Enova International, Inc. (ENVA) Q1 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Enova International First Quarter 2017 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, Drew, and good afternoon everyone. Enova released results for the first quarter of 2017 ended March 31, 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 web site 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 web cast 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 web site. And with that, I'd like to turn the call over to David.

Thanks Monica. Good afternoon everyone. Thanks for joining our call today. I am going to start by giving a brief overview of the quarter. Then I will update you on our strategy for 2017, and finally, I will share our perspectives looking forward. After my remarks, I will turn the call over to Steve Cunningham, our CFO, to discuss our financial results and guidance in more detail. We are again pleased with the strong performance and profitability of our business. First quarter revenue was in line with our guidance at $192.3 million, an increase of 10% over Q1 of last year. The strong revenue was driven from healthy demand across almost all of our products. Adjusted EBITDA for the quarter, was $43.9 million, up 16% from a year ago and at the high end of our guidance. Net income was 40% from the first quarter of last year, to $13.9 million or $0.41 per share. Both EBITDA and net income once again benefited from our strong revenue, as well as solid credit performance and efficient marketing. Total company-wide originations in Q1 rose only slightly from the first quarter of last year. However, we originated significantly more loans and financings this year, as our origination mix shifted at more smaller short term loans. We saw particular strength in our U.S. subprime and our U.K. subprime products, with a number of new customers in both of those businesses up over 20% year-over-year. Even with the higher new customer volumes, we were able to keep marketing costs low, through efficient marketing. The result was cost per funded loan down double digits year-over-year in both U.S. subprime and U.K. subprime. Our total portfolio grew 90% year-over-year in the first quarter, driven by our installment and our line of credit products. Installment loans and lines of credit now comprise 88% of our portfolio and 75% of our revenue. Our success and strong results across our short term, line of credit and installment and receivable purchase agreement segments have been driven by our focus on our six 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 large U.S. subprime consumer business generated another strong quarter of profitability. That business continues to grow and become more diversified with 32% of that portfolio consisting of installment products, 45% line of credit products, and only 23% of single pay products. And despite the delay in tax returns this year, credit quality remained good. While default rates in this business were higher than we typically see in the first quarter, and were in line with our expectations. Looking forward, we still see a large opportunity to generate substantial growth in the business, as our market share is just in the single digits. In the U.K., we continue to demonstrate our ability to grow profitable business following the regulatory changes that were implemented there in 2014 and 2015. U.K. loan originations increased modestly from Q1 of last year, despite the currency impact following the Brexit referendum. On a constant currency basis, loan originations increased 16% year-over-year. In fact, we saw very strong new customer originations in Q1, as a competitive shakeout, following the regulatory changes is not yet over. As a result, even though we are the leading subprime lender in the U.K. by market share, we believe that over time, we can continue to generate meaningful growth in the U.K. and increase profitability there. Net credit loan balances, ended the quarter at $267 million, which is up 34% from the first quarter of last year. Our U.S. near prime product has gone to represent 49% of our total U.S. loan portfolio. The growth of net credit shows a strong demand from near prime customers, who are not being served by banks. As we have discussed before, this is not a new market. Many of our net credit customers historically would have been customers of the legacy brick and mortar installment lenders. But by offering a more convenient, secure and straightforward product, we have been able to take significant share of this market in a short period of time. Our small business financing products represented 13% of our total portfolio at the end of