LENDINGTREE, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere within this report. This discussion includes both historical information and forward-looking information that involves risks, uncertainties and assumptions. Our actual results may differ materially from management's expectations as a result of various factors, including but not limited to those discussed in the sections entitled "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Information."
Company Overview
LendingTree, Inc. is the parent ofLT Intermediate Company, LLC , which holds all of the outstanding ownership interests ofLendingTree, LLC , andLendingTree, LLC owns several companies. We operate what we believe to be the leading online consumer platform that connects consumers with the choices they need to be confident in their financial decisions. Our online consumer platform provides consumers with access to product offerings from 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, sales of insurance policies and other related offerings. In addition, we offer tools and resources, including free credit scores, that facilitate comparison shopping for loans, deposit products, insurance and other offerings. We seek to match consumers with multiple providers,who can offer them competing quotes for the product, 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 monitor consumers' credit profiles and then identify and alert them to loans and other offerings on our marketplace that may be more favorable than the terms they may have at a given point in time. This is designed to provide consumers with measurable savings opportunities over their lifetimes. We are focused on developing new product offerings and enhancements to improve the experiences that consumers 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. 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 (loss) 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 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 various lockdown orders and related economic pullback are affecting our business and marketplace participants to varying degrees. We are continuously monitoring the impacts of the current economic conditions related to the COVID-19 pandemic and the effect on our business, financial condition and results of operations. Of our three reportable segments, the Consumer segment was most impacted as unsecured credit and the flow of capital in certain areas of the market have contracted. The impact to our Home and Insurance segments was much less substantial. We believe our three reporting segments have generally recovered from the impact of the pandemic. Most of our selling and marketing expenses are variable costs that we adjust dynamically in relation to revenue opportunities to profitably meet demand. Thus, as our revenue was negatively impacted during the recession, our marketing expenses generally decreased in line with revenue.
Segment Reporting
We have three reportable segments: Home, Consumer and Insurance.
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Recent Business Acquisitions
OnFebruary 28, 2020 , we acquired an equity interest in Stash for$80.0 million . OnJanuary 6, 2021 we acquired an additional equity interest for$1.2 million . Stash is a consumer investing and banking platform. Stash brings together banking, investing, and financial services education into one seamless experience offering a full suite of personal investment accounts, traditional andRoth IRAs , custodial investment accounts, and banking services, including checking accounts and debit cards with a Stock-Back® rewards program. In the fourth quarter of 2021, we sold a portion of our investment in Stash for$46.3 million , realizing a gain on the sale of$27.9 million . OnJanuary 10, 2019 , we acquired 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 insurance carriers and agents. This strategic acquisition positions us to achieve further scale in the insurance space as well as the broader financial services industry.
These acquisitions continue our diversification strategy.
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
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 steadily decreased from a monthly average of 4.46% inJanuary 2019 , ending at a monthly average of 3.72% inDecember 2019 . The declining trend continued into 2020, largely as a result of stimulus efforts in response to the COVID-19 pandemic, beginning at a monthly average of 3.62% inJanuary 2020 and ending at a monthly average of 2.68% inDecember 2020 . During 2021, 30-year mortgage interest rates steadily increased from a monthly average of 2.74% inJanuary 2021 , ending at a monthly average of 3.10% in December.
On a full-year basis, 30-year mortgage interest rates decreased to an average 2.96% in 2021, compared to 3.11% and 3.94% in 2020 and 2019, respectively.
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[[Image Removed: tree-20211231_g3.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 to Mortgage
Bankers Association ("MBA") data, total refinance origination dollars increased
from 38% of total 2019 mortgage origination dollars to 60% in 2020, then
remained relatively consistent at 59% in 2021 as a result of the general trend
in average mortgage interest rates. Total refinance origination dollars
increased by 109% in 2020 over 2019 and decreased by 11% in 2021 over 2020.
Industry-wide mortgage origination dollars increased by 59% in 2020 over 2019
and decreased by 3% in 2021 over 2020.
Looking forward, the MBA is projecting 30-year mortgage interest rates to
increase slightly in 2022 to an average 4.0%. According to MBA projections, the
mix of mortgage origination dollars is expected to move back towards purchase
mortgages with the refinance share representing just 33% for 2022.
