Q4 2023 Lendingtree Inc Earnings Call
Participants
Andrew Wessel; VP of IR & Corporate Development; Lendingtree Inc.
Douglas Lebda; Chairman, CEO, & Founder; Lendingtree Inc.
Trent Ziegler; CFO; Lendingtree Inc.
Scott Peyree; President of Marketplace Businesses &COO; Lendingtree Inc.
Jed Kelly; Analyst; Oppenheimer & Co. Inc.
Youssef Squali; Analyst; Truist Securities
Ryan Tomasello; Analyst; KBW
John Campbell; Analyst; Stephens, Inc.
Melissa Wedel; Analyst; J.P. Morgan
James Friedman; Analyst; Susquehanna Financial Group
Presentation
Operator
Good day and thank you for standing by, and welcome to the LendingTree, Inc. fourth quarter 2023 earnings conference call. (Operator Instructions)
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Wessel, VP of Investor Relations and Corporate Development. Please go ahead.
Andrew Wessel
Thank you, Gary, and good morning to everyone joining us on the call to discuss LendingTree's Fourth Quarter 2023 financial results with us on the call today are Doug Lebda, LendingTree's Chairman and CEO, Scott Perry, COO and President of Marketplace businesses, and Trent Ziegler, CFO.
As a reminder to everyone, we posted a detailed letter to shareholders on our Investor Relations website earlier today. And for the purposes of today's call, we will assume that listeners have read that letter and we'll focus on Q&A before I hand the call over to Doug for his remarks.
I remind everyone that during today's call, we may discuss LendingTree's expectations for future performance. Any forward-looking statements that we make are subject to risks and uncertainties, and LendingTree's actual results differ materially from the views expressed today. Many but not all of the risks we face are described in our periodic reports filed with the SEC.
We will also discuss a variety of non-GAAP measures on the call today, and I refer you to today's press release and shareholder letter, both available on our website to the comparable GAAP definitions and full reconciliations of non-GAAP measures to GAAP. And with that, Doug, please go ahead.
Douglas Lebda
Thank you, Andrew, and thank you to all who are with us on the call today. In 2023, we strategically simplified our business, reduced our fixed expense base, strengthened our balance proven margins. Despite the revenue challenges, we continue to navigate we remain solidly profitable and maintain the ability to strategically invest in the company.
All three of our reportable segments have operated through historic period of disruption following a rapid move higher in interest rates, it's a period of elevated inflation. And at the same time, our business model has again proven its durability as we earned $78.5 million of adjusted EBITDA this year and generated $55 million of free cash flow as our lender and insurance partners probably pulled back from new customers of these external factors.
Last year, we chose to focus on efficiency, causing our operating margins to steadily increase throughout the year. In Q4, we earned $15.5 million, which is normally a seasonally softer quarter for us encouragingly, the much anticipated upturn in our in our insurance segment began to take hold in December and has continued to strengthen into the first quarter.
The consumer, auto and home insurance markets have endured a prolonged hard market cycle over the last two years that has, in many ways, unprecedented driven by the inflationary impacts to loss costs. We're following AMI after COVID lockdown now that insurers have effectively passed through numerous rounds of price increases, we've been they have returned to a more robust pace of marketing spend.
Fortunately, our customers continue to shop for new policies at record levels, with volumes increasing 10% compared to a year ago. During the quarter, we also repurchased $100 million of our 2025 convertible notes at a discount to par value.
Similar to the transaction we completed earlier in the year, we now have opportunistically paid down half of the original $575 million amount of these notes at about a 20% discount, and we remain committed to retiring the remainder in the most efficient, manageable manner possible for our shareholders.
Finally, the financial outlook we released this morning assumes continued improvement in the insurance segment compared to last year. We have taken what we believe to be a conservative view for our Home & Consumer in continued dislocations in the housing market and persistently tighter lending standards at many of our consumer partners.
