Good day, everyone, and welcome to the LendingClub Corporation First Quarter 2019 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 also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Simon Mays-Smith, VP of Investor Relations. Please go ahead.

Thank you and good afternoon. Welcome to LendingClub's 2019 First Quarter Earnings Conference Call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey CFO. Our remarks today will include forward-looking statements that are based on our current expectations, and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our guidance for the first quarter and full year 2019. 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, and our most recent Form 10-K and Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. Also, during this call, we will present and discuss both GAAP and non-GAAP financial measures. A description of non-GAAP measures and reconciliation to GAAP measures are included in today's earnings press release and related slide presentation. The press release and accompanying presentation are available through the Investor Relations section of our website at ir.lendingclub.com. And now, I'd like to turn you over to Scott.

Thank you, Simon. Welcome, everyone. I'll start by saying, we're off to a good start to the year and we are on track to achieve our 2019 goals. The operating environment outside of us remains dynamic, but it hasn't really changed much since our last call and we are acting with urgency to deliver on our plan. We're continuing to execute with discipline, leveraging our data, scale and marketplace model to our advantage. We also just passed a new milestone, serving our 3 millionth customer on their path to financial health. To put that in perspective, that means we have more club members than the state of Mississippi has residents. It's a testament to the value we provide and the opportunity that we can further unlock. We're focused and delivering on both sides of our platform, with more tools and partnerships to improve our borrowers' financial health and deepening relationships with our largest platform investors. Back in February, I said, LendingClub would drive responsible revenue growth in 2019, continuing to innovate while carefully allocating capital, managing risk and simplifying our operations to drop more of our top line growth through to the bottom line. We have lots more to do, but let me share what we've accomplished so far this year. First, the investor base we've worked hard to build over the last several years is giving us an important advantage and range of risk appetite and cost of capital, meaning we're able to offer more attractive rates to more borrowers. That, coupled with our work on demand generation, throughput and lifetime value, has translated into strong responsible growth in Q1 with applications up 31%, loan volumes up 18% and revenues up 15% year-on-year, so overall solid numbers. One area we are working through is the difference between loan growth…

Thanks Scott. We've got a busy start to the year, so let's get right into it. I'll start by reviewing our Q1 performance and then update you on or cost simplification initiatives including details on our second site in Lehi and then finish with our Q2 and full year outlook. As I noted, last quarter we continue to deliver targeted returns to our investors using our price, mix, credit and scale and this gives us great strength and flexibility. While we still have much to do our strong performance so far this year is encouraging and we see good opportunities to grow revenues and expand margins in 2019. Perhaps more importantly, we can already see that our simplification program is fundamentally transforming the way we operate our business, giving us a road map over the medium term to adjusted EBITDA margins of 25% and beyond. So let's start with Q1 revenues which were up 15% to $174 million. On the borrower side of the platform transaction fees grew 22% in Q1 to $135 million on the back of 18% growth in originations and a 14 basis points increase in transaction fee yield as we continue to optimize transaction fee and other pricing levers to balance investor returns, borrower demand and LendingClub economics. I want to bring your attention to our income statement as we've made some modifications to more clearly report net investor revenue. We think net investor revenues as a whole will give you a better aggregate view of the investor side of our platform. Net investor revenue was down 5% to $37 million with growth in investor fees and gain on sale offset by three items in net interest income and fair value adjustments that I like to address before I go into gain on sale and other…

Thanks, Tom. All I would do is wrap-up with an overview. Clearly, we've had a good start to the year. We are executing well and are on track to deliver against our 2019 financial goals. So we're eager to turn it over now and take your questions.

Ladies and gentlemen, at this time we will begin the question-and-answer session [Operator Instructions] Our first question today comes from Brad Berning from Craig-Hallum. Please go ahead with your question.

Good afternoon, guys. Thanks for the update on the expense side and the confidence in that sounds I think pretty good. But wanted to touch on the guidance on the revenue side a little bit, if you could get into little bit deeper on kind of the timing of the growth rates it sounds like it decelerated a bit next quarter acceleration second half? And I think you mentioned fair value adjustments. But you can maybe talk about whether what's impacting some of that and your confidence to kind of reaccelerate growth in the second half a little bit relative to 2Q. So maybe you can get a little bit deeper on kind of your thoughts around revenue timing.

