LendingTree, Inc. Q1 FY2021 Earnings Call

Good day, ladies and gentlemen, and welcome to the LendingTree, Inc. First Quarter 2021 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Trent Ziegler, Vice President of Investor Relations.

Great. Thanks, operator, and thanks, everyone, for joining the call this morning to discuss LendingTree’s First Quarter 2021 Financial Results. On the phone with me today are Doug Lebda, LendingTree’s Chairman and CEO; and J.D. Moriarty, currently our CFO. As a reminder to everyone, we posted a detailed letter to shareholders on our Investor Relations website earlier today. And for purposes of today’s call, we’ll assume that listeners have read that letter, and we’ll spend most of our time on Q&A. Before I hand the call over to Doug, I also want to remind everyone that during today’s call, we may discuss LendingTree’s expectations for future performance. Any forward-looking statements we make 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 our 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, go ahead, Doug.

Thanks, Trent, and thanks to everyone for joining the call today. The first quarter’s results demonstrate the core strength of our business and the continued momentum we’re seeing across all of our segments. We once again substantially exceeded our prior guidance, and our perspective on the remainder of the year is improving as the economy continues to gradually reopen. Our Home segment posted record revenue in Q1 as consumers and lenders increasingly turn to the LendingTree network to fill their mortgage needs. Our deep lender network, world-class marketing machine, and product evolution have enabled us to continue to scale our mortgage business throughout market cycles. Our Insurance business continues to perform consistently well as a market leader at scale and is clearly less susceptible to macroeconomic conditions. We continue to diversify and strengthen our insurance business by expanding into new traffic acquisition channels, expanding our carrier network, and growing into adjacent categories, further adding to the durability of our business model as a whole. Our Consumer segment continues to show tangible signs of recovery one quarter after another. We see clear signs of returning demand from our network of lenders, and it’s only a matter of time before consumer demand begins to return to pre-pandemic levels. The economy is reopening, consumers are beginning to borrow and spend, and we’re confident that our consumer businesses will continue to accelerate throughout the remainder of the year. In aggregate, we feel really good about the overall health of our business. In addition to the quarter’s results, we are also announcing a realignment of our executive team to further propel the business forward, and I’d like to just touch on that briefly. The breadth and scale of our marketplace across categories is an undeniable asset and a core competitive advantage for LendingTree. It’s also become clear over the last several months that in order to sustain the levels of growth that we’ve historically delivered, certain aspects of our business deserve more focus, and we are organizing the company accordingly. You can all read about this in this morning’s press release, so I won’t spell it out in too much detail, but here’s essentially what we’re doing. Neil Salvage is going to continue to lead the core LendingTree business and will endeavor to streamline those key assets. Scott Peyree, who founded QuoteWizard, will continue to oversee all things insurance, which has different and unique end-market dynamics than our other businesses. Scott will begin reporting directly to me. I’m thrilled to announce that J.D. Moriarty will be moving into a bigger operational role, leading what we are calling LendingTree Next. This division of the company will encompass our more strategic initiatives, including our all-evolving consumer experience, My LendingTree, strategic partnerships, enterprise sales, corporate development, and broader operations management. Finally, with J.D.’s transition, Trent Ziegler, who you all know well, will be assuming the role of CFO. Trent has held our leadership position throughout our finance team in FD&A, Investor Relations, and Treasury for the last 8 years, and this is a natural and well-deserved progression for him. These moves should signal our commitment to investing in this company for the long haul. While our core business is incredibly solid, we recognize the need to focus on continued innovation, and we are aligning our people to support those efforts. I’d like to personally congratulate each of these leaders on their new roles. I’d also like to thank our HR team and our Board of Directors, who provided a great deal of thought leadership throughout our decision-making process. With renewed energy, focus, and support, I am incredibly confident in our ability to scale this company well into the future. And with that, operator, let’s open it for questions.

Your first question comes from the line of James Friedman from Susquehanna.

Trent, J.D., Scott, Neil, congratulations on your new roles. I would like to ask Doug about Tree's experience during various economic transitions, including the financial crisis and the dot-com bubble. Given the current context of COVID and the reopening of the economy, Doug, do you consider yourself a beneficiary of the reopening trade? If so, which areas of the business are experiencing this benefit and why?

