Enova International, Inc. (ENVA) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Enova International Third Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note that 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, operator and good afternoon everyone. Enova released results for the third quarter of 2016 ended September 30, 2016 this afternoon after the market close. If you did not receive a copy of our earnings press release, you can 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 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 would like to turn the call over to David.

Thanks and good afternoon everyone. Thanks for joining our call today. I am going to start off by giving a brief overview of the quarter, then I will update you on our strategy and initiatives, and finally, I will share perspectives looking forward. Then I will turn the call over to Steve Cunningham, our CFO to discuss our financial results and guidance in more detail. We continue to be very pleased with the strong performance and momentum we are seeing in our core businesses as well as the sustained traction of our new initiatives to drive additional growth. For the third quarter, our revenue was $196 million, an increase of 19% from Q3 of last year and above our guidance of $175 million to $190 million. Our higher than expected revenue was driven by strong originations across almost all of our products. We believe the continued strength in our originations this year is due to a combination of factors. First, our team has done an excellent job of continually improving our products to meet customers’ needs and pairing those products with efficient marketing that is resonating with our customers. Second, we are likely benefiting from where we are in the economic cycle. The economy is still in good enough shape that our customers feel comfortable borrowing when necessary, but it’s not so strong that savings have increased meaningfully. As we have discussed before, over 47% of Americans don’t have sufficient savings to cover up $400 financial emergency. Finally, we are winning on the competitive front. As a result of our significant experience and solid diversified funding, we have been able to be aggressive this year as others have had to pullback in the face of credit concerns and liquidity issues. Adjusted EBITDA for the quarter was $34.2 million, which was at the high-end of our guidance of $25 million to $35 million. Our strong EBITDA performance was driven by combination of the good customer demand, I just discussed as well as very efficient marketing and good credit performance. Our sustained solid credit metrics remain a substantial competitive advantage for us. The sophistication of our analytics in the extensive experience of our team has allowed us to effectively manage credit quality through product launches, multiple economic cycles and substantial regulatory changes. We have been doing this for 12 years and we continue to get it right. Total originations were up 7% from last year. This marks the fifth sequential quarter of year-over-year growth in total originations since the new UK regulations went into effect in 2014. As a result of the strong originations, our total loan book grew 38% year-over-year and 12% sequentially. 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. This led to a 34% year-over-year increase in U.S. installment loan revenue and a 40% increase in U.S. line of credit revenue. Installment loans and lines of credit now comprised over 73% of our total revenue and 87% of our portfolio. I want to make an important point about our originations in Q3. We actually have the ability to grow originations even faster in the quarter, but we throttled our marketing in the back half of the quarter in the face of very strong demand from new customers. As we have discussed in the past, we manage our portfolio to deliver both near-term and long-term profitability. And rapid growth in originations, especially originations in new customers can impact near-term profitability from a GAAP perspective as we incur upfront marketing expenses as well as higher levels of loan loss provisions. Steve will discuss this in more detail in a few minutes. But in Q3, we made the decision to moderate growth to maintain strong profitability for the quarter. As an online business with the focus on direct marketing, we have the flexibility to respond to demand by adjusting our marketing spend to either accelerate or decelerate growth in order to maintain our profitability and margin targets. Our ability to dynamically adjust the changes in demand has somewhat, but we clearly saw the benefits of our online direct model this quarter. That being said, even with our scaling back, you can see the impact of high originations and our somewhat lower gross profit margin for the quarter. Turning to some additional detail in our products, our large U.S. sub-prime consumer business generated another strong quarter of profitability with revenue up 13% year-over-year. This business is becoming more diversified with 28% of our U.S. sub-prime consumer portfolio consisting of single-pay products, 26% installment products and 46% line of credit products. Despite its size, we still had single-digit market share in the U.S. and so we believe there is still a lot of opportunity to generate substantial growth in the business and we will continue to focus on maximizing this opportunity. While the new CFPB rule will impact this market, as we discussed in the past, the larger and stronger we are going into those changes, the larger and stronger we believe we will be coming out of them. In the UK, we continued to successfully grow our business following the regulatory changes that were implemented there in 2014 and ‘15. UK loan originations were 7% higher than Q3 of last year and 26% higher on a constant currency basis. We have maintained our number one market share position having taken share from our competitors since the new rules became effective. Moreover, our UK business remains profitable with over $20 million at EBITDA contributions so