Enova International Inc (ENVA) 2015 Q1 法說會逐字稿

Good afternoon and welcome to the Enova International first-quarter 2015 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Monica Gould, Investor Relations for Enova. Please go ahead.

Thank you, Emily. Good afternoon, everyone, and thank you for joining us. Enova released results for the first quarter fiscal 2015 ended March 31, 2015 today after the close.

If you would like a copy of the release, you can access it on the IR section of our website at ir.enova.com. With me on today's call are David Fisher, Chief Executive Officer, and Robert Clifton, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

Before David begins, I'd like to remind you that the information we are about to discuss today may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. Factors that could cause these results to differ materially are set forth in today's press release and on Form 10-K filed with the SEC on March 20, 2015. Any forward-looking statements should be considered in light of these factors. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

Additionally, this presentation contains GAAP measures and certain non-GAAP or adjusted financial measures as defined by the SEC. Per SEC requirements, you will find additional disclosures regarding non-GAAP measures, including reconciliations of these measures with US GAAP in our press release issued today.

As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website at ir.enova.com. And with that, I'd like to turn the call over to David.

Thanks, Monica, and good afternoon, everyone, and thank you for joining our call today.

I'm going to start off by giving a brief overview of the quarter, along with an update on our new business initiatives, and then I will provide some color on recent regulatory developments before turning the call over to Rob to discuss our financial results in more detail.

Overall we are pleased with our results this quarter. Revenue of almost $166 million for the first quarter was within our guidance, and profitability exceeded our expectations with adjusted EBITDA of just over $61 million. These results demonstrate the resiliency built into our business model with our sophisticated advanced analytics and the flexibility of our proprietary lending platform. These core competencies have enabled us to continually improve the quality of originations, as well as adapt to regulatory changes.

For example, we have recently seen some positive momentum in the UK, hopefully beginning to reverse the course of the substantial year-over-year decline in our UK revenue we saw in Q1, driven by the new regulations implemented there over the last year.

In comparison, many of our UK competitors have experienced severe dislocations in their businesses, including restructurings, senior management changes, product and business exits and substantial operating losses.

Our core competencies of advanced analytics, flexible technology, and sophisticated marketing also play a key component in our strategy as we seek to leverage them to continue to grow our existing product offerings and to diversify our business by launching successful new products. While year-over-year revenue is down because of the decline in the UK business, we are seeing positive results from our strategy which has enabled us to partially offset this decline.

For example, our net credit near prime installment product in the US grew at a strong rate in Q1. Loan balances at the end of the quarter for net credit were more than 250% higher than at the same time last year.

In fact, due to the strong growth in our US installment loan business, installment loans are now our largest revenue contributor at 35% of total revenue in the first quarter, up from 30% a year ago.

Turning to our more recent initiatives, all four of our pilots launched last year continue to perform well and have or will soon move forward into what we term Phase II pilots. This includes On Stride, our near-prime installment product in the UK; our short-term installment loan in Brazil; a medium-term installment loan in China; and Headway Capital, our small business line of credit offering in the US.

As you may recall, our process for rolling out new products begins as a three- to six-month Phase I pilot period during which we assess potential demand for the product in the market and begin to collect data to build a product-specific credit model. Only if we see meaningful demand for a product that can contribute a positive unit economics will we move forward to the next stage, which involves increasing our investments with a primary focus on whether we believe that product can be scaled at attractive unit economics. This phase of our pilots can last between three and 12 months.

As a result, by the end of this year, we should have a clearer picture about which of our initiatives we will be pursuing and which we will wind down.

A key requirement in this decision-making process is the potential for the product to become a minimum $15 million to $20 million EBITDA business. We still believe that given all the work ahead and our high requirements, it is not likely that all four of our new initiatives will ultimately succeed. However, we did not anticipate that they would all perform this well, and we're very encouraged by their progress.

Beyond our new initiatives, we believe that a successful diversification strategy, combined with our extensive track record of growing our business profitably through changes in regulatory environments and marketing conditions across multiple geographies, positions us well to adapt to changes in regulation.

Clearly, this is top of mind for many of you given the recent activity from the CFPB.

As you are all likely aware, in April, the CFPB published an outline of proposals for regulating high cost short-term loans, installment loans, and certain other products. The CFPB published the outline prior to convening a small business review panel to evaluate the potential impact of new regulations on small businesses and not for profits.

