Good day, and welcome to the LendingClub's Fourth Quarter 2018 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded and broadcast over the internet. I would now like to turn the conference over to Simon Mays-Smith, VP of Investor Relations. Please go ahead..

Thank you, Sean, and good afternoon, everyone. Welcome to LendingClub's 2018 fourth quarter earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, the CFO.

Our remarks today will include forward-looking statements that are based on our current expectations, and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our guidance for the first quarter and full year 2019.

Our 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, and our most recent Form 10-K and Form 10-Q filed with the SEC.

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. Also, during this call, we will present and discuss both GAAP and non-GAAP financial measures.

A description of non-GAAP measures and reconciliation to GAAP measures are included in today's earnings press release. The press release and accompanying presentation are available through the investor relations section of our website at improvement.lendingclub.com. And now, I'd like to turn you over to Scott..

first, growing responsibly while growing responsibly while prudently managing credit; second, continuing to carefully allocate capital, innovating for long term growth while managing operational and regulatory risk; and third, simplifying our operations in costs, targeting adjusted net income profitability over the second half of 2019.

When we look back at this time next year, I expect that 2018 and 2019 will be seen as pivotal years in the development of the company. Over the last few years, Lending Club has been tested and emerged stronger. We have enormous opportunity ahead of us and are well-placed to capture.

None of these could have been achieved without the hard work and innovation from the employees of Lending Club and our partners and I'd like to take this as an opportunity to thank each and every one of them. With that, I'll turn it over to Tom for a look at the financials..

first, to expand our margins even more; two, to further improve our customer service; 3, to focus our engineering and operational capacity on our highest return initiatives; four, to lower our unit cost; and five, to increase our resiliency by increasing the percentage of cost that are variable.

So let's take each of those categories in turn and show how they help us achieve our goals. Let me start with business process outsourcing. We started our BPO program early last year and was both an important first step in our simplification program and also a clear contributor to our 2018 margin improvement.

We've used BPO to build capacity in our member support, collections and backend credit verification.

There are two important benefits for BPO; first, we are able to lower the unit cost to deliver loan servicing while maintaining very high customer satisfaction and net promoter scores; and second, we swapped fixed cost for variable cost which gives us further resiliency over the economic cycle.

To give you some idea of the scale of our BPO work, by the end of 2018, we had a BPO head count of more than 250 people and is a critical part of our future. We're also using BPO to help focus our engineering capacity on our core products.

For example, in 2019 we will complete the transition of our growing loan servicing business to an off-the-shelf platform provided by a third party. Initiatives like this are important contributors to focus our technology investments and benefit from our scale.

Having learned to successfully manage multiple remote sites through our BPO initiative, we're now able to leverage that experience to work for steel [ph] locations. Our announcement to open our Utah facility significantly reduces our unit, FTE and property cost, enabling us to do more for less and benefiting our ONS, MNS and G&A line items.

Just as we're simplifying the infrastructure we used to support our customers, we're also simplifying the infrastructure that supports our business and leverages our scale. We are rigorously reviewing all of our vendor agreement and are in the process to be the managing renewals were consolidating.

These efforts will further drive margin expansion and should improve contribution margin as well as tech and G&A expenses. Finally, as part of our deliberate capital allocation process, we conducted a bottoms up review or what I would call zero-base budget of our cost base.

We started this review in the fourth quarter last year and is just in the process of coming to a conclusion here in the first quarter. This process highlighted several areas of potentially significant opportunities in our processes and portfolio structure.

We're in the process of developing our execution road map of each initiative and while they are not all to be executed in the first quarter, we see benefits accruing to the bottom line in 2019 and 2020.

Our simplification program provides a number of opportunities to further leverage our scale and simplify our business operations and give us the confidence that we can continue to expand our adjusted EBITDA margin another 5 points and get us to adjusted net income profitable in the second half of 2019 with adjusted EBITDA margins approaching 20% as we end the year.

