LendingTree, Inc. Q3 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to LendingTree Incorporated Third Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there'll be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Andrew Wessel, Vice President Investor Relations. Please go ahead, sir.

Thank you, Norma and good morning to everyone joining us on the call to discuss LendingTree’s third quarter 2023 financial results. On the call today are Doug Lebda, LendingTree’s Chairman and CEO; Scott Peyree, COO and President of Marketplace Businesses; and Trent Ziegler, CFO. As a reminder to everyone, we posted a detailed letter to shareholders on our Investor Relations website earlier today. And for the purposes of the call, we will assume that listeners read that letter and will focus on Q&A. Before I hand the call over to Doug for his remarks, I remind everyone that during today's call, we may discuss LendingTree’s expectations for future performance. Any forward-looking statements that 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 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, for the comparable GAAP definitions and full reconciliations of non-GAAP measures to GAAP. With that, Doug, please go ahead.

Thank you, Andrew. And thank you to all of you who are joining us today. We achieved $22 million of adjusted EBITDA in the third quarter, generating a 14% operating margin, which was at the high end of our forecast. We again generated strong segment margins in both consumer and insurance and continue to benefit from our focus on operating efficiency. We remain soundly profitable with a strong balance sheet, despite the significant revenue challenges we've been navigating over the last few quarters. We have made significant changes at the company, most notably including our senior leadership positions. Our operating expenses have decreased by 30% from peak levels, thanks to proactive cost initiatives taken by management, which should generate strong operating leverage in a recovering revenue scenario. We have redesigned our product function, with dedicated project staffing and clearly defined quarterly goals by group that are tracked and published internally, so that all employees can follow them. Finally, we focused our resources on optimizing our core marketplace business and removed distractions from our employees to accomplish targeted VMD improvements. For example, during the quarter, we identified areas where we can increase monetization of consumer traffic through more effective routing and cross-selling. Also, we began recently live testing with six credit card issuers for our redesigned TreeQual platform. It is the first service to offer full credit pre-qualification to unauthenticated consumer traffic, with complete fraud protection, enabled by our partnership with a top credit bureau. TreeQual has received significant interest from top credit card issuers. In combination with the margin enhancements we've seen from our Lightspeed implementation, we are quite optimistic about how our credit card business can improve going forward as we work and grow share in this very large market. Our outlook for insurance has improved significantly over the last quarter. We know from publicly available data that we are taking share from competitors. Over a year ago, our team committed to delivering the highest quality volume in the face of reduced demand from carriers. That focus on quality and meeting each one of our insurance partners where they needed us most drove those market share gains. Recent conversations with the marketing team at large carriers reinforced that we are accounting for an increased portion of their budgets. Carriers also have indicated that underwriting results are supportive of increased marketing for customer acquisition, which we expect will be in the very near term. We aim to continue increasing our share of their growing budgets, which would provide a material uplift to our earnings profile. We are also acutely aware of the pressure our July 2025 convertible note maturity has on our share price. The management team continues to explore a variety of paths to replace this debt with capital that has an extended maturity profile, providing us with additional time for our numerous actions to improve the business to take hold. And now operator, I'd be happy to open it for questions.

Thank you. First question comes from the line of Jed Kelly with Oppenheimer and Company. Your line is now open.

Great. Thanks for taking my question. Just two if I may. Just digging into the consumer segment, I think personal loans were down. Can you just talk about the competition in that segment? I mean, one of your competitors that reported last week had pretty strong results in that product. So can you talk about the competition? And then just circling back to the convertible. Can you talk about the cash flow profile? I think Q4 is typically your strongest free cash flow profile, how much cash you need to run the business? I think you said $50 million historically and where we are in terms of wanting to get the debt refinance? Thanks.

Scott, if you could take the first one there and then Trent, if you could take the second one.

