LendingClub Corporation (NYSE:LC)
Q4 2016 Results Earnings Conference Call
February 14, 2017 05:00 PM ET
Charly Kevers – Head, IR
Scott Sanborn – President and CEO
Tom Casey – CFO
Brad Berning - Craig-Hallum
Eric Wasserstrom - Guggenheim Securities
Henry Coffey - Wedbush
James Faucette - Morgan Stanley
Mark May - Citi Investment Research
Tom White - Macquarie Research
Jed Kelly - Oppenheimer
Bob Ramsey - FBR
Rob Wildhack - Autonomous Research
Jefferson Harralson - KBW
Good afternoon and welcome to the Lending Club Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there’ll be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Charly Kevers, Head of Investor Relations. Please go ahead.
Thank you, and good morning. Welcome to Lending Club’s fourth quarter of 2016 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, President and CEO; and Tom Casey, CFO.
Before we get started, I’d like to remind everyone that our remarks today will include forward-looking statements and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today’s press release, the related slide presentation on our Investor Relations website, and our Form 10-K filed with the SEC on February 22, 2016, and our most recent Form 10-Q filed on November 9, 2016. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release. The press release and accompanying investor presentation are available on our website at ir.lendingclub.com.
Unless specifically stated, all references to this quarter relate to the fourth quarter of 2016 and all sequential comments or quarter-over-quarter comments are comparisons to the third quarter of 2016 and year-over-year comparisons are to the fourth quarter of 2015.
And now, I’d like to turn the call over to Scott.
Thank you, Charly. Good afternoon, everyone.
Today, I’ll start by sharing my perspective on our Q4 2016 performance including a review of the great progress we’ve made on the investor side of our business and an update on credit and how our management approach drives competitive advantage. Then, I’ll share our plans on the path forward for the year before turning it over to Tom for a detailed review of our financial performance and discussion of our expectations for 2017.
2016 was a very significant year for Lending Club. We were tested and we showed great resiliency. I’m proud of how this rose to the challenges and delivered against the targets we set for ourselves. It was a year that accelerated important foundational work, making Lending Club better and stronger for the years to come. Q4 in particular was pivotal. Our objective was to deliver close to $2 billion in originations without the use of an incentive program and with banks representing 25% of our funding mix, while also working through remaining remediation items stemming from May events.
Simply put, I’m very pleased with our execution. Borrowers and investors continue to show great interest in our products, and we delivered the nearly $2 billion in originations in a seasonally difficult quarter while implementing tighter credit standards and interest rate increases. And we did it without incentives, resulting in $129 million in operating revenue, up 15% from Q3 and ahead of our expectations. We also achieved a 31% funding contribution from banks, exceeding our targeted mix. Finally, and through the tireless efforts of many of our employees, we completed all planned actions in order to remediate our historical material weakness.
Now, let me spend a minute on the investor base as it has been the focus of much of our recent activity. As we’ve discussed in Q4, our attention was focused on rebalancing our funding mix, a key step to bolster our resiliency and enable a return to growth. We set a target to help our bank partners close out their rigorous diligence, so that they could return to scale. I’m pleased to say that our efforts have paid off as not only are all of our key bank investors back buying on the platform, but we’ve also welcomed multiple new bank partners over the last few months. This is a clear testament to the attractiveness of our assets and of our ability to help banks efficiently deploy their capital and to consumer credit. It is also a testament to the strengthening of our control environment.
It bears repeating that by supporting banks demanding diligence and regulatory requirements, we become a better Company. Our bank partners remain a key differentiator for Lending Club and their low cost of capital combined with our low operating cost enables us to provide attractive rates to borrowers.
Beyond the banks, we’ve crafted adorable foundation of other capital sources, starting with our self-directed retail investors, representing 13% of our origination mix in Q4. They continue to form a resilient source of funding and represent a unique and powerful asset for us.
Next is our managed accounts category, which was amongst the first to resume purchasing its scale after our announcement in May, and represented 43% of our overall volume in Q4. This category is comprised primarily of asset managers, who have built businesses based on funds exclusively dedicated by mandate and prospectus to investing in marketplace lending. Managed accounts help us reach both high net worth and mass affluent individuals, both directly and through RAAs, family offices and broker dealers.
Remaining category is other institutions, which includes primarily investment banks and multi-strategy hedge funds, which have appetite for higher yields and enable us to serve higher risk borrowers. This group shrank quarter-over-quarter from 18% down to 13%, reflecting lower volume and the high risk grades as well as the recovery of our other capital sources. Within this category, we hit a key milestone with the first rated securitization of Lending Cub loans executed by a third party investor. We’re seeing very strong demand from the capital markets validating the appeal of our asset and the potential to expand access to even larger pools of low cost capital while also opening up opportunities for Lending Club to generate additional economics.
