Enova International Inc (ENVA) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to the Enova International Second Quarter 2018 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, Kate, and good afternoon, everyone. Enova released results for the second quarter of 2018 ended June 30, 2018, 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, and good afternoon, everyone, and thanks for joining our call today. I will start by giving a brief overview of the quarter, and I'll update you on our strategy and progress in 2018. And finally, I will share our perspective looking forward. After my remarks, I'll turn the call over to Steve Cunningham, our CFO, to discuss our financial results and guidance in more detail.

Q2 was another strong quarter for Enova. By successfully executing on our focused growth strategy, we were able to exceed our revenue expectations while delivering adjusted EBITDA and adjusted EPS at the high end of our guidance range. Our financial results continue to be driven by strong demand and stable credit in each of our 6 growth businesses, leveraging our scalable online model, diversification efforts and balanced efficient marketing. Following 2 strong quarters, we have a nice tailwind heading into the back half of 2018.

Revenue in the second quarter was $253 million, a robust 33% higher than Q2 of last year. This was above the high end of our guidance range and marks the ninth consecutive quarter of double-digit year-over-year revenue growth. Although we saw growth across all of our products, the strongest growth was in our U.S. and international subprime installment loan portfolios, our line of credit portfolios and our U.S. near prime product.

A significant driver of the recent acceleration in our growth has been the increase in new customers, which represented 28% of total originations in the quarter. As we've mentioned in the past, these new customers ultimately expand our returning customer base and our revenue potential going forward. Although, as we've discussed many times, a higher percentage of new customers can impact near-term profitability as we reserve at a higher provision for losses upfront.

But in Q2, despite our strong new customer growth, adjusted EBITDA and adjusted EPS came in at the high end of our guidance range. Adjusted EBITDA rose 20% year-over-year to $50 million. And adjusted EPS, up $0.59, was up from $0.41 in Q2 of last year. This was a result of stable credit and very efficient marketing, which enabled us to generate good margins even with the higher percentage of new customers.

Total company-wide originations in Q2 increased 8% sequentially and 17% from last year, driven by strong growth in our installment and line of credit products. Installment loans and lines of credit now comprise 80% of our total revenue and 90% of our total portfolio.

Our consistently strong financial performance has been driven by our focus on our 6 growth businesses, namely our U.S. subprime business; our U.S. near prime offering; 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 growth strategy revolves around actively building out each of these businesses and adding additional products within them to drive growth.

Our diversified product offering gives us the flexibility to grow the overall business in a rational way and is one of Enova's many unique characteristics that has allowed us to excel.

Our large U.S. subprime consumer business continue to expand, with originations growth of 17% year-over-year. This portfolio is well diversified, consisting of 46% line of credit products, 36% installment products and only 18% single-pay products. This diversified offering provides our customers with flexibility as we strive to consistently meet their evolving needs.

Our U.S. subprime consumer business is a well-known brand that we've been able to leverage to expand our footprint and further penetrate the large and fragmented market. As a result, we continue to believe that there is a huge opportunity to grow our single-digit market share.

In the U.K., we are pleased with the momentum we are seeing. We remain the leading subprime lender by market share and believe there is significant opportunity to capture additional share. Our second quarter U.K. revenue increased 24% year-over-year, primarily driven by strong growth in our installment loan product. Loan originations rose 16% from Q2 of last year as we saw continued strong growth from new customers. We remain focused on producing meaningful growth in the U.K. while increasing our profitability there.

We're able to drive another quarter of rapid growth at NetCredit, with loan balances increasing 43% year-over-year to over $400 million. Our U.S. near prime product represented 52% of our total U.S. portfolio at the end of Q2, up from 49% in Q2 of last year. NetCredit's Q2 originations rose 36% over the prior year. We are achieving this rapid growth by continuing to take share from incumbent brick-and-mortar installment lenders as customers greatly prefer the speed, ease and privacy of our online model.

