LendingClub Corp (LC) 2014 Q4 法說會逐字稿

Good afternoon, and welcome to Lending Club's fourth-quarter earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to James Samford. Please go ahead.

Thank you. Good afternoon, and welcome to Lending Club's fourth-quarter earnings conference call. Joining me today to talk about our results are Renaud Laplanche, Founder and CEO, and Carrie Dolan, CFO.

Before we get started, I would like to remind everyone that our remarks today will include forward-looking statements, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release, and in our prospectus filed with the Securities and Exchange Commission on December 11, 2014. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at IR.lendingclub.com. And now, I would like to turn the call over to Renaud.

Thank you, James. I'd like to welcome everyone to our first quarterly conference call as a public company, following our initial public offering in December. Our IPO was an important milestone in Lending Club's history, and we believe we're just getting started on our path of transforming the banking system into a transparent, frictionless, cost efficient, and consumer-friendly online marketplace.

I begin today's call with highlights from the fourth quarter. And then, since this is our first quarter as a public company, I'll spend a little bit more time than usual, introducing you to Lending Club. I will then talk about our priorities for 2015, and turn the call over to Carrie, who will go into more details about our financial results, and give you guidance for Q1 and the full-year 2015. At that point, we will turn the call over to the operator for your questions.

Now let's dig into a few of the fourth-quarter highlights. Loan origination in the fourth quarter increased 103% year over year to $1.4 billion, compared to $698 million in the same period last year. Over $7.6 billion in consumer and small business loans have now been issued since we launched nearly eight years ago, including nearly $4.4 billion just last year. We hope to eclipse the $2 billion mark in quarterly origination sometime this year.

While we remain neither supply nor demand constrained, we'll continue to stay focused and disciplined about our growth rate. We plan to continue to scale the platform, staff and operations, including risk management, compliance, back office and security ahead of the growth, and safeguard the great user experience, trust, and confidence we have built in the lending program.

Operating revenue in the fourth quarter was close to $70 million, up 108% year over year, and full-year 2014 was $213 million up 118% year over year. Adjusted EBITDA in the fourth quarter was $7.9 million or 11.4% of revenue, compared to $6.5 million or 19.5% of revenue in the fourth quarter of 2014. We continue to invest aggressively in engineering and product development to release new products and features that will fuel future growth, as well as in the support functions to continue to build up infrastructure to support future growth.

In the fourth quarter, we launched a couple of new products. First in mid November, we launched a AA-grade, super-prime loan. We continue to execute on our strategy of becoming more useful to more people, and we believe this new product will appeal to the top end of the credit spectrum, with a solid interest rate of 3.99%.

Then in November, we made significant changes to the product line we had inherited from the Springstone acquisition last April. Springstone, as you know is active in both education and [elective] medical financing. A very common, product in medical financing and purchase financing in general, is a different interest product where interest is waived for a promotional period. But if the customers still has a balance at the end of that period, interest gets charged retroactively from day one.

Springstone provided this type of product, which we felt didn't align well with Lending Club's value of transparency and consumer friendliness. Accordingly, we terminated that product, and launched a true, no-interest product, with no retroactive interest feature. In general, I am very pleased with the progress we're making as we continue to integrate Springstone, and with how that first acquisition is contributing to our business. As we've have continue to build confidence with platform investors, we are increasingly in the position to lower interest rates, and deliver more savings to borrowers.

In the fourth quarter, we lowered interest rates by an average of 50 basis points, which was our third rate cut last year, for an average rate cut of roughly 100 basis points in 2014. While nominal rates are coming down for investors, we believe this has a positive impact on credit quality, and provides investors with even more confidence in the platform, and the quality of the returns. In the first quarter of 2015, we lowered our rates by another 20 basis points on average. Driving down interest rates is also creating a new set of partnership opportunities, with potential partners interested in offering better rates to their members, partners, or customers.

Now since this is our first quarter as a public company, I want to take a few minutes to provide additional background on Lending Club, and outline our longer-term opportunity. I started Lending Club over eight years ago, based on the idea that an online marketplace would be a more efficient mechanism to allocate capital between the source of capital, investors or depositors, and the use of capital, consumers or businesses looking for credit.

