LendingTree, Inc. 10-Q

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 2021 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 LT Intermediate Company, LLC, which holds all of the outstanding ownership interests of LendingTree, LLC, and LendingTree, 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 our Network Partners, including mortgage loans, home equity loans, 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 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 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. 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 statements of cash flows for all periods 28 Table of Contents 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 various lockdown orders 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 was most impacted as unsecured credit and the flow of capital in certain areas of the market have 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, our marketing expenses generally decreased in line with revenue. During the first six months of 2022, the challenging interest rate environment combined with annual inflation persistently running above 8% has presented additional challenges for many of our mortgage lending and insurance partners. We have seen the most significant impact in our Home segment as mortgage rates have nearly doubled over the first six months of 2022, causing a sharp decline in refinance volumes and more recent pressure on purchase activity. Although our Insurance segment continues to rebound from the trough in the fourth quarter of 2021, the recovery has been slower than expected as demand from our carrier partners remains volatile as premium increases continue to chase inflation. Segment Reporting We have three reportable segments: Home, Consumer and Insurance. Recent Business Acquisitions On February 28, 2020, we acquired an equity interest in Stash for $80.0 million. On January 6, 2021 we acquired an additional equity interest for $1.2 million. Stash is a consumer investing and banking platform. Stash brings together banking, investing, and financial services 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. In the fourth quarter of 2021, we sold a portion of our investment in Stash for $46.3 million, realizing a gain on the sale of $27.9 million. In January 2022, the Company acquired an equity interest in EarnUp for $15.0 million. EarnUp is a consumer-first mortgage payment platform that intelligently automates loan payment scheduling and helps consumers better manage their money and improve their financial well-being. See Note 7—Equity Investment for additional information on the equity interest in EarnUp. North Carolina Office Properties Our new corporate office is located on approximately 176,000 square feet of office space in Charlotte, North Carolina under an approximate 15-year lease that contractually commenced in the second quarter of 2021. 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 through 2029 beginning in 2017 for investing in real estate and infrastructure in addition to increasing jobs in North Carolina at specific targeted levels through 2021, 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 an aggregate amount up to $8.4 million in reimbursements through 2032 beginning in 2021 for increasing jobs in North Carolina at specific targeted levels through 2024, and maintaining the jobs thereafter. 29 Table of Contents 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 increased from a monthly average of 3.10% in December 2021 to a monthly average of 5.52% in June 2022. On a quarterly basis, 30-year mortgage interest rates in the second quarter of 2022 averaged 5.24%, compared to 3.00% in the second quarter of 2021 and 3.08% in the fourth quarter of 2021. 30 Table of Contents 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 to Mortgage Bankers Association (“MBA”) data, total refinance origination dollars decreased to 30% of total mortgage origination dollars in the second quarter of 2022 compared to 53% in the fourth quarter of 2021. In the second quarter of 2022, total refinance origination dollars decreased 57% from the fourth quarter of 2021 and 66% from the second quarter of 2021. Industry-wide mortgage origination dollars in the second quarter of 2022 decreased 24% from the fourth quarter of 2021 and 35% from second quarter of 2021. In July 2022, the MBA projected 30-year mortgage interest rates to increase during 2022, to an average 5.2% for the year. According to MBA projections, the mix of mortgage origination dollars is expected to move back towards purchase mortgages with the refinance share representing approximately 30% for 2022. 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 decreased 16% in the second quarter of 2022 compared to the fourth quarter of 2021, and 12% compared to the second quarter of 2021. Fannie Mae predicts an overall decrease in existing-home sales of approximately 16% in 2022 compared to 2021. 