LC Q4 2018 Earnings Call

Operator: 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.

Simon Mays-Smith: 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.

Scott Sanborn: Thank you, Simon. Hello, everyone. I'm pleased to say that we delivered a very strong 2018. Achieving for the year, new record highs in originations, revenue and adjusted EBITDA. We are demonstrating the resilience and adaptability of our business, successfully navigating a dynamic and competitive market in which we continue to deliver savings to borrowers, now burdened by the highest credit card interest rates in a decade, while simultaneously delivering attractive risk-adjusted returns to investors struggling to find yield. We've come a long way in the last few years; having stabilized the business in 2017, we demonstrated strong momentum in 2018 despite rising interest rates, capital market volatility, competitive intensity, tightening credit and substantial shifts in investor demand towards higher quality credit. We are gaining share and enhancing our competitive advantage through data driven innovation at scale, marketing excellence and our cost of capital advantage. We are integrating more closely with our customers and developing more tools and partners to improve our borrowers financial health. In 2019, we will drive responsible revenue growth with a significant management focus on delivering more revenue to the bottom-line. We're taking further steps to simplify our business and are targeting adjusted net income profitability over the second half of this year. Our strong results last year reflect solid execution of the plan we laid out for you back at our Investor Day in December 2017. The capital allocation decisions we've made to support those plans and the market context in which we operate. I'm going to spend a minute on each of these topics. Our plan at Investor Day had four pillars; first, continue to grow our personal loan business while prudently managing credit. Second, sustain our investment in auto and eventually leverage secured capabilities for personal loans. Third, strengthen our investor franchise by expanding securitization and growing new structures. And finally, address legacy issues. We've made tremendous progress in all four of these areas. In personal loans, we grew applications in 2018 by 35% to a total of more than 14 million. Loan volumes and revenue, both grew by 21% and we enhanced our market leadership while simultaneously improving our marketing efficiency. We achieved these results despite proactively tightening credit in our standard program by 17%, and raising interest rates across our credit spectrum by between 49 and 114 basis points. We are succeeding because we can offer lower rates to higher quality borrowers than many of our competitors. The compelling value we offer to borrowers is routed in our marketplace model's ability to connect to low-cost capital providers the unique products and processes we have developed to enable the seamless extension of credit, our proprietary risk models built on more than 10 years of data and our ability to test and learn at scale. In auto, improvements in the customer experience reduced application processing time by 80% and doubled our application to issuance rate, helping to increase throughput in more than double originations in 2018. While origination volume has not been our core focus in auto and remains small in the overall scheme of Lending Club, some contacts might be helpful. Auto originations since launched are three times higher than personal loans at the same point in their life cycle. So, we remain encouraged of auto as a long-term driver of our growth. Having developed the user experience and credit model in 2018, we will be focusing on building out our investor base in auto in 2019. Turning to our investor franchise where product innovation has driven a significant transformation over the last 18 months and enabled us to access ever-larger pools of capital. It's worth noting that investors provided funding for more than $10 billion in loans last year -- a figure which represents almost a quarter of the total loans facilitated in our entire decade-plus' history. Investors continue to be attracted to our high-yield short-duration asset which in 2018 out-perform 99% of fixed income assets, providing further compelling evidence of their diversification benefits. In 2019, we'll be focused on more deeply integrating with our largest investors, becoming more a part of the investment process and actively managing the delivery of targeted returns for their portfolio. Finally, the last pillar of our investor day plan was resolving legacy issues where we made significant progress last year. We settled the class action lawsuits in February and resolved both the DOJ and the SEC in October. As concerns the FTC, the government shut down has hampered progress. While we maintain that the facts do not support the allegations in their complaints, we absolutely shared a goal of wanting to help consumers. For that end, we will be proactively implementing changes to our application process to further cement our position as an industry-leader of consumer-friendly practices. Tom will show you how we measured up financially in 2018. As I'm sure you have already seen, we achieved or exceeded all of our goals. So now let's talk about how our capital allocation initiatives helped us deliver on our promises in 2018 and how they set us up for 2019 and beyond. Our decisions to invest either organically or through acquisitions and to fund those decisions through cash flow, process efficiencies or divestments are taken within a clear capital allocation framework that seeks to maximize our market opportunity while sustaining strong liquidity and managing operational and regulatory risk. Our goal remains to enhance our position in areas where we have clear competitive advantage and to exit or partner where we don't. In addition to our investment in auto, our organic investments in our platform products and process are reinforcing the strength of our personal loan marketplace -- first, by growing borrower demand and funnel efficiency; and second, by expanding our addressable investor asset goals. Our demand generation has been phenomenal. We've been able to grow applications while sustaining our marketing efficiency in a competitive market despite raising interest rates and tightening credit. We've been able to do this by leveraging our scale to optimize through testing, that's more than 100 tests in Q4 alone and through