Enova International, Inc. (ENVA) Q1 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Enova International First Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Monica Gould, Investor Relations. Please go ahead.

Thank you, Shantel, and good afternoon everyone. Enova released results for the first quarter of 2019 ended March 31, 2019, this afternoon after the market close. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com. With me on today's call are David Fisher, Chief Executive Officer; and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be available 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.

Good afternoon everyone. Thanks for joining our call today. I'm going to start by giving a brief overview of the first quarter, and then I will update you on our strategy. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and guidance in more detail. We kicked off the year with a strong first quarter. Top line results were in line with our guidance driven by demand consistent with typical Q1 seasonality. In the quarter, we also experienced good credit performance and very effective and efficient marketing. This enabled us to deliver solid profitability that exceeded the top end of our guidance. First quarter revenue of $293 million increased 15% over last year primarily driven by growth in our U.S. businesses. In first quarter adjusted EBITDA was a record $75 million, an increase of 10% over last year while adjusted EPS increased 14% to $1.16. These results reflect the strong credit quality I just mentioned, as well as our continued consistent execution and solid operating leverage inherent in our online model. During the quarter, loans to new customers represented 26% of total originations in line with Q1 of last year. As we mentioned in the past, these new customers ultimately expand a returning customer base and revenue potential going forward. While a new customer mix was down slightly from the low 30s we saw in the back half of 2018, this is to be expected with typical first quarter seasonality driven by the tax return season in the U.S. As I mentioned, we also saw excellent credit performance from our customers with noticeable improvements in credit quality across our portfolio and charge-offs in line with our expectations. While net charge-offs were higher than last year, this is largely result of the high mix of new customers over the last several quarters, as well as our ongoing portfolio mix shift to installment and line of credit products. We are confident that our sophisticated analytics and over 15 years of experience, as well as all of our data allows us to effectively maintain excellent credit quality across our products. Total companywide originations in the first quarter declined 3% year-over-year. This was largely due to a tough comp as we did not experience the typical tax seasonality in 2018 which resulted in much higher than expected originations last year. The 21% sequential decline in originations again reflect the seasonality we typically see in Q1 combined with our ongoing diversification into LOC and installer products. This diversification could be seen in total AR which was up 16% year-over-year and down only 7% sequentially. As Steve will discuss in more detail, the moderation of growth we saw in Q1 resulted in adjusted EBITDA and EPS above our expectations while still delivering strong consistent revenue growth. As expected, this year will be some more typical seasonality in the first quarter originations have accelerated as we've entered the second quarter. We have discussed on prior calls how managing growth can be challenging but our experience team is able to leverage our sophisticated analytics models to respond rapidly to changes in demand by adjusting our marketing spend and credit cutoffs. Our past results have demonstrated our ability to managing these growth versus profitability trade-offs and we will continue to focus on running the business with this balanced approach going forward. We believe our strong performance is attributable to 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 growth and profitability. Originations increased 6% year-over-year in the portfolio remains well diversified consisting of 52% line of credit products, 34% installment products, and only 14% single pay products. We continue to believe there's a significant opportunity for future growth in U.S. given the large addressable market in our single digit market share. NetCredit loan balances increased 21% year-over-year to over $450 million and originations increased 8% year-over-year. Our U.S. near prime products represented 46% of our total portfolio at the end of Q1 compared to 45% in Q1 of last year. NetCredit has become a very large business yet we still see many avenues for future growth in the near prime market. Our first quarter U.K. revenue decreased 12% year-over-year on accounting currency basis primarily driven by the purposeful repositioning of our U.K. business to focus on installment offerings. During the quarter we relaunched On Stride Financial, our installment product in the U.K. On Stride offers a variety of durations in a wider range of APRs and is resonating well with consumers there. Installment loan revenue in U.K. increased 18% year-over-year and 26% on a constant currency basis. Overall, we remain the leading subprime lender by market share in the U.K. and believe we are well positioned for future growth. Turning to small business. As we discussed in our Q4 earnings call, in recent quarters we've seen a strengthening of demand for our small business products at attractive unit economics leading us to be moderately more assertive in expanding in this space. The result was good growth in our small business financing products during Q1. Originations increased 58% year-over-year resulting in small business representing 10% of our total loan book at the end of Q1. Going forward we will be focused on maintaining growth in this market to the extent we continue to see attractive opportunities. In Brazil first quarter originations declined 30% year-over-year on a constant currency basis due to a difficult comparison to a strong Q1 of last year. In addition, we intentionally slowed originations in Brazil while we reconfigured certain operational practices to deal with new debiting practices implemented by the banks there. Brazil is one of our smaller businesses but we continue to see a large opportunity there with a huge population growing middle class and stable regulatory environment. Lastly Enova Decisions, a real-time Analytics as-a-Service business continues to develop their product offering and outreach to potential customers. While this business remains in the early stages, we still believe there are opportunities for us to use our sophisticated data and analytics to help other businesses with their decision. Before I wrap up, I want to provide a brief regulatory update. In March, our Federal Judge ordered a stay on August 2019 compliance date for the small dollar rule. As you know, earlier this year the CFPB announced it is revisiting the ability to repay portions of that rule. The Judge stay also covers the payment provision in the rule. Right now it remains unclear how long that stay will remain and whether the payment provisions will also be revisited by the CFPB. As with the ability to repay provision, we believe the flexibility for online platform, diversified product offering and our extensive experience navigating regulatory changes positions us well to succeed regardless of the outcome of the rulemaking and the litigation. At the state level, the California legislature is once again considering a number of bills dealing with consumer credit. We have consistently supported good regulations based on facts that help consumers. For example, the Senate Banking Committee in California passed the bill which we support that propose a set of consumer oriented protections without restrictive recaps. Our team will stay engage as these bills progress through the summer in California. Separately, Oklahoma just passed a new installment lending bill which will open up a nice new product opportunity for us there when it takes effect next year. Overall, we're off to a strong start in 2019 and are raising our outlook for the year as Steve will describe in more detail. As we have demonstrated, we will continue to manage the business to effectively balance growth and profitability. We believe our diversified revenue streams, talented employees advanced technology, world-class analytics platform and strong competitive position set us up very well for the remainder of 2019 and beyond. With that, I'll turn the call over to Steve who will provide more details on our financial and guidance and following his remarks, we’ll be happy to answer any questions that you may have. Steve?

