LendingTree - Q1 2023

Transcript

Andrew Wessel (SVP of Investor Relations and Corporate Development)

Good morning.

Operator (participant)

Thank you. Good day, and thank you for standing by. Welcome to the LendingTree first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to our speaker today, Andrew Wessel, Head of Investor Relations. Please go ahead.

Andrew Wessel (SVP of Investor Relations and Corporate Development)

Thanks, Amber. Good morning to everyone joining us on the call this morning to discuss LendingTree's first quarter 2023 financial results. On the call today are Doug Lebda, LendingTree's Chairman and CEO; J.D. Moriarty, President of Marketplace and COO; Trent Ziegler, CFO; and Scott Peyree, President of Insurance. As a reminder to everyone, we posted a detailed letter to shareholders on our investor relations website earlier today. For the purposes of today's call, we will assume that listeners have read that letter and will focus on Q&A. Before I hand the call over to Doug for his remarks, I remind everyone that during today's call, we may discuss LendingTree's expectations for future performance. Any forward-looking statements that we make are subject to risks and uncertainties, and LendingTree's actual results could differ materially from the views expressed today.

Many, but not all of the risks we face are described in our periodic reports filed with the SEC. We will also discuss a variety of non-GAAP measures on the call today, and I refer you to today's press release and shareholder letter, both available on our website for the comparable GAAP definitions and full reconciliations of non-GAAP measures to GAAP. With that, Doug, please go ahead.

Doug Lebda (Founder, Chairman and CEO)

Thanks, Andrew. Thank you to everyone who's joining us today. We took several actions during the first quarter to right-size our expense base and position the company to serve our customers and partners more efficiently. These were strategic decisions made to simplify our operations and streamline our corporate priorities. We have been reinforcing a startup mindset with our team. It's important that we empower our employees to identify and solve issues in real time, harnessing the positive aspects of working in tighter and more cohesive project teams. The centerpiece of this effort has been moving to a quarterly strategic project cadence from our previous annual planning sessions. The quarterly corporate priorities are communicated to the entire company, with specific employees assigned to each initiative and cross-functional teams to improve speed of execution and drive accountability.

The benefits from our leaner organization and improved project-based planning are made clear in our updated financial outlook. Our lowered revenue forecast considers the impact of the businesses we exited this quarter, as well as closing Ovation Credit Services, which began in April after quarter end. We have also included an expected reduction in insurance revenue as one of our largest partners has paused new policy acquisition across several states for the foreseeable future. It's important to recognize that despite the $180 million reduction in our 2023 revenue forecast at the midpoint, our adjusted EBITDA guidance range has decreased by just $5 million. We've simplified our business and made it leaner. We will generate substantial operating leverage on our lower fixed cost base when the revenue environment does improve. Moving on to our segment performance.

In the first quarter, our insurance division again posted impressive results. The changes that our Scott and his team have implemented in the second half of last year have driven increases in segment operating margins, which rose to 39% from 26% in the first quarter of last year. We expect another subdued year of demand from our insurance carrier partners, we have positioned the company to capture market share with exceptional economics once demand returns. We have leaned into specific verticals that are displaying more resiliency, such as healthcare insurance, our service that pairs local captive agents with our customers looking for new policies and routing more of our customers into our own PNC agency for fulfillment. Within the home segment, we generated $24 million of revenue from our home equity offering in the quarter, producing modest growth from last year.

Our team is working on improving purchase conversion rates while also helping our partners meet our customers' strong demand for home equity loans. In consumer, higher short-term interest rates set by the Fed appear to finally be having the intended effect. Close rates have declined across all loan types, with lending partners tightening their underwriting requirements and slowing the pace of loan origination. We expect that this trend will continue as the year progresses. The implementation of Lightspeed on our platform is performing as expected, making our credit card business more efficient and enabling us to transition our CompareCards brand over to the core LendingTree experience, which will drive material cost savings over time. The message I would like to leave you with is that we have significantly reshaped the cost to run our company in the first quarter.

Our actions have removed low returning businesses that were consuming capital, time, and other resources. We've refocused our team on key priorities that will drive our profitable growth and more efficiently now and in the future. Operator, I'd be happy to open it to questions.

Operator (participant)

Thank you. At this time, we'll conduct the question-and-answer session. As a reminder, to ask a question you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. Please stand by as we compile the Q&A roster. Our first question comes from Youssef Squali of Truist Securities.

Youssef Squali (Managing Director)

Great. Can you guys hear me?

Doug Lebda (Founder, Chairman and CEO)

Yes, we can.

Youssef Squali (Managing Director)

Excellent. Good morning to you all. Two questions for both. One, maybe can you please talk about, as you guys have closed some of these businesses that you just spoke to, maybe the impact on the new guys for Q2 and fiscal 2023, just trying to get a more of an apples-to-apples comparison. Then second, maybe this is a question for Trent. As you look at the growth, particularly for 2023, what kind of growth assumptions are you assuming for the different businesses, the, the three main businesses? Thank you.

