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LENDINGTREE INC (TREE)
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LENDINGTREE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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07/27/2018 | 12:17pm CEST
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 identify 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 2017 Annual Report.
Other unknown or unpredictable factors that could also adversely affect our
business, financial condition and results of operations may arise from time to
time. In light of these risks and uncertainties, the forward-looking statements
discussed in this report may not prove to be accurate. Accordingly, you should
not place undue reliance on these forward-looking statements, which only reflect
the views of LendingTree, Inc.'s management as of the date of this report. We
undertake no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results or expectations, except as required by law.
Company Overview
LendingTree, Inc., is the parent of LendingTree, LLC and several companies owned
by LendingTree, LLC.
LendingTree operates what we believe to be the leading online loan marketplace
for consumers seeking loans and other credit-based offerings. Our online
marketplace provides consumers with access to product offerings from our Network
Lenders, including mortgage loans, home equity loans and lines of credit,
reverse mortgage loans, auto loans, credit cards, deposit accounts, personal
loans, student loans, small business loans and other related offerings. In
addition, we offer tools and resources, including free credit scores, that
facilitate comparison shopping for these loans, deposits and other credit-based
offerings. We seek to match consumers with multiple lenders, who can provide
them with competing quotes for the product they are seeking. We also serve as a
valued partner to lenders seeking an efficient, scalable and flexible source of
customer acquisition with directly measurable benefits, by matching the consumer
inquiries we generate with these lenders.
Our My LendingTree platform offers a personalized loan comparison-shopping
experience by providing free credit scores and credit score analysis. This
platform enables us to observe consumers' credit profiles and then identify and
alert them to loan and other credit-based opportunities on our marketplace that
may be more favorable than the loans they may have at a given point in time.
This is designed to provide consumers with measurable savings opportunities over
their lifetimes.
In addition to operating our core mortgage business, we are focused on growing
our non-mortgage lending businesses and developing new product offerings and
enhancements to improve the experiences that consumers and lenders have as they
interact with us. By expanding our portfolio of loans and other product
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 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 lender
network place us in a strong position to continue to benefit from this market
shift.
The LendingTree Loans business is presented as discontinued operations in the
accompanying consolidated balance sheets, consolidated statements of operations
and comprehensive income and consolidated cash flows for all periods presented.
Except for the discussion under the heading "Discontinued Operations," the
analysis within Management's Discussion and Analysis of Financial Condition and
Results of Operations reflects our continuing operations.

