LENDINGTREE, INC. 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 2022 Annual Report. Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views ofLendingTree, Inc.'s management as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations, except as required by law.
Company Overview
LendingTree, Inc. is the parent ofLT Intermediate Company, LLC , which holds all of the outstanding ownership interests ofLendingTree, LLC , andLendingTree, LLC owns several companies. We operate what we believe to be the leading online consumer platform that connects consumers with the choices they need to be confident in their financial decisions. Our online consumer platform provides consumers with access to product offerings from ourNetwork Partners , including mortgage loans, home equity loans and lines of credit, auto loans, credit cards, deposit accounts, personal loans, student loans, small business loans, insurance quotes, sales of insurance policies 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(s) they are seeking. We also serve as a valued partner to lenders and other providers seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer inquiries we generate with theseNetwork Partners . Our MyLendingTree platform offers a personalized comparison-shopping experience by providing free credit scores and credit score analysis. This platform enables us to monitor consumers' credit profiles and then identify and alert them to loans and other offerings on our marketplace that may be more favorable than the terms they may have at a given point in time. This is designed to provide consumers with measurable savings opportunities over their lifetimes. We are focused on developing new product offerings and enhancements to improve the experiences that consumers andNetwork Partners have as they interact with us. By expanding our portfolio of financial services offerings, we are growing and diversifying our business and sources of revenue. We intend to capitalize on our expertise in performance marketing, product development and technology by leveraging the widespread recognition of the LendingTree brand. 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 ourNetwork Partners place us in a strong position to continue to benefit from this market shift. 21
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Economic Conditions
We continue to monitor the impact of the COVID-19 pandemic, government actions and measures taken to prevent its spread, and the potential to affect our operations. We are also monitoring the current global economic environment, specifically including inflationary pressures and interest rates, and any resulting impacts on our financial position and results of operations. Refer to Part I, Item 1A. "Risk Factors" of our 2022 Annual Report for additional information. Of our three reportable segments, the Consumer segment was impacted the most from the COVID-19 pandemic as unsecured credit and the flow of capital in certain areas of the market 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 and the macro-economic conditions that followed, our marketing expenses generally decreased in line with revenue. During the first quarter of 2023, the challenging interest rate environment and inflationary pressures have continued to present challenges for many of our mortgage lending and insurance partners. In our Home segment, mortgage rates have remained relatively consistent in the first quarter of 2023 compared to the fourth quarter of 2022, but nearly doubled compared to the first quarter of 2022. The significant increases in mortgage rates caused a sharp decline in refinance volumes and are putting pressure on purchase activity. In our Insurance segment, demand from our carrier partners remains volatile as they continue to deal with persistent industry headwinds.
Segment Reporting
We have three reportable segments: Home, Consumer, and Insurance.
Recent Business Acquisitions
In
Our new corporate office is located on approximately 176,000 square feet of
office space in
With our expansion inNorth Carolina , inDecember 2016 , we received a grant from the state that provides up to$4.9 million in reimbursements through 2029 beginning in 2017 for investing in real estate and infrastructure in addition to increasing jobs inNorth Carolina at specific targeted levels through 2021, and maintaining the jobs thereafter. We have received approximately$0.7 million related to theDecember 2016 grants. If we are unable to maintain the specified target levels, our ability to earn further reimbursements could be limited. Additionally, the city ofCharlotte and the county ofMecklenburg provided a grant that will be paid over five years and is based on a percentage of new property tax we pay on the development of a corporate headquarters. InDecember 2018 , we received an additional grant from the state that provides an aggregate amount up to$8.4 million in reimbursements through 2032 beginning in 2021 for increasing jobs inNorth Carolina at specific targeted levels through 2024, and maintaining the jobs thereafter. We have currently not met the specified target levels set forth in theDecember 2018 grant and may not realize any reimbursements from this grant.
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
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.
