Cautionary Statement Regarding Forward-Looking Information This report contains "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements related to our anticipated financial performance, business prospects and strategy; anticipated trends and prospects in the various industries in which our businesses operate; new products, services and related strategies; and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. The use of words such as "anticipates," "estimates," "expects," "projects," "intends," "plans" and "believes," among others, generally identifies forward-looking statements. Actual results could differ materially from those contained in the forward-looking statements. Factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include those matters discussed or referenced in Part II, Item 1A. Risk Factors included elsewhere in this quarterly report and Part I, Item 1A. Risk Factors of the 2019 Annual Report. Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views ofLendingTree, 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 OverviewLendingTree, Inc. is the parent ofLendingTree, LLC and several companies owned byLendingTree, LLC . We operate what we believe to be the leading online consumer platform that connects consumers with the choices they need to be confident in their financial decisions. Our online consumer platform provides consumers with access to product offerings from ourNetwork Partners , including mortgage loans, home equity loans and lines of credit, reverse mortgage loans, auto loans, credit cards, deposit accounts, personal loans, student loans, small business loans, insurance quotes and other related offerings. In addition, we offer tools and resources, including free credit scores, that facilitate comparison shopping for loans, deposit products, insurance and other offerings. We seek to match consumers with multiple providers,who can offer them competing quotes for the product, or products, they are seeking. We also serve as a valued partner to lenders and other providers seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer inquiries we generate with theseNetwork Partners . Our My LendingTree platform offers a personalized comparison-shopping experience by providing free credit scores and credit score analysis. This platform enables us to observe consumers' credit profiles and then identify and alert them to loans and other offerings on our marketplace that may be more favorable than the terms they may have at a given point in time. This is designed to provide consumers with measurable savings opportunities over their lifetimes. Three Months Ended June 30, My LendingTree 2020 2019 % Change Cumulative Sign-ups as of quarter-end (in millions) 15.2 12.1 26 % Revenue Contribution (in thousands)$ 9,139 $ 20,246 (55 )% % of total revenue 4.9 % 7.3 % We are focused on developing new product offerings and enhancements to improve the experiences that consumers andNetwork Partners have as they interact with us. By expanding our portfolio of financial services offerings, we are growing and diversifying our business and sources of revenue. We intend to capitalize on our expertise in performance marketing, product development and technology, and to leverage the widespread recognition of the LendingTree brand to effect this strategy. 31
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We believe the consumer and small business financial services industry is still in the early stages of a fundamental shift to online product offerings, similar to the shift that started in retail and travel many years ago and is now well established. We believe that like retail and travel, as consumers continue to move towards online shopping and transactions for financial services, suppliers will increasingly shift their product offerings and advertising budgets toward the online channel. We believe the strength of our brands and of our partner network place us in a strong position to continue to benefit from this market shift. The LendingTree Loans business is presented as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of operations and comprehensive income and consolidated cash flows for all periods presented. Except for the discussion under the heading "Discontinued Operations," the analysis within Management's Discussion and Analysis of Financial Condition and Results of Operations reflects our continuing operations. Economic Conditions DuringMarch 2020 , a global pandemic was declared by theWorld Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus ("COVID-19"). The pandemic has significantly impacted the economic conditions in theU.S. , as federal, state and local governments react to the public health crisis, creating significant uncertainties in theU.S. economy. The downstream impact of social distancing and related economic pullback are affecting our business and marketplace participants to varying degrees. We are continuously monitoring the impacts of the current economic conditions related to the COVID-19 pandemic and the effect on our business, financial condition and results of operations. Of our three reportable segments, the Consumer segment has been and is expected to be most impacted as unsecured credit and the flow of capital in certain areas of the market have contracted. Within our Consumer segment we have seen reductions of over 70% in near-term lender demand for our services reflecting those lenders' uncertainty over the length and depth of the economic recession. The impact to our Home and Insurance segments has been and is anticipated to be much less substantial. Most of our selling and marketing expenses are variable costs that we adjust dynamically in relation to revenue opportunities to profitably meet demand. Thus, as our revenue is negatively impacted during the recession, we anticipate our marketing expenses will continue to generally decrease in line with revenue. Segment Reporting We have three reportable segments: Home, Consumer and Insurance. We changed our reportable segments in the fourth quarter of 2019, and prior period results