GreenSky, Inc.
Q4 2018 Earnings Call Transcript

Published: 6 Mar 2019

[Operator:]

Ladies and gentlemen, thank you and welcome to the GreenSky Fourth 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 are webcasting this call live on the GreenSky Investor Relations website. 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, Crystal, and good morning, everyone. Earlier this morning, GreenSky issued a press release announcing results for its fourth quarter and fiscal year ended December 31, 2018. You can access this press release on the Investor Relations site of the GreenSky website. Joining me on the call today are David Zalik, Chairman and Chief Executive Officer; Gerry Benjamin, Vice Chairman and Chief Administrative Officer; and Rob Partlow; Chief Financial Officer. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These are 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 are included in our press release this morning as well as in our filings with regulators. We will also be discussing certain non-GAAP financial measures on today’s call. These 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. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation material, the press release dated March 05, 2019 and on the investor relations page of our website. 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 finally, a replay of this call will be available later today on our website at GreenSky.com. And with, I'll now turn it over to David.

[David Zalik:]

Thanks, Rebecca. Good morning, everyone, and thank you for joining us today. Before I begin, I’d like to take a moment to thank both the GreenSky leadership team and GreenSky’s 1100 plus associates for all their hard work that resulted in a great 2018 and their continued focus as we head in to 2019. I’ll start by providing a brief overview of our 2018 performance and update on key business initiatives before turning it over to Gerry to discuss our key operating metrics and then to Rob to review our financial results in greater detail. As highlighted on slide 4, I’m very pleased that GreenSky met our 2018 outlook, led by transaction volume of $5.03 billion, which is a 34% year-over-year increase. This strong growth rate was achieved in the year when solar origination declined from as high as 20% in late 2016 and less than 5% in 2018. This growth also reflects strong demand in our growing electric healthcare vertical which now represents approximately 10% of total monthly transaction volume. GreenSky’s strong growth and transaction volume, our assets like model and operating efficiencies culminated in adjusted EBITDA of $171.5 million for the year, representing an adjusted EBITDA margin of 41%. Turning to slide 5 let me touch on a few of the key highlights of our first year as a public company. In August, we entered in to a comprehensive strategic alliance with American Express, the first phase of this alliance whereby American Express will enable eligible domestic merchants to accept American Express cards to access GreenSky’s digital loan technology platform launched in September 2018. Through the end of the year GreenSky has received over 2,000 home equipment merchant referrals from American Express. In February of this year, this merchant referral program was extended to elective healthcare providers. In the next 60 days, we will launch the American Express and GreenSky consumer direct home improvement installment loan pilot program in five cities, Atlanta, Chicago, Dallas, Los Angeles and Tampa. We are excited about this next phase of our alliance and we look forward to sharing results as they post. In January 2019, we launched our first revolving credit product for our growing network for elective healthcare providers, our current lineup of both revolving and instalment loan products positions us to compete favorably with all major players in electric healthcare vertical. We are currently piloting this product with select providers with a phase nation-wide rollout plans in the first half of fiscal 2019. Given our minimal electric healthcare market share and emerging market position in the home improvement vertical, we look to achieve increased market penetration in 2019. Future growth wise and entering attractive new industry verticals including specialty, retail and e-commerce each with a focus on large ticket purchases facilitated for prim and super prime borrowers. From a technology and product development standpoint, our innovation pipeline has never been more robust. From enhancing feature functionality to optimizing the user experience for both our affiliated merchant leveraging our proprietary technology platform and program borrowers alike, we continue to widen our technology mode. The examples of new product releases to be hitting the market over the coming quarters include automated merchant porting tools, CRM prospecting and account management tools, sales order entry integration tools and digital lead generating and customer marketing tools. To further advance the GreenSky borrower user experience, we will be further leveraging voice recognition technology including innovative and highly intuitive Siri and Alexa integration. Each of these product innovation is a singularly geared for enhancing both the volume and pace of frictionless e-commerce in generating volume for both our merchants and program borrowers. I’ll now turn it over to Gerry. Gerry?

