Q3 2019 Earnings Call
Good afternoon, and welcome to the lending club third quarter 2019 earnings Conference call.
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Please note this event is being recorded.
I would now let's turn the conference over decided amazed at Smith, Vice President Investor Relations. Please go ahead.
Thank you and good afternoon, welcome to lending club 29 team third quarter earnings Conference call.
Joining me today to talk about our results in recent events, Scott Sanborn C O and Tom Casey CFR.
Our remarks today will include forward looking statements that are based on our current expectations in full cost.
Oh risks and uncertainties.
These statements include but are not limited to our guidance for the fourth quarter and fully at 29 team.
Our actual results may differ materially from those contemplated by these forward looking statements.
Factors that could cause these results to differ materially described in today's press release and our most recent Form 10-K and Form 10-Q filed with the FCC.
Any forward looking statements that we make on this call it based on assumptions as of today, we undertake no obligation to update these statements as result of new information or future advice.
Also during this call we will present in disgust, both GAAP and non-GAAP financial measure a description of non-GAAP measures and reconciliation to GAAP measures are included in todays earnings press release unrelated slide presentation. The press release, an accompanying presentation are available through the Investor Relations section of our website at <unk> Dot lending club Dot com.
And now I'd like to turn over the cool to Scott Scott.
Thank you Simon a welcome everybody.
Kick it off we have delivered another good quarter on the topline.
Set new records for originations and revenues and grown both in line with our expectations.
On the bottom line, we're executing I head of class achieving adjusted net income profit for the first time since I took over as CEO .
At the numbers indicate our continued focus on profitability is paying off and it allows us today to raise adjusted EBITDA and adjusted net income guidance.
So we're pleased with the performance of the business, taking a step back.
We are the number one provider of personal loans in the country and we continue to take market share.
Leveraging our data scale and marketplace model to execute with discipline and to compound or competitive advantages.
Our simplification program and focus on partnerships is transforming the company and delivering operational and financial momentum, while increasing our resilience.
And finally, we're making continued progress on our long term strategy to become a financial health platform launching innovative new capabilities that set us up for the next stage of growth and margin expansion.
Back in February I said 2019 would be about driving responsible revenue growth continuing to innovate well carefully allocating capital managing risk and simplifying our business to drop more of our growth through to the bottom line.
As you can see and the results that we released today, we're continuing to make great progress.
Let's start with responsible growth into three we grew origination volumes, 16% revenues, 11% and adjusted EBITDA by 43%.
This growth allowed us to comfortably achieve adjusted net income profitability and to get within spitting distance of breakeven on a GAAP basis.
On the Investor side of the marketplace. Our securitization program continues to introduce us to new low cost sources scalable capital.
And once introduced these loan investors are increasingly buying directly from lending club the about whole loan purchases and structured program innovations such a certificate.
The fact more than a billion dollars a funding this quarter came directly from investors, who were first introduced to us through our securitization program.
And our innovation on the Investor side continue adding to the launch of the select plus platform that we announced on the Q2 call. We recently launched LTX, our digital loan transaction platform.
This is an industry first that enables investors to bid for loans in real time, and then settled the transactions through an automated process.
Over the long term LCFS has the potential to further improve our balance sheet velocity, while increasing the liquidity and eventually the clearing price of the asset.
With the launch of L.C. acts that brings the total number of investor platforms, we offered to five.
The original notes platform for our retail investors and for institutional platforms.
Okay, and select which we launched in 2017 and now select plus an L.C. acts.
Taken together these platforms give us access to larger pools of capital enable better execution and by providing more routes to the market they increased our resilience.
Combined they're continuing to facilitate our transformation to a midstream asset class.
Okay, Let me turn to the borrower side at our Investor Day back in 2017, we outlined three focus areas to drive growth demand generation throughput.
Lifetime relationship [laughter].
On demand generation, we officially drove an average of 53000 loan applications per day in Q3, that's up 30% year on year.
On throughput our conversion efforts have increased the 24 hour issuance rate to 71%.
That's up 11 points year on year.
Our increasing focus is now on the third growth driver building, a lifetime relationship by creating value through membership in the club.
Club membership is important and so you're going to hear us talk more about it over the coming quarters as Americans wrestle with debt and the spread between credit card rates and personal loans hits, an all time high club membership is how we will empower and motivate each individual on their path to financial health, increasing the savings we generate for them.
While reducing customer acquisition costs and growing revenue per member for lending club.
Our visitor to member and product to platform initiatives describes how we will create the lifetime relationships.
[noise] visited a member is about improving our customer experience to continue to add value beyond the first loan.
And product platform is how we're finding additional ways for members to save by leveraging both our own efforts and those third parties to deliver additional products and services.
