LendingTree, Inc.
Q3 2015 Earnings Call Transcript

Published: 26 Oct 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the LendingTree Incorporated Third 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 call maybe recorded. I would now like to turn the conference over to, Gabe Dalporto, Chief Financial Officer. You may begin.

[Gabriel Dalporto:]

Thanks, operator, and thanks everyone for joining us today for LendingTree's third 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 Inc'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 website at investors.lendingtree.com for the comparable GAAP measures, definitions and full reconciliations of non-GAAP measures to GAAP. The third quarter marked our fourth consecutive quarter of record revenue and our seventh consecutive quarter of record variable marketing margin. We generated revenue growth of 69% year-over-year and accelerated from 8% sequential growth in the second quarter to 27% in Q3. And we once again translated our top line growth into profitability growing adjusted EBITDA to $11 million. Let's first discuss mortgage. Revenue from our mortgage product increased to $44.2 million in the third quarter, up a remarkable 38% compared to the third quarter last year and up 19% sequentially from our previous high. Our substantial growth in mortgage represents increases in both purchase and refinance and was driven primarily by our sales efforts. The addition of new lenders combined with expanding wallet share from existing lenders provided for improved monetization enabling us to invest heavily in marketing and to drive increase consumer traffic. Our non-mortgage products was performed exceptionally well, also experienced accelerated growth in the third quarter, recording year-over-year growth in every lending category. Revenue from non-mortgage products increased 176% year-over-year and 43% sequentially to a record $25.6 million and now comprises 37% of our total revenue. Inside of non-mortgage, we're certainly pleased to see the continued success of our personal loans marketplace. A $15.6 million revenue from our personal loans marketplace was up 35% quarter-over-quarter and 325% over third quarter 2014. As mentioned in the press release, credit cards has quickly emerged as a promising revenue driver, delivering $2.7 million of revenue in the third quarter, increasing from just $400,000 in Q2. Our growth in cards was driven by strong fundamentals, including rapid volume growth, supported by material price increases. We now have direct relationships with all major issuers and we garner competitive pricing that supports growth in our marketing efforts. We believe that we represent only a small portion of this very large and growing category and that there are substantial opportunity ahead of us. All-in, we grew consolidated revenue by $14.7 million in the quarter to a total of $69.8 million. These results mark a new record for the company and substantially exceed our prior guidance. From a profitability standpoint, we delivered a new record of $24.3 million in variable marketing margin, up 46% of our third quarter 2014, also exceeding the high-end of our previous guidance. At 35% of revenue in a quarter, our variable marketing margins reflect increased television advertising costs as we continue to provide increased support to the LendingTree brand. Adjusted EBITDA increased 90% year-over-year to a record $11 million, exceeding the high end of our guidance. On a per share basis, the company delivered adjusted net income per share of $0.79, up 93% versus the prior year. And from a GAAP perspective, we recorded net income from continuing operations of $7.4 million or $0.59 per diluted share. And finally, we've generated real cash from the business as net cash provided by operating activity is over $31 million for the nine-month ended September 30. From a balance sheet perspective, as you should have seen in the release, we closed last week on a five-year, a $125 million senior secured revolving credit facility. While we're certainly comfortable that we have sufficient working capital to run our business day-to-day, revolver gives us additional flexibility to execute on attractive acquisition opportunities and support other strategic growth initiatives. While nothing is immediately actionable and the facility is undrawn for the time being, we will continue to explore attractive opportunities and are now better prepared to act. In closing, the third quarter provided an opportunity for LendingTree to make measurable progress both operationally and financially in further scaling our business. Our record-breaking financial results reflect our team's proven ability to execute and gives us confidence to increase our guidance for the year. Now I'd like to turn it over to Doug, who will add his comments on the business and discuss our outlook for the rest of the year in 2016.