The
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 Fannie Mae data, existing-home sales in 2019 remained consistent with 2018 levels, which had decreased due to limited inventory of homes for sale and rising interest rates. In 2020, existing home sales grew by 6% over 2019, fueled by increased competition for low inventory as well as an increase in first-time home buyers. This trend continued into 2021 with existing home sales growing 9% over 2020. Fannie Mae expects a 5% decrease in existing home sales in 2022.
Convertible Senior Notes and Hedge and Warrant Transactions
OnJuly 24, 2020 , we issued$575.0 million aggregate principal amount of our 0.50% Convertible Senior Notes dueJuly 15, 2025 and, in connection therewith, entered into Convertible Note Hedge and Warrant transactions with respect to our common stock. OnMay 31, 2017 , we issued$300.0 million aggregate principal amount of our 0.625% Convertible Senior Notes dueJune 1, 2022 and, in connection therewith, entered into Convertible Note Hedge and Warrant transactions with respect to our common stock. OnJuly 24, 2020 , a portion of the net proceeds from the issuance of the 2025 Notes was used to repurchase approximately$130.3 million principal amount of the 2022 Notes. A portion of the call spread transactions associated with the 2022 Notes was also terminated onJuly 24, 2020 in notional amounts corresponding to the principal amount of the 2022 Notes repurchased. 36
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For more information, see Note 15-Debt, in the notes to the consolidated financial statements included elsewhere in this report.
Our principal executive office is located on approximately 176,000 square feet of office space inCharlotte, North Carolina under an approximate 15-year lease that commenced in the second quarter of 2021. With our expansion inNorth Carolina , inDecember 2016 , we received a grant from the state that provides an aggregate amount up to$4.9 million in reimbursements through 2029 beginning in 2017 for investing in real estate and infrastructure in addition to increasing jobs inNorth Carolina at specific targeted levels through 2021, 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 an aggregate amount up to$8.4 million in reimbursements through 2032 beginning in 2021 for increasing jobs inNorth Carolina at specific targeted levels through 2024, and maintaining the jobs thereafter. 37
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Results of Operations for the Years ended
For information on fiscal 2019 results and similar comparisons, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations for the Years ended
Year Ended December 31, 2021 vs. 2020
$ %
2021 2020 Change Change
(Dollars in thousands)
Home $ 441,738 $ 320,992 $ 120,746 38 %
Consumer 329,945 253,198 76,747 30 %
Insurance 326,153 333,765 (7,612) (2) %
Other 663 2,035 (1,372) (67) %
Revenue 1,098,499 909,990 188,509 21 %
Costs and expenses:
Cost of revenue (exclusive of depreciation and
amortization shown separately below) 57,297 54,494 2,803 5 %
Selling and marketing expense 773,990 617,404 156,586 25 %
General and administrative expense 153,472 129,101 24,371 19 %
Product development 52,865 43,636 9,229 21 %
Depreciation 17,910 14,201 3,709 26 %
Amortization of intangibles 42,738 53,078 (10,340) (19) %
Change in fair value of contingent consideration (8,249) 5,327 (13,576) (255) %
Severance 53 295 (242) (82) %
Litigation settlements and contingencies 392 (943) 1,335 142 %
Total costs and expenses 1,090,468 916,593 173,875 19 %
Operating income (loss) 8,031 (6,603) 14,634 222 %
Other (expense) income, net:
Interest expense, net (46,867) (36,300) 10,567 29 %
Other income 123,272 376 122,896 32,685 %
Income (loss) before income taxes 84,436 (42,527) 126,963 299 %
Income tax (expense) benefit (11,298) 19,961 (31,259) (157) %
Net income (loss) from continuing operations 73,138 (22,566) 95,704 424 %
Loss from discontinued operations, net of tax (4,023) (25,689) (21,666) (84) %
Net income (loss) and comprehensive income (loss)
$ (48,255) $ 117,370 243 % Revenue
Revenue increased in 2021 compared to 2020 due to increases in our Home and Consumer segments, partially offset by decreases in our Insurance segment.
