Company Presentation. December 2015

Transcription

1 Company Presentation December 2015

2 Forward-Looking Statements This presentation, including the accompanying oral presentation (collectively, this presentation ), does not constitute an offer to sell or the solicitation of an offer to buy any securities. This presentation is provided by On Deck Capital, Inc. ( OnDeck ) for informational purposes only. No representations express or implied are being made by OnDeck or any other person as to the accuracy or completeness of the information contained herein. This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other legal authority. Forwardlooking statements include statements about scalability, growing distribution channels, credit predictability and information concerning our future financial performance, business plans and objectives, potential growth opportunities, financing plans, competitive position, industry environment and potential market opportunities. Forwardlooking statements can also be identified by words such as "will," "enables," "expects," "allows," "continues," "believes," "anticipates," "estimates" or similar expressions. Forward-looking statements are neither historical facts nor assurances of future performance. They are based only on our current beliefs, expectations and assumptions regarding the future of our business, anticipated events and trends, the economy and other future conditions. Moreover, we do not assume responsibility for the accuracy and completeness of forward-looking statements. As such, they are subject to inherent uncertainties, changes in circumstances, known and unknown risks and other factors that are difficult to predict and in many cases outside our control. As a result, you should not rely on any forward-looking statements. Our expected results may not be achieved, and actual results may differ materially from our expectations. Important factors that could cause actual results to differ from our forward-looking statements are the risks that we may not be able to manage our anticipated or actual growth effectively, that our credit models do not adequately identify potential risks, and other risks, including those under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2014 and in other documents that we file with the Securities and Exchange Commission, or SEC, from time to time which are available on the SEC website at We undertake no obligation to publicly update any forward-looking statements for any reason after the date of this presentation to conform these statements to actual results or to changes in our expectations, except as required by law. In addition to the U.S. GAAP financial information, this presentation includes certain non-gaap financial measures. We believe that non-gaap measures can provide useful supplemental information for period-to-period comparisons of our core business and is useful to investors and others in understanding and evaluating our operating results. These non-gaap measures have not been calculated in accordance with U.S. GAAP. You should not consider them in isolation or as a substitute for an analysis of our results under U.S. GAAP. There are a number of limitations related to the use of these non-gaap measures versus their nearest GAAP equivalents. For example, neither Adjusted EBITDA nor Adjusted Net (Loss) Income is a substitute for Net (Loss) Income. In addition, other companies may calculate non-gaap financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-gaap financial measures as tools for comparison. Adjusted EBITDA excludes some recurring costs, including interest expense associated with debt used for corporate purposes, non-cash stock-based compensation, depreciation and amortization expense and fair value adjustment for our warrant liability. Therefore Adjusted EBITDA does not reflect interest expense, the non-cash impact of stock-based compensation or working capital needs that will continue for the foreseeable future. Adjusted Net (Loss) Income excludes stock-based compensation expense and warrant liability fair value adjustment which will continue for the foreseeable future and therefore will generally be more favorable than Net (Loss) Income determined in accordance with GAAP. Please refer to the Non-GAAP Reconciliations at the end of this presentation for a description of these non-gaap measures and a reconciliation to Net (Loss) Income. 2

3 A Leading Online Platform for Small Business Lending $3 Billion+ total originations Originations $MM 67% y-o-y originations growth 459 1, ,318 Scalable financial model 45,000+ small businesses served 5 th Generation proprietary credit scoring model M '14 9M '15 Gross Revenue $MM net promoter score M '14 9M '15 1. Based on OnDeck s Direct channel. 3

4 Investment Highlights Massive and underserved market Proprietary analytics and scoring models Integrated and scalable technology platform Diversified customer acquisition channels Robust funding platform Experienced management team Attractive financial profile 4

5 Small Business Lending Market is Massive and Underserved 28MM U.S. Small Businesses $80-120Bn $80-120Bn Unmet Demand Unmet for Small Demand Business for Lines Small of Credit Business Lines of Credit $186Bn Business Loan Balances Under $250,000 in the U.S. in Q2 ꞌ15 45K OnDeck Unique Small Businesses Served $0.8Bn OnDeck Loans Under Management 1 Sources: U.S. SBA, FDIC 06/30/15, Oliver Wyman, How New-Form Lending Will Shape Banks Small Business Strategies, As of 09/30/2015; Loans under management represents the unpaid principal balance plus the amount of principal outstanding for loans held for sale, excluding net deferred origination costs, plus the amount of principal outstanding of term loans the company serviced for others, each at the end of the period. 5

