IAC/InterActiveCorp Tree.com Spin Off Discussion Call Transcript

Jun.30.08 | About: IAC/InterActiveCorp (IAC)

IAC/InterActiveCorp (IACI) Tree.com Spin Off Discussion Call June 30, 2008 11:00 AM ET


Tom McInerney — IAC Executive Vice President, Chief Financial Officer

Doug Lebda – Tree.com Chairman and Chief Executive Officer

Matt Packey – Tree.com Senior Vice President, Chief Financial Officer

Eoin Ryan – Vice President, Investor Relations


Jeetil Patel — Deutsche Bank Securities

Brian Bensky – Lehman Brothers

Jeffrey Lindsey – Sanford Bernstein

Mark Mahaney – Citigroup

Allan Gould for Jeff Shelton - Natexis Bleichroeder

George Askew – Stifel Nicolaus


Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Tree Kickoff Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions.

(Operator Instructions)

I would now like to turn the call over to Mr. Eoin Ryan, Vice President of Investor Relations at IAC. Please go ahead, Sir.

Eoin Ryan

Thanks operator and thank you every for joining us this morning for the Tree.com kick off conference call. It is the ultimate call in a series of four conference calls to introduce management of the IAC companies being spun off and to provide an opportunity for the investment community to learn more about each company’s operations, competitive position and strategic objective.

On the call with me today is IAC Executive Vice President and CFO, Tom McInerney; Tree.com Chairman and CEO, Doug Lebda; Tree.com Senior Vice President and CFO, Matt Packey.

Tom will give you a brief update on spin timing, process and capital structure before turning it over to Doug and Matt for a discussion of Tree.com’s business.

First let me remind you that during this call we will discuss Tree.com’s outlook for future performance. These forward-looking statements typically are preceded by words such as we expect, we believe, we anticipate or similar statements.

These forward-looking statements are subject to risks and uncertainties and Tree.com’s actual results could differ materially from the views expressed today. Some of these risks have been set forth in the slide presentation accompanying this call as well as Tree.com’s Form 10 filed with the SEC.

We will also discuss certain non-GAAP measures. I refer you to the appendix of the accompanying slide presentation for all comparable GAAP measures and full reconciliation’s. And with that, I will turn it over to Tom.

Tom McInerney

Thank Eoin and good morning everyone. First, as has been the format of these calls, let me give you a quick update on timing for the spin offs where in general we are making good progress on the time line we discussed previously. Last Thursday we filed Amending Form 10’s with the SEC and this filing included additional detail on the expected capital structure of each spin off company. If you have not done so yet I suggest taking a moment to read through these documents.

As you know we intend to initially capitalize HSN, Ticketmaster and Interval with Net Debt and dividend the proceeds up to IAC pre-spin. Other than its warehouse line of credit Tree.com will not carry any debt and immediately prior to the spin IAC will cede the company with a sufficient amount of cash to allow it to operate while it seeks to return to profitability. The exact amount of cash Tree.com will receive is not determined. We will update you when it is.

We expect to satisfy all our conditions for the spin off’s including final SEC and Board review and approval some time in mid to late July which puts us on course to complete the spins in early August.

With that let me turn it over to Doug and Matt who have a short presentation for you and then we’ll take your questions.


Doug Lebda

Thanks Tom and Eoin. Thank you all for attending. I am very excited to tell you all today about Tree.com which is the company that is being formed as the result of Lending Tree and several other companies, all of the financial services and real estate business inside of IAC. A good place to start is on our 12-year history with the company beginning in 1996 when the company was founded.

We launched our site nationally in 1998. Went through a successful IPO and sold the company to IAC in 2003. Since that time we have invested significant capital to both grow the business as well as diversify it. We have done that in the Real Estate sector with the acquisition of Homespace, Service Magic’s Real Estate business, RealEstate.com the domain name as well as other tools and our iNest acquisition which expanded us in the new home market.

We have expanded in the short-form business by acquiring GetSmart.com and then expanded into the corresponding mortgage business with the acquisition of Home Loan Center which we re-branded Lending Tree Loans. After 12 years in this business I believe it is safe to say that this company knows our market, we know our numbers incredibly well and we know our industry.

The acquisitions and the competencies we have developed, particularly in marketing, are the building blocks for the leading successful and diversified company which will now be spun out of IAC as Tree.com.

I’d like to take you through the vision of Tree.com and the areas we think we can play and the significant opportunities that we believe are in front of us. When I was given the opportunity to come back to this company I took a very hard look at the assets that we have. The good news is I found four significant assets that could be significantly leveraged.

The first was the Lending Tree brand. I felt that not only was the Lending Tree brand strong but it could also be leveraged to other areas of financial services. Second, we had a growing and very large customer database. We have assisted over 20 million people since the company was founded getting mortgages and home loans as well as other loan products. Third, we had a real estate business which had ever-increasing site traffic, ever-increasing and ever-improving financial performance and after years of capital that we had invested in the business the company felt like it was on the right path with a great business model and a great website. Fourth, Lending Tree had a great marketing capability. We were one of the largest and best spenders on the Internet I believe and at IAC we were working across the other beads at IAC to leverage this capability we had at Lending Tree to capitalize on some synergies and how we could market multiple products through one engine.

