Enova International Inc (ENVA) 2017 Q3 法說會逐字稿

Good afternoon, and welcome to the Enova International Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over Monica Gould. Please go ahead.

Thank you, Brian, and good afternoon, everyone.

Enova released results for the third quarter of 2017 ended September 30, 2017, this afternoon after the market closed. 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'd 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 U.S. 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.

And with that, I'd like to turn the call over to David.

Thanks, Monica, and good afternoon, everyone. Thanks for joining our call today. As usual, I'm going to start by giving a brief overview of the quarter, then I'll update you on our strategy, and finally, I will share our perspective looking forward. After our remarks, I will turn the call over to Steve Cunningham, our CFO, to discuss our financial results and guidance in more detail.

In Q3, we continued to focus on growing our 6 businesses, and we are pleased with the performance and profitability we generated. Third quarter revenue was at the high end of our guidance at $218 million, an 11% increase over the third quarter of last year, as we saw healthy demand across our products.

Adjusted EBITDA for the quarter was $34.2 million, and adjusted net income of $8.6 million or $0.25 per share was also at the high end of our guidance ranges.

These strong financial results were driven by continued solid credit combined with efficient marketing, which offset somewhat higher non-marketing operating expenses from variable loan transaction-related expenses as well as investments in technology and analytics personnel to support growth.

As I just mentioned, we continue to see stable credit metrics across our portfolio. While our net charge-offs are higher than last year, this is almost exclusively attributable to the strong new customer volumes we have seen over the last several quarters. In fact, in Q3, we generated the highest mix of new customers since I have been at Enova. This creates a nice tailwind for us as these new customers increase our revenue-generating asset base going forward.

Another sign of stable credit was our gross profit margin in Q3 of 51%, which is within our guidance range as their near-term credit performance has been good, and we're receiving adequate yields for the credit risk in our portfolio. As was the case in the second quarter, company-wide originations in Q3 declined slightly from the prior year. However, our loan and finance receivable balance is up over 15% from last year despite this decline in originations, as we have successfully diversified over the past several years into line of credit and installment products with higher balances and longer durations.

Including our small business offerings, installment loans and lines of credit now comprise 88% of our portfolio and 77% of our revenue. The increase in installment loans and lines of credit allows us to grow revenue with lower marketing costs and other expenses. Steve will discuss this in more detail later.

Our success and strong results across our short-term line of credit and installment and receivable purchase agreement segments continue to be driven by our focus on our 6 growth businesses. These are our U.S. subprime and U.S. near prime offerings; our U.K. consumer brands; U.S. small business financing; our installment loan business in Brazil; and Enova Decisions, our analytics as a service business.

Our large U.S. subprime consumer business generated another strong quarter of profitability. That business continues to grow and become more diversified with 33% of that portfolio consisting of installment products, 45% line of credit products and only 22% single-pay products. Across our entire portfolio, single-pay products are now less than 12%.

In the U.K., loan originations increased 13% from Q3 of last year, and the number of new customers was up 12% year-over-year.

We remain the #1 subprime lender by market share in the U.K. and see this business generating even higher levels of profitability over time, especially if the pound strengthens.

NetCredit loan balances rose to end the quarter at $330 million, which is up 15% from the third quarter of last year. Our U.S. near prime product has grown to represent 49% of our total U.S. loan portfolio. Consumer demand for near prime loans remains strong, and we believe NetCredit is well positioned to continue to serve that market with our quick and efficient online model that is taking share from the brick-and-mortar incumbents.

Our small business financing products represented 11% of our total portfolio at the end of Q3 while originations decreased 17% year-over-year, reflecting the more cautious approach we have discussed for this business compared to a year ago as we navigate the ongoing fallout in this market.

Our Brazilian loan portfolio has grown to over $17 million at the end of the third quarter. We have been successful in increasing originations there with Q3 originations up 6% from Q2 and 135% from Q3 of last year. We continue to see a substantial opportunity in Brazil from a combination of a large population, strong demand for credit, a stable regulatory environment and an advanced, interconnected banking system.