Thank you, David and good afternoon everyone. I'll start by reviewing our financial and operating performance for the first quarter of 2019 and then provide our outlook for the second quarter and the full year 2019. As David mentioned, we are pleased to report another quarter of solid financial results with revenue in the middle of our guidance range and adjusted EBITDA and adjusted earnings per share exceeding our guidance. Financial results reflect our typical first quarter seasonality with sequential declines in originations, receivables and revenue which contribute to strong bottom-line profitability. In fact net income, adjusted EBITDA and adjusted earnings per share this quarter are all quarterly records for Enova as a public company. Total first quarter 2019 revenue increased 15% to $293 million above the midpoint of our guidance range of $280 million to $300 million. On a constant currency basis revenue increased 16% year-over-year revenue growth was driven by a 16% year-over-year increase in total company combined loan and finance receivables balances which grew to $980 million from $844 million at the end of the first quarter of 2018. Installment loan and line of credit products continue to drive the growth in total loans and finance receivables balances. Total quarterly originations decreased 3% year-over-year which was primarily driven by our continued diversification to installment and line of credit products, lower originations in our international businesses and currency headwinds. Total domestic originations increased 10% year-over-year compared to the year ago quarter as consumer line of credit originations rose 34% and small business originations increased to 58%. Installment loans, receivables, purchase agreements and line of credit products now comprise nearly 84% of our total revenue and 93% of our total portfolio demonstrating our customer’s preference for these products. Domestic revenue increased 21% on a year-over-year basis and declined 4% sequentially to $258 million in the first quarter of 2019. Domestic revenue accounted for 88% of our total revenue in the first quarter again this sequential decline in revenue is typical seasonality for our U.S. business. Revenue growth in our domestic operations was driven by a 33% year-over-year increase in line of credit revenue and a 17% increase in installment loan and RPA revenue. Continued strong demand for these products drove our domestic combined loan and finance receivables balances of 21% year-over-year. International revenue decreased 15% from the year ago quarter to $35 million primarily due to the aforementioned repositioning of our UK business as well as currency headwinds. On a constant currency basis international revenue decreased 8% on a year-over-year basis. International revenue accounted for 12% of total revenue in the first quarter of 2019. Total international loans decreased 13% compared to a year ago. International installment loan balances increased 4% year-over-year while international short-term loan balances decreased 47% year-over-year. On a constant currency basis international loan balances decreased 5% year-over-year. Turning to gross profit margins, our first quarter gross profit margin for the total company was near the high-end of our guidance range expectations at 53%. This compares to 57% in the year ago quarter as we’ve described in the past we typically see gross profit margin in the upper end of our guidance range during the first quarter of the year as we experienced seasonally lower growth. Typical of the seasonality our gross profit margin improved from 43% in the fourth quarter of 2018. Total company gross profit margin continues to reflect the solid credit quality of the portfolio. Overall the credit performance of the portfolio is stable and in line with our expectations. We continually monitor the marginal and portfolio economics across our product advantages and remain pleased with the returns we’re generating on our originations. Net charge-offs as a percentage of average combined loan and finance receivables increased in the first quarter to 15.8% from 13.7% in the prior year quarter. This increase is expected given the rising proportion of new customers in our portfolio over the past several quarters and was reflected in our ratio of allowance and liability for losses as a percentage of gross loan and financing receivables at the end of the previous quarter which was 15.7%.As David mentioned, originations from new customers across all of our businesses were 26% of the total during the first quarter equal to the proportion from the year ago quarter. At the end of the first quarter the allowance and liability for losses for the consolidated company as a percentage of combined gross loan and financing receivable was 14.6% compared to the year ago quarter of 13.7%.The increase reflects the expectation of continued seasoning of new customer receivables originated in recent quarters. For 2019 we continue to expect our consolidated gross profit margin to be in the range of 45% to 55%.Quarter-to-quarter our gross profit margin will be influenced by seasonality and growth characteristics including the pace of growth in originations, the mix of new versus returning customers and originations and the mix of loans and financings in the portfolio. Our domestic gross profit margin was 56% in the first quarter compared to 59% in the first quarter of 2018 and 43% in the fourth quarter of 2018.Our international gross