LendingTree - Q2 2023

Transcript

Operator (participant)

Good day, thank you for standing by, and welcome to the LendingTree conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll 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 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 is being recorded. I would now like to hand the conference over to your speaker today, Andrew Wessler, Head of Investor Relations. Please go ahead.

Andrew Wessler (Head of Investor Relations)

Thanks, operator. Good morning to everyone joining us on the call to discuss LendingTree's Q2 2023 financial results. On the call today are Doug Lebda, LendingTree's Chairman and CEO, Scott Peyree, COO and President of Marketplace Businesses, and Trent Ziegler, CFO. 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'll 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. 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 (Chairman and CEO)

Thank you, Andrew. Thank you everyone for joining us today. We earned $27 million of adjusted EBITDA in the Q2, generating a 15% margin, which was well ahead of our forecast. Our outperformance was due to strong segment margin performance in consumer and insurance, combined with our laser focus on managing operating expenses. Although the revenue environment remains challenging across all three of our segments, our team's work on improving operating efficiency allowed us to meet our VMD forecasts. As the Q2 progressed, credit markets broadly tightened across the banking and lending industries, causing demand for many of our lending partners to decline. In home, several mortgage originators were forced to reduce their bids as cost per funded loan had reached levels that were no longer sustainable.

Personal and small business lenders broadly tightened their criteria lending further, causing approval rates for our customers to decline. The insurance carriers we work with were continuing to decrease their marketing budgets as inflationary impacts will require further increases to auto and home premium rates. This revenue degradation continued into July and is baked into our updated financial outlook we're providing this morning. That's the bad news. The good news is that these macroeconomic headwinds should prove temporary. We're encouraged that the Fed is signaling it's nearing the end of its campaign to tighten financial conditions. With higher interest rates, the pace of inflation continues to slow.

We also recognize that a healthy labor market with historically low unemployment is a key component for lenders to expand their relationships with our customers, one, capital markets volatility and short-term economic uncertainties subside. We have made changes to adapt to the challenges we're facing. We've focused our management team to capture incremental revenue while improving our expense profile. We have improved our product function and have identified key areas for potential additional savings as a result. For example, Scott Totman, our CTO, has taken over personally our data initiative. We've also brought our people back to the office, which has helped us speed decision-making and reinforce the entrepreneurial culture that has made us such a successful company historically.

In the Q3, the management team is focused on maintaining cost discipline and identifying areas of incremental revenue growth despite the various headwinds that we've been facing. We're going to release our reimagined and rebranded My LendingTree platform and continue working on improving the customer experience to drive more engagement with our customers, higher conversion rates, and thus higher unit economics. Before turning the call over to Scott for his comments, I would like to thank J.D. Moriarty for the impact he has had in his time at LendingTree. He helped lead our diversification strategy, completing 7 acquisitions in 3 years, which have helped us remain solidly profitable despite the very difficult operating environment that we're facing. I could not be more excited for Scott to assume his additional responsibilities of leading our lending marketplace businesses. Our sales and marketing teams will also report directly to him.

His performance as the founder and president of QuoteWizard has been exemplary through multiple cycles, including the current one. He's proven to be an exceptional operator, inspirational leader, and truly embodies the entrepreneurial spirit of LendingTree. We are looking forward to the positive impact he's going to have on our own business moving forward. Scott?

Scott Peyree (COO and President of Marketplace Businesses)

Thanks, Doug. Appreciate it. First off, I'd like to say I'm really excited to take on these expanded responsibilities and looking forward to providing a larger impact to the overall organization. I've spent the last two weeks taking a real deep dive into all the components of the marketplace businesses, and I'm excited to say that both the quality of the people and the number of near-term opportunities that I believe exist in the core business. I will be fully focused on improving the operational efficiency and growing the core businesses of LendingTree. you know, first off, I...

We really want to build a more cohesive symmetry between the marketing and sales teams, as it's critically important for the people developing the product to be working very closely with the people selling the product. Similar to insurance, instead of focusing on clawing every dime of revenue from customers that are already under budget constraints, we'll be focusing on providing the highest quality, highest intent consumers, and then focusing on monetizing efforts around those consumers. You know, at QuoteWizard, as we've seen, even due to macro headwinds in the industry, we're currently driving the highest quality traffic at the highest VMM margins in our company history. I fully believe we can do that across the board in all of our business units. In insurance, we're actually doing more VMD year-over-year, over significantly lower revenue, as you can see in the numbers.

I'm a big believer in having a maniacal focus on a small number of things that are the most impactful to the business. It's already becoming clear to me what some of those things and those items are, and we are actively focusing our resources towards accomplishing those items to quickly get some wins on the board. Finally, we will have a relentless focus on operational efficiency, velocity of decision making, turning big projects into small projects, challenging long-held assumptions, focusing on understanding the sizes of opportunities before committing resources, et cetera, et cetera. We will have an aggressive offensive stance going forward, which will have a big impact on our productivity. Thank you.