far this year. In addition to growing our core businesses, we remain focused on the expansion of our initiatives to further diversify our revenue base and provide additional growth while reducing regulatory risk. Our strategy is focused on the three initiatives that we believe have the potential to become really big businesses, each potentially exceeding $100 million in annual adjusted EBITDA. These are NetCredit new prime offering, our installment loan business in Brazil and our small business financing solutions. NetCredit continues to grow at a rapid pace with originations up 26% from last quarter and 55% from the third quarter of last year. Loan balances are now $275 million, which is 66% higher than Q3 of last year. Due to the sustained growth of our U.S. near-prime offering, 47% of our total U.S. loan portfolio is now near-prime. As I mentioned last quarter, we expect NetCredit to generate over $20 million of EBITDA contribution this year and that number could be meaningfully higher next year. Finally, our small business financing portfolio now represents 14% of our total loan book and almost $90 million. Given the differences in the small business products versus our consumer products as well as a significant competitive shakeout that is going on in the small business industry, I guess is that we are still several quarters away from feeling confident enough about our underwriting models, our operations and our portfolio management to significantly ramp up the rate of our small business originations. Now, I would like to turn to our Brazil operation and provide a little more detail on our business there. As you may recall, we launched a short-term installment loan pilot in Brazil in mid-2014. A good progress in that market led us to take the business out of the pilot phase at the end of last year. And since then we have been focusing on growing more aggressively. At the seventh largest economy in the world, with the population over 200 million people, Brazil represents a very large untapped market opportunity for us. Our target customer is the new middle-class consisting of approximately 74 million people who are under-banked by the country’s mainstream financial system. This represents an addressable market estimated approximately $115 billion in unsecured and personal loans. We enjoy a first mover advantage in Brazil as there is very little online lending and a favorable regulatory environment. Our product offering consist of the short-term installment loan product with the term of 3 months to 12 months and loan size in the range of or approximately R$500 and R$2,500 or approximately $150 to $800. I would characterize our products in Brazil as near-prime. Our rates are generally at the high-end to slightly above credit card rates there. This is also reflected in the demographics of our customer base. Majority of our customers are under 34-years-old and represents up incoming middle-class. And over 3x more likely to have college education and their average incomes are about 40% higher than the meeting average income in Brazil. Our Brazilian loan portfolio has grown to almost $14 million at the end of the third quarter, which is up nearly 19% from the end of Q2. Based on the strong unit economics, we are currently generating in Brazil, we have been meaningfully increasing origination level. And in the third quarter, we grew originations by 28% sequentially. This is continuing in Q4. In fact, we had a record funding day last week with almost 300 loans. While our Brazilian business will have a small EBITDA loss this year, we expect it to be EBITDA positive next year as we – and as we mentioned last quarter, we believe Brazil presents a significant opportunity for us with the potential of generating $100 million of annual EBITDA contribution down the road. Turning briefly to our marketing, you may recall that Google recently implemented new policies for AdWords, which restrict the promotion of short-term loans around the world and loans with APRs over 36% in the U.S. As we noted on last quarter’s call, AdWords account for just a small percentage of our new customer volume and is anticipated, we have not seen a material impact from the new policies and we do not anticipate while going forward. Despite not having anticipated any significant impact from the Google AdWords change, we did modestly increase marketing spend on direct mail and TV at the beginning of the quarter to provide additional protection. However, as I mentioned a minute ago, our marketing expense was very efficient in the quarter and we pulled back in our marketing in the back half of Q3. The result was that our overall marketing expense grows only modestly on an absolute basis from Q2 and actually declined as a percentage of revenue sequentially to 13.6% from 14.8% in the second quarter. This is countered to what we have historically seen as our Q3 marketing spend usually is much higher than Q2. As a result, our marketing spend as a percentage of revenue decreased an outsized 8 percentage points year-over-year. For Q4, we expect marketing to more closely approximate historical levels for the quarter. So, I would anticipate that would modestly rise from Q3 levels as a percent of revenue. To summarize, we are very pleased with our financial performance so far this year. And given the great progress on our new initiatives, creating diversification and additional growth, we are equally excited about the future. To see the success we have had so far this year, continuing into Q4 and 2017, given our focus growth strategy, strong competitive position and solid balance sheet with diversified funding. As we look to the pending regulatory changes in the U.S. in 2018. Our continued success and market share gains reinforce our confidence that our proprietary analytics and deep experience navigating past regulatory changes will enable us to emerge a winner. Now I would like to turn the call over to Steve, our CFO, who will go with the financials in more detail and following Steve’s remarks, we will be happy to answer any questions you may have. Steve?