[Gerry Benjamin:]

Thanks David. As David touched upon, our overall performance in fiscal 2018 was solid, and we achieved significant growth over 2017 in each of our key business metrics. Our active merchant network with nearly 15,000 home improvement contractors and elective healthcare providers, a growth year-over-year of 37%. We continue to enjoy greater than 100% dollar based merchant retention. Of note, our 2008 cohort of enrolled merchants was by far the strongest in the company’s history as measured by its year one origination dollars. We added two new bank partners to our lending consortium, BMO Harris Bank and Flagstar Bank. Combined with increases in funding commitment by our existing bank partners, we ended the year with aggregate commitments of 11.8 billion, reflecting an increase commitment level of 3.8 billion since December 2017. Current unused bank partners commitment at year-end totaled $4.8 billion. As you’ll see on slide 10 and 11, we maintain an attractive consumer profile. For all loans originated in our platform during 2018, the dollar weighted average consumer credit score was 768. Consumers with credit scores over 780 comprised 33% of the loan servicing portfolio at year-end in over 85% of the year-end loan servicing portfolio consisted of consumers with credit scores north of 700. Importantly, I want to stress again that GreenSky’s bank partners have never relaxed their credit standards in an attempt to stimulate transaction volume growth. As a result of our focus in prime and super prime borrowers, we see very stable delinquencies across all abilities of the bank partners’ portfolios, and our fourth quarter 30 day delinquencies came in as expected. As noted on slide 10, for the fourth quarter of 2018, 30 day delinquencies were 1.48% of balances with a payment due, just 3 basis points higher than the fourth quarter of 2017. In the first quarter of 2018, 30 day delinquencies were 1.18%, and we expect a similar rate in the fourth quarter of 2019. These trends mimic customary, consumer credit seasonality or by delinquency rates grab in part due to the timing of individual income tax refunds. Noting on slide 12 in addition to a stable credit profile, we are pleased with a life time aggregate economics of fourth quarter loans originated through the GreenSky platform as measured by the Origination Productivity Index or OPI also remained incredibly stable. You’re head us say many times over that we’re truly agnostic as to what the financial product are offered by merchants to their customers, and this is reflected again in our OPI, which remains flat relative to the third quarter at 22.2%. GreenSky enjoys a balance capital allocation strategy including investing in continued profitable growth, as well as now returning capital to shareholders through share repurchases. On our third quarter call, we announced that the GreenSky Board had authorized a purchase of up to 150 million of the company’s Class A common stock. Through the end of 2018, we successfully repurchased 4.7 million shares of Class A common stock at a cost of 43.9 million. We repurchased 1.2 million shares more at an incremental cost of 12.7 million through February 28, 2019. We continue to believe that share repurchases in today’s price vicinity are far too compelling an opportunity to pass upon. And with that I’ll turn it over to Rob to review our financial performance and provide our update on our 2019 guidance. Rob?

[Rob Partlow:]