Q1. During our last earnings call, we discussed how we were taking a measured approach to growth with our small business products. Due to a shakeout that we saw occurring in the non-bank small business lending and financing industry. The upside of this shakeout, is that we have seen very strong demands over the last several months. And importantly, we continue to see recent vantages [ph] of our small business book performing well, with the unit economics continuing to improve. As a result, we would expect our origination volumes in these products to increase over the next couple of quarters. Our Brazilian loan portfolio has grown to over $10 million at the end of the first quarter, which is up 22% from the end of the first quarter of last year. We have been successful in ramping up originations, with Q1 originations up 28% from Q4 and 34% from Q1 of last year. Having gained additional confidence in both our analytics and operations over the last couple of quarters, we are now accelerating our growth in Brazil. Given the strong demand we have been seeing there, we anticipate that origination levels to grow fairly quickly. Finally, Enova Decisions, a real-time analytics-as-a-service business signed a few new clients during the quarter. As a reminder, Enova Decisions is a customizable real time scoring and decisioning platform, that helps companies make data driven decisions instantly and at scale. It's still the very early days for the business, but we are excited about both our initial customers across several verticals, as well as the pipeline we have built so far. So that's a brief overview of our six growth businesses. We believe that our continued solid performance across each of them is based on our leading competitive position and focused growth strategy, supported by our solid balance sheet, with diversified funding. Before I wrap up today, I want to spend a couple of minutes on the regulatory and legislative environment. On the federal side, there is not much new to report from the CFPB. As we discussed in the fall, there are no signs that the small dollar roll from the CFPB will be finalized soon. In fact, the earliest we are hearing is mid-2019. And there are many reasons to believe, it could be later, if at all. We are watching the developments in the house around Dodd-Frank reform, but feel it's much too early to make any predictions around what will emerge from there. At the state level, we are seeing more activity than we have over the last couple of years. There appears to be a bit of a backlash at the Trump election, with some state legislatures considering new small dollar legislation, under the premise that it's less likely there will be rule making from the CFPB. The most recent example of this is in Maryland, where bill recently passed out of the legislature and posing a 33% rate cap on line of credit products. This bill hasn't been signed by the governor yet, but we think it's likely that will become law. If it does, we will be forced to stop our line of credit product in Maryland. We don't yet have a precise estimate of the impact, but don't see any in Q2. We will provide a further update next quarter, if the bill becomes law. At this time, we don't see any other states at high risk, although we are monitoring developments closely. On the positive side, there are also a few states ruling the other way and debating new legislation to open up access to small dollar lending in those states. The closest is Oklahoma, where a bill just passed today out of their legislature, and could become effective later this year. In summary, we continue to diversify our business to decrease regulatory risk and spur growth, and we remain dedicated to our mission of helping hardworking people fulfill their financial responsibilities with fast, trustworthy credit. Our commitment to delivering exceptional products and services to these customers, who trust and count on us is driving growth in our business, and we continue to win on the competitive front. Our efficient marketing is [indiscernible] with our customers, and as a result of our significant experience, and solid diversified funding, we are taking advantage of opportunities to gain further share, as others pull back in the face of credit concern and liquidity issues. I remain confident in our direction, and believe that a world class team, focused growth strategy, strong competitive position and solid balance sheet, will drive continued success. Now I'd like to turn the call over to Steve Cunningham, our CFO, who will go over the financials in more detail. And following Steve's remarks, we will be happy to answer any questions that you may have. Steve?

