OnDeck Capital's (ONDK) CEO Noah Breslow on Q4 2015 Results - Earnings Call Transcript

| About: OnDeck Capital (ONDK)

OnDeck Capital, Inc. (NYSE:ONDK)

Q4 2015 Earnings Conference Call

February 22, 2016 17:00 ET


Kathryn Miller - Director, IR

Noah Breslow - CEO

Howard Katzenberg - CFO


Julianna Balicka - KBW

Vasu Govil - Morgan Stanley

Chris Brendler - Stifel

Lloyd Walmsley - Deutsche Bank

David Scharf - JMP Securities

Bob Ramsey - FBR

Brian Pitz - Jefferies

Jason Mitchell - Bank of America ML

Michael Tarkan - Compass Point


Good evening. My name is Blair and I will be your conference operator today. At this time, I'd like to welcome everyone to OnDeck's Fourth Quarter and 2015 Full Year Earnings Conference Call.

All lines have been placed on mute to prevent any background noise. Just so you know, this call is being recorded today February 22, 2016. Once the speakers' have done their prepared remarks, we will do a Q&A session. [Operator Instructions]

Kathryn Miller, please go ahead.

Kathryn Miller

Thank you. Good afternoon and welcome to OnDeck's fourth quarter and full year 2015 earnings conference call. I'm here with Noah Breslow, our Chief Executive Officer; and Howard Katzenberg, our Chief Financial Officer.

As a reminder, today's conference call is being broadcast live via webcast. Our earnings release was issued earlier today and is available on the Investor Relations section of our Web site. Please remember that certain statements made during this call, including those concerning our business and financial outlook for the first quarter and full year of 2016, our growth opportunities and expectations, areas of strategic focus and investments, our market opportunities and anticipated demand for our products and anticipated benefits from strategic partners are not facts and are forward-looking statements.

These statements are subject to a numbers of risks, uncertainties and assumptions described in our SEC filings, including the risk factors described in our Annual Report on Form 10-K. Should any of the risks or uncertainties materialize or should any of our assumptions prove to be inaccurate, actual results could differ materially and adversely from those anticipated. These statements are also based on currently available information and we undertake no duty to update this information, except as required by law.

Today's discussion is also subject to limitations on forward-looking statements in today's press release. During this call, we'll be referring to both GAAP and non-GAAP financial measures. For information about these non-GAAP measures and reconciliation to GAAP, please refer to today's press release and the appendix of the Investor Relations presentation posted today on the Investor Relations section of our Web site.

We will also refer to credit ratings because they can impact our availability and cost of funds. Ratings are opinions of the relevant ratings agency and are not recommendations to purchase, sell or hold any securities and can be changed or withdrawn at any time.

With that, I will turn the call over to Noah.

Noah Breslow

Thanks Kathryn and thank you all for joining us today.

OnDeck's fourth quarter results brought a strong finish to our first full year as a public company. We continued to achieve many records for our business demonstrating OnDeck's momentum and setting the stage well as we look to 2016 and beyond.

To summarize the fourth quarter's results, OnDeck generated record loan originations of $557 million, up 51% year-over-year. Record gross revenue of $68 million, up 34% versus Q4 of last year. Net revenue of $42 million, up 67% versus last year and adjusted EBITDA of $315,000 for the quarter.

In addition loans sold through OnDeck marketplace grew to 40% of term originations at a healthy gain on sale rate. And we continue to diversify our funding mix for optimal flexibility. As you may recall, OnDeck's long-term strategy is to become the first choice lender to small businesses at all stages of their life cycle and for all of their financing needs. And OnDeck's fourth quarter performance reflected several important achievements as we continue to execute towards this goal.

First, OnDeck generated total originations of $557 million, up 15% sequentially, fueled by strong performance across all three distribution channels. This total originations growth was driven by higher application rates and stronger conversion in each of our channels. Originations in our direct and strategic partner channels combined grew 69% year-over-year and 11% sequentially. In our direct channel OnDeck's targeted marketing strategy continue to gain traction and we experienced improvement in our funnel metrics.

Meanwhile, OnDeck's strategic partner channel reached a record level of production reflecting broad-based growth from our partners.

Lastly, our funding advisor channel grew 17% year-over-year and 30% sequentially reflecting in part seasonality that we historically see during Q4, but also reflecting that the heavy lifting of our recertification program is behind us. As mentioned on prior calls, our certified funding advisors are showing higher credit quality originations in customer satisfaction levels more on par with our direct channel. While we are pleased with the sequential growth in this channel we continue to expect our direct and strategic channels to comprise the majority of our customer acquisition volume.

Another Q4 milestone and pillar in OnDeck's long-term strategy has been the launch and ramp of our expanded product offerings. In October 2015, we announced the expansion of our maximum term loan up to $500,000 and our line of credit up to $100,000. While it is still early in our ramp of these offerings we're pleased with the performance thus far. In fact, we saw significant customer adoption of our line of credit products as outstanding balances grew by almost 26% sequentially and line of credit originations reached 10% of total Q4 originations. With larger average loan amounts, longer average terms and a lower average pricing now available to qualified small businesses, OnDeck can offer a wider range of products better suited to the diverse capital needs of our small-business customers as they grow and mature resulting in more durable relationships and higher customer lifetime value.

A third pillar of OnDeck's long-term strategy has been in building deeper integrations with strategic partners. Unlocking frictionless access to capital for small business owners while also expanding our market reach. During the fourth quarter, we launched our expanded collaboration with Intuit, the QuickBooks line of credit powered by OnDeck so that more mature small businesses can qualify for lower-cost lines of credit based on the QuickBooks data.

Also during the quarter, OnDeck announced a strategic relationship with JPMorgan Chase and signed an agreement establishing the parameters for OnDeck to provide a technology platform and OnDeck Score for an online lending products for Chase's small business customers.

We believe Chase selected OnDeck because of our market leadership in online small business lending, our proven OnDeck Score and analytics capabilities and our OnDeck as a service technology.

Additionally OnDeck has made considerable investments in our IT, data security and compliance infrastructure over the last year, which are critical to working with the nation's top financial institutions. By combining Chase's relationships and lending experience with OnDeck's credit model and platform, Chase will be able to offer almost real-time approvals in the same or next day funding a dramatic improvement over a traditional loan process that might take weeks. Chase will hold the loans, which will be priced like bank products on their balance sheet and OnDeck will earn servicing and platform fees based on volume.

So, between the Intuit QuickBooks line of credit partnership, our collaboration with Chase and a robust pipeline of potential new partners we believe that there is considerable opportunity for our OnDeck as a service model to grow. As a reminder, we believe OnDeck is a number of competitive advantages with these integrated platform partnerships offering strategic partners our complete credit solution, which provides the online lending industry's broadest suite of offerings for small businesses. Our scaled and sophisticated credit model, the OnDeck Score, which has been battle tested and refined over almost 10 years of lending and learning and can be augmented with partner data for even greater accuracy and our technology platform, which incorporates API-based integration between platforms, partner branded products and essential security and compliance measures to deliver a frictionless customer experience.