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Convertible Senior Notes and Hedge and Warrant Transactions
On May 31, 2017, we issued $300.0 million aggregate principal amount of our
0.625% Convertible Senior Notes due June 1, 2022 and, in connection therewith,
entered into Convertible Note Hedge and Warrant transactions with respect to our
common stock. For more information, see Note 11-Debt, in the notes to the
consolidated financial statements included elsewhere in this report.
Recent Business Acquisitions
On July 23, 2018, we acquired Student Loan Hero, Inc. ("Student Loan Hero") for
$60.7 million cash consideration at the closing of the transaction. Student Loan
Hero, a personal finance website dedicated to helping student loan borrowers
manage their student debt, offers current and former students in-depth financial
comparison tools, educational resources, and unbiased, personalized advice.
On June 11, 2018, we acquired Ovation Credit Services, Inc. ("Ovation"), a
leading provider of credit services with a strong customer service reputation
for $12.2 million at the closing of the transaction and potential contingent
consideration payments of up to $8.75 million through June 2020, subject to
achieving specified targets. Ovation utilizes a proprietary software application
that facilitates the credit repair process and is integrated directly with
certain credit bureaus while educating consumers on credit improvement via
ongoing outreach with Ovation case advisors. The proprietary software
application offers consumers a simple, streamlined process to identify, dispute,
and correct inaccuracies within their credit reports. Ovation's experienced
management team, strong credit bureau relationships and customized software
platform will enable us to help more consumers achieve their original financial
goals through the LendingTree platform.
On September 19, 2017, we acquired certain assets of Snap Capital LLC, which
does business under the name SnapCap for $11.9 million in cash at closing and
contingent consideration payments of up to $9.0 million through March 31, 2020.
SnapCap is a tech-enabled online platform, which connects business owners with
lenders offering small business loans, lines of credit and merchant cash advance
products through a concierge-based sales approach. We believe that by combining
SnapCap's high-touch, high-conversion sales approach with our brand and
performance marketing expertise, we can derive substantial revenue synergies and
accelerate growth in our small business offering.
On June 20, 2017, we acquired the membership interests of Camino Del Avion
(Delaware), LLC, which does business under the name MagnifyMoney for $29.6
million cash consideration at the closing of the transaction. MagnifyMoney is a
leading consumer-facing media property that offers editorial content, expert
commentary, tools and resources to help consumers compare financial products and
make informed financial decisions. The MagnifyMoney team brings the expertise
and infrastructure to expand content creation and distribution across all of our
consumer facing brands, improving our presence and efficacy in acquisition
channels such as search engine optimization.
On June 14, 2017, we acquired substantially all of the assets of Deposits
Online, LLC, which does business under the name DepositAccounts.com
("DepositAccounts") for $24.0 million in cash at closing and contingent
consideration payments of up to $9.0 million through June 30, 2020.
DepositAccounts is a leading consumer-facing media property in the depository
industry and is one of the most comprehensive sources of depository deals and
analysis on the Internet, covering all major deposit product categories through
editorial content, programmatic rate tables and user-generated content. This
acquisition represents our first offering to address the asset side of the
consumer balance sheet.
These acquisitions continue our diversification strategy.
Acquisition of North Carolina Office Properties
In December 2016, we completed the acquisition of two office buildings in
Charlotte, North Carolina, for $23.5 million in cash. The buildings were
acquired with the intent to use such buildings as our principal executive
offices in the future; any unused space in the buildings may continue to be
occupied by tenants. We are re-evaluating our plans for these buildings.
With our expansion in North Carolina, we received a grant from the state that
provides up to $4.9 million in reimbursements over 12 years for investing in
real estate and infrastructure in addition to increasing jobs in North Carolina
at specific targeted levels through 2020, and maintaining the jobs thereafter.
Additionally, the city of Charlotte and the county of Mecklenburg provided a
grant that will be paid over five years and is based on a percentage of new
property tax we pay on the development.

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Seasonality

Revenue in our lending business is subject to cyclical and seasonal trends. Home
sales (and purchase mortgages) typically rise during the spring and summer
months and decline during the fall and winter months, while refinancing and home
equity activity is principally driven by mortgage interest rates as well as real
estate values.
We anticipate revenue in our newer products to be cyclical as well; however, we
have limited historical data to predict the nature and magnitude of this
cyclicality. Based on industry data, we anticipate as our personal loan product
matures we will experience less consumer demand during the fourth and first
quarters of each year. We also anticipate less consumer demand for credit cards
in the fourth quarter of each year and we anticipate higher consumer demand for
deposit accounts in the first quarter of each year. The majority of consumer
demand for student loan products occurs in the third quarter coinciding with
collegiate enrollment in late summer. Other factors affecting our business
include macro factors such as credit availability in the market, interest rates,
the strength of the economy and employment.
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. Typically, a
decline in mortgage interest rates will lead to reduced lender demand, as there
are more consumers in the marketplace seeking financing and, accordingly,
lenders receive more organic lead volume. Conversely, an increase in mortgage
interest rates will typically lead to an increase in lender demand, as there are
fewer consumers in the marketplace and, accordingly, the supply of organic
mortgage lead volume decreases.
According to Freddie Mac, 30-year mortgage interest rates have increased
steadily during 2018 to a monthly average of 4.57% in June 2018. On a quarterly
basis, 30-year mortgage interest rates in the second quarter of 2018 averaged
4.54%, as compared to 3.99% in the second quarter of 2017 and 4.27% in the first
quarter of 2018.
                        [[Image Removed: mortgage.jpg]]
Typically, as mortgage interest rates rise, there are fewer consumers in the
marketplace seeking refinancings and, accordingly, the mix of mortgage
origination dollars moves towards purchase mortgages. According to Mortgage
Bankers Association ("MBA") data, total purchase origination dollars increased
to 74% of total mortgage origination dollars in the second quarter of 2018 from
63% in the first quarter of 2018, while total refinance origination dollars
decreased to 26% of total mortgage origination dollars in the second quarter of
2018 from 37% in the first quarter of 2018. In the second quarter of 2018, the
volume of total refinance origination dollars decreased 20% from the second
quarter of 2017 and 8% from the first quarter of 2018.

