LendingTree, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. LendingTree operates an online marketplace connecting consumers seeking loans, deposits and other financial products with lenders. LendingTree Loans is reported as discontinued operations.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $171.5 million | $94.6 million | $456.8 million | $283.6 million |
| Operating income | $17.5 million | $14.2 million | $33.3 million | $38.7 million |
| Continuing-operations net income | $10.1 million | $7.3 million | $25.9 million | $23.2 million |
| Consolidated net income, including discontinued operations | $9.1 million | $6.6 million | $23.3 million | $20.2 million |
| Adjusted EBITDA (non-GAAP) | $34.7 million | $18.5 million | $85.6 million | $50.9 million |
Q3 operating margin was approximately 10.2%, compared with 15.0% a year earlier; nine-month operating margin was approximately 7.3%, versus 13.6%. Diluted earnings per share from continuing operations were $0.74 for Q3 and $1.90 for the first nine months (prior-year periods: $0.57 and $1.81, respectively).
- Revenue mix: Q3 mortgage revenue was $73.8 million, up 38%; non-mortgage revenue was $97.7 million, up 138%. For nine months, mortgage revenue rose 27% to $208.2 million and non-mortgage revenue rose 109% to $248.6 million.
- Cash flow: Nine-month operating cash flow from continuing operations was $65.1 million, compared with $38.9 million. Investing cash outflow was $72.3 million, primarily for acquisitions; financing cash inflow was $263.7 million, largely from convertible notes and related warrant proceeds. Cash and cash equivalents were $345.2 million at September 30, 2017, versus $91.1 million at year-end 2016.
- Debt and liquidity: The company issued $300 million of 0.625% convertible senior notes due 2022; their net carrying amount was $235.1 million after discount and issuance costs. The $125 million revolving facility had no borrowings, and the company reported covenant compliance. Management said cash and operating cash flows should fund needs for the next 12 months and beyond.
- Balance sheet: Total assets were $679.7 million and total liabilities $376.8 million at quarter-end. Contingent consideration liabilities totaled $54.1 million, including current and non-current amounts.
Changes versus prior periods
- Revenue growth reflected increased non-mortgage activity, notably credit cards, personal loans and home equity, alongside higher mortgage purchase and refinance revenue. Credit card revenue grew substantially, primarily following the CompareCards acquisition.
- Marketing expense rose 89% in Q3 and 67% for the nine-month period, with advertising expense up 93% and 71%, respectively, as the company increased consumer acquisition spending to meet lender demand.
- Nine-month operating income declined 14% despite revenue growth, reflecting higher operating costs, including $20.6 million of contingent-consideration expense, higher amortization, marketing and compensation. Q3 operating income increased 23%.
- Acquisitions of DepositAccounts, MagnifyMoney and SnapCap expanded deposit, consumer-finance content and small-business lending offerings. The acquisitions contributed $3.3 million of Q3 revenue in aggregate, based on amounts disclosed individually.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided. Management said it adjusts marketing spending in response to expected revenue opportunities and lender demand.
- Management expects additional CEO and leadership equity awards to increase general and administrative expense and cause material reductions in future continuing-operations net income compared with historical periods. Non-cash compensation is excluded from Adjusted EBITDA.
- Business sensitivities include mortgage rates, housing conditions, lender demand, consumer demand, online competition and seasonal patterns. Management noted that mortgage rates and housing inventory can affect lead demand; it also anticipates seasonality in personal loans and credit cards.
- Contingent consideration fair values depend on forecast performance, interest-rate assumptions and other unobservable inputs; changes are recognized in operating income. Earnouts may be payable for CompareCards, DepositAccounts and SnapCap.
- Discontinued LendingTree Loans liabilities remain a risk. The estimated reserve for losses on previously sold loans was $7.6 million, against an estimated range of $4.3 million to $7.9 million; the company stated actual losses could vary significantly. RFC sought $61 million in a separate loan-related case, for which a $3.0 million liability was recorded.
- The Massachusetts Division of Banks matter had an estimated possible loss range of $0.5 million to $6.5 million, with $0.5 million accrued. The Next Advisor matter was settled and closed. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported growth is organic versus attributable to acquisitions, and whether marketing spend continues to generate profitable returns.
- The effect of planned executive equity awards on GAAP earnings, dilution and future stock-based compensation expense.
- Actual acquisition earnout payments and any resulting contingent-consideration remeasurement expense.
- Developments in discontinued-operation loan-loss and litigation exposures, particularly whether recorded reserves remain adequate.
- Convertible-note settlement, potential dilution, and the company’s ability to maintain liquidity and comply with credit-facility covenants.