This morning OnDeck shared their Q4 2016 and full year 2016 financial results. Originations grew in Q4 by 13% to $632 million and gross revenue grew by 21% to $81.8 million. The company originated a total of $2.4 billion in small business loans in 2016. According to the press release the increase in gross revenue was driven by higher interest income (totaling $76.1 million) as OnDeck continues to hold a majority of loans on their balance sheet. Revenues were offset by lower gain on sale revenue ($1.8 million) as a result of this continuing trend for the company. To give a perspective on how the business has shifted since Q4 2015, gain on sale revenues were down 90% year over year. The company is reducing expectations of the OnDeck Marketplace part of the funding total to between 5-15% of originations. In Q4, the premiums paid by investors purchasing loans remained flat, which continues to make holding loans on balance sheet more attractive for the company long term. The current funding mix is depicted below.
As part of the earnings release, the company shared some bad news. OnDeck announced cost cutting measures which includes a reduction of 11% of its staff with hopes to achieve positive adjusted EBITDA in 2017 and GAAP profitability in 2018. Part of the cost cutting also includes non-labor expenses, primarily in sales & marketing and technology & analytics. The cost cutting will total approximately $20 million in savings compared to their 2016 operating expense run rate. In the Q & A CEO Noah Breslow shared that moving towards profitability can be accomplished by keeping the marketing spend flat while still growing originations. A portion of the $20 million cost cutting measure will be related to marketing efforts that haven’t been delivering. The company is prioritizing marketing channels instead of driving leads at any cost. The faster the company grows, the harder it is for OnDeck to be profitable due to having to hold loan loss provisions.
The company added $19 million in provision expenses following a “recalibration of loss estimates for loans with original maturities of 15 months or longer.” According to Breslow, “Most of these loans were originated in 2016 as part of our expanded offerings to OnDeck customers and, even with the updated loss estimates, continue to generate attractive returns.” Total provisions are $55.8 million, up from $20 million in the prior year. Provision Rate for the fourth quarter of 2016 was 10.2%, up from 5.6% in the prior year period. The provision rate for 2016 was 7.4%.
Many of the analysts focused heavily on these 15 month+ loans which represents around 30% of their loan book and resulted in increased provisions. The adjustments to the provision rate on 2016 loans is coming from data on loans from 2015 that have had more time to season. Some analysts were critical, speculating that the OnDeck score was not accurately pricing risk, but Breslow clarified that if you look back at these loans the model is predicting the risk ranking of the loans accurately, but obviously delinquencies or charge-offs are trending higher than expected. They have since taken a hard look at these loans and now that they have more data it will only improve the latest version of the OnDeck score. According to OnDeck no specific channel is to blame for the underperformance. Despite this news OnDeck still likes the longer term loans and believes they can generate healthy returns with respect to how they reprice them and turning some yes’s into no’s. [Read more…]