Lending Club was created and continues to operate today as a two-sided marketplace, serving two constituents, borrowers and investors. Investors invest capital, borrowers make monthly payments of principal and interest, and our marketplace underwrites prices and services the loans. Our marketplace operates at a lower cost than the traditional banking system, and we pass on the cost savings to borrowers, in the form of lower interest rates, and investors, in the form of attractive risk-adjusted returns.

Today traditional banks have an operating expense ratio of 5% to 7%. The same measure at Lending Club, assuming no growth in origination is less than 2%. That has come down over time, as we gained scale and increased automation.

There are two sources of cost reduction. First, there are costs that we do not incur at all, such as the cost of maintaining a branch network, and the cost of collecting and guaranteeing deposits, including capital reserve requirements and FDIC insurance. Then there are costs that we do incur, but at lower amounts, as we use our innovative business model and technology platform to drive costs down.

Our lower cost of operations allows us to offer big savings to consumers, and at the same time provide our investors with attractive risk-adjusted returns. Our platform has enabled about $7.6 billion in loans since inception, including $4.4 billion in the last year alone. And as you can see from our outlook, we expect to enable roughly another $7.6 billion this year, making 2015 as big as the past eight years combined.

While this is certainly rapid growth, we have been very disciplined about growing only as fast as we believe is responsible. We believe our disciplined growth has helped us deliver a great user experience, and focus on risk management, internal controls, and IT security and scalability. To give you a sense of the market opportunity, we estimate that roughly $390 billion in credit balances can be refinanced through our marketplace, and with the launch of small business lending in 2014, we've expanded that opportunity by another $300 billion.

But our goals go far beyond our current products. We have established that we can operate at the lower cost, and deliver a better experience than traditional banks. I firmly believe that we have an opportunity to transform the entire banking system into a frictionless, transparent, and highly efficient online marketplace offering all types of credit products to consumers and small businesses. If you add to the mix, product like mortgages and home equity lines of credit, we believe the current addressable market is closer to $13 trillion, and this is just the domestic market. We believe the opportunity for online credit marketplaces is a global opportunity.

Let's talk about our value proposition to borrowers for a second. As we operate at a lower cost than the traditional banking system, we are able to pass on the cost savings to both borrowers and investors. In addition to offering attractive rates, our borrowers tell us they come to Lending Club for three additional reasons, the fast and efficient decisioning, transparency and fairness with rates are that clearly disclosed with fixed monthly payments, no hidden fees, and the ability to pre-pay at any time with no penalty, and the great customer experience.

Our customers tend to be mainstream consumers with an average FICO score of 700, and an average individual income of over $70,000 for our standard program, which puts them in the top 20% of the US population. They are current in their credit, and appreciate the opportunity to refinance at a better rate. The main use case is paying off an existing credit card balance, with a better rate and a fixed monthly payment. Borrowers who received a loan to pay off their credit card balance, reported that the interest rate they are paying with Lending Club was on average 680 basis points lower than the rates on their outstanding balance, which represents a 32% savings.

We also provide strong benefits on the investor side of the platform, providing investors with access to an asset class that was generally not available to them, and easy to use tools to build their portfolio. We also provide very attractive risk-adjusted returns with well-diversified investors, achieving an average, net, annualized return of 5% to 9% since inception, depending on the loan grades we've invested in. We give self-directed investors tools that enable them to build and model out their portfolio, and we make it easy for them to diversify across hundreds of thousands of loans. And for the more hands-off investors, there are also funds and managed accounts available through our SEC registered investment advisors, (inaudible) advisors or from third-party providers. Investors are rewarding us by increasing their investment, and adding to their accounts over time, with many retail investors adding to their accounts on a monthly or quarterly basis.

Now let's spend a minute, talking about our technology, which provides the bridge between the borrower and the investor side of the marketplace. Our technology platform is purpose-built, which makes it extremely flexible. We release new code every two weeks, and very efficient. We drive automation to lower our costs, and improve user experience. We also invest considerable resources into our risk-assessment models, security and scalability. We use behavioral data, transactional data, and other online data to supplement traditional credit attributes, which helps us manage fraud risk, and allows our platform to make a decision in a matter of seconds.