[Douglas Lebda:]

Thanks, Gabe, and thank you everyone for joining the call today. Now that Gabe discussed our financial results for the quarter, I'd like to share some perspective on the business and provide an update on our outlook for the remainder of this year and next year. As reflected in our results, LendingTree performed exceptionally well in the third quarter, exceeding our own expectations and the Street's expectations across the board. Our team is successfully scaling our business, producing high quality consumer traffic, while still growing our customer base. In our mortgage business, this was a remarkably strong quarter. We continue to profitably ramp our sales efforts, while at the same time meeting lenders cost per funded loan goals, which is the highest priority among our network lenders. We've added18 net new lenders in Q3 alone, while at the same time, significantly increasing sales within our existing network. We once again outperformed the overall mortgage industry and considering the quarter's declining interest rate environment, where lenders typically experience more organic volume, this is a significant accomplishment for us. We're seeing growth in refinance and purchase and significant growth with major banks and retail mortgage companies. Additionally, our pay per call product continues to scale. We've added several new lenders to this product and they tell us consistently that we are helping them increase conversion rates, increase capacity to take more volume and scale their businesses with us. Moving into our non-mortgage products, I'm even more thrilled with our progress there. In personal loans, we continue to grow volume month-over-month with substantial increases from several different marketing channels. We have been investing heavily and growing revenue for this product and cross selling personal loans to our existing customer base through e-mail and My LendingTree. We remain deeply focused on improving conversion rates and in the third quarter, even as lenders begin to test into broader credit profiles, conversion rates continue to improve. In the quarter, we facilitated an estimated $560 million in personal loan originations and our network of personal loan lenders, which is now at 24 lenders continues to grow, providing expanded coverage for consumers across the credit spectrum. In our other non-mortgage businesses, the most exciting – the most exciting development for me, is in our credit cards business, which has experienced 17 times growth since January due primarily to sales, product enhancements and improved marketing with many more initiatives in the pipeline. We expect credit cards to continue a strong growth trajectory, as issuers are highly interested in growing with us. I now, truly believe that our credit card product will be a new growth engine, for this company. Switching gears to My LendingTree, who has now grown the user base to more than 2 million consumers. It took us 11 months to get the first million users and only five months for the second million and sign-ups continue to accelerate. And we are continually improving the user experience. This quarter, we rolled out, new savings-based lending pages for mortgage, have added relevant savings alerts on the actions page of our free credit report product and introduced a social sharing component and also enhance the credit score features. And finally, I'll briefly touch on marketing. Our financial success in the quarter enabled us to accelerate, investment in our brand, and we spent nearly $10 million on broadcast, TV, radio and print. That's up more than $3 million from the prior quarter. We continue to believe that the LendingTree brand, is our sustainable competitive advantage and you should expect to see a continued investment to support that, while still very profitably scaling our business. With that context, I would like to provide our expectations for the rest of the year as well as 2016. For the full year 2015, we now anticipate revenue to be in the range of $244 million to $247 million, up from prior guidance of $225 million to $230 million and now that represents year-over-year growth of 46% to 48%. That implies Q4 revenue of $68.1 million to $71.1 million, reflecting normal seasonality in our business in Q4. We expect variable marketing margin to end the year in the range of $89 million to $91 million implying fourth quarter's VMM of $22 million to $24 million and adjusted EBITDA is expected to land in the range of $38 to $38 million for the year, up from prior guidance of $35 million to $36 million and representing impressive growth of 75% to 78% versus 2014. The implied fourth quarter adjusted EBITDA range of $9.5 million to $10 million represents year-over-year growth of 57% to 65%. More importantly, I'd like to also discuss our expectations for next year. For full year 2016, we expect revenue to grow to $315 million to $320 million, a growth rate of 28% to 30% of the midpoint of our 2015 guidance. Embedded within that you should expect continued growth from both mortgage and non-mortgage categories. Without getting too specific you should also expect mortgage revenues to generally continue sequential growth off of the elevated levels that we've achieved in the third quarter with non-mortgage revenues to continue to grow even as a percentage of the total. Variable marketing margin for next year is anticipated to be in the range of $108 million to $112 million and we anticipate adjusted EBITDA in the range of $50 million to $52 million implying year-over-year growth of 30% to 35% over the midpoint of our 2015 guidance. I continue to be thrilled with our performance this year, and I'm very, very confident in our growth prospects heading into next year. As I've said before, LendingTree is still in the early days of a significant shift to online comparison shopping for all types of loans, just like the Internet has enabled most other categories of consumer shopping. Our product will continue to improve, our sales pipeline is extremely strong and our team is executing very well. The online market for our products is growing, and LendingTree is continuing to grow wallet share with our lenders. With that, I'm happy to open it up for Q&A.

