LendingTree (TREE) is trading sharply higher today (+16%) after reporting strong Q3 earnings/guidance this morning. In terms of quick background, TREE primarily operates through its LendingTree.com segment. It's an online loan marketplace where consumers can do comparison shopping for loans. Basically, consumers visit the site and enter data about themselves and state what kind of loan they are looking for. Lenders then compete to provide loans at the best rates and TREE receives a fee for each lead.
LendingTree does not charge consumers or small businesses anything. Revenue from its mortgage products are mostly derived from upfront match fees paid by Network Lenders that receive a loan request. Because a given loan request form can be matched with more than one Network Lender, up to five match fees may be generated from a single consumer loan request form. Revenues from its non-mortgage products are derived from upfront match fees paid on delivery of a loan request, click or call and closed loan fees. For its credit card product, TREE sends click traffic to issuers and are paid per card approval.
TREE does not take the loan risk itself, it's more of a lead generator for lending institutions which pay a fee to TREE. Most of its business is for mortgages but it has been branching into other non-mortgage credit categories as well: home equity loans/lines of credit, personal loans, credit cards, auto loans, student loans etc.
Turning to the Q3 results, TREE reported non-GAAP EPS of $1.17, which was up 30% from the prior year period. Revenue rose 81.3% year/year to $171.5 mln, well above prior guidance of $155-160 mln. The EPS was well ahead of market expectations and you can see the revenue upside. Adjusted EBITDA rose 29% YoY to $34.7 mln, which also was above prior guidance of $28-30 mln.
The guidance was pretty impressive as well as TREE expects Q4 revenue of $146-151 mln (+45-50% YoY), which is above market expectations. Adjusted EBITDA for Q4 is expected to be $25.5-27.5 mln.
To understand the TREE story, you have to break down the numbers a bit. Most of TREE's business had been mortgage loans but the company has been expanding aggressively into non-mortgage loans (home equity, personal loans, credit cards, autos, education, insurance). As recently as 2013, non-mortgage loans represented just 11% of revenue. That grew to 20% in 2014, 35% in 2015 and 43% in 2016. In 2017, non-mortgage accounted for 53% of total revenue in both Q1 and Q2 and that was bumped up to 57% in 3Q17. So you can see non-mortgage is quickly becoming a larger part of the overall business.
Revenue from mortgage products rose 38% YoY to $73.8 mln, primarily driven by strong growth in both purchase and refinance transactions. Record revenue from non-mortgage products came in at $97.7 mln in Q3, an increase of 138% YoY. By far, the biggest growth driver for its non-mortgage business is TREE's credit card revenue which jumped to $39.4 mln from just $6.6 mln in the prior year period. Personal loans revenue grew 44% YoY to $25.4 mln.
TREE says that while it continues to diversify the business, it's also seeing secular growth in mortgage despite industry headwinds. TREE believes the momentum it saw in Q3 sets it up well for exceptional growth and profitability in 2018 and beyond. TREE is achieving real scale in new areas, offering additional growth opportunities while further reducing interest rate exposure and other macro-economic risks.
On a final note, LendingTree's success has allowed it to be pretty active on the M&A front. In September 2017, TREE acquired the non-lending assets of Snap Capital, a tech-enabled online platform connecting business owners with lenders offering small business loans, lines of credit and merchant cash advance products through a concierge-based sales approach. Before that, in June 2017, TREE made two acquisitions. It acquired MagnifyMoney.com, a consumer-facing media property that offers unbiased editorial content, expert commentary, and resources to help consumers compare financial products and make informed financial decisions. TREE also acquired DepositAccounts.com, another consumer-facing media property in the depository industry. TREE's stock price has been on fire. It was trading around $75 in late October 2016 and is now getting close to $260 in about a year, and it's getting a big push today.