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, as amended, 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 on Form 10-Q and Part I, Item 1A. Risk Factors of the Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Annual Report"). Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward-looking statements discussed in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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 solutions 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, auto loans, credit cards, deposit accounts, personal loans, student loans, small business loans, insurance quotes, sales of insurance policies and other related offerings. In addition, we offer tools and resources, including free credit scores, that facilitate comparison shopping for loans, deposit products, insurance, and other offerings. We seek to match consumers with multiple providers, who can offer them competing quotes for the product(s) they are seeking. We also serve as a valued partner to lenders and other providers seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer inquiries we generate with these Network Partners. Our LendingTree Spring TM platform (previously MyLendingTree) 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 by leveraging the widespread recognition of the LendingTree brand. We believe the consumer and small business financial services industry is still in the early stages of a fundamental shift to online product offerings, similar to the shift that started in retail and travel many years ago and is now well established. We believe that like retail and travel, as consumers continue to move towards online shopping and transactions for financial services, suppliers will increasingly shift their product offerings and advertising budgets toward the online channel. We believe the strength of our brands and of our Network Partners place us in a strong position to continue to benefit from this market shift. 25 Table of Contents Economic Conditions We continue to monitor the current global economic environment, specifically including inflationary pressures and interest rates, and any resulting impacts on our financial position and results of operations. Refer to Part I, Item 1A. “Risk Factors” of our 2022 Annual Report for additional information. During 2023, the challenging interest rate environment and inflationary pressures have continued to present challenges for many of our mortgage lending and insurance partners. In our Home segment, mortgage rates have remained relatively consistent in the third quarter of 2023 compared to the fourth quarter of 2022, but nearly doubled compared to the first quarter of 2022. The significant increases in mortgage rates caused a sharp decline in refinance volumes and are putting pressure on purchase activity. In our Insurance segment, demand from our carrier partners remains volatile as they continue to deal with persistent industry headwinds. Segment Reporting We have three reportable segments: Home, Consumer, and Insurance. Business Acquisitions In January 2022, we 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. North Carolina Office Properties Our 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. We have received approximately $0.7 million related to the December 2016 grants. If we are unable to maintain the specified target levels, our ability to earn further reimbursements could be limited. 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. We have currently not met the specified target levels set forth in the December 2018 grant and may not realize any reimbursements from this grant. Recent Mortgage Interest Rate Trends Interest rate and market risks can be substantial in the mortgage lead generation business. Short-term fluctuations in mortgage interest rates primarily affect consumer demand for mortgage refinancings, while long-term fluctuations in mortgage interest rates, coupled with the 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 26 Table of Contents the amount lenders will pay per matched lead in this situation is limited by the overall cost models of our lenders, and our revenue earned per consumer can be adversely affected by the overall reduced demand for refinancing in a rising rate environment. We dynamically adjust selling and marketing expenditures in all interest rate environments to optimize our results against these variables. According to Freddie Mac, 30-year mortgage interest rates increased from a monthly average of 6.36% in December 2022 to a monthly average of 7.20% in September 2023. On a quarterly basis, 30-year mortgage interest rates in the third quarter of 2023 averaged 7.04%, compared to 5.58% in the third quarter of 2022 and 6.69% in the fourth quarter of 2022. 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 increased to 18% of total mortgage origination dollars in the third quarter of 2023 compared to 17% in the fourth quarter of 2022 but decreased from 19% in the third quarter of 2022. In the third quarter of 2023, total refinance origination dollars increased 19% from the fourth quarter of 2022 and decreased 15% from the third quarter of 2022. Industry-wide mortgage origination dollars in the third quarter of 2023 increased 9% from the fourth quarter of 2022 and decreased 10% from third quarter of 2022. According to MBA projections, the mix of mortgage origination dollars is expected to continue to be weighted towards purchase mortgages with the refinance share representing approximately 19% for 2023. 