Good day, ladies and gentlemen, and welcome to the Tree.com First Quarter 2013 Earnings Conference Call. [Operator Instructions] As reminded, today's conference call is being recorded. I would now like to turn the conference over to your host today, we have Alex Mandel, Chief Financial Officer; and Doug Lebda, Chairman and CEO. Alex, please proceed.

Thanks, operator, and thanks to everyone, for joining us today for Tree.com's first quarter 2013 earnings conference call. First, a quick disclaimer. During this call, we may discuss Tree.com'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'll discuss a number of non-GAAP measures, and I refer you to today's 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. One note at the terminology, our results for the quarter are actual figures, as are those for preceding fourth quarter. However, figures for the first quarter 2012, which we refer to in making year-over-year comparisons, may reflect what we have termed adjusted exchanges metrics, which are non-GAAP metrics we used in the prior quarters preceding the sale of our Mortgage business to demonstrate model results as if the company did not operate that business during those periods to facilitate comparability of our results. Thanks for joining us today as we review our first quarter results. We're excited to share with you details of our continued progress. The quarter's results reflect record revenue and variable marketing margin in our Mortgage business, a turnaround in our non-Mortgage businesses, and strategic positioning for future growth. Starting at the top, our Mortgage business grew revenue at 20% sequentially and 29% year-over-year to a record $25.7 million in the quarter. To put this in perspective, interest…

Thanks, Alex, and thanks to all of you for joining us on the call today. Since Alex touched on the financials and our results are also available in our press release, I'll give a few brief thoughts on Q1 and what to expect for the remainder of the year. As evidenced by the numbers, we're off to an excellent start in 2013. We generated revenue and variable marketing margin at record levels during the first quarter even as mortgage rates began to tick up. With adjusted EBITDA of $4.1 million in the quarter, we delivered on our previous guidance of $4 million to $4.5 million and would have been higher -- near the higher end of the guidance, except for the exclusion of the $300,000 that Alex mentioned. We expect to recognize that in Q2, but as Alex mentioned, we'll get all of it back next quarter. We showcased that we could efficiently scale our marketing efforts this quarter while retaining strong margins and that our lender network continues to be ready and willing to accept substantial increases in lead volume. In fact, revenue increased 17% from first quarter 2012 while our variable marketing margin grew 20% and our revenue per lead was up 17% year-over-year. Looking specifically at the mortgage Exchange, revenue was up 20% over Q4 and up 29% over Q1 of last year. The demand for our leads continues to expand. In fact, the number of lenders participating on the mortgage Exchange increased more than 27% since last quarter, and remarkably over 60 lenders increased their marketing spend with us by at least 20%. In addition to driving increased volume, we're increasingly focused on optimizing our mix as we prepare for increasing interest rates. That means greater sales and marketing focus, enhanced customer experience in our purchase…

[Operator Instructions] Our first question comes from Carter Malloy with Stephens.

So Doug, on the 2Q guide, which was great on the revenue side, help us understand your confidence there and what's behind it. Is that just great metrics you guys have seen already out of the first week of television advertising? Or what are the things that can change in the quarter to make us not hit that number? It seems much more optimistic than where our models were.

I get -- it really is a continuing of the trend in Q1 as we're a supply-and-demand business and let's just take demand of leads. Lenders are continuously not only joining the network, but also increasing their caps with us and as they increased their caps and they want more volume, they naturally bid up the price of each individual lead. And as they expand their filters to get more volume in areas that they might not normally take that monetizes leads that before were really under monetizing, that, plus the new products, so as we see revenue per -- in the unit economics go up and we see demand go up, then you turn over to the marketing side of the equation. And can they produce the volume at acceptable margins? And the answers are yes. And obviously, we're sitting here at the end of May, so we have a pretty good foresight into where that is.

Okay. And then a little more on that demand and pricing mechanics there. Is the demand you're seeing, is it still primarily around refi? Are you starting to begin to see a shift towards purchase? And is that -- is the pricing consistent in purchase or is that still lower as it historically was?

So there's multiple ways to look at it. The answer is lenders will always want as much refi as they can get, but that is generally limited. Now that said, we've got a small share, so we're continuing, we believe, to grow share. So they will bid up the price of a refi lead in certain segments. But they will also -- you also get revenue in for increases because you get -- in a certain segment, for example, you might have only had 2 lenders matching. Now, as more lenders come in, now you're matching it with 3 lenders. You might have some segments -- so you get both increases of price of the individual lead, you get increased coverage through the transmit rate, which is more lenders, more consumers get matched and then you also get revenue increases through the transmits per, which is the number of times that's matching. And then you go out in market and then you get it through adding new products like purchase, for example, as lenders do expand caps in Purchased. Essentially, what happens in the business, if you're a lender and just hypothetical example, you're getting 50% of your volume just flooding in through the refi market. As that volume abates, you have to keep your staff full, so you have to go get those customers from somewhere, so you'll increase your buy with us, you'll probably increase your buy with competitors. But if the LendingTree model works, you're going to buy more of it until it's not profitable for you and we know this is a very high-quality, profitable channel.

