Welcome to the Lending Club's Second Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to James Samford. Please go ahead

Thank you. Good afternoon and welcome to Lending Club's second quarter of 2015 earnings conference call. Joining me to talk about our results are Renaud Laplanche, Founder and CEO and Carrie Dolan, CFO. Before we get started I'd like to remind everyone that our remarks today will include forward-looking statements and 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 27, 2015. 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 the new information of our future events. During this call we present both GAAP and non-GAAP measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and the accompanying investor presentation are available on our website at www.ir.lendingclub.com. And now I'd like to call turn the call over to Renaud.

Thank you, James. Welcome to our Second quarter conference call. This was another great quarter. We generated operating revenue growth of 98% year over year, accelerating from 17% quarter over quarter in Q1 to 19% in Q2, faster than our initial plan as we saw opportunities to efficiently accelerate as the quarter developed. Given the strong momentum we're seeing in our core business and the progress we're making in our new business initiatives, we have again decided to raise both our revenue and EBITDA outlook for the year and the dollar and percentage basis. I'll begin today's call with our Second quarter results and progress on key initiatives, then we'll talk about repeat customers in [indiscernible], discuss the regulatory framework we operate in and talk about an addition we're making to our Executive team. I will then turn the call over to Carrie for more details on our financial results, third quarter guidance and an updated full year outlook. At that point, we'll turn the call over to Operator for questions. Let's get started. Loan originations in the second quarter increased 90% year over year to $1.91 billion compared to $1 billion in the same period last year. Since we closed the Springstone acquisition on April 17 last year, this quarter was our first quarter we brought in year-over-year growth on the fully comparable basis. About $11.2 billion in consumer and small business loans have now been issued through our platforms since we launched over eight years ago including $6.1 billion just in the last 12 months. Currently, our marketplace remains neither supply nor demand constrained. We set our growth plans each quarter in a way that optimizes for long-term shareholder value creation for delivering a great user experience that helps build customer satisfaction and the long-term value of our…

Thanks, Renaud. This was another outstanding quarter with financial results that topped our initial outlook thanks to a combination of incrementally faster growth and a couple positive drivers. I will first review our financial results and then review third quarter and annual guidance before taking your questions. All year-over-year comments are comparisons to the second quarter in the prior-year. As Renaud shared, total originations in the second quarter grew to a record $1.9 billion, an increase of 90% compared to the same period last year. This origination growth drove equally strong revenue growth. Operating revenue in the second quarter was $96.1 million, up 98% year over year. As a reminder, the majority of our revenue is earned in two ways. First, transaction fees are earned upfront when a loan is originated. These fees totaled $85.7 million, up 87% year over year and represented roughly 89% of operating revenues in the second quarter. Second, servicing and management fees from investors are earned over the life of investment. During the second quarter, these fees totaled $9 million, up 208% from last year. Second quarter revenue performance came in ahead of our outlook as a result of several drivers. First, we continue to see favorable marketing efficiency in our standard personal loan product. Second, we saw positive momentum in our custom programs which includes custom personal loans, education and patient finance and small business. Custom program originations grew 33% quarter over quarter and represented 24% of our Second quarter originations compared to 21% last quarter. Third, we continue to see favorable investor mix this quarter with demand coming from investors who pay marginally higher servicing fees. Our revenue yield which is operating revenue as a percent of origination, was 5.03%, up 7 basis points sequentially and 20 basis points year over year. Servicing…

[Operator Instructions]. And our first question comes from Smittipon Srethapramote at Morgan Stanley.

Renaud, you spoke about the potential to unlock value from the one million borrowers who taken a loan from your platform in the past of which 14% has taken a second loan. Can you talk about the degree that you guys may be constrained to serve these customers by only having limit product set? And if so, what are your thoughts and plans about potentially introducing new products to service these customers?

