LendingTree, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also presents unaudited fourth-quarter results. The company changed its name from Tree.com, Inc. to LendingTree, Inc., effective January 1, 2015.
Business context
LendingTree operates an online marketplace that matches consumers seeking loans and other credit products with lenders and lead purchasers. It earns primarily upfront fees for qualified leads, with some closed-loan fees. Lending is the sole reportable segment; auto, education and home services are included in “Other.” The company’s strategy is to grow non-mortgage offerings and use its brand, marketing and technology capabilities to diversify revenue.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $167.4 million | $139.2 million |
| Operating loss | $1.0 million | $1.1 million |
| Loss from continuing operations | $0.5 million | $0.7 million |
| Income from discontinued operations | $9.8 million | $4.6 million |
| Net income | $9.4 million | $3.9 million |
| Adjusted EBITDA (non-GAAP) | $21.8 million | $18.7 million |
| Cash flow from continuing operating activities | $9.1 million | $10.2 million |
Revenue increased 20%. Mortgage revenue rose 9% to $134.1 million, while non-mortgage lending revenue grew to $20.4 million from $4.9 million. Matched consumers increased 64%, but average revenue per matched consumer fell 26%, reflecting product mix and lower revenue per match in mortgage products. Selling and marketing expense rose 24% to $112.7 million, or 67% of revenue versus 65%; advertising expense was $102.2 million. Adjusted EBITDA margin was approximately 13.0%, compared with 13.4% in 2013.
Fourth-quarter revenue was $43.9 million, versus $36.4 million in Q4 2013. Continuing-operations income was $2.1 million, versus $1.3 million; reported net income was $15.6 million, substantially reflecting $13.5 million of income from discontinued operations.
At year-end, cash and cash equivalents were $86.2 million, restricted cash was $18.7 million, total assets were $139.9 million and shareholders’ equity was $96.4 million. The filing says cash and expected operating cash flow should fund needs for the next 12 months. It reports no material off-balance-sheet arrangements other than operating leases and surety-bond commitments. The former LendingTree Loans warehouse credit lines terminated in 2012; the filing does not report current borrowings as a material funding source.
Changes, outlook and notable items
- 2014 revenue growth was led by purchase mortgage leads and newer non-mortgage products, particularly personal loans. The company launched student loans and small-business lending in 2014, and student-loan refinancing in Q4.
- Mortgage conditions remained a key driver: average 30-year rates were 4.17% in 2014, versus 3.98% in 2013. Management cited MBA projections for rates averaging 4.20% in 2015 and refinance originations representing 40% of the market; these are industry forecasts, not company guidance.
- No specific company revenue or earnings guidance is provided. Management said it would adjust marketing spending to anticipated revenue opportunities and focus on non-mortgage growth and product development.
- Discontinued operations included a $14.1 million 2014 income benefit from a loan-loss reserve adjustment following a settlement with a major purchaser of previously originated loans. The settlement covered existing and future losses for that investor. A further $12.1 million of escrowed funds was expected to be released in December 2015.
- Remaining legacy loan-loss reserve was $8.8 million, within a disclosed estimated range of $6.3 million to $11.2 million. The company said its maximum exposure cannot be precisely determined because it lacks current loan performance data.
- Litigation expense was $10.6 million in 2014, primarily patent-related. A jury found LendingTree’s two patents invalid and not infringed in the Zillow litigation; the company appealed. NexTag was awarded $2.3 million in fees and costs, accrued by the company. A separate West Virginia class action had a $2.8 million damages award and remained subject to further proceedings; the company had recorded a reserve.
- The FTC closed its 2014 investigation in January 2015 without fines or penalties. A Massachusetts regulatory matter remained under negotiation, with a stated possible-loss range of $0.5 million to $6.5 million and a $0.5 million reserve.
- The company recorded a $0.8 million impairment for education-business customer lists and software after losing key customers and revising its strategy for the product. It also disclosed a non-material out-of-period correction to deferred-tax asset calculations, with no net financial-statement impact.
- The filing identifies risks from mortgage-market and interest-rate changes, lender concentration and dependence, personal-loan demand, regulation and licensing, customer acquisition costs, cybersecurity and privacy, and litigation. Two lenders each generated more than 10% of 2014 revenue.
Important facts for investors to verify
- How much of recurring earnings and cash generation depends on discontinued-operations settlements and reserve releases, rather than continuing marketplace operations?
- Can rapid non-mortgage growth continue, and can LendingTree improve revenue per matched consumer while managing rising marketing costs?
- What will be the ultimate cash cost and outcome of legacy loan-loss obligations, escrow releases, and pending litigation or regulatory matters?
- How sensitive are mortgage lead volumes and lender demand to interest rates, housing activity, and the company’s significant lender relationships?
- What are the company’s actual 2015 operating targets? The filing provides industry outlook commentary but no specific company guidance.