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LendingClub Corp  (NYSE:LC)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 5:00 p.m. ET


Prepared Remarks:


Good day, and welcome to the LendingClub Fourth Quarter 2018 Earnings Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded and broadcast over the Internet.

I would now like to turn the conference over to Simon Mays-Smith VP of Investor Relations. Please go ahead.

Simon Mays-Smith -- Vice President of Investor Relations

Thank you, Shawn and good afternoon, everyone. Welcome to LendingClub's 2018 fourth quarter earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, the CFO.

Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our guidance for the four quarter and full year 2019. Our 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 earnings press release and our most recent Form 10-K and Form 10-Q filed with the SEC. 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 new information or future events.

Also, during this call, we will present and discuss both GAAP and non-GAAP financial measures. A description of non-GAAP measures and reconciliation to GAAP measures are included in today's earnings press release. The press release and accompanying presentation are available through the Investor Relations section of our website at ir.lendingclub.com.

And now I'd like to turn you over to Scott.

Scott Sanborn -- Chief Executive Officer, Director

Thank you, Simon. Hello, everyone. I am pleased to say that we delivered a very strong 2018, achieving for the year new record highs in originations, revenue and adjusted EBITDA. We are demonstrating the resilience and adaptability of our business, successfully navigating a dynamic and competitive market, in which we continue to deliver savings to borrowers now burdened by the highest credit card interest rates in a decade while simultaneously delivering attractive risk-adjusted returns to investors, struggling to find yield.

We've come a long way in the last few years. Having stabilized the business in 2017, we demonstrated strong momentum in 2018, despite rising interest rates, capital market volatility, competitive intensity, tightening credit and substantial shifts in investor demand toward higher quality credit.

We are gaining share and enhancing our competitive advantage through data-driven innovation at scale, marketing excellence, and our cost-of-capital advantage. We are integrating more closely with our customers and developing more tools and partnerships to improve our borrowers' financial health.

In 2019, we will drive responsible revenue growth with a significant management focus on delivering more revenue to the bottom line. We're taking further steps to simplify our business and are targeting adjusted net income profitability over the second half of this year.

Our strong results last year reflect solid execution of the plan we laid out for you back at our Investor Day in December 2017, the capital allocation decisions we've made to support those plans and the market context in which we operate.

I'm going to spend a minute on each of these topics. Our plan at Investor Day had four pillars. First, continue to grow our personal loan business while prudently managing credit; second, sustain our investment in auto and eventually leverage secured capabilities for personal loans; third strengthen our investor franchise by expanding securitization and growing new structures; and finally address legacy issues. We've made tremendous progress in all four of these areas.

In personal loans, we grew applications in 2018 by 35% to a total of more than 14 million. Loan volumes and revenue both grew by 21% and we enhanced our market leadership while simultaneously improving our marketing efficiency. We achieved these results despite proactively tightening credit in our standard program by 17% and raising interest rates across our credit spectrum by between 49 and 114 basis points.

We are succeeding, because we can offer lower rates to higher-quality borrowers than many of our competitors. The compelling value we offer to borrowers is rooted in our marketplace model's ability to connect to low-cost capital providers, the unique products and processes we have developed to enable the seamless extension of credit, our proprietary risk models built on more than 10 years of data and our ability to test and learn at scale.

In auto, improvements in the customer experience reduced application processing time by 80% and doubled our application-to-issuance rate, helping to increase throughput in more than double originations in 2018. While origination volume has not been our core focus in auto and remains small in the overall scheme of LendingClub, some context might be helpful.

Auto originations since launch are three times higher than personal loans at the same point in their life cycle. So we remain encouraged of auto as a long-term driver of our growth. Having developed the user experience and credit model in 2018, we will be focusing on building out our investor base in auto in 2019.

Turning to our investor franchise, where product innovation has driven a significant transformation over the last 18 months and enabled us to access ever-larger pools of capital. It's worth noting that investors provided funding for more than $10 billion in loans last year, a figure which represents almost a quarter of the total loans facilitated in our entire decade-plus history.

Investors continue to be attracted to our high-yield short-duration asset, which in 2018 outperformed 99% of fixed income assets, providing further compelling evidence of their diversification benefits. In 2019, we'll be focused on more deeply integrating with our largest investors becoming more a part of their investment process and actively managing the delivery of targeted returns for their portfolios.

Finally, the last pillar of our Investor Day plan was resolving legacy issues where we made significant progress last year. We settled the class action lawsuits in February and resolved both the DOJ and the FTC in October. As concerns the FTC, the government shutdown has hampered progress. While we maintain that the facts do not support the allegations in their complaints, we absolutely share the goal of wanting to help consumers.

To that end, we will be proactively implementing changes to our application process to further cement our position as an industry leader of consumer-friendly practices. Tom, will show you how we measured up financially in 2018, but as I'm sure you have already seen we achieved or exceeded all of our goals.

So now, let's talk about how our capital allocation initiatives helps us deliver on our promises in 2018 and how they set us up for 2019 and beyond. Our decision to invest either organically or through acquisitions and to fund those decisions through cash flow, process efficiencies or divestments are taken within a clear capital allocation framework that seeks to maximize our market opportunity, while sustaining strong liquidity and managing operational and regulatory risk.

Our goal remains to enhance our position in areas where we have clear competitive advantage and to exit or partner where we don't. In addition to our investment in auto, our organic investments in our platform, products and process are reinforcing the strength of our personal loan marketplace, first by growing borrower demand and funnel efficiency, and second by expanding our addressable investor asset pools.

