Enova International Inc (ENVA) 2016 Q2 法說會逐字稿

Good evening and welcome to the Enova International second-quarter 2016 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions). Please also note that this event is being recorded.

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

Thank you, Andrea, and good afternoon. everyone. Enova released results for the second quarter of 2016 ended June 30, 2016 this afternoon after the market close. If you did not receive a copy of our earnings press release you may obtain it from the investor relations section of our website at ir.enova.com.

With me on today's call are David Fisher, Chief Executive Officer and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the investor relations section of our website.

Before I turn the call over to David, I would like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it and as such does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion.

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.

In addition to US GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release.

As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website.

With that, I would like to turn the call over to David.

Good afternoon, everyone. Thank you for joining our call today. I'm going to start by giving a brief overview of the quarter, then I will update you on some of our initiatives and finally, I will share our perspective looking forward. After my remarks, we will turn the call over to our new CFO, Steve Cunningham, to discuss our financial results and guidance in more detail.

We are again pleased with the solid performance we generated during the second quarter and the continued momentum we are seeing at Enova. In addition to another quarter of strong financial results, we are successfully executing on our strategy of growing our core businesses while further developing our new initiatives to generate additional future growth.

We attribute our continued success to the quality of our talented employees and our extensive experience serving subprime and near prime borrowers. We have been in business for over 12 years, longer than any other online lender and during this time we have successfully navigated a number of economic cycles as well as substantial regulatory changes.

This experience combined with the growing diversification of our business positions us very well to manage through the forthcoming regulatory changes in the US which I will talk about in more detail shortly.

But before I get to that, for the second quarter, revenue was $172.5 million, an increase of 18% from Q2 of last year and above our guidance range of $155 million to $170 million. The second quarter is not always a strong quarter for lending but we saw good demand across almost all of our products. In particular, we were able to attract a large number of new customers both in the US and the UK.

As I briefly mentioned a moment ago, solid credit performance was another highlight of the quarter as we were able to manage the larger macro economic trends that apparently negatively impacted other online lenders. Clearly managing our credit performance is an area where the sophistication of our analytics and the experience of our team are demonstrating their value.

Adjusted EBITDA for the quarter was $35.2 million which was also above our guidance of $23 million to $33 million. The higher than expected EBITDA was driven by a combination of strong customer demand, good credit performance and efficient marketing.

Total companywide originations were up 15% from the prior year. This marks the fourth sequential quarter of year-over-year growth and the strongest growth we have seen in total originations since the new UK regulations went into effect in 2014.

The growth in our revenue and originations continues to be led by our installment and line of credit portfolios as we create and customers embrace alternatives to our short-term single pay products.

Our total loan book grew by almost 50% year-over-year. The largest contributors to this growth were NetCredit and our small business products which led to a 39% year-over-year increase in US installment loan and finance receivables revenue. In addition, installment loans and lines of credit now comprise 73% of our total revenue and 86% of our portfolio. We think our recent success positions us well for the future and as we look forward, our strategy remains centered on focused growth. This involves maintaining consistent profitable growth in our two large core businesses namely US and UK subprime lending, while actively growing the new initiatives we have seen the most promise lately namely NetCredit which is our US near prime business, Brazil, and our small business products.

Our large subprime US business generated another strong quarter of profitability. Despite its size, the business continues to grow and is becoming more diversified with 27% of our US subprime portfolio consisting of single pay products, 28% installment products and 45% from line of credit products.

In the UK, we are successfully growing our business again following the regulatory changes that were implemented there in 2014 and early 2015. UK loan originations were 23% higher than Q2 of last year, 33% on a constant currency basis. We are now the number one lender in the UK having taken market share from our competitors since the new rules became effective. In addition, our UK business is profitable with over $15 million of EBITDA contribution so far this year.

As the second component of our strategy, we are focused on the expansion of our new initiatives to further diversify our revenue base and provide future growth all while reducing regulatory risk.

NetCredit's growth has continued at a rapid pace with originations up 57% from last quarter and 55% over the second quarter of last year. Loan balances are now $232 million which is 68% higher than Q2 of last year. Due to the sustained growth of our US near prime offering, 45% of our total US loan portfolio is now near prime loans and 49% of those loans have an APR at or below 36%.

