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TREE > SEC Filings for TREE > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for TREE.COM, INC.

Form 10-Q for TREE.COM, INC.


8-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement 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 also 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 identify 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 and Part I, Item 1A. Risk Factors of the 2013 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 of Tree.com 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 Overview
Tree.com is the parent of LendingTree, LLC which owns several brands and businesses that provide information, tools, advice, products and services for critical transactions in consumers' lives. Our family of brands includes:
LendingTree®, GetSmart®, LendingTree AutosSM, LendingTree EducationSM and LendingTree Home ProsSM. Together, these brands serve as an ally for consumers who are looking to comparison-shop for loans and other services from multiple businesses and professionals who will compete for their business. In June 2014, we launched the new My LendingTree, a platform that combines personalization and comparison shopping, while providing free credit scores, monthly updates, credit score analysis and an in-depth view of a consumer's credit profile. This new platform is LendingTree's most significant innovation since the creation of the online loan marketplace concept 18 years ago. The businesses of RealEstate.com, REALTORS® and LendingTree Loans are presented as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of operations and consolidated cash flows for all periods presented. The analysis within Management's Discussion and Analysis of Financial Condition and Results of Operations reflects our continuing operations.
Reportable and Operating Segments
Our four operating segments are lending, auto, education and home services. We sometimes refer to these operating segments as our "businesses". Of these, only our lending operating segment meets the criteria for a reportable segment. We formerly referred to this reportable segment as our mortgage segment. The auto, education and home services operating segments are reported in the "Other" category in our segment reconciling information. See Note 10-Segment Information to the consolidated financial statements included elsewhere in this report. Seasonality
Revenue is subject to the cyclical and seasonal trends of the U.S. housing and mortgage markets. Home sales typically rise during the spring and summer months and decline during the fall and winter months, while refinancing and home equity activity is principally driven by mortgage interest rates as well as real estate values. However, in recent periods additional factors affecting the mortgage and real estate markets have impacted customary seasonal trends.


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Recent Mortgage Interest Rate Trends
Interest rate and market risks can be substantial in the mortgage lead generation business. Fluctuations in interest rates affect consumer demand for new mortgages and the level of refinancing activity which, in turn, affects lender demand for mortgage leads. Typically, a decline in mortgage interest rates will lead to reduced lender demand for leads from third-party sources, as there are more consumers in the marketplace seeking refinancings and, accordingly, lenders receive more organic lead volume. Conversely, an increase in mortgage interest rates will typically lead to an increase in lender demand for third-party leads, as there are fewer consumers in the marketplace and, accordingly, the supply of organic mortgage lead volume decreases. According to Freddie Mac, in 2013, mortgage interest rates rose gradually through the first five months of the year. In June 2013, mortgage interest rates increased more significantly, subsequently peaking at 4.49% in September 2013, then dropped more than a quarter-point early in the fourth quarter of 2013 and then increased again to 4.46% by the end of 2013.
In the first half of 2014, mortgage interest rates declined to 4.16% in June 2014 and averaged 4.23% during the second quarter, as compared to averages of 4.36% and 3.69% during the first quarter of 2014 and second quarter of 2013, respectively. According to Mortgage Bankers Association ("MBA") data, lower average mortgage interest rates during the second quarter of 2014 resulted in an 18% increase in the total dollar volume of mortgage originations as compared to the first quarter of 2014. In contrast, higher average mortgage interest rates during the second quarter of 2014 as compared to the second quarter of 2013 resulted in a 50% decline in the total dollar volume of mortgage originations. For the remaining quarters of 2014, MBA is projecting the dollar volume of aggregate mortgage originations to be slightly higher than first half of 2014 levels. Notwithstanding that anticipated improvement from the first half of 2014, full year 2014 projected aggregate mortgage originations of approximately $1.0 trillion are expected to represent a decline of 42% from 2013 and the lowest level of originations since 2000, resulting from increasing mortgage interest rates projected to average 4.5% in 2014, as compared to 3.98% in 2013. The rise in mortgage interest rates will also continue to move the mix of mortgage originations towards purchase, with estimated refinance share of originations of 63% in 2013 declining to 43% in 2014, according to MBA data. The U.S. Real Estate Market
The U.S real estate market continued its recovery in 2013, as job growth improved and demand drove the market, resulting in nationwide sales of existing homes at their highest level since 2006, according to the National Association of Realtors ("NAR"). However, despite continued job growth in the first half of 2014, nationwide sales of existing homes have declined approximately 6% and 8% as compared to both the first and second halves of 2013, respectively, likely associated with affordability. The median existing home price was up over 4% in June 2014 as compared to one year ago, which marks the 28th consecutive month of year-over-year price gains, according to the NAR. The NAR suggests that affordability due to stagnant wage growth below price growth is holding back what should be a stronger pace of sales in the U.S. market. Nonetheless, the NAR believes that housing fundamentals are trending positively, as rising home inventory continues to push overall supply towards a more balanced market. Results of Operations for the Three and Six Months ended June 30, 2014 and 2013

