LendingTree, Inc. (TREE) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to the LendingTree conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Wessel, Head of Investor Relations. Please go ahead.

Thanks, operator. Good morning to everyone joining us on the call to discuss LendingTree's Second Quarter 2023 Financial Results. On the call today are Doug Lebda, LendingTree's Chairman and CEO; and Scott Peyree, COO and President of Marketplace Businesses; and Trent Ziegler, CFO. As a reminder to everyone, we posted a detailed letter to shareholders on our Investor Relations website earlier today. And for the purposes of today's call, we'll assume that listeners have read that letter, and we'll focus on Q&A. Before I hand the call over to Doug for his remarks, I remind everyone that during today's call, we may discuss LendingTree's expectations for future performance. Any forward-looking statements that we make 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 our 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, for the comparable GAAP definitions and full reconciliations of non-GAAP measures to GAAP. And with that, Doug, please go ahead.

Thank you, Andrew, and thank you, everyone, for joining us today. We earned $27 million of adjusted EBITDA in the second quarter, generating a 15% margin, which was well ahead of our forecast. Our outperformance was due to strong segment margin performance in Consumer and Insurance, combined with our laser focus on managing operating expenses. Although the revenue environment remains challenging across all 3 of our segments, our team's work on improving operating efficiency allowed us to meet our VMD forecasts. As the second quarter progressed, credit markets broadly tightened across the banking and lending industries, causing demand for many of our lending partners to decline. In Home, several mortgage originators were forced to reduce their bids as cost per funded loan had reached levels that were no longer sustainable. Personal and small business lenders broadly tightened their criteria lending further, causing approval rates for our customers to decline. The insurance carriers we work with, were continuing to decrease their marketing budgets as inflationary impacts will require further increases to auto and home premium rates. This revenue degradation continued into July and is baked into our updated financial outlook we're providing this morning. That's the bad news. The good news is that these macroeconomic headwinds should prove temporary. We're encouraged that the Fed is signaling it's nearing end of its campaign to tighten financial conditions with higher interest rates, the pace of inflation continues to slow. We also recognized a healthy labor market, with historically low unemployment as a key component for lenders to expand their relationships with our customers, when capital markets volatility and short-term economic uncertainties subside. We have faced -- we have made changes to adapt to the challenges we're facing. We've focused our management team to capture incremental revenue while improving our expense profile. We have improved our product function and have identified key areas for potential additional savings to result. For example, Scott Totman, our CTO, has taken over personally our data initiative. We've also brought our people back to the office, which has helped to speed decision-making and reinforce the entrepreneurial culture that has made us such a successful company historically. In the third quarter, the management team is focused on maintaining cost discipline and identifying areas of incremental revenue growth despite the various headwinds that we've been facing. We're going to release our reimagined and rebranded My LendingTree platform and continue working on improving the customer experience to drive more engagement with our customers, higher conversion rates and thus higher unit economics. Before I turn the call over to Scott for his comments, I would like to thank J.D. Moriarty for the impact he has had in his time at LendingTree. He helped lead our diversification strategy, completing 7 acquisitions in 3 years, which helped us remain solidly profitable despite the very difficult operating environment that we're facing. I could not be more excited for Scott to assume additional responsibilities of leading our lending marketplace businesses. Our sales and marketing teams will also report directly to him. His performance, the Founder and President of QuoteWizard has been exemplary through multiple cycles, including the current one. He has proven to be an excellent operator, inspirational leader and truly embodies the entrepreneurial spirit of LendingTree. We are looking forward to the positive impact he's going to have on our own business, moving forward. Scott?

