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10-Q: LENDINGTREE, INC.

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(EDGAR Online via COMTEX) -- 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 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 of LendingTree, 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 Overview

LendingTree, Inc. is the parent of LT Intermediate Company, LLC, which holds all of the outstanding ownership interests of LendingTree, LLC, and LendingTree, 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 our Network 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 these Network 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 and Network 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







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presented. Except for the discussion under the heading "Discontinued Operations," the analysis within Management's Discussion and Analysis of Financial Condition and Results of Operations reflects our continuing operations.

Economic Conditions

During March 2020, a global pandemic was declared by the World 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 the U.S., as federal, state and local governments react to the public health crisis, creating significant uncertainties in the U.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 six 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 six 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.

Segment Reporting

We have three reportable segments: Home, Consumer and Insurance.

Recent Business Acquisitions

On February 28, 2020, we acquired an equity interest in Stash for $80.0 million. On January 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 and Roth IRAs, custodial investment accounts, and banking services, including checking accounts and debit cards with a Stock-Back(R) 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 January 2022, the Company acquired an equity interest in EarnUp for $15.0 million. EarnUp is a consumer-first mortgage payment platform that intelligently automates loan payment scheduling and helps consumers better manage their money and improve their financial well-being. See Note 7-Equity Investment for additional information on the equity interest in EarnUp.

North Carolina Office Properties

Our new corporate office is located on approximately 176,000 square feet of office space in Charlotte, North Carolina under an approximate 15-year lease that contractually commenced in the second quarter of 2021.

With our expansion in North Carolina, in December 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 in North Carolina at specific targeted levels through 2021, and maintaining the jobs thereafter. Additionally, the city of Charlotte and the county of Mecklenburg 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. In December 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 in North Carolina at specific targeted levels through 2024, and maintaining the jobs thereafter.







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Recent Mortgage Interest Rate Trends

Interest rate and market risks can be substantial in the mortgage lead generation business. Short-term fluctuations in mortgage interest rates primarily affect consumer demand for mortgage refinancings, while long-term fluctuations in mortgage interest rates, coupled with the U.S. real estate market, affect consumer demand for new mortgages. Consumer demand, in turn, affects lender demand for mortgage leads from third-party sources, as well as our own ability to attract online consumers to our website.

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 selling and marketing expenditures in all 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% in December 2021 to a monthly average of 5.52% in June 2022. On a quarterly basis, 30-year mortgage interest rates in the second quarter of 2022 averaged 5.24%, compared to 3.00% in the second quarter of 2021 and 3.08% in the fourth quarter of 2021.

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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 to Mortgage Bankers Association ("MBA") data, total refinance origination dollars decreased to 30% of total mortgage origination dollars in the second quarter of 2022 compared to 53% in the fourth quarter of 2021. In the second quarter of 2022, total refinance origination dollars decreased 57% from the fourth quarter of 2021 and 66% from the second quarter of 2021. Industry-wide mortgage origination dollars in the second quarter of 2022 decreased 24% from the fourth quarter of 2021 and 35% from second quarter of 2021.

In July 2022, the MBA projected 30-year mortgage interest rates to increase during 2022, to an average 5.2% 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 U.S. Real Estate Market

The health of the U.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 16% in the second quarter of 2022 compared to the fourth quarter of 2021, and 12% compared to the second quarter of 2021. Fannie Mae predicts an overall decrease in existing-home sales of approximately 16% in 2022 compared to 2021.