profit margin was 28% in the first quarter compared to 51% in the prior year quarter. The decrease in international gross profit margin from the year ago quarter was driven primarily by the seasoning of new customer originations in recent quarters and by the change in gross profit margin for international installment loans, which reflects the recent growth of new customers from the purposeful repositioning of our U.K. business to focus on installment offerings that David mentioned earlier. We expect our international gross profit margin in 2019 to be in the range of 45% to 55%, slightly lower than our previous guidance as we grow and attract new customers in our international installment businesses. As a reminder, quarter-to-quarter, the international gross profit margin will be influenced by seasonality in growth characteristics including 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. Efficient marketing and operating leverage in our scalable online model contributed to our ability to generate record quarterly levels of profit or meeting customer demand. During the first quarter of 2019, total operating expenses including marketing were $83 million or 28% of revenue compared $80 million or 32% of revenue in the first quarter of 2018. We continue to see efficiency in our marketing spend. Marketing expenses in the first quarter declined 15% year-over-year to $24 million or 8% of revenue compared to $28 million or 11% of revenue in the first quarter of 2018. We expect marketing spend will range in the low-to-mid teens percentage of revenue in 2019 with the highest been during our seasonal growth periods in the second half of the year. Operations and technology expenses totaled $30 million or 10% of revenue in the first quarter compared to $26 million or 10% of revenue in the first quarter of 2018 and were higher primarily from volume -related variable expenses including ongoing expenses associated with complaints in the U.K. General and administrative expenses were $30 million or 10% of revenue in the first quarter compared to $27 million or 11% of revenue in the first quarter of the prior year and were higher primarily from higher personnel related expenses. Adjusted EBITDA and non-GAAP measure reached a quarterly record of $75 million and increased 10% year-over-year in the first quarter. Our adjusted EBITDA margin was 25.5% compared to 26.7% in the first quarter of the prior year. Our stock-based compensation expense was $3.1 million in the first quarter, which compares to $2.4 million in the first quarter of 2018.Our effective tax rate was 22.5% in the first quarter compared to a 20.8% rate in the first quarter of 2018.We expect our ongoing normalized effective tax rate to be in the mid-20% range. Net income increased to $35 million or $1.02 per diluted share in the first quarter from net income of $27.9 million or $0.81 per diluted share in the first quarter of 2018. Adjusted earnings and non-GAAP measure increased to $39.9 million or a $1.16 per diluted share from $35.4 million or a $1.02 per diluted share in the first quarter of the prior year. We continue to maintain a solid liquidity position with strong operating cash flows and meaningful available capacity in our financing facilities. During the first quarter cash flows from operations totaled $222 million and we ended the quarter with unrestricted cash and cash equivalents of $93 million and total debt of $792 million. Our debt balance at the end of the quarter includes $99 million outstanding under our $350 million of combined installment loan securitization facilities and no amount outstanding under our $125 million corporate revolver. Now I would like to turn to our outlook for the second quarter and full-year 2019.We expect to see our typical seasonality, quarterly seasonality during 2019 As we move through the year, seasonal demand and originations typically increased from the first quarter low point in peak during the fourth quarter. As we move into our faster growth periods and the seasonality typically generate sequential revenues that rise faster than adjusted EBITDA and adjusted EPS as growth related provisioning lowers gross margins and outpaces scale benefits. Our outlook also reflects an expectation of continued faster growth, relative growth in installment and line of credit products, stable credit, steady growth in the mix of new customers and originations, no significant impact to our businesses from regulatory changes and no significant volatility in the British pound from current levels. As noted in our earnings release, in the second quarter of 2019, we expect total revenue to be between $265 million and $285 million. Diluted earnings per share to be between $0.41 and $0.63 per share, adjusted EBITDA to be between $45 million and $55 million and adjusted earnings per share to be between $0.48 and $0.70 per share. Full year, we continue to expect total revenue to be between $1.25 billion and $1.31 billion and are revising our full your profitability higher based on first quarter performance. We now expect diluted earnings per share to be between $2.83 and $3.48 per share, adjusted EBITDA to be between $237 million and $267 million and adjusted earnings per share to be between $3.17 and $3.82 per share. As David mentioned, we remained well-positioned and are very optimistic about our ability to generate growth and increased profitability for the remainder of 2019. And with that we would be happy to take your questions, operator?