6 Diversity of Small Businesses Creates Challenges for Traditional Lenders Cash Flow Profile Restaurant Credit Card Rev. Cash Rev. Monthly Exp. Inventory & Payroll Landscaping Company Landscaping Rev. Snow Removal Rev. Monthly Exp. Fuel & Payroll Plumbing Company CHALLENGES FOR TRADITIONAL LENDERS Diverse businesses require manual underwriting Technology and data limitations Lack of standardized small business credit score Repair Rev. Subcontractor Rev. Monthly Exp. Supplies & Payroll Q1 Q2 Q3 Q4 6

7 Leading to a Frustrating Borrowing Experience for Small Businesses FRUSTRATIONS FOR SMALL BUSINESSES Time consuming offline process Non-tailored credit assessment Product mismatch Rigid collateral requirements 7

8 The OnDeck Score Proprietary and Purpose Built for Small Business 5 th Generation proprietary credit scoring model Transactional Data Score 100+ external data sources 10 Million+ small businesses in proprietary database 2,000+ data points per application Credit Data Proprietary Data Accounting Data Public Records Social Data Proprietary Data Analysis Platform Probabilistic record linkage Dimensionality reduction Ensemble learning Exhaustive cross validation Feature engineering Adaptive learning A B C D E F Risk Grading 8

9 We Rely on the OnDeck Score for Greater Accuracy, Predictability and Access % of Defaults Eliminated More Accurate than the Personal Credit Score at Predicting Bad Credit Risk 1 Resulting in Funding Significantly More Loans for the Same Risk 100% 90% % 0% 100% 40% 20% 10% 0% Acceptance Rate (%) OnDeck Score Personal Credit Score Random Random Personal Credit Score OnDeck Score 1. Analysis on OnDeck Score v5 using actual OnDeck loan performance data. 9

10 The OnDeck Solution for Small Business Lending Apply Approve Fund Online Minutes 1 Automated Review As Fast As Immediately 3 As Fast As Same Day Traditional Lending Offline Manual Review 33 Hours 2 Weeks or Months Several Days 1. Application time depends on customer having the required documentation available. 2. Source: Small business survey conducted by the Federal Reserve Bank of New York, Spring Approximately 1/3 of customers are subjected to secondary, manual review process. 10

11 Tailored Products for Small Businesses Term Loan (Launched in 2007) Line of Credit (Launched in 2013) Use Case Buying Inventory Hiring New Staff Marketing Managing Cash Flow Size $5,000 $500,000 $5,000 $100,000 Term 3 36 months 6 months Pricing Annual Interest Rate as low as 5.99% 1 Average 43% APR % 36% APR Payment Automated daily or weekly payments Automated weekly payments Availability Renewal opportunity at ~50% paid down Draw on-demand 1. For Select Customers 2. Based on Q3 ꞌ15 11

12 Established and Diverse Customer Base $600,000 Median Annual Revenue 7 Years Median Time in Business 700+ Industries 45,000+ Small Businesses Served in all 50 U.S. states 12

13 Integrated and Scalable Technology Platform Online Customer Experience Data Aggregation, Analytics and Scoring Technology Powered Servicing & Collections $3 Billion+ Total Originations 75,000+ Total Loans 8 Million+ Customer Payments 13

14 Diversified and Growing Distribution Channels Direct Strategic Partners 14,920 5,758 1, , , Channel Mix 3Q % Funding Advisors 8,131 5,955 3, Direct and Strategic Partners 19% Funding Advisors Numbers represent loan units. 14

15 Expanding Partner Ecosystem OnDeck Enabling Partners to Expand Core Solutions and Value Added Services SMB Solutions Online Lending Banks ISOs/ Processors as a service Includes affiliates, subsidiaries and divisions. Pending partnership with Chase announced in 12/1/2015 Form 8-K. 15

16 Hybrid Funding Model Focused on Diversity Securitization / Warehouse Marketplace OnDeck Funding Mix 3Q 2015 Securitization Target Mix 60-65% of Term Loan Originations 35-40% of Term Loan Originations Marketplace Investor Type Investors Seeking Fixed Returns Investors Seeking Variable Returns Flexibility Scalable as Originations Grow Greater Product and Investor Flexibility Cost Low Cost Execution Profitable Revenue Stream Resiliency Capital-Light Structure, Equity Contribution Aligns Interests Diversified Risk Exposure, Servicing Fee Aligns Interests Warehouse Lines Funding mix is shown as of September 30, 2015 based on the outstanding debt by funding source and Marketplace unpaid principal balance. 16

17 Consistent Portfolio Performance Over Time Net Charge-offs by Cohort 1 5.5% 9.0% 6.4% 4.4% 5.5% 6.9% 6.8% 6.2% 3.3% 0.9% 0.1% Q' 15 2Q' 15 3Q' Percentage of dollars loaned that are charged off. 2. As of 09/30/15, principal balance still outstanding was 0% for all cohorts except the 2013, 2014, Q1 15, Q2 15, Q3 15 cohorts, which had principal outstanding of 0.2%, 5.1%, 27.3%, 55.1% and 87.2%, respectively. 17