[Operator:]

[Operator Instructions] Our first question comes from the line of John Campbell of Stephens, Inc. Your line is now open.

[John Campbell:]

Hey, guys. Good morning, and congrats on a great quarter.

[Douglas Lebda:]

Thank you.

[John Campbell:]

I guess, just first, Doug, the credit card rev that's a really good result, something we were looking for, it's a nice work getting that done, but I know you mentioned you guys have relationships with multiple different issuers now. But just curious as far as 3Q 2015 results, was that driven by one or two used issuers or is that multiple or is it kind of evenly spread?

[Douglas Lebda:]

It's definitely evenly spread, some issuers still pay us more than others. But the key thing for credit card is really simply this, once we've now got the payouts, roughly equivalent to where let's say a bank rate or credit card is then we can step on the marketing gas and use our marketing advantage to go get even more share and that's basically what we are doing. The expected value of a credit card user has increased substantially just as issuers get more comfortable with us, and we're just marketing into that.

[John Campbell:]

Got it, got it. It makes sense. And then Doug on the, I guess, Gabe or Doug on the mortgage – I think you said that was expected to kind of sequentially grow each quarter and that's going to be pretty good result. If you think about the industry at the mortgage market kind of flip into more of a headwind over the next few quarters, so what kind of gives you the confidence about the mortgage growth sequentially from here?

[Douglas Lebda:]

I think the mortgage growth really just comes back to and non-mortgage as well, just comes back to the – the penetration of the market. So, LendingTree is facilitating roughly probably 1.5% of all of the mortgages in the U.S. I mean it's about 1.2%, and 1.3% that's increased substantially over the last few years, but we're in the early days of that moving online substantially. So we're seeing lenders consistently increasing their buys with us, consistently shutting down other channels that they could work with, and it's hitting their goals, and they want more of it. So now we're getting lenders to – actually in some instances even scaling up just to take more LendingTree volume.

[John Campbell:]

Got it. Got it. Thanks. Just if can squeeze one here, on the...

[Douglas Lebda:]

Approved.

[John Campbell:]

On the LendingTree, just anything you can provide anecdotally as far as user conversions or anything of it – any kind of net new sales you're seeing out of some of the – some of the guys you're signed up?

[Douglas Lebda:]

So, I could, but I – I would rather not at this time and the reason is – it's just a competitive – it's just a competitive thing for us and our competitors all like to parse these conference calls and analyze them. I can't tell you that the marketing to drive that customer is paying off within the first three months or four months and is continuing to decline. So, with those kind of payoffs, there is no reason that we can't continue to grow that channel through both paid marketing as well as just organic volume it comes that comes off of LendinTree and just organic volume from people hearing about it.

[John Campbell:]

Excellent. Appreciate it. Thanks, guys.

[Operator:]

Thank you. Our next question comes from the line of Kerry Rice of Needham & Company. Your line is open.

[Kerry Rice:]

Thanks. Great quarter, guys. Maybe back to the visibility question. Inherently, I guess, within the customer acquisition and filling that funnel, it's a little bit lumpy, there is not long-term contract. Can you talk about a little bit more about how you feel confident, or why you feel confident to give 2016 guidance at this point?

