LENDINGTREE, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Caution Regarding Forward-Looking Information
This report contains "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements related to our anticipated financial performance, business prospects and strategy; anticipated trends and prospects in the various industries in which our businesses operate; new products, services and related strategies; and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. The use of words such as "anticipates," "estimates," "expects," "projects," "intends," "plans" and "believes," among others, generally identifies forward-looking statements. Actual results could differ materially from those contained in the forward-looking statements. Factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include those matters discussed or referenced in Part II, Item 1A. Risk Factors included elsewhere in this quarterly report and Part I, Item 1A. Risk Factors of the 2021 Annual Report. Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views ofLendingTree, Inc.'s management as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations, except as required by law.
Company presentation
LendingTree, Inc. is the parent ofLT Intermediate Company, LLC , which holds all of the outstanding ownership interests ofLendingTree, LLC , andLendingTree, LLC owns several companies. We operate what we believe to be the leading online consumer platform that connects consumers with the choices they need to be confident in their financial decisions. Our online consumer platform provides consumers with access to product offerings from ourNetwork Partners , including mortgage loans, home equity loans, reverse mortgage loans, auto loans, credit cards, deposit accounts, personal loans, student loans, small business loans, insurance quotes and other related offerings. In addition, we offer tools and resources, including free credit scores, that facilitate comparison shopping for loans, deposit products, insurance and other offerings. We seek to match consumers with multiple providers,who can offer them competing quotes for the product, or products, they are seeking. We also serve as a valued partner to lenders and other providers seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer inquiries we generate with theseNetwork Partners . Our My LendingTree platform offers a personalized comparison-shopping experience by providing free credit scores and credit score analysis. This platform enables us to monitor consumers' credit profiles and then identify and alert them to loans and other offerings on our marketplace that may be more favorable than the terms they may have at a given point in time. This is designed to provide consumers with measurable savings opportunities over their lifetimes. We are focused on developing new product offerings and enhancements to improve the experiences that consumers andNetwork Partners have as they interact with us. By expanding our portfolio of financial services offerings, we are growing and diversifying our business and sources of revenue. We intend to capitalize on our expertise in performance marketing, product development and technology, and to leverage the widespread recognition of the LendingTree brand, to effect this strategy. We believe the consumer and small business financial services industry is still in the early stages of a fundamental shift to online product offerings, similar to the shift that started in retail and travel many years ago and is now well established. We believe that like retail and travel, as consumers continue to move towards online shopping and transactions for financial services, suppliers will increasingly shift their product offerings and advertising budgets toward the online channel. We believe the strength of our brands and of our partner network place us in a strong position to continue to benefit from this market shift. The LendingTree Loans business is presented as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of operations and comprehensive income and consolidated statements of cash flows for all periods 30
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present. Except for the discussion under the heading “Discontinued Operations”, the MD&A’s discussion of financial condition and results of operations reflects our continuing operations.
Economic conditions
DuringMarch 2020 , a global pandemic was declared by theWorld Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus ("COVID-19"). The pandemic has significantly impacted the economic conditions in theU.S. , as federal, state and local governments react to the public health crisis, creating significant uncertainties in theU.S. economy. The downstream impact of various lockdown orders and related economic pullback are affecting our business and marketplace participants to varying degrees. We are continuously monitoring the impacts of the current economic conditions related to the COVID-19 pandemic and the effect on our business, financial condition and results of operations. Of our three reportable segments, the Consumer segment was most impacted as unsecured credit and the flow of capital in certain areas of the market have contracted. Most of our selling and marketing expenses are variable costs that we adjust dynamically in relation to revenue opportunities to profitably meet demand. Thus, as our revenue was negatively impacted during the COVID-19 pandemic, our marketing expenses generally decreased in line with revenue. During the first nine months of 2022, the challenging interest rate environment combined with annual inflation persistently running above 8% has presented additional challenges for many of our mortgage lending and insurance partners. We have seen the most significant impact in our Home segment as mortgage rates have nearly doubled over the first nine months of 2022, causing a sharp decline in refinance volumes and more recent pressure on purchase activity. Although our Insurance segment continues to rebound from the trough in the fourth quarter of 2021, the recovery has been slower than expected as demand from our carrier partners remains volatile as premium increases continue to chase inflation.
Sector reports
We have three segments to report: Home, Consumer Goods and Insurance.
Recent business acquisitions
OnFebruary 28, 2020 , we acquired an equity interest in Stash for$80.0 million . OnJanuary 6, 2021 we acquired an additional equity interest for$1.2 million . Stash is a consumer investing and banking platform. Stash brings together banking, investing, and financial services education into one seamless experience offering a full suite of personal investment accounts, traditional andRoth IRAs , custodial investment accounts, and banking services, including checking accounts and debit cards with a Stock-Back® rewards program. In the fourth quarter of 2021, we sold a portion of our investment in Stash for$46.3 million , realizing a gain on the sale of$27.9 million .
