LendingTree, Inc. Q2 FY2024 Earnings Call

Good day everyone and thank you for standing by. Welcome to LendingTree, Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I will hand the call over to the Senior Vice President of Investor Relations and Corporate Development, Andrew Wessel.

Thank you, Carmen, and good afternoon to everyone joining us on the call to discuss LendingTree's second quarter 2024 financial results. With us today are Doug Lebda, LendingTree's Chairman and CEO; Scott Peyree, COO and President of Marketplace Businesses; Trent Ziegler, our CFO; and Jason Bengel, our incoming CFO. As a reminder to everyone, we posted a detailed letter to shareholders on our investor relations website earlier this afternoon, and for 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 view 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 the 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 everyone for joining us this evening. Our company generated exceptional revenue growth this quarter, led by the insurance business more than doubling from the second quarter last year. Our overall revenue outlook continues to improve into the third quarter. As you all know, we operate the business on a day-to-day basis with a laser focus on generating positive incremental variable margin dollars. We seek to attract as many high-intent consumers to our marketplace as we can at positive unit economics while at the same time driving wallet share gains with our insurance and lending clients to both deepen our relationships and expand demand on the network. During the past two years in insurance, we successfully executed our plan to drive high-intent traffic despite limited budgets to grow our share with carriers. Now is the time to execute the same strategy in lending. Ultimately, we expect this gain in share as at partners will be rewarded when interest rates decrease or lending conditions begin to loosen. We are also encouraged by the increased consensus forming that the Federal Reserve may be ready to lower its target rate at one of its next two meetings, although we do not assume any rate change in our financial outlook. Looking at segment performance, insurance grew revenue 109% and VMD grew 47% from the same time last year. Demand from carrier partners continued to build throughout the period. On one level, competition for market share has strengthened within the auto insurance category as very good underwriting results have allowed carriers to invest more into customer acquisition, and we expect that trend will continue throughout the rest of the year. But to put our insurance growth into context, two years ago, we were the third largest insurance aggregator in the US market. Today, based on comparable results, we are the second largest and believe our continued market share gains will propel us into first. Our partnerships with carriers are stronger than they have ever been; we could not be more excited for the future or more appreciative of those relationships. Our consumer segment grew revenue by 9% sequentially. We are still lapping a period of looser underwriting standards in the first half of last year, which resulted in a decline from a year ago. During the quarter, we leaned into stable lending demand at many of our partners with a particular focus on the personal loan business. Our strategy drove a 44% sequential increase in high intent consumer traffic, which helped to improve the number of loans we closed for our partners by 34%. The home segment performed as expected with higher mortgage rates and lower supply of homes for sale, limiting the number of consumers shopping for refi and purchase loans. Home equity continues to be the bright spot of the segment as revenue grew 6% sequentially. Finally, I'd like to extend my sincere gratitude to our CFO, Trent Ziegler. He started 12 years ago as an analyst in our finance department. In his time at the company, he's helped build our financial planning and analysis team, build an award-winning investor relations function by himself, and took on the role of treasurer as well. His work the last three years as our CFO helped us to improve our operating efficiency and recapitalize our balance sheet with a loan from Apollo we closed in March. Jason Bengel will be taking over the job from here. Jason is truly one of the most respected people at LendingTree, and last year he partnered with Trent to remove over $60 million of fixed costs from the business. Jason has built out and led a team of professionals tasked with driving ongoing improvements in operating efficiency. He also co-led our internal strategy process which has resulted in us becoming a much more responsive and agile company. I am excited and thrilled for him to take over this expanded role. And with that introduction, Jason would like to say a few words as well.

Thank you, Doug. Trent and I have worked very closely over the last six years, and we've made huge progress fixing our balance sheet and right-sizing our expense base. So we're very happy with where we are. We now have an expense base that's highly leverageable. And going forward, my priority is going to be continuing to make strides in focus and discipline. Focus, not trying to do everything at once, but placing thoughtful bets. And disciplined about resource allocation and measuring our progress with KPIs to ensure we pivot where it makes sense. So I'm very excited about the opportunity LendingTree has before it, and I'm also very excited about my new role in it. So, thank you Trent and thank you Doug. I really appreciate the opportunity here.

