The online lender E-Loan Inc. has beaten analysts earnings estimates for the seventh straight quarter, but revenue was disappointing and analysts expressed concern about its future sources of income.
The Dublin, Calif., company said Thursday that it lost $2.2 million, or 4 cents per share, excluding certain charges, in the second quarter 3 cents less than the First Call consensus estimate. It had lost $9.7 million, or 22 cents per share, a year earlier.
Revenue for the latest quarter was $15.2 million, up 79% but less than the $16 million expected. The company said again that it would break even in the fourth quarter.
Improved operating efficiency and lower marketing costs helped in the second quarter, but pressure on auto lending hurt revenues. The company faced increasing competition from the likes of GMAC and Ford Motor Credit for financing new car purchases.
Mortgage refinancing business was strong, though, bolstered by lower interest rates.
The opposite pattern prevailed late last year, noted Richard Zandi, an analyst at Deutsche Bank in New York. Three quarters ago, when the mortgage market wasnt doing so great for them, the auto business was great, and this quarter the auto market wasnt great but the mortgage market was good.
Auto loan revenue of $2.1 million represented 14% of total revenue in the second quarter, down from 32.5% ($5.3 million) in the first quarter and 35% in the fourth, Mr. Zandi said.
Chris Larsen, E-Loans chairman and chief executive officer, said the company is not worried about a decline in one business line. In fact, he said, that is accounted for in its business plan.
E-Loan employs a three-legged stool approach, he said, consisting of three distinct business lines mortgage, auto, and home equity loans which serve to counterbalance a falloff in any one business. For example, lower interest rates hurt new car financing but help mortgage refinancing; this will work the other way when rates go back up and refinancing falls off, but home equity and auto lending make a comeback, he said.
We always expect that one of the units will be weaker, but two of the units will be doing well, which is the exactly the case we had in the second quarter, Mr. Larsen said.
Though diversification has so far steadied revenues for the four-year-old company, analysts worry that when refinancing which constitutes about 85% of E-Loans mortgage business slows down, and if stiff competition for auto loans remains, E-Loan will have to find a more stable revenue source.
The question is how E-Loan will operate in a more challenging environment, said Eric E. Wasserstrom, an analyst at UBS Warburg in New York. Lets see what kind of revenue generation they get as refinancing dissipates.
The refinancing market is too volatile, Mr. Zandi said, and is an increasing part of E-Loans mortgage business, up 2% from the first quarter. Until they prove themselves in the purchase mortgage market, I wouldnt be in a position to recommend the stock, he said. It is absolutely essential that sooner rather than later they prove they can establish traction with purchase mortgages. To date they havent been able to do it.
The company is also taking steps to stimulate its purchase mortgage business. E-Loan announced during its earnings call that it has signed an agreement with the medical manufacturer Johnson & Johnson to offer mortgage financing services to J&J employees when they relocate the first of many such deals it hopes to make with corporations. The company also hopes to ramp up mortgage originations by reaching out more to real estate agents, and plans to broaden its products by offering subprime mortgages.
E-Loans second quarter included special charges related to the companys stock-option plan, amortization of goodwill, and certain marketing costs. Factoring in those costs, E-Loan reported a loss of $16.1 million, or 29 cents a share. That was better than the loss of $23.1 million, or 52 cents per share, a year earlier.
E-Loans stock closed Friday at $1.12, 11% higher than last Fridays close.