LendingTree, Inc. (TREE) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Tree.com Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. With us on the call today are Alex Mandel, CFO; and Doug Lebda, Chairman and CEO. I'll now turn the conference over to Alex Mandel. Sir, please go ahead.

Thanks, operator, and thanks to everyone for joining us today for Tree.com's Q4 2012 Earnings Conference Call. First, a quick disclaimer. During this call, we may discuss the company's plans, expectations, outlook or forecasts for future performance. These forward-looking statements are typically preceded by words such as we expect, we believe, we anticipate, we are looking to or other similar statements. These forward-looking statements are subject to risks and uncertainties, and Tree.com's actual results could differ materially from the views expressed today. Many, but not all, of the risks we face are described in Tree.com's periodic reports filed with the SEC. On this call, we will discuss a number of non-GAAP measures, and I refer you today to the press release available on our website at investor-relations.tree.com for the comparable GAAP measures, definitions and full reconciliations of non-GAAP measures to GAAP. Thanks to all of you for joining us today as we review our fourth quarter results. We're excited to share with you the details of our continued progress. As many of you know, Q4 2012 was our second full quarter as a pure-play, asset-light performance marketing company, following the sale of our mortgage origination business back in June. We view our results this quarter as continued validation of the strategic course we have charted for the company. In both quarters following the sale of our mortgage origination business, we achieved top line growth in our mortgage Exchanges business, profitability in our continuing operations at all levels down to EPS and positive operating cash flow from our continuing operations. One note as to terminology, our results for the fourth quarter are actual figures as are those for the preceding third quarter. However, figures for the fourth quarter 2011, which we refer to in making year-over-year comparisons, may reflect what we…

Thanks, Alex, and thanks, to all of you for joining us on the call today. Since Alex already touched on many of the important financial measurements and you can all read the release, I'll be brief. Looking at Q4, I'm particularly pleased that we seem to, for almost the first time in our history, counter typically seasonal trends. We saw lender demand particularly strong throughout December and we were able to deliver the volume at great margins. Because of the strength we were seeing, we took it upon ourselves to loosen the reins a bit and let our GMs test some new things and accelerate projects. And we took a number of actions that hurt our financial results in the short-term, but set us up for success longer-term. For example, we moved our Education business to a new technology platform in one shot, and more quickly than we would have otherwise. While that hurt our Q4 by about $200,000, it's paying dividends now. As you know, we'll continue to follow that practice going forward so we don't substantially over deliver our results that set ourselves up for the future. Looking to the mortgage Exchange, revenue was up 10% over Q3 and 55% over Q4 of last year. The number of lenders participating on the mortgage Exchange increased over 15% since last quarter and over 30 lenders increased their marketing spend with us at least 20%. In an environment where there was, in fact, fewer consumers in the marketplace as there are in almost every fourth quarter, the quality of customers coming into our mortgage Exchange and the demand from our lenders for those consumers fueled a nearly 20% increase in the average revenue generated per lead. We think that bodes well for a rising interest rate environment. In our non-mortgage…

[Operator Instructions] Our first question comes from the line of Hamed Khorsand from BWS Financial.

Just want to touch on 2 things this morning. First off, on your loan exchange, what you just said -- the rate table, have you seen any incremental improvement as far as revenue goes in Q1? I mean, what kind of incremental benefit have you seen from that so far?

Sure. It's still early. We just launched it a couple of months ago, so it's definitely early in terms of revenue and we're not going to break that out separately. What I can say is, we've got over 20 lenders already on the platform, they're very pleased with the quality and we've begun to syndicate that out to partners. So our plan there is to syndicate that to other websites. It's a resident on LendingTree.com but clearly, a pay-per-click platform won't monetize like a pay-per-lead platform, so you see it in areas where the pay-per-lead model isn't going to monetize as well, but it's going to primarily be syndication. So we're rolling it out as we speak, lenders are happy, the syndication partners are happy. We think it will out-monetize our competitors, which means that we should be able to steal some nice share there.

Okay. And the second thing is, you touched on it a little bit towards the end of your comments, but just to get a little bit more granular on this. Your full year guidance for adjusted EBITDA is $15 million to $17 million, in Q1, you said $4 million to $4.5 million. So if I just looked at that from a run rate perspective, I'm at $16 million. And I understand in Q2, you're increasing expenses on the -- your marketing side, but Q2 is seasonally up anyways from activity in the mortgage business. So wouldn't there have to be, I mean, it just sounds like you guys are being a little bit conservative on the adjusted EBITDA right now.

Yes, I think -- I honestly, I think that's safe to say. I mean, I think we're generally conservative folks, I think the -- from my perspective, Q1 was very, very solid or is running very, very solid. Q4 was extremely solid; Q2, because of the ad spend, will be down on adjusted EBITDA basis. And the second half of the year right now the MBA is projecting extreme downfall in mortgage, in mortgage originations and I think we just want to be cautious. So I think I want to just -- before we adjust guidance upward, I want to see a couple of more months. And then, the other thing I'd say is, our practice here is very much, we want to deliver solid earnings, solid growth on the top line and the bottom line, but we can hit numbers within some range of specificity. We're never surprised by the results we post, given the way the business runs, and we reinvest back in either testing or product development, et cetera, if we're going to be substantially over. So I want to give ourselves room to pull the trigger on some things, if opportunities present themselves.

Okay. And is the non-mortgage business, are you expecting that to be EBITDA-accretive this year? Or is that going to be a drain for you guys?

