LendingTree, Inc. Q4 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the LendingTree, Inc. Fourth Quarter 2023 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 conference over to your speaker today, Andrew Wessel, VP of Investor Relations and Corporate Development. Please go ahead.

Thank you, Didi and good morning to everyone joining us on the call to discuss LendingTree's fourth quarter 2023 financial results. With us 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 today's call, we will assume that listeners have 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 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 for the comparable GAAP definitions and full reconciliations of non-GAAP measures to GAAP. And with that, Doug please go ahead.

Thank you, Andrew and thank you to all who are with us on the call today. In 2023, we strategically simplified our business, reduced our fixed expense base, and strengthened our margins. Despite the revenue challenges we continue to navigate, we remain solidly profitable and maintain the ability to strategically invest in the company. All three of our reportable segments have operated through a historic period of disruption, following a rapid move higher in interest rates and a period of elevated inflation. At the same time, our business model has again proven its durability, as we earned $78.5 million of adjusted EBITDA this year and generated $55 million of free cash flow. As our lender and insurance partners broadly pulled back from new customers due to these external factors last year, we chose to focus on efficiency, causing our operating margins to steadily increase throughout the year. In the fourth quarter, we earned $15.5 million, which is normally a seasonally softer quarter for us. Encouragingly, the much-anticipated upturn in our insurance segment began to take hold in December and has continued to strengthen into the first quarter. The consumer, auto, and home insurance markets have endured a prolonged hard market cycle over the last two years, that is in many ways unprecedented, driven by the inflationary impacts on loss costs following the COVID lockdowns. Now that insurers have effectively passed through numerous rounds of price increases, they have returned to a more robust pace of marketing spend. Fortunately, our customers continue to shop for new policies at record levels with volumes increasing 10% compared to a year ago. During the quarter, we also repurchased $100 million of our 2025 convertible notes at a discount to par value, similar to the transaction we completed earlier in the year. We have now opportunistically paid down half of the original $575 million amount of these notes at about a 20% discount, and we remain committed to retiring the remainder in the most efficient manner possible for our shareholders. Finally, the financial outlook we released this morning assumes continued improvement in the insurance segment compared to last year. We have taken what we believe to be a conservative view for our home and consumer businesses amid dislocations in the housing market and persistently tighter lending standards at many of our consumer partners. However, due to the extensive work we've done to right-size our expense base, we're now forecasting our adjusted EBITDA to grow at a healthy pace from last year as we hold fixed costs near current levels. As the revenue picture improves, we would expect this operating leverage to positively impact our bottom line. And now operator, please open the line for questions.

Thank you. Our first question comes from Jed Kelly of Oppenheimer and Company.

Hey great. Just two if I may. One in the consumer segment. Can you talk about just on the outlook how much of the growth is that you control sort of based on improving conversion sort of maybe clawing back some of the market share losses versus what's going on in the macro? And then it looks like the Fed is going to push out the interest rate cuts. Can you just talk about how that impacts your outlook and then how you think about potentially refinancing the convert? Thanks.

Sure. Let me take the second part of that regarding the home when we have the operational pieces on consumer. At a high level, Jed, our outlook in terms of controlling it and not controlling it is as follows: When you look at LendingTree as a balance of supply and demand and all of your advertisers, all your clients are pulling back. Obviously, we right-sized the marketing and adjusted the business to get that balance right. We believe that every one of those segments is now at its bottom. Now, all you're waiting for in consumer is better credit so that we can lean into marketing. Any improvements in conversion rates, anything from our initiatives, we have some baked into our outlook from our TreeQual initiative, for example, that's starting to bear some real fruit and our lenders are really liking it, which has generated a robust pipeline. We've factored in some of the things that we know are pretty certain to happen, and we still can invest in the business. I feel really comfortable about the guidance we're giving. I think it's also shown significant growth at this point. The thing that people miss about our business is that when rates start to fall even a little bit, our performance in home and refinance moves with the rate of change of interest rates. So, you don't need much of a tick down, say 0.25, 0.5 points in mortgage rates, and you will have a whole bunch of borrowers today who are coming through our funnel that currently do not see refinancing as a viable option, but that will change once conditions improve a little bit. Scott, do you want to add anything there and Trent can discuss the refinancing?