Thank you, Gerry. Turning to slide 13 of the supplemental deck we’ve posted on our IR website, transaction volume increased 23% to $1.3 billion in the fourth quarter of 2018 relative to the prior year. Solar originations were approximately $80 million lower in the fourth quarter of 2018 than in 2017. Excluding solar originations, we grew transaction volume by 34% during the fourth quarter of 2017, and on a full year basis transaction volume increased 34% to 5.03 billion. The average transaction season for the full year was 6.9% compared to 7.4% in fiscal 2017, reflecting a reduction in solar originations, which carry higher average transaction fee than non-solar volumes? We are pretty pleased with the average transaction fee for the fourth quarter of 2018 increase to 7.1% from 6.9% in the third quarter, and we expect it to stay in the 7% to 7.1% range for fiscal 2019. However in the first quarter of every year, we apply volume based commercial allowance for certain sponsors and therefore we expect our first quarter 2019 transaction fee rate of approximately 6.8%, notwithstanding we do expect that the net transaction fee rate to be in the 7% to 7.1% for the full year. The average loan servicing portfolio increased 38% in the fourth quarter of 2018 to 7.1 billion from 5.2 billion in the prior year. For the full year, the average loan servicing portfolio increased 40% to $6.3 billion from $4.5 billion last year. And consistent with the growth in our loan servicing portfolio, servicing fees increased 41% to $65.6 million and remained at 1.04% at the average loan servicing portfolio. Fourth quarter total revenue grew 22% to a $109.7 million in 2018 from $89.8 million in 2017, and for the full year the total revenue grew 27% to 414.7 million from 325.9 million last year. On a breakout on slide 14 cost of revenue is made up of three distinct components, servicing costs, origination cost, and fair value change in FCR liability. Service related expenses totaled $35.5 million in 2018 which was 0.6% of the average servicing portfolio. We expect servicing expenses above 0.5% of the average loan servicing portfolio in 2019. Origination related expenses for the full year 2018 are approximately 0.6% of 2018 originations. We expect these costs to grow up with origination and remain consistent at approximately 0.6% throughout 2019. The fair value change in the FCR liability was $37.3 million or 2.1% of the average loan service portfolio in the fourth quarter of 2018. For the full year, the fair value change in FCR liability was $96.9 million or 1.5% of the average loan servicing portfolio, up from 1% in 2017. On slide 15, we’d do any of the activity within the FCR liability by quarter which contributes to the fair value change in the FCR liability within cost of revenue. However, to best understand the drivers of this expense, I think it’s helpful to breakdown these line items in to several components as we have done on slide 16 of our presentation. The increase in the fair value change in the FCR liability is driven by first, the continued growth within our loan servicing portfolio of deferred interest loans in their promotional period as a result of both the growth and originations in the home improvement as well as the growth in elective healthcare, which present a much higher mix of deferred interest products. Second, higher built APRs in deferred interest loans in response to higher bank cost of loans, and third, the variability in receipts which is impacted by the timing of our trans versus charged off receivables as well as the seasonality of consumer defaults in our bank partner portfolios. We typically see lower charge-offs in the second and third quarters, which resulted in higher incentive payments, and in the fourth and first quarters we typically see a higher consumer defaults thereby lowering our incentive payments. These factors are the primary drivers of the increase in the fair value change in the FCR liability, year-over-year as well as from Q3 to Q4 on 2018. As we look forward, we expect the fair value change in the FCR liability to increase as a percentage of the average loan servicing portfolio by approximately 40 basis points in 2019 over 2018 1.54%, driven by higher build APR and deferred interest loans in the promotional period as well as the continued growth in the elective healthcare’s deferred interest loan portfolio. For the first quarter of 2019, we expect a seasonal effect to consumer credit to keep receipts as a percentage of the average loans over the same portfolio at a similar rate as the fourth quarter of 2018 at 1.62%, before increasing the third and fourth quarter as consumer defaults have lowered. For those of our listeners who are interested in unpacking the components of fair value change in FCR liability on slide 16, we provide details of the quarterly receipts and settlements as well. I’d be happy to jump in on a separate call with of our analysis and analysts or investors wanting to take a deeper dive in to these components including how best to model the quarter and the variability of the fair value change in the FCR liability. Jumping back to slide 13, operating profit totaled a $152.8 million for 2018. Other expenses net of other income were $19.3 million for the full year of 2018, an increase of $12.3 million, primarily due to the inclusion of a full year of interest expense on our term loan in 2018, a $50 million increase in the principal loan balance during the first quarter of 2018 and the impact of higher LIBOR rates. Pretax net income for the full year $133.5 million, $5.2 million lower than 2017 due to the combination of items previously noted, including $12.3 million of higher interest expenses, a 0.5% decline in the transaction fee rate, and the higher fair value change in FCR liability which offset the benefit of higher transaction volume in 2018. Income tax expense of $5.5 million represents a 4.1% effective tax rate on the income attributable to our public C-Corporation. As a result, 2018 net income of $128 million were not fully burdened by our long term expected tax rate. Therefore, we also used a measure of pro forma net income where taxes fall over earnings. Pro forma net income was $21.5 million for the fourth quarter of 2018 and $109.1 million for the full year of 2018, and assumes an effective tax rate for the full year of 19.7%. On fully diluted basis earnings per share was $0.11 for the fourth quarter of 2018. Adjusted EBITD was $33.1 million to the fourth quarter of 2018 and represented 30% of revenue. As previously noted, higher transaction volume in 2018 was offset by lower average transaction fee rate, higher fair value change in FCR liability due to the continued growth of our deferred interest loan origination, higher built APR on deferred interest originations and lower charged off receivable proceeds. For the full year, adjusted EBITDA increase by 8% to $171.5 million which was higher the mid-point of our November guidance up from a $159.4 million in 2017. The adjusted EBITDA margin was 41% for the full year 2018. And finally, as referenced in the appendix of our earnings presentation, free cash flow for fiscal 2018 was $224 million, representing 25% of our pro forma net income for the year. Now, let me turn to our guidance for 2019. Based on the company’s fiscal 2018 performance and 2019 planning and current marketing conditions, we reiterate our previously announced guidance of transactional volume to increase 27% to 35% over 2018 to between $6.4 billion and $6.8 billion. Adjusted EBITDA to grow between 22% and 31% over 2018 to between 210 million and 225 million, where it also provides an additional fiscal 2019 guidance as follows; revenue to grow 30% to 38% over 2018 to between 538 million and 572 million, pro forma net income to grow between 17% and 28% over 2018 to between a $128 million and $140 million using an effective tax rate of 22.5%. We also expect our fully diluted shares to average $185 million for 2019. As a reminder, we do have substantial seasonality in our business. As previously discussed, our cost of revenue is higher in the fourth quarter and first quarter and lower in the second and third quarter due to the seasonal patterns of consumer credit. In addition, our transaction volume is weakest in the first and fourth quarter of each year, which directly impacts our revenue. Over the last several years, we have seen a very consistent seasonal pattern, and after 2019 we expect that seasonal pattern to continue. From modelling 2019 origination, we expect quarterly originations to represent approximately 19%, 26% and 28% and 27% respectively for the total expected originations. And with I’d like to turn it over to Rebecca to set up the Q&A.

