LendingTree, Inc. Q1 FY2024 Earnings Call

Good day and thank you for standing by. And welcome to the LendingTree, Inc. First Quarter 2024 Earnings Conference Call. 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, the VP of Investor Relations and Corporate Development. Please go ahead.

Thank you, Justin, and good morning to everyone joining us on the call to discuss LendingTree's first quarter 2024 financial results. On the call today are Doug Lebda, LendingTree's Chairman and CEO; Scott Peyree, COO and President of Marketplace; 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 the 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. We are very excited to report first quarter adjusted EBITDA increased 48% from last year as our Insurance segment produced very strong results with both revenue and VMD, up double digits from a year ago. Many products in our Consumer business generated strong sequential growth, a trend we expect to continue into the second quarter. The revenue outlook continues to improve into the second quarter, providing us confidence that we are finally through the worst part of the cycle for our company. We forecast stable underwriting conditions at our lender partners, combined with sizable demand growth from our insurance partners, will return our business to revenue and adjusted EBITDA growth for the full year. Jumping into segment performance. Our Insurance business generated 11% growth in both revenue and VMD over a difficult comp from last year. Carrier partners steadily increased spending with us to acquire new customers, while a record volume of consumers came to us looking for auto insurance policies following significant premium increases over the past year. The momentum has continued in the second quarter, and we are now forecasting record revenue in this segment. Our Consumer segment performance was highlighted by 24% sequential growth in small business revenue. As we mentioned on last quarter's call, we made a strategic decision in 2023 to optimize operating margins given the uncertain demand trends at many of our lenders. We have been encouraged that underwriting conditions at most lender partners have remained stable for some time. And so we are leaning into this increased certainty with additional marketing investments aimed at driving higher revenue in VMD for the segment across multiple product categories. Our Home segment continues to perform at trough levels given the backdrop of higher mortgage rates and low supply of homes for sale. Our home equity offering continues to provide most of the opportunity for us, and we expect that the trend will continue for the remainder of the year. Last but certainly not least, at the end of the quarter, we secured a new $175 million loan commitment from Apollo funds. The proceeds from this financing, in combination with existing cash on our balance sheet and future free cash flow, provide us with ample liquidity to meet our remaining convertible note maturity next year. We would expect leverage of 4x or less once we've retired the 2025 convertible notes, and we look to continue optimizing our capital structure thereafter. We are happy to have addressed this financing, which enables us to focus solely on improving our business and our financial results going forward. And we could take any questions.

And our first question comes from Youssef Squali from Truist Securities.

I guess on the guide, I was just wondering if you can help us better understand your thinking in terms of the rate environment. So what kind of rate environment is baked into that mid-single-digit revenue growth for the year? I guess we went from expecting six cuts to maybe, maybe one or two, perhaps even a potential hike by year-end. Does that or how much risk does that pose to that guide? I guess what I'm trying to get to is how much of the guide is really within your control versus just macro. And then, in your efforts to lean into marketing again, for Insurance and Consumers, what gives you confidence that this is the right time? I guess for Insurance, I understand it. For Consumer, maybe you can help us better understand kind of the drivers there.

Yes, this is Doug. I'll start at a high level, and then Trent and Scott can add their thoughts. We don't have any plans in our guidance for macro rate cuts, and Trent can elaborate on that, but I hope this provides you with some assurance. Regarding our focus on certain Consumer categories, with the increasing demand we're observing, it makes sense for us to increase our spending and raise our bids across search, display, and other platforms, even if it means operating at a lower margin than before when we were prioritizing short-term volume. This approach is still a profitable expenditure, albeit with lower margins.

Yes. Just to add to that, Youssef, if you recall, when we introduced the full year guide last quarter, we were pretty clear about the fact that we weren't baking in any substantial macro improvement, rate cuts or otherwise. We expected mortgage to kind of stay where it is for the remainder of the year, similar macro backdrop for consumer, and we obviously did expect insurance to get better and it is, right? And so the increased revenue guide is largely a function of increasing confidence in the Insurance business, and we're seeing that play out four months into the year. And then to a lesser degree, kind of piggybacking on your second question, obviously, we are leaning in a bit more aggressively into the marketing side to drive top line and wallet share improvements, particularly in Consumer.

And one moment for our next question. And our next question comes from Jed Kelly from Oppenheimer & Company.

Just circling up, can you talk about your comments around the stable lending environment and what's giving you the confidence to lean back in? And then, in the Insurance segment, how should we view the outlook maybe over like the next 12 to 18 months? I know it's been really volatile. And can you talk about how we should think about periods where you're over-earning?

Scott, do you want to take that?