Our demand generation has been phenomenal. We've been able to grow applications while sustaining our marketing efficiency in a competitive market despite raising interest rates and tightening credit. We've been able to do this by leveraging our scale to optimize through testing with more than 100 tests in Q4 alone and through refinements to our targeting models and messaging.

In throughput, our investments in product, process and partnerships are improving the customer experience and converting more applicants to borrowers. Expanded product features such as joint app and balance transfer and improved data collection from bank and tax data are helping us to reduce funnel friction and improve our credit assessment. This is augmented by improved omni-channel customer support across online, messaging, and mobile.

In combination, our demand generation and throughput initiatives improved both the customer experience and our marketing efficiency. As evidence to the progress, we're making here in 2018, 58% of our personal loan customers went from application to approval within 24 hours. This is up from 41% in 2017. Given these improvements, it's perhaps not surprising that last year we hit an all-time high Net Promoter Score of 78. While we've made tremendous progress on funnel conversion much opportunity remains.

In 2018, we generated 14 million personal loan applications though we helped only 728,000 of those applicants with a loan. We want to make sure that we help more customers on their path to financial health and build a lifetime relationship with LendingClub members.

We are continuing to explore ways to say yes to more in a way that is prudent and responsible both through our own efforts and those of partners and to find ways to further reduce friction in the process. We are personalizing the experience for the growing number of returning customers and you'll see more ways for us to increase the value of being a member of the club in 2019.

On the investor side of the platform, we made tremendous progress. The presence of some of the largest asset managers in the world on our platform something that wasn't true even a year ago is a testament to the appeal of the asset and the breadth and quality of capital that we are now attracting. At the same time, it's making our platform more accessible to new sources of capital we're integrating with our largest customers more deeply. In sum, our investment contributed to our strong revenue and EBITDA performance in 2018 and will continue to benefit us in 2019 and beyond.

So let's move on to the next part of our capital allocation process, which is our operational footprint and expense management. You've seen some of the progress we made in 2018 with the winding down of LendingClub Asset Management, and we're continuing to explore opportunities to simplify our portfolio. As Tom will talk about more, our business process outsourcing partnerships enable us to lower our unit cost, shift more of our cost to a variable basis, and focus our engineering and operations talent on areas of competitive advantage. Partnerships are also an important part of our membership strategy. Adding high-quality partners that align with our mission has the potential to meaningfully contribute to our customers' financial health by providing them with additional ways to save, while simultaneously providing opportunities to grow our business.

As you know we've also been reshaping our physical footprint adding capacity in Utah and reducing our square footage in San Francisco. This move provides for enhanced business continuity, while lowering unit costs across the company.

We'll continue to assess our operations in any organic investment, divestments, partnerships, or acquisitions that closely align with our strategic and financial goals. And as Tom will talk about in a bit more detail, we are laser-focused on simplifying our business to drive productivity and fuel our growth.

Our capital allocation decisions enabled us to maintain our leadership position, healthily grow revenues, and more than double our EBITDA. There what will deliver adjusted net income profitability over the second half of 2019 and beyond that, we believe the intrinsic scale and operating leverage in our marketplace will generate cash flows to sustain our growth investment, and over time, generate excess capital to return to shareholders.

Let's have a look at the market context in 2018 which will set us up to discuss the year ahead. For 2018, wage growth and low unemployment made conditions generally benign for the consumer, although rising debt levels have made consumers more sensitive to higher rates and less able to find savings from refinancing fixed-rate mortgages and student loans.

Capital markets have tempered expectations for future rate increases. As a whole charge-off rates and delinquencies remain stable and we have taken credit and pricing actions to resolve normalization and supply side driven pockets of weakness.

Competitive intensity remains high, but stable. Our competitive advantages in scale, data, marketing, cost of capital, and credit continue to give us an edge. We were particularly pleased that our marketplace did not miss a beat in 2018 despite dynamic movements in our markets and that gives us confidence as we enter 2019.

So far, in 2019, market conditions are similar to last quarter. We demonstrated resilience last year and we will be enhancing that resilience given the uncertain macroeconomic outlook for 2019 with borrowers who are investing in our service and capabilities to better support customers and lower the unit cost of providing that support with our second site in Utah and our BPO partnerships.

In credit, we continue to add data to our model to refine our assessment and selectively tighten credit to meet investor return requirements. We're pricing confidently using our data and cost-of-capital advantage to avoid adverse selection. And our investments in products, features, and partnerships are enabling us to improve funnel conversion and lifetime value.

We've developed broad distribution capabilities that give us alternative routes to market, improve the velocity of our balance sheet, give us better price discovery, and ultimately, lower the risk premium for our products. We are using these channels to manage our overall risk exposure and have new investor products coming to market in 2019 to further expand our capacity.

And finally, our simplification program will help us manage our profitability and sustain our investments in an uncertain environment. We will continue to allocate our capital carefully whatever the economic weather.

So to finish, in 2019, we remain committed to helping improve the financial health of borrowers and deliver attractive risk-adjusted return to lenders. Our work will be focused in three areas; first, growing responsively while prudently managing credit; second, continuing to carefully allocate capital innovating for long-term growth, while managing operational and regulatory risk; and third simplifying our operations and costs, targeting adjusted net income profitability over the second half of 2019.

When we look back at this time next year, I expect that 2018 and 2019 will be seen as pivotal years in the development of the company. Over the last few years LendingClub has been tested and emerged stronger. We have enormous opportunity ahead of us and are well placed to capture it.

None of this could have been achieved without the hard work and innovation from the employees at LendingClub and our partners and I'd like to take this is an opportunity to thank each and every one of them.