Trent Ziegler (CFO and Treasurer)

Thanks, Youssef. This is Trent. Yes, I think I can kind of hit both of those. If you think about the commentary we gave around the original guide, in February, you know, across segments, we said we expected home to be down, more than 20% from a top-line perspective. Our expectation there is that that's a little bit worse today than we thought two months ago. You know, we reserved at the time some optimism around our ability to grow and purchase, and the market there has proven, you know, harder than expected. Home equity continues to be really solid and that's a good contributor within the home segment.

You know, refi is obviously compressed, and then our, you know, our outlook on purchase is probably the real driver there. As you think about the insurance segment, we initially said kind of mid-teens type growth for that business this year. Keeping in mind, you know, obviously, last year was a tough year, so mid-teens type growth coming into 2023, we didn't feel like was much of a stretch. You know, I think as we've all seen the operating environment in insurance is getting harder. Obviously, you know, some big players just announced plans to reduce their marketing spend, and so we're reflecting that. I think, you know, from our perspective, we're happy that we were not sort of overly optimistic in the recovery in insurance.

Certainly the recent developments do temper our expectations for the year. What I'd point out at insurance is, you know, if we expected it to be up mid-single digits two months ago, now we probably expect it to be down, you know, mid-single digits. The contribution margin from that business, we do still expect to be up 10%-15% year-on-year. That's a testament to the work we've done to improve the margin profile of that business over the last six-nine months. Finally, within consumer, this is probably the biggest swing factor relative to the prior guide. We called out that we expected consumer to be up again mid-single digits this year. That's probably down mid-teens sitting here today.

Within that, you know, we have announced the plans to wind down the Ovation business. That's about half of the driver within consumer. Obviously, some developments within the broader credit repair space over the last couple months have led us to that decision. We were actually in a process to sell that business. You know, with an adverse ruling against one of the bigger players in that space, that whole industry has kind of been shaken up. You know, we're obviously going to be missing out on the direct Ovation revenue stream.

There's also a component of our business where we cross-sell to other players in that space, and that's been, you know, sort of temporarily impaired, and we're looking for other outlets for some of that traffic that goes under monetized through our traditional lending businesses. I think that covers it in terms of our new outlook and sort of where the declines are coming from.

Youssef Squali (Managing Director)

Okay. That's helpful. Thank you.

Operator (participant)

Please hold for our next question. Our next question comes from Jamie Friedman of equity research analyst. Jamie, your line is open.

Jamie Friedman (Senior Analyst)

Hi. Good morning, and thanks as always for the shareholder letter and doing this call. In the shareholder letter, you comment that the expense structure is back to the 2019 level. Trent, maybe this is for you. I just wanted to check, are you thinking about that on a percentage basis or an absolute basis or what is that comment referring to?

Trent Ziegler (CFO and Treasurer)

Yeah. On an absolute dollars basis, you're not gonna see the, you know, the full impact of the benefits of the cost reductions in Q2. By the time we get to the back half of the year in Q3 and Q4, we'll be run rating on an annual basis pretty close to the $200 million, which is where we were operating in 2019.

Jamie Friedman (Senior Analyst)

Got it. Okay.

Doug Lebda (Founder, Chairman and CEO)

The only thing I'd add to that is the fact that it's at 2019 levels is a reference point. It's not what we were necessarily going towards. You know, we were taking out costs very deliberately as the unit economics of the business change, and then some of your projects and things that you were working on just simply are underwater, you know, based on new realities. You just gotta

Keep adjusting to the reality of lender demand in the business.

Jamie Friedman (Senior Analyst)

Doug, just to follow up there, and maybe J.D., in terms of consumer, the component that surprised us a bit, and I wonder if it surprised you, was card, down 39% to $18 million. You know, when we look at the issuers, their originations look like they're fine. I realize it's more complicated than that, but is it possible that you're losing market share? Are there some specific issuers that have gone elsewhere? What's going on there to drive that this way?

John Moriarty (President of Marketplace and COO)

Sure. You kinda have to look, Jamie, at not just the Q1 contribution in card, but actually as the quarter progressed. In card, I think they certainly started out the year with more of an origination focus that has diminished somewhat. One of the things we've talked about is from a contribution perspective for us, this is our lowest margin big business, and so we're doing things to try to improve the quality of it. Two things, one referenced in the letter was the move to Lightspeed. That's a whole new platform that is dramatically faster for us, and it offers. That speed results in better marketing dollar efficiency for us.

What we'll be able to do, and we are about a third of the way there, is transition our traffic from the CompareCards experience to LendingTree. That will offer another level of efficiency. Okay, we're about a third of the way there. That will creep into Q3, be done hopefully the beginning of Q3 in terms of that transition to the LendingTree brand. It is possible that in Q1, we probably were not on our front foot with some issuers as a result of these initiatives. Having said that, it's a reasonably anemic card environment right now to begin with. In consumer, the desire of issuers, they...