31 Table of Contents Results of Operations for the Three and Six Months ended June 30, 2022 and 2021 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (Dollars in thousands) Home $ 73,938 $ 104,861 $ (30,923) (29) % $ 175,882 $ 232,986 $ (57,104) (25) % Consumer 106,144 75,676 30,468 40 % 207,212 133,583 73,629 55 % Insurance 81,756 89,263 (7,507) (8) % 161,794 175,877 (14,083) (8) % Other 85 214 (129) (60) % 213 318 (105) (33) % Revenue 261,923 270,014 (8,091) (3) % 545,101 542,764 2,337 — % Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below) 14,574 13,934 640 5 % 30,135 27,829 2,306 8 % Selling and marketing expense 184,537 185,206 (669) — % 388,694 382,668 6,026 2 % General and administrative expense 40,289 39,811 478 1 % 76,262 74,800 1,462 2 % Product development 14,318 13,290 1,028 8 % 28,370 25,758 2,612 10 % Depreciation 4,896 4,443 453 10 % 9,750 8,161 1,589 19 % Amortization of intangibles 7,075 11,310 (4,235) (37) % 14,992 22,622 (7,630) (34) % Change in fair value of contingent consideration — (8,850) 8,850 100 % — (8,053) 8,053 100 % Restructuring and severance 135 — 135 — % 3,760 — 3,760 — % Litigation settlements and contingencies (7) 322 (329) (102) % (34) 338 (372) (110) % Total costs and expenses 265,817 259,466 6,351 2 % 551,929 534,123 17,806 3 % Operating (loss) income (3,894) 10,548 (14,442) (137) % (6,828) 8,641 (15,469) (179) % Other (expense) income, net: Interest expense, net (6,765) (9,840) (3,075) (31) % (14,270) (20,055) (5,785) (29) % Other income 284 — 284 — % 283 40,072 (39,789) (99) % (Loss) income before income taxes (10,375) 708 (11,083) (1,565) % (20,815) 28,658 (49,473) (173) % Income tax benefit 2,337 9,092 (6,755) (74) % 1,954 454 1,500 330 % Net (loss) income from continuing operations (8,038) 9,800 (17,838) (182) % (18,861) 29,112 (47,973) (165) % Loss from discontinued operations, net of tax — (3,199) (3,199) (100) % (3) (3,462) (3,459) (100) % Net (loss) income and comprehensive (loss) income $ (8,038) $ 6,601 $ (14,639) (222) % $ (18,864) $ 25,650 $ (44,514) (174) % Revenue Revenue decreased in the second quarter of 2022 compared to the second quarter of 2021 due to decreases in our Home and Insurance segments, partially offset by an increase in our Consumer segment. Revenue increased in the first six months of 2022 compared to the first six months of 2021 due to an increase in our Consumer segment, partially offset by decreases in our Home 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 increased $30.5 million, or 40%, in the second quarter of 2022 from the second quarter of 2021 and increased $73.6 million, or 55%, in the first six months of 2022 from the first six months of 2021, primarily due to increases in our personal loans, credit cards, and small business loans. Many of our products in the Consumer segment experienced increases in revenue in the second quarter and first six months of 2022 from the second quarter and first six months of 2021 due to the recovery from the impacts of the COVID-19 pandemic. Revenue from our personal loans product increased $17.1 million, or 68%, to $42.3 million in the second quarter of 2022 from $25.2 million in the second quarter of 2021, and increased $37.4 million, or 93%, to $77.5 million in the first six months 32 Table of Contents of 2022 from $40.1 million in the first six months of 2021 primarily due to an increase in the number of consumers completing request forms and an increase in revenue earned per consumer. Revenue from our credit cards product increased $4.9 million, or 22%, to $27.3 million in the second quarter of 2022 from $22.4 million in the second quarter of 2021 primarily due to an increase in revenue earned per approval. Revenue from our credit cards product increased $17.1 million, or 43%, to $57.1 million in the first six months of 2022 compared to $40.1 million in the first six months of 2021, due to an increase in revenue earned per approval and an increase in the number of approvals. 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 small business loans product increased $7.8 million, or 81%, in the second quarter of 2022 compared to the second quarter of 2021, primarily due to an increase in revenue earned per consumer. Revenue from our small business loans product increased $18.5 million, or 106%, in the first six months of 2022 compared to the first six months of 2021, primarily due to an increase in revenue earned per consumer and an increase in the number of consumers completing request forms. Our Home segment includes the following products: purchase mortgage, refinance mortgage, home equity loans, reverse mortgage loans, and real estate. Revenue from our Home segment decreased $30.9 million, or 29%, in the second quarter of 2022 from the second quarter of 2021, and $57.1 million, or 25%, in the first six months of 2022 compared to the first six months of 2021, primarily due to a decrease in revenue from our refinance mortgage product, partially offset by increases in our home equity and purchase mortgage products. Revenue