LendingTree, Inc. Q1 FY2020 Earnings Call

Thank you for joining us for the LendingTree Incorporated First Quarter 2020 Earnings Conference Call. All participants are currently in a listen-only mode. Following the presentation, there will be a question-and-answer session. I will now turn the call over to Trent Ziegler, Head of Investor Relations. Please proceed.

Great, thanks Michelle. Good morning and thanks everyone for joining the call this morning to discuss LendingTree’s first quarter 2020 financial results. I'm joined on the call today by LendingTree’s Chairman and CEO, Doug Lebda; and CFO, J.D. Moriarty. Before I hand the call over to Doug, I'll just remind everyone that during today's call we may discuss LendingTree’s expectations for future performance. These forward-looking statements are subject to risks and uncertainties and LendingTree’s actual results could differ materially from the views expressed today. Many but not all of the risks we face are described in LendingTree’s periodic reports filed with the SEC. We will also discuss a variety of non-GAAP measures on the call today. And I refer you to today's press release and shareholder letter, both available on our website at investors.lendingtree.com for the comparable GAAP measures, definitions and full reconciliations of non-GAAP measures to GAAP. And with that, I'll turn it to Doug.

Thank you, Trent and thanks everyone for joining the call today. I hope you and your loved ones remain safe and healthy during these difficult times. Before we get started I want to point out that we are adjusting the format of our call. As you have hopefully seen we have published a detailed shareholder letter to our Investor Relations website earlier this morning and linked to it from our press release. We think the letter provides a better platform for us to share our thoughts and make our conference calls more efficient predominantly focused on Q&A. So with that I will give some brief opening remarks and we will get right into your questions. First I am incredibly proud of our first quarter results particularly in light of everything that's going on. Our team has responded quickly and decisively to the rapidly changing conditions that we have all experienced over the last several weeks enabling us to meet our original adjusted EBITDA guidance. This is a testament to the strength of our team and to the resiliency and strength of our business model. The flexibility of our model and the diversification we have put in place enable us to strengthen partner relationships, accelerate product innovation, and drive market share gains. We're encouraging our team to remain on the offensive and look for opportunities to further strengthen our competitive position in the quarters and years ahead. I'm particularly happy with the progress we've made against two critical strategic initiatives involving our mortgage experience and scaling My LendingTree. We've discussed these in more detail in our shareholder letter, and in the case of mortgage, the progress is very evident in our results. Before going to Q&A I'd just add that in our 24 plus years as a company, we've successfully managed through periods like this time and again. While it doesn't necessarily feel good in the moment, times like these always create opportunities, and they always drive change and separate the winners from the losers. I'm as confident as I've ever been that our business model is proven and that we will emerge from this period a better, stronger company. And with that operator, we can open the line for questions.

Your first question comes from the line of Eric Wasserstrom with UBS.

Great, thanks, can you hear me okay Doug? Can you guys hear me?

We can hear you. Yes.

Okay, great. Thanks very much Doug. Just two questions, and Doug or J.D. could you give us maybe a quick update on what was going on in terms of lender health, if it's changed at all versus what you highlighted in the shareholder letter, particularly in small business and personal loans, and credit cards, any changes in conditions in those end markets?

J.D., why don't you take personal loans and credit cards, and I will talk small business.

Sure. So, Eric, I guess what it is, we've highlighted three businesses that are most profoundly affected here obviously, credit cards, personal loans, and small business. Personal loans and small business, let me put this in context. In personal loans, we've got a high 30s number of lenders on the network and those lenders, like small business, in many cases rely on access to the capital markets to make loans. And so right away in March when the capital markets activity started to become challenging for them, they started to seize up. So we had a quicker reaction from personal loan lenders and from small business lenders than we did from credit cards. Having said that, card issuers have pulled back as well. So is it any different than what's in the shareholder letter? No, it's a little bit of a different driver. If you think about the incentive for a card issuer to issue a new card, what are they after? One, they want to know that it's a good credit, but two, they want a consumer who's going to spend. And so right now, as you know all too well, they are not enthusiastic about either. So the underwriting standards in cards will go up, but their desire to acquire new customers is diminished because the spend simply is not there. Now, in personal loans, we have lenders who don't have access to capital. So that one side of the marketplace is impaired, as we talked about, and we referred to a 60% to 80% reduction in lender capacity in those businesses. And that remains the case, that's lender capacity. Now, interestingly we also in personal loans don't have as much interest on the part of consumers, which might not sound intuitive. You would think in this environment, people need money. But think about the reasons why people take out a personal loan. There's an event in their life where they're going on vacation or they're doing a home repair, all those things that are positive economic things that people just aren't focused on today. So if you Google LendingTree personal loan index, you'll see some great data that we publish on a regular basis about the personal loan industry, it's very useful, and I encourage you to do it. And we will show you on a weekly basis the desire of consumers to take out personal loans. We're just not seeing it right now because of the economic situation. That will come back as the economy comes back and we hope that the lenders side of the equation will as well. In the case of credit cards, as I said, they need to see a positive ROI from issuing a new card to a consumer. And so we've seen the card issuer step to the sidelines. Initially, we saw some issuers using it as a period of time where they thought they could take market share in cards. Some of that has tapered off. So again in cards we see a severely diminished capacity. And so that's really the driver there. I'll let Doug address it with respect to small business.