Okay. And as that -- but as the supply wanes on the refi side, I'm hopefully I'm getting to my next question more around next year, just trying to understand the pricing mechanics there. Is the demand and purchase currently strong enough? We're actually seeing pricing increase there. Is that pricing still in a pretty steep discount to refi?

Absolutely. Purchase pricing and we don't like to disclose specific per-lead pricing. And you also need to remember, pricing is highly variable based on state and loan-to-value and credit score. But yes, we're seeing substantial increases in demand and purchase and we're also hearing about more coming and then the key will be, in that pricing on a per-lead basis, if you took the same segment of consumer, state, loan-to-value, et cetera, purchase pricing is a deep discount to refi. The predominant reason for that is, from a lender's perspective, the conversion rate is a lot lower than refi, but that's because they don't focus on it yet. As they start to -- as the refi volume goes down and they put their better loan officers on the purchase product and as we improve our purchase product then they do as well, they will, as their economics work in purchase, which they already are, but as they work even better, they'll demand more of those leads and then we'll make sure they have them.

And ultimately, all of this is leading out to -- given your understanding of the business and how it works, it's very early to ask for this, but just in general for 2014, do you see the top line or the bottom line stating double-digit type of growth or is there any type of guidance or understanding you can give us just given the difficulty in waiting through all that mix shift from our end?

I think what we would need to do -- so first off, if we can't get double-digit growth on the top and bottom line in a company where we've got 0.7% market share, you all should kick me out of my job. So I would see no scenario that I can think of today where that could not happen or that won't happen. I don't have a plan that backs that up. But just understanding the business and doing this for 16 years or so, it feels like that should be eminently doable based on where we are. And it should be higher than that. In order to really do that and our normal plan, by the way, of kind of rolling this out is once we've got good industry projections and we've, later in the year, call -- normally, our process is we give the next year's guidance kind of late Q3, early Q4 of this year and we'd look to do that, but I think double-digit growth is certainly very achievable.

[Operator Instructions] Our next question comes from Hamed Khorsand with BWS Financial.

First off, I wanted to start off with the marketing program you're talking about, the offline marketing program. And has that -- the traffic flow that you've generated for your -- the website, has that transcended to revenue at all? Or are you just creating web traffic for you?

No. You absolutely generate revenue and we go through, while we won't give the secret sauce of what's offline and what's online in all the different channels, we have a very sophisticated attribution modeling program that we have. So we are tracking the impact of the offline marketing on our revenue and on our lead flow and we do -- and so you attribute some improvement from off -- for example, you attribute some improvement from offline to your online channels based on very elaborate statistical models, but yes, we absolutely are seeing that convert. It's important -- and it is important that it does help all of your channels. But it just launched last week and so it is early, but the -- we've got a pretty good gut for these things and even though it is early, we're getting a lot of buzz in the media, we're hearing a lot of things from consumers and we also are pushing in every ad the phone call, so we can see phone call volume, which we don't disclose publicly. We can see that tick up substantially as a result of this. So we think the ads are great. It took us a long time to get to this because we needed something to tell the LendingTree story, which is -- which used to just be fill out one form and get multiple offers, you got a lot more tools, a lot more content, more lenders, we don't have LendingTree Loans anymore. And so it was a more complicated story, but it still had to be as good as when banks compete you in, if not better and we believe we found that.

Okay. And I'm just trying to understand as much as you're trying to do brand investment, why invest so much in marketing that seems more costly than your previous marketing campaigns? Your VMM as a percentage is declining.

Yes, that's a timing issue. So first off, the notion of "brand investment" is one, we want to enhance the brand and the brand is important, but we are direct marketers at our core. And when we think about spending marketing dollars, we spend marketing to get a customer and it always has to be VMM positive. It may not be over the short run and when you think about an ad campaign, one of the very significant things that Alex touched on, but I'll go a little deeper here, is production cost. And so if you spend $1 million and we spent more than that on making ads and by the way, we got a great deal on producing them for a variety of reasons I could go into. You expense 100% of those costs of production, the minute you run the first ad. So we're -- we plan on running these ads for a long time, if not at least a couple of years, but all that production cost hits in Q2. So that has a sort of a one-quarter impact on a little bit of a hit in Q1. So you get a lot of -- so you have that kind of effect and then any offline spend takes a while to build. So you have some spend in one quarter outside of production, where you're running media, where you're going to see an effect of that in Q3 and Q4 and not so much in Q2. But the good news about offline media, just like our online media, it's highly variable, the vast, vast majority of its purchase in the spot, in the scattered markets, so it can be turned on and off and adjusted in realtime. So we're applying all the things we learned in online media, now to our offline media and it's one of the reasons we have a lot of different ads, we have a lot of different variability, we're testing them across a lot of different channels and networks, all with a lot of mathematical rigor behind them, so that we can adjust it like we do it online and we view it as testing and scaling, but we are a direct marketer and everything is VMM certainly for the year.