Hey, Brad thanks. Couple of things. Actually, we're executing right on track with where we expected. I'll have you – I'd point to last year, if you recall we were at the 27% revenue growth on 31% origination growth. So clearly, we've got some mathematical comparables that are making it look like we're deceling but actually we're right on track with our guide right around that 10% growth for the first half. We've indicated in the past that a lot of the savings will come in the back half. So we're right on track where we thought we'd be and see great momentum in the business.

Understood. And then also if you could touch a little bit on the FTC you put a different thing on your website a little bit. Maybe you can expand upon that just so – you guys didn't touch on it on the call.

Hey, Brad. This is Scott. Pretty unorthodox for us to be commenting in the middle of litigation, but we do know it's a common question we get. So we pretty much put in the blog post really everything that we have to say on the topic at the moment.

Understood. I get back in the queue. Thanks guys.

Our next question comes from Jed Kelly from Oppenheimer. Please go ahead with your question.

Great. Just circling back on the guidance. Can you speak to some of the trends you're seeing in April how they compare to 1Q and how that's actually been projecting?

Hey, Jed, we don't typically comment specifically on the months, but I know that people are tracking that with the various agencies or services out there. We continue to be on track where we expected. Typically, in the second and third quarters are typically are stronger quarters than the first quarter. And so we continue to see ourselves in good position for 2Q and started the quarter off right as we would have expected.

And then when you raised your EBITDA guidance I guess your medium-term EBITDA guidance to 25% can you just discuss your biggest expense is still sales and marketing just how should we view the leverage you can drive out of that line item? And then as a follow-up, as we get later in the credit cycle or in any cycle businesses with a tremendous amount of scale such as yours usually it presents an opportunity to take share gains. And how do you just balance profitability versus growth? And how should we think about that?

Let me touch on the expense discussion and then Scott may talk about market share. So first, we feel very good about the work we did. As Scott mentioned, we've got a pretty extensive zero-based budget and we've got line of sight clearly to 20%. And now we're targeting another five points. We think that's going to come out of a couple different places. First, in M&S and O&S, we have a number of things happening here. First, with moving to Lehi, we're going to get facility savings as well as salaries and benefits savings. So that was already in flight and we can see that improving our contribution margin. I would expect that additional five points of margin going from 20% EBITDA margin to 25% that -- a piece of that is going to come from the productivity we're seeing in variable cost. Our ability to convert customers at a higher rate, as Scott mentioned, is really a big focus of ours and we would start to see our contribution margin go over 50% and add a couple of points or more to that EBITDA margin expansion. Clearly on the fixed cost, when we think about tech and G&A, we see additional margin expansion on that as well as we start to really take advantage of our scale that we've mentioned. So, it's coming from both areas. It's consistent with the move from 15% to 20%. 20% to 25% is the next step we see line of sight to. So, we're feeling very good about -- really starting to leverage our scale and really hone the investments we're making and the returns we're seeing on some of those investments. Scott, you want to talk maybe a little bit about the market?

Yeah. Hey, Jed. First and foremost, as we've said multiple times in the last couple calls, our primary driver is to grow responsibly, make sure we are being good stewards of credit on behalf of our investors. And we are doing that in a way that if you look over the course of last year, we're doing that in a way that is -- we're actually growing ahead of the pace of the overall market. And we're doing that while also optimizing the performance of our credit and adjusting pricing. So, overall, we feel really good about our ability to not only defend our share as the largest participant in the market, but actually to be able to grow and leverage the unique advantages that come with operating at this kind of a scale. And if the share is there for the taking responsibly, we absolutely won't hesitate to do it. And what we also talked about is we are looking at over time ways of increasing lifetime value of customers and that will -- that thinking right now where our acquisition is really based on profitability on their initial contact with us, but over time we will see opportunity to expand the relationship and the value that we give to customers and the value we get in return.

Thank you.

Our next question comes from Eric Wasserstrom from UBS. Please go ahead with your question.

