Item 2. Management’s Discussion and Analysis
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Information
This report contains "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements related to our anticipated financial performance, business prospects and strategy; anticipated trends and prospects in the various industries in which our businesses operate; new products, services and related strategies; and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. The use of words such as "anticipates," "estimates," "expects," "projects," "intends," "plans" and "believes," among others, generally identifies forward-looking statements.
Actual results could differ materially from those contained in the forward-looking statements. Factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include those matters discussed or referenced in Part II, Item 1A. Risk Factors included elsewhere in this quarterly report and Part I, Item 1A. Risk Factors of the 2019 Annual Report.
Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of LendingTree, Inc.'s management as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations, except as required by law.
Company Overview
LendingTree, Inc. is the parent of LendingTree, LLC and several companies owned by LendingTree, LLC.
We operate what we believe to be the leading online consumer platform that connects consumers with the choices they need to be confident in their financial decisions. Our online consumer platform provides consumers with access to product offerings from our Network Partners, including mortgage loans, home equity loans and lines of credit, reverse mortgage loans, auto loans, credit cards, deposit accounts, personal loans, student loans, small business loans, insurance quotes and other related offerings. In addition, we offer tools and resources, including free credit scores, that facilitate comparison shopping for loans, deposit products, insurance and other offerings. We seek to match consumers with multiple providers, who can offer them competing quotes for the product, or products, they are seeking. We also serve as a valued partner to lenders and other providers seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer inquiries we generate with these Network Partners.
Our My LendingTree platform offers a personalized comparison-shopping experience by providing free credit scores and credit score analysis. This platform enables us to observe 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.
Three Months Ended September 30,
My LendingTree
2020
2019
% Change
Cumulative Sign-ups as of quarter-end (in millions)
15.7
13.1
20
%
Revenue Contribution (in thousands)
$
9,647
$
22,997
(58
)%
% of total revenue
4.4
%
7.4
%
We are focused on developing new product offerings and enhancements to improve the experiences that consumers and Network Partners have as they interact with us. By expanding our portfolio of financial services offerings, we are growing and diversifying our business and sources of revenue. We intend to capitalize on our expertise in performance marketing, product development and technology, and to leverage the widespread recognition of the LendingTree brand to effect this strategy.
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We believe the consumer and small business financial services industry is still in the early stages of a fundamental shift to online product offerings, similar to the shift that started in retail and travel many years ago and is now well established. We believe that like retail and travel, as consumers continue to move towards online shopping and transactions for financial services, suppliers will increasingly shift their product offerings and advertising budgets toward the online channel. We believe the strength of our brands and of our partner network place us in a strong position to continue to benefit from this market shift.
The LendingTree Loans business is presented as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of operations and comprehensive income and consolidated cash flows for all periods presented. Except for the discussion under the heading "Discontinued Operations," the analysis within Management's Discussion and Analysis of Financial Condition and Results of Operations reflects our continuing operations.
Economic Conditions
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus ("COVID-19"). The pandemic has significantly impacted the economic conditions in the U.S., as federal, state and local governments react to the public health crisis, creating significant uncertainties in the U.S. economy. The downstream impact of social distancing and related economic pullback are affecting our business and marketplace participants to varying degrees. We are continuously monitoring the impacts of the current economic conditions related to the COVID-19 pandemic and the effect on our business, financial condition and results of operations. Of our three reportable segments, the Consumer segment has been and is expected to be most impacted as unsecured credit and the flow of capital in certain areas of the market have contracted. Within our Consumer segment we have seen reductions of approximately 70% in near-term lender demand for our services reflecting those lenders' uncertainty over the length and depth of the economic recession. The impact to our Home and Insurance segments has been and is anticipated to be much less substantial. 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 is negatively impacted during the recession, we anticipate our marketing expenses will continue to generally decrease in line with revenue.
Segment Reporting
We have three reportable segments: Home, Consumer and Insurance. We changed our reportable segments in the fourth quarter of 2019, and prior period results have been reclassified to conform with this change in reportable segments.
Recent Business Acquisitions
On January 10, 2019, we acquired Value Holding Inc., the parent company of ValuePenguin Inc. (“ValuePenguin”), a personal finance website that offers consumers objective analysis on a variety of financial topics from insurance to credit cards for $106.2 million. Combining ValuePenguin’s high-quality content and search engine optimization capability with proprietary technology and insurance carrier network from QuoteWizard enables us to provide immense value to carriers and agents. This strategic acquisition positions us to achieve further scale in the insurance space as well as the broader financial services industry.