In
Our new head office is located on approximately 176,000 square feet of office space at
With our expansion inNorth Carolina , inDecember 2016 , we received a grant from the state that provides up to$4.9 million in reimbursements through 2029 beginning in 2017 for investing in real estate and infrastructure in addition to increasing jobs inNorth Carolina at specific targeted levels through 2021, and maintaining the jobs thereafter. Additionally, the city ofCharlotte and the county ofMecklenburg provided a grant that will be paid over five years and is based on a percentage of new property tax we pay on the development of a corporate headquarters. InDecember 2018 , we received an additional grant from the state that provides an aggregate amount up to$8.4 million in reimbursements through 2032 beginning in 2021 for increasing jobs inNorth Carolina at specific targeted levels through 2024, and maintaining the jobs thereafter. 31
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Recent Trends in Mortgage Interest Rates
Interest rate and market risk can be significant in the mortgage lead generation business. Short-term fluctuations in mortgage interest rates primarily affect consumer demand for mortgage refinancing, while long-term fluctuations in mortgage interest rates, combined with
Typically, when interest rates decline, we see increased consumer demand for mortgage refinancing, which in turn leads to increased traffic to our website and decreased selling and marketing efforts associated with that traffic. At the same time, lender demand for leads from third-party sources typically decreases, as there are more consumers in the marketplace seeking refinancings and, accordingly, lenders receive more organic mortgage lead volume. Due to lower lender demand, our revenue earned per consumer typically decreases, but with correspondingly lower selling and marketing costs. Conversely, when interest rates increase, we typically see decreased consumer demand for mortgage refinancing, leading to decreased traffic to our website and higher associated selling and marketing efforts associated with that traffic. At the same time, lender demand for leads from third-party sources typically increases, as there are fewer consumers in the marketplace and, accordingly, the supply of organic mortgage lead volume decreases. Due to high lender demand, we typically see an increase in the amount lenders will pay per matched lead, which often leads to higher revenue earned per consumer. However, increases in the amount lenders will pay per matched lead in this situation is limited by the overall cost models of our lenders, and our revenue earned per consumer can be adversely affected by the overall reduced demand for refinancing in a rising rate environment.
We dynamically adjust sales and marketing spend across interest rate environments to optimize our results against these variables.
According to Freddie Mac, 30-year mortgage interest rates increased from a monthly average of 3.10% inDecember 2021 to a monthly average of 6.11% inSeptember 2022 . On a quarterly basis, 30-year mortgage interest rates in the third quarter of 2022 averaged 5.58%, compared to 2.87% in the third quarter of 2021 and 3.08% in the fourth quarter of 2021. [[Image Removed: tree-20220930_g2.jpg]] 32
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Typically, as mortgage interest rates rise, there are fewer consumers in the marketplace seeking refinancings and, accordingly, the mix of mortgage origination dollars will move toward purchase mortgages. According toMortgage Bankers Association ("MBA") data, total refinance origination dollars decreased to 19% of total mortgage origination dollars in the third quarter of 2022 compared to 53% in the fourth quarter of 2021. In the third quarter of 2022, total refinance origination dollars decreased 82% from the fourth quarter of 2021 and 84% from the third quarter of 2021. Industry-wide mortgage origination dollars in the third quarter of 2022 decreased 52% from the fourth quarter of 2021 and 55% from third quarter of 2021. InOctober 2022 , the MBA projected 30-year mortgage interest rates to increase during 2022, to an average 6.7% for the year. According to MBA projections, the mix of mortgage origination dollars is expected to move back towards purchase mortgages with the refinance share representing approximately 30% for 2022.
The
The health of theU.S. real estate market and interest rate levels are the primary drivers of consumer demand for new mortgages. Consumer demand, in turn, affects lender demand for purchase mortgage leads from third-party sources. Typically, a strong real estate market will lead to reduced lender demand for leads, as there are more consumers in the marketplace seeking financing and, accordingly, lenders receive more organic lead volume. Conversely, a weaker real estate market will typically lead to an increase in lender demand, as there are fewer consumers in the marketplace seeking mortgages. According to Fannie Mae data, existing-home sales decreased 24% in the third quarter of 2022 compared to the fourth quarter of 2021, and 22% compared to the third quarter of 2021. Fannie Mae predicts an overall decrease in existing-home sales of approximately 18% in 2022 compared to 2021.
