LendingClub Corporation (LC) Q3 2015 Earnings Report, Transcript and Summary

Good day and welcome to the LendingClub Third Quarter 2015 Earnings Conference Call and webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to James Samford, Investor Relations. Please go ahead

Thank you. Good afternoon and welcome to LendingClub's third quarter of 2015 earnings conference call. Joining me today to talk about our results are Renaud Laplanche, Founder and CEO and Carrie Dolan, CFO. Before we get started I'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 and 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 the new information of our future events. During this call we present both GAAP and non-GAAP 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 few specific new slides including Slide 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 on year-over-year comments are comparisons to the third quarter in the prior year. And now I'd like to turn the call over to Renaud.

Thank you, James. This quarter was our best quarter so far. We continue 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. It 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 are in a position to raise both our revenue and EBITDA outlook for the quarter and for the year. The magnitude of the market opportunity and our growing competitive advantage in the space put us in a position to set significant growth targets from next year with 70% revenue growth and expanding margin. Now let’s dig into specific results and contacts for the quarter. Following with originations, loan originations of this quarter increased 92% year-over-year to $2.2 billion compared to nearly $1.2 billion in the same period last year. About $13.4 billion in consumer and small business loans have now been issued since inception including more than $7.2 just in the last the 12 months. Operating revenue this quarter was $115 million, up 112% year-over-year. Revenue grew faster and originations as strong credit performance and investor appetite give us the opportunity to increase investor fees while preserving strong platform returns. Favorable investor needs also helped increase our revenue yield. Adjusted EBITDA was $21.2 million, up 181% year-over-year with margins expanding sequentially for the third consecutive quarter from 13.1% in Q1 to 18.4% in Q3. But we believe the remains considerable margin leverage available to us as we drive more volume for the platform, we plan to continue investing in engineering and product development to long-term growth and continue to maintain or improve user experience and operating efficiency. We will also continue to invest and compliance data management and credit underwritings to maintain our reputation and continue to strong credit performance. Now let me turn to business highlights for the quarter. I thank to give you an update on marketing channels on both the borrower and 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 absorb a greater marketing efficiency and an increasing share of 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 should even stronger organic traffic in the future. We believe we’re also benefiting from a shift in consumer behavior towards online lending and the wave from the more traditional channels and expect that trend to continue. And then we recorded lower acquisition costs quarter-over-quarter that drove sales and marketing expense down to 192 basis point of originations this quarter compared to 201 basis points last quarter. We continue 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 cost 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 extended our adjustable geographic market over the quarter and first quarter end. With the addition of nine new states bringing our retail coverage to 39 states with an active 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 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 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 accounts more than six months earlier. Capital from existing investors has been growing steadily each quarter which represented only 48% of total investments in 2012 and reached 90% for the first time this quarter. It demonstrates the stickiness of the investor base we have built over the last eight years. As another way to illustrate the depth 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 rate. The typical way 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 originations 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 economy 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 investing 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 also continued to reach the benefit of past investments with a sequential growth rate that has been equal to or greater than our core personal loans for the last two quarters. As the field sales force continues to deliver growth, when we continue to create new territories that decided to expand the size of its sales force by 25% over the next two quarters. Switching to 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 businesses with lines of credit ranging from $5,000 to $300,000. We are 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 on our 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 the base compatible with good risk management and presents credit underwriting. More broadly about the product road 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 those major product launches, we continuously release product improvements that 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 on 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 all our customers. In fact, there is evidence that scale in traditional banking correlates with a worsening of customer satisfaction were the largest banks typically regarding a worse net promoter score than local community banks. If you consider bank as a two-sided marketplace, we have 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 marketplaces like LendingClub, the banks assets and liabilities are not matched to one and other, so improvements on one side that unnecessarily benefit the other. In market-based lending in contrast the two sides of the marketplace feed on each other. Our track record of performance with investors to accept lower returns as they perceive these returns as being more dependable. Lower return requirements from investors help lower rates to borrowers which lead to lower acquisition costs and positive selection and quantity of the borrowers attracted by the lower rates, which in turn fuels our 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 to increase our revenue yield by about 30 basis points over the last year. Higher investor fees coupled with lower barrower acquisition cost enabled by the lower rate 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 of our key areas including products and credit underwriting. Investments in underwriting intern should have strong track record of performance and investment in product will have strong customer satisfaction rate which leads to more repeat customers and it’s accretive to our brand and reputation which helps to generate more organic traffic and increase conversion rates throughout the panel or with dynamics ultimately including lower acquisition cost and higher margins. We believe this network effects and benefits of scale will help to solidify LendingClub’s dominant position in online lending as market-based dynamics make the larger market base increasing the more efficient and more objective over time. We believe most of these dynamics are not available to one sided market base is founded 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 market-based lending, we believe the process was helpful and supportive of our growth 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 the bank, while providing us with a more cost efficient framework. In fact all the loans enabled to our marketplace are overseen, issued and originated by Fidelity regulated banks and all Fidelity lending regulations including proofing lending disclosures, fare lending, faculties reporting are applicable to us. We provided our perspective nine month of interest and disclose our requirements. Started with the reminder as we have tremendous amount of skin in the game we have 20% of our revenue from each loan being subject to loan performance of our time and then ongoing nine month of interest to investors. We also made a number of proposals design to increase transparency in small business lending provide more information to marketplace investors through mandatory disclosure requirements provide targeted tax incentive and make it easier to verify income using tax returns. In regards to our loan issuance framework, we continue 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 the 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 