On February 28, 2020, we acquired an equity interest in Stash Financial, Inc. (“Stash”) for $80.0 million . Stash is a consumer investing and banking platform. Stash brings together banking, investing, and education into one seamless experience offering a full-suite of personal investment accounts, Traditional and Roth IRAs, custodial investment accounts, and banking services, including checking accounts and debit cards with a Stock-Back ® rewards program.
North Carolina Office Properties
In December 2016, we completed the acquisition of two office buildings in Charlotte, North Carolina, for $23.5 million in cash. The buildings were acquired with the intent to use such buildings as our corporate headquarters and rent any unused space. In November 2018, the office buildings were classified as held for sale. In May 2019, we sold these buildings to an unrelated third party for a sale price of $24.4 million.
With our expansion in North Carolina, in December 2016, we received a grant from the state that provides up to $4.9 million in reimbursements over 12 years beginning in 2017 for investing in real estate and infrastructure in addition to increasing jobs in North Carolina at specific targeted levels through 2020, and maintaining the jobs thereafter. Additionally, the city of Charlotte and the county of Mecklenburg provided a grant that will be paid over five years and is based on a percentage of new property tax we pay on the development of a corporate headquarters. In December 2018, we received an additional grant from the state that provides up to $8.4 million in reimbursements over 12 years beginning in 2020 for increasing jobs in North Carolina at specific targeted levels through 2023, and maintaining the jobs thereafter.
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Recent Mortgage Interest Rate Trends
Interest rate and market risks can be substantial in the mortgage lead generation business. Short-term fluctuations in mortgage interest rates primarily affect consumer demand for mortgage refinancings, while long-term fluctuations in mortgage interest rates, coupled with the U.S. real estate market, affect consumer demand for new mortgages. Consumer demand, in turn, affects lender demand for mortgage leads from third-party sources, as well as our own ability to attract online consumers to our website.
Typically, when interest rates decline, we see increased consumer demand for mortgage refinancing, which in turn leads to increased traffic to our website and decreased selling and marketing efforts associated with that traffic. At the same time, lender demand for leads from third-party sources typically decreases, as there are more consumers in the marketplace seeking refinancings and, accordingly, lenders receive more organic mortgage lead volume. Due to lower lender demand, our revenue earned per consumer typically decreases, but with correspondingly lower selling and marketing costs.
Conversely, when interest rates increase, we typically see decreased consumer demand for mortgage refinancing, leading to decreased traffic to our website and higher associated selling and marketing efforts associated with that traffic. At the same time, lender demand for leads from third-party sources typically increases, as there are fewer consumers in the marketplace and, accordingly, the supply of organic mortgage lead volume decreases. Due to high lender demand, we typically see an increase in the amount lenders will pay per matched lead, which often leads to higher revenue earned per consumer. However, increases in the amount lenders will pay per matched lead in this situation is limited by the overall cost models of our lenders, and our revenue earned per consumer can be adversely affected by the overall reduced demand for refinancing in a rising rate environment.
We dynamically adjust selling and marketing expenditures in all interest rate environments to optimize our results against these variables.
According to Freddie Mac, 30-year mortgage interest rates declined during 2020 to a monthly average of 2.89% in September 2020. On a quarterly basis, 30-year mortgage interest rates in the third quarter of 2020 averaged 2.95% , compared to 3.67% in the third quarter of 2019 and 3.23% in the second quarter of 2020.
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Typically, as mortgage interest rates decline, there are more consumers in the marketplace seeking refinancings and, accordingly, the mix of mortgage origination dollars will move towards refinance mortgages. However, COVID-19 pandemic-related restrictions that impacted traditional homebuying in the second quarter of 2020 resulted in increased demand for purchase mortgages in the third quarter of 2020. According to Mortgage Bankers Association ("MBA") data, total refinance origination dollars decreased to 52% of total mortgage origination dollars in the third quarter of 2020 compared to 63% in the second quarter of 2020. In the third quarter of 2020 , total refinance origination dollars decreased 22% to $450 million from the second quarter of 2020 and increased 63% from the third quarter of 2019 . Industry-wide mortgage originations in the third quarter of 2020 decreased 7% from the second quarter of 2020 and increased 32% from the third quarter of 2019.
In October 2020, the MBA projected 30-year mortgage interest rates to remain relatively consistent through the end of the year. According to MBA projections, the refinance share of total mortgage origination dollars is projected to represent approximately 55% for 2020.