With that I'll turn it over to Tom for a look at the financials.

Thomas Casey -- Chief Financial Officer

And thanks Scott. I'm going to start by reviewing how we performed against the 2018 financial goals we set out at our Investor Day in December 2017. I'll then review our Q4 and full year performance before talking more detail about our simplification efforts and how that will help us achieve our 2019 financial goals of sustainable revenue growth and adjusted net income profitability over the second half of the year.

In our December 2017 Investor Day, we set several financial goals for 2018 and are happy to report we exceeded all of them. At $695 million, our revenues were above the midpoint of our expected range, at 48.8% our contribution margin was toward the top end of our expected range. Our tech and G&A expenses as a percent of revenues came in about 80 basis points better than our target.

For the year our adjusted EBITDA margins came in at 14% exceeding the high end of our expected range for the year and we delivered our goal of achieving 15% margins in the third quarter and the fourth quarter. And finally our full year adjusted EBITDA was $97.8 million exceeded the high end of our expected range.

So in short, we feel good about our strong Q4 and the full year 2018 results. Before I start on the details for 2018, unless I specify otherwise, all growth rates will be year-over-year. So let's start with revenue. On the borrower side of the platform, transaction fees grew 18% in Q4 to $142 million on the back of 18% growth in originations at $2.9 billion.

For the year, transaction fees grew 17% to $527 million and originations grew 21% to $10.9 billion. But the strong reported growth really only tells half the sorry. What I found particularly encouraging was the flexibility and adaptability shown by our marketplace in response to changing investor demand and our ability to match borrowers to that demand.

You can see that in the shifting mix of our loan volume with higher grade A and B loans in the standard program growing from 45% in 2017 to 56% in 2018. This is an enormous shift and our platform handled it without missing a beat with only 15 basis points year-over-year decline in our transaction fee yield.

On other side of the marketplace, net revenue excluding transaction fees represents the revenue we earn on the investor side of our business. These revenues grew -- were up 10% to $39 million in Q4 and 33% to $168 million for full year. There are two things that I'd emphasize here. First, the growth of the investor side of the platform is increasingly being driven by our recurring investor fees which accounted for 16.5% of net revenues in 2018 up from 15.2% in 2017.

The second point I'd emphasize is, how innovative new products such as CLUB Certificates have allowed us to reach an entirely new investor base in the large fixed-income money market segment. Our industry-leading CLUB Certificates program reached $1.1 billion by year end with $478 million of that in the fourth quarter and that's up from $300 million in the third quarter. We're still only just scratching the surface on demand for this product and see it as yet another way LendingClub is innovating in the marketplace.

With that let's get into more detail on the investor side of the marketplace. Investor fees were up 25% to $30 million in the fourth quarter and up 32% to $115 million for the full year. This strong performance in part reflects the 50% annual growth in our loan servicing portfolio to $13.7 billion as well as a 16% increase in average servicing rate.

Gain on sale revenue was $11 million in Q4 and $46 million for the full year, up 2% in Q4 benefited from the higher sold volumes and average servicing rates I just mentioned and up 97% for the full year mostly driven by the structured programs that were launched in June of 2017 and active throughout the full year of 2018.

Net interest income at fair value adjustments were a $3 million loss in Q4 and $1 million gain for the full year with positive net interest income offset by fair value adjustments. It's important to note that much of the value of our structured program comes to the gain on sale line while many of the costs are reflected in the net interest income and fair value adjustment lines. This line item does move from quarter-to-quarter reflecting timing of purchases and sales between reporting periods.

Other revenue was $1 million for Q4 and $6 million for the full year. Overall, total revenue was $182 million in Q4 and $695 million for the full year, up 16% and 21%, respectively.

So, let's move to costs and how our efforts drove our adjusted EBITDA margins up 6.3 points year-over-year. Marketing and sales expenses were $67 million in Q4 and $261 million for the full year. For the year, M&S as a percent of originations was down seven basis points to 240 basis points, reflecting our conversion efforts and new products we introduced this year. The 17 basis point quarter-on-quarter improvement to 2.32% reflected these efforts as well as the timing of certain marketing campaigns and channel testing in Q3.

Origination and servicing costs were $24 million in Q4 and $94 million for the full year. O&S costs as a percent of originations were down four basis points for the full year benefiting from the BPO efforts we started earlier in the year which I'll talk about in a minute.

The improvements in both M&S and O&S efficiency boosted our contribution margin to 50.1% in Q4 and 48.8% for the full year, up 198 basis points and 176 basis points, respectively.

One of the key financial themes at our 2017 Investor Day was our focus on growing tech and G&A spend lower than revenue. So, let's talk about our excellent progress here. Engineering operating expenses were $23 million in Q4 and $90 million for the full year, down as a percentage of revenue by 113 basis points and 160 basis points, respectively.

Turning to G&A, expenses were $40 million in Q4 and $152 million for the full year, representing 21.9% of revenue in both periods and a 40-basis point and 291 basis point improvement for the quarter and the full year.

Overall, you can start to see the positive impact of our expense management it is having on our adjusted EBITDA margins and the benefits of our scale. When you combine our full year tech and G&A expenses, they grew only 7% on net revenue growth of 21%. This is what we described at last year's Investor Day.

This wedge between revenue and expense growth rates drove 4.5 points of the total 6.2 points in our adjusted EBITDA margin in 2018, with the other 1.7 points coming from a higher contribution margin from our improved marketing efficiency. And we think there is more margin expansion opportunity ahead. I'll talk about some of this new initiatives in a moment.

