Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011 for Tree.com, Inc. (d/b/a LendingTree). The company operates two primary segments: LendingTree Loans (origination and sale of residential mortgages) and Exchanges (online lead generation networks). During the quarter, the company exited its proprietary real estate brokerage business, RealEstate.com, REALTORS®, classifying it as discontinued operations. Additionally, the company acquired assets of SurePoint Lending for $8.0 million in cash.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenue | $33.4 million | $44.7 million |
| Gross Margin | $21.3 million (63.7%) | $33.0 million (75.9%) |
| Operating Loss | $(28.5) million | $(4.2) million |
| Net Loss (Continuing Ops) | $(28.8) million | $(4.9) million |
| Net Loss (Total) | $(39.5) million | $(6.1) million |
| Adjusted EBITDA | $(15.4) million | $1.9 million |
| Cash & Equivalents | $53.5 million | $73.1 million |
| Warehouse Debt Outstanding | $66.5 million | $100.6 million |
Note: Net Loss includes $(10.7) million from discontinued operations in Q1 2011.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 25% year-over-year. LendingTree Loans revenue fell 25% due to higher mortgage interest rates reducing refinance volume (down 20%) and purchase originations (down 5%). Exchanges revenue fell 26% due to a 22% decline in matched requests.
- Expense Increases: Selling and marketing expenses rose 19% to $23.3 million, driven by increased advertising spend to counteract lower consumer demand. General and administrative expenses increased 15% due to higher headcount from the SurePoint acquisition.
- Impairments and Litigation: The company recorded $5.0 million in asset impairments (primarily $4.1 million in trademark impairment related to the RealEstate.com exit) and $4.5 million in litigation settlements and contingencies.
- Discontinued Operations: The exit of the RealEstate.com brokerage resulted in a net loss of $10.7 million for the quarter, including $8.0 million in goodwill disposal charges.
Outlook, Risks, and Subsequent Events
- Subsequent Event (Asset Sale): On May 12, 2011, Tree.com entered into an Asset Purchase Agreement to sell substantially all operating assets of the LendingTree Loans segment to Discover Bank for approximately $55.9 million in cash. The transaction is subject to regulatory and shareholder approval and is expected to close by the end of 2011.
- Liquidity and Debt: The company relies on two warehouse lines of credit totaling $150 million. One line ($50 million) expires June 29, 2011, and the other ($100 million) expires October 28, 2011. Management intends to renew these lines but notes that loss of credit availability would materially impact operations.
- Internal Controls: The company disclosed a material weakness in internal control over financial reporting related to income taxes, which remains unremediated as of March 31, 2011.
- Market Risks: Operations remain sensitive to interest rate fluctuations and housing market conditions. Rising rates continue to suppress refinance activity.
Investor Verification Checklist
- Asset Sale Closure: Verify the status of the Discover Bank transaction, including regulatory approvals and shareholder vote results.
- Warehouse Line Renewals: Confirm the renewal status of the $50 million and $100 million credit lines expiring in June and October 2011.
- Loan Loss Reserves: Review the adequacy of the $20.0 million reserve for losses on previously sold loans, given the estimated range of remaining possible losses ($16 million to $26 million).
- Internal Control Remediation: Monitor progress on remediation of the material weakness regarding income tax controls.
- Legal Settlements: Track the resolution of pending litigation, specifically the class action regarding network lender interference and South Carolina mortgage broker registration claims.