The U.S. Real Estate Market
The health of the U.S. real estate market and interest rate levels are the primary drivers of consumer demand for new mortgages. Consumer demand, in turn, affects lender demand for purchase mortgage leads from third-party sources. Typically, a strong real estate market will lead to reduced lender demand for leads, as there are more consumers in the marketplace seeking financing and, accordingly, lenders receive more organic lead volume. Conversely, a weaker real estate market will typically lead to an increase in lender demand, as there are fewer consumers in the marketplace seeking mortgages.
According to Fannie Mae data, existing-home sales increased 38% in the third quarter of 2020 compared to the second quarter of 2020, and increased 10% compared to the third quarter of 2019. Fannie Mae predicts an overall increase in existing-home sales of 1% in 2020 compared to 2019.
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Results of Operations for the Three and Nine Months ended September 30, 2020 and 2019
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
$
Change
%
Change
2020
2019
$
Change
%
Change
(Dollars in thousands)
Home
$
78,859
$
77,265
$
1,594
2
%
$
232,156
$
212,458
$
19,698
9
%
Consumer
48,377
151,929
(103,552
)
(68
)%
205,419
401,621
(196,202
)
(49
)%
Insurance
92,500
74,849
17,651
24
%
248,156
213,882
34,274
16
%
Other
515
6,562
(6,047
)
(92
)%
1,930
23,455
(21,525
)
(92
)%
Revenue
220,251
310,605
(90,354
)
(29
)%
687,661
851,416
(163,755
)
(19
)%
Costs and expenses:
Cost of revenue (exclusive of depreciation and amortization shown separately below)
13,220
17,671
(4,451
)
(25
)%
40,936
51,651
(10,715
)
(21
)%
Selling and marketing expense
154,670
200,818
(46,148
)
(23
)%
464,129
567,338
(103,209
)
(18
)%
General and administrative expense
33,705
30,323
3,382
11
%
94,276
89,391
4,885
5
%
Product development
11,477
10,200
1,277
13
%
33,252
30,541
2,711
9
%
Depreciation
3,535
2,696
839
31
%
10,463
7,737
2,726
35
%
Amortization of intangibles
13,090
13,778
(688
)
(5
)%
40,603
41,485
(882
)
(2
)%
Change in fair value of contingent consideration
6,658
3,839
2,819
73
%
7,711
21,221
(13,510
)
(64
)%
Severance
—
179
(179
)
(100
)%
190
636
(446
)
(70
)%
Litigation settlements and contingencies
13
(92
)
105
114
%
(983
)
(291
)
(692
)
(238
)%
Total costs and expenses
236,368
279,412
(43,044
)
(15
)%
690,577
809,709
(119,132
)
(15
)%
Operating (loss) income
(16,117
)
31,193
(47,310
)
(152
)%
(2,916
)
41,707
(44,623
)
(107
)%
Other (expense) income, net:
Interest expense, net
(16,617
)
(4,845
)
11,772
243
%
(26,406
)
(15,408
)
10,998
71
%
Other income
—
4
(4
)
(100
)%
7
143
(136
)
(95
)%
(Loss) income before income taxes
(32,734
)
26,352
(59,086
)
(224
)%
(29,315
)
26,442
(55,757
)
(211
)%
Income tax benefit (expense)
7,925
(1,889
)
9,814
520
%
14,866
11,552
3,314
29
%
Net (loss) income from continuing operations
(24,809
)
24,463
(49,272
)
(201
)%
(14,449
)
37,994
(52,443
)
(138
)%
Income (loss) from discontinued operations, net of tax
166
(20,199
)
(20,365
)
(101
)%
(25,550
)
(22,024
)
3,526
16
%
Net (loss) income and comprehensive (loss) income
$
(24,643
)
$
4,264
$
(28,907
)
(678
)%
$
(39,999
)
$
15,970
$
(55,969
)
(350
)%
Revenue
Revenue decreased in the third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019 due to decreases in our Consumer segment and Other category, partially offset by increases in our Insurance and Home 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 in the third quarter and first nine months of 2020 from the third quarter and first nine months of 2019 , primarily due to decreases in our credit cards, personal loans, student loans and small business loans products.
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Revenue from our credit cards product decreased $48.1 million to $6.7 million in the third quarter of 2020 from $54.8 million in the third quarter of 2019 , or 88% , and decreased $100.0 million to $65.4 million in the first nine months of 2020 from $165.4 million in the first nine months of 2019 , or 60% , primarily due to the impact of economic conditions related to the COVID-19 pandemic that caused lower issuer demand, resulting in a decrease in the number of approvals and a decrease in revenue earned per approval.