So we're starting in a very good place we've got more than 3 million club members and our satisfaction levels are hitting new highs.
So that's a huge installed customer base that is eager to engage with us in September alone almost half a million members logged into our member centre and that's up almost 30% year over year.
What I talked about visitor to member on our call last quarter I told you. We're working on upgrading our member center to make it more useful more engaging.
And this quarter, we began offering select members a beta version of credit monitoring.
So far almost two thirds of members who were offered this service have chosen to opt in.
That is that's an amazing number for beta product and it's far exceeded our expectations.
When we asked customers why why did you choose to elect this option with us they told us because lending club can actually help us make use of this information.
And they're right. Our vision is to use the credit David data to enable members to take back control of their financial health and to monitor progress towards their goals and the surface additional opportunities to save money, whether it's getting a new personal loan, but just one quick or refinancing their auto loan or overtime, introducing trusted partners to.
Deliver more savings through other products and services.
This is how visitor to member and product platform come to life and it's a substantial opportunity.
[laughter] using auto as an example, 61% of lending club members have an auto loan with a combined outstanding balance of $30 billion and we have a product that could save them an average of $3000 each over the lifetime of their alone.
That savings opportunity is part of the reason why we remain excited about the long term auto opportunity.
As we round the three year Mark since launch the business is tracking ahead of personal loans at the same finding its lifecycle at just a fraction of the investment.
We've created a world class user experience in contrast to a process that traditionally takes weeks, we're able to refinance in days and this quarter, we achieved a new milestones we delivered an approval within two hours of application.
In addition to this experience we're also demonstrating the effectiveness of our credit model and are now able to begin accelerating the program.
In 2020, we expect to double our auto origination volume and to have approximately a third of those originations coming from existing lending club members.
Our ongoing analysis clearly shows us that our product platform and visitor to member efforts would be enhanced by having a national bank charter.
And as part of our broader capital allocation planning, we are actively assessing path to achieved that goal.
Our vision is to build on our marketplace model and to support it with a marketplace bank, which we believe will be both strategically and financially accretive for a number of reasons.
First we'll be able to attract more members better engage in serve them and generate more data to inform our actions.
Second.
It will increase our resiliency by providing a source of low cost stable funding, while also providing regulatory clarity through a direct relationship with the primary regulator and third a bank charter will diversify and increase our earnings by recapturing significant revenue, which is currently going to issuing banks, reducing our use of.
Hi cost warehouse line and generating additional and recurring net interest income.
Bottom line by increasing our capital efficiency, we can generate higher revenues higher margin and higher return on equity.
We've told you we expect to exit 2021 with a 25% adjusted EBITDA margin. After 2021, we believe the addition of a bank charter will be instrumental in achieving the next five point improvement in adjusted EBITDA margins.
I'll, let me finish by talking about the credit outlook or the consumer continues to look good strong spending and continued low unemployment.
That said, we often get asked by investors, how we'll lending club manage when the economy slows down.
So overall, we believe investor returns across the portfolio will remain relatively attractive that's just due to the high yields short duration nature of this asset.
And our own analysis as well as research from others like Transunion also indicate that personal loans fall reasonably high end consumers repayment hierarchy, which will help relative performance.
That said vintages issued on the Eva cycle will have weaker performance just underpinning the importance for investors, but having a program of investment and reinvestment to even out their returns over time.
We do believe that there will be investors looking for yield throughout the cycle and that will be able to generate an asset that we will continue to appeal to those investors are they know we will not hesitate to make credit cards and to increase prices when required.
And that's because we believe our market power will actually grow as consumer demand for credit likely increases through the cycle, while the supply of credit becomes constraint.
It's worth adding that over the last few years, we've worked to increase our own readiness to operate in a potentially more challenging environments.
First we've lowered both our unit costs and the percentage of our costs that are fixed as of today just about half of our cost base is variable and can be adjusted quickly if the conditions require it.
Second we have been increasing our liquidity in addition to our strong cash position and 700 million in committed warehouse facilities. We recently added a new investor with a broad risk appetite is committed up to 900 million a funding at agreed upon pricing over the next 12 months.
And third we've been driving profitability prioritizing profit growth over revenue growth, which we will continue to do.
So taken together, while the current consumer signals continue to be solid we recognize the importance of being prepared for a more challenging environment and believes the strengths of our model in the actions. We are taking set us up to respond and take advantage of a variety of economic conditions.
So to close we've delivered very good results in the first nine months at 29 team, we are moving with urgency to simplify our business and expand margins and we're executing with disciplined against initiatives on both sides of our platform delivering our near term goals and building towards our longer term vision.