And with that, operator, we'll take questions.

Thank you so much. One moment for our first question. And it comes from Jed Kelly with Oppenheimer. Please proceed.

Hi. Thanks for taking our call. This is Josh on for Jed. Thanks for taking our questions. I just had two. How much of the insurance margin compression is due to the higher demand versus some of the competition from other operators? And then, do you get concerned with how long this period of earning can continue going forward?

This is Scott Peyree. Regarding the margin compression, I want to emphasize that overall VMD dollars continue to increase, which is our primary focus as we aim to provide the highest quality products to our clients while also maximizing VMD growth. The recent incremental revenue growth has been significant but has occurred at lower margins, albeit with positive VMD margins. Historically, in the insurance business, during periods of rapid growth, which we are currently experiencing, margins might drop to the high 20s. Conversely, during downturns, as we faced last year, margins tend to rise to the low to mid-40s. Although we haven't experienced long-term normality since before COVID, I anticipate that we will remain in a growth phase for some time. However, looking ahead to possibly a year from now when things may start to normalize, I would expect our margins to stabilize around the low to mid-30s, reflecting our historical averages in the insurance sector.

The only thing I would add is that as demand continues to increase in the marketplace, whether it's in terms of price, quantity, or volume and coverage, it's important to fulfill that demand. As you expand your market share and increase your revenue per lead, the share you capture from the market enhances your competitiveness in auction-based advertising markets, particularly in search. Our ability to deliver high-quality, high-converting, and high-intent volume to customers is where we truly stand out.

Great, and then the last one for the personal loans, there was some good improvement there. Just trying to get an idea of how much is from better conversion versus better macro background and if there's any color you can give us on the consumer segment's benefit if the Fed does lower rates?

Yeah, I'll say I'll start at a high level just on consumer lending in general, overall lending in general, I would say as Doug mentioned at the top of the call, we've reached a level of stability for a while that we saw in Q2. Like, I would say Q1 was probably the trough as far as the tightening of underwriting standards from clients. And then it's kind of been a level of stability, and we were able to grow through that level of stability mainly by focusing on gaining market share in the high intent marketplaces, which we've done a very successful job of doing. So that drove revenue growth in personal loans. Whereas VMD was relatively flat overall on consumer quarter-over-quarter. We were able to grow revenue with high quality, high intent traffic and having better positioning in those marketplaces sets us up extremely well for when rates start coming down and more importantly our clients start opening up their underwriting criteria again which will be the biggest domino to fall, honestly, in the consumer lending segment when rates start coming down. So, that's eminently in front of us at this point, more clearly in front of us than it's been in years. So, I'm really, really happy personally with our positioning right now. We put a lot of focus on personal loans in Q2, but honestly, we did a lot of similar work in the mortgage space, which you saw revenue grow there in high-intent consumers. Towards the end of the quarter, we started putting our efforts into small business, and our high-intent consumers are growing there. So I think we're showing lots of success across the board to drive more of those consumers in improving our mix, and that's going to set us up really well for when the lending market starts to turn in the near future.

Great. Thank you.

Thank you. One moment for our next question. And it's from Ryan Tomasello with KBW. Please proceed.

Hi, everyone. Thanks for taking the questions. I guess just taking a step back on the margin front, it looks like the revised guide for the year is calling for EBITDA margins of around 10%, the second half implied guide is, I think, high single-digit margins. How should we think about all the moving pieces here, insurance being the biggest one near term around how that impacts the timing and your ability to get back to structural EBITDA margins closer to the mid to high teens that you've previously shown an ability to get to? Is that going to take this massive insurance cycle maturing a bit, and also seeing consumer come back? Just trying to understand the moving pieces around what drives the margin expansion on a consolidated basis. Thanks.