So let me finish with guidance for Q1 and the full year of 2019. 2018 demonstrated our ability to use credit, price, mix and scale to dynamically adapt the changing marketplace conditions and poised to the resilience of our business model.

Our growth investments, simplification program and preparation for uncertain macro-economic conditions provides us with additional resilience as we head into 2019. We expect the operational phasing of our business to be similar to 2018 with a seasonally slower Q1.

As Scott mentioned, we continue to selectively tighten credit and raise prices to manage returns to investors. We expect our restructuring charges to broadly breakeven for the year at the GAAP net income level with a net negative impact in the first half of the year, offset by a positive impact in the second half of the year and into 2020.

We've excluded restructuring charges and legacy issues and non-recurring items from both our GAAP consolidated net income and adjusted net income guidance to give you a better view on the underlying performance of the business. We'll update GAAP consolidated net income guidance each quarter as we incur these charges.

Despite further creditizing to manage returns to investors, we've had a solid start to the year, expect Q1 revenue growth of between 7% and 13% implying revenues of between $162 million to $172 million. We expect full year growth between 10% and 14%, implying revenues between $765 million and $795 million.

For adjusted EBITDA, our guidance range for Q1 is $13 million to $18 million. For the full year, our guidance range is $115 million to $135 million. The wide full year ranges for revenue and profit reflects some of the uncertainty we've seen in the macro-economic environment.

We'll look to tighten these ranges as we have a better sight throughout the year. We expect stock-based compensation, charges of approximately $18 million Q1 and $81 million in the full year. We expect depreciation, amortization and other net adjustment charges of approximately $15 million in Q1 and $63 million for the full year.

We therefore expect GAAP net loss of between $15 million and $20 million in Q1 and $9 million to $29 million for the full year. And as I mentioned earlier, we are targeting adjusted net income profitability over the second half of the year.

This expected [ph] swing from adjusted net income loss to profit starting 2019 marks an important reflection point for Lending Club. While we still have a lot of work to do, the opportunity to grow our profitability and further build resiliency in our marketplace gives us further confidence in 2019 and beyond. Scott, back to you..

Thanks, Tom. So to summarize, we feel very good about our execution of the plan in 2018 and how the intrinsic strength of our business model combined with our capital allocation to the decisions delivered strong results.

Our proven ability to use credit, price, mix and scale to dynamically adapt to changing marketplace conditions points to our resilience and underpins our confidence in 2019 and beyond. With that, I'd like to open it up for Q&A to answer any questions..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brad Berning with Craig Hallum..

Good afternoon, guys.

Appreciate the focus in the bottom line, but wanted to ask a little bit more details about where you're seeing pockets are tightening in underwriting that is show on the decelerating loan growth and just wondering if you could kind of expand upon where you're seeing those areas a little bit further?.

It's really kind of a continuation of really what we've been talking about for some time now which is overall normalization, I would say, in performance as the super-benign conditions over the last several years kind of come back to where they were pre-recession and where it manifested has really primarily been on the higher risk side of crime.

So overall portfolio delinquencies look good and we're overall pleased with the performance of the book, but that higher risk side of prime is continuing to kind of normalize..

Has there been any changes in the non-prime side of it? We could obviously see the [indiscernible] were slower this last quarter, but just wondering how that impacts the other business lines as well..

Yes. F&G are still part of the prime program. The custom program volumes you can see there are actually pretty flat and performance there is in-line with our expectations. And importantly, in-line with investor expectations because that's what this is really about.

If you think about our plan next year, it's to really drive us all to our all bottom line, but also given where we are in the cycle, to really make sure we're protecting the bottom line of our investors and that's what I talked about on the prepared remarks -- really integrating more deeply with our key customers to become a part of their process, understand their business and help support their overall financial management..

And then one really quick accounting-related follow up on the quarter; can you just talk about the mark to markets this quarter under fair value adjustments in a falling rate environment, no back half of the quarter in particular.