Thanks very much. Maybe Scott to ask a similar question maybe a slightly different way. Has anything occurred recently in the competitive or operational environment that has changed your approach to your growth investment coming into this year?

So, I'll start. Tom, if you want to finish I'd say go. I mean, we see the environment right now is pretty much in line with what we've been seeing over the last several quarters. We are on track to execute against the plan that we laid out.

Yeah. And what I would say Eric, we are organizing around the opportunities that Scott mentioned. We are modifying our resources to be more focused on this lifetime value, the ability for us to really take advantage of the very, very high NPS scores that we have. Consumers are coming back to us at a higher rate and we see opportunities to continue to serve them as this product becomes a part of how they manage their credit. Scott mentioned the speed in which we're able to decision and get customers their money is another example where we we're changing the use case and we're organizing around that. So it's -- if you remember we did a lot of work last year on demand gen, a lot of work on conversion and now we're really focusing on the lifetime value of the customer.

Yeah. The only other thing I'd add, Eric, is evolution of where we've been we've been talking about overall health of the consumer. We see us continuing to be strong with unemployment low, wages starting to come up. Overall, performance across credit pretty benign including in our portfolio, but what we see as a supply-side-driven pressure on higher risk prime. We do believe that we've largely addressed that with the changes that we've made, so there's nothing right now that we're seeing that represents a change in overall environment we're bearing.

Great. And just Tom just one clarification. I just want to make sure I understood your EBITDA commentary because obviously you've just sort of improved the medium-term guidance from 20% to 25%. But did I also understand that you think that there's incremental margin opportunity even beyond that?

Sorry what I gave is the -- our outlook on a medium term. So as we get the benefits, full year benefits in 2020 and then another leg of initial items we see in 2020 going into 2021, it's kind of medium term to sometime in 2021 we believe we can deliver those types of numbers. May not be for the full-year, but clearly that's where we're headed. But I think what's happened is Scott mentioned in his comments we're changing the culture of the organization to be focusing on driving level of profitability organization. So the way we approach our business, the way we're leveraging our scale has shifted as a part of this exercise. It's not just about the mathematics. It's about how we think about investments and how we are targeting returns. So we think that this business has an entitlement above that. We don't have specifics right now, but let us get -- if you remember went from 7% to 15%, 15% to 20% now we're going from 20% to 25%. We're sharing with you our current thinking but to the extent, we can execute on some of the things we've talked about today I'll give you an update when I think we can hit above 25%.

Excellent. Thanks very much.

Our next question comes from Heath Terry from Goldman Sachs. Please go ahead with your question.

Great. I know the growth and profitability trade-off question has been asked but I kind of wanted to get a sense from you that -- is there something magic about 25% that I don't think you feel like it's the right number to get to? And I mean you just referenced sort of getting beyond 25% that makes you feel better about being at that level versus reinvesting that back into the business in terms of faster growth. I guess what level of EBITDA is -- of EBITDA margin is sort of high enough for you to want to start putting money back into the business for faster growth? And then Scott maybe a sort of higher level question sort of related to the quarter itself. But as you look at the company's use of data and the way that you're assessing risk in the portfolio or loan applicants, can you just give us a bit of an update on where you are in the use of alternative data? And particularly to the extent that you're seeing a divergence in the performance of your poor grades of loans versus the comparable number would be on a credit score basis?

So let me get the first one. So the information that I've been laying out over the last couple of quarters the 20% EBITDA number is critical, because at that point we start to cover all of our stock-based compensation, depreciation so we start to get profitable on a GAAP basis. We think that's an entitlement that the business needs to demonstrate and allows us to show the true profitability of the company. As we move to 20% to 25% that will obviously -- that's an indication that we see additional GAAP profitability above that level, so not just hitting 20%, but being able to then demonstrate net income growth beyond that. I think your point's a good one. That's why I paused. It's not to give an indication of going beyond 25% because to the extent that we do see opportunities to double down on an investment we want to have that flexibility to do that. But right now we feel very well positioned to continue to grow. We're not -- we have plenty of opportunity to reinvest at the level of growth that we're seeing and it doesn't seem to be slowing at that. We think we can do both and it's important for us to do both.