So entering 2017, we feel good about our accomplishments and momentum on the investor front. The capable team we have built, which includes the new capital markets function is now firing on all cylinders and is interpreting great opportunities for enhancing our business and building the investor experience for the long-run. Our large, diversified and stable pool of capital combined with our strong balance sheet gives us the competitive advantage that allows us to expand access to low cost credit for borrowers and to successfully navigate changing market environments.
Part of continuously delivering value to investors is maintaining a transparent, proactive and deliberate approach to credit, a driver of long-term value for Lending Club. Throughout 2016, we implemented policy changes involving increased prices and a limiting of certain borrower populations based on observed performance. While it is still early and the data is correspondingly thin, we are pleased to see increase gross yields and signs of stabilization in early delinquency rates through our latest data in January. Last month, we implemented an additional change that resulted in our seizing to offer credit to roughly 6% of our total borrower base. The change is disproportionately focused on our higher risk grades, similar to previous adjustments and targets the unique combination of risk factors. While this change will give us some short term pressure in Q1, we’re building a business for the long-term in a truly massive market and prudent credit management is our priority. We’ve ample opportunities for growth and remain focused near term on validating the trust investors have placed in us as the stewards of their portfolio. We believe the resumed purchase activity of all of our targeted investors, most of whom have their own data scientists and credit analysts as the sign of support for our actions.
With our position in the market, you’ll see us continue to take a leadership role in monitoring the dynamics of the credit environment supported by heavy investments in our data infrastructure, we constantly analyze our considerable data on borrower performance, incorporate macroeconomic and competitive factors, evaluate a growing range of data sources and engage with our platform investors for their take on results. Our ability to distill and incorporate data insights is the core strength of our marketplace model and our platform architecture, which allows adjustments to credit, pricing, underwriting and behavior models with ease, speed and agility.
This year will mark the 10-year anniversary of our first loan. In this time period, we’ve resoundingly demonstrated the power of the marketplace model. Lending Club has facilitated the origination of over 2 million loans, amounting to nearly $25 billion in total issuance. We’ve saved borrowers on average 30% versus their traditional alternatives, and we’ve generated more than $3 billion in interest for investors. And with close to 2 million customers served, we’re the world’s largest online marketplace connecting borrowers and investors. I’ve great confidence in the long term potential of our platform and in our ability to further penetrate the $1 trillion consumer revolving credit market, the $1 trillion auto market which we’re just entering through refinance, and the larger consumer credit market beyond.
I’m enormously proud of where we stand as a company today. We began 2017 with a strong foundation, which includes a diverse, stable, and scalable mix of investors featuring a broad range of credit appetites that enables us to say yes to more borrowers and effectively compete in the market. Deep insights and immense data gathered over almost a decade of lending including proprietary and unique sources to inform our credit, pricing and behavioral models, a massive base of satisfied borrowers, which are closed to 2 million would put us squarely in the ranks of a top 20-bank in the country and that’ll serve as a means of efficient growth as we expand our product offering to this established and satisfied customer base. A consumer centric culture of innovation and execution that is the engine of our success, a scalable technology platform enabling better decision making and an improved borrower and investor experience, fortified processes and controls that position us well for the long term and finally a world-class leadership team.
As an important sight, in the few short months this team has been in place, I’ve been blown away by how quickly they’ve come together to solve issues and identify new value creation opportunities. I’m excited to fill the few remaining senior roles we have open namely, the leadership role for our borrower business and the CTO, so that we can refocus on growth and the path ahead.
All of the above represent an excellent foundation from which to execute, and Lending Club knows how to execute. As we move beyond remediation and recovery, we’re shifting our organizational energy to focus on borrower facing initiatives that will deliver greater marketing efficiency and an enhanced customer experience. I expect these efforts to start bearing fruit in Q2, getting us back to a consistent trend of sequential revenue growth from Q2 to Q4, ending the year with a strong year-over-year growth profile and an adjusted EBITDA margin in the 15% to 20% range. We have a renewed commitment to building a broad consumer product portfolio with auto refinance as the most recent example and with other products to be explored over the coming quarters.
On auto refinance, the early customer feedback has been positive, and we’re saving customers an average of 2.5% off of their rate, translating to $1,200 in savings over the life of the loan. We’ve recently expanded to 26 states and expect to spend the next several months streamlining the product and experience before beginning marketing in earnest.
