LendingTree, Inc. (TREE) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the LendingTree Incorporated First Quarter 2020 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. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Trent Ziegler, Head of Investor Relations. Thank you. Please go ahead sir.

Great, thanks Michelle. Good morning and thanks everyone for joining the call this morning to discuss LendingTree’s first quarter 2020 financial results. I'm joined on the call today by LendingTree’s Chairman and CEO, Doug Lebda; and CFO, J.D. Moriarty. Before I hand the call over to Doug, I'll just remind everyone that during today's call we may discuss LendingTree’s expectations for future performance. 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. We will also discuss a variety of non-GAAP measures on the call today. And I refer you to today's press release and shareholder letter both available on our website at investors.lendingtree.com for the comparable GAAP measures, definitions and full reconciliations of non-GAAP measures to GAAP. And with that, I'll turn it to Doug.

Thank you, Trent and thanks everyone for joining the call today. I hope you and your loved ones remain safe and healthy during these difficult times. Before we get started I want to point out that we are adjusting the format of our call. As you have hopefully seen we have published a detailed shareholder letter to our Investor Relations website earlier this morning and link to it from our press release. We think the letter provides a better platform for us to share our thoughts and make our conference calls more efficient predominantly focused on Q&A. So with that I will give some brief opening remarks and we will get right into your questions. First I am incredibly proud of our first quarter results particularly in light of everything that's going on. Our team has responded quickly and decisively to the rapid changing conditions that we have all experienced over the last several weeks enabling us to meet our original adjusted EBITDA guidance. This is a testament not only to our -- to the strength of our team but to the resiliency and strength of our business model. The flexibility of our model and the diversification we have put in place enable us to strengthen partner relationships, accelerate product innovation, and drive market share gains. We're encouraging our team to remain on the offensive and look for opportunities to further strengthen our competitive position in the quarters and years ahead. I'm particularly happy with the progress we've made against two critical strategic initiatives involving our mortgage experience and scaling My LendingTree. We've discussed these in more detail in our shareholder and in the case of mortgage the progress is very evident in our results. Before going to Q&A I'd just add that in our 24 plus years as a company, we've successfully managed through periods like this time and again. While it doesn't necessarily feel good in the moment times like these always create opportunities and they always drive change and they separate the winners from the losers. I'm as confident as I've ever been that our business model is proven and that we will emerge from this period a better, stronger company. And with that operator, we can open the line for questions.

[Operator Instructions]. Your first question comes from the line of Eric Wasserstrom with UBS.

Great, thanks, can you hear me okay Doug. Can you guys hear me.

We can hear you. Yes.

Okay, great. Thanks. Thanks very much, Doug just two questions and Doug or J.D. could you give us maybe a quick update on what was going on in terms of lender house, if it's changed at all versus what you highlighted in the shareholder letter, particularly in small business and personal and card, any changes in conditions in those end markets?

Jay, why don't you take a personal and card and I will talk small business.

Sure. So, Eric I guess what it is, we've highlighted three businesses that are most profoundly affected here obviously, card, personal, and small business. Personal and small business let me put this in context. In personal loans, we've gotten high 30s number of lenders on the network and those lenders like small business and Doug will touch on small business, like small business they in many cases rely on access to the capital markets to make loans. And so right away in March when the capital markets activity started to become challenging for them, they started to seize up. So we had a quicker reaction from personal loan lenders and from small business lenders than we did from credit cards. Having said that, card issuers have pulled back as well. So is it any different than what's in the letter, no. It's a little bit of a different driver, right. If you think about the incentive for a card issuer to issue a new card, what are they after? One, they want to obviously know that it's a good credit, but two, they want a consumer who's going to spend. And so right now, as you know all too well, right. So they are not enthusiastic about either. So the underwriting standards in card will go up, but their desire to acquire new customers is diminished because the spend simply is not there. Now, in personal loans, we have lenders who don't have access to capital. So that one side of the marketplace is impaired, as we talked about, and we referred to 60% to 80% reduction in lender capacity in those businesses. And that remains the case, that's lender capacity. Now, interestingly we also in personal loans don't have as much interest on the part of consumers, which might not sound intuitive. You would think in this environment, people need money. But think about the reasons why people take out a personal loan. There's an event in their life where they're going on vacation or they're doing a home repair, all those things that are positive economic things that people just aren't focused on today. So if you Google lending three personal loan index, you'll see some great data that we publish on a regular basis about the personal loan industry, it's very useful, and I encourage you to do it. And we will show you on a weekly basis the desire of consumers to take out personal loans. We're just not seeing it right now because of the economic situation. That will come back as the economy comes back and we hope that the lenders side of the equation will as well. In the case of credit cards, as I said, they need to see a positive ROI from issuing a new card to a consumer. And so we've seen the card issuer step to the sidelines. Initially, we saw some issuers using it as a period of time where they thought they could take market share in card. Some of that has tapered off. So again in card we see a real diminishment of very diminished capacity. And so that's really the driver there. I'll let Doug address it with respect to small business.

With respect to small business it's a similar story to personal loans. If you think overall about the marketplace, again, we're basically balancing supply and demand. So first off, on a high level the fact that we're diversified and not dependent on credit card or not dependent on mortgage, etc., helps. We are always in business until the capital arrows [ph] gets closed off. When that happens, the good news is we don't have to do marketing, so both things balance out. In terms of lender health, though in card, obviously card issuers are healthy, they're just being appropriately pulling in the reins a little bit. Personal loan lenders, as their capital sources come back will be healthy. They sell all their loans. Obviously, we saw that companies have been doing layoffs in that area but expect that as capital comes back they're healthy. And on small business, the issue, not the issue, our lenders were non-SBA lenders doing mostly working capital loans with capital that comes from investors. As that capital goes away that goes away but pivot there was we opened up an SBA marketplace, signed up several lenders, and we're using that as an opportunity to further expand there. So overall, I think lenders are healthy and they're making appropriate, which I like, they are making appropriate decisions to pull back in times of economic and under riding uncertainty.

