James Samford - IR Renaud Laplanche - Founder & CEO Carrie Dolan - CFO.

Smittipon Srethapramote - Morgan Stanley Ralph Schackart - William Blair & company Josh Beck - Pacific Crest Securities Stephen Ju - Credit Suisse Heath Terry - Goldman Sachs.

Welcome to the Lending Club's Second Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to James Samford. Please go ahead.

Thank you. Good afternoon and welcome to Lending Club's second quarter of 2015 earnings conference call. Joining me to talk about our results are Renaud Laplanche, Founder and CEO and Carrie Dolan, 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 27, 2015.

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 the new information of our future events. During this call we present both GAAP and non-GAAP measures.

A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and the accompanying investor presentation are available on our website at www.ir.lendingclub.com. And now I'd like to call turn the call over to Renaud..

Thank you, James. Welcome to our Second quarter conference call. This was another great quarter. We generated operating revenue growth of 98% year over year, accelerating from 17% quarter over quarter in Q1 to 19% in Q2, faster than our initial plan as we saw opportunities to efficiently accelerate as the quarter developed.

Given the strong momentum we're seeing in our core business and the progress we're making in our new business initiatives, we have again decided to raise both our revenue and EBITDA outlook for the year and the dollar and percentage basis.

I'll begin today's call with our Second quarter results and progress on key initiatives, then we'll talk about repeat customers in [indiscernible], discuss the regulatory framework we operate in and talk about an addition we're making to our Executive team.

I will then turn the call over to Carrie for more details on our financial results, third quarter guidance and an updated full year outlook. At that point, we'll turn the call over to Operator for questions. Let's get started.

Loan originations in the second quarter increased 90% year over year to $1.91 billion compared to $1 billion in the same period last year. Since we closed the Springstone acquisition on April 17 last year, this quarter was our first quarter we brought in year-over-year growth on the fully comparable basis.

About $11.2 billion in consumer and small business loans have now been issued through our platforms since we launched over eight years ago including $6.1 billion just in the last 12 months. Currently, our marketplace remains neither supply nor demand constrained.

We set our growth plans each quarter in a way that optimizes for long-term shareholder value creation for delivering a great user experience that helps build customer satisfaction and the long-term value of our band into managing risks and operating efficiency.

As the quarter progressed, we saw that internal and external conditions supported a faster growth than initially planned and took that opportunity.

As I mentioned in introduction, operating revenue in the second quarter jumped 98% year over year to $96 million with growth accelerating quarter over quarter from 17% sequential growth in Q1 to 19% in Q2. Adjusted EBITDA in the second quarter was $13.4 million, up 235% year over year.

Margins expanded sequentially from 13.1% in Q1 to 13.9% in Q2 despite the continued aggressive investment in engineering and product development designed to fuel long-term growth, increase operating efficiency under the very aggressive experience as well as aggressive investments in back-office and risk management functions to continue to derisk future growth.

Now let me turn to our progress towards key initiatives and other highlights from the quarter. First, an update on our marketing channels.

In our core personal loan business, we continue to diversify our marketing channels with new local channels providing additional marketing efficiency as well as benefit from marginally lower acquisition costs across the board with selling and marketing expense as a percentage of origination dropping from 2.04% in Q1 to 2.01% in Q2.

The network effect we have benefited from in the past, continued to manifest themselves and in Q2 we saw further efficiency gains particularly in our core personal loan product, including higher conversion rates and improving final efficiency. We have not seen this quarter the negative impact of increased competition.

We also expanded our addressable geographic market as of the quarter and post quarter end with the addition of two states on the borrower side and five states on the investor side. Education and patient finance continue to be an area of investment for us in Q2, with the expansion of our field sales team which is generating strong momentum.

In fact, our education and patient finance originations and revenue grew faster sequentially than the rest of the business in percentage terms for the first time in the second quarter.

In small business, we have several key partnerships launching this quarter and we signed a series of new partnerships in Q2 including an alliance with Ingram Micro, the world's largest wholesale technology distribution company, to be the exclusive provider of unsecured lines of credit and term loans up to $300,000 for the tens of thousands of U.S.

value-added resellers. We also signed an exclusive partnership with Zulily, an online specialty retailer to make financing available to their online merchants. We believe that our scale, brand and reputation continue to help us secure the most sought-after partnerships in the industry.

