GreenSky, Inc.
Q3 2018 Earnings Call Transcript

Published: 6 Nov 2018

[Operator:]

Ladies and gentlemen, thank you and welcome to the GreenSky Third Quarter Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. We're webcasting this call live on the GreenSky Investor Relations Web site. After the completion of the call, a recording of the call will be made available on the same site. I would now like to turn the conference over to Rebecca Gardy, Senior Vice President of Investor Relations at GreenSky. Please go ahead.

[Rebecca Gardy:]

Thank you, Bester, and good morning, everyone. This morning, GreenSky issued a press release announcing results for its third quarter ended September 30, 2018. You can access this press release on the Investor Relations section of the GreenSky Web site. Presenting on today's call will be David Zalik, GreenSky's Chief Executive Officer; Gerry Benjamin, our Chief Administrative Officer and Vice Chairman; and Rob Partlow; our Chief Financial Officer. We will be making forward-looking statements on our call today, statements that are based on current assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those projected. We disclaim any obligation to update any forward-looking statements except as required by law. Information about these risks and uncertainties is included in our press release this morning as well as in our filings with regulators. Also, our commentary today will include certain adjusted financial measures, which are non-GAAP measures. Non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing GreenSky's performance. We have provided reconciliations of the non-GAAP financial measures to GAAP financial measures in today's earnings press release available on our Web site. Following our prepared remarks, we will take your questions. As a courtesy to other participants, please ask no more than two questions. In the event you have additional questions that are not covered by others, please feel free to re-queue and we will do our best to come back to you. Thank you for your cooperation on this. And with that, I'll turn it over to David.

[David Zalik:]

Thanks, Rebecca. Good morning, everyone, and thank you for joining us today. I’m pleased to share the results of our third quarter performance, which continue to illustrate GreenSky's unique combination of growth and profitability. I will also touch on exciting developments as we're focused on the best market opportunities for our technology enabled promotional point-of-sale financing products. We generated record adjusted EBITDA of $58.9 million, a growth of 27% from the third quarter of 2017. Year-to-date, through the third quarter, adjusted EBITDA was $138.5 million, an increase of 25% over last year. As a percentage of revenue, adjusted EBITDA was 52% in both the third quarter of 2018 and 2017. We delivered pro forma earnings this quarter of $39 million, up 23%. On a fully diluted basis, pro forma earnings were $0.21 per share. We had another strong quarter in terms of originations. Total transaction volume increased to $1.4 billion this quarter. Each month this quarter we facilitated home improvement originations of approximately $400 million on the GreenSky platform and we expect that run rate will continue to accelerate in 2019 and beyond. We expect our home improvement originations to grow by approximately $900 million to $1 billion in each of fiscal 2018 and 2019 against the total addressable market in home improvement of over $300 billion. We’ve a long runway ahead to get to a meaningful market share. We remain equally as convicted in our rapidly growing elective health care business, as elective healthcare providers strive to improve patient access, GreenSky [indiscernible] by facilitating financing that provides patients affordable access to quality care. Our growth trajectory in elective health care transaction volume can continue to mirror what we saw early on in our home improvement business and it is on track to exceed 10% of monthly enterprise-wide volume by the end of next quarter. Moreover, we expect to more than double our elective health care business in calendar year 2019. This brings me to the topic of liquidity and funding. From a funding perspective, let me provide an update as to the status of our bank partner consortium. Existing bank partners increased GreenSky program funding commitments by $1.6 billion in the third quarter. In addition, Chicago-based BMO Harris Bank, a wholly-owned subsidiary of Bank of Montreal, the eighth largest bank in North America, and Troy, Michigan-based Flagstar Bank, have joined the GreenSky ecosystem since our last earnings call. Including their commitments of $2 billion in aggregate, our bank partner funding is now $11.5 billion, an increase of $3.5 billion since the second quarter. Bank demand for loans originated by the GreenSky platform remain very strong as the quality of our bank partners portfolio remains outstanding. The average FICO score for loans originated in the third quarter was 768. In addition, our loan servicing portfolio remains high quality with an average FICO of 757. Furthermore, borrowers worth FICO score over 700 were more than 85% of the portfolio. We ended the quarter with $294 million in unrestricted cash on our balance sheet and year-to-date we've generated approximately $167 million in free cash flow. This morning we announced on intend to repurchase up to 150 million of our Class A common stock as an important component of our overall capital allocation strategy. We have the utmost confidence in the long-term fundamentals of our business and we believe the intrinsic value of our stock far exceeds what is reflected in the current GreenSky market price per share. Our management team and the Board of Directors want to opportunistically take advantage of the decline as we aim to maximize the benefit for our long-term shareholders. I'm excited to share to update on our multifaceted collaboration with American Express. Over the eight weeks since American Express began cross marketing the GreenSky platform to American Express accepting home improvement merchants, we've received over 1,000 merchant referrals. We are also excited to announce that the launch of the AMEX direct-to-consumer pilot is on track for the first quarter of fiscal 2019 and will occur in five of the country's largest metropolitan areas, Atlanta, Chicago, Dallas, Los Angeles and Tampa. American Express will be marketing a highly attractive promotional home improvement installment loan powered by GreenSky to select preapproved American Express card members, which such loans to be funded by American Express Bank. As a reminder, we've not included any impact of our American Express alliance in our expectations for fiscal years 2018 or '19. This brings me to the topic of interest rates, pricing and the overall macro environment, as we look forward including recalibrating our full-year 2018 and 2019 guidance. As many of you know, the 2-year swap rate has risen dramatically by some 80% from 1.58% to 2.89% over the 12 months ended October 31, 2018, directly increasing our bank waterfall cost of funds. Yet as I just reviewed, our growth and profitability for the quarter remain strong. We're just escalating bank interest rates through a combination of transaction fee increases, loan APR increases, and product design strategies, such as short integration of the promotional period. These actions offset the impact of higher bank cost of funds and preserve the lifetime economics of loan originations. As we discussed last quarter, while we enacted certain loan product price increases beginning in the first half of the year, there's a lag effect delaying our revenue as home improvement loan originations generally occur over 180 day purchase window, and higher APR loans with lower transaction fees pushed revenue into the future. We are encouraged as our transaction fee percentage this quarter was up 7 basis points over the second quarter and we expect that we've passed the point of inflection as the decline in the transaction fee rate attributable to solar merchants has run its course and the impact of price changes are beginning to be visible. In addition to achieving higher transaction fee rates, we also saw higher average loan APR's such that third quarter originations reflects 175 -- 177 basis points higher than third quarter of 2017. Finally as a reminder, we anticipate mild seasonal origination headwinds during the fourth quarter and continuing into January before we merge into our stronger seasonal periods of the second and third quarter. As a result of the above factors, we're recalibrating our fiscal 2018 full-year guidance. We will also take this opportunity to provide fiscal 2019 guidance. Rob will go through the specifics in a few minutes. We're pleased with this quarter's results. We certainly have no lack of growth opportunities within the vast addressable home improvement and elective healthcare markets. We're seeing early signs of success within our e-commerce and specialty retail businesses, representative new merchants added into our specialty retailing segment, include a premium at home fitness equipment manufacturer, a 300 dealer billiards manufacturing company, one of the largest home security and alarm monitoring companies, a 350 merchant gemstone purchasing co-op. In aggregate, these third quarter wins represent approximately $200 million in potential annual transaction volume. We continue to be aggressively focused on initiatives where we can bring even higher value to our merchant network and ultimately their consumers. With all those potential add, hopefully you will understand why I'm excited about GreenSky's future. I will now turn it over to Gerry, to comment on our additional key operational metrics. Gerry?

