LendingClub Corporation (LC) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the LendingClub Second Quarter 2017 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ardim [indiscernible], Investor Relations Manager. Please, go ahead.

Thank you and good afternoon. Welcome to LendingClub's Second Quarter 2017 Earnings Conference Call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, CFO. Before we get started, I'd like to remind everyone that this conference call is being broadcast on the air. We have provided a slide presentation to accompany our commentary and both the presentation and call are available through the Investors 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 our guidance for the third quarter and full year 2017. 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 form 10-K filed with the SEC on February 28, 2017 and our most recent Form 10-Q filed on May 5, 2017. 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. In discussing our historical financial performance, we have chosen to present certain non-GAAP measures because we believe that these measures provide investors a consistent basis for analyzing the company's performance across different periods. Further, all operating expenses that we will discuss exclude stock-based compensation, depreciation and amortization. A reconciliation of these and other GAAP to non-GAAP measures is included in today's earnings press release and investor presentation. Unless specifically stated, all references to this quarter relate to the second quarter of 2017 and all sequential comments or quarter-over quarter comments are comparisons to the first quarter of 2017 and year-over-year comparisons are to the second quarter of 2016. And now I'd like to turn the call over to Scott.

Thank you, Ardim [ph]. Good afternoon, everyone. I am pleased to say today that LendingClub is back, back to our growth trajectory, back to executing on our vision and back to focusing on delivering value for our customers. A quick look at the highlights. Q2 was a breakthrough quarter for LendingClub. We're on track as the growth company we're designed to be. We delivered the second highest revenue in the company's history, up 35% year-over-year and 12% sequentially. As importantly, we generated cash with a solid $4.5 million in adjusted EBITDA. We also successfully launched our first securitization, creating an additional mechanism to fund future growth and to open up our asset class to more investors. We're very pleased to be back on our front foot, are confident in our momentum and are excited to focus on how best to capitalize on our investments from the past year to deliver on the opportunity for sustained growth. Leading the charge on the borrower side is Steve Allocca, who we announced right after close of the last quarter as having joined our talented leadership team as President. Steve is showing himself to be a natural fit and we couldn't be more excited to see him jump in to drive forward momentum in borrower growth and product innovation. Before I dive into details for the quarter and the opportunities we see on both sides of the marketplace, I'd like to touch on consumer credit. Looking at macro trends, we see a lot to like, low unemployment, low interest rates, low inflation and low oil prices, with an increase in consumer confidence and in household formation, all positive trends. Counter balancing that is that debt levels are back at or near all-time highs, driven by credit card, auto and student loan debt. So we need to remain vigilant about consumers' ability to service their obligations. The volume and breadth of LendingClub's data, paired with our technology platform and the unique and powerful feedback loop from our investors enables us to do just that. We've made a series of credit adjustments throughout the last 18 months, with the last ones taking place in January. Those credit adjustments are paying off as we're now observing lower early-stage delinquencies and a reduction in annualized charge-offs, leaving our updated loss forecast and projected returns for investors in line with what we saw last quarter. It's also worth noting that the increase in credit card and auto debt represent a very significant marketing opportunity which LendingClub's business is specifically designed to address. Currently, outstanding U.S. credit card balances are approximately $1 trillion. 60% to 70% of our customers are currently taking advantage of our personal loans to pay off their credit card balances and save an average of 24% on their rates while getting themselves on the path to financial success. Given LendingClub's size relative to the size of the problem we're addressing, it leaves plenty of opportunity for us to grow. And the numbers are just as compelling in auto. Our growth this quarter is evidence of our ability to capture this market opportunity. Leveraging our scale and volume of data, we accelerated testing on our product initiatives to run 26 distinct tests through to completion. From that, we've implemented 5 new strategies that have already produced meaningful impact. We redesigned our website to make it easier to find through organic search and easier to navigate, resulting in better conversion. We conducted pricing tests to optimize borrower take rate. We rolled out a new strategy and technology for verifying income and employment which streamlines the process for borrowers while increasing efficiency for LendingClub. The sum total of these initiatives result in a better experience for borrowers and better conversion rates for the business. The proof is in the positive feedback we get from our customers, including the ease-of-use, money saved and the impact to their financial lives. On the investor side, we experienced record diversification and participation, with more than 100 managed accounts and institutional investors participating on the platform. Banks represented 44% of the mix, demonstrating not only their appetite for our asset but a strong confidence in our model. Sequentially, we saw lower contribution from retail investors and managed accounts which is due in part to the heavy contributions to IRAs in the first quarter and the continued strong performance in the equities market set off against lower-than-expected performance for our 2015 and early-2016 loan vintages. While we don't have a targeted mix, individual investors are an important part of our diverse investor base. And now that the institutional segment of our platform is back to growth, we will increase our efforts to serve them. One of the key investor highlights from the quarter was our sponsorship of a near-prime securitization. The transaction demonstrated significant investor appetite, with the excess demand resulting in better pricing than anticipated and bringing 20 new investors to our asset class. Overall, I am very pleased with how we built momentum throughout the quarter on both sides of our marketplace. Tom is going to provide the details on our results and outlook, but I'd like to mention that we look forward to Q3 being our biggest revenue quarter ever. Tom?