Thank you, David, and good afternoon everyone. I will start by reviewing our financial and operating performance for the first quarter, and then provide our outlook for the second quarter and full year 2017. We are off to a strong start in 2017. For the first quarter, total revenue and adjusted EBITDA exceeded the midpoint of our guidance. In addition, diluted earnings per share grew 36.7% from the first quarter of 2016. As David mentioned, total revenue was $192.3 million in the first quarter, a 10.1% increase from the year ago quarter. On a constant currency basis, revenue increased 11.9%. Year-over-year revenue growth was driven by growth in total company, combined loans and finance receivable balances, which totaled $621.3 million at the end of the first quarter of 2017. That's up 18.8% from $523 million in the first quarter of last year. Line of credit products and installment loans in receivable purchase agreements products, continue to drive the year-over-year increases in total loans and finance receivable balances. Total company origination dollar volume in the first quarter rose slightly on a year-over-year basis, and was down 12.7% sequentially, reflecting our typical first quarter seasonality. However, as David mentioned in his remarks, the number of loans and financings originated increased 5.6% from the first quarter of 2016, and was the highest number of originations in a first quarter period since 2014, as we saw increased demand for short term loans in both the U.S. and the U.K. Domestically, revenue increased 14.8% on a year-over-year basis and declined 5.3% sequentially to $164.7 million in the first quarter. Domestic revenue accounted for 86% of our total revenue in the first quarter of 2017. Domestic year-over-year revenue growth was driven primarily by a 21.9% increase in domestic line of credit revenue and a 14.4% increase in domestic installment loan in receivable purchase agreement revenue. Continuing strong demand for these products drove our domestic combined loan and finance receivable balances up 22.6% year-over-year. International revenue declined 11.6% on a year-over-year basis to $27.6 million and accounted for 14% of total company revenue in the first quarter. On a constant currency basis, international revenue decreased 1.3% on a year-over-year basis. The year-over-year decline was primarily the result of the wind down of our Canadian and Australian businesses. On a constant currency basis, excluding these revenue impacts, international revenue increased 8.6% on a year-over-year basis in the first quarter. International loan balances were down 2.3% year-over-year and 6.5% sequentially. On a constant currency basis, international loan balances were up 8.2% year-over-year, excluding the impact of the wind down of the Canada and Australia, international loan balances increased 16.8% year-over-year on a constant currency basis. Turning to gross profit margins, our first quarter gross profit margin for the total company was 57.4%, which compares to a gross profit margin of 60.2% in the first quarter of last year. The decline in gross profit margin is expected, given trends we have discussed in recent quarters related to strong new customer growth, and the higher mix of near prime installment loans in the portfolio. A higher mix of new customers in the recent originations requires higher loss provisions upfront, as new customers default at a higher rate than returning customers with the successful history of payment performance. Given these recent trends, net charge-offs as a percent of average combined loans and finance receivables, increased as expected for the first quarter of 2017 to 14.9% from 13.1% in the prior year quarter. The increase was driven by two factors, first, the continued seasoning of new customers originated in recent quarters. And second, an enhancement to our accounting estimates for Brazil, which led to a onetime non-recurring adjustment, that added 120 basis points to the first quarter net charge-off rate. At the same time, we have seen the cost of revenue as a percentage of loans and finance receivables decline, as the mix of new customers and new originations had stabilized, which would lead to slower growth and provision for losses. We expect that consolidated gross profit margin will remain in the range of 50% to 60% and will be influenced by the pace of growth and 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 was 57.1% in the first quarter, compared to 57.8% in the prior year quarter, for the reasons is previously discussed. Our international gross profit margin was 59.3% in the first quarter compared to 70.8% in the prior year quarter. The decline in international gross profit margin was driven by the aforementioned enhancements to our accounting policies for Brazil, and by the impact of the discontinued U.K. line of credit product. Excluding the onetime non-recurring Brazil impacts to gross profit, the international gross profit margin would have been 68.5%. We expect our international gross profit margin to range from 60% to 70%, 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, we saw strong operating leverage this quarter, as our total operating expenses decreased 0.6% year-over-year to $68.8 million. Marketing expenses declined 7.5% year-over-year to $19.6 million in the quarter, and accounted for 10% of revenue. This compares to 12% of revenue in the prior year quarter. The year-over-year decline was driven by increased marketing spend efficiency across our channels. We expect marketing spend will increase for the remainder of the year, to around the mid-teens, as a percent of revenue. Operations and technology expenses in the first quarter increased 16.9% year-over-year to $23.5 million, primarily due to a onetime charge of $1.5 million related to the cleanup of capitalized software projects, as well as higher compliance related costs in the U.K. General and administrative expenses decreased 8% year-over-year to $25.7 million in the first quarter, primarily due to lower third party, legal and compliance costs. Adjusted EBITDA, a non-GAAP measure, increased 16.1% year-over-year to $43.9 million in the first quarter, from $37.8 million in the first quarter of last year. Our adjusted EBITDA margin increased to 22.8% from 21.6% in the first quarter of last year. Our stock based compensation expense was $2.3 million in the first quarter, which compared to $2 million in the first quarter of last year. Net income increased 40.4% to $13.9 million in the first quarter, or $0.41 per diluted share from net income of $9.9 million or $0.30 per diluted share in the first quarter of last year. Our effective tax rate for the first quarter decreased to 34.3% from 43.6% in the prior year quarter. The decrease in the effective tax rate in the current quarter, was driven by tax benefits from restricted stock units divested during the first quarter at a price above the original grand price. Cash flows from operations for the first quarter totaled $115.4 million, and we ended the first quarter with cash and cash equivalents of $97 million, and total debt of $631.1 million. Our debt balance includes $145 million outstanding under the $295 million of combined installment loans securitization facilities. There was no balance outstanding on our $35 million revolving line of credit at the end of the first quarter. With that, I'd like to turn to our outlook for the second quarter and full year 2017. As David mentioned in his remarks, we remain focused on producing strong profitability, as we continue to grow our six businesses. Our outlook reflects continued strong growth in each of our businesses, a continued higher mix of new customers and originations, no significant changes in the competitive landscape in the U.K., and no impact to our U.S. business from proposed CFPB rulemaking 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 second quarter of 2017, we expect total revenue to be between $190 million and $200 million. Diluted earnings per share to be between $0.20 and $0.40 per share, and adjusted EBITDA to be between $35 million and $45 million. For the full year 2017, we expect total revenue to be between $810 million and $880 million. Diluted earnings per share to be between $0.88 and $1.44 per share, and adjusted EBITDA to be between $145 million and $175 million. And with that, I will hand the call back over to David.