Revenue from our personal loans product decreased $31.4 million to $12.5 million in the third quarter of 2020 from $43.9 million in the third quarter of 2019 , or 72% , and decreased $64.7 million to $52.8 million in the first nine months of 2020 from $117.5 million in the first nine months of 2019 , or 55% , primarily due to the impact of economic conditions related to the COVID-19 pandemic that caused a contraction in the flow of capital and a decrease in revenue earned per consumer.
For the periods presented, no other products in our Consumer segment represented more than 10% of revenue; however, certain other Consumer products experienced notable changes primarily due to the impact of economic conditions related to the COVID-19 pandemic. Revenue from our student loans product decreased $11.3 million in the third quarter of 2020 compared to the third quarter of 2019 and decreased $16.9 million in the first nine months of 2020 compared to the first nine months of 2019 , due to a decrease in the number of consumers on our marketplace seeking student loans and lower demand for student loan refinancing due to the Coronavirus Aid, Relief, and Economic Security ("CARES") Act providing temporary payment deferral relief. Revenue from our small business loans product decreased $9.9 million in the third quarter of 2020 compared to the third quarter of 2019 and decreased $14.0 million in the first nine months of 2020 compared to the first nine months of 2019 , due to a contraction in the flow of capital and a decrease in revenue earned per consumer.
The ongoing COVID-19 pandemic is anticipated to continue to significantly impact our Consumer product revenues in the near-term due to the significant industry-wide contraction in the availability of capital for products in the Consumer segment, specifically credit cards, small business loans and personal loans, as discussed above.
Revenue from our Insurance segment increased $17.7 million to $92.5 million in the third quarter of 2020 from $74.8 million in the third quarter of 2019 , or 24% , and increased $34.3 million to $248.2 million in the first nine months of 2020 from $213.9 million in the first nine months of 2019 , or 16% . The increase in the third quarter and first nine months of 2020 is due to increases in the number of consumers seeking insurance coverage, partially offset by a decrease in revenue earned per consumer.
Our Home segment includes the following products: purchase mortgage, refinance mortgage, home equity loans and lines of credit, reverse mortgage loans, and real estate. Revenue from our Home segment increased $1.6 million in the third quarter of 2020 from the third quarter of 2019 , or 2% , and increased $19.7 million in the first nine months of 2020 from the first nine months of 2019 , or 9% , primarily due to an increase in revenue from our refinance mortgage product, partially offset by decreases in our purchase mortgage and home equity loans and lines of credit products. Revenue from our refinance mortgage product increased $17.1 million in the third quarter of 2020 compared to the third quarter of 2019 , and increased $65.3 million in the first nine months of 2020 compared to the first nine months of 2019 , primarily due to an increase in the number of consumers completing request forms resulting from increased refinancing activity in a declining interest rate environment. For the first nine months of 2020 compared to the first nine months of 2019 , this was partially offset by a decrease in revenue earned per consumer. Revenue from our purchase mortgage product decreased $8.2 million in the third quarter of 2020 compared to the third quarter of 2019 and decreased $23.4 million in the first nine months of 2020 compared to the first nine months of 2019 . Revenue from our home equity loans and lines of credit product decreased $6.6 million in the third quarter of 2020 compared to the third quarter of 2019 and decreased $19.8 million in the first nine months of 2020 compared to the first nine months of 2019 . Revenue from our purchase mortgage and home equity loans and lines of credit products decreased due to a shift in lender focus toward refinance products as well as decreases in revenue earned per consumer.
Our Other category primarily includes revenue from the resale of online advertising space to third parties and revenue from home improvement referrals. Revenue in the Other category decreased $6.0 million in the third quarter of 2020 compared to the third quarter of 2019 , and decreased $21.5 million in the first nine months of 2020 compared to the first nine months of 2019 , as we ceased offering home improvement referrals during the first quarter of 2019 and ceased reselling online advertising space during the first quarter of 2020.
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, costs for online advertising resold to third parties, credit scoring fees, credit card fees, website network hosting and server fees.
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Cost of revenue decreased in the third quarter of 2020 from the third quarter of 2019 , primarily due to a $5.8 million decrease for the cost of resold advertising space. We ceased reselling online advertising space during the first quarter of 2020. This was partially offset by an increase in credit card fees and customer service costs of $0.5 million and $0.3 million , respectively. Cost of revenue decreased in the first nine months of 2020 from the first nine months of 2019 , primarily due to a $17.1 million decrease for the cost of resold advertising space, partially offset by increases in website network hosting and server fees, compensation and benefits, and credit card fees of $2.2 million , $2.1 million , and $1.5 million , respectively.
