LendingClub Corp (LC) 2015 Q3 法說會逐字稿

Good day and welcome to the Lending Club third-quarter 2015 earnings conference call and webcast.

(Operator instructions)

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

Thank you. Good afternoon and welcome to Lending Club's third-quarter of 2015 earnings conference call. Joining me today to talk about our results are Renaud Lafarge, Founder and CEO and Carrie Dolan, CFO.

Before we get started, I'd like to remind everyone that our remarks today will include forward-looking statements and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release, the related slide presentation on our investor relations website, our form 10-K filed with the SEC on February 27, 2015 and our form 10-Q filed on August 5, 2015. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of 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 the accompanying investor presentation are available on our website at www.ir.lendingclub.com. In addition to the regularly presented slides, comments made by Renaud and Carrie will also refer to a few specific new slide, including slides 10, 11, 12, 14 and 30 in the slide deck. Unless specifically stated, all references to this quarter relate to the third quarter of 2015 and all year-over-year comments are comparisons to the third quarter in the prior year. Now I would like to turn the call over to Renaud.

Thank you, James. This quarter was our best quarter so far. We continued to deliver very high customer satisfaction and strong credit performance while increasing marketing efficiency and expanding margins. We generated operating revenue growth of 104% year over year, reaccelerating from 98% revenue growth last quarter, which was faster than our initial plan as we saw opportunities to efficiently accelerate during the quarter while maintaining strong risk management, credit quality and customer satisfaction. Once again we're in a position to raise both our revenue and EBITDA outlook for the quarter and for the year. At the magnitude of the market opportunity and our growing competitive advantage in the space put us in a position to set significant growth targets for next year with 70% revenue growth and expanding margins.

Now let's dig into specific results and context for the quarter. Starting with originations, loan originations this quarter increased 92% year over year to over $2.2 billion compared to nearly $1.2 billion in the same period last year. Over $13.4 billion in consumer and small business has now been issued since inception, including more than half, $7.2 billion, just in the last 12 months. Operating revenue this quarter was $115 million, up 104% year over year. Revenue grew faster than originations, as strong credit performance and investor appetite gave us the opportunity to increase investor fees while preserving strong platform returns. A favorable investor mix also helped increase our revenue yield.

Adjusted EBITDA was $21.2 million. That's 181% year over year, with margins expanding sequentially for the third consecutive quarter from 13.1% in Q1 to 18.4% in Q3. While we believe there remains considerable margin leverage available to us as we drive more volume through the platform, we plan to continue investing in engineering and product development to fuel long-term growth and continue to maintain or improve user experience and operating efficiency. We will also continue to invest in compliance data management and credit underwriting to maintain our reputation and continue to deliver strong credit performance.

Now let me turn to business highlights for the quarter. I'd like to give you an update on marketing channels on both the borrower and the investor side of the platform, as well as an update on education and patient financing, small business and our product roadmap. First, an update on our marketing channels on the borrower side. In core personal loans, we continue to diversify our marketing channels and observed greater marketing efficiency in an increasing share of loans applications coming from organic traffic as we believe our brand awareness is getting stronger. For the first time this quarter, we measured unaided brand awareness within our target population, which came out at just 3%. We would expect increased brand awareness to fuel even stronger organic traffic in the future.

We believe we are also benefiting from a shift in consumer behavior towards online lending and away from the more traditional channels and expect that trend to continue. All in, we recorded lower acquisition costs quarter over quarter that drove sales and marketing expense down to 192 basis points of originations this quarter compared to 201 basis points last quarter.

We continued to test direct response radio and TV and again are encouraged by the results. We are increasingly convinced that we can make these channels work in a way that delivers customers of the same acquisition costs as the marginal cost of other channels and generate additional brand awareness. We are hoping that this direct marketing effort will not only stand on its own as an acquisition channel but also help raise brand awareness and credibility at a higher rate than other channels. Accordingly, we are planning to expand the scope of our test campaign in the next few quarters.

On the investor side, we expanded our addressable geographic market over the quarter and post quarter end with the addition of nine new states, bringing our retail coverage to 39 states with an active in investor base of over 100,000 retail investors. The investor mix for the standard program this quarter was 20% self-directed individual investors, 44% individual investors investing through a fund or a managed account and 36% institutional investors.

We continue to efficiently acquire investors as existing investors tend to refer new ones and add to their account over that time. In fact, a growing share of the capital invested on the platform comes from our existing investor base. About 87% of the capital invested in loans issued year to date came from investors who opened their account more than six months earlier. Share of capital from existing investors has been growing steadily each quarter. It represented only 48% of total investments in 2012 and reached 90% for the first time this quarter. This demonstrates the stickiness of the investor base we have built over the last eight years.