And if I can just follow up on the OPEX point that you just mentioned, how should we think about the cadence of operating expense over the next three quarters, the 2Q guidance would imply that it's maybe coming down, but at a lesser pace than the contraction of revenue, but how should we think about how you're thinking about discretionary and continued investment and sort of the cadence of VMM and EBITDA over the remainder of this year if you can give us any points of guidance on that?

J.D. you want to hit that first one.

Yeah, yeah, absolutely. So Eric, we obviously go into the year with quite a few hires that we're going to make throughout the year. And we refer to those as strategic cards that we're going to play in our business. And so each business puts forward how they intend to grow the business. Obviously, some of the cost associated with that is hit. When we go through a period like right now, we re-evaluate that but we're very mindful to make sure that we're not simply saying freeze all hiring, because this is exactly the time when we want to play some of those cards. The cards are going to be different -- the strategic initiatives are going to be different based on this environment. But we're actually going through a process right now where we've gone back out to each business owner and said, okay, what's the right strategic move right now? We actually want to take advantage of our competitive position and in some areas we're going to press on the gaps. Now, is that going to drive OPEX, no, it's going to be down relative to what our plans were for sure. We're cognizant of the revenue opportunity. But we are strategically investing in certain businesses. As Doug points out, the nice thing is we can do the right thing for 2021 in this environment, and that's everybody's mandate. How should you think about how OPEX comes in? I think, first of all, we're in a good position to have 75% of our cost structure be variable. And so in all these businesses where revenue has come in -- have come down, the revenue opportunity has come down, the good news is that the cost to acquire customers has actually dropped faster, which is great. And so that's the first cost that we were able to address and that's just the healthy thing about the model. Then there's OPEX and we're re-evaluating all of the incremental hiring for this year and adjusting it for the most strategic priorities. And so what you'll see is what typically happens for us is OPEX steps up in Q1 as we have talked about, and then it kind of is leveled throughout the year. I think what you'll see is probably you'll see it come down. It won't come down as much as revenue because candidly we're making those hires, the headcount piece of it for 2021 and 2022 and to build the business and to be aggressive. We go into this period relatively under levered and able to do that and we're thrilled that we are.

Thanks so much for taking my questions.

Your next question comes from the line of Jed Kelly with Oppenheimer.

Great, thanks for taking my question. Can you hear me okay?

Yes, hey Jed, how are you.

Hey, good. Hope everyone's safe. Just a couple of questions; first, on the insurance segment, can you kind of talk about how demand trends have sort of trended lately versus March and your ability to stimulate demand to get consumers to think about shopping? And then on the Stash investment, any reason why you chose to invest in one platform versus creating a marketplace for all the challenger banks that are in the industry?

J.D. do you want to take the first one.

Yeah, absolutely. So, Jed the first question on insurance, you have to kind of look at a timeline and as I think Trent pointed out, if you looked at January and February insurance was doing great. You typically have a period of time in the insurance industry, which is tax refund season, right. So for people who are getting a tax refund, they file quickly, get that money back and it typically results in some car purchase activity. And insurance tends to correlate with that somewhat. This year that was a short-lived period. Typically, that would be from mid-February to mid-March, that was a short-lived period this year and it ended somewhat abruptly if you look at auto sales in and around March 5th. And so I think the way that you would characterize it in terms of the consumer, the consumer was to steal from our insurance team -- the view of the carrier was that the insurer -- the consumer was looking but didn't have high intent. And that's because there wasn't a lot of auto sale activity going on. And so the carriers were reluctant to spend a lot for that traffic if it didn't have high intent. We see an improvement in that since the kind of mid mid-March, late March period and so we're happy with the improvement. And we're also cognizant of the environment in insurance which is, obviously you've seen the headlines around Allstate and others returning money to consumers. And now much can be made of that. In some cases, those are policies that are based on obviously driving activity, driving activities down there, returning money, etc. But we're also conscious of the fact that accidents are down because of diminished economic activity. So claims are down. And so if the carriers are making money in this period, longer term we're hopeful that that will be very good for what we do. But -- so I guess I would say to you, it is certainly improved from March and we're happy with that. What we can do to stimulate activity and interest that's candidly there, a few areas, right. We obviously write a lot of valuable content on insurance, that's one area in SEO where we write content around what you need to know about insurance. We're also doing a good job and we are happy with it. Actually, we've talked to you about the integration of insurance with My LendingTree and that's something that we were happy within the quarter as well. So there are things that we can do on the execution side, but they are probably dwarfed by the macro trend which is auto sales. So we're going to continue to execute and be in a good position for when the carriers want to find new customers in a more aggressive, more normalized way is how I should characterize it. The second question around Stash, I'll turn to Doug and he could certainly talk about this. I guess I would just say before we do, part of it was the Stash team that we were so impressed with and so there's obviously a strategic question there, which is why one provider versus a marketplace approach? And I'll let Doug comment on that.