Cost of revenue as a percentage of revenue remained consistent at 6% for each of the third quarters and first nine months of 2020 and 2019.
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 third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019 primarily due to decreases in advertising and promotional expense of $47.1 million and $103.7 million , respectively, as discussed below.
Advertising and promotional expense is the largest component of selling and marketing expense, and is comprised of the following:
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
$
Change
%
Change
2020
2019
$
Change
%
Change
(Dollars in thousands)
Online
$
136,496
$
182,401
$
(45,905
)
(25
)%
$
405,993
$
501,119
$
(95,126
)
(19
)%
Broadcast
2,662
3,952
(1,290
)
(33
)%
12,140
20,885
(8,745
)
(42
)%
Other
2,967
2,885
82
3
%
9,588
9,370
218
2
%
Total advertising expense
$
142,125
$
189,238
$
(47,113
)
(25
)%
$
427,721
$
531,374
$
(103,653
)
(20
)%
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 decreased our advertising expenditures in the third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019 in response to changes in Network Partner demand on our marketplace as a result of the ongoing COVID-19 pandemic discussed above. We will continue to adjust selling and marketing expenditures dynamically in relation to this and in response to anticipated revenue opportunities.
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 increased in the third quarter of 2020 compared to the third quarter of 2019 , primarily due to increases in professional fees, facilities expense, and compensation and benefits of $1.9 million , $1.9 million , and $1.2 million , respectively, partially offset by a decrease in travel and entertainment expense of $1.0 million . General and administrative expense increased in the first nine months of 2020 compared to the first nine months of 2019 due to increases in professional fees, facilities expense, and technology expense of $5.1 million , $3.1 million , and $2.3 million , respectively. The first nine months of 2019 also benefited from a $2.7 million gain on the sale of two office buildings. This was partially offset by decreases in travel and entertainment expense, compensation and benefits, employee morale, and other taxes of $2.9 million , $2.2 million , $1.2 million , and $0.9 million , respectively.
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General and administrative expense as a percentage of revenue increased to 15% in the third quarter of 2020 compared to 10% in the third quarter of 2019 , and increased to 14% in the first nine months of 2020 compared to 10% in the first nine months of 2019 .
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 increased in the third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019 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 and Network Partners.
Depreciation
The increase in depreciation expense in the third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019 was primarily the result of higher investment in internally developed software in recent years, to support the growth of our business.
Contingent consideration
During the third quarter and first nine months of 2020 , we recorded aggregate contingent consideration expense of $6.7 million and $7.7 million , respectively, due to adjustments in the estimated fair value of the earnout payments related to our recent acquisitions. For the third quarter of 2020 , the contingent consideration expense for the QuoteWizard and Ovation acquisitions was $6.6 million and $0.1 million , respectively. For the first nine months of 2020 , the contingent consideration expense for the QuoteWizard, Ovation and SnapCap acquisitions was $6.4 million , $1.3 million and $0.1 million , respectively.
During the third quarter and first nine months of 2019 , we recorded aggregate contingent consideration expense of $3.8 million and $21.2 million, respectively, due to adjustments in the estimated fair value of the earnout payments related to our recent acquisitions. For the third quarter of 2019 , the contingent consideration expense for the QuoteWizard and SnapCap acquisitions was $4.3 million and $0.3 million, respectively. This was partially offset by a contingent consideration gain recorded for the Ovation acquisition of $0.8 million. For the first nine months of 2019 , the contingent consideration expense for the QuoteWizard and SnapCap acquisitions was $21.2 million and $1.8 million, respectively. This was partially offset by contingent consideration gains recorded for the Ovation and DepositAccounts acquisitions of $0.8 million and $1.0 million, respectively.
Interest expense
Interest expense increased in the third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019 due to the issuance of $575.0 million of our 0.50% Convertible Senior Notes due July 15, 2025 (the “2025 Notes”) as well as the repurchase of a portion of our existing 0.625% Convertible Senior Notes due June 1, 2022 (the “2022 Notes”) in July 2020. In the third quarter and first nine months of 2020 , interest expense of $4.9 million was recognized on the 2025 Notes. Further, a loss on debt extinguishment of $7.8 million was recognized within interest expense upon the partial repurchase of the 2022 Notes. These increases to interest expense were partially offset by lower interest expense on the 2022 Notes in the third quarter and first nine months of 2020 as a result of the repurchase of $130.3 million principal amount of the 2022 Notes. See Note 14 —Debt for additional information on the issuance of the 2025 Notes and the partial repurchase of the 2022 Notes.