Doug Lebda (Chairman and CEO)

Now, operator, I'd be happy to open the call for questions.

Operator (participant)

Great, thank you. Thank you. We will now set the question-and-answer session. As a reminder, to ask questions, please 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 while we compile the Q&A roster. Please stand by. Our first question comes from Ryan from KBW. Please go ahead.

Ryan O'Donnell (Managing Director)

Good morning, everyone. Thanks for taking the questions. Clearly, the hope is that the revenue environment inevitably improves, you know, but given the importance of navigating the upcoming maturities, maybe you could provide a bit more detail on the different options you're thinking about for addressing the convertible that goes current next year. Do you feel like the current free cash flow and EBITDA profile of the business can support that? I guess on the expense side, are there additional levers you could pull if needed in the scenario that the revenue environment doesn't go your way?

Doug Lebda (Chairman and CEO)

I'll open up broadly and then let Trent give you the details. Obviously, this is something that we are very, very focused on. We have had a number of conversations internally. We have a number of options that we are exploring. I don't know how much of those details we want to talk about, but to the extent of other levers, the answer is yes. You know, we do have discretionary product investments that I've talked about, that if they, you know, things, you know, do not bear fruit, you can certainly make changes there. Yes, there are other cost levers you can do.

Right now, we want to maintain, you know, balance between, we have a few focused, a small, you know, investment initiative, you know, investment into initiatives around data, customer experience, because we think they're core to the business, but at the same time, you know, we're incredibly judicious with that. Suffice it to say, we are very, very, very focused on that maturity and, you know, would hope to be, you know, refinancing it in, in some way. Go ahead, Trent.

Trent Ziegler (CFO)

Yeah, I mean, I think Doug covered it well. We're obviously laser focused on it. We're exploring a bunch of alternative options available to us. You know, I think the good news is we take some solace in the fact that we have four quarters left before that maturity comes current. We've got eight quarters left before it actually matures. You know, we're weighing all of our options relative to the performance of the business. Obviously, the options available to us get a little bit better should performance improve.

You know, I think we have some reason to believe that as we get a little bit more certainty around the macro, there's good reason to believe that the insurance backdrop could turn a little bit as we head into next year. You know, some stability in some of our consumer businesses should provide some upside. We're weighing all of those alternatives relative to the performance of the business.

Doug Lebda (Chairman and CEO)

Yeah, and the only thing I'd add is in an environment like this, where your unit economics on the revenue side, you know, whether it's the price lenders want to pay, the amount of volume or the coverage of how wide they're willing to go. As all of that has gone negative, and we have gotten sharper and sharper and sharper on the marketing side, particularly in insurance, and Scott just talked about bringing that to the lending side. The business and the margin profile increases when you get any sort of tailwind on the other side, whether it's a conversion rate increase through a product improvement, whether it's, you know, lenders expanding demand in some way, that margin tends to stick.

Obviously, sometime in the next many quarters, we're going to have to be improving our financial profile so that people are going to want to lend money to us. We are laser focused on that, while Trent's also working on his financial options as well.

Ryan O'Donnell (Managing Director)

Thanks, appreciate all that color. I guess on the guidance, the revised guide looks like it implies second half EBITDA of around $30 million-$40 million by our math, round numbers, $60 million-$80 million annualized. It looks like the implied 4Q EBITDA guide is at the low end of that range on an annualized basis. I guess, should we think about that as kind of the run rate EBITDA power as things stand here for the business today? Are there key variables that could move the needle in the second half relative to the guidance that you'd call out specifically?

Trent Ziegler (CFO)

Well, I guess what's worth calling out relative to that would be, you know, obviously, we're like, the revenue challenges are real, and we're seeing those, and that's probably not a surprise to anybody, given the headlines around, you know, it's the worst mortgage environment in 20 years. We've talked about home equity as a relative source of strength within that. That's, you know, starting to be a little bit more challenging as rates continue to go higher, that's becoming less attractive for consumers. You know, there's a lot of reasons why we've had to pull down our revenue outlook for the rest of the year. What I would say is we are forecasting similar seasonal declines in Q4.

Q4 is always a seasonally much slower, period for us, and I think there is a little bit of uncertainty as to how much does that seasonal effect, show up in a year where sort of the baseline is already beaten up a little bit, right? We're certainly taking a conservative stance with regard to, you know, forecasting those trends through the rest of the year and in the Q4 in particular.

