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

Welcome, everyone, to the LendingTree fireside chat at the JPMorgan TMC Conference. My name is Melissa Wedel, and with us today is LendingTree CFO, Trent Ziegler. Trent, I want to thank you for being here with us today, especially so soon after your transition to the CFO role. Of course, most of our participants today and those listening are going to know you already from many years covering as Head of IR and Treasury. But that being said, we've got a lot of questions we've been getting from clients in the last few months on a variety of topics. And if you're ready, I thought we could just jump right in.

Yes. Sounds great. Thanks for having us.

Absolutely. So I'd say one of the areas we get questions about the most is regarding LendingTree Next, and that's the recently announced focus on growth strategies that's being headed up by previous CFO, J.D. Moriarty. It seems like one of the avenues for growth within that category would be My LendingTree, and that's existed for a couple of years. I'm wondering if you could update us on what the go-forward growth strategy could look like for My LT.

Yes. I mean My LendingTree is certainly an important initiative for us. That's a platform that we launched back in 2014, really under the premise that we should be able to create a more engaged consumer base, right, a bigger installed base. The business, by nature of our concentration in the mortgage vertical, historically, has tended to be very transactional in nature. And so as we've really diversified the business, have added obviously additional lending categories, more recently, we've gotten into things like insurance, it's given us an ability to make that a much more compelling value proposition, where we have a lot to offer the consumer by way of functionality around helping consumers manage their financial health, understanding their credit score and why it is what it is, helping them understand affordability. And we continue to iterate on the functionality there and continue to build that out. But as we can talk to -- as we can be talking to them about a number of other products beyond just their home, right, it's given us the opportunity to really start to build out that user base. And so we've got 18 million members or so who have permissioned us with the ability to access their credit file in the background and enable us to provide recommendations and advice for them. We've gotten to that 18 million members, largely by just leveraging the marketing spend that we're putting into the market every year but attracting people who are in the market for a specific transaction, whether it's a mortgage or a credit card or a personal loan. We have not aggressively gone to market with the simple message of, "Hey, come create an account at LendingTree, and here are all the benefits to you in the process." Obviously, there's a longer payback period and a less certain payback period in doing that relative to the transactional nature of our marketplace businesses. And so I think, really, we're thinking about growth in My LendingTree along 2 primary vectors. One would be just getting more aggressive or getting more leverage out of the nearly $700 million of marketing spend that we're already deploying, right? It's an asset for us to be able to do that at that level of scale and do it profitably but being able to get more mileage out of that, right, and really thinking about how we interact with consumer after they complete their initial transaction. That's kind of point one. And I guess point two is the notion of doing -- having a more holistic B2B approach, where, look, there are lots of audiences that could stand to benefit from the things that we've built, whether it's the functionality of My LendingTree and kind of a comprehensive financial health platform or whether it's the asset, which is all the supply that we've built out with our 800-plus partners in financial services. Those are real assets that we think are extensible to other audiences. And so we talked a lot about the H&R Block partnership as kind of a key example of that. That's a scenario where H&R Block has an audience of users that often don't engage with H&R Block outside of tax season. They would love to be able to provide their audience away to stay connected throughout the year, and so we've got a co-branded version of My LendingTree that sort of lives in the background of the H&R Block experience and gives their users that functionality, and it's a win-win. We think there are lots of other settings where that's applicable, right? Any sort of audience that is thinking about their personal finances to a degree could make a lot of sense. So whether that's -- we've got an equity investment in a platform called Stash that, that platform endeavors to kind of simplify investing and bring investing to the masses. So they've got pretty robust functionality around savings and investing tools, but their audience could also benefit from a marketplace for loans, whether it's mortgages or personal lines or credit cards or other things, right? And so that's one example. You could go on down the list and think about other platforms that are providing investment advice that could benefit from a lending marketplace in the background. We think about perhaps the opportunity to engage with employers who want to provide financial wellness tools for their employees. That's another setting where you could see us deploy the assets that we've built in My LendingTree and otherwise in that type of a setting, and it can make a lot of sense. And so we're really just scratching the surface of exploring those opportunities. We think there's no shortage of opportunity. Part of the recent reorg will help us be more thoughtful and intentional about how we go to market with those types of offerings. We've struck up a few of those deals over the last couple of years, and it's been a scenario where you kind of sell a customized solution, and then you have to go build it, and it takes time to build and to integrate. So we're trying to architect our platforms and our systems in a way that make some of those offerings a bit more extensible and more plug and play. And so that's kind of where we're headed on that front.

