OnDeck has made many changes to the business over the last several quarters. With their latest financial results released today, the firm reiterated their plans to achieve GAAP profitability in the fourth quarter of 2017. OnDeck was affected by Hurricanes Harvey and Irma in the third quarter and would have posted numbers closer to breakeven if it wasn’t for these storms. Similar to other lenders in the space, OnDeck announced that they  worked with borrowers on payment plans for those located in the disaster zones. By the end of October, most of their affected borrowers were back in business.

Originations in the quarter grew to $531 million, up 14% from the prior quarter. They also reported that operating expenses were at the lowest level in more than two years. According to the company, their credit quality of new borrowers remains near historic highs reflected in both the OnDeck Score and personal credit scores of borrowers.

Revenue increased to $83.7 million, up 8% over the prior year period. Not surprisingly, loans sold or designated for sale continued to fall and represented just 1.3% of term loan originations. Other Revenue increased $0.7 million from the previous quarter to $3.4 million which reflected increased revenue from OnDeck-as-a-Service. Compared to the third quarter of 2016, the company improved bottom line performance by $12 million.

In the third quarter OnDeck shared that their partnership with JP Morgan Chase was extended for up to four years. Two weeks ago they also announced a partnership with VISA and Ingo Money which disburses loan proceeds in real time to business debit cards. In the earnings call CEO Noah Breslow noted that they still believe they are in the early days of the potential of partnerships. The company teased another big bank partnership to be announced in the first half of 2018.

On the operational side of the business OnDeck reported that they were testing more features including asking for more information up front from borrowers and optimizing collections. Breslow discussed the decision to test litigating loans themselves where borrowers have failed to make payments. Previously, the company relied on third party debt buyers, but now has built out a team internally. They believe they will recover more in the long term than what they previously received with debt buyers.

Conclusion

Overall OnDeck reported a solid quarter with originations coming in higher than projections. They continued to execute on their plan and continue to meet the goals they set out for themselves. As pointed out above, OnDeck is just scratching the surface of what is possible with bank partnerships. The reality is that banks move slow and as Breslow noted in the Q&A, they are playing the long game here, looking out 5 to 10 years into the future since these deals take a long time to scale.

This morning OnDeck announced their second quarter 2017 earnings. In addition to the earnings release and webcast, we were able to speak with OnDeck CEO Noah Breslow today to get additional perspective on the financials and the news they shared.

The big win for the quarter was that they have expanded their partnership with JPMorgan Chase by up to four years. When we spoke to Breslow he wasn’t able to provide much additional detail about the partnership but he did say that the credit performance of these Chase loans has met or exceeded expectations. He also said that the initial structure of the relationship is still in place in their new deal.

The other interesting tidbit Breslow shared was around the SMART Box. The SMART Box was announced in October 2016 by the Innovative Lending Platform Association (ILPA) and it has been part of all OnDeck loans and lines of credit for several months now. He said that Chase has also adopted the SMART Box in all the loans originated in their OnDeck partnership, so having the Chase stamp of approval is a big positive for this new initiative.

In the Q&A section of the call Breslow teased that there may be an opportunity to expand the reach of the product beyond Chase customers. Although he wouldn’t elaborate further it’s safe to say that there is much more opportunity to grow both the product offerings and the target market. Not surprisingly the Chase book is lower risk compared to OnDeck’s book and they have increased the maximum loan size from $100,000 to $200,000. The net promoter score of the product remains high at 84. OnDeck provided the below screenshot of how the Chase offering is presented to prospective borrowers.

On to the numbers from the Q2 earning report. OnDeck loan originations fell to $464 million down from $590 million in Q2 2016 as the company continues to tighten their credit policy. Gross revenue increased to $86.7 million, up 25% year over year. Loans sold or designated as held for sale on OnDeck’s marketplace fell to just 2.3%, continuing the trend of OnDeck holding more loans on their balance sheet. Adjusted EBITDA was $3.3 million for the quarter, up from a negative $12.4 million in the prior year period.