So with those four very significant assets the Tree.com strategy was born. I’d like to walk you through each of the businesses that we have at a very high level and just give you a sense for this.

First are the two segments we are going to be reporting; the lending segment and the real estate segment. As you can see in 2007 our lending revenue was $295 million. It is a business of significant scale and size that we think can grow in the future. It is made up of several businesses. The first is the Lending Tree network, which you all know that business very well. You fill out one form and get five offers within minutes. I’ll take you through that business.

Lending Tree Loans, based in Irvine, California and that is the business of being a correspondent mortgage lender. Still giving the consumer choice but acting as a correspondent lender.

Our other businesses group together and we call this our emerging businesses. These group together the short-form market which is Lending Tree Quick Match as well as Get Smart in addition to a site we are launching in about a month which will be called Tuition Tree and will be just like lending tree but for student loans. Then over time the Tree.com website where we would hope we can bring lots of our products together under one brand.

Our next business is the real estate business which in 2007 generated over $50 million in revenue. That operates under the brand RealEstate.com. The site itself I will take you through but it is basically a website, a portal about everything about real estate and then monetized principally through a national real estate brokerage business that we built in.

The last segment we think about is marketing. We think of this obviously as a department but we really think of this as a business. We spend over $100 million a year in marketing. Except for our real estate business all of our marketing is centralized in this group of all of our creative, site development and media spend going through this group and I’ll take you through why we think that gives us great synergy.

When you add this all together we believe at the end of the day Lending Tree which has become an indispensable ally for consumers in their home loan needs that we can leverage this company to be the indispensable ally across a broad range of financial services businesses for consumers. We think there is huge opportunity.

On the left hand side of the next chart you can see the online banking which is a good proxy for financial services adoption in general continues to expand and continues to be standard issue for consumers. Each of the markets that we play in as well as a couple that we are planning to play in are very large, very highly fragmented where we have extremely small market shares today.

You can see in the home loan category there is over $2 trillion of loans originated. Over 40% of the people who are willing to research but only 16% of consumers are willing to apply online and Lending Tree’s share is less than 1%. This is a site that is known by 84% of the U.S. population but where we originate less than 1% of all mortgages.

The same thing is true in real estate. Over $60 billion of real estate commissions are paid every year. Realestate.com gets a 0.16% share. The other consumer credit category, an area where Lending Tree has not focused in prior years like we had planned to when the company was founded, and it is an area like auto loans, personal loans and credit cards where there is just big opportunity for consumers who want to comparison shop and Lending Tree has a very small share.

When you look at the insurance vertical you see basically the same thing. $1 trillion of premiums are paid. We are not even in that business but the insurance aggregators online have started to show reasonable success and we believe there is a play for us to make there as it the case in higher education through the student loan market.

Why will Tree.com win?

Well first we’re going to win because all of these markets are similar. They are big. They are highly fragmented and there are lots of sellers in the market who sell their own products and each of whom says, “We’re the best. We’ve got great service. We have great pricing.” But those suppliers, we believe, need help getting new customers online and we believe that through our marketing, efficiency and scale we can be that source for them. Just like we have always done in Lending Tree where we say to our lender partners we can give you new customers. We can help reduce your acquisition costs and we can do all that at a significant scale. We believe we can do that in new verticals.

Most importantly consumers want someone on their side to help them make the right decisions, to help be that indispensable ally that we talked about.

The second reason we’re going to win is because the Lending Tree brand can absolutely be leveraged to grow in loan products and then new categories other than where we have been in mortgages and home loans. Also because RealEstate.com is a natural brand that we believe is parity with the competition in the space and that we believe can grow and prosper. We’ve also got a great user base which we can naturally cross to other products and I already talked about all of our marketing skill.

Now let me go deeper into our core business in home loans and then take you through the other businesses that we operate. On the mortgage products and I’m going to break this into two sections here to do first the overall industry and then take you through each of Lending Tree Loans and the exchange.

The mortgage industry, just like the industries that we already talked about, are extremely large and extremely fragmented. There are over 40,000 mortgage providers in the United States and not a single one of them has a dominant market share. In fact the largest originator has 6% of consumer direct origination share. The top 15 have only a 37% share. This is a business that is very much dominated by local brokers. We believe going forward that is a much harder model because of the increasing regulations and shrinking wholesale business that has happened with the recent credit crunch.

We think there is a huge opportunity for consumers to come online and find information from sites like Lending Tree. Now the market is down 36% from its peak but it is still over $2 trillion. The mortgage market in the United States is a very large part of the U.S. economy. On the competition there has been lots of people who have duplicated what Lending Tree has done. There is clearly direct lenders and their sites that provide advertising revenue. But at the end of the day Lending Tree, we believe, is the only site that gives multiple offers by filling out a single form and we believe that is a differentiated value proposition to the consumer.

Now let me show you how the Lending Tree exchange process works.

As many of you know Lending Tree is simply an exchange between supply and demand. On the supply side we have over 200 lending partners who join our exchange, many of whom have built their origination business around Lending Tree and have been with us for many years. On the demand side we have millions of customers who come to us through all kinds of different channels. They come directly to our website, find us through portals and partnerships, see our online advertising, see our search advertising and they see us through a very robust affiliate network.