Great. Thanks Steve. At this time, we will open up the call to your questions.

We will now begin the question-and-answer session. [Operator Instructions]. The first question will come from David Scharf of JMP Securities. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Maybe just hitting upon kind of the big topics, obviously number one is credit. Can you just maybe elaborate -- I think there was a comment about Q1 seasonally -- you may have seen a loss profile a little higher than you typically see [indiscernible] quarter. Is it just timing related to delayed tax refunds, is there anything else you observe?

I think it's a little bit of product mix, with higher short term products, but also really strong customer volume as I mentioned. We thought, with delayed tax returns, that it might be higher than our [indiscernible] models which show, given the mix, but it wasn't. I think given the mix, the credit was right in line with our expectations, so it was pretty much all mix based.

Got it. And you know, a question -- maybe on the gross margin or the provisioning, it looks like sequentially, there was a reserve release around $16 million odd. I imagine, most of that is seasonal, as balances kind of drop in Q1. But I was wondering, specifically with the installment product, on a year-over-year basis, it looks like the loss rates are up a bit, but gross margin is down. But it looks like the reserve rate, the allowance rate has actually come down; 10.9% looks close to a low level. Is that just based on more of a mix of near prime credit kind of customers, or just trying to get a sense for how we ought to be thinking about the allowance rate going forward, with all these moving pieces, and why the ALL came down, when the loss rate has been going up for installment?

So first of all, let me provide a little clarity on the loss rate. So in the first quarter of 2017, the 12.4% in the supplemental table that we have put out, the Brazil impact is in that particular number. So if you adjust for the Brazil impact, that number would have been 10.6%, which you would see is fairly flat to the first quarter of last year.

Got it.

So I think that probably puts a little bit more of the reserving in perspective. But overall, reserving is going to be driven by the mix. Bearing in mind, we have from near prime through the CNU installment products in this particular category, and also the level of new customers, as well as the level of delinquency. So I think, when you look at it, when you look at the loss rate, excluding that one time item and then look at the reserving, I think it probably makes a little bit more sense to you.

Okay. No, that helps a lot. And then maybe the last question, I will get back in line, how should we think about the average life or duration of your entire loan book versus a year ago? Particularly given, the growth in longer term installment loans. Is there an average month we could ascribe to the portfolio on aggregate versus 12 months ago?

It's not a number we have given out, but we do break down balances by product type in our supplemental disclosures, and just understand -- I think you have a general sense of where the average life is by the three buckets -- four buckets rather. So you surely get pretty close from that disclosure.