So first off with Stash, in addition to the team what we really like about the company is multiple revenue streams and the second thing is an amazing customer experience and then the third thing really is them plus us. So Stash has a user base of members and they would like to improve their monetization obviously and improve their customer experience. And they can do that through alerts, with loans hopefully through us. And in My LendingTree context the same thing applies, which is right now, you're a member of My LendingTree, you're getting alerts on all your loans. Wouldn't it be great if you also had functionality that Stash has where you can also save and invest in budget, etc in a very light way. And we think that their consumer experience and we also like the revenue model and that it's not just a trading model. It's not just an assets under management model, it is actually very, very pro consumer, making the right decision model. And we thought it was the right thing to do at the right time. And doing a meta in My LendingTree context once you're already a member we don't think you'd have to do that. We would still retain that option, however but we really think that these two products integrated will be great for the customer, great for lenders, and obviously very profitable for us. The only other thing I would add is that Stash investment looping back to Eric's comment, if you think about how things get done at LendingTree and J.D. talked about the variablization of it, everything comes through as a project or an investment. And if we can invest $100 to make $200, we're going to continue to do that. However, given as -- if you think about just what happens to be in the economic environment in each of our businesses, some of them lenders aren't demanding things so you pull back on some of those investments, right because your modernization is down. Some of them are doing better so you push into those. But overall, you're -- as the economics of the business change the profitable projects, some of the profitable projects drop away and that's where you see this slow ring of operating costs just natural with the business. It's just the way that business runs and the way we do it. And Stash is basically the same thing but run through the same process if you build it -- partner and made the decision you got to do this. And strategically, if we can get the right products integrated with each other we think it's a homerun.

Thank you.

Your next question comes from the line of Mark Mahaney with RBC.

Thanks. Doug, could you talk about what the curve of the recovery could look like and I know you can't -- I know on an economic forecast, but if you assume that we do have a slow, jagged recovery in the back half of the year, and that sometime in the first half of 2021 we get back to kind of regular GDP growth but, we're talking about a solid 9 months, maybe 12 months recovery. Which of the segments do you think in that kind of outlook, which of these segments do you think recovers fastest and which will be leading, which will be lagging, thanks?

Let's see, well I'm going to let J.D. add on to that, because it's all coming at a little high level. It's going to be wherever the capital is. And the good news for us in this environment is that a) we're profitable where if you think broadly about our competitors, many of them are not. Many of them are not versatile and many of them are hurting. So as long as lenders lend, want to lend and borrowers want to borrow, we'll do just fine sitting in the middle of those things. And you need to make sure, obviously, the consumer is healthy enough. So it would be my expectation that personal loans would probably well, credit card will come back as bank balance sheets are fine. And card companies want to put on more issuers, which I would think as long as their businesses are solid they're going to want to be doing that. And then the personal loan lenders, which are more of the online players, you guys would know that business almost better than me. But as hedge funds and other people who wouldn't invest in those platforms, the Lending Club and Prosper and same thing in small business, then I would be expecting that those come back as that capital comes back. And when that happens is anybody's guess but the good news is we're better positioned than everybody else in our market. And quite frankly, in some ways, the longer it goes the more are competitors hurt and the more share we can gain. So from that standpoint, it's probably pretty good for us. J.D. do you want…

Mark, yeah, I would just say, Mark, our numbers assume no recovery in capacity in the affected businesses that we've highlighted. We've really assumed no recovery in capacity until late in Q3, okay and so if lenders have paused, we presume that they are paused. Now, why late Q3? Well, to the extent that you get some recovery in Q4 and in 2021 to your point, we would anticipate that there should be some enthusiasm on the part of lenders to begin stepping back. Now, we're not assuming that they come back to full capacity in September and in Q4, it's gradual but that's when we've assumed that there's some recovery in capacity. In terms of the businesses, I think, card you have to think that card is the one that comes back quicker. And I say that just because those balance sheets are there and they're going to anticipate spend as people leave their homes and start going to dinner again and planning trips, etc. So I would think card, I would think then personal loan but again, you've got the lender health issue there so it is going to take a little longer for those balance sheets to be back and available. Now, longer term, we really do like the small business lending business. And I think regardless of administration, you're going to have a very friendly environment for small business. And it doesn't -- I mean it's very, very likely that you see a lot of private capital go in the direction of lending to small business because of that tenor from a -- from the government. So much like where does private capital flock post the financial crisis in I would imagine that there's a lot of private capital that will become available to small business over time and so that's a business that we like. Whether it comes back quickly in the fourth quarter and early 2021 is a different question. But we think there'll be a whole new group of small business focused lenders and so that's a business we want to lean into.

Okay, thanks J.D., thanks Doug.

Your next question comes from the line of John Campbell with Stephens, Inc.

Hey, guys. Good morning. Congrats on the Stash investment.

Hey good morning.

Hey good morning. On the Stash investment you guys have talked a little bit about that, that seems like a really kind of compelling long term opportunity for you guys. I mean, it sounds like it is going to be a good investment even if it doesn't do a single thing for the LendingTree core but Doug, I mean, obviously, it sounds like there is some integration work in the days ahead. If you could maybe talk to us about how that might look within My LendingTree and then higher level, if you could maybe help us frame up the synergies over time?

Yeah, if you -- their company and our companies are so aligned about being focused on helping the consumer with whatever the consumer has a need to make a decision. And also believes that little changes can add up to a lot of big change in your life. The integration ahead, if you think about it, is -- and we're going to work through this piece by piece. We have some ideas and market sale, obvious competitive things. Overall, if you think of LendingTree has a membership service, if you will, that gives you free credit reports and alerts on all of your loans and helps you improve your credit score so that you can access the credit markets. They have something which helps you save budget and invest and which is really obviously the asset side of it. And you put those two things together and then you throw in insurance and couple of other things and you've got a product that could surround the customer and help them achieve whatever goal they have; buying a house, getting a car, retiring really whatever it is. They've got a platform that could do that and they will have a platform called My LendingTree, you can do that in a platform called LendingTree where you can do that. And then over on Stash or their brand, where they've got exactly the flipside, they've got an amazing product, personalization around investing, saving, etc. And what they don't have is anything related to loans. So their people are going to want it, their customers are going to get mortgages and personal loans, credit cards that make sense and save the money. They'd love to get free credit scores, etc. And as we add products into their area, obviously their monetization goes up and then they can market into it. And the other thing I would say that we really like about them versus a lot of the other FinTech companies is that they have got the same philosophy around we invest in our business and it produces returns and it is not just a throw money at things and they are very, very disciplined, and they are very, very smart and they kind of see the world in the same way which a lot of other startups Valuations, Zoom, etc don’t necessarily see it that way and so all of those things philosophically product, etc, it's just a great fit.