When they come to our site the process basically works like this. About 2.8 million people come to us every single month. They visit the site and can click around and obviously find lots of content and lots of tools. A small percentage of them will then complete a loan request or what we call a qualification form. Depending on the loan type it is 60-80 questions we are going to take them through.

We have a lead optimization process which determines whether a given consumer is going to go down the Lending Tree network path or down the Lending Tree loans path. It is based on two factors. One is profitability, but importantly that is based on also the customer’s choice. They can choose to opt in to one of these two processes and I’ll take you through the differences.

If it goes down the Lending Tree network path we run what we call the filters. The filters are how the lenders profile the exact types of customers they want to see. They can use attributes such as state, loan type, loan amounts, loan to value, debt to income ratio, credit scores to profiling the exact types of customers that they want. We then, if it matches the criteria of more than five lenders we run our predictive model to figure out the best five lenders to send that consumer to based on historical conversion rates and historical customer satisfaction scores. We then transmit that information directly to lenders we have built over the years and interface directly into their systems so we can bring back offers from those lenders and display those to consumers via the web and the consumer can then select the offer that works best for them.

We make money with two fees on the network side. One is a transmit fee where we get generally speaking a smaller fee for every lead that matches a lenders criteria and gets sent to them. Then a much larger fee for closing a loan. This keeps us aligned very closely with our lender network and as their conversion rates rise we see higher expected revenue and our lenders see better returns on their marketing investment.

The key initiatives we are working on in our operations are to increase the efficiency of our exchange. Trying to manage volume better for our lenders. Try to make our pricing much more flexible and easier to change. Improving our lender sales efforts and putting a field based sales force in place. The net of it all is to drive up our expected value and expected revenue for every customer who visits our site and then therefore take that revenue and reinvest it back in marketing. That is the core of how the Lending Tree exchange works.

Shifting to Lending Tree Loans. The same first couple of steps. The consumer visits the site and fill out that same qualification form and then it goes through the lead optimization process. The customer selects they want to go to the Lending Tree Loans path. They see multiple offers as well. The difference is those offers come from wholesale lenders instead of retail lenders. We call those investors. Just like any correspondent mortgage lender we get pricing from them, apply a mark up to that. The difference is we actually show multiple wholesalers that the consumer can select from.

We then transmit that consumer’s information to one of our sales people. We call them loan officers in the industry. They are either in Irvine, California or in Charlotte. Those loan officers engage in a sales process walking the consumer through all the different options they have. Some percentage of them will then turn into a loan application, an actual 1003 loan application, and then lock in an actual rate with us. Once the rate is locked we process the loan so we can go get it closed and then that loan is funded through our warehouse line which Matt will walk you through how that works. Then ultimately those loans are sold. Loans get sold very quickly in this business. As I said we are a correspondent mortgage lender. We don’t keep loans on our books for more than 20-30 days except in very rare instances which we can talk to you about. We don’t service loans and the risk that we have is lower than those types of risks you read about by some of the big mortgage companies taking write downs. Wholesalers can put loans back to us for early payment default, borrower fraud or an underwriting issue, but other than that we have sold these loans.

The key for us is to boost conversion rates all throughout the funnel, contact more customers, convert more leads into loans, watch our costs and make sure we get the right customers to Lending Tree Loans versus the network so we can service this business profitably in a very high consumer satisfaction. All of the initiatives we are working on right now are to increase that pull through and those percentages in that customer satisfaction. Putting best in class technology throughout this process from contact center to processing to sales so we can boost our conversion rate and improve our customer satisfaction.

Next I want to take you through the Real Estate.com business. RealEstate.com is an absolutely fantastic website. We have been working on this for several years and I’m really pleased with the results of where we are. I think it is as good as anything out there on the web today. It is a listing centered website. We believe the number one thing consumers want to do when looking for a home is they want to search listings. They want to come online and get a great experience to figure out where they want to move to, how much home they can afford and compare all of the different features of a given home. That is the way our site is set up.

When you are looking for a home you also need other information that we have laid out here on the site. We show drive-by images. You can actually see what the neighborhood looks like. We have local information on schools and crime and other local data the consumer might want. You can get home value estimates on millions of homes nationwide to know what a home might actually be worth. Or use the voyeuristic elements of the web and see what your home is worth or anybody that you might know.

You can get “How To’ guides. A lot of our customers are first time homebuyers and these guide information and checklists help walk you through the process of buying a home or getting a mortgage. We obviously cross-sell the Lending Tree mortgage products and all of this content is great for search engine optimization. We really believe the search engines are the home page of this site if you will and we have lots of ways from the search engines that you can find this content.

The great thing about this business is this site is linked to a very solid revenue and hopefully profit model over the long-term.

There are three basic ways we make money at this business. One of the other nice things about this business is the huge synergy with Lending Tree. We are able to take leads coming in off of Lending Tree, recommend them to our realtor network or to a realtor in our network and we are also able to show listings on Lending Tree, etc. So these two businesses work very nicely.