[Douglas Lebda:]

So first of on 2016 guidance, this is our practice has always been to do it on the third quarter conference call. And we just feel good about where we are, particularly as you look at where the business is run rating. Today, I don't think that the guidance we are putting out is that big of a leap. In addition to that, really the whole physics of the business work on the customer acquisition costs against the expected revenue. And with lenders increasing their buys like they are, with credit policy expanding moving into lower loan amounts, moving into lower credit bands, someone are moving into higher credit bands that just has a turbo charging on the whole business, which enables us to go out and market even more. So I think -- I'm thrilled that we were able to increase our offline spendable level that we were, and still drive profitability and I'd expect that to continue and then the offline spend helps the online spend. And I'm hoping to get back to the days where the revenues are a lot higher and the marketing to drive that as even a lot higher. But we just have – we're just seeing with lenders they just keep wanting more from us and we just keep giving it to them.

[Kerry Rice:]

Okay, great. Second question is just around the personal loans business. Can you talk a little bit about industry trend, particularly as price moves up, are you finding a price per loan moves up? Are you seeing any of the lenders look for other channels or kind of shift in any of the spending away from online channel to either partnerships or I think that you see is a lot of direct mail, but any – anything, any color there?

[Douglas Lebda:]

Sure. So, one thing that we're actually seeing and this is believe it or not a good thing, is it on a cost per funded loan basis, we are seeing pricing actually go down. And that's happening because conversion rates are going up. So, because lenders are increasingly effective at closing these loans, their cost per funded loan goes down, which obviously gives them room to not only up their bids, but also to expand the population of customers if they want. So, we're definitely, the trends I think are our friend in personal loans as well, that said obviously, particularly the online lenders are, they do believe it or not a lot of direct mail for example and drive a lot of volume that way. They also get volume from Credit Karma and they get some volume from BankRate, but LendingTree hits their cost per funded loan goals and then the best brand in the business can go market against that. And in addition to that, I'm starting to hear some very good signals from the banks and the non sort of just online vendors, who I believe will aggressively get into this space, because it's quite frankly not rocket science to have an instant approval online for a personal loan in the same way that big banks did it probably a decade ago even for home equity loans, where they also needed an appraisal or at least an automated valuation, which I would say to home equity, I expect to be the next kind of growth engine to come back as we're getting a lot of, a lot of good inquiries on home equity as well and then we'll start marketing back into that category also.

[Kerry Rice:]

All right. Thank you, Doug.

[Gabriel Dalporto:]

Yeah this is...just to emphasize Doug's point around bank lenders and others, we see a lot of interest in launching even more personal loans lenders, so we think that over time that market will just get deeper and deeper and more and more competitive for these.

[Douglas Lebda:]

Yeah the banks, definitely the banks and major financial institutions are not going to seed a big category to the online lenders and there'll be in the game as well.

[Kerry Rice:]

All right. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Hamed Khorsand of BWS Financial. Your line is now open.

[Hamed Khorsand:]

Hi, good morning. Could we start with, you're talking very positively about what your conversion rates are and bankers -- banks spending more with you, but it's transitioning to the EBITDA line, why isn't there scale on the business and why are you spending, so much on sales and marketing?

[Douglas Lebda:]

So the spend with LendingTree, first-off I mean, Hamed I think we've talked about this before. We believe, we market as far as we can to increase dollar profitability, so my analogy I'd like to get used with investors as if we only had a 10% variable marketing margin but spend $1 billion on marketing and that all fell through to the bottom-line we'd all be pretty happy. And I think that and what we did this quarter and I always call it out, as we always try to, we always endeavor want always happen not going with, but I -- with the trends been our friend for the last seven years and we've been able to execute. We always call out whenever we make additional investments in product technology or marketing and if we've – and in addition to that the offline advertising typically pays itself back over the next four months to six months. So if we have good news, we continue to spend to grow the business, so we try to maintain a balance between revenue growth and sustained an increase in profitability and that's what we're we are doing. EBITDA is up obviously about 90% year-over-year, and 25% quarter-over-quarter. So, on a percentage basis, you'll see those numbers move around, but we focus on bottom line dollars really.

