OnDeck Notches A Surprise Earnings Miss

6. November 2017.








While it would not be accurate to say Milli Vanilli sang the infamous song “Blame It On The Rain,” they certainly lip synced along with it convincingly enough to win a Grammy almost 30 years ago. And while almost no one has thought much of either the band or the song since that lip-syncing incident, we couldn’t help but be reminded of it today when OnDeck offered its explanation for the unexpected third-quarter loss it reported.

To put it succinctly, they blamed it on the rain.

And the hurricane-force winds.

“The bottom-line results would have been even better, but for the negative impacts from hurricanes Harvey and Irma, which caused us to increase loss reserves by $3.5 million,” CEO Noah Breslow told investors in a call after the results were announced. “Customers representing approximately 11 percent of our loan balances were located in the counties designated by FEMA as disaster areas.”

Excluding hurricane impact, OnDeck had improved both its provision rate and delinquency rate in the third quarter, while operating expenses fell. The company’s CFO, Howard Katzenberg, noted that due to the effects of the hurricanes, the firm’s forecasted gross revenue range is $342 million to $352 million, albeit at the lower end.

It was a rather plausible explanation.

As for the rest of the numbers…

By The Numbers

Loan originations were up in Q3, increasing to $531 million in the third quarter of 2017, up 14 percent from Q2. Gross revenue was up to $83.7 million, an 8 percent year-on-year increase driven largely by higher-interest income.

Gains on the sale of loans was $100,000, with loans sold or designated as held for sale through OnDeck representing 1.3 percent of all originations in the marketplace. Other revenue was $3.4 million, a notable increase from the $700,000 reported in the prior quarter. The nearly five-fold increase is attributed to revenues from the company’s OnDeck-as-a-Service (ODaaS) business.

Net revenue was $32.8 million during the third quarter of 2017, up 1 percent versus the prior year period.

As of Q3, the 15+ day delinquency ratio had increased to 7.5 percent, up from 7.2 percent during Q2.

However, removing the percentage of loans in disaster-affected areas that were delinquent, the average delinquency rate for all other areas averaged 6.6 percent.

Touting a Strong Quarter Nonetheless

On the call with investors, Breslow noted that other than a spot of some fairly extreme bad weather for a significant portion of the OnDeck user base, Q3 was largely marked by solid progress.

OnDeck has been one of many online lenders of late hit hard by investor skepticism about online and marketplace lenders, and whether they can scale and profitably offer their services. Its stock price has fluctuated accordingly.

However, this quarter, Breslow told investors that OnDeck is on track to achieve profitability this quarter after strengthening its credit standards and cutting expenses.

“Our credit performance is benefiting from the adjustments we made earlier in the year,” Breslow said. “Loan rates have recovered meaningfully since the beginning of the year.”

Breslow also noted that while the hurricanes in Florida and Texas had tripped up Q3’s performance, the SMB-focused small lender had by and large seen its customers recovered in time for Q4.

“As of the end of October, I’m also pleased to report that most of our impacted customers who’re back in business had resumed making payments on their loans,” said Breslow. “As a result, we believe the effects of the hurricane will be transitory, consisting of higher delinquency levels and charge-offs over the next few quarters from those customers, who are most adversely affected by the storms. Hence, our $3.5 million reserve build in Q3.”

Breslow also spent significant time touting its future of partnering with mainstream financial services players, particularly calling out a renewed partnership with JPMorgan Chase in August to expand the banks’ SMB lending reach.

Breslow said the company would announce its second major bank partnership in the first half of 2018. “Partnership interest from banks continues to increase,” he said.

Still, the unexpected loss stung investors, who were expecting gains. As a result, shares were down 3.7 percent during the morning trading shortly after the results hit the wires.

Killer Stats

$531 million: Q3’s total loan originations, a 14 percent increase from Q2, but down 13.3 percent from the same time a year ago

$80.12 million: Interest income, a year-on-year increase of 12.3 percent

$37.25 million: Operating expenses in Q3 2017, down 25.6% year-on-year

43.8 percent: Weighted average APR for loans originated during Q3

16.9 percent: Net charge-off rate for Q3, down from 18.5% in Q2

14.5 percent: The proportion of loans in disaster-affected areas that were delinquent in Q3, as opposed to 6.6 percent in non-affected areas

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