The first of our revenue models is advertising. We’ve got very large traffic here, about 20 million page views a month. The traffic is growing quite nicely. Our advertising revenue is still in the very early days of this but we think it can be significant over time and we are putting some steps in place to start to grow this revenue. It is more of an optionality for the future but it is an opportunity for us.

The second key area is lead generation. We sell leads to builders and then cooperate in the real estate commission whenever they close a new home and have over 300 real estate brokers around the country where we can send them business in markets where we don’t operate in. They can close a transaction and pay us a referral fee.

The largest and most important stream of revenue for us is RealEstate.com realtors. We are building an Internet enabled real estate brokerage business that we think is unique and we think can grow significantly over time. The way it works is when you click on the website and make an inquiry about a property that call comes into a call center. We then qualify that customer and transfer that customer into a live agent in the field. We have over 900 agents in 14 markets and the key here because we are doing all the marketing in a centralized manner we get a generally speaking higher commission split than traditional real estate brokerages do and we operate our markets on much lower fixed cost base.

Next I want to spend a few minutes on some of our other businesses that we are launching as part of Tree.com. We have grouped all of our non-home loan products on Lending Tree as well as GetSmart and the new sites that we are starting into the group and managing them by one group of great product and technology folks. We have already had some great and early wins in the first six months. The GetSmart and Lending Tree Quick Match business is significantly growing and we think has great opportunity to expand in new verticals. We have launched a new credit card product through our partnership with CreditCards.com. We are testing auto insurance on GetSmart.com and we have got several credit products and credit reports and credit repair and we are looking to leverage that into a much deeper site around credit. Our other loan types that existed we are putting some more effort behind those, in particular our auto products.

On the horizon we are launching TuitionTree.com. We are launching InsuranceTree.com. We are launching, as I said, a new credit site. Look for us to do more things in auto. Overall the strategy of this business is to leverage the Lending Tree brand and leverage the Lending Tree site traffic and leverage our marketing scale. The great thing is our marketing advantage is significant. I want to spend a few minutes just taking you through why we are so bullish on the company’s marketing advantage.

First is the Lending Tree brand and the fact that its awareness is absolutely enormous at over 84% nationwide brand awareness. Importantly though it is not just well known but it is uniquely positioned as a trusted advisor. This is a brand that is about consumer choice and consumer empowerment. We believe that extends nicely to other verticals as well.

We are a world class marketer with great online reach and the ability to operate across all off line media. We believe that multiple products and multiple brands put through the same marketing engine increases our efficiency over time. Just think about it and let me give you a real live example. Imagine you are an individual insurance lead generation site. That type of a site would generally do SEO and organic traffic and search marketing. But then Lending Tree decides to enter the business with a site like InsuranceTree.com. We’ve got the Lending Tree brand. We have got the Insurance Tree brand. We can cross sell this from Lending Tree as well as GetSmart. We have got inquiries on RealEstate.com where consumers would be open to a cross sell on homeowner’s insurance.

We’ve got more bargaining power with the portals. We can cast offline media whether it is radio, print or TV and we have the infrastructure to do technology and creative that we believe would be better than an individual small company doing it themselves. At the end of the day we believe the complexity is actually a good thing. The more channels, the more brand, the more product and the more partners mean there are more variables that we can optimize across and for us we think that will boost the ROI that we get on our marketing spend across all of these things and give us a competitive advantage in the future.

With that I’d like to turn it over to Matt Packey to take you through some numbers.

Matt Packey

Thanks Doug. Good morning everyone and thanks for joining us today. I’m going to hopefully walk you through some of the basics of the revenue and EBITDA graphs for lending and real estate. Just as a reminder those are the two segments that we break out. Lending is defined as the Lending Tree Loans business, the lending exchanges business and real estate includes the iNest, company owned brokerage also called RealEstate.com realtors, as well as our broker network business.

As you can see in the chart I’m going to walk through Lending first as that would be the light blue columns. Then I’ll get to real estate which is the tan colored columns. On the revenues side 2000-2004 we showed some pretty impressive growth on the lending revenue. In 2005 we took a significant step up in revenue. That is the time we acquired Home Loan Center, also now called Lending Tree Loans. We established a pretty good base line there and in 2006 improved on that significantly.

As you see on the EBITDA side, and for those of you who don’t know EBITDA is our earnings before taxes, depreciation and amortization and also excludes non-cash dot com. We have a schedule in the appendix that defines all that and reconciles it back to operating income for you. You can see in 2000 we took a pretty significant loss of $65 million and that was our investment in the brand. Post IPO, we had been a public company before and we spent quite a bit on our marketing efforts building the brand nationally, launching TV ads across the country and by 2002 you can see we started to make our money.

Revenue at that point had tripled from the early stages in 2000 and our marketing as a percentage of revenue dropped to 50%. In 2003 you’ll note that our EBITDA was flat to 2002 even though we had a $50 million increase in revenue. That was principally due to significant expenses we incurred for professional services in conjunction with the IAC acquisition of Lending Tree. Then in 2005 again the revenue more than doubled to $364 million and that was our acquisition of Home Loan Center.