[Hamed Khorsand:]

Okay. And then on the My LendingTree side, can you provide us any kind of data as far as how the customer traction is after they sign up? Is there any improvement as far as how long they stay connected with My LendingTree, and what you're seeing from the original million customers that did sign up with you?

[Gabriel Dalporto:]

Yeah. So I can, and I won't give specific numbers on this just because of competitive intelligence, but more definitely seeing monetization continue to increase the longer that people are on the side. In addition to that, it gets better for the new so called cohorts, who come on the site just because of the increased user experience – the better user experience, more frequency of alerts and just refining our logic in terms of when we reach out to people. So, one little small example for is that – for example we have to – every time we pull somebody's credit, there is obviously a cause to that, so we are getting better at predicting what changes in people's credit is and then when to send them alert. And I expect that trend to continue and at some point we'll report on all the monetization statistics of it, but it's safe to say that my LendingTree is definitely helping us to improve the – my LendingTree is definitely helping to improve our overall marketing cost and give us repeat business that's really staying sticky and by the way consumers are loving it. We're getting great feedback, but this is a great product for consumers. And I think compared to the other ones out there, we're at least equal to, if not a little better on some aspects.

[Hamed Khorsand:]

So, is it profitable yet?

[Gabriel Dalporto:]

[indiscernible] few anecdotal points. If you look back or as we look back at some of the initial cohorts when we launched the product in June 2014 and July 2014, those cohorts are still generating a pretty significant revenue, on revenue per user basis. So, we can – we are seeing that over time, we get repeated monetization even from some of our oldest cohorts.

[Hamed Khorsand:]

All right. Is that a profitable yet?

[Gabriel Dalporto:]

Oh, absolutely. Now it's even on a paid marketing basis, it's profitable. As I said within the first three months to four months and obviously if we're capturing it from organic volume off of a LendingTree or just free traffic from the web it's even – it's obviously very profitable, but yeah, yeah, on a paid marketing basis, just like all of our other products we can advertise free credit reports and actually make that profitable pretty quickly.

[Hamed Khorsand:]

All right. Great. I appreciate it. Thank you.

[Operator:]

Thank you. Our next question comes from line of Josh Goldberg a G2 Investment Partners. Your line is now open.

[Josh Goldberg:]

Hi, guys. Good morning. First obviously congratulations on just strong results, great call out the, the whole team Doug, Nikul, Gabe, Neil, [ph] Trent really just across the board almost 30% sequential growth from 69% year-over-year growth someone that's been in the company for this long, hard to believe, but congratulations. I guess, for me, it's just – it sounds like the next real growth engine can be credit cards. And if you look back at last year, personal loans kind of ticked up to about 3 million or so at this time last year and a year later, it's 15 million. And obviously it notes a different industry, in different regions, why it could go faster or slower, but do you feel that you're in position to have a credit card growth of that nature over the next 12 months to 18 months, and I have a follow-up?

[Douglas Lebda:]

Without getting the specific numbers, thank you for the kind words. I absolutely belief credit card can be the next significant growth engine for the company. And if you look at our share – if you compare, let's say our penetration in the online mortgage category, compared to some of our competitors and then you go over to credit card, we're just barely penetrating the credit card market, obviously bank rate owns something called creditcards.com, which is – I believe that's a $300 million business top line. I mean – so there is significant increases that we can make in cards and we think the LendingTree brand plays incredibly well, particularly compared to the brands out there. So, credit card is a unique animal in that -- you get improved monetization, as credit card companies get comfortable with the quality and with your compliance and with the volume that you can send them and once you saw those challenges, the payouts go up and then we can step on the marketing gas.

