Company Presentation. February 2016

Transcription

1 Company Presentation February 2016

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 and Operating expense (or any of its components) net of stock-based compensation is not a substitute for Operating expense (or any of its components) presented under GAAP. 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 $4 Billion+ total originations 1 62% y-o-y originations growth Scalable financial model 45,000+ small businesses served 5 th Generation proprietary credit scoring model 76 net promoter score 2 1. Occurred subsequent to December 31, Based on OnDeck s Direct channel. Originations $MM 1,158 1, Q '14 4Q '15 Gross Revenue $MM Q '14 4Q '15 Net Revenue $MM Q '14 4Q '15 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 Q3 ꞌ15 45K+ $0.9Bn OnDeck Unique Small Businesses Served Sources: U.S. SBA, FDIC 09/30/15, Oliver Wyman, How New-Form Lending Will Shape Banks Small Business Strategies, As of December 31, Loans Under Management represents the unpaid principal balance of loans held for investment 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. OnDeck Loans Under Management 1 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 42% 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 4Q ꞌ15. 11

12 Established and Diverse Customer Base $580,000 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 $4 Billion+ 80,000+ Total Originations 1 Total Loans 9 Million+ Customer Payments 1. Occurred intra-quarter 1Q

14 Diversified and Growing Distribution Channels 29,516 Channel Mix 4Q 15 Direct & Strategic Partners 7,103 18, % Funding Advisors 5,955 8,131 7, % Direct and Strategic Partners 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 4Q 15 Securitization Target Mix 55-65% of Term Loan Originations 35-45% 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 includes the principal balance outstanding in Loans Under Management as of December 31, 2015 for loans financed with funding debt or sold to OnDeck Marketplace investors. 16

17 Consistent Portfolio Performance Over Time Net Charge-offs by Cohort 1 9.0% 5.5% 6.4% 4.4% 5.5% 6.9% 6.9% 6.8% 5.2% 2.9% 0.9% 0.0% Q '15 2 2Q '15 2 3Q '15 2 4Q ' Percentage of dollars loaned that are charged off. 2. As of December 31, 2015, principal balance of all term loans in Loans Under Management still outstanding was 0% for all cohorts except the 2013, 2014, 1Q 15, 2Q 15, 3Q 15, 4Q 15 cohorts, which had principal outstanding of 0.1%, 1.8%, 11.5%, 26.1%, 56.8% and 88.2%, respectively. 17

18 Growth Strategy Brand and direct marketing Product expansion Strategic partnerships Expand 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 Noah Breslow Chairman of the Board Ronald Verni Sage Software David Hartwig Sapphire Ventures James Robinson III RRE Ventures American Express Sandy Miller Institutional Venture Partners Bruce P. Nolop E*TRADE Financial Corporation Jane J. Thompson Walmart Financial Services CFPB Advisory Board Neil Wolfson SF Capital Group 19

20 Financial Highlights Originations $MM Rapid Growth 1,158 1, Compelling Customer LTV Capital Light Funding Model Demonstrated Operating Leverage Q '14 4Q '15 Gross Revenue $MM Q '14 4Q '15 Net Revenue $MM Q '14 4Q '15 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 All Customers Acquired in 2013 Average 2.3 loans per customer through 9 quarters ($MM) $8 $9 $7 $7 $6 $5 $3 3.1x+ ROI or $83 Return 3 after 9 quarters $27 $17 $20 $27 Investment Acquisition Cost 1 Contribution 2 +2Q +3Q +4Q +5Q +6Q +7Q +8Q +9Q Through Dec 31, 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. Estimates may be adjusted in subsequent periods to reflect updated information. 3. Return on Investment (ROI) is contribution divided by initial acquisition cost. Acquisition costs include upfront internal and external commissions as well as direct marketing expenses. 4. Figures may not foot due to rounding 22