This is Doug. I want to reiterate what Scott mentioned earlier, which is that our main focus has to be on maximizing variable margin dollars every day. If we can generate an additional $100 in margin and it costs us $97 to achieve it, we will pursue that, especially when our clients are asking for more customers than we currently have. This drives us to seek additional demand, which then allows us to invest more in marketing. For us, the percentage margin at the end of the day is more an outcome than a target, and we see marketing expenses as an investment rather than a cost. We're more concerned with revenue and variable margin dollars. With that, I'll pass it over to Jason or Scott to discuss the numbers.

Yeah, it's Jason. I can outline some of the assumptions in our guidance. A good way to think about it is in comparison to Q2. Starting with insurance, we anticipate continued strength for the rest of the year. This market has significant potential, so we expect growth in both revenue and VMD relative to Q2, though we anticipate some margin compression for the reasons we've discussed. Our focus remains on increasing VMD dollars. On the expense side for insurance, we are gradually adding some headcount to support VMD growth, leading to an increase in expenses for the rest of the year. Moving to home and consumer, our guidance assumes a generally stable situation with a typical seasonal decline in Q4. The main uncertainty is rates, which seem likely to change soon, and while we expect to benefit from that, we are not factoring any benefits into our current guidance for home and consumer. Those are the key assumptions to cover.

Great. That's really helpful. You already touched on what would be my second question, but could you help us understand the potential magnitude and timing of the uplift the business might experience from Fed rate cuts? Do you believe that the Fed starting a trend of cuts will elicit an emotional response from your network partners, or do you think it will take several rate cuts before we see benefits in terms of loosening credit boxes and driving more volume on the consumer side and in the mortgage market?

Yes, you are correct in identifying the term benefit. Currently, 70% of mortgage customers have rates at 5% or lower. Therefore, significant changes in consumer benefits may be a while away. However, we anticipate that shopping behavior will shift dramatically. Once that takes place, we expect to see a noticeable increase in inflows due to market changes. We will need to collaborate with our lenders to manage the increased demand or supply that will arise. Additionally, we are actively preparing for this shift because it will accompany a change in shopping behavior. I would characterize it more as a psychological change rather than a benefit change, but it will be prominent in the news when the Fed cuts rates.

Yeah, this is Scott. I'll add on a few things. I mean, as Doug said, the first domino to fall would be consumer shopping behavior. The next domino will be loosening up of underwriting requirements. In all, I'll be honest without getting into any specific client negotiations, we've had multiple clients we're working with right now, not just like one, multiple clients that are talking already about loosening underwriting requirements and accepting more consumers from us, a wider swath of consumers across multiple product lines. And it echoes very similar to Q3 last year when insurance was in its trough. It was around Q3 last year when we started having similar conversations with carriers about them loosening their underwriting requirements and opening up geographies. And then it started actually happening in Q4 and then it started snowballing in Q1. So I would say a combination of increased shopping and then even the bigger domino of loosening underwriting requirements, it could really snowball the lending side, getting into early ‘25. And then the final domino, as Doug said, is when that rate benefit, especially for refinance, when that reaches that tipping point, refinance will probably skyrocket. That's probably going to be the third domino.

Great. Thanks for all the color, guys.

Thank you. One moment for our next question, please. And it's from the line of John Campbell with Stephens. Please proceed.

Hey guys, it's Jonathan on for John. I was wondering if you could give some more color on the trajectory of insurance revenue throughout the quarter. Did it sort of ramp up as more and more carriers got off the bench and increased marketing dollars? What did that look like and what was the trajectory like exiting the quarter?

Yes, it continued to ramp up throughout the quarter, which is why our revenue beat was significant compared to our estimates going into the quarter. We had strong positioning entering the quarter, and there was a notable change at the beginning of June, largely due to my insurance team successfully negotiating substantial budget increases from our top clients. We made a significant improvement in June, and honestly, heading into July, we're seeing slightly better results than we did in June. I would say our current Q3 revenue forecasts for insurance may be quite conservative, given the current state of the insurance market. Of course, with such rapid growth, it's wise to be conservative, but carriers, particularly those that have achieved rate adequacy, are very eager to take on new consumers right now.