Doug Lebda (Chairman and CEO)

The way I, just to add on a little bit, I think of, you know, Q2 as a, you know, a solid quarter, you know, not where it historically has been, to call it fairly, you know, normal. Q3, as we talked about, you're seeing some pullbacks from lenders that we do not believe are, you know, institutionalized in the market. It's not like our product doesn't work. It's not like the buyers aren't there. It's literally just that, you know, they just like we won't, you know, bid on Google search terms, past the point of profitability, lenders do the same thing with us. We don't see that clearly as permanent.

The other thing that we take some comfort in is when we talk to lenders about what they're doing with us vis-a-vis competitors, we feel like, you know, we're, generally speaking, one of the last places that they turn off or that they pull back on. Q4, as Trent said, is seasonal. It is a seasonal downturn. Typically in our industry, people, you know, consumers in general, are not thinking about financial services in Q4, and then they really think about it in Q1. No, I wouldn't take this as a, as a, as the ongoing run rate.

Trent Ziegler (CFO)

Yeah, the short answer to that question is, I think Q3 is probably a better baseline.

Doug Lebda (Chairman and CEO)

Sure.

Trent Ziegler (CFO)

use as your run rate.

Doug Lebda (Chairman and CEO)

Sure.

Trent Ziegler (CFO)

Q3 is a better baseline than Q4 as you look at kind of how you model it into next year.

Ryan O'Donnell (Managing Director)

Great. Thanks for taking the questions.

Operator (participant)

Okay, let me queue up the next question. Our next question comes from Jed Kelly, from the Oppenheimer & Co.

Jed Kelly (Managing Director and Senior Analyst)

Hey, great. Thanks for taking my question. Just circling back on the insurance segment. Should we expect this margin profile you're seeing to continue as demand from the carriers is depressed? Just looking at, you know, the insurance marketing segment in general, Scott, you know, there's quite a few of marketplaces that participate in this business. You know, are all of them going to be able to survive as this continues to get pushed out, or do you see some type of consolidation, you know, happening in the industry? Just can you touch on how you think these headwinds are gonna affect the, you know, some of your competitors? Thank you.

Scott Peyree (COO and President of Marketplace Businesses)

Yeah, thanks, Jed. I'll start with the margins. Yeah, in a compressed market, we would expect our margins to remain high because just like I mentioned earlier, we're just focusing on the highest quality, highest intent consumers for our clients with the limited budgets they have. Honestly, they're, you know, our competitors' advertising is very suppressed. Our direct clients, like, they're not spending any money directly with a lot of places they historically do. The traffic, you know, being that we're focusing, we're not spreading our spend out and our monetization out, like, thin like butter, like, we're focusing in the right areas, so we would expect our margins to stay good.

When the budgets start coming back in 2024, then, you know, margins might start getting compressed a little bit as the marketplaces get more competitive. That said, we'll be very conscientious about total VMD dollars going up significantly, which we think we're really well positioned for that when the budgets start coming back, which I do expect them to start coming back in early 2024. Now, then that kind of leads into your final question of the competitors. Yeah, long story short, there will be a number of players that don't survive this. There's a number of, you know, I would almost say you start with the smaller marketing affiliates that maybe aren't as well known out there, but that do go out and kind of clog up the marketplaces a little bit.

Those guys have been hit really hard, and some of them have exited the marketplaces. You know, like the SEM marketplaces, for example, I don't know if they'll ever come back into those marketplaces. You know, so some of, you know, some of them will just disappear, some of them might get consolidated into some of the bigger players, you know? I don't know if any of the big players, ourselves included, are out looking to actively look to buy any of these guys without getting an absolute screaming deal out of it. I do think when we get into next year, similar to the 2016 downturn, there's gonna be a lot fewer players in the marketplace, which does create a Goldilocks scenario, for a performance marketing company.

Jed Kelly (Managing Director and Senior Analyst)

Just as a follow-up, Scott, you know, what is the team looking at? You know, is it interest rates stabilizing, supply chain stabilizing, that gives you confidence that the carriers are gonna get their profitability, underwriting profitability under control?

Scott Peyree (COO and President of Marketplace Businesses)

Insurance is not interest rates as much as it is inflation. That's the insurance company's problems. They need because right now, for the past, what? 18 months, they have not been able to keep their rate increases at the pace of how inflation's been going. Inflation, and as well publicized in the auto insurance industry, for car repairs and whatnot, has been even higher than the overall CPI, and it still is quite a bit higher. That all said, it is starting to cool down, and there is positive signs, you know, used car prices, cost of car repairs, it's starting to normalize, and come down.

That equation where they can't catch up to inflation is now starting to change, where the rate increases, inflation is starting to stabilize in the car insurance industry, and the rate increases keep happening. Sooner or later, those lines will cross, and they will get back to a profitable combined ratio scenario. you know, the big hope with a lot of these carriers is that they're feeling in a really good spot by the end of 2023, when the budget cycle switched to 2024, that they're feeling that all the policies they're bringing on are profitable policies they're bringing on, and they reset their budgets going into 2024. Based on their confidence level, you know, they, they can get aggressive really quick. But the big driving factor is inflation stabilizing.