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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 6.36% inDecember 2022 to a monthly average of 6.54% inMarch 2023 . On a quarterly basis, 30-year mortgage interest rates in the first quarter of 2023 averaged 6.36%, compared to 3.79% in the first quarter of 2022 and 6.69% in the fourth quarter of 2022. [[Image Removed: Picture2.jpg]] Typically, as mortgage interest rates rise, there are fewer consumers in the marketplace seeking refinancings and, accordingly, the mix of mortgage origination dollars will move toward purchase mortgages. According toMortgage Bankers Association ("MBA") data, total refinance origination dollars increased to 20% of total mortgage origination dollars in the first quarter of 2023 compared to 17% in the fourth quarter of 2022 but decreased from 45% in the first quarter of 2022. In the first quarter of 2023, total refinance origination dollars did not change from the fourth quarter of 2022 and decreased 79% from the first quarter of 2022. Industry-wide mortgage origination dollars in the first quarter of 2023 decreased 16% from the fourth quarter of 2022 and 52% from first quarter of 2022. InApril 2023 , the MBA projected 30-year mortgage interest rates to an average 5.5% for the 2023 year, consistent with the average rates in 2022. According to MBA projections, the mix of mortgage origination dollars is expected to continue to be weighted towards purchase mortgages with the refinance share representing approximately 24% for 2023. 23
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The
The health of theU.S. real estate market and interest rate levels are the primary drivers of consumer demand for new mortgages. Consumer demand, in turn, affects lender demand for purchase mortgage leads from third-party sources. Typically, a strong real estate market will lead to reduced lender demand for leads, as there are more consumers in the marketplace seeking financing and, accordingly, lenders receive more organic lead volume. Conversely, a weaker real estate market will typically lead to an increase in lender demand, as there are fewer consumers in the marketplace seeking mortgages.
According to Fannie Mae data, existing home sales increased 3% in the first quarter of 2023 compared to the fourth quarter of 2022, and decreased 28% compared to the first quarter of 2022. Fannie Mae predicts an overall decrease in existing-home sales of approximately 16% in 2023 compared to 2022.
MyLendingTree
We consider certain metrics related to MyLendingTree set forth below to help us evaluate our business and growth trends and assess operational efficiencies. The calculation of the metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts or investors. We continued to grow our user base and added 1.0 million new users in the first quarter of 2023, bringing cumulative sign-ups to 25.8 million atMarch 31, 2023 . We attribute$20 million of revenue in the first quarter of 2023 to registered MyLendingTree members across the LendingTree platform. Our focus on improving the MyLendingTree experience for consumers remains a top priority. Becoming an integrated digital advisor will greatly improve the consumer experience, which we expect to result in higher levels of engagement improved membership growth rates, and ultimately stronger financial results.
Cost Reductions and Simplification of Business
OnMarch 24, 2023 , we committed to a workforce reduction plan (the "Reduction Plan"), that is intended to reduce operating costs. The Reduction Plan includes the elimination of approximately 13% of the Company's current workforce. As a result of the Reduction Plan, we expect to incur approximately$5.6 million in severance charges in connection with the workforce reduction,$4.3 million of which was incurred in the first quarter of 2023. Part of this Reduction Plan included the shut down of our LendingTree customer call center as well as our Medicare insurance agency operations within QuoteWizard. We anticipate the Reduction Plan will reduce annual compensation expense by approximately$14 million , comprised of$2 million in cost of revenue,$4 million in selling and marketing expense,$3 million in general and administrative expense, and$5 million in product development. Separately, we made the decision to close our Ovation credit services business, an asset group within our Consumer segment, by mid- 2023. As a result, the Company recorded an asset impairment charge of$4.2 million in the first quarter of 2023 related to the write-off of certain long-term assets. We acquired Ovation in 2018 to better serve those customers who come to LendingTree and receive suboptimal offers of credit. The business grew for a number of years before running into challenges in the wake of COVID-19, and more recently the industry has faced increased regulatory pressure. The business is capital-intensive, requires elevated overhead, and future prospects were becoming uncertain. The Ovation business accounted for approximately 3% of total Revenue and 3% of Total Costs and Expenses, with an immaterial impact to Net Income on the Consolidated Statement of Operations and Comprehensive Income (Loss) for the year endedDecember 31, 2022 . 24