Our platform evaluates and segments each individual borrower's risk profile, and prices them accordingly individually. This means that responsible borrowers benefit from risk-based pricing, instead of being penalized by the one-size-fits-all approach often used by credit card issuers. The historical loan performance data we make available publicly helps investors build portfolios confidently, and model target returns from a large pool of loans. We believe this builds a lot of confidence in our platform within the investor community.

Now let's talk about the regulatory framework we operate in. We have crafted an efficient framework that offers borrowers the same level of protection they benefit from a bank, while providing us with more flexibility, and a more cost efficient and capital-light framework. While the loans enabled through our platform are issued by issuing banks, we partner with issuing banks, so that our borrowers benefit from all the consumer protection regulations applicable to bank loans, including fair lending, truth in lending disclosure, fair-credit reporting, and so on.

But instead of financing loans with deposits like a bank would, we sell securities to investors, and these securities are a perfected match, in terms of rate and duration with the underlying loans. Lending Club does not assume credit risk or interest-rate risk which are borne by investors, therefore, there is no capital reserve requirements or FDIC insurance.

Now before I turn it over to Carrie, I want to touch briefly on our 2015 priorities. This year, we intend continue to deliver rapid, but disciplined growth in our core personal loan product, by activating our existing marketing channels at a higher level, and continuing to establish new channels mostly through partnerships. We also plan to test new radio and TV ads that will be primarily direct response ads, but will also increase brand awareness and convey brand values. We will also continue to make our marketplace more useful to more people, by building new features and use cases, as well as new delivery platforms.

In terms of the two newer products, small business loans and education and patient financing, we are planning to grow both products. We will continue to grow the small business lending platform through partnerships, with companies that already have millions of small business customers, like Google and Alibaba. We will also continue to invest in the aggressive ramp-up of education and patient financing, that we hope to grow at a pace similar to the rest of the business this year, which will be a significant acceleration compared to their annual growth rate of about 30% last year.

Some of the acceleration is expected to come from the expansion of funding sources to include select, Lending Club, institutional investors, as well as a more efficient technology platform, enabling the launch of new features. And finally, from the creation of the nationwide field sales force, to expand our relationships with healthcare providers. Some of these developments require investments that may create a drag on our contribution [model] and EBITDA this year, but we believe the resulting shareholder-value creation is well worth the investment, and we are encouraged by the momentum we are already seeing from our recent efforts.

More importantly, we intend to continue to innovate and roll out at least one to two new products each year. To that effect, we will continue to frontload investments in technology and engineering to support new product development, and continue to automate processes to perpetuate our low cost advantage, and investments in the support functions that will help derisk future growth. I will now turn the call over to Carrie, who will go into more details of our financial results, and our guidance for the quarter and the next 12 months.

Thanks, Renaud. I would also like to reiterate how pleased we are with the Company's fourth-quarter performance. I will review our financial results, as well as our guidance for this year in a moment. But since this is our first earnings call, before doing so, I want to quickly review a few key elements of our business model. We earn revenue in two ways. First, the transaction fees are earned when a loan is originated. These fees represented roughly 92% of our operating revenues in 2014. Second, servicing and management fees from investors are earned over the life of the investment.

In 2014, these fees represented roughly 8% of operating revenue. In contrast to the traditional banking system, capital to invest in loans is provided from loan sales and securities issued to investors, rather than from banking deposits. A key differentiator for our marketplace model, is that we do not assume credit risk, or use our own balance sheet to invest in loans, and the loan sales and securities issued to investors perfectly match the term of the loan. We maintain consistent balance between supply and demand, and work to maintain a disciplined growth rate to optimize customer experience, risk management, scalability and security.

We use our technology platform to drive automation and lower the cost of acquiring, underwriting, originating and servicing loans. These costs are netted against our operating revenue to derive contribution income, and a contribution margin. The contribution margin measures the efficiency of how we drive our revenue.

To derive our adjusted EBITDA, we subtract technology and other overhead expenses. For both of these non-GAAP margins, we exclude stock compensation, depreciation, amortization and acquisition-related expenses. Our long-run focus is to optimize both our contribution and adjusted EBITDA margins.