We believe we are the only small business online lender that has invested so heavily in IT security and compliance measures to meet the high standards of the nation's largest banks. We are excited about the opportunity presented by these integrated platform partnerships and by our pipeline of potential strategic partners.

Lastly, I would like to provide a quick update on recent achievements in Australia. As expected OnDeck launched operations on schedule during the fourth quarter. We're very excited about the Australian market and are proud to say that not only have we partner with MYOB, the foremost small business accounting software provider in Australia, but we have also now established a partnership with the Commonwealth Bank of Australia, the CBA, Australia's largest bank and a leader in technology innovation.

It took our U.S. business six years from launch to build the track record and establish the caliber of strategic partners with which our Australian business has launched on day one. So thanks for the unique access to customers and data provided by both our CBA and MYOB partnerships, OnDeck Australia is launching with very strong competitive advantages.

Now, before I turn the call over to Howard, I want to spend a few minutes talking about OnDeck's outlook for 2016. First, let me address our credit outlook, which I'm sure is on the mind of a lot of people. As Howard will discuss we are not seeing weakness in our portfolio at this time. In fact, our 15-day delinquency rates continue to improve in January and thus far into February despite expectations for some seasonal headwinds.

That said, we have built a number of important structural protections into our business that give OnDeck an important competitive edge in varying economic environments and makes our model very different than traditional lending models to small business. Specifically, thanks to almost a decade of lending and learning over multiple credit and economic cycles, version 5 of our OnDeck score ranks risk substantially better than our prior versions.

In addition, OnDeck's short average duration and small averaged size loans are paid back daily or weekly, which means that our loan portfolio revolves quickly, reducing the amount of time our capital remains outstanding while also providing real-time data regarding our portfolios credit performance. The combination of our experience and the small business lending market and the characteristics of our products provides us with flexibility to adjust both pricing and approval rates rapidly in response to changes in the credit landscape.

In addition, we believe we have the most diversified and lowest-cost funding model of any of our dedicated small business lending competitors, which will serve us well in a variety of credit environments. Finally, we have been steadily moving up market in terms of the credit quality of our customers. We are sourcing customers with higher OnDeck scores through higher quality channels than we were several years ago.

So, while our portfolio performance is strong heading into 2016, we're monitoring the macro environment very closely for any fundamental changes in the small business health or portfolio performance. We have built OnDeck to perform in a robust way in a variety of market conditions. To the extent that any negative trends emerge we believe we can react very nimbly because of the ways which we have built our credit model, designed our product structure and diversified our funding model. OnDeck has a vast amount of data early warning signals and portfolio management tools at our discretion, which could present an opportunity for OnDeck to extend our market leadership even further over time.

Meanwhile, as OnDeck continues to forge our path towards becoming the first choice lender for small businesses, we will build upon the strong foundation that we laid in 2015. From an originations perspective, our growth in 2016 will continue to be driven by our direct and strategic partner channels aided by stabilization in our funding advisor channel.

From a product perspective we will continue to drive growth by providing a complete credit solution to our customers, providing working capital lines of credit, short-term loans and longer term loan products tailor-made for small businesses. Not only does having a broad range of products increase our conversion rate on our marketing, but I would note that our line of credit and longer-term loan offerings are still relatively new to our business and to scale up substantially in the next few years.

And from a customer perspective, we will drive growth by focusing on life-term relationships. With our complete credit solution, better pricing for repeat customers and our deep commitment to providing outstanding customer service, we are enhancing our utility and appeal to small businesses. We expect these initiatives to contribute to even stronger customer loyalty and retention over time.

Also in 2016, OnDeck will continue to invest in our data and technology. From a data perspective, we expect to releases several substantial improvements to the OnDeck Score over the course of the year culminating in the release of version 6. We will also continue to use data signs to drive many other facets of our business from sales and marketing to operations to pricing and collections.

From a technology perspective, we will be focusing on continuing to simplify and improve our customer experience automating even more of our processes, building out our mobile functionality and delivering new and deeper integrations with strategic partners. And of course, we expect our international operations to continue to scale up as we progress through the year. Altogether, OnDeck is poised for continued high-quality originations growth as well as strong operating performance in 2016. This is due in large part to all the progress we achieved in 2015. OnDeck's intense focus on providing the best possible experience for our customers through our distribution channels, our product offerings and our end-to-end platform is yielding real results.

In fact, during the fourth quarter, OnDeck achieved our highest quarterly net promoter score ever, demonstrating the value that OnDeck is creating for our customers and ultimately for our shareholders.

I'll turn the call now over to Howard to discuss our fourth quarter results and 2016 financial guidance in greater detail.

Howard Katzenberg

Thanks Noah.

I have a lot to cover today and will discuss our fourth quarter results, financial priorities for 2016 and 2016 guidance. But first, I want to reiterate something Noah talked about. There are a lot of macro questions right now around the economy, credit performance and access to funding. But it's precisely for times like these that we've built the product and funding model we have today. The short durations, the pricing spreads, the daily collections and our diversified balance sheet securitization and marketplace funding models.

As a result, we have the ability to detect and respond quickly to changing economic conditions. So, in times of uncertainty, we believe our model will serve us extremely well. That said, to repeat what Noah stated, our portfolio's credit performance has continued to be very strong so far this year. In that vein we exited 2015 a stronger company financially than when we began the year. And we are well positioned for continued financial execution in 2016.

As Noah mentioned, we had a solid fourth quarter. Originations growth was robust and credit performance remained strong. This resulted in top and bottom line financial performance that exceeded our previous guidance. Specifically, gross revenue reached a record $68 million, up 34% from the prior year. This performance topped our previous guidance range of $64 million to $66 million. The primary driver of the gross revenue outperformance was our gain on sale and servicing fee revenue.

In Q4, we took advantage of continued robust demand for our loans and strong gain on sale levels. Marketplace grew to approximately 40% of term loan originations and we achieved a gain on sale rate of 9% versus 6.4% last year. Meanwhile, other revenue comprised primarily of servicing fees to 133% versus last year as the marketplace portfolio continued scaling. Given the significant ramp of the marketplace mix that occurred during the year, our on balance sheet portfolio represented by our unpaid principle balance metric grew at a slower pace in 2015. This led to a 5% increase in interest income year-over-year, on a sequential basis, interest income in Q4 declined, but there were three fewer business days. On a business day adjusted basis, interest income would have increased over Q3.

EIY in Q4 was 35.7% down from 37.9% in the third quarter which again had three fewer business days. Adjusted for business days, EIY declined 50 basis points sequentially. Similar to the dynamics that impacted EIY in Q3, our Q4 interest income included interest earned, our marketplace loans between the time they were originated and the time they were sold.