Income tax expense
For the third quarter and first nine months of 2020 , the effective tax rate varied from the federal statutory rate of 21% in part due to a tax benefit of $0.2 million and $2.0 million , respectively, recognized for excess tax benefits resulting from employee exercises of stock options and vesting of restricted stock in accordance with ASU 2016-09 and the effect of state taxes. The effective tax rate for the first nine months of 2020 was also impacted by a tax benefit of $6.1 million for the impact of the CARES Act, as described below.
On March 27, 2020, President Trump signed into law the CARES Act. This legislation is an economic relief package in response to the public health and economic impacts of COVID-19 and includes various provisions that impact us, including, but
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not limited to, modifications for net operating losses, accelerated timeframe for refunds associated with prior minimum taxes and modifications of the limitation on business interest.
We revalued deferred tax assets related to net operating losses in light of the changes in the CARES Act, and recorded a net tax benefit of $6.1 million during the first nine months of 2020 . These deferred tax assets are being revalued, as they will be carried back to 2016 and 2017, which are tax periods prior to the Tax Cuts and Jobs Act ("TCJA") when the federal statutory tax rate was 35% versus the 21% federal statutory tax rate in effect after the enactment of the TCJA.
For the third quarter and first nine months of 2019 , the effective tax rate varied from the federal statutory rate of 21% primarily due to a tax benefit of $2.8 million and $16.5 million , respectively, recognized for excess tax benefits resulting from employee exercises of stock options and vesting of restricted stock in accordance with ASU 2016-09, a tax benefit of $1.9 million recognized from an adjustment to the federal research tax credit and the effect of state taxes.
Discontinued operations
The results of discontinued operations include the results of the LendingTree Loans business formerly operated by our wholly-owned subsidiary, Home Loan Center, Inc., or HLC. The sale of substantially all of the assets of HLC, including the LendingTree Loans business, was completed on June 6, 2012. HLC filed a petition under Chapter 11 of the United States Bankruptcy Code on July 21, 2019, which was converted to Chapter 7 of the United States Bankruptcy Code on September 16, 2019.
As a result of the voluntary bankruptcy petition, as of the initial July 21, 2019 bankruptcy petition filing date, HLC and its consolidated subsidiary were deconsolidated from LendingTree’s consolidated financial statements. The effect of such deconsolidation was the elimination of the consolidated assets and liabilities of HLC (and its consolidated subsidiary) from LendingTree’s consolidated balance sheets.
Prior to the bankruptcy filing, losses from the LendingTree Loans business were primarily due to litigation settlements and contingencies and legal fees associated with ongoing legal proceedings.
The results of discontinued operations include litigation settlements and contingencies and legal fees associated with ongoing legal proceedings against LendingTree Inc. or LendingTree LLC that arose due to the LendingTree Loans business or the HLC bankruptcy filing.
See Note 18 —Discontinued Operations to the consolidated financial statements included elsewhere in this report for more information, including the accounting effect of HLC’s bankruptcy filing on our consolidated financial statements.
Segment Profit
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
$
Change
%
Change
2020
2019
$
Change
%
Change
(Dollars in thousands)
Home
$
25,166
$
28,092
$
(2,926
)
(10
)%
$
99,803
$
76,223
$
23,580
31
%
Consumer
21,647
65,169
(43,522
)
(67
)%
84,148
169,914
(85,766
)
(50
)%
Insurance
37,043
30,003
7,040
23
%
97,698
86,673
11,025
13
%
Other
2
384
(382
)
(99
)%
(245
)
1,488
(1,733
)
(116
)%
Segment profit
$
83,858
$
123,648
$
(39,790
)
(32
)%
$
281,404
$
334,298
$
(52,894
)
(16
)%
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 17 —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 from continuing operations.
Consumer segment profit decreased $43.5 million in the third quarter of 2020 from the third quarter of 2019 , and decreased $85.8 million in the first nine months of 2020 from the first nine months of 2019 , primarily due to decreases in revenue, partially offset by corresponding decreases in selling and marketing expense. While the Consumer segment remains challenged from the impact of economic conditions related to the COVID-19 pandemic, we are encouraged that the performance of each of our credit cards, personal loans and small business loans products has steadily improved from the lows in the second quarter of 2020.