Okay. Thank you for that. And then as a follow-up, at this point, is it pretty broad-based, or is it still a couple players, are there still players on the bench? Any color you can provide there?

I would say yes to both of that. It is extremely broad-based. We're seeing very significant budgets from a number of carriers. Our revenue levels indicate that our long-term clients are spending significantly more with us than ever before. However, there are a few carriers that have historically spent much more who have not yet returned at any significant level. This presents an opportunity. Additionally, there are still certain regions with very limited coverage that will eventually open up. The home insurance industry has not yet reached rate adequacy, which means it is still quite suppressed, but that will change with increased demand. Logically, there is a lot of potential remaining in this growth phase of insurance.

That's great. Thank you for taking my questions.

Thank you. One moment for our next question. And it comes from the line of Youssef Squali with Truist Securities. Please proceed.

All right. Thank you. Trent, all the best for you in your new role. And Jason, congratulations. I'm looking forward to working with you. So maybe just…

Youssef, thank you.

A couple of follow-ups. I guess as you look at your prior guidance for the year relative to the new guidance, is it basically fair to assume that all of the revenue upside, and I think it was like $140 million of it at the main point, is from insurance? In other words, the other two segments, your expectations really have not changed. That's the first question.

Yeah, it's Jason, I'll take that. Yeah, that's basically right. It's primarily due to favorability in insurance just as Scott had outlined.

And then regarding the balance sheet, how much remains in the convertible note due in July 2025? What are the upcoming maturities after that?

So it's Jason, I'll take that one also. So the convert, we retired $161 million of the convert in Q2. So as of Q2, we have $123 million left. And then subsequent to that, we retired another $7 million. So we're down to $116 million. And so the strategy there is the same. We're going to buy those back at a price that's attractive to us. And then going forward, we'll use cash on hand, the $50 million delayed draw from the Apollo facility and future cash to address that maturity. The remaining maturities are several years out. So we're feeling pretty good about our capital structure.

Can you specify the $250 million that is due in 2028? Is there anything else we need to consider besides that?

So yeah, Apollo is 2031, so that's — that will be $175 million with a $50 million delayed draw. And then the original term loan is September 2028.

Yeah. Okay. And lastly, maybe Doug, there was a broad data breach out there that affected everybody including you guys. Can you just help us kind of, well, first provide any update to kind of what went on there and then how is this potentially impacting the business, if at all? Maybe it's not.

Scott, would you like to start with that? Do you have any comments on it? Then I can follow up afterward.

I'll be honest, I have to read the statement. We can confirm that we use Snowflake for our business operations and that we were notified by them that our subsidiary QuoteWizard was impacted by the Snowflake data incident. We immediately began an investigation upon hearing from Snowflake, we take these matters seriously and are currently working to conclude our investigation and address any related legal obligations. Based on our investigations, no consumer social security numbers or financial account information was affected and no LendingTree branded products or services were impacted.

Okay, so in other words, from a financial standpoint, you don't really see this as impacting the business, at least as of now, based on which.

No.

Yeah, we really can't comment on this. It's an ongoing investigation. What I can say is, we don't expect this. If it were material, we would have announced its materiality, and we don't believe it is.

Got it. Okay. That's helpful. Thank you, guys.

Thank you. One moment for our next question. And it comes from the line of Melissa Wedel with JPMorgan. Please proceed.

Good afternoon. Thank you for taking my questions. I also want to congratulate Trent on the new role and express my enthusiasm for collaborating with the team moving forward. Regarding the strategy of lowering margins to increase market share, it seems to be a successful approach at this moment, as you're experiencing growth in both revenue and margin. However, it's important to note that achieving this took about five to six quarters of committed margin reduction. It appears that in the consumer sector, you believe the timeframe for investment or margin compression may not be as lengthy as it was in insurance. Is that an accurate understanding of your perspective?