this stage 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 where the strong conviction that the fact of the Madden case we are very different from our situation and that in addition our choice of loan framework we are continue to prevail. That being said we are modifying some aspects of our relationship with our issuing banks in the way that we believe creates even more with the Madden case. Finally, we were encouraged by recent remarks from Federal Reserve Governor O'Brien in a speech at the third annual Community Banking Research and Policy Conference, in St. Louis last month. We noted consistent with our belief that partnerships between community banks and online platforms they have expand access to credit for consumers and small business and helped banks retain and grow of our customer base. In summary, I would say that regulatory environment remains dynamic in response to flat base of innovation and we are active participants in the regulatory dialogue. Our opinion is sought after and heard as a clear leader in the space. We continue to see strong alignment between our values and the principles and the goals to 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 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 term 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 2015, before opening the call up for questions. As a reminder all year-over-year comments are comparison to the third quarter and the prior year. Starting with origination, as Renaud shared total originations in the third quarter reached $2.2 billion and increase of 92% compared to last year. While we continue to be disciplined about the pace of our growth we continued the see opportunity 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 a $115.1 million, up 104% year-over-year. The growth and origination volume was again outpaced by our revenue growth as revenue yield continue to expand. Our revenue yield which is operating revenue as a percent of originations was 5.15% of 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 total $104 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 a $11.9 million in the third quarter up a 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 of this year we’ve 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 continue to see favorable investor mix trends with demand coming from investors to 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 adjustments as a percent of our servicing portfolio balance. In the third quarter our servicing portfolio, which is comprised of all the loans we’ve serviced 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 four basis points to 16 basis points from 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. Now 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 a 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 two 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 nine basis points down from 2.01% Our core personal loan expenses declined nine basis point, while our education and patient finance and small business expenses were roughly flat. Our origination and servicing expense consist primarily a personnel related expenses for credit collections, customer support and payment processing teams and vendor costs associated with facilitating and servicing loans such as issuing bank 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. While 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 and 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 yield offset by higher contribution margin expenses which are driven by our newer products. As a percent of operating revenue, 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 margins, but are included in our adjusted EBITDA margins, our engineering, product developments and other G&A costs. Engineering and product development expenses 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 secured platform and continued to push our technology advantage is reflected in our continued investments in our engineering and product development team, who accounts were 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 revenues 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 includes fees paid to service providers and personnel related expenses for our support organization 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 developments 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 drove 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 the 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 are borrowed fund. This is a fundamental differentiator for our marketplace model versus the traditional banking system. As we do not assume credit risk or use our balance sheet to invest in loans. Rather the loan sales and securities issued to investors match the balances interest-rate 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 certificate as the offsetting liability. The changes in the value of these loans notes and certificate 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 me give 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 a range of $128 million to $230 million, up from the previous range of $122 million to $224 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 mid-point margin of 15.5% increases from 11.4% in the prior year reflecting significant operating leverage inherent in our business. Holding in the revised fourth quarter out look 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 the midpoint margin of approximately 15.5% of 550 basis points of margin expansion compared to 2014 annual margin at 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 feel 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 disclose that interest rates are the borrower returns came down about 100 basis points year-over-year. I was wondering if you get give us a sense of what’s behind that is that a function defaults increasing is that just a function of the fact that there is there so much supply of capital out there. And then when we look at the slowdown in custom loans growth is 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 on, which is counter to at least what we seem to hear from up a lot of your private competitors in terms of customer acquisition costs increasing or even some of the legacy banks that are in the space as well. I was wondering if you could give us a sense of what it is that you think that’s allowing you to see that 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 effects, we detailed further this quarter and that’s on Page 12 of the earnings deck. I think as we continue to attract more and more investors and then as we continue to build our track record, we are able to lower the returns we offer to investors and continue to be not be supply constrains by any mean and continue to see very strong investor appetite. And we essentially pass on big part of a benefit to the borrowers in the form of lower interest rates and the impact – positive impacts in both ways, first it’s - lowered our own acquisition cost and then also addresses part of your – the third part of your question with lower interest rates increasing the number of borrowers taking our offer, which increases our conversion, which decreases acquisition cost. But also generates positive selection from the borrower population and that positive selection fits our good track record of performance, which further increases little bit of confidence from the investors. I think all that is working to our benefit and to the benefit of all market based participants because we believe that the negative impact on investor return is of less than the positive impact on the borrower side due to the positive selection that essentially lowers the credit losses. So it’s a benefit for all market participants including us. In terms of the standard, custom I mean 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 in terms of our ability to continue to grow very fast and double year-over-year with no increase essentially in acquisition cost. I think that’s a lot of the network effects that play a lot of the investments we made early on in products, quality of underwriting and servicing, compliance, back office and all these investments or either in the - products of improved the customer experience makes for more loyal customers, drive 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 repetition online. And we know our customers, new customers as choices when they go online and they typically check the repetition of every reaffirm and can see that LendingClub as a four or five star rating on every review website and we generally have some lower pricing again enabled by a very diverse investor base. So I think all these factors really point to – they all work together to generate more volume, more value for market based participants and better efficiency.

