On Deck Capital Inc (NYSE:ONDK) announced third quarter 2016 financial results highlighted by continued execution of the company’s long-term plan, which has led to record levels of Loans Under Management, Originations and gross revenue. For the three months ended September 30, 2016, OnDeck increased Loans Under Management by 44% year-over-year to $1.1 billion, Originations by 27% to $613 million, and gross revenue by 15% to $77.4 million.
“OnDeck continued to execute on our plan to scale Loans Under Management while also prudently managing our operating expense base,” said Noah Breslow, OnDeck’s chief executive officer. “As part of that strategy, our Unpaid Principal Balance grew 76% year-over-year, which builds upon our solid foundation of assets that will generate future interest income. In addition, our strong leadership position and sophisticated marketing model enabled further improvement in our direct acquisition efficiency during the quarter. 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 Marketplacesales and its resulting accounting impact.”
Mr. Breslow continued, “As we look forward, we will continue to operate our business for the long-term, focusing on our disciplined approach to scaling our loan portfolio, while further diversifying our funding model and proactively managing credit.”
- 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.
Key Business Highlights
- Origination volume increased to a record $613 million for the quarter, reflecting 27% growth over the prior year period.
- Loans Under Management reached $1.1 billion, up 44% from the prior year period.
- Unpaid Principal Balance grew to $889 million, up 76% from the prior year period.
- OnDeck continued to diversify its funding sources, adding a $100 million warehouse facility.
“OnDeck delivered another solid quarter of responsible growth in our loan portfolio. We achieved record year-over-year growth in both our loan book and interest income, and drove improvements in both our Adjusted Expense Ratio* and Adjusted Operating Yield*, demonstrating our commitment to driving operating efficiencies while responsibly scaling our business,” said Howard Katzenberg, OnDeck’s chief financial officer. “From a credit perspective, our 15+ Day Delinquency Ratio remained below prior year period levels but, as expected, increased sequentially from historic lows. Our provision rate for the third quarter was 6.9%, which reflected consistent loss estimates for new originations and a reserve build for term loans originated in prior periods.”
Mr. Katzenberg continued, “During the quarter, we continued to diversify and expand our funding capacity, and we are actively engaged in the process of bringing new funding sources online. We remain confident in our unique model and track record of performance, which we believe positions us well for further growth, improved operating results and continued access to the capital markets.”
Review of Financial Results for the Third Quarter of 2016
Loans Under Management increased to $1.1 billion, up 44% from the comparable prior year period, driven primarily by 27% growth in originations. Originations were $613 million during the third quarter of 2016 and reflected double-digit growth across all three of OnDeck’s customer acquisition channels. The company’s Direct and Strategic channels, combined, grew 23% year-over-year, contributing 73% of total dollar volume, and its Funding Advisor channel grew 40% versus the prior year and comprised 27% of total dollar volume.
Gross revenue increased to $77.4 million during the third quarter of 2016, up 15% from the comparable prior year period. The increase in gross revenue was primarily driven by higher interest income, partially offset by lower gain on sale revenue. Interest income increased to $71.4 million during the quarter, up 47%, and primarily reflected the growth of average loans, which increased 58%. The Effective Interest Yield for the third quarter of 2016 was 32.8%, down from 34.8% in the comparable prior year period, primarily reflecting the shift of the loan portfolio toward longer average term loans and more Lines of Credit.
Gain on sale was $2.7 million during the third quarter of 2016, down 84% from the comparable prior year period. The decline in gain on sale primarily reflected a lower Gain on Sale Rate during the quarter and the reduction of loans sold through OnDeck Marketplace. OnDeck sold $89.9 million1 of loans through OnDeck Marketplace at a 3.0% Gain on Sale Rate during the third quarter of 2016, compared to $173.7 million of loans throughMarketplace at a 9.7% Gain on Sale Rate in the third quarter of 2015. Loans sold or designated as held for sale through OnDeck Marketplacerepresented 16.6% of term loan originations in the third quarter of 2016 compared to 38.2% of term loan originations in the comparable prior year period.
Net revenue was $32.3 million during the third quarter of 2016, down 30% from the comparable prior year period. The decline in net revenue primarily reflected the reduction of Marketplace sales in the third quarter, which led to lower gain on sale revenue and higher provision expense. Net revenue margin decreased to 41.8% during the third quarter of 2016 from 68.3% in the prior year period, primarily reflecting the decline in net revenue.