You know, keep in mind, we get paid when they get approvals, and we know that they started the year with consumers clicking through, applying for cards, and they were well ahead of pace on approvals, many of them, in terms of what their internal budgets were. We've seen that abate. It would be unreasonable for us to make an assumption that that's just suddenly gonna correct itself and the issuer in this credit environment, that all of our credit card issuers are gonna be, you know, changing course and be very aggressive with respect to card issuance. Now, your question has to do with just the top line, obviously, of card in Q1. We're taking the steps to fix it. The good news for us is that things like the Lightspeed transition and moving to one brand, those have opportunity cost.

That opportunity cost in Q2 is lower because of the environment that we're facing in card right now. We're able to make this transition at a lower opportunity cost. We're just focused on getting to the other side and having a more efficient card business. Within consumer, you have to sort of recognize that it's not just card. The other businesses that are in there are personal loans. We get paid mostly on closed loans there, right? We've seen tighter credit conditions throughout Q1. Obviously with SVB and the banking crisis, that credit tightening, you know, accelerated. That started in March and continues here in Q2. That ripples through a bit in SMB, which is a big contributor for us in consumer.

As Trent points out, Ovation and the other ancillary cross-sell businesses associated with that are in that consumer vertical. Recognize, like, that all kind of contributes to some of the adjustment in the top line for the guide.

Jamie Friedman (Senior Analyst)

Okay. Thank you for the context.

John Moriarty (President of Marketplace and COO)

Sure.

Operator (participant)

Please hold for our next question. Our next question comes from John Campbell of Stephens Inc. John?

Doug Lebda (Founder, Chairman and CEO)

Hey, John.

Operator (participant)

Your line is open.

John Campbell (Managing Director and Research Analyst)

Good morning, guys. Thank you. Hey, on, you know, if we look at the stock, what it's indicating this morning, if I just take the midpoint of your new adjusted EBITDA guidance, I mean, the stock looks like it's 8x what feels like pretty trough-level EBITDA. I'm just trying to get a sense for maybe how you guys are thinking about the outlook beyond 2023? Obviously, there's, you know, there's a lot of uncertainty around the market, you're showing a willingness to tighten the cost, you know, the cost controls along the way. On that 13%, you know, headcount reduction, I mean, you guys mentioned that's taking you back to 2019 levels, you know, revenue is still set to be about 30% below 2019 at this point.

Maybe if you could talk to the degree of cost saves you might see if revenue kinda hangs out around this territory, if you guys have visions of incremental cost saves, and then just maybe how much of it is kind of a VMM or cost to acquire situation?

John Moriarty (President of Marketplace and COO)

I'll start that and then, and then hand it over to Trent. On the, on the last one specifically, we are always gonna be looking for cost savings. Now, on the VMD line, one thing that I'm really, really comfortable and pleased to see is the resiliency of the business. When you have three of your businesses facing significant headwinds and lenders and insurance companies just, you know, pulling back and advertising less, the fact that we can adjust our marketing and improve it that quickly, so that we don't degrade EBITDA is a breath of fresh air from what we've had to go with in the previous two times we've dealt with this. On next year, I'll let Trent more comment on that. I don't comment on that.

Personally, I think we gotta wait and see, how things shape up in the industry. The second thing we need to see is if one or two of our strategic initiatives hits, then we could have a change in the unit economics and be off to the races again. Trent?

Trent Ziegler (CFO and Treasurer)

I don't know that I have a whole lot to add there, John. I mean, I think, you know, you think about the situation we're in. As Doug said, every one of our businesses is facing, you know, pretty real macro headwinds. We're focused on doing the right thing for the business to, you know, continue to generate good positive cash flow during this environment. We've right-sized our cost structure. We've gotten out of businesses that were capital intensive and, you know, marginally profitable or potentially a little bit money-losing. We still maintain enough, you know, resources and human capital to continue to place a few calculated bets, right? We're within the core business. We're focused on margin preservation, and we're executing to that end.

We still got a, you know, a few projects, whether it's My LendingTree or some of our customer experience-based initiatives that we think can really evolve the business over the next, you know, six, 12, 18 months. That's where we're focused. Short of making a call on where the macro goes, into 2024, I mean, I think we're working on the right things, and that's where we're focused.

John Campbell (Managing Director and Research Analyst)

Okay, that's helpful. Secondly, just from an industry standpoint, I've seen some reports of some new legislation just geared towards the ending of the creation and sale of trigger leads. I know, you know, obviously the big credit bureaus are actually selling those trigger leads. I think that's probably happening more so across mortgage and personal loans, maybe to an extent in auto. Maybe if you guys could talk to how competitive those offerings are, and whether a ban of those trigger leads would be a positive development for you guys.