Thanks Doug, this is Scott Peyree. Hello, Jed, how are you this morning? Just to add on real quick to some of Doug's comments: On the consumer lending side of the businesses, many of those items from a consumer perspective, they're not quite as rate-sensitive. If you're looking at personal loans or small business loans or credit cards, these are more consumers that need money and are seeking out loans. We have had a lot of focus over the past year in optimizing the business, both from an operational perspective, but also from a media performance and marketing performance perspective. I'll be honest; I’d say we probably gave up a little bit of market share by optimally focusing too heavily. But that said, I think we're in a very, very good position right now where our business is very profitable on a unit economic basis. We are ready and are actively leaning into multiple areas of opportunity. We're already seeing strong sequential growth in our home equity business and also strong sequential growth in our small business area. We're seeing sequential growth in the purchase and refinance in auto loans, as well. Even though these segments are coming off of lows, we are now pivoting the business back into growth mode. Although interest rates remain elevated, it has changed consumer psychology, and there is a significant number of consumers coming through and searching for loans on a daily basis.

Trent, can you talk about the refinance?

Yes. Jed, could you repeat the question?

Yes, let me address this first. So, Jed, it was how the credit environment is evolving. From my perspective, the credit markets have definitely improved a little bit. We continue to have conversations. Trent can add more, but we're pretty confident that we'll be able to handle our refinancing needs. We wouldn't be taking on a debt load that we couldn't manage. We think the company is in a solid financial position.

Yes. As it relates to the balance sheet, Jed, obviously, we did a lot of work last year to make that a much more manageable number. We've continued to explore alternatives across the capital structure for the last three to four quarters. Those conversations are becoming increasingly constructive as the fundamentals are stabilizing and improving. We feel pretty good about our ability to address that maturity in the first half of this year.

Thank you.

Thank you. And our next question comes from Youssef Squali of Truist Securities.

Hi Youssef.

Good morning. So, maybe just stepping back a little bit at a high level kind of following up on the macro question. As you were formulating your 2024 outlook, can you just discuss what you are baking as a base case? What I'm really trying to get to is, could you hit your guidance of flat revenues across the entire business if rates stay high? And can you talk a bit about the competitive landscape across the three segments? You mentioned on the consumer side, how you guys went back a little bit, lost some market share. How are you doing across the other two segments, and how are you positioned as you enter 2024? Thank you.

Yes. So, if I understand your inquiry, you're asking about the base case for our guidance and how competition is evolving. Is that correct?

Yes.

Okay. Good. Our base case assumes higher interest rates for a prolonged period, and we're not incorporating any Fed rate cuts or an improvement in consumer credit conditions at personal loan lenders in our guidance. Everything we are doing is managing the business as it stands today, incorporating initiatives that we know are underway. The good news about this space now is we have a defined set of competitors in both insurance and lending in lead generation or comparison shopping, and you can compare results. We feel that we are gaining market share and performing very well in insurance. To the extent that we lost share to competitors, that arose simply from the previous marketing adjustments Scott mentioned earlier, where we reduced our bids and managed our Google advertising differently. Now we can lean back into that and regain some market share due to the improved unit economics Scott described. Scott, do you have anything to add regarding competition?

Yes, just high-level, Youssef, on the competitive landscape. I'll start with insurance. I think we are positioned extremely well in that space. Based on reports, we are the only company that is looking at growth year-over-year in Q1 in both revenue and VMD and growing on a double-digit percentage basis in both categories. Our health insurance business had an all-time high year last year in revenue and VMD, both in Q4 and throughout the year, which is a strong segment for us. Our local agent business is also thriving; January was our all-time high revenue for local agent revenue with the highest number of agents buying leads from us ever. Our paid search quote requests are nearly triple what they were from 2021 levels. We have control over a significant volume of high intent, high-quality consumers. I believe we've effectively increased our market share during the downturn and are positioned well to maintain that share as growth resumes. And I expect this to be a broad-based recovery; many strong companies in our industry have good client relationships, and all will benefit from the upcoming insurance recovery over the next 24 to 36 months, which is already occurring rapidly. I think we will be an outsized winner, but I believe everyone will benefit from that recovery. Regarding mortgages, although it is in a severe downturn right now, we have largely maintained a dominant position and have established close relationships with the major players in this space. We have a broad distribution network; we offer more clients and wider distribution in mortgage, purchase, refinance, and home equity than our competitors. On the consumer side, that is the one area where we've struggled a bit more than the other two categories, but I have significant optimism because consumer demand remains high.