We're on track to hit our profit targets and again raised our EBITDA and adjusted net income guidance.
In executing our strategy over these last three years, we've taken lending club from recovery to growth and now back to profitability and in the process. We are transforming the DNA of the company, our addressable market opportunity and our cash generation capacity.
So with that Tom over to you.
Thanks, Scott we met our goal of being adjusted income positive in the third quarter. This is an important milestone that demonstrates that our strategy is working.
Well as for the next phase of growth.
Let me start by reviewing Q3 results the move onto the cost of the case, an updated finished with our Q4 full year outlook.
Starting with Threeq you revenues, we had another inline quarter with revenues up 11% the $205 million.
On the borrower side of the platform transaction fees grew 17% to $161 million on the back of 60% growth in originations and a four basis points increase in transaction fee yield reflecting the benefit of the pricing changes we made in the fourth quarter of 2018, partly offset.
By ongoing mix shifts.
Then investor revenue was down 5.7 million to 39.7 million.
With growth investor fees and gain on sale of loans offset by higher net fair value adjustments as we use the balance sheet to balance the platform.
Fair value adjustments improve quarter on quarter in both dollar terms as well as percent of originations.
[noise] investor be fees and gain on sale both relate to our loan servicing business combined revenues grew 21% year over year to $48.6 million, reflecting growth in our loan servicing portfolio and growth in loans sold.
Other revenue was $4 million with the increase primarily reflecting the rental income, we're earning from Subletting, our San Francisco facilities.
And product to platform referral revenue from our partnership with opportunity fund and funding circle small business loans.
Before I get into details of tech in DNA I want to highlight the efficiencies we are driving in our variable costs.
This is an important area as we are seeing our M&A us and I want to sufficiency continue improve which drove up our contribution margin by 370 basis points from last year.
Marketing and sales expense was $74.3 million up 3.5% year over year on origination growth of 16%.
With eminence as a percent origination down 27 basis points year over year to 2.22%.
This is especially notable considering we grew volume and tightened credit.
The 11% improvement in marketing efficiency was in part driven by our efforts in conversion demand generation and from vendor renegotiations within our simplification program.
But we also continue to benefit from an improved mix with our returning member base again growing as a proportion of our total origination volume.
Origination and servicing costs servicing costs were up 2% do $24.8 million.
Own as cost as a percent of originations was down 10 basis points or 12% to 74 basis points.
To give you some perspective, the combined MNS and no one asked as a percent of originations averaged 3.39% in 2017.
At 2.96% in Q3 2019.
MNS, an onerous is 30% more efficient than two years ago and has resulted in a significant reduction in our customer acquisition and servicing costs.
As a result contribution dollars hit new records at $105.8 million with margins of 51.6% up 370 basis points year over year.
So, let's talk about fixed expenses in engineering and Gionee.
Total cash engineering expenditures declined 4% to $32 million with engineering operating expenses up 11% to 25.2 million and engineering Capex expense of 7.2 million down 35%.
As we've indicated over the last few quarters, we are optimizing our technology infrastructure to support key initiatives that will drive differentiation for lending club.
As we use more infrastructure partners and transition to the cloud we are shifting the mix of our engineering spend from Capex to opex, lowering our future depreciation and amortization costs.
DNA expenses were up 7% to $40.5 million.
Again, the revenue from Subletting, our San Francisco property appears and other revenue, while the rental cost of our Lehigh lease isn't DNA.
If you strip out the effects of this mismatch Gina expenses only grew about half of our revenue growth rate.
With the benefit to our hard work on MNS, Oh goodness, Angie the efficiency adjusted EBITDA grew 43% to a record $40 million.
Put another way revenue was up $20.3 million EBITDA was up by $12 million, reflecting a 59% pull through from revenue down to the adjusted EBITDA line.
This resulted in Q3, adjusted EBITDA margins of 19.5% up 4.3 percentage points year over year, which sets us up nicely for 2020.
So now let's move down under GAAP net income.
Stock based compensation was $18.1 million declining 180 basis points as a percent of revenue to 8.8%.
At $14 million depreciation amortization and other net adjustments came in slightly lower than expected in part, reflecting the shift in engineered capex to opex that I just mentioned.
All of our work to grow top line, while driving margin expansion meant we were able to report Threeq you adjusted net income profit of $8 million.
We set this goal two years ago, and we're excited to reach it.
What has been most encouraging is how we've been able to generate gains are both our fixed and variable cost base, which positions us well to generate attractive returns from our future growth.
Moving down the Pinedale nonrecurring costs totaled $8.3 million.
This included $4.1 million of legacy issue expenses.
$3.4 million of simplification costs, which mostly related to severance and almost $1 million in other nonrecurring costs.