We expect NetCredit to generate over $20 million of EBITDA contribution this year with significant opportunity to meaningfully increase that contribution next year.

NetCredit's program with Republic Bank is progressing well and has grown from a single pilot state in Q1 to 10 states at the end of the second quarter. This is in line with the expectations we set on the Q1 earnings call. We expect to expand to additional states throughout the year.

As a reminder, this program leverages Enova's online lending platform by providing technology, loan servicing and marketing services to Republic Bank with the objective of expanding their online consumer lending. All loans originated by Republic under this program have an APR at or below 36%.

We are also continuing to make good progress with our installment product in Brazil. Our Brazilian loan portfolio was almost $12 million at the end of the quarter which is up almost 40% from the end of Q1. For the second half of the year, our focus in Brazil is to meaningfully increase origination levels. While the Brazil business will lose a couple of million dollars this year, the loans we are originating there are profitable on a unit economic basis which should allow that business to generate positive EBITDA contribution next year.

We are also pleased with the growth of our small business financing initiatives which include two complementary products, a receivables purchase agreement product under the Business Backer brand and a line of credit under our Headway brand. We grew small business originations 24% sequentially. As a result, our portfolio is now over $80 million and represents 14% of our total.

Now I want to turn to the ongoing CFPB rulemaking. Following the issuance of the CFPB's proposed rule on small dollar lending in early June, we remain more confident than ever in our ability to remain a large and profitable player in the industry following the implementation of the final ruling. Our sophisticated analytics with more customer history than any other online lender will allow us to quickly adapt and implement required changes and we have experience at this. In addition to the significant changes in UK regulation over the last two years, we have managed through dozens of regulatory changes at the US state level.

Our team has been hard at work developing the tools we will use to implement the new rule and we are proud of the great progress they have made in such a short time. Moreover, our successful diversification efforts have the potential to substantially mitigate the impact from the regulations. On our June call to discuss the potential impact of the proposed CFPB rule, we estimate that based on our preliminary assessment at that time, approximately 60% to 65% of our Q1 2016 revenue would be subject to the final rule and that the revenue for the product subject to the rule could decline by 38% to 40%. In other words, if the proposed changes were implemented then, approximately 18% to 24% of Q1 2016 revenue would be impacted.

While a slightly higher percentage of EBITDA would be impacted, a significant portion of our expenses are variable with origination volume which will help ensure that our US subprime business remains profitable following the implementation of the new rule.

Importantly, we have more than two years to adapt to the new rule and by the time we need to be in compliance, we expect that the actual impact to our revenue to be substantially below the levels I just mentioned as we continue to execute on the diversification strategy and our growth initiatives expand.

Looking three to five years out, we believe that each of our growth initiatives, net credit, Brazil and small business, has the potential to become a really big business, each potentially exceeding $100 million in annual adjusted EBITDA. Clearly the growth of these businesses could go a long way in offsetting the potential impact of the proposed CFPB rule.

In addition, we believe that the CFPB rule could create an opportunity for Enova to gain substantial market share as storefront lenders struggle to implement the new rule and tribal lenders are forced to comply with federal regulations for the first time.

Today we have less than 10% market share in the US subprime market so it is certainly conceivable that our market share could double or more.

In terms of the CFPB's process, the current consensus is that the rule may not become effective until late 2018 which is several months later than we had previously anticipated. As such, we expect a very minimal impact to our 2017 results.

Now I would like to briefly turn to a few other macro topics that have arisen in our sector in recent weeks.

First, Google implemented new policies for Google AdWords last week restricting promotion of short-term loans around the world and loans with APRs over 36% in the US. Google AdWords accounts for just a small percentage of our new customer volume so we do not anticipate significant direct impact to your business from this change.

In addition, we do not believe that these new policies will have any impact on customer demand and we believe that we are well-positioned to capture that demand from other channels given our large size and experience in marketing to subprime customers.

The new policies were just put into place late last week so we don't have a ton of data yet but so far we have been able to maintain good volumes across almost all of our marketing channels.