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        Results of Operations for the Three and Six Months ended June 30, 2022 and 2021
                                                            Three Months Ended June 30,                                 Six Months Ended June 30,
                                                                             $              %                                             $             %
                                                  2022         2021        Change        Change                2022         2021        Change       Change
                                                                                            (Dollars in thousands)
        Home                                   $ 73,938    $ 104,861    $ (30,923)            (29) %       $ 175,882    $ 232,986    $ (57,104)          (25) %
        Consumer                                106,144       75,676       30,468              40  %         207,212      133,583       73,629            55  %
        Insurance                                81,756       89,263       (7,507)             (8) %         161,794      175,877      (14,083)           (8) %
        Other                                        85          214         (129)            (60) %             213          318         (105)          (33) %
        Revenue                                 261,923      270,014       (8,091)             (3) %         545,101      542,764        2,337             -  %
        Costs and expenses:
        Cost of revenue (exclusive of
        depreciation and amortization shown
        separately below)                        14,574       13,934          640               5  %          30,135       27,829        2,306             8  %
        Selling and marketing expense           184,537      185,206         (669)              -  %         388,694      382,668        6,026             2  %
        General and administrative expense       40,289       39,811          478               1  %          76,262       74,800        1,462             2  %
        Product development                      14,318       13,290        1,028               8  %          28,370       25,758        2,612            10  %
        Depreciation                              4,896        4,443          453              10  %           9,750        8,161        1,589            19  %
        Amortization of intangibles               7,075       11,310       (4,235)            (37) %          14,992       22,622       (7,630)          (34) %
        Change in fair value of contingent
        consideration                                 -       (8,850)       8,850             100  %               -       (8,053)       8,053           100  %
        Restructuring and severance                 135            -          135               -  %           3,760            -        3,760             -  %
        Litigation settlements and
        contingencies                                (7)         322         (329)           (102) %             (34)         338         (372)         (110) %
        Total costs and expenses                265,817      259,466        6,351               2  %         551,929      534,123       17,806             3  %
        Operating (loss) income                  (3,894)      10,548      (14,442)           (137) %          (6,828)       8,641      (15,469)         (179) %
        Other (expense) income, net:
        Interest expense, net                    (6,765)      (9,840)      (3,075)            (31) %         (14,270)     (20,055)      (5,785)          (29) %
        Other income                                284            -          284               -  %             283       40,072      (39,789)          (99) %
        (Loss) income before income taxes       (10,375)         708      (11,083)         (1,565) %         (20,815)      28,658      (49,473)         (173) %
        Income tax benefit                        2,337        9,092       (6,755)            (74) %           1,954          454        1,500           330  %
        Net (loss) income from continuing
        operations                               (8,038)       9,800      (17,838)           (182) %         (18,861)      29,112      (47,973)         (165) %
        Loss from discontinued operations, net
        of tax                                        -       (3,199)      (3,199)           (100) %              (3)      (3,462)      (3,459)         (100) %
        Net (loss) income and comprehensive
        (loss) income                          $ (8,038)   $   6,601    $ (14,639)           (222) %       $ (18,864)   $  25,650    $ (44,514)         (174) %
        


Revenue

Revenue decreased in the second quarter of 2022 compared to the second quarter of 2021 due to decreases in our Home and Insurance segments, partially offset by an increase in our Consumer segment. Revenue increased in the first six months of 2022 compared to the first six months of 2021 due to an increase in our Consumer segment, partially offset by decreases in our Home and Insurance segments.

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 $30.5 million, or 40%, in the second quarter of 2022 from the second quarter of 2021 and increased $73.6 million, or 55%, in the first six months of 2022 from the first six months of 2021, primarily due to increases in our personal loans, credit cards, and small business loans. Many of our products in the Consumer segment experienced increases in revenue in the second quarter and first six months of 2022 from the second quarter and first six months of 2021 due to the recovery from the impacts of the COVID-19 pandemic.

Revenue from our personal loans product increased $17.1 million, or 68%, to $42.3 million in the second quarter of 2022 from $25.2 million in the second quarter of 2021, and increased $37.4 million, or 93%, to $77.5 million in the first six months







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of 2022 from $40.1 million in the first six months of 2021 primarily due to an increase in the number of consumers completing request forms and an increase in revenue earned per consumer.