MyLendingTree
We consider certain metrics related to MyLendingTree set forth below to help us evaluate our business and growth trends and assess operational efficiencies. The calculation of the metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts or investors. We continued to grow our user base and added 0.8 million new users in the third quarter of 2022, bringing cumulative sign-ups to 23.9 million atSeptember 30, 2022 . We attribute$29 million of revenue in the third quarter of 2022 to registered MyLendingTree members across the LendingTree platform. Our focus on improving the MyLendingTree experience for consumers remains a top priority. Becoming an integrated digital advisor will greatly improve the consumer experience, which we expect to result in higher levels of engagement improved membership growth rates, and ultimately stronger financial results. 33
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Results of Operations for the Three and Nine Months endedSeptember 30, 2022 and 2021 Three Months Ended September 30, Nine Months Ended September 30, $ % $ % 2022 2021 Change Change 2022 2021 Change Change (Dollars in thousands) Home$ 64,927 $ 112,422 $ (47,495) (42) %$ 240,809 $ 345,408 $ (104,599) (30) % Consumer 102,661 100,011 2,650 3 % 309,873 233,594 76,279 33 % Insurance 70,231 84,837 (14,606) (17) % 232,025 260,714 (28,689) (11) % Other 17 180 (163) (91) % 230 498 (268) (54) % Revenue 237,836 297,450 (59,614) (20) % 782,937 840,214 (57,277) (7) % Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below) 14,105 15,020 (915) (6) % 44,240 42,849 1,391 3 % Selling and marketing expense 176,875 206,475 (29,600) (14) % 565,569 589,143 (23,574) (4) % General and administrative expense 39,540 40,126 (586) (1) % 115,802 114,926 876 1 % Product development 14,043 13,384 659 5 % 42,413 39,142 3,271 8 % Depreciation 5,274 4,808 466 10 % 15,024 12,969 2,055 16 % Amortization of intangibles 6,582 10,345 (3,763) (36) % 21,574 32,967 (11,393) (35) % Change in fair value of contingent consideration - (196) 196 100 % - (8,249) 8,249 100 % Restructuring and severance - 47 (47) (100) % 3,760 47 3,713 7,900 % Litigation settlements and contingencies (7) 22 (29) (132) % (41) 360 (401) (111) % Total costs and expenses 256,412 290,031 (33,619) (12) % 808,341 824,154 (15,813) (2) % Operating (loss) income (18,576) 7,419 (25,995) (350) % (25,404) 16,060 (41,464) (258) % Other (expense) income, net: Interest expense, net (5,720) (11,826) (6,106) (52) % (19,990) (31,881) (11,891) (37) % Other income 1,523 - 1,523 - % 1,806 40,072 (38,266) (95) % (Loss) income before income taxes (22,773) (4,407) (18,366) (417) % (43,588) 24,251 (67,839) (280) % Income tax (expense) benefit (135,910) 1 (135,911) - % (133,956) 455 (134,411) - % Net (loss) income from continuing operations (158,683) (4,406)
(154,277) (3,502)% (177,544) 24,706 (202,250)
(819) % Loss from discontinued operations, net of tax (1) (54) (53) (98) % (4) (3,516) (3,512) (100) % Net (loss) income and comprehensive (loss) income$ (158,684) $ (4,460) $ (154,224) (3,458) %$ (177,548) $ 21,190 $ (198,738) (938) % Revenue Revenue decreased in the third quarter of 2022 compared to the third quarter of 2021, and in the first nine months of 2022 compared to the first nine months of 2021, due to decreases in our Home and Insurance segments, partially offset by an increase in our Consumer segment. Our Consumer segment includes the following products: credit cards, personal loans, small business loans, student loans, auto loans, deposit accounts, and other credit products such as credit repair and debt settlement. Many of our Consumer segment products are not individually significant to revenue. Revenue from our Consumer segment increased$2.7 million , or 3%, in the third quarter of 2022 from the third quarter of 2021. Revenue from our Consumer segment increased$76.3 million , or 33%, in the first nine months of 2022 from the first nine months of 2021, primarily due to increases in our personal loans, small business loans, and credit cards. Many of our products in the Consumer segment experienced increases in revenue in the third quarter and first nine months of 2022 from the third quarter and first nine months of 2021 due to the recovery from the impacts of the COVID-19 pandemic. Revenue from our personal loans product increased$3.9 million , or 12%, to$37.7 million in the third quarter of 2022 from$33.8 million in the third quarter of 2021, and increased$41.3 million , or 56%, to$115.2 million in the first nine months of 34
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2022 from
Revenue from our credit cards product decreased$2.6 million , or 10%, to$24.3 million in the third quarter of 2022 from$26.9 million in the third quarter of 2021 primarily due to a decrease in the number of consumer clicks. Revenue from our credit cards product increased$14.5 million , or 22%, to$81.4 million in the first nine months of 2022 compared to$67.0 million in the first nine months of 2021, due to an increase in revenue earned per click. For the periods presented, no other products in our Consumer segment represented more than 10% of revenue; however, certain other Consumer products experienced notable changes. Revenue from our small business loans product increased$1.3 million , or 9%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to an increase in revenue earned per consumer. Revenue from our small business loans product increased$19.8 million , or 62%, in the first nine months of 2022 compared to the first nine months of 2021, primarily due to an increase in revenue earned per consumer