Business Context and Reporting Period
Company: Tree.com, Inc. (operating as LendingTree, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: The Company operates three primary segments: LendingTree Loans (origination and sale of residential mortgages), Exchanges (online lead generation for lending, education, and autos), and Real Estate (brokerage and lead generation). The Company was spun off from IAC/InterActiveCorp in August 2008.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenue | $48,011 | $57,260 |
| Gross Margin | $33,950 | $39,073 |
| Operating Loss | $(5,342) | $3,180 (Income) |
| Net Loss | $(6,146) | $3,160 (Income) |
| Adjusted EBITDA | $834 | $9,159 |
| Cash and Cash Equivalents | $73,051 | $81,436 |
| Restricted Cash | $12,173 | $12,019 |
| Warehouse Lines of Credit Outstanding | $83,498 | $78,481 |
| Net Cash Used in Operating Activities | $(15,091) | $11,245 (Provided) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 16% to $48.0 million. The LendingTree Loans segment saw a 25% revenue drop due to a 29% decline in loan origination and sale revenue, driven by tight secondary credit markets and lower loan closing rates despite a 20% increase in consumer requests.
- Exchanges Growth: The Exchanges segment revenue increased 37% to $26.1 million, primarily due to a 296% increase in inter-segment revenue from selling leads to LendingTree Loans and a 42% increase in match fees.
- Profitability Shift: The Company reported a net loss of $6.1 million compared to net income of $3.2 million in the prior year. Operating loss widened significantly due to higher selling and marketing expenses and restructuring charges.
- Expense Increases: Selling and marketing expenses rose 46% to $20.1 million, largely due to increased online advertising spend ($5.5 million increase) to drive lead volume. Restructuring expenses increased to $2.6 million from $0.8 million, primarily related to continuing lease obligations for call center facilities.
- Cash Flow: Net cash used in operating activities was $15.1 million, a reversal from the $11.2 million provided in Q1 2009. This was driven by litigation payments of $8.0 million and a decrease in net proceeds from loan sales.
Guidance, Outlook, Risks, and Unusual Items
- Liquidity and Credit Facilities: The LendingTree Loans business is highly dependent on three warehouse lines of credit totaling $165 million. One $40 million line expires June 30, 2010, and the lender is exiting the business; renewal is not expected. Management believes operations can continue at reduced capacity if two lines are lost, but loss of all three would be material.
- Loan Loss Obligations: The Company maintains a reserve for losses on previously sold loans. As of March 31, 2010, the estimated range of remaining possible losses (excluding a known $3.5 million settlement) is $10 million to $17 million. A $4.5 million settlement regarding limited documentation second lien loans was finalized in January 2010.
- Legal Proceedings: The Company settled patent litigation with Source Search Technologies (SST) for $9.5 million ($4.75 million paid in Q1, remainder due Q2) and Block Financial Corp. for $3.25 million (paid in Q1).
- Executive Changes: The CFO, Matthew Packey, announced his resignation effective May 28, 2010. Christopher Hayek will assume the role of Principal Financial Officer and Principal Accounting Officer.
- Outlook: Management anticipates selling and marketing will continue to represent a high percentage of revenue as the Company promotes its brands. No specific financial guidance for the full year was provided in this filing.
Investor Verification Checklist
- Warehouse Line Renewals: Verify the status of the $40 million line expiring June 30, 2010, and the renewal prospects for the lines expiring in June and October 2010.
- Loan Loss Reserves: Monitor the actual loss experience on previously sold loans against the estimated reserve range of $10 million to $17 million.
- Marketing Efficiency: Assess the return on the increased marketing spend (up 46%) and its impact on lead conversion rates and future revenue.
- Liquidity Position: Review the cash burn rate given the negative operating cash flow of $15.1 million and the upcoming litigation payment of $4.75 million.
- Segment Performance: Track the divergence between the declining LendingTree Loans segment and the growing Exchanges segment to understand the shifting revenue mix.