Our Consumer segment includes the following products: credit cards, personal loans, small business loans, student loans, auto loans, deposit accounts, and other credit products such as credit repair and debt settlement. Many of our Consumer segment products are not individually significant to revenue. Revenue from our Consumer segment increased$76.7 million in 2021 from 2020, or 30%, primarily due to increases in our personal loans, small business loans products, and credit cards.
Revenue from our personal loans product increased
For the periods presented, no other products in our Consumer segment represented more than 10% of revenue; however, certain other Consumer products experienced notable changes. Revenue from our small business loans product increased$21.5 million in 2021 compared to 2020, due to loosening underwriting standards and improved flow of capital, as well as an 38
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increase in revenue earned per consumer. Revenue from our credit cards product
increased
Revenue from our Insurance segment decreased$7.6 million to$326.2 million in 2021 from$333.8 million in 2020, or 2%, due to a decrease in revenue earned per consumer, partially offset by an increase in the number of consumers seeking insurance coverage. 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$120.7 million in 2021 from 2020, or 38%, primarily due to increases in revenue from our refinance mortgage, purchase mortgage, and home equity loans products. Revenue from our refinance mortgage product increased$65.5 million in 2021 compared to 2020, primarily due to an increase in revenue earned per consumer, partially offset by a decrease in the number of consumers completing request forms. Revenue from our purchase mortgage product and our home equity loans and lines of credit product increased$24.5 million and$31.5 million , respectively, in 2021 compared to 2020. Revenue from our purchase mortgage product and home equity loans and lines of credit product increased due to a shift in both lender and consumer focus away from refinance products as well as an increase in revenue earned per consumer. While we believe our three reportable segments have generally recovered from the impacts of the ongoing COVID-19 pandemic, we are continuously monitoring the impacts of the pandemic on the economy and any potential future impacts to our segment revenue.
Our Other category primarily includes revenue from the resale of online
advertising space to third parties. Revenue in the Other category decreased
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 increased in 2021 from 2020, primarily due to increases in compensation and benefits, website network hosting and server fees, and call center technology of$3.7 million ,$1.5 million , and$1.5 million , respectively, partially offset by a$3.3 million decrease in credit card fees.
Cost of revenue as a percentage of revenue decreased to 5% in 2021 compared to 6% in 2020.
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 2021 compared to 2020 was primarily due to the increases in advertising and promotional expense discussed below. Additionally, compensation and benefits increased$7.7 million in 2021 compared to 2020. Advertising and promotional expense is the largest component of selling and marketing expense, and is comprised of the following: Year Ended December 31, 2021 vs. 2020 $ % 2021 2020 Change Change (Dollars in thousands) Online$ 687,976 $ 539,910 $ 148,066 27 % Broadcast 8,738 13,415 (4,677) (35) % Other 19,925 14,423 5,502 38 % Total advertising expense$ 716,639 $ 567,748 $
148,891 26 %
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
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to ensure sufficient consumer inquiries to profitably meet such demand. An increase in a product's revenue is generally met by a corresponding increase in marketing spend, and conversely a decrease in a product's revenue is generally met by a corresponding decrease in marketing spend. This relationship exists for our Home, Consumer and Insurance segments. We adjusted our advertising expenditures in 2021 compared to 2020 in response to changes in Network Partner demand on our marketplace as they recovered from the COVID-19 pandemic discussed above. We will continue to adjust selling and marketing expenditures dynamically in relation to this and in response to anticipated revenue opportunities.
General and administrative expense
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, corporate information technology, human resources and executive management functions, as well as facilities and infrastructure costs and fees for professional services.
General and administrative expense increased in 2021 compared to 2020, primarily due to increases in compensation and benefits, technology expense, and facilities expense of$18.0 million ,$4.0 million , and$2.1 million , respectively. This was partially offset by decrease in professional fees of$2.3 million . Losses on the disposal of assets also increased$2.3 million in 2021 compared to 2020. Non-cash compensation expense within general and administrative expense increased in 2021, which resulted in reductions in net income from continuing operations in 2021 compared to historical periods. For additional information, see Note 13-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.
General and administrative expense as a percentage of revenue remained consistent at 14% for each of 2021 and 2020.
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 2021 compared to 2020 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 2021 compared to 2020 was primarily the result of higher investment in internally developed software in recent years, to support the growth of our business.