Thanks, Scott. I'd like to begin by highlighting how encouraged I am with our ability to deliver on the promise of growth. This marks the second highest revenue quarter in our history as we grew revenue 12% sequentially to $140 million. In the second quarter, we can see the renewed focus of growth beginning to improve our financial results including increases in originations, higher revenue yields, improved marketing efficiency and a return to EBITDA profitability. We exited June with strong momentum going into Q3 and I feel the company is well positioned to focus on driving growth and profitability in the second half of the year. Now let's move on to our financial performance for the second quarter. Total originations for the quarter grew 10% to over $2.1 billion, with the mix of higher grade loans in our standard program continuing to increase sequentially as well as overall higher growth in our custom program driven by our securitization and the investor demand it created. Our total net revenue of $140 million came in about $5 million above the midpoint of the guidance we gave you in May on the back of higher originations. I'm encouraged by the increasing revenue yield of 6.5%, up 14 basis points from Q1. The fees from our second quarter securitization represented approximately 3 basis points, with the remaining 11 basis points primarily coming from an increase in net interest income from loans accumulated through the quarter and subsequently sold. Now let me take a moment to comment on the securitization. The securitization impacted several revenue lines and so please see Page 16 in the investor slides that highlights the impact the securitization had on our 2Q financials. This quarter, we set up the program whereby several investors contributed their own assets which had been purchased from our platform at an earlier date. As the sponsor of the securitization, we generated net revenue of approximately $600,000. Note that in the quarter, we did not contribute any loans from our balance sheet as we plan to do going forward. We did accumulate loans during the quarter of approximately $144 million that were subsequently sold to some of the investors who contributed loans into the securitization and wanted to reinvest. The interest income we earned from these accumulated loans was $4.5 million for the quarter and represents the increase you see in the net interest income line. Offsetting interest income was a $1.4 million fair value adjustment on loans sold, so that was recorded in other revenue. Taken together, the total revenue for the quarter related to our securitization efforts was $3.7 million. Our securitization program going forward will look a little differently and will expand to include prime loans. In addition to assets contributed by our partners, LendingClub may contribute loans directly from its balance sheet. At the end of the second quarter, we had approximately $57 million of loans, of which some may be used for future securitizations or other investor activities. I expect that balance to continue to grow throughout the quarter as we look to finalize our plans for Q3 and Q4 securitizations. Given the capabilities we have built and the strong investor demand we're seeing, we expect to come in at the top of our previous guidance of $10 million to $15 million in securitization-related revenue for the year. This represents less than 3% of our full year net revenue and further expands our investor reach and provides additional value that we can retain or pass back to the borrower. Now let's switch gears back to revenue and some of the drivers for the quarter. And again, I would refer you to Page 16 of the investor supplement so you can see our performance, excluding the impact of securitizations. Transaction fee revenue came in at 5%, down 4 basis points for the first quarter, driven by the continued shift to higher-grade loan origination mix in the quarter. A and B grade loans in our standard program continue to outpace total volume growth, increasing 12% sequentially. For the second quarter, investor fees were flat sequentially at $21 million but up $1.2 million adjusted for the securitization due to a modest increase in the servicing portfolio. Other revenue came in at $4.2 million, up $1.5 million sequentially, adjusted for the securitization driven by higher gain on sale from loan volumes. Net interest income came in at $6.9 million or flat sequentially when adjusted for the securitization. Now let's look at our contribution margin. I'm pleased to see the recovery in our contribution margin be back in line with our 45% to 50% target. CM for the quarter was 47%, up from 43% in Q1. About half of the increase was due to higher revenue yield, with the remainder coming from M&S improvement, reflecting