Yes, sure absolutely. Hi, Jed. Good morning. Starting off, on the consumer side with personal loan categories, credit cards, or small business loans. Over the past 18 months, things have tightened with our clients, and monetization has come down. We've done a good job of maintaining our traffic levels and controlling our marketing expenses to make equal to and often greater margins on the traffic. So I would say that while you look at our consumer volume has generally remained fairly steady over that time period, you've seen the drop in revenue tied to the monetization per consumer. So where we're focusing now is improving that monetization for consumers. We've historically been a very specific product search-focused company. So when I say that, what I mean is, if you're searching for a personal loan, we're going to try really hard to give you a personal loan. We're now shifting to more of a solution-based model where if you're looking for a personal loan, we're going to try to get you a personal loan, but maybe a home equity loan is a better option. Maybe you can't get a personal loan, but you can get a credit card; maybe you're a debt relief candidate. If you own a car, maybe you get a cash-out refinance on your car loan, etc., etc. We have a lot of ways to help solve the consumer problems. The problem is seeking money, and we have distinct advantages in the industry because we have direct client relationships and distribution in various financial industries. So we just need to be better at providing solutions across the board and cross-selling to other products. This will create a win-win-win across the board, resulting in better options for consumers, more high-quality leads for our clients, and increased monetization. Most importantly for us, this will allow us to crank up the marketing flywheel to start increasing the traffic coming through our network of sites.

Trent?

Yes, regarding your question about cash flow, we remain solidly profitable. Our EBITDA is typically in the range of $15 million to $25 million each quarter, and that translates to cash flow at a very healthy rate. While there is some capital expenditure and an ongoing interest burden, our EBITDA effectively converts on a one-to-one basis. We feel very positive about our cash flow position and are optimistic that we are at a low point and poised for improvement as we approach next year.

Thank you.

Thank you, one moment for the next question, please. And our next question comes from the line of Ryan Tomasello with KBW. Your line is now open.

Good morning, everyone. Thanks for taking the questions. I was hoping you can put a finer point just elaborating on the comments from your prepared remarks around what you're seeing from carriers regarding the 2024 growth plans. Obviously, a recovery in the insurance business seems like the area you have the most visibility around. So I guess, it would just be helpful if you could provide some guardrails around the different scenarios for that business next year, how fast it could inflect, the margin profile, whether that's sustainable as competition increases for that traffic? And just generally how you feel about the competitive positioning and the ability to take shares as wallets increase?

I'll cover the main points and then pass it to Scott, who has done excellent work. We believe the margin profile may fluctuate as your marketing efforts start to gain traction, which requires investment to meet demand. However, our team has performed exceptionally well. We've had discussions with carriers that have given us some preliminary insights. Scott, why don’t you finish up?

Yes, sure. Yes, I would say we've had a lot of good conversations, and there's definitely positive momentum in the insurance industry. Over the past two to three months, we've received numerous positive indications from many of our clients, including our historically largest client with whom we're currently working on budget planning for '24. The short of it is, they've made it clear that their budgets are going to be increasing significantly starting in January and will continue to grow throughout the year. Not just them, though. Another major client of ours initially indicated there would be no budget until January, but now it looks like we're going to receive a decent amount of budget for November and December this year. This shows that these carriers are feeling increasingly positive. I would say another four substantial carriers of ours have either increased their budgets or reopened states that they previously shut down over the past three months. Nothing crazy significant enough at this point, but it shows that overall macro trends are shifting from tightening and shutting things down towards getting back into expansion mode. From a quality and market share perspective, we've received specific feedback from a number of carriers that we are outperforming both from a market share standpoint and a quality perspective compared to competitors. So we feel really good about receiving additional budget pieces as the money returns.

Great. Thanks for all that color. And then separate question on just typical seasonality, maybe for Trent. How are you thinking about that heading into the fourth quarter? Does the Q4 guidance assume that typical seasonality plays out, or maybe some different assumptions, variables you're assuming given just the nature of the current environment?

Yes, thanks, Ryan. Yes, look, I mean, the guidance assumes kind of typical seasonal patterns that we've observed historically. What I'd say is that baked into the guidance for the rest of the year is kind of a stabilization in fundamentals, but it really is just those seasonal trends that we've seen kind of applied over the top. We've had a lot of debate internally about that, given where the trends have been; will the seasonality be as pronounced as it has been in prior years? We obviously don't know the answer to that. But we've taken a pretty conservative stance with respect to what's baked into the guide for the rest of the quarter.