That's helpful. Thank you, both.

Thank you. And our next question comes from Ryan Tomasello of KBW.

Hi everyone. Thanks for taking the questions. Just to put a finer point around the convert. How committed is the company to avoiding equity-linked dilution when addressing that maturity? And Trent just to clarify, in your earlier remarks, did you say you're optimistic you can address that in the first half of this year? Or did I hear that wrong?

Yes, that's right. Good question, Ryan. We obviously are sensitive to dilution as we've been exploring the various alternatives. Obviously, those alternatives were not great when our stock was at penny share; they're becoming more interesting at $35 a share. However, with the fundamentals improving and the cash flow and debt service we can support, we feel confident that we can avoid dilution when addressing the maturity. That's point one. It has always been our stated goal to address this before it becomes current in July of this year, and we will continue to seek the best path to doing so.

Okay.

The only thing I would add is that as we embarked on this process, I am personally and corporately focused on the implications of potential dilution as we address this. And as Trent said, we feel good about being able to do it without dilution.

Okay, great. And then, Scott, as a follow-up on the insurance business, I'm just trying to understand if there are any marketing channels in the space that you view as better positioned to capture more spend or to see that recovery sooner than other areas, among SEM, direct-to-click, direct carrier versus agents? Just trying to understand how LendingTree QuoteWizard is relatively positioned versus the competition. Thanks.

Yes, I believe when looking at the recovery within any industry, including insurance, clients will initially pursue the highest quality, highest intent, and most profitable consumers for them. We've effectively focused over the past two years on increasing our position in the various marketplaces where those highest quality consumers are found. Honestly, that's what has granted us some outsized budget in the early days of the recovery. As the recovery broadens over the year, carriers will likely open their budgets more broadly to the entire competitive landscape, which may require some margin management to maintain your positioning. However, we believe that maintaining positioning is considerably easier than attempting to grow that positioning. We've effectively increased our positioning over the past two years.

And I would like to add that what I appreciate about the insurance business is our acquisition strategy. As Scott mentioned, we've sharpened our marketing focus in preparation for the recovery while maintaining strong client relationships. This strategy positions us to capture more spending than competitors as they return to the market, and we need to deliver the impressive number of policies they expect. Differences in the carriers exist; some perform better with direct-to-agents, others are better with calls, clicks, or events, etc. The wonderful aspect of this is that we maintain a highly balanced portfolio of insurance channels to cater to our clients' needs efficiently. As for Scott's leadership on the lending side, I believe we have strong relationships in place, and as conditions become more profitable for our clients, they will likely reinvest into the market this year.

Great. Appreciate all the color.

Thank you. And our next question comes from John Campbell of Stephens.

Hey guys. Good morning.

Good morning.

Hey wanted to stay on the insurance segment and outlook. Obviously, it was encouraging to see you guys see the snapback in activity in December. It looks like your Q1 outlook seems like a continuation of strength and then share gains as well. But I'm curious about how you guys are thinking about the sequential lift coming out of Q1? And then maybe just more broadly, the shape of that curve? I understand the timing is challenging to pin down. Could you also discuss if you think the essential components are in place to reach new peaks at some point this year in the insurance business?

Trent, I'm going to let you take that as it relates to the curve. Are you referring to everything in insurance?

Just within insurance for now?

Okay.

Yes, John, just from our guidance perspective, we're obviously monitoring this in real-time. Q1 has shown strong signs of where things are heading. Much like Doug's comments regarding our outlook for home and consumer and what we factored in. We maintain a fairly conservative stance. As the year progresses, we are not baking in substantial upside. That said, we do feel like the recovery could broaden further. Scott can add some commentary to that.

Yes, I'll add there, John. As Trent mentioned, especially regarding the previous year's Q1 situation, from a forecasting perspective, we'd prefer to be conservative until our clients provide us with some guaranteed budget information. That said, with all our interactions with clients, they're highly satisfied, very profitable, and will continue expanding their geographic reach as the year progresses. Anecdotally, I would anticipate continued sequential growth as the year progresses unless some major macro event disrupts the current trajectory. It appears to be a broad recovery within the insurance space. There's a lot of profitability across various firms. We are already witnessing a few carriers opening new geographies in March when we previously anticipated that it would be much later in the year; so, there appears to be a snowball effect underway.

