Lendingtree Inc (TREE) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tree.com first-quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions.) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Alex Mandel, Chief Financial Officer. Sir, you may begin.

Thanks, operator, and thanks to everyone for joining us today for Tree.com's first-quarter 2014 earnings conference call. First, a quick disclaimer. During this call we may discuss Tree.com's plans, expectations, outlook, or forecast for future performance. These forward-looking statements are typically preceded by words such as we expect, we believe, we anticipate, we are looking to, or other similar statements. These forward-looking statements are subject to risks and uncertainties, and Tree.com's actual results could differ materially from the views expressed today.

Many, but not all, of the risks we face are described in Tree.com's periodic reports filed with the SEC. On this call, we will discuss a number of non-GAAP measures, and I refer you to today's press release, available on our website at investor-relations.tree.com, for the comparable GAAP measures, definitions, and full reconciliations of non-GAAP measures to GAAP.

To put my remarks today in context, in the first quarter, total mortgage originations industry-wide declined by 50% year over year, and refinance share of total origination volume declined to 48% in the quarter as compared with 73% refinance share in the first quarter of 2013. In contrast to this 50% decline in total industry originations, our mortgage products revenue in the quarter grew significantly, by 35%, to a record $34.2 million. This also marks our sixth consecutive quarter of Company outperformance relative to the market.

Said differently, relative to Q3 2012, our first full quarter following the sale of our former mortgage origination business, industry originations have dropped by over 50%, while our mortgage products revenues have increased by over 80%.

Our non-mortgage products revenue also grew year over year by 108% to a record $5.8 million in the quarter. Interestingly, over half of that gain came from products that were either newly launched or relaunched last year, which is to say primarily our reverse mortgage and personal loan offerings. Another significant contributor was our autos business, which is also primarily a loan-based comparison shopping service that effectively leverages the Lending Tree brand.

So really, what we're seeing is strong performance across a more fulsome suite of loan-based offerings beyond the core mortgage products, which we believe represent intuitive extensions of our core competencies and are resonating well with both consumers and lenders. In the months ahead, we anticipate further adding to this suite of loan-based comparison shopping offerings, as well as other relevant, high-value considered purchase categories to more fully realize the potential of the Lending Tree brand.

All in, consolidated revenue of $40 million in Q1 was up 43% over Q1 2013, representing a record level and exceeding our prior guidance. From a profitability standpoint, the Company delivered $15.2 million of variable marketing margin, ahead of our previous guidance. As a percentage of revenue, VMM declined to 38% in the quarter. Keep in mind that from a year-over-year perspective, our new brand campaign didn't launch until Q2 last year, so Q1 2013 didn't reflect significant offline marketing spend. And in Q4, as we described previously, we strategically lightened up on our TV spend.

Further, in Q1 of this year, we completed production of several new TV spots, the first of which debuted in March, causing us to recognize some production expense, which is reflected here. This was anticipated, both as we discussed in our last call, as well as reflected in our guidance for the quarter. In fact, the 38% variable marketing margin achieved is right in line with the midpoints of our previous revenue and VMM guidance.

Adjusted EBITDA, $4.5 million in the quarter, reflected the high end of our previous guidance and was up 10% year over year. Our reported net loss from continuing operations for the quarter of $5.8 million reflects significant legal expenses related to the patent litigation trial that ended in March.

Touching briefly on our discontinued operations, which primarily represent our former mortgage origination business, the loss of approximately $600,000 is largely comprised of legal fees related to the continued wind-down efforts at HLC.

From a balance sheet perspective, our unrestricted cash ended the quarter at $89.5 million, and our working capital position was $64.6 million, which we calculate as current assets, including unrestricted and restricted cash, minus current liabilities, including loan loss reserves.

In conclusion, we believe our first quarter demonstrated strong performance, as we exceeded prior guidance on revenue and VMM while hitting the high end of our adjusted EBITDA guidance, and we continued to gain share in a challenging market environment. We also continued to make demonstrable progress in broadening out the suite of loan-based comparison shopping offerings we provide, reflecting our strategic focus on diversifying the business in an appropriate and relevant manner to leverage our core competencies, including the iconic brands, into additional revenue streams. We anticipate this will be a theme with further developments to come in the quarters ahead.