Our small business financing portfolio represented 8% of our total loan book at the end of Q2. We are remaining cautious on this space as the market rationalizes. As a result, our loan portfolio contracted 10% year-over-year, and originations were down 23% year-over-year. However, we are optimistic about our future opportunity in this space as we have very good credit performance across vintages, and we have recently seen an uptick in origination volume.

Our Brazilian loan portfolio ended Q2 at $17 million. On a constant currency basis, Q2 originations rose 27% year-over-year and 6% sequentially. Brazil represents a significant opportunity with a huge addressable market. With our growing experience in Brazil, we are in a great position to grow and scale this business, given Brazil's large population, growing middle-class and stable regulatory environment.

Lastly, Enova Decisions, our real-time Analytics-as-a-Service business, continues to gain traction. This business is still in its very early stages, but we believe that we have an opportunity to increase the rate of customer acquisition over time and continue to grow out this business.

Before wrapping up my remarks, I want to provide a brief regulatory update. As we discussed in previous quarters, regulatory activity at the state level picked up after President Trump was elected. On the positive side, despite that increased focus, we have had a couple of positive legislative wins this year, including a new Florida law that expands access to consumer credit by creating an additional lending product and a new Mississippi law that extends by 4 years the sunset of the existing credit availability act in Mississippi.

However, one state is likely to unnecessarily restrict access to credit for their citizens. The Ohio legislature recently passed a bill eliminating an existing subprime lending product and replacing it with a set of rules that we believe will hurt Ohio [lenders]. This bill is likely to be signed by the governor, and we expect it to apply to loans originated after mid-2019. Fortunately, given our significant diversification efforts over the past 5 years, we do not expect this to be a material to us. Ohio is not a top 5 revenue state for Enova. Our existing product in Ohio was not one of our more profitable ones. And we will be able to continue lending in Ohio under the new rules, although volumes will likely be lower. In addition, we already have plans underway to launch 2 new products in Ohio later this year, and those products will not be subject to this new legislation.

Beyond Ohio, we are not currently seeing any additional state activity that would likely be problematic for us, but we will continue to monitor state activity closely and make sure we are in a position to keep access to credit available wherever possible.

On the federal level, I'm sure you are aware that President Trump nominated Kathy Kraninger to be the next Director of the CFPB. Kraninger, who worked for Mulvaney previously, appears to have an informed view of the need to keep access to credit open for consumers. So we expect it to be a net positive if she is confirmed. In any case, the diversification efforts we have taken over the years have reduced our regulatory risk, and we believe that our flexible lending platform positions us well to adapt our products as necessary. And any new rules from the CFPB may present the opportunity for us to gain significant share as competitors struggle to adapt.

Overall, our second quarter performance demonstrates the strength in our business and solid execution made possible by our world-class team and advanced technology and analytics platform. We believe that our flexible online model, preferred by borrowers, allows us to win on the competitive front and expand our market share. We remain confident in our direction and our ability to execute on our focused growth strategy. Our well-diversified product offering positions us well to navigate any regulatory changes and deliver sustainable and profitable long-term growth in 2018 and beyond.

Now I'll turn the call over to Steve, who will provide more details on our financial. And following his remarks, we will be happy to answer any questions that you may have. Steve?

Thank you, David. Good afternoon, everyone. I'll start by reviewing our financial and operating performance for the second quarter and then provide our outlook for the third order and the full year 2018.

We are pleased to report another quarter of strong financial results, with revenue above our expectations and adjusted EBITDA and adjusted earnings per share at the high end of our guidance. As David mentioned, total second quarter 2018 revenue increased 33% from a year ago to $253 million, exceeding our guidance range of $230 million to $245 million. On a constant currency basis, revenue increased 33% year-over-year. Year-over-year revenue growth is driven by an increase in total company combined loan and finance receivable balances, which rose 33% year-over-year to $901 million from $676 million at the end of the second quarter of 2017. Installment loan and line of credit products continue to drive the growth in total loan and finance receivable balances. Total company originations during the quarter increased 17% year-over-year to $599 million, driven by originations in our installment in RPA and line of credit products, which increased 33% and 29%, respectively.