Thanks, Doug. Appreciate it. First off, I'd like to say I'm really excited to take on these expanded responsibilities and looking forward to providing a larger impact for all organizations. . I've spent the last 2 weeks taking a real deep dive into all the components of the marketplace businesses, and I'm excited to say that both the quality of the people and the number of near-term opportunities that I believe exist in the core business. I will be fully focused on improving the operational efficiency and growing the core business of LendingTree -- businesses of LendingTree. First off, I really want to build a more cohesive symmetry between the marketing and sales teams as it's critically important for the people developing the products we work very closely with the people selling the product. Similar to Insurance, instead of focusing on [ prying ] every dime of revenue from customers that are already under budget constraints, we'll be focusing on providing the highest-quality, highest-intent consumers and then focusing on monetizing efforts around those consumers. As we've seen, even due to macro headwinds in the history, we're currently driving the highest-quality traffic at the highest VMM margins in our company history. I fully believe we can do that across the board in all of our business units. In Insurance, we're actually doing more VMD year-over-year over significantly lower revenue, as you can see in the numbers. I'm a big believer in having a maniacal focus on a small number of things that are the most impactful to the business. It's already becoming clear to me what some of those things and those items are, and we are actively focusing our resources towards accomplishing those items to quickly get wins on the board. Finally, we'll have a relentless focus on operational efficiency, velocity of decision-making, turning big projects into small projects, challenging long-held assumptions, focusing on understanding the sizes of opportunities before committing resources, et cetera, et cetera. We will have an aggressive offensive stance, going forward, which will have a big impact on our productivity. Thank you.

And now operator, I'd happy to open the call for questions.

[Operator Instructions] Our first question comes from Ryan from KBW.

Clearly, the hope is that the revenue environment inevitably improves. But given the importance of navigating the upcoming maturities, maybe you could provide a bit more detail on the different options you're thinking about for addressing the [ convert ] that goes current next year. Do you feel like the current free cash flow and EBITDA profile of the business can support that? And I guess on the expense side, are there additional levers you could pull if needed, in the scenario that the revenue environment doesn't go your way?

I'll open up broadly and then let Trent give you the details. Obviously, this is something that we are very, very focused on, and we have had a number of conversations internally. We have a number of options that we are exploring, I don't know how much of those details we want to talk about. But to the extent of other levers, the answer is yes. We do have discretionary product investments that I've talked about that if they -- if things do not bear fruit, you can certainly make changes there. So yes, there are other cost levers you can do. . Right now, we want to maintain a balance between [ new ] focus, a small investment initiative -- investment into initiatives around data, customer experience because we think they're core to the business. But at the same time, we're incredibly judicious with that. But suffice it to say, we are very, very, very focused on that maturity and would hope to be refinancing it in some way. Go ahead, Trent.

Yes. I mean, I think Doug covered it well. We're obviously laser-focused on it. We're exploring a bunch of alternative options available to us. I think the good news is we take some solace in the fact that there's -- we have 4 quarters left before that maturity becomes current. We've got 8 quarters left before it actually matures. And so we're weighing all of our options relative to the performance of the business. Obviously, the option's available to us to get a little bit better, should performance improve. And I think we have some reason to believe that as we get a little bit more certainty around macro, there's good reason to believe that the Insurance backdrop could turn a little bit as we head into next year, some stability in some of our consumer businesses should provide some upside. And so we're weighing all those alternatives relative to the performance of the business.

Yes. And the only thing I'd add is, in an environment like this, where your unit economics on the revenue side, whether it's the price lenders want to pay, the amount of volume or the coverage of how wide they're willing to go, as all of that has gone negative and we have gotten sharper and sharper and sharper on the marketing side, particularly in Insurance, and Scott just talked about bringing that to the [ lending ] side, the business and the margin profile increases, when you get any sort of tailwind on the other side, whether it's a conversion rate increase through product improvement, whether it's lenders expanding demand in some way, that margin tends to stick. So obviously, sometime in the next many quarters, we're going to have to be improving our financial profile so that people are going to want to lend money to us. But we are laser, laser-focused on that, while Trent is also working on financial options as well.

I appreciate all that color. I guess on the guidance, the revised guide looks like it implies second-half EBITDA of around $30 million to $40 million by our math round numbers, $60 million to $80 million annualized. And it looks like the implied 4Q EBITDA guide is at the low end of that range on an annualized basis. I guess, should we think about that as kind of the run rate EBITDA power, as things stand here for the business today? And are there key variables that could move the needle in the second half relative to the guidance that you'd call out specifically?