[Rebecca Gardy:]

Before we move to question, I wanted to remind listeners that Gerry Benjamin and I will be attending the Raymond James Institutional Investors Conference tomorrow in Orlando, and our presentation is at 9

[Operator:]

[Operator Instructions] And our first question comes from James Schneider from Goldman Sachs. Your line is open.

[James Schneider:]

I was wondering if you could may be give us a little bit of color on how are you thinking about 2019 from an end market demand perspective, from a transaction volume perspective in terms of the relative growth you’re assuming for home improvement and elective healthcare, and to what extent those are different assumptions than what you had maybe three month ago. Any type of color on that would be appreciated, and may be kind of sense it out how they - I would like (inaudible) to be by the end of the year would be great.

[David Zalik:]

So in terms of on the demand side, we obviously spent a lot of time with our merchant and provider customers and our merchants are reporting just they pass to grow already this year for their businesses great demand. We’re engaged with many, many of our customers about expanding their marketing appetite and we’re seeing terrific demand, and on top of that just the fact that we are so incredibly so underpenetrated not only in home improvement but certainly in healthcare we feel very, very good about the demand. I think something that does seem to confuse people is, there is no correlation between our business and housing starts. If anything, less inventory availability drives more home improvement demand. We’re not seeing any indication of softness from our providers and merchants. Jim did I answer your question?

[James Schneider:]

Yes, you did. And how big do you think elective healthcare will be by the end of this year let’s say?

[David Zalik:]

Gerry?

[Gerry Benjamin:]

Well we want to be sort of cautious and that we don’t plan on breaking out elective healthcare discretely, and we don’t view that as a separate segment. But we have given guidance and in fact healthcare has emerged to represent 10% of originations in the first week of January. We expect given the run rate that at the end of 2018, it’s reasonable to expect that business to double in the current year. So we’re expecting significant growth in elective healthcare business with strong visibility Jim.

[James Schneider:]

And then maybe as a follow-up, is more of a clarification, but you obviously gave us some good data points about the American Express partnership and it sounds like that’s off to a good start. I just want to clarify, first of all that the MX partnership is not included in the 2019 guidance as it stands now, and to the extent that it does ramp quickly would that have any kind of impact on the transaction fee rate in your financials as it ramps?

[David Zalik:]

Yeah, I can speak to that. It’s not included in any of our models, it’s still testing and it’s a pilot. We’re very excited about it. It would have a positive impact on both rates. It would not have a negative impact on rate or average rate. So it would only be upside on transaction volume, merchant growth and take rate.

[Gerry Benjamin:]

Let me just add a bit to that. James as you recall there is really little that our sales and marketing teams are going to do in 2019 that’s going to impact our ’19 results. The year is highly visible and really based on those cohorts of merchants, collective healthcare providers that are already on our platform in the best of case as we have merchants and elective healthcare providers throughout the year. On average anybody out is going to be only on the platform for six months in the first year, and it takes about six months for folks to ramp. So this really isn’t a story about a rocket chip of new originations coming from 2019 marketing activity. We’re going to reap the benefits of all the work that’s been done over the last three, four years building these merchant cohorts. It will be no different irrespective of how successful that MX alliance is. It will take time.

[Operator:]

Our next question comes from Andrew Jeffrey from SunTrust. Your line is open.

[Andrew Jeffrey:]

Rob, I wonder if you can comment in little more detail about how the cadence of ’19 quarterly result is likely to look. Specifically it sounds like 1Q and 4Q are probably the lowest quarters of the year. Just trying to get a sense of how to think about changes in delinquencies and loan losses and how to model those as they affect your results?