With respect to small business it's a similar story to personal loans. If you think overall about the marketplace, again, we're basically balancing supply and demand. So first off, on a high level the fact that we're diversified and not dependent on credit cards or not dependent on mortgage, etc., helps. We are always in business until the capital arrows get closed off. When that happens, the good news is we don't have to do marketing, so both things balance out. In terms of lender health though in cards, obviously card issuers are healthy, they're just appropriately pulling in the reins a little bit. Personal loan lenders, as their capital sources come back will be healthy. They sell all their loans. Obviously, we saw that companies have been doing layoffs in that area but expect that as capital comes back they're healthy. And on small business, the issue, not the issue, our lenders were non-SBA lenders doing mostly working capital loans with capital that comes from investors. As that capital goes away that goes away but pivot there was we opened up an SBA marketplace, signed up several lenders, and we're using that as an opportunity to further expand there. So overall, I think lenders are healthy and they're making appropriate, which I like, they are making appropriate decisions to pull back in times of economic uncertainty.

And if I can just follow up on the OPEX point that you just mentioned, how should we think about the cadence of operating expense over the next three quarters? The 2Q guidance would imply that it's maybe coming down, but at a lesser pace than the contraction of revenue, but how should we think about how you're thinking about discretionary and continued investment and sort of the cadence of VMM and EBITDA over the remainder of this year if you can give us any points of guidance on that?

J.D., you want to hit that first one?

Yes, we plan on making several strategic hires this year as we look to grow our business. Each sector within the company presents its own plan for growth, and we do recognize the associated costs. During challenging times like now, we reassess our hiring plans, but we want to avoid a complete hiring freeze since this is when we need to leverage our strategic initiatives. These initiatives may vary based on current conditions, and we are actively reaching out to leaders in each department to determine the best strategic moves. We aim to capitalize on our competitive position and focus on bridging gaps where needed. While this will not increase our operating expenses, we are aware of the revenue potential and are making targeted investments in specific areas. As Doug mentioned, our goal is to make the right strategic decisions for 2021, reflecting the current environment. In terms of operating expenses, we are fortunate that 75% of our cost structure is variable. As our revenue has decreased, it's a positive sign that customer acquisition costs have also dropped more significantly. We are reviewing all additional hiring for the year and concentrating on our top priorities. Generally, we see operating expenses rise in the first quarter and then stabilize throughout the year, but we may actually see a decrease this time. It won't decline as steeply as revenue because we continue to invest in hiring to support our growth for 2021 and 2022. We're entering this period with a manageable load and are excited about our direction.

Thanks so much for taking my questions.

Your next question comes from the line of Jed Kelly with Oppenheimer.

Great, thanks for taking my question. Can you hear me okay?

Yes, hey Jed, how are you.

Hey, good. Hope everyone's safe. Just a couple of questions; first, on the insurance segment, can you kind of talk about how demand trends have sort of trended lately versus March and your ability to stimulate demand to get consumers to think about shopping? And then on the Stash investment, any reason why you chose to invest in one platform versus creating a marketplace for all the challenger banks that are in the industry?