However, due to the extensive work we've done rightsizing our expense base, we're now forecasting, our adjusted EBITDA will grow at a healthy pace from last year as we hold fixed costs near current levels. If the revenue picture improves, we would expect this operating leverage to positively impact our bottom line.
And now, operator, please open the line for questions.
Question and Answer Session
Operator
Thank you. (Operator Instructions)
Jed Kelly, Oppenheimer & Co.
Jed Kelly
A great just start to, if I may. One in the consumer segment. Can you talk about just on the outlook, how much of the growth is that new control sort of based on improving conversion and sort of maybe clawing back some of the market share losses versus what's going on in the macro?
And then it looks like the Fed is going to push out the interest rate cuts. Can you just talk about how that impacts your outlook and then how you think about potentially refinancing the convert takes.?
Douglas Lebda
Sure. Let me take the second part of that. On home lending, you might actually take the or the operational pieces on consumer. And but I would say this high-level, Jed our outlook in terms of controlling it and not controlling it.
What I would say is that if you when you look at Lending Tree has a balance of supply and demand and all of your advertisers, all your clients are pulling back. We can obviously, we rightsize the marketing, right-size the business to get that right? We believe that every one of those segments is now at its bottom.
And now all you're waiting for in consumer is better credit newish on so that we could lean into marketing. So any conversion rate improvements, anything from our initiatives. We have a little bit baked in to our outlook from our tree qual initiative.
For example, that's starting to bear some real fruit. And our lenders are really liking it and really robust pipeline there. So we baked in some a little bit for some of the things that we know that we're pretty certain they're going to happen and we also can still invest in the business. So I feel really, really comfortable about the guide we're giving. I think it's also shown significant growth.
And just a follow-up on that as soon as the thing that people miss about our business is that and when rates start to fall, even a little bit, our business in home and refinance moves with the rate of change of interest rates.
So you don't need you're only a little tick down, call it a quarter, half a point mortgage rates and you will have a whole bunch of borrowers today that are coming through our funnel, that it doesn't make sense for them to refinance and it will come once conditions improve a little bit, Scott, if there are any add on anything there and trend talk about the refinancing?
Trent Ziegler
Yes, I'll get things started. This discovery a little agenda this morning. Just just to add on real quick to some of Doug's comments there. I'll start to say it in the consumer lending side of the business is a lot of those items from a consumer's perspective aren't they're not quite as rate sensitive.
You know, if you're looking at personal loans, small business loans or credit cards, these are more just consumers that need money and are seeking out money. We did as we've had a lot of focus over the past year in optimizing the business, both from an OpEx perspective, but then also just from a media performance and marketing performance perspective, I'll be honest, I said we probably gave up a little bit of market share.
We probably let the pendulum swing little too far to the optimization side of that. But that said, I think we're in a very, very good position right now where our business is very profitable on a unit economic basis, and we are ready in our actively leaning into multiple areas of opportunity.
I mean, we're already seeing strong sequential growth in our home equity business, really strong sequential growth in our small business area. We're also seeing we're also seeing growth in purchase and refi and in auto loans up sequentially.
So even though they're coming off the lows, we are now pivoting the business back to growth mode. And as interest rates have leveled. It does change the consumer psychology, even though the route they remain elevated, that there is a large quantity of consumers coming through and searching for loans on a day-to-day basis.
Douglas Lebda
Great question. Trent, talk about the refinance. Yes, you had broken it out, but can you repeat thec question on the on the average family homes versus jet was how it's how well.
And while that would jeopardize the credit from my perspective, the credit markets have definitely improved a little bit. We continue to have conversations Trent and add on more, but we're pretty confident that we'll be able to handle that once you take it out on anything else.
And we feel that we have areas where ever we would be we wouldn't be taking on a debt load and that we couldn't handle. We think the Company is on really sound footing.
Scott Peyree
Yes. As it relates to the balance sheet, I mean, obviously, we've we did a lot of work last year to make that a much more manageable number. And we've continued to explore for the last three, four quarters. We've been having a bunch of conversations on sort of we are looking at alternatives across capital structure.