So first a clarification on the 14% number. So we're seeing about 14% of our existing total commutative borrower base that came back and got approved for a second loan. That number is driven down quite a bit by the rate of growth that we're seeing on the site because there are a lot of credit checks that make it really hard for borrowers. We voluntarily make it hard to take a second loan until the first loan has substantially amortized and pulling itself out. And about 80% of that one million borrower base came in in the last two years. So only a portion of that base really got to the point where they are eligible and so if he is going to be approved for a second loan. If you look at that number on the vintage basis, you see that's within the three to four years we get to 25% to 30% of the borrower base gets a second loan. So it's a very nice repeat customer rate we find, but certainly with the young age of the base it gives us a lot of future value to unlock. Now you're absolutely correct to mention that as our use cases and our product line gets broader and we release other consumer products, that would only increase our ability to cross sell products and continue to further monetize our base.

And do you have any comments on the Madden versus Midland funding case that's going through the court system right now in terms of how it potentially impact your business?

Yes, so we've seen that case that came out a couple of months ago. I think the --our take there is obviously the particular circumstances of the case are different from what we're seeing on our platform. But in general what really helps us apply Utah low to most of our loans is really a couple of things. One is for the all preemption. And the second is choice of low provision in our contract. The Madden case really challenged the federal preemption but did not challenge the choice of low provision, so that's really the - and we don't need both, we need one of them. So we continue to operate in the second separate district where that decision was rendered exactly as we did before and are relying on our choice of provisions. Note that this particular case is getting challenged by a lot of players in the banking industry, including the American Banking Association. And I think it's an unusual case, but certainly that doesn't come back to us in that the sense that we continue to rely on choice of low provision. If we were to see that the choice of low provision was getting challenged elsewhere which there's no reason to expect at this point, we could also think of a different issuance framework than the one we're using now where we would switch to a series of state licenses. And that's in [indiscernible] we provided in our slide deck that shows that using the current mix we have about 12.5% of our loans that would exit the state interest rate caps. So that certainly would be [indiscernible] demand and we'd have to revise our pricing in certain states, but that certainly would be another option available to us if our choice of low provision and federal preemption was getting challenged in other states.

And Carrie, one quick question for you. You guys had a large negative other net operating cash flow item of $426 million in the quarter. Can you go into little bit more details about that line item?

Yes. We have about close to $900 million in cash and what we did this quarter is about half of that, so $400 million or so, we moved into a securities portfolio to start actually earning a little bit better return. So if you're just looking at the cash flow specifically, that outflow reflected the investments that we made this quarter.

The next question is from Ralph Schackart at William Blair.

Renaud, first question a marketing efficiencies. I think last quarter you talked about some short-term efficiencies in the channel and that was also talked about pretty extensively at Lendit and one of your smaller competitors in SMB space last night called that out. Yet you seem to have a reversal this quarter, curious if you could give some color, did you change mix between on and off line? Is a partnerships driving the efficiencies? And any extra color would be helpful.

Yes I think what we're seeing is a lot of tailwind coming from our brand gaining in wellness and credibility, that's certainly drives some of the conversion rates. A lot of the good reviews we're getting online. A lot of the high level of customer satisfaction that drives. But then that promoter score also drives conversion and some efficiency. We also did some work on specific channels and certainly the partnerships tend to be more efficient than direct marketing in some cases. We actually released a specific [indiscernible] here. Some of the partnerships we talked about before. So one was the Bank Alliance partnership and we launched with a number of banks, small community banks for the most part that are part of that alliance. And as you know we're making, usually making co-branded loans with the banks that are part of the network and offering some personal loans to the bank customers, so a win for the bank that has that customer as a mortgage customer but doesn't necessarily have an unsecured product to refer to that customer. It's a win for us because it gives us access to a new customer base that wouldn't necessarily be responsive to the Lending Club brand by itself. And - but would be responsive to a co-branded offer that includes the brand of the local bank that they're familiar with. And so we've seen in this channel, it is still pretty early, but we're seeing in this channel a two to three times better marketing efficiency than we're seeing on average for the rest of our business. So certainly some of these partnerships are starting to show signs of really good efficiency.