While we do not expect any significant impact on our originations from the new Google policies, we did make the decision to modestly increase marketing spend in Q3 primarily on direct mail and TV to provide additional protection.

As we guided to on our Q1 call, we spent more on marketing in Q2 than in Q1 although still 200 basis points less as a percent of revenue than in Q2 of last year. That marketing paid off with the high level of new customers I discussed earlier resulting in a lower than expected cost per loan.

For Q3, it is likely that our marketing spend will be a couple of hundred basis points more as a percentage of revenue than it was in Q2.

Next I want to turn to the UK decision to leave the EU. As many of you know, our only European business is in the UK. We don't export or license other parts of the EU and our primary regulator to the UK regulator, not EU. Hence, we do not anticipate any disruption in our UK business from Britain's decision to leave the EU.

The one impact we have seen is from the weakening of the pound against the dollar. We had very little cash in the UK at the time of the vote so we didn't have any significant losses from the selloff but the revenue we generate in the UK today is worth less in US dollars than it was before the vote.

To summarize our thoughts on the quarter, we are very pleased with our strong financial performance and progress on our diversification efforts. We had a very good start to the year and so far we are seeing that momentum continue into Q3. As we have discussed before, Enova was one of the first online lenders when we launched over 12 years ago and that experience combined with the strength of our proprietary technology platform, advanced analytics, and our very talented employees is showing its true value.

We believe that our current strategy to grow our core offerings while diversifying into new profitable products is working. While we know regulatory changes are coming in the US, we believe we are prepared and will emerge a winner.

In the meantime, our core businesses are doing well and our new initiatives are driving growth and beginning to contribute meaningfully to our bottom line.

Now I'm happy to introduce Steve Cunningham, our new CFO, who will go over the financials in more detail. Steve has only been here a few weeks but as you will hear, he has gotten up to speed quickly. Certainly his deep financial services experience that we were attracted to is already paying dividends for us.

Following Steve's remarks, we will be happy to answer any questions that you may have. Steve?

Thank you, David, and good afternoon, everyone. I'm really excited to be part of Enova. I have been very impressed with how the talented team here is leveraging the power and experience of our technology and analytical platforms to help hard-working people fulfill their financial responsibilities with fast, trustworthy credit.

I will review our financial and operating performance for the second quarter and then provide our outlook for the third-quarter and full-year 2016.

As David mentioned, second-quarter results are a reflection of solid execution across our core US and UK products, the continued growth of new diversification initiatives, and stable loan performance. Total revenue was $172.5 million in the second quarter, a 17.9% increase from the year-ago quarter and above our guidance range of $155 million to $170 million.

On a constant currency basis, total revenue increased 19.5% compared to the prior year quarter to $174.9 million.

Total Company revenue rose with strong origination volume and increases in outstanding receivables balances. Total Company origination volume increased 16.2% on a year-over-year basis and 15.6% sequentially in the second quarter. That drove ending total Company loans and finance receivable balances of $595 million. That is up 48.7% from $400.3 million in the second quarter of last year and 13.8% sequentially.

New customer acquisitions continued to play a significant role in our performance. The dollar amount of new customer loan originations during the quarter was the highest in Enova's history with strong growth across all significant products.

Domestic revenue accounted for 81% of total revenue in the quarter and rose 24% on a year-over-year basis to $140.3 million. In particular, year-over-year revenue growth for domestic installment loans and receivables purchase agreements and for line of credit products increased 39% and 46% respectively, as both categories saw significant year-over-year and sequential growth in both originations and ending balances.

This was primarily led by increased demand for our domestic near prime installment product and growth in portfolios serving the needs of small businesses which drove domestic loan and finance receivable balances up 58% in the quarter.

International revenue declined 2% year-over-year to $32.2 million and accounted for 19% of total Company revenue in the second quarter. The decline is primarily due to the changes in the regulatory environment in the UK that occurred after March 31, 2014. Excluding the revenue contribution from the discontinued UK line of credit product, international revenue increased 21.9% on a year-over-year basis in the second quarter.