[Rob Partlow:]

So I laid out in my prepared remarks certainly the seasonality of consumer survey truly affects the fourth quarter and the first quarter receipts line items as performance payments or incentive payments are reduced. I think what we fully expect is that as a percentage of servicing portfolio that the receipt were very, very similar in the first quarter as are in the fourth quarter, which is kind of a consistent pattern. And also that we would expect that receipt line item to move up in the third and fourth quarters somewhere as to prior years as consumer defaults add. So that’s the core way to think about that. That affect has kind of a direct, the changes in the receipts has a direct impact on fair value change in the FCR liability expense line item. And we also think we look at the overall trend in the FCR line item to be moving up, just really because of a growing servicing portfolio of the (inaudible) interest products and the growing or the higher APR and these deferred products. So the combination of these two items on slide 16 kind of fall together where we expect the trend to move to. That’s one of the things that I would focus on typically is looking at both – well actually on slide 16 where we look at the, what I’d call, the reference number A, where actually we can see the expense of the buildup of the deferred interest portfolio and the expenses related to that and you can see that we would expect that component over the next year.

[David Zalik:]

Thank you, Rob. Andrew I would add to that. From our perspective, the seasonality that we’ve seen every year for the last decade are most volume are Q2 and Q3 every year, and so we see the same seasonal trends in terms of volume and growth, and certainly everybody will see the same seasonality in terms of delinquency which overall stays very low, but it’s certainly even lower in Q2 and Q3.

[Rob Partlow:]

We can still go in to more detail offline, I think slide 16 really does give you the tools to – I think through the seasonal impact it did highlight and I’ve highlighted in those quarters to come.

[Andrew Jeffrey:]

And then David, maybe you can comment a little bit on the competitive environment. You’re obviously doing very well in terms of growing your share in home improvement regardless of macro. We saw JP Morgan introduce perhaps a new pay as you go product this morning. There are others in the market. Can we just talk about how GreenSky will likely fair as more entrants come to the market, maybe talk about some of the things that distinguish you a little bit?

[David Zalik:]

So let’s just start off on easy one, are you referencing to the Forbes article relative to JP Morgan’s so called point-of-sale product?

[Andrew Jeffrey:]

Yes.

[David Zalik:]

So we were scratching our head because we didn’t see anything about that actually being point of sale. It just appears to be a personal loan product wrapped inside a credit card balance. There is actually no point of sale functionality referenced in any of the materials related to that article. So we think it’s a wonderful service for consumers that want that, but it’s not for merchants, it’s not promotional credit, it’s actually not point-of-sale. So, I do think that as GreenSky gets bigger, lots of people want to wrap themselves in the banner of point-of sale and we think that’s great, but you actually have to deliver a tremendous amount of real-time point of sale technology both merchants and consumers using mobile technology in an instant and paperless and digital fashion. So that’s a data point. And in terms of the competitive side, we’ve been building technology on point-of-sale for multiple vertical now for a decade and that gives us a head start, and we’re not going to slow down. We spent dozens and dozens of million dollars in the technology every year. This is all we do, so it’s a tremendous advantage over large money center financial institutions that have a trillion dollar balance sheet and probably a few other priorities. And we see ourselves as partners to super regional banks, providing the technology and partnership with their diverse local deposits and relationships. So a couple of competitive advantages are all the technologies that we’ve built and delivered and deployed is a great start. All the technology that we have in the pipeline now, all the additional tools that we’re providing the merchants, the merchants rely on as a core part of their business, makes the business every stickier creating a bigger mode, and then add to that our emerging ability to bring customers, incremental customers to our merchant is incredible value add and differentiator. And I would conclude with one of our largest network of customers recently went through an expensive RFP and passed in the whole country and he’s decided to stay with GreenSky after evaluating of all of the different pieces of value add and technology and services that we’ve provided.

[Operator:]

Our next question comes from Chris Donat from Sandler O’Neil. Your line is open.

[Chris Donat:]

David, since you just mentioned the bank partnerships, I wanted to ask about SunTrust, and I know we’re early days here, but with SunTrust being a key partner for you and then also merging with BB&T, I’m just wondering if you had any discussions, early indications? I recognize that SunTrust is important for GreenSky, but for the merged SunTrust and BB&T you guys would be a pretty tiny percentage of that pro forma balance sheet, just wondering if there’s any update.