We also see more opportunity on the investor side. Our success has spawned an ecosystem of businesses, leveraging our marketplace to unlock value. This year, we will actively look to participate in more components of this value chain through deeper partnerships with our platform investors and making limited strategic use of our excess capital. Tom will share more details on this in his comments.
Looking further ahead, as I look at our core technology, the talent we’ve brought together, our customer base, the strength of our balance sheet, the partnerships we’ve developed and the emerging regulatory environment, I’ve never been more excited about the power and potential our model can unleash for the long run, a marketplace that eliminates friction and costs in consumer credit, passing savings on to borrowers and providing investors access to a unique asset class that offers attractive risk-adjusted returns. It’s an exciting time for Lending Club and I look forward to beginning the next phase of our growth.
With that, I’ll turn it over to you, Tom.
Thanks, Scott. I’ve been in my role now for about four months, and I must say, the team assembled here at Lending Club is the highly talented group dedicated to driving our future growth, and there is more value in the model than I originally expected. I’ve had the opportunity to meet many of you over the last few months, and I look forward to meeting you in the future to talk more about Lending Club.
As Scott said a minute ago, we achieved our goal of facilitating nearly $2 billion of originations. We are pleased with the quarter’s performance in light of pricing and the credit policy changes we implemented last year, and I’m particularly pleased with our success in facilitating $2 billion in loans with no incentives. Investor demand continues to be strong, as demonstrated by exceeding the target, bank portion of our investor mix coming in at 31%.
As you know, banks returning to the platform has been a priority for us and acts as an endorsement of our strength and compliance and controls. As Scott mentioned, we have all the key banks back on the platform that purchased between January and April, and added five more last quarter. Just as banks are an indication of our strong internal processes, I’m pleased to report that during the quarter, we are able to complete the planned remediation steps related to material weakness.
Now, let’s move on to our financial results. I’ll focus my comments on our core sequential quarter-over-quarter operating results, as well as our outlook for 2017. Note that all operating expenses discussed exclude stock-based compensation, depreciation, and amortization.
Our net operating revenue came in at $129 million, up 15% over the prior quarter. Impacting the quarter’s results was a $4.3 million favorable adjustment to the servicing asset valuation, as well as the elimination of $11 million in incentives in the prior quarter. Our reported net operating yield came in at 6.5%. Adjusted for the valuation of the servicing asset, net operating yield would have been 6.29%, up from 5.71% in the prior quarter, due primarily to the elimination of the $11 million incentives from Q3.
Looking at transaction fees for the quarter, they were $102 million, increased in line with originations and flat sequentially as percentage of originations at 5.11%. Servicing and management fees for the quarter were $26 million on a reported basis, and up 18% over Q3, after adjusting for the $4.3 million valuation adjustment. Adjusted servicing and management fees were up slightly to 21 basis points of our average outstanding balance compared to 19 basis points in the third quarter. Other revenue came in at $1.6 million, up $8 million sequentially due primarily to eliminating the third quarter incentives of $11 million, I mentioned earlier.
Now, let’s look at our contribution margin. For the quarter, our contribution margin came in at 46% or $59 million, up $5 million from the third quarter. While our revenue was up approximately $17 million, we did see higher expenses in sales and marketing and services. Sales and marketing was up $10 million or 47 basis points to 2.66% of originations. This increase reflects the anticipated fourth quarter seasonality, higher application volume, and the launch of auto.
I want to reiterate what Scott mentioned a minute ago. We are turning our organizational effort to borrower driven initiatives after a successful 2016 focus on investors. While we expect higher credit standards to have some ongoing impact on sales and marketing, we have several initiatives underway to improve marketing efficiency throughout the course of the year. Now, I want to be clear that the fourth quarter increase in marketing and sales as a percent of originations is driven by our own actions with increasing prices and tightening credit as well as our more-pronounced seasonality in Q4. Origination and servicing expenses in the fourth quarter were $16.9 million, up $1.5 million sequentially, in line with the growth of our servicing portfolio at approximately 50 basis points.
Total engineering costs were $19.7 million, roughly in line with the third quarter as we continue to invest in technology, platform improvements, and new product development over the quarter.
G&A costs continued to be elevated relative to historical norms at $42 million, albeit down from $46 million in the third quarter. Everyone should note that G&A spend includes majority of the $13 million of unusual expenses related to our board review disclosures, which is down from $15 million in Q3. These expenses include items related to our board review in the form of legal, litigation, audit, retention and other fees. For 2017, we expect G&A expenses to continue to be elevated by these costs by approximately $20 million, most of which will fall in Q1 and Q2, putting some pressure on our reported adjusted EBITDA for the first half of 2017.