refinements to our targeting models and messaging. In throughput, our investments in product, process and partnerships are improving the customer experience and converting more applicants to borrowers. Expanded product features such as join app and balance transfer and improved data collection from bank and tact data are helping us to reduce funnel friction and improve our credit assessment. This is augmented by improved omni-channel customer support across online messaging and mobile. In combination, our demand generation and throughput initiative improve both the customer experience and our marketing efficiency. As evidence to the progress we're making here, in 2018, 58% of our personal loan customers went from application to approval within 24 hours. This is up from 41% in 2017. Given these improvements, it's perhaps not surprising that last year we hit an all-time high net promoter score of 78. While we've made tremendous process on funnel conversion, much opportunity remains. In 2018, we generated 14 million personal loan applications that we helped only 728,000 of those applicants with a loan. We want to make sure that we help more customers on their path to financial health and build a lifetime relationship with Lending Club members. We are continuing to explore ways to say yes to more in a way that is prudent and responsible both through our own efforts and those of partners, and to find ways to further reduce friction in the process. We are personalizing the experience for the growing number of returning customers and you'll see more ways for us to increase the value of being a member of the club in 2019. On the investor side of the platform, we made tremendous progress. The presence of some of the largest asset managers in the world on our platform, something that wasn't true even a year ago is a testament to the appeal of the asset and the breadth and quality of Capital that we are now attracting. At that same time as making our platform more accessible to new sources of capital, we are integrating with our largest customers more deeply. In sum, our investments contributed to our strong revenue and EBITDA performance in 2018 and will continue to benefit us in 2019 and beyond. So let's move on to the next part of our capital allocation process, which is our operational footprint and expense management. You have seen some of the progress we made in 2018 with the winding down of Lending Club asset management and we're continuing to explore opportunities to simplify our portfolio. As Tom will talk about more, our business process outsourcing partnerships enable us to lower our unit cost, ship more of our cost to a variable basis and focus our engineering and operations talent on areas of competitive advantage. Partnerships are also an important part of our membership strategy, adding high quality partners that align with our mission has the potential to meaningfully contribute to our customers' financial health by providing them with additional ways to save while simultaneously providing opportunities to grow our business. As you know, we've also been reshaping our physical footprint, adding capacity in Utah and reducing our square footage in San Francisco. This move provides for enhanced business continuity while lowering unit costs across the company. We'll continue to assess our operations in any organic investments, divestments, partnerships or acquisitions that closely align with our strategic and financial goals. And as Tom will talk about in a bit more detail, we are laser-focused on simplifying our business to drive productivity and fuel our growth. Our capital allocation decisions enabled us to maintain our leadership position, healthily grow revenues and more than double our EBITDA. They well have delivered adjusted net income profitability over the second half of 2019 and beyond that, we believe the intrinsic scale and operating leverage in our marketplace will generate cash flows to sustain our growth investment and over time generate excess capital to return to shareholders. Let's have a look at the market context in 2018 which will set us up to discuss the year ahead. For 2018, wage growth and low unemployment made conditions generally benign for the consumer. Although rising debt levels have made consumers more sensitive to higher rates and less able to find savings from refinancing fixed rate mortgages and student loans. Capital markets have tempered expectations for future rate increases. As a whole, charge-off rates and delinquencies remain stable and we have taken credit in pricing actions to resolve normalization and supply side driven pockets of weakness. Competitive intensity remains high but stable. Our competitive advantages in scale, data, marketing, cost of capital and credit continue to give us an edge. We were particularly pleased that our marketplace did not miss a beat in 2018 despite dynamic movements in our market and that gives us confidence as we enter 2019. So far in '19, market conditions are similar at the last quarter. We demonstrated resilience last year and we will be enhancing that resilience given the uncertain macroeconomic outlook for 2019. With borrowers who are investing in our servicing capabilities to better support customers and lower the unit cost of providing that support, but our second sight in Utah and our BPO partnerships. In credit, we continue to add data to our model to refine our assessment and selectively tighten credit to meet investment return requirements. We're pricing confidently using our data and cost of capital advantage to avoid adverse selection. And our investments in products, features and partnerships are enabling us to improve funnel conversion and lifetime value. We've developed broad distribution capabilities that give us alternative roots to market, improve the velocity of our balance sheet, give us better price discovery and ultimately lower the risk premium for our products. We are using these channels to manage our overall risk exposure and have new investor products coming to market in 2019 to further expand our capacity. And finally, our simplification program will help us manage our profitability and sustain our investments in an uncertain environment. We will continue to allocate our capital carefully, whatever the economic weather. So to finish, in 2019, we remain committed to helping improve the financial health of borrowers and deliver attractive risk adjusted return to lenders. Our work will be focused in three areas: 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.

