LendingTree, Inc. (Tree.com, Inc.) — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The filing reports Tree.com, Inc. and subsidiaries; LendingTree is its principal brand and lending business. RealEstate.com, REALTORS and LendingTree Loans are presented as discontinued operations.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $42.1 million | $37.4 million | $82.2 million | $65.5 million |
| Operating income (loss) | $2.6 million | $(2.0) million | $(3.2) million | $(2.3) million |
| Continuing-operations income (loss) | $2.7 million | $(2.0) million | $(3.2) million | $(2.3) million |
| Net income (loss), including discontinued operations | $(0.2) million | $7.1 million | $(6.7) million | $4.4 million |
| Adjusted EBITDA, non-GAAP | $5.5 million | $3.4 million | $10.0 million | $7.4 million |
- Q2 revenue rose 13% year over year; operating margin was approximately 6.2%, versus a loss in the prior-year quarter. Six-month revenue rose 25%, but operating results remained negative.
- Q2 selling and marketing expense was $29.0 million, 69% of revenue. Six-month litigation settlements and contingencies were $8.1 million, a major contributor to the continuing-operations loss.
- Continuing-operations operating cash flow was $2.2 million for the first half, versus $1.1 million a year earlier. Continuing-operations investing cash flow was positive $1.4 million and financing cash flow was negative $4.8 million. Cash and cash equivalents declined $4.0 million overall to $87.6 million; restricted cash was $22.0 million.
- Total assets were $145.8 million and shareholders’ equity was $78.6 million at June 30. The balance sheet reports no continuing-operations borrowings; discontinued-operations liabilities were $32.6 million. Management said cash and operating cash flows should cover needs for the next 12 months and beyond.
Changes and business developments
- Lending revenue increased 16% in Q2 and 28% for the first half. Management attributed growth to purchase and non-mortgage products. Matched consumers rose 32% in Q2 and 44% for the first half, while revenue per matched consumer declined 13% and 11%, respectively, reflecting a shift toward lower-yield purchase and non-mortgage products.
- Q2 revenue growth included increases in mortgage revenue of $1.5 million and non-mortgage lending revenue of $3.7 million year over year. The first-half increases were $10.5 million and $6.0 million, respectively.
- The company launched My LendingTree in June, combining personalized comparison shopping with free credit scores and credit-profile tools. It also acquired home-services intangible assets for $0.6 million, with up to $0.8 million of contingent consideration.
- Adjusted EBITDA increased from the prior-year periods, but it is a non-GAAP measure that excludes items including litigation costs, stock compensation, depreciation and restructuring.
Outlook, risks and unusual items
- No company-specific revenue or earnings guidance is provided. Management said marketing spending would be adjusted dynamically to revenue opportunities and anticipated significant cash use in Q3 to pay legal fees from the Zillow trial.
- Management cited MBA projections that 2014 U.S. mortgage originations would be about $1.0 trillion, down 42% from 2013, with rates expected to average 4.5%. This is an industry forecast, not company guidance. Mortgage rates, lender demand, housing activity and seasonality may affect results.
- The LendingTree Loans wind-down remains exposed to repurchase, indemnification and premium-repayment obligations on previously sold loans. The estimated remaining loss range was $15.9–$28.8 million, with a $28.4 million reserve recorded; approximately $19.2 million was held in escrow. Management cautioned actual losses could vary significantly.
- In the Zillow patent case, a jury found the asserted patents invalid and found no infringement; the company appealed and post-trial matters remained pending. The estimated possible loss on motions for sanctions and attorneys’ fees was $0–$7.3 million.
- Other disclosed matters include a Massachusetts regulatory matter with estimated possible loss of $0.5–$6.5 million and a $0.5 million reserve, and a West Virginia case for which the court awarded $2.8 million after quarter-end; the company said it believed it had grounds to appeal. A $450,000 Boschma settlement was funded after quarter-end.
- Discontinued operations produced a $2.9 million Q2 loss and $3.5 million first-half loss in 2014. The prior-year periods included a $10.0 million gain on the sale of LendingTree Loans, affecting net-income comparisons.
Key investor verification points
- Track whether lending volume growth can offset lower revenue per matched consumer and elevated marketing costs.
- Review the size, timing and potential variability of legacy LendingTree Loans losses against the reserve and escrow balances.
- Monitor outcomes and cash costs from Zillow-related proceedings, the Massachusetts matter and the West Virginia award and appeal.
- Assess the quality of reported profitability using GAAP operating results alongside Adjusted EBITDA and its exclusions.
- Confirm that cash availability remains adequate after Q3 legal-fee payments and other discontinued-operations obligations.