John Moriarty (President of Marketplace and COO)

Yeah, no, I'm glad you asked. It, you know, it's interesting, John. We do a lender summit. We did a lender summit in November of last year for a number of our partners in Home and a lender advisory council, and trigger leads were certainly a big part of that discussion. Interestingly, you know, when somebody comes through the LendingTree Home funnel, we do a soft pull of credit, not a hard pull. The, the trigger leads create a lot of noise for our partners, right? Because the consumer... Let's say the consumer goes through the Home funnel and gets matched to four LendingTree lenders, and they've given consent to be matched to those lenders, et cetera, and those lenders are calling. Trigger leads create an echo chamber effectively of others calling that same consumer, okay?

The awareness is there that that consumer is in market. Absolutely, the removal of that would be a very good thing for our business and in turn for our consumers. We're happy to see the movement to that being discussed. Anything that removes the noise and results in a more curated and improved consumer experience, we are all for.

John Campbell (Managing Director and Research Analyst)

That's good color. Thanks, J.D.

Operator (participant)

Please hold for our next question. Our next question comes from Jed Kelly of Oppenheimer & Co. Jed, your line is open.

Jed Kelly (Managing Director and Senior Analyst)

Hey, great. Thanks for taking my question. Just circling back on insurance. You know, are, is this going to be another six months where the carriers are gonna have to readjust their rates, and it's gonna have to get through the state boards? You know, we are seeing, I guess, new car inventory improve. Do you have any sense on where we are in terms of the carriers, you know, sort of getting any handle on being able to underwrite auto policies profitable again?

Scott Peyree (President of Insurance)

Yeah. Hi, Jed. This is Scott. I'll answer that question for you. You know, I would start by saying, you know, heading into the first quarter this year, there was a lot of our carrier partners were telling us at that point that it was gonna be third or fourth quarter of this year before they were leaning back in. There was a few carriers that started leaning in pretty heavily in the first quarter, which was great. Some of them continued to lean in a little bit. Our largest client is as well known, has pulled back pretty significantly. They did indicate it would be probably six to nine months as they continue to push through rate increases.

They were, you know, if anything, just continued to be on their heels a little bit with just the inflation and how inflation's specifically affecting, you know, used car prices, used parts, you know, repair times and all the, all of those things. It is still a hard environment for the carriers out there. You know, at the end of the day, we've got a large distributed network. We sell leads, clicks, calls to a large number of carriers and local agents. We are, you know, there's certain areas, like Doug mentioned earlier, the local agent network we have.

We had an all-time revenue record in Q1 there, and we're looking to have another all-time revenue record in Q2. There's definitely areas, you know, large independent brokerages, you know, because premiums being so high, commissions are higher for large brokerages now. A lot of them are leaning in a little bit. There's areas of growth, but at the direct carrier level, yes, you know, you're probably looking through the end of the year continuous slowly coming back into market.

Doug Lebda (Founder, Chairman and CEO)

The only thing I'd add to that, I'd just accentuate a little bit of what Scott said and I said before, but the nice thing about insurance is that you're not only diversified by types of insurance, but you're also diversified by business models. You have your call, click, and lead product that's bought by, you know, big major carriers, and then you also can do that, if your carriers aren't there, then you have your local agents, and you have your own in-house agency. That can help to keep the unit economics better than they would be otherwise by a huge carrier opponent if you didn't have that diversification. And that's enabled the insurance business to still do well despite, you know, despite one big customer just pulling back.

Jed Kelly (Managing Director and Senior Analyst)

Got it. My follow-up question is just, you know, you did pay off some of the convert last quarter. You know, given where the stock price is and, you know, the cash you have on hand, you know, how do you think about opportunely paying down that debt, especially, you know, if it makes sense to pay down given, you know, given where the share price is? Thanks.

Trent Ziegler (CFO and Treasurer)

Yeah, quickly on that one, Jed. I mean, we're happy with the execution of the transaction in March. Obviously, we, you know, we still maintain a fair amount of excess cash on the balance sheet, $150 million at quarter end. You know, conservatively, we think $50 million-$75 million is what we need to run the business. There's some excess cash there, and we'll continue to look at kind of the trading levels on the converts and the term on both. You know, we'll continue to think about it and to kind of monitor where those are trading and we'll, you know, we'll think about it opportunistically.

Jed Kelly (Managing Director and Senior Analyst)

Thank you.

Operator (participant)

Please hold for our next question. Our next question comes from Robert Wildhack with Autonomous Research. Robert, your line is open.

Robert Wildhack (Analyst)

Morning, guys. I asked a similar question a couple of quarters ago, wanted to revisit. In the letter, you said you expect to continue generating meaningful free cash flow, which is great, the current level of CapEx doesn't cover depreciation, let alone the amortization on the intangibles. Considering the competition today and the fact that some of the competitors are backed by, you know, big, big parent companies who can spend a lot, how do you know and make sure you're investing enough?