Those conversations are getting quite a bit more constructive as the fundamentals are becoming more stable and improving. So we feel pretty good about our ability to on to address that maturity in the first half of this year.
Jed Kelly
Thank you.
Operator
Thank you.
Youssef Squali, Truist Securities.
Youssef Squali
I use for Good morning. So maybe just stepping back a little bit at a high level and kind of following up on that the macro question, as you were formulating your '24 outlook, can you just talk about why you are 18 as a base case for them?
I guess what I'm really trying to get to is what could you hit your guidance of flat revenues across the entire business if rates stay stubbornly high? And then can you maybe talk a little bit about the competitive landscape across the three segments that I just talked about.
Maybe on the consumer side, you guys go back a little bit lost a bit of share. How high are you how do you do across the other two segments? And how are you kind of positioned as you and thank you.
Scott Peyree
Jan. So use of I understand it, our base case assuming for the macro for our guide, and I'm talking about competition, so I get that right? Yes.
Okay. So on our base case assumed the higher for longer have rates and we're not baking in any that our and nothing in our guidance is baking in Fed rate cuts at or no a strong consumer credit conditions at P. lenders or things like that.
So we're not everything that we're doing from here on out is and that you see is managing the business as it is today. Baking in initiatives that we know are happening on competent function on the phone, then let Scott drill down. The good news about this space now is we have a defined set of competitors in both insurance and lending in lead generation or comparison-shopping.
Trent Ziegler
And you can all compare We resolved to we feel that we are absolutely gaining share and doing well and doing very, very well in insurance and we think that to the extent that we lost share to competitors, that is simply due to As Scott put up, put a finer point on some that Scott said earlier, when we were working on our marketing last year.
We have reduced our auto builds and manage our Google stuff very differently, manage our advertising broadly very differently. And now we can lean back and regain some of that share simply by marketing into the better unit economics that Scott talked about, Scott, once you had anything else on competition?
Scott Peyree
Yes, just high level, you said on the competitive landscape, I'll start in insurance. I think we are positioned extremely well in the insurance space. Youh know, I believe from everyone that's reported. We're the only company that's looking at growth year over year in Q1 in both revenue and VMD.
And growth at it on a double digit percentage basis in both of those categories. So you know, our and it's pretty wide across the board. Our health insurance business had an all-time high year last year in revenue and VNB, both Q4 and the year as a whole.
That's a very strong business for us. Our local agent business is very strong for us. January was our all-time high revenue for local agent revenue with also the highest quantity of agents buying leads from us it's ever ever been. Our own paid search, quote requests are nearly triple what they were from 2021 levels.
So we are controlling a massive amount of very high intent, high high-quality consumers. So I believe there was done a very good job of increasing our piece of the pie during the downturn and are positioned well to maintain that piece of the pie.
We increased it as growth comes back in. I'll step back and say this is going to be a broad-based recovery. There's lots of good companies in our business, have good relationships with the clients that everyone's going to be rewarded during the insurance recovery. That's going to happen over the next 24, 36 months and it's happening very rapidly.
So I think we're going to be an outsized winner of that. But I think everyone's going to be a winner of that recovery hitting on mortgage quickly. I feel we made it even though it's in a severe downturn right now. We pretty much maintained a very dominant position in the mortgage space.
We've got extremely close relationships with the biggest players in that space. But we also have what I would call the broadest distribution network from a client perspective as well. We have much more clients and broader client distribution in mortgages and purchase refi home equity than our competitive set does on the consumer side.
That's probably the one area where we where we've struggled more than the other two categories, but it's also an area where I would say I have some of the most optimism because there still remains a lot of consumer demand.
There's been just a level of consistency with our clients over the past three months that we have not seen in over eight years now that we've reached that level of consistency is going to make it much easier, of course, to lead into growth opportunities and lean into media opportunities. So I think we're going to see I think you're going to see over the next year starting to gain some of that market share.
Youssef Squali
That's helpful. Thank you.