Reopening trade, I’m going to leave the technicals of that to you all. But here’s where we think the future kind of recovery goes, which is really along the Consumer business. You hit on it that we’ve weathered many cycles. This past year was probably the first time in LendingTree’s history where we didn’t see lenders shutting us off as their volume kicked up. We think we’re going to continue to grow in mortgage. But definitely, in the Consumer businesses, that’s where we expect to see renewed growth. The credit card companies and the personal loan companies are starting to make loans again, and they move into the online channels, which is where they find LendingTree. So I think that’s probably the most likely 'reopening trade.' J.D., what do you think?

Yes. Jamie, it’s a good question. I think there are two ways of looking at it. Obviously, as you know, there are a number of companies that are clear, what I would call, clear short-term beneficiaries or clear companies that got five years’ worth of brand awareness through COVID without the marketing spend. We’re certainly not in that category. However, I think longer term, we are absolutely a beneficiary. If you think about overall marketing spend for our financial services partners in any of our categories, whether that’s in Home, whether that’s in credit card, personal loan, or Insurance, this, what we’ve just been through, we think, is going to move more and more of that spend online. It is going to force those who had not adopted to online channels of marketing to do so. That’s going to take some time. Now obviously, we’ve been through the short term of it. We think we’re getting through the short term of it, and our results are testament to that. We’re seeing signs of recovery there. Longer term, we think this is very good for our business. So most times people use the term reopening trade, they’re thinking about a beneficiary in a one- or two-quarter way as the reopening of the economy as you see things like New York City opening this morning. What does that mean for Q3, Q4? I think we will benefit some. I care much more about the long-term impact, which is more and more marketing spend is going to come online, and that’s going to benefit each of our segments. So I do think so. I don’t think we’re as obvious as some of the other ones, but I think longer term for sure.

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

Great. Two, if I may. Just J.D. or Doug, can you talk about how we should look at the unit economics or margin in sort of the Consumer segment as products start to come back and particularly in credit card, personal loan? And then just with the new management structure, Doug, how does this tie into My LendingTree and some of the stuff you talked with at your last Analyst Day in December 2019?

Sure. Yes, why don’t I take the second one first, and then J.D. can touch on unit economics. So how this ties into My LendingTree? My LendingTree and our post-COVID experience are going to be reporting into J.D. where we’re going to be doing a lot of experimentation and innovation. Not to say we’re going to have that inside of every one of our business units, but that’s where we’re really going to focus on continuing to get that to full capacity. The numbers are looking very positive from that front. If you just think about what we’re really trying to do at a high level, we are basically taking one bucket of product and tech work, and being able to split it up into three different streams so that we can then move assets around them as priorities change. There’s definitely a group within LendingTree that is focused on improving the unit economics, improving conversion rates, and hopefully getting step change improvements in NPS. And then the Powered by LendingTree, which is co-branding with partners, that’s in J.D.’s world. I think it’s going to give us a lot of focus in that area.

Yes. Sure. I think we’re just excited to have dedicated focus on those things. I look at each of the things in my world as really being an extension of those core marketplace assets and then how do we use that competitive advantage to grow in an outsized way? So that’s the thought process. As it relates to unit economics, just stepping back from it and looking at Q1 a year ago, and that is one of the ways we look at our business internally as well. We remind everybody that each of those businesses within consumer are not yet back to 2019 capacity. When we do our projection for where they’ll be at the end of this quarter, we’re happy to see that our home business is obviously dramatically ahead, and our insurance business is meaningfully ahead. Our small business, personal loans, and credit card, are literally in the mid-50s percentage range relative to where it was pre-COVID. Personal loans, 58-ish percent, credit card, 43%, and that’s on a revenue basis. So that ripples through, obviously, on our margin profile, as your question points out. A year ago, when the consumer business was 42% of our revenue, it was also operating at a 36% margin. The aggregate margin is still very healthy in Consumer, but as we’ve talked about, credit card is not. Personal loan margins remain healthy. The issue with personal loans is volume on the consumer side. The lender demand is absolutely there. We have not yet seen the renewed consumer demand. We’re starting to see signs of it, which is great. But obviously, all the stimulus money out there has had an impact on that. So the margin profile in that business remains very strong for us. We’re happy with that. The lender demand is there, and as we see consumer demand come in with the return to consumers traveling and building up credit card balances, we will see a return in that personal loan business, and we’re excited about that. Our guide is conservative in this business, in particular, and for good reason. We’ve approached the entire year conservatively around consumer because calling the timing is extraordinarily hard. When you look at unit economics in credit card, those are sub-10% right now, okay, in terms of VMMs. Recognize that is a drag. We said this in the third quarter of last year. We said that when credit card returns and we’re seeing that revenue growth, revenue growth would lead contribution growth. What’s going to impact that for us? I think on the last call, I mentioned we’re one aggressive issuer away from being able to garner some margin there, and that’s kind of where we are.