I'll now turn to Doug for his comments.

Thanks, Alex, and thanks to everyone for joining us on the call today. As Alex already discussed, Q1 was another solid quarter for Lending Tree. I'd like to share my perspective on the quarter and discuss what's coming in the months ahead.

Continuing our top-line momentum, we achieved record revenue in the quarter, which is a testament not only to our continued market share gains in the mortgage space, but also to the scaling of our non-mortgage products. All in, total revenue was up a remarkable 43% year over year. Mortgage revenue was up 35% during a time when the industry originations were down 50%. To put that into further context, industry originations in Q1 were at their lowest level since the third quarter of 1997, essentially the same time that we originally launched Lending Tree.

Additionally, revenue from our non-mortgage offerings was up 108% year over year and 23% versus Q4. Our non-mortgage offerings continue to be an increasingly important driver of our growth story.

We translated that revenue into variable marketing margin of $15.2 million, ahead of our Q1 guidance of $14 million to $15 million. As we talked about in our last call, we produced and began airing a new round of TV spots during Q1 and started ramping our offline advertising investment during the second half of March. With a portion of the production being expensed in Q1 and the nature and timing of the offline media investment, our Q1 margins were consistent with the midpoints of our prior guidance.

Another important note regarding the offline effort is that in our new creative, we're beginning to expand the message to promote a broader subset of our products and services beyond mortgage, purchase, and refinance. We've got a full suite of personal finance and other high-value considered purchase offerings for consumers, and it's imperative we get the word out in a meaningful way.

Also in marketing, we are beginning to see real advancement in our partnership channel. As background, we partner with other companies to syndicate our content, rates, and calculators to their consumers. We then share the earnings from those customers with our partners. So far this year, we've signed a number of great new partnerships, and revenue from this channel in Q1 was up 125% versus Q1 of last year.

On the product front, we're beginning to see meaningful growth in our mobile traffic. For the first time in April, more than 50% of our lending segment traffic originated via mobile devices. This continued growth is driven by a couple of things. First, we have a much-improved user experience. Throughout 2013, we made several iterative enhancements to our mobile experience that are really bearing fruit. Collectively, these improvements resulted in increased conversion rates and ultimately monetization to levels which enable us to then effectively market into this new channel. The increase in traffic and volume resulting from these efforts has been very significant. We continue to maintain a robust product pipeline, and I look forward to discussing our continued product development efforts as the year progresses.

Moving to the bottom line, as Alex mentioned, we delivered $4.5 million of adjusted EBITDA, which safely met the high end of our guidance range and surpassed our internal targets. And we've talked to you before that we always try to manage to that, and when have opportunities, we reinvest in the business.

Now looking ahead to the second quarter, we're off to a great start. Revenue in Q2 is anticipated to grow 10% to 15% versus Q2 of last year. We expect variable marketing margin to be $15 million to $15.5 million, and adjusted EBITDA to be $4.5 million to $5 million. I want to be clear that our strategy is to step on the gas in marketing, to get in front of the spring and summer home-buying season, and set ourselves up for a stronger second half of the year.

To that end, we're also increasing our revenue guidance for full year 2014 to 15% to 18% growth over full year 2013, from the previous range of 10% to 15%. For VMM and adjusted EBITDA, we're maintaining our previously provided guidance. VMM is anticipated to be $62 million to $66 million, and adjusted EBITDA is expected to be $20 million to $21 million. Keep in mind that as we continue to build out our non-mortgage products, we will continue to reinvest top-line outperformance back into those businesses to test and optimize our marketing tactics against those offerings.

In closing, I'm very pleased with our results in Q1. In mortgage, we continued to separate ourselves from the market, and our non-mortgage businesses are gaining real scale. With a strong product pipeline and an ever-improving marketing machine, I'm very encouraged about our prospects for the rest of the year. And the fact that we still have $65 million in working capital on our balance sheet gives us tremendous capacity, which we continue to analyze ways to use that.

With that, I'll turn it back to the operator for Q&A.