[David Zalik:]

So we obviously have a wonderful relationship with SunTrust going back almost a decade and we have great respect for BB&T. I think the impression that we’ve gotten and the – our thought is – if any indication is that their demand and appetite for more super prime customers would only grow. Certainly that’s a long time, but I think it’s great that it’s a merger of equals and we had such a long standing relationship with one part of that (inaudible). So our impression thus far is, we wouldn’t be surprised if demand grows, but frankly there’s so much demand from the rest of the our bank network that we’re overly subscribed if you will as it already is. So we feel that that’s positive from our perspective.

[Chris Donat:]

And then just want to ask one question about the delinquency so far in the first quarter, it looks like its on track with seasonality of private – (inaudible) years. There’s been some hammering in and off the market place though about on a macro level about the piece of tax refunds being different from prior years. I understand that tax refunds fit in to some of your seasonality. I’m just wondering if you’ve seen anything different in consumer behavior related to tax refunds or if it’s similar to prior year just because of what’s going on in the broader macro environment?

[David Zalik:]

I was with our risk folks yesterday on a call, and let me just summarize that we’re very pleased with what we’re seeing, not only from a credit performance standpoint, but just also from the demand side, both from the merchant and the consumer, notwithstanding the incredible amount of thrust on the dire situation in the world. American consumers appear us to be very strong, certainly it shows in our business.

[Operator:]

Our next question comes from Ashwin Shirvaikar from Citi. Your line is open.

[Unidentified Analyst:]

This is Anders (inaudible) on for Ashwin. Thanks for taking my question and also thanks for the brief disclosure for the fair value change and FCR liability. If we could dig a little bit in to that and appreciate the comments on credit and seasonality and how great things are trending pretty well thus far. But what are expectations for credit quality for the full year? If you could just talk about what’s embedded as it relates to FCR liability that we hope for?

[David Zalik:]

Gerry why don’t you --.

[Gerry Benjamin:]

Yeah, I’ll give you a quick over view and let Rob supplement it with a little more detail. The real driver in terms of the FCR liability first and foremost is the percentage of our servicing portfolio, the deferred interest loans and promotions. It’s a lot of macro or high level as our healthcare elective healthcare business grows as a percentage of our total mix. You’ll expect our deferred interest mix of loans to grow, so that at a very high level will create greater FCR. When we look at the seasonality that we spoke to, and then think about the full year, Rob’s given some pretty discreet guidance as to how the quarters will progress throughout the year. But Rob if you want to talk from a full year point of view how you’re thinking about FCR, feel free to jump in.

[Rob Partlow:]

I think as Gerry highlights, the big driver of when I talked about the FCR, fair value change in the FCR liability that expands increasing by about 40 basis points year-over-year is really the growth of our deferred interest portfolio, which is a function of our home improvement portfolio to potential products as well as the growing elective healthcare which has a much higher mix of the potential product. That is a primary driver of that overall increase. You do see some seasonality and its consumer credit and that kind of drives the momentum for each line item. But the biggest thing which we are seeing for 2019 really is just that growing deferred interest portfolio. The overall credit environment we expect to be very consistent with the current credit environment that we are in and that’s what’s based in our forecast. We’ve seeing no indications that there are any changes in that environment as Gerry alluded to or David alluded to. Of course seen very stable and consistent delinquency matters early stage and late stage, so we continue to be – I think the American consumer continues to be very resilient.

[Unidentified Analyst:]

That’s very helpful. And appreciate the comments on your new addressable markets, e-commerce being one of them. Wonder if you could comment on how, if at all the platform used to adapt to address the e-commerce opportunity? And then obviously there’s a few embedded players in that space, still a lot of room for growth. But what would be GreenSky’s differentiation there?

[David Zalik:]

The first that we’re seeing is as we’re getting market share is GreenSky is uniquely situated and that we have a fully integrated omni-channel point-of-sale, point-of-search in store, in home, on a mobile device, on a website, in the store room platform. We’re going to try to say that in a fewer words, but the ability to go to a retailer and offer an integrated credit solution that works for both in-store and online sales that can start in a showroom and end online or the other way around has already proven to be fabulous differentiator. The fact that we have tools and API integration to allow people to promote monthly payments and attractive promotions as part of the catalog. One thing you’ll notice about I think the general competitive landscape is it tends to be historically for us sublime in small pickets. We’ve tried taking a very different approach where its’ actually about commerce not credit, and what that means to us is, we’re trying to enable people to (inaudible) a $2000 purchase in to an affordable $89 monthly payment at a very responsible interest rate that’s less than credit cards, whereas most e-commerce providers you’re talking about $300 and $500 average ticket, 29% APR, completely different business, that to us is extending credit to people who are credit challenged and that is not our mission. Our mission is all about commerce and helping businesses grow and delighting their customers.