Doug Lebda (Chairman and CEO)

Yeah, we were.

Jed Kelly (Managing Director and Senior Analyst)

Thank you.

Doug Lebda (Chairman and CEO)

talking about this yesterday. We were talking about this yesterday at our board meeting, Scott hit the point of the combined ratio, but also that it varies state by state. A number of your large states, you know, where, you know, for example, California, that you have state by state things, too, where insurance carriers, if they're not gonna make money, you know, they're not gonna go market to originate that policy for sure, and that's the same thing you see with the lenders. You know, with the, when rates stabilize, and inflation stabilizes, in some ways, those are both intertwined, you know, we feel like we're gonna be a much sharper company and be ready to roll.

Jed Kelly (Managing Director and Senior Analyst)

Thank you.

Operator (participant)

Thank you. Please stand by. Our next question comes from Youssef Squali from Truist Securities. Please go ahead.

Youssef Squali (Managing Director and Head of Internet and Digital Media Research Group)

All right. Good morning, guys. Thank you for taking the question. Maybe a quick one for Doug and one for Trent. Doug, obviously, anybody looking at Tree right now, they're looking past the second half of the year. They're looking into 2024 and beyond. Knowing what you know today, what kind of segments, or what segments, sorry, do you see kind of coming back first? And what are the kind of indicators or gating factors that you're kind of watching for that turnaround? Trent, you know, good job on the operating efficiencies that you've shown against a pretty tough top line. How much of that operating cost efficiency do you think you can maintain maybe into next year as revenues come back?

Doug Lebda (Chairman and CEO)

I'll take the first one. I would say, in this order, I think you'll see insurance come back first. I think you'll see probably consumer come back second, and I think you'll see home come back third. By the way, like, you know, I think as you think about it, those are, you know, also an order of probably the most, the biggest opportunities as well for revenue and profit contribution. The insurance business, Scott's covered. That's a fact of simply insurance companies being able to underwrite, get their rates higher so they can underwrite appropriately and profitably.

Consumer, keep in mind that many of the personal loan lenders, or pretty much most of them, are, you know, either marketplace lenders or correspondent lenders that are selling funds directly into the capital markets. The capital markets are tighter, which we all know with the Fed doing, that's gonna hurt there. That air hose snaps that. You know, that capital markets have stepped on that air hose from time to time with us, but it always bounces back. And then the home business, right now you've got, you know, refinancing obviously doesn't make sense for anybody. And in the purchase market, you know, home buying and selling is not what it would be given high rates and, you know, buyers and sellers really kind of staring at each other in that market.

I would say underlying all of that is us trying to improve our consumer experience, which improves conversion rates, which, you know, makes the whole business profitable, I think insurance, consumer, and home. The other thing that we really monitor, as I said before, is like if we're gaining share or maintaining share versus competitors, you know, that's, you know, that's important too. I won't say it's perfect in every one of those, but I, I, I do know that I feel really good, from the standpoint of our partnerships, the efficacy of the model, and lenders just wanting to do business with us, and they're telling us, you know, this is, it's an economic thing right now, and, you know, they'll be back.

Trent Ziegler (CFO)

Yeah, Yousuf, on the operating efficiency point, I mean, I think what we've seen is, you know, we've, we've taken a lot of steps over the last 12, you know, 6-12 months to simplify the business in many respects. As Doug noted earlier, like, candidly, we still have some discretionary investment going on, right? That, that we could choose to dial back if, if the situation warranted. No, I mean, I think we've seen as a result of, of leaning out and getting more focused and efficient, we're, we're already operating better and faster, and on more, on fewer focused things, right? You know, as the revenue opportunity comes back, looking into next year, there, there's not a need to continue to staff up considerably against that revenue backdrop.

I don't see our OpEx growing materially at all as we look into next year.

Doug Lebda (Chairman and CEO)

I'll tell you just, wonk out on 1 change that we made internally, which is, you know, most companies might set goals and OKRs at the beginning of the year, probably do it in November, and then by January, February, in a highly changing environment, they're pretty much irrelevant. We've moved to a quarterly cycle, and to the, to the fewer points comment, everybody in the company is responsible for 3 to 5 things that you're going to, you know, make sure that you deliver on in the next 3 months. I mentioned the last quarter, we did that with our how we do product. By the way, we've also brought on, you know, a lot of new management and made a lot of changes to make us sharper as well, too.

That quarterly cycle enables us to pivot, enables us to look at each one of our initiatives and say, okay, like, you know, this one's working, that one's not, this one's behind. All right, let's shift personnel over here. The market's changed. Let's double down over there. It's enabled us to be much more nimble, and we're doing a lot more with individualized, focused teams that are cross-functional, that can make all their decisions. As Scott was alluding to, too, just getting faster, a lot of that all goes into it. We're really trying to improve the way we do operations and at this company.