Sure, Jed. Regarding your first question about insurance, it's important to consider the timeline. As Trent mentioned, January and February were promising for insurance. Typically, during tax refund season, people file quickly and use their refunds for car purchases, which generally boosts insurance activity. This year, however, that positive trend was short-lived, especially from mid-February to mid-March, and it ended rather abruptly around March 5th. You could describe the consumer behavior during this time as cautious; they were interested but lacked strong intent due to a slowdown in auto sales. Consequently, carriers hesitated to invest heavily in attracting this traffic. Since mid to late March, we've noticed some improvement, which we're pleased about. We are also aware of the ongoing changes in the insurance sector, particularly the news about companies like Allstate returning money to consumers. While some of this pertains to driving habits and the reduced accident rates due to lower economic activity, it ultimately impacts claims. If carriers are profitable during this time, we are optimistic about favorable outcomes for us in the long run. Overall, things have improved since March, and we appreciate that. To stimulate more engagement, we write valuable content about insurance, which helps our SEO efforts. We're also pleased with the integration of insurance with My LendingTree, which we managed well in the past quarter. However, we recognize that these efforts are likely overshadowed by the broader trends in auto sales. We'll continue to execute effectively to be ready for when carriers are more aggressively seeking new customers. Now, regarding your question about Stash, I'll let Doug address it. I just want to emphasize how impressed we were with the Stash team and the strategic considerations involved in choosing a single provider over a broader marketplace approach. Doug will provide more insight on that.

First off, regarding Stash, we appreciate the company for its multiple revenue streams and exceptional customer experience. Additionally, there's great synergy between them and us. Stash has a member base that aims to enhance their monetization and customer experience, which they can achieve through alerts and potentially loans with our support. The same principle applies to My LendingTree; currently, as a member, you're receiving alerts on your loans. Imagine if you also had Stash's features, allowing you to save, invest, and budget easily. We value their consumer experience and revenue model, which goes beyond just trading or assets under management—it promotes making informed decisions. We believe this integration will benefit customers, lenders, and be very profitable for us. Furthermore, regarding Stash's investments, consistent with Eric's earlier comment, at LendingTree, all actions are viewed as projects or investments, wherein we pursue opportunities where we can invest $100 to earn $200. Due to varying demand from lenders influenced by the economic environment, we adjust our investments accordingly. While some profitable projects may decline, it’s a natural part of business dynamics. Stash operates under the same principles, and if we can effectively integrate our products, we believe it will be a significant success.

Thank you.

Your next question comes from the line of Mark Mahaney with RBC.

Thanks. Doug, can you discuss what the recovery curve might look like? I understand you can't provide an exact economic forecast, but if we assume a slow, uneven recovery in the latter half of the year, and we anticipate a return to regular GDP growth in the first half of 2021, we could be looking at a solid 9 to 12 months of recovery. Based on that outlook, which segments do you believe will recover the fastest, and which will be leading or lagging? Thank you.

Let's see, well I'm going to let J.D. add on to that, because it's all coming at a little high level. It's going to be wherever the capital is. And the good news for us in this environment is that a) we're profitable where if you think broadly about our competitors, many of them are not. Many of them are not versatile and many of them are hurting. So as long as lenders lend, want to lend and borrowers want to borrow, we'll do just fine sitting in the middle of those things. And you need to make sure, obviously, the consumer is healthy enough. So it would be my expectation that personal loans would probably come back well, credit cards will come back as bank balance sheets are fine. And card companies want to put on more issuers, which I would think as long as their businesses are solid they're going to want to be doing that. And then the personal loan lenders, which are more of the online players, you guys would know that business almost better than me. But as hedge funds and other people who wouldn't invest in those platforms, the Lending Club and Prosper and same thing in small business, then I would be expecting that those come back as that capital comes back. And when that happens is anybody's guess, but the good news is we're better positioned than everybody else in our market. And quite frankly, in some ways, the longer it goes the more our competitors hurt and the more share we can gain. So from that standpoint, it's probably pretty good for us. J.D., do you want to add anything?

Mark, I would like to clarify that our projections do not account for any recovery in capacity in the impacted sectors we've mentioned until late in the third quarter. If lenders have stopped lending, we believe they are indeed paused. We expect a possible recovery in the fourth quarter and into 2021, which may encourage lenders to start lending again. However, we do not anticipate them returning to full capacity by September or in the fourth quarter; rather, we expect it to be a gradual process. Regarding specific sectors, we believe that the card industry will recover more quickly, as lenders will likely anticipate increased spending as people start dining out and traveling again. Personal loans may take a bit longer to rebound due to lender health issues, affecting the availability of those funds. Long-term, we are optimistic about the small business lending sector. Regardless of the administration, the environment is likely to be favorable for small businesses, which may attract private capital into this sector, similar to trends observed post-financial crisis. Although it’s uncertain whether this sector will recover quickly in the fourth quarter or early 2021, we foresee the emergence of a new wave of lenders focused on small businesses, and that’s an area we want to invest in.