[Gerry Benjamin:]

Thank you, David. For those of you that are new to the GreenSky's story, the company's recurring revenue business model is unusually attractive. And that the company's core value proposition resonates strongly with its growing network of merchants, funding bank partners, and GreenSky program consumer borrowers, resulting in sequentially growing recurring revenues, unrivaled low customer acquisition costs, and highly attractive operating margins. We reported a 40% increase year-over-year and the number of merchants leveraging the GreenSky platform with 14,163 active merchants, including 11,779 home improvement merchants, and 2,384 elective health care providers. This growing network of merchants and providers sets up a virtuous cycle of referrals and is a key for GreenSky competitive advantage. We also continue to see strong volume growth by our home improvement merchants as the dollar volume of transactions originated by merchants acquired in the first nine months of 2018 was over 50% greater than the same period in 2017 on a comparable basis. As of September 30, 2018, our cumulative customer accounts or the aggregate number of consumer accounts approved on our platform since our inception was 2.1 million, an increase of 44% over the prior year. We’ve now facilitated over $15 billion of loan originations with this customer base since our inception. And as previously indicated, we are only just beginning to capture this potential market. As David referenced in his comments, we anticipate doubling our elective health care transaction volume in 2019. Our product and technology teams have been hard at work over the past six months and we are excited to be soon delivering our first revolving consumer loan product in support of our growing elective healthcare business. We have three multi-market beta test lined up with large national dental and veterinary medicine providers that in the aggregate support more than 1,600 clinical sites, step up approximately 5,000 healthcare providers currently generated aggregate annual patient finance volumes in excess of $350 million. Our ability to offer a revolving GreenSky Patient Solutions Dental Card and a GreenSky Patient Solutions Vet Card designed for everyday recurring category specific expenditures will serve as a the wonderful complement to our call -- core installment loan product. And the availability of such loan product has been pivotal in securing these large exciting beta-test. Lastly, I would like to review our third quarter origination productivity or index or OPI. As a reminder, this key performance measure captures the future net cash flows to be generated related to the subject quarters originations, expressed as a percentage of the quarter's dollar origination. Simply put, it measures the productivity of every dollar originated through the GreenSky platform. Importantly, our origination productivity index remained incredibly stable during the third quarter at 22%, illustrating that even with rising interest rates we continue to maintain the overall productivity of every dollar of volume originated through the GreenSky technology platform. We continue to have three levers at GreenSky's disposal to optimize OPI. These levers include transaction fee rate, loan product APR, and the length of loan product promotional periods offered. OPI computations are again contained in the financial presentation for the third quarter that has been posted on the GreenSky Investor Relations Web site. And now I'll turn it over to Rob for a brief review of our third quarter results and to layout the provisions to our expectations for our fiscal 2018 and full-year 2019. Rob?