Last quarter we reported that the company was seeking to achieve GAAP profitability by the end of the year, something that they would have achieved this quarter but for the one-time $3 million of severance charges. Breslow noted that the company is on track to return to sequential originations growth in the third quarter. Below is a look at OnDeck’s EBITDA over the last seven quarters showing the progress they have made. [Read more…]

On OnDeck’s Q4 2016 earnings call we learned that the company was cutting 11% of its staff resulting in $20 million in savings. At the time, OnDeck shared plans to become positive adjusted EBITDA profitable in 2017 and GAAP profitable in 2018. The company is now accelerating those plans which we learned about in today’s earnings press release.

As part of our continued commitment to drive efficiencies and reduce OnDeck’s operating expenses, we are implementing an additional $25 million of annual run rate operating expense savings relative to our year-end 2016 exit run rate.

The company is now targeting GAAP profitability in the second half of 2017 with the increased cost cutting. The cost savings will come primarily from a workforce reduction in the second quarter. At the end of the second quarter headcount will be 27% less than the headcount was on December 31, 2016.

Originations for the first quarter were $573 million, down from the previous quarter of $632 million and up 1% from the prior year period. This is a result of the company’s credit tightening that was implemented during the quarter. OnDeck is not only being more selective on who they approve, but is also making more conservative offers, focusing on smaller loans with shorter terms. The company noted that they exited the quarter with a lower risk profile than they started the quarter with. While originations fell, OnDeck shared that the first quarter brought the second highest loan applications to date. Loan volume for 2017 is projected to be less than 2016.

Other financial highlights for the quarter include:

• Gross revenue of $92.9 million (up 48% from the comparable prior year period) driven by higher interest income.
• Gain on sale revenue of $1.5 million (down 79% from the comparable prior year period).
• Net revenue of $35.4 million (down 13% versus the comparable prior year period).
• GAAP net loss attributable to On Deck Capital, Inc. common stockholders was $11.1 million, or $0.15 per basic and diluted share.
• Adjusted EBITDA was negative $5.2 million (versus negative $7.3 million in the comparable prior year period).

For several quarters now I’ve been writing about how OnDeck has shifted its business from selling loans on the OnDeck Marketplace to holding loans on their balance sheet. In the past I have viewed this as a necessary move for the company due to falling investor demand. However, it seems now this may be the long term strategy for the company. Going forward OnDeck anticipates less than 5% of term loan originations to be placed on the OnDeck Marketplace. This is despite CEO Noah Breslow’s comments in the earnings call stating that investor demand had improved in the quarter. From the press release:

To optimize long-term financial performance, OnDeck plans to reduce the percentage of term loan originations sold through OnDeck Marketplace to less than 5% for the remainder of 2017.

Loans sold or designated as held for sale through OnDeck Marketplace represented 9.0% of term loan originations in Q1 2017, down from 15.8% in the prior quarter.and Noah Breslow noted that the liquidity benefit of selling loans on the marketplace is much less important. The company has $1 billion of funding capacity and ended the quarter with $73 million in cash and cash equivalents.

Conclusion

While an additional workforce reduction is tough to swallow it seems like this is the right decision for OnDeck to ensure its long term success. OnDeck has been under pressure from outside stakeholders such as Marathon Partners to explore changes to the business. There were also rumors that competitor Kabbage was looking for acquisition targets and OnDeck could be one of them. No one knows what the future holds for OnDeck but the company certainly will be in a better position once it becomes profitable.

You can listen to the conference call and view the earnings presentation on OnDeck’s website.

[Disclosure: Peter Renton, the founder and CEO of Lend Academy, owns ONDK stock.]

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…]

This morning OnDeck released their Q3 2016 earnings. The company continues to increase originations which were $613 million for the quarter, up from $590 million in the second quarter. The trend of holding more loans on their balance sheet continued in Q3. The distribution of OnDeck’s managed portfolio versus balance sheet loans is highlighted below with 79% of the portfolio being balance sheet loans, up from 75% in the prior quarter.