And our superior technology architecture enables us to efficiently launch deeply integrated partnerships. In terms of new channel testing, in Q2 we completed several direct response radio and TV test ad campaigns and have been pleased with the lift we saw in some of the test markets.

We will continue to test and iterate on messaging media channel and programming to try and generate the predictable and consistent lift across that market before expanding this program more broadly. But I would say that we have learned a lot in the short time and the early results are encouraging.

Finally, we continue to make progress across all custom programs which include small business and education and patient finance with marketing, distribution, pricing and credit model improvements that helped drive 33% sequential growth in these programs in the second quarter.

Now we're making two one-time disclosures this quarter that we hope you will find useful to understand long-term trends in the business. The first is about repeat customers, both from the investor and borrower side. The second relates to the investor mix and how that mix helped drive interest rates down over the last couple of years.

We released last quarter some data on customer satisfaction [indiscernible]. The very high satisfaction rate we have earned from our borrower base translates into a high propensity to do business with us again.

This quarter we have included in the quarterly earnings presentation available on our website, the few slides on repeat customer trends for both investors and borrowers. On the investor side, repeat investment and increased account size are key measures of satisfaction. We have included a slide showing retail investor account size by vintage.

Our software retail investor base surpassed 100,000 active accounts for the first time this quarter including many investors who consistently add to their account and reinvest the principal and interest payments we receive.

You will notice that the average initial low count pending value as well as the pace of growth of the average account size has increased which each vintage. The most recent annual vintage of 2014 is now showing an average account size of well over $15,000 at the one-year mark.

Individual investors represent 70% of the $1.45 billion invested in our standoff program loans in Q2. This was a milestone quarter with our first $1 billion quarter contributed by individual investors.

As we expand geographically and open to investors in new states, we expect to see this loyal investor base continue to represent a stable source of capital. We believe that new and repeat investments are clear indicators of investor engagement and satisfaction with our platform.

On the borrower side, we're reporting this quarter repeat borrower rates both by vintage and as a percentage of our total customer base.

Once the first loan is paid off or substantially amortized, roughly 27% of our borrowers come back to Lending Club and obtain a second loan within four years of obtaining their first loan despite stringent restrictions from a credit policy standpoint.

This rate of repeat customers has accelerated over time much as we saw in the investor side as we have continued to improve the customer experience and level of satisfaction with the three-year repeat rate approaching 30% in our most recent vintages.

We believe substantial value remains to be unlocked from our existing customer base with only 14% of the current base of nearly one million bowers having written for a second loan.

Because our rapid growth, the average age of our core personal loan borrower base remains very young at roughly 1.3 years with roughly 80% of our borrowers having received their first Lending Club loan in just the last two years.

Overtime as the age of the borrower increases and as we add new use cases and new products, we would expect the repeat borrower trends and cross-sell opportunities to continue to increase both on the vintage and overall basis.

From a credit standpoint, our platform applies stringent controls over the ability to take a second loan with the application of the same credit checks and credit parameters as the first loan augmented with additional obligations to have made at least 6 to 12 months of on-time payments on the first loan depending on credit quality.

We take great care to manage this repeat population and the performance trends in order to deliver consistent and predictable returns to investors on the platform. We have also provided in our quarterly earnings presentation high level unit economics for the first and second loan.

This simple illustration highlights that there is effectively no sales and marketing cost for repeat borrowers and therefore on the blended basis we expect to see contribution margin in the 80s for the second loan driving the average contribution margin in the 60s for repeat borrowers as compared to 45% of the business overall.

As we continue to expand use cases and offer new products, this trend represents an important tailwind for customer engagement, cost efficiency origination growth and contribution margin leverage. Now turning to investor mix and average yield.

Investor mix for the standoff program in Q2 was 20% self-directed investors, 50% individual investors investing through a fund or managed account and 30% institutional investors.

Now diversified institutional investor base which includes foundations, ordinance, insurance companies, banks, finance companies, asset management firms and corporate pension funds, continues to provide our platform with the flexibility to broaden the scope of our originations and expands our credit offering into very high credit qualities for prime loans as well as lower credit quality near prime.