27 Table of Contents 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 4% in the third quarter of 2023 compared to the fourth quarter of 2022, and decreased 16% compared to the third quarter of 2022. Fannie Mae predicts an overall decrease in existing-home sales of approximately 18% in 2023 compared to 2022. LendingTree Spring TM (previously MyLendingTree) We consider certain metrics related to LendingTree Spring TM ("Spring") set forth below to help us evaluate our business and growth trends and assess operational efficiencies. The calculation of the metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts or investors. We continued to grow our user base and added 0.7 million new users in the third quarter of 2023, bringing cumulative sign-ups to 27.6 million at September 30, 2023. We attribute $21 million of revenue in the third quarter of 2023 to registered to Spring members across the LendingTree platform. Our focus on improving the Spring experience for consumers remains a top priority. Becoming an integrated digital advisor will greatly improve the consumer experience, which we expect to result in higher levels of engagement, improved membership growth rates, and ultimately stronger financial results. Cost Reductions and Simplification of Business During September 2023, we completed workforce reductions of approximately 12 employees. We estimate that we will incur approximately $0.9 million in severance charges in connection with the workforce reductions, consisting of cash expenditures for employee separation costs of approximately $0.7 million in the third quarter of 2023 and non-cash charges for the accelerated vesting of certain equity awards of approximately $0.2 million through the fourth quarter of 2023. On March 24, 2023, we committed to a workforce reduction plan (the “Reduction Plan”), to reduce operating costs, which included the elimination of approximately 13% of the Company’s workforce. As a result of the Reduction Plan, we expect to incur approximately $5.3 million in severance charges in connection with the workforce reduction, $4.3 million of which was incurred in the first quarter of 2023 and $1.0 million was incurred in the second quarter of 2023. Part of this Reduction Plan included the shut down of our LendingTree customer call center as well as our Medicare insurance agency operations within QuoteWizard. We anticipate the Reduction Plan will reduce annual compensation expense by approximately $14 million, comprised of $2 million in cost of revenue, $4 million in selling and marketing expense, $3 million in general and administrative expense, and $5 million in product development. Separately, we made the decision to close our Ovation credit services business, an asset group within our Consumer segment, by mid- 2023. As a result, the Company recorded an asset impairment charge of $4.2 million in the first quarter of 2023 related to the write-off of certain long-term assets. Additionally, we incurred $2.1 million in severance charges in the second quarter of 2023 in connection with cash expenditures for employee separation costs. We acquired Ovation in 2018 to better serve those customers who come to LendingTree and receive suboptimal offers of credit. The business grew for a number of years before running into challenges in the wake of COVID-19, and more recently the industry has faced increased regulatory pressure. The business is capital-intensive, requires elevated overhead, and future prospects were becoming uncertain. The Ovation business accounted for approximately 3% of total revenue and 3% of total costs and expenses, with an immaterial impact to net income on the consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2022. 28 Table of Contents Results of Operations for the Three and Nine Months ended September 30, 2023 and 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (Dollars in thousands) Home $ 33,390 $ 64,927 $ (31,537) (49) % $ 118,628 $ 240,809 $ (122,181) (51) % Consumer 67,253 102,661 (35,408) (34) % 229,439 309,873 (80,434) (26) % Insurance 54,536 70,231 (15,695) (22) % 190,016 232,025 (42,009) (18) % Other 9 17 (8) (47) % 66 230 (164) (71) % Revenue 155,188 237,836 (82,648) (35) % 538,149 782,937 (244,788) (31) % Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below) 7,570 14,105 (6,535) (46) % 30,632 44,240 (13,608) (31) % Selling and marketing expense 97,244 176,875 (79,631) (45) % 350,420 565,569 (215,149) (38) % General and administrative expense 26,380 39,540 (13,160) (33) % 92,223 115,808 (23,585) (20) % Product development 10,840 14,043 (3,203) (23) % 36,096 42,413 (6,317) (15) % Depreciation 4,760 5,274 (514) (10) % 14,239 15,024 (785) (5) % Amortization of intangibles 1,981 6,582 (4,601) (70) % 6,012 21,574 (15,562) (72) % Goodwill impairment 38,600 — 38,600 100 % 38,600 — 38,600 100 % Restructuring and severance 1,955 — 1,955 100 % 9,967 3,760 6,207 165 % Litigation settlements and contingencies (150) (7) (143) (2,043) % 350 (41) 391 954 % Total costs and