Looking at adjusted EBITDA for the quarter, we reported a loss of $2.2 million, which beat the guidance we gave you on our last earnings call. As I mentioned earlier, we had $4.3 million favorable adjustment to the servicing asset valuation. So, excluding this revenue upside, our reported adjusted EBITDA would have been around $6 million loss, well within our guidance.
GAAP net loss was $32.3 million compared to $36.4 million in Q3, and earnings per share came in at a loss of $0.08 per diluted share compared to a loss of $0.09 last quarter. The difference between GAAP and adjusted EBITDA was $30.1 million and includes stock-based compensation of $22.8 million, depreciation and amortization of $8.8 million.
Stock-based compensation as a percent of operating revenue increased sequentially to 18% from 16% in Q3. As you may recall, last quarter, we disclosed that we had accelerated our 2017 February grant to September of 2016. The acceleration of the grant and the hiring of new leadership drove this sequential increase. Stock-based compensation will continue to be elevated in Q1 and will begin to return to historical norms throughout the year. We ended the quarter with $803 million of cash and securities available for sale and no debt.
I’m proud of the performance. We reported strong revenues in the seasonally difficult quarter; strengthened our investment base -- investor base and continue to see opportunities to grow our business. While non-recurring expenses will impact the first half of 2017 and near-term marketing expenses will remain elevated, we will continue to make improvements and drive value from our marketplace model.
Before we get into 2017 outlook, we’d like to share some thoughts on additional areas of focus for the Company. As Scott has indicated, the investor side of our business is strong and our investments are paying off. We have significant opportunities to create new revenue streams within the model. Our Chief Capital Officer, Patrick Dunne and his team have done an excellent job planning the next wave of growth by identifying new investor and providing access to consumer credit through additional investor programs.
One opportunity we are pursuing is the Lending Club sponsored securitization program. Over the last year we’ve seen several successful securitizations of our loans and continue to see increased demand from new investors. We will partner closely with financial institutions by controlling the process, pricing and transparencies to drive improved execution of loan securitizations. As part of this initiative, Lending Club will begin utilizing some of its excess capital to begin participating in these securitizations with our investment ramping to approximately $100 million of our quarterly originations.
Moving on to credit, as we mentioned, we strive to provide market-driven value to our borrowers and investors. We are stewards of credit to both sides of our marketplace, proactively and deliberately monitoring performance, which is critical to our success. The January credit policy update is expected to remove about 6% of our borrower funnel. While this is a small portion as a whole, it was a substantial segment of our higher risk rates, which will have a short-term impact on our contribution margin in the first half of 2017. We have a number of initiatives in place to mitigate the impact on the borrower side of the business. We also have an ongoing search for a new head of our borrower group. In total, we are confident these efforts will return us to a growth profile starting in the second quarter.
With that, let me share our expectations for 2017.
As the business has stabilized over the last few quarters, we are expanding our guidance to include full-year results, as well as our outlook for the current quarter. We have a number of moving pieces that will affect our first half results, so resuming full-year guidance should provide context on our goals for the year, and remind everyone of our longer-term outlook for the Company. Some of those moving pieces include expectations for expenses pertaining to our May board review.
While these costs are difficult to predict, we are estimating approximately $20 million for the year with most of it being recorded in the first two quarters of the year. Also affecting our reported results will be revenue from our securitization initiatives of approximately $10 million to $15 million for the year. We expect these efforts to commence in Q2 and mostly impact the back half of the year. I also want everyone to note that since the portion of these initiatives will include interest revenue, our adjusted EBITDA metric will now include the line item, net interest income and fair value adjustments from our income statement. As a result, we’ll be redefining our guidance from an operating revenue to total net revenue, which will more accurately capture the full spectrum of revenue we expect to generate through these initiatives.
Now, let’s talk about our outlook for the year.
For the full year, we expect total net revenue to be in the range of $565 million to $595 million; adjusted EBITDA in the range of $40 million to $55 million; and GAAP net loss between $69 million and $84 million, which includes stock-based compensation, depreciation and amortization of about $124 million.
In terms of core lease trajectory, we expect our adjusted EBITDA margins in the first half of 2017 to be slightly negative, primarily due to the non-recurring expenses and elevated marketing spend I mentioned earlier, but second half we’ll return to a range of adjusted EBITDA margins of about 15% to 20%. So, for the full year, excluding one-time items, over the course of the year, margins are estimated to be around 10% in total.
Now, let’s talk through what we expect for the first quarter of 2017.
We’re forecasting total net revenue in the range of $117 million to $122 million, which is in line with Q4 2016 when adjusted for the valuation adjustment and credit tightening. Adjusted EBITDA loss of around $5 million to $10 million with stock based compensation, depreciation and amortization of about $33 million. GAAP net loss is expected to be between $38 million and $43 million.