Now let's review our results for the fourth quarter. As a reminder, contribution adjusted EBITDA and adjusted EPS are non-GAAP measures. The specific calculations of these measures are noted in the appendix of our fourth-quarter financial deck that is available on our IR website. All my year-over-year comments will be comparisons to 2013 fourth quarter.

Total originations in the fourth quarter of 2014 grew to a record $1.4 billion, an increase of 103% compared to the same period last year. Our marketplace offers loan programs we call standard and custom. Standard program loans are three- or five-year personal loans that are offered to borrowers with a FICO score of at least 660, and that meet other strict-credit criteria. These loans can be invested in through the purchase of notes, which are only available through our website. Separately, qualified investors may also invest in standard program loans in private transactions.

Custom program loans are only invested in through private transactions with qualified investors, and currently include small business loans, super-prime consumer loans, education and patient finance loans, and personal loans that don't meet the requirements of the standard program. Standard program, loan originations increased 71% year over year to $1.1 billion in the fourth quarter.

The composition of investors who invested in standard program loans during the fourth quarter was 47% individual through investment vehicles or managed accounts, 20% self-managed individual investors, and 33% institutional investors. Custom program, loan originations increased 483% year over year to $311 million in the fourth quarter.

Operating revenue in the fourth quarter of $69.6 million was up 108% year over year, consisting of $63.3 million of transaction fees which were up 107% year over year, and $6.3 million of servicing, management fees and other revenues which were up a combined 118% year over year. Revenue yield, which is operating revenue as a percent of originations was 4.92%, up roughly 13 basis points year over year.

Higher transaction fees as a percent of revenue accounted for 9 basis points, and was driven by a higher mix of 60-month loans and custom loans, both of which have a higher average transaction fee. In addition, higher mix of servicing accounted for a 4 basis point increase year over year in revenue yield.

Two sets of expenses impact our contribution income: sales and marketing, and origination and servicing. Sales and marketing expenses consist primarily of those related to borrower and investor acquisitions. These also include general brand and awareness building, and personnel-related expenses for our marketing and sales team.

These expenses are generally variable, and track origination volume. In addition, they vary with seasonality, channel testing, and additional marketing efforts designed to support new product launches. Origination and servicing expense consists primarily of personnel-related expense for our credit, collections, customer support, and payment processing team, and vendor costs associated with facilitating and servicing loans such as our issuing bank expenses and credit agency fees.

On a dollar basis, our contribution income in the fourth quarter was $32.7 million, up 109% year over year. As a percent of operating revenues, contribution margin was 47% in the fourth quarter, roughly flat with the prior year.

With the launch of several new products in 2014, including small business and super prime, and as we invest in growing education and patient finance, we expect our contribution margin to remain relatively flat, or even come down some in 2015, as we continue to invest in new products which are inherently less efficient.

Turing to operating expenses, operating expenses include engineering and product development expenses and other G&A. Engineering and product development expenses include personnel-related costs, along with non capitalized hardware and software costs, and depreciation and amortization of technology assets. We are aggressively building our engineering team to develop new products that will fuel future growth, and build up scalability and security ahead of growth. As a result, engineering and product development expense increased to $8 million in the fourth quarter, up 163% year over year.

Other G&A includes personnel-related expenses for our support organizations, such as legal, finance, internal audit, accounting, risk management and human resources, along with facilities expense and acquisition-related costs. Year over year, these expenses increased to $16.7 million in the fourth quarter, up 175% as we continue to aggressively invest in these support teams to further derisk future growth.

Adjusted EBITDA was $7.9 million or 11.4% of revenue, compared to $6.5 million or 19.5% of revenue in the fourth quarter of 2013. Our adjusted EBITDA margins were intentionally lower, as we aggressively invest in engineering and product development to work on new products and features that will fuel future growth, as well as support functions to continue to build up the infrastructure that will support future growth.

Adjusted net income was $4.2 million or $0.01 per diluted share during the fourth quarter, versus $5.8 million or $0.02 per diluted share in the year-ago period. Adjusted EPS excludes stock-based compensation, depreciation and other nonreoccuring charges such as amortization of intangibles and acquisition-related expenses.