expenses 189,180 256,412 (67,232) (26) % 578,539 808,347 (229,808) (28) % Operating loss (33,992) (18,576) (15,416) (83) % (40,390) (25,410) (14,980) (59) % Other income (expense), net: Interest (expense) income, net (7,097) (5,720) (1,377) (24) % 10,992 (19,990) 30,982 155 % Other (expense) income (110,910) 1,523 (112,433) (7,382) % (108,637) 1,806 (110,443) (6,115) % Loss before income taxes (151,999) (22,773) (129,226) (567) % (138,035) (43,594) (94,441) (217) % Income tax benefit (expense) 3,534 (135,911) 139,445 103 % 2,912 (133,954) 136,866 102 % Net loss and comprehensive loss $ (148,465) $ (158,684) $ 10,219 6 % $ (135,123) $ (177,548) $ 42,425 24 % Revenue Revenue decreased in the third quarter and first nine months of 2023 compared to the third quarter and first nine months of 2022 due to decreases in our Home, Consumer, and Insurance segments. Our Consumer segment includes the following products: credit cards, personal loans, small business loans, student loans, auto loans, deposit accounts, and other credit products such as credit repair and debt settlement. Many of our Consumer segment products are not individually significant to revenue. Revenue from our Consumer segment decreased $35.4 million, or 34%, in the third quarter of 2023 from the third quarter of 2022, and decreased $80.4 million, or 26%, in the first nine months of 2023 from the first nine months of 2022 primarily due to decreases in our personal loans, credit cards, and small business. Revenue from our personal loans product decreased $11.2 million, or 30%, to $26.5 million in the third quarter of 2023 from $37.7 million in the third quarter of 2022, and decreased $36.9 million, or 32%, to $78.3 million in the first nine months of 2023 from $115.2 million in the first nine months of 2022 primarily due to a decrease in the number of consumers completing request forms and in revenue earned per consumer. Revenue from our credit cards product decreased $9.7 million, or 40%, to $14.6 million in the third quarter of 2023 from $24.3 million in the third quarter of 2022 and decreased $27.5 million, or 34%, to $53.9 million in the first nine months of 2023 compared to $81.4 million in the first nine months of 2022, primarily due to a decrease in the number of consumer clicks and in revenue earned per click. For the periods presented, no other products in our Consumer segment represented more than 10% of revenue; however, certain other Consumer products experienced notable changes. Revenue from our small business loans product decreased $4.5 29 Table of Contents million, or 28%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to a decrease in revenue earned per consumer. Revenue from our small business loans produced decreased $10.5 million, or 20%, in the first nine months of 2023 compared to the first nine months of 2022, primarily due to a decrease in the number of consumers completing request forms and a decrease in revenue earner per consumer. Revenue from our credit products decreased $5.7 million or 53% in the third quarter of 2023 compared to the third quarter of 2022 primarily due to the closure of our Ovation credit services business at the end of the second quarter of 2023. Our Home segment includes the following products: purchase mortgage, refinance mortgage, and home equity loans and lines of credit. We ceased offering reverse mortgage loans in the fourth quarter of 2022. Revenue from our Home segment decreased $31.5 million, or 49%, in the third quarter of 2023 from the third quarter of 2022, and decreased $122.2 million, or 51%, in the first nine months of 2023 from the first nine months of 2022 primarily due to decreases in revenue from our refinance and purchase mortgage products. Revenue from our mortgage products decreased $21.2 million, or 61%, to $13.3 million in the third quarter of 2023 from $34.5 million in the third quarter of 2022, and decreased $107.3 million, or 68%, to $49.5 million in the first nine months of 2023 from $156.9 million in the first nine months of 2022. Revenue from our refinance mortgage product decreased $10.2 million in the third quarter of 2023 compared to the third quarter of 2022 and decreased $78.2 million in the first nine months of 2023 compared to the first nine months of 2022 due to a decrease in the number of consumers completing request forms and a decrease in revenue earned per consumer, as interest rates have risen. Revenue from our purchase mortgage product decreased $11.1 million in the third quarter of 2023 compared to the third quarter of 2022, and decreased $29.1 million in the first nine months of 2023 compared to the first nine months of 2022 primarily due to a decrease in the number of consumers completing request forms and a decrease in revenue earned per consumer. Revenue from our home equity loans product decreased $8.9 million, or 31%, to $20.1 million in the third quarter of 2023 from $29.0 million in the third quarter of 2022, and decreased $11.4 million, or 14%, to $69.1 million in the first nine months of 2023 from $80.5 million in the first nine months of 2022 primarily due to a decrease in revenue earned per consumer. Revenue from our Insurance segment decreased $15.7 million, or 22%, to $54.5 million in the third quarter of 2023 from $70.2 million in the third quarter of 2022, and decreased $42.0 million, or 18%, to $190.0 million in the first nine months of 2023 from $232.0 million in the first nine months of 2022, primarily due to a decrease 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 decreased in the third quarter of 2023 from the third quarter of 2022, primarily due to a decrease in compensation and benefits of $4.9 million. Cost of revenue decreased in the first nine months of 2023 from the first nine months of 2022 primarily due to a decrease in compensation and benefits of $9.1 million, and a decrease in website network hosting and server hosting fees of $2.2 million and a decrease in customer service fees of $1.1 million. The decreases in the third quarter and first nine months are primarily due to the Reduction Plan at the end of the first quarter of 2023, including shutting down the LendingTree customer call center. Cost of revenue as a percentage of revenue decreased to 5% in the third quarter of 2023 compared to 6% in the third quarter of 2022, and remained consistent at 6% in the first nine months of 2023 and 2022. Selling and marketing expense Selling and marketing expense consists primarily of advertising and promotional expenditures and compensation and other employee-related costs (including stock-based compensation) for personnel engaged in sales or marketing functions. Advertising and promotional expenditures primarily include online marketing, as well as television, print, and radio spending. Advertising production costs are expensed in the period the related ad is first run. Selling and marketing expense decreased in the third quarter of 2023 compared to the third quarter 2022 by $79.6 million, and decreased $215.1 million in the first nine months of 2023 compared to the first nine months of 2022 primarily due to the changes in advertising and promotional expense discussed below. Additionally, compensation and benefits decreased $3.9 30 Table of Contents million in the third quarter of 2023 compared to the third quarter of 2022 and decreased $9.6 million in the first nine months of 2023 compared to the first nine months of 2022. 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, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (Dollars in thousands) Online $ 86,524 $ 145,478 $ (58,954) (41) % $ 311,598 $ 495,662 $ (184,064) (37) % Broadcast 61 15,152 (15,091) (100) % 281 16,762 (16,481) (98) % Other 854 2,514 (1,660) (66) % 5,917 10,948 (5,031) (46) % Total advertising expense $ 87,439 $ 163,144 $ (75,705) (46) % $ 317,796 $ 523,372 $ (205,576) (39) % In the periods presented, advertising and promotional expenses are equivalent to the non-GAAP measure variable marketing expense. See Variable Marketing Expense and Variable Marketing Margin below for additional information. Revenue is primarily driven by Network Partner demand for our products, which is matched to corresponding consumer requests. We adjust our selling and marketing expenditures dynamically in relation to anticipated revenue opportunities in order to ensure sufficient consumer inquiries to profitably meet such demand. An increase in a product’s revenue is generally met by a corresponding increase in marketing spend, and conversely a decrease in a product’s revenue is generally met by a corresponding decrease in marketing spend. This relationship exists for our Home, Consumer, and Insurance segments. We adjusted our advertising expenditures in the third quarter and first nine months of 2023 compared to the third quarter and first nine months of 2022 in response to changes in Network Partner demand on our marketplace. We will continue to adjust selling and marketing expenditures dynamically in response to anticipated revenue opportunities. 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 decreased in the third quarter of 2023 from the third quarter of 2022 primarily due to a decrease in compensation and benefits of $7.2 million, and decreases in professional fees, technology costs, fees and other charges and loss on assets of $1.9 million, $0.8 million, $0.8 million, and $0.7 million, respectively. General and administrative expense decreased in the first nine months of 2023 from the first nine months of 2022 primarily due to a decrease in compensation and benefits of $14.8 million, a decrease in facilities expenses of $2.2 million, a decrease in franchise tax expense of $1.5 million, and a decrease in technology of $1.5 million. We incurred a $4.2 million loss on the impairment of assets for our Ovation business in the first quarter of 2023. General and administrative expense as a percentage of revenue remained consistent at 17% in the third quarter of 2023 and the third quarter of 2022, and increased to 17% in the first nine months of 2023 compared to 15% in the first nine months of 2022. Product development Product development expense consists primarily of compensation and other employee-related costs (including stock-based compensation) and third-party labor costs that are not capitalized, for employees and consultants engaged in the design, development, testing and enhancement of technology. Product development expense decreased in the third quarter and first nine months of 2023 compared to the third quarter and first nine months of 2022 primarily due to the Reduction Plan at the end of the first quarter of 2023. 