The key driver of our network affect comes from the amount of data we have been collecting over the last eight years and our track record of delivering consistent returns which we believe increases investor confidence and lowers the risk premium required by investors.

This enables our platform to deliver lower interest rates for borrowers which drives positive selection, increases loan performance and further reinforces our track record. As a result, the risk premium on the lending platform as measured by the spread over a three year treasury came down by 270 basis points over the last three years.

Our ability to lower our interest rates to borrowers came both from the existing investor base being - waiting to accept a lower yield and new more conservative investors growing their participation on our platform. Year to date, roughly 20% of the loans on our personal loan platform were invested in by banks and finance companies.

Generally most of these [indiscernible] with lower yields than other types of institutional investors. Our platform also benefits from investments from more aggressive institutions including asset managers with appetite for our custom programs. Next let me say a few words about the regulatory framework we operate in.

Our market place benefits from what we believe to be an efficient regulatory framework that offers borrowers the same level of consumer protection that benefit from a bank while providing us with more flexibility and the more cost efficient and capital light framework.

In particular, all loans are overseen, issued and originated by Federally regulated banks and often our lending regulation which has truth in lending and fair lending and fair credit reporting [indiscernible]. We believe that one of the benefits of our platform is to use technology to make consumer protection more effective and more efficient.

As an alternative to our partnerships with issuing banks and other framework available to us is a direct lending approach by utilizing state licenses. Under a state license framework, however, interest rates would be limited by state specific interest rate caps.

And based on our current mix, we estimate that roughly 12.5% of our platforms loan volume would exceed the interest rate caps in southern states. Another key aspect of our regulatory framework is that we do not collect deposits like a bank would.

Instead we sell securities or whole loans to investors and the securities are matched in terms of rate and duration with the underlying loans. Lending Club does not assume credit risk or interest rate risk which are borne by investors. Therefore, there is no capital requirement or DSE insurance.

Over the last eight years we have been in regular dialogue with regulators of the city level and state level and are encouraged by the constructive discussions we're having.

In general, we believe regulators recognize the benefit of our business practices and our ability to make credit more affordable and transparent to consumers As an example, CSTB Director, Richard Coldrea [ph] declared in an Associated Press interview released on July 31 when asked about marketplace lending that I quote, so far it's been a pretty consumer friendly industry, we'll see how it develops., end quote.

We intend to continue to prove the industry towards more transparency and better terms for consumers. In another recent development, the Department of the Treasury recently sought public comments on online marketplace lending and expanding access to credit which we very much welcome and support.

The request for comments is aimed at evaluating the potential for online market-based lending to expand access to safe and affordable credit for consumers and businesses. And other financial regulatory framework should evolve to support a safe growth of the industry.

We applaud this initiative from the Treasury for setting up a transparent and open process which we believe will help raise awareness and understanding for the current regulatory framework for our consumer friendly and transparent business practices and provide further support for Lending Club's ability to safely grow into a very large online marketplace which will make credit more available and affordable to consumers and small business owners.

Now before turning over the call to Carrie, I would like to share the good news that Sandeep Bhandari will be joining Lending Club as our new Chief Credit Officer on August 24. We're excited to welcome Sandeep as a key member of the Executive team.

He joins after 15 years at Capital One where he was most recently Assistant Chief Credit Officer at Capital One Bank.

Prior to that Sandeep held a variety of holes requiring expertise in strategy, credit risk management, marketing, product development and underwriting across several lines of business including consumer and small business credit card, auto lending and mortgage and home equity lending.

Chaomei Chen will be retiring later this year after ensuring a transition period. We're grateful to Chaomei for the formative role she has played over the last four years in establishing the foundations for and building a remarkable credit and risk management organization and wish her the very best as she begins a new chapter of her life.

Now let me talk turn the call over to Carrie to go into more detail about our financial results, our guidance for the third quarter and an update on our full-year outlook..

Thanks, Renaud. This was another outstanding quarter with financial results that topped our initial outlook thanks to a combination of incrementally faster growth and a couple positive drivers. I will first review our financial results and then review third quarter and annual guidance before taking your questions.

All year-over-year comments are comparisons to the second quarter in the prior-year. As Renaud shared, total originations in the second quarter grew to a record $1.9 billion, an increase of 90% compared to the same period last year. This origination growth drove equally strong revenue growth.