In 2006 we were really hitting on all cylinders. Our prices investors were paying for our loans, and I’ll get into the mix of loans in a minute, were very high. We also had very good transmit metrics. You heard Doug talk about our QF’s or our qualification forms. Those are our loan requests. We can send those to multiple lenders, up to five in some cases, and in the 2006 timeframe we were really hitting it out of the park.

What we saw though on the expense side was some of our major partners like MSN and Yahoo were also able to charge more to us for acquiring those leads. So on a per lead basis we had to pay more to draw those consumers in. They didn’t see the great impact on 2006 EBITDA compared to 2005.

In 2007 most of you know what happened across the industry. The lendable product selection started to go away. What I mean by lendable is those nonconforming products. The loan products that don’t meet the Freddie Mac and Fannie Mae guidelines, the sub prime loans, a lot of home equity went away and our margins deteriorated just like everybody else’s. But the most significant note I want you to walk away with is in 2007 we took out over $110 million of annualized costs excluding our marketing spend. So that is a step change which got us back to break even for the lending segment in 2007.

Stepping into Real Estate you can see early on in 2001, 2002 and 2003 that was our broker network business. We did show some significant growth there year-over-year but we did not break out EBITDA at that point in time. In 2005 and 2006 we started to leverage into our company owned brokerage business and that is the principal focus of the business going forward.

I want to shift now a little bit to our key metrics for the lending business on the next slide. You’ll see the bars represent our transmitted loan requests and the line represents our revenue per transmit in the upper left hand side. On the right hand side the bars represent the number of closed loans, which includes both Lending Tree Loans as well as fee loans closed through the exchange, and then our revenue for closing.

In 2008 our revenue for closing did jump from 2007 which was a bit unusual. This increase was really driven by an accounting change and we can get into that in the Q&A if you care to. The bottom graph shows the value of our closed loans and as you would expect in 2007 and 2008 the value of the closed loans has decreased because of market conditions.

What I’d like to jump into now is a little bit of the loan mix that I referred to earlier which is the loans sold by type. This is principally for Lending Tree Loans. This is where the risk exposure is highlighted in the industry but what I want to point out for Lending Tree Loans is the minimum amount of risk that we have because of the types of loans we have originated over time and the improved quality that we have started to originate in 2007 and early 2008. You can see in 2005 and 2006 the nonconforming products, those in the Peach, Light Blue and Green colors, the sub prime, home equity and AltA products were a more significant percentage of our originations.

But we stopped originating most of those products in late Q2, early Q3 of 2007 and for the remainder of 2007 and early 2008 all we are originating are conforming loans. Again, those loans that meet the Freddie Mac and Fannie Mae guidelines. There are strict controls over those and strict underwriting guidelines, and a bit of AltA which is currently all FHA loans or government underwritten loans.

Our exposure to the sub prime mess and being in a second lien position on a home equity loan has been mitigated by our improving quality of loans and the fact we never really had a significant portion of our originations in those categories.

You can see on the charts on the right the value of our loans sold compared to the value of the losses we have incurred to date is very, very small. So our experience to date has been minimum and at a very small level. While we continue to get some losses in for those historical periods it is a very small number that comes in each period.

One last graph on the real estate revenue drivers, similar to lending, what we disclosed are the number of closed units with the peach bars that you see there and then the revenue for closing is the line. The line has improved over time as we added iNest in 2005 and then have continued to emphasize the company owned brokerage in 2006, 2007 and early 2008. We earned a much higher proportion of the commissions from the iNest and company owned brokerage business so although our number of closing units have gone down the revenue per transaction has gone up because of the nature of those businesses.

At this time I think we will pause and set up for question-and-answers.

Question-And-Answer Session


(Operator Instructions)

Your first question comes from Jeetil Patel — Deutsche Bank Securities.

Jeetil Patel — Deutsche Bank Securities

On your loans business it is about a $75-80 million annualized run rate on a revenue basis. Can you talk about what type of style or size and scale of business your current infrastructure and headcount can support right now just to try to understand what kind of margin leverage you have as you move ahead over the next couple of years?

Second on the exchange side can you talk about what types of EBITDA margins you are carrying currently in the business and what was the peak if you go back a couple of years on the exchange side of the equation?

Doug Lebda

Let me answer that at a high level first and then turn it over to Matt to take you through the numbers that we can disclose. On LTL we are constantly in the process of matching the headcount and the infrastructure to the right level of lead volumes. We have had significant headcount reductions in the past. I think though the thing I would say going forward we would expect our leverage would improve because of the application of technology.

We are looking at putting new technology inside the call center, putting new technology to aid our sales process to make sure calls get transferred and people get followed up with appropriately through the very long process from qualification form to actually closing. We are looking for ways to partner with much bigger technology providers on outsourcing and working with others on the processing front.

Then on the exchange side the same thing is true there. The biggest note on the exchange piece is the biggest driver of that margin would be the marketing margin. Those margins have come down and where we’ve been in this cycle over the past couple of years of cutting our marketing spend because online placements in particular go unprofitable as your conversion rates on lenders go down and your margins go down on the lenders. We’ve been in a bit of a negative cycle on the marketing piece. However that is where we believe that by diversifying and cross selling other products on the back of the Lending Tree qualification form by having more of web 2.0 site to engage consumers in a much broader way we can improve our revenue per customer and get our margins back to something that is acceptable where we can then invest money back in marketing to drive some customers in.