In the fourth quarter, we further benefited from higher contribution margin and lower overhead expense growth, resulting in adjusted EBITDA of $28 million in Q4, up 49% year-over-year and adjusted EBITDA margin of 15.7%, up 3.2 points. For the full year, adjusted EBITDA was $98 million, up 119% and adjusted EBITDA margins were up 6.2 points for 2017.

So let's now -- let's move down to the GAAP net income. The adjustment for stock-based compensation was $18 million in Q4 and $75 million for the full year, up 9% and 6% respectively. Depreciation and amortization and other net adjustments totaled $50 million in Q4 and $55 million for the full year.

Our adjusted net loss, which we are now defining to only exclude non-recurring and unusual items, therefore equaled a $4 million loss in Q4 and a $32 million loss for the full year. There is a reconciliation of this through the GAAP consolidated net loss on slide 20 of the presentation.

Moving on down to the P&L. Non-recurring cost totaled $96 million, including $54 million of legacy issue expense, a $35.6 million goodwill impairment in Q2 and $7 million in restructuring charges in Q4, reflecting early progress on our simplification program. Combining all these items, our reported GAAP consolidated loss was $13 million in Q4 and $128 million loss for the full year.

Before I turn to our simplification programs, one final word on our balance sheet. For the quarter, cash and cash equivalents was $543 million, up from $513 million in the third quarter. Also, I want to point out that on the year-end balance sheet you will see our loans held for sale at $840 million, reflecting the consolidation of our $300 million Q4 securitization until we sell the related residual interest. Most of the remaining $500 million year-end loans are being sold to investors in the opening weeks of 2019 through structured programs such as the block trades or CLUB Certificates.

With that, let's move on to our simplification program. Scott's already talked about how our capital allocation decisions are helping to drive revenue growth. I'll talk about how they are also driving profitable growth. I'll update you on the initiatives that contributed to our strong performance in 2018 and give details on some new initiatives that we expect to contribute to 2019 and 2020 GAAP net income growth.

These simplification initiatives fall to four categories: first, business process outsourcing; second, geolocation; third, leveraging our scale; and fourth, all other initiatives. We used the same capital principles that Scott set a moment ago to guide our work, with the aim of enhancing our position in areas we have clear competitive advantage and to exiting our partnering where we don't.

Our simplification program has five goals: first, to expand our margins even more; two, to further improve our customer service; three, to focus our engineering and operational capacity on our highest return initiatives; four to lower our unit cost; and five to increase our resiliency by increasing the percentage of costs that our variable.

So let's take each of those categories in turn and show how they help us achieve our goals. Let me start with business process outsourcing. We started our BPO program early last year and was both an important first step in our simplification program and also a critical contributor to our 2018 margin improvement. We've used BPO to build capacity in our members support collections and back-end credit verification. There are two important benefits for BPO. First, we are able to lower the unit cost to deliver loan servicing, while maintaining very high customer satisfaction and Net Promoter Scores and second we swapped fixed costs for variable costs, which gives us further resiliency over the economic cycle.

To give you some idea of the scale of our BPO work, by the end of 2018 we had a BPO headcount of more than 250 people and is a critical part of our future. We're also using BPO to help focus our engineering capacity on our core products. For example, in 2019 we will complete the transition of our growing loan servicing business to an off-the-shelf platform provided by a third-party. Initiatives like this are important contributors to focus our technology investments and benefit from our scale.

Having learned to successfully manage multiple remote sites through our BPO initiative we are now able to leverage that experience through workforce geo-location. Our announcement to open our Utah facility significantly reduces our unit, FTE and property costs enabling us to do more for less and benefiting our O&S, M&S, and G&A line items.

Just as we're simplifying the infrastructure, we use to support our customers, we're also simplifying the infrastructure that supports our business and leverages our scale. We are rigorously reviewing all of our vendor agreements they're in the process of either managing renewals or consolidating. These efforts will further drive margin expansion and should improve contribution margin as well as tech and G&A expenses.

Finally, as part of our deliberate capital allocation process, we conducted a bottoms-up review, or what I would call a zero-based budget of our cost base. We started this review in the fourth quarter last year and is just in the process of coming to a conclusion here in the first quarter. This process highlighted several areas of potentially significant opportunities in our processes and portfolio structure. We're in the process of developing our execution roadmap of each initiative. And while they are not all to be executed in the first quarter, we see benefits accruing to the bottom line in 2019 and 2020.

Our simplification program provides a number of opportunities to further leverage our scale and simplify our business operations and give us the confidence that we can continue to expand our adjusted EBITDA margin another five points and get us to adjusted net income profitable in the second half of 2019, with adjusted EBITDA margins approaching 20% as we end the year.

So let me finish with guidance for Q1 and the full year 2019. 2018 demonstrated our ability to use credit, price, mix and scale to dynamically adapt to changing marketplace conditions and points to the resilience of our business model. Our growth investments, simplification program and preparation for uncertain macroeconomic conditions provides us with additional resilience as we head into 2019. We expect the operational phasing of our business to be similar to 2018 with a seasonally slower Q1.

As Scott mentioned, we continue to selectively tighten credit and raise prices to manage returns to investors. We expect our restructuring charges to broadly breakeven for the year at the GAAP net income level with a net negative impact in the first half of the year offset by a positive impact in the second half of the year and into 2020.

We've excluded restructuring charges and legacy issues and nonrecurring items from both our GAAP consolidated net income and adjusted net income guidance to give you a better view on the underlying performance of the business. We'll update GAAP consolidated income guidance each quarter as we incur these charges.