18 Growth Strategy Brand and direct marketing Product expansion Strategic partnerships Extend customer lifetime value Data and analytics International expansion 18

19 Industry Leading Management Team Management Team Team Experience Noah Breslow CEO Howard Katzenberg CFO James Hobson COO Pamela Rice Technology Paul Rosen Sales Krishna Venkatraman Data & Analytics Cynthia Chen Risk Andrea Gellert Marketing Zhengyuan Lu Capital Markets Board of Directors James Robinson III RRE Ventures American Express David Hartwig Sapphire Ventures Ron Verni Sage Software Sandy Miller Institutional Venture Partners Jane J. Thompson Walmart Financial Services CFPB Advisory Board Neil Wolfson SF Capital Group 19

20 Financial Highlights Originations $MM Rapid Growth Compelling Customer LTV Capital Light Funding Model 459 1, , M '14 9M '15 Gross Revenue $MM Demonstrated Operating Leverage M '14 9M '15 1. Based on OnDeck s Direct channel. 20

21 Illustrative Loan Economics Revenues Expenses Origination Fee Acquisition Interest Income - Processing and Servicing Funding Costs = Loan Profit Losses 21

22 Compelling Customer Lifetime Value Customers Acquired in Q1 ꞌ13 Average 3.0 loans per customer in 11 quarters $2.7MM in interest still outstanding ($MM) $1.9 $1.5 $1.1 $ x ROI $1.6 $1.4 $0.9 $1.0 $ x+ ROI or $18.0 Return 3 after 11 quarters $5.0 $2.8 $3.7 $5.0 Investment Acquisition Cost 1 Contribution 2 +2Q +3Q +4Q +5Q +6Q Q1 ꞌ13 1. Includes upfront internal and external commissions as well as direct marketing expenses. 2. Contribution is defined to include interest income and fees collected on initial and repeat loans, less acquisition costs for repeat loans, less the following items for both initial and repeat loans: estimated third party processing and servicing expenses, estimated funding costs (excluding any cost of equity capital) and charge offs. For this purpose, processing and servicing expenses are estimated based on the mix of new and renewal originations and outstanding principal balances. Includes all loans originated in the period. New and repeat loans sold funding cost is estimated based on the average on-balance sheet cost of funds rate in the period. 3. Figures may not foot due to rounding. +7Q +8Q +9Q +10Q +11Q To Date 22

23 Customer Lifetime Value Has Increased Q1 14 vs Q1 13 Customers Acquired in Q1 ꞌ14 Q1 14 cohort outperforming Q1 13 with an ROI of 3.0x after 7 quarters ($MM) $4.2 $4.2 $3.5 $2.9 $ x+ ROI or $36.8 Return 3 after 7 quarters $9.7 $12.2 $9.1 $12.2 Investment Acquisition Cost 1 Contribution 2 +2Q +3Q +4Q +5Q +6Q +7Q To Date Q1 ꞌ14 1. Includes upfront internal and external commissions as well as direct marketing expenses. 2. Contribution is defined to include interest income and fees collected on initial and repeat loans, less acquisition costs for repeat loans, less the following items for both initial and repeat loans: estimated third party processing and servicing expenses, estimated funding costs (excluding any cost of equity capital) and charge offs. For this purpose, processing and servicing expenses are estimated based on the mix of new and renewal originations and outstanding principal balances. Includes all loans originated in the period. New or repeat loans sold funding cost is estimated based on the average on balance sheet cost of funds rate in the period. 3. Figures may not foot due to rounding. 23

24 Demonstrated Operating Leverage, but Investing for Growth Driving Efficiencies in Cost of Revenues Expanding OpEx Investment to Support Growth 81% 84% Operating Leverage Potential 61% 54% 68% 51% 61% 37% M ' M '15 Funding Costs Provision for Loan Losses Processing & Servicing Sales & Marketing General & Administrative Technology & Analytics Figures are based on a percentage of gross revenue 24

25 Adjusted EBITDA and Adjusted Net Income (Loss) $15.8 $11.4 $9.0 $7.4 $2.6 $1.5 ($0.7) ($3.8) 9M 14 9M 15 Q3 ꞌ14 Q3 ꞌ15 Adjusted EBITDA Adjusted Net Income (loss) See appendix for a reconciliation of these non-gaap measures. 25

26 Building Shareholder Value Expand our addressable market and increase customer lifetime value with a full spectrum of SMB credit products and by investing in long-term customer relationships Drive sustainable net revenue growth for the longer term, prioritizing stable credit quality across the portfolio Leverage technology and analytics leadership to extend our competitive moats while driving operating leverage and enhancing profitability Diversify our funding sources by type and investor to balance risk retention with flexibility and resiliency over an economic cycle 26