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Results of Operations for the Three Months ended
Three Months Ended March 31,
$ %
2023 2022 Change Change
(Dollars in thousands)Home$ 43,675 $ 101,944 $ (58,269) (57) % Consumer 79,709 101,068 (21,359) (21) % Insurance 77,082 80,038 (2,956) (4) % Other 42 128 (86) (67) % Revenue 200,508 283,178 (82,670) (29) %
Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below)
13,760 15,561 (1,801) (12) %
Selling and marketing expense 137,111 204,157 (67,046) (33) %
General and administrative expense 36,683 35,977 706 2 %
Product development 14,655 14,052 603 4 %
Depreciation 4,795 4,854 (59) (1) %
Amortization of intangibles 2,049 7,917 (5,868) (74) %
Restructuring and severance 4,454 3,625 829 23 %
Litigation settlements and contingencies 12 (27) 39 144 %
Total costs and expenses 213,519 286,116 (72,597) (25) %
Operating loss (13,011) (2,938) (10,073) (343) %
Other income (expense), net:
Interest income (expense), net 25,029 (7,505) 32,534 433 %
Other income (expense) 1,834 (1) 1,835 183,500 %
Income (loss) before income taxes 13,852 (10,444) 24,296 233 %
Income tax expense (395) (382) (13) (3) %
Net income (loss) and comprehensive income (loss) $ 13,457 $ (10,826) $ 24,283 224 %
Revenue
Revenue decreased in the first quarter of 2023 compared to the first quarter of 2022 due to decreases in our Home, Consumer, 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 decreased$21.4 million , or 21%, in the first quarter of 2023 from the first quarter of 2022 primarily due to decreases in our personal loans and credit cards.
Revenue from our personal loans product decreased
Revenue from our credit cards product decreased$11.5 million , or 39%, to$18.3 million in the first quarter of 2023 from$29.8 million in the first quarter of 2022 primarily due to a decrease in the number of consumer clicks and in revenue earned per click.
For the periods presented, no other products in our Consumer segment represented more than 10% of revenue.
Our Home segment includes the following products: purchase mortgage, refinance mortgage, and home equity loans and lines of credit. We ceased offering reverse mortgage loans in the fourth quarter of 2022. Revenue from our Home segment decreased$58.3 million , or 57%, in the first quarter of 2023 from the first quarter of 2022 primarily due to decreases in revenue from our refinance and purchase mortgage products. Revenue from our mortgage products decreased$58.0 million , or 74%, to$20.0 million in the first quarter of 2023 from$78.0 million in the first quarter of 2022. Revenue from our refinance mortgage product decreased$48.2 million in the first 25
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quarter of 2023 compared to the first quarter of 2022 due to a decrease in the number of consumers completing request forms and a decrease in revenue earned per consumer, as interest rates have risen. Revenue from our purchase mortgage product decreased$9.8 million in the first quarter of 2023 compared to the first quarter of 2022, primarily due to a decrease in the number of consumers completing request forms and a decrease in revenue earned per consumer. Revenue from our home equity loans product increased$0.5 million , or 2%, to$23.7 million in the first quarter of 2023 from$23.2 million in the first quarter of 2022. Revenue from our Insurance segment decreased$3.0 million , or 4%, to$77.1 million in the first quarter of 2023 from$80.0 million in the first quarter of 2022 due to a decrease in revenue earned per consumer, partially offset by an increase in the number of consumers seeking insurance.
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 decreased in the first quarter of 2023 from the first quarter of
2022 by
Cost of revenue as a percentage of revenue increased to 7% in the first quarter of 2023 compared to 5% in the first quarter of 2022.