Finally, Enova Decisions, our real-time analytics-as-a-service business, is gaining traction. We have and will continue to evolve the product offering, and we signed several additional contracts during the quarter. While this business is still very small and has much to prove, we are pleased with the initial success so far across a number of different verticals.

Now I want to turn to the CFPB rule-making process. Following the issuance of the CFPB's final rule on small dollar lending a few weeks ago, we are more confident than ever in our ability to remain a large and profitable player in the industry. We believe that we are very well prepared and positioned, particularly relative to storefront lenders, who will be significantly impacted by the limitation of loan renewals and will struggle to implement the ability to repay underwriting standards under the rules. Moreover, we expect the impact to the proposed regulations to be much smaller than we estimated last year when the preliminary rule was published as a result of a more focused rule as well as our continued diversification.

As you may recall, when the rule was released last year, we estimated that, based on our revenue mix at that time, products that compose approximately 60% to 65% of our revenue will be subject to the final rule, and that revenue for those impacted products could decline by 30% to 40% from the bank current levels for a total potential revenue impact at that time of 18% to 24%. We now expect the total revenue impact to be less than 10% as products that comprise only 15% to 20% of our second quarter 2017 revenue will be subject to this short-term, loan-specific portions of the rule and products that represent an additional 50% to 55% of revenue may also be subject to the changes of payment pre-authorization process.

Now that all assumes that the rule is implemented without additional changes. And at a minimum, we have nearly 2 years to adapt to the new rule, and by that time, we expect the actual impact to revenue to be substantially below the levels I just mentioned as we continue to execute on our diversification strategy and our growth initiatives expand.

In addition, we continue to believe that Enova will have an opportunity 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 U.S. subprime market, so it's certainly conceivable that our market share could increase meaningfully.

Now all that being said, there is significant uncertainty as to whether this rule will become effective in its current form. There are likely to be several legal challenges to the rule, and the specter of the director leaving the CFPB next summer, if not sooner, adds additional uncertainty. In any event, we believe that our sophisticated analytics with more customer history than any other online lender will allow us to quickly adapt and implement any required changes. And our successful diversification efforts should continue to mitigate the impact from regulation.

We also have experience at this. In addition to the significant changes in U.K. regulation over the last few years, we've managed through dozens of regulatory changes at the U.S. state level.

So to wrap up, we are pleased with our continued progress and the momentum in our business. The macro environment remains favorable and credit continues to be solid. Our commitment to delivering exceptional products and services to customers who trust and count on us is driving our growth, and we continue to diversify our business to decrease regulatory risk and spur growth.

I remain confident in our direction and believe that our world-class team, focused growth strategy, strong competitive position and solid balance sheet will drive continued success and enable us to achieve our mission of helping hard-working people fulfill their financial responsibilities with fast, trustworthy credit.

Now I'd like to turn the call over to Steven Cunningham, our CFO, who will go over the financials in more detail. And then following Steve's remarks, we'll be happy to answer any questions that you may have. Steve?

Thank you, David, and good afternoon, everyone.

I'll start by reviewing our financial and operating performance for the third quarter and then provide our outlook for the fourth quarter and the full year 2017.

Our financial performance was solid this quarter and represents the eighth consecutive quarter where we've delivered within our guidance ranges. Revenue, adjusted EBITDA and adjusted EPS all came in at the high end of our expectations.

Total revenue was $217.9 million in the third quarter, which increased 11.2% from the year-ago quarter. Foreign currency exchange rates did not have a significant impact on total company revenue compared to the third quarter of last year.

Year-over-year revenue growth was driven by growth in total company combined loans and finance receivable balances, which increased 15.6% year-over-year to $771.7 million from $667.3 million in the third quarter of last year. Line of credit products and installment loan products continued to drive the year-over-year increases in total loans and finance receivables balances.