Operating revenue in the second quarter was $96.1 million, up 98% year over year. As a reminder, the majority of our revenue is earned in two ways. First, transaction fees are earned upfront when a loan is originated. These fees totaled $85.7 million, up 87% year over year and represented roughly 89% of operating revenues in the second quarter.

Second, servicing and management fees from investors are earned over the life of investment. During the second quarter, these fees totaled $9 million, up 208% from last year. Second quarter revenue performance came in ahead of our outlook as a result of several drivers.

First, we continue to see favorable marketing efficiency in our standard personal loan product. Second, we saw positive momentum in our custom programs which includes custom personal loans, education and patient finance and small business.

Custom program originations grew 33% quarter over quarter and represented 24% of our Second quarter originations compared to 21% last quarter. Third, we continue to see favorable investor mix this quarter with demand coming from investors who pay marginally higher servicing fees.

Our revenue yield which is operating revenue as a percent of origination, was 5.03%, up 7 basis points sequentially and 20 basis points year over year. Servicing and management fees accounted for 17 basis points of the increase. The servicing line includes adjustments for our servicing liability for loans that we have sold but continue to service.

Last year we made a one-time accounting adjustment which drove most of the 9 basis point year-over-year increase. Higher collection fees drove 5 basis points at the increase and the remaining 3 basis point improvement was split between higher servicing fees and a change in fee mix.

Other revenue also increased year over year moving 9 basis points higher driven by gains on sale associated with selling whole loans.

These increases were partially offset by a 7 basis point decline in transaction fees due to a greater mix of the education and patient finance true no interest product which was launched in late 2014 and has inherently lower revenue yield. On a sequential quarter-over-quarter basis, we saw improving revenue yield across all products.

Now turning to expenses. We divide expenses into two major buckets, those that directly drive revenue and are part of contribution margin and those that support our infrastructure and long-term growth.

As we review expenses in this section, please note that these amounts exclude stock-based compensation, depreciation, amortization and acquisition-related expenses. The contribution margin expenses that directly generate revenue include sales and marketing and origination and servicing.

Sales and marketing expenses consist primarily of those related to borrower and investor acquisition and activation, as well as overall brand building. They vary quarter to quarter with seasonality, channel mix, channel testing and additional marketing efforts designed to support new product launches.

In the second quarter, sales and marketing expenses were $38.5 million, up from $18.61 million a year ago. As a percent of originations, sales and marketing expenses decreased from 2.04% to 2.01% sequentially, quarter over quarter and increased from 1.85% to 2.01% year over year.

The year-over-year increase is the result of continued efficiency gains in our personal loan core business offset by marketing investments in the newer businesses and channels and expense reclassification.

As we highlighted in the last quarter, we reclassified our personal loan sales team cost from origination and servicing line into the sales and marketing line. Excluding this reclassification, our sales and marketing expenses as a percent of originations would have been 1.95% in the second quarter, up 10 basis points from the prior year.

Network affects and scale continue to play in our favor with respect to our personal loan core business driving sales and marketing expenses in our core business down 5 basis points year over year.

This improvement was offset by 15 basis points of year-over-year increase and education and patient finance and small business products as we continue to invest in building up our sales team and developing scale in new marketing channels.

Our origination and servicing expense consists primarily of personal-related expenses for credit collections, customer support and payment processing teams and vendor costs associated with facilitating and servicing loans such as issuing bank and credit agency fees.

In the second quarter origination and servicing expenses were $14.4 million, up from $8.1 million last year. As a percent of origination, these expenses increased 2 basis points sequentially from 73 to 75 basis points and declined 5 basis points from 80 to 75 basis points year over year.

Excluding the 6 basis point reclassification origination and servicing expenses would have been 1 basis points higher with 3 basis point improvement in our core personal loan product offset by less efficiency in small business and education and patient finance.

Both sales and marketing and origination and servicing expenses are netted against our operating revenue to derive contribution income and a contribution margin which focuses on the efficiency of how we drive our revenue. On a dollar basis, our contribution income in the second quarter was $43.2 million, up 97% year over year.

As a percent of originations, our contribution margin expanded 8 basis points from 2.18% to 2.26% year over year driven by 20 basis point improvement from higher revenue yield offset by 12 basis points of higher expenses driven by our newer products.