our conversion efforts and other efficiencies in our marketing channels. Sales and marketing was $53.6 million or 2.5% of originations, down 17 basis points sequentially. As Scott indicated, this area continues to be a focus for us as we return to growth. We rolled out a new website, improved our testing capabilities, added new marketing partners and brought Steven to continue to build momentum in this area. Origination and servicing expenses in the second quarter were $19.9 million, up $900,000 from last quarter. As a percentage of volume, O&S efficiencies improved 4 basis points sequentially to 93 basis points of originations. Turning to technology investments. We continue to invest in our technology infrastructure. For the quarter, total engineering costs were $21.5 million, flat sequentially and were primarily focused in building out our data analytics, platform improvements, mobile capabilities and cloud infrastructure to drive product enhancements and scalability. Now let's turn to G&A. Costs were $40.1 million for the quarter. As you may recall, we have nonrecurring expenses and insurance recoveries impacting this line. In Q2, we had $8.4 million in nonrecurring expenses offset by $2.4 million in insurance recovery. For reference, in the first quarter, we saw nonrecurring expenses of $10.6 million and $9.6 million in insurance recoveries. G&A, excluding nonrecurring and insurance recoveries as a percent of revenue declined this quarter and expect that to continue through the remainder of the year as we return to business as usual. On the back of revenue outperformance, EBITDA came in at $4.5 million, well above our guidance range of plus or minus $2.5 million and puts us solidly back in positive EBITDA territory. On a normalized basis, EBITDA would've been around $10.4 million given the nonrecurring expenses exceeding recoveries by $6 million. And our GAAP net loss has improved $56 million from a year ago, with earnings per share coming in at a loss of $0.06 per diluted share. Stock-based compensation as a percent of total net revenue decreased sequentially to 14%, about 2% lower than the first quarter. We expect stock-based compensation will continue to decline as a percent of revenue through the remainder of the year. We ended the quarter with $764 million of cash and securities available for sale and no debt. We continue to maintain strong liquidity and capital levels to ensure we're well positioned to serve customers and capitalize on opportunities in all market conditions. We will also continue to deploy capital against strategic opportunities with strong return profiles as we did this quarter with our new securitization program which broadened our investor base and drove $3.7 million in incremental revenue. Now let's turn to our outlook for the third quarter and the full year. Given the strength we've seen in our organic growth year-to-date and our confidence to drive new revenue initiatives, we're pleased to raise our full year revenue and EBITDA guidance for the second consecutive quarter. Specifically, we're taking our revenue midpoint up by $8 million to a new range of $585 million to $600 million. We're increasing our adjusted EBITDA midpoint by $4 million to a range of $50 million to $58 million. And we now expect our full year GAAP net loss to be in a range of $69 million to $61 million which is an improvement of $8 million at the midpoint, driven by higher EBITDA and lower stock-based compensation. With the second quarter momentum and what we're seeing in the third quarter, we expect another quarter of double-digit sequential revenue growth in the range of $154 million to $159 million. Q3 will therefore mark our highest revenue quarter ever and represents a year-over-year growth rate of approximately 37%. Even more impressive, we anticipate significant growth in EBITDA to $18 million to $22 million in the third quarter. As noted earlier, we continue to see elevated levels of nonrecurring expenses as well as offsetting insurance recoveries. For the third quarter, our guidance has these amounts largely offsetting one another. Lastly, our GAAP net loss should be in the range of $12 million to $8 million in the quarter. So if you take EBITDA guidance for 3Q at $18 million to $22 million and the full year at $50 million to $58 million, that implies that 4Q EBITDA to be approximately $27 million to $31 million. With the significant operating leverage our business model produces, we believe we can obtain our 15% to 20% EBITDA margin target in 4Q and approach GAAP profitability as we exit the year. In sum, we're very pleased with our progress year-to-date and our increase to guidance emphasizes our excitement for continued growth. Before we turn to questions, Scott has a few comments he'd like to share.