[Operator Instructions] Your first question will be coming from John Hecht from Jefferies. Please go ahead.

I really just want to focus on the line of credit versus the installment loans. Both had good year-over-year growth but it's clear that in terms of origination trends in the snap that the – there’s been higher growth factors tied to line of credit. I'm wondering, are those tied to some marketing, your strategic marketing changes or consumer demand or are you just seeing that different geographic pockets?

So I think, what you're seeing there is especially counts as oppose to dollar amounts, it’s a big shift and it's really over the last several years in our subprime business from short-term products to line of credit products. It’s a combination of States passing new line of credit laws, opening up availability for us as well as also expanding in the States that didn't have – didn’t prior have line of credit, short-term products and out that do have – single pay products that do have line of credit products. So certainly in terms of counts because those are relatively small loan sizes, those have the biggest impact. In installment you'll see that that somewhat muted in terms dollar amounts because of our larger net credit loans which is the actually one of the fastest growing businesses as you've seen over the last year or two.

And maybe can you talk about what’s – like say for the last year with respect to average balance of line of credit versus installment loan what's happened?

Our average balances had a really meaningfully changed over the past year, John.

Okay, so its mix. Okay. And then you talked about the international gross margin, I guess it was impacted this year relative to last year on a few factors and then you talked about the recovery over the course of the year. How fast do you expect that to recover and is that just a one quarter migration as you move things in the U.K. or is there something longer-term?

Well, its definitely longer-term. It's a pretty big shift for us from the short-term product to the installment product and as any product ramps up, obviously our booking, a lot of those losses from new customers upfront and you know that'll take many quarters to till it normalizes, really till the growth slows pretty meaningfully. Long-term it’s a great thing we talked before. Customers really seem to like this new installment product. It does have a very wide range of APRs as well as a wide range of loan sizes, so that flexibility seems to be a really resonating in the U.K. So we’ve seen strong adoption, stronger than we expected and that that's what led to the drop in the gross margins there.

And then relative to our model just much better leveraging of various expenses including marketing maybe can you give us a sense for how you're deploying marketing budget, any changes to the different channels there, and getting different kind of efficacy rates and response rates you're seeing in these channels?

We saw decent rates in Q1. It’s just again, Q1 is more typical seasonality and that’s what we saw – that’s what we typically saw in the past. Last year was definitely an anomaly which surprised us. I think it surprised everybody, so kind of getting back to that. We pull way back in the marketing in Q1. This year we just pulled back a little bit more. As we’ve entered Q2,we’ve definitely seen a strengthening demand – demand, post tax return season as would be expected and we're clearly leaning into the marketing. I think over the last couple of years, the big growth has been on the direct-mail side and I think now it's – we’re seeing good success in TV actually and sort of leaning in on the TV side. But these are fairly minor and longer-term mix shifts in terms of marketing. They are not dramatic. They're not overnight but they have had the effect over say the last three to five years of greatly reducing our reliance on lead providers and controlling our destiny much more in terms of attracting new customers.

