LendingTree, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are to Q1 2019 unless stated otherwise. LendingTree operates an online marketplace connecting consumers with financial-services and insurance providers. Its LendingTree Loans business is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $283.1 million | $262.4 million |
| Operating income (loss) | $20.7 million | $(1.8) million |
| Net income from continuing operations | $19.0 million | $0.6 million |
| Net income (loss), including discontinued operations | $14.4 million | $(0.5) million |
| Diluted EPS, continuing operations | $1.34 | $0.04 |
| Adjusted EBITDA | $44.9 million | $43.0 million |
| Cash from continuing operating activities | $29.3 million | $23.3 million |
Revenue increased 8%. Operating margin was approximately 7.3%, versus negative 0.7% a year earlier. Adjusted EBITDA margin was approximately 15.9%, compared with 16.4%. Operating results benefited substantially from an $8.1 million gain on remeasurement of acquisition-related contingent consideration; Q1 2019 included a $14.6 million expense of this type.
Revenue by segment: Home $79.2 million, up 25%; Consumer $119.9 million, down 1%; Insurance $82.7 million, up 23%; Other $1.2 million, down 89%. Home and Insurance growth chiefly reflected refinancing and insurance-shopping activity. Consumer segment profit declined 20% to $43.1 million, while Home segment profit rose 50% to $35.9 million and Insurance segment profit rose 10% to $30.5 million.
Cash, debt and liquidity at March 31: Cash and cash equivalents were $51.2 million, down from $60.2 million at year-end; restricted cash was $0.1 million. Carrying value of convertible notes was $267.9 million, and revolving-credit borrowings were $130.0 million. The revolver had a $500 million commitment and matures in December 2024; the company reported $369.8 million of remaining capacity, including the effect of a $0.2 million letter of credit, as of May 5, 2020. The company was in compliance with its credit-facility covenants. Continuing-operations investing cash use was $84.2 million, including an $80.0 million Stash investment and $4.2 million capital expenditures. Operating cash flow less capital expenditures was approximately $25.1 million.
Material changes and notable items
- Mortgage refinancing activity drove a $25.9 million increase in refinance revenue; lower revenue per consumer partly offset the volume increase. Insurance revenue rose with more consumers seeking coverage.
- Online advertising expense increased 16% to $173.1 million; total advertising expense rose 13% to $183.8 million. Management says marketing spending is adjusted in response to revenue opportunities and partner demand.
- On February 28, LendingTree invested $80.0 million for an equity interest in Stash Financial. The investment was funded through revolver borrowing and was carried at cost at quarter-end.
- The company recorded a $6.1 million tax benefit from the CARES Act, contributing to a $3.1 million total income-tax benefit. Discontinued operations recorded a $4.6 million net loss.
- On May 5, 2020, LendingTree reported a verbal settlement agreement for $36.0 million resolving HLC-related claims against the company defendants. A $36.0 million liability was already recorded at March 31 within discontinued-operations liabilities. The filing describes a potential loss range of $0–$40 million plus possible prejudgment interest for the dividend-related matter.
Outlook, risks and management commentary
The filing provides no specific company-wide revenue or earnings guidance. Management expected COVID-19 to reduce near-term lender demand for LendingTree’s credit-card, personal-loan and small-business products by as much as 60–80%, reflecting lenders’ uncertainty about the recession. It anticipated less substantial effects on Home and Insurance, while warning that operating cash flow could be negatively affected. Management stated that cash, operating cash flows and revolver availability were expected to fund operating needs for the next twelve months and beyond, while noting that the pandemic’s duration and effects were uncertain.
Key risks include pandemic-related changes in consumer demand and lender capital availability; mortgage interest-rate and housing-market volatility; dependence on third-party network partners and technology providers; and collection risk on accounts receivable. The company also faces continuing HLC-related litigation and contingent earnout payments from prior acquisitions. It reported $22.3 million in total contingent consideration liabilities at quarter-end, with potential earnouts varying by acquisition performance.
Investor verification checklist
- Track post-quarter COVID-19 impacts on Consumer lender demand, segment revenue and marketing spend.
- Verify the terms, timing and settlement documentation for the HLC $36.0 million agreement, and monitor remaining HLC and related litigation exposure.
- Review revolver utilization, interest expense, covenant compliance and liquidity as operating cash flow changes.
- Assess the Stash investment’s future valuation and any observable events or impairment indicators.
- Separate recurring operating performance from contingent-consideration fair-value gains and CARES Act tax benefits; compare GAAP results with the company’s non-GAAP Adjusted EBITDA.