And I'd circle back if I could Tom on the -- we are investing now in areas that we're being very, very selective about. So auto as I mentioned on the call is clearly an area we're investing. And we are investing in our data infrastructure and analytics infrastructure, because we know those can drive long-term growth. And then there are other areas we're being thoughtful about what is the best use of capital. Is it us building ourselves? Or is it partnerships? Cut you off I don't know if you'd…

No, no I think you got it Scott. Those are the key things.

So, Heath on your other question on use of data -- alternative use of data. As I believe we talked about before, our core models that are powering fraud, pricing, credit decisioning, underwriting already are really taking a look at things outside of traditional metrics roughly half of the variables in our model and we've got over 100 variables in the core decisioning model are proprietary to us and have been developed by us. And we are continuing to see success. The direct application, of course, is in areas like fraud and underwriting where they can be very powerful and alternative data can be very powerful on making sure the individuals that are applying are who they say they are, work where they say they work, and earn what they say they earn, but increasingly also using those in decisioning. An example is we talked about -- I believe about a year ago today, we talked about using cash flow based underwriting through bank accounts. That's a program that's been successful for us and it's continuing to expand delivering strong returns for investors and allowing us to increase access to credit for people whose bureaus might not otherwise -- might otherwise not look attractive, but whose actual demonstrated experience and their ability to build balances and maintain balances is strong. So, in terms of where we are I'd say never done, that's why we're investing in the infrastructure, our team, our tools, and our processes to continue to identify opportunities.

Thank you, both.

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

Thanks. I just had one. I wanted to reconcile or make sure I understood. In your prepared remarks, you talked about some of the issues that you saw in the quarter around high-risk classes of loans, but I think you also talked about going forward you have some plans to really try to bring in a new class of institutional investors that can help you scale that end of the class spectrum. So, just trying to reconcile those two things and get a better sense of what's happening there. Thanks.

Yes. Thanks Mark. Actually they're highly related, so let me kind of give you a view. To the extent that we did $2.7 billion of originations this quarter, we sold $2.85 billion of loans so massive scale. To the extent that we're seeing a difference between targeted returns and the coupon on our bonds or returns on our loans rather, we will step in and clear the market. You see that with our fair value market I mentioned in my prepared remarks. That is something that we're constantly using our balance sheet. To the extent that we can partner with others that have a specific credit underwriting capability that want to fund specific loans across a different spectrum that we may not be able to sell in scale those are opportunities for us to leverage all the marketing, all the underwriting and infrastructure we've put in place. That goes back to even some of the comments I made earlier about margin expansion by being able to further convert customers with a different profile or a different view on credit that is a real growth opportunity for us. It's something that we're looking for partners to do to do just that. So, they're highly related and to the extent that we can put those in place they can be very accretive.

And just add to that if you look at the overall shift in mix over the last 18 months, we've clearly been moving with -- together with investor demand and to the higher quality credit. Overall, you see that on our shift of increasing mix of banks. And if you -- you'll note the growth in our custom loan program, the fastest growing segment of that is our AAs which is our highest quality credit, the super prime credit.

That makes sense. Thank you.

Our next question comes from Henry Coffey from Wedbush. Please go ahead with your question.

Yes, good afternoon and thank you for taking my questions. I want you to kind of indulge me because I want to ask the same question just to make sure I understand it. So you've had loans that you originated where the returns were not perfect, so you held those on balance sheet or sold them at a discount. Is that what we should understand about the fair value market?

Yes. So, Henry what we do -- and want you to think of this as velocity. When we say hold on the balance sheet, these are within 30 to 45 days on average. These are moving quite quickly. To the extent that the returns are not hitting the investors' expectations, we will evaluate providing a slight discount. That's what I'm referring to.

Yeah, that's what I thought. And then -- but on the other side, for most of the last almost two-plus years, the discussion's been around narrowing the credit box and finding growth channels, like you said, on the AA program. But now it sounds like, in addition to the fact that you're willing to sort of sell them at a discount should you have to and everybody has to do that. You're also talking about in a very selective way, in a customized program, opening the credit box a little bit.