Doug Lebda (Founder, Chairman and CEO)

I'll let these guys handle the financial aspect of that, there's definitely not a lot of CapEx in the business. The way of going forward, I alluded to this, I'll go into it in more depth. The places where we can invest, obviously, we're not building plants and doing things like that, are in building software, executing on projects with product and tech, and obviously, you know, our new cross-functional teams. The way we'll know how much to invest is based on the expected ROI of those projects. As the unit economics have gone down, many of the stuff that we were working on is now, you know, put on the shelf, we're focused on a smaller handful of priorities.

To the extent that, either, you know, the unit economics come back to justify something, to do something or, a new idea comes along or something works, I could see us, you know, there will be other things to do that will meet the threshold. That's how you know, is you know it by the numbers and the opportunity in the projects that you're looking at. Now we can adjust accordingly. If something is working or seems to have higher likelihood, we can shift more resources onto that team immediately. If something is not working, we can adjust or pull back or stop doing it, and we can make those decisions now in real time. Anything on CapEx and intangibles?

I think our Cash Flow is fairly equal to EBITDA, but Trent.

Trent Ziegler (CFO and Treasurer)

Yeah, I guess I haven't thought about it from the perspective that CapEx needs to cover depreciation or amortization. That's not been how we've oriented the business. What I would say is, you know, we made reference to the cost structure getting back to near 2019 levels earlier. You know, interestingly, within the makeup of that cost structure, the relative skew toward things like engineering and product and data and analytics is much higher today than it was in 2019, and that's offset by lower costs in things like our call center based businesses. I mean, we feel like we've got a focused list of projects that we're working on.

Those projects are not starved from a, you know, from a resourcing standpoint. We'll just continue to kind of chip away at those projects.

Robert Wildhack (Analyst)

I appreciate all the color there, guys. Just to make sure I'm hearing correctly, it's safe to assume you're comfortable that the current level of investment, whether it's CapEx or runs through the P&L, is sufficient to stay competitive even in the context of some pretty deep pockets at your competitors?

Doug Lebda (Founder, Chairman and CEO)

Yeah.

Trent Ziegler (CFO and Treasurer)

Yes. 'Cause the deeper pockets, you'll generally see that in the realm of TV advertising, and that too will come back for us as expected values go up. I think as we improve our customer experience, improve our product, you know, we'll, as I said, we'll start to see improvements there and then you layer in the investments in marketing and advertising to drive more volume.

John Moriarty (President of Marketplace and COO)

Rob, if anything, you know, it's interesting, your question focuses on competition from big competitors. One of the things that we face day-to-day are those competitors who are quite small. Periods like now actually will cause some of those competitors to go away, right? Those competitors who are focused on one vertical that goes through a particularly challenging time. What we actually look forward to and is to actually improve margin in certain of our businesses because that competitive landscape changes on the other side, not the big player, but the small ones.

Robert Wildhack (Analyst)

Thanks for all the color, guys.

Doug Lebda (Founder, Chairman and CEO)

Sure.

Operator (participant)

Please hold for our next question. Our next question comes from Ryan Tomasello at Keefe, Bruyette & Woods.

Ryan Tomasello (Managing Director)

Hi, everyone. Thanks for taking the questions.

Doug Lebda (Founder, Chairman and CEO)

Go ahead.

Ryan Tomasello (Managing Director)

Hey, guys. On the consumer engagement side, can you elaborate on the expected rebranding of My LendingTree later this year? Specifically if that will include a media campaign, and if that brand spend is being baked into the forecast. Then on the Win Card, you know, realizing it's still early days, but any initial data points around uptake and benefits to engagement that you're willing to provide?

Doug Lebda (Founder, Chairman and CEO)

Let me start, and then J.D. can chime in. On the Win Card, nothing that I'm ready to report yet. It's too early and so stay tuned. That's also the part of the My LendingTree strategy. Right now we do not have assumed that we will have an ad campaign to either launch any rebranding of My LendingTree or the Win Card. The reason for that is that we're focused heads down on getting the product right which will get the monetization right. Then we can, you know, lean into advertising to the extent that it's there.

John Moriarty (President of Marketplace and COO)

Ryan, the only thing I would add is, you know, we alluded to this. Last year, we did a lot of product research as to what consumers would want from My LendingTree and how we should roll those products out. We've got, call it eight products that are in the queue, that's a multiple year rollout. When we talk about rebranding, what we're talking about is eight. We've been pretty candid that we don't love the name My LendingTree. When we talk about rebranding, we're talking about a name that we're comfortable with in terms of the way that we're trying to align ourselves with the consumer.

We've talked about being adjacent to and honoring the spirit with which the consumer first came to LendingTree and having products that really serve that need as opposed to a feature factory. Recognize when we talk about rebranding, we're just giving you the timing of when that will occur, and we're right now going through evaluating names. It would be premature to talk about that. You know, the Win Card is really just the hub for your My LendingTree account, and we're trying to encourage repeat engagement. It's not gonna be facilitated by some aggressive spending campaign, you know, like many people do when they launch a traditional credit card. That's not really our goal.