In Q4, this amount comprised $4.6 million of our interest income. As we've said in the past, we expect to continue to bring EIY down in a controlled fashion as our portfolio mix evolves to comprise more direct and strategic partner loans, more repeat customers, more line of credit customers and more generally as we move up market. Each of these initiatives enables OnDeck to grow responsibly while also expanding customer lifetime value a key driver of operating leverage over time.

That said, as these trends stabilize of larger basis and all else being equal, we should see a slower rate of decline in the average APR's we charge to customers. Therefore, we expect a slower decline in business day adjusted EIY as well. So, for the full year of 2015, OnDeck gross revenue grew 61% over 2014. This was roughly in line with total originations growth despite a decline in EIY from an average of 40.4% in all 2014 to 36.9% for 2015. This level of growth was of course aided by originations, but also benefited from our significant mix shift in marketplace funding. Specifically, the market place mix increased from an average of 13% in all of 2014 to an average of 34% in 2015.

We executed this increase to take advantage of the rising gain on sale levels we were achieving in the marketplace. This shift was also part of our concerted strategic effort to diversify our funding sources to create a sustainable competitive advantage for OnDeck in a variety of funding environments.

Moving on, we are $42 million in net revenue in Q4, up 67% year-over-year. Also, our net revenue margin in Q4 2015 increased to 63%, up from 50% in the prior year period. This strong margin growth was primarily driven by the mix shift to more marketplace funding, higher gain on sale levels year-over-year and a lower provision rate.

On the provision side, our provision rate was 5.6% in Q4 compared to 6.7% in the prior year period. The decline in the provision rate was primarily related to the improved credit quality of our new originations. This improvement was largely driven by the channel mix shift in growth of repeat business that I highlighted as key drivers of our long-term strategy.

Our cost of funds rate in Q4 increased to 5.8%. This was 10 basis points higher than the rate in Q3. The increase was primarily related to a termination fee payment made in connection with our voluntary closure of a $17 million debt commitment that was not being utilized.

Backing out this fee, our cost of funds rate would have been a 5.6%. 2015 was a good year for net revenue as it increased to 117% over 2014 levels. Importantly, we also grew our full year net revenue margins from 46% in 2014 to 63% in 2015. This significant margin expansion was driven by reductions in both our provision rate and cost of funds rate for the full year. It also benefited from the substantial growth of marketplace. Specifically, as the marketplace mix increased, we recognized an increasing amount of gain on sale while also slowing the growth of our provision expense as a lower percentage of our loans originated were being held for investment. These benefits which resulted from the accelerated marketplace growth that occurred in 2015 should not occur to the same degree in the future as our marketplace mix stabilizes.

Now onto OpEx. Please note, I will highlight each of our functional areas in total absolute dollars. I will also discuss these items as a percentage of gross revenue or total originations. However, when doing so, please note that in each case, I will exclude stock-based compensation cost from the respective calculations. In Q4, we continue investing to capture share in our large and growing market. Sales and marketing expense was $17 million for the quarter or 24% of gross revenues. This was an increase from 22% on a comparable basis in the same period of 2014 and largely driven by higher direct marketing spend and higher compensation costs.

That said, looking at it as a percentage of total originations, sales and marketing was 2.9%, down from 3% in Q4 of last year and 3.1% last quarter. Though we continue seeing leverage in this metric as we enhanced our brand awareness and utilized our data advantage to better acquire and retain customers.

In Q4, we also continue to invest in our tech and analytics capabilities spending $30 million or 18% of gross revenue. This is up from 11% last year reflecting our commitment to continue investing in innovation. To that point we believe that we have the largest and most talented team of data scientists and software engineers solely focused on improving small business access to capital. Our investment in technology and analytics has enabled our OnDeck as a service integration including our partnership with Chase.

Going forward, we plan to continue investing in our technology platform, enabling better targeting and improved credit performance over time. While also deepening OnDeck's competitive mode.

Finally, processing and servicing in G&A expenses totaled $18 million in the quarter or 23% of gross revenue up from 18% last year. This increase largely reflected continued investments in collections, fraud detection and customer service as well as increased costs to operate as a public company. This quarter, G&A also included a $1 million provision to build our reserve for undrawn line of credit balances. In addition, it included a $600,000 unrealized loss related to the depreciation of the Canadian dollar. That said, in 2016, as we lap the one-year anniversary of our IPO, these line items combined should become a driver of operating leverage.

Putting it all together, our total OpEx as a percent of gross revenue was 55% up from 52% in Q4 2014. This increase, however, was consistent with the plans we outlined at the time of our IPO to advance our industry leadership and continue building our competitive modes.

Overall, OnDeck generated adjusted EBITDA of over $300,000 in Q4 compared to almost $600,000 a year ago. This is above the negative $1 million to breakeven guidance range I provided on our last call. Relatedly, adjusted net loss was $1.1 million in Q4 and GAAP net loss attributable to common was $4.6 million.

And for the full year of 2015, OnDeck generated over $16 million of adjusted EBITDA and $10 million of adjusted net income. Both metrics were up from losses in 2014. That was a very good year from an operating perspective.

On the balance sheet side, our ending unpaid personal balance or UPB was $544 million at the end of the quarter. This was up 11% year-over-year and 8% sequentially. Likewise, our ending funding debt was $380 million, down 2% year-over-year but up 8% from Q3 reflecting the sequential growth of UPB. As we look forward, we expect UPB and funding debt balances to continue increasing as originations grow and our marketplace mix stabilizes.

Lastly, our ending loans under management, which includes both our on balance sheet and marketplace portfolios grew to $890 million at the end of Q4, up 56% over the prior year and 14% sequentially. On the credit side, we continue to see encouraging trends during Q4. Our 15-day delinquency rate was 6.6%, a sequential improvement from 7.5% in Q3. This decline reflected the general improvement in our portfolio performance.

Meanwhile, our ending reserve ratio was 9.8% compared to 10.4% in Q3. Finally, the annualized net charge-off rate for Q4 was 14.7%, up from 13.3% in Q3. As you'll see in the 10-K delinquency data, the higher sequential losses were not from new delinquencies or worsening performance from earlier stage delinquent customers. In fact, our 1 to 14 day delinquency level was at a multiyear low at the end of Q4 representative of the high quality of recent originations. Instead, the increase was largely driven by write-offs of accounts that were already severely delinquent at the beginning of the quarter and for which we were already sufficiently reserved.

Specifically, as our collections capabilities have improved, we've been increasingly successful at implementing workout plans for these later stage delinquent customers. That said, they rolled to write-off at a faster clip than other delinquent customers and because they comprise a greater mix of our delinquent accounts in Q4 write-off increased.