from our mortgage products decreased $43.1 million, or 49%, to $44.4 million in the second quarter of 2022 from $87.5 million in the second quarter of 2021, and decreased $81.5 million or 40%, to $122.3 million in the first six months of 2022 from $203.8 million in the first six months of 2021. Revenue from our refinance mortgage product decreased $44.0 million in the second quarter of 2022 compared to the second quarter of 2021, and $91.6 million in the first six months of 2022 compared to the first six months of 2021, due to a decrease in the number of consumers completing request forms as interest rates have risen. Revenue from our purchase mortgage product increased $0.9 million in the second quarter of 2022 compared to the second quarter of 2021 and $10.1 million in the first six months of 2022 compared to the first six months of 2021, primarily due to an increase in revenue earned per consumer. Revenue from our home equity loans product increased $11.8 million, or 71%, to $28.4 million in the second quarter of 2022 from $16.5 million in to the second quarter of 2021, and increased $24.0 million, or 87%, to $51.5 million in the first six months of 2022 from $27.5 million in the first six months of 2021, primarily due to an increase in consumers completing request forms, and an increase in revenue earned per consumer. Revenue from our Insurance segment decreased $7.5 million, or 8%, to $81.8 million in the second quarter of 2022 from $89.3 million in the second quarter of 2021, and $14.1 million, or 8%, to $161.8 million in the first six months of 2022 from $175.9 million in the first six months of 2021 due to a decrease in the number of consumers seeking insurance coverage, partially offset by an increase in revenue earned per consumer. 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 remained relatively consistent in the second quarter of 2022 from the second quarter of 2021, increasing $0.6 million. Cost of revenue increased in the first six months of 2022 from the first six months of 2021, primarily due to a $1.5 million increase in website network hosting and server hosting fees. Cost of revenue as a percentage of revenue increased to 6% in the second quarter of 2022 compared to 5% in the second quarter of 2021, and increased to 6% in the first six months of 2022 compared to 5% in the first six months of 2021. 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. 33 Table of Contents 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 remained relatively consistent in the second quarter of 2022 compared to the second quarter 2021, decreasing $0.7 million. Selling and marketing expense increased in the first six months of 2022 from the first six months of 2021, primarily due to the changes in advertising and promotional expense discussed below. Additionally, compensation and benefits increased $1.1 million in the first six months of 2022 compared to the first six months of 2021, as a result of an increase in headcount in the first quarter of 2022. Advertising and promotional expense is the largest component of selling and marketing expense, and is comprised of the following: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (Dollars in thousands) Online $ 167,711 $ 165,038 $ 2,673 2 % $ 350,184 $ 341,859 $ 8,325 2 % Broadcast 770 2,649 (1,879) (71) % 1,610 3,816 (2,206) (58) % Other 2,670 3,908 (1,238) (32) % 8,434 9,623 (1,189) (12) % Total advertising expense $ 171,151 $ 171,595 $ (444) — % $ 360,228 $ 355,298 $ 4,930 1 % 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 second quarter and first six months of 2022 compared to the second quarter and first six months of 2021 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. 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 second quarter of 2022 compared to the second quarter of 2021, primarily due to increases in loss on assets of $1.9 million and in technology expenses of $1.1 million, partially offset by a $2.5 million decrease in compensation and benefits. General and administrative expense increased in the first six months of 2022 compared to the first six months of 2021 primarily due to increases in technology of $2.6 million, loss on assets of $2.0 million, other tax expense of $1.5 million, an increase in travel and entertainment expenses of $1.1 million, and an increase in fees and charges of $1.1 million. This was partially offset by decreases in compensation and benefits of $4.9 million and a decrease in professional fees of $2.0 million. General and administrative expense as a percentage of revenue remained consistent at 15% for each of the second quarters of 2022 and 2021, and remained consistent at 14% for the first six months of 2022 and 2021. 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 second quarter and first six months of 2022 compared to the second quarter and first six months of 2021 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. 