Business context and reporting period
Tree.com, Inc. (parent of LendingTree, LLC) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The continuing business operates consumer comparison marketplaces, with mortgage and non-mortgage reporting segments. RealEstate.com and LendingTree Loans are presented as discontinued operations; LendingTree Loans’ asset sale to Discover closed in June 2012.
Financial performance and liquidity
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $37.3 | $23.3 | $102.8 | $53.5 |
| Operating income (loss) | $0.2 | $0.8 | ($2.1) | ($7.2) |
| Continuing-operations net income (loss) | $0.3 | $0.3 | ($2.0) | ($4.8) |
| Net income (loss), including discontinued operations | ($0.2) | $4.4 | $4.1 | $44.3 |
| Adjusted EBITDA (non-GAAP) | $5.4 | $3.9 | $12.8 | $1.0 |
- Q3 revenue increased 60% year over year; mortgage revenue rose 76% to $34.3 million, while non-mortgage revenue fell 13% to $3.1 million. For the nine-month period, revenue increased 92%, driven by 134% mortgage-segment growth.
- Q3 operating margin was approximately 0.6%, versus 3.5% a year earlier. Selling and marketing expense rose 86% in the quarter to $24.8 million, including increased online and broadcast advertising. Litigation settlements and contingencies were $2.9 million in Q3 and $6.8 million year to date.
- Q3 continuing-operations diluted EPS was $0.03; nine-month continuing-operations loss per share was $0.18. Nine-month total income included a $10.1 million after-tax gain from the LendingTree Loans sale; 2012 total income included a $24.3 million gain on that sale and substantial discontinued-operations income.
- Cash from continuing operating activities was $3.4 million for the first nine months, compared with $4.3 million used in 2012. Continuing investing activities provided $1.3 million, while financing activities used $5.0 million. Cash and cash equivalents were $87.8 million at September 30, plus $26.0 million restricted cash; cash increased $7.6 million from year-end.
- Total assets were $151.4 million and total liabilities $64.8 million. No material continuing-operations borrowings are reported; the former LendingTree Loans warehouse credit lines were terminated in 2012. Current liabilities include $31.9 million related to discontinued operations, principally legacy loan-loss obligations.
- Working capital was $71.7 million based on reported current assets of $131.3 million and current liabilities of $59.6 million. Management stated cash and operating cash flows should fund operating and other needs for the next 12 months and beyond.
Changes, outlook, risks and unusual items
- Mortgage growth reflected expanded lender sales capacity and marketing channels, 66% more consumers matched in Q3, and an 8% increase in average revenue per matched consumer. The company attributed year-to-date growth in part to leads becoming available to the exchange after the LendingTree Loans sale.
- Management said a national LendingTree advertising campaign launched in Q2 2013 and that marketing spend would be adjusted dynamically to revenue opportunities. Non-mortgage revenue declined primarily because of education-industry regulation affecting clients and the discontinuation of printed home-services directories.
- Mortgage rates rose to an average 4.49% in September 2013, and MBA data cited by the company showed mortgage originations down 27% year over year in Q3. MBA projected originations to decline in Q4 versus both Q3 2013 and Q4 2012. These market trends may affect lead demand and revenue.
- Discontinued LendingTree Loans operations recorded a $28.7 million reserve for losses on previously sold loans, within management’s estimated $18 million–$37 million range. The estimate is subject to significant uncertainty, and the company expects further repurchase requests and losses. An $18.1 million portion of sale proceeds remained in escrow for contingent liabilities.
- The Massachusetts Division of Banks matter had an estimated possible loss range of $0.5 million–$6.5 million, with a $0.5 million reserve. Other disclosed proceedings include patent disputes and legacy mortgage-related litigation; a tentative settlement in Boschma was not material. A patent case brought against the company was dismissed in October 2013, with an appeal filed in November.
- Disclosure controls were not effective at quarter-end because a previously identified material weakness over income-tax accounting and oversight of third-party tax advisers remained unremediated. Management warned remediation may not be adequate and that tax-related misstatements could go undetected.
- Prior-period share counts and EPS were revised to correct double-counting of certain vested restricted shares. Management said the errors were not material to previously issued financial statements. The company also repurchased $3.3 million of shares year to date.
Important facts for investors to verify
- Whether mortgage lead growth and revenue remain durable as interest rates and industry origination volumes change, and whether advertising spend yields sufficient returns.
- The adequacy and assumptions behind the $28.7 million legacy loan-loss reserve, the remaining escrow, and potential indemnification or repurchase claims.
- Progress and independent validation of remediation of the material weakness in income-tax controls.
- The effect of ongoing litigation costs and regulatory matters on results, including the patent cases and Massachusetts Division of Banks proceeding.
- How much reported nine-month profitability depended on the Discover sale payment, and how continuing-operations performance compares with the non-GAAP Adjusted EBITDA measure.