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. 31 Table of Contents Amortization of intangibles The decrease in amortization of intangibles in the third quarter and first nine months of 2023 compared to the third quarter and first nine months of 2022 was primarily due to certain intangible assets associated with our recent business acquisitions becoming fully amortized. Goodwill impairment In the third quarter of 2023, we incurred a goodwill impairment charge of $38.6 million in our Insurance reporting unit. See Note 6 - Goodwill and Intangible Assets for additional information. Restructuring and severance During September 2023, we completed workforce reductions of approximately 12 employees. We estimate that we will incur approximately $0.9 million in severance charges in connection with the workforce reductions, consisting of cash expenditures for employee separation costs of approximately $0.7 million in the third quarter of 2023 and non-cash charges for the accelerated vesting of certain equity awards of approximately $0.2 million through the fourth quarter of 2023. We anticipate the cash payments for separation costs will be completed by the third quarter of 2024. On March 24, 2023, we committed to the Reduction Plan to reduce operating costs, which included the elimination of approximately 13% of the Company’s workforce. As a result of the Reduction Plan, we estimate that we will incur approximately $5.3 million in severance charges in connection with the workforce reduction, consisting of cash expenditures for employee separation costs of approximately $4.3 million and non-cash charges for the accelerated vesting of certain equity awards of approximately $1.0 million. We incurred restructuring expense of $4.3 million in the first quarter of 2023 and an additional $1.0 million of restructuring expense in the second quarter of 2023 related to the Reduction Plan. We anticipate that the execution of the Reduction Plan, including cash payments, will be completed by the end of the second quarter of 2024. We made the decision to close the Ovation credit services business by mid-2023 and all operations ceased in August 2023. We incurred $2.1 million of restructuring expense related to the Ovation closure in the second quarter of 2023 in connection with cash expenditures for employee separation costs. We anticipate the cash payments for separation costs will be completed by the first quarter of 2024. 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. We incurred total expense of $3.8 million in the first nine months of 2022 related to these actions, 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. Interest income/expense In the first quarter of 2023, we repurchased approximately $190.6 million in principal amount of our 0.50% Convertible Senior Notes due July 15, 2025 (the "2025 Notes") for $156.3 million plus accrued and unpaid interest of approximately $0.1 million. As a result of the repurchase, we recognized a gain on the extinguishment of $34.3 million, a loss on the write-off of unamortized debt issuance costs of $2.4 million, and incurred debt repayment costs of $1.0 million, all of which are included in interest income/expense, net in the consolidated statements of operations and comprehensive income. See Note 13—Debt for additional information. Other income In the third quarter of 2023, we incurred an impairment charge of $113.1 million related to an investment in equity securities. See Note 8 - Equity Investment for additional information. Income tax expense For the third quarter and first nine months of 2023, the effective tax rate varied from the federal statutory rate of 21% primarily due to the change in the valuation allowance, net of the current period change in tax effected net indefinite-lived intangibles. 32 Table of Contents For the third quarter and first nine months of 2022, the effective tax rate varied from the federal statutory rate of 21% primarily due to expense of $139.7 million to record a full valuation allowance against our net deferred tax assets, excess tax expense of $1.8 million and $4.7 million, respectively, resulting from vesting of restricted stock in accordance with Accounting Standards Update 2016-09 and the effect of state taxes. Segment Profit Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (Dollars in thousands) Home $ 11,295 $ 24,117 $ (12,822) (53) % $ 39,750 $ 86,766 $ (47,016) (54) % Consumer 34,427 45,793 (11,366) (25) % 109,973 132,888 (22,915) (17) % Insurance 23,359 22,568 791 4 % 78,262 66,255 12,007 18 % Other (12) (211) 199 94 % (450) (413) (37) (9) % Segment profit $ 69,069 $ 92,267 $ (23,198) (25) % $ 227,535 $ 285,496 $ (57,961) (20) % Segment profit is our primary segment operating metric. Segment profit is calculated as segment revenue less segment selling and marketing expenses attributed to variable costs paid for advertising, direct marketing and related expenses that are directly attributable to the segments' products. See Note 16—Segment Information in the notes to the consolidated financial statements for additional information on segments and a reconciliation of segment profit