On a related note, given our current scale and investments we've made in our collections process, we now believe that it is more cost-effective to leverage our internal collections team to attempt to collect on certain charge-off loans rather than selling them immediately to a third-party post charge-off.

As a result, beginning in September, we began selling fewer charge-off loans. This decision has lowered recoveries in the short-term but we believe will increase recoveries down the road. Combined, we estimate these two factors which represent enhancements to our collections approach contributed approximately 90 basis points to the annualized net charge-off rate in Q4. Again though, we believe these actions will lead to higher pre-write off collections and higher post write-off recoveries in the future.

Now, let me talk a little more about our credit expectations going forward. Overall, we continue to see strong credit performance as 2015 envisages are performing right within expectations. And we expect 2016 envisages to continue that trend. That said, I want to mention two seasonal patterns we have seen in the past around this time of year. The first is a sequential up tick in our 15-day delinquency ratio in Q1 as some small businesses fall behind in their payments due to the post holiday lull or adverse weather conditions. The second trend is a sequential elevation in our net charge-off rate in Q2 as some of those seasonal delinquencies rolled to write-off.

That said, we are very pleased with our portfolio performance. As evidenced by our fourth quarter originations small business demand for capital remains robust. Economically, we believe lower gas prices and stable employment trends are good for the overall health of small business. And as Noah mentioned, our 15-day delinquency rate in January and thus far through February was lower than the end of December. And this is despite the expected seasonal headwinds. As always, we will continue monitoring the situation very closely but as of now, things look okay.

Moving on, our ending cash balance was $150 million at the end of Q4. Also, our debt to equity remained very low at approximately 1.2x, as such, our business remains very well capitalized, which brings us now to 2016. But before I discuss our financial priorities, I'd like to provide an update on our expected marketplace mix. This will impact several of our reported financial metrics.

In Q4, 40% of term loan originations were financed through marketplace. Currently, we see this mix stabilizing and varying between 35% and 45% for the full year of 2016. Where precisely we are in this range will continue to be driven by the relative economics of holding loans on balance sheet versus funding through marketplace. However, given the increasing risk premiums being priced into the market that could result in lower gain on sale rates, we expect that the marketplace mix won't grow from current levels in the near term.

Having this type of funding flexibility is one of the chief benefits of our hybrid funding model. We can adapt quickly to market conditions and manage our funding mix based on relative yield expectations. As mentioned, our funding mix has an impact on several financial metrics.

Specifically for 2016, as a percentage of loans sold through marketplace stabilizes, we should see slower gain on sale revenue growth then we had in 2015. Meanwhile, interest income should increase at an even more rapid pace, but the recognition of this revenue will be spread over longer time periods. Finally, provision expense will accelerate as our loan book grows. This is because we recognize expected lifetime losses at the time of loan origination. Nonetheless, we continue to expect our provision rate to improve and I'll touch on that trend in a moment.

Overall, we remain focused on optimizing the drivers of our long-term financial performance though OnDeck's financial priority number one in 2016 is to grow originations, the biggest driver of gross revenue. And we will do this responsibly by pricing risk appropriately and avoiding originations that we deem too risky. Accordingly, we currently believe we can grow annual originations by 45% to 50% in 2016.

Noah has already discussed several drivers of this originations growth. But the bottom line is that the 2016 strategy should look similar to 2015 driven by increased growth of our direct and strategic partner channels, increased repeat business and increased line of credit originations. These segments not only increase lifetime value due to their attractive risk characteristics but also drives strong customer retention which ultimately results in higher loan balances outstanding for longer periods of time. As such in 2016, we also expect loans under management to grow at a slightly faster pace than their annual loan originations as it did in 2016. And because we are expecting our marketplace mix to remain relatively stable, our unpaid principal balance should begin demonstrating more rapid growth again lending leading to higher interest income.

Financial priority number two involves our target provision rate. In 2016, we expect to release the sixth generation of the OnDeck Score, which will enhance our already strong risk ranking capabilities. As this occurs and as our loan portfolio continues its evolution towards stronger credit quality originations such as more repeats loans, our expected provision rate should decrease. These factors primarily drove the decline in our provision rate for the full year of 2015, which was 5.8% versus our target of 6% to 7%.

As a result of the structural shift in our portfolio, towards higher credit quality and lower-priced loans, we are lowering our optimal provision rate target to between 5.5% and a 6.5%. I understand this may seem counterintuitive given the current market environment. However, this range is now where we believe our efficient frontier is. Over time, as loans under management grows EIY decline stabilize and provision rates approach our efficient frontier, we should see significant growth in net revenue.

Lastly, financial priority number three is focused on the levers that will drive operating efficiency and adjusted EBITDA growth. 2015 was a year of investment where as planned and executed our OpEx grew faster in both gross revenue and originations. In 2016, we will continue making targeted investments to power our growth. However, we will also be focused on driving operating leverage as such we expect total OpEx to decline as a percentage of gross revenue in 2016. Let me talk a little more about this now.

First, sales and marketing. Since our IPO we've made significant investments to build our brands. Investments have included a national television and radio campaign, a sponsorship of minor-league baseball and more recently a relationship with Barbara Corcoran. These initiatives have not only helped us attract new customers, but have also aided our attempt to sign new strategic partners.

We also significantly increased our direct marketing spend in 2015 both in direct mail and online marketing. In 2016, we expect to continue making brand investments. But, we will also seek to optimize our direct marketing spend. We will do this by further leveraging our data and scale advantages to invest in the most efficient acquisition channels at any time. As this optimization occurs, our strategic partner originations increase and as we continue driving longer lifetime relationships, sales and marketing expense should decline as a percentage of gross revenue and total originations.

As mentioned earlier, we believe this also to be the case for the combined G&A and processing and servicing expense. Specifically, we expect to see improved economies of scale as we grow loans under management and extract the inherent operating leverage embedded in our scalable infrastructure and highly automated operations. As I said earlier, we expect our tech and analytics expense to grow faster than gross revenue as we further our innovation leadership, we'll do this not only to deliver outstanding customer experiences for our small business customers, but also to build outstanding integrations with our OnDeck as a service partners.

And this last point, we believe the bank market is on the cusp of a significant shift away from making small business loans off-line to online. And we believe OnDeck is uniquely positioned to be at the heart of this transition, providing the technology platform that powers these transactions for banks. This will enable OnDeck to capture considerable share of this emerging market opportunity. As such, a large portion of the expected increase in tech and analytics expense in 2016 relates to investments we're making to enhance our OnDeck as a service capability. We are confident these investments will fortify our leadership position with respect to this very big opportunity.

Now, before I move on to guidance, let me spend a moment discussing our expectations for the broader OnDeck as a service opportunity. By their nature, partnerships like these generate lower revenue per loan than the interest income available to the owner of a loan. However, the margin profile will be much higher when you consider that there are no acquisition, credit or funding costs associated with these revenues.