have been reclassified to conform with this change in reportable segments. Recent Business Acquisitions OnJanuary 10, 2019 , we acquiredValue Holding Inc. , the parent company ofValuePenguin Inc. ("ValuePenguin"), a personal finance website that offers consumers objective analysis on a variety of financial topics from insurance to credit cards for$106.2 million . Combining ValuePenguin's high-quality content and search engine optimization capability with proprietary technology and insurance carrier network from QuoteWizard enables us to provide immense value to carriers and agents. This strategic acquisition positions us to achieve further scale in the insurance space as well as the broader financial services industry. OnFebruary 28, 2020 , we acquired an equity interest inStash Financial, Inc. ("Stash") for$80.0 million . Stash is a consumer investing and banking platform. Stash brings together banking, investing, and education into one seamless experience offering a full-suite of personal investment accounts, Traditional andRoth IRAs , custodial investment accounts, and banking services, including checking accounts and debit cards with a Stock-Back® rewards program.North Carolina Office Properties InDecember 2016 , we completed the acquisition of two office buildings inCharlotte, North Carolina , for$23.5 million in cash. The buildings were acquired with the intent to use such buildings as our corporate headquarters and rent any unused space. InNovember 2018 , the office buildings were classified as held for sale. InMay 2019 , we sold these buildings to an unrelated third party for a sale price of$24.4 million . With our expansion inNorth Carolina , inDecember 2016 , we received a grant from the state that provides up to$4.9 million in reimbursements over 12 years beginning in 2017 for investing in real estate and infrastructure in addition to increasing jobs inNorth Carolina at specific targeted levels through 2020, and maintaining the jobs thereafter. Additionally, the city ofCharlotte and the county ofMecklenburg 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. InDecember 2018 , we received an additional grant from the state that provides up to$8.4 million in reimbursements over 12 years beginning in 2020 for increasing jobs inNorth Carolina at specific targeted levels through 2023, and maintaining the jobs thereafter. 32
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Recent Mortgage Interest Rate Trends Interest rate and market risks can be substantial in the mortgage lead generation business. Short-term fluctuations in mortgage interest rates primarily affect consumer demand for mortgage refinancings, while long-term fluctuations in mortgage interest rates, coupled with theU.S. real estate market, affect consumer demand for new mortgages. Consumer demand, in turn, affects lender demand for mortgage leads from third-party sources, as well as our own ability to attract online consumers to our website. Typically, when interest rates decline, we see increased consumer demand for mortgage refinancing, which in turn leads to increased traffic to our website and decreased selling and marketing efforts associated with that traffic. At the same time, lender demand for leads from third-party sources typically decreases, as there are more consumers in the marketplace seeking refinancings and, accordingly, lenders receive more organic mortgage lead volume. Due to lower lender demand, our revenue earned per consumer typically decreases, but with correspondingly lower selling and marketing costs. Conversely, when interest rates increase, we typically see decreased consumer demand for mortgage refinancing, leading to decreased traffic to our website and higher associated selling and marketing efforts associated with that traffic. At the same time, lender demand for leads from third-party sources typically increases, as there are fewer consumers in the marketplace and, accordingly, the supply of organic mortgage lead volume decreases. Due to high lender demand, we typically see an increase in the amount lenders will pay per matched lead, which often leads to higher revenue earned per consumer. However, increases in the amount lenders will pay per matched lead in this situation is limited by the overall cost models of our lenders, and our revenue earned per consumer can be adversely affected by the overall reduced demand for refinancing in a rising rate environment. We dynamically adjust selling and marketing expenditures in all interest rate environments to optimize our results against these variables. According to Freddie Mac, 30-year mortgage interest rates declined during 2020 to a monthly average of 3.16% inJune 2020 . On a quarterly basis, 30-year mortgage interest rates in the second quarter of 2020 averaged 3.23%, compared to 4.00% in the second quarter of 2019 and 3.51% in the first quarter of 2020. [[Image Removed: mdaq22020historicalmixchart.jpg]] Typically, as mortgage interest rates decline, there are more consumers in the marketplace seeking refinancings and, accordingly, the mix of mortgage origination dollars will move towards refinance mortgages. According toMortgage Bankers Association ("MBA") data, total refinance origination dollars increased to 63% of total mortgage origination dollars in the second quarter of 2020 compared to 54% in the first quarter of 2020. In the second quarter of 2020, total refinance origination dollars increased 297% to$580 million from the second quarter of 2019 and 90% from the first quarter of 2020. Industry-wide mortgage origination volume in the second quarter of 2020 was up 85% from the second quarter of 2019. InJuly 2020 , the MBA projected 30-year mortgage interest rates to remain relatively consistent through the end of the year. According to MBA projections, the refinance share of total mortgage origination dollars is projected to represent approximately 54% for 2020. 33