Okay, thanks J.D., thanks Doug.

Your next question comes from the line of John Campbell with Stephens, Inc.

Hey, guys. Good morning. Congrats on the Stash investment.

Hey good morning.

Hey good morning. On the Stash investment you guys have talked a little bit about that, that seems like a really compelling long term opportunity for you guys. I mean, it sounds like it is going to be a good investment even if it doesn't do a single thing for the LendingTree core but Doug, I mean, obviously, it sounds like there is some integration work in the days ahead. If you could maybe talk to us about how that might look within My LendingTree and then higher level, if you could maybe help us frame up the synergies over time?

Our companies are very much aligned in our goal of assisting consumers in making informed decisions. We believe that small changes can lead to significant life improvements. As we move forward with the integration, we’ll approach it step by step. We have various ideas and competitive insights. If you envision LendingTree as a membership service, it provides free credit reports, alerts on loans, and helps users improve their credit scores to access credit markets. Additionally, they offer tools for saving, budgeting, and investing, which address asset management. Combining these elements with insurance and other services creates a comprehensive product that supports customers in achieving their goals, whether it's buying a home, getting a car, or planning for retirement. Their platform, called My LendingTree, will facilitate this. On the other hand, Stash excels with its personalized investment and saving services but lacks loan-related offerings. Their customers will seek mortgages, personal loans, and credit cards that are beneficial and cost-effective. As we introduce new products into their ecosystem, their revenue potential will increase, enabling them to market those offerings effectively. What we appreciate about them, compared to other FinTech companies, is their disciplined investment approach, which generates returns, rather than just spending without a strategy. They share a similar vision with us, unlike many other startups, making our partnership an excellent match across philosophy and product alignment.

Okay, that makes a lot of sense. I need to do more work on Stash, but do they have their own platform, or will some of those users be able to come over to My LendingTree? Is it part of My LendingTree as well?

It definitely is My LendingTree so please download the Stash app. And so Stash has a year of subscription. So you're paying a subscription which will access you to a bank account and the debit card and investment advice as well as fractional investing. So, for example, every time you make a purchase basically rebate some of the interchange back in fractional shares. And so then you're constantly always sort of building up this portfolio as you even go through your day. And then they've got some light budgeting on top of that. It's all we can help you with your budgeting. But the nice thing about this is the difference, when you look at the so-called neo banks or banks or whatever you want to call them. Many of them are using the banking to make money. Stash is using it to see your activity and make recommendations to you more than they're doing it to try to make interchange fees or try to get assets under management. And so we like that model much, much more and think it's better for the consumer, better for the providers.

Make sense. Last one from me, a quick question again on My LendingTree. I mean, obviously, a lot of that comes from personal loans and credit cards. It looks like you grew My LendingTree revenue at a little bit better rate than those products. Obviously, you're either seeing gains out of other products in the platform or maybe you're just seeing a share shift to more of that personal loans and credit cards revenue going on the LendingTree so how would you characterize kind of that better growth out of My LendingTree?

It's interesting to note that most of the revenue from My LendingTree primarily comes from personal loans, many of which are from somewhat subprime customers, making it a challenging environment. However, My LendingTree now accounts for over 20% of our total revenues and continues to grow. We have a strong understanding of our unit economics compared to competitors. Although our member base is smaller due to the nature of high-intent purchases through the LendingTree channel, we're not just attracting users looking for free credit scores with no clear intent to convert. This allows for effective monetization, and we've adjusted our marketing strategy accordingly. I'm very pleased with our progress; although I wish it had come sooner, the model is robust, and we are well-positioned to continue its growth.

Yeah John, looking at what to expect with My LendingTree in this period, we have a strong position. One reason the personal loan business is strategically important is that it supports My LendingTree. To give you some context, at any given time, personal loans make up about 55% to 60% of our My LendingTree revenues. In this environment, that could pose some challenges for My LendingTree. However, the good news is that the integration points of My LendingTree to the consumer experience and everything else are ahead of schedule this year. The integration with insurance has started well, and we are pleased with some of the third-party integrations like identity theft services. There are many positive developments happening with My LendingTree, and as we've mentioned, we’re also making progress with My LendingTree benefit cards, mortgage, and insurance. We are executing on this.

Okay, thanks guys.