As another way to illustrate the depths and breadth of our investor base, we have included on page 11 of the earnings presentation available on our website an investor coverage map. We mapped investor portfolios by weighted average term, ranging from 36 months to 60 months and by weighted average interest rates. The key takeaway is that we have built a very diverse set of funding sources with investors of all sizes across a full spectrum of duration, investment objectives and risk appetite.

This enables the broadest range of loan origination at attractive rates to borrowers which means that our marketing funnel converts at a higher rate. We believe our diverse funding sources also make us more resilient to changes in the economic environment as different categories of investors are likely to behave differently, particularly in an economic downturn. We expect individual investors, in particular, whether they invest in a self-directed way or through a fund or managed account, to be more consistent in their investment behavior than other sources of capital and less sensitive to market movements.

Now switching to updates on education and patient financing and small business. Education and patient financing continues to be an area of investment this quarter and we will also continued to reap the benefit of past investments with a sequential growth rate that has been equal to, our greater than, our core personal loans for the last two quarters. As the field sales force continues to deliver growth, we continue to create new territories and have decided to expand the size of it sales force by 25% over the next two quarters.

Switching into small business lending, last quarter we said we would be launching a new product by year end which we did on October 14. We rolled out a new multi-draw line of credit product for small business with lines of credit ranging from $5000 to $300,000. We're very excited about this new product that gives small businesses convenient and flexible access to affordable credit with interest rates starting at just 5.9%. Business owners can draw just the amount they need at any time, which can reduce the effective cost of their credit. We piloted the product with Alibaba and Ingram Micro customers and have now made it available more widely to all qualified small businesses on our website. Our small business platform continues to grow in line with our expectation at a pace compatible with good risk management and prudent credit underwriting.

More broadly about the product hot map, we told you last quarter that we will be entering an entirely new large consumer credit product category in the first half of next year. We are glad to confirm that we remain on track with this timeline. Outside of major product launches, we continuously release productive improvements to contribute to constantly improving the experience for our customers and our own operating efficiency.

Let me now turn to page 12 of the earnings presentation that describes the network effects we have been observing in our marketplace. Traditional banks do not typically benefit from strong network effects. A new customer joining the bank does not necessarily increase the utility of the product for other customers. In fact, there is evidence that scale, in traditional banking, correlates with a worsening of customer satisfaction, with the largest banks typically recording a worse net promoter score than local community banks.

If you consider a bank as a two-sided marketplace with depositors on one side and borrowers on the other side, there is no network effect between borrowers and depositors as greater volume or efficiency on one side doesn't translate into the same on the other side. This is because unlike true market places like Lending Club, the bank's assets and liabilities are not matched to one another, so improvements on one side doesn't necessarily benefit the other. In market-place lending, in contrast, the two sides of the marketplace feed on each other. Our track record of performance leads investors to accept lower returns as they perceive these returns us being more dependable. Lower return requirements from investors and help lower rates to borrowers, which lead to lower acquisitions costs and positive selection in the quality of the borrowers attracted by the lower rates which in turn fuels a strong track record of performance.

The lower return hurdle from investors also gives us the ability to earn higher investor fees, which has helped us increase our revenue yield by about 30 basis points over the last year. Higher investor fees, coupled with lower borrower acquisition costs enabled by the lower rates and lower investor acquisition costs enabled by the strong track record of performance, generate high margins that we can use to fund investments in several key areas, including product and credit underwriting. Investments in underwriting, in turn, fuel our strong track record of performance and investments and product feed our strong customer satisfaction rate which leads to more repeat customers and is accretive to our brand and reputation which helps generate more organic traffic and increase conversion rates throughout the funnel. All of these dynamics are ultimately fueling lower acquisition costs and higher margins.

We believe these network effects and benefits of scale will help solidify Lending Club's dominant position in online lending as marketplace dynamics make the larger marketplace increasingly more efficient and more attractive over time. We believe most of these dynamics are not available to one-sided marketplaces funded on balance sheet.

Finally let me give you a quick update on regulatory trends. We believe this was a productive quarter. In September, we provided the Department of the Treasury with our response to their request for information on marketplace lending. We believe the process was helpful and supportive of our goal of increasing transparency and efficiency designed to make credit more affordable and more available to consumers and small business owners. We led with our values and the benefits we are bringing to our 1.2 million customers and to the many partners we work with, including local community banks across the country.