Great. Thanks, guys.

Thank you. One moment for our next question, please. Our next question comes from the line of John Campbell, with Stephens. Your line is now open.

Good morning, everyone. I want to revisit Ryan's question regarding the channel commentary. It seems like the indications are favorable for recovery next year. However, regarding the VMM outlook, it might be helpful to consider it like a seesaw effect. Next year, we could see a revenue rebound with a corresponding improvement in VMM margin, or on the other hand, if revenue remains sluggish, the VMM may stay at current levels. Is that a reasonable way to think about it for next year?

I'm going to let these other guys comment too. But the way I like to think about it is, in VMD, not as support, not as much on the percentage. And as your demand kicks in, you're able to advertise, while your cost of acquisition might go up a tad as you know, let's just keep it simple bid higher on search terms. That obviously might crimp a percentage margin, but it would drive a lot more dollars. Trent? Scott?

Yes, I'll jump in quickly to echo what Doug says. We look at total VMD. So as your client budgets are significantly increasing, as you're spending into more traffic, your VMM margins will typically come down, but your overall VMD will go up pretty significantly. When we're in limited budget environments, it's easy to target the types of traffic that yield high-quality results with clients who want to maintain good margins. As the budgets move more towards what you would call an unlimited budget at like CPA targets for clients, that's where you're more aggressively spending to generate revenue and traffic, but oftentimes at lower VMM margins while achieving higher overall VMD.

Okay, that makes sense. I appreciate that. Can you walk us through the strategic shifts in credit cards and how you plan to partner? I'm interested in the partnership economics at a high level and what you believe a partnership could do for the business in the coming years.

Scott?

I'm really excited about our partnership with the third-party bureau because it enhances consumers' ability to obtain credit cards, especially for those in the subprime and near-prime categories. This partnership is likely to have a significant impact from a business standpoint, as many of our current credit card offerings are tailored to prime consumers, leaving out those who do not qualify for such cards. By collaborating with this bureau and providing more options, we are enabling onboarding for a greater number of issuers. This will create a smoother process for consumers to get pre-approved for cards they might not have considered before. Increasing consumer choice means that for every 100 visitors to our site, we will be able to offer solutions to more of them than we currently do. This should lead to a substantial increase in traffic.

Okay, make sense to me. Thanks, guys.

Thank you. One moment for our next question. Our next question comes from the line of Chris Kennedy, with William Blair. Your line is now open.

Good morning. Thanks for taking the questions. Doug, you've seen a lot of cycles in this business over time, can you just talk about your competitive position today relative to prior cycles, and as the markets improve, talk about the earnings power of the business?

I believe our position is better in this one. If it weren't for the debt refinancing that we're facing, I would say we're in a much stronger position. In the past several cycles that I've experienced where monetization went down, we did not have the balance sheet we have today. We were concentrated in nearly 95% mortgage. This business, with the diversification we’ve achieved, has enabled us to weather the mortgage downturn and now the personal loan downturn. This is the first time I've experienced where literally everything has pulled back all at once in every category, and we've still been able to make a good amount of money. That's what differentiates this situation from the previous ones. From a competitive standpoint, I would add that there are fewer competitors today, and the LendingTree brand name is obviously well-known. We need to improve our product offerings, but that effort is underway. I'm thrilled that TreeQual has finally made it out of the gates after discussing it with you all for the last couple of years. It's going to be a competitive battle with some other players, but we're ready for it.

Got it. Thank you. And then just can you talk about the margin profile? You've taken a lot of expenses out of the business, and as the macro improves, could you discuss the long-term margin profile?