Operator
Ryan Tomasello, KBW.
Ryan Tomasello
Hi, there. Thanks for taking the questions. But just to put a finer point around the convert, how committed is the company to avoiding equity dilution when addressing that maturity and trends? Just to clarify in your earlier remarks, did you say you're optimistic you can address that in the first half of this year, or did I get that wrong?
Scott Peyree
No, that's a good question, Ryan? Yes. Look, I mean, we obviously are sensitive to dilution, right? As we've been exploring the various alternatives, obviously does eat up. The alternatives are not great when our stock was at 10 a share.
They're becoming more interesting it on 35 a share, but also our fundamentals and the just the cash flow and debt service that we can support make us feel pretty confident that that we don't have to use dilution as a means to addressing addressing the maturity of the events.
That's 0.1. And then you know, it has always been our stated goal that we wanted to do everything before it goes current in July of this year. And we intend to continue to drive to find the best path to doing so.
And guess the only thing I the only thing I'd add is, as we started down this process, I am as much personally and corporately as we focus on shareholders, but there is dilution on on that. And we feel, as Trent said, we feel it's good we can do that's non-dilutive.
Ryan Tomasello
Okay, great. And then, Scott, a follow-up on the insurance business. I'm just trying to understand if there's how you view as this recovery takes shape, if there's any marketing channels in the space that are maybe better positioned to capture more spend or see that recovery sooner than other areas among SEM, direct to click direct carrier versus agents? Just trying to understand how LendingTree QuoteWizard is relatively positioned versus the competition banks?
Scott Peyree
Yes. I mean, I think we when you look at a recovery on in an interest in any industry, I mean insurance included. But I you know that what the clients are going to go after. First is of the highest quality, highest intent, most profitable consumers for them.
And I think we have done a very good job over the past two years on was a laser focus on increase, increasing our position in the various marketplaces where there are where those highest quality consumers are. And in all honesty, right, I think that's that is what's given us some outsized budget in the early days of the recovery.
Now as the recovery broadens as the year goes on, carriers are going to open up the kimono of their budgets, more fully data, all that competitive landscape. And and that's for a transition in probably half that the margins have to come down a little bit to maintain your positioning, but I think it's a lot easier to maintain positioning than to grow positioning.
Douglas Lebda
And we've done a lot of growing our positioning over the past two years and Ryan, I'd add to that what I really have loved about the insurance business and I'm so happy we agree that acquisition at what Scott was leading there was sharpening the marketing pencils and getting ready for the recovery.
But still maintaining great client relationships so that when they come back, we hopefully get more of the spend than our competitors. And then we have to be able to deliver to them the number of policies that they want. And as you know, it sounds like you're very up to speed on the insurance businesses here the carriers.
Some of them are better with direct agent. Some are better with calls them better with Qlik and customer events are better with lower intent and the great thing. But and summer auto and some focus in homeowners and the beautiful beautiful thing about all of that is we've got a very, very well balanced portfolio of insurance channels and where we didn't look helps it to help our clients, but holiday once and now Scott's leading that on the lending side.
And I think we still have those are very good relationships and as profitable for our clients to spend. We feel that they'll be spending back into this year.
Ryan Tomasello
Great. Appreciate all the color.
Operator
John Campbell, Stephens.
John Campbell
Hey, guys, good morning.
Douglas Lebda
Good morning, Doug.
John Campbell
What I wanted to stay on the insurance segment and the outlook obviously was encouraging to see you guys see the snapback in activity in December. It looks like your 1Q outlook seems like a obviously a continuation of strength and then share gains as well.
But I'm curious about how you guys are thinking about the sequential lift coming out of 1Q? And then maybe just more broadly how the shape of that curve is going to is going to look I know the exact timing is going to be difficult to pin down. So maybe if you guys could also talk to whether you think the puzzle pieces are in place to maybe reach new peaks at some point this year and insurance business.