Thanks, Tom. I would just like to take a minute to acknowledge and thank our shareholders for their support as we have reestablished our company over the past year. I can speak for the management team and the board and say that our core shareholders are an important driver of our success and we will continue to work hard each day to earn and grow your support. For our investors and analysts, now that our team is in place and executing, we're positioned to share more about our strategy and plans for the next stage of growth. To this end, we will host our first Investor Day in New York in the coming months and we'll be sending out a save-the-date shortly. Again, thank you all for your support, let's open it up for questions.

[Operator Instructions]. Our first question comes from Mark May with Citi.

I think in your prepared remarks, you mentioned optimizing borrower take rates. Could you elaborate a little bit more on that and how we should be -- what you're doing strategically and how we should be thinking about that going forward? I wonder also if you could comment a bit on what portion of borrowers and/or originations are coming from repeat borrowers? Those are my 2 questions. I just had one housekeeping or clarification, one at the end I'd like to tack on. For Q4, are you assuming any nonrecurring net costs or benefit?

Maybe I'll just take the last one first and then maybe Scott can comment on some of the things we're doing in the funnel. I do not have good line of sight of any kind of insurance recoveries. We do expect to continue to be in line with the level of nonrecurring expenses we gave last quarter which was about $30 million, so you could see our run rate for the rest of the year kind of working towards that. First half, we had about $9 million and again, about a $8.5 million now, so we're on track to kind of hit that number. It's hard to estimate what the recovery would be in 4Q at this point. But for 3Q, we feel they're reasonably offsetting.

So the question on take rates, in addition to our ability to identify the borrowers that we can say yes to and to price that risk appropriately, from a risk perspective, it's also finding that right place where the borrower says yes to us. And we put a robust new testing infrastructure in place in the first quarter and conducted a number of product and experience tests which included pricing optimization to find the right price points for certain classes of borrowers. It's worth noting, our -- we look at dozens and dozens of variables that go far beyond FICO in evaluating risk. And worth mentioning, there was a recent study that came out of the Federal Reserve in Philadelphia that used our publicly available data to really demonstrate how fintech and, in this case, LendingClub is actually providing access to consumers and that's markedly increased in areas where there's been increases in bank closures as well as affordability versus the traditional lending channels that are pricing on a FICO basis. It's actually better than their alternatives. And so this is really just part of that overall muscle that we're flexing, where small changes can deliver a meaningful impact to results.

Our next question comes from James Faucette with Morgan Stanley.

I had two quick questions, one operational and one more strategic, is that on the operational side, you've seen a lot of the other marketplace platforms and other lenders kind of start to reassert themselves in the market over the last couple of quarters. Are you seeing any measurable impact that you can see on things like conversion rates of borrowers, et cetera? And how are you planning for expectation that those -- a lot of those platforms are looking for continued growth. And then my second question is, I guess, with such high levels of profitability improvement anticipated as we go through the rest of 2017 and exit the year, how are you balancing continued -- how should we think about further expansion of profitability versus pushing on the accelerator and continuing to grow revenue and origination growth?

James, maybe I can touch on it. Scott may have some additional thoughts. We're very encouraged with the conversion rates we've seen in the quarter and the improvement we saw in sales and marketing as a percent of originations. So a lot of the efforts that Scott mentioned all drive to that -- the efforts we have of making our process easier for consumers and borrowers as well as the number of tests that we put in place to optimize that conversion rate. So we feel that those are competitive advantages. We think the data that we have, the insight we have from the many, many points of light that we touch with our borrowers that we can actually continue to be very, very competitive despite the environment. On -- with regard to the balance of profitability and growth, we feel we can do both. We feel that we can continue to deliver the target of 15% to 20% EBITDA margins that we've set for ourselves as well as continue to invest back into the business. While the numbers are lower as a percent of revenue because our revenue was growing but we were continuing to see opportunities to invest and where we see that, we will continue to do it. Our tech spend continues to run at high levels and we continue to see opportunities to grow in our marketing efforts. So I don't see any change in that. Scott, I don't know if you have any other thoughts on just on the growth side, but feel we can do both.