[Robert Partlow:]

Thank you, Gerry. Before I begin, I would like to note that all my remarks will be as compared to the third quarter of 2017, unless otherwise noted. As David and Gerry highlighted, GreenSky continues to grow transaction activity for their existing merchants and bring new merchants on a daily basis, leading to strong financial performance this quarter. Revenue grew by 29% to $113.9 million during the quarter. The impact of the higher transaction volume this quarter was offset by decrease in the average transaction fee per dollar originated. Compared to the third quarter of last year, transaction fee rate decreased to 6.91% compared to 7.27% in the third quarter of last year as a mix of high transaction fee solar business increased from 12%, just 4% of originations this quarter. However, on a sequential basis, the transaction fee rate of 6.91% was up 7 basis points over the second quarter as the price -- as price increases begin to take hold even while the mix of origination shifted to [indiscernible] with higher APRs. As David noted, we've reached a point of inflection during the quarter for the trajectory of our transaction fee rate as the diminishing impact of solar has more than offset by price changes in mix shift within our products. Transaction revenue of $96.8 million, an increase of 27% and servicing and other revenue was $17.1 million, up 41%. GreenSky's average loan servicing portfolio for the three months ended September 30 was $6.6 billion, a 40% increase over the same period in 2017. At the end of the third quarter, the servicing portfolio was $6.9 billion compared to $4.9 billion last year. The total cost of revenue was $35.4 million or an annualized 2.2% of our average loan servicing portfolio, up from $22 million and 1.9% of our average loan servicing portfolio last year. Origination related expense was $7.5 million, which represented .5% of transaction volume and improvement from .6% in the third quarter of 2017. Servicing related expense was $9.1 million or .6% of the servicing portfolio on an annualized basis, consistent with the third quarter of 2017. The fair market value change of our financial charge reversal liability was approximately $18.8 million or an annualized 1.1% of our servicing portfolio, down from 1.3% last quarter, but up from .8% during the third quarter of 2017. As a refresher, the FCR expense line item represents GreenSky's obligation to remit previously billed, but uncollected finance charges on deferred interest loans that are expected to pay off during the promotional period. The FCR expense is driven by a number of factors. First, the increase in the FCR liability period-over-period. If FCR liability has grown consistently with the growth of our servicing portfolio and represents 1.8% of the average servicing portfolio, consistent with each of the last six quarters. Second, the remittance of our bank partners to -- of our bank partners of finance charges that are reversed in the quarter due to the payoff of a deferred interest loan during its promotional period. This is referred to as settlements in our reporting and represented an annualized 2.9% of the average servicing portfolio during the third quarter of 2018. The settlement line will vary quarter-to-quarter, bearing the seasonality of our loan origination activity. And finally, the FCR expense line item is reduced by the [indiscernible] of incentive payments and collections on our charge-off, loans, [indiscernible] recoveries, as well as the proceeds from the sale of rights to future recoveries, all collectively refer to as receipts in our reporting. The FCR receipts represented an annualized 2.3% of the servicing portfolio during the third quarter of 2018 consistent with the second quarter of 2018, but down from 2.6% during the third quarter of 2017. The year-over-year decline is largely due to the quarterly variances in charge-offs, recovery amounts, and the normal aging of the servicing portfolio as well as other small variations in the portfolios composition. So as we work to reach component, you can see consistency in each factor once you’re capped for the normal seasonal fluctuations. For a more detailed FCR roll forward, that includes receipts and settlements, please refer to the slides we've published alongside of our earnings release this morning. Operating expenses, which represents total cost and expenses excluding the aforementioned cost of revenue were $24.3 million, down $1.9 million from $26.2 million during the third quarter of 2017, primarily as a result of a $2.6 million of related party expenses in 2017 associated with finalizing our term loan facility. In addition, we continue to benefit from our heavy investment in our technology resulted in a $1.2 million increase in capitalized expenses for a joint developed software. The largest component of operating expense is compensation benefits expense that totaled $14.3 million in the third quarter 2018. 43% of the compensation benefits expense related to our IT and product teams, reflecting our continued heavy investment in our technology platform. Sales and marketing and personnel expenses make up the next largest portion of our personnel expenses of 32% of the total. And the remaining 25% relates to finance, HR and other corporate support functions. During the quarter, we adjusted our incentive program to align included a combination of both cash and incentives as well as long-term equity. Our expense net of $5.2 million increased compared to 2017, primarily related to interest expense on our term loan B debt issuance, which closed in August of 2017. Our GAAP net income was $45.7 million or $0.20 per diluted share. Our adjusted EBITDA increased by 27% to $58.9 million from $46.4 million last year. A reconciliation of adjusted EBITDA is provided in both the press release and the third quarter financial presentation, which are posted on the Investor Relations section of our Web site. Our pro forma net income was $38.8 million or $0.21 per diluted share. This measure includes all of GreenSky's enterprise earnings for the period, net of tax expense, which is calculated at our assumed effective tax rate of 21.8% all of GreenSky's pre-tax income. Because of our up C structure, GAAP net income only reflects the tax expense on the earnings of our Class A shareholders. As pro forma net income assumes that all earnings are subject to corporate taxation, we believe it is a useful measure for the comparability purposes, irrespective of the percentage of GreenSky owned by the C Corp. Turning now to the key elements of our balance sheet. Our unrestricted cash was $294 million at the end of the quarter, an increase of approximately $70 million since year-end, reflecting our strong cast generation and a $59 million reduction of loans receivable held for sale, which ended the quarter at $15 million. Our finance charge reversal liability was $117 million, reflecting a $23 million increase since year-end and consistent with the continued growth of our deferred interest loan originations. That brings us to our outlook for the four fiscal year and then we will open it up for questions. Based on the company's performance at the end of third quarter, David's early remarks in the current market conditions, we now expect our fiscal 2018 transaction volume to increase between 30% and 35% to between $4.95 billion and $5.1 billion. Adjusted EBITDA to grow between 4% and 10% to between a $165 million and $175 million. The key variable impacting our updated guidance is our expectation that merchants will continue to select higher rate loan products as we change pricing to reflect the rising rate environment. Therefore, we expect our transaction fee percentage to increase only modestly from current levels during the fourth quarter. In addition, we're refining our origination forecast to better account for seasonality in originations and consumer payment patterns. With the revisions to our full-year 2018, and in conjunction with our fiscal 2019 planning, we are taking the opportunity to present our expectations for fiscal 2019 as follows