[Josh Goldberg:]

Okay, great. And then just on the mortgage side, obviously 38% top line growth in an environment, where mortgage originations are not growing at that level. Is there some breakdown you can give us of purchase versus refi, where you saw some of the upside relative to your expectations and obviously the level of confidence that this will continue, it is clearly the number one market in terms of size overall. And like you said, you are less than 2% in that market, even though it's a huge part of your revenue. So, maybe talk about what's really happened that sort of – kind of the pig in the pole that kind of got things going here in the third quarter and why you see it going forward?

[Gabriel Dalporto:]

Got it. So, purchase and refi are both growing and they are both growing and I know this seems, this might seem simplistic, they are growing because it's – it works for the lenders and if it works, they want to do it more and if we go back to a travel analogy or any kind of really search business analogy, once we get increased conversion rates, lenders want more of it, they upbids, they expand the categories that they are looking, they reduce their loan amounts and we get tremendous leverage on our model output, not only conversion rate from lead to close, but also the percentage of customers that we match and the number of times that we can match them. If you think about LendingTree matching let's say roughly 70% or 80% of mortgage customers with at least one lender, that's in Google terms, back in the day imagine a 20% or 30%, the people didn't have any paid search results and they weren't able to monetize those customers. We are monetizing more customers, we're monetizing those customers better and it's happening because of increased conversion rates on both purchase and refi.

[Douglas Lebda:]

And I think -- I just add up to our sales team here, they've done a phenomenal job of really embedding deeply with our lenders, growing that wallet share, helping them understand where they can make money and how they can scale their businesses, and then also adding new lenders, and banks have really kind of picked up their orders with us. So we are trying to put ourselves in a position to dominate under any type of mortgage environment, rising rate or falling rate to have a deep bench of lenders that's the economics work for, that are continuing to ask for more volumes. So really we had some rate progress on the sales side, this....

[Josh Goldberg:]

How much success are you getting in some of these bigger Tier 1 banks, which -- with your local introduction of product, with some of your other new enhancements on mortgage, can you really have that, that funnel really pickup as well?

[Douglas Lebda:]

Yes.

[Gabriel Dalporto:]

Yes. I think as the...

[Douglas Lebda:]

I think and when we're talking about banks, that's a big piece of the story is, the top banks in United States and we've got really good traction of them.

[Gabriel Dalporto:]

Yes, and when I, again I'll give you my search analogy or even a travel analogy the early days of online hotel shopping, if you went and looked for a hotel in New York City, you probably got the independent or the smaller hotels and then over time, the big guys start playing. And the big guys are, they want more volume. I just was at a bank conference a couple of week ago – a couple of weeks ago. And when I compared the size of their marketing budgets to the amount that they are spending online, their online spend is a fraction of what their offline spend is. And their comparison shopping spend with their marketplace spend is very, very small. So with the call product and the local introduction of product that business really helps to scale, even with the biggest banks.

[Josh Goldberg:]

Okay. Great. Well, thanks again. Congratulations and keep up the great works.

[Douglas Lebda:]

Thank you.

[Operator:]

Thank you. [Operator Instructions]. And I am showing no further questions at the time. I'd like to hand call back over to Doug Lebda for any closing remarks.

[Douglas Lebda:]

Thank you very much, operator. And again thank you to everybody else. It's been just a thrill to run this company and to work with a team that – we get to work with and just see the continued growth and I seem to say this almost every quarter, but I'm still more optimistic than I've ever been. I keep guessing more optimistic and it really is the in a simple notion that on lender side, we're getting great conversion rates from lenders. We're able to add new products, able to penetration deeper into their spend. And on the other side of marketing just leverage the LendingTree brand, which is the best brand in this space, which makes our offline marketing very efficient and then obviously makes our online more efficient, and we – our penetration of – of these products today is very low over the next even 10 years. It's going to track to something where I believe that consumers are going to be comparison shopping for loans, as a standard in the same way they comparison shop online for everything else and the best days are certainly ahead of us and we're still very much in the early innings here. So, thank you all very much. We'll talk to you next quarter.

[Operator:]

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