International loan balances were up 9.4% year-over-year and were higher sequentially for the fourth quarter in a row. On a constant currency basis, international loan balances were up 26% year-over-year. Excluding the discontinued UK line of credit product, international loan balances increased 16% on a year-over-year basis in the second quarter as new and returning customer originations in our core UK business exhibited strong increases.

Turning to gross profit margins, our second-quarter gross profit margin for the total Company was 62.1%. That compares to 71.6% in the second quarter of last year. The decline in gross margin was primarily the result of three factors.

First, continued strong growth in our domestic near prime installment portfolio resulting in a higher mix of installment loans in the total portfolio.

Second, a higher mix of new customers and new customers require higher loss provisions since they default at a higher rate than returning customers with a successful history of loan repayment.

Third, the wind down of the UK line of credit product. Excluding the discontinued line of credit product, our consolidated gross profit margin was 61.2% for the current quarter compared to 67.1% in the prior year quarter.

We expect the consolidated gross profit margin will remain in the range of 55% to 63% and we will continue to be influenced by the mix of loans and financing to new and returning customers, the mix of domestic portfolio originations and growth in loan originations from our international operations.

Domestic gross profit margin was 58.8% in the second quarter compared to 64.6% in the prior year quarter for the reasons previously noted.

Our international gross profit margin declined to 76.1% from 95.8% in the prior year quarter. The decrease in international gross profit margin is driven by the impact of the discontinued line of credit product as well as higher levels of originations particularly from new customers.

Excluding the discontinued UK line of credit product, our international gross profit margin decreased to 71.6% for the current quarter from 78.1% a year ago.

We expect our international gross profit margin to remain in the range of 65% to 75% and it will be driven by the level of growth in the UK, the mix of new and returning customers and the pace of growth in Brazil.

Turning to expenses, total expenses increased 5.2% year-over-year to $78.3 million and were largely driven by domestic variable costs that were supporting growth in originations and loans and finance receivables.

Marketing expenses increased due to higher domestic television advertising and direct mail costs which were partially offset by lower international television advertising costs. Marketing expense as a percent of revenue decreased year-over-year to 14.8% from 16.9% last year.

Operations and technology expenses increased in the current quarter as a result of higher software costs as well as from increased underwriting and transaction cost as a result of higher origination volumes.

Adjusted EBITDA, a non-GAAP measure, totaled $35.2 million in the second quarter compared to $41.1 million in the second quarter of last year and also came in above our guidance range of $23 million to $33 million. Our adjusted EBITDA margin was 20.4% in the quarter compared to 28.1% in the prior year quarter and 21.6% in the first quarter of 2016.

Our stock-based compensation expense was flat at $2.2 million for the second quarter. Net income totaled $8.2 million in the quarter or $0.025 per diluted share compared to net income of $10.9 million or $0.33 per diluted share in the prior year quarter.

Our effective tax rate for the quarter ended June 30, 2016, increased to 38.2% from 37.7% for the quarter ended June 30, 2015. Our effective tax rate for the six months ending June this year increased to 41.3% from 38.2% for the six months ended June 30, 2015. We still believe that our full-year 2016 effective tax rate will approximate 40% as the rate continues to be heavily influenced by the significant decline in intrinsic value of previously granted restricted stock units resulting in adjustments to the deferred tax asset balance related to those units that have vested to date.

Adjusted earnings, a non-GAAP measure, totaled $9.4 million in the quarter or $0.28 per diluted share compared to $14.4 million or $0.44 per diluted share in the prior year quarter.

We ended the second quarter with cash and cash equivalents of $39.2 million and total debt of $588.8 million which is now presented net of $13.3 million and debt issuance cost. Our debt balance includes $106.8 million outstanding under our $175 million securitization facility. We continue to believe that the current facility will provide us with runway to support the anticipated growth of our

NetCredit product.

Our core US and UK businesses are self funding and their strong operating cash flow characteristics allow us to largely self fund new initiatives aside from NetCredit. We believe our strong operating cash flows as well as liquidity available under our credit facility and securitization facility will be sufficient to satisfy our working capital needs this year.

Now I would like to turn to our outlook for the third-quarter and full-year 2016.

