LendingTree, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are to the same 2015 periods. LendingTree operates an online marketplace matching consumers seeking loans and other credit products with lenders. LendingTree Loans, sold in 2012, is reported as discontinued operations.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $94.3 million | $55.1 million | $189.0 million | $106.1 million |
| Operating income | $12.7 million | $6.8 million | $24.6 million | $12.5 million |
| Operating margin | 13.5% | 12.3% | 13.0% | 11.8% |
| Net income from continuing operations | $9.0 million | $6.4 million | $15.9 million | $11.9 million |
| Net income, including discontinued operations | $7.9 million | $4.7 million | $13.6 million | $9.9 million |
| Adjusted EBITDA (non-GAAP) | $16.7 million | $8.9 million | $32.5 million | $17.8 million |
Q2 revenue grew 71%; first-half revenue grew 78%. Mortgage revenue rose 51% in Q2 and 50% in the first half. Non-mortgage revenue rose 113% and 145%, respectively. Management attributed non-mortgage gains mainly to personal loans, credit cards and home equity; mortgage growth reflected refinance and purchase products. Selling and marketing expense rose 75% in Q2, led by a 79% increase in advertising, as the company sought to meet lender demand. Selling and marketing represented about 68% of Q2 revenue versus 67% a year earlier.
Income tax expense was $3.6 million in Q2 and $8.4 million for the first half; effective tax rates were 28.4% and 34.5%, versus 4.1% and 4.7% in 2015. The 2016 rates reflected research tax credits, partly offset by state taxes; the lower 2015 rates reflected a deferred-tax valuation allowance that was largely released in late 2015.
Cash, liquidity and capital
- Cash and cash equivalents were $159.6 million at June 30, 2016, down from $207.0 million at December 31, 2015; restricted cash was $4.1 million.
- First-half cash from continuing operating activities was $10.8 million, down from $15.2 million. Investing activities used $8.5 million, including $6.5 million of capital expenditures and $4.5 million for the SimpleTuition acquisition, partly offset by a $2.5 million release of restricted cash. Financing activities used $46.9 million, primarily for $48.1 million of share repurchases.
- No borrowings were outstanding under the $125 million revolving credit facility, which matures in October 2020. The company reported compliance with its covenants. Management said cash, operating cash flows and the facility should fund needs for the next twelve months and beyond.
- There is no balance-sheet debt reported for continuing operations, apart from other liabilities; the filing reports $0.3 million of interest expense for the first half. The credit facility remains available subject to its terms and covenants.
- During the first half, the company repurchased 686,627 shares for approximately $48.2 million; about $49.1 million of authorization remained at June 30.
Material developments, outlook and risks
- Outlook: Management expected more moderate year-over-year non-mortgage revenue growth for the remainder of 2016 than in the comparable 2015 quarters, citing normalized personal-loan growth and anticipated growth in student loans and home equity. It planned to adjust marketing spending to revenue opportunities. No company-specific revenue or earnings guidance was provided.
- Market exposure: Mortgage-market revenue is affected by interest rates, housing activity, consumer demand and lender appetite for third-party leads. Management cited low mortgage rates and limited remaining refinance opportunities; it also noted that a broad contraction in non-mortgage lending capital could hurt revenue. The business is seasonal and exposed to competition, including lenders’ ability to reach consumers without the marketplace.
- Personal-loan market: Some online personal-loan lenders faced higher investor pricing and reduced marketing spend during the first half. Management said it expected additional lenders to enter the marketplace and viewed long-term non-mortgage prospects as strong.
- Acquisition: LendingTree acquired certain SimpleTuition assets on May 31 for $5.0 million, including a $0.5 million holdback. The purchase-price allocation was preliminary as of the filing, with $4.5 million assigned to definite-lived intangible assets and $0.375 million to goodwill.
- Discontinued operations and contingencies: LendingTree Loans generated a first-half net loss of $2.4 million. Its reserve for previously sold-loan obligations was $8.1 million, within management’s estimated range of $5.8–$10.4 million; the company said actual losses could vary significantly. Approximately $4.0 million remained in escrow. A settlement of the Dijkstra class action was reached in June, subject to court approval; the recorded liability was $3.2 million. Other matters include a preliminary injunction in the Next Advisor trade-secret case, an estimated $0.5 million liability for Massachusetts regulatory matters, and mortgage-related claims involving Residential Funding and Lehman Brothers. The filing does not clearly quantify potential exposure for all pending matters.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2015 Form 10-K.
Important facts for investors to verify
- Whether rapid non-mortgage growth and higher advertising spending can be sustained while preserving margins and cash generation.
- How personal-loan lender funding conditions, mortgage rates and lender demand affect marketplace revenue.
- Whether discontinued LendingTree Loans reserves and escrow will cover remaining repurchase, warranty and litigation obligations.
- Final SimpleTuition purchase-price allocation and the business’s contribution to results.
- Future use of the remaining repurchase authorization and compliance with revolving-credit covenants.