No, I guess I would just echo, James, the -- we feel very good about our ability to compete. We're executing well. The initiatives that we've put in place are performing in line with our expectations and we've got an exciting list of new initiatives that we're working on and would emphasize that the infrastructure that we have invested in to put in place, together with the volume of data that's come through the platform, we feel like that positions us very well to continue to execute.

Our next question is going to be from Heath Terry with Goldman Sachs.

Just a couple of questions. Scott, you mentioned some of the adjacent verticals that are sort of back. Auto, being one that comes to mind, given you've been in that category for almost a year now. And curious how much of the guidance acceleration for originations in the back half is related to that? Or if there's anything else in particular that you would sort of call out to -- as being particularly key to that acceleration. And then to the extent that we're seeing the cost of customer acquisition in the space evolve, can you give us a sense of sort of where your mix of customer acquisition channels and what the ROI on those channels currently looks like. Obviously don't expect exact numbers but just generally where you're seeing the most impact.

Maybe I'll give you some of the financial piece and then Scott may have some thoughts on the -- on the adjacent verticals, the primary driver of originations is going to come from personal loans. The auto piece is still continuing to ramp up. We continue to learn in our marketing efforts. It's an area that we think has long term strategic growth, but between now and end of the year, I don't see that as being a material driver of origination volumes. As far as the cost of customer acquisition and the evolution of that, we obviously participate in many, many channels. The costs associated with those vary dramatically from quarter-to quarter. To the extent we can drive more unpaid search, that obviously drives a lot more economic benefit for us. We've seen some lift in those areas and we continue to drive initiatives to improve our position in those lower cost acquisition areas. And I think, again, with the size of the borrower base that we have, we also have an installed base of customers that have borrowed from us in the past and are repeat customers. So we think the combination of all those channels give us a very good competitive profile and allow us to emphasize the lower-cost channels.

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

Sorry for tossing my headset aside, will try this again with the speaker, so I apologize. I was wondering if you could talk a little bit more about the securitization program as far as what kind of levels you're expecting to hold of capital committed on the balance sheet, just to help us think about capital commitments and think a little bit more about the economics of how that's going to work. I appreciate the reconciliation this quarter, but just help us think about how that runs through the model going forward.

So as I said in my prepared remarks, we think this is just a terrific extension of our existing strategy to reach additional investors that want to participate in this asset. As Scott mentioned, over 100 investors this quarter alone. So we feel very, very good about the reach and the people that are doing the work to understand this product, so we're quite encouraged. We would expect the third and fourth quarter to include prime securitizations. We haven't specifically outlined exactly the timing, but we would expect securitization as probably 1 per quarter. We will contribute loans, I indicated that's somewhere in the $100 million range per quarter, that can vary as -- if you're doing a prime deal in 3Q and you may be accumulating loans for 4Q, so there may be some overlap. But I would expect the -- our participations to be around $100 million. Again, this is an extension of our existing platform. Investors like the fact that we're putting skin in the game and it's generating a new revenue stream for us that we can benefit from. As far as capital commitment, we have significant liquidity. That's obviously #1 for us, to manage a strong liquidity position. The amount of capital we put into this is quite low. With almost $800 million of cash on the balance sheet, we see opportunity to continue to participate in this and I see that probably growing as we move into the end of this year and into next year. But as a percentage of our total originations, still a very, very small amount. But again, we think it's an important piece. It does allow us to generate some additional revenue, as I mentioned and allows us to fund some of the testing that Scott mentioned earlier, as we continue to find price points, discovery, with -- in various channels and with various borrowers. So it's an important development. We're very, very excited about the capability we've built. The investor team has done a terrific job and we're encouraged for the rest of the year. That's why I brought our guidance up to the higher end of that range that I had previously shared with you probably in the first quarter.

Much appreciated. One follow-up on the marketing efficiency and testing, to combine a question in there, is can you talk a little bit more specifically about, I think you said, where you say yes but you want to make sure you're finding where other customers say yes a little bit. Can you talk about that gap, what the size of that is and how sizable the opportunity set is to optimize that there and what other kind of changes in the models are opportunities to leverage the marketing efficiency there?