Matt you want to do some numbers there?

Matt Packey

I wouldn’t give specific numbers on the margins of that business however I would agree that our capacity at Lending Tree Loans in particular has a way to go before we would do any more infrastructure. We do have the facilities and technology infrastructure in place and as we talked about a week or so ago we did take out a considerable amount of headcount, loan officers as well as layers of management at Lending Tree and Lending Tree Loans that we would not add back in the case of the market turn for us where we start to add capacity. The technology Doug spoke about will help us to leverage getting the leads to the right loan officers, getting them more leads on a daily, weekly and monthly basis and to the extent we have to add additional costs there I would say it would be the variable costs in the scope of adding loan officers for that type of capacity.

On the real estate side what we have seen is the company owned brokerage really establishing a base line per market on how much it has to invest to set up that market up front and then it is all gravy or additional margin on top of that variable spend they have to drive the leads in. So after they get that sort of critical mass of getting leads coming in they are paying for their infrastructure costs. All of the agents on the company owned brokerage real estate side are all variable cost. They are all commission based. They are not on payroll. So as the market turns and we see more leads coming in that we can turn into transactions I expect our margins to improve on both the lending and real estate businesses.

Jeetil Patel — Deutsche Bank Securities

As a follow-up just on the lending side of the equation, you have right sized your marketing spend for the environment we are in but I guess as we start to bottom out in the industry I’m not sure when that is but…or start to improve…but do you think you’ll start to step up your marketing efforts more aggressively at that point? Is that the strategy that you are looking at deploying once you start to see more of an up tick or really some stability in the marketplace or any sort of incremental improvement in the business?

Doug Lebda

I would say partially. What we target on our marketing spend is we look at the variable marketing margin against a given placement for given products and that is what we look at in terms of…obviously we cannot disclose those numbers because we are very proprietary, but we are constantly looking at our variable marketing margins. If there are ways to spend more and do it at our target marketing margins we will do so. I don’t want you to think we will spend foolishly. We will spend only to that variable marketing margin. We’ve learned how to optimize that over 10 plus years.

At the same time a big focus for the company is we need to get more organic traffic. We need to be much better at STO. We need to be much better at driving in customers without having to spend so aggressively and that is where our new site we are going to launch at the end of July or early August on LendingTree.com we’ve got a lot better as well as several new tools we are planning for some time in the fall which will start to enable repeat purchases and use much more of the community and web 2.0 features of the web that will enable Lending Tree to hopefully boost its organic traffic and not have to spend as much as we historically have in the past.


The next question comes from the line of Brian Bensky – Lehman Brothers.

Brian Bensky – Lehman Brothers

I guess given the thinner margins on the conforming types of loans as we move away from sub prime, do the margins now justify even being in this business meaning isn’t there still tremendous risk? Having some of those bad loans put back to you? If so, are there any reserves you guys are currently setting aside for any of those older vintage loans being put back to you in the second half of 2008 or 2009? That is one side of the question.

Second, on the real estate business can this business be profitable in sort of EBITDA terms without revenue growth? It looks like the revenue trajectory is not really…we might not see growth in 2008 at least not the way I’m looking at it and I’m just wondering if there are costs still to get rid of in 2008 in order to make this profitable?

Doug Lebda

I’m going to take your Lending Tree Loans question and then have Matt answer the margin question on that. Then we’ll come back and I’ll answer your real estate question.

We believe that even though the conforming margins are tighter clearly we should be in the Lending Tree Loans business. We see that in getting any several segments of lead flow with the consumers opt in and their desire to go to Lending Tree Loans that we can actually have higher margins than if those leads went to the exchange. In addition we believe that we should take a shot at improving the technology, improving the service and streamlining our process there to much smaller business than it used to be but we believe we should take a shot at that because the notion of giving the consumer choice, of having a single point of contact and being able to control the process all the way through to closing we think could be potentially a better experience than typically sending them to five lenders and letting the consumer and the lender work that out off line.

On the put back issue there is some risk clearly but as Matt took you through we believe those risks are minimal and he can answer that. At the same time I would say there is still optionality on this business. If we can’t get the business to sort of a sustainable margin despite lower margins there is no reason we have to be in it. We think it is deserving of a shot and we think the initiatives are happening at the right pace right now so we’d like to take that shot.

Tom McInerney

Jeff just to elaborate a little bit more on the conforming margins being thin and the risk of the loan losses we do look at the loan losses by what we call segments or loan types and just historically the conforming loan losses or experiences have been very, very minimal. Most of our experience and exposure has been with the sub prime and the equity products. Products where we were in a second lien position where we had exposure from early payment default and the nature of our shift to conforming and FHA has helped us in that regard.

Now we have set up reserves for the historical loans that we have originated and we publicly disclosed in 2007. It was about $19 million in provisions we took and that compared to about $6.5 million for 2006. We believe those provisions are adequate for our exposure for those historical periods where we were originating the nonconforming loans. Going forward we continue to evaluate the reserves. We continue to look at our loss trends. The losses that are coming in now are for those older loans. We haven’t really had exposure or experience to the most recent loan originations of late 2007 or early 2008.