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Looking forward, MBA is projecting 30-year mortgage interest rates to increase
through the end of the year. According to MBA projections, the mix of mortgage
origination dollars will move toward purchase mortgages during 2018 with the
refinance share representing approximately 29% for 2018.
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 the National Association of Realtors ("NAR"), despite strong demand
in the real estate market, limited inventory of new and existing homes is
contributing to declining sales levels. The NAR expects a slight decrease of
0.4% in existing home sales in 2018 from 2017.
Results of Operations for the Three and Six Months ended June 30, 2018 and 2017
                             Three Months Ended June 30,                    Six Months Ended June 30,
                                                $          %                                   $          %
                         2018       2017      Change    Change        2018        2017       Change    Change
                                                       (Dollars in thousands)
Mortgage products     $ 66,948$ 71,515$ (4,567 )     (6 )%   $ 140,410$ 134,453$  5,957        4  %
Non-mortgage products  117,153     81,258     35,895       44  %     224,726     150,835     73,891       49  %
Revenue                184,101    152,773     31,328       21  %     365,136     285,288     79,848       28  %
Costs and expenses:
Cost of revenue
(exclusive of
depreciation and
amortization shown
separately below)        6,043      4,164      1,879       45  %      11,739       7,755      3,984       51  %
Selling and marketing
expense                123,946    109,141     14,805       14  %     249,990     202,392     47,598       24  %
General and
administrative
expense                 24,759     12,094     12,665      105  %      47,573      23,641     23,932      101  %
Product development      5,967      4,064      1,903       47  %      12,227       7,687      4,540       59  %
Depreciation             1,633      1,808       (175 )    (10 )%       3,304       3,511       (207 )     (6 )%
Amortization of
intangibles              3,964      2,608      1,356       52  %       7,927       5,217      2,710       52  %
Change in fair value
of contingent
consideration             (167 )    9,393     (9,560 )   (102 )%        (908 )    18,139    (19,047 )   (105 )%
Severance                    3        247       (244 )    (99 )%           3         404       (401 )    (99 )%
Litigation
settlements and
contingencies             (170 )      285       (455 )   (160 )%        (192 )       689       (881 )   (128 )%
Total costs and
expenses               165,978    143,804     22,174       15  %     331,663     269,435     62,228       23  %
Operating income        18,123      8,969      9,154      102  %      33,473      15,853     17,620      111  %
Other (expense)
income, net:
Interest expense, net   (2,924 )   (1,079 )    1,845      171  %      (5,912 )    (1,244 )    4,668      375  %
Other (expense)
income                     (71 )       13         84      646  %         (37 )        13         50      385  %
Income before income
taxes                   15,128      7,903      7,225       91  %      27,524      14,622     12,902       88  %
Income tax benefit      29,721        104     29,617   28,478  %      53,182       1,183     51,999    4,396  %
Net income from
continuing operations   44,849      8,007     36,842      460  %      80,706      15,805     64,901      411  %
Loss from
discontinued
operations, net of
tax                     (2,302 )     (689 )    1,613      234  %      (6,635 )    (1,621 )    5,014      309  %
Net income and
comprehensive income  $ 42,547$  7,318$ 35,229      481  %   $  74,071$  14,184$ 59,887      422  %