Maybe just talking about that more broadly is that we do think we're uniquely positioned as a marketplace to understand true market clearing price. I'd say the efforts we did in Q2 are really just scratching the surface at looking at what are the implications on the borrowers' side of changes in price and what kind of investor appetite corresponds to that. So I think that's something you'll be hearing from us more on in the coming quarters, but it's an absolute very significant lever in the toolkit that we're just beginning to tap into.

Our next question comes from Jed Kelly with Oppenheimer.

Just with the securitization being well received, can you share with us some of the internal discussions you have, given that it seems that you have the capability to meaningfully accelerate a program well over $100 million per quarter? And how do you balance that growth?

Yes. So obviously, this is the first time we've done it. So I think the last time we chatted on the call, we hadn't done anything yet. So we've got one underneath our belt and we felt very good about what we put in place. And we got a very good reception by the market and so that's why we moved our guidance up. I think as a percentage of our total, I think, the $100 million, $150 million range seems to be appropriate for us. As we think about '18 -- when we start talking about '18 guidance, that will be something I'll give you a better view on. But again, we've done a near-prime deal in 2Q, we can do a prime deal in 3Q, we'll continue to build momentum in that market with new investors and have a predictable program that we can come to market each quarter. That's what we're trying to build and we're just encouraged by what we've seen and the appetite for our product.

And then as a housekeeping question, it seems that outstanding shares increased sequentially. What would your outstanding share count be if you were profitable on a GAAP basis?

I think on a fully diluted basis, about 400 million probably, on a dilute -- I think it's about 400 million and change maybe.

Our next question comes from Michael Tarkan with Compass Point.

Just so I'm clear on the securitizations, are you planning on retaining 5% on balance sheet once you do those securitizations moving forward?

I'm sorry, can you just repeat the question?

Yes, just on the securitizations moving forward, are you planning on retaining 5% of the deals on balance sheet? And is that a vertical slice, horizontal slice? How should we could about that?

Yes, I'm sorry. Yes, just so everyone knows, the retention requirements have us retaining a vertical slice of about 5%. We did that in this quarter as well. The total amount was about $8 million, so a pretty small percentage of the total transaction of slightly over $300 million. So that would be something that we would expect going forward.

Okay. And then just a follow-up. You mentioned market clearing price and testing some things from that perspective, are you evaluating potentially moving that transaction fee down on the borrower side? Or are you specifically referring to interest rates on the loans themselves?

I mean I think both are in consideration and I'd want to highlight that doesn't necessarily have implications for the overall revenue yield because we're similarly seeing opportunities to increase fees on the investor side as an offsetting mechanism. And again, those are programs and tests that we're running actively.

Jed, just to update you on the share count, 400 million was last quarter, it's about 406 million this quarter.

Our next question comes from Jeff Cantwell with Guggenheim Securities.

Demand from the bank channel has continued to rise. Can you just talk about where that demand has been concentrated, A grade, B grade, et cetera? And then can you talk about what you're seeing thus far in 3Q? It's up 34 -- 44% coming from banks, something that should remain stable or perhaps expand further. I'm just trying to get a sense of sources of demand currently and develop a reasonable set of expectations.

Yes. So taking a big step-back, obviously, banks are an important part of the mix as I indicated, both in terms of our ability to provide an attractive product to the best credit quality customers as well as kind of an indication of the strength of the control environment. If you -- their purchases are primarily concentrated in A grade and B grade and so both -- when you look at the contribution coming from banks as well as the credit actions we took, that's why you're seeing sort of that increase in our standard program of those A and B grade loans quarter-over quarter. In terms of the momentum, I would say that an enormous focus of the company over, really, the past year was to bring back -- banks back onto the platform. If you recall, they were more significantly impacted last year. And we successfully did that and I would say so successfully, in fact, that we're continuing to add many new ones. So added a whole bunch of new banks to the platform again this quarter. So our efforts are working. That really signifies how attractive this asset is for them in this continued low-yield environment. In terms of overall mix, again, we don't have necessarily a target there. We're pleased with the strength in the channel. That strength is continuing this quarter. Don't expect significant movement, but that's not something that we kind of tightly manage to.