One more if I could, on the operating revenue percent just above 5%, slightly higher than last quarter. I think it's been increasing for about the last four quarters or so and you're up about 40 basis points or so since 2013. Any trends we can draw from the consistent growth or pattern? Should we expect this to continue to increase modestly and/or what would cause this trend to reverse? Thanks.

Yes, when you look at the yield, particularly over the last year as you pointed out, we have seen it gradually increasing. There's two things driving that. One is collection fees. We talked a bit about introducing collection fees or passing those through to investors late last year. In the second quarter, we actually benefited roughly 5 basis points from that, that is a trend that we do - that is permanent, so certainly relative to last year. The second thing that has been increasing is servicing fees. So we actually on the investor side charge to retail investors 1% of payments on servicing and that's remained the same over the last couple of years. But as we brought on new investors, particularly high net worth and institutional investors, we've bringing those on at marginally higher rates. And so over the last year the mix of moving towards more and new investors at slightly higher rates has also caused a bit of the increase. This is harder to predict permanently over the next several quarters, but we do expect some marginal expansion in servicing fees over time. So in other words, the 5% level is a bit of the new normal relative to last year.

The next question is from Josh Beck of Pacific Crest.

Quick question for Renaud, you talked about direct response, you talked about radio and TV a little bit as well. As you spend on those channels that tend to I think earlier on in their lifecycle build the brand, maybe versus leading to a direct improvement conversion improvement, what have you learned? You said you're learning a good bit there in TV and radio, but what are the early learnings? What should we think about in terms of cadence of spending? Is this a trial period and then at some later point we could see an uptick once you have it flushed out a little bit more? Any color there would be very helpful.

Yes, so at this point radio and TV continues to be direct response radio and TV, so it's not an overall brand building. It continues to be with a strong call to action and is being measured using the same measures, same metrics of efficiency as any other channel, even though certainly as some brand awareness benefit, but we're not self-relying on this benefit. So basically we learned a lot in terms of day partying in terms of messaging, in terms of combination of [indiscernible] radio or TV and some other marketing in given test markets. And so we would continue to test and continue to learn. There are some of the test markets where it's already above the marginal efficiency of other channels so already other area is why it can pay for itself. So I think we don't necessarily increase that spend in a meaningful way in circumstances where it does not meet our efficiency, our efficiency threshold. But in areas or in use cases where it's already as or more efficient then marginal cost and other channels, we'll certainly do more TV and more radio and/or are hoping to optimize our way down over the next few quarters.

Okay and one of the things that you've talked about in the past is your I think letters and flexibility to move across channels. I'm wondering if you saw any trouble spots maybe this quarter that made you have to shift between channels or was it mainly as you alluded to earlier driven by conversion and partnerships?

It's mostly the latter although I'm going to say we've made a comment last quarter about seeing some inefficiency in some of the most visible channels. And we continue to see some of that although not as much as we did in the last quarter. And again when that's the case, we usually move our budget to some other channels that are more efficient at that time. I think it's one of the benefits of the channel diversification we've been building over the last several years. We have that flexibility and that luxury that we don't have to use any particular channel to its full capacity. That being said, again typically when that happens, when we lower our spend we usually get a call from the CEO of that particular partner or channel giving us better pricing. So I think we benefit from our leading position in our industry and that gives us the ability to negotiate really good terms across all channels

And last one for me on Springstone and thinking about building out the field sales force there. Any sense you can give us on how much of the footprint is built out relative to your plans? How you're thinking about adjusting that cadence moving forward based on it sounds like the success you've had to date there.

Yes, so it took us about three quarters to build out phase one of that field sales force. So we have about 30 field sales reps at this point. I think we're going to post there and let it scale, let it reach efficiency before we accelerate or continue the buildup phase. What we're seeing is the territories that were staffed first, so over six months ago, are showing some great momentum. So we believe newer territories over time or some of them at least, are going to follow the same pattern. So we'll let that prove itself out and if that's the case, we'll continue to build and would enter into another phase of buildup.