Youssef Squali (Managing Director and Head of Internet and Digital Media Research Group)

Great. Thank you, and good luck.

Operator (participant)

Thank you. Please stand by. Our next question comes from John Campbell from Stephens Inc. Please go ahead.

John Campbell (Managing Director of Equity Research)

Hey, guys. Good morning.

Trent Ziegler (CFO)

Morning, John.

John Campbell (Managing Director of Equity Research)

Hey, you know, Trent, and I think in the past, you've talked to the belief that, you know, you can return the business back to high teens or kind of possibly, you know, 20% type EBITDA margins. You guys are obviously there in the past. You're gonna need a, you know, a degree of a rebound in the top line, I'm sure, for that better leverage. You know, you've taken a lot of steep cost cuts. It sounds like you, you know, there's gonna be a little bit more in that in the back half. Trent, I think you said that maybe very modest, if any, OpEx growth next year.

Maybe if you guys can talk about how you're feeling about that margin target now, and maybe what type of top line you think you might need to get back to those past margin levels?

Trent Ziegler (CFO)

Yeah. No, thanks, John. I mean, look, we hit 15% EBITDA margins in the Q2. That's a level that we hadn't been at in quite some time, and that's against a pretty bleak revenue backdrop. You know, obviously, the revenue trend continues to work against us in the back half of this year. I think we have reconfigured the cost structure of the business in such a way that any rebound in the top line should result in us getting back to mid to high teens EBITDA margins in the not too distant future. I don't think it would take much.

Scott Peyree (COO and President of Marketplace Businesses)

Yeah, I, I'll just add in there, I mean, just for specific examples, going to insurance is, you know, some of our largest clients, which When they come back and they start spending significant budget again with us, we don't have to hire a bunch of people or anything. you know, we have the same account managers, we have the same marketers. We're just generating more revenue and VMD over the same cost basis. As Trent alluded to in an earlier question, I believe across all the industries we're in, we can see significant revenue and VMD growth without the need for OpEx growth for quite some time.

John Campbell (Managing Director of Equity Research)

Yeah, makes a lot of sense. On homes, you know, I, I saw in the shareholder letter, you guys called out the 11% decline in HELOC and just kind of triangulating that, or at least in my math, I'm showing that mortgage would be down maybe 15%-20% or so sequentially. You know, the industry, it looks like, was actually up 40%. That's just with seasonality. I'm guessing you guys maybe just kind of de-emphasized that from the VMM standpoint. Any kind of color you can provide there? Also, I don't want to put your feet to the fire, but, I mean, is it potentially, do, do you feel like this could be the trough for homes or maybe just mortgage with the 2Q results?

Doug Lebda (Chairman and CEO)

God, picking the trough. Listen, we, we hope so, and at the same time, you know, mortgage lenders are taking capacity. From an industry standpoint, like it, and in channel checks, et cetera, it feels like purchase is poised to do better and rates and the mortgage rates seem to not be rising. The flip side of that would be some lenders are taking, and I think you'll hear from it from public, you know, some lenders are doing layoffs and pulling back on capacity. From the standpoint of, you know, it, the price they're willing to pay, the quantity they want, and the coverage and the demand equation, their capacity, you know, we're. I want to make sure we're not going to see reductions in capacity, which would reduce the demand equation.

Now, that said, flip side of that is one of the things that, you know, we're going to do aggressively, particularly with Scott coming in here, is really get out and see our clients, plan with them, you know, and be much more closer to them over this period of time, personally, for both Scott and me and the rest of the team. You know, I expect some, you know, just operational wins there. Scott, anything to add?

Scott Peyree (COO and President of Marketplace Businesses)

I would add in also just, I mean, you look at the refi market, I mean, I would say that has fallen off dramatically. I would say you're probably at a trough, or we might be at the trough for a little bit. What I would add there is, you think about it, every month, there's a lot of consumers out there purchasing homes at very high interest rates. I mean, that's happening every month right now this year. If you look into early next year, you could theoretically see maybe some mortgage rates start to drop a little bit, you will have this ingrained user base of consumers that bought homes this year, that will be actively looking to refi with any drop in interest rates at all.

that could be a start of a little bit of a benefit next year, from a, you know, compared to, say, you know, a company like ours.

John Campbell (Managing Director of Equity Research)

Makes a lot of sense. Thanks, guys.

Doug Lebda (Chairman and CEO)

The only other comment I'd make inside of our product development initiatives, and Owen is doing a fantastic job at taking over product. We're focused on purchase conversion rates. Now, as many of you know, that's been an age-old challenge at LendingTree, how to crack that code, but we are working on it and hope to see some progress.

