LendingTree, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. LendingTree operates an online marketplace matching consumers seeking loans and other credit products with lenders. LendingTree Loans is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $94.7 million | $50.9 million | +86% |
| Operating income | $11.8 million | $5.7 million | +107% |
| Net income from continuing operations | $6.9 million | $5.4 million | +28% |
| Net income, including discontinued operations | $5.7 million | $5.2 million | +10% |
| Adjusted EBITDA (non-GAAP) | $15.8 million | $8.9 million | +77% |
| Operating cash flow from continuing operations | $8.1 million | $5.3 million | +$2.7 million |
Mortgage revenue rose 49% to $55.0 million; non-mortgage revenue rose 185% to $39.7 million. Management attributed non-mortgage growth mainly to personal loans, credit cards and home equity. Mortgage matched consumers increased 45%, and average revenue per matched consumer increased 3%.
Operating margin was approximately 12.5%, versus 11.2% a year earlier. Selling and marketing expense increased 98% to $65.1 million, including advertising expense of $60.6 million, up 104%, as the company increased spending to meet lender demand. The effective tax rate was 41.0%, compared with 5.4%; the 2015 rate reflected a valuation allowance that was largely released in Q4 2015.
At March 31, cash and cash equivalents were $174.2 million, down from $207.0 million at year-end; restricted cash was $4.1 million. Cash decreased $32.7 million during the quarter, principally reflecting $40.5 million of share repurchases. The company had no borrowings outstanding on its $125 million revolving credit facility, which matures in October 2020, and reported compliance with its covenants. Total liabilities were $59.7 million, including $14.9 million of current liabilities of discontinued operations.
Material changes and outlook
- Revenue growth reflected both product categories, with non-mortgage products contributing the larger dollar increase. Management said each non-mortgage lending product grew year over year.
- Management expects more moderate year-over-year non-mortgage revenue growth for the remainder of 2016, citing normalized personal-loan growth and anticipated growth in credit cards and home equity. It described long-term non-mortgage growth prospects as strong, while warning that an industry-wide contraction in lending capital could harm revenue.
- The company expects cash, operating cash flows and its undrawn revolver to fund operating needs for the next 12 months and beyond. It said marketing spending will continue to be adjusted in relation to anticipated revenue opportunities.
- Management noted mortgage-market sensitivity to interest rates and seasonal patterns. It cited Q1 2016 average mortgage rates of 3.74% and reported that MBA projections anticipated higher rates and a lower refinance share for 2016.
Risks, contingencies and unusual items
- Discontinued LendingTree Loans: The business generated a $1.2 million Q1 net loss. The reserve for losses on previously sold loans was $8.1 million, within management’s estimated range of $5.8 million to $10.4 million. Approximately $4.0 million is held in escrow. The company said actual losses could vary significantly and it cannot precisely determine maximum exposure.
- Legal matters: The filing describes ongoing intellectual-property and other litigation, including claims involving the former LendingTree Loans business. A $3.2 million reserve was recorded for the Dijkstra class-action matter, subject to a verbal settlement agreement and further conditions; a $1.0 million reserve was recorded for the Lehman matter. The Massachusetts Division of Banks matter has an estimated possible loss range of $0.5 million to $6.5 million, with a $0.5 million reserve. Some discontinued-operation exposures may be covered by insurance.
- Capital return: The company repurchased 580,014 shares under its public program for approximately $40.5 million; about $56.7 million remained authorized at quarter-end.
- Controls and accounting: Management concluded disclosure controls were effective. A new ERP system was implemented during Q1 and significantly affected certain accounting functions; management said key controls were maintained. No material risk-factor changes were reported.
- The filing identifies dependence on third-party technology, online security and fraud, lender competition, interest-rate-driven mortgage demand, and potential reduced lender demand if consumers obtain loans without using the marketplace.
Important facts for investors to verify
- Whether strong non-mortgage growth can continue as management anticipates more moderate growth for the remainder of 2016.
- How advertising and marketing investment affects revenue growth, operating margins and cash generation.
- Developments and ultimate costs in LendingTree Loans’ loan-loss obligations and the disclosed litigation matters, including settlement conditions and insurance recovery.
- Cash use, share repurchases and compliance with the revolving credit facility’s financial covenants.