Total company originations rose sequentially by 10.9% and decreased 2.3% year-over-year. As David mentioned, the strong growth in total company combined loans and finance receivables balances, combined with slightly lower total company originations, reflects on the effectiveness of our diversification based on our strategy of focused growth across our 6 businesses.

In particular, we've been generating faster receivables growth in our line of credit and installment loan products across our 6 growth businesses. These products have longer durations and have higher average loan amounts. As a result, we're able to drive higher receivables and revenue growth with fewer originations resulting in less effort and lower costs. This is a contributing factor to the recent trend of lower marketing expense as a percentage of revenue.

While we may see some variation from quarter-to-quarter, we expect these trends to continue for the foreseeable future.

Domestically, revenue increased 9.8% on a year-over-year basis and increased 14.9% sequentially to $181.6 million in the third quarter. Domestic revenue accounted for 83.3% of our total revenue in the third quarter of 2017. Revenue growth in our domestic operations was primarily led by a 16.8% increase in domestic line of credit revenue and a 13.4% increase in domestic installment loan and receivable purchase agreement revenue. Continued strong demand for these products drove our domestic combined loan and finance receivable balances up 14.3% year-over-year.

International revenue increased 18.6% on a year-over-year basis to $36.3 million and accounted for 16.7% of total company revenue in the third quarter. On a constant-currency basis, international revenue increased 18.4% on a year-over-year basis. International revenue growth was primarily driven by a 34.6% increase in international installment loan revenue as we've had good recent access with our installment loan products in the U.K. and are benefiting from the continued growth of our Brazilian business.

International loan balances were up 25.1% year-over-year and 13% sequentially. On a constant-currency basis, international loan balances were up 21.1% year-over-year.

Turning to gross profit margins. Our third quarter gross profit margin for the total company was 50.7%, which compares to a gross profit margin of 51.3% in the third quarter of last year. The modest decline in gross profit margin was in line with our expectations given the continued growth in the proportion of new customers and originations and the greater mix of near-prime installment loans in the portfolio.

Domestic near prime installment loans grew 15.1% year-over-year and now comprise 43% of total company combined loans and finance receivable balances at the end of the quarter.

Across all of our businesses, originations from new customers totaled 30% during the third quarter. This is the highest proportion we've seen in any recent quarter. The higher proportion of new customer originations has been particularly noteworthy in our CNU and NetCredit businesses. We're very pleased with our ability to continue to attract new customers as it sets us up very well for the future.

However, as we've stated on prior calls, a higher mix of new customers and originations requires higher loss provisions upfront as new customers default at a higher rate than returning customers with a successful history of payment performance.

Given these recent trends, net charge-offs as a percentage of average combined loans and finance receivables increased slightly for the third quarter of 2017 to 11.9% from 11.7% in the third quarter of last year. The modest increase year-over-year was driven primarily by the continued seasoning of new customers originated in recent quarters, particularly in our short-term and installment loan portfolios and was in line with our expectations.

We continue to expect consolidated gross profit margin to remain in the range of 50% to 60% and will be influenced by the pace of growth in originations, the mix of new versus returning customers and originations, and the mix of loans and financings in the portfolio.

Our domestic gross profit margin of 51.3% in the third quarter increased from 48.1% in the third quarter of last year, led by improved credit quality in our line of credit products and partially offset by new customer growth in our installment and short-term portfolios.

Our international gross profit margin was 47.9% in the third quarter compared to 68.9% in the prior year quarter. The decline in international gross profit margin from the prior year quarter was driven by originations growth in our installment products.

We expect our international gross profit margin to range from 50% to 60% and will be driven by the pace of growth in both the U.K. and Brazil as well as the mix of new and returning customers.

Turning to expenses. Our total operating expenses were $79.3 million in the third quarter compared to $68.7 million in the third quarter of last year. As David mentioned, we've seen continued efficiency in our marketing spend, which was offset this quarter by higher operations in technology and general and administrative expenses compared to a year ago. These expenses were mostly associated with our larger receivables portfolio, including transaction fees, servicing, underwriting and legal costs. In addition, personnel costs are higher year-over-year, primarily from continued investment in development of our technology capabilities. There are also a number of onetime items in these line items, which I will explain.