Thank you, David and good afternoon everyone. I will start by reviewing our financial and operating performance for the third quarter and then provide our outlook for the fourth quarter. As David mentioned, we are very pleased with the company’s strong performance in the third quarter, the continued moment we are seeing in our core businesses and attraction of our new initiatives to drive additional growth. Total revenue was $195.9 million in the third quarter, an 18.6% increase from the year ago quarter and above our guidance range of $175 million to $190 million. On a constant currency basis, revenue increased 21.4% year-over-year. In the third quarter, total company origination volume increased 7.6% on a year-over-year basis and 12.7% sequentially. This drove ending total company loans and finance receivable balances to $667.3 million, that’s up 38.4% year-over-year from $482.2 million in the third quarter of last year and up 12.1% sequentially. New customer acquisitions continued to drive a significant amount of our originations during the quarter. The dollar amount of new customer loan originations has exceeded 25% for two consecutive quarters with increases across all of our significant products. Domestic revenue increased 23.7% on a year-over-year basis and 17.8% sequentially to $165.3 million in the third quarter and accounted for 84% of total revenue. In particular, year-over-year revenue growth for domestic installment loans and receivable purchase agreements and for line of credit products increased 34% and 41%, respectively. During the quarter, we continued to see increased demand for our domestic near-prime installment products and line of credit offerings, which drove our domestic loan and finance receivable balances up 44% year-over-year. International revenue declined 3% on a year-over-year basis to $30.6 million and accounted for 16% of total company revenue in the third quarter. On a constant currency basis, international revenue increased 11.6% on a year-over-year basis. The decline was primarily due to the wind down of our Canadian and Australian businesses as well as the UK line of credit products following the changes in regulatory environment there. Excluding revenue impacts from these wind downs, international revenue increased 8.1% on a year-over-year basis in the third quarter. International loan balances were up 7.6% year-over-year marking our fifth quarter of sequential growth. On a constant currency basis, international loan balances were up 18.7% year-over-year. Excluding Canada, Australia and the discontinued UK line of credit product, international loan balances increased 15.3% on a year-over-year basis in the third quarter. Turning to gross profit margins, our third quarter gross profit margin for the total company was 51.3%, which compares to a gross profit margin of 60.3% in the third quarter of last year. The year-over-year decline in gross profit margin continues to be driven by three primary factors. First, the continued strong growth of our domestic near-prime installment loan portfolio, resulting in a higher mix of those products in the total portfolio. Second, a higher mix of new customers and originations, which requires higher loss provisions upfront as new customers default at a higher rate than returning customers with the successful history of loan performance. And third, the wind down of the UK line of credit products in the prior year quarter. As David mentioned in his remarks, rapid growth in originations especially from new customers creates long-term value to Enova. And that can impact near-term profit measurement due to the timing of recognizing revenues and expenses under Generally Accepted Accounting Principles. New loan originations will provide substantial profit over their lines, but during the quarter originations, the effect will be dampened by upfront marketing expenses as well as the need to building allowance for expected loan losses. In subsequent months, GAAP profit measures for these originations will turn more positive. For example, it would typically take about 3 months for a new CashNetUSA line of credit customer to achieve breakeven gross profit because of upfront provisioning. As we have guided in the past, we expect the consolidated gross profit margin will be in the range of 55% to 60% and will be influenced by the growth in originations, the mix of new versus returning customers in new originations, and the types of loans