[Operator Instructions] Your next question comes from David Scharf, JMP Securities. Go ahead please.

David I want to actually follow-up on the prior questions and in discussion on marketing. It's become pretty clear that you guys have demonstrated that the model has an awful lot of flexibility in terms of kind of managing to your earnings guidance particularly by throttling or pulling back at marketing spend. I am just wondering, just to give us maybe a broader sense for how to think about the range of marketing spend from quarter-to-quarter. I know you've given guidance as a percentage of revenue for the year but no based on the scale you're at now, is $23.5 million and should we think of that is a floor on quarterly spend that anything below that is you know can't sustain this kind of growth?

We do not pull back on marketing in Q1 to try to achieve higher profitability. We generated above our guidance range and profitability just through a normal operations. We try to be as - we tried to make sure we're hitting our return thresholds with our marketing and not exceeding on them just given the lower levels of demand, because of the tax return season. That’s where marketing played out. So unlike Q4, where we purposely pulled back, because of the extremely strong levels of new customer growth, we did not do that in Q1 but still saw our lowest percentages of marketing - marketing as a percentage of revenue we've ever seen. And so I would not expect in the future marketing and either absolute dollars or as a percentage of revenue to get much more of that number. That was a very, very -very, very low number. In terms of the ranges, we would be very comfortable spending mid-to-upper teens as a percentage of revenue for marketing in a given quarter. We found some opportunity to accelerate that kind of in the middle of last year and it paid off so well that we ended up having a pullback in the back - in the back quarter of the year, the last quarter of the year. Right now we are seeing some good opportunities that to deploy marketing dollars as we've kind of exited the tax return season and moved into kind of growth season again and that's why kind of our guidance for marketing for the year hasn't changed a lot. We think we can deploy more marketing dollars throughout the year and we would like to if we can. So that’s great growth for the future. We’re - every marketing dollar we spend we think we’re spending at attractive unit economics and generating good - good returns for the business, so if you're thinking about a range, that's we would not expect to go below where we were in Q1, certainly not in the back three quarters of the year but really like in any - in any quarter going forward about crazy things can happen. And we will you know, be happy to spend kind of in the upper teens, if we find the right opportunities in some of the more growth quarters.

Okay. That's really helpful going forward. Easy question, just point of clarification I want to make sure I understood the commentary on international gross margins. Because on the one hand I thought I heard that the full-year guidance was modestly trimmed just couple of percentage points but still in the 45 to 55 range. Yet a little later I thought David, you may have said that you know those margins are going to get back overnight off to that 28% level and in the first quarter and I'm kind of reconcile those comment because how to think about the trend over the course of the year?

Yes David, this is Steve. I think over the course of the year you'll see some of the return there but again it won’t be overnight. That's really what David was talking about is we’re making some of these transitions and purposeful repositionings, so expect to see that but as I talked about in my commentary, it's also going to depend on how fast we’re growing those deviations from our new versus returning as we’re looking to the future. So that's probably the best way to think about it. It was a fairly meaningful reduction, we brought it down five points, so but again, you should expect to see some normalization based on our best view going forward today.

And then lastly for you Steve, there’s more just sort of a mechanical question but it looks like your EBITDA guidance for the year was taken up by $7 million book high in the low end, yet the earnings guidance went up by about $0.40, which by my calculation it's roughly like $18 million of pre-tax and sort of wondering, is it sort of an $11 million reduction in sort of below the operating line assumptions like I could take it offline if it easier but I was just trying to reconcile?

Really below EBITDA, the big two levers are financing and tax, so I think our tax view has been pretty steady but we did - we did expect to have maybe a slightly lower balance sheet than we did going into the year, so there's lower size balance sheet you have lower level of financing needed against that. So that's really the leverage you see below the EBITDA line. And we also have some mix, some mix shifts across our financing instruments as well.

[Operator Instructions] Okay. Thank you. I would now like to turn the conference back to David Fisher for any closing remarks.

Great. Thanks everybody for joining our call today. We'll look forward to chatting again next quarter. Have a good evening.