and an increase in the number of consumers completing request forms. Our Home segment includes the following products: purchase mortgage, refinance mortgage, home equity loans, and reverse mortgage loans. Revenue from our Home segment decreased$47.5 million , or 42%, in the third quarter of 2022 from the third quarter of 2021, and$104.6 million , or 30%, in the first nine months of 2022 compared to the first nine months of 2021, primarily due to a decrease in revenue from our refinance mortgage product, partially offset by increases in our home equity and purchase mortgage products. Revenue from deposits increased$2.4 million , or 134%, in the third quarter of 2022 compared to the third quarter of 2021, and$3.3 million , or 52%, in the first nine months of 2022 compared to the first nine months of 2021, primarily due to increases in both revenue earned per consumer and in the number of consumers. Revenue from student loans decreased$3.3 million , or 40%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to a decrease in the number of consumers. Revenue from student loans decreased$5.8 million , or 43%, in the first nine months of 2022 compared to the first nine months of 2021, primarily due to revenue earned per consumer. Revenue from our mortgage products decreased$58.1 million , or 63%, to$34.5 million in the third quarter of 2022 from$92.6 million in the third quarter of 2021, and decreased$139.6 million or 47%, to$156.9 million in the first nine months of 2022 from$296.5 million in the first nine months of 2021. Revenue from our refinance mortgage product decreased$58.8 million in the third quarter of 2022 compared to the third quarter of 2021, and$150.4 million in the first nine months of 2022 compared to the first nine months of 2021, due to a decrease in the number of consumers completing request forms as interest rates have risen. Revenue from our purchase mortgage product increased$10.8 million in the first nine months of 2022 compared to the first nine months of 2021, primarily due to an increase in revenue earned per consumer. Revenue from our home equity loans product increased$10.0 million , or 52%, to$29.0 million in the third quarter of 2022 from$19.0 million in to the third quarter of 2021, and increased$34.0 million , or 73%, to$80.5 million in the first nine months of 2022 from$46.5 million in the first nine months of 2021, primarily due to increases in consumers completing request forms and in revenue earned per consumer. Revenue from our Insurance segment decreased$14.6 million , or 17%, to$70.2 million in the third quarter of 2022 from$84.8 million in the third quarter of 2021 due to decreases in the number of consumers seeking insurance coverage and in revenue earned per consumer. Revenue from our Insurance segment decreased$28.7 million , or 11%, to$232.0 million in the first nine months of 2022 from$260.7 million in the first nine months of 2021 due to a decrease in the number of consumers seeking insurance coverage, partially offset by an increase in revenue earned per consumer.
Revenue cost
Cost of revenue consists primarily of costs associated with compensation and other employee-related costs (including stock-based compensation) relating to internally-operated customer call centers, third-party customer call center fees, credit scoring fees, credit card fees, website network hosting, and server fees. Cost of revenue decreased in the third quarter of 2022 from the third quarter of 2021 by$0.9 million . Cost of revenue increased$1.4 million in the first nine months of 2022 from the first nine months of 2021, due to an increase in website network hosting and server hosting fees. Cost of revenue as a percentage of revenue increased to 6% in the third quarter of 2022 compared to 5% in the third quarter of 2021, and increased to 6% in the first nine months of 2022 compared to 5% in the first nine months of 2021. 35
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Sales and marketing expenses
Selling and marketing expense consists primarily of advertising and promotional expenditures and compensation and other employee-related costs (including stock-based compensation) for personnel engaged in sales or marketing functions. Advertising and promotional expenditures primarily include online marketing, as well as television, print and radio spending. Advertising production costs are expensed in the period the related ad is first run. Selling and marketing expense decreased in the third quarter of 2022 compared to the third quarter 2021 by$29.6 million and decreased in the first nine months of 2022 from the first nine months of 2021 by$23.6 million , primarily due to the changes in advertising and promotional expense discussed below. Additionally, compensation and benefits decreased$1.2 million in the third quarter of 2022 compared to the third quarter 2021.
Advertising and promotion expenses are the largest component of sales and marketing expenses and include the following:
Three Months Ended September 30, Nine Months Ended September 30,
$ % $ %
2022 2021 Change Change 2022 2021 Change Change
(Dollars in thousands)
Online$ 145,478 $ 185,214 $ (39,736) (21) %$ 495,662 $ 527,073 $ (31,411) (6) % Broadcast 15,152 3,065 12,087 394 % 16,762 6,881 9,881 144 % Other 2,514 3,268 (754) (23) % 10,948 12,891 (1,943) (15) % Total advertising expense$ 163,144 $ 191,547 $ (28,403) (15) %$ 523,372 $ 546,845 $ (23,473)
(4)%
In the periods presented, advertising and promotion expenses are equivalent to our variable marketing expenses. See Variable Marketing Margin below for more information on variable marketing spend.