I think it's important to point out that the concept and the CFPB's outlines are not proposed for final rules. Many future rules could be significantly different.

In addition, the effective date for the implementation of final rules is not expected until the beginning of 2017 or later. As a result, we are still in the early stages of what will be a long process.

Since it is not possible to predict what the final rules will look like when implemented, we thought it might be helpful to provide a little color on the process to better frame the discussion.

As I mentioned, the CFPB has formed a small business review panel that will assess the potential impact of new regulations for the industry. The small business panel includes representatives from approximately 25 to 30 small businesses that would be directly impacted by CFPB regulations.

During this process, the CFPB will discuss anticipated compliance requirements and potential costs. Following submission of written comments by the panel in mid-May, the CFPB will issue a report which is expected toward the end of June. This report may include significant alternatives that would minimize the economic impact of the proposed rules.

Once a small business panel report is finalized, the CFPB can publish a Notice of Proposed Rulemaking. Publication of the proposed rules could technically be as early as July of this year, but will likely be in the fall or later.

Following the publication of the rules, there will be a 60- to 90-day comment period. After the comment period, the CFPB must review and respond to comments and determine whether additional review is needed. The length of this process varies, but is typically longer when there are a large number of comments and the issues being addressed are complex, as is expected here.

Once a final rule is published, there will be an implementation period of up to a year, which makes it highly likely that these new rules will not take effect until 2017.

As the rulemaking process progresses, we will continue to actively engage with the CFPB and look forward to providing additional data and analysis into the process to encourage that the final rules reflect the realities of consumer credit needs and ensure that responsible credit remains available to consumers.

So, again, this is clearly a long process, and unfortunately it is not possible right now to know exactly what will be in the final rules.

Consequently, it is also currently not possible to determine the eventual impact to our US business.

That being said, it seems likely that the core of the CFPB framework will be built around ability to repay based on their writings. This plays to our strengths as the sophistication of our underwriting has long been a competitive advantage for Enova.

In addition, our recent experience in the UK adapting to an enhanced ability to repay regulatory frameworks provides us valuable experience for similar efforts in the US.

One additional factor I believe we have in our favor is that we have always tried to not only follow applicable laws, regulations and best practices, but to also consider the customer and try to do what is best for them. The result is that when there are new regulations, we have often found that we have less work to do in adapting our products than some of our competitors. That is certainly what we saw in the UK.

Overall, our advanced analytics capabilities, along with our strong business practices, leading regulatory compliance and experience navigating into regulatory changes, positions Enova extremely well for continued success.

To wrap up, we are growing our existing businesses, continuing to diversify our revenue stream and preparing for the future. Our US business remains strong. We are seeing improvements in the UK, and our new initiatives are exceeding our expectations.

Looking forward we continue to believe there's a huge opportunity serving under banked customers, and we think we are uniquely positioned to be successful addressing this need.

As I said during our last call and will continue to say, none of this would be possible without the tremendous team we have at Enova. We have amazing people that will be focused on continuing to develop our technology and analytics and introducing new products which will further diversify our revenue base and drive sustainable long-term growth and profitability.

I will now turn the call over to Rob Clifton, our CFO, to go over the financials in more detail, and following Rob's remarks, we will be happy to answer any questions you may have. Rob?

Thank you, David, and good afternoon, everyone. I will first review our financial and operating performance for Q1 and then provide our outlook for the second quarter and full-year 2015.

Our first-quarter results continue to demonstrate the strength of our underwriting capabilities and the scalability of our online business model. Most notably, we were at the upper end of our adjusted EBITDA guidance, even though revenue came in at the lower end of the guidance range. This level of profitability was driven by a further strengthening of our gross profit margins at lower operating expenses, primarily due to the smaller loan portfolio in the UK as a result of changes in the regulatory environment during 2014.

While total revenue of $165.7 million in the first quarter declined from $208.5 million in the first quarter of last year, our US business, which accounts for almost three quarters of our total revenue, delivered another solid quarter. Domestic revenue rose 9% on a year-over-year basis to $119.1 million in the first quarter, driven primarily by growth in our installment products, which advanced at a very high double-digit rate. This strong growth was led by continued momentum in NetCredit, our near prime installment offering.

International revenue, which accounted for 28% of our total revenue in the quarter, declined 53% on a year-over-year basis, primarily due to the changes in the regulatory environment in the UK that occurred after March 31, 2014. Stricter underwriting standards in 2014 lead to lower consumer loan originations and balances outstanding.