Combined these items, we reported a small GAAP consolidated net loss of about $400000.
With that let me give you an update on our simplification program.
We remain encouraged by our progress here.
We fundamentally transformed the nature of our cost base into important ways.
In the third quarter, 19% of our total workforce resided in our BPL partnerships, while 48% of our workforce was located outside San Francisco.
Our BPL partnerships and geolocation initiatives have grown variable costs as a proportion of total costs and transform the unit cost of running the company, thereby increasing both scalability and resiliency.
The savings from these initiatives can be seen in our 2019 results and we will add to adjusted EBITDA margin as the annualized in 2020.
Yes.
Before I move onto guidance I'd like to no two things.
First we ended the quarter with $710 million of loans held for sale, which is composed of primarily high prime loans accumulated for our fourth quarter securitization.
This year, our high Prime loan growth has been running about double our total loan volume growth or about 30%.
Over the last year, we've only included a portion of high prime loans infrastructure programs.
In the fourth quarter were excited to be executing our first high prime securitization.
Our experience over the last two years has proven that using our structured program is a great investment to reach new investors and bring them onto the platform.
And second we will soon adjust the FCC note registration filings to more closely reflect the operations of our retail program.
As a reminder, the finally as we currently make with the FCC include our entire standard program.
And after this adjustment has made.
A little more accurately reflect just the retail portion of this volume.
We are in the process of developing our budgets for 2020, but let me finish by sharing some preliminary thoughts.
First we will continue our evolution of prioritizing profit growth over revenue growth.
Segment profit growth would benefit from the annualization of fixed and variable cost savings from our simplification program.
I will help generate further adjusted EBITDA margin improvement.
Third.
Our usual seasonality will again, meaning that the back part of the year, we'll have stronger revenues and adjusted EBITDA margins than the first quarter.
And fourth lower simplification charges will be partly offset by expenses from our accelerated efforts to tainted bank charter.
We exclude those one off costs from adjusted EBITDA and adjusted net income. So you have a better view of the underlying performance of the business.
Let me finish with our Q4 guidance, which is set out on page five of results presentation deck.
We are assuming a similar growth profile to prior years with slower growth in the fourth quarter with the revenue growth rate of between five and 10% implying between 190 million in $200 million.
This implies 9% to 11% revenue growth the full year and puts us on track to generate revenues in the Titan range of 760 million to $770 million.
We expect Q4 adjusted EBITDA to be in the range of 34 million to $39 million, implying margins between 17.9% and 19.5%.
For the full year. This implies we're bringing up the bottom end of our range of adjusted EBITDA by another $10 million to a range of $130 million to $135 million.
At the midpoint of our Q4 guidance. This puts us on track to hit 17.3% adjusted EBITDA margins in 2019 up from 14% in 2018 and 7.8% in 2017.
We expect Q4 stock based compensation charges of approximately $19 million and depreciation amortization and other net adjustment charges of approximately $15 million.
We now expect stock based compensation charges of approximately $76 million for the full year and.
And depreciation amortization and other net adjustment charges of approximately $59 million.
We therefore expect adjusted net income profit in Q4 between zero and $5 million.
As a result of our higher full year, EBITDA guidance and lower depreciation amortization guidance, we are raising our full year adjusted net income guidance range to sit between a loss of $5 million and right around breakeven.
For GAAP net income in addition to so legacy issues and simplification costs will be incurring some one off expenses related to our bank charter initiative in the fourth quarter, which we intend to exclude from adjusted EBITDA and adjusted net income numbers as I mentioned earlier.
For the fourth quarter, we expect the total adjustments to be lower as most of the cost of our simplification program have already been recognized.
As you heard in our remarks, we're on track to have a good year, our innovation simplification program and partnerships are transforming lending club growing your market opportunity enhancing our business model and building, our resilience all of which positions us well over the short and long term.
Scott back to you.
Thank you Tom.
Ill keep it short we we are pleased to see that our efforts are working the business is on track to hit our financial goals in 2019, and we feel good about the progress we're making against our longer term strategy. So with that I'll turn it over to take your questions.
We will now begin the question and answer session, we'd like to ask a question that you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to.
Our first question comes from Brad Berning with Craig Hallum.
Please go ahead.
Good afternoon, guys and congrats on the progress wanted to follow up on the lifetime.
Membership kind of approach here and talking specifically about auto.
And it was just wondering if you could talk a little bit more about timing.
How you think about balance sheet or whether you have enough.
Credit history here from a buyer's perspective, just help us understand the financial implications of talking about doubling the volumes on that and then a follow up question is on L. CX just talk about real time.