Revenue
                      Three Months Ended June 30,                    Six Months Ended June 30,
                                          $          %                                  $           %
                2014        2013       Change     Change      2014        2013        Change     Change
                                                (Dollars in thousands)
Lending       $ 39,049    $ 33,781    $ 5,268       16  %   $ 75,977    $ 59,454    $ 16,523       28  %
Other            3,095       3,003         92        3  %      6,203    $  5,410         793       15  %
Corporate            -         622       (622 )   (100 )%          -    $    622        (622 )   (100 )%
Total revenue $ 42,144    $ 37,406    $ 4,738       13  %   $ 82,180    $ 65,486    $ 16,694       25  %

Revenue from our lending segment increased in the second quarter and first six months of 2014, compared to the second quarter and first six months of 2013, primarily due to increases in our purchase and non-mortgage products. Within our lending segment, revenue from mortgage products increased $1.5 million in the second quarter of 2014 compared to the second quarter of 2013 and $10.5 million in the first six months of 2014 compared to the first six months of 2013. Revenue from non-mortgage


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products within our lending segment increased $3.7 million in the second quarter of 2014 compared to the second quarter of 2013 and $6.0 million in the first six months of 2014 compared to the first six months of 2013. Our non-mortgage products within our lending segment include the following products: personal loans, home equity and reverse mortgage. Revenue from each of these non-mortgage products increased in the second quarter and first six months of 2014 compared to the second quarter and first six months of 2013. Our reverse mortgage product was introduced in the first quarter of 2013 and our personal loan product was re-launched in the third quarter of 2013.
The number of consumers matched on our lending exchange increased by 32% in the second quarter of 2014 compared to the second quarter of 2013 and by 44% in the first six months of 2014 compared to the first six months of 2013. Our average revenue earned from network lenders per matched consumer decreased by 13% in the second quarter of 2014 compared to the second quarter of 2013 and by 11% in the first six months of 2014 compared to the first six months of 2013. The decrease in revenue earned per matched consumer was primarily due to the increased relative contribution of our purchase and non-mortgage lending products, which have lower revenue per matched consumer rates than refinance, which had been a bigger portion of our business previously.
Other revenue, which includes our auto, education, home services and other businesses, increased in the second quarter and first six months of 2014 compared to the second quarter and first six months of 2013. The increase in other revenue in the first six months of 2014 compared to the first six months of 2013 is primarily due to an increase of $2.2 million in our auto business, partially offset by a decrease in our education and home services businesses of $1.3 million.
Corporate revenue in 2013 was primarily related to fees for certain marketing-related services provided in connection with the sale of our LendingTree Loans business. We completed these services in the second quarter of 2013.
Cost of revenue
Cost of revenue consists primarily of costs associated with compensation and other employee-related costs (including stock-based compensation) relating to internally-operated call centers, third-party call center fees, credit scoring fees, credit card fees and website network hosting and server fees.

                          Three Months Ended June 30,                       Six Months Ended June 30,
                                             $            %                                   $            %
                   2014        2013        Change      Change       2014        2013        Change      Change
                                                     (Dollars in thousands)
Lending          $ 1,773     $ 1,395     $    378         27  %   $ 3,318     $ 2,550     $    768         30  %
Other                122         163          (41 )      (25 )%       242     $   337          (95 )      (28 )%
Corporate              -         392         (392 )     (100 )%         -     $   419         (419 )     (100 )%
Total cost of
revenue          $ 1,895     $ 1,950     $    (55 )       (3 )%   $ 3,560     $ 3,306     $    254          8  %
As a percentage
of total revenue       4 %         5 %                                  4 %         5 %

Lending cost of revenue increased in the second quarter of 2014 from the second quarter of 2013, primarily due to increases of $0.2 million in credit scoring fees and $0.1 million in credit card fees. Lending cost of revenue increased in the first six months of 2014 from the first six months of 2013, primarily due to increases of $0.3 million in credit card fees, $0.3 million in credit scoring fees and $0.1 million in compensation and other employee-related costs. Other cost of revenue decreased in the second quarter and first six months of 2014 compared to the second quarter and first six months of 2013, primarily due to decreases in third-party call center fees.
Corporate cost of revenue in 2013 reflects costs associated with the marketing-related services provided in connection with the sale of our LendingTree Loans business. We completed these services in the second quarter of 2013.
Selling and marketing expense
Selling and marketing expense consists primarily of advertising and promotional expenditures, fees paid to lead sources 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.