34 Table of Contents Amortization of intangibles The decrease in amortization of intangibles in the second quarter and first six months of 2022 compared to the second quarter and first six months of 2021 was due to certain intangible assets associated with our recent business acquisitions becoming fully amortized. Contingent consideration During the second quarter and first six months of 2022, we did not record contingent consideration expense. All earnouts were completed prior to 2022. During the second quarter and first six months of 2021, we recorded an aggregate gain of $8.9 million and $8.1 million respectively, due to adjustments in the estimated fair value of the earnout payments related to the QuoteWizard acquisition. Restructuring and severance In the first quarter of 2022, we completed a workforce reduction of approximately 75 employees, and in the second quarter of 2022 completed a workforce reduction of approximately 25 employees. The Company incurred total expense of $3.8 million consisting of employee separation costs of $2.7 million and non-cash compensation expense of $1.1 million due to the accelerated vesting of certain equity awards. All employee separation costs are expected to be paid by the first quarter of 2023. Interest expense Interest expense decreased in the second quarter and first six months of 2022 compared to the second quarter and first six months of 2021 primarily due to the adoption of ASU 2020-06 on January 1, 2022, whereby we derecognized the remaining debt discounts on the 2022 Notes and 2025 Notes and therefore no longer recognize any amortization of debt discounts as interest expense partially offset by an increase in interest from our Term Loan Facility. See Note—2 Significant Accounting Policies for additional information. Other income For the first six months of 2021, other income primarily consists of a $40.1 million gain on our investment in Stash as a result of an adjustment to the fair value based on observable market events. See Note 7—Equity Investment for additional information on the equity interest in Stash. Income tax expense For the second quarter and first six months of 2022, the effective tax rate varied from the federal statutory rate of 21% primarily due to excess tax expense of $0.4 million and $2.9 million, respectively, resulting from vesting of restricted stock in accordance with ASU 2016-09 and the effect of state taxes. For the second quarter and first six months of 2021, the effective tax rate varied from the federal statutory rate of 21% in part due to a tax benefit of $8.3 million 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. Segment Profit Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (Dollars in thousands) Home $ 26,740 $ 39,017 $ (12,277) (31) % $ 62,649 $ 78,007 $ (15,358) (20) % Consumer 44,588 33,394 11,194 34 % 87,095 58,001 29,094 50 % Insurance 22,584 33,238 (10,654) (32) % 43,687 66,080 (22,393) (34) % Other (147) (49) (98) 200 % (202) (141) (61) (43) % Segment profit $ 93,765 $ 105,600 $ (11,835) (11) % $ 193,229 $ 201,947 $ (8,718) (4) % 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 35 Table of Contents 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 from continuing operations. Home The rapid rise in interest rates throughout the quarter significantly impacted the performance of our Home segment. The 30-year fixed mortgage rate, as measured by the Freddie Mac Mortgage Market Survey, approached 6% during the second quarter of 2022, causing refinance volumes to decline sharply. Combined with persistently low inventory of homes for sale, the purchase market also declined steadily throughout the quarter, recording activity below the peak of the pandemic, dropping to levels not seen since 2015 according to the MBA purchase index. As a result, during the second quarter of 2022, we recorded revenue of $73.9 million, down 29% from the second quarter of 2021, with segment profit of $26.7 million in the second quarter of 2022, down 31% from the second quarter of 2021. Home equity continues to be an important part of our overall product mix, achieving record revenue with 71% growth in the second quarter of 2022 compared to the second quarter of 2021. Purchase revenue grew 6% in the second quarter of 2022 compared to the second quarter of 2021 despite volumes declining. As is typically the case during difficult origination markets, revenue per lead expanded significantly as purchase leads become more valuable for our lending partners. However, we expect that limited home inventory and affordability concerns will continue to weigh on home sales going forward. As a leader in the mortgage marketplace, we are committed to supporting our lender partners during this rising rate environment. We anticipate that our broadcast marketing campaign will help to increase lead volume for our partners over time. We remain focused on optimizing higher converting products, such as cash-out refinance and home equity loans, to help them meet their origination goals. Despite the sharp uptick in interest