Just wondering why that was up as much as it was this quarter? Where are the moving parts in the business model that kind of drove that?.

As I said in my prepared remarks, this number moves around because of the timing of when we sold. So what you're seeing here is the mark to market at year-end. As you said, there's a lot of volatility at the end of the quarter, so you're seeing some of that come through the fair value adjustment.

Keep in mind though that the interest income and the interest expense when you're looking for all three of those lines together, they kind of come to about flattish. What really is driving the structure program is the net gain on sale.

We continue to see good performance there as we're finding our way to manufacture new structures that allow investors to invest with us with ease. That's really the story on the structured program. That's in-line with what we expected. It just has some variability on line items, but overall net, it's in-line..

Yes, appreciate it. Thank you for the outlook on bottom line efforts. I'll get back in the queue. Thanks, guys..

Our next question comes from Eric Wasserstrom with UBS..

Thanks very much, just a couple of questions. In terms of the outlook for next year, you've given a lot of information about a number of initiatives on margin and other elements of the income statement.

But can you just maybe frame for us, Scott or Tom, how to think about the volume growth expectation as it relates to the outlook?.

Yes, sure. You're absolutely right. We emphasized in our prepared remarks our focus on a number of key initiatives to improve our bottom line. If you go back in 2017, it was really about stabilizing the company. '18 was demonstrating our ability to grow again, which we feel very good about.

As we head into '19, we are emphasizing the initiatives and focus to drive the margin expansion to get our business to the most profitable we can given our scale. That's the 2019 focus. On the revenue side, we are looking at the environment and trying to capture what is a little bit more uncertainty in the outlook and being prudent.

We think that as Scott mentioned, the book continues to operate well, we'll continue to deal probably with some additional rate increases. The [indiscernible] is expected to continue to raise rates. We experienced that last year with over 100 basis points of increase over the last 18 months.

We feel good about our ability to adapt, and adjust and meet the demands of our investors. We think we're well-positioned, but I think the guide is really trying to reflect that uncertainty..

Got it.

I certainly understand your reticence [ph] about a point forecast, but maybe to approach it differently, would this year's level of growth represent more of an upper band of expectation?.

As I mentioned, we started last year at our investor day with the conviction that we needed to demonstrate to the market our ability to drive lower cost of origination, done; expanded our contribution margin, done; increased our EBITDA margins, done.

And that was off of a lot of work that we've done to put a testing plan in place, new product design and all those things.

So wanted our guide, we reflected those initiatives and I think what you're seeing here is a focus on the bottom line to drive profitability so that our investors can understand the amount of cash this business can generate, how the margins can expand even with a mid-teens type of revenue growth. That's our focus. We need to be prudent in the outlook.

We're reflecting the demand on the platform, we're reflecting the outlook that we see right now. If things change, we'll update that, but that's where we see it right now..

Got it. The message on that is very, very clear. And then Tom, you touched on this in your prepared remarks, but in terms of the on-balance sheet asset exposure, it would obviously jumped up a bit this quarter, you touched on why.

But just on a go-forward basis, how do we think about that component of your balance sheet going forward?.

We have a number of things that we're doing to reach new investors and the investors that we're making with use of the balance sheet have really expanded the universe of investors.

If you think about the club certificates, these are $25 million to $50 million increment, they come on the balance sheet for a very short period of time, but they're structuring in a way to deliver to an investor that is looking for [indiscernible]. The velocity that's coming through the balance sheet is quite high, so they don't sit there very long.

And then the securitization you saw at year-end, that's just again representing our ability to reach the ABS market. It's $300 million on almost $3 billion of volume for the quarter. That's 10%.

We think that's important because what we've learned is that as we go to the ABS market, we've been able to attract new investors that want the only asset in different forms. I would say that we were quite encouraged with our efforts. It has opened up new pools of capital that we never had access before.