Jason? Scott?

I'll start, and again, I'll just repeat as I've repeated, like our goal is increasing total VMD dollars. So if I can do $3 billion of revenue at lower margins, but double my VMD, I'm happy with that. So I would say when you get into an extreme growth mode in lending, which we will be sooner rather than later, if our clients have high demand and want to be writing loans for 3x, 4x, 5x the amount of consumers than they do currently, we're going to do our best to service that because we want to walk in that budget, we want to show them that we can deliver on that budget, and if we need to do it at a slightly lower margin, as long as we're making more VMD at the end of the day, our clients are happy and we're happy.

Yeah, the way I like to think of it in a two-sided marketplace is if you've got demand for customers from our clients, you have to go fulfill that. And you go take that, as much of that demand as you can, and then you go try to compete to fulfill that because not only are you making money in the first transaction, we're also making money in cross-sell and other revenue streams afterwards and the added effect of that and the positive effect that you're having even if it's that theoretically 0% margin, that budget is coming from somebody else or it's coming from the market growing overall. And to the extent it's coming from somebody else, it's improving our revenue per liter, our RPL, our demand equation, and it's hurting somebody else's. And that's making us more positive in the auctions, and we've always prided ourselves on dominating among that high-intent traffic and working with our clients because they want more efficiency and higher conversions and don't want to buy the trash. And so we partner with them. And the only reason we can do that is because we have more demand than others. And when you're in a growth mode, you want to capture all of that that you get.

Yeah. Okay.

Hi, it’s Jason, I'll just…

Jason, go ahead.

I'll just add one more point to that. When we consider the return of home and consumer spending, it's important to note that we have been concentrating on ensuring our expense base has significant leverage. Thus, when home and consumer spending increases, it primarily comes from our existing partners increasing their spend with us. Our goal is to ensure that as much of that variable marketing contribution as possible contributes to EBITDA. The actions taken when our partners increase their spending with us won't require significant changes. We don't necessarily need to hire a large number of account managers to support that growth. Therefore, our focus remains on ensuring that this translates into a return in EBITDA.

Yeah, that's a great point. Like, you're basically hanging on during these markets, but trying to use it to gain share.

I wanted to follow up on what some of the partners in the consumer sector have mentioned about potentially loosening underwriting standards. I'm curious if this is happening across multiple partners and whether it's focused on a specific segment of the market, such as super prime customers, or aimed at a particular type of customer.

I can share that there have been discussions about loosening underwriting standards among some of our partners. While I can't mention specific clients, we’re seeing conversations around loan purposes for small business and personal loans. For instance, the reason for a loan, whether it's for inventory or a vacation, is something that has become more restrictive, but they're considering broadening the acceptable purposes. Additionally, there’s talk about credit scores; previously, we required scores above 720, and now we're looking at accepting scores of 680 and above. This is just the beginning of a shift. On the mortgage side, a few clients that were limited to certain products, like purchase mortgages, are now starting to open up. Overall, we’re observing a trend towards loosening in various lending categories.

Okay, okay. And so I was asking my last question too was around small business. It seems like that had been obviously the performance there is by procuring from personal loan a little bit, but you're saying you're hearing that from lending partners too, expanding that credit box a little bit into the small business area?

Yep, yep. And I'll caveat it all with everything that's happening it's small. It's nothing as significant. But what is significant is the first time the winds have changed from restrictive to opening. And it's just like it happened in a short period of time. It starts very small. But then once the dam starts to break open, it can be a flood pretty quick.

Okay. Thanks, everyone.

Thank you. One moment for our next question, please. And it's from the line of Madeleine Zhou with Susquehanna International. Please proceed.

Hi. It was actually Jamie. So is home and consumer contemplated to grow in the second half of ‘24?