Yes, sure. I'll take that. To start on the Consumer and kind of to answer your question, Jed, and I'll follow-up a little bit on Youssef's question there, on just leaning into Consumer. The reality is the higher rate. A lot of consumers are just becoming more accepting of those rates. And you do still see from the Consumer segment has strong demand, and Home equity has been increasing in demand. Personal loans have strong demand from consumers, and small business loans have strong demand for consumers. So we see that a level of stability with our clients. Over the past 12 to 18 months, they kept tightening their underwriting standards constantly as rates were going up, there were concerns about delinquency. However, over the past 3 to 4 months, we've really seen a leveling off of that. Our client partners still have tight underwriting standards, but they're not tightening anymore. So that has given us a level of stability where we do see overall lower RPLs in general, but we still see high consumer demand, and we don't have the chaos of RPLs continuing to lower over time. So that lets us be more consistent with our marketing, be more consistent with our projected revenue models to make our media campaigns more efficient. And as I've talked about over the past few earnings calls, a real focus on operational efficiency, more effective cross-selling of products, matching alternative products when consumers can't get the primary product they're seeking, combined with better pricing with our clients to open up further budgets to ensure they're profitable with everything they're buying from us. And at the end of the day, better revenue attribution models that our machine learning media algorithms can use to more smartly buy media. All of those things have added up to our ability to profitably lean in and gain market share in the important media marketplaces where consumers are shopping for these products. To be bluntly honest, we're pretty excited with what's been happening in the past few months and what we expect to happen through the end of the year even in this down environment in LendingTree. And then to answer your big picture question on Insurance over the next 18 months, I would just say Insurance is back. I shouldn't say fully back because they're still opening up. We even have a number of our clients on new states. But we are seeing broad-based whether it's local agents, whether it's corporate direct buyers, whether it's writing policies through our agency; everyone is opening up products and geographies across the board. We believe that continues in the upcoming months. I believe that carriers are ending in a very profitable period of time. So I feel we're on the front end of what I call a super cycle in Insurance in the next couple of years, where carriers return to profitability. But due to the high rates of insurance policies right now, you have high consumer demand. Our consumer demand was up 19% year-over-year in Q1; they're just continuing to shop for insurance quotes, and that's going to continue for a while. So I think we're on a long runway in Insurance right now.

And I know Scott was a bit hard to hear there. Did you get any follow-ups on that?

No, it was clear.

Perfect.

And our next question comes from Ryan Tomasello from KBW.

I just wanted to start with trend just on unpacking some of the guideposts for the year for revenue growth and VMMs baked into the guide by segment, maybe for 2Q and the full year. Overall, how much of the revenue guide increase is being driven by Insurance versus Consumer, driven by the increased marketing efforts? It sounds like you're alluding to more of it being driven by Insurance. But just curious if you can give us some handholding for all the different moving pieces by segment here for the guide.

Yes, happy to. Yes. I mean, on the full year revenue guide, the vast majority of that is driven by Insurance, and it's based on what we're already seeing in the month and into the second quarter. As it relates to margin profile, we assume Home remains relatively stable compared to where it's been for the last couple of quarters. Insurance, as one would expect, right, as the revenue opportunity continues to unlock, as both the carriers and our competitors get more aggressive, we do expect margins to contract a little bit there. It's been running in the low 40s, high 30s in Q1, and we expect that to trend down a little bit. And then Consumer will continue to remain very high and healthy. But based on some of the dynamics we've been talking about, we would argue that in the back half of last year, they were sort of a naturally high margin profile in many of those businesses. And so we would expect those to tick back down closer to 50%.

And then any color on just top line revenue growth by segment, Trent, that you can give us?

Yes. I mean, stopping short of guiding by segment. The Insurance business, clearly, as we said, is driving most of that incremental increase. Double-digit growth in Q1, which is the toughest comp that we face relative to last year. So we'd expect that to accelerate pretty substantially as we continue throughout the year. The other businesses, I would say, are there's not a ton of incremental revenue upside; Consumer is a modest contributor to that incremental increase on a full year basis.

Yes, I would like to emphasize our core business flywheel. We attract demand from clients, lenders, and insurance companies, which we then fulfill as efficiently as possible. If demand outpaces our supply, we seek out additional customers. A key aspect of our business model is its flexibility to scale up. This additional spending might yield lower margins, but we aim to optimize it for profitability. A rise in total VMM alongside a decline in margin percentage typically indicates business health, as it reflects greater demand than supply. Every day, we focus on maximizing our VMD generation. Additionally, regarding Trent's comment about not providing guidance at the product level, our recent diversification allows us to navigate the varying dynamics of each marketplace effectively. Overall, as Scott mentioned, we are witnessing a net increase in demand from clients. Plus, I want to credit Scott and his team for improving our operational efficiencies and implementing short-term strategies, allowing us to maximize our efforts.

And just one last follow-up here to put a finer point on the reinvesting some of the margin back into marketing. Just trying to understand why we're not seeing VMD guide up here despite the significant revenue guide up. I mean, when should we expect these marketing efforts to start to translate into more of the VMM dollars? It sounds like you do expect the spend to be profitable. Just trying to understand the puts and takes there.