As noted in our earnings release, in the third quarter of 2016, we expect total revenue to be between $175 million and $190 million and adjusted EBITDA to be between $25 million and $35 million. For the full-year 2016, we expect total revenue to be between $700 million and $740 million and adjusted EBITDA to be between $130 million and $145 million.

Our outlook reflects continued strong growth in our new initiatives including NetCredit, a continued higher mix of new customers, no significant changes in the competitive landscape in the UK, the wind down of our loan portfolios in Canada and Australia and no immediate impact to our US business from proposed CFPB rulemaking since any new rules are not set to go into effect until late 2018.

Any significant volatility in the pound from current levels could impact our results within this range.

Before I hand the call back over to David, I wanted to let everyone know that Rob Clifton will be leaving Enova at the end of next week. He is headed back to the Lone Star State. Some of you know that Rob moved from Texas to join Enova in Chicago and most of his family is in Texas. Recently a company that has known Rob around for a long time asked him to join them in Texas as their CFO. Understandably, the opportunity to head home to Texas is something Rob and his family are excited about.

Since joining Enova more than five years ago, Rob has been at the center of much of our growth playing a critical role in our successful spinoff, insuring we meet our quarterly reporting obligations and helping us complete numerous financial transactions. Please join me in wishing him all the best.

With that, I will hand the call back over to Dave.

Great. Thanks, Steve. That is the end of our prepared remarks for today. We will now open up the call to any questions.

David Scharf, JMP Securities.

Good afternoon. Thanks for taking my questions. Dave, actually one is more just a clarification on the impact on the Google AdWords ban which you noted. Your reference to it representing an extremely small part of your new customer volumes, does that relate to just the ones that Enova directly acquires or does that also relate to the 50% or more of your customers that come through lead generation? Do you have a sense of what the overall impact is?

Sure. So I was referring to the ones we get directly. The ones we get from the lead providers we don't typically have great visibility in how they acquires the leads that they are passing on to us but as I mentioned since the rule has become effective, we have maintained good volumes across almost all of our marketing channels including leads as us and lead providers are adapting to the new Google policies.

Got it. That is helpful. Shifting just to the credit side, it seems like sequentially and usually tax refund season, Q1 is a good paydown quarter but you definitely saw some very strong improvement in credit quality going from Q1 to Q2 particularly looking at the loss rates for both line of credit and installment. It seems almost a little counterintuitive given how many new customers you are adding. Can you provide any color on just what you are seeing out there in terms of customer behavior, payment patterns and the like?

Yes. We are seeing just good, solid credit performance and some of it installment portfolios is the impact of our near prime products but really across all of our portfolios, our models are working really well. We have added a ton of additional beta fields over the last couple of years. I think a lot of that work is really paying off now with really strong performance. The new customer volume is strong and that could in different circumstances, negatively impact credit but we still get the bulk of our business from returning customers but we are seeing good credit performance across both of those buckets, both returning customers and new customers.

Got it. I will ask just one more and get back in the queue. Steve addressed this in his prepared remarks on your funding availability. Just want to be clear, based on how rapidly the net credit product is growing which is not self funding per se, should our takeaway be that based on the availability and the securitization facility as well as the undrawn credit facility that you feel comfortable with your current liquidity to meet the growth targets that are embedded in your full-year guidance?

Absolutely. The way we look at our business is the bulk of our products, the large majority of our products are self funding. We don't need access outside credit to grow them at any conceivable reasonable growth rate. The one product that doesn't fit into that bucket is net credit so we almost think about that as a completely separate business that requires separate funding. To date, we have looked to our securitization facility for funding for that NetCredit business. We do as Steve mentioned, still have plenty of headroom under that facility but also as we have talked about as we get into Q3, the end of Q3, the beginning of Q4, we will be looking at additional capacity to fund that credit going forward.

The good news is that we seem to have good relationships with our existing lenders, investors under our NetCredit securitization but even more importantly, the NetCredit product is working well with good credit and so we think there is a pretty strong appetite for that product in the market today.