Our goal is to give somebody really the key to their My LendingTree account, and then that all those products will tie into that account. I wouldn't, you know. The early read is encouraging in terms of the type of consumers that are opting into it, but it would be way premature on volume to give you any numbers.

Ryan Tomasello (Managing Director)

Great. I just follow up around the mortgage business more broadly. Do you feel like that business has effectively troughed here in the first quarter, given signs of, I guess, what seems to be a broader bottoming in mortgage fundamentals? You know, I guess thinking out over the next, you know, year or two or more, how much momentum do you think mortgage could ultimately return to in a more normalized purchase environment, but without assuming, I guess, you know, a significant refi wave that we're likely not to get here anytime soon? You know, just layering one follow-up around mortgage here, just with the bigger picture. Clearly a lot of market share shifts happening in mortgage land given what's going on, particularly away from banks and more to non-banks.

Curious how you're thinking about that dynamic in the context of your mortgage business, if there's anything, you know, you're looking to capitalize on there as the environment shifts here. Thanks.

John Moriarty (President of Marketplace and COO)

Sure. you know, listen, we obviously watch just as our, as our partners do, we watch to see whether we see signs of troughing in mortgage. We watch loan officer counts, you know, among our top partners, and where they are relative to a year ago, but perhaps more importantly, where they are relative to, you know, pre-pandemic levels, because we saw unprecedented loan officer hiring through 2020 and 2021. Then we watch rates like everybody else. Most of our partners, you know, month on month, we see a diminishing number of loan officers. If you think about how they partner with us, they think about, their buy with LendingTree and how many leads they provide for their loan officers to optimize their productivity. You have to think about the products that they're engaging in, right?

Why have so many of our partners shifted to home equity? Because it adds value for the consumer, but more importantly for the partner and for their loan officers, it converts, right? They're not chasing refi right now because very few Americans would benefit from a refi. In a normal cycle, they would be chasing purchase. Those conversion rates are just not there because the home sales are not there. They are surviving through this cycle, largely on home equity. In some cases, we see partners finding success with refinance, where people have to refinance for to manage a payment, but there's just not a lot of it out there. The other part of your question is the shift away from banks. That shift has been going on for a long time.

Recognize that the partners who power our network are not big banks. They are non-bank mortgage originators. That shift is very much in our favor. In order to get to a trough in mortgage, though, I think we've got to have first, just stability in rates. You don't have to have a big refi cycle, as you point out. You do have to have a little bit of a give in the what seems like an ever-increasing rate environment. That's really what our loan officers are contending with. If we just get a little bit of stability and a little bit of a pullback, you will see a little bit better lender health, and our network will improve as a result.

Doug Lebda (Founder, Chairman and CEO)

The only couple of things I'd add to that in mortgage, generally speaking, there is, except for an environment like today where J.D. just said there's no benefit as rates have gone up, with stabilization or rates going down, you will have some amount of refinance business. Our existing business model, the way of execution, through hand off to lenders and then them contacting you predominantly through the phone, that lends itself very well to a refi transaction. However, it's not enough. All of our product innovation, you guys have heard me talk about this before, is geared towards making an engaging experience that is not multi-lender phone call dependent after you press Submit on our form, and then we give you offers, and we need to curate you and carry you through that experience.

In purchase, it could involve, like, linking in with Realtors. If you pull way back and just think of the non-bank lenders as effectively almost like direct marketing companies, this whole thing, and the whole notion from them is acquire customers, acquire leads, at a level where the conversion rate hits an acceptable cost per funded loan, that still makes them money. Right now, because conversion rates are low, because there is no benefit, because there isn't a lot of, you know, home buying going on, you know, they're not buying as heavily, so therefore, we're not advertising as much. The way to break that cycle is to improve your product, and that's what we're working on.

Operator (participant)

Great. Thanks for the color, guys. Please hold for our next question. Our next question comes from Cristopher Kennedy at William Blair.

Cristopher Kennedy (Research Analyst)

Good morning. Thank you for taking the question. When you think about your cost initiatives and then kind of how your market share has trended over time, how should investors think about the ultimate earnings power of your business?

Trent Ziegler (CFO and Treasurer)

Yeah, this is Trent, Chris. Look, I mean, I think for starters, you know, by the back half of this year, if you know, you sort of unpack our guidance and you look at how it calendars throughout the year, you know, I mean, basically, we're assuming the macro backdrop stays relatively flat, right, in this environment. So the top line progression in terms of both revenue and variable marketing margin, kind of bump along relatively flat throughout the rest of the year with a little bit of seasonality. When you get down to the cost structure line, even in that environment, right, which assumes a pretty tepid macro backdrop, there's a scenario where in the back half of the year, you know, we're approaching kind of mid-teens EBITDA margin.