Okay, that makes a lot of sense. I have got to do a lot more work on Stash, but do they have their own, I guess, platform so to speak or will, I guess -- will some of those users be able to come over to My LendingTree, is it My LendingTree play as well?

It definitely is My LendingTree so please download the Stash app. And so Stash has a year of subscription. So you're paying a subscription to which will access you to a bank account and the debit card and investment advice as well was fractional investing. So, for example, every time you make a purchase basically rebate some of the interchange back in fractional shares. And so then you're constantly always sort of building up this portfolio as you even go through your day. And then they've got some light budgeting on top of that. It's all we can help you with your budgeting. But the nice thing about this is the difference, when you look at the so-called neo banks or banks or whatever you want to call them. Many of them are using the banking to make money. Stash is using it to see your activity and make recommendations to you more than they're doing it to try to make interchange fees or try to get assets under management. And so we like that model much, much more and think it's better for the consumer, better for the providers.

Make sense. Last one from me, a quick question again on My LendingTree. I mean, obviously, a lot of that comes from personal loans and credit cards. It looks like you grew My LendingTree revenue at a little bit better rate than those products. Obviously, you're either seeing gains out of other products in the platform or maybe you're just seeing a share shift to more of that personal loans and credit cards revenue going on the LendingTree so how would you characterize kind of that better growth out of My LendingTree?

So, it's interesting and J.D. you should add onto this too. So, most of the revenue from My LendingTree does come from personal loans, and a lot of those people are somewhat subprime and therefore that gets harder. However, My LendingTree is now over 20% I believe of our total revenues -- the EBITDA of the company and continues to scale. And our unit economics, so if you think about just us versus competitors there, our unit economics we now have a very good read on it, very solid. We have a lower member base because it's more of a high intense thing that's you've come through it mostly through the LendingTree channel at a high intent purchase. We're not just coming in to get a free credit score and let's just see what happens here and then we try to sell you a credit card. So we are going to have a lower member base, however, our monetization can be good and/or better and now actually we've shifted some of our marketing into marketing that. And we're now at a place where we can market and continue the product growth that we've still got. So I'm thrilled with our progress, I wish it would have happened sooner, as I always do. But the model is solid and now we can lean into it.

Yeah John, I mean, that's -- if I look at what you should anticipate with My LendingTree in this period we have this great -- it's one of the reasons why the personal loan business has a strategic rate as it feeds My LendingTree and give everybody context, right. At any given period, 55% to 60% of our My LendingTree revenues is personal loans. So obviously, in this environment, that's going to challenge My LendingTree a bit. The good news is the integration points of My LendingTree to consumer experience everything else, all that I say is ahead of schedule this year. The integration with insurance has gotten off to a nice start. Some of the third party integration is like identity theft and that sort of thing that we're very happy with. So there are a lot of really good things going on under the hood with My LendingTree and then what you're also seeing, as we have talked about My LendingTree benefit card and mortgage and insurance. And we're executing on this.

Okay, thanks guys.

Your next question comes from the line of Mayank Tandon with Needham.

Thank you, good morning. Doug or J.D. could you talk a little bit more about the insurance segment in terms of the court request volumes that you're seeing versus the monetization rates, kind of see how that is going to trend line over the next several quarters? And also speaking of just the ad spend, we will think that you'd get a nice benefit given that the ad market has softened, maybe just talk about the profitability as well on the insurance side?

I will take the ad piece first and then J.D. could take the other one. One the ad side absolutely and that's a natural product of what happens in these markets. So typically you get back to the marketplace then you'll see whatever loan type. If lender demand is typically going down on average, whether price, quantity, or coverage, that typically also means that those same lenders and/or marketplaces are not advertising on Google, etcetera. And we pull back our advertising, but we still market to the last profitable dollar. So yes, there is definitely benefit on the -- as there is a detriment on the lender supply side where that decreases, there is a benefit on the marketing side. And typically they even out over the years. Sometimes they go better. So if for example in the event of mortgage right now, we are seeing and this is fantastic I think for us, we are seeing that overall the lender demand is still -- we're getting more of a benefit from lenders. We're getting less of a detriment from lender demand and we're getting a bigger benefit from the marketing side and mortgage right now. And that means that lenders who would typically be advertising directly inside of Google or anywhere else online are pulling that back and they're not pulling back their ad spend on LendingTree, their buys from LendingTree as much. So that's a very, very good sign for us. So if I'm a lender and I go, right, where am I making money today guys, they go well, Google's at this margin, we're spending this much money on Google today. But over here at LendingTree, we're spending this much for -- to close on whatever it is and our ROI over there is better than over here. Okay, pull back we will keep LendingTree on and so they market to the last profitable dollar. They are making the same marketing decisions that we are. And when they decide to leave LendingTree on instead of something else, that basically shows us that the market is strong and that our business is strong. [Multiple Speakers]

The second part to your question, yes, Doug it does. I just want to -- remind me the second part of the question. I apologize.

Sure J.D. I was just trying to dive into a little bit on the insurance side in terms of what you're seeing in terms of the court requests versus the monetization rates so far? And how do you expect that to trend line over the next few quarters?