Yes. I mean, I would say there's some effect of it that is certainly conservatism and wanting to give us enough flexibility so that we can do the best we can, and we always try to do better. But we're just beginning this over the last couple of months, and we want to make sure that we have a margin of safety.

It's important also; we want to grow our revenue to have higher market share, have more significant relationships with our clients, and provide more options for our clients. This gives us more opportunities to optimize in the future. At some level, you could only optimize the margin percentage to a certain level. At the end of the day, you need to grow revenue, and that's the key to expanding your VMD over the long run. So even though margins might squeeze a little bit in the next few quarters, overall, we're expecting our overall VMD to continue to increase. The more revenue you generate over time, the easier it is to expand your overall VMD. And that's definitely the route we're taking.

And our next question comes from John Campbell from Stephens Inc.

So this is the first time in 10 quarters that we discussed revenue. It's also been a long time since you raised your revenue guidance, which is great. It seems like you are making some measured turnarounds. I wanted to focus on the Insurance business. It feels like we are in the early stages of a potential super cycle. This time, it seems a bit steadier than past cycles. Regarding the recovery, it appears to be largely broad-based and not primarily driven by one or two customers. Previously, we had relied on one large customer for growth. If you could elaborate on the results this quarter, particularly regarding clicks versus leads, and perhaps discuss the carrier versus agent channel as well?

I was just going to say real quickly, the one thing that we're very focused on in Insurance is, everywhere but definitely Insurance, because we believe we have a very leading position there is gaining share versus competition. And I think we've done a really good job of that. Take away, Scott.

Yes. Starting at the channel level, which I think is even better than clicks versus leads versus calls, just because different carriers buy different things. The corporate direct carrier buyers have had huge growth, and those are largely a lot of the click buyers, but to talk about being broad-based, our top seven corporate property and casualty buyers all grew over 100% year-over-year compared to Q1 last year. So to your point of last year maybe being one or two, not maybe, it was just a couple driving the growth. From the corporate carrier standpoint, it's broad-based across the board. They're all expanding. We're expecting significant expansion from all of them in Q2 sequentially compared to Q1. We're going to do an all-time revenue record. It will probably be the first time we ever do over $100 million in the Insurance division. On the local agent, that was an all-time record in Q1. It's more of a big shift, but it was up over in double-digit percentage wise. Our agency, where we write our business ourselves, has carriers opening up enough geographies and products that as we look at our KPI agency management models, it tells us our staff should be three times the size that it is today, and we're profitably running staff three times the size today. So we're diligently in the process of expanding our agencies. So the carriers, right through independent agencies, are also expanding dramatically. So it is really just completely across the board. And as I said, to answer an earlier question, the expansion continues. It's not like all of these carriers are fully open at this point. They're continuing to open up states each month.

Great to hear. I appreciate all that color. And then on the Home segment, that ended up being, I think, a key driver of the beat at least relative to our model. But if I unpack it, just relative to what we had, I mean I'm thinking mortgage was maybe down 80% or so year-over-year, just given the strength in HELOC. Is that right?

Yeah. Mortgage was down 80% no. But there, I mean, Home equity was more steady, and mortgage was down pretty significantly year-over-year. I think as Doug said at the top of the meeting, Home equity is probably going to be the big driver through the end of this year. But we have been pleasantly surprised to your point. Revenues did grow pretty decently sequentially from Q1, from Q4 overall in mortgage, and we are expecting it to grow decently from Q1 to Q2 as well. A lot of that's just been driven by consumers being a little more accepting of the high rates. So you're seeing increased shopping behavior for home equity products mainly. But honestly, we've seen a little bit, at a very low level, but an uptick in purchase and refinance as well. But it still is very local.

I want to emphasize that mortgage and home equity are essentially interchangeable. Viewing them separately may not provide the best perspective. Mortgage companies sell home loans tailored to the consumer's needs. If refinancing doesn't make sense and you're not buying a house, second mortgages can be beneficial, certainly more so than credit card debt. Given the rise in home prices and values, home equity is a sought-after product in this market, both by consumers and lenders. It's essentially a substitute that will become more prevalent as purchasing activity increases. We're beginning to notice this, and when interest rates drop even slightly, the lengthy period of high rates has created a significant pool of potential refinance customers in the mortgage segment.

And our next question comes from Melissa Wedel from JPMorgan.

I was hoping to follow-up on a couple of the comments from earlier about sequential strength into the second quarter, just based on piecing together comments across the different segments, certainly hearing the strength in Insurance coming through also it sounds like increased sequential revenue growth in Q2 for both Home and Consumer. Within Consumer, we should be thinking about that as being driven by small business and noticeably absent from your comments or any sort of current trends that we did note the reference to Bank of America onboarding to TreeQual in the shareholder letter. I was hoping you could just elaborate on that a little bit. And then maybe speak to any seasonality in sort of Home equity trends that you've seen historically?

And Trent, why don't you start that and then Scott add on.

Yes. Just as it relates to the sequential improvement, Melissa, obviously, a lot of that is driven by Insurance for the reasons Scott just detailed. We continue to see partners opening up budgets, opening up geographies, et cetera, which is encouraging. We do expect some sequential growth in Home, again, mostly driven by Home equity, which is where the opportunity is right now. And then in Consumer, I would probably point to mostly personal loans and small business. There's a seasonal component to those businesses, a seasonal trend where we tend to expect things to pick up from Q1 to Q2 and into Q3. The card business, while we're excited about some of the product work that's going on there, particularly around TreeQual, we're not expecting a ton of growth in that business or certainly not baking it into our guidance for the rest of the year. But we're going to continue to chip away at the blocking and tackling around TreeQual and onboarding new partners there, and we think that's ultimately the future of that business for us.

I believe we are going to see sequential revenue improvement in almost every major industry we operate in, with the exception of possibly credit cards. Small business lending is growing, personal loans are increasing, and we are seeing growth in deposits, borrow loans, mortgages, and home equity. It's a lot of hard work in the current lending environment, but we are confident that we have taken the right steps to gain market share in key media marketplaces and drive additional traffic, ensuring we have the distribution with our clients to deliver that traffic. Overall, I feel optimistic about the broad-based revenue growth from Q1 to Q2.

I just asked to, is there typically anything we should think about in terms of seasonality or consumer behavior around Home equity? Certainly, I understand there's a lot of HPA embedded in housing prices right now. But do you typically see an increase in demand for that type of product in the spring summer months?

We don't normally see a lot of seasonality in Home equity. I'd say that's more like one of our normal products that Q4 would be more seasonally light, and the rest of them would be seasonally normal. There's not a lot of seasonality in that product. It's really just based on consumer need.

If I see more seasonality in personal loans, you would see some in Home equity, but I think a lot more of the growth in home equity is just the fact that buying and purchasing homes has come to a crashing halt. A lot of consumers are turning more to home equity, remodeling or whatever versus selling so we're seeing growth there because of that.

And our next question comes from Michael Grondahl from Northland Securities.

Two questions. One, could you kind of talk about the significance of TreeQual getting into BofA on the credit card side? Kind of what's your goal for that? And then secondly, did you guys disclose home equity revenues or credit card revenues in the first quarter?

I'll take part of the first one and let Scott add in on that. Getting BofA on TreeQual is fantastic from the standpoint that we've landed a significant card issuer and gone through the integration, which will lead to a better consumer experience. From a financial standpoint, to get to the point where you can give multiple offers to all consumers, you probably need 20 of those types of issuers of different sizes. We've got a lot of interest. We've got a good pipeline. We have people live, the product works, consumers like it, clients like it, but it's got to get to enough scale that we would be able to supplement and/or replace the crazy click walls of the credit card business.

Yes. And then, Mike, on your second question, we did disclose revenue for home equity. It was in the press release, $20.8 million in the quarter. We did not disclose credit card revenue and our kind of guidepost is we disclose anything that is 10% or more of total revenue.

And our next question comes from International Group.

Can you just walk through the math for the 2025 convertible notes? Because it looks like there's still a significant gap between cash on the balance sheet once you take out about $50 million in cash as being necessary to keep on the balance sheet and the remaining balance of $284 million of the July 2025 convertible notes?

Yes. I mean, $175 million of new money. There's more like $60 million to $70 million of excess cash flow on the balance sheet that we feel like we could put to work. Yes, and then we think we can free cash flow the remaining balance over the course of the next 15 months.

And I am showing no further questions. I would now like to turn the call back over to Doug Lebda, CEO, for closing remarks.

Thank you, and thank you all for being here. Look, over the last several years, they have not been easy for us and certainly not easy for you as shareholders. The business faced RPLs and demand pulling back from clients, which forced us to have to rightsize the business, and we had a looming debt repayment. However, from that chaotic couple of years actually came some really good schemes and very, very good things. Today in our operations, operational improvement what Scott and his team are gripping and our operators are working much more closely with finance and other areas of the company and really approaching things together. On product and tech, we are now able to work on discrete key projects that we hope will have positive financial returns. We've got a new product process and a number of new people there, and I'm excited to show you some results from that in the future. I think that's shown with TreeQual. Our clients are optimistic and strong financially, and I think that bodes well for the future. Our company and all of our employees are fired up to be taking the hill to win. I want to thank you all for your stick-to-itiveness with LendingTree, and I look forward to showing you guys some continued growth and continued growth and profitability as this company plays to win in the future. Thank you.

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