Okay. And then where do you think your lender customers are taking their marketing spend from? Is that online competitors? Or are they taking -- expanding their spending budget? Where are they coming to you with that increased spend?

Great question and it really is all of the above. So we are definitely hearing that as we have become much more effective at managing volume to the individual lender level, we're definitely getting more wallet share, absolutely. So if you take a LendingTree lead and a lead from a competitor at the same price, if a LendingTree lead converts higher, that's going to be more profitable for the lender both from conversion rate and also just because it's more efficient to run their whole shop. The knock on LendingTree in the past has always been, "Hey, your volume is variable." There are a number of reasons for that, which we'd go into, but we fix that problem and we're much better at forecasting and delivering managed volume to lenders. And so as you get -- as you do that and you prove that over time, they ask you for more and they turn down some of our competitors. And that is, we're seeing that everywhere and we're absolutely -- and that's happening. We have many lenders who -- we have 100% wallet share. They have built their entire business around LendingTree and we love that. I mean, if it's -- our ultimate aim is to be the Google of mortgage advertising, if you will, from the standpoint that we've got a very dominant share and we are the go-to place to get consumers that meet individual criteria at a business model and metrics that you can set. And that's what we're doing. So we're absolutely stealing share from competitors. We're also getting lenders to increase budget, and that goes to the notion of the free versus the spend. If you're a lender and you have a certain shop that needs 500 leads a day and you're getting 200 of…

Okay. And then last topic, on the product development increase this past quarter, was that mostly associated with the rate table on the credit card product that was launched? And will that decline going forward?

It's going to pump up and down. That is one of my 2-lever -- or one of my several levers I have, but it's a significant one for managing to our bottom line goals. And our strategy, once we got profitable, has always been to say, we're going to give our investors solid, predictable earnings growth on adjusted EBITDA, very solid revenue growth, to the extent that we could drop more to the bottom line, we're going to tell you we could, but then we're going to tell you what we're doing with it. The 2 biggest levers in that are marketing spend, which we already -- always -- which we already kind of hit, or marketing testing where I could give somebody a new channel. For example, the display channel started off unprofitable and as they tested, it's now very profitable and scaling, so I can give them more marketing dollars to test. I can give money to our verticals where I could, instead of squeezing them for shorter-term performance, I can let -- give them a little more rope [ph] and let them invest. And then you have product development. And it's safe to say, in product, I and everybody around here have about 1,000 ideas for how to make our customer experience and our lender experience better. And we can't do them all, you can't afford to do them all, or else -- I can't afford to do them all at once, I wish I could, and quite frankly, it's never fast enough. But our new product team under the leadership of Nikul Patel and a lot of people have been here and have built a very flexible model where I can -- where we can turn that on and off within reason. I can't -- I couldn't give them $10 million and tell them to spend it tomorrow, that wouldn't make sense, but he can staff up. We know what we want to build and we know what order we want to build it in and within reason, I can give him investment dollars and go faster or I can give him -- or I can say, "Hey, listen, I need you to go a little slower." The good news is, is we've told you, we've been accelerating that those cycles, and you've seen it in all the product launches. I mean, we have a credit card product on the site now, you got reverse mortgage, we launched Loan Explorer and we have a number of things in the hopper that I think are really, really exciting. The new -- the form testing, as we alluded to, paid off substantially and that will continue. And so within a realm, we can give investors the numbers that we commit to, but then still would give us the flexibility to invest for the longer term.

[Operator Instructions] I'm not showing any other questions in the queue at this time.

Seeing no more questions, I just want to thank you all for your attention, for your continued support of Tree.com and LendingTree. I want to thank our lenders for their continued confidence in us and I want to thank our consumers for all the -- for their business. And most importantly, our employee base has worked extremely hard, has been working extremely hard and I'm really happy it's beginning to pay off after now multiple success of quarters in a row of doing -- saying what we're going to do and going out there and delivering, and I still think it's still very early days. So thank you, all, very much.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.