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Tuesday, April 23, 2024

Fintech innovator LendingTree recharges after rivals stole its thunder

Not long ago, the stars seemed to be aligning for LendingTree. The titanic shift to more online purchases of homes, cars and insurance policies would surely propel digital ad spending to benefit the business that CEO Doug Lebda had built with tenacity since 1996.

By 2017, after years of marketing spending topping $2 billion, LendingTree’s “When banks compete, you win” tagline was part of the online financial marketplace’s lexicon. LendingTree’s brand awareness ranked at 69% among consumers, not far behind Chase’s 77%, and dwarfed other financial services startups such as Zillow, Rocket Mortgage and Bankrate, company research showed.

Investors bought the story, pushing the market value of the Charlotte-based financial services platform company to as much as $5 billion in mid-2019. Four years later, the shift online in financial services continues at a rapid clip, but the shiny promise of LendingTree has lost some luster.

It has laid off about a fifth of its staff in the past year. Revenue tripled between 2016 and 2019, but has flatlined since then. Including charge-offs, the company has reported a cumulative $150 million net loss over the last four years. The market cap was about $300 million in mid-April.

LendingTree’s history is that of a survivor, however. Lebda, a former Ironman competitor,  has shown remarkable staying power. The company is buckling down and testing new strategies. The company last year hired “Saturday Night Live” personality Molly Shannon to front a marketing campaign in support of its newest product, the Win Card. She will appear in some new ads this year. 

Win Card is LendingTree’s first branded credit card. The goal is to encourage a deeper relationship between customers and the company by rewarding responsible borrowing with benefits linked to the card. For example, a 20-point increase in one’s credit score prompts an automatic increase in the borrowing limit.

 Initial offers went to members of MyLendingTree, an opt-in service that provides free credit scores and credit monitoring to about 25 million people. Membership in the service has more than doubled in the past five years. “It’s our version of Amazon Prime,“ Lebda says.

“We want to be a digital ally to the consumer,” says J.D. Moriarty, the company’s president of marketplace and chief operating officer. “Win Card is the start of that.”

The launch follows a challenging year for consumer lenders and people trying to buy homes, cars and insurance. Rising interest rates spiked mortgage originations, and put a damper on refinancings, both big businesses for LendingTree. Insurance, another big line, was hit by inflation as rising prices for used cars and car repairs caused insurers to pull back. The cost of personal loans rose. “Our business was tested in 2022, in perhaps one of the most difficult operating environments we have faced in our history as a public company,” according to LendingTree’s year-end letter to shareholders.

In 2022, the company reported a loss from continuing operations of $188 million, or $14.69 per share. That followed a $69 million profit a year earlier, or $5.34 per share. LendingTree revenue fell to $984 million, compared with $1.1 billion in 2021.

Once heavily dependent on revenue from mortgage products, LendingTree has diversified effectively in the past decade. The company’s biggest business segment, consumer, which includes credit cards and personal loans, saw 2022 revenue increase by 20% to $396 million. But the home unit, which includes the mortgage products, was down 34%, to $289 million. Insurance, the third major category, dipped 8% to $299 million.

Much has been beyond LendingTree’s control. In March 2022, the Federal Reserve began to lift interest rates at the fastest pace in decades. By the end of the year, the cost of borrowing from the Fed had jumped from effectively zero to about 4.5% and 30-year, fixed-rate mortgages were costing nearly 7%.

LONG HAUL

A defining quality of LendingTree is its longevity. Founded as Lewisburg Ventures with $3,000 in 1996 by Doug Lebda, Tara Garrity, and Jamey Bennet, the company became CreditSource and then LendingTree. Lebda, who grew up in Lewisburg, Pennsylvania, dropped out of the University of Virginia’s MBA program to build the company. It went public in February 2000, a year best remembered for the dot-com crash. 

Hundreds of early stage companies vanished, but LendingTree survived and grew rapidly, which observers credit to more than $50 million in clever advertising in 2000 that directed consumers to mortgage lenders eager to make deals. Three years after the IPO, media executive Barry Diller’s IAC bought the company for $725 million, or about four times revenue. It wasn’t his finest deal. The financial crisis in 2007-2009 swamped the mortgage market, and IAC wrote off $475 million related to the acquisition.

IAC spun off LendingTree in 2008, marking its second incarnation as a public company. It was still led by Lebda. Shares started trading for about $8, then flatlined for several years as the reliance on mortgage products declined from about 90% of revenue in 2013 to 45% in 2017. Adjusted operating earnings soared from $19 million in 2013 to $154 million in 2018, helping make LendingTree one of the hottest U.S. stocks during that period. Many investors thought that Lebda’s success in home lending channels could be replicated in other consumer franchises.

“LendingTree is the secret success story of fintech,” technology news site TechCrunch wrote in 2018. An investor presentation that year noted that the company was poised for the game-changing shift toward online shopping for financial products. 

LendingTree wasn’t alone in noticing the trend, however. That included companies offering similar services with bigger financial backers and major ties to the Charlotte area. Credit Karma is owned by Intuit, whose brands include TurboTax and QuickBooks. Last year, it opened a south Charlotte office that employs more than 600 employees. Then there’s Bankrate, which was acquired for $1.7 billion in 2017 by Red Ventures, the Fort Mill, S.C.-based company with estimated annual revenue of $2 billion, according to a New York Times story in 2021.

Meanwhile, online marketplaces were evolving from transaction-driven matching services to being increasingly anchored by data and personalized recommendations. LendingTree’s innovation was encouraging customers to submit a loan application, then get five competitive offers. It was Lebda’s creative response to his own frustrating effort to secure his first home loan while living in Pennsylvania. The problem is that the conversion rate — the percentage of loan or credit card applications ultimately approved by a lender — is consistently low. 

