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

Okay. Good morning, everybody. I'm Mark Mahaney, Senior Managing Director of Internet Research here at Evercore ISI. My colleague, Shweta Khajuria, and I will be interviewing for the next 35 minutes management from LendingTree. Thrilled to have this company, have been tracking them mostly on, sometimes off, but mostly on for a better part of 15 years. So we're thrilled to have Trent Ziegler, the relatively new CFO of LendingTree; and J.D. Moriarty, President of LendingTree Next. So Trent and J.D., thanks again to both of you for joining today.

And I guess, the first thing I want to do is ask you, J.D., what is LendingTree Next? And then you and Trent, just talk about the recent management changes and what was behind them. And what's the -- what are the implications for investors?

Sure. And I'll take that. And we -- obviously, it's not as much changes as it is alignment. And so if you think about everything that we're doing in LendingTree Next is effectively an extension off of our core assets. And so Next includes our My LendingTree platform. It includes new consumer experiences, new shopping experiences that we're going to try and work on that should be more conducive to the logged-in experience; as well as what we call Powered by LendingTree, which is our efforts to syndicate marketplaces and our My LendingTree assets. So partners who will white [ labeling ] My LendingTree, for instance, or will want a mortgage marketplace on their site for their members, and they're a range of partners that we're working with on things like that. But think of everything there as being a more dedicated focus on that experience, so the MyLT, different shopping experiences and Powered by LendingTree. Also in Next is corporate development, which I've had as CFO since 2017. And obviously, we've been an acquisitive company. And then enterprise operations management, so things that span across the company to try to draw out efficiencies and actually make all of our businesses, right? Diversification is one of our great assets, make all of those businesses work better together. So 3 divisions: LendingTree insurance, LendingTree marketplace, which is our core marketplace assets; and then Next, and everything in Next is trying to play off of those assets. And that's what I'm charged with.

Okay. And Trent, do you want to explain the management changes? You've been with the company for a long period of time. Congratulations on the extensions to the CFO throne. But do you want to put a little more context around that? And is there any signaling here that M&A is going to become less or more of a priority at the company with the change in management?

No. I mean, I can answer that last one first. And then I think J.D. would agree, corporate development will stay with J.D. and sort of keep it very aligned to what we're trying to do strategically. You shouldn't take any read that there's less focus on it as a result of these management changes. And then to the broader question, I'd say, somebody who's been with the company for almost nine years, I'm pretty excited about these changes. Because I do think it addresses one of the challenges that we've had in -- you've got a core marketplace business, where you're spending marketing dollars to drive traffic and you're trying to monetize that traffic efficiently. That can sometimes be at odds with providing a great consumer experience and one in which you engage a consumer and follow-up with them repeatedly and get more leverage out of them. And so I think, with dedicated focus and dedicated accountability, this helps address some of that kind of natural tension that has existed. So I'm thrilled with changes.

Okay. Super. Let me ask another broad question, and then I'll spin it over to Shweta. J.D., you mentioned diversification, and that's been a core trend that the company, for the last, I don't know, 5, 7 years, maybe even longer. This was a company that was almost entirely built around -- well, it was built around the Mortgage business. And over the last couple of years, it's diversified into what used to be called Consumer and then Insurance and Home, and those used to beat those that were relatively equal contributors in, roughly, in terms of revenue and profitability. And so I guess the question I want to ask you is, and especially since J.D., you're in charge with LendingTree Next, is further diversification necessary? Is further diversification a good thing? Are there particular areas that -- if you think about the wall that is LendingTree -- are there particular missing pieces, white space opportunities that would be interesting under the right circumstances to diversify into?