Marketing expenses were $27 million in the third quarter and accounted for 12.4% of revenue, which compares to $26.7 million or 13.6% of total revenue in the third quarter of last year. Marketing expenses for the third quarter included a onetime reduction of $1.9 million related to the deferral of certain marketing costs that were incurred in prior periods. We expect marketing spend will remain in the mid-teens as a percentage of revenue for the fourth quarter.

Operations and technology expenses totaled $27.2 million in the third quarter compared to $20.6 million in the third quarter of last year. Operations and technology expenses for the quarter include a $2.3 million increase from ongoing costs that previously were included in general and administrative expenses. The year-over-year increase outside of this expense recategorization was primarily due to volume-related servicing and underwriting expenses as well as an increase in U.K. customer settlements compared to a year ago.

We expect operations and technology expenses to grow with volume and range between 11% to 11.5% of revenue in the fourth quarter.

General and administrative expenses were $25.2 million in the third quarter compared to $21.3 million in the third quarter of last year. General and administrative expenses include a $2.3 million decrease from ongoing costs that are now included in operations and technology expenses, and the quarter also included $900,000 of onetime costs from multiple items. The increase in general and administrative expenses outside of these adjustments was primarily due to higher technology-related personnel costs as well as legal expenses.

We expect general and administrative expenses to range between 11.5% and 12% of revenue for the fourth quarter.

Adjusted EBITDA, a non-GAAP measure, was flat year-over-year at $34.2 million in the third quarter. Our adjusted EBITDA margin was 15.7% compared to 17.4% in the third quarter of last year.

Our stock-based compensation expense was $3 million in the third quarter, which compares to $2.3 million in the third quarter of last year.

Our effective tax rate for the third quarter was 38.5% compared to 35.4% in the third quarter of last year. The increase in the effective tax rate was primarily due to the impact of higher nondeductible items relative to the year-ago quarter.

Our effective tax rate for the 9 months ending September of this year is 34% compared to 40% for the prior year 9-month period.

We believe our full year tax rate will remain in the mid-30% range.

Net loss was $3.4 million in the third quarter or negative $0.10 per diluted share, which compares to net income of $7.8 million or $0.23 per diluted share in the third quarter of last year.

Our GAAP results were impacted by a loss on the early extinguishment of debt during the quarter of $14.9 million as a result of retiring $155 million of our 9.75% notes during the quarter with a portion of the proceeds from our 8.5% unsecured senior note issuance.

Adjusted earnings, a non-GAAP measure, totaled $8.6 million or $0.25 per diluted share compared to $9.3 million or $0.28 per diluted share in the prior year quarter.

We continue to strengthen our balance sheet -- we continued to strengthen our balance sheet during the quarter as we accessed the unsecured senior note market during August to raise $250 million of 7-year notes at 8.5%, which was used to redeem a portion of our existing 9.75% notes and support liquidity as we move into our seasonal peaks for growth. This follows the placement of our $40 million bank led secured line of credit last quarter.

In addition, today, we announced the renewal of our $275 million net credit securitization facility. The renewal extends the maturity of the facility to April 2019, lowers our cost of financing and includes flexibility to issue into the term securitization markets.

In total, we've raised $565 million at competitive costs during 2017 across these 3 markets.

During the third quarter, cash flows from operations totaled $125.2 million, and we ended the quarter with unrestricted cash and cash equivalents of $110.1 million and total debt of $765.4 million. Our debt balance at the end of the quarter includes $186.5 million outstanding under the $295 million of combined installment loan securitization facilities.

Now I'd like to turn to our outlook for the fourth quarter and full year 2017. We've remained focused on maintaining solid profitability as we further expand our 6 growth businesses. Our outlook reflects continued strong growth in each of our businesses, a continued higher mix of new customers and originations and no impacts to our U.S. business from CFPB rules during 2017. Any significant volatility in the British pound from current levels could also impact our results.