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. Advertising and promotional expenditures primarily include online marketing, as well as television, print, and radio spending. Advertising production costs are expensed in the period the related ad is first run. Selling and marketing expense decreased in the first quarter of 2023 compared to the first quarter 2022 by$67.0 million primarily due to the changes in advertising and promotional expense discussed below. Additionally, compensation and benefits decreased$2.4 million in the first quarter of 2023 compared to the first quarter 2022.
Advertising and promotional expense is the largest component of selling and marketing expense, and is comprised of the following:
Three Months Ended March 31,
$ %
2023 2022 Change Change
(Dollars in thousands)
Online $ 120,720 $ 182,473 $ (61,753) (34) %
Broadcast 306 840 (534) (64) %
Other 3,373 5,763 (2,390) (41) %
Total advertising expense $ 124,399 $ 189,076 $ (64,677) (34) %
In the periods presented, advertising and promotional expenses are equivalent to
the non-GAAP measure variable marketing expense. See Variable Marketing Expense
and Variable Marketing Margin below for additional information.
Revenue is primarily driven by Network Partner demand for our products, which is
matched to corresponding consumer requests. We adjust our selling and marketing
expenditures dynamically in relation to anticipated revenue opportunities in
order to ensure sufficient consumer inquiries to profitably meet such demand. An
increase in a product's revenue is generally met by a corresponding increase in
marketing spend, and conversely a decrease in a product's revenue is generally
met by a corresponding decrease in marketing spend. This relationship exists for
our Home, Consumer, and Insurance segments.
We adjusted our advertising expenditures in the first quarter of 2023 compared
to the first quarter of 2022 in response to changes in Network Partner demand on
our marketplace. We will continue to adjust selling and marketing expenditures
dynamically in response to anticipated revenue opportunities.
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General and administrative expense
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, corporate information technology, human resources and executive management functions, as well as facilities and infrastructure costs and fees for professional services.
General and administrative expense remained relatively consistent in the first quarter of 2023 compared to the first quarter of 2022. Compensation and benefits, other tax expense, and facilities expense decreased in the first quarter of 2023 compared to the first quarter of 2022 by$1.7 million ,$1.5 million , and$0.8 million , respectively. We incurred a$4.2 million loss on the impairment of assets for our Ovation business in the first quarter of 2023.
General and administrative expense as a percentage of revenue in the first quarter of 2023 was 18% compared to 13% for the first quarter of 2022.
Product development
Product development expense consists primarily of compensation and other employee-related costs (including stock-based compensation) and third-party labor costs that are not capitalized, for employees and consultants engaged in the design, development, testing and enhancement of technology.
Product development expense remained relatively consistent in the first quarter of 2023 compared to the first quarter of 2022 as we continued to invest in internal development of new and enhanced features, functionality and business opportunities that we believe will enable us to better and more fully serve consumers andNetwork Partners .
Amortization of intangibles
The decrease in amortization of intangibles in the first quarter of 2023 compared to the first quarter of 2022 was primarily due to certain intangible assets associated with our recent business acquisitions becoming fully amortized.
Restructuring and severance
OnMarch 24, 2023 , we committed to the Reduction Plan that is intended to reduce operating costs. The Reduction Plan includes the elimination of approximately 13% of the Company's current workforce. As a result of the Reduction Plan, we estimate that we will incur approximately$5.6 million in severance charges in connection with the workforce reduction, consisting of cash expenditures for employee separation costs of approximately$4.6 million and non-cash charges for the accelerated vesting of certain equity awards of approximately$1.0 million . We incurred restructuring expense of$4.3 million in the first quarter of 2023 and expect to incur an additional$1.3 million of restructuring expense in the second quarter of 2023 related to the Reduction Plan. We anticipate that the execution of the Reduction Plan, including cash payments, will be completed by the end of the second quarter of 2024. In the first quarter of 2022, we completed a workforce reduction of approximately 75 employees. We incurred total expense of$3.6 million consisting of employee separation costs of$2.5 million and non-cash compensation expense of$1.1 million due to the accelerated vesting of certain equity awards. All employee separation costs were paid by the first quarter of 2023.