Your next question comes from the line of Mayank Tandon with Needham.

Thank you, good morning. Doug or J.D. could you talk a little bit more about the insurance segment in terms of the court request volumes that you're seeing versus the monetization rates, kind of see how that is going to trend line over the next several quarters? And also speaking of just the ad spend, we will think that you'd get a nice benefit given that the ad market has softened, maybe just talk about the profitability as well on the insurance side?

I will start with the advertising aspect, and then J.D. can address the other part. On the advertising front, that is a natural result of market conditions. Generally, when lender demand decreases, which can involve price, quantity, or coverage, it often indicates that lenders and the marketplaces are not spending as much on advertising platforms like Google. While we also reduce our advertising efforts, we continue to focus on maximizing profitability. There is definitely a positive impact on the marketing side, although there's a downside with lender supply decreasing. These factors usually balance out over time, and occasionally one performs better than the other. For instance, in the current mortgage scenario, we're experiencing a positive trend where lender demand is benefiting us more than it's harming us. Consequently, we're seeing a larger advantage from the marketing side in the mortgage sector. This means lenders who usually advertise on Google are scaling back while not significantly reducing their spending with LendingTree. This is a very encouraging sign. When lenders evaluate their profitability, they see that spending on Google may yield lower margins compared to LendingTree, prompting them to allocate more budget to us. Their decisions to continue investing in LendingTree suggest a strong market and indicate that our business is performing well.

Yes, Doug, it does. I just need a moment to recall the second part of your question. I apologize.

Sure J.D. I was just trying to dive into a little bit on the insurance side in terms of what you're seeing in terms of the court requests versus the monetization rates so far? And how do you expect that to trend line over the next few quarters?

Yeah, we've seen it. Well, one of the nice things that's occurred during this period of time is our agent business has done well. So, you worry about in a work from home environment what happens to businesses that are so people intensive, right. And what we've seen is actually a strong demand for our product. They are on the agent side of the business. So that's been a nice highlight in the insurance. In terms of traffic, as Trent pointed out in the month of March it was obviously down with auto sales being problematic, and so carriers reacted to that. We've seen somewhat of a recovery in terms of both consumer interest. We don't publish specifics out ourselves. Obviously, you can look at Google data with respect to keywords around auto insurance and that sort of thing, and you can see what those trends are. But we've seen recovery in the month of April and our carrier demand has increased with that. And as I said before, carriers will be reluctant to pay for traffic that they deemed to be lookers, which is, if you look at our other businesses we talked about levels of intent. How serious is the consumer about converting, about actually needing a new policy, switching their auto insurance or being a new auto insurance customer? So carriers need to get confidence that the consumer today wants that and as we get a little stronger economic environment, as people get back to work, I think you'll see the carriers come back online. They are rightly being cautious about building up in our marketplace if they don't think that the consumer intent is there. The traffic trends would suggest to you that that intent is coming back.

Got it, that's helpful. Thank you so much.

Your next question comes from the line of Mark, I'm sorry, Mike Grondahl with Northland Securities.

Yeah, thanks. Guys, just a follow up on insurance, what percent of that business is from new and used car purchases? And then secondly, the 50 million of brand investment that you're kind of re-evaluating, how much of that was spent in Q1 and what's sort of embedded in your 2Q guidance?

Sure. J.D. why don't you take that and then I will comment…

In the insurance sector, approximately 80% pertains to auto. I cannot provide a specific breakdown between new and used, but it is predominantly auto. Regarding our brand investment, we spent about 8.3 million in the first quarter. For the year, we anticipate that around 50% of our planned spending will occur, leading us to expect total expenditures of roughly 50 million. We've already allocated 8.3 million in Q1, and we plan to spend an additional 25 million judiciously throughout the year.

When we mention brand, it still represents profitable advertising for us. Although it cannot be tracked as accurately, it remains a profitable endeavor. It may not always yield returns within the same quarter, but generally, if you invest a dollar, you will receive more than a dollar in return.

Okay, great. I guess, regarding the insured...

Wait a second, sorry, and just pause there real quick if you think when we say brand that is still moneymaking advertising for us. You can't track it as precisely; however, it's a money-making proposition for us. Not always in the quarter, but definitely if you spend a dollar, you get more than a dollar back.

My guess is it's people who are not buying a car but who already have a car and who are shopping for new insurance based on saving money. And the nice thing in that product is that on TV, if you look at all the carriers independently, they're all advertising against each other. And that obviously translates on. So it raises the profile in consumer's minds that hey, maybe I should go try to save money on insurance.