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However, it remains difficult to predict the pace of recovery. We continue to observe favorable trends in consumer credit and spending, but these trends remain unclear due to the uncertainty surrounding further government stimulus and the staying power of COVID-19. Our Network Partners continue to view the market with caution; while many Network Partners have resumed activity on our marketplace, their interest in doing so is primarily to assess consumer behavior and performance rather than to aggressively pursue new origination at scale or market share gains.
In considering the coming quarters, it is possible that our unit economics will remain constrained in our credit cards, personal loans and small business loans products due to the lack of heightened competition among our Network Partners. However, we believe that we are strategically positioning ourselves for success when industry conditions return to health. We continue to drive volume to our Network Partners, which could decrease segment profitability in the near term. The strength of our Home and Insurance segments, discussed below, enables us to adopt a longer-term orientation toward our Network Partners in these challenging times.
Home segment profit decreased $2.9 million in the third quarter of 2020 from the third quarter of 2019 , primarily due to an increase in selling and marketing expense, and increased $23.6 million in the first nine months of 2020 from the first nine months of 2019 , primarily due to an increase in revenue. Mortgage lender capacity continued to expand in the third quarter of 2020 as refinance mortgage activity abated from the highs in the second quarter of 2020. While increased lender capacity benefits our business and enables improved traffic monetization, these same dynamics drive heightened competition and costs to acquire such traffic, leading to compressed margins. Other factors such as the November 2020 election also contributed to increased traffic acquisition costs; however, we view those dynamics as temporary and expect the industry backdrop to remain favorable in the coming quarters.
Insurance segment profit increased $7.0 million in the third quarter of 2020 from the third quarter of 2019 , and increased $11.0 million in the first nine months of 2020 from the first nine months of 2019 , primarily due to increases in revenue, partially offset by corresponding increases in selling and marketing expense. While decreased search engine traffic presented modest headwinds in the second quarter of 2020, such headwinds largely dissipated in the third quarter of 2020. We also accelerated the Insurance business in the third quarter of 2020 in a number of areas: the roll out of our publisher platform that is expected to be a significant growth driver in future quarters, the build out of an in-house agency that complements our existing offerings by enabling us to drive volume for insurance carriers who do not write premiums directly, and steady progress made in the health insurance and Medicare categories.
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 management and many employees are compensated. 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.
Definition of Adjusted EBITDA
We report Adjusted EBITDA as net income from continuing operations 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) restructuring and severance expenses, (5) litigation settlements and contingencies, (6) acquisitions and dispositions income or expense (including with respect to changes in fair value of contingent consideration), and (7) 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 with SEC rules. For the periods presented below, there are no adjustments for one-time items.
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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. 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.
The following table is a reconciliation of net (loss) income from continuing operations to Adjusted EBITDA (in thousands) .
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
Net (loss) income from continuing operations
$
(24,809
)
$
24,463
$
(14,449
)
$
37,994
Adjustments to reconcile to Adjusted EBITDA:
Amortization of intangibles
13,090
13,778
40,603
41,485
Depreciation
3,535
2,696
10,463
7,737
Severance
—
179
190
636
Loss (gain) on impairments and disposal of assets
134
609
686
(1,369
)
Non-cash compensation expense
14,161
10,797
39,236
40,832
Change in fair value of contingent consideration
6,658
3,839
7,711
21,221
Acquisition expense
205
18
2,405
197
Litigation settlements and contingencies
13
(92
)
(983
)
(291
)
Interest expense, net
16,617
4,845
26,406
15,408
Income tax (benefit) expense
(7,925
)
1,889
(14,866
)
(11,552
)
Adjusted EBITDA
$
21,679
$
63,021
$
97,402
$
152,298
Financial Position, Liquidity and Capital Resources
General
As of September 30, 2020 , we had $187.3 million of cash and cash equivalents, compared to $60.2 million of cash and cash equivalents as of December 31, 2019 .
In February 2020, we acquired an equity interest in Stash for $80.0 million . The investment was funded through $80.0 million drawn on our Amended Revolving Credit Facility. See Note 7 —Equity Investment to the consolidated financial statements included elsewhere in this report for more information.
During the first nine months of 2020 , we made net repayments of $75.0 million on our Amended Revolving Credit Facility.
During the first nine months of 2020 , we made two contingent consideration payments of $3.0 million each, related to the prior acquisition of SnapCap. In October 2020, we made a contingent consideration payment of $4.4 million related to the prior acquisition of Ovation. We could make additional potential contingent consideration payments of up to $46.8 million for QuoteWizard.