As a percent of operating revenues, our contribution margin was 44.9% in the second quarter, down slightly from 45.1% in the prior year and up from 44.1% in the prior quarter.

The second set of expenses that are outside our contribution margin but are included in our adjusted EBITDA margin are costs that support our infrastructure and long-term growth. Specifically, these are engineering, product development and other G&A costs.

Engineering and product development expenses include personnel-related costs along with non-capitalized hardware and software costs. We continue to aggressively build our engineering team to develop new products that will fuel future growth and drive automation and to increase scalability and information security ahead of growth.

As a result, engineering and product development expense increased to $10.4 million in the second quarter, up 82% year over year. As a percent of operating revenues, engineering and product development expenses were 10.8% in the second quarter of 2015, down from 11.7% last year.

Other G&A includes personnel-related expenses for support organizations such as legal, finance, internal audit, accounting, risk management and human resources, along with facilities expense. Year over year these expenses increased to $19.4 million in the second quarter, up 59%.

While we continue to invest in these support teams to further accommodate and derisk future growth, we generated strong leverage in these areas during the quarter. As a percent of operating revenues, other G&A expenses were 20.2% in the second quarter, down from 25.2% last year.

To derive our adjusted EBITDA, we subtract these operating expenses from our contribution income. In this quarter adjusted EBITDA was $13.4 million or 13.9% of revenue, compared to $4 million or 8.2% of revenue in the second quarter of last year.

Adjusted EBITDA came in ahead of our Second quarter guidance range mainly driven by higher revenues and improved G&A leverage.

Adjusted net income which is GAAP net income excluding stock-based compensation and acquisition-related expenses, was $10.3 million or $0.03 per diluted share during the second quarter, versus $2.3 million or $0.01 per diluted share in the year-ago period. Our GAAP net loss this quarter was $4.1 million compared to a loss of $9.2 million a year ago.

The difference between GAAP and adjusted net income is largely due to stock-based compensation which increased $4.2 million year over year or 50% to $12.5 million. Meanwhile stock-based compensation as a percent of operating revenue declined from 17.3% last year to 12.9% this quarter. Now turning to the balance sheet.

As we have discussed in contrast to the traditional banking systems, capital to invest in loans is provided from loan sales and securities issued to investors rather than from banking deposits. A key differentiator for our marketplace model is that as a matter of business model we do not assume credit risk or use our balance sheet to invest in loans.

And the loan sales and securities issued to investors perfectly match the term of the loan. When reviewing our balance sheet, you will see both the loans as an asset and the corresponding notes or certificate as the offsetting liability.

The changes in value of these loans, notes and certificates generally offset one another and do not impact our equity. At the end of March, total balance sheet assets reached $4.8 billion. Of this, $3.6 billion is in loans, $888 million is in cash and available for sale securities and the remaining $258 million in other assets.

Our servicing portfolio which includes both loans on the balance sheet and sold loans, increased to $6.5 billion in the second quarter up from $5.6 billion from the prior quarter and $3.3 billion in Q2 last year. With that, let me give you our thoughts about the third quarter and FY15.

Given the strong performance we continue to see on many fronts, we remain encouraged that our strategy of fast yet disciplined growth is paying off and continues to derisk future results. As such, we feel confident in once again raising our full-year revenue and EBITDA guidance ranges.

We expect operating revenue to be in the range of $106 million to $108 million in the third quarter. We're also raising our full-year outlook to a range of $405 million to $409 million, up from a range of $385 million to $392 million provided during our first-quarter earnings call.

As we have shared, our focus is to optimize long-term contribution and adjusted EBITDA margin and eventually net income. However, over the short term we will continue to invest in key areas such as channel development, product development, engineering, process automation, support and risk management functions.

In addition, there is seasonality in the business that we expect will lower our marketing and sales efficiency in the fourth quarter. With that in mind, we expect third-quarter adjusted EBITDA in the range of $12 million to $14 million with the midpoint margin of 12.1%.

And for the full year we're increasing our range to $49 million to $53 million with a mid-point margin of 12.5%. With that, let's turn to your questions.

Operator?.

[Operator Instructions]. And our first question comes from Smittipon Srethapramote at Morgan Stanley..

