LendingTree, Inc. (TREE) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the LendingTree Second Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Gabe Dalporto, Chief Financial Officer. Sir, you may begin.

Thanks, operator and thanks to everyone for joining us today for LendingTree's second quarter 2015 earnings conference call. First, a quick disclaimer. During this call, we may discuss LendingTree'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 LendingTree's actual results could differ materially from the views expressed today. Many but not all of the risks we face are described in LendingTree's periodic reports filed with the SEC. On this call, we will discuss a number of non-GAAP measures, and I refer you to today's press release available on our Web site at investors.lendingtree.com for the comparable GAAP measures, definitions and full reconciliations of non-GAAP measures to GAAP. To put my remarks from the earnings release in context, the second quarter marks our third consecutive quarter of record revenue and our fifth consecutive quarter of record variable marketing margins. A huge accomplishment for our team and a testament to our strategic growth initiative. Looking first at our mortgage products, we recorded revenue of $37.2 million, representing an increase of over 7% over second quarter 2014. Compared to the first quarter, our mortgage results were somewhat indicative of the broader market as revenue from our refinance products was essentially flat and our purchase revenue grew modestly as we entered the summer home buying season. Also, during the quarter and into July, we landed several key sales wins which have positioned us for continued growth in the second half. These impacts will be reflected in our forward looking guidance which Doug will discuss in a moment. Moving to our non-mortgage products. Our growth story continued in the second quarter with revenue climbing 139% year-over-year and 29% sequentially to a record $17.9 million. Non-mortgage revenue now comprises 32% of our total revenue. Inside of non-mortgage, we are especially pleased to see the ongoing success of our personal loans marketplace. At $11.5 million revenue from our personal loans marketplace was up 46% quarter-over-quarter and an impressive 393% over the second quarter of 2014. Additionally, we are seeing material growth in several other non-mortgage revenue streams, most notably our credit cards offering is starting to show significant signs of traction after more than two years of development and investment. More broadly, what we are seeing is continued growth across a more full-some suite of loan and credit based offerings as we saw year-over-year growth in each of our non-mortgage lending categories. All-in, our consolidated revenue of $55.1 million in Q2 was up $13 million or 31% over Q2 2014, exceeding our prior guidance and reaching a new record for the company. From a profitability standpoint, the company delivered a new record of $21.4 million in variable marketing margin, up 35% over second quarter 2014, which also exceeds our previous guidance. At 39% of revenue, this reflects a substantial portion of the expense associated with the production of several new TV spots in the quarter, which came in under budget. These new commercials began airing in late June and July and according to Ace Metrix, are among the highest scoring ads we have produced. Adjusted EBITDA of $8.9 million in the quarter exceeded the high end of our previous guidance and represents an increase of 62% year-over-year. Adjusted net income which includes certain amounts expensed under GAAP and is reconciled to our earnings release, registered $7.8 million or $0.63 per diluted share, an increase of $0.24 or 62% over second quarter 2014. And for the second consecutive quarter, we demonstrated significant GAAP earnings potential as we converted EBITDA into $6.4 million of net income from continuing operations or $0.52 per diluted share. From a balance sheet perspective, our working capital position increased to $88.7 million at June 30, 2015 compared to $86.4 million at March 31. Working capital is calculated as current assets including unrestricted and restricted cash minus current liabilities including loan loss reserves. In conclusion, we believe our second quarter demonstrated an incredibly strong performance as we exceeded prior guidance on revenue, BMM, adjusted EBITDA and continued to gain share and scale our business. Most importantly, we continue to make measurable progress both operationally and financially in growing the suite of loan-based comparison shopping offerings we provide, reflecting our strategic focus on diversifying the business into new sustainable and high growth revenue streams. Thank you for your time today and now I would like to turn it over to Doug for his comments.