As David mentioned, our focused growth strategy across our 6 growth businesses continues to diversify our receivables portfolio. As we've discussed in the past, we've been generating faster receivables growth in our line of credit and installment loan products. These products have longer durations and higher average loan amounts. As a result, we are able to drive higher total company receivables and revenue growth with fewer originations, which generally should result in less effort and lower cost to grow over time.

Originations from new customers across all of our businesses were 28% of the total, which is the highest proportion for a second quarter that we have ever seen. New customer originations accounted for 41% of the quarterly year-over-year change in total company originations.

Domestically, revenue increased 35% on a year-over-year basis and rose slightly sequentially to $214 million in the second quarter of 2018. Domestic revenue accounted for 84% of our total revenue in the second quarter. Revenue growth in our domestic operations was primarily driven by a 48% year-over-year increase in installment loan and finance receivable revenue and a 36% increase in line of credit revenue. Continued strong demand for these products drove our domestic combined loan and finance receivables balance, up 35% year-over-year. Driven by the strong growth of NetCredit, domestic near prime installment loans grew 43% year-over-year and comprised 45% of total company combined loan and finance receivable balances at the end of the second quarter.

International revenue increased 25% from the year ago quarter to $40 million and accounted for 16% of total company revenue in the second quarter. On a constant currency basis, international revenue rose 20% on a year-over-year basis. Year-over-year international revenue growth was driven by a 40% increase in international installment loan revenue and a 12% increase in short-term loan revenue. International loan balances were up 20% year-over-year as international installment loans grew 26%. On a constant currency basis, international loan balances were up 21% year-over-year.

Turning to gross profit margins. Our second quarter gross profit margin for the total company was 52%, which compares to 58% in the year ago quarter and a gross profit margin of 57% in the first quarter of 2018. The change in gross profit margin year-over-year is largely driven by the higher level of originations from new customers, combined with the small product mix shift as portfolio yields and credit performance were both relatively stable. As we've highlighted in the past, 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.

Net charge-offs as a percent of average combined loan and finance receivables increased in the second quarter to 12.9% from 12.2% in the prior year quarter. The allowance and liability for losses as a percent of combined gross loan and financing receivables at the end of the second quarter was 13.8% compared to the year ago quarter at 12.7%. The increases in the net charge-off and allowance coverage ratios are in line with our expectations and reflect continued growth and seasoning of new customers originated in recent quarters.

Going forward, we expect our consolidated gross profit margin to be in the range of 47% to 57%, same as our expectation last quarter, and will be influenced by the pace of growth in originations, the mix of new versus returning customers in originations and the mix of loans and financings in the portfolio.

Our domestic gross profit margin was 52% in the second quarter compared to 57% in the second quarter of 2017. Gross margin declined from 59% in the first quarter because of the reasons I've previously discussed.

Our international gross profit margin was 51% in the second quarter compared to 61% in the prior year quarter and was flat sequentially. The decline in international gross profit margin from the year ago quarter was driven primarily by the acceleration of growth in international originations compared to a year ago. The rate of growth for total international originations quadrupled from the year ago quarter to 16%, driven by a 35% year-over-year increase in international installment loan originations. 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. Total operating expenses, including marketing, were $85 million or 34% of revenue in the second quarter compared to $71 million or 38% of revenue in the second quarter of 2017.

Marketing expenses in the second quarter grew 26% to the year -- compared to the year ago quarter to $29 million compared to $23 million in the second quarter of 2017. But as a percent of revenue, marketing remained consistent at 12% as the increase in marketing spend drove strong customer volumes this quarter while maintaining efficiency and attractive CPS. We continue to expect marketing spend to remain meaningfully higher than a year ago in dollar terms and will likely be in the mid-teens percentage of revenue during 2018, with the highest spend during our seasonal growth periods in the second half of the year.