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TheU.S. Real Estate Market The health of theU.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 theNational Association of Realtors ("NAR"), existing-home sales rebounded at the end of the second quarter of 2020 after three straight months of sales decline caused by the ongoing COVID-19 pandemic. Existing-home sales decreased 21% in the second quarter of 2020 compared to the first quarter of 2020, and decreased 18% compared to the second quarter of 2019. The NAR expects a continued increase in existing-home sales as long as mortgage rates remain low and job gains continue, but predicts an overall decrease of 3% in 2020 compared to 2019. Results of Operations for the Three and Six Months endedJune 30, 2020 and 2019 Three Months Ended June 30, Six Months Ended June 30, $ % $ % 2020 2019 Change Change 2020 2019 Change Change (Dollars in thousands) Home$ 74,123 $ 71,756 $ 2,367 3 %$ 153,297 $ 135,193 $ 18,104 13 % Consumer 37,118 128,963 (91,845 ) (71 )% 157,042 249,692 (92,650 ) (37 )% Insurance 72,919 71,941 978 1 % 155,656 139,033 16,623 12 % Other 166 5,761 (5,595 ) (97 )% 1,415 16,893 (15,478 ) (92 )% Revenue 184,326 278,421 (94,095 ) (34 )% 467,410 540,811 (73,401 ) (14 )% Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below) 13,464 16,310 (2,846 ) (17 )% 27,716 33,980 (6,264 ) (18 )% Selling and marketing expense 113,921 191,629 (77,708 ) (41 )% 309,459 366,520 (57,061 ) (16 )% General and administrative expense 28,489 27,951 538 2 % 60,571 59,068 1,503 3 % Product development 10,812 10,175 637 6 % 21,775 20,341 1,434 7 % Depreciation 3,550 2,559 991 39 % 6,928 5,041 1,887 37 % Amortization of intangibles 13,756 14,280 (524 ) (4 )% 27,513 27,707 (194 ) (1 )% Change in fair value of contingent consideration 9,175 2,790 6,385 229 % 1,053 17,382 (16,329 ) (94 )% Severance 32 403 (371 ) (92 )% 190 457 (267 ) (58 )% Litigation settlements and contingencies (1,325 ) 8 (1,333 ) N/A (996 ) (199 ) (797 ) (401 )% Total costs and expenses 191,874 266,105 (74,231 ) (28 )% 454,209 530,297 (76,088 ) (14 )% Operating (loss) income (7,548 ) 12,316 (19,864 ) (161 )% 13,201 10,514 2,687 26 % Other (expense) income, net: Interest expense, net (4,955 ) (5,095 ) (140 ) (3 )% (9,789 ) (10,563 ) (774 ) (7 )% Other income 7 71 (64 ) (90 )% 7 139 (132 ) (95 )% (Loss) income before income taxes (12,496 ) 7,292 (19,788 ) (271 )% 3,419 90 3,329 3,699 % Income tax benefit 3,880 5,689 (1,809 ) (32 )% 6,941 13,441 (6,500 ) (48 )% Net (loss) income from continuing operations (8,616 ) 12,981 (21,597 ) (166 )% 10,360 13,531 (3,171 ) (23 )% Loss from discontinued operations, net of tax (21,141 ) (763 ) 20,378 2,671 % (25,716 ) (1,825 ) 23,891 1,309 % Net (loss) income and comprehensive (loss) income$ (29,757 ) $ 12,218 $ (41,975 ) (344 )%$ (15,356 ) $ 11,706 $ (27,062 ) (231 )%
Revenue
Revenue decreased in the second quarter and first six months of 2020 compared to the second quarter and first six months of 2019 due to decreases in our Consumer segment and Other category, partially offset by increases in our Home and Insurance segments. 34
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Our Consumer segment includes the following products: credit cards, personal loans, small business loans, student loans, auto loans, deposit accounts, and other credit products such as credit repair and debt settlement. Many of our Consumer segment products are not individually significant to revenue. Revenue from our Consumer segment decreased in the second quarter and first six months of 2020 from the second quarter and first six months of 2019, primarily due to decreases in our credit cards, personal loans, small business loans and student loans products. Revenue from our credit cards product decreased$48.8 million to$7.2 million in the second quarter of 2020 from$56.0 million in the second quarter of 2019, or 87%, and decreased$51.8 million to$58.8 million in the first six months of 2020 from$110.6 million in the first six months of 2019, or 47%, primarily due to the impact of economic conditions related to the COVID-19 pandemic that caused a decrease in the number of approvals and a decrease in revenue earned per approval. Revenue from our personal loans product decreased$32.3 million to$8.8 million in the second quarter of 2020 from$41.1 million in the second quarter of 2019, or 79%, and decreased$33.3 million to$40.3 million in the first six months of 2020 from$73.6 million in the first six months of 2019, or 45%, primarily due to the impact of economic conditions related to the COVID-19 pandemic that caused a contraction in the flow of capital and a decrease in revenue earned per consumer. For the periods presented, no other products in our Consumer segment represented more than 10% of revenue; however, certain other Consumer products experienced notable changes primarily due to the impact of economic conditions related to the COVID-19 pandemic. Revenue from our small business loans product decreased$8.5 million in the second quarter of 2020 compared to the second quarter of 2019 and decreased$4.1 million in the first six months of 2020 compared to the first six months of 2019, due to a contraction in the flow of capital and a decrease in revenue earned per consumer. Revenue from our student loans product decreased$2.3 million in the second quarter of 2020 compared to the second quarter of 2019 and decreased$5.6 million in the first six months of 2020 compared to the first six months of 2019, due to a decrease in the number of consumers on our marketplace seeking student loans. The ongoing COVID-19 pandemic is anticipated to significantly impact our Consumer product revenues in the near-term due to the significant industry-wide contraction in the availability of capital for products in the Consumer segment, specifically credit cards, small business loans and personal loans, as discussed above. Our Home segment includes the following products: purchase mortgage, refinance mortgage, home equity loans and lines of credit, reverse mortgage loans, and real estate. Revenue from our Home segment increased$2.4 million in the second quarter of 2020 from the second quarter of 2019, or 3%, and increased$18.1 million in the first