Contingent consideration
During 2021, we recorded aggregate contingent consideration gains of
During 2020, we recorded aggregate contingent consideration expense of
Interest expense
Interest expense increased in 2021 compared to 2020 primarily due to the issuance of the 0.50% Convertible Senior Notes dueJuly 15, 2025 (the "2025 Notes") as well as the partial repurchase of the 2022 Notes inJuly 2020 . Interest expense was recognized on the 2025 Notes for the entire year of 2021, compared to the partial period in 2020. This incremental interest expense was partially offset by lower interest expense on the 2022 Notes in 2021 compared to 2020 as a result of theJuly 2020 partial repurchase of the notes. The overall increase was further offset by the loss on debt extinguishment of$7.8 million recognized inJuly 2020 , noted above. See Note 15-Debt for additional information on the issuance of the 2025 Notes and the partial repurchase of the 2022 Notes. Other Income 40
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During 2021, we sold a portion of our investment in Stash and realized a gain of$27.9 million . Additionally, we recorded unrealized gains of$95.4 million as a result of an adjustment to the fair value of the Stash equity securities still held by us based on observable market events. Income tax benefit Year Ended December 31, 2021 2020 (in thousands, except percentages) Income tax (expense) benefit $ (11,298)$ 19,961 Effective tax rate 13.4 % 46.9 % For 2021, the effective tax rate varied from the federal statutory rate of 21% in part due to the benefit derived from excess tax deductions from exercise of stock options of$11.7 million , including state taxes and from research and experimentation ("R&D") tax credits of$3.2 million , partially offset by expense due to nondeductible executive compensation of$3.1 million and incremental valuation allowance on state net operating losses of$0.6 million , primarily due to state legislative changes. For 2020, the effective tax rate varied from the federal statutory rate of 21% in part due to the benefit derived from excess tax deductions from the vesting of restricted stock and exercise of stock options of$2.5 million , including state taxes. The effective tax rate for 2020 was also impacted by a tax benefit of$6.1 million for the impact of the 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. 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 2020. These deferred tax assets have been revalued, as they have been carried back to 2016 and 2017, which are tax periods prior to the TCJA when the federal statutory tax rate was 35% versus the 21% federal statutory tax rate in effect after the enactment of the TCJA.
Discontinued Operations
The results of discontinued operations include the results of the LendingTree Loans business formerly operated by our wholly-owned subsidiary, 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. During the HLC bankruptcy, a bar date for claims against HLC was set, establishing a deadline for all HLC's creditors to assert any claim they may have had against HLC. Distributions were made to holders of allowed claims deemed timely filed. After all distributions to creditors were made andHLC's Chapter 7 bankruptcy estate was fully administered, the HLC bankruptcy case was closed onJuly 14, 2021 .
Prior to the bankruptcy filing, losses from the LendingTree Loans business were primarily due to litigation settlements and contingencies and legal fees associated with legal proceedings.
The results of discontinued operations include litigation settlements and
contingencies and legal fees associated with legal proceedings against
See Note 21-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.
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Segment Profit
Year Ended December 31, 2021 vs. 2020
$ %
2021 2020 Change Change
(Dollars in thousands)
Home $ 153,352 $ 132,123 $ 21,229 16 %
Consumer 143,497 106,890 36,607 34 %
Insurance 113,464 131,142 (17,678) (13) %
Other 53 (682) 735 108 %
Segment profit $ 410,366 $ 369,473 $ 40,893 11 %
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
22-Segment Information in the notes to the consolidated financial statements for
additional information on segments and a reconciliation of segment profit to
pre-tax income from continuing operations.
HOME
The Home segment had an increase in revenue and segment profit of 38% and 16%, respectively in 2021 compared to 2020. Our unit economics steadily improved throughout the year, with increases in revenue per lead for refinance, purchase and home equity in 2021 compared to 2020. Mortgage rates have risen from historic lows and refinance volumes have subsequently declined. The purchase market remains competitive as a national home inventory shortage and lower affordability impact purchase application rates. In this type of environment our lender partners rely even more on LendingTree to help meet their origination goals. We continue to look for opportunities to optimize towards higher converting products such as cash-out refinance and home equity loans, as our partners are focused on these products. The average home with a mortgage has increased its available equity from a year ago. As interest rates have risen broadly from all-time lows, loans secured with home equity represent the lowest cost source of financing for most consumers. We continue to focus on improving the consumer experience to increase repeat users, cross-sell, and conversion rates. This will allow us to increase our reach and better align the right borrowers to the right experiences based on their readiness to transact.