Okay, thank you.

Your next question comes from the line of Youssef Squali with SunTrust.

Great, thank you very much. Good morning and thank you guys for the shareholder letter, super helpful. Doug, in that letter you talked about how you've been obviously making improvements to the mortgage products and the mortgage experience, which have helped offset some of the weakness. I was wondering if you can be a little more specific as to what changes have helped and kind of how that differentiates you guys from peers? And then, J.D., I just want to dig a little deeper into your Q2 guide. So we're halfway into the quarter, I was wondering and considering some of the commentary you provided, positive commentary you provided around home, around insurance, some of the negative commentary you provided around the consumer. If you can help us maybe parse out the two, kind of what's baked into your Q2 guidance as far as growth rates for these three different segments are concerned, considering the year-on-year decline in the high 30s. What I'm trying to really get to is how realistic potentially is it to see maybe a home and insurance segment that are somewhat flattish on year-on-year basis with most of the weakness coming from the consumer segment? Any color there would be super helpful.

Let me address the first part and then J.D. can follow up with the second. Regarding the mortgage experience, we have been focused on enhancing our mortgage product over the past few years. When you consider LendingTree Mortgage 1.0, it involved filling out a form or search query, followed by our internal analytics and credit filters, which led to consumers being connected with four to five lenders. These lenders would then respond with offers on our website as well as through phone calls. Over the past couple of years, we've learned to optimize the process after the form submission. The forms are tailored based on advanced data analytics. Although the results page generally remains consistent, we've discovered that providing exclusive leads to a lender improves the process. By increasing transparency and pricing and reducing the competition among lenders for each borrower, we streamline the experience so that consumers often hear from the best lender. They can either choose this lender or we might suggest that one of the options is preferable. This has led to improved conversion rates and efficiencies for lenders since the competitive aspect is occurring online rather than over the phone. Consequently, lenders are operating more efficiently, their conversion rates are rising, and their profitability is positively impacted by better volume management. Additionally, we're committed to ongoing personalization and CRM initiatives aimed at assisting lenders in enhancing their conversion rates, particularly as they look to control costs per funded loan. As for competitors, we have established deep and longstanding relationships with lenders. We've noticed that lenders tend to keep us as partners longer, which gives us a significant advantage in the mortgage business.

Youssef your second question with regard to the three segments, let me just give you a framework because we obviously suspended our full year guide and we did so because it is in this environment. Obviously, a full year guide is only valuable if you can do it with great accuracy and we want to be able to convey as much as we can now for Q2, but recognize that when we did that, we were cognizant of the fact that the consumer business gave you what we assume in terms of when we start to get some recovery there. And we think that's probably not until through the summer and September it starts to come back a little bit. We also did haircut our expectations for home and insurance, just in light of a recessionary environment. Now, the good news is that since we did that both of those businesses are trending better than we would have expected. We were thrilled with mortgage and the performance in March, despite a really difficult backdrop and in insurance and home are performing very well here in April. Now, the consequence is obviously with consumer flagging because of the capacity issue that we talked about we are more dependent on those businesses for sure. So in terms of the growth rates in them, implied in them we're monitoring that on a daily and weekly basis. And our guidance reflects some of the strength, but mostly reflects the fact that we did haircut those projections for the remainder of the year internally in light of a recessionary environment. We're trying to give you as much of a real-time assessment of Q2, but we're not giving a full year projection because the environment obviously is incredibly fluid right now.

Okay, that's helpful. Thank you.

If you consider the situation, each of these factors changes minute by minute and day by day. There are dynamics at play between lenders and consumers. When lenders want to lend, they tend to attract customers from the platforms that are easiest for them to work with. This means focusing on existing customers first and then seeking new ones. As long as they are looking to gain new customers and consumers are willing to borrow, we will be fine. Even when the market shrinks, we continue to succeed, albeit on a smaller scale. However, as long as we maintain our share of consumer spending and market presence, which we are seeing in mortgages with significant gains among our lenders, we are winning. This is actually advantageous because that increased volume tends to stick. For instance, if a lender raises their spending on LendingTree from 20% to 40% of their advertising budget, it indicates they're becoming strategic about their channels. That boost in spending generally remains even when overall volume returns. Consequently, we benefit from a larger share of a bigger market as it grows again, ultimately enhancing our economics and monetization compared to competitors, which allows us to promote ourselves more effectively and get our flywheel turning.