That's interesting. Okay. So how should investors be thinking about the size of any incremental investment expense that you guys might need to do on top of what's already being done, as you talked about, to sort of fuel this next growth strategy?

Yes. I mean the good news is you shouldn't necessarily expect any incremental investment as a result of this renewed focus. Like a lot of those things are -- they're already in motion. They're already adequately staffed. It's really just a matter of delineating kind of the core marketplace business from some of these more aspirational endeavors. And so there's not expected to be some big incremental CapEx. It's really just about renewed focus. That said, I mean, as we went through our planning process last fall, as we do every year, we really beefed up that planning process to the extent that we've sort of decoupled the day-to-day business and improvements that we should get and growth that we should get out of the core marketplace businesses, have decoupled that from kind of key strategic initiatives that we're going after that require incremental sourcing and staffing. And that list is about 15 or 16 initiatives. The cost of those things incremental to the base case plan, for lack of a better phrasing, that's about $17 million, $18 million expected this year, but that's not incremental as a result of the recent changes that's been part of the base case all along. The idea of the reorg is just to put a little bit more focus and oomph behind those things.

Sure. So M&A has always been a part of LendingTree's growth strategy and arguably a pretty successful one. I'm curious if that M&A strategy is evolving at all as J.D. takes on sort of this new operating focus with LendingTree Next.

No. I mean you shouldn't expect it to evolve a great deal. So J.D. will retain corporate development and M&A in his new role. And if anything, I would just expect it to be more closely aligned with some of the things that we're trying to accomplish strategically, not that it hasn't been. I mean everything that we've done has been very intentional and strategic. Most of the things we've done have been about diversification to date.I don't know that there are as many gaps to fill from just a diversification or adding new products standpoint. You could see it perhaps evolve over time, where we're being more thoughtful about the functionality that we need and the value prop that we're providing to consumers in a log-in experience, but that's about the extent of it. I wouldn't expect it to evolve a whole lot.

Okay. Maybe we can shift gears for a moment to sort of the competitive environment and dynamics. I'm curious, as you talk about the competitive landscape in terms of digital lead gen versus platform partners on brand spending or direct mail customer acquisition, is there a case to be made that digital lead gen is poised to take share from those other categories?

Yes. I mean I think it's been pretty clear to us that we have benefited over the last several years from this kind of fundamental migration of advertising dollars in legacy off-line channels, whether that's television or retail branch footprints or sports sponsorships or direct mail. Clearly, the mix is shifting in favor of more digital means, right? And so in that context, we've got to continue to compete and add value relative to other digital sources. I think the advantage that we have in a category like financial services is that, broadly speaking, any one of our clients doesn't want to serve the whole population. They all have certain areas of focus, whether it's credit profiles of their consumers, whether it's geographically based. They're all going after certain things, and there are elements of the population that they don't necessarily want to serve and are better served by other lenders, right? And so in that context, we can very efficiently kind of aggregate consumer demand kind of at the top of the funnel and efficiently carve it up and distribute it to the folks that can do something with it. And in turn, what the lenders get from that is the elimination of waste or redundancies, right? We end up being a very efficient channel for them because they can come to us with very targeted -- kind of targeted criteria and sort of ignore everything else, right? And so because of that, I think we retain pretty efficient and pretty optimized monetization on the traffic that we're able to acquire that enables us to go do more of it. And that's kind of a unique characteristic of financial services when you consider us relative to other marketplace businesses, right? Amazon will sort of -- they'll sell anything to anybody. In travel, broadly speaking, you can -- you're going to sell that plane ticket or that hotel room to anybody. It's not quite as simple in financial services, which we think makes it an even more attractive category for a marketplace like us.