So, there is -- we're always focusing on how to maximize the margins in our business. It could be through originations on our side. Keep in mind that our transaction fees continue to be quite stable, and so it still makes sense for us to provide a small discount to clear the platform. To the extent that another market participant would be interested in leveraging our sales and marketing and ability to use our systems and infrastructure to generate loans that they are selecting that's a -- opening our platform. It may or may not be opening specific credit. It could be just different attributes that they believe are indications of the value. So it's going to vary. We don't have specifics to give you today. But to the extent that we can increase our loan volume off of the current cost and scale that we have, that's additional profit for us.

Yeah. A way to think about it, we're generating 40,000 applications a day. A small fraction of those are getting into an actual loan. And given the Investor Days we work with, many of whom have investment managers, who worked at some of the leading unsecured consumer credit shops across the country they -- we have people who have different views. So there are places where we have hard cuts. We don't go below for example 600 FICO. We don't go above the certain level of DTI. They might have different views based on experience with new to credit or thin file. And based on that experience, they might be willing to take some of our applicants and run them through a custom model and book them. We're already attracting the applicants. We're pulling the credits, so we can take that duty underwriting deliver an integrated LendingClub experience and with a custom program like that. So be...

Now it makes perfect sense. And you're not so much opening the credit box as much as letting someone else define what the box for them might look like.

That's exactly…

That's exactly right. That's exactly right.

And then, just some trivial questions. I noticed on your servicing, investor fees, there was a difference between the adjusted number, which runs around 30 basis points and the reported number. What was that -- what's the difference there?

Right now, it's mostly probably the charges related to the redundancy that we had for the quarter Henry. We did have some retention in place as we were transitioning to Lehi so. I'm assuming that's the number you're referring to. But we saw productivity in both...

I'm talking about the gross fee, which was -- the gross fee was up -- the adjusted fee was unchanged at like 29 to 30 basis points year-over-year, but the reported number on your GAAP financials was different. Is that -- it's on the revenue side, I was asking about.

No, I don't know of anything specific. The piece that's helping that number grow is the current servicing portfolio now has gone over $14 billion, and also our average servicing rate has also gone up. So you're getting both of those impacting that number. That's the -- I think that's what you're looking at.

Great. Thank you very much.

Our next question comes from Steven Kwok from KBW. Please go ahead with your question. Mr. Kwok, your line is open and is it possible your phone is on mute. And our -- we'll move on to a follow-up question from Brad Berning from Craig-Hallum. Please go ahead with your question.

Yes. One more follow-up on the user experience on the application by speeding up the process there. And I was just wondering if you could talk a little bit about differentiating yourselves in the market on that user experience, and if you have line of sight on any further improvements on that too to help scale, saying yes, more often by being more efficient and effective at doing so?

Yes. In terms of market there is -- it's a pretty broad range of experiences, because we serve a broad range of customers. The experience you'd get in a let's talk for a self-employed customer or let's call it someone with a FICO of 600 versus a FICO of 700 is pretty different. I would say, we feel very good overall about both the amount of data and the amount of process improvement communication skills we're bringing overall to drive that experience further and continue to improve the -- those customer satisfaction rates. In terms of, is there more row to hoe there? The answer is definitively yes. We had a pretty solid road map last year. That's exceeded our expectations and we've got another very exciting road map this year to continue to make gains there.

Was TurboTax part of that improvement that you've already seen? Or is that part of the road map that already…/

Yes. That's part of the road map. That's part of the road map to come. The example I gave ties pretty much to that. An area where TurboTax can be very useful is with self-employed borrowers for whom it's harder to get a handle on pay stubs.

And then do you have any thoughts on what kind of turndown rates you have on self-employed currently versus the non-self-employed?

Nothing I'd give specifically, but I will say that they are certainly a much more difficult to -- more confident to underwrite customer. They just tend to have more fluctuations in income and be harder to in a structured way validate.

Understood. Much appreciated your thoughts.

And ladies and gentlemen, at this point I'm showing no further questions. I'd like to turn the conference back over to management for any closing remarks.

That's it. Just like to thank everybody. We feel really good about results in the first quarter and feel solidly on track for the year.

And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.