And then can you just remind us how you're thinking about operating leverage beyond the third quarter sort of on a run-rate basis?

Yes so, as I mentioned, I think we're -- the target that we gave ourselves is to exit the fourth quarter with a 15% to 20% EBITDA margin. We think that -- we acknowledge that, that's going to depend on the level of investment that we put in place. But I think we feel that you'll see meaningful improvement in 3Q and then 4Q, somewhere in that range of 15% to 20%. I think also we indicated in my comments that we're going to start talking about getting back to net income positive which is the next big hurdle for us is to get net income positive. We're generating good positive EBITDA now and our next big push will be to get to that net income positive number. As we get into '18, we'll have a better profile, but I think the 15% to 20% is the next goal for us.

Our next question comes from Henry Coffey with Wedbush.

Tremendous amount of progress going on here. I don't want to labor it too hard, but going back to Page 16, in terms of securitization revenue, how should we understand all of this? There's -- I'm looking at some of the gold comments, what was -- was there a gain on sale related to the transaction?

Yes, Henry, let me try to give you a chance to digest this and I did color-code it to try to make this a little easier. It's hitting a couple of line items, for those of you following along the -- on Page 16 of the investor deck. What created some complexity is that the original servicing asset that was established when we sold the loans is declining and that goes through the investor fee line. And then the setup of the new loan -- servicing loan asset goes in through other revenue. And so you can see there's about an $800,000 difference just between those...

That's like an old into new aspect.

That is correct. I would call out, as you can see, that we also generated program fee revenue of about $1.2 million, but we did have some start-up costs this quarter as well as some variable costs that brought the program cost up above -- a little over about $1.5 million. So we expect those numbers to decline over time as we get some of the scale benefits of the startup.

And the $1.2 million was a cash gain on the -- in other words, you sold $100 worth of loans for $101.2 or...

A portion of the fees are cash and a portion are the future servicing asset flows that we will receive. So that's a combination.

Relatively small in the scheme of things.

That's correct.

And then the interest income, is that interest income that's going to stay with you now? Or is that interest income that goes away?

So the interest income lines, we showed on a gross basis effectively. So as we accumulate loans, we generate interest income. And then to the extent -- based on like the seasoning of those loans, there may be a mark-to-market below par. And so the way to think of that is net. That's why I put them both in green. And so you could see, we generate about $3.1 million associated with that.

But now that you've -- the interest income portion that's -- that goes away?

That gets reloaded with new assets, that's correct.

And then in terms of looking forward to your new -- your next set of securitizations, those are going to be more prime-based, you're going to contribute about $100 million of on-balance sheet loans? And then you're going to accumulate from third parties other loans, is that the idea?

That's correct.

Great. This is very helpful. And obviously, a lot of very positive things going on here.

Yes, a couple of things to highlight, Henry, is keep in mind, that the first deal was near-prime. The second, we expect to do a prime deal, but we will contribute. So we will pick up a little bit of gain that you don't see in these numbers in the second quarter financials. So there'll be some mix yet again and I'll walk you through that when we talk next quarter.

And then that gain all gets captured in "other revenue?"

Yes, that's right.

Our next question comes from John Davis with Stifel.

Scott, maybe -- I appreciate the comments on the credit environment. Maybe just dig in a little bit deeper, any impact on pricing and/or changes in underwriting in the quarter? And also, is there any impact on the improved take rate from credit? Also maybe just high-level competitive comments, I've seen some of your competitors get more aggressive and some pull away. So that would be helpful.

Yes. So we actually did not have significant changes in the quarter there which is kind of what I was trying to indicate. We started talking about this really in Q1 of last year and started making changes around that time. And our last set of change is really targeting this population where we had seen a real market departure in their behavior or change in behavior versus historic. Those last changes went in, in January. And at this point, what we're seeing is that performance is in line with our expectations. Our early-stage delinquencies are down. And we update quarterly our expectations for charge-offs and projected losses. And this quarter, they remain really, essentially unchanged versus Q1 and the pricing overall also essentially unchanged. That said, we continue to see enormous opportunity within the population and we're doing some very interesting things with the data that I think indicates -- which is informing part of our enthusiasm going forward for better serving borrowers' needs.