Operations and technology expenses totaled $27 million or 11% of revenue in the second quarter compared to $22 million or 11% of revenue in the second quarter of 2017 and were higher primarily on volume-related variable expenses.

General and administrative expenses were $28 million or 11% of revenue in the second quarter compared to $26 million or 14% of revenue in the second quarter of the prior year and were higher primarily due to personnel-related costs.

Adjusted EBITDA, a non-GAAP measure, of $50 million increased 20% year-over-year in the second quarter. Our adjusted EBITDA margin was 19.6% compared to 21.9% in the second quarter of the prior year.

Our stock-based compensation expense was $2.8 million in the second quarter, which compares to $3 million in the second quarter of 2017.

Our effective tax rate in the second quarter was 22.6% compared to 35% for the second quarter of 2017, primarily as a result of lower corporate federal tax rates. We continue to believe that our effective tax rate will normalize in the mid-20%.

Net income was $18.2 million in the second quarter or $0.52 per diluted share, which compares to net income of $11.9 million or $0.35 per diluted share in the second quarter of 2017. Net income has benefited from rising EBITDA, a drop in the company's cost of financing and the drop in the effective tax rate.

Adjusted earnings, a non-GAAP measure, increased 49% to $20.8 million or $0.59 per diluted share from $14 million or $0.41 per diluted share in the second quarter of the prior year.

During the second quarter, cash flows from operations totaled $143 million, and we ended the quarter with unrestricted cash and cash equivalents of $47 million in total debt of $763 million. Our debt balance at the end of the quarter includes $179 million outstanding under the $295 million of combined installment loans securitization facility. Also, today, we announced the addition of a new 3-year $150 million securitization facility to support the growth of our near prime installment product. The new facility brings our total securitization capacity to $445 million, expands our investor base and lowers our cost of financing.

Now I'd like to turn to our outlook for the third quarter and full year 2018. Our 2018 outlook reflects continued strong growth in each of our businesses, stable credit, a sustained higher mix of new customers in originations and no significant impacts to our businesses from regulatory changes. Any significant volatility in the British pound from current levels could impact our results.

We expect to experience our typical quarterly seasonality during the remainder of 2018 as we continue to focus investment on new customers across our businesses. During our peak growth periods in the second half of the year, gross margin, EBITDA and earnings per share could be impacted by higher provisions for losses during those periods.

As noted in our earnings release, in the third quarter of 2018, we expect total revenue to be between $260 million and $275 million, diluted earnings per share to be between $0.30 and $0.52 per share, adjusted EBITDA to be between $40 million and $50 million and adjusted earnings per share to be between $0.37 and $0.58 per share.

For the full year 2018, we are raising our guidance and now expect total revenue to be between $1.035 billion and $1.075 billion, diluted earnings per share to be between $1.78 and $2.22 per share, adjusted EBITDA to be between $195 million and $215 million and adjusted earnings per share to be between $2.19 and $2.63 per share.

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

Great. Thanks, Steve. At this point, we'll open up the call to any questions you may have.

(Operator Instructions) The first question is from David Scharf of JMP Securities.

I was wondering, you may have mentioned with respect to the continued focus on new customer acquisition. I know you gave the 28% figure. I'm curious, do you know roughly what percentage of your portfolio ending loan balances is attributable to first-time borrowers of Enova?

I mean, David, we don't -- off the top of my head, I wouldn't -- we don't have that in front of us. But I think you can safely assume that we've been generating -- it's been increasing over time. If you look back over the past several quarters, we've been in our highest periods, around 30% in the back half of last year and then the upper 20s for the other quarters. So you can safely assume we're starting to see the overall amounts start to creep up towards those numbers as we settle in longer term.

And as we think about it -- and obviously, we appreciate the variability in the forecast because of the mix issues, how that impacts reserving. When we think about the low end of gross margin levels, is it predominantly related to the new customer mix? Or is a lot of it related to the lengthening of the duration of the loans and the size of the loans? Just trying to get a sense if it's borrower or product-related or if it's skewed towards one or the other.