Yeah, we've seen it. Well, one of the nice things that's occurred during this period of time is our agent business has done well. So, you worry about in a work from home environment what happens to businesses that are so people intensive, right. And what we've seen is actually a strong demand for our product. They are on the agent side of the business. So that's been a nice highlight in the insurance. In terms of traffic, as Trent pointed out in the month of March it was obviously down with auto sales being problematic, and so carriers reacted to that. We've seen somewhat of a recovery in terms of both consumer interest. We don't publish specifics out ourselves. Obviously, you can look at Google data with respect to keywords around auto insurance and that sort of thing, and you can see what those trends are. But we've seen recovery in the month of April and our carrier demand has increased with that. And as I said before, carriers will be reluctant to pay for traffic that they deemed to be lookers, which is, if you look at our other businesses we talked about levels of intent. How serious is the consumer about converting, about actually needing a new policy, switching their auto insurance or being a new auto insurance customer. So carriers need to get confidence that the consumer today wants that and as we get a little stronger economic environment, as people get back to work, I think you'll see the carriers come back online. They are rightly being cautious about building up in our marketplace if they don't think that the consumer intent is there. The traffic trends would suggest to you that that intent is coming back.

Got it, that's helpful. Thank you so much.

Your next question comes from the line of Mark, I'm sorry, Mike Grondahl with Northland Securities.

Yeah, thanks. Guys, just a follow up on insurance, what percent of that business is from new and used car purchases? And then secondly, the 50 million of brand investment that you're kind of re-evaluating, how much of that was spent in 1Q and what's sort of embedded in your 2Q guidance?

Sure. J.D. why don’t you take that and then I will comment…

Yes, so Mike, in insurance it's about 80% auto. I don't know if that would give you a specific as to what's new versus used, but it's about 80% auto. And with respect to brand, there was about 8.3 million in Q1 and we have -- so you should basically assume of the 50 we will end up spending I think this year roughly 50% of what we kind of set out the year intending to spend. So we've spent 8.3 and you can -- and we spent 8.3 in Q1 and we will judiciously spend roughly 25 throughout the year.

Okay, great. In -- I guess, on the insured...

Wait a second, sorry, and just pause there real quick if you think -- when we say brand that is still moneymaking advertising for us. You can't track it as precisely, however, it's a money making proposition for us. Not always in the quarter, but definitely you spend a dollar you get more than a dollar back.

Thank you. And then hey, just to follow up on the new and used car purchases. I was a little bit more curious -- I know auto insurance is 80% of your insurance area. Do you know what percent of that 80 comes from new and used car purchases?

No, I don’t, as I'm saying, I can't give you a number on that. I can track it down separately. I don't have the number on that.

Okay.

I understood your question… [Multiple Speakers]

My guess is it's people who are not buying a car but who already have a car and who are shopping for new insurance based on saving money. And the nice thing in that product is that on TV, if you look at all the carriers independently, they're all advertising against each other. And that obviously translates on. So it raises the profile in consumer's minds that hey, maybe I should go try to save money on insurance.

Okay, thank you.

Your next question comes from the line of Youssef Squali with SunTrust.

Great, thank you very much. Good morning and thank you guys for the shareholder letter, super helpful. Doug, in that letter you talked about how you've been obviously making improvements to the mortgage products and the mortgage experience, which have helped offset some of the weakness. I was wondering if you can be a little more specific as to what changes have helped and kind of how that differentiates you guys from peers? And then, J.D. I just want to dig a little deeper into your Q2 guide. So we're halfway into the quarter, I was wondering and considering some of the commentary you provided, positive commentary you provided around home, around insurance, some of the negative commentary you provided around the consumer. If you can help us maybe parse out the two, kind of what's baked into your Q2 guidance as far as growth rates for these three different segments are concerned, considering the year-on-year decline in the high 30s, what I'm trying to really get to is how realistic potentially is it to see maybe a home and insurance segment that are somewhat flattish on year-on-year basis with most of the weakness coming from the consumer segment? Any color there would be super helpful.

Let me take the first one, J.D. can do the second. On the mortgage experience, we've spent the last several years talking about and experimenting with changes in our mortgage product. If you think about LendingTree Mortgage 1.0, it is filling out a form 8-K or search query, us running some analytics internally, credit, filters, etc., and then sending you to four to five lenders and then having those lenders both respond back to you with offers on our website as well as phone calls from those lenders directly to you. What we've done over the past couple of years is figured out after you fill out that form and by the way, those forms vary a little bit based on very smart data analytics, so really the datas help to drive, so the forms vary. And then on the results page, the results page is always the same, however, generally the same. However, one of the things that we've learned is that so-called exclusive leads to a lender, which we have known. If you give transparency and price and you reduce the fact that five lenders need to go do the exact same thing to try to barrage each other to get this borrower, we clean that up so that the consumer is basically hearing from the best lender in many instances. And either they select it or we're saying, hey, of these here are the five but among this one, you should take this one. And that is showing improvements in conversion rate. It's also showing improvements in lender efficiencies because they're not doing -- the sales, the competitiveness if you will is happening on the website as opposed to on the telephone. And therefore the lenders are more efficient. Their conversion rates are going up. Their profitability is better than the volume that we can send them sticks a little better. So that's the biggest change. In addition to that, it's just ongoing personalization, ongoing CRM to really focus on how we can help lenders improve conversion rates because they focus on cost per funded loan. And versus competitors, which was the second part of that, I don't know any other company that has the depth and quality of lender relationships that go back years. And what we're seeing in the mortgage business is that lenders shut us off last. And that is tremendously helpful for us.

Youssef your second question with regard to the three segments, let me just give you a framework, because we obviously suspended our full year guide and we did so because it is in this environment. Obviously, a full year guide is only valuable if you can do it with great accuracy and we want to be able to convey as much as we can now for Q2, but recognize that when we did that, we were cognizant of the fact that the consumer business gave you what we assume in terms of when we start to get some recovery there. And we think that's probably not until through the summer and September it starts to come back a little bit. We also did haircut our expectations for home and insurance, just in light of a recessionary environment. Now, the good news is that since we did that both of those businesses are trending better than we would have expected. We were thrilled with mortgage and the performance in March, despite a really difficult backdrop and an insurance and home are performing very well here in April. Now, the consequence is obviously with consumer flagging because of the capacity issue that we talked about we are more dependent on those businesses for sure. So in terms of the growth rates in them, implied in them we're monitoring that on a daily and weekly basis. And our guidance reflects some of the strength, but mostly reflects the fact that we did haircut those projections for the remainder of the year internally in light of a recessionary environment, right. We're trying to give you as much of a real-time assessment of Q2, but we're not giving a full year projection because the environment obviously is incredibly fluid right now.