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Revenue

Revenue increased in the second quarter of 2018 compared to the second quarter
of 2017 due to an increase in our non-mortgage products of $35.9 million,
partially offset by a decrease in our mortgage products of $4.6 million. Revenue
increased in the first six months of 2018 compared to the first six months of
2017 due to increases in our non-mortgage products of $73.9 million and in our
mortgage products of $6.0 million.
Our non-mortgage products include the following non-mortgage lending products:
personal loans, credit cards, home equity loans and lines of credit, reverse
mortgage loans, auto loans, small business loans and student loans. Our
non-mortgage products also include deposit accounts, home improvement referrals
and other credit products such as credit repair and debt settlement. Many of our
non-mortgage products are not individually significant to revenue. The increase
in revenue from our non-mortgage products in the second quarter and first six
months of 2018 from the second quarter and first six months of 2017 is primarily
due to increases in our personal loans, home equity and credit cards products.
Revenue from our personal loans product increased $15.7 million to $36.2 million
in the second quarter of 2018 from $20.5 million in the second quarter of 2017,
or 77%, and increased $24.7 million to $62.2 million in the first six months of
2018 from $37.5 million in the first six months of 2017, or 66%, due to
increased revenue earned per consumer. Additionally, the number of consumers
completing request forms increased as a result of increased lender demand and
corresponding increases in selling and marketing efforts.
Revenue from our credit cards product increased $1.7 million to $38.7 million in
the second quarter of 2018 from $37.0 million in the second quarter of 2017, or
5%, due to increases in click traffic sent to issuers. Revenue from our credit
card product increased $14.1 million to $84.9 million in the first six months of
2018 from $70.8 million in the first six months of 2017, or 20%, due to
increased revenue earned per consumer, as well as increases in click traffic
sent to issuers.
For the periods presented, no other non-mortgage product represented more than
10% of revenue, however certain other non-mortgage products experienced notable
increases. Revenue from our home equity product increased by $5.6 million in the
second quarter of 2018 compared to the second quarter of 2017 and increased by
$12.6 million in the first six months of 2018 compared to the first six months
of 2017 due to increases in the number of consumers completing request forms as
a result of increases in lender coverage and lender demand, and corresponding
increases in selling and marketing efforts, partially offset by decreased
revenue earned per consumer. We believe the market for our non-mortgage products
remains under-penetrated and we believe long-term growth prospects are strong
for non-mortgage products.
Revenue from our mortgage products decreased in the second quarter of 2018
compared to the second quarter of 2017 due to a decrease in revenue from our
refinance product of $7.3 million, partially offset by an increase in revenue
from our purchase product of $2.7 million. Revenue from our refinance product
decreased in the second quarter of 2018 compared to the second quarter of 2017
primarily due to a decrease in the number of consumers completing request forms
as a result of fewer consumers seeking refinancing in a period of rising
interest rates. Revenue from our purchase product increased in the second
quarter of 2018 compared to the second quarter of 2017 due to an increase in
revenue earned per consumer. Revenue from our mortgage products increased in the
first six months of 2018 compared to the first six months of 2017 primarily due
to an increase in revenue from our purchase product of $5.6 million. The
increase in revenue from our purchase product in the first six months of 2018
compared to the first six months of 2017 is primarily due to 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 increased in the second quarter of 2018 from the second quarter
of 2017, primarily due to an increase of $1.1 million in compensation and
benefits as a result of increases in headcount and an increase of $0.6 million
in credit scoring fees.
Cost of revenue as a percentage of revenue remained consistent at 3% in both the
second quarter of 2018 and the second quarter of 2017.
Cost of revenue increased in the first six months of 2018 from the first six
months of 2017, primarily due to an increase of $2.0 million in compensation and
benefits as a result of increases in headcount, an increase of $0.9 million in
credit scoring fees and an increase of $0.8 million in website network hosting
and server fees.