and financings in the portfolio. Our domestic gross profit margin was 48.1% in the third quarter compared to 55.8% in the third quarter of last year for the reasons previously discussed. Excluding – we expect our international gross profit margin to remain in the range of 65% to 75% and will be driven by the pace of growth in both the UK and Brazil as well as the mix of new and returning customers. Turning to expenses, we continue to see strong operating leverage as total expenses decreased 10% year-over-year to $72.5 million. Marketing expenses totaled $26.7 million in the quarter or 14% of revenue compared to 22% of revenue in the prior year quarter. As David mentioned, very efficient marketing and strong customer demand led to a 25% decrease year-over-year marketing spend. In the quarter, we saw lower online marketing, television advertising and revenue sharing costs, which were partially offset by higher direct mail costs. Operations and technology expenses increased 11% year-over-year in the third quarter, primarily due to higher software costs, higher underwriting costs for our domestic installment and receivables purchase agreement products as well as higher domestic transaction cost as a result of higher origination volumes. General and administrative expense decreased 6% to $21.3 million in the third quarter primarily due to a higher rate of capitalized labor expenses and lower third-party legal, consulting and outsourced costs. Adjusted EBITDA, a non-GAAP measure, increased 35% year-over-year to $34.2 million in the third quarter from $25.2 million in the third quarter of last year. It also came in at the high end of our guidance range of $25 million to $35 million. Our adjusted EBITDA margin increased to 17.4% from 15.3% in the third quarter of last year. Our stock-based compensation expense was flat sequentially and totaled $2.3 million in the third quarter. Net income increased to $7.8 million in the quarter or $0.23 per diluted share from net income of $4.4 million or $0.13 per diluted share in the prior year quarter. Our effective tax rate for the third quarter increased to 35.4% from 18.8% for the third quarter of last year. Our effective tax rate for the 9 months ending September of this year increased to 39.6% from 36.5% in the prior year 9-month period. We continue to believe that our full year 2016 effective tax rate will be approximately 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 invested to-date. Adjusted earnings, a non-GAAP measure, increased to $9.3 million in the quarter or $0.28 per diluted share from $6.2 million or $0.19 per diluted share in the prior year quarter. Turning to our balance sheet, our consistent operating cash flows and the recent extension and upsizing of our installment loan securitization facility give us the financial flexibility to execute on our strategic growth plans and further strengthen our competitive position. As we disclosed yesterday, the total capacity of our installment loan securitization facility has increased by $100 million to $275 million. In addition, the monthly variable interest note or warehousing component of the facility has been upsized to $30 million. We also extended the maturity of the facility out to October 2017. Cash flows from operations for the quarter totaled $120.2 million and we ended the third quarter with cash and cash equivalents of $45.7 million and total debt of $635.2 million. Our debt balance includes $137 million outstanding under the $275 million installment loan securitization facility. Now, I would like to turn to our outlook for the fourth quarter and full year of 2016. Our outlook reflects continued strong growth in our new initiatives, including NetCredit and continued higher mix of new customers. No significant changes in competitive landscape in the UK and no immediate impact to our U.S. business from proposed CFPB rule-making since any new rules are not anticipated to go into effect until late 2018. Any significant volatility in the pound from current levels could also impact our results. As noted in our earnings release, in the fourth quarter of 2016, we expect total revenue to be between $185 million and $205 million and adjusted EBITDA to be between $32 million and $37 million. For the full year, we expect total revenue to be between $728 million and $748 million and adjusted EBITDA to be between $139 million and $144 million. With that, I will hand the call back over to David.