Got it. Just one follow-up. Are any of the personal loans, credit cards, or small businesses at risk of long-term structural impairment due to COVID? Or do you believe they can all return to their 2019 margin profiles in the next 18 to 24 months?

No, I don’t think they are structurally impaired in terms of margin at all. We occasionally receive questions about the Buy Now Pay Later sector and whether it is taking away from credit cards. I want to remind everyone that this is debt that will be refinanced. If it is indeed taking away from the credit card sector, then customer acquisition will actually increase in priority. A credit card issuer will need to expand their portfolios at some point. So, competition for consumers is ultimately beneficial for us. I don’t believe any of them are structurally impaired, and in small businesses, resilience continues to be strong. After the Paycheck Protection Program, as people recognize the health of the restaurant industry and other small businesses, I believe we will see a new group of small business lenders emerge, which will be advantageous for us. Therefore, I don’t think any are structurally impaired, and I believe they could become better businesses after this situation.

I totally agree, not impaired. To J.D.’s point, they could be better. During the past year, we’ve just seen it in every category. People are more comfortable online, and more of the consumer space is moving online, particularly in consumer lending. It is going to be better post-COVID than pre.

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

I apologize for the mute. Congratulations to everyone. I have two quick questions. Regarding My LendingTree, could you discuss the integration of non-personal loan products within the platform? Specifically, what is the status of credit cards, mortgages, insurance, and so on? What are the main barriers to progress? We've been discussing My LendingTree for some time, and there are significant benefits to optimizing that business. Also, concerning your guidance, I would appreciate insights into the expected growth by segment. The home segment is performing well, but the consumer business was notably slower. However, it seems March ended strongly. Are we expecting the Insurance business to return to a growth trajectory of over 20%? Any guidance or details regarding the consumer segment's growth expectations would be very useful.

J.D., you want to take that?

Yes, absolutely. Let me begin by addressing the My LendingTree question and provide some context. We have been pleased with our acquisition results over the last two quarters. The growth of the My LendingTree base is largely driven by our existing competitive edge, particularly in personal loans. Personal loans are the product that aligns most closely with our business. After the challenges we faced in 2020, where personal loans were relatively stagnant, the acquisition growth we’ve seen is encouraging. It marks our best quarter for new My LendingTree users, indicating that our strategy to syndicate this platform to partners is effective. We also made notable progress in mortgages. Quarter-on-quarter, credit card revenue increased by 26%, reflecting better alignment with our other products. Much of the work done last year focused on building infrastructure, which is essential for our strong foundational offering. Insurance stands out as a clear integration opportunity; we launched a new integration in insurance just yesterday. We are progressing with our strategy to incorporate insurance into My LendingTree and create a unique offering for consumers. We believe we have effectively addressed our prior overreliance on personal loans that impacted our revenue and sign-ups. Through our acquisition strategy, we anticipate seeing significant advancements in insurance as the year progresses. This strategy aligns with our initiatives in the insurance sector, where My LendingTree plays a central role in supporting our agency strategy, and we believe this will yield impactful results.

The only thing that I would add is the notion of new experiences. As a member of My LendingTree, we can push alerts to you for transactions as opposed to the consumer having to be self-directed in thinking about it. Part of those new experiences includes credit improvement. Think of My LendingTree as tied with LendingTree and its own separate flow. So far, we’ve been getting most of the users from our other loan types. Over time, that starts to change, and we’re noticing positive engagement metrics.

In the first quarter, the Home metrics were quite impressive, showing significant growth both sequentially and year-on-year. Some of this growth, though difficult to measure precisely, is likely due to rising rates during the quarter that encouraged people to take action regarding refinancing. As we move into the second quarter, we anticipate a slight sequential decline in the Home segment. However, it remains robust, and the decreases are minor. Counterbalancing this decline is a rapid growth in our Insurance business. Earlier in Q1, we encountered some challenges, but we ended March with over 30% growth, and we expect this momentum to carry into the second quarter. Regarding Consumer, we’ve discussed its direction. For guidance, we are maintaining a cautious stance but anticipate a modest recovery across all segments—credit cards, personal loans, and small businesses.