to pre-tax income. Home Home segment revenue of $33.4 million in the third quarter of 2023 decreased 49% from the third quarter of 2022 and segment profit of $11.3 million in the third quarter of 2023 decreased 53% from the third quarter of 2022. Lower close rates at our lenders increased their cost per funded loan, which in-turn pressures our revenue per consumer. Lower competition for digital advertising, which causes lower cost per lead, helped offset most of our drop in pricing to generate a 34% segment margin in the third quarter of 2023, a decrease from 37% in the third quarter of 2022. We continue to focus on driving cost per lead lower to improve efficiency while maintaining quality for our partners. Home equity revenue of $20.1 million in the third quarter of 2023 decreased $8.9 million from $29.0 million in the third quarter of 2022. The Prime benchmark rate for home equity loans has climbed to 8.5% and is a typical rate for high quality borrowers, while lower credit score consumers expect to pay an additional mark-up. Although this cost of debt is lower than a personal loan or credit card, it still adds significant interest expense burden. As a result, we have seen customer demand for home equity loans recede the last few months. Home equity loans remain the best opportunity for our lenders given the environment. Ultimately, we believe the housing market will need to experience some combination of lower interest rates, lower home prices or more for sale inventory before the Home segment can sustainably improve performance . Consumer Our Consumer segment revenue of $67.3 million in the third quarter of 2023 decreased 34% from the third quarter of 2022, and segment profit of $34.4 million decreased 25%. Segment margin improved to 51% in the third quarter of 2023 compared to 45% in the third quarter of 2022. Personal loans revenue of $26.5 million in the third quarter of 2023 decreased 30% from the third quarter of 2022. We saw close rates decline modestly during the quarter and expect this trend to continue in the fourth quarter of 2023 partially due to normal seasonality, but also as some lenders on our network have proactively tightened underwriting criteria further with the resumption of student loan payments in October 2023. We are in the midst of multiple platform migrations that we believe will enable more customization and optimization of personal lender offers on our platform. Small business revenue decreased 28% in the third quarter of 2023 from the third quarter of 2022. A continuation of lower close rates due to tighter credit requirements at lenders remains the key headwind for the business. Not surprisingly, lenders are favoring business owners that have been operating for several years, have strong annual revenue generation and high credit scores. Competition for these borrowers remains strong, as does the cost to attract them to our platform. We have been working 33 Table of Contents on several initiatives to solidify the business given the weaker economic backdrop. We have enhanced our application form by adding a connection to a third-party service provider to enrich the applicant’s data for lenders, added new lenders to our network to expand coverage, and have continued rightsizing affiliate partners based on cost and quality. Credit card revenue of $14.6 million in the third quarter of 2023 decreased 40% from the third quarter of 2022. We have been strategic with our marketing spend and have optimized our landing pages following our Lightspeed implementation, our new credit card tech platform, to improve redirect and approval rate performance. Insurance Insurance revenue of $54.5 million in the third quarter of 2023 decreased 22% from the third quarter of 2022, however, segment profit of $23.4 million in the third quarter of 2023 increased 4% from the third quarter of 2022. Our carrier partners have been asking for and receiving successive price increases across most states over the last two years, as persistent loss cost inflation negatively impacted underwriting results. Recent commentary from carriers has been optimistic regarding marketing budgets as we enter 2024. The positive impact from premium increases on loss ratios, combined with broad declines in used car prices and other components of auto loss cost, may help our record volume of customers searching for auto insurance find an increasingly competitive partner marketplace moving into next year. Segment margin improved to 43% in the third quarter of 2023, an increase of 11 points from a 32% segment margin in the third quarter of 2022. We have maintained our focus on efficiency and adapting to changing carrier needs throughout this difficult market cycle. These efforts helped us control costs and improve quality despite industry profitability challenges. During the third quarter of 2023, aggressive shopping from consumers resulted in all time high volume. We are encouraged by our ability to drive significant margin improvement and attract record consumer traffic. Coupled with the encouraging outlook from our carrier partners, we believe the business is well positioned to generate improved financial performance as we move into next year. Variable Marketing Expense and Variable Marketing Margin