That said, to level set on timing expectations with respect to this broader opportunity, we view 2016 to be about achieving two main objectives. One, launching and refining our pilot program with Chase, and two, continuing to build out our infrastructure to add and support additional partners that understand the small business capital assets problem and are willing to invest in a great customer experience.

Our 2016 financial guidance reflects these expectations. On the other hand, we expect 2017 and 2018 to be years in which OnDeck as a service revenues really begin scaling.

Now, onto our 2016 financial guidance. First, with respect to gross revenue, given our expectations that marketplace mix will remain in the 35% to 45% range for term loan originations, the rate of decline in EIY slows in 2016, and originations will grow between 45% and 50% versus 2015 levels, we are forecasting gross revenue for the full year of 2016 to grow to between $320 million and $328 million.

As a reminder, the gap between our originations growth rate and our gross revenue growth rate is wider in 2016 than 2015 because the marketplace mix won't be growing as fast as it did in 2015. In 2017 and beyond, as we anniversary the fast ramp in marketplace that occurred in 2015, our originations in gross revenue growth rate should more closely align.

On to our adjusted EBITDA guidance. As I said a few minutes ago, we are dedicated to driving operating leverage with respect to our fixed expenses in 2016. However, with a stabilizing marketplace mix we'll see provision expense increase as a percentage of gross revenues in 2016 leading to some deleveraging for adjusted EBIDTA. In particular, given our originations, marketplace and provision rate expectations for 2016, we are forecasting over $100 million in provision expense to be recognized as our on balance sheet portfolio grows. As such we expect adjusted EBITDA for 2016 to be between $10 million and $14 million. Backing out the impact of the provision expense, we expect to see margin improvement in 2016 from the levels achieved in 2015.

Now, onto our first quarter financial outlook. For the first quarter of 2016, we currently expect gross revenue between $56 million and $69 million. As a reminder, Q1 has 62 business days. This outlook also reflects the expectation that given current market conditions gain on sale rates will likely come down from Q4 2015 models. We also expect adjusted EBITDA between negative $3 million and negative $5 million, which primarily impacts of stabilizing the marketplace mix on both gain on sale on provision expense. This outlook also reflects the accelerated investment in tech and analytics we will make in the first half of 2016 to support our Chase relationship and other strategic partners.

Lastly, before I turn the call back to Noah, please note that beginning in 2016, we are refining the definitions of a few of our KPIs to reflect the evolution of our model and a required change in an accounting policy. First, due to the substantial growth and impact of marketplace, we are making a few changes to the definition of average loans, which is a denominator of EIY calculations.

Going forward, average loans will now include loans held for sale in addition to loans held for investment. Also, we will calculate average loans for a period based on monthly averages rather than the quarterly averages. These changes will make EIY calculation less sensitive to our funding source mix [and lots] [ph] of time we hold loans before selling them into marketplace.

Finally, going forward, our reported EIY numbers will be normalized to adjust for the number of business days in the period to improve comparability between periods. Also in 2016, we will be updating the cost of funds definition to also utilize monthly averages and to conform to a mandatory GAAP accounting change related to our deferred debt issuance costs, all else being equal, this accounting change will lead to an increase in the cost of funds metrics solely due to this new accounting requirements.

To assist investors with these changes, we have included additional data tables in our press release and investor presentation comparing the historical values of the affected metrics with the values calculated using the updated definitions. To reiterate again, we plan to roll out these new definitions beginning with our Q1 financial report.

And finally, I'd like to provide a quick update on the status of our deferred tax assets which was valued at $32 million at the end of the year. As of December 31, 2015, we continue to record a full valuation allowance against our DTA and based on our current expectations, we do not expect a valuation allowance to release until 2017 at the earliest. Given the various moving parts of the accounting assumptions we will provide further guidance from the timing of valuation allowance release when we get closer to the event.

With that, let me now turn it back to Noah for some concluding remarks.

Noah Breslow

Thank you, Howard.

In closing, OnDeck emerge from 2015 as a much stronger company. The continued refinement of our OnDeck Score, one of our major competitive advantages has led the higher conversion rates in our funnel, stronger credit performance across our portfolio, and enhanced risk management for our business.

The growth of our direct and strategic channels and the recertification of our funding advisor channel has enabled OnDeck's progression towards more direct ownership of our customer relationships and enhanced economics for OnDeck. This channel mix shift towards higher-quality originations combined with our product expansion has also driven stronger customer lifetime value.

We have generated high-quality growth and improved operating results all while investing in and advancing OnDeck's competitive advantages. The respective leaders in small business accounting software and in banking in the U.S. and Australia have each selected OnDeck as the underwriting engine and servicing platform to power their small business programs. This is a tremendous validation of OnDeck's small business online lending expertise and market leadership and we believe it will provide high-margin streams of revenue for OnDeck over time.

We've also strengthened the resiliency of our funding model with the growth of marketplace from 18% to 40%, the addition of warehouse facilities with Bank of America and SunTrust and the recent securitization rating upgrade, OnDeck has further diversified our funding sources and improved the economics of our model.

Despite the competitive noise, OnDeck has become the clear market leader in small business online lending. And as we look to 2016 and beyond it is not out of the question to think that in two or three years OnDeck will have a core business that is substantially scaled up from where we are now while simultaneously powering online small business loan programs for major banks and some large non-banks and doing all of this in a few international markets around the world as well as in the U.S.

To achieve this, OnDeck must continue to build upon our competitive note as we have in 2015. This means that we will maintain our relentless focus on the small-business customer and their capital needs. We will build the leading SMB lending solution attracting customers at all stages of the small business lifecycle for all of their needs and retaining those customers longer as their needs grow and change. We will drive simplicity into the customer experience building technology that does the heavy lifting for our customers while creating operating leverage for the business.

And lastly, we will deliver astonishingly good service and reward loyal customers. OnDeck's personal approach to customer service, loan that build the small businesses credit history and loyalty terms and pricing let to a highest net promoter scores ever in 2015. And we will continue to improve our service offerings in 2016.

So, as OnDeck continues to execute on all three of these pillars in 2016 and the years to come, we are confident in the foundation we've laid and the competitive advantages we have as the scaled leader in the online small business lending market.

With that, I'll turn the call over to the operator for questions.

Question-and-Answer Session


[Operator instructions] The first question comes from the line of Julianna Balicka from KBW. Your line is open.

Julianna Balicka

Good afternoon.

Noah Breslow

Hi, Julianna.

Julianna Balicka

Hi, there. I was wondering, if you can maybe give us a little bit more color about breakdown of your originations in dollars between the direct and the strategic partner channels and it may be too early to breakdown strategic versus direct maybe where you would like to see that go to over the course of 2016 as your partnerships ramp up?