Interest income/expense
In the first quarter of 2023, we repurchased approximately$190.6 million in principal amount of our 2025 Notes for$156.3 million plus accrued and unpaid interest of approximately$0.1 million . As a result of the repurchase, we recognized a gain on the extinguishment of$34.3 million , a loss on the write-off of unamortized debt issuance costs of$2.4 million , and incurred debt repayment costs of$1.0 million , all of which are included in interest income/expense, net in the consolidated statement of operations and comprehensive income. See Note 12-Debt for additional information.
Other income
For the first quarter of 2023, other income primarily consists of dividend income.
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Income tax expense
For the first quarter of 2023, the effective tax rate varied from the federal statutory rate of 21% primarily due to the change in the valuation allowance, net of the current period change in tax effected net indefinite-lived intangibles. For the first quarter of 2022, the effective tax rate varied from the federal statutory rate of 21% primarily due to excess tax expense of$2.5 million , resulting from vesting of restricted stock in accordance with ASU 2016-09 and the effect of state taxes. Segment Profit Three Months Ended March 31, $ % 2023 2022 Change Change (Dollars in thousands) Home$ 15,108 $ 35,909 $ (20,801) (58) % Consumer 34,876 42,507 (7,631) (18) % Insurance 30,152 21,103 9,049 43 % Other (179) (55) (124) (225) % Segment profit$ 79,957 $ 99,464 $ (19,507) (20) % Segment profit is our primary segment operating metric. Segment profit is calculated as segment revenue less segment selling and marketing expenses attributed to variable costs paid for advertising, direct marketing and related expenses that are directly attributable to the segments' products. See Note 15-Segment Information in the notes to the consolidated financial statements for additional information on segments and a reconciliation of segment profit to pre-tax income. Home Revenue in the Home segment decreased 57% to$43.7 million in the first quarter of 2023, with segment profit of$15.1 million in the first quarter of 2023, a decrease of 58% from the first quarter of 2022. Despite the sharp decrease in revenue in the first quarter of 2023, our variable marketing model generated a 35% segment margin, which was consistent with the first quarter of 2022. Our home equity business again produced the majority of the Home segment's revenue, growing 2% in the first quarter of 2023 from the first quarter of 2022. Consumer demand to borrow against a near record level of equity in their homes remains strong, with volume for the product increasing 20% in the first quarter of 2023 compared to the first quarter of 2022. Our team is focused on operating efficiently in this difficult period, helping our lending partners improve conversion rates for our customers that are in the market to purchase a home. The 30-year fixed mortgage rate fluctuated between a range of 6.09% and 6.73% during the quarter, according to theFreddie Mac Mortgage Market Survey . Interest rates for new home loans remain at the highest level recorded since 2006. Home affordability, as measured by theNational Association of Realtors ("NAR") Composite Index, remains at the lowest level since it began the benchmark dating back to 1986. In addition to affordability concerns, current homeowners appear patient with regard to moving during the typically busy spring selling season. Existing for-sale home inventory remains exceptionally low at just under 1 million homes in theU.S. , according to NAR, up only modestly from the all-time low of 0.85 million homes for sale recorded in January, 2022. Current mortgage rates that are much higher than the average homeowner has today are creating a "lock-in" effect, discouraging those who desire a change in their current living situation from moving. Many homeowners instead are exploring renovation projects to accommodate changes in lifestyle. This phenomenon has likely led to the increased demand we have seen for Home Equity loans, and we have been shifting more of our team and resources to focus on this opportunity.