Thank you, sir. (Operator Instructions.) Kerry Rice, Needham.

Just a couple of questions. I wondered if you could provide a little bit more detail on the growth in the mortgages business, if you can break it out a little bit between the refis and the originations or things that you're doing there that are driving that in, obviously, the opposite direction of where the market's headed.

And then maybe a little more detail on the non-mortgage business. You called out reverse mortgages and personal loans, some autos. How do I think about those in size of each other? Is one primarily the key driver, even though you saw growth in all of those? Thank you.

In the mortgage business, we are definitely seeing, like everybody is, much more purchase volume than refinance volume. And, as we've talked about before, we're basically balancing supply and demand. So as refinance volume has gone down, we've seen steady increases in demand for purchase volume, and therefore, we can market into that. So purchase has increased to a much more substantial percentage of our revenue than it was years ago. Now, for competitive reasons, we don't break that out, but we're seeing significant growth in purchase and, quite frankly, refinance is down, as it should be. So we're down less than the market, but we're definitely down, and purchase is more than making up for it.

In the non-mortgage business, things are actually fairly balanced. We don't give out, for all the competitive reasons, the actual size of them. But I can say that autos has been around a long time but is seeing significant growth. Personal loans, while newer, is growing very rapidly and is at very solid scale. And the nice thing there is, with the advent of guys like Prosper and Lending Club and more people joining that space every day, we're essentially becoming a front end for these alternative platforms, and that's where we hope to continue to expand. So there's some interesting stuff going on, for example, in the small business space where we think there might be an opportunity for us to play.

So as I said, we don't break them out specifically, but they're all nicely balanced. Some are growing faster than others. I would say personal loans is growing probably the fastest, auto is the biggest, and reverse mortgage is just doing fine, and believe it or not, education's doing pretty well, too. So that's about as much information as I can without giving away the store.

Great, thank you. I want to ask one follow-up on maybe the mortgage business, and as you think about guidance, it seems like there has been some loosening up of some credit standards on some level. Is that what you owe, maybe the upside in the guidance, too? Or is there anything you would call out that you're seeing particular strength in that gives you that confidence to raise guidance?

I think across the board, we're getting confidence to continue to raise guidance. And there's a number of, I think, tailwinds that are happening. So we've talked in the past that lenders obviously need our volume to continue to maintain their profitability, and so the demand for leads continues to increase, we continue to get new lenders on the network.

Guidelines loosening or getting more appropriate is also, though, helping. So you're seeing -- we put out some press releases a couple of weeks ago about average credit scores that we're seeing lenders will actually approve going down, average down payments also going down, which means loan values are going up. And people are starting to underwrite back to the Fannie and Freddie guidelines, which we think is appropriate.

The other thing that's starting to happen, which could be a huge boost for us, although I don't think yet baked in fully, is home equity. And as lenders are starting to lend second mortgages again, that used to be our most profitable and scalable business that, quite frankly, in 2008 just went away. So we expect to see that coming back, probably later in the year. So I think things, all told, are all moving in the right direction.

Thank you very much.

Hamed Khorsand, BWS Financial.

First, a housekeeping question. On the litigation expense, was that cash charge, and what was the basis for taking a charge?

Really, it was a cash charge. It's not really a charge. You know, we got the bills in from the trial and then had to pay them, and that happened during Q1. And so we paid the bills, and that's what you got.

Okay, but I thought the trial -- you guys were the ones -- you were the plaintiffs.

We are. We did lose. Yes, we didn't get any revenue from that. We're obviously appealing it. But we had to pay our lawyers, so that's what we were doing. Patent trials are very expensive and time-consuming, and unfortunately, we had a snowstorm thrown right in the middle of it, which delayed things about a month. And it was an expensive effort, and one that we're going to continue. We feel, while it did cost us a bunch of money, we think that defending our patent rights makes a lot of sense, and so we plan to appeal.

Okay. As far as the non-mortgage products go, there was a huge jump from Q4. Is a lot of that seasonality? Because I think it dropped almost 50%, Q4 from Q3, and then you got this big boost in Q1. How much of that is seasonality and how much of that is normalized?