Thanks, Gabe and thank to everyone for joining the call today. With Gabe having discussed our financial results for the quarter, I would like to share some perspective on the business and provide an update on our outlook for the remainder of the year. First, I would like to welcome Gabe for his first earnings call as CFO. Internally, the transition at CFO has been seamless and the other executive appointments announced a couple of months ago are all going absolutely terrifically. The business is humming across the board and this team is successfully scaling our business. In our mortgage business I am very pleased with our results. We are now serving 11 of the top mortgage originators in the country and we continue to make inroads with large national and regional banks with other new lenders signing up literally every week. We are rapidly scaling our call center capabilities, enabling us to better serve large banks and transfer very high quality, high intent consumers to their loan officers. We think this offering provides a key point of differentiation for many of our competitors and as many of these institutions move into their annual planning seasons, we continue to see a great deal of interest from them as they look to increase their online presence. We are all seeing increased -- we are also seeing increased demand from existing lenders and the fact to discover home loans exited the mortgage business and there is no hiccup in our results is a testament to the value that we provide. In short, we are definitely seeing lenders increasing use us to access customers and we are feeling the effects of both a growing market transition to online and deeper penetration into our lenders marketing budgets. Going forward, we expect the growth rate of our mortgage business to accelerate in the third quarter, even as the industry volumes are projected to soften. Moving into our non-mortgage products. I am even more thrilled with our progress there. In personal loans, we continue to grow volume month over month with substantial increases from page search, SEO, offline and CRM. We have been investing heavily in growing revenue for this product and cross-selling personal loans to our existing customer base through email and My LendingTree. We remain acutely focused on improving conversion rates from leads to closed loans. In the second quarter we facilitated an estimated $375 million in personal loan originations. And our network of personal loan lenders, now at 22 lenders, continues to grow, providing expanded coverage for consumers across the credit spectrum. In our other non-mortgage businesses, we continue to be particularly encouraged by our prospects in the credit card and small business loan arenas. Our credit card revenue grew 75% quarter-over-quarter, mainly driven by our ability to secure, improved modernization. Certain issuers have provided us with higher payouts which enabled us to ramp up our marketing efforts. And in small business loans, we continue to focus on improving our matching algorithm. Matching small business owners with the proper array of lenders to suit their specific needs. Switching gears to My LendingTree. We have now grown the user base to more than 1.4 million consumers. We have recently rolled out the release of the new alert functionality within My LendingTree as well. This new logic creates a much improved user experience, providing precise calculations of savings opportunities that consumers can realize, and follow a recommended course of action. To date, we have identified nearly $500 million in potential savings opportunities for consumers and we will be continuing to rollout new features and alert functionality in the coming months. Now on to marketing. As Gabe mentioned, we expensed much of the production of our new round of TV commercials in Q2. We have got four new spots in market already and the early results have been encouraging. The new round of creative aims to continue to establish LendingTree as the brand that consumers see as the place to shop for money across all lending categories. Also worth noting is the fact that for the first time, all of our new spots were entirely written and produced by our team internally. We have actually done for the first time in 20 years, not had an agency help us with our marketing. By decreasing our reliance on outside agencies, we drastically improved our speed to market while reducing online or offline production expenses and I think you will find the quality of this new creative, it's as good if not better than anything we have done to date. We continue to believe that the LendingTree brand is one of our key competitive advantages and we are maintaining a strong offline presence that reinforces our names with consumers and provides tremendous efficiency in our digital marketing efforts. With that context in hand, I would like to provide our expectations for Q3 and the rest of the year. For Q3, we anticipate top line revenue to come in between $60 million and $62 million, representing year-over-year growth of 45% to 50%. As previously noted, the strong sequential growth is attributable to progress in both mortgage and non-mortgage. With the cost of new TV spots behind us and those new spots now in market, we anticipate variable marketing margin to be in the range of $22.5 million to $23.5 million, an increase from $1 million to $2 million over the first quarter of this year. And adjusted EBITDA is anticipated to be in the range of $9.2 million to $9.7 million, representing year-over-year growth of 59% to 67%. For the full year guidance, we are increasing our expectation substantially from our previous guidance. Revenue is now anticipated to be $225 million to $230 million, up from prior guidance of $202 million to $208 million and now representing annual growth of 34% to 37%. Variable marketing margin is now expected to be in the range of $86 million to $89 million. And we are taking adjusted EBITDA to $35 million to $36 million, up from prior guidance of $30 million to $31 million. The midpoint of our revised guidance represents growth of 63% over 2014. Clearly, our outlook for the year continues to improve. With our reorganized executive team in place, our business is firing on all cylinders across all functional areas and across all lines of business. I am thrilled with our results and even more so with how we are positioned in a rapidly growing market for both consumers and lenders. With that, let's open it to Q&A.

[Operator Instructions] Our first question comes from Kerry Rice of Needham & Company. Your line is open.

Maybe touch on mortgage and this kind of all relates to the strong guidance, but is there any particular thing that you caught? Is it the call center product that's really helping drive the mortgage business kind of above expectations? And then on the non-mortgage business, you highlighted in the press release the better matching of customers. And I don't know if you can talk about just, maybe levels of conversion and how you are driving that improved matching and then, I guess, as that relates to guidance as well. If you think about the upside in guidance, maybe if you can spit out the growth our expectations in mortgages and non-mortgage business. Thanks.