[Rebecca Gardy:]

Thank you, Rob. This is Rebecca. As a reminder, please limit yourselves to two questions each so that we can get everyone in the queue. Thank you for your cooperation. And can we have our first question?

[Operator:]

Yes, ma'am. Our first question is from the line of Jim Schneider from Goldman Sachs. You may begin.

[Jim Schneider:]

Good morning. Thanks for taking my question. I was wondering if you can maybe address the housing slowdown in terms of resales and some of the results we're seeing from building materials companies that reported in the market recently. Can you maybe talk a little bit about the housing slowdown. What’s happening in the home improvement market generally speaking and maybe quantify how that is impacting your 2019 guidance assumptions, and what factors you’re assuming for 2019 with respect to that?

[David Zalik:]

Jim, good morning. Thank you. We have not seen or detected any trace of impact from housing sales slowdown. The only thing that we see is a very large market that has laborer shortages which makes everything take longer. So I think anybody doing home improvement in America today, knows that the project that used to take three weeks seems to take five or six weeks, if you can get a contract [indiscernible] So Jim, we haven't seen any indication of impact from slowing home sales.

[Jim Schneider:]

That’s helpful. And then maybe a follow-up you reported that delinquency rate in your slides that’s kind of a back to where, but 1.4, I believe. Can maybe talk about -- that’s kind of up a lot from where it was in Q2, but similar was Q3 last year. So you can maybe talk about how if at all that is impacting your assumptions in terms of the go forward on FCR liability or their credit assumptions.