Consumer
Our Consumer segment experienced a continued slowdown in revenue due to stricter underwriting criteria at many of our partners and decreased new loan appetite across multiple product lines. Revenue of$79.7 million in the first quarter of 2023 decreased 21% from the first quarter of 2022, and profit of$34.9 million in the first quarter of 2023 decreased 18% from the first quarter of 2022. Consumer segment margin increased to 44% in the first quarter of 2023 from 42% in the first quarter of 2022 due to a mix-shift towards higher earning products, as well as continued operating discipline as we moved away from underperforming marketing partners, publishers and channels. 28
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Personal loans revenue of$23.6 million decreased 33% in the first quarter of 2023 from the first quarter of 2022 as lending standards continued to tighten, a trend that began to emerge in the second-half of 2022. Close rates have declined at most issuers, leaving more of our customers who are looking for a loan without an offer. We are working to assist this growing pool of borrowers who are being turned down by pairing them with debt relief partners to help improve their credit profile. Small business revenue also slowed, with revenue decreasing 11% in the first quarter of 2023 from the first quarter of 2022. The causes were similar to those experienced in personal loans. Tighter credit conditions are decreasing conversion rates at our lending partners. We are primarily focused on optimizing our marketing mix to increase the quality of our potential borrowers to drive higher conversion rates, and negotiating better terms from our lending partners as a result of those improvements. Our credit card business generated revenue in the first quarter of 2023 of$18.3 million , a decrease of 39% from the first quarter of 2022. At the end of the quarter we had completed our transition to a new tech platform for our credit card business,LightSpeed . This new platform provides faster page load speeds and improved routing flexibility. Initially we expect to see improved throughput for our customers to partner application pages, which should result in improved margins and conversion. TheLightSpeed implementation has also allowed us to begin transitioning all of our credit card traffic from the Compare Cards brand to our core LendingTree experience. Over time we expect improved marketing efficiencies and reduced costs from this shift will help stimulate improvement in results. Insurance Revenue of$77.1 million in the first quarter of 2023 decreased 4% from the first quarter of 2022 as our carrier partners remain cautious in their desire for new auto and home policyholders. However, disciplined operating improvements the team implemented over the second-half of last year generated segment profit of$30.2 million in the first quarter of 2023, an increase of 43% from the first quarter of 2022. The realized 39% segment margin in the first quarter of 2023 is a testament to the quality of our Insurance business. We experienced an uptick in partner spend for new auto policies during the quarter, an encouraging sign after six straight quarters of reduced demand. However, loss ratios at major personal auto insurers remain elevated. As such, we do not expect this uptick in demand for new customers from our carrier partners to continue. We are now forecasting segment revenue to decline somewhat from the first quarter of 2023 for the remainder of the year given this development.
Variable Marketing Expense and Variable Marketing Margin
We report variable marketing expense and variable marketing margin as
supplemental measures to GAAP. These related measures are the primary metrics by
which we measure the effectiveness of our marketing efforts. Variable marketing
expense represents the portion of selling and marketing expense attributable to
variable costs paid for advertising, direct marketing, and related expenses, and
excludes overhead, fixed costs, and personnel-related expenses. Variable
marketing margin is a measure of the efficiency of our operating model,
measuring revenue after subtracting variable marketing expense. Our operating
model is highly sensitive to the amount and efficiency of variable marketing
expenditures, and our proprietary systems are able to make rapidly changing
decisions concerning the deployment of variable marketing expenditures
(primarily but not exclusively online and mobile advertising placement) based on
proprietary and sophisticated analytics. We believe that investors should have
access to the same set of tools that we use in analyzing our results. This
non-GAAP measure should be considered in addition to results prepared in
accordance with GAAP but should not be considered a substitute for or superior
to GAAP results. We provide and encourage investors to examine the reconciling
adjustments between the GAAP and non-GAAP measures discussed below.
Variable marketing expense is defined as the expense attributable to variable
costs paid for advertising, direct marketing and related expenses, and excluding
overhead, fixed costs and personnel-related expenses. The majority of these
variable advertising costs are expressly intended to drive traffic to our
websites and these variable advertising costs are included in selling and
marketing expense on our consolidated statements of operations and comprehensive
income (loss). Variable marketing margin is defined as revenue less variable
marketing expense.
