Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, for Tree.com, Inc. (formerly a segment of IAC/InterActiveCorp). The company operates two primary segments: Lending (connecting consumers with financial providers via LendingTree.com and originating loans via LendingTree Loans) and Real Estate (brokerage and online networks). The filing reflects the company's operations in anticipation of a spin-off from IAC, scheduled for August 2008. The financial statements are presented on a stand-alone basis as if the spin-off had occurred.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenue | $59.98 million | $130.18 million |
| Gross Margin | $42.61 million (71% of revenue) | $95.04 million (73% of revenue) |
| Operating Loss | $(176.75) million | $(186.24) million |
| Net Loss | $(162.92) million | $(172.72) million |
| Cash and Cash Equivalents | $53.30 million | $53.30 million (as of period end) |
| Short-term Borrowings | $75.43 million | $75.43 million (as of period end) |
| Operating Cash Flow | Not explicitly stated for quarter | $(5.15) million (used) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 46% year-over-year for the quarter and 41% for the six-month period. Lending revenue dropped 48% (quarter) and 42% (six months) due to reduced consumer demand and a shift to lower-margin conforming loans. Real Estate revenue fell 33% (quarter) and 35% (six months).
- Impairment Charges: The company recorded significant non-cash impairment charges in Q2 2008: $131.0 million for goodwill and $33.4 million for indefinite-lived intangible assets. These charges were driven by adverse mortgage and real estate market conditions.
- Operating Loss Expansion: Operating loss widened significantly from $(11.76) million in Q2 2007 to $(176.75) million in Q2 2008, primarily due to the aforementioned impairments.
- Cost Reductions: Selling and marketing expenses decreased 45% (quarter) and 43% (six months) due to reduced advertising spend. General and administrative expenses fell 45% (quarter) and 38% (six months) due to workforce reductions.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: The financial results are heavily impacted by the $164.4 million in total impairment charges (goodwill and intangibles). Additionally, the adoption of SFAS No. 157 and SAB 109 in 2008 changed the timing of revenue recognition for interest rate lock commitments, resulting in higher reported revenue from derivative gains compared to 2007.
- Liquidity and Credit Risk: The company relies heavily on warehouse lines of credit to fund loan originations. As of June 30, 2008, it had $100 million in committed lines and $150 million in uncommitted lines. Management notes that continued disruptions in credit markets could adversely affect operations.
- Legal Contingencies: The company settled a patent infringement lawsuit with IMX, Inc. in August 2008 for $11.75 million. Several other class-action lawsuits regarding privacy and employment practices are pending.
- Outlook: Management anticipates continued operating losses and potential additional restructuring or impairment charges if adverse market conditions persist. The company expects to incur increased costs associated with operating as an independent public entity post-spin-off.
Investor Verification Checklist
- Impairment Validity: Verify the assumptions used to calculate the $164.4 million goodwill and intangible asset impairments, specifically regarding future cash flow projections in the current mortgage market.
- Credit Facility Renewals: Confirm the status of the $100 million committed lines of credit, particularly the $50 million expiring October 31, 2008, and the lender's stance on the spin-off.
- Revenue Quality: Analyze the composition of revenue, specifically the portion derived from fair value changes in derivatives (interest rate lock commitments) versus core fee income, given the accounting standard changes in 2008.
- Legal Exposure: Monitor the status of pending privacy class-action lawsuits and the finalization of the IMX settlement payment.
- Spin-off Costs: Assess the projected increase in general and administrative expenses required to operate as a standalone public company.