Tree.com, Inc. (LendingTree) — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Tree.com’s continuing business is the Exchanges segment, an online consumer lead-generation network. RealEstate.com, REALTORS® and LendingTree Loans are reported as discontinued operations.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Continuing-operations revenue | $17.2 | $15.1 | $31.3 | $34.1 |
| Gross margin (dollars) | $15.7 | $14.0 | $28.5 | $31.5 |
| Operating loss | ($8.4) | ($6.4) | ($29.6) | ($15.7) |
| Adjusted EBITDA, non-GAAP | ($6.0) | ($3.6) | ($14.9) | ($7.5) |
| Net loss from continuing operations | ($8.5) | ($6.9) | ($30.0) | ($16.9) |
| Net loss available to common shareholders, including discontinued operations | ($17.8) | ($0.8) | ($57.3) | ($6.9) |
- Q2 continuing revenue rose 14%; the six-month total fell 8%. Q2 match-fee revenue increased 37% to $16.0 million, while closed-loan fees fell 69% to $0.8 million, reflecting a pricing change that raised match fees and eliminated closed-loan fees on home-loan matches.
- Q2 gross margin was about 91% of revenue, versus about 93% a year earlier. Selling and marketing was $15.4 million, or 90% of revenue, up 34%; management attributed the increase partly to higher advertising and investment in marketing capabilities. General and administrative expense declined 11% to $5.6 million.
- Six-month operating loss widened substantially, including $5.3 million of asset impairments and $4.5 million of litigation settlement and contingency expense, both recorded in Q1. Adjusted EBITDA is a company-defined non-GAAP measure.
- Discontinued operations reported a Q2 loss of $9.3 million and a six-month loss of $27.3 million. LendingTree Loans had six-month revenue of $44.6 million and a $16.8 million net loss; RealEstate.com had revenue of $2.6 million and a $10.5 million net loss, including $8.0 million of goodwill disposal charges and $2.0 million of restructuring charges.
Cash flow, liquidity and obligations
- At June 30, cash and cash equivalents were $34.3 million, down from $68.8 million at year-end 2010; restricted cash was $10.3 million, up from $8.2 million. Total assets were $257.0 million, total liabilities $211.3 million, and shareholders’ equity $45.7 million. These balance-sheet totals include discontinued operations.
- For the six months, continuing operations used $15.3 million of operating cash, $5.7 million in investing activities and $1.6 million in financing activities. Discontinued operations used a net $11.9 million. Overall cash and cash equivalents declined by $34.5 million.
- LendingTree Loans, classified as discontinued, had $114.3 million outstanding on warehouse lines at June 30, against $126.978 million of loans held for sale. It had $150 million of committed capacity plus a $25 million uncommitted line. The business depends on these facilities to fund loans; maturities and extensions were near-term considerations.
- The company recorded a $24.3 million reserve for losses on previously sold loans; estimated remaining possible representation-and-warranty losses were $21–$30 million, excluding a separate $0.3 million settlement amount. The company said it believed the reserve was adequate, while noting estimates could vary materially.
Material changes, outlook and risks
- On May 12, Tree.com agreed to sell substantially all operating assets of LendingTree Loans to Discover Bank for approximately $55.9 million, subject to adjustments: $35.9 million at closing and two conditional $10 million payments on the first and second anniversaries. The transaction required regulatory and shareholder approvals and was expected to close by year-end 2011; it had not closed as of the filing. Certain continuing conditions and operating metrics apply to the later payments.
- Tree.com closed all RealEstate.com, REALTORS® field offices by March 31, 2011. The resulting impairments and restructuring contributed to the period’s losses. The company said marketing efficiencies were expected to eliminate approximately $3 million of Q2 expense in future quarters and expected additional cost savings as it focused on fewer verticals. No formal revenue or earnings guidance is provided.
- Management cited housing-market weakness, mortgage-rate movements and changes in consumer demand as factors affecting lead volumes and revenue. For Q2, total matched requests rose 10% year over year to 349,000, including a 29% increase in home-loan matches; for the first half, total matches fell 8% to 668,000.
- Completion of the Discover transaction, continued access to warehouse financing, compliance with sale-agreement conditions and the possibility of reduced or forfeited contingent payments are material risks. If the sale does not close or credit availability deteriorates, management said it might need to manage working capital more aggressively, sell assets or seek financing, which may not be available on acceptable terms.
- Disclosure controls were reported ineffective at June 30 due to an unresolved material weakness in income-tax controls. Management described remediation steps but said sufficient time had not passed to conclude the weakness was fully remediated.
- Litigation settlements and contingencies expense was $4.5 million for the first half; the related liability was $4.3 million at June 30. The filing says an unfavorable outcome in one or more legal matters could have a material effect, notwithstanding management’s current assessment.
Most important facts for investors to verify
- Whether the Discover asset sale received all required approvals and closed, and whether the $35.9 million closing payment and conditional future installments were ultimately received.
- Whether the LendingTree Loans warehouse facilities were extended, repaid or replaced, and whether the business met the sale agreement’s operating and financial conditions.
- How the $21–$30 million estimated remaining loan-loss exposure compared with later repurchase claims, settlements and reserve levels.
- Whether marketing efficiencies delivered the anticipated expense reductions and improved operating losses and cash use.
- Whether management remediated the income-tax internal-control material weakness and improved disclosure controls.