While at a glance the financials shared by the company today may look troubling compared to last year, it’s important to understand that this is in part due to the shift from selling loans on the marketplace to increasingly holding loans on balance sheet. This has played out over the past two quarters to a greater degree than we’ve seen in the past. Noah Breslow, OnDeck’s CEO was quoted in the press release alluding to this fact:

…While we made progress on several fronts and remain well-positioned to execute on our strategy, our financial comparisons continue to be affected by our planned and previously communicated reduction in Marketplace sales and its resulting accounting impact.

The important metric which reflects OnDeck’s sale of loans to investors is their Gain on Sale Rate, shown below.

Marketplace Gain on Sale Rate equals our gain on sale revenue from loans sold through OnDeck Marketplace divided by the carrying value of loans sold, which includes both unpaid principal balance sold and the remaining carrying value of the net deferred origination costs. A portion of loans regularly sold through OnDeck Marketplace are or may be loans which were initially designated as held for investment upon origination. The portion of such loans sold in a given period may vary materially depending upon market conditions and other circumstances.

Financial highlights from the press release:

• Gross revenue was $77.4 million for the quarter, up 15% from the prior year period.
• Net revenue was $32.3 million for the quarter, down 30% from the prior year period.
• GAAP net loss attributable to OnDeck common stockholders was $16.6 million for the quarter, compared to net income of $3.7 million in the prior year period.
• Adjusted EBITDA was a loss of $10.8 million for the quarter, compared to positive $9.0 million in the prior year period.
• Adjusted Net Loss was $12.9 million for the quarter, compared to Adjusted Net Income* of $7.4 million in the prior year period.

OnDeck reiterated full-year guidance for 2016 and highlighted their recently closed $100 million warehouse facility. Other topics were the rebranding that rolled out in August, the recent partnership with Shark Tank star Barbara Corcoran and the SMART Box, which was announced last week by the Innovative Lending Platform Association. The company shared that they are seeing stable trends in the industry with no evidence of a declining macroeconomic environment. The company did note that they are tightening lending standards and raising rates in some pockets. OnDeck’s 15+ Day Delinquency Ratio remained below prior year levels but increased sequentially from historic lows. The company now holds provisions for loan losses of $36.6 million which is up from $16.2 million from the prior year period. OnDeck’s stock price closed at 4.09, down 9.51% for the day.

Highlighted below are a few questions from the Q & A that have been summarized: [Read more…]

OnDeck announced a record $590 million in originations for Q2 2016 in yesterdays earnings report. This is an increase from $569 million from Q1 2016. They have also crossed the $5 billion mark in total small business loan originations.

As we reported on last quarter, OnDeck has continued to hold more loans on their own balance sheet and this trend continues. CEO Noah Breslow provided an update to this end in the press release:

Our leadership position and diversified funding model enabled us to produce solid results this quarter. Although financial comparisons continue to be affected by our planned reduction in Marketplace sales and its resulting accounting impacts, we believe that retaining a greater percentage of loans on our balance sheet is the right decision for the long-term economics of the business. To that end, our Unpaid Principal Balance grew 57% year-over-year, which will drive future gross revenue.

The Unpaid Principal Balance now totals $790 million and is up 57% from the prior year period. Cash and equivalents total $78 million, down from $160 million at end of December 2015. The decrease in cash is directly related to the increase of funding loans on balance sheet.

Below are the key financial highlights taken from the press release:

• Gross revenue was $69.5 million for the quarter, up 10% from the prior year period.
• Net revenue was $28.9 million for the quarter, down 33% from the prior year period.
• GAAP net loss attributable to OnDeck common stockholders was $17.9 million for the quarter, compared to net income of $5.0 million in the prior year period.
• Adjusted EBITDA was a loss of $12.4 million for the quarter, compared to positive $8.7 million in the prior year period.
• Adjusted Net Loss was $14.0 million for the quarter, compared to Adjusted Net Income of $7.3 million in the prior year period.

When trying to understand OnDeck as a company, it’s important to understand what holding more loans on their balance sheet means from a financial perspective. The financial highlights above at a glance paint a pretty negative picture but there is more to the story.  Historically, OnDeck has captured more revenue directly from the sales charge called “gain on sale revenue” due to selling loans on their marketplace. This gain is realized immediately and boosts quarterly revenue when a larger portion of loans are sold. [Read more…]