Renaud, you spoke about the potential to unlock value from the one million borrowers who taken a loan from your platform in the past of which 14% has taken a second loan.

Can you talk about the degree that you guys may be constrained to serve these customers by only having limit product set? And if so, what are your thoughts and plans about potentially introducing new products to service these customers?.

So first a clarification on the 14% number. So we're seeing about 14% of our existing total commutative borrower base that came back and got approved for a second loan. That number is driven down quite a bit by the rate of growth that we're seeing on the site because there are a lot of credit checks that make it really hard for borrowers.

We voluntarily make it hard to take a second loan until the first loan has substantially amortized and pulling itself out. And about 80% of that one million borrower base came in in the last two years. So only a portion of that base really got to the point where they are eligible and so if he is going to be approved for a second loan.

If you look at that number on the vintage basis, you see that's within the three to four years we get to 25% to 30% of the borrower base gets a second loan. So it's a very nice repeat customer rate we find, but certainly with the young age of the base it gives us a lot of future value to unlock.

Now you're absolutely correct to mention that as our use cases and our product line gets broader and we release other consumer products, that would only increase our ability to cross sell products and continue to further monetize our base..

And do you have any comments on the Madden versus Midland funding case that's going through the court system right now in terms of how it potentially impact your business?.

Yes, so we've seen that case that came out a couple of months ago. I think the --our take there is obviously the particular circumstances of the case are different from what we're seeing on our platform. But in general what really helps us apply Utah low to most of our loans is really a couple of things. One is for the all preemption.

And the second is choice of low provision in our contract. The Madden case really challenged the federal preemption but did not challenge the choice of low provision, so that's really the - and we don't need both, we need one of them.

So we continue to operate in the second separate district where that decision was rendered exactly as we did before and are relying on our choice of provisions. Note that this particular case is getting challenged by a lot of players in the banking industry, including the American Banking Association.

And I think it's an unusual case, but certainly that doesn't come back to us in that the sense that we continue to rely on choice of low provision.

If we were to see that the choice of low provision was getting challenged elsewhere which there's no reason to expect at this point, we could also think of a different issuance framework than the one we're using now where we would switch to a series of state licenses.

And that's in [indiscernible] we provided in our slide deck that shows that using the current mix we have about 12.5% of our loans that would exit the state interest rate caps.

So that certainly would be [indiscernible] demand and we'd have to revise our pricing in certain states, but that certainly would be another option available to us if our choice of low provision and federal preemption was getting challenged in other states..

And Carrie, one quick question for you. You guys had a large negative other net operating cash flow item of $426 million in the quarter.

Can you go into little bit more details about that line item?.

Yes. We have about close to $900 million in cash and what we did this quarter is about half of that, so $400 million or so, we moved into a securities portfolio to start actually earning a little bit better return. So if you're just looking at the cash flow specifically, that outflow reflected the investments that we made this quarter..

The next question is from Ralph Schackart at William Blair..

Renaud, first question a marketing efficiencies. I think last quarter you talked about some short-term efficiencies in the channel and that was also talked about pretty extensively at Lendit and one of your smaller competitors in SMB space last night called that out.

Yet you seem to have a reversal this quarter, curious if you could give some color, did you change mix between on and off line? Is a partnerships driving the efficiencies? And any extra color would be helpful..

Yes I think what we're seeing is a lot of tailwind coming from our brand gaining in wellness and credibility, that's certainly drives some of the conversion rates. A lot of the good reviews we're getting online. A lot of the high level of customer satisfaction that drives. But then that promoter score also drives conversion and some efficiency.

We also did some work on specific channels and certainly the partnerships tend to be more efficient than direct marketing in some cases. We actually released a specific [indiscernible] here. Some of the partnerships we talked about before.

So one was the Bank Alliance partnership and we launched with a number of banks, small community banks for the most part that are part of that alliance.

And as you know we're making, usually making co-branded loans with the banks that are part of the network and offering some personal loans to the bank customers, so a win for the bank that has that customer as a mortgage customer but doesn't necessarily have an unsecured product to refer to that customer.

It's a win for us because it gives us access to a new customer base that wouldn't necessarily be responsive to the Lending Club brand by itself. And - but would be responsive to a co-branded offer that includes the brand of the local bank that they're familiar with.

