Ladies and gentlemen, thank you for standing by, and welcome to the LendingTree, Inc. Second Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the call over to your speaker today, Trent Ziegler, Head of Investor Relations. Please go ahead, sir.

Great. Thank you, Ursula, and thanks, everybody on the call for joining this morning to discuss LendingTree’s second quarter 2020 financial results. On the call with me this morning are Doug Lebda, LendingTree’s Chairman and CEO; and J. D. Moriarty, Chief Financial Officer. Before I hand the call over, I’ll quickly remind everyone that during today’s call, we may discuss LendingTree’s expectations for future performance. Forward-looking statements are typically preceded by words such as we expect, we believe, we anticipate, or other similar statements. 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 may 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.

Thanks, Trent, and thank you to everyone for joining the call. As a reminder, last quarter, we took a new approach to managing these calls. We published a detailed letter to shareholders on our Investor Relations website and used our time on the conference call to address your questions. We received positive feedback on that approach. So we’re doing the same approach this morning. As Trent mentioned, our letter to shareholders was posted on our IR website earlier this morning. I’d like to give just a few comments, and we can get right to your questions. First, I’ve been consistently amazed at how well our team has executed in this challenging period. Despite material headwinds in certain product categories and the difficulties of a remote work environment, our team remains especially focused on optimizing every aspect of our business in the near term while continuing to innovate and drive better outcomes for consumers and our partners over the long haul. In addition to terrific execution, our better-than-expected quarterly results are a testament to the flexibility of our model and the durability of this company. And with the recent financing activity we just completed in July, our balance sheet is particularly strong, leaving us well positioned to capitalize on the accelerating evolution of Consumer Finance. And with that, operator, we can open the line for questions.

Your first question comes from Youssef Squali with Truist.

Hi, guys. Good morning. Sorry, I may have been on mute. So, just a couple of questions. On the consumer segment, it looks like most of the card issuers are back. That’s basically what we’ve been hearing from some channel checks. And I think even in your letter you kind of talked about that. But their level of spend is still obviously very depressed. One, what kind of KPIs are they kind of waiting for to increase their spend? Is it just really just all macro? And second, anything you can do on your end to sweeten the deal, so to speak, to maybe get them to commit more spending? And lastly, what have you seen so far in July, just in terms of demand for the three key components of the business: refinances, credit cards, and insurance? Thank you.

Let me hit some of that and then J.D. will definitely chime in, and we should also talk a little bit about student here in Q3, too. The card issuers are definitely back. Spend is definitely lower. Our focus is, as you said, on winning. We want to make sure that we’ve got more budget than our competitors, that we’re doing marketing better than our competitors, and that our business is better than competitors. We believe that it is based on everything that we’ve seen and according to our conversations with the credit card companies. Their spend will come back. What we’re hearing is it’s not as much macro as it is more micro, which is they need to understand the performance of their current loan portfolios before they’re going to materially take on new loans. Currently, unless it’s a government-backed loan, the private lending market is challenged, but we’re winning, and I think the personal loan market is not going to be dead forever. The private student loan market is also not going to be dead forever, which is a big Q3 business for us. We’re doing fine. In this environment, what I told us last quarter is to make sure that our people are safe, and make sure the business is safe and then lean in and look for opportunities. That’s what we’ve been doing.

Sure. So Youssef, I guess I would just say, in card, we’re encouraged that issuers are back, and your channel checks are reflecting that. What your channel checks don’t reflect is when they have reduced payout or tightened underwriting. But we’re happy that they’re back and that the major issuers are dipping their toe in the water now. I don’t know that their getting more committed spend will be a function of KPIs in our network as much as it will be confidence in consumer spend. Think about why they’re issuing a card, what they care about when they issue a new card. Obviously, the creditworthiness of that consumer matters, but also they want spend and a return for it. So as we see consumer spending increase—and we saw the article in the journal yesterday talking about what consumers have seemingly done with the stimulus money—that creates a good backdrop for them. However, when we think about planning for the remainder of the year, we’re not anticipating a resurgence. We think it’s going to take some time. If we’re pleasantly surprised that it’s better, great. We’re encouraged that they’re on the network. Now you asked another question, which is as we start the third quarter here, how does the trend line feel in each of refinance, card, and insurance? I would say that in insurance, we’ve had very good acceleration, which we’re thrilled with. In July, we’ve certainly seen double-digit to mid-teens growth in insurance. We’re really thrilled with the performance there. Now the standout in the second quarter was refinance. We enjoyed extraordinary margins in the beginning of the quarter, those normalized in June, and we’ve seen steady improvement in July. However, we’re not anticipating that margin environment resumes in refinance at all. We’re being somewhat conservative with that aspect. And we just want to take market share, as Doug said. With card, we’ve touched on it.