Provision for loan losses during the third quarter of 2016 increased to $36.6 million, up from $16.2 million in the comparable prior year period. The increase in provision expense primarily reflected the 67% increase in originations of loans designated as held for investment in connection with the strategic decision to retain a greater proportion of loans on balance sheet. The third quarter of 2016 provision expense also included an estimated $5 million build of loss reserves for term loans originated in prior periods, generally reflecting an increase in delinquency roll rates from historically low levels. As a result of the foregoing, the Provision Rate in the third quarter of 2016 was 6.9% compared to 5.1% in the comparable prior year period, which benefited from a release of loan loss reserves in that period. The 15+ Day Delinquency Ratio decreased to 6.2% in the third quarter of 2016 from 7.5% in the prior year period, but increased from 5.3% sequentially, due to the continued seasoning of the portfolio and the increase in delinquency roll rates from historically low levels.
The Cost of Funds Rate during the third quarter of 2016 decreased to 5.7%, down from 5.8% in the comparable prior year period.
Operating expenses were $49.4 million during the third quarter of 2016, up 16% over the comparable prior year period as OnDeck continued investing in its technology and analytics capabilities and incurred expenses related to overall growth.
OnDeck had GAAP net loss attributable to On Deck Capital, Inc. common stockholders of $16.6 million, or $0.23 per basic and diluted share, for the quarter which compares to GAAP net income attributable to On Deck Capital, Inc. common stockholders of $3.7 million, or $0.05 per basic and diluted share, in the comparable prior year period.
Adjusted EBITDA was a loss of $10.8 million for the quarter, versus positive $9.0 million in the comparable prior year period.
Adjusted Net Loss was $12.9 million, or $0.18 per basic and per diluted share for the quarter versus Adjusted Net Income of $7.4 million, or $0.11 per basic share and $0.10 per diluted share, in the comparable prior year period.
Unpaid Principal Balance was $889 million at the end of the third quarter, up 76% over the prior year period. The increase primarily reflected OnDeck’s decision to retain more loans on its balance sheet in connection with reducing Marketplace loan sales throughout 2016.
Total Funding Debt at the end of the third quarter of 2016 was $652 million, up 88% over the prior year period, which reflected the growth of Unpaid Principal Balance during the period. OnDeck recently expanded its funding capacity with the closing of a $100 million warehouse facility. The company is in discussions to further strengthen its financial flexibility, including active discussions to add new debt facilities and increase its corporate line of credit, as well as preliminary discussions to upsize existing debt facilities and enter into additional securitizations.
At the end of the third quarter of 2016, cash and cash equivalents were $86 million, down from $160 million at December 31, 2015. The decrease in cash and cash equivalents primarily reflected the company’s increased self-funding of loans on balance sheet.
Guidance for Full Year 2016
OnDeck reiterated the following guidance for the full year ending December 31, 2016.
Full Year 2016
- Gross revenue between $280 million and $290 million.
- Adjusted EBITDA between a loss of $35 million and a loss of $43 million.
OnDeck has not reconciled its Adjusted EBITDA outlook for the fourth quarter and full year 2016 to a net income (loss) outlook because the company does not provide guidance for stock-based compensation, which is a necessary reconciling item between those non-GAAP and GAAP measures. Because of the significant volatility in OnDeck’s operating model (timing of equity grants, hiring of new employees, employee turnover and revisions to forfeiture rates), OnDeck is unable to forecast future stock-based compensation grants under its option and restricted stock unit plan with any reasonable accuracy. The value of compensation expense under OnDeck’s Employee Stock Purchase Plan, which are elements of the company’s total ongoing share-based compensation expenses, are determined using a complex formula that incorporates factors, such as market volatility and forfeiture rates, that are beyond the company’s control. Because of this variability, OnDeck cannot reasonably estimate future stock-based compensation expense and expects the variability of the above charges to have a significant, and potentially unpredictable, impact on the company’s future U.S. GAAP financial results. (Original Source)
Shares of On Deck Capital are currently trading at $4.41, down $0.11 or -2.43%. ONDK has a 1-year high of $12.85 and a 1-year low of $4.20. The stock’s 50-day moving average is $5.52 and its 200-day moving average is $5.65.
On the ratings front, ONDK stock has been the subject of a number of recent research reports. In a report issued on October 31, BTIG analyst Mark Palmer reiterated a Hold rating on ONDK. Separately, on September 28, Oppenheimer’s Jed Kelly assigned a Hold rating to the stock.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Mark Palmer and Jed Kelly have a yearly average loss of 3.9% and a return of 26.2% respectively. Palmer has a success rate of 47% and is ranked #3809 out of 4165 analysts, while Kelly has a success rate of 60% and is ranked #94.
The street is mostly Neutral on ONDK stock. Out of 6 analysts who cover the stock, 5 suggest a Hold rating and one recommends to Buy the stock. The 12-month average price target assigned to the stock is $6.50, which represents a potential upside of 44% from where the stock is currently trading.
On Deck Capital, Inc. engages in online small business lending. It offers financing solution for small businesses, including short term loans, long term loans and lines of credit. Its proprietary data and analytics engine aggregates and analyzes the online and offline data attributes and the relationships among those attributes to assess the creditworthiness of a small business in real time.