Operator (participant)

Great. Please stand by. Our next question comes from Melissa from JP Morgan. Please go ahead.

Speaker 12

Good morning. Thanks for taking my questions today. First, I wanted to follow up on the revised guidance, and just kind of comparing EBITDA margins from the most recent quarter, which, Trent, you noted were in the mid-teen. Just sort of implied in the back half, you're guiding some margins in the low double digits, so a couple of hundred basis points lower than 2Q levels. I'm just trying to wrap my head around that. Is it just sort of embedded conservatism and guidance driving that, or something else that you're seeing?

Trent Ziegler (CFO)

It's just the magnitude of the kind of compressed revenue in the back half of the year. You know, we assume that we have done most of the work on the cost structure in the first half of this year. Kind of the quarterly OpEx levels, we expect to remain relatively consistent through the back half of the year to where they were in Q2. Obviously, as your revenue trails off, that's going to impact your EBITDA margin. I mean, in the core gross margins or VMMs, we actually do expect to see a little bit of improvement there, in 2 segments. It's just not quite enough to offset the, the, you know, the magnitude of the decline in the revenue guide.

Doug Lebda (Chairman and CEO)

By the way, one thing I'd add on the margin front, we did a little math calculation here that for a prior question of how much would you need to get to 20% EBITDA margin. If on Q2, it's roughly you need $10 million more dollars of VMD. If we could do that at a 50% VMM margin, you know, you need $20 million in revenue in the quarter. That's not a, you know, that is not a long putt, and it I can't tell you when we're going to do it, but I can tell you we're going to get there because I can tell you we've been there before.

Typically, when, you know, the company has come back from the 2 other, you know, significant financial dislocations, we come back bigger and stronger with more share.

Speaker 12

Okay. Got it. Thank you. Follow-up question on a couple of the categories within consumer. If we're looking at things right, it looks like there was a little bit of a sequential increase in card, in terms of revenue, in card and personal loan. Just wanted to understand if, how you attribute that? Is it mostly, do you think is there some seasonality in that number, or are you starting to see, you know, sort of TreeQual payoff? What's driving that?

Doug Lebda (Chairman and CEO)

Yeah. On, on card in particular, we talked last quarter about how we migrated to a sort of a new and improved foundational platform on which we operate that business. That has enabled us to better leverage the LendingTree proper domain, right? You recall, we acquired the CompareCards business back in 2016, 2017, and that has been the primary, you know, sort of activity. Like, most of the activity in the card business for us has run through that domain. There's a lot of value in us migrating some of that activity and some of that traffic over to the LendingTree domain to capture emails and repeat business and things like that. We're seeing that bear fruit.

You saw a slight uptick in not only revenue, but a relatively pronounced uptick in the margin profile of that business in Q2. We expect that to continue to, you know, progress forward through the back half of the year. That's probably one of the bright spots within consumer. That continues to be an end market that is, you know, sort of more healthy relative to some of the other businesses.

Scott Peyree (COO and President of Marketplace Businesses)

Yeah, if I just add on there, that, you know, Lightspeed was the name of the platform it migrated it to, that did have a significant impact on funnel throughput, funnel performance, conversion rates of our consumers, which helped have an immediate bump in marketing efficiency. What I'd add on to that, I believe the next few quarters is gonna continue, because we needed that new platform conversion to happen, and now we're doing a lot of continued testing and increased funnel optimization, throughput, and optimizing result sets for consumers and better matches. I think there's a lot of opportunity in the credit card business for us, you know, in the coming quarters. A big part of that was that platform migration that needed to happen.

Doug Lebda (Chairman and CEO)

Yeah, I would only add, Lightspeed's a great example of us having a team, getting product right, getting that up and running. That helps our existing credit card click-out business. You've mentioned TreeQual. I would say we've been talking about TreeQual and beavering TreeQual for a long time, which I would say is something that we're all very mindful of. The flip side of that is, we've made some, some pivots in the product and how we're working with lenders. So we, you know, hate to say we expect that to bear fruit shortly, or soon in the future, but we're, we're getting more lender receptivity to it. Then the biggest challenge you find is that we need the lenders work with us, too.

A little bit of a catch-22, that you gotta go to major card issuers, get them to work on a tech project with you, when you're also a small business for them. We're, you know, we're slogging and having some success. When that hits, we expect it to have a big impact, but that will be a, you know, a one-time event whenever we get it done.

Speaker 12

Got it. Thank you, everyone.

Operator (participant)

Thank you. Please stand by. Our next question comes from Christopher Kennedy, from William Blair.

Christopher Kennedy (Research Analyst)

Good morning. Thanks for taking the questions. Just wanted to follow up on the efforts to improve the conversion rates. Doug, you just mentioned a few of them, but can you just dive a little bit more into the initiatives and how they're going relative to your expectations?