Okay, super helpful. Thanks, guys.

Your next question comes from Kunal Madhukar with Deutsche Bank.

Hi, thanks for taking the question. Good morning. I have a question on the mortgage space. And you mentioned a number of new products and innovations that you were doing that really resonated with the lenders. Can you talk about that? And can you talk about how that has improved your market share in terms of the total loans that passed through your system versus the total refinance volumes that happened in the market in general? Thanks.

I’ll take the second one first. So market share declines in this type of environment; however, the market is growing substantially, and all you're trying to do is make sure that you’re growing wallet share while your lenders are staying with you and continuing to bid with you and hopefully, shut off or decrease your competitors. What we’re seeing is the new experiences have improved as we’ve enhanced our CRM capabilities, and we are having more interactions with the consumer on our own. We are able to curate particularly with My LendingTree and be able to deliver exclusive leads to a lender. They’re still getting choice. But after they are able to make more of a selection, we are able to send one lead to one lender while still giving choice with other lenders. Because of that, lenders are able to have higher conversion rates through their clogged systems. In the mortgage space, our marketing costs went down dramatically because those lenders and our competitors pulled out of the online ad marketplaces. As J.D. said, we’re assuming that normalization will occur going forward. However, the great news is that wallet share typically coming out of a situation like this completely sticks.

No, I don’t have a lot to add. I mean I think, Kunal, we’re really happy with the product innovation. It’s everything from exclusive leads to a product that we’re really happy with that is a midyear launch, which is a local loan officer product. It’s all under this theme of CRM of greater identification at the top of the funnel as to where that consumer should go. Product efficacy like that is going to manifest itself in better wallet share. However, in periods like this, you’ll notice that market share is never going to look great because there’s just so much organic that all lenders get. So you’ve got a denominator problem. Our focus from an execution perspective is wallet share. We’re really happy with that. And so that’s the strategy in mortgage. And really, the strategy across all products. It just so happens that the product innovation in mortgage and insurance has been really extraordinary.

Great, thanks Doug. Thanks, J.D.

Thank you.

Your next question comes from Nat Schindler with Bank of America Merrill Lynch.

Yes, hi guys. Hey, two questions. One quickly on the insurance product. You mentioned insurance being affected by market dynamics of people not buying cars, and that’s taking you down from growth to basically flat year-over-year. You have a competitor in the space that is predicting fairly high growth in this category this quarter. Obviously, they haven’t reported. But is there anything else going on dynamically? And how are you doing versus competitors? The second question is, you’re calling for EBITDA guidance next quarter where the margins are roughly half what they were this quarter. Is there anything other than mix that is really driving that change?

Sure. J.D., do you want to take both of those?