If that were to change going forward, if there is some kind of financial crisis down the road and that securitization market were to dry up again, our remedy is to just slow the growth of NetCredit. So the bulk of our other products, all of our other products are self funding. It is not the type of business where we could end up in a liquidity crunch. We can turn off new originations in NetCredit overnight.

So you never like to be reliant on third parties for anything in this world but we think that we are in a pretty good place where we are with NetCredit and kind of how we view that growth going forward.

Got it, got it. This is just maybe a follow on from that as I look at this, I haven't dug into all of the balance sheet items but given how quickly NetCredit has been growing including sequentially, how is the securitization balance -- how did it actually get drawn down a bit from Q1? It looks like it actually closed with a lower balance than it was at the end of March?

Because the way it works as those loans get paid down, the facility actually decreases in size giving us additional headroom under that facility. So it kind of a mini evergreen feature built into it.

Got it. Okay, thank you very much.

Bob Ramsey, FBR.

Good afternoon. You may have given this but do you have the actual NetCredit balances and originations for this quarter?

Hang on one quick second.

Sure. While you dig that up, I am curious about the yield as well.

Hang on one second.

And I guess, while you look for those numbers, one other question I have got for you. I know, David, you mentioned that there have been negative trends this quarter which had impacted other lenders in the space and honestly there has been a fair amount of that. I'm just kind of curious what you see as what you guys are doing differently, how you have really been able to grow your originations and balances while others have had to pull back, sort of compare and contrast a little bit about where you guys are succeeding where others are faltering?

Yes, I really think some of the other online lenders in the space just grew too quickly and their credit models weren't fully developed, they didn't have the data, they didn't have the experience to keep up with their growth and their origination volumes.

And you saw even before Lending Club had some of their internally generated problems with their CEO, they were already having credit issues with their B&E tiers. We just have a lot more experience having been at this 12 years through the hundreds of iterations our credit models have been through. The many, many terabytes of internal customer data we have collected plus really I think one of our strengths is our ability to go out and get external data and to integrate that into our model.

So a combination of being a little bit more slow and steady but also that experience over time. I mean it has paid off. But there were certainly times we were growing our NetCredit business where we looked out at our competitors and saw how much quickly they were growing their near prime portfolios and wondered if we should be going faster? But having done this before and having grown businesses before, we knew the pace that we were comfortable with and we made sure not to push it and I think now that is starting to pay off.

Steve, do you have those numbers now, the total originations and the yields for the NetCredit?

I do. Total originations $85 million and the yield just under 60%.

Great. Do you have the balance at quarter end?

For all of NetCredit,. $232 million.

Great. I appreciate that. Last question and I will hop out but I know you've talked a little bit about financing and funding of the business. Can you just maybe touch on the change in the leverage ratio covenants that I think you guys had disclosed at the end of June or early July? I forget the exact timing but sort of what it was that led to the change in those covenants?

Yes, sure, Bob. If you go back and look at our facility, there was an original covenant at 3.0 to 1 and that was set back in mid-2014, really before we went through some of the changes in the UK and if you think back, we actually did modify that covenant in Q4 last year and Q1 of this year. So really what we did is continue that trend of making sure that we prudently modified the covenant for the rest of this year.

Okay, okay. All right. Great, thank you very much.

John Rowan, Janney.

Good afternoon, guys. Last quarter you gave a number -- I just want to make sure I'm framing this up correctly using the correct number -- you gave a number of total revenue from new products. I think you said earlier on the call, David, that it was 73%. Is that correct on an apples-to-apples basis?

I am not sure. No, I don't think I said it on this call, I'm not sure exactly what you are referring to. Total revenue from new products, of the percentage of total revenue?

Yes, so it new initiatives, NetCredit, new initiatives. I believe you said in the first quarter it was 23% of revenue. Am I missing something?

We will have to get back to you. I can't remember disclosing that in the first quarter. We didn't have that in the remarks this quarter. We can get back to you on that.

And then to go back to the competitive front, I mean did you see a pickup after Lending Club changed its pricing model or was it more from them pulling back or do you have any sense as to really what drove your -- frankly benefit competitive position?