Great. Thanks, Steve. At this time, we are happy to take any questions you might have.

[Operator Instructions] Our first question comes from Bob Ramsey of FBR. Please go ahead.

Hey, good afternoon guys. This is actually Kyle Peterson on for Bob today. I just want to touch on the G&A it went down you guys mentioned in your prepared remarks that some of that was kind of capitalized labor costs, is this type of run-rate something we might be able to expect moving forward or G&A might kind of drift backup a little bit?

Yes, I would. This is Steve. Hey, it’s nice to have you on the call. I would expect that the drift backup there was some one-time catch-up in that. Yes, you should not take that reduction as a run-rate.

Okay, great. And then also switching a little bit on NetCredit, you guys have the average yields that you guys are getting on NetCredit available?

Yes, the average yield on the total portfolio is in the low 50%.

Okay. You say low 50%?

Yes.

Okay. And then I guess just finally on NetCredit here, I know you guys upsized the securitization or is that kind of your primary vehicle for funding that book going forward and just want to kind of want to get your thoughts on funding in NetCredit?

Yes. Our securitization facility, as you know, NetCredit is really our business that doesn’t benefit from a self-funding type of mechanism. So, we rely on that securitization facility to fund the bulk of the NetCredit originations.

Right, right. I guess, I was just trying to get about how – do you guys have any kind of leeway or runway in terms of what the upsize gives you guys before maybe you guys had considered tapping the market again or kind of exploring some other financing options, because obviously it’s growing very quickly?

Yes. Well, I think the structure and size will take us through our needs for 2017.

Alright, great. I think that’s all for me. Thanks, guys.

Good. Thank you.

And our next question comes from David Scharf of JMP. Please go ahead.

Hi, good afternoon. Thanks for taking questions. Dave, wondering if you can talk a little bit about, well, maybe the quality – credit losses are obviously holding it nice and stable. But as we think about the ending allowance rate going forward and the consolidated gross margin going forward was the pullback in origination, the intentional pullback at the end of the quarter partially based on the quality of the applications that were coming in or was it just sort of managing capital liquidity and volume?

Yes, it was absolutely not based on quality of the applications. The quality we saw was very good. Credit quality has been consistently good this entire year. It’s really just based on the extremely strong level of demand we are seeing particularly in new customer demand, as Steve mentioned in his remarks, with the highest level of new customer originations this quarter. And if we would have continued at the pace we were running, it will be great top line growth and great long-term growth, but would not have been good for Q3 profitability, so really just pulled back on those origination levels and purely to maintain that profitability level for the quarter, nothing at all to do with credit quality.

Got it, perfect. And along those same lines, as we think about the ending allowance, which was up at 14.5%, obviously reflective of a bigger mix of new borrowers, since you – as you said sort of throttle back a bit at the end of the quarter and possibly into the fourth quarter, is those newer borrower sees and you get a better read-on and then presumably they start generating more repeat borrowing in the first of half or throughout next year, is that 14.5%, should we think of that as a high watermark, should it be trending downward from here?

Well, it depends on mix going forward. But as we mentioned, Steve mentioned, with very high new customer mix this quarter that’s why that number is higher, it’s why gross profit margin was lower this quarter. And Steve guided to a higher expected gross profit margin all things equal going forward.

Got it. Switching to small business, before your comments, I have noticed that the origination volumes sort of tapered off of a bit, I am just curious if you can expand upon your comment regarding the discipline you are showing with respect to just confidence level in the model just you had and how competitive is out there, I mean reading between the lines, I got the sense you were implying that it’s still – if not frothy very, very competitive market right now that you don’t want to necessarily jump into first?