And so we've seen in this channel, it is still pretty early, but we're seeing in this channel a two to three times better marketing efficiency than we're seeing on average for the rest of our business. So certainly some of these partnerships are starting to show signs of really good efficiency..

One more if I could, on the operating revenue percent just above 5%, slightly higher than last quarter. I think it's been increasing for about the last four quarters or so and you're up about 40 basis points or so since 2013.

Any trends we can draw from the consistent growth or pattern? Should we expect this to continue to increase modestly and/or what would cause this trend to reverse? Thanks..

Yes, when you look at the yield, particularly over the last year as you pointed out, we have seen it gradually increasing. There's two things driving that. One is collection fees. We talked a bit about introducing collection fees or passing those through to investors late last year.

In the second quarter, we actually benefited roughly 5 basis points from that, that is a trend that we do - that is permanent, so certainly relative to last year. The second thing that has been increasing is servicing fees.

So we actually on the investor side charge to retail investors 1% of payments on servicing and that's remained the same over the last couple of years. But as we brought on new investors, particularly high net worth and institutional investors, we've bringing those on at marginally higher rates.

And so over the last year the mix of moving towards more and new investors at slightly higher rates has also caused a bit of the increase. This is harder to predict permanently over the next several quarters, but we do expect some marginal expansion in servicing fees over time.

So in other words, the 5% level is a bit of the new normal relative to last year..

The next question is from Josh Beck of Pacific Crest..

Quick question for Renaud, you talked about direct response, you talked about radio and TV a little bit as well.

As you spend on those channels that tend to I think earlier on in their lifecycle build the brand, maybe versus leading to a direct improvement conversion improvement, what have you learned? You said you're learning a good bit there in TV and radio, but what are the early learnings? What should we think about in terms of cadence of spending? Is this a trial period and then at some later point we could see an uptick once you have it flushed out a little bit more? Any color there would be very helpful..

Yes, so at this point radio and TV continues to be direct response radio and TV, so it's not an overall brand building.

It continues to be with a strong call to action and is being measured using the same measures, same metrics of efficiency as any other channel, even though certainly as some brand awareness benefit, but we're not self-relying on this benefit.

So basically we learned a lot in terms of day partying in terms of messaging, in terms of combination of [indiscernible] radio or TV and some other marketing in given test markets. And so we would continue to test and continue to learn.

There are some of the test markets where it's already above the marginal efficiency of other channels so already other area is why it can pay for itself. So I think we don't necessarily increase that spend in a meaningful way in circumstances where it does not meet our efficiency, our efficiency threshold.

But in areas or in use cases where it's already as or more efficient then marginal cost and other channels, we'll certainly do more TV and more radio and/or are hoping to optimize our way down over the next few quarters..

Okay and one of the things that you've talked about in the past is your I think letters and flexibility to move across channels.

I'm wondering if you saw any trouble spots maybe this quarter that made you have to shift between channels or was it mainly as you alluded to earlier driven by conversion and partnerships?.

It's mostly the latter although I'm going to say we've made a comment last quarter about seeing some inefficiency in some of the most visible channels. And we continue to see some of that although not as much as we did in the last quarter.

And again when that's the case, we usually move our budget to some other channels that are more efficient at that time. I think it's one of the benefits of the channel diversification we've been building over the last several years. We have that flexibility and that luxury that we don't have to use any particular channel to its full capacity.

That being said, again typically when that happens, when we lower our spend we usually get a call from the CEO of that particular partner or channel giving us better pricing. So I think we benefit from our leading position in our industry and that gives us the ability to negotiate really good terms across all channels.

And last one for me on Springstone and thinking about building out the field sales force there. Any sense you can give us on how much of the footprint is built out relative to your plans? How you're thinking about adjusting that cadence moving forward based on it sounds like the success you've had to date there..

Yes, so it took us about three quarters to build out phase one of that field sales force. So we have about 30 field sales reps at this point. I think we're going to post there and let it scale, let it reach efficiency before we accelerate or continue the buildup phase.

What we're seeing is the territories that were staffed first, so over six months ago, are showing some great momentum. So we believe newer territories over time or some of them at least, are going to follow the same pattern.