CONSUMER
The Consumer segment grew steadily throughout the year, generating revenue and segment profit growth of 30% and 34%, respectively, in 2021 compared to 2020. Personal loans and small business revenue in the fourth quarter of 2021 returned to 2019 levels and we are forecasting strong growth to continue in 2022, while credit card is experiencing a slower rebound. As we add new lending partners to the TreeQual platform, we anticipate a significantly improved customer experience that should drive increased conversion rates, margins, and pace of revenue growth in both credit card and personal loans. Demand for the personal loans continues to grow as consumer savings rates decline with the end of government stimulus programs and higher consumer spending. Our partner network has grown in 2021 compared to 2020, and we maintain a strong pipeline of new lenders looking to onboard. The addition of TreeQual to the personal loans product and our continued investment in the down funnel experience should continue to push close rates higher and increase monetization. Our credit card business continues its recovery from pandemic lows. Issuers remain aggressive with the introduction of new cards and features, and we have expanded our partner network. Margins in the credit card business continue to lag pre-pandemic levels. We are working to diversify our marketing mix, actively pursuing more profitable marketing channels and partnerships to expand our reach and attract more consumers, which should lead to improved unit economics over time. Our small business product has been consistently growing, and we expect that to continue in 2022. We launched ourPremium Marketplace offering in the fourth quarter of 2021, which led to increased conversions and higher revenue per referral from enhanced customer tiering. Volume increased as our concierge model helps small business owners find the right financing options to fit their unique business needs. We expect these positive trends to continue in 2022 as we focus on product diversification, optimization of customer matching by segment, and cross-sell to unlock additional marketing opportunities.
INSURANCE
The claims market for our carrier partners was challenging in the last half of
2021, driving insurance revenue down 2% in 2021 from 2020 and segment profit
down 13%. Property and Casualty ("P&C") carriers reduced marketing budgets as
they incurred significantly higher loss ratios, but we believe this down cycle
may be behind us. Although the dynamic remains fluid, we expect the business to
return to a normalized operating environment by mid-year. In the face of the
overall industry challenge, we are committed to capturing additional share of
carrier budgets by focusing on conversion rate and lead quality,
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which will benefit results when carriers look to aggressively acquire new customers. Consumer demand, as measured by traffic to our sites, remains robust and continued to strengthen into year end. We expect this trend to continue as significant rate increases kicks-off a historic cycle of drivers shopping for new auto policies. We also made significant progress expanding ourP&C Agency , adding P&C carriers to the platform and increasing our agent base, driving growth in policies sold and written premium in our direct-to-consumer channel. Providing bindable insurance quotes improves the consumer experience and increases conversion rates, and aligns well with our strategy of improving customer fulfillment across our platform. OurMedicare Agency has scaled nicely, with growth in written policies of 111% in 2021 compared to 2020 as we invested in additional training while managing our agent count responsibly. Exiting our second Annual Enrollment Period, we continue to evaluate our performance and look for ways to improve unit economics through marketing effectiveness and close rates. We have observed the challenges increased customer churn and lower policy persistency have created for competitors in the space. We will only scale this business to the extent we can do so with attractive targeted returns.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
We report Adjusted EBITDA as a supplemental measure to GAAP. This measure is the primary metric by which we evaluate the performance of our businesses, on which our marketing expenditures and internal budgets are based and by which, in most years, management and many employees are compensated. We believe that investors should have access to the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures discussed below.
Definition of Adjusted EBITDA
We report Adjusted EBITDA as net income from continuing operations adjusted to exclude interest, income tax, amortization of intangibles and depreciation, and to further exclude (1) non-cash compensation expense, (2) non-cash impairment charges, (3) gain/loss on disposal of assets, (4) gain/loss on investments (5) restructuring and severance expenses, (6) litigation settlements and contingencies, (7) acquisitions and dispositions income or expense (including with respect to changes in fair value of contingent consideration), and (8) 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. One-time items for the year endedDecember 31, 2020 consisted of expenses incurred in connection with a secondary public offering of our common stock by our largest shareholder, for which we did not receive any proceeds. There are no adjustments for one-time items for the year endedDecember 31, 2021 .