Well, this is a competitive market. That’s not necessarily our biggest concern. We actually think there is a little bit of a competitive shakeout going on right now. We have some of the kind of smaller competitors are starting to running with some funding issues. I think people are finally stepping up from regulatory standpoint providing better disclosures, making better products available which will help us because we certainly didn’t play on the fringes like some of the people did out there. But until that shakes out and if we have been at this 10 years that we have on the consumer side, maybe we would be more aggressive, but as we are still refining our operations, our credit models really understanding lifetime value, we are happy to go a little bit slower while that shakeout is happening, continue to refine and kind of we fully expect that still to be a good business for us long-term. And I would expect sometime in 2017, there is a good chance we would become more aggressive in growing that business.

Got it. And then lastly, just the UK and what’s going on competitively, I know you have talked about during the whole sort of regulatory shakeout sort of halted maybe from further force to first in terms of market share, any anecdotal commentary about Dfc Global’s brands, did you feel like you are growing simply because, you are emerging from the darkness like everybody else after that first year post new rules or do you feel like competitors are actually losing share to you?

We feel like competitors are really losing share to us. We can see it in some of our marketing and customer reach numbers as well beyond the origination numbers. And if you look at the UK growth, on it’s phase it doesn’t look spectacular in Q3, but if you look at it on a constant currency basis and see daily some of those numbers, it’s actually really strong growth in the UK. And the market isn’t growing in the UK, kind of grows of rate population, but our business certainly is and we think that’s largely from taking share.

Got it. Great, thank you.

And our next question comes from John Hecht of Jefferies. Please go ahead.

Good afternoon guys. Thanks very much. I guess, just getting a little bit more to the new customers and higher compensation of new customers in the quarter, as you have hit, I guess if you were to hit an optimal balance of new and recurring customers, where are you in the context of that. And then the second question is which – would they across all products and geographies or maybe can you tells us where the new customer benefits came in from the product perspective?

Yes. So let me – let’s do the first part first. Absent on having public guidance out there quarter-to-quarter being a public company with kind of expectations, we would take as many new customers as we can possibly get every single quarter. While it does hurt near-term profitability, it’s very near-term. And so we do not think it, we won’t be putting the business at risk by taking as many new customers as we possibly could because those new customers turn into returning customers pretty quickly and become great profit drivers for us. So managing that balance is really more about kind of whatever came through this year, which is doing what we said we are going to doing. And once we have those expectations out there, we certainly work hard to meet them. The second part of your question…?

In terms of like which business we are driving it, both the U.S. and the UK core businesses you saw gains in the quarter or how constant from an already strong second quarter same thing within that credit. So really our largest businesses most significant products we are seeing, those new customer acquisitions.

That’s balanced across all products there.

Yes.

Yes.

And it sounded like, as you mentioned, David to deliver on what you set forth with respect to guidance you kind of throttled back, are you able to tell us month ended this quarter or is there interest in new customer the appetite for new customers is strong as it was kind of too last quarter at this point in time?

Yes. We are still seeing good new customer volume.

Okay, great. Thanks so much. And the last question, you mentioned the upside credit facility, any changes with covenants or anything worth noting in that, because I know that was just yesterday, I think you announced that?

Yes. No changes in covenants.

Great, alright. Thanks very much.

And our next question comes from John Rowan of Janney. Please go ahead.

Good afternoon, guys. Steve, I just wanted to make sure I understood gross profit guidance for 2017 is between 55% and 60%, is that correct that’s all consolidated?

Yes. Well, that’s in our guidance for 2017 necessarily, but that’s sort of where we would expect. Quarter-to-quarter it can vary. And we would expect a full year to sort of fall into that range.

Do you think that it’s more – it’s a seasonal lumber or maybe you have a higher gross profit in the beginning half of the year trailing up for the back half of the year?

That’s correct. That’s how the gross profit pattern works in the business.