How does that help attract a new buyer groups versus does that help reduce like the net fair value adjustments is that the real benefit in the financial statements for lending club.
Okay, All star Tom feel free to to jump in so.
On on auto.
I guess.
Stepping back I think could you remind everybody of the had the value proposition on auto is where essentially very similar to personal loans, you've got alone. It's not a very good one and we can make you a better offer these savings potential in autos actually higher these there is or larger loans and for the used vehicles theres some structural.
Yes pricing out there that we can address.
We've been working on the experience in order for this to work in Reston move what is really a pretty paper based offline process online.
Quite a bit and work so thats.
Focus one that we've been doing and Thats why when we say we've gotten a multi week process down to a couple of days, we believe that thats, reducing the friction reducing friction means the marketing can begin to be more efficient. So that I was kind of one big thing. The second big thing is proving out the credit model there is less yields cushion here.
In the auto and there are and personal loan so.
And the new asset class for us so proving out.
Proving out that the model is working take some time and the higher you go and the credit spectrum, we know that kind of center that yield cushion as so we we have Ben as we've been working on the experience we've been using our balance sheets.
To facilitate the program.
So now.
Essentially adding a sizable investor allows us to allows us to essentially.
Makes more limited use on the balance sheet and begin to scale the program and leaning into the experience changes, we've gotten and be able to start cross selling to our existing members as well as using as a way to bring new people onto the platform.
Setting everyone's expectations.
As I mentioned in the prepared remarks credit businesses take time to build so we're excited that we're kind of ahead from a volume perspective of appeal and we're doing it for a lower investment but.
Doubling originations as positive that's us really beginning to ramp.
But in terms of.
Meaning for the overall piano would probably still have a couple of years before it starts to really show through in the financial results, but we're excited we do view this as.
As a as this is an important milestone to start ramping.
I agree Scott Scott I mean, we've been using the balance sheet to test as we've indicated the past we use the balance sheet.
For testing.
I'm very excited and now we're actually selling loans on the back of our experience, which is really really is a great milestones. So let me touch on LCD X. I could.
We're very excited about what Lcs can bring bring to the to the table. We do believe will bring additional investors onto the platform keep in mind, what what LTX is trying to do is actually build to a much broader market you guys have heard us talk about building an asset class. This allows investors to come onto the platform.
Then choose individual loans.
At par above or below par and allows us to deliver those in a seamless way to settle.
Very efficient approach using technology to do that.
We do think that there is a big opportunity here as we build this out when we expect more investors come onto the platform in the next few quarters as we continue to build out that capability and put more and more of our of our originated loans on there too to this new new puff.
Same thing in terms of expectation setting here. This is essentially building a new market for it to work.
If we got to have enough investor demand there to be enabling us to put the supply there. So building it out adding those investors and understanding what works will be something we ease into but we do think over the medium term, it's a pretty important capability and will help with.
When any of the asset class and increase the appeal of the asset overtime.
Good stuff for appreciate it thanks guys.
The next question is from Jed Kelly with Oppenheimer. Please go ahead.
Great. Thanks for taking my question.
Looks like you had nice growth on originations and accelerated can you just talk about what you're doing or some of the pursue you're putting in place in terms of of conversion.
And.
Soreness round, the sales and marketing leverage you're driving and then just on the Fourq guidance. It does look like you took down the revenue a little lower than what we're modeling so anything we should be or whatever there.
Yep.
I will start Trinity you again talk so.
Yeah, what you're seeing right I guess of.
Fraud statements.
If you think about the market right now.
Picked up in the prepared remarks, but the spread between credit cards and personal loans is at a record high that's according to data. So the appeal for this asset class.
And you know the the interest by consumers continues to be to be quite strong. We together with others are being increasingly picky about the loans that were booking.
And.
What we are focused on right now is that you know the.
If you take that data point I get 53000 applications that is just a lot of data that we are able to make use of and theres a number of things we're doing everything from.
Marketing message testing to actual experience testing really drilling down into what channels are people coming from what is the use case for these loans how are they interacting with us to develop custom experiences to drive conversion.
And manage risk so you see that in some of the the numbers we put out there. The 24 hour approval is just.
So increasingly automating processes and using new data sources to eliminate manual steps and very specifically eliminate friction on on the part of the consumer so there's.
There's a lot.
Going on there.
And then when it comes to Q4 I would say look overall, we feel quite good demand is strong on both sides of the platform and Q4 is a continuation of what we've been doing all year, which is prioritizing profit growth over over revenue growth and.
And that and that what that really comes out to finding the right balance between investor demand and borrower demand.
If you got anything to add so that's good.
Okay.
Then on anything on the Fourq guidance.