At year end, total balance sheet assets reached $3.9 billion. Of this $2.8 billion are in loans, which are invested in, by investors. Of the remaining $1.1 billion in assets, $870 million represents cash and cash equivalents. With our net IPO proceeds of approximately $830 million, we used $49 million to repay the debt that we incurred when we purchased Springstone in April last year.

With that, let me give you our thoughts about the first quarter and FY15. We feel we are entering 2015 with strong momentum on many fronts, and we intend to continue to execute on our strategy of fast, yet disciplined growth. In addition, we plan to continue to aggressively invest in new channels, product development, engineering, process automation, and the build up of support and risk management functions to pave the way for long-term sustainable growth.

As a result, we expect operating revenue to range between $74 million and $76 million in the first quarter, and the full year to range between $370 million and $380 million. For adjusted EBITDA, we expect this to range between $6 million and $9 million in the first quarter, and range between $33 million and $42 million for the full year. With that, I would like to turn the call back over to the operator, and open up the lines to take any questions.

(Operator Instructions)

Stephen Ju, Credit Suisse.

Thanks, hi Renaud and Carrie, and congratulations on your first report as a public company. So if I look at your full-year guidance range, it looks like the implied EBITDA margin suggests about 100 basis points of either expansion or compression, versus what you just reported for 2014. You touched on this briefly on the prepared remarks, but what do you think will be the biggest swing factors which will get you near one end versus the other?

And second, you recently signed agreements with Google, Alibaba, and [Bag] Alliance. Will you talk about how this incremental volume will flow through the P&L? You know, these three partners are bringing you demand for your marketplace, so presumably they may be compensated with some sort of a lead-generation bounty, so will this be booked as a marketing expense, or were your -- I guess, take rates effectively change? Thanks.

Hello, Stephen, yes so in terms of the EBITDA margin, I think what we're seeing here is we're not driving for margin expansion this year, we're guiding towards margin remaining in a 10% range, as we aggressively invest in product development and engineering, that will fuel future growth, and also in sort of compliance, risk management, back office, security, all the functions that will help us support and derisk future growth.

In terms of what can sway the margin one way or the other, one end of the range or the other, I think a lot of the investments we are making are investments in people. So we have a aggressive hiring plan that we will [get over] over the course of the year, so there might be some variance there.

What we're seeing so far is that the increased brand awareness coming from the IPO itself, and then from operating as a public company, and the additional brand credibility we've picked up seems to be helpful, in terms of attracting some talent. We're pretty hopeful we're going to meet our lofty recruiting goals, and so come in around the midpoint of the guidance in terms of [what we've done].

In terms of the Google, Alibaba and Alliance Partners deals, so two of these deals are in small business lending, where we said since last year that we would have a partnership strategy which really helps leverage of the existing relationship that large companies have with millions of small businesses, whether they're customers or partners. And that will also give us access to a lot of data that we can use for underwriting the loans to small businesses, so that's really part of our strategy.

In terms of how that will flow through the P&L, typically this type of deal, we're essentially targeting the same contribution margin, or similar contribution margin, as we have in other parts of the business. We might not necessarily say a bounty of referral fee, but we get a -- no acquisition costs or very low acquisition costs, because were directly available as a point of sale, or we're leveraging an existing brand, but we're passing on the cost savings to the borrowers, and we'll be charging a lower fee to the customers we acquire that way. So the contribution margin would be similar.

Thank you.

(Operator Instructions)

Smittipon Srethapramote, Morgan Stanley.

Thank you, good afternoon. Can you please give us an update on your thoughts on expanding internationally? Is the US opportunity still large enough to keep you guys focused here in the near term, or is the opportunity to establish yourself as the marketplace of choice in emerging markets make it worthwhile for you guys to devote some time outside the US?