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.
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The following table is a reconciliation of net income (loss) from continuing operations to Adjusted EBITDA.
Year Ended December 31,
2021 2020
(in thousands)
Net income (loss) from continuing operations $ 73,138 $ (22,566)
Adjustments to reconcile to Adjusted EBITDA:
Amortization of intangibles 42,738 53,078
Depreciation 17,910 14,201
Severance 53 295
Loss on impairments and disposal of assets 3,465 1,160
Gain on investments (123,272) -
Non-cash compensation expense 68,555 53,733
Costs of secondary public offering - 863
Change in fair value of contingent consideration (8,249)
5,327
Acquisition expense 1,796
2,217
Litigation settlements and contingencies 392
(943)
Interest expense, net 46,867
36,300
Income tax expense (benefit) 11,298 (19,961) Adjusted EBITDA$ 134,691 $ 123,704
Financial Position, Liquidity and Capital Resources
For information on fiscal 2019 results and similar comparisons, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Financial Position, Liquidity and Capital Resources of our Form 10-K
for the fiscal year ended
General
As of
We expect our cash and cash equivalents and cash flows from operations to be sufficient to fund our operating needs for the next twelve months and beyond. Our credit facility described below is an additional potential source of liquidity. We will continue to monitor the impact of the ongoing COVID-19 pandemic on our liquidity and capital resources.
Notable transactions affecting cash and cash equivalents during the reported periods are as follows:
2021
In 2021, we repurchased an aggregate of 334,253 shares of our common stock
pursuant to a stock repurchase program for
In the first quarter of 2021, we acquired an additional equity interest in Stash for$1.2 million . In the fourth quarter of 2021, we sold a portion of our Stash equity securities to a third party for$46.3 million . See Note 8-Equity Investment to the consolidated financial statements included elsewhere in this report for additional information on the equity interest in Stash.
2020
InJuly 2020 , we made litigation settlement payments of$26.5 million to the ResCap Liquidating Trust ("ResCap") and$36.0 million to the HLC bankruptcy Trustee for the matters noted in Note 21-Discontinued Operations. InOctober 2020 , due to the timing of distributions from the HLC bankruptcy estate, we were required to make a further payment of$6.4 million to ResCap. In 2021, we received an$8.6 million reimbursement from the HLC bankruptcy estate related to the ResCap payments. InJuly 2020 , we issued$575.0 million of our 2025 Notes for net proceeds of approximately$559.9 million . We used approximately$63.0 million of the net proceeds to enter into Convertible Note Hedge and Warrant transactions. Further, we used$234.0 million of the net proceeds to repurchase approximately$130.3 million principal amount of our 2022 Notes. To the 44
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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 15-Debt for additional information.
In
During 2020, we made net repayments of
During 2020, we made contingent consideration payments of$6.0 million ,$4.4 million and$20.2 million related to the prior acquisitions of SnapCap, Ovation and QuoteWizard, respectively.
Credit Facility
OnSeptember 15, 2021 , we entered into a credit agreement (the "Credit Agreement"), consisting of a$200.0 million revolving credit facility (the "Revolving Facility"), which matures onSeptember 15, 2026 , and a$250.0 million delayed draw term loan facility (the "Term Loan Facility" and together with the Revolving Facility, the "Credit Facility"), which matures onSeptember 15, 2028 to the extent the loans thereunder will be drawn. The delayed draw commitments under the Term Loan Facility will be available untilJune 1, 2022 . The proceeds of the Revolving Facility can be used to finance working capital, for general corporate purposes and any other purpose not prohibited by the Credit Agreement. The proceeds of the Term Loan Facility can be used to settle the Company's 2022 Notes, including related fees, costs and expenses, and up to$80.0 million may be used for general corporate purposes and any other purposes not prohibited by the Credit Agreement. See Note 15-Debt for additional information. As ofFebruary 28, 2022 , we have outstanding a$0.2 million letter of credit under the Revolving Facility, and the remaining borrowing capacity is$199.8 million . No term loans have been drawn under the Term Loan Facility as ofFebruary 28, 2022 .