six months of 2020 from the first six months of 2019, or 13%, primarily due to an increase in revenue from our refinance mortgage product, partially offset by decreases in our purchase mortgage and home equity loans and lines of credit products. Revenue from our refinance mortgage product increased$22.3 million in the second quarter of 2020 compared to the second quarter of 2019, and increased$48.2 million in the first six months of 2020 compared to the first six months of 2019, primarily due to an increase in the number of consumers completing request forms resulting from increased refinancing activity in a declining interest rate environment, partially offset by a decrease in revenue earned per consumer. Revenue from our purchase mortgage product decreased$10.3 million in the second quarter of 2020 compared to the second quarter of 2019 and decreased$15.2 million in the first six months of 2020 compared to the first six months of 2019. Revenue from our home equity loans and lines of credit product decreased$8.6 million in the second quarter of 2020 compared to the second quarter of 2019 and decreased$13.2 million in the first six months of 2020 compared to the first six months of 2019. Revenue from our purchase mortgage and home equity loans and lines of credit products decreased due to a shift in lender focus toward refinance products as well as decreases in revenue earned per consumer. Revenue from our Insurance segment increased$1.0 million to$72.9 million in the second quarter of 2020 from$71.9 million in the second quarter of 2019, or 1%, and increased$16.6 million to$155.7 million in the first six months of 2020 from$139.0 million in the first six months of 2019, or 12%, due to increases in the number of consumers seeking insurance coverage, partially offset by a decrease in revenue earned per consumer. Our Other category primarily includes revenue from the resale of online advertising space to third parties and revenue from home improvement referrals. Revenue in the Other category decreased$5.6 million in the second quarter of 2020 compared to the second quarter of 2019, and decreased$15.5 million in the first six months of 2020 compared to the first six months of 2019, as we ceased offering home improvement referrals during the first quarter of 2019 and ceased reselling online advertising space during the first quarter of 2020. 35
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Cost of revenue Cost of revenue consists primarily of costs associated with compensation and other employee-related costs (including stock-based compensation) relating to internally-operated customer call centers, third-party customer call center fees, costs for online advertising resold to third parties, credit scoring fees, credit card fees, website network hosting and server fees. Cost of revenue decreased in the second quarter of 2020 from the second quarter of 2019, primarily due to a$5.1 million decrease for the cost of resold advertising space. We ceased reselling online advertising space during the first quarter of 2020. This was partially offset by a$1.1 million increase in website network hosting and server fees and a$0.7 million increase in compensation and benefits as a result of increases in headcount. Cost of revenue decreased in the first six months of 2020 from the first six months of 2019, primarily due to a$11.3 million decrease for the cost of resold advertising space, partially offset by increases in website network hosting and server fees, compensation and benefits, and credit card fees of$2.0 million ,$1.8 million and$1.0 million , respectively. Cost of revenue as a percentage of revenue increased to 7% in the second quarter of 2020 compared to 6% in the second quarter of 2019, and remained consistent at 6% in each of the first six months of 2020 and 2019. Selling and marketing expense Selling and marketing expense consists primarily of advertising and promotional expenditures and compensation and other employee-related costs (including stock-based compensation) for personnel engaged in sales or marketing functions. Advertising and promotional expenditures primarily include online marketing, as well as television, print and radio spending. Advertising production costs are expensed in the period the related ad is first run. Selling and marketing expense decreased in the second quarter and first six months of 2020 compared to the second quarter and first six months of 2019 primarily due to decreases in advertising and promotional expense of$77.7 million and$56.5 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 EndedJune 30 ,
Six Months Ended
$ % $ % 2020 2019 Change Change 2020 2019 Change Change (Dollars in thousands) Online$ 96,416 $ 169,779 $ (73,363 ) (43 )%$ 269,497 $ 318,718 $ (49,221 ) (15 )% Broadcast 3,154 6,398 (3,244 ) (51 )% 9,478 16,933 (7,455 ) (44 )% Other 2,259 3,373 (1,114 ) (33 )% 6,621 6,485 136 2 % Total advertising expense$ 101,829 $ 179,550 $ (77,721 ) (43 )%$ 285,596 $ 342,136 $ (56,540 ) (17 )% Revenue is primarily driven by Network Partner demand for our products, which is matched to corresponding consumer requests. We adjust our selling and marketing expenditures dynamically in relation to anticipated revenue opportunities in order to ensure sufficient consumer inquiries to profitably meet such demand. An increase in a product's revenue is generally met by a corresponding increase in marketing spend, and conversely a decrease in a product's revenue is generally met by a corresponding decrease in marketing spend. This relationship exists for our Home, Consumer and Insurance segments. We decreased our advertising expenditures in the second quarter and first six months of 2020 compared to the second quarter and first six months of 2019 in response to changes in Network Partner demand on our marketplace as a result of the ongoing COVID-19 pandemic discussed above. We will continue to adjust selling and marketing expenditures dynamically in relation to this and in response to anticipated revenue opportunities. General and administrative expense General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, corporate information technology, human resources and executive management functions, as well as facilities and infrastructure costs and fees for professional services. 36