As noted in our earnings release, in the fourth quarter of 2017, we expect total revenue to be between $220 million and $240 million, diluted earnings per share to be between negative $0.01 and $0.18 per share, adjusted EBITDA to be between $32 million and $42 million, and adjusted earnings per share to be between $0.14 and $0.33 per share.

For the full year 2017, we expect total revenue to be between $820 million and $840 million, diluted earnings per share to be between $0.65 and $0.84 per share, adjusted EBITDA to be between $151 million and $161 million, and adjusted earnings per share to be between $1.24 and $1.43 per share.

And with that, I'll hand the call back over to David.

Thanks, Steve. And now we will open up the call to any questions you may have.

(Operator Instructions) First question comes from David Scharf with JMP Securities.

David, I'm wondering, just to help put things into context, the 30% of origination volume that was a record coming from new customers, maybe over the last 2 years, 8 quarters or so, I mean what is the lowest that figure has ever been?

I don't have like an 8-quarter number, but I can tell you 3, 4 years ago, I mean, it was as low as the kind of low to mid-teens. So that number's come way up, which is a really terrific sign in the strength of our marketing efforts. Really, over the last 3, 4 years, this has been an ongoing improvement from our teams. And to be able to increase that number from the low to mid-teens kind of 4, 5 years ago when I started here to where we are today is a great sign for our future.

Got it. And as we think about that very wide range of gross margin guidance, the 50% to 60%, I mean, obviously, so much of that is driven by the mix of new versus repeat users. I mean, do you think this 30% is close to a peak? I mean -- or is there a number you even have in mind that you wouldn't -- that you'd feel not so comfortable going above?

We'll take as many as new customers as we get, which is why we give the large -- which is why we give somewhat wide ranges across all of our guidance because mix is a big driver of that. I mean, there's also other factors like the calendar affects our gross margin more significantly than you might imagine kind of when -- kind of what day of the week the quarter ends on has -- could have a several-point swing in our gross margin for that quarter. It'll swing back the following quarter, but for a quarter, you can have a fairly wide swing. So short-term mix, calendar, those kinds of things can move gross margin pretty significantly, which then obviously drives gross profit and can move EBITDA around a lot, which is why our guidance ranges are wide. But that longer-term trend has been very positive. And keeping those, we've been able to deliver results within those guidance ranges. And when you look deeper into the business like -- with metrics like new customer growth and with some of the other credit metrics, we continue to see very positive trends.

Got it. And given the kind of the variability in product mix shift quarter-to-quarter, I'm just wondering, on an annual basis, we realize originations can shift around a lot. It looks like with longer duration, larger loans, you're growing your balances nicely without having to originate as much. Is the mid-teens year-over-year growth in balances for line of credit installment a pretty good way for us to think about the balance sheet growth near term?

I think the best -- we think that kind of growth rate is sustainable. And hopefully we can do more, but that's not -- that's certainly not something we view as an anomaly.

Got it, got it. And then lastly, and then I'll jump back in line here. On the renewal of the NetCredit securitization, is there anything on the terms that changed materially? I didn't know if there was a reference to the cost of funding there, Steve.

There was, David. There's one -- you may remember, we had 2 classes previously. There's only 1 class of issuance now, and it's at LIBOR plus 750. You may recall there was a minimum 9.5% cost in the prior renewal. And we will issue once a quarter, so the variable note is a little bit larger than the monthly issuance variable note that we had in the previous renewal.

The next question comes from John Rowan with Janney.

I'm just trying to square out the fourth quarter guidance. It looks like -- the difference between GAAP and operating is about $0.15. That obviously is not going to be all stock-based comp. I'm just trying to figure out if there are any type of other onetime items that are going to come in the fourth quarter that make that GAAP so large?

Are you talking about the GAAP EPS, John?