As previously discussed with the implementation of the rate cap rules in the UK in January, we discontinued offering draws on our UK line of credit accounts product.

During the first quarter, our line of credit customers begin to pay down and pay off their account balances, and we began to see former line of credit customers return and apply for one of our other loan products. However, the origination volumes did not offset the higher pay downs, and this was the primary reason total revenue came in at the lower end of our guidance range for the quarter.

We ended the quarter with combined consumer loan balances outstanding of $356 million, down 7.4% from the $384 million a year ago. Domestic loan balances were up 47% on the strong growth from our NetCredit installment loan portfolio, offsetting the seasonal decline in loan demand and loan balances for short-term products that occurred during income tax refund season.

International loan balances were down 59% due to the regulatory changes and to a lesser extent the strong dollar relative to the local currencies in the foreign markets we operate in. On a constant currency basis, international loan balances were down 54% year over year.

We saw continued strength in our gross profit margins in the first quarter. Gross profit margin increased to 76.7% in the first quarter from 68.1% last year for the total Company. Our US gross profit margin decreased slightly to 71.7% from 73.3% in the prior year quarter due to product mix, primarily the greater concentration from installment loans in the overall portfolio.

Our international gross profit margin increased significantly to 90% from 62.4% in the same quarter of last year. The increase in gross profit margin was not due to an increase in loan pricing. Our loan products offered in the UK are compliant with the rate cap that was affected at the beginning of this year. As has been the trend over the last two quarters, the increase in international gross profit margin was driven by stricter underwriting in the UK as a result of the regulatory changes.

In addition, the wind down of the UK line of credit portfolio further enhanced the international gross profit margin.

The recent high level for our international gross profit margin is only temporary, and we expect the margin to trend down over the balance of the year. We expect our international gross profit margin for the full year to range between 65% and 75%, depending on the level of loan originations and the mix of new to returning customers.

Total expenses declined 3% year over year, driven by lower marketing spend in the UK. Total marketing expense declined 15% from the same quarter last year. General administrative expenses increased 5%, primarily due to the higher personnel costs from analytics and technology personnel we added during 2014. This increase was partially offset by lower incentive expenses and lower incremental standalone costs in the current quarter compared to corporate service costs allocated from Cash America, our former parent, from the prior year quarter.

Adjusted EBITDA totaled $61.1 million in the first quarter compared to $71.3 million in the prior year quarter. Our adjusted EBITDA margin increased 270 basis points to 36.9%.

I would like to point out that with this earnings release we have revised our definition of adjusted EBITDA in order to be consistent with other technology-driven firms. We are now excluding stock-based compensation by adding it back to net income in a calculation of adjusted EBITDA.

Our stock-based compensation expense was $1.7 million for the first quarter compared to $85,000 in the prior year quarter, a time period before the spinoff when our long-term incentive plans were cash-based performance programs.

Net income totaled $24.5 million in the quarter or $0.74 per diluted share.

Our balance sheet and liquidity continue to be strong. We ended the quarter with cash and cash equivalents of $143.4 million, and we also had over $58 million of borrowing capacity on our credit facility.

Over the remainder of the year, we expect to deploy our cash to fund the expected growth in our loan portfolio, as well as to fund the working capital needs of our new initiatives.

In addition, we continue to look for opportunities to further diversify our product offering, either through acquisitions or other strategic partnerships.

With that, I would like to turn to our outlook for the second quarter of 2015 and the full year. As noted in our earnings release, in the second quarter of 2015, we expect total revenue to be between $150 million and $170 million and adjusted EBITDA to be between $35 million and $50 million. This outlook reflects the beginning of a recovery in the level of loan originations in the UK. As David mentioned, we are beginning to see positive momentum in UK loan origination volumes and look for this trend to continue.

For the full year, we continue to expect total revenue to be between $750 million and $830 million and adjusted EBITDA to be between $180 million and $240 million. Underlying this guidance is our expectation of continued growth in our US business as we introduce additional installment products and continue to expand our NetCredit offering to additional states, as well as stronger growth in the UK in the second half of the year. This guidance is also based on the assumption that state legislative and regulatory environments in the US remain stable.

With that, I will hand the call back over to David for his additional remarks.

Thanks, Rob, and again, thanks, everyone, for joining us today. We look forward to updating you on our progress next quarter and ill now take your questions.

(Operator Instructions) Mike Taiano, Burke & Quick Partners LLC.