The ability for fixed income investors to consume this in an efficient way, I think really provides a broader understanding and investment that these surround the asset class. And we're going to continue to do that. We'll find ways to make it as efficient as we can to the balance sheet, but this is again one of the things that we have.

We benefit from our scale, our ability to bring things to the balance sheet instruction [indiscernible] specific investor need. That's what we're doing..

Got it. So it sounds like if I'm interpreting you correctly, Tom, the demand potentially grow through the initiatives that you're putting in place, there's kind of an upward bias, but recognizing that, the velocity through the balance sheet will probably be fast..

That's right. The average life of these loans are quite low. We're talking in service structures. A loan is just the accumulation for the securitization, but other products are quite quick..

And just last one for me. I was just doing a quick calculation of your origination piece and it look like they actually crept up a bit, but at the same time your origination of A and B grades are also crept up a bit and usually when that happens, the origination fee is typically trending down.

How do we reconcile that fact, that both the origination fees do seem to go up as well as the proportion of A and B grade loan..

Yes. This is Scott.

I'd bring you back to some of what we said about our ability to do testing at scale and really understand, take rate sensitivities to the borrower where we have pricing power through the unique -- whether it's data attributes or product features that we've got that help us split risk and therefore our understanding of our ability to do that versus their other options in the market and find where we're able to price in the market and find where we're able to price the output of that and the initial shift to A and B, you saw some decline in our overall transaction fee, but essentially over time as we tested and optimized, we caught that back..

Okay, Thanks very much..

[Operator Instructions] Our next question comes from Jed Kelly with Oppenheimer..

You drove decent sales of marketing this quarter, can you dive into some of the factors and then connect and continue into next year and have external factors got easier. And then I just want to look at your four year results for '18. Your total revenue yield was consistent with last year.

Should we expect that same level of consistency in the '19?.

I'll start and then Tom, maybe pass it over to you. First, I'll print a big picture. What's driving it is really execution on our side. That's the primary driver. When I talk about testing and learning at scale, creating messaging, targeting model, channel optimization, product and process optimization, that's really the key driver.

And as I have mentioned in my prepared remarks, we continue to see the opportunity there. The broader environment has not shifted in terms of competitive intensity. It's stable, but if you look at kind of those external metrics around your mail volume sent and all the rest, we're not seeing any kind of decline.

We think the big driver is our ability to effectively compete in what remains a competitive market. There is an additional factor. Quarter-to-quarter is always tricky.

I'd ask everybody to keep that in mind because the timing of certain span and we did call out in Q3 that marketing cost were slightly elevated in Q3 because of the timing of the spend that we reap the benefit of in Q4.

But I think you got a look at things over kind of an arch of time and over the arch of time, we're pleased for the year of how we drove efficiency and continue to feel good about initiatives we've got an offer.

Tom?.

Just on the revenue yield, we continue to feel very good about our ability to find ways to improve our yield. As Scott mentioned, we were able to claw back from mid-year to the end of the year on the transaction fees. We continue to see opportunities for us to further improve our investor yield which complements that.

I think from a revenue standpoint, as far as the mix goes, we feel good about where we are and I don't see that changing in the outlook right now. I think the markets will become a little bit more comp. They were in the fourth quarter, but we are expecting more volatility as we go through the year. I don't see much change in the yield right now..

And then just one last one, your revenue guidance does imply some back-half acceleration.

Is that a fact launching of easier tabs, or do you expect other factors to drive that acceleration?.

I think what you're really seeing is the typical seasonality of Q1 being low and then our ability to pick up our growth from the back half of the year. As you know, our second and third quarters are quite stronger just because where that fits.

This is something that's just natural seasonality of the market, so we do expect more warnings in those quarters..

Again, borrower demand remained high just kind of zoom out a little bit. Personal loans remain the fastest growing segment of consumer credit. Last year, we maintained and in fact even grew our leadership position within that market.