rates, loans secured with home equity remain the lowest cost source of financing for most consumers that own a home. Consumer We continue to be pleased with the ongoing recovery of our Consumer segment, which again performed quite well, with revenue of $106.1 million in the second quarter of 2022, up 40% from the second quarter of 2021, and profit of $44.6 million in the second quarter of 2022, up 34% from the second quarter of 2021. Personal loans revenue of $42.3 million in the second quarter of 2022 was up 68% from the second quarter of 2021 as consumers are able to access attractive rates for debt consolidation. Credit card balances continue to increase as a result of enduring consumer spending growth. Some of our lenders, however, have begun to tighten their underwriting criteria on the margin in order to reduce portfolio risk should a recession occur over the next few quarters. In response, we are helping our partners by providing segment level insights to help them win in this environment. Also, our new brand campaign features commercials specifically targeting our personal loan offering, providing additional awareness and driving demand, which we anticipate will lead to increased monetization. Our credit card business generated revenue of $27.3 million in the second quarter of 2022, up 22% from the second quarter of 2021, driven by an increase in revenue per approval, as issuers looked to capitalize on summer travel demand. Margins in the segment remain lower than historical levels as we prioritize capturing partner spend and maximizing variable marketing dollars. The card business remains competitive, and we continue to diversify our marketing mix to pursue more profitable marketing channels and partnerships to expand our reach and attract more consumers. We expect these actions will lead to improved unit economics over time. Small business again delivered a solid performance, achieving revenue growth of 81% in the second quarter of 2022 compared to the second quarter of 2021. We continue to add new lenders to our network, expanding and diversifying our marketplace for borrowers. We are focused on driving lender performance by providing insights and recommendations to grow originations and improve conversion rates. We believe being a valued partner to our lenders will help us continue to secure more marketing budget and gain share over time. Insurance The Insurance segment continues to recover after troughing in the fourth quarter of 2021, but the pace of recovery has been slower than initially expected. The industry is facing prolonged headwinds due to inflation, supply chain challenges, and rising accident severity and frequency. This challenging environment limited growth in the quarter, with revenue of $81.8 million in 36 Table of Contents the second quarter of 2022, down 8% from the second quarter of 2021. Segment profit of $22.6 million in the second quarter of 2022 was down 32% from the second quarter of 2021. We anticipate the property and casualty insurance industry will continue to be challenged through the rest of the year. Most of our top carrier partners have indicated lower budgets in the third quarter of 2022 due to profitability concerns as well as the threat of hurricane season. Our top priority is to maintain as much budget as possible with our partners by delivering high quality, high intent leads that achieve and exceed their targets. We believe positioning ourselves as a first class partner will allow us to capture additional share of carrier marketing spend when budgets return. We continued our focus on agency expansion and efficiency for both the property and casualty and Medicare businesses. Variable Marketing Margin We report variable marketing margin as a supplemental measure to GAAP. This measure is the primary metric by which we measure the effectiveness of our marketing efforts. Variable marketing margin is a measure of the efficiency of our operating model, measuring revenue after subtracting variable marketing and advertising costs that directly influence revenue. 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. The following is a reconciliation of net (loss) income from continuing operations to variable marketing margin (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net (loss) income from continuing operations $ (8,038) $ 9,800 $ (18,861) $ 29,112 Adjustments to reconcile to variable marketing margin: Cost of revenue 14,574 13,934 30,135 27,829 Non-variable selling and marketing expense (1) 13,385 13,610 28,466 27,370 General and administrative expense 40,289 39,811 76,262 74,800 Product development 14,318 13,290 28,370 25,758 Depreciation 4,896 4,443 9,750 8,161 Amortization of intangibles 7,075 11,310 14,992 22,622 Change in fair value of contingent consideration — (8,850) — (8,053) Restructuring and severance 135 — 3,760 — Litigation settlements and contingencies (7) 322 (34) 338 Interest expense, net 6,765 9,840 14,270 20,055 Other income (284) — (283) (40,072) Income tax benefit (2,337) (9,092) (1,954) (454) Variable marketing margin $ 90,771 $ 98,418 $ 184,873 $ 187,466 (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. 