Alex, correct me if I'm wrong. I don't believe we fell that much in Q4 over Q3, but I don't believe there's any seasonality in this. So the growth drivers are personal loans, autos, reverse mortgage, none of which have seasonal effects. You definitely see some seasonality in the EDU business, but that's more of a Q2 effect. So it's really not seasonal. It's basically lenders asking us for volume, and the more they up the bid, the more we can afford to go get it, and that's what we're doing. Alex, do you have a comment on Q4?

Yes, Doug, thanks. Just to be clear, we've seen relatively consistent growth in the non-mortgage products, and we saw Q4 being up slightly over Q3, up about 8%.

If there is ever any seasonality, Q4's always a little slower for us, just because of the rise in media costs and competing with retail. And so we tend to advertise less, but we were still pleased with Q4's growth and obviously pleased with Q1's.

Okay. I just probably have an error in our file. And then what I'd like to talk about was just a (technical difficulty) in operations (technical difficulty) guidance you're only (technical difficulty) by $0.5 million sequentially at the top end, even though revenue could go up by $3 million sequentially. Why aren't we seeing any kind of leverage in the business yet?

So that's really, quite frankly, by design. And what we always say at the start of the year is we're going to give very solid earnings growth. But the nice thing about our business is it's all variable expenses, and so we're choosing right now to let our emerging businesses grow at lower-than-normal margins, just so we can get that volume. So if a lender says, for example, "I want 500 personal loan leads a day," and then they change it to, they say 1,000, and they obviously have other sources for that, it's a way for us to gain share very quickly, a way for us to invest at not breakeven, but at lower margins so that we can grow that business.

The nice thing is you can turn it on or off. If we wanted to optimize the business for short-term EBITDA, we could do that. But our plan is really to continue to diversify and continue to grow, and so what we're trying to do is give shareholders that $20 million to $21 million of EBITDA and then reinvest whatever is left back in marketing and product so we can continue to grow.

Okay. Is there any pathway to get from these low teen percents to maybe 15% of revenue?

Absolutely. I think longer term, I don't think 20% to 25% is out of the question, and it really comes down to the efficiency of your marketing. What you'd see is we're in the growth phase in these new businesses. We'll reinvest in them at some point. As that marketing gets more efficient, as the brand gets well known, as we get more customers that we, most importantly, can get repeat business off of, which come at no marketing expense, and as you lower your product development expense, a more mature company, but right now, we want to invest for share. But it's simply a matter of dialing back marketing spend if the margin is less profitable than others, and you could do that tomorrow if you wanted to. It's just we're really delivering for growth.

Okay, thank you.

John Campbell, Stephens Inc.

Congrats on an impressive quarter, guys.

Thank you.

First question here is related to one of the previous questions on margins. But you guys mentioned continuing to just roll out the new loan comparisons -- you know, shopping products -- so with that in mind, just trying to get a sense for just incremental investment spend versus just a general pickup in marketing spend, just any kind of color you guys can provide there.

We can kind of land this plane wherever we want to, within a range of reasonableness. And in the new vertical, wherein if you -- and every marketing deal is somewhat different, and we always focus not on, as you guys have probably heard me say before, that dollars pay the bills, not percentages.

So, for example, if you took an extreme example, if you could do a marketing deal that yielded you, call it $1 million of EBITDA but was at a 9% marketing margin, you'd do that all day long. When Google was building their syndication business, they routinely did 95%, 96%, 85% rev share deals with syndication partners while their owned and operated traffic was growing. And so we're always looking to maximize that VMM dollars level.

And in the new businesses in particular, so in mortgage, we've got demand for leads outpacing the supply. And so we're trying to market that to gain share, and incremental marketing in this environment comes at lower margins. And in the other businesses where we haven't yet seen, where we're expecting more revenue increases per lead and volume to go up, we're marketing in front of that, so we're taking even lower margins on those.

We used to actually do new businesses at breakeven. We're well past that, but these things all need to make money and carry their own weight. But we're willing to accept lower marketing margins.