Sure. Okay. So among the various digital lead gen platforms, are you seeing any changes in the competitive dynamic across the existing platforms or anything from newer entrants?

No. I mean, look, it's a question that comes up a lot. I think it's getting a lot of attention recently because a fair amount of players in our ecosystem have gone public over the last 18 months or so, and so perhaps it's getting a bit more attention, not that there's anything drastically different about the competitive dynamics. I mean we would point to -- Credit Karma is probably our most relevant competitor. They've been acquired by Intuit recently, and so now there's some publicly available information as a result of that. But I don't know that the competitive landscape has changed drastically. There's just -- there's kind of more information in the market. Clearly, certain areas of our business are more competitive than others, and that has implications on the margin profile of any given business, but it's nothing new. It's nothing that we haven't dealt with before. You certainly see competitors kind of ebb and flow and come and go. I think our more holistic view is that in a marketplace business, it tends to, over time, become a winner take most or a handful of winners takes most, and we think we're still incredibly well positioned to be one of those winners.

And you alluded to my next question, actually, which is around the margin profile and service segment profitability. How should we be thinking about that headed into the back half of this year and into next year, particularly coming off some pretty volatile swings during the COVID period?

Yes. Good question. I mean you kind of have to take that segment by segment, I suppose. If I look at our Home segment or our mortgage business, I mean, over long stretches of time, kind of the natural margin there has been kind of 35% to 40% in terms of our variable marketing margin that we break out our segment profit. It was a bit lower than that. In the first quarter of this year, we expect it to normalize back to those levels as we progress throughout the year. In the first quarter, it was lower in terms of margin profile. But on revenue, that accelerated 45% sequentially. The nature of that business, any time the revenue opportunity expands that sharply, that quickly, it's not uncommon for us to have to go fill that incremental revenue opportunity with less efficient kind of higher-cost channels. But the flip side of that is, as the revenue opportunity normalizes a little bit and then we have the benefit of 3 or 4 months to optimize our marketing campaigns in that setting, the margin profile tends to normalize as well. So that's -- I guess that's Home. Insurance is probably an easier one. I mean that business has been relatively consistent in and around 40% since we've been in it. Part of the reason why that one tends to be less volatile is this notion that kind of every consumer that goes to a carrier is "right-priced." I mean they're just very transparent with the carriers in terms of letting the carriers know exactly what they're buying, what channel it came from, all of the demographics. And there's sort of an intrinsic value associated with all of those characteristics. So we expect that to remain relatively stable. And then on the consumer business, like that's been a little bit more volatile. That's largely a function of mix. We've got some products categories in that consumer segment that are very high margin and others that are lower margin. We've talked about the credit card business for the time being, running at somewhat compressed margins by design as we try to rebuild that business, right? As issuer demand comes back to us, we're kind of taking the incremental economics there and putting them back into the marketing machine to, in turn, continue to drive scale and drive relevance for those issuers. The personal loans business is a very high-margin business for us. It's the business that gets the most benefit out of our My LendingTree user base. And as a result of that, I mean, it runs at very high margins. And so as that business comes back, that will be beneficial to the margin profile as well. So we think the there's reasons to be optimistic about margins in Home and the profitability of that segment as we start to see the consumer recovery.

That's really helpful. Maybe we could dig into some of the segments specifically a little bit more. And why don't we start with Home? I think one of the main questions or concerns that we've heard from investors is around the impact on Home revenue as refi volumes come off their peak, and you guys did definitely talk about that a bit on your last earnings call. But you also indicated that category revenues were quite strong headed into 2Q, so a bit lower -- or expected to be a bit lower than the 1Q expected peak. I guess I'm wondering, can you help us understand the framework that you use to think about refi volumes and revenue into second half of this year and into next year, particularly given the couple of quarter lag that you talked about for My LendingTree revenues versus that actual activity happening in the market?