Okay. And then just quickly if I can, the outlook for origination growth. Has that changed at all? Or is the uplift in revenue guidance more revenue from the securitization and other sources? How has your outlook for origination growth changed, if at all?

We moved away from giving specific origination guidance but the implied guidance continues to show strong growth in Q3 and Q4. Obviously, we'll have some seasonality in Q4 that you typically would see in any given year. But what we saw in July has been encouraging and we're continuing to execute to continue to drive that growth. So the securitization piece, as I mentioned, we expect for the year to be about $20 million. So that's about another, call it, $15 million, $14 million-or-so between now and the end of the year. So at the high end of that range, that's what's -- that's the revenue that you would get in our current quarter. So I don't expect a lot of revenue coming driving that originations are still very strong.

Our next question comes from Rob Wildhack with Autonomous Research.

Scott, I think you may have briefly mentioned some new conversion initiatives in addition to the ones rolled out this quarter. Can you talk in any more detail about what these might be? And how will the financial impact be similar to or different from the impact we saw this quarter?

Yes. So I would much rather prefer to talk about these things once we've got them out into the market. So suffice to say, a quarter from now, we'll be happy to share those with you. But it's a pretty extensive list. I can point backwards, if you will. We talked about the joint application which we launched in Q1 and have continued to optimize that product, how it's presented to consumers. And we're seeing excellent results there, both in terms of consumer adoption of it which has the benefit of giving them a lower rate, because it lowers the risk for investors and it also allows us to extend more credit because we have 2 sets of income off of the debt. So that -- we have items similar to that in the pipeline that I'll look forward to sharing in the future. The website is the other one that's kind of an obvious one, just making it easier to find LendingClub on the Internet through organic search and then, once you get there, making it easier to get through the process is something that we did multiple tests on this quarter and had great results there.

Great, okay. And safe to say though that you still have plenty of opportunities here and that the low hanging fruit isn't completely exhausted, right?

Yes. absolutely. Absolutely.

Our next question comes from Steven Ju with Crédit Suisse.

So I guess a bigger picture question on the data set. So I guess, with analytics and deep-learning tools increasingly available out there for some of your competitors to think about using, is there any way to characterize how much of a data advantage you have and how sustainable that may be going forward? I guess, some of the data may be more readily available and out there but some you have amassed over time.

Yes, I think the critical thing here, where you just start with the basics, is you need the data set to run those analytics tools on. And so having issued $28 billion worth of loans over 10 years just gives -- and having all of the raw data from when those loans were submitted and being able to observe their performance over time is just -- and that's a very, very significant advantage for us to be able to apply our tools to. And then there's data that is unique to us and not available externally, outside of us. On top of that, you just get the scale and the volume that's running through our platform today that allows us to generate more data at scale and continue to be learning. And this is kind of a sort of flywheel effect or a self-perpetuating effect that more data is generating more data and allows us to continue to learn and get stronger. So we believe it's a very material advantage.

We have a follow-up question from Brad Berning.

Yes, one thing, just to follow up a little bit on the retained loans that you have for the standard loans. Are those going to be reported through the daily securitization standard program? Or are those just kept in-house? And then one other technical follow-up. I'm curious on your perspective on when do you think you'll have GAAP taxes. Is that a 2018 or 2019 and your current thoughts?

Yes. First, I believe that the loans that we retain -- that's a good question, that they're being -- that they're in there -- if they're filed or not. I don't believe they are, but they may be, so that's a follow-up question. I believe they are since we're purchasing them the same way as everybody else is on our platform. So I'm probably leaning towards they probably are part of that. The second question with regard to taxes, we continue to have significant NOLs that will probably take us through all of '18 and into '19 depending on our growth rate. So as I think about earnings guidance and giving you a longer term view, I'll have a better view of that on when we think we'll be a taxpayer. But right now, I'm focused on getting net income positive and then figuring out how we harvest that NOL to improve our cash flow and our earnings.

Yes. Obviously, a higher class problem to start to think about. So appreciate it.

Yes.

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

Well, thank you, everybody. Obviously, we feel great about the quarter. We feel great about the path ahead. And I look forward to speaking to many of you one-on-one. Thank you.

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