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

Thank you. Hi, Renaud and Carrie. My first question is on guidance for the operating revenue growth of 70% in 2016, can you help us think about what part of that growth is coming from origination growth versus what part would be coming from continued increase in servicing fees. And also how much of the growth in originations maybe attributable to some of the new product lines that you gave us a hint that you are going to be launching?

Thanks, Smitti. So at this point we can talk a little bit about the revenue yield this quarter at 515, it does reflect continued expansion from a couple of things, one the investor mix as we’ve continue to bring on investors paying marginally higher servicing fees or market rate servicing fees and we've 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 a high-level view on the outlook for next year, we are 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 kind of within our categories. So those are the things that are embedded in that outlook, but we are not providing more granularity at this stage.

Great. And then maybe just a follow-up question at the Money 2020 conference this past week, we met with a couple [BCs] in some of the smaller platforms and one of the things we’ve heard was that there seems to be an increase in attempts, in fraudulent attempts to hit the marketplace funders and some of the smaller platforms noted that they've seen increase, some of them noted there's been a lot of talks about newer entrance into the market seeing increase 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 – there is successful fraud rate. We are not surprised that our players would see such an increase in that. Fraudsters would typically go to least resistance and certainly smaller on newer platforms wouldn’t have had the opportunity to build some of fraud detection and prevention mechanisms we put in place over the last eight years. We are not speaking specifically about [indiscernible], but where our fraud detection mechanisms are working on.

