Analysis of Lending Club’s Improving Efficiency Ratio

This is a guest post from Bryce Mason, a Lending Club investor and long time reader here. 

Lending Club’s Annual Report 10-K was submitted to the SEC on 29 June 2012 and a brief analysis shows their operating efficiency continues to improve. The key revenues related to their business model, now more clearly presented as (1) Origination Fees, (2) Servicing Fees, and (3) Other Revenue in the first section of the Consolidated Statement of Operations, showed strong growth of about 19% from their third to fourth quarter. Operating expenses, which have always been clearly labeled (1) Sales & Marketing, (2) Engineering, and (3) General & Administrative, only increased 8%. Thus, Lending Club continued to inch toward profitability in their last quarter of the prior fiscal year.

A common measure of corporate health is the efficiency ratio, which describes how many dollars one had to spend to make one dollar in revenue. Profitable companies have ratios less than 1.0. An analysis of Lending Club’s historical 10-Q and 10-K documents reveals that the efficiency ratio has improved dramatically in the last three years, from about 5.0 to 1.5 today. The following table shows revenues, expenses, profits, and efficiency ratios from 2009/10-Q3 to 2011/12-Q4 (Lending Club’s fiscal year spans calendar years and ends in March). Prior to this 2009/10-Q3, Lending Club did not report revenues in a way that allowed an obvious calculation of the efficiency ratio.

Lending Club Quarterly Financials (all amounts in thousands)

RevenueSales/MrktEngineeringAdminTotal ExpensesProfitEfficiency Ratio
Dec-0955115864426472675-21244.9
Mar-1073721084386473193-24564.3
Jun-10110522984988343630-25253.3
Sep-10158330765009464522-29392.9
Dec-10158830595149024475-28872.8
Mar-112168342344012565119-29512.4
Jun-112786385852015145892-31062.1
Sep-113404428966717946750-33462.0
Dec-114394459066320087261-28671.7
Mar-125214493386220447839-26251.5

Unfortunately, Lending Club still spends about $1.50 to earn $1. However, even though Lending Club remains unprofitable, they have enough cash on hand for 10 quarters at their last level of losses, a solid trajectory, and in my opinion a huge untapped borrower market. With the major marketing push and increased origination volume over the last few months (not included in the most recent statement), we can all eagerly await the 2012/13-Q1 statement.

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