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                           Three Months Ended June 30,                        Six Months Ended June 30,
                                               $           %                                     $            %
                    2014         2013       Change      Change        2014         2013        Change      Change
                                                       (Dollars in thousands)
Lending          $ 26,952     $ 24,119     $ 2,833         12  %   $ 52,571     $ 39,279     $ 13,292         34  %
Other               2,012        2,262        (250 )      (11 )%      3,842        4,357         (515 )      (12 )%
Corporate               -            5          (5 )     (100 )%          -            5           (5 )     (100 )%
Total selling
and marketing
expense          $ 28,964     $ 26,386     $ 2,578         10  %   $ 56,413     $ 43,641     $ 12,772         29  %
As a percentage
of total revenue       69 %         71 %                                 69 %         67 %

The increases in lending selling and marketing expense in the second quarter and first six months of 2014 compared to the second quarter and first six months of 2013 are primarily due to increases in advertising expense of $2.9 million and $13.0 million, respectively, as discussed below.
The increases in lending advertising expense correspond to 32% and 44% increases in consumers matched with network lenders in the second quarter of 2014 compared to the second quarter of 2013 and the first six months of 2014 compared to the first six months of 2013, respectively.
Other selling and marketing expense decreased in the second quarter and first six months of 2014 from the second quarter and first six months of 2013, primarily due to decreases in compensation expense and benefits as a result of decreases in headcount.
Total selling and marketing expense as a percentage of revenue decreased in the second quarter of 2014 compared to the second quarter of 2013, primarily due to a decrease in broadcast spend for the national advertising campaign for our LendingTree brand. Total selling and marketing expense as a percentage of revenue increased in the first six months of 2014 compared to the first six months of 2013, primarily due to the national advertising campaign for our LendingTree brand which launched in the second quarter of 2013 and continues through the second quarter of 2014.
Advertising expense is the largest component of selling and marketing expense, and is comprised of the following:

                           Three Months Ended June 30,                        Six Months Ended June 30,
                                               $           %                                     $            %
                    2014         2013       Change      Change        2014         2013        Change      Change
                                                       (Dollars in thousands)
Online           $ 22,093     $ 17,015     $ 5,078         30  %   $ 40,233     $ 29,703     $ 10,530         35 %
Broadcast           3,055        3,644        (589 )      (16 )%      5,684        4,147        1,537         37 %
Other               1,225        3,052      (1,827 )      (60 )%      5,249        4,481          768         17 %
Total
advertising
expense          $ 26,373     $ 23,711     $ 2,662         11  %   $ 51,166     $ 38,331     $ 12,835         33 %

We increased our online advertising expenditures in the second quarter and first six months of 2014 compared to the second quarter and first six months of 2013, in order to generate additional lending lead volume to meet the increased demand of network lenders on our mortgage exchange. Our broadcast and other advertising was higher in the second quarter of 2013 than in the second quarter of 2014, as we spent to support our new national advertising campaign for our LendingTree brand, which commenced in the second quarter of 2013. Our broadcast and other advertising was higher in the first six months of 2014 than in the first six months of 2013 due to the timing of the the launch of our national advertising campaign in 2013.
We will continue to adjust selling and marketing expenditures dynamically in relation to revenue producing opportunities. General and administrative expense
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, corporate information technology, human resources and executive management functions, as well as facilities and infrastructure costs and fees for professional services.


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                          Three Months Ended June 30,                       Six Months Ended June 30,
                                             $           %                                     $            %
                   2014        2013       Change      Change        2014         2013        Change      Change
                                                      (Dollars in thousands)
Lending          $ 1,247     $   874     $   373         43  %   $  2,493     $  1,852     $    641         35  %
Other                615         420         195         46  %      1,397          930          467         50  %
Corporate          3,616       4,357        (741 )      (17 )%      7,721        9,425       (1,704 )      (18 )%
Total general
and
administrative
expense          $ 5,478     $ 5,651     $  (173 )       (3 )%   $ 11,611     $ 12,207     $   (596 )       (5 )%
As a percentage
of total revenue      13 %        15 %                                 14 %         19 %