Okay. And then on an earlier question you mentioned some one-time catch-up items in G&A, can you kind of just go over that again, I didn’t really catch what you said, how big were the items that – I guess, if you reverse that of G&A in the quarter?

Well, we capitalize labor that’s related to the development of technology in the firm. And in this quarter, there was a little bit of catch-up, which created some of the goodness that you saw on that line item. If I had to sort of guide you a little bit between the items that I mentioned in my comments, there is probably about $1.5 million of goodness, $1.5 million to $2 million of one-timeish type items in that G&A line item.

So that reduced to $21.3 million in G&A line items?

That’s correct.

Okay. Versus your initial guidance when you came out when you see if we put out the rules, you were saying 60% to 65% of your products will be impacted in some way, shape or form, you have obviously grown ancillary products, you have been generating loan growth out of the UK, so can you update just on what that number is today, I think you said you said there was if I am not mistaken 28% of your U.S. portfolio was lending so let me square out what the overall buckets of business are that are exposed to that rule, Dave you into your bunch of numbers earlier today, I just I think that will more damage you are going through them?

Yes. We are probably not going to update that number every quarter our momentum on get to that number on the back end of the year, but I think it hasn’t changed a tremendous amount. We have got some outside growth from Brazil since that time, but it’s very small. NetCredit has grown maybe incrementally faster than CNU has, but both of those businesses have grown on an absolute basis size, CNUs actually probably growing faster than NetCredit. So, it hasn’t changed at times since June when we first put that out there.

Okay. And then just last question, when did Google actually change their policy on marketing, because I heard that the ads are actually still showing up on Google? That I know obviously you don’t get a lot of direct marketing from Google but I know some of your lead gens also do use Google. And that will be my last question.

They were couple of weeks late in getting it out. So, it was right around the 1st of August.

Okay, thanks.

And our next question comes from Tom White of Macquarie. Please go ahead.

Great, thanks for taking my question. I have done a little late. So, I apologize if this is already covered. But Enova decisions maybe just – can you give us kind of an update there on number of customers, any new customer wins? And just kind of stepping back, I am just kind of curious how you guys are differentiating or trying to differentiate that product with some of the other kind of online lending platforms that are looking to provide kind of outsourced credit positioning. And then just housekeeping on the guidance – the full year guidance, I am just curious the strengthening of the dollar versus the pound, can you kind of call out sort of what the headwind since you guys last kind of gave a full year guidance number? And how should we be thinking about that headwind in the new guidance?

Yes. So, Enova decision is actually, we didn’t doing really well. They have a nice pipeline. We have a few signed customers now, but more importantly we have half a dozen or more and kind of what in data studies are prototyping, which is kind of like the first step to a long-term sign agreement. So, really it’s obviously very, very small and its early stages, but we like the traction we are getting in our conversations with customers, which kind of leads into the second part of your question about how we differentiate that product. And it’s not a lending platform, that’s not what Enova decision – the decisioning platform. And the focus for Enova decisions and how we differentiate ourselves is really to provide real-time transactional decisions to customers. So, we are not doing big data studies for them. We are writing custom algorithms. We are using our existing tools whether it’s customer acquisition, credit decisioning, fraud prevention to help these companies make decisions about their own customer bases in real time. And Steve, you want to address on the pound?

On the pound, just to give you some context, the third quarter of this year versus last year, the pound is down about 14% – 14%, 15%. And clearly, the line items associated with the pound are going to be worth less whether it’s P&L or a balance sheet line item. And I think our point is our guidance is just highlighting that we are subject to volatility from the pound dollar relationship, but that’s really all we are trying to communicate. And we try to give you some color on the constant currency measures back in our commentary, so you can get a feel for more of an apples-to-apples.

Okay, thank you.

[Operator Instructions] Our next question comes from Greg Hillman of First Wilshire Securities. Please go ahead.

Yes, good afternoon gentlemen. Hey, first of all, Steve, when you say near prime 47% origination to NetCredit near-prime, does that mean 36% per year at an existing below when you say near-prime?