[Gerry Benjamin:]

Hey, Jim. This is Gerry. One that that we do want to point out, we got a net loss number of questions last quarter when we chronicled 30 day default data, in that included our entire loan portfolio, including our deferred interest loans. This quarter we are basically depicted the 30 day default with respect to only those loans that have a payment due. If you’re a borrower, the deferred interest loan and you’ve done of a payment, you obviously. You I couldn't have defaulted. So the market was looking for more granular data, excluding those deferred interest borrowers without payments due, so what you’re seeing has what’s been chronicled on the Investor Relations section of the site is just [indiscernible] with the payment due and you’re seeing seasonal trends almost identical to last year, incredibly consistent. The quality of the credit performance is just where we would like it; we published the FICO bands again which you will see in the attachment. We are seeing no sign of deterioration other than the same kind of seasonal variances we would expect throughout the fourth quarters year-over-year.

[Jim Schneider:]

Thank you.

[David Zalik:]

Certainly.

[Operator:]

And our next question comes from the line of Reggie Smith from JPMorgan. You may begin.

[Reggie Smith:]

Hey, good morning, guys. Thanks for taking my question. I’m not sure if I missed it or not, did you guys provide an updated revenue and EPS outlook for '18? And if you did, secondarily where should this EBITDA reduction show up? Is it in revenues or is it more a TR liability, where should we look to kind of refining and reduce [ph] that model?

[Gerry Benjamin:]

Hey, Reggie, I will let Rob speak to that in detail. We want to head and gave guidance with respect to originations and EBITDA purposely. We don’t place a lot of credence [ph] on GAAP revenue for our own planning, our own internal management. That being said, we wanted to get those metrics up there quickly. What you will see as David mentioned is seasonal headwinds that will impact the origination level in fourth quarter as we would expect. And that’s more a function of tightness to the labor market and the inability to get people on a job that doesn’t has anything to do with housing start. And then in our cost of sales, the increased cost of funds were run through the cost of services. Rob will speak to that. And of course, little decrease in the take rate over last year would show up in a tapering of our transaction thing. But Rob you want to supplement that?

[Robert Partlow:]

Yes, I mean, as Gerry highlighted, I think the key place your focus on is when we talked about the transaction fee rate versus the -- or the take rate versus what we had talked about previously. So I think when you think about its really going to be primarily around the transaction fee volume revenue, its where you see the majority of the [indiscernible].

[David Zalik:]

Let me jump in. Hi, it's David Zalik and make it clear that I along with the GreenSky senior management team are no way pleased with our revised calendar year 2018 projected results. In retrospect we didn’t do is precision [ph] a job anticipating the steepness of the yield curve as I would have liked, although were hardly [indiscernible]. And while the transaction fee take rate is down 70 basis points year-over-year driven by the reduction in solar, I know that we in essence push $35 million of profitability into future periods. And we’re encouraged that the take rate is now not only showing stability of rising again. This is not a management team that spent time reading its own press clippings, just the contrary we are going to double down our efforts to ensure that we're ahead of the curve literally with respect to rate increases, continue to grow our core home improvement business, another billion dollars in $2019, double our emerging elective health care business next year and enjoy nice wind in our sales as we're witnessing an APR in the portfolio that today is 177 basis points higher than this time last year.

[Reggie Smith:]

Understood. And if I could sneak one follow-up in. Just kind of mechanically I’m trying to understand -- or I thought to understood how the required returns were kind of establishing the portfolio. My question is, when a loan is originated, obviously you know the APR, you know that the transaction rate that you make, but the required return for the bank is also locked in at that point. Two, I thought is that correct [indiscernible] required rate on that [multiple speakers]?

[David Zalik:]

That is correct. At the moment of origination, the consumers interest rate is locked, the banks expected yield is locked, the impact of rising rates only impacts prospective origination. So at the beginning of every month or every quarter, any new origination for a new customer, the APR to the consumer is set and the banks expected margin is set. Reggie, did I answer your question?

[Reggie Smith:]

Yes, so I guess the question is with the steepening yield curve, essentially every month you guys can adjust your pricing. So, I guess, I’m asking did you guys [indiscernible] adjust your pricing for the steepening of the yield curve that we’ve seen over the last 8 or 9 months, like I guess it seems from our perspective that it should have adjusted by itself or you should have done it before?

[David Zalik:]

Sure. Right. So great question. So first of all, what we change is the pricing to the merchant. And that has a 3 to 4 to 5 months lag effect. So we see prices go up, we notified the merchants and let them know that prospectively next month the prices on new originations will go up. The new originations will come in over the subsequent 4, 5 months and the bank margin expected will match that. But there is a delay in repricing to the merchants and what we are really seeing is that if our average take rate in our book has actually been outside of solar, incredibly stable for the last four years. In fact, it's been unbelievably stable. Even as we've had nearly half a dozen rate increases, what the merchants do is if it's a particular merchant that used to spend 7% when fed funds were near zero, and we've raised their price 200 or 300 basis points on whatever plan they were using, what the merchants do is that I’m going to still only spend 7%. And they’re going to chose a product that is more expensive for the consumer, which is still great for the consumer because relative to market rates, consumer is still getting a promotion that is worth 7%. What that does is it pushes our revenue and margin into the next 24 months.