I think you're going to see the low end of the ranges around those periods where we're growing most quickly, which is related to marketing spend and as well as when we're having to provide allowance and associated provision for losses. That's -- and if you kind of look across historically, that's when you see -- that's how you see the pattern of our gross profit margin playing out between first and fourth quarter, for example, which would typically be our high and low points across a range for a year. Duration is really not so much a factor.

In the near term, the next couple of quarters that our guidance covers, mix is not going to have -- product mix isn't going to have a big impact in overall levels of profitability because the EBITDA margins across products just aren't very different. So it's really almost exclusively driven by the rate of growth and the rate of new customer growth, which, as Steve says, impacts our marketing spend and our level of provisions.

Okay. That makes sense. And the -- also just thinking about market share, Dave, you made a comment that the near prime product is capturing share at the expense of maybe some traditional brick-and-mortar installment lenders out there. Do you know whether or not a fair amount of your NetCredit product are refis -- are refinancing some of these brick-and-mortar guys? Or do you just get a sense based on where they've been looking around?

No, they're not necessarily straight-up refinances, but they certainly are customers that have used brick-and-mortar installment lenders in the past. But if we weren't here, we'll be looking at brick-and-mortar installment lenders as an option.

Got it. One cleanup question, then I'll get in queue for the others. Just looking at the sequential rise in share count, it was definitely higher than we were expecting it. And based on the stock comp in the quarter, that didn't stand out. It's unusually high. Was there any option granting? Or was there something that entered the diluted count that took place in the second quarter?

No, that -- the increase was largely exercising the stock options that were already granted out there and not new. But as you exercise those existing rents as our share price has been raising, those will add to the share count.

Okay. Well, is the treasury method getting diluted by the share price?

Yes.

The next question is from John Rowan of Janney.

Just 2 quick questions. So the gross profit margin guidance of 47% and 57%, I'm assuming that's not 2 half, right? I don't think we've seen a 57% gross profit number for a second half quarter ever. I just want to make sure that we're -- that's bracketing a full year, not just the half.

That's correct.

Okay. And then marketing spend, I understand that it's going to be materially higher year-over-year. Steve, you said a mid-teen number. Is that mid-teen number full year marketing versus revenue? Or is that mid-teen for the last 2 quarters relative to revenue?

Yes, it's going to be more like the last half. I mean, you've seen us. We've been pretty consistent, but the dollar spent is up substantially because our revenue spend is up quite a bit year-over-year.

Okay. And then just lastly, can you comment maybe about the net charge-off right in the line of credit product? It seemed like it was higher year-over-year. Is that just a function of originations? Or is there something else going on there?

Yes, it's kind of like what we've been talking about with new customer growth. You start to see that showing up, and you can see from an allowance coverage as well that it's things we expected as we're building that base and those returning customers. They will eventually become returning customers for us.

And we said very strong new customer growth in the line of credit products.

The next question is from John Hecht of Jefferies.

And I think you touched on some of this already. But you said more new customers, but you're still coming at the high end of your overall guidance range, and it's predominantly on stable credit in a context of more new customers. Do you think -- I mean, is this -- you're getting better new customers? Or the general customer you're getting is just better off because of the economic backdrop and higher wages? Is there any way to attribute that?

John, I would say that what you're seeing -- revenue obviously is benefiting from the overall customer growth from the portfolios. As you move down the EBITDA, I think credit has been very consistent with what we would expect as they season, and you've seen some of that show up in our numbers. But it's also benefiting EBITDA. It's benefiting from the operating leverage. And you can see as a percent of revenue, in particular G&A, has been coming down pretty consistently. And revenue has been outpacing nonmarketing expenses, at least 2:1 now for a little bit of time. So all of that sort of contributes to landing that figure on the higher end of the range. But obviously, as you move into periods -- some of the seasonal periods as we've talked about, where there is increasing growth, in particular the higher proportion to new customers that we've typically seen in the second half of the past couple of years, it will be a little harder to continuously be able to do that.