Yes. We -- as it relates to the mortgage business, obviously, we don't have a crystal ball as to where origination activities are going. We're probably looking at the same -- starting with the same set of assumptions as you guys are -- any investors are looking at. Look, I mean, I think it stands to reason that interest rates will be a bit higher going forward than they were last year. We do expect refi activity in the market broadly to start to contract. But in our business, that can end up being an okay thing because what we've seen is, is over the last 12 months, I mean, it's been a pretty extraordinary time to be a mortgage lender. Not only has there been an abundance of refi activity, which it creates easy origination volumes, but the margin profile of -- for many mortgage lenders has been really robust, gain on sale margins and otherwise. And so we've seen them add a ton of capacity to their operations as a result. The mortgage business, for us, is the one more than any other that is subject to the notion of capacity, right? There needs to be capacity in the system. Every loan officer or every mortgage shop can only work through so many leads or so many referrals in any given day. And so as they've added capacity to that -- to their operations, that's a good starting point for us to be working from. And so as they've added capacity and now you're starting to see kind of the natural organic refi exuberance start to fade a little bit, that creates a nice window for us because they turn to us to enable them to keep plugging along. And so we've seen, as we called out in the first quarter earnings dialogue, our revenue per lead was up 53% in the first quarter of this year relative to where it was last year. And so the strengthening unit economics are a reflection of lenders turning to us because they need us in this type of an environment. And so that ends up being a pretty good setup as we think about the back half of this year and into next year. I would also argue our business is just structurally a better business today than it was 2 or 3 years ago, the last time we went through a similar cycle, right? And so as we think about the mortgage business, I mean, we're inevitably going to have to live through the ebbs and flows of cycles. But to the extent we're able to put in kind of higher ceilings and higher floor, that's kind of how we have to manage that business. And I think we've done a good job of that over the last couple of years.

Okay. So one of the things that we've been hearing sort of covering other companies in that space that as much as refi volume is expected to tail off a bit, that we're also seeing some really resilient purchase volumes. Could you speak to that a little bit? How much of an offset could that be from the revenue pullback on the refi side? And I guess could you remind us like historically, how much of the mix purchased versus refi has been or a range around that?

Yes. Sure. Yes. Look, I mean admittedly, I think we've been relatively open about the fact that purchase is a much harder business for us than refi is. If you think about the median consumer come into LendingTree to refinance their mortgage relative to somebody who's interested in buying a home, the likelihood of that refi candidate converting with one of our lenders is structurally much higher than that of someone expressing interest in a new purchase mortgage. Just because the -- I mean the home buying process is a much more involved, lengthy, complex, emotional process, and so the points of disintermediation are far greater in a purchase transaction. So as a result of that, I mean refi, it monetizes better. The unit economics and the refinance transaction for us are 2 to 2.5x better than that of purchase. And so that mix shift, like, it does have some relevance on our business. That said, in -- as we transition, we think, away from a refi environment, lenders will clearly have to start putting more time and focus and energy into the purchase product. To give you some sense, I mean, our purchase business as a percent of the overall mortgage business was down to about 10% over the last quarter or 2. Historically, it's been as high as 40 or 50 in terms of mix of revenue. And that's just -- that's broadly a reflection of the fact that the nature of most of our customers who are nonbank originators, right, and who get paid to originate and are less focused on the balance sheet implications. If there's refi available, that's where they tend to spend their time and energy. And so we're already seeing signs where lenders are coming to us and expressing more interest and showing an appetite for purchase. And so absolutely, purchase and home equity, for that matter, will be able to help us offset some of those headwinds on the refi side.