[Reggie Smith:]

I see. Okay. That makes sense. I apologize for the [indiscernible]?

[David Zalik:]

Our lifetime profitability as summarized by the OPI metric is very stable. And so the disappointment for us in 2018 is our average transaction fee take rate year-over-year is down 70 basis points, entirely driven by our solar mix going from a high of almost 20% of our business in '17 to 4% of our business. And just to remind you our solar business had an average take rate of 14% nearly 14%. So when we take nearly 20% of your business at a 14% and drop it to 4% and replace it with 7%, you can see what the impact is. Now the lifetime profitability on every dollar is stable, but those dollars are pushed into the future. The other metric that we mentioned in the average APR of our origination is up 170 basis points. And that will generate incremental revenue and profit over the next 2.5 years of the weighted average life.

[Reggie Smith:]

Understood. Thank you.

[Operator:]

And our next question comes from the line of James Faucette from Morgan Stanley. You may begin.

[James Faucette:]

Thank you very much. I had a question -- maybe both for David. When you look at the new partners that increased the available funding etcetera. With the introduction of those are bringing them on minor in preparation for bringing them online at all impact the pacing of any of your business or changes in pricing etcetera, just as you kind of were resetting the -- what the distribution of and availability of funds is going to look like?

[David Zalik:]

No, I want to reiterate that our demand, the appetite from our current ecosystem of bank partners far outpaces our most ambitious growth objectives. And in no way has that incredible appetite suppressed our growth. And so, it is only emboldened us. We're not surprised, we actually expected to increase our bank funding commitments by $2 billion, we are quite pleased that we've increased it just in the last 10 weeks by $3.6 billion. There is more demand than what we can fulfill. We were actually managing expectations from our bank partners down. We want a good healthy ecosystem. It creates tremendous opportunity for GreenSky and for our more strategic bank partners. But that's only created opportunity for us in our strategic bank partners, it's not driven anything down.

[James Faucette:]

Great. And then -- thanks. And then, my second question relates to the share buyback, I think always some investors will be pleased to see that the company wanted to buy back shares at these levels. But my question is the IPO proceeds all went to existing shareholders or pre-public share holders as well as management and what are the limitations? Whether from a timing etcetera perspective that would keep those shareholders from also buying back shares, and when would those be resolved etcetera? Thank you.

[David Zalik:]

The buyback that was announced to us authorized by the GreenSky Board, so it wouldn't be shareholders buying shares, it with be corporate buying shares. But tend to be clear that’s a $150 million that was authorized. No time limit under our authorization, so we would expect to go into the market, an opportunity market -- and opportunistically buy those shares. As long as we believe we’re rewarding our long-term shareholders based on intrinsic value. So not contemplating shareholder level buys, but rather entity level buyback. I don’t know if that answered your question fully, but …

[James Faucette:]

It doesn’t answer my question. I understand that my question was at the IPO, the process of the IPO went to management and existing shareholders or shareholders before the company was public. And my question is are those beneficiaries from the IPO at all restricted in their ability to buy back GreenSky shares? And if so, how long and under what circumstances this could be under the market to buy back shares?

[David Zalik:]

As you’re aware all the insiders executed customary lock ups. At the point in time of the IPO. I think those expire late November 20, 180 days after the effective date there. There is no limitation on insides going and buying public in the market, buying shares, and a publicly -- public market transaction subject to blackout periods of course, which we institute judiciously .

[James Faucette:]

Great. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Andrew Jeffery from SunTrust. You may begin.

[Andrew Jeffery:]

Hi, guys. Good morning. I appreciate you talking the question.

[David Zalik:]

Sure.

[Andrew Jeffery:]

So I just want to understand sort of from a big picture macro perspective stepping back a little bit. I guess [indiscernible] as I understand it is merchants willingness to pass on higher transaction costs to consumers. And consumers willingness and desire to absorb those costs is still that that's a viable dynamic because the value prop to the consumer is still sufficient as an inducement awards compared to other products in the market even though the consumer might be paying more today than he was yesterday. He still feels like he's getting a pretty good deal. Did I sort of summarize that reasonably well for the ….?