Our strategy at this point is to continue to focus on the US market in the near future. I think there is such a huge opportunity to continue to grow, both with the existing products and with new products we've launched last year, and other products that might be coming in the future, that we really believe there's no urgency from that standpoint in exploring other markets. I think obviously the price to pay for that strategy is that we might see other platforms emerge in other markets, and possibly take a [first more] advantage, but what we are seeing at the moment is we're observing what's happening, we're seeing a lot of new platforms coming up in different countries. And what we're seeing is different versions of the model, sometimes in the same geography, and not a lot of clarity yet on how each take on the model would get customer adoption, or would be blessed by local regulators.

So I think by waiting, you also -- there's a little bit of a wait and see. We believe that by waiting before we jumping into an international market, we are also derisking our entry strategy into that market. We will see what model is really the winning model in the particular geography, and at that point the entry price might be higher. But again, the risk will be lower as well, so it might be still a similar value. And during that time, we believe we can grow fast enough in the domestic market that on a relative basis, that entry price might not necessarily be higher. And again, the US market is such a big opportunity that we believe that's where we should be focused right now.

Got it. And maybe just a follow-up on the comments that you made earlier on the call around utilizing some of the demand that you're seeing from institutional investors to accelerate the rate of growth in your healthcare product. From what we're hearing, from talking to various players, it seems like there is tremendous demand from institutions to buy the notes that -- you know, for instance, it's just yourself right now. Can you talk about what -- the trends that you're seeing from institutions, and the prospect of potentially getting a credit rating of some of your notes, what that could mean for demand from larger institutions like insurance companies and banks, to purchase notes from you guys?

Yes, so we're seeing a lot of interest, again, on both sides of the platform. We don't feel like we're supply or demand constrained right now. On the supply side, the supply of capital, there's certainly a lot of interest from institutional investors, but there is also a lot of interest from individual investors. So if you look at the -- how that breaks down, I think over the last quarter, from Q3 to Q4, the institutional investors share of the funding, I think, increase by a couple of basis points -- by 200 basis points. So they -- very similar. So a lot of appetite from investors in general. I think we're -- our low-cost of preparation is really allowing us to deliver a lot of value to both sides of the platform.

We like institutional investors, in terms of their ability to ramp up quickly and a fairly low cost of servicing. But we also like individual investors, in terms of their diversification, in terms of the fact that it's tens of thousands of individual investors making their own investment decisions. Who are also in aggregate, fairly predictable, and who have proven to be very loyal to the brand, and add to their account on a monthly or quarterly basis. With a lot of individual investors now investing for retirement accounts, it's really the capital that is invested for the long run.

Our institutional investors also tend to be long-term minded investors, but -- so there are some pros and cons of both individual and institutional investors, and we are managing the mix, based also on the type of products we want to originate from the borrower side, from borrower products, or more appropriate for retail individual investors. Others, especially new products, tend to be -- to come with a less of a track record, so more of an initial risk, and then it's easier to have a conversation with a handful of institutional investors who understand the risk and are willing to take that risk.

We're managing the splits between individual and institutional that way, but although not necessarily expecting the institutional side to grow a lot faster than the rest of the platform. In terms of rating, we're not very focused on rating the notes at this point. There are securitization deals happening outside of our platform with some of our institutional investors, refinancing in the securitization markets, and interested in refinancing and securitizing the loans, and might want to obtain their own ratings.

But in terms of rating the notes themselves, we don't feel that there is a lot of need for it, and we feel that we are -- our own rating has the benefit of being very transparent, very low cost, so we're not adding the cost of operating agency. And increasing the trustees by investors, the investors can only get eight years of track record from the performance of loans by grade, so we have the A1 to G5 grade. And so far, that rating has been working well, and I think it's providing a lot of value to investors, so we are not necessarily looking for a rating agency to provide additional rating on the note.

Thank you.

Scott Devitt, Stifel.

Thanks. Renaud, you spoke of front-end loading costs in the model in 2015. I was wondering if you could talk a bit about the margin profile of the business beyond 2015, and how you think about the long-term margin profile? And then secondly, my follow-up, is related to all these initiatives that you have going on, some that have been mentioned already in Q&A between Google, Alibaba, Community Banking, education, health care, and I'm probably missing a few. Can you just kind of set a ranking in terms of your excitement level of contributions, in terms of originations and revenue in 2015 and 2016, to the extent that any seem more interesting to you as drivers in the more near term? Thank you.