Matt Packey

In real estate what you are seeing over the last year and a half is a bit of a mix shift on revenue. The RealEstate.com realtors business has showed continued month-over-month growth. We have exited a subscription based business where we sold leads to agents and significantly downsized our iNest or our builder business. But to get the profitability you do need to show some continued growth in the RealEstate.com realtors business. That said we have taken a lot of costs out of there in Charlotte and some of our markets are actually showing some break even positive growth despite this real estate market. They are not all there yet so we do need to get some revenue growth in that business but it is not crazy.


The next question comes from the line of Jeffrey Lindsey – Sanford Bernstein.

Jeffrey Lindsey – Sanford Bernstein

I’d just like to ask about the new products. Basically the dynamics of the student loans, insurance tree and the credit card products. Could you give us some indication of the profitability of these products relative to say Lending Tree and real estate and give us an indication of what stage you are at and how long before you really come to recognize as scale, from your definition, and what are the key factors in this?

Tom McInerney

One thing I would say is we clearly can’t give a sense of profitability or guidance yet on the profitability of these products. I can say our attitude is basically this. We are going to test lots of things. We’re going to get into products like Insurance Tree or Tuition Tree with a very small investment, a couple few hundred thousand dollars in internal site development. We have a fantastic team that can test and prototype very quickly at a very low cost. Insurance Tree right now is not live. We are doing some insurance tests on the site on GetSmart and on Lending Tree to see what the conversion rate and consumer take rates on those kinds of things are going to be. The credit card product right now is through a partnership with CreditCards.com where we get an XNL feed and then use them effectively to power the listings of our search engine. All of these will only show scale to the extent we can profitably market them and profitably drive volume. They can be very interesting cross sells and incremental new streams of revenue but at the end of the day we’ve got to be able to put these in our marketing engine and drive people from specific placements on the web back to these specific landing pages in addition to the cross sell.

So it is early days. They are more than ideas but they are not yet generating substantial revenue that we are taking to the bank.

Jeffrey Lindsey – Sanford Bernstein

Are you thinking years for these? Is it months or years or what are you thinking?

Tom McInerney

I would say it is certainly quarters, not years. Every one of these things…for each vertical we look at if you look at things that are natural extensions of Lending Tree or GetSmart or RealEstate.com and by the way this is kind of what we did with Real Estate and I alluded to this in the presentation, but when we got into the real estate business we didn’t just decide to get into the real estate business. We saw that consumers filling out purchase mortgage QF’s on Lending Tree were many times first time home buyers and hadn’t selected a realtor. So we said well gosh with a realtor network we could cross sell that product on Lending Tree and then we decided to build that out as a stand alone business. The same thing is true with credit cards and student loans and home owner’s insurance and other insurance products as well.

So the Lending Tree relationship just gives you a natural leg up and a way to kind of prime the pump if you will but each of these are just months or quarters.


The next question comes from the line of Mark Mahaney – Citigroup.

Mark Mahaney – Citigroup

Doug any comments on the rise state of some of these alternative models that are not lead generation based, particularly versus the Lending Tree model, and whether you think they could have an impact and if there are structural issues with those models or not? Secondly, just in terms of guidance and maybe a question to both of you but do you think you will have any change in how you would approach giving financial guidance to Wall Street? Would you wait on a more stable macro environment or would you be consistent with how Interactive has treated that in the past?

Doug Lebda

Sure. Some of the other models that have come to the fray are advertising, clearly, sites like Bankrate and others that do a good job of basically selling ads against consumer interest in these products. You have Zillow launching a free product in lead generation and monetizing that via advertising as well. My view on “alternative” models is basically this. At the end of the day we are all in the advertising business. Our realtors and our lenders are paying us for leads. Whether you pay for a new customer on a transmit fee basis or a closed loan fee basis like we do or whether it is a leap fee basis like Lower My Bills or Lending Tree Quick Match or a GetSmart or whether it is a banner ad and then a click through and they come to your site as it would be with CreditCards.com or Zillow or somebody else at the end of the day the advertiser is paying for a new customer and they are doing that with our site as well.

These get traction absolutely. They are clearly our competitors. We think at the end of the day with our brand and our ability to scale we can compete. What some of these sites have that we don’t yet have is the ability to generate free and organic traffic at significant scale. As I said we are not yet good at that on LendingTree.com or at SEO. The structure of our site is not yet good for SEO. That will be fixed next month and then some of these new tools and new content will be rolling out in succession throughout the fall to hope to fix some of that where we’re not so dependent on marketing.

Switching gears in terms of guidance. We’re going to get through the spin and then evaluate our posture on guidance. I would ere on the philosophy without disclosing any sort of competitive information that would help our competitors; we generally like broad range guidance. We did that before from 2000 to 2003. We generally like to tell people what we are going to go do and then endeavor to do it. So I think we’ll take a probably slightly different approach than how IAC has taken that in the past but we have to work through specifics post spin.


The next question comes from the line of Jeff Shelton - Natexis Bleichroeder.