Despite further credit tightening to manage returns to investors, we've had a solid start to the year and expect Q1 revenue growth of between 7% and 13% implying revenues of between $162 million to $172 million. We expect full year growth between 10% and 14% implying revenues between $765 million and $795 million.

For adjusted EBITDA, our guidance range for Q1 is $13 million to $18 million. For the full year our guidance range is $115 million to $135 million. The wide full year ranges for revenue and profit reflect some of the uncertainty we see in the macroeconomic environment, we'll look to tighten these ranges as we have a better sight throughout the year.

We expect stock-based compensation charges of approximately $18 million in Q1 and $81 million for the full year. We expect depreciation amortization and other net adjustment charges of approximately $15 million in Q1 and $63 million for the full year. And we therefore expect GAAP net loss of between $15 million and $20 million in Q1 and $9 million to $29 million for the full year.

And as I mentioned earlier, we are targeting adjusted net income profitability over the second half of the year. This expected swing from adjusted net income loss to profit during 2019 marks an important inflection point for LendingClub. While, we still have a lot of work to do the opportunity to grow our profitability and further build resiliency in our marketplace give us further confidence in 2019 and beyond.

Scott, back to you.

Scott Sanborn -- Chief Executive Officer, Director

Thanks Tom. So to summarize we feel very good about our execution of the plan in 2018 and how the intrinsic strength of our business model combined with our capital allocation decisions delivered strong results. Our proven ability to use credit, price mix and scale to dynamically adapt to changing marketplace conditions points to our resilience and underpins our confidence in 2019 and beyond.

So with that I'd like to open it up for Q&A to answer any questions.

Questions and Answers:


(Operator Instructions) Our first question comes from Brad Berning with Craig-Hallum. Please go ahead.

Brad Berning -- Craig-Hallum -- Analyst

Good afternoon guys. Appreciate the focus on the bottom line, but wanted to ask a little bit more details about where you're seeing pockets tightening in underwriting that is kind of shown in the decelerating loan growth? And just wondered if you could kind of expand upon where you're seeing those areas a little bit further?

Scott Sanborn -- Chief Executive Officer, Director

Hey, Brad. It's really kind of a continuation of really what we've been talking about for some time now which is overall normalization I would say in performance as the super benign conditions over the last several years kind of come back to, where they were pre-recession and where it manifested has really primarily been on the higher risk side of prime. So overall portfolio delinquencies look good, and we're overall pleased with the performance of the book, but that higher risk side of prime is continuing to kind of normalize.

Brad Berning -- Craig-Hallum -- Analyst

Has there been any changes in the non-prime side of it? We can obviously see the F&G loans were slower this last quarter, but just wondering how that impacts the other business lines as well.

Scott Sanborn -- Chief Executive Officer, Director

Yeah. So F&G are still part of the prime program. The custom program volumes you can see there are actually pretty flat and performance there is in line with our expectations. And importantly, in line with investor expectations because that's what this is really about, where if you think about our plan next year, it's to really drive results for our own bottom line, but also given where we are in the cycle to really make sure we're protecting the bottom line of our investors. And that's what I talked about on the prepared remarks.

So really integrating more deeply with our key customers to become a part of their process, understand their business and help support their overall financial management.

Brad Berning -- Craig-Hallum -- Analyst

And then one really quick accounting related follow-up in the quarter, can you just talk about the mark-to-markets this quarter and the fair value adjustments in a falling kind of rate environment no back half for the quarter in particular. Just wondering why that was kind of up as much as it was this quarter where the moving parts in the business model that kind of drove that?

Thomas Casey -- Chief Financial Officer

Yeah. So as I said in my prepared remarks this number moves around because of the timing of when we sold. So what you're seeing here is the mark-to-market at year-end -- you -- as you said there's a lot of volatility at the end of the quarter. So you're seeing some of that come through the fair value adjustment.

Keep in mind though that the interest income and the interest expense when you look at all three of those lines together, they kind of come to about flattish. What really is driving the structured program is the net gain on sale. And we continue to see good performance there as we're finding our way to manufacture new structures that allow investors to invest with us with ease.

So that's really the story on the structured program. It's in line with what we expected and it just has some variability on the line items. But overall net, it's in line.

Brad Berning -- Craig-Hallum -- Analyst

Yeah. Appreciate it. And thank you for the outlook on bottom line efforts. I'll get back in the queue. Thanks guys.


Our next question comes from Eric Wasserstrom with UBS. Please go ahead.

Eric Wasserstrom -- UBS -- Analyst

Thanks very much. Just a couple of questions. In terms of the outlook for next year you've given a lot of information about a number of initiatives on margin and on other elements of the income statement, but can you just maybe frame for us Scott or Tom what the -- how to think about the volume growth expectation as it relates to the outlook?

Thomas Casey -- Chief Financial Officer

Yeah, sure. So you're absolutely right. We emphasized in our prepared remarks our focus on a number of key initiatives to improve our bottom line. If you go back in 2017, it was really about stabilizing the company, 2018 was demonstrating our ability to grow again, which we feel very good about.

As we head into 2019 we are emphasizing the initiatives and focus to drive the margin expansion to get our business to the most profitable it can given our scale. So that's the 2019 focus.

On the revenue side, we are looking at the environment and trying to capture what is a little bit more uncertainty in the outlook and being prudent. We think that as Scott mentioned the book continues to operate well. We'll continue to deal probably with some additional rate increases as the Fed is expected to continue to raise rates. We experienced that last year with over 100 basis points of increase over the last 18 months.

So we feel good about our ability to adapt and adjust and meet the demands of our investors. So we think we're well-positioned, but I think the guide is really trying to reflect that uncertainty.