It's necessary -- sorry, I don't think it's necessary, I do think it's likely. When we look at the corporate development opportunities that we see, they tend to be, let's say, a number of extensions off of Insurance, not surprisingly, given the scale of our Insurance business. We see some things in Small Business, which is a category that we like. We've mentioned the investments category before. We'll continue to grow that business organically and look at acquisitions. So that's not a line item that is meaningful today, Mark. But that if you fast forward 5 years, do I think that, that's a category that we're talking about? Yes. In terms of the diversification, I remember going into 2019 and saying, "Geez, we're going to have 4 businesses, each of Mortgage, Insurance, Personal Loans, Credit Cards. Each of them could be $200 million in revenue." And I just meant that from a scale perspective. Now you get surprised, sometimes Insurance was way better, right? And Personal Loans, from a revenue perspective, didn't get there in '19. As I sit here in the middle of '21, what's happened, interestingly, the results of COVID, Mortgage and Insurance became a bigger part of the total, right, roughly 70% of our business last year across those 2 businesses. Those businesses have actually gotten, I think, better, more stable, more relevant for our partners. And now, in Consumer's, repairing and recovering, right? And so I think we'll get back to that type of diversification. I'd like to remind people, our Consumer segment pre-COVID was 43% of revenue, right? So I tend to think about not just the 3 segments, Consumer, Home and Insurance, but actually individual businesses and can they get to a certain scale. And so we're seeing that recovery in Consumer. And I think as you look out to '22, we'll be back to more similar diversification. I don't think it's necessary. We are in some pretty big partner wallet, but I think we are going to see certain of our businesses grow. And it's really the difference of in 2 years or 5 years. In 2 years, we'll be talking about the same segments. In 5 years, invariably, there will be something that we're not really talking about in a prominent way today that is very exciting and interesting to talk to you about.

Okay. Super. Thanks, J.D. Shweta?

Sure. Thanks, Mark. So following up on your comment on impact from COVID, I guess, how would you characterize -- do you think that you are seeing any permanent changes that will stick post-COVID on your business across these segments? And what gives you confidence that the diversification level within the Home or Mortgage and Insurance and Consumer will be back to pre-COVID levels, call it, next year?

Yes, I'll take that one. I mean, I guess, structurally, clearly, our Consumer businesses have been impacted during COVID and the demand for them. But that's -- we don't feel like there's anything structural there, right? I mean that's a macro-driven event. That's a cyclical event, where there was real concern for consumer credit due to uncertainty for a period of time. And I think we're already seeing real recovery there, right, and concerns about the health of the consumer are kind of in the rearview mirror at this point. So I think, structurally, well, those Consumer businesses will continue to recover. We're thankful for the diversification that we put in place over the last several years because, clearly, the mortgage business benefited from some of the dynamics that we saw during COVID. The Insurance business continued to perform quite well. If anything, we've seen across categories, whether it's financial services or otherwise, clearly, you've seen just a digital acceleration, where consumer behavior, partner behavior, in our case, has continued to move online. Those are trends that we've seen over the last decade. I think those have only accelerated as you think about bank's reliance on retail branch networks, and that's going to continue to fade, right? If you think about a complex mortgage process that has historically involved a lot of human intervention and manually -- manual shuffling of paper and other things and, by necessity, that process has had to evolve over the last year. You've had to find ways to accommodate those processes in a more virtual world. Similarly, in the Insurance business, where many of those insurance carriers rely heavily on retail agents and, obviously, those agents have been less effective in a more virtual world. So I think we've seen a lot of structural things just in terms of the evolution of consumer behavior. And so those things should accrue to our benefit in time, no question about it. The other thing I would point to is just kind of the evolution of our workforce. Certainly, in a more remote world, you're competing for talent more broadly, but at the same time, we have access to greater talent. And we don't have to be relying on concentration in certain geographical areas, right? We can rethink our real estate footprint through the acquisitions that we've done over the last several years. We've got offices and presence in, I don't know, 9 or 10 different cities. So we can start to rethink some of that and get smarter about how we leverage talent and deploy our workforce.

And then how about the impact from rising rates and just a fully reopened economy? How diversified are you now, where you have some offsets to potential headwinds from rising rates to mortgage or refinancing or refinanced piece of mortgage?