Doug Lebda (Chairman and CEO)

I'm mindful of competitive things here, so let me hit it overall. Obviously, we talked about TreeQual and... If you look at a conversion funnel in a performance marketing company, you have to see where the biggest leak is, and then you go try to plug the leak. Credit cards, it's approval rate, and that's because we don't gather a lot of your information, and we click out, click you out, and there's a pretty low approval rate on those. You also have in that business, which all the competitors have, the fact that people are seeking for credit, seeking credit. You have to get more pre-approved data, so that you're making offers to consumers that they're gonna get. As I...

I just talked about that one. The other series of teams are working on close rates from lead to fund in the mortgage space. There, what you're doing is, and for those of you who might be new, you think about the act of getting a home loan or getting a small business loan. That doesn't happen in 1 sitting. We need to enhance our CRM capabilities and be more interactive with the lender so that you're not just getting a 1-time offer from LendingTree, and then getting barraged with phone calls.

We are working the change that we've made in how we're working with lenders is we actually now leverage our lender advisory council to have a smaller group of lenders that works with us on a test basis in a managed marketplace. It's very collaborative and co-creating with them. I expect that to bear fruit. Now, the good news about these is while we're evaluating every quarter and we're pivoting, well, the last one I would say is My LendingTree, which is important. There, it's about improving engagement and our offers platform so that we can give you much more personalized alerts, and that work is underway. Underlying a lot of this is a technical change that we have in what we call our offers platform.

Today, if you're making changes to the pages where you're seeing your offers and interacting with lenders, it's very rigid. We're moving that very shortly to a system that we've been working on for almost about 1 year. 1 year, I'd say, that's gonna make that much more flexible. The last thing I'd say about all of this, we don't need them to pay off tomorrow. Any 1 of these that hits would have a change when it works. If they don't work, as Trent said, we got a lot of discretionary money that we're spending. As things like Lightspeed get done, we can shift those resources to work on something else.

Christopher Kennedy (Research Analyst)

Yeah, very helpful. Then just to follow up to that, what type of timeframe are you kind of envisioning in order to make that ultimate decision, whether they're working or not? Thanks for taking the question.

Doug Lebda (Chairman and CEO)

Yeah. In our new, in the way we're doing product now, as I said, we've got dedicated cross-functional teams on anything that we deem a tech product initiative. They have quarterly OKRs against each one of them. I'll tell you one of the other things that I... you know, not everybody hits them every quarter, but you go through a review, a product review process, and we are making adjustments every quarter. Sometimes it's keep going, you're hitting your marks. Sometimes it's, we need you to raise the bar. Sometimes it's we need you to, we're gonna shut this thing down. That's just the way you do it with the... We need LendingTree to be a great product and tech organization.

With our leadership now of Scott Totman and Owen, I feel like we've really got it.

Scott Peyree (COO and President of Marketplace Businesses)

Yeah, I just get to throw in one specific, you know, the personal loans offers platform, which is, you know, we've seen the success on credit cards, we're now all hands on deck. We know there's a lot of opportunity in personal loans on getting that offers platform converted over, which should happen sooner rather than later. You know, honestly, as we look at it, you know, since those are all essentially pre-approved offers that we're putting to the consumer. Having better algorithms for better matches and making sure, like, the top listings have the highest potential for a consumer getting a funded loan, this is a lot of good work we can do there that will have an immediate and iterative, constantly, continually improving impact on more revenue per consumer.

At the same time, giving them better matches so they're getting funded loans at a, you know, easy, you know, in an easier method. I mean, we're pretty excited that some of this stuff can have impact sooner rather than later.

Christopher Kennedy (Research Analyst)

Great. Thank you.

Operator (participant)

Great. Please stand by. Our next question comes from Robert Wildhack. Please go ahead.

Robert Wildhack (Analyst)

Hi, guys. On home, do you have a number in mind for how far mortgage rates would have to come down? Maybe it's to 5% or 4.5%, before there's a healthy refinance opportunity again?

Doug Lebda (Chairman and CEO)

No, I don't. I'd tell you to go look at the MBA forecast, but in almost 30 years of doing this, like, you know, they're, they're directionally right and sometimes hard to be precise. The good news about... What I will say, though, about refinance, is there's actually, I would say, almost always, except at times like this, you do have a decent level of refinance activity. You have people who have adjustable rate mortgages coming due, you have people whose credit scores improve, you have people whose values go up, and they want cash out to go do something or pay off other debts. All we're, you know, right now, it's just that, the borrower benefit to a refinance isn't there.

If you go get a mortgage at 7%, or you get it at 9% because your credit's not great, you know, when that gets to 6.5, you know, there's savings in it for you. I think, you know, you just need to start seeing a tick down, but even really a stabilization, I think, would see more refinance business. Man, oh, man, we are like storing mortgages, that, you know, as rates do come down, it, you've got a lot of refinance business stacked up, and the industry in general has gotten more efficient. I'd expect, you know, throughput to be better because technology improvements are happening in the background as everybody's trying to be as efficient as they can.