Really what we're pointing to for next year is we're saying based on where we are in the cycle, we don't think the question is going to be borrower demand.

It's really a question of one, make sure management focuses in the right place for this point in the cycle which is driving, pushing through the major initiatives that are going to drive profitability for us; and two, be prudent and make sure we're not reaching for originations in loan growth and we're setting up an expense structure and a frame work that we know we can deliver on whatever, let's say the back half of '19 may bring..

Our next question comes from Stephen Kang with KBW..

I just wanted to touch back on the comments around the FTC where you said you would proactively implement in changes around the application process.

Just wondering, are you seeing any impacts from that on around originations? Or is this still too early to tell?.

Reminder, I said we are going to be implementing those. They're really pretty minor changes to the application process that we believe are in-line with the feedback we've gotten from the FTC and it's an effort for us to really try to continue to move this forward and we don't expect any significant impact to our operations or our business..

Got it. And then just around when I look at the servicing portfolio, it seems like the loans are invested in by the company, increased materially relative to the last couple of quarters. The last couple of quarters, the run rate was around $500 million and this quarter it was $840 million.

Was there anything there around like timing? How should we think about it going forward?.

Yes, Stephen, as I mentioned in my prepared remarks, we did a securitization in December and we retain the residual. So $300 million of that $800 million -- $840 million is actually that. If you take that out, it's the $500 million which should be in-line with most of our quarters..

Our next question comes from Henry Coffey with Wedbush. Please go ahead..

Greetings and thank you so much for taking my question. I know we keep tormenting you to try to turn the net revenue guidance into a loan volume guidance, but is it safe to assume -- in 2018, you had net revenue of 16%, volume up 18%.

Is it sort of safe to assume a similar closely tied relationship there in terms of likely loan volume versus your revenue guidance?.

I think they're closely tied. We've moved away from just an origination guide because as you heard us talk earlier, the mix sometimes can change the actual transaction fees that we earn. We're also trying to focus on our ability to earn additional dollars by restructuring product for a whole new investor class. Part of this is that effort as well.

I think they're close, but they're not necessarily perfectly late because of some of those activities we're pushing. To the extent that we start to generate additional fee income, that also becomes an important part. Also our servicing book is growing very, very nicely over $13.07 billion.

We have this nice [indiscernible] of servicing income that it is not highly correlated with our new origination. Those are some of the things that we try to consider when we just give the revenue guidance as opposed to just origination..

That's very helpful. But the other issue is you talked a lot about building your service initiative. Your A program was the most successful and just looking at the numbers on a year-over-year basis, your custom program was in the second spot, which we're assuming could be lower quality.

As you look at your servicing business, have you thought about the collections work outside of how that business might play out, or you still looking at this strategy of just selling delinquencies and moving on?.

We've actually been investing in that structure and part of our key initiatives for next year continues to include that. You'll see if you look in our publicly available data, we've been investing in people, processes, tools, models there and if you look at our recovery rates, enroll rates there, you're seeing we're making great progress.

So we feel really good about what we've been able to accomplish. We still are excited about the opportunity in front of us and a number of the initiatives we talked about are really setting us up to drive this business harder.

So the move to a new location with a lower cost, the use of BPO resources to switch some of that to a variable cost to a new system that we're implementing which will bring us new capabilities at a lower cost to maintain, easier system to integrate with others, that's all part of really playing the long game here and preparing ourselves for whatever the next couple of years will bring..

I would also add, keep in mind that in the custom bucket, we also have our super prime AA program. So that also is growing very, very nicely year-over-year as some of our investors are looking for low credit risk product. So that's a nice growth profile for us to meet a specific need of investors there and looking for that super prime customer..

As you grow servicing muscle, will this allow you to go down the FICO spectrum more?.

I don't think at this time we're considering that. I think as Scott mentioned, the efforts we have is to improve the performance of recurring and outstanding loans. We think there's plenty of opportunity for us to improve that. We're not targeting an expansion of FICO at this time..