Okay, that's helpful. Thank you.

And again, if you think about it and I think Trent made a comment here too each of these reacts minute by minute, day by day. And you again, you've got the lender issue. Not issue -- these lender dynamics and the consumer dynamics. And as lenders want to lend then they're going to -- they're going to get customers from the platforms that are most easy for them, right? So the first one is your existing customers, the second one is go get new customers. So you want to show up your existing customers and you're getting new ones. As long as they want to go get new customers and as long as consumers want to borrow, we'll be fine. And then when we're not, we're still winning but it's just smaller because the market's gotten smaller. But as long as they are getting wallet share and market share, which we're seeing in mortgage, big wallet share gains among our lenders and that's winning the game. And that's okay, that's actually great because that volume, that capacity sticks. For example, if you've got a lender that goes from spending 20% of their revenue or their ad expense on LendingTree to 40% on LendingTree during this time, because they're getting smart about their channels too. That increase in ads and spend on us will typically stick as volume comes back. So now we're getting 40% of a bigger pie as that comes back. And then that further -- that improves our economics, our monetization versus our competitors, which enables us to go out market more than they can do, which gets the fly [ph] we spend.

Thanks.

Make your comment about the -- you had made earlier about this area on mortgage…

In mortgage I specifically, I…

You're 80% or 40% sorry.

Yeah. If I understood your question, you were just trying to triangulate kind of the breakdown of the segments within the Q2 guide, is that fair?

Yeah, exactly. [Multiple Speakers]

So, if you kind of piece together our comments, right we had basically 40% of our business, right which is credit cards, personal loans, and small business lending. Well, those make up 40% of our revenue. If you lose somewhere between 60% to 80% of that, right your starting point they're sort of down 30. And then as our Q2 guide implies, we've got at the midpoint 40% year-over-year decline that leaves some room for some softness in the home segment outside of mortgage, because that segment is -- most of our lenders are focused on refinance right now. So things like purchasing and home equity are going to be a little bit softer. But then when you move down to the VMM line, obviously we've got pretty significant margin expansion that goes along with that, right. And so even though there's a little bit of a headwind on the top line and mortgage, the profitability is pretty strong and so I think that all hangs together to answer your question.

Your next question comes from the line of James Friedman with Susquehanna.

Hi. Doug, in your prepared remarks you talked a little bit about the changing mix in SMB and you talked about previously had non-bank investors and now you have signed up some SBA lenders. I was just wondering about that. Are those lenders qualified for PPP distributions like are they form of banks? That's the first one. I'll just do the second one too, in the mortgage side a couple of your competitors, I shouldn’t call competitors but companies in the ecosystem have talked about the rise of credit unions in mortgage in this environment. I was just wondering if you had any perspective on that, like the liquidity unions more meaningfully you're seeing them? So, the first on SMB and the second on mortgage. Thanks.

Yes, great. So, first question on small business, yes. These new lenders are PPP related. So what we did is when we saw this happening and we put out a number of press release, some announcements about this too, we saw -- this was both helping people and helping our business, which is what we always try to do. So typically having SBA lenders on a marketplace, the SBA process is pretty let's call it not that efficient. With PPP they've obviously made it more efficient. So what we did is we pretty much immediately stood up a PPP marketplace, started signing up lenders. I think we have three or four. We have to look on the site. I know we've got Live Oak [ph] for example, which is the largest and they're doing great. And we've already gotten a lot of customers flowing in. What we were seeing in the market, which is well publicized on TV, is that the PPP loans were going to people "small businesses", many of them with 400, 500, 600 employees getting millions of dollars, whereas the corner deli wasn't getting it yet. And we want to step into that breach, but also use it as a way to sign up small business lenders that will help us going forward. And I think -- and so that's been the last time I checked, I think we had over $50 million in loans just in the first few days that the people had requested. And we're working that through. So that's -- I was really -- it's not going to be a huge revenue driver, but I was really thrilled with how our company, our people particularly in small business, reacted so quickly to get that up and running. And it's a short run. Not that much effort, but long run. We got a whole new marketplace now, which is SBA lenders. So it's great. On credit unions they're there. I don't think today -- they would have the chops to like banks would to market to their existing customers and mortgage. But they're not going to have the CRM and customer relationship chops to compete with the likes of the LendingTree, loan depots, etc, etc, etc. So they're there, however, the lenders who have been operating on the internet for a while would still do a lot better. So the answer to that one is, no, I don't see credit unions having a major impact particularly in refinance mortgages. We had purchased mortgage but we don't see it a lot, but it's there.

Got it, thank you for the color.

Your next question comes from the line of Rob Wildhack with Autonomous Research.

Good morning guys. You touched on it a little earlier, some of the friction in the mortgage market during March. Can you just give us a bit more detail on what happened there, how you and your lenders reacted, and then how that looks today as the plumbing behind the mortgage business?

J.D. why don’t you tackle it.

What friction, when you talk about friction in March.

Was referring to the secondary market?

Okay, right. I think what you are referring to is the secondary market which in March are really challenging for all of our lenders. And, you've got -- you had difficulty -- yeah, go ahead.