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 that’s impressive and it clearly displays your scale advantage compared to this narrative that exists around competition in the market. And you also gave 2016 guidance of 70% revenue growth which is well above the Street. My question as it 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 would be interesting if you can just 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 just more broadly if you can speak to the relevance or lack thereof of any individual lender on the platform? Thanks.

Thank you, Scott. So at this stage I mean is still very early in terms of 2015 guidance so really lots of breaking down much of the separate line items, as we get closer we always give more – we’ll get more granular. I think the margin guidance I mean to a larger extent is more driven by investment then it is by customer acquisition. We decide on at any point in time how much we want to invest in products, engineering, back office, compliance, all the things that drive essentially G&A headcount with the product engineering and separate functions. And our philosophies that we – we have a very big opportunity in front of us and we are focusing on building long-term growth and embedded in the 18% EBITDA guidance is continued investments in all these areas. In terms of [indiscernible] they have been a great partner and we’re also very grateful for the relationship we’ve had with them over the years. This year specifically they were a single-digit percentage of originations. They start investing at some point [indiscernible] main program and we are able to replace them with other investors essentially overnight. So that’s really speaks to the resiliency of the platform and we need the power of the marketplace model and the diversity of our investor base and so our ability to manage the flow of both supply and demand. There is actually a slide in the earnings deck Page 11, that shows some of the diversity those of a very broad appetite of our investor base in terms of both risk and duration. I think I can but great benefit of the model now that benefits get even stronger in some different economic environment especially as we go into the next cycle and we show be as a resliancy of the diverse investor base will be out, a patiently over the last ratios. I think we done into a big competitive advantage of some of the newer platforms that for the most part of there is not retail investor and consideration concentration in the invest base are strong reliance on the securitization market which even our cash loan.

Thank you.

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

Good afternoon, two questions first Renaud on the prepared remarks I think you said something along the lines of modifying some of the relationships with the banks to - distance yourself from Madden. So curious if you could provide may be a little bit more color on that statement and then sort of the implications for LendingClub going forward. And second question Carrie’s it relates the 2016 guidance. Can you just give us a sense even qualitatively since it was significantly above the street with your visibility on 2016 just maybe compared to a 2015 a similar point when you wee forecasting those numbers. Thank you.

So with respect to Madden so we continue to see know impact from our investor base and actually really some new data showing that so investors are continue to phones loans made to our residents of the free states covered by the Madden decision and institutional all the shares, institutional investors in the states are actually increased contrary to rumors we have heard in the market. So that shows but investors if you think the most sophisticated investors really are lined with us in terms of our interpretation of the different facts of the Madden case compared to our situation and so we believe that no chance is necessary is that being said to your point as a matter of extra cushion we decided to make a few changes to our relationship with our issuing bank to make sure of good with stand Madden type of case. Well I am not going into more details at this stage about what the specific measures are – we’ve done a quite bit of work, we think it’s a proprietary advantage – competitive advantage. So we're not discussing them publicly.

Yes, and on the outlook for next year, so as we continue to talk about we are neither supply nor demand constrained. And so as we think about kind of 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’re continuing to balance on the efficiency side as we grow. And so we believe as we look out several quarters that that we’ve continued to lay out kind of 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 and any given period, and the amount of whole loans sold reported in the period and kind of the relationship there. It looks like that if I’ve 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 and how it ultimately I guess impacts revenue in the quarter? Thanks.

