy litigation: LendingTree Loans remains exposed to representations-and-warranties claims on previously sold mortgages. The estimated remaining loan-loss range was $4.3M–$7.8M, with a $7.6M reserve. A discontinued-operations litigation accrual totaled $8.0M. In the RFC matter, the plaintiff seeks $61.0M; trial was expected to begin in October 2018, and LendingTree accrued $7.0M for this matter. The company said it could not precisely determine maximum exposure for the legacy loan obligations.
- Management reported no material changes to the risk factors in its 2017 Form 10-K and concluded disclosure controls were effective as of June 30, 2018.
Key facts for investors to verify
- How much of reported earnings growth reflects the unusually large stock-compensation tax benefit, and what are normalized earnings and tax rates?
- Whether non-mortgage growth and marketing efficiency persist as advertising expense rises, and whether mortgage weakness continues with changing rates and refinance demand.
- Cash conversion and liquidity after the $60.7M Student Loan Hero acquisition, further earnout payments, and planned or continued share repurchases.
- Potential dilution or cash settlement obligations under the convertible notes and warrants, and continued compliance with revolver covenants.
- Final Ovation purchase accounting and earnout outcomes, plus exposure to legacy mortgage litigation and loan-loss obligations.