37 Table of Contents 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 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) 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) dividend income, and (9) 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, one-time items consisted of the franchise tax caused by the equity investment gain in Stash. 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. 38 Table of Contents The following table is a reconciliation of net (loss) income from continuing operations to Adjusted EBITDA (in thousands) . Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net (loss) income from continuing operations $ (8,038) $ 9,800 $ (18,861) $ 29,112 Adjustments to reconcile to Adjusted EBITDA: Amortization of intangibles 7,075 11,310 14,992 22,622 Depreciation 4,896 4,443 9,750 8,161 Restructuring and severance 135 — 3,760 — Loss on impairments and disposal of assets 2,996 1,052 3,427 1,400 Gain on investments — — — (40,072) Non-cash compensation expense 17,335 18,294 31,332 34,730 Franchise tax caused by equity investment gain — — 1,500 — Change in fair value of contingent consideration — (8,850) — (8,053) Acquisition expense 58 1,110 67 1,139 Litigation settlements and contingencies (7) 322 (34) 338 Interest expense, net 6,765 9,840 14,270 20,055 Dividend income (282) — (282) — Income tax benefit (2,337) (9,092) (1,954) (454) Adjusted EBITDA $ 28,596 $ 38,229 $ 57,967 $ 68,978 Financial Position, Liquidity and Capital Resources General As of June 30, 2022, we had $279.1 million of cash and cash equivalents, compared to $251.2 million of cash and cash equivalents as of December 31, 2021. In the first quarter of 2022, we acquired an equity interest in EarnUp Inc. (“EarnUp”) for $15.0 million. See Note 7—Equity Investment to the consolidated financial statements included elsewhere in this report for additional information on the equity interest. On May 31, 2022, we drew $250.0 million on the Term Loan Facility. A portion of this was used to pay the outstanding balance of $169.7 million and interest on our 0.625% Convertible Senior Notes that matured on June 1, 2022. 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 ongoing COVID-19 pandemic and inflation on our liquidity and capital resources. Credit Facility On September 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 on September 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 on September 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 on May 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 July 29, 2022, we have outstanding $250.0 million under the Term Loan Facility, a $0.2 million letter of credit under the Revolving Facility and the remaining borrowing capacity under the Revolving Facility is $199.8 million. 39 Table of Contents Our cash flows attributable to continuing operations are as follows: Six Months Ended June 30, 2022 2021 (in thousands) Net cash provided by operating activities $ 16,099 $ 54,580 Net cash used in investing activities (22,786) (24,765) Net cash provided by (used in) financing activities 34,584 (4,970) 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 six months of 2022 from the first six months of 2021 primarily due to unfavorable changes in income taxes receivable, prepaid and other current assets, and accounts payable, accrued expenses and other current liabilities, partially offset by favorable changes in accounts receivable. Cash Flows from Investing Activities Net cash used in investing activities attributable to continuing operations in the first six months of 2022 of $22.8 million consisted of the purchase of a $16.4 million equity interest in EarnUp and another small investment, as well as capital expenditures of $6.3 million primarily related to internally developed software. Net cash used in investing activities attributable to continuing operations in the first six months of 2021 of $24.8 million consisted of capital expenditures of $23.6 million primarily related to internally developed software and leasehold improvements for our new principal corporate offices, as well as the purchase of an additional $1.2 million equity interest in Stash. Cash Flows from Financing Activities Net cash provided by financing activities attributable to continuing operations in the first six months of 2022 of $34.6 million consisted primarily of $250.0 million in proceeds from the term loan and the repayment of $169.7 million to settle the Company’s 2022 Notes discussed in the “Credit Facility” section above, $43.0 million for the repurchase of our stock, and $2.7 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 attributable to continuing operations in the first six months of 2021 of $5.0 million consisted primarily of $ $4.8 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 . 40 Table of Contents