So what you had in March for a very, very brief period in time. Keep in mind that most mortgage lenders, our correspondents are selling their loans and they have to when they walk in alone, if they hedge their pipeline for the 30, 60, 90 days before that loan closes and so you're basically shorting the mortgage market. When Treasury started to buy inside of the mortgage backed securities market, it drove up the value, this mortgage backed securities and mortgage lenders were met with a temporary cash flow problem where they had originated a whole bunch of new loans, which, as they close and get sold off, will have tremendously high value. But their existing pipelines, because the Treasury buying mortgage backed, basically had lenders getting millions and millions and millions and tens and sometimes hundreds of millions of dollars of margin calls on their hedging. Treasury ceased or slowed that down and that corrected itself very, very quickly. But there was a -- there were a few days in March where we were going, oh, my gosh. Like this may have unintended with what the government tried to do, may have unintended consequences and the very, very good news is they fixed it right away and it corrected itself. And mortgage companies right now are incredibly healthy.

That's great. Really helpful.

So to put that in context for you Rob that's when we refer to capacity in each of our markets. In mortgage, we would tell you that we probably in the month of March, were offering about half the capacity that we were of lender capacity in January and February because some of the weaker lenders and weaker, smaller, right. They couldn't deal with that cash flow issue, right. And so they were less likely to take on new customers or look for new customers in light of this concern. What we've seen in April was some of that capacity come back online, and so that's been really encouraging.

That's really helpful. Just hoping you could also square up a couple numbers for us on My LendingTree. Press release called out 14.7 million sign ups this quarter, I think that was 14.3 million last quarter, but also mentioned 887,000 users added this quarter. Is that just a net gross difference and if so, is that attrition rate normal?

I got to see, just one second, if we have discrepancy in those numbers. 14.7 is certainly the end of period number that I know, yeah the attrition rate is not normal.

Yeah, I was going to say, Rob, we've historically given that number like as of the announcement date. This quarter we moved to as of the end of the period just to try to bring more standardization to it. So I think that might be the discrepancy we can come back to on it offline if you like.

Okay, no problem. Thank you.

Any other questions, operator.

My apologies, your next question comes from the line of Melissa Wedel with J.P. Morgan.

Good morning, hi, thanks for taking my question. Good morning. First of all, I wanted to reiterate appreciation for the expanded shareholder letter it was helpful. I also wanted to dig in to just some of the margin trends that we're seeing at the segment level. Want to make sure I'm thinking about this the right way. Is it fair to say that you would expect some of the year-over-year trends in margin to sort of persist similar to what we had seen in Q1 of this year versus Q1 of last year, expect that to sort of persist directionally and so we see revenue recovery late this year, early into next year?

Yeah, I think there's a little bit of noise in here, in consumer in particular with respect to margin. And I say that because recognize that one of the businesses that we were operating at thinner margin last year than normal is our card business. And that was largely strategic to grow that card business, we're happy to make it 200 -- north of $200 million revenue business last year. But as you know, in the fourth quarter and this persisted in the first quarter, we did have some marketing challenges in cards specifically. And so that does weigh on the margin profile within consumer in aggregate, even though you're seeing the segment profit of 36%. That was mostly within card. Now, I do think absent COVID in these capacity challenges, I do think we've remedied those marketing challenges for card. We are in the process of doing so in quarter when all of this hit. So I think there's a little bit of noise within consumer. So I think that your year-over-year comparisons are candidly a little bit challenging on the margin side partially because we're also going through this nice benefit of reduced cost of acquisition in many of our businesses. So, as Trent just pointed out within home we've obviously seen our ability to acquire customers accelerate in this environment. And so I think there's just some noise in there when you look year-over-year that's going to miss what's going on in the background.

Okay Doug, thanks for that.

The only thing I would add to that which I always look at the business margin percentages, in my opinion, aren't very indicative and we could debate that. However, VMD variable margin dollars is the test of the business because in every one of these marketplaces, every product, you market to the last profitable dollar. And so you could have a situation, for example, where lenders -- where you have very low lender demand and therefore were not marketing at all and we're just taking free traffic. And you would have extremely high margin percentages, but very low dollars. The flip side is you could have lender demand being enormous and therefore you go market into it. And, my favorite example used to be if I spent a billion dollars on marketing and got $100 million at VMD. That $100 million, that would be a good investment. However, it's at a 10% margin. And so I always encourage people to look at the VMD dollars line and to see where that's trending and then underneath that, it's basically the supply and demand dynamics of each loan type.

Yeah, understood. I know you always talked about [Question Inaudible] I guess sum up question two around some capital allocation opportunities. I know you guys are just virtually stay opportunistic on share repurchase and serious about how you think about the effectiveness of sharing now relative to organic or inorganic opportunities? Thank you.

Yeah, let me just say we obviously have and we are generally thrilled with when we have been able to buy back our stock during periods of volatility. We've also, though, we have to consider always what our cash balance is. We obviously have if you look at our balance sheet, as I mentioned before, relatively under levered. We are a company who has been acquisitive. We did for a period of time, have a considerable cash balance after we did convert in 2017. And we're constantly evaluating potential acquisitions. We've acquired nine companies since 2016 while we didn't do anything in 2018, that's not because we weren't looking at things closely and always considering what we might do. So that does factor into it. I wish it obviously were. Obviously we are evaluating by our own stock versus inorganic opportunities and acquisitions. And I wish it all played out in as real time as a given quarter and looking at it and saying, okay, they bought their stock, they think it's cheap. We always have to preserve that option value, that's particularly true when we don't have a huge cash balance. We were very happy with our utilization of our revolver. As a reminder, we use cash on hand and the revolver to buy QuoteWizard and ValuePenguin at the end of 2018 and early 2019. And we paid that down very, very well and then we just used our revolver again to make this cash investment. So we're constantly evaluating acquisitions and being mindful of what our potential balance sheet might look like if we go through with one of them. That does influence how we think about buying back our stock as much as we'd like to be opportunistic we have to consider our flexibility. And sometimes that factors into it and it doesn't give you quite as pure of a read as to whether we think our stock is cheap or not. But we're constantly evaluating it relative to those other alternatives. Fortunately for us, in this environment, as a company that's been acquisitive we're very conscious of the fact that a number of interesting opportunities are going to come our way. And they're probably going to be cheaper than they would have been six months ago and we want to have the flexibility to do it.