For additional information on the Credit Facility, see Note 15-Debt in the notes to the consolidated financial statements included elsewhere in this report.
Convertible Debt
Our 2022 Notes have a principal balance of$169.7 million and mature onJune 1, 2022 , unless earlier repurchased or converted. Our 2025 Notes have a principal balance of$575.0 million and mature onJuly 15, 2025 , unless earlier repurchased or converted. See Note 15-Debt to the consolidated financial statements included elsewhere in this report for more information.
Operating Leases
We have operating lease obligations associated with office space in various cities across the country and office equipment. Our principal executive office is located inCharlotte, North Carolina under an approximate 15-year lease that commenced in the second quarter of 2021. We anticipate cash payments under operating lease obligations of$13.7 million in 2022. See Note 11-Leases to the consolidated financial statements included elsewhere in this report for more information.
Cash Flows from Continuing Operations
Our cash flows attributable to continuing operations are as follows:
Year Ended December 31,
2021 2020
(in thousands)
Net cash provided by operating activities $ 131,256 $ 111,299
Net cash provided by (used in) investing activities $ 10,067 $ (122,149)
Net cash (used in) provided by financing activities $ (63,347) $ 193,290 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
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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 2021 from 2020 primarily due to a increase in revenue, partially offset by a corresponding increase in selling and marketing expense. Additionally, cash from changes in working capital increased primarily as a result of changes in contingent consideration, accounts payable, accrued expenses and other current liabilities, and income taxes receivable, partially offset by unfavorable changes in accounts receivable.
Cash Flows from Investing Activities
Net cash provided by investing activities attributable to continuing operations in 2021 of$10.1 million consisted of$46.3 million in proceeds from a partial sale of our equity interest in Stash partially offset by$1.2 million for the purchase of an additional equity interest in Stash and capital expenditures of$35.1 million primarily related to internally developed software. Net cash used in investing activities attributable to continuing operations in 2020 of$122.1 million consisted of the purchase of an$80.0 million equity interest in Stash and capital expenditures of$42.1 million primarily related to internally developed software and leasehold improvements for our new principal corporate offices.
Cash Flows from Financing Activities
Net cash used in financing activities attributable to continuing operations in 2021 of$63.3 million consisted primarily of$40.0 million for the repurchase of our stock,$14.4 million in withholding taxes paid upon surrender of shares to satisfy obligations on equity awards, net of proceeds from the exercise of stock options, as well as$6.4 million for the payment of debt issuance costs and$2.5 million paid for the original issue discount on the undrawn Term Loan Facility. Net cash used in financing activities attributable to continuing operations in 2020 of$193.3 million consisted primarily of$575.0 million of gross proceeds from the issuance of the 2025 Notes, partially offset by$233.9 million paid to repurchase a portion of the 2022 Notes, a net$47.4 million paid for the related convertible note hedge and warrant transactions outlined above,$75.0 million of net repayments on our Amended Revolving Credit Facility, and$16.6 million for the payment of debt issuance costs.
Critical Accounting Policies and Estimates
The following disclosure is provided to supplement the description of our accounting policies contained in Note 2-Significant Accounting Policies to the consolidated financial statements included elsewhere in this report in regard to significant areas of judgment. This disclosure includes accounting policies related to both continuing operations and discontinued operations. Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. Because of the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a more significant impact on our consolidated financial statements than others. A discussion of some of our more significant accounting policies and estimates follows.
Income Taxes
Estimates of deferred income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 14-Income Taxes to the consolidated financial statements included elsewhere in this report, and reflect management's assessment of actual future taxes to be paid on items reflected in the consolidated financial statements, giving consideration to both timing and the probability of realization. Actual income taxes could vary from these estimates due to future changes in income tax law, state income tax apportionment or the outcome of any review of our tax returns by theIRS , as well as actual operating results that may vary significantly from anticipated results. We also recognize liabilities for uncertain tax positions based on the two-step process prescribed by the accounting guidance for uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. 46
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A valuation allowance is provided on deferred tax assets if it is determined that it is "more likely than not" that the deferred tax asset will not be realized. AtDecember 31, 2021 , 2020 and 2019, we recorded a partial valuation allowance of$6.0 million ,$5.8 million and$4.1 million , respectively, primarily related to state net operating losses, which we do not expect to be able to utilize prior to expiration.