Revenue is primarily driven by Network Partner demand for our products, which is matched to corresponding consumer requests. We adjust our selling and marketing expenditures dynamically in relation to anticipated revenue opportunities in order to ensure sufficient consumer inquiries to profitably meet such demand. An increase in a product's revenue is generally met by a corresponding increase in marketing spend, and conversely a decrease in a product's revenue is generally met by a corresponding decrease in marketing spend. This relationship exists for our Home, Consumer, and Insurance segments. We adjusted our advertising expenditures in the third quarter and first nine months of 2022 compared to the third quarter and first nine months of 2021 in response to changes in Network Partner demand on our marketplace. We will continue to adjust selling and marketing expenditures dynamically in response to anticipated revenue opportunities.
General and administrative costs
General and administrative expenses primarily include compensation and other personnel costs (including stock-based compensation) for personnel engaged in finance, legal, tax, IT, human resources and management functions, as well as as facilities and infrastructure costs and fees for professional services.
General and administrative expense decreased in the third quarter of 2022 compared to the third quarter of 2021, due to a$2.6 million decrease in compensation and benefits, partially offset by an increase in technology expenses of$1.6 million . General and administrative expense increased in the first nine months of 2022 compared to the first nine months of 2021 primarily due to increases in technology of$4.2 million , loss on assets of$1.6 million , other tax expense of$1.5 million , an increase in travel and entertainment expenses of$1.5 million , and an increase in fees and charges of$1.3 million , partially offset by decreases in compensation and benefits of$7.6 million and a decrease in professional fees of$1.8 million . General and administrative expense as a percentage of revenue in the third quarter of 2022 was 17% compared to 13% for the third quarter of 2021, and 15% for the first nine months of 2022 compared to 14% for the first nine months of 2021. Product development
Product development expenses primarily include compensation and other employee-related costs (including stock-based compensation) and third-party labor costs that are not capitalized, for employees and consultants engaged in the design, development, testing and improvement of technology.
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Product development spending increased in the third quarter and first nine months of 2022 compared to the third quarter and first nine months of 2021, as we continued to invest in the internal development of features, functionality and new and enhanced business opportunities that we believe will enable us to better and more fully serve consumers and
Amortization of intangible assets
The decrease in amortization of intangibles in the third quarter and first nine months of 2022 compared to the third quarter and first nine months of 2021 was due to certain intangible assets associated with our recent business acquisitions becoming fully amortized.
Conditional consideration
During the third quarter and first nine months of 2022, we did not recognize any contingent consideration expense. All price supplements were made before 2022.
During the third quarter and first nine months of 2021, we recorded an aggregate gain of$0.2 million and$8.2 million respectively, due to adjustments in the estimated fair value of the earnout payments related to the QuoteWizard acquisition.
Restructuring and dismissal
In the first quarter of 2022, we completed a workforce reduction of approximately 75 employees, and in the second quarter of 2022 completed a workforce reduction of approximately 25 employees. The Company incurred total expense of$3.8 million consisting of employee separation costs of$2.7 million and non-cash compensation expense of$1.1 million due to the accelerated vesting of certain equity awards. All employee separation costs are expected to be paid by the first quarter of 2023.
Interest expense
Interest expense decreased in the third quarter and first nine months of 2022 compared to the third quarter and first nine months of 2021 primarily due to the adoption of ASU 2020-06 onJanuary 1, 2022 , whereby we derecognized the remaining debt discounts on the 2022 Notes and 2025 Notes and therefore no longer recognize any amortization of debt discounts as interest expense partially offset by an increase in interest from our Term Loan Facility. See Note-2 Significant Accounting Policies for additional information.
Other income
For the first nine months of 2021, other income primarily consists of a$40.1 million gain on our investment in Stash as a result of an adjustment to the fair value based on observable market events. See Note 7-Equity Investments for additional information on the equity interest in Stash.
income tax expense
For the third quarter and first nine months of 2022, the effective tax rate varied from the federal statutory rate of 21% primarily due to expense of$139.7 million to record a full valuation allowance against our net deferred tax assets, excess tax expense of$1.8 million and$4.7 million , respectively, resulting from vesting of restricted stock in accordance with ASU 2016-09 and the effect of state taxes. See Note 11-Income Taxes for additional information on the valuation allowance. For the third quarter and first nine months of 2021, the effective tax rate varied from the federal statutory rate of 21% in part due to an excess tax expense of$0.9 million and an excess tax benefit of$7.4 million , respectively, resulting from employee exercises of stock options and vesting of restricted stock in accordance with ASU 2016-09 and the effect of state taxes. 37
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Segment Profit
Three Months Ended September 30, Nine Months Ended September 30,
$ % $ %
2022 2021 Change Change 2022 2021 Change Change
(Dollars in thousands)
Home $ 24,117 $ 41,517 $ (17,400) (42) % $ 86,766 $ 119,524 $ (32,758) (27) %
Consumer 45,793 44,716 1,077 2 % 132,888 102,717 30,171 29 %
Insurance 22,568 26,610 (4,042) (15) % 66,255 92,690 (26,435) (29) %
Other (211) 97 (308) (318) % (413) (44) (369) (839) %
Segment profit $ 92,267 $ 112,940 $ (20,673) (18) % $ 285,496 $ 314,887 $ (29,391) (9) %
Segment profit is our primary segment operating metric. Segment profit is
calculated as segment revenue less segment selling and marketing expenses
attributed to variable costs paid for advertising, direct marketing and related
expenses that are directly attributable to the segments' products. See Note
15-Segment Information in the notes to the consolidated financial statements for
additional information on segments and a reconciliation of segment profit to
pre-tax income from continuing operations.