Those five competitive lenders each paid LendingTree about $30 to show their offer to a customer, says Robert Wildhack, an analyst at Autonomous Research in New York. “But you only click on one so that for four of them, that’s $30 they’ve basically flushed. Better recommendations make the consumer happy and they make the lenders happy because they lead to higher conversions so they (the lenders) will pay more.”

LendingTree moved its headquarters from south Charlotte to the South End neighborhood last year.

The conversion rate issue has been a particular problem for LendingTree’s credit card business. Given the environment, Wildhack says, the company has “done a pretty good job re-emphasizing its home equity and purchase businesses. Personal loans, too.” But credit cards are different. “Credit cards are where the competitive pressures are showing through.”

Rival Nerdwallet, a publicly traded San Francisco-based company, has had double-digit growth in its card business, while LendingTree shows double-digit declines, the analyst says. To address this, the company rolled out an automated pre-approval platform last year dubbed “TreeQual.” It collects more customer data upfront, allows for better targeting and, ultimately, higher approval rates. 

When LendingTree redirects a consumer to a partner’s website for credit cards, fewer than 15% of applications are approved, according to Moriarty. “When we’re talking about something that is pre-approved, it is converting at an 80% approval rate,” he says. Through TreeQual and MyLendingTree, the company can compare consumer credit accounts against offers on its network,  and contact customers when there is an opportunity to save money. 

“With MyLendingTree, the consumer proposition is giving you the right answer, not necessarily a multiple choice,” Lebda says.

CREDIT SCORE KARMA

LendingTree is also addressing the cost of acquiring customers. It relies heavily on paid search to bring customers to its platform. Those customers are then connected to a network of more than 600 lenders, insurers, and credit card issuers.

Those ads are costly, with the company’s total marketing expense typically making up more than half of revenue. The trends on marketing spending have been moving in the wrong direction, pressuring LendingTree’s margins. In the fourth quarter of 2022, it spent $124 million in advertising to generate its $202 million in revenue. The previous year, the company spent $170 million in that period, resulting in $258 million in revenue. 

LendingTree’s competitors are viewed as less dependent on paid advertising, relying instead on search engine optimization (SEO) and other lower-cost strategies to attract clients to their websites.

“NerdWallet and Credit Karma were the first to figure out that advertising free credit scores was a great way to attract users,” says Lebda. LendingTree provided free credit scores, too, but did not market the service as aggressively.

“(Their) volume has been built up with SEO and content. They’re not dependent on advertising to the tune of 65% of revenue. They’re getting their traffic from Google organic search as opposed to Google paid search.”

A Google search for “personal loan rates” brings up a screen with LendingTree at the top, followed by a website called 10bestpersonalloans.com, and then NerdWallet. LendingTree and the 10best site are flagged as “Sponsored,” meaning they have paid for their place in the listings. NerdWallet appears organically, based on content it has generated that has been optimized for the search engine terms utilized by Google’s algorithms. 

“We’re playing a catch-up game in SEO,” Lebda says. “It’s one of the major initiatives we’re working on.” To improve its search-engine results, LendingTree has hired editors, writers, and researchers and technical experts to put together a library of personal finance content.

A CYCLICAL BUSINESS

More than a decade of near-zero interest rates has created obvious distortions in the economy, including favorable ones such as ultra-low rates for mortgages and lines of credit. That era has come to a close, particularly after the Silicon Valley Bank failure in March exposed banking industry problems caused by the sharp uptick in rates. Still, most economists concur that Fed tightening should be ending by early next year, and markets are adjusting. 

People still need a place to live, which will require mortgages. Some who have equity in their homes will want to borrow to help pay for cars, which will need insurance. They will also take out personal loans. 

LendingTree’s core businesses are not going away. Companies that are successful in streamlining the application and approval process and increasing the relevance of products will have a competitive advantage.

LendingTree expects to remain a viable competitor with Lebda, 53, having obvious motivation to excel. He’s the company’s largest shareholder with 2.17 million shares as of April 2022, or about 17% of outstanding shares. BlackRock also owned about 17%, while Vanguard held nearly 10%.

His base salary of $750,000 has been supplemented historically by large stock option awards, including about $33 million provided in December 2020. Those options have an exercise price of $300 that expires in 2030, putting them far out of the money given the sharp decline in LendingTree’s shares. During more successful years, Lebda  cashed in on tens of millions of dollars of stock options, helping pay for a minority stake in the NFL’s Pittsburgh Steelers, start a foundation and become a Charlotte civic leader. 

Analyst views on LendingTree are generally positive. As of April, nine of 10 of analysts tracked by Yahoo Finance had a “buy” on the company, with an average price target of about $40. Three rated the stock a “hold” and one an outright “sell.” For now, LendingTree is trimming costs and investing selectively. The company dismissed  about 150 workers this spring, following 200 job cuts last year. Before those actions, the company had said it employed about 1,350 people. In June, it is closing the Ovation Credit Services credit-repair service it bought for $20 million in 2018, the Jacksonville Business Journal reported. 

Revenues for this year are expected to be roughly flat compared to 2022 with its home unit down by at least 20%. The consumer and insurance businesses are projected to expand at mid-single digit rates.

Fortunately, LendingTree’s balance street remains “a source of strength” because it didn’t overpay for acquisitions in recent years when valuations were high, Lebda wrote in his shareholders letter. Cost of servicing its $824 million in debt is less than 3%, while the company earns more than 4% on its $299 million cash balance.

The work continues, Lebda says, to “build a destination for our customers to get timely advice on how to improve their financial lives, which is more relevant to them now than ever.” Or as Molly Shannon might say, “Ya need a lenda?”

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