[David Zalik:]

Absolutely. The consumer knows his cost of funds is going up everywhere. If you're thinking of deferred interest loan, you still can't do better than incurring the any of interest for reduced rate loan this is far more beneficial than putting it out interest bearing credit card or other alternatives available so the consumer is getting a great value, irrespective of the increased cost of funds. Yes, there is a couple of things I think that we’ve learned here and that absent a solar mix which drives down the average take rate. Take rate is incredibly stable in a high rate environment and a low rate environment. And so, what we've seen is that in a higher rate environment the merchants still want to spend roughly 700 basis points in most industries. In solar that’s been 14%, but everyone [indiscernible] averaging seven. And it's been averaging seven and as we raise prices to maintain margin, the merchants pick new plans that to your point have a lesser promotion for the consumer, but relative to the consumer market opportunity it's still highly attractive for the consumer. And that's another point that we validated is that if a merchant was offering their consumer 12-month no interest product in a near zero rate environment, that clearly increases that merchants sales average order value close rate. And in a higher interest rate environment, if the merchants still want to spend 7%, the consumer may only get nine-month same as cash. Well, something that’s obviously very important and encouraging and validating is to your point that nine-month promotion in a high rate environment has the same positive impact. In other words, our model is very viable in a high rate environment, for the low rate environment.

[Andrew Jeffery:]

Okay. I appreciate the color. And as I just think through sort of this dynamic, it sounds like a lot of what you're describing is fairly consistent with the business cycle, right. So to the extent that that's true and the steepening of the yield curve and increasing consumer funding costs is consistent with what we had expect to see it; at the cycle and we sort of follow the logic of sell-through [ph] and we think about, okay the next thing that happens is perhaps the value of the consumer's home [indiscernible] to a fall in, maybe unemployment starts to pick up, we get into a situation where it's less a question of consumer evaluating his funding option than the cost thereof and more a question of is this a loan I want to take out. Then is there any reason to think we're not sort of this is an early indication that the cycle is just kind of maturing and that these are the next steps and if so how do you just for that, I think about that dollars as we look for the next year too.

[David Zalik:]

So we haven't seen a degradation in credit performance. We haven't seen a degradation in appetite from the consumer, and so that's very, very encouraging. I think we have a -- full employment, we have a robust economy. We think we are seeing normalization. As we in the future see signs of economic or consumer stress, then there's opportunity to manage the business, support our bank partners of both with credit policy and line policy changes as well as pricing changes. But we're not seeing any indication of a economic slowdown or a lack of demand by either merchants or consumers.

[Robert Partlow:]

We’ve consistently got on record saying that this threat of borrower, this 780 FICO, they’ve every intension of repaying their plans. The one macroeconomic effect that would impact performance is if saw people losing their jobs. And to David's point or just not seeing any signs of all, in terms of weakness in employment just the contrary we are probably closest to pull employment we seen in decades in this country. Yes, I actually I want reiterate an interesting point that Gerry alluded too. With average 780 FICO score, our average customer actually does not mean credit. This is about convenience, this about commerce,. This is about incremental. Our -- vast majority of our customers have plenty of [indiscernible], plenty of credit cards that are unused and often even have a home equity line and they find this to be much more convenient. So I think when you’re going into a FICO, having a high income, high credit quality, profile of consumer that puts us and our bank partner network in a much more attractive position.

[Andrew Jeffery:]

I appreciate it. Thanks.

[Operator:]

Thank you. And our next question comes from the line of John Davis from Raymond James. You may begin.

[John Davis:]

Hi, good morning guys. I want to start out and just make sure I understand the reduction in origination growth this year. So, David, if I understand you correctly, it has entirely the labor shortage, and doesn’t have anything to do with this steeper yield curve, kind of dampening demand for the product or merchants willingness to offer promotional financing?

[David Zalik:]

Certainly, no impact tempering demand. We are not seeing any signs from our merchants across the country. The one thing we are seeing is a consistent theme regarding tightening labor supply and we make it a policy here at GreenSky we never blame the weather for anything. But there's no question that the last two hurricanes have sucked up a lot of skilled labor in this country. And the last [indiscernible] we saw there's roughly $20 billion insured, property damage replacement work taking place right now, that’s sucking up labor. And accordingly it's tough for our merchant contractors to mobilize as quickly as they like. But we’ve seen this in the past with other natural tragedies. You see a deferral in terms of starts at the end of the project there s a whole lot more discretionary spending that comes with it. So typically despite we never want a natural disaster, usually it's a net positive toward our number. But there is a little bit of deferral in terms of the startup jobs. That’s all we are seeing. No weakness and [indiscernible] demand, no link in for the housing market whatsoever.

[John Davis:]

Okay. And then just trying to square here, the OPI is relatively stable. In 2019 origination guidance maybe down 3% from what your expectation. Net EBITDA guidance is now where between 15% and 20% from original expectations. So they’re trying square a profitability of the loan at the end of the day, not carrying up its take right or receipts with kind of the original or the initial 2019 EBITDA guidance for next year.