And as I say, you can stop that at any moment. You can just not do a deal and lower your payouts and reduce your revenue growth and increase your bottom line growth and make your margins look better. It's just not the trajectory that we want to be on while we're letting these things grow. So we're not -- I always try to walk a balance. I don't want to sit here and just be a top-line revenue growth company, because I do want to have acceptable EBITDA for shareholders and maintain that credibility.

But we're always trying to walk the balance of making sure we get as much growth as we can, but making sure that it's still dollar profitable. And the thing that we're not as focused on are percentage margins, because as I say, it's dollars that pay the bills.

Okay, that's fair. Thanks for that color. And then it does look like you guys bought back a fair amount of shares in the quarter. So just curious about thoughts on the continued repurchase activity in the coming quarters and any kind of updated view on just overall capital allocation.

I actually don't think we bought shares. Alex, I'm wondering if there was -- while I'm riffing on here, he can look at the numbers. I do not think we bought any, if many, shares during the quarter. And it was really a combination of the fact that this patent trial was going on, and we obviously had information at different times that would have kept us out of the market.

Our view going forward is -- and we've got a Board meeting tomorrow, so we'll debate it -- is I think we do want to, we liked the fact of buying back stock when the stock was cheap. Right now, I would say we're more focused -- but I think we're still reasonably valued -- right now, I think there's such a robust M&A pipeline that we're seeing that I think there are some really interesting deals that could happen. And so I'd rather keep the powder dry for that at the moment. I think there could be both small tuck-ins and larger, transformative things that would be pretty exciting for us. So we're erring more on that side. Alex, do you have a comment on the share count?

Thanks, Doug. The share counts have not -- we didn't buy any shares back in the quarter, that's correct. It's possible that you were seeing a change in the diluted share count, and it may simply be the triggering of which securities are considered dilutive in the quarter relative to the net loss profile. So no shares bought back in the quarter.

Okay, great. And then just one quick follow-up. Any kind of meaningful (inaudible) that maybe kicked off January 1, or throughout 1Q that is worth noting?

Nope, if anything, I think pricing has -- well, in the mortgage business, I would say pricing has stabilized. It's been going up for some time. It's still moving up a little bit on a per-lead basis from time to time, but it's not the story. The only pricing changes have been a continued bidding up of lead pricing in the non-mortgage businesses, which certainly helps, although, as I said, we reinvest a lot of that back in marketing. And we don't do price changes ourselves. Lenders bid up and down the value of the leads that they want to buy. The guidelines that we referred to earlier, that expansion, that certainly helped, because we can place some leads that we couldn't have before, and we expect that to continue. But not a big -- it's much more of a volume story than it is a price story for this quarter.

That's great to hear. Thanks, guys.

Thank you. (Operator Instructions.) Josh Goldberg, G2 Investment Partners.

Hey, guys, good results, obviously in a difficult mortgage environment. I guess I had a couple of quick ones. First, it sounds like second quarter is generally a strong quarter for mortgage revenue. Could you help us just assess how much of the increase in the second quarter versus the first is going to be led by your mortgage business versus your non-mortgage business?

I would expect that mortgage revenue will continue to grow in Q2 from Q1. How much, I'm not entirely sure. I just need to see where it lands, and I don't have a bunch of stuff in front of me, and we generally don't get that specific. But I would expect mortgage will continue to growth quarter over quarter, but at lower rates. And I'd expect that most of the growth is coming from non-mortgage.

And in the mortgage category, what will be growing in Q2 versus Q1 -- I think we'll continue to see lower refinance volumes unless something funky happens with rates, and purchase is really going to be driving the growth of mortgage going forward.

Okay. It just seems like some of the Fannie and Freddie data is saying that originations could be up 40% sequentially from the first quarter, so it would seem to be that you guys should benefit a little bit from that as well.

Absolutely. I definitely think we would. It would be -- that feels a little high to me based on what I'm seeing now, but yes, Q2 and Q3 are kind of home-buying season. If it's a strong home-buying season, which we expect -- and look, we want to outpace the market, so we want to have our revenue growing faster than the industry, hopefully in all quarters.