I guess, what's -- we're calling out relative to that would be -- obviously, we're -- the revenue challenges are real, and we're seeing those, and that's probably not a surprise to anybody, given the headlines around -- as the worst mortgage environment in 20 years. We've talked about home equity as a relative source of strength. Within that, that's starting to be a little bit more challenging as rates continue to go higher, that's becoming less attractive for consumers. . And so there are a lot of reasons why we've had to pull down our revenue outlook for the rest of the year. What I would say is, we are forecasting similar seasonal declines in Q4. Q4 is always a seasonally much slower period for us. And I think there is a little bit of uncertainty as to how much of that seasonal effect show up in a year, where sort of the baseline has already beaten up a little bit, right? And so we're certainly taking a conservative stance with regard to forecasting those trends through the rest of the year and in the fourth quarter in particular.

Yes. The way I -- just to add on a little bit, I think of Q2 as solid quarter, not where it historically has been, but call it fairly normal. Q3, as we talked about, you're seeing some pullbacks from lenders that we do not believe are institutionalized in the market. It's not like our product doesn't work. It's not like the buyers aren't there. It's literally just that they -- just like we won't bid on Google search [ terms ] path to point of profitability, lenders do the same thing with us. So we don't see that, clearly, as permanent. The other thing that we take some comfort in is when we talk to lenders about what they're doing with us vis-a-vis competitors, we feel like we're, generally speaking, one of the last places that they turn off or that they pull back on. And then Q4, as Trent said, is seasonal, is a seasonal downturn. Typically, in our industry, people -- consumers in general are not thinking about financial services in Q4, and then they really think about it in Q1. So no, I wouldn't take this as the ongoing run rate.

Short answer to that question is I think Q3 is probably a better baseline to use as your run rate. Q3 is a better baseline than Q4 as you look at kind of how you model it into next year.

Our next question comes from Jed Kelly from Oppenheimer & Company.

Just circling back on the Insurance segment, should we expect this margin profile you're seeing to continue as demand from the carriers is depressed? And then just looking at the insurance marketing segment in general, Scott, there's quite a few of the marketplaces that participate in this business. Are all of them going to be able to survive as this continues to get pushed out? Or do you see some type of consolidation happening in the industry? Just can you touch on how you think these headwinds are going to affect some of your competitors?

Yes. Thanks, Jed. I'll start with the margins. Yes, in the compressed market, we would expect our margins to remain high. Because like I mentioned earlier, we're just focusing on the highest quality, highest intent on consumers for our clients with the limited budgets they have. And honestly, there -- our competitors' advertising is very suppressed, our direct clients, like they're not spending any money directly with a lot of places they historically do. So the traffic -- being that we're focusing, we're not spreading our spend out in our monetization now like spin like butter, like we're focusing on the right areas. So we would expect our margins to stay good. Now when the budget started coming back in '24, then margins might be start getting compressed a little bit as the marketplaces get more competitive. But that said, it will be very conscientious about total VMD dollars going up significantly, which we think we're really well positioned for that when the budget starts coming back, which I do expect them to start coming back in early '24. Now that kind of leads into your final question of the competitors. And yes, long story short is there will be a number of players that don't survive this. There's a number of -- I would almost say, you start with the smaller marketing affiliates that maybe aren't as well known out there, that do go out and kind of clog up the marketplace a little bit. Those guys have been hit really hard, and some of them have exited the marketplaces like the SCM marketplaces, for example, and I don't know if they'll ever come back into those marketplaces. Some of them just disappear. Some of them might get consolidated into some of the bigger players. I don't know if any of the big players, ourselves included, are out looking to actively look to buy any of these guys without getting an absolute screaming deal out of it. But I do think when we get into next year, similar to the 2016 downturn, there's going to be a lot fewer players in the marketplace, which does create a Goldilocks scenario for a performance marketing company.