Thanks, Kerry. On the first one on mortgage, it really is, quite frankly, sales wins. Neil Salvage has taken over as our Chief Revenue Officer. Our sales team continues to execute, lender guidelines continue to expand and we are very very focused on product from a conversion perspective. So just like Google or any search engine, we are just very focused on helping our lenders continue to convert as they can convert customers into close loans, it all helps. So definitely the call center product helps but I can't attribute anything specifically just to that. We are really also seeing great strides in purchase and lenders increasingly being able to handle purchase. In the non-mortgage category, obviously personal loans are doing great. We do not give out total conversion rate data just from a competitive standpoint, but what I can tell you the recent data I've seen literally is, as late as this morning, is that we are hitting all of our lenders across the funded loan goals, which means they want to increase, when we scale up, with us. And so as we continue to do that and as they get better at serving customers needs, we expect that to continue and more and more lenders are coming into that market every single day. So it's, honestly, it's really just across the board. We are just executing on sales. We are executing on product. We are executing on marketing. And that's the whole business and then leveraging the brand on top of that and we couldn't be happier.

Thank you. Our next question comes from John Campbell of Stephens. Your line is open.

Gabe, congrats on the new role in your first quarter at the helm and then, Doug, congrats to you guys and the rest of the team on just another really, really strong quarter. It's great that you guys have been posting these really strong results without having to lean on the My LendingTree kind of driven [around] [ph]. So just curious, related to that, in the past you guys talked about the long-term adjusted EBITDA margin of about 25% or so. But it seems to us, if My LendingTree helps just really drive down that media margin like we think you can, it seems like that could be a good bit higher. So, Gabe, I don't know if you had much time to dig on that -- dig in on that long-term goal, but just any thoughts around that long-term margin profile.

Yes, on long-term margins, and I will let Gabe respond as well, my perspective is we are always focused on the dollars. So if we can, we absolutely will see margin improvement over time. When I am seeing, and I'm not going to give out real numbers on this, is that our My LendingTree product is able to attract consumers at customer acquisition cost that are unprecedented compared to mortgage and other credit types. And then as our alerts get smarter and smarter, we expect to leverage that over time. So I would fully expect increase in margin. At the same time, I would expect us to be able to use those dollars to spend much more aggressively in marketing. As I saw some numbers, again, as late as this morning, we are now looking at inside of My LendingTree less than 1% of all the debt in the United States. Quite frankly, we should be able to give a product to a consumer to save everybody money. We can give you recommendations on improving your credit and we should be able to give you recommendations on saving your money across all your debts. So we want to have a bigger and bigger market share of the total debt addressable by consumers in My LendingTree and then that positions us perfectly with consumers to be able to make improvements to save the money. Gabe, do you have any additional thoughts on that?

Yes, I think that's exactly right. And to reinforce Doug's point, we focus on variable marketing dollars on an absolute basis and to the extent we can drive people to our site directly to my My LendingTree or even through the mortgage and personal loans and credit cards product, and things like that. If we can get them signed up into My LendingTree, that creates an annuity stream for us, ongoing revenue. Which means the net present value of those customers are higher, which means we can actually go out and afford to bid higher in paid media, capture a bigger share of voice in paid media and make more money than people who don't have that annuity stream.

Got it. That's all very helpful. And then, Doug, just touching back on the mortgage business for a second. I mean you guys have obviously done a good job in the correspondent channel that seems to be where you are growing share, that's obviously your well house. But how do you get better penetration in the more traditional, just retail channels. And maybe more specifically, how do you grow share with the larger lenders?

Absolutely. A very, very great question. With bigger lenders in the non-correspondent channel, we quite frankly have been -- we need to continue to make steps to make our product better for them. So somebody earlier alluded to the call channel and we have had very very good success with that with certain national banks. So the lender uses their own proprietary decisioning algorithm to actually give the consumer an offer. And then in some instances, LendingTree or an outsourced call partner actually uses our technology to get that person on the line so they can increase conversion. Everything that we do is about conversions. So we need to make our product work for big national lenders. What we are seeing not only in mortgage but also in credit card very, very importantly, is that national lenders want to do business with us if we can do it in a way that helps make it easy for them. That typically means they do not have high volume, [indiscernible] technology-based call centers. It means they are either working with either inbound call centers or local loan officers. And we are tweaking our product to make it work for them. So all of the advances in technology with all the startups are great but we are seeing bigger and bigger budgets from more traditional lenders. And basically the way I see it, if it works they will keep doing it. If we there cost per funded loan goals, if we can help them get new customers -- and one thing I will highlight, with one national bank we recently launched something that we call internally portfolio retention. So some banks don't want to necessarily go get new customers but they would like to have a look forward to make an offer to every customer who banks with that company. We added one question to the form. It was very easy to do and this bank is thrilled with the results. So basically, we just want to make it easier and easier for banks to do business with us. And just like Google, just like Expedia, just like every other vertical search engine we expect to continue to get more business as long as it works.