[Operator:]

[Operator Instructions] And our next question comes from Tingting Wang from JP Morgan. Your line is open.

[Tingting Wang:]

I just want to check on the visibility on the transaction fee rate, I got the Q1 and full year number, but just with the solar outlook and what you mentioned on how which carries the higher fee rate, I’m curious what those dynamics to get to the 7.0 to 7.1 for the year?

[David Zalik:]

I think the most important thing is understanding where we are right now, and what we’ve seen is incredible stability just to remind everybody, incredible stability in our non-solar business. It has gone up 20 basis points over the last quarter in terms of just even non-solar. Overall, Q4 we were already at 7.1 and its still inching up a little bit. So, we’re already above 7.1, we feel really good about that. Q1 is literally a one month phenomena because we’ve got promotional funds for some big partners that we expense in Q1, but seeing the trend and the mix and the stability, solar’s already down below 4%. It’s been stable there for now finally last two quarters. So, we don’t see anything bringing it down and we only see upside. We’re projecting 7.1 for the year, we’re already there.

[Tingting Wang:]

I know a lot of good question have been asked already and maybe David just want to ask you, your priorities if you could rank them. It’s a lot going on, you’ve talked about e-com, big growth in elective medicine, the [MX’s] rolling out, I’m sure you have some of the partnerships you’re working on as well. So just how would you rank where you spending your time and priorities for the year?

[David Zalik:]

I spend my time on talent and products, and certainly always being a professional paranoid when it comes to risk. But the growth strategy for GreenSky I think is very clear, grow home improvement, grow healthcare, continue to grow and develop both e-commerce and specialty retail and then there’s a category of tools and technology that provides services to our merchants and to our consumers and we see MX a piece of that and that is anything from additional products and services for our now more than 2 million consumers working with our banks to develop other products leveraging our technology and user experience and then partnering with a great company like American Express as it relates to driving more consumers to our merchants. So you can see how that would be very much appreciated by our merchant network, another differentiator, tremendous amount of technology goes into making those integrations very elegant. So home improvement, healthcare, e-commerce, specialty, retail and additional tools and products grow merchant (inaudible), which creates more opportunities for our banks.

[Operator:]

Our next question comes from James Faucette from Morgan Stanley. Your line is open.

[James Faucette:]

A couple of questions from me, and I think you’ve touched on some of these subjects, but I want to make sure that at least I’m clear on how days developing. If I look at the 2019 targets that you’ve set for origination versus revenue etcetera is that compared to our model it seems like the revenue associated with originations is a little bit different than we thought. And I suspect that’s probably relate a little bit to the mix that is going to deferred interest loans versus other types. Can you just talk about what has been happening and given an update on what that mix looks like especially after some of the pricing changes that were implemented in the second half of 2018?

[David Zalik:]

It’s a great question and I actually think the best to do would be to sit down and work with you and your team on the model. Gerry, Rob, you guys want to make some general comments, but then we’d like James to provide you with some additional support.

[Rob Partlow:]

I’m not clear, kind of from a revenue perspective were you saying --.

[James Faucette:]

The question is just from a mix perspective or have you seen a discernible change in merits between deferred interest loans and other types of loans that you’ve implemented pricing changes?

[Rob Partlow:]

We’re actually seeing a pretty consistent mix on the home improvement space. One of things we’ve highlighted is while we’re seeing that consistent mix, you’ll see some shifts between 12 months and 24 months or 18 months at different products but that’s it. One of the things we do see is we continue to grow healthcare and to a certain degree also to the specialty retail side we do see higher mix of different products in those channel. So as those take up a greater share of our business that will also drive the mix as well.

[James Faucette:]

And then you also talked about how you have a lot of – you still only have enough capacity from a bank and bank partner’s perspective right now. How are you thinking about the pace at which it makes sense to continue to add new bank partners and continue to grow that capacity? Should we expect that that capacity grows faster than the overall rate of origination growth or do you want to improve or increase your utilization before you really do that?

[David Zalik:]

Our perspective now is we have so many large super-regional banks, great partnerships, there’s so much activity and demand from existing partners and so much opportunity to expand the relationship in to other products and other services. We feel really good where we are now, anything else we would do would be purely opportunistic and the American Express type partnership where there are additional services and offerings and opportunities that go on with it. The demand from our existing partners.