Yes, sure. In terms of insurance, we recognized it in March when COVID first started; we certainly saw some impact from declining interest in new cars, and thus new insurance. It has been a gradual climb back through the quarter, and we’re thrilled with the recent performance in terms of insurance. As it relates to competitors, we approach the insurance business much the way we do all of our businesses, which is wallet share and gains with our carriers. When you look at year-over-year gains, you have to realize we’re operating off of a pretty big base, and we’re happy with the growth in absolute profitability of our insurance business. We’re particularly happy with the product innovation going on there, so I don’t spend too much time worrying about absolute growth rates. I worry about the health of the business. In that respect, we’re really happy with insurance. As it relates to the margin in Q3, you have to recognize we’re not getting contribution from our consumer business. One of the big businesses in there is personal loans, which is one of our highest margin big businesses because it’s so tied to My LendingTree. When personal loans diminish for all the obvious reasons, that will factor into Q3. That is mostly mix, and I mentioned students, so that’s just a tough comp issue. We have assumed normalized margins in mortgage. There are a few things in there, Q2 to Q3 on the OpEx line that are worth noting. We paused hiring in Q2 briefly and asked our teams to come back with a plan B. The hires that are made in the back part of this year have to be with the mind, obviously, to 2021 and the opportunities there. There is also worth noting a fairly meaningful pickup in rent expense in Q3. We are moving to our new headquarters in Q1 next year. However, from an accounting perspective, that rent expense needs to be recorded as soon as the building is technically available. That is embedded in here. We also have some technology spend associated with the new headquarters. The one notable thing is we do have about $350 million of expense in there. We expanded benefits for employees around COVID and added a work-from-home stipend—so there are some things in there on the OpEx fund worth calling out, but most of it, Nat, is mix. I think conservatism around what we think margins could be in mortgage. When we spoke to you in May and gave our one-quarter forward guide, we were conservative, and we’re going to continue to take that approach for the time being.

Just quickly, J.D., with those expenses, we should assume those expenses continue indefinitely. So this new margin level should be, other than mix shifts, a new normal that you grow from?

Well, not everything in there is going to be indefinite. Recognize that the facilities expense has heightened in these two quarters, and it will start to normalize next year. We’re paying for more facilities for a short time. Furthermore, the technology costs are more onetime. The expansion of benefits and other COVID responses are going to be incorporated into our run rate going forward. But I do think, for the most part, once you've got a new team, that should be based on normalizing.

And on the facilities thing, keep in mind, as J.D. said, from an accounting perspective, we’re literally paying for a building that’s theoretically available to us, but it’s still being constructed. We’ve still got facilities in Charlotte, where people will be able to go back to. From an accounting perspective, we’re adding on another expense from a building that’s still being constructed. So that’s the double count there, and that definitely goes away. The only other thing I’d add is with these loan types coming back, as these product categories come back, then things return to the old normal, hopefully plus additional wallet and market share.

Great. Thank you.

Your next question comes from Jed Kelly with Oppenheimer.

Great. Thanks for taking my questions. Just to kind of follow up on the non-variable marketing expenses or your operating expenses. They’re not that different from what you initially laid out at your Investor Day back in December. So does that mean like you believe you can get back to that revenue level in the next 18 months to 24 months? Or just how should we be thinking about the overall recovery? And when can you get back to your original guidance that you laid out at the beginning of 2020?

J.D., do you want to start? I’ll finish.

Yes, yes, yes. Jed, they’re lower; they’re not dramatically lower. When we went to people and said plan B, we didn’t say, give us your bare minimum. We said really think about—don’t think about the annual budget; think about the needs for the business over the next 18 months. We are staging that hiring. The hiring piece of it is lower; it is not dramatically lower, and it is absolutely reflecting the fact that we do see that revenue opportunity coming back. We would be enabling plan B if we didn’t. You’re just seeing a different timing of that hiring relative to us pausing a bit in Q2.

The only thing I would add is this is all project and financially driven. So if you start from the bottom up, you have a certain amount of fixed cost to run the company. You need a finance department, and you need headquarters, if you will. After that, a lot of costs are driven variably, which are obviously the cost. They're not variable in the short run, but they’re variable in the long run. And even inside technology, those projects are still done even though on a longer-term basis, they're IRR-focused. If we pull off the gas pedal, you have unit economics changing in the midst of COVID, and once you get confidence in those, you go back on it.

I guess just a follow-up on the M&A commentary, Doug. Is there anything new that you’re looking at with the additional capital? Or is it still looking at opportunities on the asset side of the consumer balance sheet or anything else that you’ve seen because of this pandemic that’s more interesting?

J.D. can comment more. We always have a robust pipeline and are always looking at it. We’re between strategy and finance, trying to ensure that we’re doing the right things. Now we’ve got a lot of dry powder. The biggest change I’ve seen is valuations coming down, as expected, because what we’re experiencing is being massively magnified because they don’t have the brand awareness, the history with prior customers, or their tech already built.