Yes, Chris, this is Trent. I'll address that. Obviously, you've seen us take margins from mid to high teens EBITDA margin to mid-teens. Just over the course of the last year or so, I think as we've unpacked our cost structure and continue to chip away at it, we've made significant progress. As we sit here today, we feel that we are still well-resourced to continue running this business and making focused bets. We're not strapped for resources in a way that prevents us from innovating and improving product quality. We are adequately staffed for that. As the macro environment continues to improve, there's not much variable expense that we have to layer on top. We feel good about our ability to maintain and even enhance that mid-teens EBIT margin profile that you're seeing today.

Thanks for taking the questions.

Thank you. One moment for our next question. Our next question comes from the line of Youssef Squali, with Truist Securities. Your line is now open.

Awesome, thank you so much. So a question for Doug and for Trent. Doug, just as you look at the potential turnaround in 2024 across the businesses, maybe what early indicators are you tracking to identify the reversion in underwriting standards by lenders across both the consumer segment and home segment, not as much insurance, I'm sure you’ve discussed that? And then Trent, can you just help us think through the Q4 guide and what's implied across growth across the three segments, home, consumer, and insurance please?

In terms of metrics, from a client perspective, you need to look at their cost per funded loan. What's it costing them to get a new loan? We look at that across all of our clients. In mortgage, as in prior quarters, that's been too high, primarily because consumers don't get as much of a benefit from refinancing, given the higher rates. So you look at cost per funded loan or cost per policy in insurance. Then it’s really the CPA – what's it costing us to get someone interested in a transaction? Then your RPL – what is the revenue from that introduction on the other side? That times volume drives the whole business. That's the marketing flywheel that Scott talks about. Additionally, with the launch of Spring on the web and with the upcoming launch of the app in November, we think we can move those numbers up significantly. Scott, or Trent, feel free to add in.

Okay, yes. Just throw in another key metric, as I alluded earlier, we'll be examining the consumers that are falling out of the funnel. A simple example is that someone may be looking for a personal loan to go on a vacation, but today it's challenging to secure that personal loan. However, they may be a homeowner with great credit that qualifies for home equity. So essentially, we need to track how extensive that leak is and how effectively we're matching consumers to alternative products that address their financial needs.

Yes, and then on the Q4 guide, Youssef, just to frame it sequentially relative to Q3, we expect insurance should be pretty stable from Q3 into Q4. We do expect some softness in both home and consumer segments. In consumer, that’s where we've typically seen the most pronounced seasonality. Historically, volumes just tend to drop off in Q4 and ramp back up in Q1. At home, we've all seen what's going on in the rate environment; we've seen home equity slow down a bit due to this environment, which affects the conversion aspects of that product. So we anticipate some weakness in both the consumer segment, while insurance remains stable.

Moreover, over the last 25 to 27 years, I’ve often mentioned that in Q4, consumer behavior in lending tends to reflect a non-borrowing mindset, as many are more focused on holiday spending. Typically, they wake up in January and say, oh, what did I do? They then work to get their financial house in order, which coincides with a resumption of normalcy in our business.

Okay, good color. Thank you all.

Thank you. One moment for our next question, please. Our next question comes from the line of Robert Wildhack, with Autonomous Research. Your line is now open.

Good morning, guys. Wanted to go back to an earlier question. Can you speak to how the changes you're making to TreeQual will lead the position to or position relative to competing products out there?

I'll let Scott chime in on some of the details of it. And some of the information we’re hesitant to disclose for competitive reasons. However, we believe this will be as good and perhaps better than any competing products available. The situation in credit cards, as Scott referred to, has a hugely leaky bucket because credit card companies accepting subprime and near-prime candidates approve only about one in ten of the people we refer to them. By this enhancement, we can drive that number up in terms of approval rates while significantly improving the consumer experience. Scott, would you like to discuss our competitive advantages with TreeQual?

Yes, I would highlight two aspects of our product that I believe are advantageous. First, by collaborating with a third-party credit bureau, our clients consider it an independent entity in this transaction, facilitating easier integration for issuers who don't have to deal with a custom proprietary system. There is also a level of trust here since we're not using their specific underwriting information for our own purposes. Second, this product allows users to have a seamless experience without the need to log in, making it accessible for many more consumers.