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Cost of revenue as a percentage of revenue remained consistent at 3% in both the
first six months of 2018 and the first six months of 2017.
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.
The increase in selling and marketing expense in the second quarter and first
six months of 2018 compared to the second quarter and first six months of 2017
were primarily due to increases in advertising and promotional expense of $11.9
million and $40.9 million, respectively, as discussed below.
Advertising and promotional expense is the largest component of selling and
marketing expense, and is comprised of the following:
                        Three Months Ended June 30,                            Six Months Ended June 30,
                                            $            %                                        $            %
               2018          2017         Change       Change        2018          2017         Change       Change
                                                     (Dollars in thousands)

Online $ 113,289$ 92,791$ 20,498 22 % $ 224,709

    $ 173,451$ 51,258          30  %
Broadcast         195        10,172       (9,977 )       (98 )%       3,435        17,404      (13,969 )       (80 )%
Other           2,891         1,497        1,394          93  %       6,259         2,607        3,652         140  %
Total
advertising
expense     $ 116,375$ 104,460$ 11,915          11  %   $ 234,403

$ 193,462$ 40,941 21 %



Revenue is driven by lender demand for our products, which is matched to
corresponding consumer loan 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 lender 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 both mortgage and non-mortgage products.
We increased our advertising expenditures in the second quarter and first six
months of 2018 compared to the second quarter and first six months of 2017 in
order to generate additional consumer inquiries to meet the increased demand of
lenders on our marketplace.
We will continue to adjust selling and marketing expenditures dynamically in
relation 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 2018 from
the second quarter of 2017, and in the first six months of 2018 from the first
six months of 2017, primarily due to increases in compensation and benefits of
$8.9 million and $18.8 million, respectively, as a result of increases in
headcount and long-term equity awards granted to our Chairman and Chief
Executive Officer in the third quarter of 2017 and in the first quarter of 2018,
which awards have both time and significant performance-based vesting
conditions. We also granted long-term equity awards to certain members of our
leadership team in the fourth quarter of 2017 and in the first quarter of 2018.
General and administrative expense is expected to increase in future periods due
to the non-cash compensation expense related to these grants. For additional
information regarding the awards granted to our Chairman and Chief Executive
Officer, see Note 9-Stock-Based Compensation in the notes to the consolidated
financial statements included elsewhere in this report. Non-cash compensation
expense is excluded from Adjusted Earnings Before Interest, Taxes, Depreciation
and Amortization ("Adjusted EBITDA"), as discussed below. In addition, we
incurred a charge of $1.6 million in the second quarter and first six months of
2018 due to the write-off of certain fixed assets.
General and administrative expense as a percentage of revenue increased to 13%
in the second quarter and first six months of 2018 compared to 8% in the second
quarter and first six months of 2017 due to the items above.