[David Zalik:]

Yes, couple of things taking place here. Obviously, we are not going to make the same mistake twice. In our [Foreign Language] we’ve dialed in success rate increases consistent with forward-looking plan. We have dialed in successive rate increases consistent with that guidance. If anything we want these numbers to have a conservative bias, that's given. And with respect to Andrew's question if we had to do it all over again, there's a lesson learned that we haven't yet commented on. In prior periods, when we're pushing rate increases through in terms of pricing increases. The yield curve movement was very, very modest. It wasn’t unusual for us to put a rate increase through that would impact both transaction fee modestly and APR. In our forecasting, we made the error of assuming that would occur in 2018 consistent with the prior five years. Given the sweetness of the yield curve and the impact to the small business owners, in retrospect, they made a rather predicable incision ,they’re going to push as much on the consumers they can first through higher APR, maintaining their out-of-pocket spend. With their transaction rate and if they see the promotion that having the value I believe then they would pay more in the way of transaction fee. But it hasn’t been necessary. So David's comment that we pushed $35 million of profitability into future periods is simple math. That’s $5 billion of origination and 70 basis points. We know the OPI is stable, so the lifetime value of every dollar we are originating remains unchanged. It's strictly the point in time it gets recognized for GAAP purposes. So we do have some [indiscernible] sales going into '19 as well. But, yes, there is a conservative bias here or no question about it.

[John Davis:]

Can remember transaction fees are kind of a current year. And the excess cash flows, coming over the life of the loan which can be two to three years. So there's a bit of a timing piece.

[Operator:]

Thank you. And our next question comes from the line of Jason Kupferberg from Bank of America Merrill Lynch. You may begin.

[Amit Singh:]

Hi, guys. This is actually Amit Singh from Bank of America Merrill Lynch. So just quickly trying to understand the steepening of yield curve and how does it impact the transaction volume. So it seems like as a yield curve is steepening, it's definitely it shows in your guidance for the full-year. It is bringing the transaction volume down. So what are you assuming for -- or what type of -- how comfortable you’re in your 2019 transaction volume guidance, given that the interest-rate environment remains very volatile?

[David Zalik:]

Amit, thank you for the question. Let me clarify really important point. The yield curve is not driving down volume. We're seeing no correlation. We are with the $5 billion business within a $100 million of our targeted annual volume. So we're not seeing a volume degradation, number one. What we're seeing is that revenue and profit because of the mix and the higher interest rate is being pushed into future period. So our confidence level in the 2019 guidance is based on, one, we're predicting what we consider a modest $900 million to $1 billion of home improvement origination growth, a elective health care trajectory that we think is extremely viable, and a stable take rate whereas 18 we had a 70 basis point headwind because we slow down solar from nearly 20% of our business to 4%. There's no other piece of our business that would have that impact. So our confidence in '19 is based on transaction volume, which has been very predictable. Take rate, which is now for the last four months shown not only stability but rising up and our forecast is assuming it flat and our forecasts assume several further rate increases from the Fed.

[Amit Singh:]

Okay. Perfect. And then it seems like the AMEX alliance is proceeding smoothly. Is any benefit from that, adding new merchants or any other benefit in your fiscal '18 or fiscal '19 guidance?

[David Zalik:]

No, we're not -- we are not assuming our guidance and our forecast that has any impact. We exit several initiatives. We see all of them as upside.

[Amit Singh:]

All right. Thank you.

[Operator:]

Thank you. And I see no further questions in the question. I would like to turn it back to Rebecca for closing remarks.

[Rebecca Gardy:]

Thank you. That concludes the Q&A portion of our call. And before I turn it over to David for closing remarks, I do want to announce that we'll be attending the JPMorgan Ultimate Services Investor Conference on November 12th in New York. David?

[David Zalik:]

Thank you, Rebecca. Notwithstanding our recalibrated guidance, I continue to be incredibly confident regarding the future of GreenSky. Our core U.S home improvement and elective health care addressable markets alone exceed $650 billion, adding e-commerce and specialty retail and we’ve a total addressable market or TAM that exceeds $1 trillion. Our mobile technology is truly special. We offer an incredible value proposition for each of our merchants, our bank partners, and GreenSky program borrowers alike. As we continue to demonstrate our business model has inherent scale, as we continuously add more merchants to our platform, we reach more consumers and we facilitate more transactions for our bank partners. We’ve strong recurring revenue with each annual cohort of merchants increasing their volume on our platform. Our cost of merchant acquisition is in the low single digits and our annual dollar-based retention of merchant transaction volume remains above 100%. And most importantly for our shareholders, we deliver a unique combination of highly attractive operating margins, significant free cash flow, and exceptional growth. With that, thank you all very much for joining us on today's call. We look forward to seeing many of you in New York at next week's upcoming JP. Morgan Investor Conference and speaking with you on our fourth quarter earnings call. Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may disconnect. Everyone have a great day.