Candidly, like, that's probably where this business belongs with the opportunity to expand from there, in a more favorable revenue environment. I think that's kind of step one. So, you know, again, I think circling back to John Campbell's question earlier, short of making a call on what the macro does next year, like, we're focused on right-sizing our cost structure, preserving margins in the core business, right, and placing a few bets that will enable us to grow from here sort of agnostic of what goes on in the macro. So there's no reason why we can't get back to a, you know, mid-teens, high teens type EBITDA margin profile.

Doug Lebda (Founder, Chairman and CEO)

Yeah. The only thing I'd add on ultimate earnings power, I think, we almost saw that, I guess it was, I'm not sure if it was three or four years ago now, when our stock was around $300 a share, and we were building, and our EBITDA was certainly twice as high. We were building towards a much bigger company. That's because the unit economics were all working, and we were able to leverage the LendingTree brand. It's good old flywheel that I've talked about for years, right? If we can leverage the LendingTree brand in online and offline marketing at acceptable returns, then you can continue to grow the business. When lenders and insurance companies pull back, you have to pull back as well.

The nice thing, though, I would say about the future earnings power is it is really, really dependent on us for the ultimate earnings power. We have to make a step change leap in our conversion rates of our core products. You've heard us talk about TreeQual, you've heard us talk about Lightspeed, you've, you know, you've heard us talk about the new projects we have, and those things, that needs to get done. If it's done, we control our destiny. 'Cause I think we can build a great product experience that will convert like crazy, make our lenders much happier. By the way, the parallel of that is, I would say, in insurance.

If you look at what has happened in insurance over the past, you know, several years, there are very specific initiatives to do certain things or to not do certain things. When something's not working, to pull the plug and put the resources somewhere else, has been part of, you know, that business staying strong. You know, we're following a very similar playbook at LendingTree.

Cristopher Kennedy (Research Analyst)

Great. Really appreciate that. Just a quick update on TreeQual and how your initiatives are going. Thanks for taking the questions.

John Moriarty (President of Marketplace and COO)

Sure. TreeQual, I guess I would say no new news with regard to partners. However, pipeline of partners and what they're telling us and what we're learning, we are encouraged by. We have partners in both the, you know, subprime world and then big bank partners who have actually shown a desire to work with us in a more direct way. One of the limitations of our current TreeQual solution is that it is dependent on kind of the Venn diagram between who's in our My LendingTree base and who our issuers are sending direct mail to. As direct mail diminishes throughout the year, and those budgets diminish, obviously the opportunities for us to send a pre-qualified notification to a consumer go along with that.

The current solution that we have, works for some partners, but it will not be the only solution. We've been saying that for a couple quarters now. We're working on solutions that involve APIs between ourselves and certain of our partners, and we're thrilled to be in those conversations. We are more convinced than ever that the future of the card business is something that is more pre-qual in orientation. You know, in that respect, we think we're on the right track. I mean, to put this in perspective, in the current card experience, you know, this is our frustration with it. This is why it carries the margins that it does. We spend a bunch of marketing dollars. Consumers come in to compare cards. Soon that will be coming into, you know, a LendingTree experience.

They then click out to a partner, and they get approved in a low teens approval rate environment, right? That's not a great consumer experience. All that marketing inefficiency is on us, not on our partners. We want to be in a scenario where we're driving conversion rates in all of our businesses. The way to do that in card is to send the right consumer to the right partner in something where the approval rates are more like 80%, and that is pre-qual. That's where we're headed. It's just gonna take longer 'cause the current...

It's gonna take longer because we're learning, we are actually happy that we've taken a, you know, kind of gradual approach with it, as opposed to building, you know, some big system around the direct mail opportunity that we identified a couple years ago. There's good news and bad news there. The bad news is it's not gonna contribute much this year. The good news is we think we're on the right track.

Doug Lebda (Founder, Chairman and CEO)

The only other thing I would add is from a resourcing standpoint, that doesn't consume a ton of tech resources. If you know, take the clock back, I've talked to a number of you about Credit Karma's Lightbox initiative. Lightbox is where you host all the underwriting criteria, approval criteria of credit card issues. We knew issuers did not like that approach, we tried to take a [Saxocom] approach and be able to offer real offers by hitting up their direct mail list. I think as J.D. said, that has its limitations. Now you have to work with individual...

The approach we're taking now is to work with individual card issuers, and to tie directly into their approval system so you don't have that leakage of approval rates being, you know, 20%, 30% when that click out. That's the legacy of TreeQual. I think we all wish it, the original model would have gripped. The challenge in this new model is now you gotta fit in with the tech side of major financial institutions as well. That makes it a little slower, but it's something that we still hold out hope for. It's just taking longer than we'd like.

Cristopher Kennedy (Research Analyst)

Great. Thanks for taking the questions.

Doug Lebda (Founder, Chairman and CEO)

Sure.

Operator (participant)

Please hold for our next question. Our next question comes from Melissa Wedel at JPMorgan.