Eric Wasserstrom -- UBS -- Analyst

Got it, got it. No, I mean, I certainly understand your reticence about a point forecast. But maybe to approach it differently, would this year's level of growth represent more of an upper bound of expectation?

Thomas Casey -- Chief Financial Officer

No, I think the -- as I mentioned it, we started last year at our Investor Day with the conviction that we needed to demonstrate to the market our ability to drive lower cost origination, done; expand our contribution margin, done; increase our EBITDA margins, done. And that was off of a lot of the work that we have done to put a testing plans in place new product designs and all those things that we want to and so our guide reflected those initiatives.

And think what you're seeing here is a focus on the bottom line to drive profitability, so that our investors can understand the amount of cash this business can generate, how the margins can expand with -- even with a mid-teens type of revenue growth that's our focus. If we need to be prudent in the outlook if we're reflecting the demand on the platform, we're reflecting the outlook that we see right now, if things change will update that. But that's kind of where we see it right now.

Eric Wasserstrom -- UBS -- Analyst

Got it. No, that -- the message on that is very, very clear. Thank you. And then just on, Tom, you touched on this in your prepared remarks. But in terms of the on-balance sheet asset exposure was obviously jumped up a bit this quarter you touched on why. But just on a go-forward basis, how do we think about that component of your balance sheet going forward?

Thomas Casey -- Chief Financial Officer

So we have a number of things that we're doing to reach new investors. And the investments that we're making with use of the balance sheet have really expanded the universe of investors. If you think about the CLUB Certificate these are $25 million, $50 million increments they come on the balance sheet for a very short period of time, but they're structured in a way to deliver to an investor that is looking for a CUSIP.

So the velocity that's coming through the balance sheet is quite high, so they don't sit there very long. And then the securitization you saw at year end that's just again representing our ability to reach the ABS market, its $300 million on almost $3 billion of volume for the quarter, so it's 10%.

We think that's important because what we've learned is that as we go to the ABS market, we've been able to attract new investors that want to own the asset in different forms. So I would say that we were quite encouraged with our efforts. It has open up new pools of capital that we never had access before, the ability for fixed income investors to consume this in a efficient way, I think really provides a broader understanding and an investment thesis around the asset class. And we're going to continue to do that, we'll find ways to make it as efficient as we can to the balance sheet. But this is again, one of the things that we have, we benefit from our scale, our ability to bring things to the balance sheet, and structure them for specific investor need that's what we're doing.

Eric Wasserstrom -- UBS -- Analyst

Got it. So it sounds like, if I'm interpreting you correctly Tom, the as the asset as the demand potentially grows through the initiatives that you're putting in place. There's kind of an upward bias, but recognizing that the velocity through the balance sheet will probably be fast.

Thomas Casey -- Chief Financial Officer

That's right. Yeah. The average life of these loans is quite low. We're talking in certain structures. The longest is the accumulation for the securitization, but other products are quite quick.

Eric Wasserstrom -- UBS -- Analyst

And just last one for me. I was just doing a quick calculation of your origination fees and it looked like they actually crept up a bit, but at the same time your origination of A and B grades also crept up a bit and usually when that happens the origination fee is typically trending down. So how do we reconcile that fact that both the origination fees seems to go up as well as a proportion of A and B grade loan?

Scott Sanborn -- Chief Executive Officer, Director

Yeah, I'd bring you back. This is Scott. I'd bring you back to some of what we said about our ability to do testing at scale and really understand, take rate sensitivities to the borrower where we have pricing power through the unique, whether its data attributes or product features that we've got that help us split risk. And therefore our understanding of our ability to do that versus there are other options in the market and find where we're able to price that's kind of the output of that. The initial shift to A and B you saw some decline in our overall transaction fee. But essentially, over time, as we've tested and optimized we've clawed that back.

Eric Wasserstrom -- UBS -- Analyst

Great. Thanks very much.


(Operator Instructions) Our next question comes from Jed Kelly with Oppenheimer. Please go ahead.

Jed Kelly -- Oppenheimer -- Analyst

Great. Thanks for taking my question. You drove decent sales and marketing this quarter. Can you dive into some of the factors? And then, can that continue into next year and have external factors gotten easier? And then just want to look at your full year results for 2018 your total revenue yield was consistent with last year. Should we expect that same level of consistency into 2019?

Scott Sanborn -- Chief Executive Officer, Director

So I'll start and then Tom maybe pass it over to you. So, first, kind of big picture what's driving it is really execution on our side that's the primary driver. When I talk about testing and learning at scale, creative, messaging, targeting models, channel optimization product, and process optimization that's really the key driver. And as I've mentioned in my prepared remarks, we continue to see opportunity there.

The broader environment has not shifted in terms of competitive intensity its stable. But if you look at some of those external metrics around mail volume sent and all the rest we're not seeing any kind of decline. So we think it's -- the big driver is our ability to effectively compete in what remains a competitive market. There is an additional factor. Quarter-to-quarter is always tricky, I'd ask everybody to kind of keep that in mind because the timing of certain spends and we did call out in Q3 that marketing costs were slightly elevated in Q3, because the timing of the spend that we reap the benefits of in Q4. So I think you got to look at things over kind of an arc of time and over the arc of time, we're pleased for the year of how we drove efficiency and continue to feel good about initiatives we've got on offer. And then Tom

Thomas Casey -- Chief Financial Officer

Yes, just on the revenue yield. We continue to feel very good about our ability to find ways to improve our yield. We've -- as Scott mentioned, we were able to claw back from mid-year to the end of the year on the transaction fees. We continue to see opportunities for us to further improve our investor yield, which compliments that. So I think from a revenue standpoint as far as the mix goes, we feel good about where we are. And I don't see that changing in the outlook right now. I think the markets have become a little bit more comp than they were in the fourth quarter, but we are expecting more volatility as we go through the year. But yes, I don't see much change in the yield right now.