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The following shows the calculation of variable marketing margin:
Three Months Ended
March 31,
2023 2022
(in thousands)
Revenue $ 200,508 $ 283,178
Variable marketing expense 124,399 189,076
Variable marketing margin $ 76,109 $ 94,102 Below is a reconciliation of selling and marketing expense, the most directly comparable GAAP measure, to variable marketing expense:
Three Months Ended
March 31,
2023 2022
(in thousands)
Selling and marketing expense $ 137,111 $ 204,157 Non-variable selling and marketing expense (12,712) (15,081) Variable marketing expense
$ 124,399 $ 189,076
The following is a reconciliation of net income (loss), the most directly comparable GAAP measure, to variable marketing margin:
Three Months Ended
March 31,
2023 2022
(in thousands)
Net income (loss) $ 13,457 $ (10,826) Adjustments to reconcile to variable marketing margin: Cost of revenue
13,760 15,561
Non-variable selling and marketing expense (1) 12,712 15,081
General and administrative expense 36,683 35,977
Product development 14,655 14,052
Depreciation 4,795 4,854
Amortization of intangibles 2,049 7,917
Restructuring and severance 4,454 3,625
Litigation settlements and contingencies 12 (27)
Interest (income) expense, net (25,029) 7,505
Other (income) expense (1,834) 1
Income tax expense 395 382
Variable marketing margin $ 76,109 $ 94,102
(1) Represents the portion of selling and marketing expense not attributable to variable
costs paid for advertising, direct marketing and related expenses. Includes overhead,
fixed costs and personnel-related expenses.
Adjusted EBITDA
We report Adjusted EBITDA as a supplemental measure to GAAP. This measure is the
primary metric by which we evaluate the performance of our businesses, on which
our marketing expenditures and internal budgets are based and by which, in most
years, management and many employees are compensated. We believe that investors
should have access to the same
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set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures discussed below.
Definition of Adjusted EBITDA
We report Adjusted EBITDA as net income adjusted to exclude interest, income tax, amortization of intangibles and depreciation, and to further exclude (1) non-cash compensation expense, (2) non-cash impairment charges, (3) gain/loss on disposal of assets, (4) gain/loss on investments (5) restructuring and severance expenses, (6) litigation settlements and contingencies, (7) acquisitions and dispositions income or expense (including with respect to changes in fair value of contingent consideration), (8) contributions to theLendingTree Foundation , (9) dividend income, and (10) one-time items. Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses, including depreciation, non-cash compensation and acquisition-related accounting. We endeavor to compensate for the limitations of the non-GAAP measures presented by also providing the comparable GAAP measures with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measures. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.
One-Time Items
Adjusted EBITDA is adjusted for one-time items, if applicable. Items are considered one-time in nature if they are non-recurring, infrequent, or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance withSEC rules. For the periods presented below, one-time items consisted of the franchise tax caused by the equity investment gain inStash Financial, Inc. in 2021.
Non-Cash Expenses that are Excluded from Adjusted EBITDA
Non-cash compensation expense consists principally of expense associated with grants of restricted stock, restricted stock units and stock options, some of which awards have performance-based vesting conditions. Non-cash compensation expense also includes expense associated with employee stock purchase plans. These expenses are not paid in cash, and we include the related shares in our calculations of fully diluted shares outstanding. Upon settlement of restricted stock units, exercise of certain stock options or vesting of restricted stock awards, the awards may be settled, on a net basis, with us remitting the required tax withholding amount from our current funds.
Amortization of intangibles are non-cash expenses relating primarily to intangible assets acquired through acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as purchase agreements, technology and customer relationships, are valued and amortized over their estimated lives.
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The following table is a reconciliation of net income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA.