Thank you. Our next question comes from Hamed Khorsand of BWS Financial. Your line is open.

First off, on the personal loan side. Can you talk about how much excess flow you have and what incremental add is from bringing on new lenders. I know you guys had one during the quarter.

By flow what do you mean?

Excess amount of how many people that you have that are looking for personal loans. You have talked about before where you have had excess amount of people looking for but not enough for the credit quality [still around] [ph].

Yes. So two ways to think about this. One, is that in the more desirable credit segment, it's really kind of a dogfight for leads. There is a lot of demand and there is really nobody falling to the floor at that point. In the subprime space, there is good but less coverage and I think there is good opportunity for us to improve coverage there and improve revenue per lead and improve conversion rate. So that's a big focus for us. So there will always be some consumer that, you know is very difficult to underwrite. But our goal is to, across the entire credit spectrum, service as many as those is humanly possible. Prime is highly covered. Kind of that midprime, subprime is fairly well covered but there are still gaps and that's a sales focus for us.

And, Hamed, the only thing I would add, it's Doug, would be that as credit standards expand, as lenders are more and more comfortable, we expect that they will take more and more volume and as conversion rates get better. So as they get better with email campaigns, as they get better with reach out, as we get better with updating pricing, we get better with matching algorithms, I mean this for a lot of things is really a matching algorithm problem. And just continuing to build out the marketplace. I said to somebody recently that the percentage of people that is not matched at LendingTree is very similar to in the early days of Google and Yahoo when you got no paid ads when you did a search query, and you only got organic results. In our instance, we don't have organic results. We only have paid results and we need to continue to fill that out. And because every lender sees the market very very, in a very detailed way, we just continue to build that out. But lenders will expand not only because of credit but also because they are better at converting in those outlying areas. And as you know and you have been through in your model, that has significant returns for us because we have actually paid to get those customers in the front door.

Okay. Two more questions. On the non-mortgage side, can you breakdown what's the [indiscernible] change in the order of revenue? Which one is the most for you? I know you guys grew out credit card this quarter? So just wanted to see if there is a change in the, which segment is doing best for you as far as revenue?

Yes. I don’t -- we are not going to give out details on everything. I am thrilled with that across the board. On absolute dollars, obviously personal loans is the biggest. On a percentage basis, absolutely credit cars has really been in upside surprise for us.

Okay. And my last question is on the mortgage side. Given the growth that you saw this quarter, was this primarily driven by your advertising garnering more consumer attention and you already have the demand on the banking side, or was it a mixture of both? What made up the growth for you this quarter?

It's really the continued flywheel. As we have better conversions on the lender side and we have better coverage on the lender side, that enables us to go spend more money in marketing. As we spend more money in marketing, it drives in more customers. And increasingly, and I think you are seeing this with some of our early reads on our competitors or maybe former competitors, we are just quite frankly taking share. So there is no reason just like there is no point for most advertisers to advertise on a search engine other than Google, for many of our lenders there is no point in working with a partner other than LendingTree. And we are just going to continue to chip away and get more and more of their marketing spend because it works. Because it's better and more efficient for their shop. And not only can we garner the very small percentage of people that are actually shopping today, but then we can spend more money in advertising to perpetually at the shift to online just as has happened with travel and other categories.

Thank you. [Operator Instructions] Our next question comes from Josh Goldberg of G2 Investment Partners. Your line is open.

Just quickly, two questions. I guess, first, obviously the guidance for September, it shows an acceleration in your growth and you talked about flywheel effect. Just wanted if you can just comment a little bit about how the, either the advertising, the brand recognition in the personal loan business, is just causing kind of the growth across the board. Whether its credit cards, auto, loan mortgage in terms of really getting this business to come alive. And then I have a follow up.