Got it. Got it. Okay. Thank you.

Yes.

The next question comes from Mike Del Grosso of Jefferies. Please go ahead.

Thank you for taking my question. Quick one on marketing, I understand the guide for mid-teens, can you help us understand the trajectory of that over the course of the year?

Yeah. I think it's going to ramp up over the next few quarters, as normal seasonality would tell you. Kind of gauging third versus fourth quarter is always a little bit [indiscernible] of a crapshoot, because August is a little unpredictable, September strong, and then October can either be weak or kind of in line. So second quarter won't -- shouldn't get there. But third, kind of third to into fourth quarter is when you will see us kind of ramp up into those numbers.

Got it. And then just I guess, jumping on another topic that was already raised, the effective income tax refund delays, obviously had a slight impact on credit. But could you talk about growth and perhaps what you saw for the latter end of the quarter? Any impact there?

Yeah, we actually said the income tax, delayed income tax refunds did not have an impact on credit. The credit was right in line with our product expectations, even without delayed income tax returns, the higher levels of provisioning in the quarter and charge-offs in the quarter, were really related to mix -- more of our short term -- more originations in the short term portfolio, from strong new customer demand, which is very-very positive long term. So that's -- so really good on the credit side, despite the delayed tax returns. In terms of kind of performance through the quarter, ended really strong, even as tax return season, even as taxes turn -- start coming in March, didn't see a precipitous drop-off, like we typically would in January, for example, in a different year. Quarter ended really well for us.

Got it. Thanks guys.

[Operator Instructions]. The next question comes from Gregg Hillman of First Wilshire Securities Management. Please go ahead.

Oh yeah, good afternoon. David, could you talk about U.K. just a little bit? Do you think it is reasonable to assume it will get back to its former profitability level for the change in regulations? And how long might it take to do that?

Yeah. You know, look, the market is a lot smaller there. 40% to 50% smaller than it was before the new rules. And so even as we grow the market share, it's -- we are growing market share in a much smaller market. In addition, the product there is not quite as profitable as it was, prior to the new rules, because of the rate cap that was put in place. So I think it would be a long time out, [indiscernible], before we got to kind of pre-2014 profitability levels. That being said, we are doing really well in the U.K. We saw extremely strong new customer growth in Q1. Credit is performing really well, and as with any market or product that's growing quickly in our business, some of the profitability is masked by that growth, as you put on higher levels of -- as you book a lot of marketing upfront, and put in higher levels of provision upfront. But we are building up some really strong assets that are going to earn us a lot of money in the future, especially if we keep up these levels of origination. Now, getting to those pre-2014 profit levels is a long way away. But there is meaningful growth we believe in that portfolio ahead for us.

Okay. And then David, in terms of getting into new countries, I know you have pulled out from China. Are you in planning stages to enter new countries?

Not right now. We are focused on those fixed growth businesses. We think there is lots of opportunity in those fixed businesses. We think there is meaningful growth in each one of them, other than U.K. We have very low market share in each one of them. So we have a core dev team who keeps their eyes on different countries, runs analysis from time to time, updates those analysis. So we will keep an eye on them. But right now, as we have said, our focus is on those fixed growth businesses.

Okay. And then finally, could you talk about your relationship through public bank and the number of states you are in, how that's changing, and whether you are pleased with that, whether that's going as planned?

Yeah, it's going really well. We continue to add additional states. We have added a significant number, just in the last couple of months, and so that continues to progress. And I think the business is going really well, and should be much larger by the end of this year.

Are you -- I think that you were in like 40 states. Are you in all the big states that you plan to go into?

So the business eventually will be in 40 states. We are not there yet. But only because, we are just taking a measured approach to rolling out to the 40 states, and so we hope to be there, shortly.

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference call back over to David Fisher, CEO, for any closing remarks.

Great, thank you and thanks everyone for joining us today. We look forward to updating you again on our progress next quarter and throughout the year. Have a good evening.

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