Melissa Wedel (VP of US Equities Research)

Good morning. Thanks for taking my questions. First, given the cuts that you announced on the workforce side, a few weeks ago, it sounds like that's probably balanced somewhat against a narrower focus on number of projects. I'm curious if you're seeing any sort of delayed timeline, even a little bit delayed timeline on rollout of some of these projects because of the cuts you've had to make.

Doug Lebda (Founder, Chairman and CEO)

Thank you. If anything, this is making us faster. We've when I've alluded this process a number of times, but basically imagine instead of somebody trying to execute a new product initiative, that they've got an idea, then they hand it off to somebody who designs it, then they hand it off to somebody who builds it, then you launch it and say a prayer to hope it works. We've now got cross-functional teams that are basically like little mini startups. They've got everybody from an HR person to finance person, engineering, data, marketing, and I'm probably missing a few, and they are with an executive sponsor, and they run like a startup. They've got clear OKRs, laid out by quarter, which then they lay them out by month.

We've made a lot of advancements in the way that we do things because we weren't satisfied with the pace of change or the pace of delivery based on the way we were doing it. As part of, so we did that all as part of the RIF. Imagine a situation where you got several hundred people working in, I'll just use product and tech for an example. We first staffed and dedicated teams, the people that we needed on those teams. Then for everybody else, we looked for a home or unfortunately had to let people go. That's the way that worked, and I think it'll make us faster, not slower.

I'm definitely encouraged by how fired up and excited people are, particularly as we get them back to the office. These teams are just, you know, are working very, very productively together and very enthusiastically. The only thing I would say that happened after the RIF, there was a typical, like, week of, you know, people, being pretty sad appropriately. I would say a week after that, you've got a renewed energy and vigor here that, I haven't seen in a while, partially because we've all been remote. I feel really good about that, all that stuff.

Melissa Wedel (VP of US Equities Research)

I appreciate the context there, and I do acknowledge these actions are always very tough to go through. Definitely appreciate that point. I guess as a follow-up question, if I could pivot a little bit to the balance sheet. You know, you guys have been pretty opportunistic in the past about making equity investments in what you see as, you know, promising related companies. I'm curious, as you refine your strategic approach to running this business and right sizing it, how do those investments fit into your sort of longer term strategic goals? Do they still play a role, or might there be another way to use that capital? Thanks.

John Moriarty (President of Marketplace and COO)

Melissa, it's J.D. I'll take it, and I'll let Trent speak to the capital allocation piece. Suffice it to say, in this environment, we keep looking at things just to remain, you know, in the flow as to what's going on around us and what people are trying to raise money for, but the bar is incredibly high. We wanna focus on our core business, and we're in the process and actually very gratified by the simplification of our business. You know, that's equity investments, away from our core are not very high on the list right now. We're spending time talking to people, but that's about it. Right now, we are focused on simplifying our business, improving our margins, improving our Cash Flow, and repaying our debt.

Trent can speak to the capital allocation piece of it. You know, the corp dev piece of it is, don't expect that to be terribly active in the near term. Amen.

Melissa Wedel (VP of US Equities Research)

J.D., I should apologize.

John Moriarty (President of Marketplace and COO)

Yeah, no problem.

Melissa Wedel (VP of US Equities Research)

Could I clarify my question? I apologize. I wasn't referring to new investments going forward. I meant more what you have already done. Is there an opportunity potentially to monetize some of the investments you've already made and redeploy that towards the debt? Thanks.

John Moriarty (President of Marketplace and COO)

You saw us do that with one of our investments, you know, a year ago. We did monetize some of our Stash investment. If there were the opportunity to do that, we would certainly consider it relative to everything I just said. Those opportunities are not always, you know, as easy to come by. You have to be conscious of what the company's going through in their own path.

Doug Lebda (Founder, Chairman and CEO)

I think I agree with J.D. And on the existing, we don't have many of them. If somebody had bids for them, if there's, particularly if there's not some strategic relationship, we're always open to hearing.

You know, those, at least the big one, which is Stash, you know, that was made in the hopes that, you know, we might actually put the two companies together, and obviously that broke when valuations started to break. We'll always look for ways to monetize things, if we can, but right now, you know, the venture markets and others are such that, you know, people are pulling their horns in, too.

Melissa Wedel (VP of US Equities Research)

Thank you.

Operator (participant)

I would now like to turn it back to Doug Lebda for closing remarks.

Doug Lebda (Founder, Chairman and CEO)

Thank you very much, and thank you, everybody for being here. While this was a frustrating quarter for us, our focus every day is to position ourselves to be in a much better place for when the headwinds in our businesses subside. We're acting fast. We're making very disciplined decisions. We're focusing on fewer high-impact projects. All of that, we think, positions us very well for the future, and we look forward to reporting to you next quarter. Thank you all for your willingness to be shareholders in LendingTree.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.