In July 2020, we made litigation settlement payments of $26.5 million to the ResCap Liquidating Trust ("ResCap") and $36.0 million to the HLC bankruptcy Trustee for the matters noted in Note 18 —Discontinued Operations. In October 2020, due to the timing of distributions from the HLC bankruptcy estate, we were required to make a further payment of $6.4 million to ResCap. We anticipate receiving a total $7.5 million reimbursement from the HLC bankruptcy estate related to the ResCap payments by the first quarter of 2021.
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In July 2020, we issued $575.0 million of our 2025 Notes for net proceeds of approximately $559.9 million. We used approximately $63.0 million of the net proceeds to enter into Convertible Note Hedge and Warrant transactions. Further, we used $234.0 million of the net proceeds to repurchase approximately $130.3 million principal amount of our 2022 Notes. To the extent of the repurchases of the 2022 Notes, we received approximately $15.6 million as a result of terminating a corresponding portion of the Convertible Note Hedge and Warrant transactions entered into on May 31, 2017. See Note 14 —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 revolving credit facility described below is an additional potential source of liquidity. We will continue to monitor the impact of the ongoing COVID-19 pandemic on our liquidity and capital resources. We expect our cashflow from operating activities to be negatively impacted by the economic recession.
Senior Secured Revolving Credit Facility
On December 10, 2019, we entered into an amended and restated $500.0 million five-year senior secured revolving credit facility, which matures on December 10, 2024 (the “Amended Revolving Credit Facility”). Borrowings under the Amended Revolving Credit Facility can be used to finance working capital needs, capital expenditures and general corporate purposes, including to finance permitted acquisitions. In July 2020, we executed a temporary amendment to the Amended Revolving Credit Facility to provide for certain covenant relief, primarily to facilitate the issuance of the 2025 Notes, the repurchase of a portion of the 2022 Notes, and to pay down existing borrowings under the credit facility. The amendment applies from the effective date through the fiscal quarter ending June 30, 2021, unless terminated in advance by us. See Note 14 —Debt for additional information.
As of November 5, 2020 , we have a $0.2 million letter of credit under the Amended Revolving Credit Facility. The remaining borrowing capacity at November 5, 2020 is $499.8 million .
Cash Flows from Continuing Operations
Our cash flows attributable to continuing operations are as follows:
Nine Months Ended
September 30,
2020
2019
(in thousands)
Net cash provided by operating activities
$
96,216
$
110,880
Net cash used in investing activities
(100,386
)
(96,187
)
Net cash provided by (used in) financing activities
197,375
(56,779
)
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, certain contingent consideration payments, and income taxes.
Net cash provided by operating activities attributable to continuing operations decreased in the first nine months of 2020 from the first nine months of 2019 primarily due to a decrease in revenue, partially offset by a corresponding decrease in selling and marketing expense. This was further partially offset by net favorable changes in working capital, primarily in accounts receivable and accounts payable, accrued expenses and other current liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities attributable to continuing operations in the first nine months of 2020 of $100.4 million consisted of the purchase of an $80.0 million equity interest in Stash and capital expenditures of $20.4 million primarily related to internally developed software and leasehold improvements for our new principal executive offices currently under construction.
Net cash used in investing activities attributable to continuing operations in the first nine months of 2019 of $96.2 million consisted primarily of the acquisition of ValuePenguin for $105.6 million , net of cash acquired, and capital expenditures of $15.2
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million primarily related to internally developed software. This was partially offset by proceeds of $24.1 million on the sale of two office buildings, net of closing expenses.
Cash Flows from Financing Activities
Net cash provided by financing activities attributable to continuing operations in the first nine months of 2020 of $197.4 million consisted primarily of $575.0 million of gross proceeds from the issuance of the 2025 Notes, partially offset by $233.9 million paid to repurchase a portion of the 2022 Notes, a net $47.4 million paid for the related convertible note hedge and warrant transactions outlined above, $75.0 million of net repayments on our Amended Revolving Credit Facility, and $16.4 million for the payment of debt issuance costs.
Net cash used in financing activities attributable to continuing operations in the first nine months of 2019 of $56.8 million consisted primarily of $40.0 million of net repayments on our 2017 Revolving Credit Facility, $4.3 million for the repurchase of our common stock, $9.5 million in withholding taxes paid upon surrender of shares to satisfy obligations on equity awards, net of proceeds from the exercise of stock options, and a $3.0 million contingent consideration payment for SnapCap.
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 .
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.