LendingTree, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the same 2018 periods. LendingTree operates an online marketplace matching consumers seeking financial products with lenders and other providers. The company reports one segment. LendingTree Loans is presented as discontinued operations.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $310.6m (+58%) | $197.1m | $851.4m (+51%) | $562.2m |
| Operating income | $31.2m (+54%) | $20.3m | $41.7m (−22%) | $53.8m |
| Net income from continuing operations | $24.5m (−14%) | $28.4m | $38.0m (−65%) | $109.1m |
| Net income including discontinued operations | $4.3m (−83%) | $25.7m | $16.0m (−84%) | $99.8m |
| Diluted EPS, continuing operations | $1.67 | $2.05 | $2.60 | $7.63 |
| Adjusted EBITDA | $63.0m (+39%) | $45.3m | $152.3m (+33%) | $114.1m |
Approximate operating margin was 10.0% in Q3 2019 versus 10.3% in Q3 2018, and 4.9% for the first nine months versus 9.6%. Adjusted EBITDA is a company-defined non-GAAP measure; it excludes, among other items, stock compensation, amortization, interest, taxes and acquisition-related contingent consideration changes.
Q3 revenue growth was driven by non-mortgage products, up 75% to $248.6m, while mortgage revenue rose 12% to $62.0m. Insurance revenue was $74.8m in Q3 and $213.9m year to date, primarily reflecting the QuoteWizard acquisition; it was immaterial in the 2018 comparison periods. For nine months, mortgage revenue fell 17% to $162.6m, partly offset by non-mortgage revenue growth of 88% to $688.8m.
Cash flow, balance sheet and debt
- Continuing-operations operating cash flow was $110.9m for the first nine months, versus $60.2m in 2018. Investing used $96.2m and financing used $56.8m. Investing included $105.6m for ValuePenguin, partly offset by $24.1m of net proceeds from the office-building sale.
- Cash, cash equivalents and restricted cash were $50.8m at September 30, down from $105.2m at December 31, 2018. The nine-month net decrease was $54.4m, including $12.3m of cash used by discontinued operations.
- Debt carrying value comprised $85.0m drawn on the revolver and $261.0m net carrying value of convertible notes, approximately $346.0m combined. The $300m notes carry a 0.625% coupon, mature in 2022 and had an estimated fair value of $482.7m. The notes were convertible through December 31, 2019 under the stated market-price conditions.
- The $350m revolving facility matures in 2022. At September 30, $85.0m was drawn at a weighted-average 3.55% rate; the company reported covenant compliance. At October 30, borrowings were $75.0m, with $274.8m remaining capacity after a $0.2m letter of credit.
- Total assets were $979.2m and shareholders’ equity $389.3m. Current assets of $204.5m were below current liabilities of $278.8m; current liabilities include $31.7m attributable to discontinued operations.
Material changes, outlook and risks
- ValuePenguin was acquired in January for $106.2m, substantially funded with revolver borrowing. QuoteWizard, acquired in October 2018, materially expanded insurance revenue. Acquisition-related amortization and contingent consideration remeasurement weighed on results: contingent consideration expense was $21.2m for the first nine months of 2019, versus $1.2m in 2018.
- Marketing expense rose 61% in Q3 and 52% year to date, mainly as advertising spending increased to meet partner demand. Management says it adjusts marketing dynamically against expected revenue opportunities. Mortgage rates declined during 2019; management cited increased refinance traffic but lower revenue per consumer, while purchase-mortgage revenue weakened.
- HLC entered Chapter 11 in July and the case converted to Chapter 7 in September; LendingTree deconsolidated HLC. Q3 discontinued-operations loss was $20.2m, including a $31.0m liability tied to a settlement offer concerning claims over HLC’s 2016 dividend, partly offset by a $4.5m accounting gain on deconsolidation. The company estimates possible losses on the dividend matter from $0 to $40m and disputes the claims.
- A court judgment of $68.5m was entered against HLC in the ResCap litigation; enforcement is stayed by the bankruptcy. ResCap separately sued LendingTree and related parties, and the company says it will defend the claims. HLC-related litigation, indemnification obligations and possible creditor claims could create additional costs or liabilities.
- Potential additional acquisition earnouts remained, including up to $70.2m for QuoteWizard. The recorded fair value of contingent consideration was $54.1m; actual outcomes depend on performance and estimates.
- No specific financial guidance was provided. Management stated it expects cash and operating cash flows to fund operating needs for the next twelve months and beyond, with the revolver as an additional liquidity source.
Investor verification points
- Track continuing-operations profitability and cash generation against revenue growth, especially the year-to-date decline in operating income and continuing net income.
- Assess how much growth reflects acquired businesses, particularly QuoteWizard’s contribution to insurance revenue, and the sustainability of organic product growth.
- Monitor HLC bankruptcy proceedings, the $31.0m recorded liability, the $0–$40.0m estimated dividend-claim loss range and the separate ResCap claims against LendingTree.
- Review contingent-consideration assumptions and potential earnout payments, particularly QuoteWizard’s maximum $70.2m exposure.
- Verify liquidity and debt trends, including revolver utilization, convertible-note conversion or settlement effects, and the effect of mortgage-rate and consumer-demand changes on marketing efficiency.