That's very helpful. For Doug, I have both a near-term and medium-term question, as well as a broader inquiry regarding brand spending. You finished the year at $8.9 million, whereas it was around $30 million for the last three years and possibly even higher in prior years. I'm interested in what is planned for this year. How much of that is fully committed? Looking at the bigger picture, do you expect to increase brand spending moving forward, or is this a new lower level?

That is an excellent question. LendingTree benefits from the fact that we started our TV spend in the year 2000 instead of our online efforts first. It proved that we could drive users profitably through TV. We got our online strategy in place, and brand has certainly aided our online growth. This year, we have zero allocation for brand spend. The nature of advertising is that we typically engage in TV spend once our unit economics and advertiser demand are high enough to justify it. If we ever utilize TV, it indicates that we are investing in the most expensive customer acquisition channel because our advertiser demands have risen to sustainable levels. I eagerly anticipate those opportunities because it signifies our success.

Okay. Thank you, Doug.

Thank you. Our next question comes from Melissa Wedel of JPMorgan.

Good morning. Thank you for taking my questions. First, I wanted to clarify something. Did I hear correctly that you're expecting double-digit year-over-year growth in the insurance segment in Q1?

Yes, in both revenue and VMD.

Okay. Got it. Thanks for clarifying that. Can you talk about the implications on margin, just kind of throughout the year and how you expect that to progress across the various segments? Thanks so much.

I will tackle this, and then Scott, you can provide further details. Regarding VMM margin, we now focus on VMM dollars, not percentages. As spending rises due to clients increasing their bids, we will increase our bids to acquire customers. You will see a slight decrease in margin. However, we can still drive volume in insurance, with margins remaining fairly stable, in line with last year's performance. Scott, do you want to elaborate on this?

Yes. Melissa, as you noted, especially within insurance during Q1, our margins remain robust compared to historical figures, slightly down from Q4, but still very high. However, as revenue growth recovers across all segments, media expenditures will expand, and margins may decrease a bit. That said, our focus is to increase total VMD dollars. We will lean into traffic and revenue that is profitable for our clients and therefore generate additional VMD dollars for us. Regarding mortgages, you're likely to see us maintain our margins until we observe a recovery. However, we will likely discover opportunities for growth in home equity in the near term. On the consumer side, I do think we are currently foregoing some VMD dollars by maintaining very strong margins, but we will explore possibilities there to see if we can invest in specific areas to gain market share and enhance our total VMD dollars by accepting slightly slimmer margins.

Thank you.

Thank you. Our next question comes from Jamie Friedman of Susquehanna International Group.

Hi. I wanted to ask about student loan repayments. I was just wondering how, if at all, the resumption of student loans around October affected the lending partner sentiment towards loan originations or consumer behavior? Any insights on student loans would be helpful.

Scott, do you want to elaborate?

Yes, hello Jamie. There was a lot of discussion about this about six months ago regarding what would transpire. The short answer is, not much at this point. Since the loan repayments began or somewhat began, we haven't observed a significant change in default or delinquency rates from our clients. It's more of a broad caution in many consumer lending businesses, as defaults began to creep back last year, and firms are wondering where these levels might stabilize. Most of these businesses, including small business and personal loans have kind of leveled off at pre-COVID levels; so, clients are cautious but remain optimistic about stabilization.

Okay. Thanks, Scott. And then for the follow-up, I was just wondering if you largely completed the restructuring now? And if so, or if not, how will those improvements flow through to potential operational efficiency in 2024?

Yes, we have completed restructuring, although we do have contingency plans in place in case of another economic catastrophe; however, we are largely finished. The positive outcome from cost evaluations is that we now understand the ROI on many areas, if not all of them. Therefore, we can strategically invest where we see fitting. If we bring on new staff, we can estimate potential client increase and demand resulting from that addition. The same applies to our AI investments.

Perfect. Thank you both.

Thank you. I'm not showing any further questions at this time. I would like to turn it back to Doug Lebda for closing remarks.

I would like to thank everyone on this call. We are passionate about continuing to improve our business. Our team is focused on driving better outcomes for both our partners and our customers through enhanced routing of inquiries and smarter matching of existing offers. We are encouraged by the growth we are experiencing in our insurance segment and look forward to eventually pairing that with an inflection in our home and consumer businesses to drive significantly improved financial performance. Thank you all for being here, and we look forward to talking to you in the next quarter.

This concludes today's conference call. Thank you for participating, and you may now disconnect.