OnDeck Results Disappoint as Shares Move Lower

OnDeck (NYSE: ONDK), a leading online lender targeting small business, published Q1 results today. While the lending platform reported and increase of loans under management to $1.2 billion, a 25% increase versus prior year, the news was not good enough to boost shares in the company. First quarter, originations were $573 million, up 1% from the prior year period. OnDeck said originations were impacted by credit tightening implemented during the period. OnDeck lost $11.6 million during the quarter as it realigned its focus on profits instead of accelerated growth.

OnDeck CEO Noah Breslow said Q1 results were indicative of the progress the lending platform had made in recent months;

“During the quarter, we continued to focus on tightening our credit management and improving the operating leverage inherent in our technology-enabled model. Our credit policy adjustments have begun to yield benefits, as demonstrated by the sequential improvement in our Provision Rate and our improving outlook for this metric for the remaining three quarters of 2017. Additionally, we are encouraged that roll rates for 2016 loans stabilized during the quarter, and that performance of loans with maturities of 15 months or longer is in line with the recalibrated expectations we set last quarter.”

Breslow continued explaining that Q1 2017 included a “cost rationalization plan” of $20 million to reduce operating costs.  Additionally, he announced a new $25 million expense saving program;

“We will continue to prioritize improving credit performance and reducing costs, which will decrease originations and portfolio growth in the short term.   As a result of our strategic actions, we are targeting the achievement of GAAP profitability in the second half of 2017, which will provide a strong foundation for profitable growth in 2018.”

OnDeck’s results and comments reflects a growing sense of unease within the online lending industry and its supporters that models have not matured to a point where platforms are sustainable. The high cost of customer acquisition has challenged many platforms. Especially for loans that can be quite small. OnDeck may see its model challenged further as online lenders with established customer touch points, like Square, push further into small business lending.

Shares in OnDeck have dropped precipitously from its IPO price of $10 a share. When the company IPO’ed in 2014, shares pushed into the high 20s. Many industry insiders believe that OnDeck pushed to go public far too quickly. WSJ.com backhanded the online lender with harsh words saying that OnDeck has gone from hot startup to dull lender.

While the results were not all bad it is apparent that shareholder patience is waning.

Gross revenue increased to $92.9 million during the first quarter of 2017, up 48% from the 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 $87.1 million during the quarter, up 63% from the comparable prior year period, and primarily reflected the growth of average loans, which increased 66% versus the comparable prior year period.  The Effective Interest Yield for the first quarter of 2017 was 33.9%, down from 34.5% in the comparable prior year period, primarily reflecting changes in portfolio mix over the period, partially offset by recent price increases. Net revenue was $35.4 million during the first quarter of 2017, down 13% versus the comparable prior year period. The decline in net revenue reflected the reduction of OnDeck Marketplace sales, which led to lower gain on sale revenue, and higher provision expense in the first quarter of 2017 versus the prior year period.

Provision for loan losses during the first quarter of 2017 jumped to $46.2 million, up from $25.4 million in the prior year period.  The increase was said to reflect a 20% increase in originations of loans designated as held for investment in the period and the comparatively lower original loss estimate for loans originated in the prior year period. The Provision Rate in the first quarter of 2017 was 8.7% compared to 5.8% in the prior year period.  The Provision Rate decreased sequentially from 10.2% in the fourth quarter of 2016.  OnDeck expects the Provision Rate for the remainder of 2017, taken as a whole, to be approximately 7%.

Loss attributable to common stockholders was $11.1 million, or $0.15 per basic and diluted share, for the quarter, which compares to GAAP net loss attributable to On Deck Capital, Inc. common stockholders of $12.6 million, or $0.18 per basic and diluted share, in the comparable prior year period.

Guidance given by OnDeck included:

Guidance for Second Quarter and Full Year 2017
OnDeck provided the following guidance for the three months ending June 30, 2017, the full year ending December 31, 2017, and the additional 2017 guidance noted below:

Second Quarter 2017

  • Gross revenue between $85 million and $89 million.
  • Adjusted EBITDA between negative $3 million and positive $1 million.

Full Year 2017

  • Gross revenue between $342 million and $352 million.
  • Adjusted EBITDA between positive $5 million and $15 million.

Additional 2017 Guidance

  • GAAP profitability to be achieved in the second half of 2017.
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