Now, keep in mind that flips if all of a sudden volume goes crazy. Lenders will demand our leads less, but we'll have a lot more flowing in. So you'll see net pricing reduce and those two offset, and we grow by continuing to gain share.

Okay. And just a little bit more on this opportunities outside of the non-mortgage. Obviously, by this quarter now, non-mortgage is over 10% of total revenue and maybe has a little less volatility to it in terms of originations, et cetera. Can you just talk about what you think, as you look out a year from now, how much could the non-mortgage part be of your business? And is it profitable now on an operating income segment line?

It is definitely profitable, and it is definitely growing in terms of percentage that it could be. I wouldn't want to say it would be half, but there's no reason it can't be that and potentially more over time. And it really depends on what these new lending platforms have, how these new lending platforms take off.

So you've heard me talk about this before. One of the challenges of the mortgage business, not only is it cyclical, but it's also capacity limited. A mortgage company only has so many processors and loan officers, et cetera. The nice thing in some of these personal loan platforms, whether it's Prosper, Lending Club, or some of the new ones that are coming out, they essentially have very automated ways of approving these loans and getting them. And so there is almost no capacity limit on them, as if you're in the travel business and you had unlimited hotel rooms. And so that sets up well for us, because we've got a great brand. And so I think personal can be that.

I think, quite frankly, credit card could be that over time. And we see a lot of opportunity, potentially, in small business, because again, there's these alternative platforms that are coming out. And even as banks are not yet, I don't think, opening the floodgates in the consumer space, there's these other companies that are doing it. So as their demand for customers increases, we've got the right brand and are able to generate that.

Okay. I guess the last question is if you take the midpoint of the June estimate here at $84 million, you annualize that, you get roughly your high end of your guidance. I know generally you're relatively conservative at the beginning of the year, but is there anything in the back half of the year that would cause you not to grow like you usually do in the back half of the year? Thanks so much.

I don't think I see anything that would keep us from growing. I feel like, quite frankly, we're hitting on all cylinders. And we always like to make sure we deliver what we say we're going to deliver. Some might call that conservative, but we try to land it in the range of reasonability. And I think we -- I still think it's early days, and I still think the growth is going to continue to come there. We're definitely gaining share versus competition. We're definitely gaining wallet share of our lender partners. And then we have all these new things that we're rolling out.

And the big surprise that we've seen coming for a while has been mobile. And that, if you would have asked me three years ago, would we be able to get people filling out a mortgage qualification form on mobile, I would have never believed it. But now mobile's over half our traffic, and we have a phenomenal user experience. We recently launched an app as well on both Android and the App Store. And that's working really well. And so not only is that traffic up, it creates different types of leads, which work better for some types of lenders.

So, for example, we have a tool there where you can compare your rate against the rate that you're getting offline or from a local broker against our network and then connect with -- you can connect with multiple lenders or you can connect with one lender, and it creates inbound phone calls right into a call center. So banks are having great success with that.

Another one is our local introduction product, where we're introducing people to local loan officers. We're seeing very good conversion rates from that. So mobile and local are becoming increasing trends in our business, just like they've transformed some other ones. And I think we're ahead of the curve.

Okay, great. And just so I got the right share count, it is 11.8 million. I guess the number was lower because you reported a GAAP loss this quarter. Is that what happened?

That is probably why. And Alex, is that the right number?

Right, that's correct, because with the GAAP loss, it does not include diluted securities for the fully diluted calculation.

Any rough sense of what the litigation settlements might be for the rest of the year, as this number was inflated this quarter?

So this was the legal expense for the trial. We don't know what the settlements, if any, will be. I mean, we lost. So we'll have some cost to appeal. And then if we win the appeal, we'll have a new trial. I would expect that that's not going to cost us as much the second time around as it did this time. So you just don't -- you don't know.

You're expecting to generate cash for the rest of the year?

I would expect us to, yes.

Okay, great. Thanks so much.

Thank you. (Operator Instructions.)

All right. Hearing no more questions, I just want to thank you all for your time and attention today, and please reach out any time if there are any questions, and we appreciate all your support and enthusiasm for the Company. And we'll continue to perform, hopefully, stellarly in the future. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.