Sure. Yes, I mean, I would say the Mortgage refi business is the one business of ours that is somewhat -- or relatively heavily correlated to rates. Many of our other businesses are not. We've not seen swings in partner demand or in consumer demand in things like Credit Card or Personal Loans related to movements in interest rates. Certainly, Insurance has its own cycles, but it's less tied to interest rates or consumer credit. So we feel really good about sort of the diversification of the business broadly. What I would say is, our Mortgage business has benefited over the last 12 months, to a degree, from the rate environment that we found ourselves in. As we sit here today, and we're in the early stages of interest rates starting to go up, we actually think that's a pretty good environment for us in that business for a couple of different reasons. If you look back at the last 12 months in the Mortgage business, in particular, it's been a pretty extraordinary environment to be a mortgage lender there. Obviously, volumes were through the roof with refinance interest, but also their margin structures were enhanced. And so because of that, many of our lenders have been consciously adding capacity and adding loan officers and building out their operations over the last 12 months to take advantage of that environment. And so as we get closer to the environment that we're in today, where rates are starting to move up, right, you've got a group of lenders who have spent the last 12 months adding capacity. And now some of that natural refinance activity is starting to fade. That ends up being a pretty good environment where they turn to us to help them keep the machine running. And so we're pretty optimistic on, at least, the next few quarters in terms of what we're seeing in the Mortgage business. And at the same time, over the last year or so, our business has become very reliant on the refinance business with less focus on purchase and home equity because that's just the nature of kind of who our lenders are. When there's refinance to be had, that's where they spend their time and their energy. And so as some of that starts to fade, we feel like there's a long runway ahead for businesses like purchase and home equity.

Makes sense. Just a quick follow-up, and then I'll flip back to Mark. How much is repurchase and refinance and purchase? What's the split? Can you please remind us? And where can -- how will that shift?

Yes. I mean, as of late, the last couple of quarters, refinance has been as high as 85% or 90% of the mix. But again, it's because of those dynamics I just mentioned. Historically, we've seen the purchase products represent 40%, 45% of total.

One of the interesting things that's happened and, obviously, this year, the public market has gotten more focus on it with a couple of our lenders going public. But just the sheer scale of our nonbank mortgage partners does make this cycle a little bit different than previous. Just -- I think we have a much more diversified product set. We used to always talk about the difficulty of building out that top 10 within Mortgage. And we've actually seen across this cycle that get a little better, and just as these lenders get larger and the reliance on our services has expanded [ candidly ].

Yes. I want to spend a little bit more time on this interest rate issue. It's obviously very important to the stock. It doesn't mean that the stock market is right. Obviously, many times, it's not. But your shares are off like 40% since interest rates started to move up in the middle of February, since the interest rate shocks started to hit. And so that -- so just go through again. I think most of your -- this is pretty consistent with what you've said in the past, most of your segments are not impacted by changes in interest rates. Credit Cards, Personal Loans and Insurance are not tied to interest rates, and it seems like you've got some natural hedges in the Mortgage business. There's always this trade-off you have. I'm not sure exactly what the gold-leaved-locks scenario is for you and with interest rates, and your Mortgage business is not just dirt cheap interest rates. So if you could just spell that a little bit more because it seems to me that that's probably -- there's probably a greater than a reasonable dislocation in your stock because of these, because of the spike or the -- yes, the rise we've seen in interest rates. Just double-click on that again, please?

Yes, I'll start. J.D., feel free to jump in. I -- in having this conversation about rates and, obviously, we've been getting the question a lot from investors as the expectation for rates do continue to go up, materializes. We keep pointing people back to kind of the 2017, 2018 time frame, which was a similar environment, right, where interest rates started to move up in early '17 after having been historically low for a period of a couple of years. There was a kind of a 2- to 2.5-year refi boom in 2015 and 2016. And as rates started to move up in early '17 and refi volumes started to contract, we continued to well outpace the market for the next 4 or 5 quarters into early 2018. And it's because of those dynamics that I just mentioned, where, in that environment, you've got lenders who have staffed up to take advantage of high volumes and of an extraordinary environment. As the natural activity or interest in the market starts to fade a little bit, that ends up being -- I don't know if it's the Goldilocks environment, but certainly in an environment where lenders turn to us to help them fill their need. Now when that started to -- that ultimately -- we started to struggle in the back half of '18 and into '19 a little bit was because, at that point, lenders came to the realization that they were overstaffed relative to available volumes in the market. They had to rationalize their own cost structures. They had to go through layoffs. They had to look for ways to cut their back-office costs. They had to look for ways, in our case, to cut their marketing costs. And so that business slowed down a little bit. But I guess, in drawing the comparison from today to back then, as J.D. said, we've got a much more differentiated offering today, right, one where we can serve a much broader swath of lenders. We've done a lot in terms of segmentation of traffic to be able to deliver high intent, more exclusive leads to those lenders that do best with those and at the other end of the spectrum, perhaps more low-intent, more low-information value leads that are priced accordingly to a different set of lenders. And so look, I mean, as we think about the mortgage business more broadly, I think we're going to have to navigate these cycles. But to the extent that we can put in kind of higher ceilings and higher floors as we continue to move forward, that's kind of the goal in the mortgage business, and I think we've done that effectively.