House
Our home equity product achieved record revenue in the third quarter of 2022, with a 52% increase in the third quarter of 2022 from the third quarter of 2021. Purchase revenue increased 4% in the third quarter of 2022 compared to the third quarter of 2021 despite volumes declining 29% in the third quarter of 2022 compared to the third quarter of 2021. Revenue per lead for purchase loans continues to expand having become more valuable to our lending partners in this difficult origination market. However, limited home inventory and overall affordability is expected to continue to weigh on overall home sale volumes. The 30-year fixed mortgage rate at the end of the third quarter, as measured by theFreddie Mac Mortgage Market Survey , reached the highest level recorded since 2006 at 6.7%, negatively impacting already depressed loan origination volumes. The number of consumers with an incentive to refinance has dropped to levels last seen inJanuary 2000 , according to theAugust 2022 Black Knight Mortgage Monitor. Near record home prices coupled with higher mortgage rates led to a 24% decrease in existing home sales inSeptember 2022 compared toSeptember 2021 . Our home lending partners continue to adjust their origination capacity to the rapidly changing housing market. As a result, revenue in the Home segment decreased 42% to$64.9 million in the third quarter of 2022 from the third quarter of 2021, with segment profit of$24.1 million in the third quarter of 2022, a decrease of 42% from the third quarter of 2021. Importantly, our variable model allowed us to generate a 37% segment margin in the third quarter, which was consistent with that of the third quarter of 2021, as decreased revenue per lead was offset by a similar decline in cost per lead.
Consumer
Growth in our Consumer segment continued, although the pace of growth has slowed as expected, with revenue of$102.7 million in the third quarter of 2022, an increase of 3% from the third quarter of 2021, and segment profit of$45.8 million in the third quarter of 2022, an increase of 2% from the third quarter of 2021. Personal loans revenue of$37.7 million in the third quarter of 2022 increased 12% from the third quarter of 2021 as debt consolidation remains attractive with consumer credit card balances continuing to rise. Many of our partners have tightened their underwriting criteria in order to reduce portfolio risk given recession fears, focusing their customer acquisition activity on consumers with somewhat higher credit quality. Small business performed well this quarter, achieving revenue growth of 9% in the third quarter of 2022 compared to the third quarter of 2021. We continue to focus on lender performance to grow originations and improve conversion rates. By optimizing our marketing mix, we have aimed to increase the quality of our leads which benefits lenders and increases profitability. We are working on providing new product offerings and expanding data capabilities to provide real-time borrower cash flow insights, with a focus on being a valued partner to our lenders to gain share in this quickly evolving market over time. 38
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Our credit card business generated revenue of$24.3 million in the third quarter of 2022, a decrease of 10% from the third quarter of 2021, as high levels of competition in the quarter drove a decline in volume. Revenue per click growth continued in the quarter, increasing 3% in the third quarter of 2022 from the third quarter of 2021. Margins in the segment remain lower than historical levels as we prioritize capturing partner spend and maximizing variable marketing dollars. We aim to continue to diversify our marketing mix to pursue more profitable marketing channels and partnerships to expand our reach and attract more consumers. Our student loan business, which typically has seasonally strong performance in the third quarter, continues to be negatively impacted by the extension of the government's loan payment moratorium. However, loan payments are expected to resume beginning in 2023. We believe borrowers will be looking for opportunities to refinance their student debt as payments have been paused since the onset of the pandemic. Our deposits business is growing quickly again as consumers are looking to capitalize on higher interest rates for their savings.