Those efficiencies are gonna stick when, you know, when the market gets starts to grow.

Robert Wildhack (Analyst)

Thanks, Doug.

Doug Lebda (Chairman and CEO)

Some of the top, like, mortgage economists right now, are looking for a pretty healthy mortgage industry next year.

Robert Wildhack (Analyst)

Got it. Thanks, Doug. Maybe one more for Scott. You mentioned earlier, insurance carriers getting profitable towards year-end, resetting budgets into 2024. Can we interpret that as a base case kind of outlook here? It takes carriers another 3-6 months before they can start thinking about growth again?

Scott Peyree (COO and President of Marketplace Businesses)

Yeah, I would say that's a base case scenario. You know, I think, you know, if I'm being completely honest, a lot of the carriers have pretty much written off 2023, and they're in survival mode in 2023. I mean, I feel like there has been stabilization. I wanna be very cautious about, you know, saying it's completely stable at this point. I mean, where I sit today, I feel like kind of June was a low point. We've even had July, you know, we're running better than June, which is positive. There are a number of carriers and big consumer name brands that have increased budgets with us in July. Not dramatically, but that's just a good sign that they're not continuing to cut. They feel like there's a stabilization.

I think when you're talking about significant major increases in marketing budget, it's probably gonna happen at the turn of the year or when their annual budget cycles shift to a new calendar year.

Robert Wildhack (Analyst)

Makes sense. Thanks.

Operator (participant)

Great. Please stand by. Our final question comes from Mike Grondahl from Northland. Please go ahead.

Michael Grondahl (Senior Research Analyst)

Hey, thanks, guys. Doug, you mentioned some lenders pulled back in 3Q, or that's what you're seeing. Which verticals did they pull back the most? Which ones did they pull back the least?

Doug Lebda (Chairman and CEO)

First off, we weren't talking, three Q. We were talking about the end of Q2. Trent, do you wanna take most and least? I would say, you know, in mortgage, you had, you know, a select number of lenders who, quote, "pulled back by reducing," the price they're willing to pay. Remember, lenders set, you know, bids in LendingTree, at least set them in Google. That obviously impacts the revenue profile. In personal loans, the, quote, unquote, "pullback" isn't like, I don't want less volume, it's I need a tighter credit box, to be able to sell those loans. In terms of relative size, Trent, any?

Trent Ziegler (CFO)

Order of magnitude, I'd say, some of the price concessions or, you know, bid reductions that we've seen in home are probably the most pronounced. We've seen a handful of smaller ones in personal loans, onesie, twosies in small business.

Michael Grondahl (Senior Research Analyst)

Got it. Then, Trent, have you disclosed or kind of put brackets around what the discretionary spend bucket is in 2023?

Doug Lebda (Chairman and CEO)

No, not yet.

Scott Peyree (COO and President of Marketplace Businesses)

I'm not.

Doug Lebda (Chairman and CEO)

Can you?

Scott Peyree (COO and President of Marketplace Businesses)

It's, you know, in the zip code of 5%-10% of the cost structure.

Michael Grondahl (Senior Research Analyst)

Got it. Okay. Thanks, guys.

Doug Lebda (Chairman and CEO)

Thanks, Mike.

Operator (participant)

Go ahead. I'm showing no further questions at this time. I'd now like to turn the conference back to Doug Lebda, CEO. Please go ahead.

Doug Lebda (Chairman and CEO)

Thank you all very much for, again, for being here today. Thank you very much for your questions. I just want to reassure shareholders that while I know this has been a long, dark winter during the COVID season, I want you to know that we get the situation, and we are on it, and we are making changes at all levels, as hopefully you can see, to address it. Our company is now smaller, we're leaner, we're faster, and we're more in person. That's making us operate more effectively.

We are incredibly mindful of our balance sheet, not only as a management team, but I can also tell you, as all of us being shareholders and me being a significant shareholder, we are in that boat with you. We are going to manage that and improve our financial profile to make sure that that can be handled. We believe our market position is very solid. As one of the leaders in this space, it is much harder on smaller marketplaces than it is on us. We continue to improve our market position, hopefully consolidate share, be sharper and higher margin, with a better margin profile so that we can capture any incremental revenue improvement with much more of it falling to the bottom line.

We're gonna focus this quarter on just continuing to provide great value for our clients, as Scott hit on, across all of our segments. That is the key on one side of the marketplace and on the other, we talked about the initiatives underway to improve the relationship with our customers. Those are hard problems to solve, we are making progress. Thank you very much for your belief in our company, we look forward to talking to you next quarter.

Operator (participant)

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.