[James Faucette:]

Last question from me is that way in 2018 it looked like we were going to be in a pretty persistently rising rate environment in 2019. Now here at the beginning of the year that doesn’t seem to be so much the case. Can you just talk a little bit about how you factor that in to your 2019 outlook, the changes in interest rates and what kind of your assumption sets are around that and what you may have to do with pricing and hitting hurdle rates etcetera?

[David Zalik:]

It’s really interesting, when rates were going up, we told people rates do not directly impact us, and they don’t impact our margins. When rates go down, I’m going to tell you the same thing. Rates do not directly impact, doesn’t affect our margin. And when rates are flat, we really like it because it means there is no noise and no distraction for our merchants and for our sales organization. So we certainly assumed a couple of more rate increases that just creates some friction, but it’s a pass through. So, for us we don’t really mind where interest rates are, it’s just creates a little bit of friction and noise and extra work for our sales organization when they rise three or four, five times in a year.

[Operator:]

And our next question comes from Rob Wildhack from Autonomous Research. Your line is open.

[Rob Wildhack:]

If I look at the 2019 guidance for adjusted EBITDA, the implication is for a slower year-over-year margin decline than you saw this year. So what are drivers and the improvement in that trend and then how should we interpret that as it pertains to the longer term earnings and margin profile of the business?

[David Zalik:]

First, not having the noise of solar is really great, because on a relative basis when as much as 20% of your business to 13% transaction fee evaporates to core by design that will on a relative basis will make anything look not so good. But I think as we get bigger and get economies of scale, get some of the benefit, I think something that‘s lost on a lots of folks, millions and millions of dollars over spending on further growth going in to new markets, building new products. So as those things start generating impact, it bring the things back in. Gerry do you want to add anything to that?

[Gerry Benjamin:]

No, I think Rob any detail you want to add.

[Rob Partlow:]

I think we’ve walked over the component that drive our forecast and one of (inaudible) goals was through this call was to be more precise about the different pieces and where we expect the core pieces to go. So I think you’re going to have – hopefully through all the discussions we’ve had today you have to build and blocks of not only the volume as well as the transaction fees, but also the FCR. And we’ve been certainly happy to talk through more detail at any point? Any other questions?

[Rob Wildhack:]

And then just looking at the revenue outlook, what do you think the key items are that move or determine whether you hit the low end or the high end of that range?

[Rob Partlow:]

The origination period, that’s sort of the beginning and end of the story. We’ve grown our home improvement book $800 to a $1 billion each in the last three years. Our 18 cohort was the strongest we ever added. We gave you a little color as to the growth we’re seeing in elective healthcare, so we feel very, very good with respect to the origination outlook. But much an origination story.

[Operator:]

And our next question comes from Jason Kupferberg from Bank of America. Your line is open..

[Amit Singh:]

This is actually Amit Singh. Just wanted to quickly talk about your new product evolving credit product? You’re in the pilot stage so just want to check about the growth that you’re seeing over there and if you could talk about the basic economics of that product, if they differ anything from your other products and the type of growth that you’re expecting from that product in’19 and beyond and if that expands your overall end market in any way.

[David Zalik:]

The economics are the same, number one. Number two, it’s actually very exciting because its tremendous amount of technology and opportunity that ultimately will have a place not only in our elective medical business but it’s another very important part of our platform. And so for us it’s just another important feature functionality and differentiator that can fully integrated, but it is fully integrated with the rest of our business that will just support growth as I mentioned not only in healthcare but potentially in other verticals, and we think it just makes the market opportunities for us even bigger.

[Amit Singh:]

And just one question on modelling part, below the adjusted EBITDA any difference achieved from 2018 into 2019 that we should see and let’s interest expenses, D&A and all of that?

[David Zalik:]

Gerry, Rob.

[Rob Partlow:]

I mean we would expect - certainly interest expense based on a higher funding cost, we expect to LIBOR to be pretty much consistent, up slightly for the rest of the year so that would be one item I would base that more on fourth quarter with a slight uptick. Other than that I’d just squeeze a little bit more in the way of equity based comp, just marginal increases there.

[Gerry Benjamin:]

Happy to go through more detail now, but it’s pretty consistent.

[Rebecca Gardy:]

Operator, I don’t see any more questions. Is that correct?

[Operator:]

Yes Ma’am, I’m showing no further questions at this time.

[Rebecca Gardy:]

I think we’ll turn it over to David for some closing remarks. David?

[David Zalik:]

Want to thank everybody for the call. Want to thank the team for getting ready for the call, and we’re going to go back to work now. Have a great day.

[Operator:]

Well ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program you may all disconnect. Everyone have a wonderful day.