Yes, there's $0.15 of differential between your GAAP earnings per share and your operating earnings per share in the fourth quarter, which is a lot bigger than it typically is.

Yes, so you'll see in the 8-K the securitization renewal that we refinanced all of the existing notes into the new facility. And really, the reason for that is it will save us money over the long haul and allowed us to utilize at newer advance rates to draw more liquidity. Similarly, to the redemption on the senior notes during the quarter, there will be in up front charge for that. But overall, this is an NPV-positive trade, so that's really what's happening with the range from GAAP to EPS.

Okay. That makes sense. I just wanted to make sure that wasn't a new run rate with the differential there because, obviously, that's not all stock-based comp. Do you happen to know what the dollar charge is that you're going to recognize in the fourth quarter for that change?

It will likely be between $5 million and $6 million, noncash.

Noncash. Okay, and then when you guys mentioned it in the prepared remarks, David, I think you talked about it, with the pre-authorization to the -- out of accounts under the CFPB rules, how that would potentially impact some of your installment products. Can you give us an idea of how your current policies for authorizing debits out of consumer accounts would juxtapose versus what the CFPB's proposal -- CFPB's final rules mandate?

Yes, they're not terribly different because we kind of self-limit ourselves. We self-limit our current debiting process on that loan to a couple of failed attempts in most cases. So the big changes to the number of debits is getting reauthorized when we talk to the customer to set up a payment plan and those kinds of things. We don't think that's going to be a major change to our overall processes. We use a lot of good analytics to make sure we have the most efficient and effective debiting as possible within the rules. We use that already to stay within the NACHA return limits. And so adapting those same analytic capabilities to the new CFPB rules, we don't think it's going to have a major impact across our line of credit and installment loan products.

Okay, last question. Steve, I think you said G&A expense for the fourth quarter, between 11 to -- 11.5% to 12% of revenues. Did I hear that right?

That is right.

(Operator Instructions) Next question comes from Michael Del Grosso with Jefferies.

First one is on the allowance. Seasonally, last year we saw relatively flat reserve quarter-over-quarter from the third to the fourth quarter. Given the new customer mix you mentioned you experienced this quarter, is it fair to expect a similar seasonality in that this year?

Yes, I think you would expect to see, particularly -- depending on the mix. So there will be growth, and new customer mix obviously drive that, but there definitely is a seasonal aspect to the allowance.

Okay. So when you say growth, should we expect that to tick up a bit? Or are you seeing more flat?

Well, so it's going to bear -- I mean, the amount of allowance coverage obviously depends on the mix in the portfolio and the mix of new versus returning. So fourth quarter is obviously our strongest growth period. And as we've mentioned, we're seeing a lot of that growth coming from the non-short-term pieces of the portfolio. So there may be a little bit of comparability issues from prior periods just because of that. But I think you should expect those are going to be the key drivers in terms of where the allowance would sit at the end of the quarter.

Okay, that's helpful. And then, David, I think last quarter you mentioned you were seeing some state-level legislative activity in Maryland. Any update there or any other states we should put on the radar in terms of new activity?

Yes, I mean, Maryland was a few quarters ago. And we talked about how under the new Maryland rules that went into effect I think 2 quarters ago now, we're not allowed to originate new lines of credit in Maryland. We do still have installment lending in Maryland. But we can continue to originate to -- lend to our existing line-of-credit customers in Maryland, so there hasn't been significant impact there. Beyond Maryland, it's been a little quiet. Some of them are not in session. They're just kind of getting back to the session now. We actually are somewhat optimistic that the final CFPB rule being published will decrease state activity as they'll see kind of a -- finally that there's a federal rule out there addressing the space, and that will reduce the impetus to try to do something at the state level. We have a couple of indications of that already from a couple of states, and we'll continue obviously to keep an eye on it as we get deeper into the session here into the late fall and early winter.

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

Thanks, everybody, for joining us again today. We look forward to updating you on our progress next quarter. Have a good evening.

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