That's great. Thanks. And then can you just give some more detail on the investment impairment in the quarter? What was that in relation to?

Yes, Rob, it's Trent. There were two impairments: one related to our investment in Stash due to an observable event that prompted us to reassess that valuation. This shouldn't come as a huge surprise if you've followed the consumer FinTech space; multiples have collapsed. The other write-down pertains to our goodwill carrying value. This is primarily a reflection of what we've observed in the market. It's not a reflection of our long-term outlook for any of our various businesses; it's based on whether our stock price supports the goodwill level we have on the books. Unfortunately, it doesn’t. We had a third party assess the different segments, and the impairment was attributed to the insurance business. This occurred because we accumulated goodwill through acquisitions from 2015 to 2019 during the transition from one reportable segment to three. Insurance bore the brunt of the carrying value and thus has a higher bar for justifying that value. We tested that goodwill annually through a third party and accounted for a modest write-down against the insurance segment.

Okay, thanks. Just on that last piece. Is it safe to assume that the majority of the goodwill impairment didn't come from your long-term outlook or projections for the business, but more from maybe comparables or discount rates, things like that?

That's right. There will be more details in the 10-Q when it comes out, but it's about 50% based on the long-term outlook and 30% based on observable market events. As you pointed out, both the discount rate and stock prices have decreased, along with multiples across the space. That's reflected in our impairment.

Got it. Thank you, guys.

Thank you. One moment, our final question will come from the line of Jamie Friedman with Susquehanna International Group. Your line is now open.

Hi. Good morning. It's helpful to have these early comments on 2024 in insurance. I'm reading through the letter, and it seems like you are optimistic about potential growth in that segment. I realize it's early, but do you have any high-level comments on the potential for the other segments as well?

I don't think we’re willing to reveal anything specific for 2024 yet. However, I do think cards will improve. Scott, feel free to add to that, and Trent, you can, too. Cards will perform better due to TreeQual. Personal loans and other products will also likely improve due to Scott's previous comments on cross-selling. This all depends on client demand, and you just heard the early insights regarding client demand. I wouldn't expect much growth in home until the logjam in the home market resolves. We have consumers who are reluctant to sell their homes and others who don't wish to buy, so while there is always a market, there are few benefits for consumers in home. Thus, we have a leaky bucket in that segment. However, we've planned out our product pipeline for Q4 and Q1, and we are making considerable improvements, conducting extensive testing to develop new consumer experiences, which is very beneficial.

Yes, I would highlight two very large categories: SMB and personal loans. Even with tightened credit criteria, there remains substantial consumer demand for these products and a high level of client interest in providing those loans. As we improve our ability to address the leaky bucket and enhance cross-selling, I believe we can achieve growth in these categories next year, driven by strong consumer demand.

Okay, thanks for that. And then Trent, I was interpreting some of your prior comments about margins. You've gone from low single digits to the teens in terms of adjusted EBITDA margin. Do you view that as structurally sustainable for the company, or asked another way: Is there any reason why your current margin would not be structurally sustainable?

We have no reason to believe that it's not sustainable. As I've stated, we've thoroughly evaluated our cost structure and believe it’s well-positioned. We think it is scalable as the top line evolves positively as we progress into the next year.

Got it. Okay. Thank you, all.

Thank you. I would now like to turn the conference back to Mr. Doug Lebda for closing remarks.

Thank you. I want to thank everybody on this call for your continued faith in our business. The outlook is beginning to turn positive, largely due to the operational improvements we've implemented, but also due to the inflection we expect in our insurance segment. Our team is focused on the core of our marketplace, working on numerous discrete initiatives to drive additional VMD from our existing base of customers who come to us every day looking for the financial product that is right for them. We are leaning into our entrepreneurial culture by testing ideas quickly and inexpensively, which helps optimize the business. Our team is leaner and better; we are operationally faster, our client relationships are strong, and we are very optimistic about the future. Thank you so much, and we look forward to talking to you in three months.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.