Business context and reporting period
Tree.com, Inc. (parent of LendingTree, LLC) filed this Form 10-K for the fiscal year ended December 31, 2012; it is an annual report, not a standalone fourth-quarter report. The company operates a consumer lead-generation marketplace, primarily for mortgage products, with auto, education and home-services businesses. Effective year-end, it reported mortgage and non-mortgage segments. The 2012 results reflect the June 2012 sale of substantially all LendingTree Loans operating assets to Discover; LendingTree Loans and the exited RealEstate.com business are reported as discontinued operations.
Financial results and position
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue from continuing operations | $77.4 million | $54.6 million |
| Operating loss from continuing operations | $2.9 million | $61.1 million |
| Net loss from continuing operations | $2.2 million | $49.7 million |
| Net income (loss), including discontinued operations | $46.6 million | $(59.5) million |
| Adjusted EBITDA, non-GAAP | $3.8 million | $(15.7) million |
| Cash used in continuing operating activities | $4.7 million | $28.1 million |
- Revenue rose 42%. Mortgage revenue increased 52% to $61.2 million; non-mortgage revenue fell 17% to $14.6 million.
- Operating margin was approximately negative 3.7% in 2012 versus negative 112% in 2011. Selling and marketing expense was 63% of revenue, down from 85%.
- 2012 net income is not representative of continuing operations: discontinued operations contributed $48.9 million, including a $24.4 million after-tax gain on the LendingTree Loans sale.
- At year-end, cash and cash equivalents were $80.2 million and restricted cash was $29.4 million, versus $45.5 million and $12.5 million, respectively, in 2011. Total assets were $143.2 million; shareholders’ equity was $82.9 million.
- Continuing operating cash use improved year over year, but continuing operations used $20.4 million in total cash across operating, investing and financing activities. The company paid a $1-per-share special dividend, approximately $12.2 million.
- The former mortgage-origination warehouse facilities, which had $197.7 million outstanding at year-end 2011, were repaid and terminated in July 2012. The filing does not state a continuing-operation debt balance as of year-end 2012.
Material changes, outlook and risks
- Mortgage matched requests increased 49% to 0.8 million and average match fees rose 9%; non-mortgage matched requests declined 19% to 0.5 million and average match fees fell 2%. The mortgage increase partly reflects leads formerly supplied to LendingTree Loans being sold on the exchange after the sale.
- Management cited lower mortgage rates and improved housing activity in 2012, but noted restrictive borrower qualification standards. Education revenue was affected by regulation of for-profit education clients; the company planned to discontinue printed home-services directories in 2013.
- No formal numerical earnings or revenue guidance is provided. Management said cash and expected operating cash flows should fund operating needs for the next twelve months and beyond. Discover-related marketing services were expected to contribute revenue through the first half of 2013.
- Contingent loan repurchase, indemnification and premium obligations remain with the company after the LendingTree Loans sale. The recorded reserve was $27.2 million, against management’s estimated remaining-loss range of $18–$34 million; $17.1 million of sale proceeds was held in escrow. Exposure is uncertain because the company lacks current loan-level performance data.
- Other notable items include a $6.5 million reduction in the loan-loss reserve following a revised estimation method, $3.1 million of net litigation income in 2012, and a prior-period correction that reduced 2012 net income by approximately $0.2 million.
- A material weakness in income-tax controls, identified in 2010, remained unremediated at December 31, 2012; management concluded disclosure controls and internal control over financial reporting were ineffective. The 2011 impairment-related control weakness was reported remediated.
- Key risks include mortgage-market and interest-rate volatility, regulation and licensing, dependence on lenders and online traffic sources, new-business profitability, and litigation. Two mortgage customers represented 14% and 11% of 2012 revenue.
Investor verification priorities
- Separate recurring continuing-operation performance from the sale gain and LendingTree Loans’ discontinued-operation results.
- Review the $27.2 million loan-loss reserve, the $18–$34 million estimated exposure range, escrow availability and Discover indemnification claim.
- Monitor remediation of the income-tax control weakness and any resulting restatements or reporting delays.
- Assess cash available for operations after restricted cash, the special dividend and remaining contingent liabilities.
- Track customer concentration, non-mortgage demand and the impact of ending printed directories and Discover service revenue.
- Check developments in the disclosed consumer and lender lawsuits and the Massachusetts regulatory settlement negotiations.