Lending general and administrative expense increased in the second quarter and first six months of 2014 from the second quarter and first six months of 2013, primarily due to increases in compensation and benefits of $0.3 million and $0.4 million, respectively, and increases in computer software maintenance of $0.1 million and $0.2 million, respectively. General and administrative expense in the other businesses increased in the second quarter and first six months of 2014 from the second quarter and first six months of 2013, primarily due to increases in compensation and benefits of $0.2 million and $0.5 million, respectively. During the second quarter and first six months of 2013, a portion of the incentive compensation for individuals in the lending and other businesses was allocated to corporate. The incentive compensation plan was modified in 2014, and as a result, for the second quarter and first six months of 2014, the lending and other businesses reflect the full incentive compensation for individuals in these businesses. Additionally, non-cash incentive compensation increased in the first quarter and first six months of 2014 from the first quarter and first six months of 2013.
Corporate general and administrative expense decreased during the second quarter of 2014 from the second quarter 2013, primarily due to decreased compensation and benefits of $0.4 million, and a decrease in professional fees of $0.2 million. The decrease in compensation and benefits in the second quarter of 2014 from the second quarter of 2013 is primarily due to the reduction in incentive compensation classified in corporate due to the allocation discussed above. Corporate general and administrative expense decreased during the first six months of 2014 from the first six months of 2013, primarily due to decreased compensation and benefits of $1.7 million. The decrease in compensation and benefits in the first six months of 2014 from the first six months of 2013 is primarily due to a compensation charge of $0.9 million related to a discretionary cash bonus payment to employee stock option holders in the first quarter of 2013, in addition to the reduction in incentive compensation classified in corporate due to the allocation discussed above.
General and administrative expense in the second quarter and first six months of 2014 was spread over proportionately greater revenue during the period, resulting in improvements in general and administrative expense as a percentage of revenue.
Product development
Product development expense consists primarily of compensation and other employee-related costs (including stock-based compensation) that are not capitalized, for personnel engaged in the design, development, testing and enhancement of technology.

                            Three Months Ended June 30,                        Six Months Ended June 30,
                                                $            %                                   $           %
                     2014         2013        Change      Change       2014        2013       Change      Change
                                                      (Dollars in thousands)
Lending          $   1,474      $ 1,226     $    248         20 %    $ 3,097     $ 2,176     $   921         42 %
Other                  352          266           86         32 %        661         521         140         27 %
Corporate                -            -            -          - %          -           -           -          - %
Total product
development      $   1,826      $ 1,492     $    334         22 %    $ 3,758     $ 2,697     $ 1,061         39 %
As a percentage
of total revenue         4 %          4 %                                  5 %         4 %

Product development expense increased in the second quarter and first six months of 2014 as compared to the second quarter and first six months of 2013, primarily due to increases in compensation and other employee-related costs. We increased headcount


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in the second quarter and first six months of 2014 compared to the second quarter and first six months of 2013, in order to support planned product launches for 2014.
Depreciation
Depreciation expense has remained relatively consistent during the second quarter and first six months of 2014 compared to the second quarter and first six months of 2013.
Litigation settlements and contingencies Litigation settlements and contingencies consists of expenses related to actual or anticipated litigation settlements, in addition to legal fees incurred in connection with various patent litigations we are pursuing. During the second quarters and first six months of 2014 and 2013, litigation settlements and contingencies is primarily due to legal fees incurred in connection with various patent litigations we are currently pursuing.
During the first quarter of 2014, we participated in a jury trial for the Zillow litigation, described in Note 9-Contingencies to the consolidated financial statements included elsewhere in this report. The legal expenses associated with this jury trial increased our litigation settlements and contingencies expense for the first quarter of 2014. We will continue to incur litigation expenses on this matter for post-trial matters, including appeal and costs relating to various pending post-trial motions. While we expect legal expenses related to this matter to decline significantly in future periods, we cannot predict the additional impact that this litigation may have on full year 2014 litigation settlements and contingencies.
Income tax provision

                                  Three Months Ended           Six Months Ended
                                        June 30,                    June 30,
                                   2014            2013        2014         2013
                                              (Dollars in thousands)
Income tax benefit (provision) $      83         $   19     $    84       $    (1 )
Effective tax rate                   3.2 %          0.9 %       2.6 %           - %

For the second quarter and first six months of 2014, the effective tax rates varied from the statutory rate primarily due to the existence of a valuation allowance that has been provided to offset our net deferred tax asset, after excluding deferred tax liabilities related to indefinite-lived intangible assets that are not going to provide a source of taxable income in the foreseeable future, and state tax refunds.
For the second quarter and first six months of 2013, the effective income tax rates varied from the statutory rate due primarily to the impact of the valuation allowance, indefinite-lived intangible assets and state taxes. There have been no changes to our valuation allowance assessment for the second quarter and first six months of 2014.
Discontinued Operations
For the second quarter and first six months of 2014, losses from discontinued operations of $2.9 million and $3.5 million were primarily attributable to operating losses associated with the LendingTree Loans business, the sale of which was completed on June 6, 2012. These operating losses were primarily related to litigation settlements and contingencies and legal fees associated with ongoing legal proceedings.
For the second quarter and first six months of 2013, income from discontinued operations of $9.1 million and $6.7 million were primarily attributable to the $10.0 million gain from the sale of LendingTree Loans business, offset by $0.9 . . .

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