Yes. So in terms of long-term margins, we are not giving guidance beyond 2015, but what we said is that we believe the long-term margin profile of the model is with the EBITDA margins in the 40%-plus range. We have -- if you look back at 2013, we essentially let the margins increase throughout 2013, up to the point where in Q4 we were close to 20% EBITDA margin. I would say much smaller revenue level than where we are at now. So that gives us a lot of confidence in the leverage in the model, and the ability of the model to deliver that 40%-plus, long-term target.

Now as you pointed out, that's not going to happen this year. We're very focused on building for the long run, and heavily investing in product development, technology, compliance, risk management, back office, so all the functions we mentioned earlier, to essentially maximize the size of the long-term opportunity, rather than looking for short-term margin expansion. In terms of the partnerships, I think the only exciting difference -- on a different level, they -- I think one we haven't talked much about, or spend a few minutes on, is the opportunity -- the partnership with Alliance Partners.

Alliance Partners is a network of about 200 community banks. And that Alliance is really the continuation of a strategy we started to roll out a couple of years ago, that -- what we called -- we really called the lending platform, which is really an opportunity for banks in this case, it could be also large corporations, in the case of Google, to use the lending platform to enable credit -- deliver credit to their partners or customers. So it's really hard for small community banks to create new products, and many of the community banks don't have an unsecured credit product, they are not big credit card issuers, but their customers have a significant credit need like the large bank customers would, and often carry a balance on their credit card as issued by one of the large banks.

So the opportunity here is for a small bank to deliver credit to our customers, who they -- to the lending platform, and essentially help repatriate these balances back on their books, and invest in long (inaudible) on both sides of the platform, providing the customers as borrowers, and investing in some or all of the loans. So that's an exciting opportunity for us to deliver value to community banks, showcase another way to use the platform and the technology, and also really continue to partner with banks. We believe that the combination of Lending Club and the banks can be a very powerful combination.

Lending Club has a very low operating cost, while the banks have a very low cost of capital. If you combine a low-cost operation and a low cost of capital, you really can drive down the cost of credit for consumers and businesses, and that's what we are doing. So in -- the same platform strategy is being used in the case of the Google partnership, and we believe there are a lot of other banks and large corporations that could benefit from making credit available to their customers and their partners.

Thanks, Renaud.

Mark May, Citi.

Thanks for taking my questions. First one related to sales and marketing. I believe in your prepared remarks, you talked about expanding into some new marketing channels, as well as doing a bit more broad-reach media. And then you also talked about expanding your local sales force to accelerate the growth in some of the Springstone purchase finance product, if you will. Can you help us think about -- or how to think about the efficiency, in terms of loan acquisition, given that it sounds like there might be a little bit of noise in that metric this year, as you build out things like the sales force. If you kind of separated out investments in some of those kind of growth-related initiatives, how should we be thinking about loan acquisition costs for your core business, if you will?

And then my follow-up was related to a comment I think that Carrie made, about how inherently new products are less efficient. Are you referring to as you're ramping those products up in the early days, or should we be thinking about some of these newer products as even at scale, having a little bit lower margins than maybe your core product today? Thanks.

Yes. So in terms of the core business, if you look how sales and marketing expenses have been trending, they have been growing roughly at the same pace as revenues. So we're really not seeing any loss in marketing efficiency, and that includes available cost of -- new sales and marketing or new products. So you have to separate out the core product, the efficiency has actually gone up. The -- we believe that the -- a lot of the brand-building is often reputation-building efforts we've done over the last several years, so we've continued to help convert more customers.

Our existing customers are our best product ambassadors, we continue to have a net promoter score in the 70s, and seeing a lot of existing customers referring new customers. So we are definitely not seeing any degradation in the efficiency of sales and marketing, or any increase in customer acquisition costs at this point. I think we're going to continue to test new channels, and expand to new partnerships.

The Springstone success force you referred to is a good example of front loading an investment. I think we in Q4 and Q1 we were really creating a new field sales force that did not exist before, that we believe will be very efficient in the long run in deepening our relationships with the medical care providers that offer the patient financing products. But certainly in the investments were making now.