And then just as a follow-up, Scott, what is the team looking at? Is it interest rates stabilizing, supply chain stabilizing that gives you confidence that the carriers are going to get their profitable -- underwriting profitability under control?

Insurance is not interest rates as much as it is inflation, that's insurance companies' problems. And so they need inflation -- because right now -- for the past 18 months, they have not been able to keep their rate increases at the pace of how inflation has been going. And inflation in -- as well publicized in the auto insurance industry for car repairs and whatnot has been even higher than the overall CPI, and it still is quite a bit higher. But that all said, it is starting to cool down and there is positive signs, used car prices, cost of car repairs, it's starting to normalize and come down. So that equation where they can't catch up to inflation is now starting to change with the rate increases, inflation started to stabilize in the car insurance industry, and the rate increases keep happening. So sooner or later, those lines will cross. They will get back to a profitable combined ratio scenario. And so then you can -- and so then the big hope with a lot of these carriers is that they're feeling a really good spot by the end of '23 when the budget cycle is switched to '24 that they're feeling that all the policies they're bringing on are profitable policies they're bringing on and they reset the budgets going into '24. And based on their confidence level, they can get aggressive really quick. But the big driving factor is inflation stabilizing.

Yes, we were talking about this yesterday at our Board meeting, and Scott hit the point of the combined ratio, but also that it varies state by state. In a number of your large states, where, for example, California, that state-by-state, things do work. Insurance carriers, if they're not going to make money, they're not going to go market to originate that policy for sure, and that's the same thing you see with the lenders. And so with -- when rates stabilize and inflation stabilizes, some way, those are both intertwined, we feel like we're going to be a much sharper company and be ready to roll.

Our next question comes from Youssef Squali from Truist Securities.

So maybe a quick one for Doug and one for Trent. So Doug, obviously, anybody looking at Tree right now, they're looking past the second half of the year, they're looking into '24 and beyond. Knowing what you know today, what kind of segments -- or what segment, sorry, do you see kind of coming back first? And what are the kind of indicators or gating factors that you're kind of watching for that turnaround? And then Trent, good job on the operating efficiencies that you've shown against a pretty tough top line. But how much of that operating cost efficiency do you think you can maintain maybe into next year as revenues come back?

I'll take the first. I would say, in this order, I think you'll see Insurance come back first. I think you'll see probably Consumer come back second. And I think you'll see Home come back third. And by the way, the -- I think -- as you think about it, those are also in order of probably the most -- the biggest opportunities as well for revenue and profit contribution. The Insurance business got covered. That's a fact of simply insurance companies being able to underwrite -- get their rates higher, so that they can underwrite appropriately and profitably. Consumer, keep in mind that many of the personal loan lenders or pretty much most of them are either marketplace lenders or correspondent lenders that are selling funds directly into the capital markets. So the capital markets are tighter, which we don't know what the Fed is doing, that's going to hurt there. But that air hose snaps that. The capital market has stepped on that arrows from time to time with us, but it always bounces back. And then the Home business, right now, you've got -- refinancing obviously doesn't make sense for anybody. And in the purchase market, home buying and selling is not what it would be, given high rates and buyers and sellers really kind of staring at each other in that market. And then I would say, underlying all of that is us trying to improve our consumer experience, which improves conversion rate, which makes the whole business profitable, I think Insurance, Consumer and Home. And then the other thing that we really monitor, as I said before, is like if we're gaining share or maintaining share versus competitors, that's important, too. I won't say it's perfect in every one of those, but I do know that I feel really good from the standpoint of our partnerships, the efficacy of the model. And lenders just want to do business with us, and they're telling us this is -- it's an economic thing right now, and they'll be back.

Yes. And then, Youssef, on the operating efficiency point, I mean, I think what we've seen is we've taken a lot of steps over the last 12 -- 6 to 12 months to simplify the business in many respects. As Doug noted earlier, like candidly, we still have some discretionary investment going on, right, that we could choose to dial back if the situation warranted. . But no, I mean, I think we've seen, as a result of leaning out and getting more focused and efficient, we're already operating better and faster and on more -- fewer focused things, right? And so as the revenue opportunity comes back, looking into next year, there's not a need to continue to staff up considerably against that revenue backdrop. I don't see our OpEx growing materially at all as we look into next year.