Well just discussed said on the on the Fourq you guidance I think that though we're continuing to focus on.
On a profitable growth we think.
Full year, we've been lower on revenue. Our guide is in line with that and as we're that top end of the guide on the even though so I think thats consistent with where we've been all year.
I went over to think it typically the fourth quarter is seasonally lower.
Volumes anyway, we are seeing some transaction.
Be.
Declines year over year as you remember we made some changes last year, but with the growth in high crime do those given as slowly so there's lower transaction fees. So that's also part of it. So when you think of mix.
Hi, Hi crime as comes at a slower at a slightly lower transaction for unit. That's also some of it but.
Thats kind of what's driving it very consistent throughout the year, yes key data point.
Well the total book this quarter as an example group.
Loan origination, 16% AMBI volume grew 30% year on year, So that's a pretty material mix shift Thats continued.
Thank you.
The next question is from Henry Coffee with Wedbush. Please go ahead.
Good afternoon, and thanks for taking my call.
Before I get into the details the great quarter.
It's pits 10 years of work on your part so congratulations.
In terms of.
Most of what my questions are always focused on the funding side of the business because I know, you'll take care of the marketing and the and the operating side.
Bakken in September there was some news about you changing your retail buying and nine different states.
Seems to have had a very small impact on the overall funding equation, but I've been getting a lot of questions about it as of late.
Okay.
I'll take that one.
So I guess.
Big picture I think.
No as well as anyone we if we operate in a fairly complex regulatory environment activities on both sides of our platform. We have multiple activities on both the bar in the investor side.
At our regulated both at the state level as well as in a variety of places in the and the federal level.
We.
As part of our overall preparation for the bank charter, we did an updated view of our licensing requirements. We identified some that we have that we don't need and some that we believe we need that we don't have.
And that's what you're saying it was five states not not night.
And you're correct overall impact of funding really not material.
Disappointing customer experience for the investors in those five states. So our look working very quickly to get that resolved.
And and the idea of being that when you get you, but the licenses that you're comfortable with you'll go back to the process of.
Of letting them by loans.
Absolutely.
And what was it just is it is it the difference between state and federal regulations on the security side of the business.
Yes, that's exactly right yeah, we're all somewhat.
That.
And then you know I also know and I know Tom I think you addressed most of this.
But the the build up in inventory.
In the in the third quarter is all prep for your securitization in the fourth is that the thought process. There, yes. So what we're trying to do is.
Changed the cadence on our Securitizations, we typically we're doing them in the third month of each quarter, because they require a level of seasoning.
With us bringing.
Our securitization target to be in November .
There are more loans held at the end of the quarter, so as long as declining from quarter to preceding quarter. So that's what you see the 930 increase in the balance sheet in anticipation of the securitization in November .
How are we going to see more this sort of cadences as you get a more sophisticated balance sheet and I'm just going to get off all listening.
Your answer we have done about we continue to do around 10% to 15% of our volume in securitization as we mentioned this is something that we've been doing for a couple of years now.
It is important for us to continue to reach out to new investors. So we do see those investments reach new investors that.
Or learning about the product.
We've demonstrated that over the last couple of years in our higher risk primary and so we're encouraged with our current.
Focus on high price.
But we think it's important to have that as it another good 10% to 15% type of range of total volumes.
Thank you.
Your next question is from Eric Wasserstrom would you be yes. Please go ahead.
Thanks very much.
Got maybe you've been I think now very explicit about the benefits of a bank charter in your intent to to pursue one. So can you maybe give us. The next couple of milestones I guess really two questions related to that the first is are there other elements of preparing yourself internally that.
You're pursuing prior to the actual.
Filing of an application and then related question is what as you move through this process or the next couple of milestones that we should pay attention to.
Yes, Hey, Eric.
So and important thing to think about and certainly is part of the equation. We had in our evaluation is that a lot of the internal preparation and RK.
Our already in place.
If you think about that.
The nature of who's buying loans from us and the kinds of activities right banks or who's providing capital to our other alone investor as banks.
And the activities that were engaged in.
Banking, we've got a lot of the infrastructure in place already.
Three lines offense, right right policies and procedures.
So.
There is up a little more to do for us, but it's it's kind of on the margin so weve.
We have brought on some advisers.
To help us to do that gap assessment and get to get the remaining pieces in place, but it's not thought overall substantial.
The other piece for us is going to be developing the overall business plan.
Because that's that's an important piece of the picture is what will be the structure of the bank how will it be capitalized.
So that will if that's what we'll be working on next.
Great. Thanks very much.
Your next question is from Heath, Terry with Goldman Sachs. Please go ahead.
[noise] necessary. Your line is open on oriented possibly muted on yours.