Revenue from our credit cards product increased $4.9 million, or 22%, to $27.3 million in the second quarter of 2022 from $22.4 million in the second quarter of 2021 primarily due to an increase in revenue earned per approval. Revenue from our credit cards product increased $17.1 million, or 43%, to $57.1 million in the first six months of 2022 compared to $40.1 million in the first six months of 2021, due to an increase in revenue earned per approval and an increase in the number of approvals.

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 primarily due to the impact of economic conditions related to the COVID-19 pandemic. Revenue from our small business loans product increased $7.8 million, or 81%, in the second quarter of 2022 compared to the second quarter of 2021, primarily due to an increase in revenue earned per consumer. Revenue from our small business loans product increased $18.5 million, or 106%, in the first six months of 2022 compared to the first six 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, reverse mortgage loans, and real estate. Revenue from our Home segment decreased $30.9 million, or 29%, in the second quarter of 2022 from the second quarter of 2021, and $57.1 million, or 25%, in the first six months of 2022 compared to the first six 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 our mortgage products decreased $43.1 million, or 49%, to $44.4 million in the second quarter of 2022 from $87.5 million in the second quarter of 2021, and decreased $81.5 million or 40%, to $122.3 million in the first six months of 2022 from $203.8 million in the first six months of 2021. Revenue from our refinance mortgage product decreased $44.0 million in the second quarter of 2022 compared to the second quarter of 2021, and $91.6 million in the first six months of 2022 compared to the first six 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 $0.9 million in the second quarter of 2022 compared to the second quarter of 2021 and $10.1 million in the first six months of 2022 compared to the first six months of 2021, primarily due to an increase in revenue earned per consumer.

Revenue from our home equity loans product increased $11.8 million, or 71%, to $28.4 million in the second quarter of 2022 from $16.5 million in to the second quarter of 2021, and increased $24.0 million, or 87%, to $51.5 million in the first six months of 2022 from $27.5 million in the first six months of 2021, primarily due to an increase in consumers completing request forms, and an increase in revenue earned per consumer.

Revenue from our Insurance segment decreased $7.5 million, or 8%, to $81.8 million in the second quarter of 2022 from $89.3 million in the second quarter of 2021, and $14.1 million, or 8%, to $161.8 million in the first six months of 2022 from $175.9 million in the first six 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.

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 customer call centers, third-party customer call center fees, credit scoring fees, credit card fees, website network hosting and server fees.

Cost of revenue remained relatively consistent in the second quarter of 2022 from the second quarter of 2021, increasing $0.6 million. Cost of revenue increased in the first six months of 2022 from the first six months of 2021, primarily due to a $1.5 million increase in website network hosting and server hosting fees.

Cost of revenue as a percentage of revenue increased to 6% in the second quarter of 2022 compared to 5% in the second quarter of 2021, and increased to 6% in the first six months of 2022 compared to 5% in the first six months of 2021.

Selling and marketing expense

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.







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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 remained relatively consistent in the second quarter of 2022 compared to the second quarter 2021, decreasing $0.7 million. Selling and marketing expense increased in the first six months of 2022 from the first six months of 2021, primarily due to the changes in advertising and promotional expense discussed below. Additionally, compensation and benefits increased $1.1 million in the first six months of 2022 compared to the first six months of 2021, as a result of an increase in headcount in the first quarter of 2022.

Advertising and promotional 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,
                                                                      $            %                                            $            %
                                           2022          2021       Change       Change               2022         2021       Change       Change
                                                                                   (Dollars in thousands)
        Online                         $  167,711    $ 165,038    $ 2,673              2  %       $ 350,184    $ 341,859    $ 8,325              2  %
        Broadcast                             770        2,649     (1,879)           (71) %           1,610        3,816     (2,206)           (58) %
        Other                               2,670        3,908     (1,238)           (32) %           8,434        9,623     (1,189)           (12) %
        Total advertising expense      $  171,151    $ 171,595    $  (444)             -  %       $ 360,228    $ 355,298    $ 4,930              1  %
        


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.

. . .

Aug 01, 2022

COMTEX_411342670/2041/2022-08-01T06:04:53

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