So I guess, David, obviously CFPB is top of mind as you mentioned. Just curious at this stage -- I know it's early days, just what parallels do you see with what you experience in the UK, particularly on the competition side? Because my understanding was the competition in the UK was much more store-based versus more, I guess, online competition in the US, and I was just curious how those dynamics maybe differ in the UK versus the US.

I think from a competition standpoint, it's actually flip flopped. In the UK, online was about 80% of the market, and now it's probably 90% of the market post-implementation of the new FCA rules over there.

In the US, the business is still about 60% brick-and-mortar lenders with a much smaller percentage online, and that online component gets even smaller, if you only include state-by-state license lenders.

So in the US, we actually think from a competitive standpoint we could be in an even better position than we were in the UK, to the extent that as we anticipate the CFPB requires detailed ability to repay underwriting that may be difficult for many less sophisticated brick-and-mortar lenders.

Got it. And I guess as I realize it's kind of very early in the process, but on the affordability side and some of the things that they sort of implied in the initial release on the rules, what impact do you think that would have on sort of the utility? Because I would imagine the online lending model, one of the core competitive advantages is the speed at which you are able to deliver funds to borrowers. Do you see as the rules are I guess currently written that potentially being an inhibiting factor for online lending and that -- it being -- taking much more time to complete loan disbursement?

Well, they are not rules at this point. So we'll have to wait and see what they come out with. But the key, again, I don't think it's going to be around disbursement. It's in the underwriting and, you know, the ability to do high quality underwriting. Hopefully the CFPB will give us the tools to be able to do that quickly and efficiently online, and if that's the case, as we hope, we think we are in a very strong position to be one of the winners that comes out of any potential rulemaking.

Got it. And then just last question. You had mentioned sort of the target for some of the, I guess, the floor initiatives that you have going on in the different products and the different regions, the $15 million to $20 million in EBITDA, and maybe I missed it. Did you say like over what time frame you would expect to achieve that?

So, that is an annual EBITDA number. We expect them to be able to achieve kind of run rate annual EBITDA of $15 million to $20 million. And, you know, we've seen historically our products being able to that in kind of three-ish years from start, but every market and every product is a little different. As we talked about before, some markets and products are going to take longer like China. Some, given our experience with relatively similar products, we think we can potentially go faster.

Got it. Thanks a lot, guys.

(Operator Instructions) Henry Coffey, Sterne, Agee CRT.

Good afternoon, everyone, and thanks for providing all this information. And a good quarter again. I heard you talk about it a little bit, David, but you mentioned what things look like in the UK now. Has revenue sort of stabilized where it was reported in the March quarter, or as customers move out of the line of credit product back into other products, is revenue starting to rebuild?

You know, we'll still see. It's early in the quarter, but we are seeing positive signs in loan originations. We are seeing customers return to us as they move from the line of credit product to the short-term product or our installment product. They are moving into both. And we are -- as loan originations improve, good things are likely to come down the road. How fast they -- how fast they improve and into which products the customers move into will determine how fast the revenue rebounds. But certainly it's a positive sign.

But revenue is not going down. It's starting to move up again, say relative to the month of March or April. Revenue levels or origination levels are starting to move up, not down. They are starting to improve again.

Certainly over time, topline revenue will increase as originations increase. That's the basis of our business.

So Henry, I would say during the first quarter I would say we bottomed out on originations. With the loss of the line of credit product, we didn't have any originations with it in Q1. So I think we are going to start to rebuild that. We will still get a little bit of revenue off of the legacy line of credit product, but it is winding down fairly quickly.

And then jumping over to the US, there was an interesting dynamic in some of the CFPB guidelines or the proposed rules that have to do with both affordability and documenting expenses. Are they going to require sort of hard paper documentation like you see in a mortgage application, or do you think they are going to allow you to continue to use more big data to sort of verify income and expenses?

So again, they are not proposing rules. It was an outlier.

Right but whatever, yes, I know. It's just, yes.

And that is actually one of the areas where they ask for additional input and are clearly looking for how do you -- they want to ensure that lenders are using real numbers, real information to do their underwriting, and they want to be able to verify that. And so, I think as part of this process is being able to show them that there are viable sources for that data outside of physical paper.

That being said, we operate successfully in states today where we need to get paper, where we need to get pay stubs or bank statements or forms of identification, and thankfully given to the advances in modern technology, like mobile phones with cameras built in, we've been able to successfully capture that data electronically without a lot of interference to our underwriting processes.