Okay. So maybe we can shift gears quickly to make sure we hit some of the other segments. On Consumer, maybe we can start with credit card. You talked last quarter about card issuer partners being back on the -- actually the last couple of quarters, card issuer partners being back on the platform but that acceptance rates were pretty low. I'm curious, from what you can see, is this a function of credit quality of applicants being lower than usual or card issuers being more discerning? And if that's the case, would you think it will be -- what will be the catalyst, do you think, for card issuers to sort of open up that acceptance box a bit?

Yes. I guess 2 things there. There's -- if you think about what drives our unit economics in the card business, one of those things is acceptance rates or approval rates, right, so for every 100 applicants that we send through to an issuer, what percentage of them do they approve. The other big driver is just the absolute payout, right, what the issuers are willing to pay someone like us per approved applicant. So both of those things, I would say, are running at 25% to 30% below where we were at precrisis. Now they're both moving in the right direction, right? And so to give you some sense, if the approval rates on our card traffic have ranged from, call it, 7% or 8% to 14% or 15%. We're kind of in the middle at the moment. We're off the lows but not quite to the highs, and I would say the same thing has been true in terms of just payout levels. And a lot of the conversation that we're having with the issuers is, look, clearly, there are headlines in the market every day about card issuers wanting to get more aggressive. And clearly, they're starting to spend more in the form of advertising to drive new card issuance and get ahead of the consumer recovery. I think there's still an element of uncertainty is just around how that new cohort of cardholders behaves over the next 6 to 12 months, given what we know about the consumer's balance sheet coming out of the crisis, right? They've been -- largely speaking, consumers have been flushed with stimulus dollars. They've paid down debt. By and large, they've built up savings. And so the behavior of the consumer over the next little stretch of time, it's still a little bit unclear, right? As to our spending, are they going to be putting that spend on credit cards as opposed to other means? If they're putting it on credit cards, are they going to be paying those balances down every month? Or are they going to be carrying a balance and enabling the issuers to earn interest? So I think all of those things is where there's still a bit of uncertainty. I don't -- I think there's less certainty today about the card issuers' appetite for putting on new accounts. It's more about kind of the profitability curves, which ultimately inform some of our unit economics and some of our decision-making. So I think that's where we're at, and that's kind of what we're hearing from the issuers.

Okay. That's helpful. If we could shift quickly to personal loan revenue. On the last call, you guys talked about -- and this was pretty intuitive, actually. The personal loan revenue trailing sort of a rebound in card revenue, which makes sense, certainly, is personal loans can be a debt consolidation tool. I'm curious, based on the historical trends that you've seen over time, how long -- is there -- do you have a sense of how long that lag is typically? Or what are you expecting in this environment?

Yes. I mean it's -- that's a difficult analysis to go through. I think largely because the -- I mean the unsecured personal loan has becomes such a more mainstream product over the last decade with the kind of the uprising of fintech and alternative lending platforms and peer-to-peer lending and all those things have made that a more accessible product. So comparing it to the last time we went through a similar downturn is difficult. I guess what I would say is, based on our own data, give or take 60% of the use cases for a personal loan have been, to your point, for debt consolidation. But as you think about the other use cases, generally, it's things like taking a vacation or helping pay for a wedding. Some of these other things that have not been happening en masse over the last 12 months that should hopefully start to begin happening again. And so we're optimistic that, that business will come back. We're seeing good signs of it as we progress throughout the quarter. So will it fully lag the card revenue? I don't know. I mean there's obviously nuances to our business model in terms of how each of these things recovers and what the impacts are to unit economics and a whole host of things. But look, we're pretty optimistic that both of them will continue to move in the right direction.

Okay. I want to be sure we touched on the Insurance category. It's been an incredibly stable segment for LendingTree, particularly during this COVID period. It has provided to really nice diversification, I think, in your business that you were alluding to earlier. One of the things you talked about in terms of a growth avenue within Insurance has been around the build-out of the Medicare segment, and we did touch on that on the last earnings call. Curious how you think about that effort scaling, how big can that be as a percentage of the Insurance category and over how long does it take to get there. Is that a multiyear effort? Or is that something that could conceivably roll out sooner?