No, we are not talking about APR cutoffs, we are talking about customers that we think are between above our credit quality for sub-prime, but not obviously, not in the prime space, so it’s broader than just the NetCredit, sub 36%.

Okay. Well, then just overall, for domestic U.S. lending, what percentage is 36% or below at this point, in terms of APR?

Yes. We don’t break out and disclose that separately.

Okay. So, it’s like hard – so, it’s hard for investors now for your installer program, your installment products and your line of credit products, what the exposure is to the regulatory risk. Is that right, it’s hard to tell, if that’s the guess?

Well, we actually gave specific guidance back in June about the percentage of our revenue that was subject to the new rules. And I think once the rules – so, once we have filed rules from the CFPB next year, that’s the guidance that we will likely update.

Okay. I think we are just sticking with that guidance from June at this point.

Yes. Like we said, it hasn’t moved a lot in 3 or 4 months since then.

Okay. And then the other thing I wanted to touch on was you have so-called credit cycle when – at certain times when lenders pulled back, because you are getting into two bad losses on their loans in particular, I think the loss rate on second mortgages and auto loans is going – is trending up right now. And since you are just a 12-year-old company, the last time there was a pullback tightening of credit standards, you were kind of a fast growing company, you just had single-pay loans and now you have your long-tail loans that go on as much as I don’t know 3 to 4 years. So, you haven’t really been stress-tested in the period when you have significant percentage of long-tail loans in the portfolio. Is that correct?

We had installment loans back in 2008, ‘09, ‘10 shorter term than some of the loans that we have today. That is correct.

Yes. But – okay, but the whole composition in your portfolio and what’s just going back – how do those loans performed in that period, the installment loans, what was the longest term for the installment loans back then?

A year.

Okay. And you have loans now that go for as long as like 3 years or 4 years, is that correct?

That is correct. Yes.

Okay. So, you haven’t gone through a period where you have kind of stress-tested your really long-tailed loans?

Is that a question?

No, no, I am thinking. Yes, is that true. You have not gone through the period.

Well, I mean, we have – those loans get stress tested at more micro levels on a very regular basis. We have states with different economic cycles. We see kind of towns with big factories that shutdown where we can see the impacts of default. So, that’s one of the great things about our model. It can be very micro focused. So, we can learn from the impacts of some of those smaller changes and adjust our underwriting – our collections of portfolio management, so that we can adapt when they are wider spread. And that’s certainly what we saw in our shorter term from portfolio back in 2008 and 2009. Our models were good enough that they were able to – they had seen smaller shocks throughout the first 4 or 5 years of our existence and we performed very, very well through the recession that started in 2008. So, we feel very, very confident in the quality of the analytics behind our longer term installment loan models and think we are in a great position to be able to withstand economic changes. I think the other thing that certainly differentiates that portfolio versus sub-prime model portfolios are certainly mortgages. It was obviously much higher interest rates on that portfolio with an average APR, north of 50% gives us a lot more cushion to withstand a downturn than say single-digit interest rate on the mortgage.

For the entire book of business, preferred series of loans?

Yes.

Okay. And then going back to your earlier part of microenvironment, so basic – so if I am correct, you said you could, let’s say, a particular town, I don’t know, loses their main factory or something like that, that you could go to that particular town and then see how your loans performed in that geographical area as kind of as many stress tests, if you will, for how those particular loans perform in an economic downturn because of that geographical area?

Yes, we are doing that virtually everyday here. Yes, absolutely.

Okay. So that’s interesting. So in a way you are saying you can simulate a general economic downturn by all these many things that happen around the country?

Yes. That’s absolutely right. And we saw the effectiveness of that, again through 2008, 2009, 2010.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to David Fisher for any closing remarks.

Great. Thank you. And thanks everyone so much for joining us today. We look forward to updating you on our progress next quarter and most importantly Go Cubs.

And ladies and gentlemen, the conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.