We report variable marketing expense and variable marketing margin as supplemental measures to accounting principles generally accepted in the United States of America ("GAAP".) These related measures are the primary metrics by which we measure the effectiveness of our marketing efforts. Variable marketing expense represents the portion of selling and marketing expense attributable to variable costs paid for advertising, direct marketing, and related expenses, and excludes overhead, fixed costs, and personnel-related expenses. Variable marketing margin is a measure of the efficiency of our operating model, measuring revenue after subtracting variable marketing expense. Our operating model is highly sensitive to the amount and efficiency of variable marketing expenditures, and our proprietary systems are able to make rapidly changing decisions concerning the deployment of variable marketing expenditures (primarily but not exclusively online and mobile advertising placement) based on proprietary and sophisticated analytics. We believe that investors should have access to the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures discussed below. Variable marketing expense is defined as the expense attributable to variable costs paid for advertising, direct marketing and related expenses, and excluding overhead, fixed costs and personnel-related expenses. The majority of these variable advertising costs are expressly intended to drive traffic to our websites and these variable advertising costs are included in selling and marketing expense on our consolidated statements of operations and comprehensive income (loss). Variable marketing margin is defined as revenue less variable marketing expense. The following shows the calculation of variable marketing margin: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Revenue $ 155,188 $ 237,836 $ 538,149 $ 782,937 Variable marketing expense 87,439 163,144 317,796 523,372 Variable marketing margin $ 67,749 $ 74,692 $ 220,353 $ 259,565 34 Table of Contents Below is a reconciliation of selling and marketing expense, the most directly comparable GAAP measure, to variable marketing expense: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Selling and marketing expense $ 97,244 $ 176,875 $ 350,420 $ 565,569 Non-variable selling and marketing expense (9,805) (13,731) (32,624) (42,197) Variable marketing expense $ 87,439 $ 163,144 $ 317,796 $ 523,372 The following is a reconciliation of net loss, the most directly comparable GAAP measure, to variable marketing margin: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Net loss $ (148,465) $ (158,684) $ (135,123) $ (177,548) Adjustments to reconcile to variable marketing margin: Cost of revenue 7,570 14,105 30,632 44,240 Non-variable selling and marketing expense (1) 9,805 13,731 32,624 42,197 General and administrative expense 26,380 39,540 92,223 115,808 Product development 10,840 14,043 36,096 42,413 Depreciation 4,760 5,274 14,239 15,024 Amortization of intangibles 1,981 6,582 6,012 21,574 Goodwill impairment 38,600 — 38,600 — Restructuring and severance 1,955 — 9,967 3,760 Litigation settlements and contingencies (150) (7) 350 (41) Interest expense (income), net 7,097 5,720 (10,992) 19,990 Other expense (income) 110,910 (1,523) 108,637 (1,806) Income tax (benefit) expense (3,534) 135,911 (2,912) 133,954 Variable marketing margin $ 67,749 $ 74,692 $ 220,353 $ 259,565 (1) Represents the portion of selling and marketing expense not attributable to variable costs paid for advertising, direct marketing and related expenses. Includes overhead, fixed costs and personnel-related expenses. Adjusted EBITDA We report Adjusted EBITDA as a supplemental measure to GAAP. This measure is the primary metric by which we evaluate the performance of our businesses, on which our marketing expenditures and internal budgets are based and by which, in most years, management and many employees are compensated. We believe that investors should have access to the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures discussed below. Definition of Adjusted EBITDA We report Adjusted EBITDA as net income adjusted to exclude interest, income tax, amortization of intangibles and depreciation, and to further exclude (1) non-cash compensation expense, (2) non-cash impairment charges, (3) gain/loss on disposal of assets, (4) gain/loss on investments (5) restructuring and severance expenses, (6) litigation settlements and contingencies, (7) acquisitions and dispositions income or expense (including with respect to changes in fair value of contingent 35 Table of Contents consideration), (8) contributions to the LendingTree Foundation, (9) dividend income, and (10) one-time items. Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses, including depreciation, non-cash compensation and acquisition-related accounting. We endeavor to compensate for the limitations of the non-GAAP measures presented by also providing the comparable GAAP measures with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measures. These non-GAAP measures may not be comparable to similarly titled measures used by other companies. One-Time Items Adjusted EBITDA is adjusted for one-time items, if applicable. Items are considered one-time in nature if they are non-recurring, infrequent, or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods presented below, one-time items consisted of the franchise tax caused by the equity investment gain in Stash Financial, Inc. 