Stock-Based Compensation
The forms of stock-based awards granted to our employees are principally
restricted stock units ("RSUs"), RSUs with performance conditions, stock
options, and employee stock purchases related to the Employee Stock Purchase
Plan ("Employee Stock Purchase Rights"). Further, stock options with market
conditions, restricted stock awards ("RSAs") with performance conditions and
RSAs with market conditions have been granted to our Chairman and Chief
Executive Officer. The value of RSUs is measured at their grant dates as the
fair value of common stock and amortized ratably as non-cash compensation
expense over the vesting term. The value of stock options issued and Employee
Stock Purchase Rights are generally estimated using a Black-Scholes option
pricing model. The value of performance-based grants is measured at their grant
dates and recognized as non-cash compensation expense, considering the
probability of the targets being achieved. Performance-based grants with a
market condition are generally valued using a Monte Carlo simulation model. If
an award is modified, we determine if the modification requires a new
calculation of fair value or change in the vesting term of the award. See
Note 13-Stock-Based Compensation to the consolidated financial statements
included elsewhere in this report for additional information on assumptions and
inputs to the fair value determination of stock-based awards.
Evaluation of Goodwill Impairment
We test goodwill annually for impairment as ofOctober 1 , or more frequently upon the occurrence of certain events or substantive changes in circumstances. As part of our annual impairment testing of goodwill, we may elect to assess qualitative factors as a basis for determining whether it is necessary to perform the traditional quantitative impairment testing. If our assessment of these qualitative factors indicates that it is not more likely than not that the fair value of the reporting unit or indefinite-lived intangible asset is less than its carrying value, then no further testing is required. Otherwise, the goodwill reporting unit must be quantitatively tested for impairment. Performing the quantitative test for goodwill impairment that compares the reporting unit fair value with its carrying value using a discounted cash flow analysis requires the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The value of goodwill subject to assessment for impairment at
Recoverability of Long-Lived Assets
We review the carrying value of all long-lived assets, primarily property and equipment, definite-lived intangible assets and operating lease right-of-use assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. Impairment is considered to have occurred whenever the carrying value of a long-lived asset cannot be recovered from cash flows that are expected to result from the use and eventual disposition of the asset. This recoverability test requires us to make assumptions and judgments related to factors used in a calculation of undiscounted cash flows, including, but not limited to, management's expectations for future operations and projected cash flows. The key assumptions used in this calculation include Adjusted EBITDA, the remaining useful lives of the primary cash flow generating asset in the asset group and, to a lesser extent, the deduction of capital expenditures and taxes paid in cash to arrive at net cash flows.
Subsequent to the adoption of ASU 2018-15 in the first quarter of 2020, capitalized implementation costs incurred in a hosting arrangement that is a service contract are also allocated to and included within long-lived asset groups tested for recoverability.
The combined value of long-lived assets and capitalized implementation costs
incurred in a hosting arrangement that is a service contract subject to
assessment for impairment is
Business Acquisitions
When we acquire businesses, we allocate the purchase price to tangible assets
and liabilities and identifiable intangible assets acquired at their acquisition
date fair values. Any residual purchase price is recorded as goodwill. We also
estimate the fair value of any contingent consideration using Level 3
unobservable inputs. Our estimates of fair value are based upon assumptions
believed to be reasonable but which are uncertain and involve significant
judgments by management.
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We reassess the fair value of contingent consideration quarterly until the contingency is resolved, and changes in the fair value are recorded in operating income in the consolidated statements of operations and comprehensive income (loss).Equity Investment Our equity investment does not have a readily determinable fair value and, upon acquisition, we elected the measurement alternative to value these securities. Accordingly, these equity securities are carried at cost and subsequently marked to market upon observable market events with any gains or losses recorded in operating income in the consolidated statement of operations.
The carrying value of our equity investment at
New Accounting Pronouncements
See Note 2-Significant Accounting Policies to the consolidated financial statements included elsewhere in this report for a description of recent accounting pronouncements.
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