Douglas Lebda
And Trent, I'm going to let you, but when you're talking about the the curve, are you talking about everything you just talking about insurance just within insurance for now on Yalla just from.
Trent Ziegler
In terms of the in terms of the guide, I mean, we're look, we're obviously monitoring this in real-time. We see what we see in Q1, which has been really strong sign of where things are headed from kind of like Doug's commentary around RR.
Outlook for home and consumer and what we baked in, we think in a fairly conservative stance here, right? And so we assume some as the year progresses, we're not baking in a ton of ton of upside. That said, obviously, we do feel like the recovery could become more broad-based. And I think Scott can can you add some color commentary to that?
Scott Peyree
Yes. I'll add in there, John, on I would say it last trend that I think it, especially within whatever was after what happened in Q1 last year, we went from a forecasting perspective, we want to be conservative until our clients, the biggest and some of the guaranteed budgets from our clients.
Now that said, all of our conversations with our clients are broad based across the board is they are very happy, very profitable and are going to continue expanding geos as the year goes on on.
So just anecdotally, I would expect continued sequential growth quarter after quarter after the year as the as the year goes on, unless some major macro event happens on, it is a very broad-based recovery in insurance. There's a lot of profitability across the board, we are already getting.
I mean, there were a few carriers that were opening geos in March that as of a month or two ago, we thought it would be the end of the year before they open up any new geos. So I I think there is a snowball effect that's happening. The snowball is rolling down the hill and I from my standpoint, I am extremely optimistic on continued growth throughout the year.
John Campbell
Okay. That's very helpful. And then maybe maybe for David here, this is kind of a near term medium term question as well as kind of a bigger picture question, just two-part question. But on the brand spend, I think you guys closed this year at $8.9 million that was closer to $30 million the last three years, making a little bit higher than that years prior to that.
So curious about what you guys have kind of outlined for this year, how much of that is fully committed? And then bigger picture, what you're thinking about as far as brand spend, is that something you expect to ratchet higher over time or is this a new kind of normal lower level at this point?
Trent Ziegler
So so the way a really, really great question and LendingTree benefits from the fact that we started with TV spend in the year, 2000 instead of doing but exactly AOL at the time. And it proved out that the TV we could drive consumers profitably through TV.
And we then got our online act together, and that branded obviously helps our online. We have zero assumption of brand spend this year in here. And the way the advertising works is you only really get to TV spend for us when your unit economics and your demand from your advertisers is so high that it's actually economically viable.
So we see a TV spend just like we see search spend, we left it to attribute, but we're actually working on that too. So we don't plan on TV this year. If you see us on TV anytime you see us on TV, it means that we are investing in the most expensive channel to acquire customers because our at the client forum at prices that that make sense for us to do that. So I love it when we can be spending big on TV because that means we're wish we can go grab any more volume from from online.
John Campbell
Okay.
Operator
Thank you.
Melissa Wedel - J.P. Morgan.
Melissa Wedel
Good morning. Thanks for taking my questions. And first, I just wanted to clarify, I apologize and I think but was still, but did I hear you right, you're looking for double-digit year-over-year growth in the insurance segment in 1Q?
Scott Peyree
Yes. And both revenue and VMD.
Melissa Wedel
Okay. Got it. Thanks for clarifying that. Can you talk about what the implications are given on margin and just kind of throughout the year and how you expect that to progress kind of across the various segments. Thanks much.
Douglas Lebda
And so I'll hit this. And then, Scott, you should go into detail. When you look at VMM margin, that's where we are at the beginning we focus on VMM dollars, not VMM percentages. And so as you spend and so clients are upping their bids, we turnaround and up our bids to go get customers.
And until you do see some decrease in margins. But what we're doing in insurance, we're seeing that we can on come back and drive volume at at margins that are still pretty good that are almost in line with where they were last year. Scott, you want to add onto that?
Scott Peyree
Yes, Melissa, like you started insurance IQ. one, our margins are still very strong from a historical standpoint, maybe down slightly over Q4, but but very, very high stats that I mean as as the recovery changes in revenue growth happens across the board and media will get more especially margin will come down a little bit.