Super. Okay. All right. Let me switch gears a little bit. Let's talk about the Consumer segment. And I think -- J.D. , I think the terminology you used was it's still recovering or something to that effect. So just walk through the different components in the Consumer segment, Credit Card, Personal Loans, and what's a reasonable time line? And what will be the signpost to look forward to see that those segments have largely fully recovered? What's a reasonable recovery path?

Sure. So it might make sense to talk a little bit about the way that COVID and, in turn, stimulus impacted our significant businesses there, right? And we tended internally to talk about 3 of our big businesses that were most profoundly affected. And so those were Credit Card, Personal Loan and Small Business. And so stimulus had different impact to each. And so initially, concerns about consumer credit -- keep in mind that the Credit Card business is large partners who immediately moved away from the affiliate channel, as they refer to us. They immediately moved out of it. And in fact, that Credit Card business, on a pure revenue basis was down as much as 90%, okay? And so when you have that much of a revenue opportunity just go away, obviously, the cost environment doesn't do anything for you when the partners simply don't want to be in the channel. And so that was Credit Card. Now Personal Loan and Small Business were initially affected somewhat similarly in that those lenders needed access to capital. And when the securitization markets rose up, those lenders were not there. Interestingly, those lenders came back in both Small Business and in Personal more quickly than our partners in Credit Card. And so in Personal Loan and in Small Business, the lenders were there. Small Business had a unique -- and that's when you get into the stimulus. The stimulus dollars in different forms, right? PPP had an impact on Small Business lending because a lot of the borrowers, not only were they taking advantage of PPP, but they were also -- there was the overhang of when is the next wave of PPP going to come. So the borrower action -- the borrower initiative was not there to the same degree. Now stimulus dollars affected our Personal Loan business in that, as we all know, consumers use the stimulus dollars to pay down credit card debt, and the #1 use for a personal loan is to consolidate your credit card debt. And that wasn't there. So it's been slow to recover. Now the good news for us is when we planned this year, we basically said unemployment with a 6-month lag, that was our projection. So we've actually been on or slightly ahead of what we projected throughout the year in terms of the recovery of those businesses. The card recovery has been slower. That's a business where, gradually, the partners are coming back. The cost environment is challenging as well, and so our ability to garner a margin in card is very hard. So in the first quarter, our VMM percentage in the Card business was about 8%, okay? Normalized environment, that's 25% or 30%, right? So that's a tough environment, but we want to grow revenue and we want to grow partner share. And so that's improving. And we think that the efforts that we're going through in the first half of the year operating at a below-normal margin will help us take wallet share over time with some of those partners. Personal Loan, we have had partners there. And now we just need the consumer to come through, and that's starting to happen. And so we're happy with the progress there. The consumer is starting to borrow again. The consumer is starting to come through, and we're experiencing very normalized margins in that business, which is great. And I would characterize Small Business the same way. Getting rid of the overhang of PPP is actually going to help that business in much the same way. So we're happy with the fact that we forecast those businesses conservatively. It's just tough. We -- one of the metrics that we look at internally is just on a revenue basis. Where is that business compared to pre-COVID? And so each of those businesses, the Card business is still less than 50% of what it was on a monthly revenue basis pre-COVID. Personal Loans is better. Small Business is better and we'll get there by the end of the year. And that recovery is something that we think people should be excited about. But Mark, to your point around I don't think it's just an interest rate read, I just think there has not been enough of a sign of recovery for investors to get excited about. And that's -- it's the confluence of a Mortgage business that people don't want to look forward on, a Consumer business where they haven't seen signs of recovery. And the Insurance business, by the way, remains very stable. So we're thrilled with the performance in insurance.