So we'll let that prove itself out and if that's the case, we'll continue to build and would enter into another phase of buildup..

The next question is from Mark May of Citigroup.

This is Ryan on for Mark. Two questions if I could. First on EBITDA margins, you've been expanding them nicely year on year and sequentially, but the back half of the year seems to imply some margin compression on both the year on year and sequential basis.

So other than seasonality of marketing spend, anything you want to call out there? And then with respect to the partnership with Zulily, any more color you can give us and the dynamics of how that will work? And do you have any other - are you working on any other partnerships with other online retailers? Thanks a lot..

On the EBITDA margin, as we talked about, really this is continued investments in really technology product infrastructure. So we have had that focus all year along and we're going to continue to focus on build up there.

And certainly as I mentioned there will be a bit of seasonality in the fourth quarter and both we're expecting to play through the margin. We're not necessarily adjusting the outlook for contribution margins specifically.

We don't guide on that, but certainly the seasonality and as we've shared this quarter we wanted to give you guys a bit more visibility into small business, Springstone relative to our core business. And so really the focus here is on infrastructure as we've been committed to all year long..

And so on Zulily, we're essentially going to be making financing available for their online merchants. And yes to your point, we're in discussions with a number of other online retailers and online platforms. The alliance with Zulily isn't very dissimilar to what we announced earlier this year with Alibaba with [indiscernible] U.S. platform of Alibaba.

And would continue to pursue that strategy of partnerships that's working out well for us with small business..

The next question is from Stephen Ju of Credit Suisse..

Renaud stepping back and looking big picture, I remember one of the primary constraints on growth for you has been on the demand or I guess the borrower side of the marketplace.

But as Lending Club looks like it's able to sustain higher growth rates with relatively little deterioration in your contribution margin, what's your appetite at this point to throughput even more volume, especially as it looks like the lifetime value of your borrowers seems to be tracking higher with increased brand recognition? Thanks..

Thank you. I would say sustain growth with actually improvements in contribution margins. So yes it's certainly going well and we don't see it constrained on either side of the platform at this point.

And I think we'll continue to implement our strategy that has worked well for us of growing aggressively but in a deliberate way that doesn't necessarily max out the short-term opportunity.

But really gives us the ability to continue to build up in cost structure and staffing ahead of the growth, continues to beef up many areas in terms of scalability in terms of security, in terms of back office. And also really deliver grades of user experience and not impact the credit mix quarter over quarter.

I think when you run an online marketplace with the levels of credit product I think it imposes different constraints than some other type of products and credit as this particular area of taking time to release of [indiscernible] know the exact performance for several quarters.

So we don't want to put our investors at risk and of change [indiscernible] of credit mix quarter over quarter. And that explains the strategy that again has worked well for us so far of some disciplined growth..

Our last question is from Heath Terry at Goldman Sachs..

I was wondering if you could give us a sense that of the level of interest that you've had as you started to see more growth in S&B and as you expand into some of the close verticals, has that experience given you any greater level of interest in entering other categories faster than had maybe been previously on the road map or certainly given the success that you're seeing here in the U.S., accelerating your timeline around international?.

Again, we're pleased with some new initiatives and some custom programs have grown faster in interest-related terms than the rest of the business over the last quarter.

And that certainly reinforced our conviction that we should continue to grow aggressively our product offering and really fulfill our mission of transforming the entire banking industry and making credit more affordable across many different products. And over time, fulfill of the credit needs of our customers.

And I think we're pleased with how the product road map is shaping out. We have said in the past we had launched one to two new product each year, I think we can give you a little bit more color on this. We're planning to launch another product in the next few months before the end of this year.

And we're planning to enter an entirely new large consumer product category in the first half of next year.

The distinction we're making between a product and the product category is a little bit what you've seen with education and patient finance where we launched a new product in late 2014 that was a true no interest product while education and patient finance itself is a new product category.

So a category is really a different use case, different borrower segment, generally different channels as well. So that gives you a little bit more color on what's coming in the product pipeline. International continues to be a really big long-term opportunity.

But again we have so many really actionable opportunities domestically that I think we'll continue to focus on these in the short term..

This concludes our question and answer session and the conference has now concluded. Thank you for attending today's presentation, you may now disconnect..