We provided the Treasury with an overview of our regulatory framework that offers borrowers the same level of consumer protection they received from a bank while providing us with a more cost efficient framework. In fact, all the loans enabled through our marketplace are overseen, issued and originated by federally regulated banks and all federal lending regulations, including truth in lending disclosures, fair lending, and fair credit reporting are applicable to us. We provided our prospective on alignment of interests and disclose requirements, starting with a reminder that we have a tremendous amount of skin in the game. We have over 20% of our revenue from each loan being subject to loan performance over time and an ongoing alignment of interest with investors. We also made a number of proposals designed to increase transparency and small business lending, provide more information to marketplace investors through mandatory disclosure requirements, provide targeted tax incentives and make it easier to verify income using tax returns.

In regards to our loan issuance framework, we continued to see no measurable impact from the Madden decision that was rendered in May this year by the Second Circuit Court of Appeals. Page 14 of our earnings presentation includes new data showing that mix of standard program originations inside and outside of the Second Circuit states of New York, Connecticut, and Vermont. Roughly 10% of the loans were issued to residents in these states this quarter, unchanged from the previous quarters. The mix of sophisticated institutional investors purchasing loans in those states increased from 35% last quarter to 40% this quarter.

Like many of our institutional investors, we continue to operate with a strong conviction that the facts of the Madden case were very different from our situation and that in addition, our choice of law framework will continue to prevail. That being said, we are modifying some aspects of our relationship with our issuing banks in a way that we believe creates even more distance with the Madden case. Finally, we were encouraged by recent remarks from Federal Reserve Governor Brainard in a speech at the Third Annual Community Banking Research and Policy Conference in St. Louis last month who noted, consistent with our believe, that "partnerships between community banks and online platforms may help expand access to credit for consumers and small businesses and help banks retain and grow their customer base."

In summary, I would say that the regulatory environment remains dynamic in response to the fast pace of innovation and we are an active participant in the regulatory dialogue. Our opinion is being sought after and heard as a clear leader in this space and we continue to see strong alignment between our values and the operating principles and the goals the regulators are pursuing of insuring that consumers benefit from affordable, transparent and responsible credit. Now let me turn the call over to Carrie to go into more detail about our financial results, our guidance for the next quarter and full year and our outlook for 2016.

Thanks, Renaud. The third quarter was another outstanding quarter, with our financial results again topping our outlook. More specifically, our revenue exceeded $100 million in the quarter for the first time and was 104% higher from the prior year. Both our contribution and EBITDA margins expanded, reflecting our continued leverage and GAAP net income turned positive for this quarter. Today I will start with our third-quarter financial results and then provide fourth-quarter guidance, along with some initial thoughts on 2016 before opening the call up for questions. As a reminder, all year-over-year comments are comparisons to the third quarter in the prior year.

Starting with originations, as Renaud shared, total originations in the third quarter reach $2.2 billion, an increase of 92% compared to last year. While we continue to be disciplined about the pace of our growth, we continue to see opportunities to efficiently accelerate growth beyond our initial plan as a result of operating efficiencies in our acquisition channel. Operating revenue in the third quarter was $115.1 million, up 104% year over year. The growth in origination volume was again out paced by our revenue growth as revenue yields continue to expand.

Our revenue yield, which is operating revenue as a percent of originations, was 5.15%, up 12 basis points sequentially and 30 basis points year over year. Transaction fees, which are earned immediately after a loan is originated, represented roughly 87% of operating revenues and totaled $100.4 million, up 91% year over year. Transaction fees as a percent of originations were roughly flat sequentially at 4.49% and were lower by three basis points from last year, primarily driven by the products used in education and patient finance, which includes the True No-Interest product launched in late 2014.

Servicing and management fees from investors, which are earned over the life of investments, totaled $11.9 million in the third quarter, up 155% from last year. Servicing and management fees as a percent of originations increased 13 basis points year over year to 53 basis points. As we have previously discussed, in the fourth quarter last year we started charging investors collection fees, which accounted for six basis points of the year-over-year increase. During the third quarter this year, we further adjusted our collection fee pricing, which added another four basis points in yield. The recent pricing changes were made in the middle of the third quarter and increased revenue more than initially planned. We also continued to see favorable investor mix trends, with demand coming from investors who pay marginally higher servicing fees.