Look, we would expect to get some real benefit from that. That's been -- historically, that's been low single digits in terms of its contribution to the broader insurance business. We would expect that to move higher. Certainly, we're making big investments in it. Like the build-out of that business is a bit more capital intensive, just in the sense that you've got higher and staff a bunch of licensed agents. So there is some upfront cost to that, and it's a more seasonal product, right? So we, this year, are intending to hire up to 150 agents to be prepared to capitalize on open enrollment this fall. Depending on how that goes, we may be willing to make a similar size investment next year to continue to grow that business. That's kind of where we are in the cycle. I think it should become a bigger piece of the mix. Does it become an outsized piece of the mix of that business? We don't believe so, certainly not over the next few years. We still think there's plenty of growth left in categories like auto, and we fully intend to continue to grow some of the more nascent segments in our business like Home, Home and under 65 health. We're looking at new categories like pet and renters and other things as well. So the Medicare piece is an initiative. I would also throw in there that we're building out an agency capability on the P&C side, too. There are a whole host of benefits in doing that. You can capture better economics if you're binding policies as opposed to just selling clicks or phone calls, but it also enables us to do some more innovative things in terms of the customer experience, right, and being able to provide a bit of a concierge-type experience to My LendingTree customers, for example. And so there are a lot of other implications to that, but that's kind of where we are with the Insurance business. The bulk of the timing is back to -- we talked about sizing the strategic initiatives earlier. About half of that investment is related to our insurance agency initiatives.

Got it. Got it. Just wrapping up the last couple of minutes that we've got here. I wanted to check in with you about something that the team has been historically sort of responsive to in terms of a dip in share price. In the past, sometimes when share prices come off, you guys have responded with some opportunistic share repurchases. I'm curious how you're thinking about the possibility of share repurchases in the context of revenues that are still recovering from sort of a COVID environment and these other growth initiatives and priorities that you've articulated.

Yes. Absolutely. Look, I guess, we've been frustrated by the performance in the stock. I think it's largely been a result of -- in fact, we've had one big seller whose trading activity is highly publicized. Hopefully, that overhang is behind us. But as it relates to our own capital allocation priorities, We are in a bit of a scenario where because our trailing EBITDA profile has been compressed because of COVID, our leverage levels are up a tick or 2 higher than we've historically like them to be and to -- with our current credit agreement, we're a little bit lacking in flexibility to be able to execute on things like buybacks. So we're working with our bank group to try to understand what kind of flexibility we might be able to get. Unfortunately, it's not just -- it's not as simple as saying, yes, we think stock is cheap. We're going to buy a bunch of it down here. There are some other considerations.

Sure, sure. And then last one here. One of the questions we hear most frequently is annual guidance. And certainly, you guys have not returned to providing annual guidance. I'm curious what is it that you think you would need to see to be confident enough to return to providing some sort of full year guidance metrics.

Yes. Look, I mean, I guess we withdrew or suspended our full year guide last year in the teeth of the crisis, as did many other companies, and we've been kind of guiding quarter-to-quarter. And unfortunately, I mean, I think the reason why we pulled the guidance in the first place are still somewhat valid reasons, just in the sense that we still feel like there's a pretty wide range of outcomes as we look into the back half of this year and into next year, particularly with an eye toward the speed and the timing of a recovery in the Consumer segment. As I said, there's still a wide range of outcomes there. And so trying to pin ourselves into a specific number is probably not the best course of action. I think we're getting closer, and we're starting to get a better feel for some notion of recovery in the Consumer segment. But again, the speed of recovery there is still a bit uncertain. It's hard to forecast. I guess I'd say we're sort of working toward getting to that point where we feel confident in providing a full year number.

Okay. That's helpful, Trent. Thank you so much for your time today. I think that is it for us, so I think we'll leave it. But again, appreciate you being here today.

Yes. Thank you very much for having Us. Appreciate it.

All right.