The only thing I would add is that we commonly get asked if more things are coming your way because of this, and the answer is yes. More interesting companies are coming our way, but not all for the same reason. In some respects, this period has actually demonstrated the attributes of some of our target companies or the companies that we just tracked over the years. Some of those companies are experiencing a greatly diminished cost to acquire customers, giving them more runway. So we’re navigating this by seeing some increased volume coming our way. Our focus areas continue to be the same: the asset side is interesting, we’ve mentioned small businesses in the past, and that continues to be interesting.

Thank you.

Thank you.

Your next question comes from Mark Mahaney with RBC.

Thanks. I think I had two questions. One is that My LendingTree revenue contribution was a little on the lower side, but I think that’s just largely due to the weakness in personal loans. I know that’s a big MLT category. So just if you could confirm that. And then, the other question was the variable marketing margin was unusually high this quarter. Is there anything that you could pull from that, that could make it sustainable going forward or at least pull up that VMM from where it was historically? Or is this just a cyclical reality of where the business is, and it’s natural to expect that to kind of float back down to those mid-30s levels? Thanks a lot.

Let me start, and then I’ll let J.D. add on. On My LendingTree, yes, firm personal loans. When you sign up for My LendingTree, you’re getting alerts to save you money. Typically, that will also improve your credit, and the easiest thing is credit card consolidation or other debt consolidation into a personal loan. With personal loan lenders pulling back, there are fewer savings opportunities. So you just can’t say it as many people money. That’s okay because we only want to send the right message to the right person at the right time, with no odds. On the VMM piece, it was obviously unusually high on a percentage basis. Because of the very low payout, the very low cost of acquisition in mortgage that I talked about before, things that we would learn from this period going forward would be just the continued emphasis and effort on recurring revenue. Our goal is to get you in for your first transaction, and then keep you here for the rest of your life. That's where we’re just continuing to focus on. And as J.D. said on the M&A side, that’s where, as you look at things even on the asset side, it brings in more customers, more ways you can save, more interactions, and that over time, hopefully , it means less dependence on paid marketing. Now the other thing I’d add, though, is if you know this from other Internet companies if you’re scaling up VMM dollars matter way more to us than VMM percentage because we’ll mark it up to the last profitable dollar.

Yes. That's the part that makes answering. The first part of the question Doug nailed it. It’s mostly just—just personal loans. As that business opportunity, the revenue opportunity goes away, that contribution from My LendingTree is going to go away. Furthermore, as we’ve called this out in May, acquisition of My LendingTree consumers is going to be somewhat diminished because of PL interest diminishing. As that comes back, you’ll see My LendingTree’s contribution come back. The second question, the thing that makes it hard to answer is we’re always going to go after the opportunity. There are going to be periods of time when we can enjoy great margins with no degradation to the revenue opportunity. We just experienced that in mortgage.

Okay. Thanks, Doug. Thanks, J.D.

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

Good morning. Back to My LendingTree, just really good user growth despite the market pressure. I don't know if you guys can talk about your approach to capturing more users and as best as you can tell, how much of that growth is kind of simply organically driven versus maybe more direct marketing spend? And then any plans to pull harder on that lever as the backdrop firms up a bit?

So I’ll start, and then J.D. can add on. Right now, it is mostly organically driven through interest from our other loan products coming in for filling out QFs. We had plans, and they are still there that as the unit economics come back, we absolutely want to lean into marketing of My LendingTree. The good news of COVID is it’s given us more time to get the product even better. We’ve got some really exciting product launches in the back half of the year on that. Users continue to grow, satisfaction continues to grow, and the product gets better as the lenders come back. My LendingTree is going to sing even louder than it already is.

Okay. That makes sense. I appreciate that, Doug. And then last one for me. I know it’s still early, but any new findings or kind of developments with Stash? And then maybe how you guys are thinking about the kind of integration roadmap and how it’s going to weave into My LendingTree over time?

I’m happy you asked that. We are integrating, and we’ve got teams working on it. I’m going to ask J.D. to comment more because he’s sitting on the Board there, and we are excited about where we’re headed with them.