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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 2018 compared to the second quarter and first six months of 2017, 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 lenders.
Amortization of intangibles
Amortization of intangibles increased in the second quarter and first six months
of 2018 compared to the second quarter and first six months of 2017 primarily
due to intangible assets associated with our business acquisitions in 2017.
Contingent consideration
During the second quarter of 2018, we recorded a net $0.2 million gain due to
adjustments in the estimated fair value of the earnout payments related to the
CompareCards, DepositAccounts and SnapCap acquisitions. We recorded a $0.8
million gain due to the decreased probability of achievement of certain defined
operating results for SnapCap. This was partially offset by contingent
consideration expense of $0.2 million for the CompareCards acquisition due to
the passage of time increasing the estimated fair value of the earnout payment
for CompareCards, and contingent consideration expense of $0.4 million for the
DepositAccounts acquisition due to an increased probability of achievement of
certain defined earnout targets. During the first six months of 2018, we
recorded a net $0.9 million gain due to adjustments in the estimated fair value
of the earnout payments related to the CompareCards, DepositAccounts and SnapCap
acquisitions. We recorded a $2.9 million gain due to the decreased probability
of achievement of certain defined operating results for SnapCap. This was
partially offset by contingent consideration expense of $0.7 million for the
CompareCards acquisition due to the passage of time increasing the estimated
fair value of the earnout payments for CompareCards, and contingent
consideration expense of $1.3 million for the DepositAccounts acquisition due to
an increased probability of achievement of certain defined earnout targets.
During the second quarter and first six months of 2017, we recorded $9.4 million
and $18.1 million, respectively, of contingent consideration expense due to an
adjustment in the estimated fair value of the earnout payments related to the
CompareCards acquisition primarily due to increased performance of CompareCards.
Income tax expense
For the second quarter and first six months of 2018, the effective tax rate
varied from the federal statutory rate of 21% primarily due to a tax benefit of
$33.7 million and $60.9 million, respectively, recognized for excess tax
benefits due to employee exercises of stock options and 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 2017, the effective tax rate
varied from the federal statutory rate of 35% primarily due to a tax benefit of
$3.8 million and $7.6 million, respectively, recognized for excess tax benefits
due to employee exercises of stock options and vesting of restricted stock in
accordance with ASU 2016-09.
There have been no changes to our valuation allowance assessment for the second
quarter of 2018.
Discontinued operations
Losses from discontinued operations are attributable to losses associated with
the LendingTree Loans business, the sale of which was completed on June 6, 2012.
Losses from discontinued operations were primarily due to litigation settlements
and contingencies and legal fees associated with ongoing legal proceedings.
Adjusted EBITDA
We report Adjusted EBITDA as a supplemental measure to GAAP. This measure is the
primary metric by which we evaluate the performance of our businesses, on which
our marketing expenditures and internal budgets are based and by which
management and many employees are compensated. We believe that investors should
have access to the same set of tools that we use in analyzing our results. This
non-GAAP measure should be considered in addition to results prepared in
accordance with GAAP, but should

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not be considered a substitute for or superior to GAAP results. We provide and
encourage investors to examine the reconciling adjustments between the GAAP and
non-GAAP measures discussed below.
Definition of Adjusted EBITDA
We report Adjusted EBITDA as net income from continuing operations adjusted to
exclude interest, income tax, amortization of intangibles and depreciation, and
to further exclude (1) non-cash compensation expense, (2) non-cash impairment
charges, (3) gain/loss on disposal of assets, (4) restructuring and severance
expenses, (5) litigation settlements and contingencies and legal fees for
certain patent litigation, (6) acquisitions and dispositions income or expense
(including with respect to changes in fair value of contingent consideration)
and (7) one-time items. Adjusted EBITDA has certain limitations in that it does
not take into account the impact to our statement of operations of certain
expenses, including depreciation, non-cash compensation and acquisition-related
accounting. We endeavor to compensate for the limitations of the non-GAAP
measures presented by also providing the comparable GAAP measures with equal or
greater prominence and descriptions of the reconciling items, including
quantifying such items, to derive the non-GAAP measures. These non-GAAP measures
may not be comparable to similarly titled measures used by other companies.
One-Time Items
Adjusted EBITDA is adjusted for one-time items, if applicable. Items are
considered one-time in nature if they are non-recurring, infrequent or unusual
and have not occurred in the past two years or are not expected to recur in the
next two years, in accordance with SEC rules. For the periods presented in this
report, there are no adjustments for one-time items.
Non-Cash Expenses that are Excluded from Adjusted EBITDA
Non-cash compensation expense consists principally of expense associated with
grants of restricted stock, restricted stock units and stock options, some of
which awards have performance-based vesting conditions. These expenses are not
paid in cash, and we include the related shares in our calculations of fully
diluted shares outstanding. Upon settlement of restricted stock units, exercise
of certain stock options or vesting of restricted stock awards, the awards may
be settled, on a net basis, with us remitting the required tax withholding
amount from our current funds.
Amortization of intangibles are non-cash expenses relating primarily to
intangible assets acquired through acquisitions. At the time of an acquisition,
the intangible assets of the acquired company, such as purchase agreements,
technology and customer relationships, are valued and amortized over their
estimated lives.
The following table is a reconciliation of net income from continuing operations
to Adjusted EBITDA (in thousands).
                                             Three Months Ended            Six Months Ended
                                                   June 30,                     June 30,
                                              2018          2017          2018          2017