Insurance
The auto and home insurance industry continues to be impacted by persistent industry headwinds, supply chain issues, rising accident severity and frequency, and more recently hurricane losses. Although consumer search volumes are running at all-time highs, the difficult operating environment for our carrier partners limited growth in the quarter. Revenue was$70.2 million in the third quarter of 2022, a decrease of 17% from the third quarter of 2021. Segment profit of$22.6 million in the third quarter of 2022 decreased 15% from the third quarter of 2021. We do not expect property & casualty carriers to return with meaningful budget increases until next year. Most of our top partners have lowered budgets due to profitability concerns and outsized losses from Hurricane Ian. Given our focus on lead quality and margin performance, we believe we are well positioned to capture additional share of carrier marketing spend when budgets begin to grow again. Variable Marketing Margin We report variable marketing margin as a supplemental measure to GAAP. This measure is the primary metric by which we measure the effectiveness of our marketing efforts. Variable marketing margin is a measure of the efficiency of our operating model, measuring revenue after subtracting variable marketing and advertising costs that directly influence revenue. Our operating model is highly sensitive to the amount and efficiency of variable marketing expenditures, and our proprietary systems are able to make rapidly changing decisions concerning the deployment of variable marketing expenditures (primarily but not exclusively online and mobile advertising placement) based on proprietary and sophisticated analytics. We believe that investors should have access to the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures discussed below. Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (in thousands) Revenue$ 237,836 $ 297,450 $ 782,937 $ 840,214
Variable marketing costs 163 144 191 547 523 372 546 845 Variable marketing margin
Below is a reconciliation of selling and marketing expense to variable marketing
expense:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands)
Selling and marketing expense $ 176,875 $ 206,475 $ 565,569 $ 589,143
Non-variable selling and marketing expense (13,731) (14,928) (42,197) (42,298)
Variable marketing expense $ 163,144 $ 191,547 $ 523,372 $ 546,845
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The following is a reconciliation of net income (loss) from continuing operations to variable marketing margin (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net (loss) income from continuing operations $ (158,683) $ (4,406) $ (177,544) $
24,706
Adjustments to be reconciled with the variable commercial margin: cost of sales
14,105 15,020 44,240
42,849
Non-variable selling and marketing expense (1) 13,731 14,928 42,197
42,298
General and administrative expense 39,540 40,126 115,802 114,926 Product development 14,043 13,384 42,413 39,142 Depreciation 5,274 4,808 15,024 12,969 Amortization of intangibles 6,582 10,345 21,574 32,967 Change in fair value of contingent consideration - (196) - (8,249) Restructuring and severance - 47 3,760 47 Litigation settlements and contingencies (7) 22 (41)
360
Interest expense, net 5,720 11,826 19,990 31,881 Other income (1,523) - (1,806) (40,072) Income tax expense (benefit) 135,910 (1) 133,956
(455)
Variable marketing margin $ 74,692$ 105,903 $ 259,565 $
293,369
(1) Represents the share of sales and marketing expenses not attributable to variables
fees paid for advertising, direct marketing and related expenses. Includes overhead,
fixed costs and personnel costs.
Adjusted EBITDA
We report Adjusted EBITDA as a supplemental measure to GAAP. This measure is the primary metric by which we evaluate the performance of our businesses, on which our marketing expenditures and internal budgets are based and by which, in most years, management and many employees are compensated. We believe that investors should have access to the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures discussed below.
Definition of Adjusted EBITDA
We report Adjusted EBITDA as net income from continuing operations adjusted to
exclude interest, income tax, amortization of intangibles and depreciation, and
to further exclude (1) non-cash compensation expense, (2) non-cash impairment
charges, (3) gain/loss on disposal of assets, (4) gain/loss on investments, (5)
restructuring and severance expenses, (6) litigation settlements and
contingencies, (7) acquisitions and dispositions income or expense (including
with respect to changes in fair value of contingent consideration), (8) dividend
income, and (9) one-time items. Adjusted EBITDA has certain limitations in that
it does not take into account the impact to our statement of operations of
certain expenses, including depreciation, non-cash compensation and
acquisition-related accounting. We endeavor to compensate for the limitations of
the non-GAAP measures presented by also providing the comparable GAAP measures
with equal or greater prominence and descriptions of the reconciling items,
including quantifying such items, to derive the non-GAAP measures. These
non-GAAP measures may not be comparable to similarly titled measures used by
other companies.
One-Time Items
Adjusted EBITDA is adjusted for one-time items, if applicable. Items are
considered one-time in nature if they are non-recurring, infrequent, or unusual
and have not occurred in the past two years or are not expected to recur in the
next two years,
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according
Non-cash expenses excluded from Adjusted EBITDA
Non-cash compensation expense consists principally of expense associated with grants of restricted stock, restricted stock units and stock options, some of which awards have performance-based vesting conditions. Non-cash compensation expense also includes expense associated with employee stock purchase plans. These expenses are not paid in cash, and we include the related shares in our calculations of fully diluted shares outstanding. Upon settlement of restricted stock units, exercise of certain stock options or vesting of restricted stock awards, the awards may be settled, on a net basis, with us remitting the required tax withholding amount from our current funds.
Amortization of intangible assets is a non-cash charge related primarily to intangible assets acquired through acquisitions. At the time of an acquisition, the intangible assets of the acquired business, such as purchase contracts, technology and customer relationships, are valued and amortized over their estimated life.
The following table is a reconciliation of net income (loss) from continuing operations to adjusted EBITDA (in thousands).