Okay. Thanks for covering all that, J.D. Very helpful. Shweta, back to you.

Okay. Thanks, Mark. So now moving on to Insurance then. You said it has been relatively stable. So how should we think about growth catalysts there in that segment? What's -- could you maybe start with framing the opportunity there, where the growth could come from? And then how material could additional verticals be like Medicare, fed insurance, renters, et cetera?

Yes, I'll take that, and J.D., you can chime in. Look, when we -- like many of the acquisitions that we've done over the last several years, when we acquired the QuoteWizard business in the fall of 2018, it was particularly concentrated in the auto category. And it was particularly good at customer acquisition through channels like paid search. And so like most of the acquisitions, we buy these businesses that are really good at a couple of things and endeavor to make them better and more well-rounded and more diversified. In the case of the Insurance business, like I said, it was 80% auto at the time we bought it. We've continued to try to grow adjacent categories. So whether that's categories like home insurance, which, as of the most recent quarter, eclipsed 10% of the total business for the first time; or the Medicare business, which is a huge opportunity. That's a business that we're investing in pretty heavily this year, and we would expect to bear fruit kind of in the back half of this year and then certainly into next year. So there are opportunities to expand, certainly the categories that we're in, within each of those categories, expanding our partner wallet, right? So it's pretty common, particularly in the auto category. It's no secret that Progressive is among one of the most aggressive spenders there. And so many of the players in insurance rely on Progressive. But one of the things we benefited from over the last several years is kind of that next tier of carrier, playing catch up and certainly beginning to invest more into the channel. So we've certainly continued to diversify our mix of carriers or our customer concentration. And finally, diversifying marketing mix. Yes, like I said, when we acquired QuoteWizard, they were about 50% plus reliant on paid search. We very quickly did another acquisition to augment that business. We acquired QuoteWizard in the fall of '18. In January of '19, we acquired a business called ValuePenguin that gave us significant presence in organic search. And we've continued to lean into that opportunity where we acquired a business in ValuePenguin, that was a content business, had very high-quality traffic. And prior to us acquiring them, we're monetizing it through a third party. By monetizing that traffic through the QuoteWizard distribution platform, we were able to extract pretty significant synergies right out of the gate, and that led us down a path of, well, if we can do that for one publisher, why can't we do that for another? And so we've continued to make real investments in that channel. I think as of the most recent quarter, it's -- it had done $27 million of revenue in the first quarter of 2021, up from basically 0 a couple of years ago. More recently, we've made progress in what we refer to as the inbound channel, but that's effectively reaching out to other partners and aggregators who may not have the same level of distribution that we do, and being able to sort of monetize that turndown traffic. And that's been a nice area of growth for us as well. So I think diversifying and scaling in those 3 areas, just more partner wallet share on adjacent categories and diversifying the marketing mix.

That makes sense. And then, I guess, could you talk about, for the overall business, how has marketing strategy sort of evolved or changed? So you spoke to Insurance, but how about the other segments? Any material changes that you have made or seen? And will that continue to evolve over time?

Yes. I mean, look, I think we certainly maintain a very diversified marketing mix. One of the areas that we get pushed back from time to time is our reliance on paid search. And I'd say that across the business, broadly, paid search doesn't account for more than 30% of traffic. With the remaining 70% being pretty broadly distributed among what we would call organic or near organic, things like SEO, direct-to-site CRM activities. But then as you go down the spectrum, social media advertising, display advertising, large media partnerships, where we're able to distribute content across major publishers, things like that. And so it is really diversified. We made a concerted effort a couple of years ago and in our M&A efforts to really focus on building out our SEO and content machine, and we've seen that grow substantially over the last few years. And then, I think, going forward, one of the biggest priorities is just how do we get more mileage out of the spend that we have, right? We're fortunate in that we're able to spend, give or take, $700 million in paid marketing every year and do it with an immediate known return. But I think through a lot of the efforts that are going on in J.D.'s new org, right, how do we get more mileage out of that spend? How do we better capitalize on that? And how do we get more repeat behavior, et cetera. So I'll stop there. J.D., if you want to add anything to that?