27 APPENDIX 1

28 Direct & Strategic Partner Channels Driving Higher Returns Customers Acquired in Q1 ꞌ13 Loans per Customer 1 Cash Yield 2 Annualized ROA % 57% 64% 24% 23% 21% Direct / Strategic Partner All Channels Funding Advisor Direct / Strategic Partner All Channels Funding Advisor Direct / Strategic Partner All Channels Funding Advisor 1. Average number of loans 2. Total cash interest and origination fee collected divided by the quarterly average Unpaid Principal Balance, or UPB, outstanding of the cohort from inception though Q3 15. Average UPB is calculated by averaging UPB at inception with UPB at the last day of each quarter in the 11 quarter period. 3. Annualized Return on Assets, or ROA, for the cohort over the 11 quarters from Q1 13 through Q3 15. Annualized ROA is defined as Cumulative Net Return on an annualized basis divided by the average UPB outstanding of the cohort from inception through Q3 15. Cumulative Net Return equals cumulative Contribution including Acquisition Cost as defined on prior slides. Average UPB is calculated as descripted in the prior footnote. 28

29 Economies of Scale Driving Higher Returns Customers Acquired in Q1 ꞌ13 and Q1 14 Through 7 Quarters At comparable seasoning points, Q1 14 shows improved ROI and stable ROA despite lower pricing ROI on Acquisition Cost 3.7x Cash Yield 1 64% Annualized ROA 2 2.5x 2.7x 3.0x 58% 48% 57% 23% 23% 23% 22% Direct /Strategic All Channels Direct /Strategic All Channels Direct /Strategic All Channels 1. Total cash interest and origination fee collected divided by the quarterly average Unpaid Principal Balance, or UPB, outstanding of the cohort from inception though the first 7 quarters of the cohort. Average UPB is calculated by averaging UPB at inception with UPB at the last day of each quarter in the 7 quarter period. 2. Annualized Return on Assets, or ROA, for the cohort over the first 7 quarters of the cohort life. Annualized ROA is defined as Cumulative Net Return on an annualized basis divided by the average UPB outstanding of the cohort from inception through the first 7 quarters of the cohort life. Cumulative Net Return equals cumulative Contribution including Acquisition Cost as defined on prior slides. Average UPB is calculated as descripted in the prior footnote. 29

30 Net Cumulative Lifetime Charge-off Ratios All Loans 30

31 Appendix: Non-GAAP Adjusted EBITDA Reconciliation Adjusted EBITDA Nine Months Ended September 30, Three Months Ended September 30, (000s) Net (Loss) Income ($14,417) $2,912 $354 $3,507 Adjustments: Corporate Interest Expense Income Tax Expense Depreciation and Amortization 2,848 4,621 1,093 1,678 Stock-Based Compensation Expense 1,447 8, ,707 Warrant Liability Fair Value Adjustment 9, Adjusted EBITDA ($726) $15,848 $2,611 $8,962 Adjusted EBITDA represents our net income (loss), adjusted to exclude interest expense associated with debt used for corporate purposes (rather than funding costs associated with lending activities), income tax expense, depreciation and amortization, stock-based compensation expense and warrant liability fair value adjustment. EBITDA is impacted by changes from period to period in the fair value of the liability related to preferred stock warrants. Management believes that adjusting EBITDA to eliminate the impact of the changes in fair value of these warrants is useful to analyze the operating performance of the business, unaffected by changes in the fair value of preferred stock warrants which are not relevant to the ongoing operations of the business. All such preferred stock warrants converted to common stock warrants upon initial our initial public offering in December

32 Appendix: Non-GAAP Adjusted Income (Loss) Reconciliation Adjusted Net Loss Nine Months Ended September 30, Three Months Ended September 30, (000s) Net (Loss) Income ($14,417) $2,912 $354 $3,507 Adjustments: Stock-Based Compensation Expense 1,447 8, ,707 Net loss attributable to non-controlling interest 226 Warrant Liability Fair Value Adjustment 9, Adjusted Net (Loss) Income ($3,848) $11,435 $1,463 $7,440 Adjusted Net Income (Loss) per share represents our net income (loss) adjusted to exclude net loss attributable to non-controlling interest, stock-based compensation expense and warrant liability fair value adjustment, each on the same basis and with the same limitations as described above for Adjusted EBITDA, divided by the weighted average common shares outstanding during the period. Adjusted Net Income (Loss) per share does not include the impact of accretion of dividends on redeemable convertible preferred stock or Series A and B preferred stock redemptions. All such preferred stock converted to common stock upon our initial public offering in December