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General and administrative expense remained relatively consistent in the second quarter and first six months of 2020 compared to the second quarter and first six months of 2019. The second quarter and first six months of 2019 benefited from a$2.7 million gain on the sale of two office buildings. Additionally, travel and entertainment expense decreased$1.5 million in the second quarter of 2020 compared to the second quarter of 2019. General and administrative expenses decreased in the first six months of 2020 compared to the first six months of 2019 due to decreases in compensation and benefits, travel and entertainment expense and other taxes of$3.4 million ,$1.8 million and$1.4 million , respectively. In addition to the change in general and administrative expenses due to the gain on the sale of the office buildings in 2019, general and administrative expenses increased in the first six months of 2020 compared to the first six months of 2019 due to increases in professional fees, technology expense and facilities expense of$3.2 million ,$1.6 million and$1.2 million , respectively. General and administrative expense as a percentage of revenue increased to 16% and 13% in the second quarter and first six months of 2020, respectively, compared to 10% and 11% in the second quarter and first six months of 2019, respectively. 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 2020 compared to the second quarter and first six months of 2019 as we continued to invest in internal development of new and enhanced features, functionality and business opportunities that we believe will enable us to better and more fully serve consumers andNetwork Partners . Depreciation The increase in depreciation expense in the second quarter and first six months of 2020 compared to the second quarter and first six months of 2019 was primarily the result of higher investment in internally developed software in recent years, to support the growth of our business. Contingent consideration During the second quarter and first six months of 2020, we recorded aggregate contingent consideration expense of$9.2 million and$1.1 million , respectively, due to adjustments in the estimated fair value of the earnout payments related to our recent acquisitions. For the second quarter of 2020, the contingent consideration expense for the QuoteWizard, Ovation and SnapCap acquisitions was$8.1 million ,$1.0 million and$0.1 million , respectively. For the first six months of 2020, the contingent consideration expense for the Ovation and SnapCap acquisitions was$1.2 million and$0.1 million , respectively, partially offset by a contingent consideration gain for the QuoteWizard acquisition of$0.2 million . During the second quarter and first six months of 2019, we recorded aggregate contingent consideration expense of$2.8 million and$17.4 million , respectively, due to adjustments in the estimated fair value of the earnout payments related to our recent acquisitions. For the second quarter of 2019, the contingent consideration expense for the QuoteWizard and Ovation acquisitions was$2.5 million and$0.6 million , respectively. This was partially offset by contingent consideration gains recorded for the SnapCap and DepositAccounts acquisitions of$0.1 million and$0.2 million , respectively. For the first six months of 2019, the contingent consideration expense for the QuoteWizard and SnapCap acquisitions was$16.9 million and$1.5 million , respectively. This was partially offset by a contingent consideration gain recorded for the DepositAccounts acquisition of$0.9 million . Income tax expense For the second quarter and first six months of 2020, the effective tax rate varied from the federal statutory rate of 21% in part due to a tax benefit of$0.8 million and$1.8 million , respectively, recognized for excess tax benefits resulting from employee exercises of stock options and vesting of restricted stock in accordance with ASU 2016-09 and the effect of state taxes. The effective tax rate for the first six months of 2020 was also impacted by a tax benefit of$6.1 million for the impact of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, as described below. OnMarch 27, 2020 ,President Trump signed into law the CARES Act. This legislation is an economic relief package in response to the public health and economic impacts of COVID-19 and includes various provisions that impact us, including, but not limited to, modifications for net operating losses, accelerated timeframe for refunds associated with prior minimum taxes and modifications of the limitation on business interest. 37
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We revalued deferred tax assets related to net operating losses in light of the changes in the CARES Act, and recorded a net tax benefit of$6.1 million during the first six months of 2020. These deferred tax assets are being revalued, as they will be carried back to 2016 and 2017, which are tax periods prior to the Tax Cuts and Jobs Act ("TCJA") when the federal statutory tax rate was 35% versus the 21% federal statutory tax rate in effect after the enactment of the TCJA. For the second quarter and first six months of 2019, the effective tax rate varied from the federal statutory rate of 21% primarily due to a tax benefit of$7.7 million and$13.7 million , respectively, recognized for excess tax benefits resulting from employee exercises of stock options and vesting of restricted stock in accordance with ASU 2016-09 and the effect of state taxes. Discontinued operations The results of discontinued operations include the results of the LendingTree Loans business formerly operated by our wholly-owned subsidiary,Home Loan Center, Inc. , or HLC. The sale of substantially all of the assets of HLC, including the LendingTree Loans business, was