To provide additional information on our servicing and management fee revenue, we added a new slide on page 30 in the earnings presentation. This slide shows our servicing and management fees, excluding the servicing liability adjustment, as a percent of our servicing portfolio balance. In the third quarter, our servicing portfolio, which is comprised of all the loans we service and includes loans that we sold and are no longer on our balance sheet, reached $7.7 billion, up $3.7 billion, or 95%, from last year. As shown on this slide, our servicing and management fees as a percent of average outstanding servicing portfolio, increased 4 basis points to 16 basis points form the prior year. Other revenue, which grew $3.5 million from the prior year, grew as a result of higher gains associated with selling whole loans at more favorable rates and added 19 basis points to the year-over-year revenue yield expansion.

Turning to expenses, we divide expenses into two major buckets, those that directly drive revenue and are part of our contribution margin and those that support our infrastructure and long-term growth and are part of adjusted EBITDA. As we review expenses in this section, please note that these amounts exclude stock-based compensation, depreciation, amortization and acquisition-related expenses. The contribution margin expenses that directly generate revenue include sales and marketing and origination and servicing.

Sales and marketing expenses consist primarily of expenses related to borrower and investor acquisition and activation, as well as overall brand building, including a test budget for new channels. They vary quarter to quarter with seasonality, channel mix, channel testing and additional marketing efforts designed to support new product launches. In the third quarter, sales and marketing expenses were $42.9 million, up from $20.1 million a year ago. As a percent of originations, sales and marketing expenses were 1.92% this quarter.

Adjusting for the reclassification of the personal loan sales team we made in the beginning of 2015, which moved expenses from origination and servicing to sales and marketing, sales and marketing expenses were 1.86% this quarter, representing a 14 basis-point increase year over year. Our core personal loan sales and marketing expenses were 2 basis points higher than last year, with the remaining 12 basis-point increase due to small business and education and patient finance. Sequentially, sales and marketing expenses declined 9 basis points, down from 2.01%. Our core personal loan expenses declined 9 basis points, while our education and patient finance and small business expenses were roughly flat.

Our origination and servicing expense consists primarily of personnel related expenses for credit collections, customer support and payment processing teams and vendor costs associated with facilitating and servicing loans, such as issuing banks and credit agency fees. In the third quarter, origination and servicing expenses were $16.8 million, up from $9.6 million last year. As a percent of originations and including the 6 basis point reclassification, origination and servicing expenses are 1 basis point lower year over year at 81 basis points. Quarter over quarter these expenses were flat at 75 basis points.

Both sales and marketing and origination and servicing expenses are netted against our operating revenue to derive contribution income and a contribution margin, which focuses on the efficiency of how we drive our revenue. On a dollar basis, our contribution income in the third quarter was $55.4 million, up 106% year over year. As a percent of operating revenues, our contribution margin hit a high of 48.1% in the seasonally strong third quarter, up from 47.5% in the prior year and 44.9% in the second quarter. As a percent of originations, contribution margin expanded 17 basis points from 2.31% to 2.48% year over year, driven by a 29 basis-point increase in revenue yields, offset by higher contribution margin expenses which were driven our newer products. As a percent of operating revenues, our core personal loan contribution margin has now exceeded our long-term 50% margin target.

The second set of expenses that are outside of our contribution margin but are included in our adjusted EBITDA margin are engineering, product development and other G&A costs. Engineering and product development include personnel related costs along with non-capitalized hardware and software costs. Our goal to launch one or two products a year on a scalable, efficient and secure platform and continue to push our technology advantage is reflected in our continued investment in our engineering and product development teams, who account for close to one-third of our total headcount. In Q3, engineering and product development expense increased $5.7 million to $12 million, up 90% year over year.

Despite rapid hiring, engineering and product development expenses as a percent of operating revenue declined slightly on a quarter-over-quarter and year-over-year basis to 10.4% in the third quarter. While we track engineering and product development expenses as a percent of revenue, at this stage of our maturity, we are not scaling these expenses to revenue and plan to continue to hire aggressively in this area, given our product development pipeline and focus on automation, scale and security.

Other G&A include fees paid service providers and personnel-related expenses for our support organizations such as legal, finance, internal audit, accounting, risk management and human resources along with facilities expense. These expenses were $22.3 million in the third quarter, up 70% year over year. Higher revenues delivered additional leverage this quarter, with G&A expenses as a percent of operating revenues dropping below 20% for the first time to 19.4% in the third quarter, down 3.8 percentage points from 23.1% in the prior year.

To derive our adjusted EBITDA, we subtract engineering, product development and other G&A expenses from our contribution income. Third-quarter adjusted EBITDA was $21.2 million, up 181% year over year with an 18.4% margin. Our stronger than planned revenue growth during the third quarter drover the majority of our higher than planned adjusted EBITDA margin. As a reminder, the third quarter is our seasonally strongest quarter.

Adjusted net income, which is GAAP net income excluding stock-based compensation and acquisition-related expenses, was $17.9 million, or $0.04 per diluted share, during the third quarter versus $5.3 million, or $0.02 per diluted share, in the same period last year. As I highlighted earlier, our GAAP net income was positive at approximately $1 million compared to a loss of $7.4 million a year ago. The difference between GAAP and adjusted net income is primarily due to stock -based compensation, which increased $2.9 million year over year to $13.5 million. Stock-based compensation as a percent of operating revenues declined from 18.6% last year to 11.7% this quarter.

Now turning to the balance sheet, as a reminder 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 equity deposits or borrowed funds. This is a fundamental differentiator for our marketplace model versus the traditional banking system, as we do not assume credit risk or use our own balance sheet to invest in loans. Rather, the loan sales and securities issued to investors match the balances, interest rates and maturities of the loans issued to borrowers.

When reviewing our balance sheet you will see both the loans as an asset and the corresponding notes or certificates as the offsetting liability. The changes in value of these loans, notes and certificates generally offset one another and do not impact our equity. As of September, total balance sheet assets reached $5.4 billion. Of this, $4.1 billion is in loans, $918 million is in cash and securities available for sale and the remaining $373 million is in other assets.

With that, let give you our thoughts about the fourth quarter as well as provide you with the first view into 2016. Our strong momentum and efficiency in the third quarter sets us up well despite heading into the next two quarters in which we typically experience negative seasonality. Despite these seasonal headwinds, we are raising our outlook for both revenue and EBITDA in the fourth quarter. We are increasing our operating revenue outlook to our range of $128 million to $130 million, up from the previous range of $122 million to $124 million that we provided last quarter.

We expect fourth-quarter adjusted EBITDA to be in the range of $19 million to $21 million, up from the previous adjusted EBITDA range of $13 million to $15 million. The midpoint margin of 15.5% increases from 11.4% in the prior year, reflecting significant operating leverage inherent in our business. Folding in the revised fourth-quarter outlook, our full-year operating revenue range increases to $420 million to $422 million, up from our previous range of $405 million to $409 million. At the midpoint, this new range implies an annual growth rate of 97%, up from 91% we provided on our last call. Full-year adjusted EBITDA is now expected to increase from a range of $49 million to $53 million to a range of $64 million to $66 million, with a midpoint margin of approximately 15.5%, or 550 basis points of margin expansion, compared to 2014's annual margin of 10%.

Finally, while we plan to give full-year revenue and adjusted EBITDA guidance on our fourth-quarter earnings call, we thought it would be helpful to provide you some early views on 2016 today. As we look ahead to next year, we continue to believe that the robust network effects and resulting momentum can continue to fuel rapid and profitable growth. As a result, we expect annual operating revenue to grow approximately 70% in 2016 and our full-year adjusted EBITDA margin to be roughly 18% of operating revenue. With that, let's open up the call for questions. Operator?

(Operator instructions)

Our first question comes from Heath Terry of Goldman Sachs. Please go ahead.

Great, thanks. Carrie, you guys disclosed that interest rates, or that borrower returns came down about 100 basis points year over year. I was wondering if you could give us is sense of what's behind that. Is that a function of defaults increasing? Is that a function of the fact that there's so much supply of capital out there?

And then will we look at the slowdown in custom loans growth, how much of that is a function of custom loans that are moving over to your standard formats versus maybe something else? And then last one, you made it pretty clear in your prepared comments that customer acquisition costs for you have generally been a place that you've been able to get leverage which is counter to at least what we seem to hear from a lot of your private competitors in terms of customer acquisition costs increasing our even some of the legacy banks that are in the space as well. I was wondering if you can give us a sense of what it is that you think that's allowing you see that thought leverage when most others aren't.

Yes, thank you. So I think the decrease in borrower yield really is a reflection of some of the network effect we detailed further this quarter and it's on page 12 of the earnings deck. I think as we continue to attract more and more investors and as we continue to build our track record, we are able to lower the returns we offer to investors and continue to not be supply constraints by any means and continue to see a very strong investor appetite. And we essentially pass a big part of the benefit to the borrowers in the form of lower interest rates and that has impact, positive impact in both ways. It lowers our own acquisition cost and that also addresses the third part of your question, with lower interest rates increasing the number of borrowers taking our offer, which increases our conversion which decreases our acquisition costs.

But also its positive selection from the borrower population and that positive selection feeds our good track record of performance which further increases the level of confidence from the investors. I think all that is working to our benefit and it's the benefit of all marketplace participants, because we believe that the negative impact on investor return is less than the positive impact on the borrower side due to that positive selection that essentially lowers the credit losses, so it's a benefit for all market participants, including us.

In terms of the share of custom, it's been pretty stable quarter over quarter. We haven't transferred any of the custom programs onto standard, so what you see is just a stable growth in both programs growing at the same pace. And then in terms of our ability to continue to grow very fast and double year over year with no increase, essentially, in acquisition costs, I think that a lot of the network effect at play, a lot of the investments we made early on in product quality of underwriting and servicing, compliance, back office and all of these investments of either, investment in products improves the customer experience, makes for my loyal customers, it drives more repeat customers and other investments in repetition, brand, compliance, back office, generates some great experience for consumers also accretive to the brand and our reputation online. We know our customers, or new customers have choices when they go online and they typically check the reputation of every firm and can see that Lending Club has four or five star rating on the review website and we generally have lower pricing, again and enabled by our very diverse investor base. So I think all of these factors really point to -- they all work together to generate more volume, more value for marketplace participants and better efficiency.

Our next question comes from Smitty Srethapramote of Morgan Stanley. Please go ahead.

Hey, thank you. Hi, Renaud and Carrie. First question is just on guidance for the operating revenue growth of 70% in 2016. Can you help us think about what part of the growth is coming from origination growth versus what part could from a continued increase in servicing fees? Also, how much of the growth in originations may be attributed -- may be attributable to the new product lines that you gave us a hint that you're going to be launching soon?

Thanks, Smitty. At this point, we can talk a little bit about the revenue yield this quarter 5.15% does reflect continued expansion from a couple of things. One, the investor mix as we have continued to bring on investors paying marginally higher servicing fees or market rate servicing fees and we been talking about that now for a few quarters. We think there is a bit of expansion that will continue there as well as then we made a change on pricing in this quarter on collection fees that will continue to roll in a little bit.

So there will be a little bit of continued expansion there but that's really rolled into our guidance for the fourth quarter into the next year and at this stage we really wanted to give high level view on the outlook for next year. We're not really providing specific color and breakdown. We are taking into account what we shared earlier, which is our intent to go into a new category in the first half of next year as well as continuing to invest in our existing products and bringing other products to market within our category. So those are the things that are embedded in that outlook but we're not providing more granularity at this stage.

Great and maybe just a follow-up question. At the Money 2020 Conference this past week, we met with a couple VCs in some of the smaller platforms and one of the things we've heard was there seems to be an increase in attempts, in fraudulent attempts to hit the marketplace lenders. And some of the smaller platforms have noted that they've seen an increase. Some of them noted there has been a lot of talk about newer entrants into the market seeing increased instances of first-payment defaults. Can you talk about what you guys are experiencing in this area and what you're doing to prevent fraudulent attempts?

We have not seen an increase in fraud attempts or in successful fraud rate. We're not surprised that other players with the such an increase. Fraudsters would typically would go the path of least resistance and companies of smaller or newer platforms wouldn't have had the opportunity yet to build some of the fraud detection and prevention mechanisms we've put in place over the last eight years. We're not speaking specifically about what ruse or -- because that would kind of defeat the purpose. But we're -- our fraud protection mechanisms are working well.

Okay, thank you.

Our next question comes from Scott Devitt of Stifel. Please go ahead.

Hi and thanks for taking my question. The growth that you are putting up with marketing efficiency and lower acquisition costs, it is impressive and a clearly displays your scale advantage compared to this narrative that exists around competition in the market. You also gave 2016 guidance of 70% revenue growth, which is well above the Street. My question as a relates to guidance is, in terms of expected customer acquisition cost trends that are implied with the 18% EBITDA margin guidance that you gave to sustain that growth, it would be interesting if you could discuss that a little bit as you look forward into 2016.

And then secondly, Santander, I believe today, announced exiting the consumer loan business and was wondering what impact that has on your relationship and more broadly if you can speak to the relevance or lack thereof of any individual lender on the platform?

Thank you Scott. It's still very early in terms of 2016 guidance so we're not breaking down much of the separate line items. As we get closer, we will get more granular. The margin guidance, to a large extent, is more driven by investments than it is by customer acquisitions. We decide at any point in time how much we want to invest in the product, engineering, back-office compliance all these things that drive essentially G&A headcount with the product, engineering and support functions. And our philosophy is that we have a very big opportunity in front of us and we're focusing on building long-term growth. We embedded in the 18% EBITDA guidance is continued investments in all of these areas.

In terms of Santander, they've been a great partner and were so very grateful for all of the relationship we've had with them over the years. This year specifically, they were single-digit percentage of originations. They stopped investing at some point over the summer as far as the main program and we were able to replace them with other investors essentially overnight. So that really speaks to the resiliency of the platform and really the power of the marketplace model and the diversity of our investor base and our ability to manage the flow of both supply and demand.

There's actually a slide in the earnings deck, page 11, that shows some of that diversity but also very broad appetite of our investor base and terms of both risk and duration. We think, again, that's a great benefit of the model now. That benefit will get even stronger in some different economic environments, especially as we go into the next cycle and we will show the resiliency the very diverse investor database we've built very patiently over the last eight years. I think we've have a big competitive advantage over some of the newer platforms that, for the most part, have no retail investors and considerable concentration in investor base or strong reliance on the securitization markets, which really isn't our case at all.

Thank you.

Our next question comes from Ralph Schackart of William Blair. Please go ahead.

Good afternoon. Two questions. First, Renaud, in the prepared remarks you said something along the lines of modifying some of the relationships with the banks to in part distance yourself from Madden. I was curious if you could broaden in a little more color on that statement and then the implications for Lending Club going forward? And the second question, Carrie, as it relates to 2016 guidance, can you give us a sense, even qualitatively, since it was significantly above the Street, what's your visibility on 2016, just maybe with a compared to 2015 at a similar point when you were casting those numbers? Thank you.

So with respect to Madden, we continue to see no impact from our investor base and released some new data showing that investors are continued to fund loans made to our residents of the three states covered by the Madden decision and that institutional, the share of institutional investors in these states has actually increase contrary, to rumors that we've heard in market. So that shows that investors, including the most sophisticated investors, are aligned with us in terms of our interpretation of the different facts of the Madden case compared to our situation. And so we believe there's -- that no change is necessary.

With that being said, to your point, as a matter of extra caution we decided to make a few changes to our relationship with issuing banks to make sure we could withstand a Madden type of case. We're not going to go into more details at this stage about what these specific measures are. We've done quite a bit of work, we think it's a proprietary advantage, a competitive advantage, so we're not discussing that.

And on the outlook for next year, as we continue to talk about we are neither supply nor demand constrained and so as we think about quarterly and annual growth, we're taking into account a number of factors that are based on growing the portfolio in a way that is responsible from the credit side, from the risk management side and certainly making sure that we are continuing to balance on the efficiency side as we grow. And so we believe as we look at several quarters that we continue to lay out how to balance all of those things. The implied origination growth that you just used, the yield from this quarter is just under $14 billion and so that is a sizable dollar amount that requires the discipline behind it to make sure that we are providing the best customer service and doing it in a responsible way.

Okay. Thank you.

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

Thanks a lot. I apologize if this is already been asked. If you could help remind me, trying to understand the relationship between the originations that you report in any given period and the amount of whole loans sold reported in the period and the relationship there. It looks like that, if I read the numbers right, your whole loan sales seem to have grown at a faster rate sequentially than origination. So just trying to understand that interplay a little bit and how it ultimately impacts revenue in the quarter. Thanks.

So we, during the quarter the originations, include essentially all types of funding behind it so there is in the press release a little bit of detail of how each is funded, whether it be from notes, certificates or whole loan sales. The method at which somebody finances it is really going to be more a preference of the investor and the investor type. Banks prefer to buy the whole loan, for example, as opposed to hold the security. And so the mix of whole loan sales versus our certificate or note funding is going to be really a function of the mix and appetite of the investors behind there. Revenue, when we look at revenue, we are looking at just total revenue as a percent of originations, which is essentially funded by all three methods.

And it's fair to say, I think I know the answer, but it's fair to say that all of the whole loans that you are selling in the quarter were originated during the quarter?

That is correct. We are essentially originating and selling within that same period.

Okay. Thanks.

Our next question comes from Josh Beck of Pacific Crest. Please go ahead.

Thanks. I wanted to ask a question on cost per funded loan. I think sequentially you said the core consumer cost per funded loan improve by nine basis points. Year over year, I think you said it was up two basis points. Could you just give us a little bit of color on what is going on underneath the covers, particularly on the year-over-year delta, if it was mix or comps or something else?

Sure. You're talking specifically about our core loan sales, so quarter over quarter we were nine basis points lower, year over year we were two basis points higher. I think the way to think about it is definitely channel mix and it's also a function of the investor appetite so if we're funding more As and Bs, there will be a different mix that will go into that. We do expect some level of noise in that on an annual basis. But that's really what's the function there, if you take a look at seasonally year over year, quarter year in that same sort of timeframe and that's what's driving that year over year.

Makes sense. Renaud, I think you mentioned unaided consumer awareness. I want to say you said 3%, maybe, is the early survey results that you've received. Where do you want that to go over time? Obviously, a lot of your competitors or products that you're replacing in the cases of credit cards spend a lot of money and have very powerful brands. Is that kind of the high water mark or are you just trying to make strides from 3% to 10% to 20%? Any other kind of color you could give us on where you'd like to see that go over time?

We're not managing brand awareness to a specific goal or target. In general, the way we're building brand is with great products and great service and great customer satisfaction. So that customers would both remain loyal customers and become repeat customers but also talk about us positively and our net promoter score continues to be at an extremely high. I think we will see some increased, organic increase of brand awareness. We don't believe -- in financial services, there's really no short cuts. It's not like some other consumer products where you can really connect the dots between awareness and sales. With financial services, reputation and trust is as important as just awareness. And so we're patiently building that reputation and that trust and I think the results of that already pretty visible in some of our metrics and I think will continue to unfold over time.

And last one for me, if I can, just on competition. I think there have been some announcements over the last several quarters of maybe more a traditional financial services or private equity firm are something getting interested or with plans to enter the online lending marketplace. Just would like to hear your take. Does that change the competitive dynamics at all in your view? Is that something that you're watching closely?

We are obviously watching the market very closely. We're not particularly worried about traditional institutions competing with us. Most of the announcements you've seen are really focused on different use cases, different market segments than what we focus on. At the end of the day, there are 6,500 banks in the country. It's a very big market, many different target segments and room for a very large number of players to be successful. But in areas where there is an overlap and where we compete, we believe our very low cost of operations, high-efficiency, great reputation, and very diverse investor base can only be built over a long period of time and track record, where there's also no short cuts. You need to build our track record over time. All of these factors really continue to give us increasing competitive advantage.

Great, thank you.

Our next question comes from Eric Wasserstrom of Guggenheim. Please go ahead.

Thanks for a much. Just wanted to follow up. You've been very clear about many components of the guidance but as I think about the EBITDA margin that you're talking about for next year, ultimately there's three levers of the improvement, right? There's a revenue margin, there's the expectation around expenses, and then ultimately just the tax rate. I am just trying to reconcile some of the comments. It seems that given the expansion, the leverage isn't going to come particularly out of expenses so it sounds like ultimately, unless there's a view on the change in tax rate, you're really zeroing in on continued revenue margin expansion. Is that a fair interpretation?

On EBITDA, that does not include taxes. This is our margin before taxes. What I would guide here a little bit on this would be to think about, we did share this quarter that in the core personal loan product our contribution margin is now in excess of 50%. And we believe that just looking at our three products, there is certainly more efficiency that we will continue to drive in our new products in small business and education and patient finance. That certainly will help continue to expand contribution margin.

Then we have -- the other lever is below contribution margin on our investments in G&A and technology, and there we will continue to invest heavily but certainly as you've seen over the last couple of quarters, there's continued leverage even in those areas. The other thing that I would remind you is that next year, we did talk about entering a new category and similar to when we launched small business and purchased Springstone last year, is we would expect going into that being less efficient out of the gate and those certainly will have some impact on being a bit dilutive on the margins and the directions that you've seen.

Thank you for the clarification. Just one other item. You put out an 8-K today having some changing in pricing that you put through various loan grade strata. I'm just wondering what the motivation for that was. In particular, was it a response to the increased servicing fees that you implemented in the period?

No, it's actually going both going the same direction. The net impact of the pricing changes that we released this quarter would be a price reduction, so lower interest rates for consumers. It's a direction that we've been implementing since the beginning of last year and again that comes from lot of the network effects we're seeing and the positive selection we're seeing in the borrower base. The fact that there continues to be a lot of appetite from investors, so that large investor appetite is allowing us to both marginally increase servicing fees but also pass on most of the benefits to the borrowers in the form of a lower interest rate.

Thanks very much.

This concludes our conference call for today. We want to thank you all for attending and we ask that you all have a very nice day. You may now disconnect your lines.