Tom Casey: Thanks, Scott. I'm going to start by reviewing how we performed against the 2018 financial goals we set out at our investor day in December of 2017. I'll then review our Q4 and full year performance report talking more detail about our simplification efforts and how that will help us achieve our 2019 financial goals of sustainable revenue growth and adjusted net income profitability over the second half of the year. In our December 2017 Investor Day, we set our several financial goals for 2018 and are happy to report we exceeded all of them. At $695 million, our revenues were above the midpoint of our expected range at 48.8%; our contribution margins was towards the top end of our expected range; our tech and G&A expenses as the percent of revenues came in about 80 basis points better than our target. For the year, our adjusted EBITDA margins came in at 40%, exceeding the high end of our expected range for the year and we deliver our goal of achieving 50% margins in the third quarter and the fourth quarter. And finally, our full year adjusted EBITDA was 97.8%, exceeded the high end of our expected range. So in short, we feel good about our strong Q4 and the full year 2018 results. Before we start on the details for 2018, unless expressed by otherwise, all growth rates will be year-over-year. So let's start with revenue. On the borrower's side of the platform, transaction fees grew 18% in Q4 to $142 million on the back of 18% growth and originations to $2.9 billion. For the year, transaction fees grew 70% to $527 million and originations grew 21% to $10.9 billion. But the strong reported growth really only tell half the story. What I found particularly encouraging was the flexibility and adaptability shown by our marketplace, in response to changing investor demand and our ability to match borrowers to that demand. You can see that in the shifting mix of our loan volume with higher grade A and B loans in the standard program growing from 45% in 2017 to 56% in 2018. This is an enormous shift and our platform handled it without missing a beat with only 50 basis point year-over-year decline in our transaction field. On the other side of the marketplace, net revenue excluding transaction fees represents the revenue we earn on the investor side of our business. These revenues were up 10% to $39 million in Q4 and 33% to $168 million for a full year. There are two things I'd emphasize here: first, the growth of the investor's side of the platform is increasingly being driven by our recurring investor fees which accounted for 16.5% of net revenues in 2018, up from 15.2% in 2017. The second point I'd emphasize is how innovative new products such as club certificates have allowed us to reach an entirely new investor base in the large fixed income money market segment. Our industry-leading club certificates program reached $1.1 billion by year-end with $478 million of that in the fourth quarter. That's up from $300 million in the third quarter. We're still only just scratching the surface on demand for this product and see it as yet another way Lending Club is innovating in the marketplace. With that, let's get into more detail on the investor side of the marketplace. Investor fees were up 25% to $30 million in the fourth quarter, and up 32% to $150 million for the full year. This strong performance in part reflects the 50% annual growth in our loan servicing portfolio to $13.7 billion as well as a 16% increase in the average servicing rate. Gain on sale revenue was $11 million in Q4 and $46 million for the full year, up 2% in Q4, benefited from the higher sold volumes and average servicing rates I just mentioned and up 97% for the full year mostly driven by the structure programs that were launched in June of 2017 and active throughout the full year of 2018. Net interest income at fair value adjustments were $3 million loss in Q4 and a $1 million gain for the full year with a positive net interest income offset by fair value adjustments. It's important to know that much of the value of our structured program comes to the gain on sale line while many of the cost are reflected in the net interest income at fair value adjustment line. This line item does move from quarter-to-quarter reflecting timing of purchases and sales between reporting periods. Other revenue was $1 million for Q4 and $6 million for the full year. Overall, total revenue was $182 million in Q4 and $695 million for the full year of 16% and 21% respectively. So let's move to cost and how our efforts drove our adjusted EBITDA margins, up 6.3 points year-over-year. Marketing and sales expenses were $67 million in Q4 and $261 million for the full year. For the year MNS has a percent of originations was down 7 basis points to 240 basis points, reflecting our conversion efforts and new products we introduced this year. The 17 basis point quarter-on-quarter improvement to 2.32% reflected these efforts as well as the timing of certain marketing campaigns and channel casting in Q3. Originations service and cost were $24 million in Q4 and $94 million for the full year. ONS cost as the percent of originations were down four basis points for the full year, benefiting from the BPO efforts we started earlier in the year which I'll talk about in a minute. The improvements of both MNS and ONS efficiency boosted our contribution margin to 50.1% in Q4 and 48.8% for the full year, up 198 basis points and 176 basis points respectively. One of the key financial themes at our 2017 investor day was our focus on growing tech and G&A spend lower than revenue. So let's talk about our excellent progress here. Engineering operating expenses were $23 million in Q4 and $90 million for the full year, down as a percentage of revenue by 113 basis points and 160 basis points respectively. Turning to G&A, expenses were $40 million in Q4 and $152 million for the full year representing 21.9% of revenue in both periods and a 40 basis point and 291 basis point improvement for the quarter and the full year. Overall, you can start to see the positive impact of our expense management it is having on our adjusted EBITDA margins and the benefits of our scale. When you combine our full year tech and G&A expenses, they grew only 7% on net revenue growth of 21%. This is what we described at last year's investor day. This wedge between revenue and expense growth, rates drove 4.5 points of the total 6.2 points in our adjusted EBITDA margin in 2018, with the other 1.7 points coming from higher contribution margin from our improved marketing efficiency. And we think there is more margin expansion opportunity ahead. I'll talk about some of these new initiatives in a moment. In the fourth quarter, we further benefited from higher contribution margin and lower overhead expense growth resulting adjusted EBITDA of $28 million in Q4, a 49% year-over-year and adjusted EBITDA margin of 15.7%, up 3.2 points. For the full year, adjusted EBITDA was $98 million, up 119% and adjusted EBITDA margins were up 6.2 points for 2017. So let's now move down to the GAAP net income. The adjustment for stock-based compensation was $18 million in Q4 and $75 million for the full year, up 9% and 6% respectively. Depreciation, amortization and other net adjustments total $50 million in Q4 and $55 million for the full year. Our adjusted net loss which we are now defining to only exclude non-recurring and unusual items therefore equaled $4 million loss in Q4 and a $32 million loss for the full year. There is a reconciliation of this through the GAAP consolidated net loss on Slide 20 of the presentation. Moving down the PNL, non-recurring cost total $96 million including $54 million of legacy issue expense, a $35.6 million goodwill impairment in Q2 and $7 million of restructuring charges in Q4 reflecting early progress on a simplification program. Combining all these items, our reported gap consolidated loss was $30 million in Q4 and $128 million loss for the full year. Before I turn to our simplification programs one final word on our balance sheet. For the quarter, cash and cash equivalents was $543 million, up from $513 in the third quarter. Also, I want to point out that on the year-end balance sheet, you will see our loans held per sale at $840 million, reflecting the consolidation of our $300 million Q4 securitization until we sell the related residual interest. Most of the remaining $500 million year-end loans are being sold to investors in the opening weeks of 2019 to structure programs such as the block trades or club certificate. For that, let's move on to our simplification program. Scott has already talked about how our capital allocation decisions are helping to drive revenue growth. I'll talk about how they are also driving profitable growth. I'll update you on the initiatives that contributed to our strong performance in 2018 and give details in some new initiatives that we expect to contribute to 2019 and 2020 GAAP net income growth. These simplification initiatives fall into four categories: first, business process outsourcing; second, geolocation; third, leveraging our scale; and fourth, all other initiatives. We'll use the same capital principles that Scott set out a moment ago to guide our work. With the aim of enhancing our position in areas we have clear competitive advantage and to exiting our partnering where we don't. Our simplification program has five goals: 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.