But as Doug as Doug said, it is about increasing total VMD dollars. And and that's that's our focus there and we will lean into traffic and revenue that's profitable for our clients and in makes additional VMD dollars for us.
I would say on on on the mortgage side, you're probably until you start seeing a recovery or probably just staying at a fairly we're running at a pretty good margins right now. You're not really looking to squeeze those margins for traffic until you start seeing more of a broad-based recovery in refinance and whatnot.
Now that said, like home equity, there's a lot of growth opportunity, I believe, in home equity in the current near term.
On the consumer side, I do think we are honestly, I think we're probably we're currently living from VMD dollars on the table by running very strong margins, which were running very strong margins right now, but that is something we are going to actively look into to see if we can reinvest in certain areas and gain gain market share and increase our total VMD dollars by running a bit slimmer margins.
Melissa Wedel
Thank you.
Operator
Thank you.(Operator Instructions)
James Friedman, Susquehanna Financial Group
James Friedman
Hey, Tom, I wanted to ask about student loan payments. So I was just wondering how if at all, there is on 100 student loans around October effect, say the lending partners sentiment towards loan originations or the consumer behavior. Any color on student loans would be helpful
Douglas Lebda
Scott, I want to say.
Scott Peyree
Hello, Jamie. Yes, that was that was a lot of discussion, you know, about six months ago was what was going to happen there. And I think the short answer is a lot of nothing at this point and that came through some of the loan repayments started or semi started.
However, you want to define that from a broad base perspective from our clients. There was no significant change in defaults or delinquency rates based off of that that they're seeing on. It's more of a bride that you know, I think that's where there's just generally a lot of semi caution in a lot of the consumer lending businesses right now as as defaults were starting to creep back up last year's, what are they going to level off?
And I say outside of credit cards where we sit right now, most of these businesses, small business, personal loans, it's kind of leveled off at the pre-COVID levels. So it's not really, oh, people are the clients are cautious there, but they're feeling optimistic that the farmers are starting to level off.
And I don't think they really saw the impact they thought might happen from student loan repayments restarting.
James Friedman
Okay. Thanks, Scott. And then for the follow-up, I was just wondering, are you largely done with the restructuring now and also for if not either way, how would those improvements flow through to potential operating efficiency in 2024?
Douglas Lebda
So I would say, yes, we are done with the restructuring and and we have contingency plans, if God forbid, yes, there was a another Cataclysm and our economy on until we are largely done the good and there's something else that came from the side.
We now know where every dollar is going and what the return on that dollar is maybe not quite every dollar yet, but pretty darn close. And so now we can if we add back staff, it will be like if we hire 10 new salespeople, we can go get X more clients and get that much more demand and the 10 salespeople will have an ROI.
That will pay off if we can pushing our AI investments faster. You know that what and if they output or else we wouldn't be investing in it and do we can we do some of those things as they come back and as your unit economics improve all of a sudden like the projects that you had before that didn't make sense at, you know, those economics will now they start.
And so there's definitely more work to do as we go to what I would call on managed growth in the hub and we can manage our growth from here any increase in expenses or I would say 90 plus plus percent of them would be, but a very high return on equity.
James Friedman
Perfect. Thank you both.
Operator
Thank you. And I'm not showing any further questions at this time. I would like to turn it back to Doug Lebda for closing remarks.
Douglas Lebda
I would like to thank everyone on this call by everyone on this call. And now we are passionate about continuing to improve our business. Our team is focused on driving better outcomes for both our partners and our content, our customers through enhanced routing of inquiries, smarter and smarter matching of existing offers.
We're encouraged by the growth we are experiencing in our insurance segment and look forward to eventually pairing that with an inflection in our Home and Consumer businesses drive significantly improved financial performance and thank you all for being here, and we look forward to talking to you in next quarter.
Operator
Which concludes today's conference call. Thank you for participating, and you may now disconnect.