Sure. We’re really excited about it. I think you’re going to see some things roll out, probably starting in September and through the end of the year. There will be a few different categories. One will just be pure marketing partnerships, meaning how do we migrate somebody from a LendingTree experience to a Stash experience from a marketing perspective. We’re trying to do that while being true to kind of the consumer experience and making sure that we’re not screwing up that experience for either consumer. One interesting thing that occurred is that in this environment, for Stash, a number of companies saw their cost to acquire customers go down, which has changed the dynamic a bit. We’re working through that, but you’ll see something in September.

Okay, good update. Thanks, J.D.

Thank you, John. I appreciate it.

Your next question comes from Eric Wasserstrom with UBS.

Hello, how are you? Just a couple of questions, please. The first is, we’ve touched a lot on elements of the cost structure. But Doug, I just wanted to revisit maybe the philosophy around investment. Historically, there’s been, let’s call it, excess revenues, and a lot of that has gone into driving future growth. I’m just curious to understand how you’re thinking about the medium-term growth opportunity at this particular point, given that there’s such an unusual market condition, and there may be, in fact, some permanent destruction to lending capacity in certain verticals.

It’s a great question. Everything is ROI based. You’ve got to pause and make sure your ROIs are right. However, if they’re still positive, you’ve got to go do them. I believe the opportunity around CRM is fantastically great. If we can raise the mortgage refinance conversion rate from 2% to 3% to 4%, wherever it is today, that makes a material difference. The opportunity just inside of our network is astounding. We could improve conversion rates, which raises bids, and that enhances the marketing side. We’re focusing on product investment because it’s still positive, and pulling back on it would be wrong.

Okay. Thanks for that. And just a couple of follow-ups. Doug, are you seeing any creation of capacity in the mortgage space through this refi cycle?

Yes, absolutely. The move to exclusivity is definitely helping us, and lender technology is getting better. The quote provided earlier on is that the Black Knights, Ellie Mae, et cetera, and we’re working with all these companies. The innovation and efficiency is enabling lenders to displace some constraints on capacity.

Great. And then just last one for me. J.D., can you comment a little on how you’re thinking about the balance sheet position going forward and your thoughts on leverage? Is there continued room to maybe optimize leverage and benefit from some of these financial condition issues?

Yes, absolutely. We’ve had the good fortune. We issued a convert in May of 2017 that elevated our balance sheet, and that cash enabled us to do the acquisitions that we did in 2017 and 2018. After recent financing, we bought in 130 of the existing converts with proceeds from the new issuance. We want to ensure that we remain acquisitive, so we’re comfortable taking on leverage as necessary. The financing enables us to deal with near-term maturities, and we have a bullish view on our stock because the equity outcome for us on that convert will not occur until north of $700 a share.

Okay. Thanks so much for all of that.

Your final question comes from Rob Wildhack with Autonomous Research.

Good morning guys. I wanted to jump back to the mortgage discussion and the product development you highlighted there. Big picture, do you think that these innovations are something that can permanently reduce the impact that changes in capacity can have on your business?

The short answer is yes. The mortgage market has historically been cyclical with lenders under-investing in technology. However, we’re seeing more institutional advancements in loan processing now than before because of the innovation we’re rolling out, which is making a structural difference across our platform.

One way to think about it is as we add products and create robust solutions, we increase our odds of expanding our addressable market. There are lenders for whom the LendingTree solution hasn’t historically worked. Innovation produces less volatility by virtue of offering more diverse solutions to various lenders.

I’ll give you an example—many lenders operate with decentralized loan officers as opposed to having them in call centers. We’ve developed a solution that enables us to manage that. This expansion allows us to bring more lenders on board as they adapt to our strategies. This is structurally different, and the lender technologies just continue to get better.

Thank you. Really helpful.

Your closing remarks will be made by Doug Lebda.

Great. Well, I just want to thank everybody for being here today. I told our team at the start of COVID—make sure people are safe, make sure our business is safe. When those two conditions are met, lean in. We’re now a stronger company as a team, utilizing this crisis to engage with the marketplace effectively to raise money, and we’re now judiciously spending in a world of opportunity. LendingTree is stronger, and we feel great about forward direction. Thank you for your continued support as fellow shareholders, and we look forward to talking to you in a few months.

Thanks, all.

Thank you for participating in today’s conference. You may now disconnect.