Thanks.

Thank you. I’m very excited about the LendingTree and how we are positioned. We understand the competitive landscape and we're committed to being the leader this year. Any other questions operator?

My apologies, your next question comes from the line of Melissa Wedel with J.P. Morgan.

Good morning, hi, thanks for taking my question. Good morning. First of all, I wanted to reiterate appreciation for the expanded shareholder letter; it was helpful. I also wanted to dig into just some of the margin trends that we're seeing at the segment level. Want to make sure I'm thinking about this the right way. Is it fair to say that you would expect some of the year-over-year trends in margin to sort of persist similar to what we had seen in Q1 of this year versus Q1 of last year, expect that to sort of persist directionally and so we see revenue recovery late this year, early into next year?

Yeah, I think there's a little bit of noise in here, in consumer in particular with respect to margin. And I say that because recognize that one of the businesses that we were operating at thinner margin last year than normal is our card business. And that was largely strategic to grow that card business; we're happy to make it north of $200 million revenue business last year. But as you know, in the fourth quarter and this persisted in the first quarter, we did have some marketing challenges in cards specifically. And so that does weigh on the margin profile within consumer in aggregate, even though you're seeing the segment profit of 36%. That was mostly within card. Now, I do think absent COVID in these capacity challenges, I do think we've remedied those marketing challenges for card. We are in the process of doing so in the quarter when all of this hit. So I think there's a little bit of noise within consumer. So I think that your year-over-year comparisons are candidly a little bit challenging on the margin side partially because we're also going through this nice benefit of reduced cost of acquisition in many of our businesses. So, as Trent just pointed out within home we've obviously seen our ability to acquire customers accelerate in this environment. And so I think there's just some noise in there when you look year-over-year that's going to miss what's going on in the background.

Okay, Doug, thanks for that.

I would add that while I often look at business margin percentages, I believe they aren't very indicative, and we could discuss that. However, variable margin dollars is the true measure of the business because in every marketplace, you market to the last profitable dollar. For example, if there is very low lender demand, we wouldn't be marketing at all and would just be utilizing free traffic. In that case, margin percentages could be extremely high, but the dollar amount would be low. Conversely, if lender demand is high, we would actively market. A previous example of mine is spending a billion dollars on marketing to achieve $100 million in variable margin dollars. While that represents a 10% margin, it would still be a good investment. I always encourage everyone to focus on the trend of variable margin dollars and consider the supply and demand dynamics of each loan type.

I understand. You have frequently mentioned certain aspects. To summarize the second question about capital allocation opportunities, I know your approach to share repurchases is opportunistic, and I'm curious about your thoughts on the effectiveness of that strategy compared to organic or inorganic growth opportunities. Thank you.

Yeah, let me just say we obviously have and we are generally thrilled with when we have been able to buy back our stock during periods of volatility. We've also, though, we have to consider always what our cash balance is. We obviously have if you look at our balance sheet, as I mentioned before, relatively under-levered. We are a company who has been acquisitive. We did for a period of time, have a considerable cash balance after we did convert in 2017. And we're constantly evaluating potential acquisitions. We've acquired nine companies since 2016 while we didn't do anything in 2018, that's not because we weren't looking at things closely and always considering what we might do. So that does factor into it. I wish it obviously were. Obviously we are evaluating buying our own stock versus inorganic opportunities and acquisitions. And I wish it all played out in as real time as a given quarter and looking at it and saying, okay, they bought their stock because they think it's cheap. We always have to preserve that option value, that's particularly true when we don't have a huge cash balance. We were very happy with our utilization of our revolver. As a reminder, we used cash on hand and the revolver to buy QuoteWizard and ValuePenguin at the end of 2018 and early 2019. And we paid that down very, very well and then we just used our revolver again to make this cash investment. So we're constantly evaluating acquisitions and being mindful of what our potential balance sheet might look like if we go through with one of them. That does influence how we think about buying back our stock as much as we'd like to be opportunistic; we have to consider our flexibility. And sometimes that factors into it and it doesn't give you quite as pure of a read as to whether we think our stock is cheap or not. But we're constantly evaluating it relative to those other alternatives. Fortunately for us, in this environment, as a company that's been acquisitive we're very conscious of the fact that a number of interesting opportunities are going to come our way. And they're probably going to be cheaper than they would have been six months ago and we want to have the flexibility to do it.