Net income from continuing operations     $   44,849$   8,007$  80,706$  15,805
Adjustments to reconcile to Adjusted
EBITDA:
Amortization of intangibles                    3,964         2,608         7,927         5,217
Depreciation                                   1,633         1,808         3,304         3,511
Severance                                          3           247             3           404
Loss on impairments and disposal of
assets                                         1,797            36         1,889           309
Non-cash compensation                         11,178         2,900        22,287         5,130
Change in fair value of contingent
consideration                                   (167 )       9,393          (908 )      18,139
Acquisition expense                              625           488           687         1,037
Litigation settlements and contingencies        (170 )         285          (192 )         689
Interest expense, net                          2,924         1,079         5,912         1,244
Rental depreciation and amortization of
intangibles                                      194           263           396           525
Income tax benefit                           (29,721 )        (104 )     (53,182 )      (1,183 )
Adjusted EBITDA                           $   37,109$  27,010$  68,829$  50,827



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Financial Position, Liquidity and Capital Resources
General
As of June 30, 2018, we had $293.3 million of cash and cash equivalents and an
immaterial amount of restricted cash and cash equivalents, compared to $368.6
million of cash and cash equivalents and $4.1 million of restricted cash and
cash equivalents as of December 31, 2017.
In June 2018, we acquired Ovation for $12.2 million in cash at closing and
potential future contingent consideration payments of up to $8.75 million
through June 30, 2020, subject to achieving specified targets.
During the first six months of 2018, we purchased an aggregate of 156,731 shares
of our common stock pursuant to a stock repurchase program for $46.0 million.
Additionally, we paid $1.1 million in the first quarter of 2018 related to
common stock repurchased in the fourth quarter of 2017.
In May 2017, we issued $300.0 million of our 0.625% Convertible Senior Notes for
net proceeds of $290.7 million. We used approximately $18.1 million of the net
proceeds to enter into Convertible Note Hedge and Warrant transactions.
In September 2017, we acquired certain assets of SnapCap for $11.9 million in
cash at closing and potential future contingent consideration payments of up to
$9.0 million through March 31, 2020, subject to achieving specified targets.
In June 2017, we acquired the membership interests of MagnifyMoney for $29.6
million cash consideration at the closing of the transaction.
In June 2017, we acquired substantially all of the assets of DepositAccounts for
$24.0 million in cash at closing and potential future contingent consideration
payments of up to $9.0 million through June 30, 2020, subject to achieving
specified targets. We made contingent consideration payments of $1.0 million in
the third quarter of 2017, $1.0 million in the first quarter of 2018, $1.0
million in the second quarter of 2018, and $1.0 million in July 2018.
In November 2016, we acquired CompareCards for $80.7 million in cash at closing
and potential future contingent consideration payments of up to $22.5 million
for each of 2017 and 2018, subject to achieving specified targets. We made the
initial $22.5 million earnout payment in the first quarter of 2018 and paid the
remaining $22.5 million earnout in the second quarter of 2018, of which $21.9
million is included within cash flows from operating activities on the
consolidated statement of cash flows for the first six months of 2018.
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 amended and restated revolving credit facility described below is an
additional potential source of liquidity.
In July 2018, we acquired Student Loan Hero for $60.7 million cash consideration
at the closing of the transaction.
Senior Secured Revolving Credit Facility
On November 21, 2017, we entered into an amended and restated $250.0
million five-year senior secured revolving credit facility which matures on
November 21, 2022 (the "Revolving Credit Facility"). Borrowings under the
Revolving Credit Facility can be used to finance working capital needs, capital
expenditures and general corporate purposes, including to finance permitted
acquisitions. As of July 26, 2018, we do not have any borrowings under the
Revolving Credit Facility.
Cash Flows from Continuing Operations
Our cash flows attributable to continuing operations are as follows:
                                                        Six Months Ended June 30,
                                                         2018               2017
                                                             (in thousands)
Net cash provided by operating activities           $     15,264       $    

48,224

Net cash used in investing activities                    (18,441 )          