Noah Breslow

Yes. So happy to do that Julianna. This is Noah and thanks for sticking with us. We recognize it was a bit of a longer introduction there. So we don't break out direct and strategic primarily because in both cases OnDeck really does own the long-term relationship with that customer in a different way than the funding advisor channel. So we've logically kind of group them together over the last couple of years. The majority of our customer acquisition remains from the direct channel, which is consistent with how it's been historically. But, we have seen a nice up ticking growth in the strategic partner channel and as you saw the overall originations growth was strong sequentially, 15% overall.

So I think as you look out in the next couple of years, we think both channels have a lot of room to grow. The direct channel will be a little bit more modulated by what we see in the competitive environment and how much activity is going on in both the online and off-line marketing channels and then the strategic partner channel will be clearly driven by our partner pipeline and how fast we ramp relationships like the once we talked about in the past with folks like Intuit. So we see a bright runway ahead, direct remains the majority of our customer acquisition and we will have some of the detail on the particular channel breakouts in the 10-K.

Julianna Balicka

Okay. Very good. And then, for my follow-up, if I can maybe switch to credit real-quick and then I'll step back. I know you said you're not seeing deterioration in your portfolio as of through the year end when you reported the favorable credit metrics in the 4Q. But quarter-to-date are you tweaking your underwriting, or any parameters kind of in response to some of the macro economics uncertainty or any geographic trends that you're noticing or any industry trends? So any leading indicator color that you can give us?

Noah Breslow

Yes. So, let me just speak more broadly about really the credit outlook. As discussed performance in Q4 was very good. Generally, we see an up tick in delinquencies in Q4 given some of the seasonal patterns, but actually it was lower this year and it was the lowest amount it's been all year. And we see, as we mentioned in the remarks that the performance has been improving quarter-to-date. So, kind of the volatility that we're seeing in the financial markets, it's not spilling over, at least from our perspective to the economy yet. And we believe a stronger U.S. consumer, accelerating wages and still healthy payrolls growth is really good for small businesses. And OnDeck specifically, we talked about our energy exposures last year being less than 5% of the portfolio and it's even a smaller amount today.

So, we believe that the performance remains strong. That said, to your point, it's something we're keeping a very close eye on. We have very sophisticated early warning monitoring, in addition to the credit performance and the daily collections that we analyze. We track the quality of new applications coming in. We look at the reasons -- small business owners are using our loans whether or not, there is a shift in kind of offense of two defenses purposes.

And then, we also kind of do time series analyses for customers seeking repeat loans. How do they compare versus this time last year or two years ago in addition to looking at many other data points. So those early warning systems are not sounding any warning bells now. And that said, from an underwriting perspective, we'll make adjustments certainly in real-time as we see fit.

Julianna Balicka

Very good. Thank you very much.


The next question comes from the line of Vasu Govil from Morgan Stanley. Your line is open.

Vasu Govil

Hi. Thanks for taking my question. I guess, I just wanted to follow up on the guidance commentary regarding origination growth. Origination growth guidance was bigger than what we were expecting, especially considering that now you're going after more price-sensitive customers so your addressable market is now bigger than it was previously. Can you sort of elaborate on what the puts and takes that are driving the deceleration in originations growth? And is competition playing a big role in the slowing growth?

Noah Breslow

Yes. I'm happy to address that Vasu. So, I think -- we haven't sort of obviously talked to the analysts' community yet formally about 2016, so I think people had expectations that were a little bit all over the map. But, we are one, very measured in our role out of new products. So, we did expand some of our offerings, especially the move from $250,000 to $500,000 towards the end of last year. But we don't expect those originations to be a huge part of our volume kind of here in 2016. Now, in 2017, 2018, some of that will scale up and actually that sort of maps back to my remarks where I talked about line of credit, where line of credit also is in relatively early stages of its development as a product for us. So we think there's a lot of leverage especially in the out years here on originations and will continue to show strong activity there.

I would also remind folks that we did go through a recertification in our funding advisor channel, while we saw nice growth sequentially in Q4, we're not necessarily expecting that channel to grow as fast as direct and strategic during the course of 2016. That also said, as we look to new relationships like the Chase and Intuit, OnDeck as a service relationships, those really start to kick-in in 2017 and 2018 as well. They are kind of in the early stages of development here in 2016 and our guidance reflects that.

Finally, I would make one more comment here around the nature of our pasture, which gets back to Julianna's question a little bit. We don't want to grow by compromising either originations credit quality or the acquisition spend we make in originations. So I think to the extent we see folks doing slightly irrational things in the market, we really have a great sense we think of the marginal risk of every customer that we approve and the marginal acquisition cost of the way we spend money in our sales and marketing line items. So we're always going to be mindful of those. We're not solving to hit a particular originations target, we're really trying to bring in the right kind of originations to scale the business and responsible, long-term way.

Vasu Govil

Great. Thanks. That's very helpful. And just a quick follow up. As you grow the OnDeck as a service product offering in 2017 and 2018, how should we think about that impacting profitability of the business?

Noah Breslow

Yes. So the OnDeck as a service model, the lower dollars per loan but higher-margin structurally business. So it's a business in which we make a processing fee or platform fee I should say and a servicing fee, so it does scale with the size of the OnDeck service loan book, if you will. But because you don't have cost of capital necessarily you don't necessarily have a cost of acquisition in this model and cost of losses, especially in the case of Chase where they are taking the loans on balance sheet. It's really about our marginal operations cost to deliver that service.

A lot of the integration is highly automated. So the customer experience is outstanding in the OnDeck as a service relationships and that we think will lead to higher operational leverage from the OnDeck as a service business over time.

Vasu Govil

Great. Thank you very much.


Your next question comes from the line of Chris Brendler from Stifel. Your line is open.

Chris Brendler

Thanks. Good afternoon. I just want to focus on 2016 perspective. How much has changed and how much is the pullback in the capital markets affect your outlook. I'm thinking about mostly again on the sales side. Can you give us any sense of what has happened to demand from those investors and by extension, how confident are you that you can maintain that 35% to 45% even in a more volatile market? And any color, I guess a directional information on the downside margin? Is it going down 50 basis points, 100 basis points, any color there would be great. Thanks.

Noah Breslow

Yes. Thank you for the question, Chris. So just broadly speaking about the outlook on the capital markets. I think what we see -- one, there is still a lot of demand out there for different asset classes including loans like the ones we originate. And issuers are still having success accessing the market. But I think investors are asking kind of where are we in the credit cycle right now, and pricing in basically higher risk premiums. So you see spreads widening. But deals are getting done. It's just being executed at higher price levels.

For OnDeck, I think we have a few things going on in our favor that are really positive. First, our first securitization that we did in 2014, that vehicle, the performance is performing extremely well. And investors constantly ask us when the next deal is going to occur. And in fact, that securitization was recently upgraded to single A status by DBRS. So we believe the securitization market and a warehouse markets remain open and there's still a lot of demand.