That makes perfect sense. Thank you for taking my question..

Our next question comes from Mark May with Citi. Please go ahead..

Just curious; you've talked about greater focus on margins and profitability and that certainly I think have been the case recently putting up year-on-year margin improvement if I recall.

But I think the Q1 guide implies are reversal and that recent margin improvement despite I think the fact that you said it excludes some of the one-time charges and whatnot that you may incur here on the first half of the year.

Just curious, sorry, if I missed it in your prepared remarks, but what is driving the year-on-year margin decline that you're forecasting on Q1 and then on the FTC-related changes to the application progress, could you just specify exactly what changes you're making there? Thanks..

Yes, Mark, ask the second one again. Just on the margin one, we feel very good about the margins for the year. AS we told you, we're focusing on driving to get the 20% EBITDA margins at the exit.

As we talked last year in the first quarter, you would typically have seasonally lower volumes, but also the carryover from the fourth quarter levels of expenses and then also additional expenses done on annual things like employee-related stuff and set up in plans and things like that.

First quarter typically has got more expenses in it than we would like, but we feel very good about the full year.

And then what was your second question?.

It was about the FTC. So I'll take that..

Sure..

Without going into the full chapter and [indiscernible] the basic thing we've done is added an additional disclosure of the origination fee further up in the application process..

Our final question comes from James Faucette with Morgan Stanley. Please go ahead..

Thank you very much. Just wanted to ask -- most of my questions have been answered but wanted to ask about A) the automotive product I know; Scott you indicated that it's pretty small volumes and will continue to be.

But how should we think about that growth and really trying to get a handle more qualitatively on where you're focused on that procurement and improvements, etcetera? And then, I guess, as a follow-up question to some of those that have also been asked; just a little -- if you could talk a little bit about the stresses that we're seeing in -- at least parts of the debt market during the latter part or the last part of 2018; whether that -- did you see any impact on the enthusiasm of the investors to participate and buy loans? Thank you..

So, just -- it was a pretty valuable time as everyone probably knows, the market was jumping around a little bit, we were in the market with a securitization trade, it was oversubscribed, Chris widened it slightly but we weren't able to get our transaction completed. We didn't see any other significant impact on our overall business.

Keep in mind that we have a very unique product and it's very short duration, it's got nice yield associated with it, and it's not highly correlated to some of the other things that are going on in the trade or other concerns people have in the market.

So, we continue to see strong demand, and as we've said, we've sold over $10 billion in loans last year. So I feel very good. We have been experiencing volatility all year, and so I think we were prepared and have continued to improve our process and analytics to prepare for those types of things.

Scott, you want to talk a little bit about auto?.

Yes. On auto, James, our focus really this past year was on driving throughput and conversion. This, as I believe we mentioned on an earlier call, you know, the typical standards for the industry is this process takes three weeks, right. There is paper work involved depending on the state.

And we've been really focusing on how to create a process that streamlines it, simplifies it, and helps customers get through it because the savings we can generate is really, really meaningful. I think we shared in previous call, it's more than $1,000 a year.

So that's really been our focus, so when we say we've doubled throughput and reduced the time by 80%, those are pretty major accomplishments and they begin to set us up for growth.

The next thing we need to do is obviously validate the credit model, the credit performance, I think we've shared in the past that we're very pleased with the initial results but they are initial and small, so we'll be looking to add investors this year, further validate and optimize as we turn really over a bit of a longer arc to meaningfully growing our business, where it's not going to be contributing meaningfully to our revenue this year or really next year..

This will now conclude the question-and-answer session. I would like to turn the conference back over to Scott Sanborn for any closing remarks..

Well, just thank you to everybody for joining the call today. Any additional questions, please don't hesitate to reach out to Simon and we look forward to coming back and updating everybody on our progress in May..

Thank you. The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect..