LendingClub Corp (LC) 2017 Q4 法說會逐字稿

Good day, and welcome to LendingClub's Fourth Quarter Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Artem Nalivayko, Investor Relations Manager. Please, go ahead.

Thank you, and good afternoon. Welcome to LendingClub's Fourth Quarter 2017 Earnings Conference Call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; Tom Casey, CFO.

Before we get started, I'd like to remind everyone that this conference call is being broadcast on the Internet. We have provided a slide presentation to accompany our commentary, and both the presentation and call are available through the Investor Relations section of our website at ir.lendingclub.com.

Also, our remarks today will include forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, our guidance for the first quarter and full year 2018. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release, the related slide presentation on our Investor Relations website and our most recent Form 10-K and Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

Also, during this call, we will present and discuss both GAAP and non-GAAP financial measures. Further, all operating expenses that we discuss exclude stock-based compensation, depreciation and amortization and expenses related to certain litigation, and regulatory matters. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and investor presentation.

And now I'd like to turn the call over to Scott.

Thank you, Artem, and good afternoon, everyone. It was great to see so many of you at our Investor Day back in December. There, we shared our vision for the company, discussed our marketplace model in detail, introduced you to our new management team and communicated how we'll strategically grow the business in today's dynamic environment. I hope that it was useful to see how we're evolving our business as we work to return to profitability.

Our mission is to empower those who strive to achieve financial success. As we explained at Investor Day, we're laser focused on delivering responsible, sustainable growth while investing in the future of this company, so we can help more people meet their financial goals and increase the transformative impact we're having on the American financial system. We'll do this by growing our personal loans business, laying down the foundation for growth with auto and other consumer products, driving operating cost discipline and resolving our remaining legacy issues.

To take a step back, 2017 was a year of transformation after we recovered from the events of May 2016. We returned to growth with the last 2 quarters each delivering the highest revenue in the company's history. We also returned to positive EBITDA, delivering over $44 million in 2017. While this is a significant improvement versus 2016, we can do better on the bottom line, and it will be a major focus for us over the course of 2018.

Throughout last year, we invested enormous effort in rebuilding this business for the long haul. We launched powerful new capabilities on the investor side and built innovative structures that further diversify our investor base and bring new revenue streams into our business.

In September, we implemented a new credit model to better represent today's environment, reflecting normalizing delinquencies and increasing levels of overall consumer debt. And we remediated several key legacy issues. These included closing out the material weakness in our controls and settling a major lawsuit. We accomplished all this while investing heavily in technology, compliance and controls to continue scaling this business responsibly.

Our efforts were designed so that we could enter 2018 prepared to execute against our long-term strategy. While we have work yet to do, we feel good about our progress and are reaffirming our guidance for the full year.

I'd like to take a moment to assess the broader environment in which we operate as we head into 2018. The fundamentals of the economy appear sound and consensus estimates predict 3 interest rate increases from the Fed. This will bring a new dynamic to the platform in 3 ways: First, for certain investors, the cost of capital will increase, and indeed, for some, it already has. Fortunately, our asset is well positioned for a rising rate environment given its short duration and relatively higher return. In addition, we've been bringing on new large-scale, low cost of capital investors, which we believe will further strengthen our position in this environment. We are also actively managing marketplace pricing to ensure we continue to deliver attractive risk-adjusted returns. As an example, we're making a modest increase in rates in some of our higher-risk, longer-duration loan grades today. And finally, we'll be evaluating agreements that further strengthen funding for especially the longer dated assets.

The second effect of rising rates will be on LendingClub. We are -- where we are now using our balance sheet to facilitate securitizations, CLUB Certificates and other programs that drive business value. When interest rates move, we will expect to mark loans on our balance sheet from quarter-to-quarter. Tom will share the details on how we plan to report on this going forward.

Finally, for borrowers, rising rates means that overall cost of credit will increase, and specifically, the rates on their credit cards will rise. So we believe we will be able to maintain the relative appeal of our offer. What's more, we believe that the rate and payment increase on their cards could act as a wake-up call for consumers that they should look for an alternative solution.

Aside from interest rates, let's talk about how our borrowers are feeling overall. The recent tax cuts are expected to put more money into their pockets, and with a strong economy and low unemployment, consumers are confident about the future and are taking on more debt. In Q4, consumer debt, excluding mortgages, rose to nearly $4 trillion. That's a 5.5% increase from the previous year, and non-housing debts now account for over 29% of overall consumer debt.

While helping them manage their debt responsibly represents a business opportunity for LendingClub, it does require vigilance. Rising debt levels enabled by the rising supply in the market, including in personal loans, has resulted in a return to long-term average delinquency rates and higher losses in higher-risk segments. We first referenced this trend 2 years ago and have taken substantial actions to reduce risk. While some of our actions have had a short-term impact on volume, it is the right thing to do for our loan investors, and we feel good about where this has put us in 2018.

Though it's too early to report conclusive results from our new credit model, we are pleased that early-stage delinquencies are down and the profile of new borrowers is improving. This quarter and in line with the trends we've been seeing, we're bringing additional data into our underwriting process to improve assessment of borrowers' debt management behavior and capacity. The new data is orthogonal to the credit bureau and helps us better identify risk. We believe that this data, incorporated together with our credit model, will ensure we deliver value to our investors and provide a stable foundation for growth.

So let's talk about how we execute on growth. As we shared at Investor Day, the personal loan market is getting increasingly competitive, but we believe that we are well positioned to maintain our lead and further grow the market. Our marketplace model, data, technology and product investments allow us to offer a compelling product to a very broad range of borrowers while delivering an outstanding experience.

There are 3 elements to our growth strategy as it relates to borrowers: demand generation, throughput and life cycle management. Demand generation is our ability to drive people to our site who are motivated to lower their cost of credit. LendingClub is a customer acquisition machine operating at scale and optimized for online and mobile. The machine is working as evidenced by the record number of applications we saw in 2017, up 43% year-on-year.

As we calibrate our marketing to our credit model throughout Q1, we continue to build new channels to reach customers. For example, last quarter, we launched a new borrower education center, a powerful resource that is focused on creating interactive visual content that extends our reach into new digital and social marketing channels.

Moving next to throughput, our efforts to convert the millions of applicants into fulfilled LendingClub customers by removing friction throughout the funnel. Over the last year, we made significant improvements to the application process. We have simplified and automated it to quickly verify income and employment without the cumbersome paperwork others demand. We've optimized the pricing and experience based on the output of dozens of tests, which were made possible by the new testing infrastructure we put in place last year. And we continue to innovate on the product to give LendingClub a competitive advantage. In Q4, we introduced direct pay off. By directly paying off customers' credit card debt, we can drive better behavior and better loan performance.

The third aspect of our borrower growth strategy is Life Cycle Management. Over time, we'll use our multi-year relationship with our large and satisfied customer base to provide additional lending products and appropriate non-lending products from a source they trust. An example of this is our auto refinance offering. While we're still optimizing the experience, we're pleased to say that we're saving customers an average of over $2,000 on the life of their car loan, and with some recent breakthroughs on throughput, our customer satisfaction scores are now on par with our personal loans business.

On the investor side of the business, we are building products and structures that allow us to open up access to the asset class and diversify our funding mix while generating more value for our business. We exited the year with a large installed base of self-directed retail investors, a long list of bank partners, a new set of funds under the recently launched LendingClub asset management portfolio and an entirely new program that makes use of our balance sheet that we're calling our structured program.

The structured program includes securitization, which provides liquidity and attractive funding to existing clients, gives us access to new highly scalable and low-cost funding partners, and generates significant revenue for LendingClub. Since our launch in Q2 of last year, our securitization efforts have brought us 35 new investors, delivered over $1 billion in funding, and generated approximately $9 million in revenue.

Building on the success of the securitization program, we launched the CLUB Certificates program in Q4. This product is a first of its kind in the industry: a whole loan pass-through vehicle that is structured like a fixed income security. We have a strong pipeline of demand for the CLUB Certificates product and believe it will be an important part of our evolving funding mix.

Before I hand it over to Tom, I want to take a minute to discuss the settlement we announced today relating to the class action lawsuits arising out of the company's 2016 disclosures. As we discussed last quarter, our efforts at mediation commenced in November, and we've been working since then towards resolution. While the number is significant, we are pleased to put this matter behind us. These lawsuits were our single largest financial exposure, and considering the risks, timing and legal costs, we believe that this agreement is in the best interest of the company and our shareholders. We were prepared for this event and have been maintaining sufficient liquidity. Importantly, we expect no material impact on our business operations going forward.

I do want to remind you that we are still addressing other outstanding legacy issues that will result in elevated legal costs. They are detailed in our upcoming 10-K but include litigation, ongoing government investigations from the FCC, DOJ and FTC and indemnification obligations for former employees. While it may take a few quarters for us to get these issues resolved, today's announcement is a major step forward in putting the events of 2016 behind us.

Importantly, back to the core business, we're pleased with our position as we enter 2018. 2017 was a year when we rebuilt and transformed LendingClub, we introduced new innovations on both the borrower and investor side of the marketplace and sequentially delivered 2 of the largest revenue quarters in our company's history. As we enter 2018, our core business will continue to grow and we will be focused on operational efficiencies to drive our profitability while making the right investments for our future. We are eager to execute and deliver.

With that, I'll turn it over to Tom to provide the details on our Q4 financials and outlook for Q1 2018.

Thanks, Scott. We're entering 2018 with healthy core operations and are on track for our 2018 growth plan. In the fourth quarter, we delivered our third straight quarter of revenue growth and achieved record revenue for the second quarter in a row. We delivered revenue of $156.5 million, up 20% from a year ago. We continued our focus on execution, delivering a contribution margin in -- at the high-end of our 45% to 50% range and adjusted EBITDA of $19 million.

Now turning to 4Q operating results. Total originations grew 23% year-over-year and were flat sequentially, which we feel is a solid outcome given the contraction of credit we implemented with our new credit model. Transaction fee revenue of $121 million was flat sequentially and up 19% year-over-year. Transaction fees as a percent of originations were 4.95% in the fourth quarter, a 4 basis point decline from the third quarter, and this is consistent with what we discussed at our Investor Day as we shift our mix to higher-quality borrowers that have lower origination fees. Investor fees grew $3.8 million or 19% sequentially, driven by both growth in our servicing book to $11.9 billion as well as an increase in the weighted average servicing rate.

Before I go through the rest of the income statement, I want to call your attention to the fact that we changed the presentation to better reflect the evolution of our business model and the use of our balance sheet. If you please turn to Page 16 of our earnings presentation, you'll see that we have taken other revenue and split it into 3 pieces, which include gain on sale of loans, fair value adjustments and other revenue. This allows you to see how the interest income we earn from loans on the balance sheet is offset by the corresponding fair value adjustments and interest expense on related warehouse lines of credit. We believe the resulting line, net interest income and fair value adjustments, is a more accurate reflection of the net revenue that we earn from loans on the balance sheet.

Now turning to Page 17 of the earnings presentation, we've broken out for you the economics from our structured program that are a subset of our total net revenue. This program includes all revenue from securitizations, club search, block sales, risk retention, residual securities and any assets we fund to balance the platform. The revenue we earn from interest income and gain on sale is partially offset by program costs, interest expense as well as fair value adjustments on loans we held throughout the quarter. So for example, to the extent we retain the residual on a securitization, you'll see the interest income we earn on the loans offset by interest expense and the fair value adjustment.

You can see the 2 biggest drivers in the fourth quarter were interest income of $13.1 million offset by fair value adjustments of $9.1 million on loans that we held through the fourth quarter, including loans at year-end that we anticipate selling in the first quarter. You will see our structured program revenue delivered $2.8 million total net revenue in Q4, driven by the completion of 2 securitizations and 2 CLUB Certificate sales in the quarter. For the year, this new structured program generated $9.1 million in net revenue at very high margins. While this program may result in some variability quarter-to-quarter, we feel great about the potential of this structured program as a new and growing revenue stream heading into 2018.

Just to connect some of the dots on the difference between the fair value adjustment from the structured program and the total you see on the face of the income statement, this reflects 2 items totaling $7.6 million. First, we took a charge related to the completion of selling the legacy LC Advisor funds. This charge shows up as a net $4.1 million fair value adjustment on our Q4 revenue results. As we also discussed last quarter, we suspended the offering of F&G loan through our platform as we test performance by using our balance sheet. In the quarter, we took a $3.5 million fair value adjustment for these loans. Both of these were partially offset by interest income and gain on sale but taken together, had a negative net revenue impact of $5.7 million for the fourth quarter.

Now let's look at contribution margin. As I mentioned earlier, we came in at the high end of our targeted 45% to 50% range with a contribution margin of 48.2%. The contribution margin level was achieved through revenue growth and deliberate marketing expense management partially offset by higher origination and serving costs in the fourth quarter.

Sales and marketing expenses was $58.3 million or 2.39% of originations, up 2 basis points sequentially and improving 27 basis points year-over-year. Though we were very pleased in the marketing efficiency in the fourth quarter, we expect marketing cost as a percent of originations will be a little higher in Q1. This is due to a seasonally lighter quarter and additional investments in testing we're making to position us for the full year.

Originations and servicing costs were $22.9 million in the fourth quarter, up $2.6 million sequentially. As you've heard us talk about before, we're making investments to improve speed and conversion in the funnel. We also have a number of exciting initiatives to drive long-term efficiencies in our O&S costs. One that we want to highlight is a recent agreement to augment our staff with a third-party operating out of a lower-cost location. While we see -- may see higher cost as we bring them online, we expect to see benefits as we get them up and running.

Engineering spend was $21.4 million in the quarter, up $2.2 million sequentially as we continue to invest in our technology infrastructure, credit model platform development and product features and capabilities. While not significantly impacting the fourth quarter results, we have recently signed a multi-year agreement to purchase a loan servicing platform that will allow us to focus our engineers on higher growth areas while providing us with operational flexibility and lower maintenance costs.

Turning to G&A. Costs were $34.9 million for the quarter. As you may recall, we had legacy costs and insurance recoveries impacting this line throughout the year. This quarter, we had legacy costs of $6 million and insurance recoveries of $9.2 million. Legacy costs net of insurance recoveries had a $3.2 million favorable impact on the G&A line for the quarter. Excluding the insurance reimbursement and legacy costs, G&A expenses would have been about $38.2 million. Going forward, we will exclude these legacy costs in our adjusted EBITDA definition so that we can focus on what's happening in that online business performance.

To recap, the impact from legacy issues on total EBITDA for the quarter had a $6 million of unusual items hitting G&A and $4.1 million hitting revenue from the sale of the LCA -- Advisors, as I mentioned earlier, for a total impact of $10.1 million, partially offset by insurance recoveries of $9.2 million. Altogether, these items had approximately a $900,000 negative impact to our adjusted EBITDA for the quarter.

For the quarter, adjusted EBITDA was $19 million with margin at 12.2%, a 1.4 point decrease sequentially and a 12.9 point increase year-over-year.

As we told you at our Investor Day, our goal is to exit 2018 around a 15% EBITDA margin. I will note that our path to 15% will not be a straight line, and we expect 1Q margins to be the low point for the year based on some of the seasonal demand and expense items I discussed.

That said, I'd like to detail some of the key components of our margin expansion in 2018. First and foremost, our plan has us continue to grow in 2018 with revenue growth in the range of 18% to 22%, while total expenses are estimated to grow at 14% to 16%. This will drive about 3 to 5 points of margin expansion over 2017's level.

As I spoke about at the Investor Day, the margin improvement will be driven by increasing revenue yield and a focus on managing our fixed costs. I mentioned a few areas we already focused on, and we're reviewing additional efficiencies in our cost model to drive incremental margin expansion in 2018 and beyond. Put simply, we heard investors loud and clear following our Investor Day, and we're dedicating serious time and effort to improve our profitability for our shareholders.

Lastly, I'll touch on our settlement, which drove most of our GAAP net loss for the quarter of $92.1 million. Because of the impact of the settlement on our cash position, I'd like to update you on how we think about capital liquidity management. As Scott mentioned, we do not expect this settlement to have any material impact on our business operations or the amount of capital we plan to deploy. We have maintained a high cash position as a liquidity buffer, in part, to ensure readiness for precisely this event. We will continue to execute against our strategy in 2018 as we put these legacy items behind us.

As an additional liquidity buffer against any future headwinds, we also have the ability to borrow against our corporate credit facility to preserve our high cash position. Put simply, our plan hasn't changed.

Now before I go into my guidance, I want to call out a few items that will impact our guidance going forward. As Scott discussed earlier, our new structure program is paying dividends for LendingClub. We're very pleased with the economics the program provides and we look at over a long term is an important part of our investor strategy to reach new investors and increase our revenue yield. As we ramp up this program, the timing, deal size and marketing conditions will introduce some variability into our quarterly results, so we'll be providing you with a wider quarterly revenue range than we have in the past.

With that, let's turn to our outlook. I want to be clear on how we're looking at guidance in 2018. While we made great progress getting the civil actions behind us, as Scott mentioned, we do have a number of legacy items that we continue to work through. As a result, our adjusted EBITDA will not reflect the impact of legacy issues. However, please note that while our GAAP guidance does not include an estimate for legacy costs because those costs are not -- are neither probable nor estimable at this time, I do expect to have some ongoing litigation costs that will affect our quarterly and annual GAAP reported results.

For the first quarter, we forecast revenue between $145 million to $155 million and adjusted EBITDA of $5 million to $10 million. We expect stock-based compensation, depreciation and amortization will be about $30 million, resulting in a net loss between $25 million and $20 million.

For the full year, I'd like to reconfirm the guidance I gave you at Investor Day in December. We feel good about our groundwork we laid out in 2017 that puts us in a great position to deliver against our plan in 2018. For 2018, we expect revenue of $680 million to $705 million and adjusted EBITDA of $75 million to $90 million. We expect stock-based compensation, depreciation and amortization will be about $128 million, resulting in a net loss between $53 million and $38 million.

And now I'd like to turn it back over to Scott.

Thanks, Tom. As I mentioned at the beginning of the call, 2017 was a year of transformation for LendingClub. We are making the right decisions to manage this business for the long term. We're pleased with the accomplishments and feel well positioned as we enter 2018.

So with that and given the amount of information we put out today, I'm sure there's a lot of questions, so we'll turn it over to Q&A.

(Operator Instructions) Our first question comes from James Faucette with Morgan Stanley.

Just had a -- I'll kick off with a couple of questions. The first is when you look at your acquisition or customer acquisition activities, et cetera, can you give us a sense -- I know you mentioned that you're happy with that. But can you help give some additional color and quantification of how things are going around close rates, conversion rates, et cetera, on that side? And my second question is you talked a little bit about how the rising interest rates, how you felt like that could increase the number of consumers looking to refinance loans, but one of the concerns for investors has been what would happen to the demand for loans if interest rates rose and would the current investors that are buying LendingClub loans be able to satisfy their yield requirements elsewhere. So just wondering if you're seeing any change and indication of interest in loans and in buying LendingClub loans, et cetera.

Hey, James, so the first one was about close and conversion rates. I kind of broke out the 3 different areas we're working on in marketing, talking first top of the funnel. We are continuing to open up new marketing channels, test new marketing channels and that, together with what's happening in the overall broader competitive market, which is new people jumping into the space and spending dollars, is increasing the awareness of this category and the utility of this product. We talked about this a little bit at Investor Day that we feel like the market is still underpenetrated. So if you just look at the sheer amount of consumers carrying high interest revolving debt, it's a good thing to have people made aware of a personal loan as a smarter solution. So that's driving a lot of activities top of the funnel, including those impressive increase in application metrics I indicated. It is -- corresponding to that is the throughput number. Close rate numbers have come down because, obviously, with application numbers up by 40%, the difference is both the credit contraction that we have made on our side as well as just overall more cross shopping by consumers. That's why we highlighted a lot of the throughput efforts that we really have been investing in throughout last year. I talked about the testing infrastructure we put in place that's allowing us to continue to optimize our experience, our pricing and then also product features, like direct pay off, which are unique to us and allow us to offer a different and more compelling product to customers. So that's closing conversion. In terms of rising rates demand for loans, again, taking a step back, another -- some more information we shared at Investor Day, overall, this asset class is very attractive, high rate, short duration. And so we feel we're well positioned for a rising rate environment. In terms of who will be participating on the platform, we do expect that will continue to evolve, and that's why we're really making a point to emphasize the activities we engaged in last year are bringing us a different breed of investors. These are lower cost of capital, longer-term investors that we think position us well for this environment. So we are seeing an evolution, and we think it's to the benefit of the platform and to the borrowers. I don't, Thomas, if you have anything to add.

Yes, just to add to that, James, in a rising rate environment, investors don't want to get too far out on the yield curve, take too much duration risk, and this product allows them to stay short but still get a attractive return.

And it's worth noting, if you just look at what's happening in the capital markets as an indicator as this product, the track record increases and execution increases, we're actually seeing, despite the rising rates, that the performance of the deals in the market has been improving.

Our next question comes from Brad Berning with Craig-Hallum.

Just a couple follow-ups to start with on the settlement. Can you be a little bit more specific about which cases have been settled? And while not reasonable and probable to estimate the other ones, is it feasible for the other legal issues out there to be anywhere near the magnitude of the exposure that we've seen here? And then lastly just on the new credit models, you touched on it. But can you give us a little bit more color how far in and what kind of magnitudes of improvement that you're seeing on the new model versus the old versus what you expected? If you could dive a little deeper on the new credit model please.

Okay. Hey, Brad. So in terms of the lawsuits, this is the federal and the state class action lawsuits. The -- they were arising out of the 2016 disclosures. In terms of the scale of these, we do believe that these represented our largest financial exposure. The remaining issues, as I indicated, are derivative lawsuit from this, which is not against the company, and then some ongoing government investigations with the FCC, DOJ and FTC. It's obviously difficult to predict the outcome of those with any certainty, but we are cooperating there and moving quickly to resolve those. In terms of the new model, I want to -- I'd say, it's really -- the model went in and September, so we really only have 2 months of data on a month's worth of loans and a month of data on the subsequent months. I think what we can say is if you just look at the only metrics available to us, which is what's the profile of the borrower, just in terms of some of their scores at the bureau and overall debt and delinquency levels, we can see an improvement. And if we look at just the first and second payment defaults, we also see an improvement versus Q3. So all we want to signal there is positive early signs, but by no means are we kind of reporting out that we have any kind of conclusions we can draw.

Understood. And the $361 million of investments that's held for investment versus the category in the balance sheet where you talk about held for sale, is there going to be an intent to actually hold those to maturity of the $361 million? Or is that -- just you can help us understand kind of the distinguishments you're making on the balance sheet there.

Yes. Those are the securitization that we did in December on the prime side that we did not send -- sell the residual, so that shows up as assets offsetting with liabilities, Brad. So that's what you're seeing there. We're holding the residual right now. We may find an opportunity to sell that in the future. We don't have any intent in the short term, but it's something that we'll continue to evaluate as we look at our capital allocation. But no plans to sell it right in the short term.

Our next question comes from Jed Kelly with Oppenheimer.

So digging back into sales and marketing. When you were at similar levels of originations, I think, back in fourth quarter of 2015, sales and marketing expenses were 2% of origination. It's now increased close to 2.4%. Is there anything that you could speak to that's changed over the past couple of years in terms of qualifying traffic or competition?

Yes. The big change -- the biggest driver there is going to be our own actions to contract on credit to drive returns for investors. That's the single largest piece, but as indicated earlier, certainly, the effect of competition will play into that as well. What we're doing to offset that is looking at, for example, the structured program we just talked about, to increase the overall revenue yield of the business as well as looking for ways to drive some of those costs down. Tom mentioned some of the initiatives we have, and O&S as well as those throughput initiatives I mentioned, which will increase conversion rate had help bring those costs down.

And then can you speak to anything you're developing internally to make it easier for smaller banks to onboard easily -- more easily on your platform?

I mean, I think if what you're referring to is our bank partnerships, I mean, in general, we've got our longest list of bank clients that we've ever had in the company's history and a lot of the work we did post our 2016 events to strengthen our controls and compliance infrastructure has enabled us to deliver a pretty complete package for potential partners to make sure that we are meeting the same standards of security and compliance that they have in (inaudible) that's the biggest thing.

Okay. And then last one for me. Your headcount was up 20% in the fourth quarter. How should we be thinking about headcount going into next year?

Jed, we don't comment specifically on headcount, but it does align with some of the investments we talked about in tech. We also saw some increase in our servicing and M&S areas in anticipation of volumes. That's going to move from period to period, but I think, overall, that's what you heard us say. We're going to continue to look at that and see where we can drive more efficiencies. I mentioned a couple of them today. Hopefully, we'll be able to give you a couple more as we move through the year, but it's an area of focus for us. But no specific forecast on headcount.

Our next question comes from Kerry Rice with Needham & Company.

A couple questions on the structured programs. You mentioned the mix a little bit, a couple securitizations, a couple CLUB Certs. Is there any more color you can give there just on total value of each of those? And then anything around -- thinking about cadence in -- for 2018, should we now think about a couple of each of those a quarter? And then the second question is it looked like the banks as a percentage of originations and investor type was down a little bit. Is that seasonality? Is there anything else to draw from that?

Yes. Let me take -- start with structured program. As we said in our comments, we're very excited about the program, and at the same time, we've really started from absolutely nothing. If you think about where we were just a few quarters ago, we did our first securitization in late in the first half of the year. Now we've gotten to a point where we've got the 2 securitizations in the fourth quarter, and we did 2 CLUB Certs in the fourth quarter. The financials, obviously, are coming through. That's why we've given you that 1 page to kind of give you a sense on where they are for the quarter, about $3 million, $2.7 million of net revenue. We think these can continue to become a more meaningful part as we get ourselves into a more normal cadence. We get these products rated. We continue to drive more and more investor adoption. We're quite encouraged by both of those programs, and I think, in 2018, they'll become more mature as we calibrate the program. As far as cadence go, that's one of the reasons why I brought it up. The ability to do securitizations, for example, are sometimes limited. For example, we've been out of the market for the first part of this year since we don't have our 10-K out. So the windows for deals are challenging in certain quarters, but we expect to continue to have these both near-prime and prime securitizations and continue to expand the investor base in our CLUB Certs. So we're encouraged with those 2 programs, and we'll continue to keep you abreast on the profitability, but we're quite encouraged on just the whole new outlet of investors. Scott, did you want to comment on...

Yes. So the mix, we had indicated that this was our expectation going into Q4 that had to do with the conclusion of an arrangement we had with the U.S. arm of a Canadian bank to purchase assets on the platform. We had indicated that was a year-long deal that came to a conclusion. The conditions under which we had signed it at the time were different for LendingClub, so we had said then and we'd repeat, we certainly believe that having kind of long-term funding arrangements in place with key partners can be accretive to the overall mix, and we'll evaluate those as situation based, meaning in a way that makes sense for what our needs are today. But the shift in Q4 was specifically that deal rolling off and the platform adjusting.

Our next question comes from Steven Kwok with KBW.

I guess, the first one was just around the loan servicing platform that you're acquiring. Can you tell us what does it give you that you previously didn't have? And how does it help you guys going forward?

So our loan servicing system is something that we have developed in-house, and essentially, what we're doing is moving to more of an industry standard provider for that platform. The benefit for us of that is -- there are multiple benefits. One is the product itself is not what enables us to differentiate and compete in the market. So having our internal engineering resources working against the development and maintenance of a loan servicing platform is not high value add so essentially allow us to take our internal staff and put them onto things that are really more of a competitive advantage for us. And two, it provides us with more operational flexibility going forward, the ability to integrate more easily with other third parties because we'll be using a standard system. So those are the big benefits.

Got it. And then just around the timing of the higher-risk accounts. What innings are we there? And do you expect to have any impact on your originations as a result of raising some of these interest -- the interest rate there?

Certainly, raising rates can, depending -- different consumers are more or less sensitive to rates, and so -- but as a general statement, raising rates can generally lead to a decline in take rates, but all of that is really -- our view of the overall market is factored in to the guidance we gave for the year. So this stuff will vary quarter-to-quarter. We're always going to be adjusting rates, reflecting supply and demand on both sides of the platform. And we'll also always be optimizing the credit model. So that's all incorporated into our view of the year ahead.

Got it. And my last question is just around the transaction fees as a percentage of loan originations. That's been coming down, about, call it, 5 basis points per quarter. How do we think about that as we go through 2018? Like at what point should we reach a steady state on that rate there?

So the overall decline, I'll say, is consistent with our shift towards a higher-quality borrower. And as I mentioned, if you look at that within the context of the overall program, that's why we're pleased with some of the initiatives on the investor side to drive overall transaction revenue or revenue yield up. Tom, I don't know...

Yes. So just to give you some context, the transaction, these have come down a little bit this quarter. They've moved around about 5 bps really throughout the year. The most recent one is due to the higher-quality credit that we're pushing up as opposed to -- because of new credit model. I'd also add to what Scott said. Actually, the revenue yield is up pretty significantly year-over-year, and that's reflecting our more holistic view of looking at both the borrower and the investor side. So to the extent that we can provide lower prices to borrowers and then extract more value through the structures we provide, that's a real win for us. And so we look at it as total revenue yield, not just the transaction fee itself.

Our next question comes from Mark May with Citi.

I think the company's been generating -- originating loans for about 10 years now. I've seen you have a decent number every year of loans that are maturing. Question is can you give us a sense of what portion of those are not refinancing but originating new loans. I would imagine that, that, if it can become a pretty decent portion of your total new loan originations, could be a nice tailwind to marketing efficiency. And then in terms of the guidance for the year, what sort of revenue contribution are you assuming for structured deals? And then lastly, sorry, for the third one, but the -- I think that you are guiding to GAAP net income and -- which would be inclusive of legacy costs. If so, can you give us a sense of the amount of legacy costs that you're -- that are baked into your GAAP net income guidance?

Okay. So I'll start on the customers. So indeed, as this business matures, the size of our customer base has become a competitive advantage for us, and we are seeing customers, given the utility of the product and the ease with which we made it possible to get a loan, we are seeing -- and the satisfaction from our borrowers based on their first interaction with us, we are seeing borrowers come back to us for subsequent use. We will plan -- we have not yet released publicly all the details on that. We -- it is an important part of our overall marketing strategy, so we will plan to share more in the coming couple quarters to give everybody a perspective on that. But your high-level assessment is correct. Tom, do you have...

Yes. So on the structured program, a couple things. We haven't given specific earnings number -- revenue number, but let me give you some context. When we've started this program, we believe that this can be a -- somewhere in the 15% to 20% of our volumes. So the way to think about it is the percentage of our volume that we originate, we think, can go through our balance sheet and be structured to reach a whole new class of investors. So that's the way we're thinking about it. It's difficult to pinpoint a specific dollar amount right now because we're still trying to figure out exactly what we think the cadence and the mix will be between these various products. But we're encouraged by it, and that's why we're breaking it out separately. So that's the way I would think about it just from a volume of what's going to go through the manufacturing shop, if you will, to create a structured product. Your next question on GAAP, let me be really crystal clear. The GAAP net income guide does not, does not include any legacy cost assumptions in it. This is a little unique because GAAP is GAAP. Net income is net income, but that guide really not really as meaningful as it would be in the past because when we book these items, they're going to hit the net income. What we're saying is that they're not in that guide. So really, really important. Thanks for bringing it up. Just want to emphasize that. So hold us to our revenue guide. Hold us to our adjusted EBITDA, but the net income, we know, is going to have some additional items in it in 2018. We just can't predict them right now.

Our next question comes from Henry Coffey with Wedbush Securities.

In terms of really understanding the business, the biggest issue seems to be throughput. How much of your applications can you convert into loans? How are the structured finance programs and the CLUB Certification -- the Club securitizations factoring into that? Are they -- is the quality mix in those the same? Or is that where more of the near-prime product is working its way?

So you're definitely right. It does help with throughput, but there are a couple different ways. I'd like to have you think about it in a couple different ways. First, we talked about this as kind of being a finished good, where we can put structures and get them rated and market them to a group of investors that wouldn't typically just come on the platform. So we do get additional value that way. But at the same time, it does allow us to consider pricing flexibility back to the borrower that may make us more competitive to improve our take rates in the platform. So they definitely are connected. It's not typically a one-for-one. The program itself is -- the structured program is for really all products. So it's near prime and prime. So for example, on a CLUB Cert, an investor can come in and pick and choose if they want what grade they want, what term they want, and then we'll package up a CLUB Cert to meet their needs. So it really does create enormous flexibility for investors as well as support the platform.

On the institutional investor side, are you running into accounts that are having mark-to-market issues because the charge-offs are higher, rates are going to go higher? Is that altering the demand equation? Or are they still fairly robust?

Well, clearly, as Scott mentioned, clearly, rates have gone up, and anybody who's in the fixed income market with rates increasing is going to be subject to some mark to markets. The short end of the curve has moved quite a bit in the last few months, and so anybody who has a portfolio subject to those types of rates is going to feel that a little bit. What we've indicated is that this is a pretty short-duration asset, so while that mark may happen in the short term, the amount of cash flow you generate allows you to reinvest pretty quickly. And so your real value at risk, if you will, is a lot less than if you were out on a 5-year part of the curve. So this is a very, very important asset, we think, in a rising rate environment because it allows investors to reinvest pretty quickly given these things are probably a 1.5 years type duration, and even in our 60 month is a little over 2-year duration. So you don't take a lot of interest rate risk in this product.

It's also worth pointing out these interest rate increases affect different investors in different ways. For banks, as an example, their cost of capital have not yet gone up in the same way that those using leverage have seen an increase. So what we are seeing on the platform is more an evolution amongst investors and an ebb and flow amongst investors.

Our next question comes from Rob Wildhack with Autonomous Research.

I know you mentioned margin improvement as we move through the year. It sounds like more of a gradual improvement rather than a step function in any given quarter. Is that the right way to think about it?

Yes, I think that's right. I think our business, we have a lot of scale. I think in order to drive chunks of margin improvement is always a little challenging. But to the extent that we can get the structured program up and running at a higher level in the short term, that would obviously help. But it is going to be, if you will, a stair step to higher margins.

Got it. And then, Scott, you mentioned some non-lending products when discussing life cycle management and the growth strategy there. Can you give us any sense for what you're thinking about there?

No, I'm not going to give too many details right now. I'm just dropping some breadcrumbs for you to follow for later.

Our next question comes from Michael Tarkan with Compass Point.

Just back to credit. Can you talk about -- I know you've tightened on the lower end of the spectrum. But are you seeing anything on the higher end of the spectrum? We've seen some issues with some of your competitors, whether they're traditional or marketplace lenders. Just any color there? And then the second question is, on the funding side, I think, Scott, you mentioned evaluating some things with some investors for the longer-term product, and I'm just wondering if that's going to take the form of what we've seen previously, whether it's accruals or incentives or anything. How should we think about that?

So on the credit side, what I'd say is the upper end of the market has remained largely stable for us, and where we've been seeing more of the stress, again, has been especially in the higher risk part of prime. So the -- our portfolio in custom, which is 600 to 660, actually remained pretty stable as well as our A through C grades. It's really been D through G grades where we've seen the issue. And again, that issue has been -- a couple of things: One has been just the accumulation of debt as I talked about what the supply to the market. That's driven both an increase in defaults but also prepayments, which also impact investor returns. And a lot of the changes that we've made have been -- including the ones I talked about today, are really specifically targeting that behavior in this -- today's environment.

Just on the funding side, look, our goal is always to have the platform in balance. So to the extent that we seek specific types of investors to -- that are attracted to certain types of assets, it's something that we continuously do. We talked a lot about our new tools to do some of that with the structured program, but from time to time, we'll look at all things on the table. We just felt it was time to talk about it since the previous deal had rolled off. We will consider other things like that as well.

Our next question comes from Heath Terry with Goldman Sachs.

To the extent that you can kind of give us a little bit more detail on what you're seeing a little bit further down the funnel, you talked about 40% growth in application. Obviously, some of the difference is coming in tighter standards. Do you have a sense of how many of those people that you ultimately either approved or offered a rate to went on to fund somewhere else? I know that's probably difficult. But just do you have any sort of anecdotal or sense of sort of where that's happening just to extent that maybe some of the competitors in this space are keeping their standards a little bit more open? And then you opened the call starting -- talking about the focus on profitability. Is there a particular either absolute or margin level of profit that you're targeting above, which you feel like you can go back and start investing in incremental growth? Or is there another way you'd have us think about that?

Yes. I mean, I'll take the second one first here just on the margin side. We had kind of laid out a goal for ourselves last year, and now we're laying out a new one this year at 15% EBITDA margin. But it's a real balancing act, Heath. We don't want to underinvest in our business. We see terrific opportunities for us to accelerate our growth, take advantage of our scale and lead this industry. So we want to be balanced about just how much we squeeze out of our infrastructure. But to say that I think there is opportunity now as we've gone through the '16 and '17 events, as Scott mentioned, we've taken a long view, I think '18 is a chance for us to take a look back at our infrastructure and tighten up where it doesn't hurt our growth but drive some efficiencies. So we've put out 15%. Obviously, we won't stop there if we can, but that's where our goal is for the year. And that's kind of how our guidance kind of connects to it as well.

And just coming back on close rates, Heath. There's a lot happening there. So yes, we can get a view into borrowers that are coming to us and what do they do subsequently. Some of what's happening is just an increase in shopping as I mentioned, right, which is people just -- now they're aware that the product is out there, and they're exploring it, checking their rate, essentially seeing if they want to go through with it. We think that's a good thing. They might not close a loan today, but the fact that they know and they're out exploring is a good thing. And in other cases -- so they could be looking, doing nothing. They could be looking going with us or looking and going with someone else. I think the point you're getting at is valid, which is there's a lot of new people in the market and we base our own pricing off of a combination of the risk of the borrower based on expected defaults and prepayments together with the demand we're seeing from investors as well as the demand we're seeing from borrowers. I think there is certainly the possibility that some of the newer entrants into the market, who are not operating off of some of that historical data, are kind of coming in and using basic bureau-based data to do pricing, and there could be a difference there between what we're offering and what they're offering. And I'll just say I feel good about our pricing there.

Okay, I think we're up on time, Artem, yes? Thank you, everybody, for making the time available, and we'll speak to you all soon.

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