LendingTree, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. LendingTree operates an online marketplace connecting consumers seeking loans, deposit accounts, and other financial products with lenders. The former LendingTree Loans business is reported as discontinued operations.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $152.8 million | $94.3 million | $285.3 million | $189.0 million |
| Operating income | $9.0 million | $12.7 million | $15.9 million | $24.6 million |
| Continuing-operations net income | $8.0 million | $9.0 million | $15.8 million | $15.9 million |
| Net income, including discontinued operations | $7.3 million | $7.9 million | $14.2 million | $13.6 million |
| Adjusted EBITDA, non-GAAP | $27.0 million | $16.7 million | $50.8 million | $32.5 million |
- Q2 revenue increased 62%; six-month revenue increased 51%. Non-mortgage revenue rose 112% in Q2 and 93% for the six-month period; mortgage revenue rose 28% and 21%, respectively.
- Credit-card revenue was $37.0 million in Q2 versus $7.8 million, primarily reflecting the CompareCards acquisition. Personal-loan and home-equity revenue also increased. Mortgage growth reflected greater lender demand, marketing, and revenue per consumer.
- Operating income fell despite strong revenue growth. Q2 operating margin was approximately 5.9%, versus 13.5%; six-month operating margin was approximately 5.6%, versus 13.0%. Selling and marketing expense rose 69% in Q2, including a $44.1 million increase in advertising and promotion.
- Adjusted EBITDA increased 62% in Q2 and 57% for six months; it excludes, among other items, acquisition-related expenses, contingent-consideration remeasurement, amortization, and stock compensation.
- Interest expense was $1.1 million in Q2 and $1.2 million for six months, up from $0.1 million and $0.3 million. Tax benefits from employee equity awards were $3.8 million in Q2 and $7.6 million for six months, materially affecting reported tax expense and net income.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $355.6 million, compared with $91.1 million at year-end 2016; restricted cash was $4.1 million. Current assets were $416.3 million and current liabilities were $107.7 million.
- Six-month cash from continuing operating activities was $48.2 million, versus $14.9 million. Investing activities used $57.0 million, principally for acquisitions and capital expenditures. Financing activities provided $274.6 million, chiefly from the convertible-note issuance.
- The company issued $300 million of 0.625% convertible senior notes due 2022; net proceeds were $290.8 million. The notes’ net carrying value was $232.1 million after debt discount and issuance costs. The company also paid $61.5 million for convertible-note hedges and received $43.4 million from warrant sales.
- The $125 million revolving credit facility had no borrowings outstanding at June 30; the company reported covenant compliance. Management expected cash and operating cash flows to fund operating needs for the next twelve months and beyond.
Material changes, outlook, and risks
- In June, LendingTree acquired DepositAccounts for $24.0 million cash, with potential additional consideration of up to $9.0 million, and MagnifyMoney for $29.6 million cash. Purchase-price allocations were preliminary at quarter-end. CompareCards’ estimated earnout liability was remeasured upward, producing a $9.4 million Q2 expense and an $18.1 million six-month expense.
- No formal numeric revenue or earnings guidance is provided. Management said marketing spend would be adjusted dynamically to anticipated revenue opportunities and expects cash and operating cash flows to cover operating needs. It noted mortgage seasonality and sensitivity to interest rates, housing conditions, and lender demand; personal-loan and credit-card demand may also vary seasonally.
- Management expects higher future general and administrative expense and potentially material reductions in net income from continuing operations due to long-term equity awards for senior leadership.
- Risks include competition and dependence on lender participation, online security and third-party technology, and mortgage-market and interest-rate volatility. Convertible notes may require cash settlement or repurchase after specified events; conversion could affect liquidity, working capital, and dilution. Warrants may dilute shares above their $266.39 strike price.
- Contingencies include legacy LendingTree Loans repurchase and indemnification obligations. The estimated remaining loan-loss exposure was $4.3 million to $7.9 million, with a $7.6 million reserve; the company said actual losses could vary significantly. Other disclosed matters include an estimated $0.5 million liability for a Massachusetts regulatory matter and ongoing litigation, including discontinued-operation claims.
- As a subsequent event, the company disclosed a modeled $87.5 million performance-based equity package for CEO Douglas Lebda, including an initial option grant made July 26, 2017. Performance and service conditions apply.
Important facts for investors to verify
- How much of revenue growth and future performance is attributable to acquisitions versus existing products, particularly CompareCards and credit cards.
- Whether increased advertising spending produces durable revenue and operating-profit growth, given the sharp decline in operating margin.
- The eventual cash cost and earnings impact of acquisition earnouts, including the assumptions behind CompareCards’ fair-value estimate.
- Cash-flow sustainability and ability to meet potential note-conversion or fundamental-change repurchase obligations; also monitor revolver covenants and any real-estate borrowing.
- Updates to legacy loan-loss reserves and litigation exposures, as well as the expense and potential dilution from CEO and other equity awards.