So, this is Gabe. What I can tell you is that there are significant advantages to being a monoline company. And when we spend advertising dollars on refinance mortgage, we actually get a lot of purchase volume as well. And we spend advertising generally on mortgage, we tend to get a lot of personal loan volume as well that we can monetize that perhaps other people can't. We get a lot of auto crossover, a lot of card crossover. And so to the extent that we are spending on each of these verticals individually, there is a lot of bleed over in terms of the traffic to our site looking for other products as well and we get to monetize those better and more deeply. And My LendingTree will just help accelerate that. So really the way I look at it is there is significant benefits to being a multi-product lending platform and people begin to know you as a place to shop for money as opposed to a place to shop for a credit card, or a place to shop for a refinance. So we can continue to push that in our brand messaging and our communications with our existing customers, I think that really positions us more broadly for repeat business.

Great. And just on the personal loan side. I mean obviously the growth has continued to be extremely strong and it's really hard to argue that you clearly are taking share in the market that the originations are just continuing to grow. Can you comment at all about why you think that is? Is it just having more lenders on your network? Is it the overall industry growing at this pace? I mean it just seems like -- I know there is a certain amount of time it will slow at a certain point, but obviously now it's sort of hitting a key inflection point in terms of your business.

It really comes back to the unit economics. And you have probably heard me say this far too often, but if we can make -- I am making up numbers, but $30 from a customer coming to our site, we can invest marketing dollars that are probably 10 to 15 times what we could have invested to drive those customers before. Being in a considered purchase category where people actually don’t yet know that they can comparison shop, that they can actually save money on these products, we have to let them know. So, obviously, the market is growing, but the market growth in terms of overall personal loan volumes is kind of single digits, double digits, but nothing crazy. But really the revenue per customer continues to grow as conversion rates go. And, quite frankly, it sounds boring, but this feels a lot like mortgage in some ways ten years ago. Our biggest competition is direct mail. Most of these companies who are multi, multi-billion market caps, are driving business through direct mail. Saying, come here to get a loan for medical procedure or whatever it is. And we can be much, much more targeted with online marketing and that’s where the brand really carries. So we want to be great for our partners in driving volume to them and if we can help them convert it and help them [dial] [ph] it in. And there is so much leverage even in the approval rates. In making sure that our filters, those matching algorithms that we use to match people up with lenders, that they actually all get approved and bring them back to My LendingTree. After that there is so much untapped leverage in this business, it just continues to get us all thrilled and excited. And it think, still even on personal loans although the growth has been great, it's still so early days if you compare it to total debt outstanding on credit cards, it's early days. And we haven't even seen -- I mean we are starting to see risk-based pricing for consumers so the consumers debt market starts to feel like the corporate debt market. But really, really early days.

All right. Doug, one last one for you. I know Credit Karma just raised money at $3.5 billion and obviously they are competing for some of these customers on the personal loan side and on the mortgage side. Have you seen anything different out of them after the capital raise or do you feel like you are still gaining share versus your competition ?

I think Credit Karma has done an absolutely terrific job. I will leave valuations to the investor class like you guys. I can tell you this, our brand name is much much better known. They have done a great job at turning a high intent product in comparison shopping for loan into a low intent product of getting a credit score and then being able to make recommendations to you. There is nothing rocket science about doing that and our brand name is probably three times better known than theirs. So as our monetization improves, particularly around credit card, which is happening already just organically. And we have got a number of initiatives in the market to continue to improve that. The unit economics free credit reports or set up an account at LendingTree will work better at LendingTree than they do on Credit Karma, just like seeing an ad for LowerMyBills or QuinStreet or Bankrate, or one of 50 other competitors, will always be inferior to an ad for LendingTree. So we expect to get more than our fair share. It is our biggest focus of monetizing that. That’s where we are lucky and also good that we have got a brand name. And I think we can win in that space. There is no reason that we shouldn’t absolutely dominate in any marketing technique that we can and even more important than that, while they have got great monetization in credit card and they have got a good personal loan business, we have mortgage, home equity, auto, small business loans, personal loans and vastly improving credit card business. So there is no reason that we cannot be the dominant player in that category, and we fully expect to. And if we don’t, that’s what I drive our team and I drive ourselves every single day.

Thank you. I am showing no further questions. I would like to turn the call back to Doug Lebda for closing remarks.

Thank you all very much. Obviously, we have had a continued good run. I really appreciate everybody on the phone. I know a lot of our lenders listen to this. We are incredibly focused on making this work for your business. I know there a lot of, obviously, shareholders on the phone and we take that very, very seriously and want to make your business good. And the fact that you have trust in us really matters. And I know there's a lot of employees who listen to this as well and I cannot thank each and every one of them enough for making this business just really hum. We are at the very early days of a significant shift in this market and we look forward to continuing to report, hopefully, fantastic results next quarter and the quarters ahead. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.