Yes, so we - during the quarter the originations include essentially all types of funding behind it. So there is an - in the press release a little bit of detail of how each is funded whether it be from note certificates or whole loan sales. And the method at which somebody finances it is really going to be more a preference of the investor and the investor type banks preferred by the whole loans 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. So revenue when we look at revenue, we are looking 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’s 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. So I think sequentially you said the core consumer cost per funded loan improved by nine basis points year-over-year I think you said it was up two points. Could you just give us a little bit of color maybe on what's going on kind of underneath the covers particularly on the year-over-year delta if it was mix or comps or something else?

Sure, yes. So you are talking specifically about our core loans sales 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 were funding more A’s, B’s, there will be different mix that will go into that. So we do expect some level of noise in that kind of on an annual basis. But that's really what the function there if you take a look at kind of seasonally year-over-year quarter you are kind of in that same sort of timeframe. And that's really what’s driving that year-over-year?

Makes sense. And Renaud I think you mentioned unaided consumer awareness. I want to say that you said 3% maybe is the early survey results that you received. Where do you want that to go over time, obviously a lot of your competitors or products that you are replacing in the cases of credit cards spend a lot of money and have very powerful brands. Is that kind of the high watermark 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 like to see that go over time?

Yes, so we are not managing brand awareness to a specific goal or target and in general the way we are building brands is we have great products and great service and great customer satisfaction. So that customers would both remain loyal customers and become repeat customers, but also talked about us positively and the promoter score continues to be at extremely high. I think we’ll see some organic increase of brand awareness. We don't believe in financial services, there is really no shortcuts; it’s not like some other consumer products where you can reconnect the dots between awareness and sales. The financial services reputation and trust is as important as just awareness and so we are sufficiently busy with that reputation and the trust. And I think the results of that already pretty visible in terms of our metrics and I think we’ll continue to unfold over time.

And last one from me if I can just on competition, I think there's been some announcements over the last several quarters maybe more a traditional financial services or private equity firm or something getting interested or planned to enter the online lending marketplace, just would like to hear your take is that changing the competitive dynamics all in your view, is that something that you are watching closely?

Yes, we are obviously watching our market very closely. We are not particularly worried about some traditional institutions that’s competing with us. Most of the announcements you have seen already focused on different use cases, different market segments than what we focused on. At the end of the day we have 6500 banks in the country, it’s a very big market and so they have many different target segments and room for 1000 of our players to be successful that in areas where there is a overlap and where we compete. We believe our very low cost operations, high-efficiency, great reputation and very diverse investor base that’s again suddenly be built over a long period of time and track record where there is also no shortcuts I need to build the track record over time all these sectors really continue to give us increasing competitive advantage.

Great, thank you.

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

Thanks very much. Just wanted to follow-up and 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 I mean ultimately there's sort of three levers of the improvement right, there is the revenue margin, there is the expectation around expenses and then ultimately just the tax rate. So I’m just trying to reconcile some of the comments, it seems that given the expansion the leverage I think going to come particularly out of expenses, so it sounds like ultimately investors view on the change in tax rate, you're really zeroing in on continued revenue margin expansion, is that a fair interpretation?

So on EBITDA that does not include taxes this is kind of our margin before taxes so what I would guide here a little bit on this would be to think about. We didn’t 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 newer products in small business and education and patient finance that certainly will help continue to expand contribution margins. And 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 this 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 launch small business and purchased Springstone last year as we would expect to going into that being less efficient out of the gate and those certainly will have some impact on being a bit diluted on the margins and the directions that you’ve seem.

Okay, thank you for the clarification. And just one other item you put out in 8-K today having some changing in pricing that you put through various loan grade strata. And I'm just wondering what the motivation for that was and in particular was it a response to the increased servicing fees that you have already implemented in the period.

And also it’s – I think we both go in the same direction so the net impact of the pricing changes that we reduced this quarter would be a price reduction and lower interest rate for consumers. It’s a jurisdiction we’ve implementing since the beginning of last year and again that comes from a lot of the network effects we are seeing and the positive selection we are seeing in the borrower base and the fact that continues to be a lot of apatite from investors, so that’s a large investor apatite really 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.

Okay, thanks very much. End of Q&A

And 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.