Okay. So more benefits tied to scaling of the infrastructure as opposed to some of the other stuff. Second question is just looking at the calculated yields at the product level, they've been much more stable with less quarter-to-quarter variability over the last few quarters relative to before. And I think before, some of that was tied to maybe some geographical mix changes and so forth. But I'm wondering, is that kind of a signal that you're kind of balancing out the mix so we should see less variability on those? Or is there's something else just in terms of maybe tightening up kind of product structures or something in that realm?

Yes, I think we have more product changes in 2016, early '17 than we have more recently. And also, that credit is still an extremely strong grower. It has big existing book, so it's making less impact on the overall portfolio than it's early on when we had a much more different looking product growing very, very quickly. So yes, I think it's just more stable -- strong growth but more stable product offering kind of over the last few quarters.

Okay. And then last question. Steven, what's the right tax rate to think for you guys in the next -- well, I guess, on the outset here?

Yes. I think the mid-20s is the right way to model it. I mean, there is some variability from quarter-to-quarter depending on some of the deductibility of our stock-based compensation is in vest, and that's sort of a function of our share price in each quarter, how much is vesting. So you'll see some variation from that. But as I said on the call, mid-20% should cover you pretty well for the foreseeable future.

(Operator Instructions) The next question comes from Vincent Caintic of Stephens.

First, just had a maybe a 2-part question about the growth pipeline that you've got built into the business. Now you had a nice 30-plus percent year-over-year loan growth for this year so far, and also that stretched back a couple of quarters before that. I'm just kind of wondering, given the investments and the marketing that you've already spent, do you have -- what's the visibility into that continuing in terms of getting 20% or 30%-plus year-over-year loan growth. And then the second part, just thinking about the marketing expense. I know there's -- the second half of the year has higher marketing spend seasonally. But when you think year-over-year, do you see a lot of opportunities to put marketing dollars to work? And are there particular channels that seem to be working particularly well?

Yes, I think that kind of all ties into kind of one unified answer, which is we do continue to see lots of opportunity for growth in the current market environment. Obviously, if the market environment changes meaningfully, that might alter our perspective. But right now, we're our seeing strong demand. Our marketing is working extremely well across a number of channels. We don't feel like we're fully pressed on the gas right now. We're kind of working into it just to be -- just to make sure we don't get too far ahead of ourselves. And so as we look on the back half of the year, we definitely see strong growth continuing. We're off to a good start so far in Q3. We've seen the strong demand continue. And so the combination of a strong product offering, efficient marketing with maybe some additional levers to pull and a strong demand we continue to see, we're pretty optimistic right now about the back half of the year.

Okay. Great. That's really helpful. So the second question on the line of credit products, so nice growth there. I was kind of wondering if you could describe in particular the growth that you see there in terms of demand. And then relatedly, it seems like there's supply coming in from -- others have been launching line of credit products. Some of them -- some of your peers have been launching credit cards products. Just kind of wondering how you see the competitive environment as well as the demand for line of credit.

Yes, I mean the "subprime credit cards" aren't really so subprime and are, I think, big competitors of our line in credit products. I mean, our line in credit product is a subprime product. And really, it's differentiated in that way. And so we're not -- we've not seen a ton of competition in that space so far. We've been able to grow that product, a, by launching additional space, by having some legislation passed in certain states that have allowed us to have access where we haven't had in the past, and we're able to offer it. It's really preferred product by customer as long as it take a lot of shares. So it's a really good product. We've been very successful at it. It's a tricky product to underwrite correctly, but we've been able to do it well, and I think that's been a nice competitive advantage for us.

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

Thank you so much for joining us today. We look forward to updating you on our progress again next quarter and throughout the remainder of the year. Have a good evening.

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