Jed Kelly -- Oppenheimer -- Analyst

And then just one last one. Your revenue guidance does imply some back half acceleration. Is that a fact function of easier comps or you expect other factors to drive that acceleration?

Thomas Casey -- Chief Financial Officer

Well I think the -- what you're really seeing is that the typical seasonality of 1Q being low and then our ability to pick up our growth in the back of the year. As you know, our second and third quarters are quite stronger just because of where that fits. So it's just something that is just a natural seasonality of the market. So we do expect more earnings in those quarters.

Scott Sanborn -- Chief Executive Officer, Director

Again the borrower demand remained high just to kind of zoom out a little bit. Personal loans remain the fastest growing segment of consumer credit. Last year, we've maintained and in fact even grew our leadership position within that market. Really what we're pointing to for next year is we're saying, based on where we are in the cycle, we don't think the question is going to be borrower demand, it's really a question of how do won, make sure management focuses in the right place for this point in the cycle, which is driving -- pushing through the major initiatives that are going to drive profitability for us. And two be prudent and make sure we're not reaching for originations in loan growth and are setting up an expense structure and a framework that we know we can deliver on whatever let's say the back half of 2019 may bring.

Jed Kelly -- Oppenheimer -- Analyst

Thank you.


Our next question comes from Steven Kwok with KBW. Please go ahead.

Steven Kwok -- KBW -- Analyst

Hi, guys. Thanks for taking my question. So I just wanted to touch back on the comments around the FTC where you said, you would proactively implementing changes around the application process. Just wondering, are you seeing any impacts from that or on around your originations? Or is it still too early to tell?

Scott Sanborn -- Chief Executive Officer, Director

So a reminder I said, we are going to be implementing those. So they're really pretty minor changes to the application process that we believe are in line with the feedback we've gotten from the FTC. And that's an effort for us to really try to continue to move this forward and we don't expect any significant impact to our operations or our business.

Steven Kwok -- KBW -- Analyst

Got it. And then just around -- when I look at the servicing portfolio, it seems like the loans that were invested in by the company, increased materially relative to the last couple of quarters. The last couple of quarters the run rate was around, like, $500 million and this quarter it was $840 million. Was there anything there around like timing? Or how should we think about it going forward?

Thomas Casey -- Chief Financial Officer

Yeah. Steven, as I mentioned in my prepared remarks, we did a securitization in December and we retained the residual. So $300 million of that $800 million, $840 million is actually that. So if you take that out it's the $500 million, which has been in line with most of our quarters.

Steven Kwok -- KBW -- Analyst

Got it, got it. Great. Thanks for taking my questions.


Our next question comes from Henry Coffey with Wedbush. Please go ahead.

Henry Coffey -- Wedbush -- Analyst

Greetings and thank you so much for taking my question. I know, we keep tormenting you to try to turn the net revenue guidance into a loan volume guidance, but is it safe to assume in the last -- in 2018 you had net revenue of 16% and volume up 18%. Is it sort of safe to assume a similar closely tied relationship there in terms of likely loan volume versus your revenue guidance?

Thomas Casey -- Chief Financial Officer

I think, they're closely tied but we moved away from just on origination guide because as you heard us talk earlier, the mix sometimes can change the actual transaction fees that we earn. We're also trying to focus on our ability to earn additional dollars by structuring product for a whole new investor class, so part of this is that effort as well.

So I think they're close, but they're not necessarily perfectly linked because of some of those activities we're pushing. To the extent we start to generate additional fee income that also becomes an important part. Also, our servicing book is growing very, very nicely over $13.7 billion. So, we have this nice annuity of servicing income that it doesn't really -- is not highly correlated with our new originations. So, those are some of the things that we try to consider when we just give the revenue guide as opposed to just originations.

Henry Coffey -- Wedbush -- Analyst

No, that's very helpful. The other issue is you talked a lot about building your servicing initiative. Your A program was the most successful and just kind of looking at the numbers on a year-over-year basis, your custom program was in the second spot which we're assuming could be lower quality.

Have you thought of -- as you look at your servicing business, have you thought about the collections, kind of, workout side of how that business might play out? Or are you still looking at the strategy of just sort of selling delinquencies and moving on?

Scott Sanborn -- Chief Executive Officer, Director

So, we've actually been investing in that structure and part of our key initiatives for next year continue to include that. So, you'll see, if you look in our publicly available data, we've been investing in people, processes, tools, models there. And if you look at our recovery rates and roll rates there, you're seeing we're making great progress.

So, we feel really good about what we've been able to accomplish, we still are excited about the opportunity in front of us. And a number of the initiatives we've talked about are really setting us up to drive this business harder.

So, the move to a new location with a lower cost, the use of BPO resources to switch some of that to a variable cost, and a new system that we're implementing which will bring us new capabilities at a lower cost to maintain easier system to integrate with others, that's all part of kind of us really playing the long game here and preparing ourselves for whatever the next couple of years will bring.

Thomas Casey -- Chief Financial Officer

But -- the only thing that I would also add is, is keep in mind that in the custom bucket we also have our Super Prime AA program. And so that also is growing very very nicely year-over-year as some of our investors are looking for low credit risk product and so that's been a nice growth profile for us to meet a specific need of investors that are looking for that Super Prime customer.