23 Lifetime Value Improving Over Time All Customers Acquired in 2013 and 2014 At comparable seasoning points, 2014 shows improved returns. Cohort Contribution Per Customer 1 Return on Investment 2 $8, x x $3, x $(2,000) +5 Quarters +9 Quarters +5 Quarters +9 Quarters 0.5x 1. Cumulative Contribution as defined on the previous page. 2. Return on Investment (ROI) as defined on the previous page. 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% 63% 37% 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) $16.2 $10.3 $0.6 $0.3 ($0.2) ($0.8) ($1.1) ($4.6) Q ꞌ14 4Q 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 Supplemental Key Performance Metrics Revisions 1 Average Loans Effective Interest Yield Average Funding Debt Outstanding Cost of Funds Rate Revised Loans Held for Investment and Loan Held for Sale Average of Months in the Period Business Day Adjusted Interest Income Divided by Revised Average Loans Funding Debt Outstanding Adjusted for ASC Average of Months in the Period Funding Cost Divided by Revised Average Funding Debt Outstanding Historical Loans Held for Investment Average of the Quarters in the Period Interest Income Divided by Average Loans Funding Debt Outstanding Average of the Quarters in the Period Funding Cost Divided by Average Funding Debt Outstanding 1. For summary purposes only and is qualified in its entirety by the descriptions of the Key Performance Metrics in our earnings release issued February 22, In April 2015, the Financial Accounting Standards Board issued ASU , Simplifying the Presentation of Debt Issuance Costs, which amends ASC , Interest - Imputation of Interest. ASU requires entities to reclassify the presentation of deferred debt issuance costs in their financial statements. Under the update to the accounting standard, an entity will be required to present such deferred costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. This accounting standard is effective beginning January 1, 2016 and is to be applied retrospectively. 28

29 Supplemental Key Performance Metrics Revisions 1 Average Loans $MM Revised Historical Effective Interest Yield 36.7% 37.6% 37.9% 35.7% 37.6% 35.9% 34.8% 34.2% 1Q '15 2Q '15 3Q '15 4Q '15 Average Funding Debt Outstanding $MM Q '15 2Q '15 3Q '15 4Q ' Q '15 2Q '15 3Q '15 4Q '15 Cost of Funds Rate 5.8% 5.8% 5.2% 5.2% 5.7% 5.8% 5.1% 5.0% 1Q '15 2Q '15 3Q '15 4Q '15 Three Months Ended / Ending Annualization Table 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 Business Days in Period Annualization Factor Beginning with the quarter ending March 31, 2016, the Company is refining the calculation of Effective Interest Yield (EIY) and certain related definitions to reflect the substantial growth and impact of OnDeck Marketplace and to present EIY on a business day adjusted basis. In addition, effective January 1, 2016, the company is adopting a new a GAAP requirement regarding the presentation of deferred debt issuance costs related to average funding debt outstanding. In preparation for these changes and to enhance comparability of prior periods, the above table contains the relevant Key Performance Metrics (1) as originally presented historically and (2) as revised to conform to the pending adoption of the 2016 calculation methodology and the retrospective application of the new GAAP requirement regarding the presentation of deferred debt issuance costs. For summary purposes only and is qualified in its entirety by the descriptions of the Key Performance Metrics in our earnings release issued February 22,

30 Current Debt Facilities: Considerable Existing Capacity ($MM) Maturity Date WA Interest Rate Principal Outstanding Borrowing Capacity Funding Debt 1,4 OnDeck Asset Securitization Trust LLC May % $175.0 $175.0 Prime OnDeck Receivable Trust, LLC June % Receivable Assets of OnDeck, LLC May % OnDeck Account Receivables Trust LLC Sept % On Deck Asset Company, LLC May % Small Business Asset Fund 2009 LLC Jan 2016 through Aug % On Deck Asset Pool, LLC Aug % Partner Synthetic Participations 4 Jan 2016 through Oct 2017 Various Total Funding Debt $380.1 $644.7 Corporate Debt 1,4 On Deck Capital, Inc. Oct % $2.7 $ Balances and Capacities as of December 31, The period during which remaining cash flow can be used to purchase additional loans expires April 30, The period during which new borrowings may be made expires in August While the lenders under our corporate debt facility and partner synthetic participation have direct recourse to us as the borrower thereunder, lenders to our subsidiaries do not have direct recourse to us. 30

31 Net Cumulative Lifetime Charge-off Ratios All Loans As of December 31, 2015, net charge-off as a percentage of original loan amount for all term loan originations, regardless of funding source, including loans sold through OnDeck Marketplace or held for sale on our balance sheet. 31