The next question is from Mark May of Citigroup

This is Ryan on for Mark. Two questions if I could. First on EBITDA margins, you've been expanding them nicely year on year and sequentially, but the back half of the year seems to imply some margin compression on both the year on year and sequential basis. So other than seasonality of marketing spend, anything you want to call out there? And then with respect to the partnership with Zulily, any more color you can give us and the dynamics of how that will work? And do you have any other - are you working on any other partnerships with other online retailers? Thanks a lot.

On the EBITDA margin, as we talked about, really this is continued investments in really technology product infrastructure. So we have had that focus all year along and we're going to continue to focus on build up there. And certainly as I mentioned there will be a bit of seasonality in the fourth quarter and both we're expecting to play through the margin. We're not necessarily adjusting the outlook for contribution margins specifically. We don't guide on that, but certainly the seasonality and as we've shared this quarter we wanted to give you guys a bit more visibility into small business, Springstone relative to our core business. And so really the focus here is on infrastructure as we've been committed to all year long.

And so on Zulily, we're essentially going to be making financing available for their online merchants. And yes to your point, we're in discussions with a number of other online retailers and online platforms. The alliance with Zulily isn't very dissimilar to what we announced earlier this year with Alibaba with [indiscernible] U.S. platform of Alibaba. And would continue to pursue that strategy of partnerships that's working out well for us with small business.

The next question is from Stephen Ju of Credit Suisse.

Renaud stepping back and looking big picture, I remember one of the primary constraints on growth for you has been on the demand or I guess the borrower side of the marketplace. But as Lending Club looks like it's able to sustain higher growth rates with relatively little deterioration in your contribution margin, what's your appetite at this point to throughput even more volume, especially as it looks like the lifetime value of your borrowers seems to be tracking higher with increased brand recognition? Thanks.

Thank you. I would say sustain growth with actually improvements in contribution margins. So yes it's certainly going well and we don't see it constrained on either side of the platform at this point. And I think we'll continue to implement our strategy that has worked well for us of growing aggressively but in a deliberate way that doesn't necessarily max out the short-term opportunity. But really gives us the ability to continue to build up in cost structure and staffing ahead of the growth, continues to beef up many areas in terms of scalability in terms of security, in terms of back office. And also really deliver grades of user experience and not impact the credit mix quarter over quarter. I think when you run an online marketplace with the levels of credit product I think it imposes different constraints than some other type of products and credit as this particular area of taking time to release of [indiscernible] know the exact performance for several quarters. So we don't want to put our investors at risk and of change [indiscernible] of credit mix quarter over quarter. And that explains the strategy that again has worked well for us so far of some disciplined growth.

Our last question is from Heath Terry at Goldman Sachs.

I was wondering if you could give us a sense that of the level of interest that you've had as you started to see more growth in S&B and as you expand into some of the close verticals, has that experience given you any greater level of interest in entering other categories faster than had maybe been previously on the road map or certainly given the success that you're seeing here in the U.S., accelerating your timeline around international?

Again, we're pleased with some new initiatives and some custom programs have grown faster in interest-related terms than the rest of the business over the last quarter. And that certainly reinforced our conviction that we should continue to grow aggressively our product offering and really fulfill our mission of transforming the entire banking industry and making credit more affordable across many different products. And over time, fulfill of the credit needs of our customers. And I think we're pleased with how the product road map is shaping out. We have said in the past we had launched one to two new product each year, I think we can give you a little bit more color on this. We're planning to launch another product in the next few months before the end of this year. And we're planning to enter an entirely new large consumer product category in the first half of next year. The distinction we're making between a product and the product category is a little bit what you've seen with education and patient finance where we launched a new product in late 2014 that was a true no interest product while education and patient finance itself is a new product category. So a category is really a different use case, different borrower segment, generally different channels as well. So that gives you a little bit more color on what's coming in the product pipeline. International continues to be a really big long-term opportunity. But again we have so many really actionable opportunities domestically that I think we'll continue to focus on these in the short term.

This concludes our question and answer session and the conference has now concluded. Thank you for attending today's presentation, you may now disconnect.