No, that's right. We've got -- our biggest advantage is our scale, right? And one of the nice things that's occurred is that scale really used to only exist in Mortgage, and the Insurance business has proven to be a great business for us and a more stable business for us. But as Trent said, one of the things we've got to do is press on that advantage on the marketplace side of things, bring those consumers back into a logged-in experience where engagement is the focus. And it's just a different experience for them, and we've got to really cultivate that. And so that's the intent of our realignment is to put more focus behind that, not to -- we don't want to look at My LendingTree as just a marketing channel. We want to look at it as where the consumer ultimately comes back to now. It's a competitive field, to be clear. But most of our competition does not have that marketplace advantage that we do. And so if we can just get the consumer to come back and engage in different ways and then make that a benefit for other businesses of ours, just like Personal Loans benefits from it, that would be a phenomenal win for the company.

That makes sense. Thanks. Back to you, Mark.

All right. Let's talk about My LendingTree. We only have a few minutes left. I think as of the most recent quarter, you had 17.7 million cumulative My LendingTree sign-ups. I'm not sure how many of them are active. So can you just talk through that? It seems like that's been a pretty powerful tool for you over the last -- and I think you started this about 5 years ago. That's my recall, but it's been around for a while. And I think it's created a lot of cross-sell opportunities for you. So just remind us where you are in terms of the overall level of revenue generation from My LendingTree, things you've done to be able to boost what's been a pretty good powerful customer engagement and loyalty program for you?

Sure. So our focus in My LendingTree has been -- obviously, first of all, monetization fell off in 2020 because, typically, 55%, 60% of the monetization from My LendingTree would be in Personal Loans. So as that business diminished, so did the revenue opportunity or the contribution from My LendingTree. And so it's probably not really the way that we would look at is My LendingTree working or not. The reality is, in 2020, we went backwards a bit on My LendingTree with regard to sign-ups because of Personal Loans and with regard to revenue because of Personal Loans. In terms of in the plumbing of it and the engagement of it, we think we made great progress. So one of the things that we did the last year was launch Plaid integration and trying to get our users to link their accounts. Now Mark, there's a -- we're having great success with new users linking accounts on Plaid. We're not having as good success with existing users going back because there's not much of a call to action. But our focus within My LendingTree is on cash flow dynamics, on recurring subscriptions and billing and things like that, and just making the consumer aware. I think as we move forward, we want to endeavor to probably have it -- well, we want to endeavor to have the My LendingTree experience feel quite different than the traditional LendingTree experience. You shouldn't have any sort of a block or with putting in a phone number because we should have your information already, and we want to encourage the consumer to do a lot of research on My LendingTree. And so that will be a hallmark of kind of the focus going forward. And so there will be a huge focus on engagement. Now one of the things that we are happy with, in the last 2 quarters, you've seen the sign-ups, the membership base grow actually pretty nicely in light of the environment we've been in for Personal Loans. So why is that? That's because some of the partnerships that we've put in place have been pretty effective. So we've talked in the past about our partnership with H&R Block. We've talked about a partnership with Equifax. That's the strategy that we're embarking on to grow the base, but also to grow the influence of the platform. And so in that respect, we've been happy with that progress. We're actually pretty confident that, that will continue and that actually we'll get the tailwind of our Consumer business is recovering as well. But I would not be surprised if the look and feel of My LendingTree over the next year evolves. And the focus will clearly be on engagement. Right now, we don't, Mark, talk a lot about MAUs. I actually think MAUs are probably one of the more gameable things based on what e-mails you send to people. Can you get them to open an e-mail? So we don't publish a monthly number broadly. We do tend to publish revenue numbers. It's not really the way that we want to look at it going forward. We want to look at it as something where a win over the next couple of years will be step change in engagement.

Okay. Great. We're at the end of our time. I want to thank Trent Ziegler and J.D. Moriarty from LendingTree. Thank you very much for your time and your efforts today. It's always great catching up with you. Wishing you all the best.

Thank you very much.

Thanks, Mark. Thanks, Shweta.

Thank you.

Appreciate it.