completed onJune 6, 2012 . HLC filed a petition under Chapter 11 of the United States Bankruptcy Code onJuly 21, 2019 , which was converted to Chapter 7 of the United States Bankruptcy Code onSeptember 16, 2019 . As a result of the voluntary bankruptcy petition, as of the initialJuly 21, 2019 bankruptcy petition filing date, HLC and its consolidated subsidiary were deconsolidated from LendingTree's consolidated financial statements. The effect of such deconsolidation was the elimination of the consolidated assets and liabilities of HLC (and its consolidated subsidiary) from LendingTree's consolidated balance sheets. Prior to the bankruptcy filing, losses from the LendingTree Loans business were primarily due to litigation settlements and contingencies and legal fees associated with ongoing legal proceedings. The results of discontinued operations include litigation settlements and contingencies and legal fees associated with ongoing legal proceedings againstLendingTree Inc. orLendingTree LLC that arose due to the LendingTree Loans business or the HLC bankruptcy filing. See Note 18-Discontinued Operations to the consolidated financial statements included elsewhere in this report for more information, including the accounting effect of HLC's bankruptcy filing on our consolidated financial statements. Segment Profit Three Months EndedJune 30 , Six
Months Ended
$ % $ % 2020 2019 Change Change 2020 2019 Change Change (Dollars in thousands) Home$ 38,726 $ 24,210 $ 14,516 60 %$ 74,637 $ 48,131 $ 26,506 55 % Consumer 19,402 50,771 (31,369 ) (62 )% 62,501 104,745 (42,244 ) (40 )% Insurance 30,122 28,806 1,316 5 % 60,655 56,670 3,985 7 % Other 81 345 (264 ) (77 )% (247 )
1,104 (1,351 ) (122 )%
Segment profit
Segment profit is our primary segment operating metric. Segment profit is calculated as segment revenue less segment selling and marketing expenses attributed to variable costs paid for advertising, direct marketing and related expenses that are directly attributable to the segments' products. See Note 17-Segment Information in the notes to the consolidated financial statements for additional information on segments and a reconciliation of segment profit to pre-tax income from continuing operations. Consumer segment profit decreased$31.4 million in the second quarter of 2020 from the second quarter of 2019, and decreased$42.2 million in the first six months of 2020 from the first six months of 2019, primarily due to decreases in revenue, partially offset by corresponding decreases in selling and marketing expense. The biggest challenge facing many of our consumerNetwork Partners , and in turn our own business, is a lack of visibility into the true health of consumer balance sheets. Credit performance across consumer lenders of varying shapes and sizes has seemingly fared better than expected, and unemployment has begun to improve after peaking at nearly 15% in April. But questions remain as to the impact on these trends from government stimulus, forbearance and deferment programs offered by the lenders, and ultimately, our country's ability to re-open safely. 38
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Credit card issuers and personal loan lenders appetite for risk is temporarily diminished until there is further evidence of economic stabilization. We do believe the revenue opportunity in our Consumer segment has hit the trough as many of our consumerNetwork Partners who initially paused entirely are beginning to return to the platform. In most cases, those consumerNetwork Partners are returning to reach narrower bands of consumers, with much stricter credit standards, smaller budgets, and less aggressive bids. Home segment profit increased$14.5 million in the second quarter of 2020 from the second quarter of 2019, and increased$26.5 million in the first six months of 2020 from the first six months of 2019, due to increases in revenue and decreases in selling and marketing expense. Historically, as explained, in periods similar to those experienced in the second quarter of 2020 with sharp declines in interest rates and increased consumer interest, our mortgageNetwork Partners become inundated with more organic volume than they can process and their demand for our services diminishes for a period of time. While that dynamic has remained very relevant for us in the second quarter, our improved ability to withstand it is evident. We've developed differentiated offerings and price points for mortgageNetwork Partners to better serve a wider array of their needs. Our Home segment has benefited from a decrease in unit marketing costs during the COVID-19 pandemic. With heightened interest in refinancing and home-buying activity, we managed to meet the demand of ourNetwork Partners in an optimized and cost-efficient way. We expect Home unit marketing costs in the third quarter of 2020 to return to levels experienced prior to the second quarter of 2020. Insurance segment profit increased$1.3 million in the second quarter of 2020 from the second quarter of 2019 due to an increase in revenue and a decrease in selling and marketing expense, and increased$4.0 million in the first six months of 2020 from the first six months of 2019 due to an increase in revenue, partially offset by corresponding increases in selling and marketing expense. At the end of the first quarter of 2020, we noted a slowdown in consumers searching for auto insurance which we attributed to slumping car sales amid the pandemic. While those trends have steadily begun to recover since early April, reduced search engine traffic has continued to present a modest headwind to achieving the levels of growth in the Insurance segment that we've historically experienced and we have taken on several initiatives to combat these trends. We've seen demonstrable traffic growth through several non-search channels and the agent portion of the Insurance segment is achieving record-highs as agents find increasing value in our services in a remote work environment. Adjusted EBITDA We report Adjusted EBITDA as a supplemental measure to GAAP. This measure is the primary metric by which we evaluate the performance of our businesses, on which our marketing expenditures and internal budgets are based and by which management and many employees are compensated. We believe that investors should have access to the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures discussed below. Definition of Adjusted EBITDA We report Adjusted EBITDA as net income from continuing operations adjusted to exclude interest, income tax, amortization of intangibles and depreciation, and to further exclude (1) non-cash compensation expense, (2) non-cash impairment charges, (3) gain/loss on disposal of assets, (4) restructuring and severance expenses, (5) litigation settlements and contingencies, (6) acquisitions and dispositions income or expense (including with respect to changes in fair value of contingent consideration), and (7) one-time items. Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses, including depreciation, non-cash compensation and acquisition-related accounting. We endeavor to compensate for the limitations of the non-GAAP measures presented by also providing the comparable GAAP measures with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measures. These non-GAAP measures may not be comparable to similarly titled measures used by other companies. One-Time Items Adjusted EBITDA is adjusted for one-time items, if applicable. Items are considered one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance withSEC rules. For the periods presented below, there are no adjustments for one-time items. 39
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Non-Cash Expenses that are Excluded from Adjusted EBITDA Non-cash compensation expense consists principally of expense associated with grants of restricted stock, restricted stock units and stock options, some of which awards have performance-based vesting conditions. These expenses are not paid in cash, and we include the related shares in our calculations of fully diluted shares outstanding. Upon settlement of restricted stock units, exercise of certain stock options or vesting of restricted stock awards, the awards may be settled, on a net basis, with us remitting the required tax withholding amount from our current funds. Amortization of intangibles are non-cash expenses relating primarily to intangible assets acquired through acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as purchase agreements, technology and customer relationships, are valued and amortized over their estimated lives. The following table is a reconciliation of net income from continuing operations to Adjusted EBITDA (in thousands). Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net (loss) income from continuing operations$ (8,616 ) $ 12,981 $ 10,360 $ 13,531 Adjustments to reconcile to Adjusted EBITDA: Amortization of intangibles 13,756 14,280 27,513 27,707 Depreciation 3,550 2,559 6,928 5,041 Severance 32 403 190 457 Loss (gain) on impairments and disposal of assets 22 (2,196 ) 552 (1,978 ) Non-cash compensation expense 13,158 15,982 25,075 30,035 Change in fair value of contingent consideration 9,175 2,790 1,053 17,382 Acquisition expense 20 60 2,200 179 Litigation settlements and contingencies (1,325 ) 8 (996 ) (199 ) Interest expense, net 4,955 5,095 9,789 10,563 Income tax benefit (3,880 ) (5,689 ) (6,941 ) (13,441 ) Adjusted EBITDA$ 30,847 $ 46,273 $ 75,723 $ 89,277 Financial Position, Liquidity and Capital Resources General As ofJune 30, 2020 , we had$101.8 million of cash and cash equivalents, compared to$60.2 million of cash and cash equivalents as ofDecember 31, 2019 . InFebruary 2020 , we acquired an equity interest in Stash for$80.0 million . The investment was funded through$80.0 million drawn on our Amended Revolving Credit Facility. See Note 7-Equity Investment to the consolidated financial statements included elsewhere in this report for more information. During the first six months of 2020, we paid down$25.0 million on our Amended Revolving Credit Facility. We made net repayments of$130.0 million on our Amended Revolving Credit Facility inJuly 2020 . During the first six months of 2020, we made two contingent consideration payments of$3.0 million each, related to the prior acquisition of SnapCap. We could make additional potential contingent consideration payments of up to$4.4 million for Ovation and$46.8 million for QuoteWizard. InJuly 2020 , we made litigation settlement payments of$26.5 million to the ResCap Liquidating Trust and$36.0 million to the HLC bankruptcy Trustee for the matters noted in Note 18-Discontinued Operations. 40
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InJuly 2020 , we issued$575.0 million of our 0.50% Convertible Senior Notes dueJuly 15, 2025 (the "2025 Notes") for estimated net proceeds of approximately$559.8 million . We used approximately$63.0 million of the net proceeds to enter into Convertible Note Hedge and Warrant transactions. Further, we used approximately$234.0 million of the net proceeds to repurchase approximately$130.3 million principal amount of our 0.625% Convertible Senior Notes dueJune 1, 2022 (the "2022 Notes"). To the extent of the repurchases of the 2022 Notes, we received approximately$15.6 million as a result of terminating a corresponding portion of the Convertible Note Hedge and Warrant transactions entered into onMay 31, 2017 . See Note 19-Subsequent Events for additional information. We expect our cash and cash equivalents and cash flows from operations to be sufficient to fund our operating needs for the next twelve months and beyond. Our revolving credit facility described below is an additional potential source of liquidity. We will continue to monitor the impact of the ongoing COVID-19 pandemic on our liquidity and capital resources. We expect our cashflow from operating activities to be negatively impacted by the economic recession. Senior Secured Revolving Credit Facility OnDecember 10, 2019 , we entered into an amended and restated$500.0 million five-year senior secured revolving credit facility, which