In terms of the impact, what's happening in the capital markets will have on gain on sale because of those higher risk premiums, we are forecasting that gain and sales are likely to come down in Q1 and specifically based on kind of our knowledge of the market today, anywhere from maybe a 100 to 150 basis points from Q4 levels.

That said, even if are at -- more towards the 7.5% and 8% again on sale level it's still better than really where we were at the beginning of the year and we still think it's the right choice to pursue that 35% to 45% of marketplace. So again, a lot of demand still out there but it's really a question of where we execute. And whether we're at the low-end of the 35% range or towards the top is going to be driven really by the relative economics of where we can execute this gain on sales relative to holding a balance sheet.

Chris Brendler

Got you. It make sense. And then I guess a related question also focusing on so far this year. As the [indiscernible] volatility provide any benefit from a competitive front yet?

Noah Breslow

I'm not sure we're seeing that competitive benefit just yet but anecdotally I think for -- it's going to be a flight to quality Chris. So what you will see is that investors want to back proven platforms. So we think that bodes very well for OnDeck especially given the performance of the securitization that's been out in market now for nearly 2 years. Yes, So I think if you're some of the smaller platforms it might not be a cost of capital question it might be an access to capital question. But I can't say we're seeing the benefits of that yet but I wouldn't be surprised if we saw the benefits of that over the next 12 or 24 months.

Chris Brendler

Okay. And one more quick one, if I could for Howard. If the capital markets got worse and you found investor demand for home loan sales to be a lot less and you wanted portfolio of the loans, would securitization be an option or just the same investors that look at the securitization or look at the whole home loans?

Noah Breslow

I think securitization certainly remains an option. If you think about it from a marketplace perspective, the investors there are taking equity risk and are subject to kind of variable returns. While with securitization and other financing vehicles we have, it's much more of a fixed income perspective. And we have such a large amount of spread in our assets that we are able to adjust if we needed to adjust terms and still really have minimal impact on our financial model.

So, certainly yes, if the marketplace is light, we could shift more business to the warehouse and that's really the hallmark of the diversified funding model that we've developed over the last three years.


The next question comes from the line of Lloyd Walmsley from Deutsche Bank. Your line is open.

Lloyd Walmsley

Great. Thanks for taking the question. Two, if I can. First, if you just look at your oldest cohorts, I'm curious you're still finding you're able to increase kind of the lifetime number of loans beyond that area right after two years? You used to give us the 1Q 2013 cohort data in your presentation, I think you're now shifting to all of 2013, so maybe some color there? And then, just second question on your comment around lowering your target loss rates by a hair, pointing to the kind of efficient frontier shifting. Can you just elaborate on that a little bit and tell us what specific endpoints inputs to the model or shifting that is lowering that targeted loss rate? Is that something on the kind of unit economics of different borrow type or changes in your cost? What are the key drivers to that? Thanks.

Noah Breslow

So let me take the cohort question first. So, yes, Lloyd, we have shifted to showing all 2013. We wanted to make sure that the investors didn't think we were cherry picking in particular cohort. And we thought this is a more representative view of really all the vintages that occurred during that period. That said, if you were to isolate the 2013 vintage, all the numbers improved from the quarter that we showed you previously, but at the same time we thought this would be more informative for you.

Now, in terms of the provision, the provision rate decrease in terms of where the target is. We took it down from 6% to 7% to $5.5% to 6.5%. And I want to reiterate that that's really structural in nature. The efficient frontier that we've always defined has been -- it's assumed a static mix to the extent the mix changes and certainly we've seen a significant change in the mix both from a channel perspective, product perspective over the last two years. The efficient frontier just naturally and mathematically changes where it is.

So because the strategic partner and direct originations went from in 2013 really being less than 50% of originations and in 2015 now it's over 70%, that's had a significant impact on the provision rates and really where efficient frontier is. So, it's not that we're taking -- that we're changing our risk tolerance, it's just that we're being more profit maximizing given the mix shift at the 5.5% to 6.5% level.


The next question comes from the line of David Scharf from JMP Securities. Your line is open.

Q - David Scharf

Yes. Thanks for taking my questions. Noah, just curious if you can give us a little more insight into just the nature of the demand in the borrower base both in the fourth quarter and year-to-date. And specifically, as you see more -- well, number one, if you can give us a sense for what the percentage of repeat borrowing is by loan amount? And whether you're seeing some of these customers gravitate towards larger lines of credit? I mean is there a natural cannibalization, if somebody keeps coming back to the well, so many times for a term loan that they are more likely really to be an LOC borrower?

Noah Breslow

Well, I see what you're getting at there. So repeat borrowing remained a strong part of our business and I think as we talked about before not only do we do a full underwriting, and every time someone comes back for another term loan, but we also see a lot of positive selection there. We see lower loss rates. We see -- we are able to offer longer average terms. We see higher OnDeck scores typically and we reward those benefits with loyalty pricing, which I think increases kind of a virtuous cycle.

In terms of the role of line of credit, yes, I do think that's right. I think there's an element of the line of credit product being a better fit for someone if they have frequent, more short-term need for capital, which might be due to their own internal working capital cycle of the company if they need to borrow $10,000 for four weeks, clearly the line of credit is going to be a much more effective and streamlined, I think simple solution for their business. So what we see is, remember line of credit was only opened up to the $100,000 level back in August. So a lot of our line of customer customers are relatively small balance customers. So we are seeing some cross-sell so people who have term loans for say $100,000, $150,000, if they want sort of day-to-day working capital it might take a small line of credit on the side as well.

So I think there are some complementary aspects to it. I do think for the smaller term loans you may see a little bit of migration frankly from the term loan product over the line of credit. But we think that's a good thing. What we see is that our line of credit balances if you look at the cohort curves from the kind of the folks we acquired back at the early part of 2014, two years later those folks -- more of those folks are still with us as customers than it is for the term loan. So we think is ultimately a high retention, longer-term product potentially than the term loan. That's ultimately I think a good thing for OnDeck and our customers because the structure matches the use case.

Q - David Scharf

Got it. And as you think about competition in pricing, do you feel that these larger lines of credit are sort of the next product, if you will, that others in the industry are going to start to move into? Just trying to get a sense ultimately for how quickly and rapidly competitors are responding to your diversifications?

Noah Breslow

Yes. So we are seeing a couple of players move towards the line of credit structure as an alternative offering to the term loan structure. So I think there is some element of that. I will say back when we introduced our kind of daily pay term loan structure we saw a number of folks move towards that as well. So no, we think both products have a bright future and I think as we've said before, line of credit still is in relatively early phases for us so were still refining our credit line management techniques. We're refining our targeting product structure, loan amount or line amount I should say offers. So I think we'll see that product continue to grow over the next couple of years, but it's going to grow in a measured way, not in some kind of dramatic way. We have a lot of control over those dynamics.