The plan is that those businesses -- that each of those businesses make us money this year. That obviously, did not happen last year, but one of the 3 was solid and they're on the right trajectory, I just reviewed those yesterday in great depth and revenue end is moving up and to the right for both Home Services and EDU, they're both still losing money, but they're losing less money every month. And they're on -- they're doing well. So I'm cautiously optimistic and pleased with the direction that those are running in. I really want to give hats off to Tamara Kotronis who came in, in November and has got EDU on the right path very quickly and also, the team there. I'm hearing very good things about -- from our clients. I've dug in personally with that and I'm hearing very good things from them about lead quality improvements and pacing of leads improving and I'm really pleased with the new tech platform and think that's on the right track.

[Operator Instructions] And we also have a question from the line of Josh Goldberg from G2 Investment Partners.

This is Joe. Just a couple of questions. First is, in terms of your guidance for the Q1 period, how much growth is coming from, do you think, the mortgage versus the non-mortgage side?

I'm going to -- on the mortgage side, we're getting significant growth. Year-over-year, non-mortgage is probably -- I'm going to get a data point here, but I think it's flattish, I'll get a real -- it's actually down year-over-year. So it's all coming -- and that's -- we had some -- last year was lumpy and bumpy in the non-mortgage stuff, particularly. EDU really got us in the mid- to late part of the year. So EDU, at the first quarter was -- had a lot of revenue and not much earnings. So it's all coming from mortgage. And I'm particularly pleased with the fact that rates are actually up; and originations, I'm waiting on some final numbers, but the market is flat to down-ish in terms of total originations. And I'm hearing really good things from the lenders. We're hearing -- we're seeing people up their buys with us and I'm -- so I'm cautiously optimistic that we're seeing some of the effects of the way we always said the business model was going to operate, that as rates tick up and originations fall that lenders are going to come to us with increased orders. And I think we might be seeing that. I want to -- I'm still holding my breath and still want to prove that out a little bit, but I'm hearing really good things.

Okay. Great. And then, just in terms of that, the mortgage Exchange revenue being strong here in Q1. Is there any concern that as you go into June and September, as the purchase market ticks up, that your traffic will grow organically? Or are you nervous that you're going to have to acquire traffic during that peak selling season?

We're definitely seeing very solid organic growth. We've put a lot of focus on that last year and it's paying off. Over 20% of our traffic is actually organic and I'm pleased with that. That said, I don't mind paid advertising, I think a lot of sites talk about "organic" and really, what that means is they're good at getting SEO traffic and then, therefore, you're at the mercy of Google's algorithm. As we see revenue per lead increase as rates tighten up, and the market shrinks, we think we're going to be able to spend aggressively into that. And as I've said in my prepared remarks, I've been pleased week-by-week, day-by-day. You guys see something kind of smooth and steady but under the surface of the water, there's a lot of paddling going on and it's really neat to watch our marketing team and our sales team react to the daily ups and downs of supply and demand and adjust, and that VMM line is up into the right. But there's a lot of technology and a lot of effort and a lot of smarts that go to make that happen, and I'm confident that it's going to continue.

Okay, great. Last question for me is, your VMM for the first quarter, at $13 million to $14 million would be the highest you've ever had. However, your margin is going to be a little bit below the 50% level that you've been reaching in the last 2 quarters. Can you just touch upon a little bit what you're doing that's kind of lowering the margin but increasing the total dollars? And is there some upside to that, over time, back to the 50% level?

There potentially could be and I just want to give us a little bit of room, too. I wouldn't focus as much on margin percentage, we really think about dollar -- VMM dollars. And as we spend adds and spend into rising expected values, I think the percentage margin could go down. But I have our team fully geared to dollar -- dollar margin and so at any given time, we're doing things that are lower margin. Particularly, on the syndication and rev share side, so we see a great opportunity to go out and get share from our competitors and we'll do that at lower percentage margin, but at significantly less risk because it's a rev share and we think we can go, put a hurting on some of our competitors and go get some of those deals at lower margins than they would typically pay, but it'll still be very dollar-accretive and no risk to us.

Would you be able to give us a sense of how much revenue you think could just come strictly from the rate table over the next couple of quarters?

Not yet because it's competitive and quite frankly, as I look at the list of our call participants, I see lots of our competitors on the line and I'd rather keep that a little more close to the vest so we don't telegraph what we're doing. It's going to be small but material and growing very rapidly, but I'd rather keep that one inside right now.

Okay. Last one for me, Doug, is sitting on the cash, you have -- I know you use a working capital number but you talked a little bit of up to $10 million are coming due in June with the acquisition close subject to certain conditions. Just can you talk a little bit about what conditions that would cause you not to get that cash?

Yes, I think this is actually public information, I'm pretty sure we had to file all the reports with this. But essentially, it's -- they're covenants but they're essentially, that we: a, don't sell the business to a competitor of the mortgage company; and b, that we're still in business, there are things like minimum threshold of lenders and minimum thresholds of volume. But it's effectively, if we're still in the lead -- in the mortgage lead business and the things not owned by one of Discover's competitors we're fine. When we signed up for that, I was only willing to do it if we were, essentially, 100% confident that we could hit all the covenants and that they were fully in our control and they were easy hurdles and just the accounting of it is different.

[Operator Instructions]

With that, I think, operator, we can -- I'm happy to wrap it up.

Certainly. Ladies and gentlemen, thank you for your participation in today's conference.

Well, if I can give some closing comments?

Certainly.

I just want to thank you, all, for your attention. Thank you for your time. It's an exciting time for our company. I feel pleased with the people we're working with, very pleased with the performance we put on the board. I do apologize for the lateness of the call in the earnings season. We -- as you all know, we have a new audit firm and a new CFO and a new Chief Accounting Officer. We wanted to make sure that things were buttoned up and ready to go. We look forward to talking to you all in about another 6 weeks, about Q1. And we're off to the races this year. I'm thrilled with our progress, thrilled with everything that's happening, completely thrilled with our team and we're excited about, here -- about the future. So thank you, all, very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.