matures onDecember 10, 2024 (the "Amended Revolving Credit Facility"). Borrowings under the Amended Revolving Credit Facility can be used to finance working capital needs, capital expenditures and general corporate purposes, including to finance permitted acquisitions. InJuly 2020 , we executed a temporary amendment to the Amended Revolving Credit Facility to provide for certain covenant relief, primarily to facilitate the issuance of the 2025 Notes, the repurchase of a portion of the 2022 Notes, and to pay down existing borrowings under the credit facility. As ofAugust 4, 2020 , we have a$0.2 million letter of credit under the Amended Revolving Credit Facility. The remaining borrowing capacity atAugust 4, 2020 is$499.8 million . Cash Flows from Continuing Operations Our cash flows attributable to continuing operations are as follows: Six Months Ended June 30, 2020 2019 (in thousands) Net cash provided by operating activities$ 87,916 $ 67,875 Net cash used in investing activities (89,108 ) (90,838 )
Net cash provided by (used in) financing activities 45,282 (24,653 )
Cash Flows from Operating Activities Our largest source of cash provided by our operating activities is revenues generated by our products. Our primary uses of cash from our operating activities include advertising and promotional payments. In addition, our uses of cash from operating activities include compensation and other employee-related costs, other general corporate expenditures, litigation settlements and contingencies, certain contingent consideration payments, and income taxes. Net cash provided by operating activities attributable to continuing operations increased in the first six months of 2020 from the first six months of 2019 primarily due to changes in accounts receivable, partially offset by changes in accounts payable, accrued expenses and other current liabilities. The first six months of 2020 also experienced a decrease in revenue, partially offset by a corresponding decrease in selling and marketing expense, compared to the first six months of 2019. Cash Flows from Investing Activities Net cash used in investing activities attributable to continuing operations in the first six months of 2020 of$89.1 million consisted of the purchase of an$80.0 million equity interest in Stash and capital expenditures of$9.1 million primarily related to internally developed software. Net cash used in investing activities attributable to continuing operations in the first six months of 2019 of$90.8 million consisted primarily of the acquisition of ValuePenguin for$105.6 million , net of cash acquired, and capital expenditures of$9.8 41
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million primarily related to internally developed software. This was partially offset by proceeds of$24.1 million on the sale of two office buildings, net of closing expenses. Cash Flows from Financing Activities Net cash provided by financing activities attributable to continuing operations in the first six months of 2020 of$45.3 million consisted primarily of$55.0 million of net proceeds from our Amended Revolving Credit Facility, partially offset by$6.1 million in withholding taxes paid upon surrender of shares to satisfy obligations on equity awards, net of proceeds from the exercise of stock options, and$3.3 million related to contingent consideration payments for SnapCap. Net cash used in financing activities attributable to continuing operations in the first six months of 2019 of$24.7 million consisted primarily of$10.0 million of net repayments on our 2017 Revolving Credit Facility,$4.0 million for the repurchase of our common stock,$7.6 million in withholding taxes paid upon surrender of shares to satisfy obligations on equity awards, net of proceeds from the exercise of stock options, and a$3.0 million contingent consideration payment for SnapCap. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements other than a letter of credit and our funding commitments pursuant to our surety bonds, none of which have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. New Accounting Pronouncements For information regarding new accounting pronouncements, see Note 2-Significant Accounting Policies, in Part I, Item 1 Financial Statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Other than our Amended 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 Amended Revolving Credit Facility, if any. As ofAugust 4, 2020 , there were no borrowings under the Amended Revolving Credit Facility. 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, 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 lead volume. Due to lower lender demand, our revenue earned per consumer typically decreases but with correspondingly lower selling and marketing costs. Conversely, when interest rates increase, we typically see decreased consumer demand for mortgage refinancing, leading to decreased traffic to our website and higher associated selling and marketing efforts associated with that traffic. At the same time, lender demand for leads from third-party sources typically increases, as there are fewer consumers in the marketplace and, accordingly, the supply of organic mortgage lead volume decreases. Due to high lender demand, we typically see an increase in the amount lenders will pay per matched lead, which often leads to higher revenue earned per consumer. However, increases in the amount lenders will pay per matched lead in this situation is limited by the overall cost models of our lenders, and our revenue earned per consumer can be adversely affected by the overall reduced demand for refinancing in a rising rate environment. 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 42
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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 ofJune 30, 2020 , 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 theSecurities 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 endedJune 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. 43
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