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. The following table is a reconciliation of net loss, the most directly comparable GAAP measure, to Adjusted EBITDA. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Net loss $ (148,465) $ (158,684) $ (135,123) $ (177,548) Adjustments to reconcile to Adjusted EBITDA: Amortization of intangibles 1,981 6,582 6,012 21,574 Depreciation 4,760 5,274 14,239 15,024 Restructuring and severance 1,955 — 9,967 3,760 Loss on impairments and disposal of assets 88 834 5,255 4,261 Loss on investments 113,064 — 114,504 — Goodwill impairment 38,600 — 38,600 — Non-cash compensation expense 8,592 15,575 28,999 46,907 Franchise tax caused by equity investment gain — — — 1,500 Acquisition expense — 104 (5) 171 Litigation settlements and contingencies (150) (7) 350 (41) Interest (income) expense, net 7,097 5,720 (10,992) 19,990 Dividend income (2,154) (1,523) (5,867) (1,805) Income tax (benefit) expense (3,534) 135,911 (2,912) 133,954 Adjusted EBITDA $ 21,834 $ 9,786 $ 63,027 $ 67,747 36 Table of Contents Financial Position, Liquidity and Capital Resources General As of September 30, 2023, we had $175.6 million of cash and cash equivalents, compared to $298.8 million of cash and cash equivalents as of December 31, 2022. On March 8, 2023, we repurchased approximately $190.6 million in principal amount of our 2025 Notes, through separate transactions with certain holders of the 2025 Notes, for $156.3 million plus accrued and unpaid interest of approximately $0.1 million. In the first quarter of 2023, we recognized a gain on the extinguishment of $34.3 million, a loss on the write-off of unamortized debt issuance costs of $2.4 million and incurred debt repayment costs of $1.0 million, all of which are included in interest income/expense, net in the consolidated statement of operations and comprehensive income. See Note 13—Debt for additional information. We expect our cash and cash equivalents and cash flows from operations to be sufficient to fund our operating needs for the next twelve months and beyond. Our credit facility described below is an additional potential source of liquidity. We will continue to monitor the impact of the current economic conditions, including interest rates 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 our 0.625% Convertible Senior Notes due June 1, 2022 ("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 13—Debt for additional information. As of October 31, 2023, we have outstanding $246.9 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. We have $147.3 million available for borrowing under the Revolving Facility as of October 31, 2023. Cash Flows Our cash flows are as follows: Nine Months Ended September 30, 2023 2022 (in thousands) Net cash provided by operating activities $ 46,692 $ 26,322 Net cash used in investing activities (9,928) (25,410) Net cash (used in) provided by financing activities (160,150) 33,411 Cash Flows from Operating Activities Our largest source of cash provided by our operating activities is revenues generated by our products. Our primary uses of cash from our operating activities include advertising and promotional payments. In addition, our uses of cash from operating activities include compensation and other employee-related costs, other general corporate expenditures, litigation settlements and contingencies, and income taxes. Net cash provided by operating activities increased in the first nine months of 2023 from the first nine months of 2022 primarily due to favorable changes in accounts receivable, prepaid and other current assets, and accounts payable, accrued expenses and other current liabilities. 37 Table of Contents Cash Flows from Investing Activities Net cash used in investing activities in the first nine months of 2023 of $9.9 million consisted of capital expenditures primarily related to internally developed software. Net cash used in investing activities in the first nine months of 2022 of $25.4 million consisted of the purchase of a $16.4 million equity interest in EarnUp and another small investment, as well as capital expenditures of $9.0 million primarily related to internally-developed software. Cash Flows from Financing Activities Net cash used in financing activities in the first nine months of 2023 of $160.2 million consisted primarily of the repurchase of our 2025 Notes for $156.3 million. Net cash provided by financing activities in the first nine months of 2022 of $33.4 million consisted primarily of $250.0 million in proceeds from the term loan and the repayment of $169.7 million to settle our 2022 Notes discussed in the “Credit Facility” section above, $43.0 million for the repurchase of our stock, and $3.3 million in withholding taxes paid upon surrender of shares to satisfy obligations on equity awards, net of proceeds from the exercise of stock options. New Accounting Pronouncements For information regarding new accounting pronouncements, see Note 2 — Significant Accounting Policies, in Part I, Item 1 Financial Statements .