The only other thing I should mention is that we incurred $2 million in expenses during the quarter related to Medicare. This is an investment decision. Over the past couple of years at LendingTree, we’ve focused not only on corporate development and acquisitions, but also on our internal investments. This is an example of one that we approved in January.

Just wanted to follow up on OpEx. You called out a good quarter in Q1, and you mentioned a step-up in Q2. I’m wondering what drove the improvement in the first quarter and then how you’re thinking about the OpEx trajectory beyond the second quarter.

Let me just hit slightly harder on something that J.D. just said about internal investments. When you see us investing and calling it out, it generally means we’ve got a lot of confidence in that growth of that product, and we don’t make those investments lightly.

We didn’t do a full hiring freeze because we wanted to be in growth mode and put ourselves in a position to grow this year. We’re going into 2021 with two internal rules: OpEx needs to grow slower than VMB, and we need to head back to less than 20% of revenue. Those are our internal rules to align with our growth initiatives.

When I see the term LendingTree Next, I really can’t help but think you guys might be hinting at an eventual deeper move into the asset side of the consumer balance sheet. Can you talk about where you are in that journey? And maybe provide a quick update on the Stash investment?

The asset side is not the reason for the reorganization. We’ll continue to make inroads there. Financial adviser relationships are a natural extension. J.D., do you want to take it from there?

The Consumer side will be part of it for sure, but it’s broader than that. My LendingTree will be part of it. We need to take that to the next level and dedicate focus on it. It’s important to get both higher-level partnerships and continue to be acquisitive, but it should be tied to our overarching strategy of leveraging existing marketplace assets.

I just wanted to touch on the insurance performance on the quarter a little more and see if you could give any more color on kind of the technical issue with one of your large partners versus if you saw any impact from severe winter weather that might have affected Texas and surrounding areas.

Can you take that, J.D.?

We did have one carrier have an outage for about five days that did impact us. That was not an issue relating to a couple of our carriers and where they had call centers.

Did you guys notice any disruption or change in carrier demand during some of the winter storms that impacted Texas and surrounding areas?

Not so much carrier demand. We did have two partners with call centers that were not fully staffed due to the weather, and that did have impact.

I want to understand. You talked about how revenue per lead improved. Can we disaggregate that into purchase and refi? Can you explain how volumes trended over the quarter? Where they are now? And how is pricing impacted by volume trends?

Got it. So let me talk at a high level and then hand it over to J.D. Mortgage demand has been very high from a consumer standpoint and our lenders have been doing very well. Lenders work on our system much like we work inside Google. They bid based on segments of consumers. RPL has been doing better because as the refinance volume has tapered off, lenders keep their pipelines full.

As a percentage of overall mortgage, while purchase grew meaningfully from where it was in the last three quarters, it's still a little less than 10% of the aggregate. That’s not surprising in a cycle like this. We monitor throughout the quarter, and we did see a step-up in purchase in March. Some of that is seasonal. We saw RPLs expand in both purchase and refinance throughout the quarter.

Great. One quick follow-up: Are you thinking that purchase will also decline sequentially in 2Q, or is the decline just in refi?

Just in refi.

Wanted to just make sure I’m thinking about the LendingTree Next in the right way. Could you explain more specifically how it relates to your growth?

You would expect to see more investment, but the investment will come based on very specific ROIs that makes sense for us.

We think we can leverage existing assets, and there might be some upfront investments, but they won’t be huge. It’s more about a focus on consumer and what we can redefine within the lending experience.

Thank you very much, and thank you all for joining our call today. I think we came through the last 12 to 14 months as a much better company that is much stronger, has a great balance sheet, and is very well positioned for the future. I think we’re coming off with a much better team. We’ve learned how to work better together and put the best interest of the company ahead of ourselves. We focused on operational improvements that are helping us to continue to scale, and we feel very good about where we’re sitting in the industry. As a founder, it is gratifying and humbling to work with people I get to work with every day, and it gives me a thrill to see people doing great things in their careers at every level. I can’t thank everyone at LendingTree enough for that. Thank you to our lenders and shareholders. We look forward to talking to you in 3 months. Have a great day.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day. You may all disconnect.