Allan Gould for Jeff Shelton - Natexis Bleichroeder

First, can you give us some idea what the availability of the warehouse lines are in this current environment? Secondly, how will the company be different as a stand alone company versus under the IAC umbrella?

Matt Packey

Currently we have two in place that give us $100 million of capacity and I guess I would indicate first that is really a rolling capacity for us so intra month we will be putting loans through that warehouse line process. So we can originate up to $200-225 million in loans during a month. Currently that is sufficient for us. We are evaluating two or three other warehouse lenders. We wouldn’t add all of those at the same time. I’m sure as most of you know there is commitment fees associated with those warehouse lines so we don’t want to increase our capacity and have a significant number of new lenders or more capacity than we need and end up paying fees on those. So we’ll continue to evaluate our relationships with current warehouse lenders and adding one or maybe two more depending on the arrangement and pricing they have in place.

Doug Lebda

How I think we’ll be different than we were under IAC, this is by no means in many ways what IAC has done with the capital they have given us and the ability to invest I think IAC has set us up extremely well to spin off and be our own company. One way that I think will be different though is because under the IAC umbrella we have put significant investments in particular into the real estate business. We are certainly hopeful those very large investments are behind us and that in the future we can invest and test much more selectively than we have as we were putting $15 plus million a year into the real estate business. We don’t see, for example, something like that happening. Our focus right now is on getting the business to profitability.

Culturally I think there will be a difference as well. This isn’t because of IAC or not because of IAC. I think it is just a different growth area of the company. Over the past few years we were building this business up until the credit market meltdown…we had the model in place with Lending Tree Loans and our marketing scale to where we were building the company with an amount of infrastructure and expense and cost to be a major player in mortgage that obviously cost us a lot of money. The world has changed. We have made a lot of changes in management. We have made a lot of changes in technology. We have made a lot of changes in our organization to return this business to a much more nimble, entrepreneurial organization on a much lower cost base, to diversify into new streams of revenue, to be much more obviously mindful of the amount of expense we have and the amount of expense we can afford and then to try to grow our strategy on a much tighter budget. That is partially driven by the discipline of being a public market company. It is also appropriate for the market that we are operating in which is just different than it was a couple of years ago when IAC was operating the business.

Allan Gould for Jeff Shelton - Natexis Bleichroeder

Do you think there will be a difference in perspective of looking at MNA opportunities? Would you like to take advantage of some of those depressed valuations that are out there now?

Doug Lebda

I don’t think immediately. The way I think of MNA and obviously we won’t comment specifically on MNA…that is one thing we will do very consistently with IAC, but I do believe that if there are companies or groups of management teams that have figured out a business and maybe they don’t have the brand, infrastructure or marketing capability and we can provide those kind of folks a jump start but I think those would be very small tuck in opportunities and I don’t see us doing…never say no, but I don’t see us doing any of that at the present time. I think our focus has to be on just getting the business right and getting it spun and then looking at that.

One change we are going to make which I know is in the Form 10…I believe in we have used this very effectively in the past, and that is using stock options to try to incent larger percentages of the employees to think like owners and we certainly plan on doing that and hopefully using that as a tool to get an employee base that is incredibly engaged and fired up.

We have time for one more question.


The final question comes from the line of George Askew – Stifel Nicolaus.

George Askew – Stifel Nicolaus

Can you just sort of address without giving away any secrets your goals regarding some of the proprietary content or ways of driving free traffic. You mention content. Is it proprietary, journalistic type content you look toward or is it data aggregation? What should we look for there?

Doug Lebda

I’d say a couple of things. One is the content on our site is organized very, very poorly right now so that the search engines can actually find it. We’re not going into all the technical details but because we have been so focused on tracking every site that traffic is coming in from and sending it to Lending Tree, for example, search engines view us as if we’ve got tens of different sites and not as one site so all that traffic isn’t actually counted. That is all getting reorganized in our new business.

If you look at the way real estate, for example, has done a great job at getting its SEO and free traffic boosted in using the search engine as the home page, we are going to take a lot of those same practices and move them over.

From there we are working on several tools that consumers can use to use Lending Tree for things other than just filling out a qualification form. I don’t want to necessarily go into the specifics yet, but it will be things like enabling consumers to opt in to more of a lifetime of services and checking in with us and keeping their loans up to date and seeing options based on different triggers that they want to do. Being able to use us as more of a directory for people in the industry and to see offers that make sense for them based on their particular situation, the ability to compare offers that they are seeing off line from other providers to what is sensible and for them. So hopefully these types of tools it can be syndicated, they can exist as widgets, they could be sent via email and enable to consumer to get something other than just a qualification form.

So I think the combination of SEO practices, organizing our current sites and then these new tools we are working on will help. But the list is incredibly long.

Tom McInerney

I have some short closing remarks. I want to thank you all for your time today. We will obviously see many of you on not only the road show but we are happy to have meetings with you and we are looking forward very much to taking everything we have done well with Lending Tree and everything we have done well with RealEstate.com, building upon that as a separate public company called Tree.com and turning this into an indispensable ally for consumers across all these products and hopefully one that is lasting, enduring and a great company for many years to come.


Ladies and gentlemen that concludes the Tree Kickoff Conference call. Thank you for your participation. You may now disconnect.

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