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net (loss) income from continuing operations $ (158,683) $ (4,406) $ (177,544) $ 24,706
Adjustments to reconcile to Adjusted EBITDA:
Amortization of intangibles 6,582 10,345 21,574 32,967
Depreciation 5,274 4,808 15,024 12,969
Restructuring and severance - 47 3,760 47
Loss on impairments and disposal of assets 834 1,251 4,261 2,651
Gain on investments - - - (40,072)
Non-cash compensation expense 15,575 17,074 46,907 51,804
Franchise tax caused by equity investment gain - - 1,500 -
Change in fair value of contingent consideration - (196) - (8,249)
Acquisition expense 104 227 171 1,366
Litigation settlements and contingencies (7) 22 (41) 360
Interest expense, net 5,720 11,826 19,990 31,881
Dividend income (1,523) - (1,805) -
Income tax (expense) benefit 135,910 (1) 133,956 (455)
Adjusted EBITDA $ 9,786 $ 40,997 $ 67,753 $ 109,975
Financial position, liquidity and capital resources
General
From
In the first quarter of 2022, we acquired an interest in
(“EarnUp”) for
OnMay 31, 2022 , we drew$250.0 million on the Term Loan Facility. A portion of this was used to pay the outstanding balance of$169.7 million and interest on our 0.625% Convertible Senior Notes that matured onJune 1, 2022 . See Note 12-Debt for additional information. 41
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We expect our cash and cash equivalents and cash flows from operations to be sufficient to fund our operating needs for the next twelve months and beyond. Our credit facility described below is an additional potential source of liquidity. We will continue to monitor the impact of the ongoing COVID-19 pandemic and inflation on our liquidity and capital resources.
Credit facility
OnSeptember 15, 2021 , we entered into a credit agreement (the "Credit Agreement"), consisting of a$200.0 million revolving credit facility (the "Revolving Facility"), which matures onSeptember 15, 2026 , and a$250.0 million delayed draw term loan facility (the "Term Loan Facility" and together with the Revolving Facility, the "Credit Facility"), which matures onSeptember 15, 2028 . The proceeds of the Revolving Facility can be used to finance working capital, for general corporate purposes and any other purpose not prohibited by the Credit Agreement. We borrowed$250.0 million under the delayed draw term loan onMay 31, 2022 and used$170.2 million of the proceeds to settle the Company's 2022 Notes, including interest. The remaining proceeds of$79.8 million may be used for general corporate purposes and any other purposes not prohibited by the Credit Agreement. See Note 12-Debt for additional information. As ofNovember 4, 2022 , we have outstanding$249.4 million under the Term Loan Facility, a$0.2 million letter of credit under the Revolving Facility and the remaining borrowing capacity under the Revolving Facility is$199.8 million .
Our cash flows from continuing operations are as follows:
Nine Months Ended
September 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 26,329 $
88,893
Net cash used in investing activities (25,410)
(31,695)
Net cash provided by (used in) financing activities 33,411 (15,192)
Cash flow from operating activities
Our largest source of cash provided by our operating activities is revenues generated by our products. Our primary uses of cash from our operating activities include advertising and promotional payments. In addition, our uses of cash from operating activities include compensation and other employee-related costs, other general corporate expenditures, litigation settlements and contingencies, certain contingent consideration payments, and income taxes. Net cash provided by operating activities attributable to continuing operations decreased in the first nine months of 2022 from the first nine months of 2021 primarily due to a reduction in revenue generated by our products.
Cash flow from investing activities
Net cash used in investing activities attributable to continuing operations in the first nine months of 2022 of$25.4 million consisted of the purchase of a$16.4 million equity interest in EarnUp and another small investment, as well as capital expenditures of$9.0 million primarily related to internally developed software. Net cash used in investing activities attributable to continuing operations in the first nine months of 2021 of$31.7 million consisted of capital expenditures of$30.5 million primarily related to internally developed software and leasehold improvements for our new principal corporate offices, as well as the purchase of an additional$1.2 million equity interest in Stash.
Cash flow from financing activities
Net cash provided by financing activities attributable to continuing operations in the first nine months of 2022 of$33.4 million consisted primarily of$250.0 million in proceeds from the term loan and the repayment of$169.7 million to settle the Company's 2022 Notes discussed in the "Credit Facility" section above,$43.0 million for the repurchase of our stock, and$3.3 million in withholding taxes paid upon surrender of shares to satisfy obligations on equity awards, net of proceeds from the exercise of stock options. 42
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Net cash used in financing activities attributable to continuing operations in the first nine months of 2021 of$15.2 million consisted primarily of$6.7 million in withholding taxes paid upon surrender of shares to satisfy obligations on equity awards, net of proceeds from the exercise of stock options, as well as$6.0 million for the payment of debt issuance costs and$2.5 million paid for the original issue discount on the undrawn Term Loan Facility.
Off-balance sheet arrangements
We have no off-balance sheet arrangements other than a letter of credit and our funding commitments pursuant to our surety bonds, none of which have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
New accounting statements
For more information on the new accounting pronouncements, see Note 2 – Significant accounting policies, in Part I, Item 1 Financial statements.
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