Great. Thank you just wanted to get a bit of an update on the customer acquisition side of things, particularly as a.
As you look at the.
The relationship between loan growth and sales and marketing this is Ed.
Sort of another quarter, where you've been able to get at a degree of leverage.
Least against net revenue and origination how much further didnt do you think you can you can push that and then there is there a point that you're going to want to get to where you where you begin to to reinvest in accelerating accelerated growth on that side of things and then to the extent that we use.
Talk a good bit in the past about that.
About the relationship between transaction fees as a percentage of revenue and the the mix shifts. There. This is another quarter, where that percentage as Bob I know you.
Suggested that in the past that that's more or less going to be.
Flat, but is it a and b b growth keeps coming down I'm just wondering if that's something that we should continue to model.
Great. So I'll start on the acquisition costs.
So very pleased with the progress we made today. This is Tom kind of covered we're seeing in both places which is the the marketing costs as well as an oral and ask so all of those costs were gaining efficiency.
And it's really a combination of thing fits our testing our channel development our conversion efforts.
The use of our of our data for targeting and new targeting models.
Really leveraging the data as well as the scale also in our vendor contracts.
It is building out our returning member experience to drive.
To drive.
Better conversion and cost there. So so we've done a lot.
In terms of where we're going I'd say, we feel good about the level, where apps and in terms of watching that it would be as we.
Build out.
Our.
Lifetime value over time in a really start to fill and what is right now kind of the vision, we're moving towards that as we start to add these other proof points and were able to drive.
Lifetime value up for the customers then I think we'll be in a position to evaluate what the right level is for that spend based on the value. We're getting back Tom you want to take to feel the only thing to add there. This is the classic example of how our scale is differentiating us.
The fact that we can take our.
Change in mix, where we are right now in the cycle take the transaction fees and a little bit or more than offset by the efficiencies were gathered gathering in the things just Scott just talked about moving to low cost locations getting full annualized benefit of that next year.
All in all the targeting we're doing so.
Continue to see that importance of our scale now.
With the DNA not growing.
As fast as it was in the past.
And improving our.
Our our contribution margins are a really really important that's why we took up the contribution margin to that 50% to 55% and that's offsetting.
In fact, we actually grew contribution margin. Despite the transaction fee. So I was putting a little bit pressure on the revenue and we're seeing nice nice.
Improving in the contribution margin line.
Great. Thank you Bob.
The next question is from Rob why would have with autonomous research. Please go ahead.
Hi, guys wanted to ask for an update on the competitive landscape I think somebody other bigger players that maybe de emphasized growth and Scott you highlighted some market share gains. So just wondering the extent to which those would be related and wanted to hear your updated thoughts on what's out there in the market. Thank you.
Yeah.
I guess that distinguish.
Two things, which I think are important one is.
Marketing activity, which remains an extremely high level despite.
I think the individual commentary if some players. So if you just look at the the kind of available third party data things like overall mail volume and those kind of pieces, you're going to see that with some shifting between player in the overall category competitive intensity remains remains quite high.
However, you know we've we've been talking.
In the past about.
Some pressure on credit driven by what we saw a supply side pressure. So I think across the board you're seeing a number of people lending club included kind of prudently pulling in and tightening a little bit on the on the credit their offerings. So I'd say the dynamic is lots of people marketing.
Approving less people and there is some you you are seeing the benefits of scale here the at least what we can see in the data smaller players are.
Having a more difficult time in this environment because if you don't have the data to differentiate your offerings and optimize your offerings, it's harder to get the pull through of like your senior lending club.
Okay. Thank you.
The next question is from James Faucette with Morgan Stanley . Please go ahead.
Yes, good evening, Steven Walt on for James Maybe just one quick one.
For Q guidance and I'll get some of the initiatives you're doing.
I guess would have thought that.
Issues like the select plus where you're sort of be able to open the credit box.
Final loans for what you're already have coming to the pipeline would add to that I think you guys referred to as profitable growth is it just too early to see that coming through in fourth quarter should we expect that maybe over the next year could you maybe just update us on what you're thinking there in terms of the growth boost from those initiatives.
Yeah. Thanks, James set so you you got it exactly right. So reminder, for everybody what select plus is essentially an opportunity for us to host alternative models to our own.
And turned what is currently a no into a yes for people who either have a specific population. They specialize in order to just a different view on the data.
It is a profit play not a volume play, meaning we you know and although it's different market conditions I think the size of this could vary based on what's happening in general it's it's more of a profit play than a volume play.
And we are excited about it but it is early at this point, we have our first investor life. We were we worked out with any new program, we worked out some integration issues, but thats now.