The next question comes from the line of Bob Ramsey from FBR. Your line is open.

Bob Ramsey

Thanks for taking the question. I'm hoping you could touch on OpEx. If I understood you correctly you said that you expect OpEx in total to decline as a percent of revenues in 2016 even though tech and analytics will be higher, is that correct?

Howard Katzenberg

That's right. We are very focused in driving leverage in the non-tech and analytics line items this year.

Bob Ramsey

Okay. But in total as well? You have offsets in the other lines that will offset the increase in tech and analytics or is that not accurate?

Howard Katzenberg


Bob Ramsey

Okay. Is it fair to look at 2014 as a better proxy for how 2016 shapes out in total? I think that year OpEx was about 51% of gross revenues.

Howard Katzenberg

Certainly, I think, some of the trends you saw in 2014 irrelevant today, but we're coming off higher bases in 2015. At this point, we're not providing any more specific guidance by line item in terms of where the numbers end up except for the fact that we do expect to see more operating leverage this year.

Bob Ramsey

Okay. Very good. Thank you.


The next question comes from the line of Brian Pitz from Jefferies. Your line is open.

Brian Pitz

Thanks guys for the questions. Just a couple more on JPMorgan. Is that deal exclusive with OnDeck, or are you free to work with other banks in the U.S. and maybe can comment internationally? And is your partnership with Commonwealth Bank of Australia similar to the JPMorgan deal? And maybe you could talk longer term. Do you see a gradual move of exiting balance sheet lending and transitioning to a white label service for traditional banks, longer-term? And then, just separately, since mentioning international, any incremental comments on Canada or Australia in terms of the ramp? Thanks so much.

Noah Breslow

Great. Thanks. This is Noah. I will try and walk through those in sequence. So first regarding Chase, OnDeck is not precluded from working with other banks. There are a few specific scenarios that we've identified that we will not be doing anytime soon as per our contract with Chase, but they're not really we believe limiting to our overall opportunity to deploy OnDeck as a service in the bank channel.

So we're very optimistic not only about our Chase partnership, but also about working with several other banks in a material way. I will say our partnership strategy is largely been focused on the major banks. The top 25, top 50 for the OnDeck as a service offering. We have a ton of interest and demand from smaller banks as well but largely we've been funneling that demand into referral partnerships.

CBA in Australia, a little bit different than Chase, but I think it's notable in the sense that we partnered with a major bank in that country. CBA is the largest bank in Australia. They're known for technological innovation. They're very bullish, I think on the opportunity. We are starting more as a referral partnership with the CBA whereas with Chase we're starting on day one as a white label. CBA will have sort of a dedicated sales pass for customers to go through, so it will be unique to the CBA relationship. But it will be sort of branded OnDeck and over time we expect to get more integrated with them.

Then to your third question on the transition. We don't really see a transition of our whole model to this white label or OnDeck as a service type model. We see the OnDeck as a service business is very complementary to what we we're doing and continue to do in our core business, so we always see it as -- banks will always have a certain risk tolerance and historically OnDeck largely serve customers that weren't able to access capital from banks now that's changing a lot over the last couple of years, but we see sort of see a model where the top part of the market might be served between OnDeck working with a partner like an Intuit or like a Chase.

Ant then, that next group of customers will always be able to be served by OnDeck with our core brand and core set of product offerings. There will be some overlap like products like our 24/36 month offerings might have some overlap there. But we do see ultimately OnDeck as a service business opening up segment of the market that may not have been as responsive to us before through either new price points or very integrated customer experiences.

Finally, I know on Canada. I know we're very pleased with the growth in our Canadian business. And we saw strong both sequential growth and very strong year-over-year growth there. We hired a country manager in the course of 2015 and we're starting to build out a small team in Canada as well on the ground. We had prior been staffing that entirely out of the U.S. I know we see a robust future for that business which also makes us quite optimistic about Australia.


Your next question comes from the line of Matt Chandler from Bank of America ML. Your line is open.

Jason Mitchell

Hi. This is Jason here for Matt. Just on the competitive environment, I think you mentioned kind of irrational spend by some competitors. Are you starting to see that to pull back a little bit now that the funding environment has tightened up a little bit? Is that helping with customer acquisition costs? And then a quick follow up.

Noah Breslow

Yes. I wouldn't characterize it in the fourth quarter as pulling back. What we saw was stability. So, largely when you look at both online and off-line channels they didn't really change all that much from Q3 to Q4. So I think that's a step in the right direction. Remember there's probably going to be some kind of time lag so what we hear about the funding environment pulling back a lot of the folks we compete against have raised rounds or still have cash in the bank. So I think as you get to the middle or end of this year if the VC funding environment remains kind of pessimistic where I believe it's trended in the last quarter or two, I think that will manifest itself in lower spend in the different channels, but right now I'd say stable in Q4, not getting worse, but not necessarily getting better either. However, we still grew very nicely in sequential originations in that environment.

Jason Mitchell

Okay. And then, just on the JPMorgan Chase deal again. So the technology investment you're making the first half of the year, if you guys signed another major bank would you be able to leverage a lot of the work that you're doing right now onto other partnerships?

Noah Breslow

Yes. The short answer is we believe so. We believe that much of the work we're doing on the data security front, the compliance front, the overall system architecture will be leverageable across other OnDeck as a service partners whether they be banks or non-banks. That being said, there is some fraction of the work that is more specific to Chase and that may have to be repeated on any subsequent bank or non-bank integration. But we think that over time as this moves from being an integration to being sort of out-of-the-box solution, we're optimistic that that sort of incremental investment for each additional partner should come down over the next couple of years.


The next question comes from the line of Michael Tarkan from Compass Point. Your line is open.

Michael Tarkan

Thanks. I will keep this quick since it's getting late. But just back to the loan sales questions. Any way you can tell us where you are with the forward flow agreement with Jefferies or just any color as to how deep the investor pool was this quarter? Thanks.

Noah Breslow

For the fourth quarter transaction that we did, a couple of data points there. One, it was actually rated by Kroll, I'm sorry it wasn't weighted, Jefferies bought the loans from OnDeck and they securitized. It was there issuance. It was rated by Kroll, single-A and it was the most distributed deal that they've done in terms of the end investor base. I'm not sure exactly where they are within that $500 million commitment, but I know they remain very committed as a partner and we expect to continue working with them for the foreseeable future.

Michael Tarkan

Okay. Thanks. Then just one quick one back to the repeat borrower question. I know that's been trending about 50% the past few quarters in terms of term loan originations, is that still the case? Thanks.

Noah Breslow

Yes. The trend in the fourth quarter mirrored the trend of the several prior quarters. I would say it wasn't dramatically different in the fourth quarter than the third.


And this concludes today's conference call. You may now disconnect.

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