Henry Coffey -- Wedbush -- Analyst

As you grow servicing muscle will this allow you to take a more aggressive view on the kinds or -- would this allow you to go down the FICO spectrum more?

Thomas Casey -- Chief Financial Officer

I don't think at this time we're considering that. I think, Scott mentioned the efforts we have is to improve the performance of our current outstanding loans. We think there's plenty of opportunity for us improve that. We're not targeting an expansion of FICO at this time.

Henry Coffey -- Wedbush -- Analyst

Well that makes perfect sense. Thank you for taking my question.


Our next question comes from Mark May with Citi. Please go ahead.

Mark May -- Citi -- Analyst

Thank you. Just curious, I know you've talked about a greater focus on margins and profitability but -- and that's certainly, I think been the case recently you've been putting up year-on-year margin improvement, if I recall. But I think the Q1 guide implies a reversal in that recent margin improvement despite I think the fact that you said that excludes some of the one-time charges and whatnot that you may incur here in the first half of the year. Just curious, sorry, if I missed it in your prepared remarks, but what is driving kind of the year-on-year margin decline that you're forecasting in Q1? And then, on the FTC-related changes to the application progress could you just specify exactly what changes you're making there? Thanks.

Thomas Casey -- Chief Financial Officer

Yeah. So Mark, I'll have you ask the second one again. I -- just on the margin one we feel very good about the margins for the year. As we told, you we're focusing on driving to get to 20% EBITDA margins at the exit. As we talked last year in the first quarter, we typically have seasonally lower volumes, but also the carryover from the fourth quarter levels of expenses and then also additional expenses on annual things like employee-related stuff and benefit plans and things like that. So first quarter, just typically has got more expenses in it than we would like, but we feel very good about the full year. And then what was your second question?

Scott Sanborn -- Chief Executive Officer, Director

It's was about the FTC. So I'll take that so. Without going into the full chapter and verse and to the basic thing we've done is added an additional disclosure of the origination fee further up in the application process.

Mark May -- Citi -- Analyst

Okay. Thank you.


Our final question comes from James Faucette with Morgan Stanley. Please go ahead.

James Faucette -- Morgan Stanley -- Analyst

Thank you very much. Just wanted to ask, most of my questions have been answered, but wanted to ask about A the automotive product. I know Scott you indicated that, it's pretty small volumes and it'll continue to be. But how should we think about that growth? And really trying to get a handle more qualitatively on where you're focused on that product and improvements, et cetera?

And then I guess as a follow-up question to some of those that have also been asked just a little if you could talk a little bit about the stresses that we're seeing in how these parts of the debt market during the latter part or the last part of 2018 whether that you saw any impact on the enthusiasm of investors participating in buying loans?

Scott Sanborn -- Chief Executive Officer, Director

Okay. I'll...

Thomas Casey -- Chief Financial Officer

I mean, it is just first...

Scott Sanborn -- Chief Executive Officer, Director

Yeah. Go ahead.

Thomas Casey -- Chief Financial Officer

So just it was a pretty volatile time. Actually as everyone probably knows the market was jumping around a little bit. We were in the market with a securitization trade, it was oversubscribed credit spreads widened slightly, but we were able to get our transaction completed. We didn't see any other significant impact on our overall business.

Keep in mind that we have a very unique product and it's very short duration. It's got nice yields associated with it and it's not highly correlated to some of the other things that are going on in trade or other concerns people have in the market.

So we continue to see strong demand. And as we say we sold over $10 billion in loans last year. So I feel very good.

We had been experiencing volatility all year. and so I think we were prepared and have continued to improve our process and analytics to prepare for those types of things. Scott, you want to talk a little bit about auto?

Scott Sanborn -- Chief Executive Officer, Director

Yeah. So on auto, James is our focus really this past year was on driving throughput and conversion. This as I believe we mentioned on an earlier call, the typical standard of the industry is this process takes three weeks, right? There's paperwork involved depending on the state. And we've been really focusing on how to create a process that streamlines this, simplifies it and helps customers get through it because the savings we can generate is really, really meaningful. I think we shared on previous calls it's more than $1,000 a year.

So that's really been our focus. So when we say we've doubled throughput and reduced the time by 80% those are pretty major accomplishments and they begin to set us up for growth.

The next thing we need to do is, obviously, validate the credit model, the credit performance. I think we've shared in the past that we're very pleased with the initial results but they're initial and small. So we'll be looking to add investors this year, further validate and optimize as we turn really over a bit of a longer arc to meaningfully growing a business. It's not going to be contributing meaningfully to our revenue this year or really next year.

James Faucette -- Morgan Stanley -- Analyst

That's really helpful. Thank you.


This will now conclude the question-and-answer session. I would like to turn the conference back over to Scott Sanborn for any closing remarks.

Scott Sanborn -- Chief Executive Officer, Director

Well, just a thank you to everybody for joining the call today. Any additional questions, please don't hesitate to reach out to Simon and we'll look forward to coming back and updating everybody on our progress in May.


Thank you. The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Duration: 64 minutes

Call participants:

Simon Mays-Smith -- Vice President of Investor Relations

Scott Sanborn -- Chief Executive Officer, Director

Thomas Casey -- Chief Financial Officer

Brad Berning -- Craig-Hallum -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Jed Kelly -- Oppenheimer -- Analyst

Steven Kwok -- KBW -- Analyst

Henry Coffey -- Wedbush -- Analyst

Mark May -- Citi -- Analyst

James Faucette -- Morgan Stanley -- Analyst

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