I was going to say something very similar, in this environment, particularly what we've seen before, where we're unprofitable business models, which could be profitable as part of us and maybe can't raise capital. We need dry powder to be able to be opportunistic there more than I think we need to be opportunistic in our stock. Now, that could change month by month, quarter by quarter, but we need to evaluate them all and right now we want to keep some dry powder around. That doesn't mean that we don't think our stocks cracked. We just think there's -- there is other opportunities versus that at the moment.

Thank you guys.

Your next question comes from the line of Chris Gamaitoni with Compass Point.

Good morning, everyone. Most of my questions have been asked. Just wanted a clarifying point on how you think about My LendingTree. You have obviously noted there is personal loan challenges from call it investment dollar capacity on the other side but it doesn't seem like you're changing any of your thoughts on the longer term of leaning in and building the ecosystems. So I just want to clarify that, in the near term, you're kind of willing to give up some of that profitability for a longer term vision or fix my comment if I missed what you're saying?

Yeah, well there's definitely not a short-term sacrifice. And we are absolutely committed to continue to build the ecosystem because we see the net promoter scores of My LendingTree users. Anybody who's a member of LendingTree, we see the NPS very high. Obviously, market costs are extremely low and the alerts continue to get better. So no change in the LendingTree posture except we are more and more confident about our product and our positioning and our ability to win in a market where you're trying to acquire a consumer and then surround them with all the products to help them make smart financial decisions. And we think we're on our way so no change in that except maybe go on a little faster.

Alright, thank you.

Your next question come from the Kunal Madhukar with Deutsche Bank.

Hey, thanks for taking the questions. Couple, if I could; one with regard to insurance, wanted to understand for the auto insurance how much of that is repeat business? So people coming back in shopping for a different insurance provider, get some savings and what have you. So how much of the revenue typically is, Is it a beat? And then on the SBA side of this one business loan side, wanted to get some color in terms of how you're seeing the market with regard to both capacity as well as risk appetite and how that ducktails into some of the industries that are more heavily affected by COVID say, restaurants, theaters, bars, what percentage of your revenue comes from these kind of businesses and how are they kind of -- what kind of support levels are they going to really get ultimately through the SBA initiatives? Thanks.

Let me take the SBA one and then turn Trent and/or J.D. can do the repeat one. On the SBA side, this is -- and we put out a survey to this result. We're not seeing just in the market money flowing to the types of businesses that you talked about. So we're hoping to rectify that just as a public policy initiative. However, just for doing good. However, it also helps us in the longer term because we can sign up those SBA lenders. In terms of risk appetite, those SBA lenders aren't thinking about that really, because the risk is being borne by the federal government. So under the PPP program, lenders basically make very nice origination fees. I believe its 400 basis points for originating alone, the government takes all the risk. So that is merely how many can you process through the system. And then for the other, the online platforms, they'll take as much risk as their capital providers want them to take risk. But on the SBA side they're not thinking about risk. They're just thinking about capacity right now. And if you think about it from a lender perspective on just like a mortgage, you make more money on a bigger mortgage than a smaller mortgage. So if you're a lender, you're going to do your existing customers first because they convert. You're going to do your bigger loans first because they're more profitable. Then unfortunately, you move to smaller and smaller loans and that's what's creating a challenge in the U.S. economy, I think. And we hope to play a small part in helping to rectify that. Does that answer your question. Then J.D. you have repeat customers insurance.

Yeah, Kuna I wish I had a statistic for you, I just don't. In insurance recognize that we're not, this is actually some of the value of integrating it into My LendingTree. We'll start to get more of a length into that and we'll get more information as to some of these current insurance. But right now, no, we don't. I don't know and I don't have a statistic for you in terms of what percentage of the customers that come through QuoteWizard are repeat customers. We don't publish a stat nor do I have one off of the top of my head.

That's good. Thanks. Thanks Doug, thanks J.D.

I am showing no further questions at this time. I would like to turn the call back to Doug Lebda, CEO for closing remarks. Thank you all.

Thank you all and thank you for being here during a very interesting times in our world. What I always like to say during times like these is when the tide goes out you see what's left under the water. And sometimes you've got rocks, you got shells, you've got trash, and sometimes there's some treasure in there too. What we're going to -- what I believe we're going see coming out of this is a change in behavior at multiple levels and I think we're willing -- we're able to capitalize on it. The consumer is going to change. In my opinion, they're going to spend less, they're going to be more conscious about money, they are going to be more concerned about savings. And we're uniquely positioned there. We think lenders are going to change as I have talked about already. We see lenders making smart decisions as they've done in the past, about getting the right types of customers that they can approve, they can underwrite easily, etc. We're also seeing lender behavior changing in terms of adopting technology and being more open to technology because that releases their capacity constraints. And then the next one is we're going to see change in competitors. If you've got a money losing business model, you see people pulling their horns back in. You're going to see and we're going to see their weaknesses and we're going to see their strengths and we already are. And then the last one is internally. Things change internally. We've been able to change our processes, our bonus process, the way we evaluate employees, putting in new processes to be more disciplined. And the last thing I would say is that LendingTree is so well positioned that instead of having to raise capital like many companies are having to do today, to shore up businesses that are losing money, we have the unique opportunity to invest our positive cash flow back into profitable projects and initiatives during this time when most of our competitors cannot. And that is a major strategic competitive advantage and we intend to use this time to double down and create those opportunities. So as behavior changes across each of those areas we think we're better positioned than anybody else to capitalize on it, and we intend to do that. So thank you all very much. We look forward to talking to you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.