Yes, I mean look, we did see strong demand in Q1. Q1 is the first time we really noticed the stronger than expected demand and that was the same time where we started seeing Prosper, Lending Club and then later Avant have kind of disclose issues, kind of credit issues and funding issues and both having the effect of slowing their lending.

So it is certainly easy to say that is causation and it very well may be. It is very difficult to determine in consumer demand driven businesses where the demand is coming from. We don't have a huge overlap in our customer base with those businesses especially outside of NetCredit and as I mentioned before, we have seen good demand across all of our products but the timing certainly does line up and I think we would be fooling ourselves to say that some of the strength in demand particularly in net credit in Q1 and Q2 was from kind of the pulling back from some of our competitors.

Do you think that -- I guess even some of the credit problems that you alluded to with some of your competitors, do you think that there is any type of impact to your ability to access the ABS market? Are people going to draw comparisons with your model? I mean obviously when Avant came out, they did a rated deal, it seemed like there was going to be more and more participation in the ABS market for unsecured consumer debt. I am just curious if you think there has been any change in that front as some of your competitors frankly have faltered? And that is it for me.

We don't think so. We are having good conversations out there and for having steady profitable quarters behind us, having good credit in our portfolios I think that is exactly the kind of product investors want. Yields in the US are incredibly low and people are dying to find good opportunities for yield and that is what our ABS products can offer.

So from the conversations we are having just plus looking at the macroeconomic environment more broadly, we think that that market is still available to good issuers with good product.

Thank you.

(Operator Instructions). Tom White, Macquarie.

Great, thanks. Just I wanted to try and reconcile from your comments about the competitive landscape and so what you guys said about marketing expense in 2Q and looking forward. Presumably one does look at Avant and some of the other peers are sort of experiencing these disruptions. They are probably pulling back in marketing. So are you guys just kind of increasing marketing here to just sort of opportunistically kind of put the pedal down and kind of maybe fill the void kind of left by the pullback of some of your competitors or is there some other dynamic that is forcing you guys to raise marketing?

Just on the CFPB, I hopped on late so I apologize if I missed this but any update on discussions you guys might be having with states where maybe you are not operating, any sense whether states that maybe haven't allowed this type of product might shift gears given the fact that the ruling kind of maybe provide a bit of kind of cover for them to do so? Thanks.

So I think on the first question, we saw good opportunity to get customers and so we spent on marketing. Again, the bulk of our businesses do not compete with Lending Club, Proper and Avant, whether it is our subprime, single day products in the US, our UK products, Brazil, small business, we are not competing with those businesses here. So it is not they are pulling back wouldn't impact those businesses and I don't think we a saw sharp pulling back of kind of competitors to our subprime businesses. But do we think it helped NetCredit product in the quarter? For sure. Is there a very small overlap with maybe some of our subprime products? Yes. But we had an abnormally low percent marketing as a percentage of revenue in Q1 and so we expected to be higher in Q2. It was higher in Q2 but we got a lot more customers. So it was much more efficient in Q2 than we expected.

Cost per funded account, a metric we watch internally, was much lower in Q2 than we expected. So we saw good opportunity to get good, high-quality loans and we took it by spending that marketing money.

With respect to your second question, with the CFPB's new rules, a couple of interesting things are going to happen with respect to the states where we don't operate today. I think one is you have illegal and tribal lenders operating in those states that the CFPB is pretty adamant that they are going to crack down on those guys.

I think the second is, look, it can't get any worse for us in those states and has the opportunity to get better if those states say okay, look, now look there is federal oversight, that gives us some comfort to put in enabling legislation. And there are a number of states where that is a possibility.

So I think we are more optimistic than we have been in recent years that we get three or four additional states but that is probably closer to the implementation of the CFPB rule two or three years out. And in the meantime, it is likely to be one-offs. We did have a one-off this year. We added Mississippi which is a really nice addition. There could be others in the interim.

But, yes, I do see the CFPB potentially being a catalyst ahead to add a handful of states. We are never going to get all of the states, I think the Northeast will continue to remain tough but a few additional states can definitely have a meaningful impact.

Thanks.

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

Great. Thanks so much for joining us today. We look forward to updating you on our progress next winter. Talk to guys soon. Thank you.

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