Great. So thank you very much, and congrats on a good quarter.

(Operator Instructions) Ken Bann, Jefferies.

I was wondering if you could talk a little bit about what's going on with the competition in the UK. You said a lot of people have left the market. Is there still, do you think, a lot of fallout to come from competitors dropping away, or have we seen most of the weaker ones out and we've reached bottom in that, and is there a lot of opportunity still for you to pick up a lot more market share as some more of these competitors drop away?

Sure, yes. Good question. Our anticipation is that there will continue to be fallout on the competitive side in the UK. I think there are a number of lenders there who still have not sorted out their business models, have not been able to adapt to new regulations and over time will eventually just fold.

In addition, all of the lenders in our business are currently going through the permanent authorization process over there. Basically their licensing process were all operating under temporary licenses so to say in the UK right now. And I think it's been very clear from the FCA that not everyone is going to be able to pass that process. And so there will be a number of lenders who don't become authorized in the UK and are forced out of the industry.

And then just in terms of new products, are there any new types of -- you are talking about new installment loans that you are offering in the UK or in the US. Anything new there that you are testing or working on at this point?

Well, we are always testing new products in our markets where we can, and we are certainly working on a number of new initiatives beyond the ones that we launched last year that we are not ready to talk about yet.

But in addition to that, as I mentioned, we have launched a near prime product in the UK called On Stride, which we are very optimistic about. In the US, in addition to our new prime product, NetCredit, which is performing very well, we have or are launching a number of installment products in states that have been primarily short-term single pay states for us, either to replace the short-term products or to supplement them to further diversify our revenue stream and protect against changes in regulatory environment, but also to generate additional growth by giving customers options.

And on that line, are there any states -- given the proposed rules that you might have to exit because you wouldn't be able to offer an installment product and if the short-term product under the new rules really didn't -- wasn't really that attractive anymore?

Well, we'll have to see what the proposed rules are when they come up. But based on the outline, it seems that the CFPB is trying to create a framework that allows for both the short-term product and an installment product. And given that we have a lot of experience with variants on both of those throughout all the different states we operate in, we think we'll be in a good position to be able to offer those where they are available.

Keep in mind, we don't have a single short-term product or a single installment product in the US. Basically the rules in each state are different, so we have a variety of each state's product is a little different than all the other ones. So we have experience with multiple forms of both short-term products and multiple forms of installment products.

Okay. Great. Thanks for your time.

Bob Ramsey, FBR.

I noticed, looking at gross revenues, that the US has now climbed to a little bit north of 70% of gross revenues. Just curious -- and I guess that's also on what's typically a seasonally weak quarter domestically -- just curious as the UK starts to rebound, if your expectation is that it can grow faster than the US, that that will sort of come back down or if you had a view on the gross revenue mix US versus UK this year?

We certainly expect the UK to come back and I think grow faster than the core -- hopefully grow faster -- certainly in terms of originations, and again, revenue will follow than the core US business.

That being said, as we commented on in the call, our NetCredit near-prime installment product in the US has grown very rapidly right now. And so in terms of total growth, it's difficult to say right now, and we have two good growth opportunities, and that's a big positive for us. And I don't think we are in a position right now to comment on which one might grow faster.

Okay. What was the NetCredit as a percent of the -- or I guess as a contribution to the loan balances domestically in the quarter?

As we talked at the end of the year, it was about 25%, and it's gone up a little bit from that.

And then the last question and I'll hop out. But how much is left in the UK of the line of credit balances that are working off the balance sheet?

Could you repeat that question?

Yes. I asked what is the remaining balance of the line of credit loans in the UK which are in runoff right now?

Surprisingly $15 million and we expect most of that to be gone by the end of Q2.

Great. Thank you.

(Operator Instructions) Henry Coffey, Sterne, Agee.

I was just trying to put a pencil to the provision levels in the UK. I know you went from about [11.7] to [4.6]. How much of that was indicative of just replenishing reserves for charge-offs, and how much of that was an actual reserve release given the shrinking of the line of credit product?

Most of the benefit and most of the high gross profit driven in the -- internationally for the UK was because of the line of credit portfolio. As it wound down, it performed very well and did not require as high a provisioning. So, those loans performed very well.

All right. Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to David Fisher for any closing remarks.

Thank you, everyone, for joining us today. We look forward to talking to you again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.