Many of the same assumptions for our expectations for 2016 Q4 pertain to the Q1 of 2017 including seasonality, non-recurring items and the impact of credit adjustments. If we were to adjust Q4’s performance for the one-time revenue favorability, adjusted EBITDA loss would have been around $6 million, which is in line with our expectations for Q1 of $5 million to $10 million. As you can see, we’ve a lot going on in 2017. It’ll be an exciting year for Lending Club as we return to growth with the stronger team than ever.
Thank you for taking time today. With that let’s open it up for questions. Operator?
Thank you, Mr. Casey. We’ll now begin the question-and-answer session. [Operator Instructions] Your first question will come from Brad Berning of Craig-Hallum. Please go ahead.
You talked about the operating margins exiting the year, and I was just wondering if you could put in perspective the longer term operating margins; you guys have talked about that in the past. How does this reflect that path towards that? Has that ultimate long-term margin changed, and so would you expect it to be in the 15 to 20 in the out year from that or would you expect there to be an opportunity to continue to improve margins, as you scale past 2017 changes that you’re making?
I think that what I would tell you is that 15% to 20% we’re giving you this year and we’re referring to kind of exiting the year at that level, that’s kind of where we think we should be. Keep in mind that we do have some additional auto expenses that as we launched that which are disproportionate, so that’s going to obviously put some pressure on that EBITDA margin. But, we think depending on the level of growth and additional new products, we think 15% to 20% is a good number at the end of the year. We’ll have a better view as we get through the year. But, I would say circa 20% is something that we think is a good balance between growth and profitability.
And then, one follow-up on the origination side. As you think about your operational readiness and you think about where you’re at from just the scalability standpoint this year, how much capacity do you have relative to the guidance that you’ve given for revenues? Are there opportunities to respond if you see them in the market or would that require quite a bit more investment to get there if you see additional opportunities?
I think that -- look, what we have given you kind of a lot of information, and I think there is opportunity to see additional productivity come from the model. We are being cautious in the first half, as we have given you some indication of that. But, if we see opportunities to grow, we can accelerate it. And our infrastructure has actually run higher than our current originations. So, I don’t see that as an issue.
The next question will come from Eric Wasserstrom of Guggenheim Securities. Please go ahead.
So, two quick questions. The first is, so the bank channel came in at nearly the second highest level as a proportion of the investor base over the past many, many quarters. Did you see any change in the nature of their demand regarding the kind of asset that they were interested relative to let’s say three quarters ago?
So, this is Scott speaking. The banks have typically been concentrated in the higher credit quality grades, and our [indiscernible] sets the A and B grades. And so that hasn’t really changed so much. What has changed is we’ve issued less of the higher yielding grades, those D through Gross margin. So, that’s -- part of the shift is these banks returning to the platform and adding new banks and part of it is the kind of volume that we are now generating.
Great, thanks. And my second question is, Tom, thanks for all the clarity on the expense base. I just want to make sure I understood. It sounds like in terms of the first half of the year, it’s the continued elevation of the remediation related expenses. And in the second half of the year, it’s largely about repurposing those funds for growth. Is that basically conceptually right?
Yes. That’s right. So, the $20 million I referenced, we think most of it, not all of it, but most of it will come in the first half. Those are difficult to predict, as I mentioned, but we think that will put some pressure on the first half reported results, and then some of the initiatives we’ve got both to get us back to growth in Q2 as well as the additional revenue we get from deploying some excess capital those will -- help us to accelerate some of the backend results, second half results.
The next question will be from Henry Coffey of Wedbush. Please go ahead.
In terms of trying to convert revenue into an origination figure, what sort of transaction fee should we be using for the year?
Yes. So, I think the number I gave you for the quarter was about 6.29…
That was total revenue, 5.11 on transactions. Yes.
Yes. 5.11 on transactions; 6.29 for total. Look, I think that obviously that number always moves around little bit by the mix of product; it also moves around by the grade of product. But, I think in that circa 5% range is the right level that we’ve given some indication but it will move around depending on the mix. But, I think that’s minimum [ph] number for the full-year.
And then on the securitization, you’ll be holding about a $100 million of originations a quarter on balance sheet, if I understand it correctly?
I don’t -- I wouldn’t characterize it as holding. I think what we’re doing is effectively warehousing them until the securitizations take place; we’re expecting those to be on a quarterly basis. So, you’ll see some growth in the balance sheet of loans in anticipation of a securitization.
So, this will be a warehouse function, not -- and the ultimate securitization will be treated as a complete sale?