Up to the scale that we had looked for when we got the thing alive and well be adding our second investor as we exit the year Inc. keep in mind similar to the conversation we had on auto right. These are people who are introducing new models into a dataset. So they are going to start out the same way we started.
Got it auto which is well that's book a few loans see how they do that'll give us the comfort to ramp up our exposure. So even the investors that we will be pulling and they're not they're not wide open. If you know I mean, we're not exposing them to the full suite of our decline population, where essentially testing our way.
And then they are testing their weigh in on this so we do think it will be valuable over time, a we're on track with getting one live in the second one coming but it'll be something that builds throughout the course of over the next 18 months.
Got it that's helpful. And then just maybe one quick follow up on on the.
You had mentioned stripping out some of the costs and you walk through some of those interest what you've taken on to.
Thanks for the marketplace Bank model could you just parse out I assume you'll probably strip out the one time costs related to exploring it but just in terms of anything you bring on more prominently that would be included in the run rate for adjusted EBITDA Raymond.
I would get adjusted out yeah, absolutely in my comments I was referring to the consulting and advisory costs. As Scott mentioned. These are just onetime costs keep in mind, we already have a lot of our infrastructure costs already in our numbers.
Fastest growing areas in our in our DNA line, our credit and compliance so.
We already have a lot of those and are on our run rate and don't expect significant increases are those.
In the fourth quarter.
Great. Thank you.
The next question is from Giuliano Valonia would BTI G. Please go ahead.
Thank you and congratulations on a great quarter.
Thank you.
I guess kind of jumping back to the auto topic UBS I heard your comments about how does this large opportunity, especially with with even within your current base, but I'd be curious if you have any plans of thinking about kind of a secured.
On offering and if they're on if there are opportunities to go further downstream in the credit spectrum with that or to offer more debt consolidation opportunities to existing clients, who might be applying for personal loan now.
Because if you look at the date on your side. It looks like you can extend larger loans to lower credit cohorts with memory of yours. So just curious about the opportunities you might have there.
HM.
I would say your.
Assessment of the opportunity is accurate and that was part of the driver for us of this as the next adjacent category. We looked at you know the where do our customers whole balances where can we provide value and where is there a real strategic synergy you don't need to look too far outside of lending club to see that some of the other large.
Your unsecured players had a very significant portion of their business and secured personal loans secured through through the auto title. So the capabilities that we're building our directly applicable there.
Again, getting the friction out of the system. So that you know that you can take a branch based paperwork intensive experience online is one of the key requirements, but we do.
We do see that as it real growth factor, which is essentially taking our current personal loan applications. Turning some knows into yes is turning some higher rates into potentially lower rates and turning some capped extensions into larger loans, we think all of that.
It is on our medium term roadmap.
That sounds good.
I'm thinking about what you're describing on the membership side and offering some credit monitoring solutions.
Obviously, the rental monetization and being able to monetize the same clients over and over it would be extremely helpful sort of platform and margins over time.
You have a couple alone products right now would you think about partnering for other loan products that might be useful to those clients and other revenue opportunities there before yes, assuming your partner versus building maneuver.
Yeah, that's exactly what this when we talk about product platform that that's exactly what we mean with that strategy, which is so you think about four eight a decent percentage of our customers today, we have the ability to.
See their their transactions and their cash flow.
We're now going to have the ability to see their core again, but both of these with the customers permission your ability to monitor their credit so our ability to provide an engaging experience for consumers and identify opportunities to add value. We can see what's happening in your financial life.
Paul is really powerful and so there'll be some things, we build and offer ourselves. So for a personal loan we've talked about the fact is not a one and done product people do come back they come in and out of the need and that's kind of getting us to this play so can we get to a one quick loan for returning numbers and we're making that yeah, we've been investing in.
In the data infrastructure and the user models and all those pieces to move down that path. Then you have auto and that absolutely. We're you know there are categories of credit that we don't offer that for the right partner who would.
Who would.
Integrate with us in a essentially be able to accept the credentials that we pass that's part of the value of membership pride that we're able to say hey, we see you have a mortgage rates have come down.
You know here you go can you be pre approved for an offer to save integrated into your lending club experience. So that is again setting everybody's expectations as would be something we build to overtime, but thats, absolutely where we're going.
Got it makes a lot essential thank you for answering my questions.
And that will help obviously with lifetime value of the members, which will feed our acquisition engine.
And drive profit.
Excellent okay, great. Thank you so much.
This concludes our question and answer session I would like to turn the conference back over to Scott Sanborn for any closing remarks.
[noise] alright, that's it thanks, everybody for for joining US today, obviously anyone with additional questions. Please reach out to Simon and we look forward to connecting a with everybody in February .
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Mm.