It's Jason, I'll take that. So it's, again I think the easiest way to think about it is relative to where we are in Q2 and relative to that it's generally steady state, some drop seasonally in Q4. When you look at it versus prior year, that comp is just much easier in the second half of the year because that's when most of the tightening happened. So, when you look at growth rates from Q1 to Q2 to Q3 to Q4, they will improve, but mostly because the comp is that much easier.

Okay. Thanks for that, Scott. And then, or Jason, I'm sorry. And then, Scott, I'm surprised that you have these constructive comments about lending but it says in the shareholder letter there's ongoing weakness in the credit card vertical. So, could you help us, like, unpack when you say lending, is there a reason why, and I'm sure there is, I just don't understand it, separate behavior being exhibited between, say, personal lines, home equity and carded originations?

It's true that credit cards remain the most challenging segment, and that's the category I didn't mention earlier. We're not seeing much enthusiasm about entering this area. Generally, credit cards represent the riskiest unsecured debt in lending, and default rates have increased significantly, more so than in many other lending sectors. To put it simply, while other lending industries have experienced rising rates and delinquencies that have since stabilized, the current situation in credit cards is more alarming. They've reached concerning levels, prompting companies to focus on reducing credit card balances rather than increasing them. Does that clarify your question?

Yeah, and the only thing I'd add is we're definitely committed to the category and see that, and it is a big financial services category, and we can do better there, and we want to be a really valuable partner for the major issuers and the minor issuers. And we've got a lot of stuff in the works on the product and tech front to hopefully address that and make it a great business for our partners so we can actually invest in sometime in the future.

Got it, and lastly, let me just echo my congratulations to Trent. It's been a pleasure working with you over the years.

Thanks, Jamie.

Thank you, and our last question, one moment please. Comes from the line of Mike Grondahl with Northland Securities. Please proceed.

Thank you for taking my question. At a high level, how would you describe the forward visibility, perhaps in months or quarters, for insurance, personal loans, and mortgages in each of those areas?

Scott, you want to take that?

Forward visibility as far as just revenue growth demands. I would say, I'll start with insurance. The terminology I would use is relentless growth in insurance. It just seems to be building and building versus leveling off. And we sure aren't getting much, if any, indications from our clients about pulling back. The general attitude is how can we get more, what can we do to get more? The lending, as Jason kind of said before, I would say lending, it troughs out in Q1, it's been in a steady state. I think we've been growing top line revenues slightly in that steady state with B&D largely staying the same. I would say as I look out and forecast out, it will probably stay generally in that state until rates start to decline. And then once rates start to decline, I think you're immediately in growth mode there. And so, like, we all hope that that will start to happen in September, right? I mean, odds are very high that that's when it starts. We don't know that. I mean, it's up to the Fed to make that decision, but that's how I would answer the lending category in general is you're probably in a steady state until the rates start to come down.

Yeah, and I don't want to get too optimistic, but if you just look at the size of the industry among the public companies, the just direct TAM there is probably is three to four times bigger than we are. And then when you look at direct marketing as a percentage of the total ad spend of the GEICO's, the Progressives, the Allstates, I don't think we're even making a dent in their total marketing budget. And we can show ROI until the cows come home. And so increasingly, we've always believed that marketplaces are going to help these guys really expand their businesses and that's proven to be the case. Now if they've gotten the rates right, just like we don't stop until the last profitable dollar, they don't want to stop until the last profitable policy they're putting on.

Got it. Thanks guys.

Thank you. And as I see no further questions in the queue, I will pass it back to Doug Lebda for final comments.

Thank you so much, and thank you everybody for your questions. We are very excited about the opportunity ahead of us. Our outlook for continued year-over-year growth in revenue, VMD, and adjusted EBITDA is the end result of many strategic decisions we have made over the last two years. Growth in our market-leading insurance segment remains robust. Our targeted strategy to increase wallet share with our lending partners is performing well and should put us in a great competitive position to grow revenue in VMD as interest rates begin to decline or credit conditions begin to ease. Thank you so much for joining us on this call and we look forward to connecting again when we report third quarter results.

And thank you all for participating in today's conference. You may now disconnect.