(57,026 ) Net cash (used in) provided by financing activities (71,890 ) 274,612




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Cash Flows from Operating Activities
Our largest source of cash provided by our operating activities is revenues
generated by our mortgage and non-mortgage 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 attributable to continuing operations
decreased in the first six months of 2018 from the first six months of 2017
primarily due to the $21.9 million portion of the CompareCards earnout payment
made in the second quarter of 2018 in excess of the contingent consideration
liability recognized at the acquisition date. Further, the increase in revenue
in the first six months of 2018 from the first six months of 2017 was offset by
an increase in selling and marketing expense and a net decrease in cash from
changes in working capital primarily driven by changes in accounts receivable
and accounts payable, accrued expenses and other current liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities attributable to continuing operations in
the first six months of 2018 of $18.4 million consisted primarily of the
acquisition of Ovation for $11.7 million, net of cash acquired, and capital
expenditures of $6.7 million related to internally developed software.
Net cash used in investing activities attributable to continuing operations in
the first six months of 2017 of $57.0 million consisted primarily of the
acquisition of MagnifyMoney for $29.4 million, net of cash acquired, the
acquisition of DepositAccounts for $24.0 million and capital expenditures of
$3.6 million related to internally developed software.
Cash Flows from Financing Activities
Net cash used in financing activities attributable to continuing operations in
the first six months of 2018 of $71.9 million consisted primarily of $25.6
million of contingent consideration payments for CompareCards, DepositAccounts
and SimpleTuition and $47.1 million for the repurchase of our stock.
Net cash provided by financing activities attributable to continuing operations
in the first six months of 2017 of $274.6 million consisted primarily of $300.0
million of gross proceeds from the issuance of convertible senior notes and
$43.4 million of proceeds from the sale of warrants in connection with the
convertible senior notes, partially offset by $61.5 million for the payment of
convertible note hedge transactions and $8.6 million for the payment of
convertible senior note issuance costs.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than our operating lease
obligations and 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.
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
Other than our Revolving Credit Facility, we do not have any financial
instruments that are exposed to significant market risk. We maintain our cash
and cash equivalents in bank deposits and short-term, highly liquid money market
investments. A hypothetical 100-basis point increase or decrease in market
interest rates would not have a material impact on the fair value of our cash
equivalents securities, or our earnings on such cash equivalents, but would have
an effect on the interest paid on borrowings under the Revolving Credit
Facility, if any. As of July 26, 2018, there were no borrowings under the
Revolving Credit Facility. Increases in the Federal Funds interest rates may
also affect contingent consideration payable to DepositAccounts. See Note
6-Business Acquisition-Changes in Contingent Consideration-DepositAccounts.

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Fluctuations in interest rates affect consumer demand for new mortgages and the
level of refinancing activity which, in turn, affects lender demand for mortgage
leads. Typically, a decline in mortgage interest rates will lead to reduced
lender demand for leads from third-party sources, as there are more consumers in
the marketplace seeking refinancings and, accordingly, lenders receive more
organic lead volume. Conversely, an increase in mortgage interest rates will
typically lead to an increase in lender demand for third-party leads, as there
are fewer consumers in the marketplace and, accordingly, the supply of organic
mortgage lead volume decreases. See also the risk factor "Adverse conditions in
the primary and secondary mortgage markets, as well as the general economy,
could materially and adversely affect our business, financial condition and
results of operations," in Part I, Item 1A (Risk Factors) in our 2017 Annual
Report.
Item 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), management, with the participation of our principal
executive officer (our Chief Executive Officer) and principal financial officer
(our Chief Financial Officer), evaluated, as of the end of the period covered by
this report, the effectiveness of our disclosure controls and procedures as
defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective, as of June 30, 2018, to reasonably ensure
that information required to be disclosed and filed under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified,
and that management will be timely alerted to material information required to
be included in our periodic reports filed with the Securities and Exchange
Commission.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that
occurred during the quarter ended June 30, 2018 that has materially affected, or
is reasonably likely to materially affect, our internal controls over financial
reporting.


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