So I'll tell you, just long out on one change that we made internally, which is most companies you might set goals and OKRs at the beginning of the year, probably do it in November. And then by January, February, a highly changing environment that is pretty much irrelevant. We've moved to a quarterly cycle. And then to the fewer [ things ] comment, everybody in the company is responsible for 3 to 5 things that you're going to make sure that you deliver on in the next 3 months. I mentioned in the last quarter, we did that with our -- how we do product. By the way, we've also brought on a lot of new management and made a lot of changes to make us sharper as well, too. But that quarterly cycle enables us to pivot, enables us to look at each one of our initiatives, say, "Okay, like this one's working. That one is not. This one is behind, right? Let's ship personnel over here. The market's changed, let's double down over there." So it has enabled us to be much more nimble, and we're doing a lot more with individualized, focused teams that are cross-functional who can make all the decisions. So as Scott was alluding to, to just getting faster, a lot of that -- all goes into it. We're really, really trying to improve the way we do operations and -- at this company.

Our next question comes from John Campbell from Stephens Inc.

Trent, I think in the past, you've talked to the belief that you can return the business back to high teens or kind of possibly 20% type of EBITDA margins. You guys are obviously there in the past. You're going to need a degree of a rebound in the top line, I'm sure, for that better leverage. But you've taken a lot of steep cost cuts. It sounds like you -- there's going to be a little bit more in back half. And Trent, I think you said that maybe very modest, if any, OpEx growth next year. But maybe if you guys can talk about how you're feeling about that margin target now? And maybe what type of top line you think you might need to get back to those past margin levels?

Yes. No, thanks, John. I mean, look, we hit 15% EBITDA margins in the second quarter. That's a level that we hadn't been at in quite some time, and that's against a pretty bleak revenue backdrop. I mean obviously, the revenue trend continues to work against us in the back half of this year. But I think we have reconfigured the cost structure of the business in such a way that any rebound in the top line should result in us getting back to mid- to high teens EBITDA margins in the not-too-distant future. I don't think it would take much.

Yes, I'll just add in there. I mean, just for specific example, going to Insurance is some of our largest clients, which we -- when they come back and they start spending significant budget again with us, we don't have to hire a bunch of people or anything. We don't -- we have the same account managers, we have the same marketers. We're just generating more revenue in VMD over the same cost basis. So as Trent alluded to in an earlier question, I believe across all the industries we're in, we can see significant revenue in VMD growth without the need for OpEx growth for quite some time.

Yes, makes a lot of sense. And then on Homes, I saw in the shareholder letter, you guys called out the 11% decline in HELOC. And just kind of triangulating that or at least in my math, I'm showing that mortgage would be down maybe 15%, 20% or so sequentially. The industry, it looks like, was actually up 40%. That's just for seasonality. I'm guessing you guys maybe just kind of deemphasize that from the VMD standpoint. So any kind of color you can provide there? And then also, I don't want to put your feet to the fire, but I mean, is it potentially -- do you feel like this could be the trough for Homes or maybe just mortgage with the 2Q results?

So picking the trough, listen, we hope so. And at the same time, the mortgage lenders are taking capacity. From an industry standpoint like -- and channel checks, et cetera, it feels like purchase is poised to do better and rates are -- and the mortgage rates seem to not be rising. The flip side of that would be some lenders are taking -- and I think you'll hear from it from some lenders are doing layoffs and pulling back on capacity. So from the standpoint of the price they're willing to pay, the quantity they want and the coverage, the demand equation, their capacity -- I want to make sure we're not going to see reductions in capacity, which would reduced the demand equation. Now that said, flip side to that is one of the things that we are going to do aggressively, particularly with Scott coming in here, is really get out and see our clients, plan with them and be much more closer to them over this period of time personally from both Scott and me and the rest of the team. So I expect some just operational wins there. Scott, anything to add?