32 Non-GAAP Operating Expense Reconciliation Sales and Marketing Non-GAAP Expense Reconciliation ($MM) 4Q '15 4Q ' GAAP expense $17.1 $11.4 $60.6 $33.2 Stock-based compensation (0.9) (0.4) (3.1) (0.7) Expense excluding stock-based compensation $16.2 $11.0 $57.5 $32.5 Percentage of Gross Revenue GAAP expense 25.3% 22.6% 23.8% 21.0% Stock-based compensation (1.3) (0.7) (1.2) (0.4) Expense excluding stock-based compensation 23.9% 21.9% 22.6% 20.6% Percentage of Originations GAAP expense 3.1% 3.1% 3.2% 2.9% Stock-based compensation (0.2) (0.1) (0.2) (0.1) Expense excluding stock-based compensation 2.9% 3.0% 3.1% 2.8% Technology and Analytics Non-GAAP Expense Reconciliation ($MM) 4Q '15 4Q ' GAAP expense Stock-based compensation (0.6) (0.2) (2.4) (0.5) Expense excluding stock-based compensation $12.1 $5.8 $40.3 $16.9 Percentage of Gross Revenue GAAP expense 18.9% 12.0% 16.7% 11.0% Stock-based compensation (0.9) (0.5) (0.9) (0.3) Expense excluding stock-based compensation 17.9% 11.5% 15.8% 10.7% Processing and Servicing Non-GAAP Expense Reconciliation ($MM) 4Q '15 4Q ' GAAP expense $4.0 $2.3 $13.1 $8.2 Stock-based compensation (0.2) (0.1) (0.8) (0.2) Expense excluding stock-based compensation $3.7 $2.2 $12.3 $8.0 Percentage of Gross Revenue GAAP expense 5.9% 4.6% 5.1% 5.2% Stock-based compensation (0.4) (0.2) (0.3) (0.1) Expense excluding stock-based compensation 5.5% 4.4% 4.8% 5.1% General and Administrative Non-GAAP Expense Reconciliation ($MM) 4Q '15 4Q ' GAAP expense $13.6 $7.7 $45.3 $21.7 Stock-based compensation (1.7) (0.7) (5.4) (1.4) Expense excluding stock-based compensation $11.8 $7.0 $39.9 $20.3 Percentage of Gross Revenue GAAP expense 20.1% 15.3% 17.8% 13.7% Stock-based compensation (2.6) (1.4) (2.1) (0.9) Expense excluding stock-based compensation 17.5% 13.9% 15.7% 12.8% Operating expense (or its components) excluding stock-based compensation expense and the percentages computed using those metrics are not presented in accordance with GAAP and are non-gaap financial measures. Management believes they can provide useful supplemental information to investors and others for comparisons in understanding and evaluating our operating expenses without the impact of non-cash stock-based compensation which can vary significantly from period to period. 32

33 Non-GAAP Adjusted EBITDA Reconciliation Adjusted EBITDA Twelve Months Ended December 31, Three Months Ended December 31, (000s) Net Loss ($18,708) ($2,231) ($4,291) ($5,144) Adjustments: Corporate Interest Expense Income Tax Expense Depreciation and Amortization 4,071 6,508 1,223 1,886 Stock-Based Compensation Expense 2,842 11,582 1,395 3,517 Warrant Liability Fair Value Adjustment 11,232 2,110 Adjusted EBITDA ($165) $16,165 $561 $315 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

34 Non-GAAP Adjusted (Loss) Income Reconciliation Adjusted Net (Loss) Income Twelve Months Ended December 31, Three Months Ended December 31, (000s) Net (Loss) Income ($18,708) ($2,231) ($4,291) ($5,144) Adjustments: Stock-Based Compensation Expense 2,842 11,582 1,395 3,517 Net loss attributable to non-controlling interest Warrant Liability Fair Value Adjustment 11,232 2,110 Adjusted Net (Loss) Income ($4,634) $10,309 ($786) ($1,127) 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

35 Deferred Tax Asset (000s) As of December 31, 2015 As of December 31, 2014 Deferred tax assets relating to: Net operating loss carryforwards $19,183 $12,271 Loan loss reserve 20,231 18,989 Imputed interest income Loss on sublease (20) 145 Deferred rent 1, Miscellaneous items 5 4 Total gross deferred tax assets $41,741 $32,517 Deferred tax liabilities: Internally developed software $1,756 $1,049 Property, equipment and software 4, Origination costs 3,394 5,164 Total gross deferred tax liabilities $9,763 $6,427 Deferred assets less liabilities 31,978 26,090 Less: valuation allowance (31,978) (26,090) Net deferred tax asset $ $ 1. Our net operating loss carryforwards for federal income tax purposes were approximately $50.6 million, $32.2 million and $47.5 million at December 31, 2015, 2014 and 2013, respectively, and, if not utilized, will expire at various dates beginning in State net operating loss carryforwards were $49.8 million, $31.4 million and $47.2 million at December 31, 2015, 2014 and 2013, respectively. Net operating loss carryforwards and tax credit carryforwards reflected above may be limited due to historical and future ownership changes. 35