The next question will come from James Faucette of Morgan Stanley. Please go ahead.
I wanted to touched on the institutional side and kind of the opposite side from the banks which is other institutions. By our arithmetic, it looked like that those -- funding from those sources was down almost $100 million sequentially. So, can you talk -- you mentioned a little bit in the prepared remarks, but can you extend a little bit there and give some color as to what’s been happening with that group, what type of conversations you’re having, and how we should expect that other group to develop over the next few quarters?
Yes. As I mentioned, there’s really a couple -- that group as a whole is -- comprises of few different types of investors. One is the investment banks who have been participating in buying loans and exiting through securitization; another is more multi-strategy funds that have focused most specifically on the higher yielding part of the book. So, essentially, what you’re seeing in that decline from 18% of our mix down to 13% is a combination of us generating slightly less of that volume, that higher yield volume and that’s again in response to the performance we’re seeing where we’re tightening our credit standards as well as the return of other investors and so therefore just taking out more of the available inventory.
And then, as a follow-up to that, I just wanted to ask when you look at trying to balance originations with funding availability, can you just give some clarity, when you say that you’re not offering any incentives, is that any incentives at all or incentives beyond, like normal type structure, some clarity there? And then, I want to make sure I understand, the originations that we’re looking at, that’s been hampered because you’ve signed up the credit, should we expect those to ramp back up then, as you kind of get the promotional machinery re-spinning and is that how should we expect the same store ramp through the rest of this year?
So, it sounds like I have two distinct questions. So, one is incentives. So, when we talk about incentive programs, James, we’re talking about really what we did in Q2 and Q3, which was essentially offering the loans at a discount in order to both satisfy the borrowers and deliver on their expectations but also just to kind of get the platform moving. And if you remember, those were specifically in Q3, they were really intended to balance. So, the discounts were heavily weighted towards that high quality paper, the AMV, because the banks weren’t back yet. So, when we talk about incentives, we’re referring to that, that discounting of loans to balance the platform. And so, yes, that has ended completely and none of those are -- those ended in Q3 and we did not make any use of those in Q4. And we think it will return all the investor we view that as a testament to their support for the quality of the asset kind of at par as is.
When it comes to the origination side, so, yes, you are seeing -- we’ve taken a number of actions over the course of the year, both pricing and credit tightening. In a typical year, which 2016 was clearly not, we have a significant amount of organizational energy going to the other side, new partnerships, marketing channel development, product enhancements, new features. We really haven’t been focused on that at all as a company. And in fact, most of those technology resources and executive resources were really on the investor side and on the remediation. So, what you are going to see and that’s really what we’ll be doing through Q1 is beginning to reallocate those resources back to where they were so that we can resume growth in Q2.
The next question will be from Mark May of Citi Investment Research. Please go ahead.
Thank you. I just wanted to ask a question around your marketing efficiency. I guess, there are few components that are driving this, one that you’ve highlighted here is the tightening of your credit standards. I guess, one question is, are there any other factors that you’d highlight? And then secondly, what can you do practically to tighten or make more efficient marketing programs to improve your efficiency over the next year or so? Thanks.
Yes. So, let me touch on that and Scott may have some thoughts as well. First, I think the -- as we characterize, it there is some normal seasonality that happens in the fourth quarter. So, I would handicap it at about 50% of our increase is just related to that, and then the other is related to pricing changes and tighter credit that we mentioned. So that’s clearly some of the challenges as we head into the first quarter. I’d just echo what Scott said is we have a number of initiatives to refine our marketing efforts and get that growth back, and we are quite confident to do that. We just not had the resources to execute some of those product builds, new features, and we expect to be able to see that going into 2Q and getting the originations back growing again.
Yes, just a reminder for everyone. If you look at -- if you rewind back to May, typically we’ve got an entire engine here of which at that time I was responsible and most directly for actually managing where we are pushing out these new feature developments, rolling out new partnerships. We really cut all of that. We had partners lined up that we said sorry, we are not going to close that deal, and we reallocated the engineering resources. So, it’s really just us getting back to that business as usual. And we -- I would say, we feel very confident, we know where we to go. The list of projects is long and list of opportunities is long, it’s just about getting back at it.
And Mr. May, do you have an additional question?
No that’s it. Thank you.
You’re welcome, sir. The next question will come from Tom White of Macquarie Research. Please go ahead.