Three Months Ended
March 31,
2023 2022
(in thousands)
Net income (loss) $ 13,457 $ (10,826)
Adjustments to reconcile to Adjusted EBITDA:
Amortization of intangibles 2,049 7,917
Depreciation 4,795 4,854
Restructuring and severance 4,454 3,625
Loss on impairments and disposal of assets 5,027 431
Non-cash compensation expense 11,203 13,997
Franchise tax caused by equity investment gain - 1,500
Acquisition expense (9) 9
Litigation settlements and contingencies 12 (27)
Interest (income) expense, net (25,029) 7,505
Dividend income (1,834) -
Income tax expense 395 382
Adjusted EBITDA $ 14,520 $ 29,367 Financial Position, Liquidity and Capital Resources
General
As of
OnMarch 8, 2023 , we repurchased approximately$190.6 million in principal amount of our 2025 Notes, through separate transactions with certain holders of the 2025 Notes, for$156.3 million plus accrued and unpaid interest of approximately$0.1 million . In the first quarter of 2023, we recognized a gain on the extinguishment of$34.3 million , a loss on the write-off of unamortized debt issuance costs of$2.4 million and incurred debt repayment costs of$1.0 million , all of which are included in interest income/expense, net in the consolidated statement of operations and comprehensive income. See Note 12-Debt for additional information. We expect our cash and cash equivalents and cash flows from operations to be sufficient to fund our operating needs for the next twelve months and beyond. Our credit facility described below is an additional potential source of liquidity. We will continue to monitor the impact of the current economic conditions, including interest rates, inflation, and ongoing COVID-19 pandemic on our liquidity and capital resources.
Credit Facility
OnSeptember 15, 2021 , we entered into a credit agreement (the "Credit Agreement"), consisting of a$200.0 million revolving credit facility (the "Revolving Facility"), which matures onSeptember 15, 2026 , and a$250.0 million delayed draw term loan facility (the "Term Loan Facility" and together with the Revolving Facility, the "Credit Facility"), which matures onSeptember 15, 2028 . The proceeds of the Revolving Facility can be used to finance working capital, for general corporate purposes and any other purpose not prohibited by the Credit Agreement. We borrowed$250.0 million under the delayed draw term loan onMay 31, 2022 and used$170.2 million of the proceeds to settle the Company's 2022 Notes, including interest. The remaining proceeds of$79.8 million may be used for general corporate purposes and any other purposes not prohibited by the Credit Agreement. See Note 12-Debt for additional information.
As of
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Cash Flows
Our cash flows are as follows:
Three Months Ended
March 31,
2023 2022
(in thousands)
Net cash provided by operating activities
(2,452) (18,465)
Net cash used in financing activities (159,565) (46,098)
Cash Flows from Operating Activities
Our largest source of cash provided by our operating activities is revenues generated by our products. Our primary uses of cash from our operating activities include advertising and promotional payments. In addition, our uses of cash from operating activities include compensation and other employee-related costs, other general corporate expenditures, litigation settlements and contingencies, and income taxes.
Net cash provided by operating activities increased in the first three months of 2023 from the first three months of 2022 primarily due to favorable changes in accounts receivable.
Cash Flows from Investing Activities
Net cash used in investing activities in the first three months of 2023 of$2.5 million consisted of capital expenditures of$2.5 million primarily related to internally developed software. Net cash used in investing activities in the first three months of 2022 of$18.5 million consisted of capital expenditures of$3.5 million primarily related to internally developed software, as well as the purchase of a$15 million equity interest in EarnUp.
Cash Flows from Financing Activities
Net cash used in financing activities in the first three months of 2023 of$159.6 million consisted primarily of the repurchase of our Convertible Senior Notes for$156.3 million and$1.7 million in withholding taxes paid upon surrender of shares to satisfy obligations on equity awards, net of proceeds from the exercise of stock options. Net cash used in financing activities in the first three months of 2022 of$46.1 million consisted primarily of$43.0 million for the repurchase of our stock and$3.1 million in withholding taxes paid upon surrender of shares to satisfy obligations on equity awards, net of proceeds from the exercise of stock options.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than a letter of credit and our funding commitments pursuant to our surety bonds, none of which have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
New Accounting Pronouncements
For information regarding new accounting pronouncements, see Note 2-Significant Accounting Policies, in Part I, Item 1 Financial Statements.
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