I think one of the -- before I let Carrie address the points about new products and how efficient they are, I think that another dynamic that is really helpful in terms of customer acquisition costs is our ability to lower interest rates, with -- I think we've built a lot of confidence within the investor community, and we're having platform investors continuing to rely on a longer track record, and a great track record of underwriting and servicing. And because their perception of the risk is coming down, they're willing to accept a lower return than they used to demand from us, and that's really enabling us to lower the interest rates on the borrower side, and create positive direction on the borrower side, but also lower our acquisition costs by increasing the conversion rates on existing borrowers. Carrie, do you want to take the question on the products.

Yes, Mark, thanks for the question. So what I was referring to on the efficiency side really has more to do with the development of new products and new channels, and so the belief that we have is that as we are developing these, we see them become more and more efficient. And as Renaud mentioned, the focus for us is really on the contribution margin. And so to the extent that we find a particular new product or channel has a different operating level, let's say, relative to the core, what we're going to do is continue to work on that efficiency, or the other option is to adjust the take rate.

We find that, as Renaud mentioned, the core, we continuing to see improvement there. We see conversion rates and operating efficiency, which gives us the ability to continue to expand and test into new channels, and then of course add the new products. And this year, we're going to continue to launch and test new products, and as we do that, that is going to -- that is why, as we think about the margin going forward, I mentioned earlier that we think it's going to be somewhere flat to maybe even down, as we continue to ramp up, as we experiment and learn with each new channel.

Thanks.

Ralph Schackart, William Blair.

Good afternoon, and congrats on the strong start. Renaud, I think you talked about lowering borrowing rates by about 50 basis points in Q4, and by another 20 basis points in Q1. Can you maybe just give us some historical context, how that may compare to how those rates have trended historically? And then as a follow-up, can you give us a sense if rates get to a certain point or a threshold, could that potentially accelerate new partnerships for you, or would you expect new partnerships to grow at a measured pace, as rates continue to decrease on the borrower cost side?

Yes, no, so, we're waiting to publish historical rates on our website. You can see the -- really how rates have trended since -- pretty much, since inception. And so we were very pleased to report that for this quarter, interest rates on the three-year term loan went below 12%, which is great savings for borrowers compared to credit card rates, being in the 17% on average. And we are continuing to test our way down. Certainly at this point, investors are continuing to be - to show a lot of appetite for our investment program, and we're not seeing the end of that strategy at this point. And you are absolutely right that lower interest rates continue to help not just direct acquisition but also our partnership strategy, with platforms and large corporations, and banks, being more interested in partnering with the -- with us, because they know we can deliver better terms and a lower cost of credit to their partners and customers, so that strategy is helpful in both (inaudible).

Okay, thank you.

Edward Williams, BOMB Capital Markets.

Good afternoon, just a couple of quick questions for you. First of all, when we look at the relationships that you announced this quarter with Alibaba and Google, can you give us a sense as to how significant those could be in throughout 2015, kind of the timing of -- as they fold into your originations? And then secondly, if we look at the custom product within your originations, obviously they ended the year at a robust clip compared to where they began the year, in part to the Springstone acquisition and other initiatives you've had. Can you give us a sense as to what we can look for from that line item, as the year progresses?

Yes, so we're not breaking down some guidance by product at this point, and certainly there's -- the partnerships are exciting and they were to help us deliver a lot of growth this year, particularly in terms of Google and Alibaba, just in terms of small business loans, which is a new product for us that just launched last year. So these two partnerships will definitely help ramp up small business loans aggressively. And the new (inaudible) products, which are the products that are not made available to all investors, but only to select institutional investors, will also continue to fuel future growth. But we have a more holistic view of growth, where we are managing the top line, that includes the core product and new custom products, and including small business loans.

Okay, great, thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Renaud Laplanche for any closing remarks

Thank you. So I think in conclusion, we had a great quarter. But more importantly, I think we truly believe we're just getting started here, and we have an opportunity to profoundly transform the banking system over the next decade. We're excited to be a public company, and we look forward to more interaction with public investors at conferences and one-on-ones. So we look forward to talking to you next quarter, if not sooner. Thank you

The conference is now concluded. Thank you for attending. You may now disconnect.