So, you guys sort of characterized 2016 as -- at least the back half of 2016 as being about kind of solidifying the investor base and then 2017 will be more tilted towards using marketing to kind of drive growth. I guess, I was wondering if you could just comment relative to your outlook for 2017, kind of what kind of assumptions do you guys have about the competitive landscape, presuming that you’re getting -- dipping back into that now, how has it changed in terms of consumer focus, marketing than maybe the last time that you guys were in the markets aggressively? And then, just a quick follow-up, on the guidance vis-à-vis the auto refinance business, can you kind of give us any color about any revenue originations from that that you guys have baked into the full year outlook?
So, on the competitive market, taking a big kind of step back, as I talked about earlier, I think we feel like we’re extremely well-positioned to compete. We’ve achieved our leadership position in this market due to a number of factors that remain, not only true today but kind of get more true over time, which is the asset we have in 10 years of experience, the breadth of our capital enabling a broad range -- us to say yes to a broad range of borrowers that kind of the platform infrastructure and our ability to ingest an evolving range of data resources. So, we feel good about our ability to compete. The market -- there were multiple large players in it when we joined, we were -- we saw the arrival through 2013 and 2014 of many, I’d call it more value driven start-ups what we competed very effectively in, and that landscape is changing. So, I’d call it dynamic, and that we’ve more traditional players that are now entering the market. But, we continue to believe that we’re well-positioned to compete with them through kind of all of these advantages that I laid out.
And just a bit of other color. If you look at what’s going on right now, if you look at demand for our product in terms of our application volume, in terms of response rates to our advertising, all of those metrics remain strong. It’s just our energy over the course of this last time period has really been on stewarding the credit and serving the diligence for the investors rather than really working to unlock that demand on the borrower side.
I’ll just pick up on the auto. I think that I’d want you walk a way that it’s probably in the range of $5 million to $10 million of investment this year we’re making. So, it’s the estimate for the EBITDA impact. Obviously that’s going to ebb and flow, based upon our ramp-up speed and our ability to sign up with investors. So, we’ll keep you informed of that throughout the year. But right now, we’ve got about 5 to 10 in for that investment.
And then, in terms of revenue or origination impact from that kind of…
I think it’s still -- it’s not meaningful in the grand scheme of things, so I’ll not -- I just gave you -- the bigger driver’s really the level of investment.
And the next question will come from Jed Kelly of Oppenheimer. Please go ahead.
One, just on engineering and product development, it’s still growing, still at elevated levels, growing nicely 20%. I mean, do you expect that type of growth in 2017 or are you expecting to spend on technology resources going forward? And then, I’ve a follow-up.
I think back to our whole discussion about margins, I think that our tax spend as a percent of our revenue, I don’t see it changing significantly. Obviously we have lots of projects, but we’ve got a lot of projects last two. I think what Scott was saying is that the deployment of that is shifting. But, I would expect that -- for the quarter, it was about 15% on tech spend as a percent of revenue; I don’t see that moving materially for the year.
And then, what would bank originations, what would then have grown sequentially without the National Bank of Canada program?
As we disclosed, I think that agreement is quite by large at $1.3 billion. So, I would expect that probably to be estimated probably about 10 points of the growth. We were slightly below 20% last quarter. So, I would expect that to be part of that growth. That’s why we gave you the indication of 25%, but it wasn’t just Credigy, it was the whole host of banks that came back to the platform and grew.
Yes. I think there is an important distinction here both between the size of the total category as well as the number of participating investors within it. So, I think what you should take away from us is we’ve got back really on a bank by bank level, all the people that we were hoping to have back. So, we feel very good about that.
The next question will be from Bob Ramsey of FBR. Please go ahead.
So, I just want to be sure I understood that correctly. You said Credigy was about 10% of the increase in the bank channel which went from 265 to 615?
I was using percentages, I hadn’t done the math, Bob. It was a good piece of that but I don’t want to distinguish just Credigy from the total and not disclosing their exact amount. So, I’d just try to give you a ballpark of where it was.
Okay, alright. But, it does sound like in dollar terms still the majority of the growth was not Credigy driven. Is that a fair statement?
I think it’s a fair statement but again, we look at it as a whole host of factors because as Scott mentioned, a lot of the banks are buying the As and Bs. And so, it’s a concentration of their efforts that we’re managing to as we discussed there…
It’s also the timing aspect of when they come back in the quarter.
Okay. Shifting gears to the servicing asset right up. Could you remind me sort of what triggers that; is it the movement higher in the rates on your loans that triggers that or in market rates or something else?
Yes, it’s not very complex. Basically it’s the reassessment of the future cash flows of the servicing portfolio. We earned a series of fees off of that. And so, the accountants sit down and estimate what the future cash flows are. We didn’t make any changes in our discount rate or anything like that but it was just the basically the calculation, discounted cash flow. It’s not anything more than that.