Scott Sanborn: 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.

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

Brad Berning: 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?

Scott Sanborn: 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.

Brad Berning: 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.

Scott Sanborn: 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.

Brad Berning: 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?

Tom Casey: 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.

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

Operator: Our next question comes from Eric Wasserstrom with UBS.

Eric Wasserstrom: 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?

Scott Sanborn: 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.

Eric Wasserstrom: 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?

Tom Casey: 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.

Eric Wasserstrom: 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?

Tom Casey: 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.

Eric Wasserstrom: 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.

Tom Casey: 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.

Eric Wasserstrom: 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.

Scott Sanborn: 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.

Eric Wasserstrom: Okay, Thanks very much.

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

Jed Kelly: 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?

Scott Sanborn: 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?

Tom Casey: 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.

Jed Kelly: 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?

Tom Casey: 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.

Scott Sanborn: 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.

Operator: Our next question comes from Stephen Kang with KBW.

Stephen Kang: 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?

Scott Sanborn: 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.

Stephen Kang: 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?

Tom Casey: 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.

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

Henry Coffey: 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?

Tom Casey: 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.

Henry Coffey: 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?

Scott Sanborn: 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.

Tom Casey: 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.

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

Tom Casey: 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.

Henry Coffey: That makes perfect sense. Thank you for taking my question.

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

Mark May: 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.

Tom Casey: 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?

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

Tom Casey: Sure.

Scott Sanborn: 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.

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

James Faucette: 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.

Tom Casey: 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?

Scott Sanborn: 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.

Operator: 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.

Scott Sanborn: 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.

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