I was going to say something very similar. In this environment, especially given our previous experiences with unprofitable business models that could become profitable but may struggle to raise capital, we need to maintain financial flexibility to take advantage of opportunities rather than focus solely on our stock. This may shift from month to month or quarter to quarter, but we need to assess all options, and for now, we want to keep some resources available. This doesn't imply that we believe our stock is overvalued; we just see other opportunities as more pressing at the moment.

Thank you guys.

Your next question comes from the line of Chris Gamaitoni with Compass Point.

Good morning, everyone. Most of my questions have been asked. Just wanted a clarifying point on how you think about My LendingTree. You have obviously noted there are personal loan challenges from call it investment dollar capacity on the other side but it doesn't seem like you're changing any of your thoughts on the longer term of leaning in and building the ecosystems. So I just want to clarify that, in the near term, you're kind of willing to give up some of that profitability for a longer term vision or fix my comment if I missed what you're saying?

Yeah, well there's definitely not a short-term sacrifice. And we are absolutely committed to continue to build the ecosystem because we see the net promoter scores of My LendingTree users. Anybody who's a member of LendingTree, we see the NPS very high. Obviously, market costs are extremely low and the alerts continue to get better. So no change in the LendingTree posture except we are more and more confident about our product and our positioning and our ability to win in a market where you're trying to acquire a consumer and then surround them with all the products to help them make smart financial decisions. And we think we're on our way so no change in that except maybe go on a little faster.

Alright, thank you.

Your next question comes from the line of Kunal Madhukar with Deutsche Bank.

Thank you for taking my questions. I have a couple. First, regarding auto insurance, I'd like to know how much of that revenue comes from repeat business, meaning customers returning to shop for different providers to save money. Also, on the SBA side related to business loans, I'm interested in your perspective on the market concerning both capacity and risk appetite, especially in industries heavily impacted by COVID, such as restaurants, theaters, and bars. What percentage of your revenue is derived from these sectors, and what level of support can they expect from SBA initiatives? Thank you.

Let me address the SBA aspect and then Trent or J.D. can handle the repeat question. Regarding the SBA, we conducted a survey related to this issue. We are not observing significant financial support flowing to the types of businesses mentioned. Therefore, we aim to address this as a public policy initiative. Our goal is not only to do good but also to benefit us in the long term by enrolling those SBA lenders. In terms of risk appetite, SBA lenders are not focused on that aspect because the federal government assumes the risk. Under the PPP program, lenders earn attractive origination fees, around 400 basis points for processing a loan, with the government covering all the risk. Thus, the key factor is how many loans they can process. For online platforms, they will take on risks according to what their capital providers are willing to accept. However, on the SBA side, the priority is capacity, not risk considerations.

Yeah, Kuna I wish I had a statistic for you; I just don't. In insurance recognize that we're not, this is actually some of the value of integrating it into My LendingTree. We'll start to get more of a length into that and we'll get more information as to some of these current insurance. But right now, no, we don't. I don't know and I don't have a statistic for you in terms of what percentage of the customers that come through QuoteWizard are repeat customers. We don't publish a stat nor do I have one off of the top of my head.

That's good. Thanks. Thanks Doug, thanks J.D.

I am showing no further questions at this time. I would like to turn the call back to Doug Lebda, CEO for closing remarks. Thank you all.

Thank you all for joining us during this interesting time in our world. I like to say that when the tide goes out, you can see what's underneath the surface, and sometimes it reveals rocks, shells, trash, and even treasure. I believe we will witness a change in behavior at various levels, and we are ready to take advantage of it. Consumers are likely to reduce their spending and become more mindful of their financial choices, placing a higher priority on savings, and we are in a unique position to benefit from that. I expect lenders to evolve as well, making intelligent choices about the types of customers they can approve and underwrite. We also observe lenders embracing technology to alleviate capacity constraints, which is a positive shift. Regarding competitors, those with unprofitable business models may begin to retreat, allowing us to identify their strengths and weaknesses, which we are already seeing. Internally, we have improved our processes, including changes in our bonus structure and employee evaluations, making our operations more disciplined. Unlike many companies that need to secure additional capital to sustain their unprofitable businesses, LendingTree is well-positioned to reinvest our positive cash flow into profitable projects and initiatives during a time when most competitors cannot, giving us a significant strategic advantage. We intend to leverage this opportunity as behaviors shift across these areas, and we are determined to capitalize on it. Thank you all once again, and we look forward to speaking with you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.