We’ve had adjustments throughout the last couple of quarters, I’ll call them out for you because they are kind of -- they do move around a little bit. So, I’ll make sure I call them out for you on a quarterly basis, but that’s why all the numbers I gave you kind of adjusted for that.
Maybe just sort of last question, could you sort of remind us how you guys think about the stock-based comp philosophy because it does seem like stock-based compensation has been growing at a pretty healthy clip.
So, again, I wanted to -- I know that was an issue that we had last quarter. Just to remind everybody, we accelerated the typical February grant into September to increase the retention efforts that the Company had undertaken. And so that has brought our -- if you will, our total stock based compensation up quite a bit from where it was. I do expect that to start to come down. We typically have been running, if you look all way back to 4Q of 2015, it was like in the 10% range; it’s been up in that 16% to 18% in the last couple of quarters. I would expect that to start coming down. I think it’ll be elevated again. If you think about it right, we have basically doubled up the impact in Q4 and almost doubled in Q1. So, you’re going to have elevated levels. But, I do expect it to start to come down in the back half of the year as we start to mitigate the impact of that acceleration. And the impact on diluted shares just -- I know that was a question we got last time, we would expect for the quarter, it ended about $395 million, $396 million; that will start to get up to about $400 million by the first quarter. So, just to give you some rule of thumb of where we think the quarter. Scott may have some views on just more broadly about how we think about the program.
I think one other tactical piece, which is another thing driving the elevated levels is the number of new executives we added over the time period. So, typically that would have been phased in over a much longer period. But taking a step back more broadly, we -- everyone in Lending Club including our members -- support representatives across the company from top to bottom, our shareholders in the Company and we do believe that that is important that they consider -- one of our key values is to act like an owner. And in this case, they literally are an owner. So, we think that’s important to align those incentives. Because we want people to be thinking about this Company for the long term. But we’re aware; we’re above where we would normally like to be and we do expect that to be coming back in line as things normalize.
And I guess coming back in line, I mean do you get back to that kind of 10% to12% range? I mean, based on the full year guidance, it seems to me like you’re still going to be above that in the back half of the year?
Yes. I think we’re coming back down close to that, I’d say some 15. I think of the things that’s important I think as we think about stock-based comp, adjusted EBITDA, if you will, and then deducting our stock-based comp, we think we can get EBITDA positive. We think that’s important threshold by the end of the year.
The next question will be from Rob Wildhack of Autonomous Research. Please go ahead.
I just want to follow on about the marketing customer acquisition. Can you give us an update on the channels in which you’re having the most seemly success? And then has there been any changes in what’s been really effective for you?
We haven’t really seen -- I think I touched on this. We haven’t seen any kind of broad-based changes in overall marketing mix. It includes online advertising, partnerships, both on and offline, offline media including direct mail. So, we are not really seeing significant shifts in those overall channels. But again, we haven’t really been putting a lot of organizational energy into the further development of those either, you will start to see that going into next year.
Okay. And then any plan changing that, as you sort of switch your focus back to the marketing side?
No significant shifts. I mean, they are all at scale through May; they were all growing as well year-on-year. And we haven’t seen significant share shift amongst those channels. It varies quarter-to-quarter; there are temporary flexes and ebbs and flows based on, will see people come in, as an example the paid search or we’ll see somebody go into a partner channel and drive really hard. But, quarter-to-quarter, we see some variation but over the long-term, we haven’t seen much variability, and we’ve seen growth and continue to expect growth in those channels.
[Operator Instructions] The next question will come from Jefferson Harralson of KBW. Please go ahead.
Most of my questions have been answered, but I just want to ask a broad question on how the profitability differs from the -- you take a loan and throw into the Lending Club sponsored securitization program versus finding the -- have it a bank funded or something. Can you just talk about how the economics differ in those two situations? I know that the diversification is great, but is it a lot less profitable to put into the securitization program?
As I said in my comments, I want to everyone understand that the strength of our investor base has allowed us to move to this next revenue stream. The opportunity to participate in these, I want you to think about it as the whole loans are in raw form and we’re creating some finished goods for another group of investors that want a securitization that’s rated and you need CUSIP, and so, those are investors that have not been able to participate and get access to this asset class and we want to do that on a regular basis. That does result typically in a higher revenue than the selling in a whole loan form. And so, we think that’s an important evolution of our model. And we will continue to keep you updated on it but it is more -- it has extracted more value from the origination of the loans.
But I’d emphasize that we continue to believe that it is the mix and the diversity of that mix which is so critical for the long-term success. So, this is adding another piece to the puzzle.
Alright. Makes sense. Thanks guys.
And ladies and gentlemen, this will conclude the question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.
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