Enova International, Inc. (ENVA) Q1 2020 Earnings Report, Transcript and Summary

Good day and welcome to the Enova International First Quarter 2020 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 of Enova. Please go ahead, ma'am.

Thank you, Operator, and good afternoon, everyone. Enova released results for the first quarter of 2020 ended March 31, 2020, this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com. With me on today's call are David Fisher, Chief Executive Officer; and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements, based on the business environment as we currently see it. 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 Dave.

Thanks, Monica, and good afternoon, everyone. Thank you for joining our call today. Instead of a usual practice of providing an in-depth review of the quarter, I'm going to spend most of this call discussing Enova's response to COVID-19 and the economic crisis we are all facing. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. First, I hope that you, your families, and loved ones are safe and healthy. I would like to extend my heartfelt gratitude to our country's first responders, and healthcare professionals. I would also like to thank all of our employees for their continued hard work and teamwork through this difficult time to support not only our customers, but also each other. Our priority is the safety and well being of our employees and customers. Fortunately, given the advantageous nature of our online only business model, we believe we are well positioned to help them manage through this crisis. Enova's nearly 1300 team members across all corporate and contact centre functions have been working remotely since mid-March. Our nimble technology and online model have enabled us to continue to operate at high levels of productivity with full access to all of our data and tools. This includes maintaining high customer service levels with our dedicated in-house contact centre team across all contact points, phone, email and chat. Approximately 50% of emails and 30% of calls with our customers pertain to COVID. But service levels remain high, as do customer satisfaction scores with over 90% of customers indicating they were satisfied with the solutions we've worked on with them. Turning to the quarter, our performance through mid-March exceeded our expectations, and we're on track to again meet our revenue and earnings guidance based on strong origination and solid credit metrics. However, as the seriousness of the COVID crisis increase in early March, we aggressively began to reduce originations and shift our focus to our existing customers and managing our portfolio of loans. One thing that became apparent almost immediately is that this recession was not going to follow the typical course, and most recessions, the economy slowly deteriorates over a period of months, giving our credit models time and adequate data to adapt. But this appears to be the first time a recession is caused by unemployment. Historically, it has always been the exact opposite. Events in the world or the market caused growth to slow and eventually jobs are lost. In every other recession, unemployment peaked near the end. But here we have the peak at the beginning with over 25 million jobless claims filed in just the first month or so. With the speed in which the employment and spending picture in the U.S. is changing, our underwriting models are not currently able to be predictive enough to make sound decisions. As a result, we meaningfully cut back originations across all of our products during the last half of March. This resulted in us curtailing almost all paid marketing and focusing our resources on supporting our existing customer base, and adjusting to the emerging risks in this economic environment. The effect of these actions led originations for the month of March declined 16% from a year ago, and in total, we have now cut back origination 60% to 80% depending on product. At Enova, one of our core values is customer first. And since we know many of them will be impacted by COVID-19, we are ensuring our policies will help them. We've increased repayment flexibility, temporarily stopped assessing late fees, and we'll continue to work with customers on due date adjustments, payments deferrals and adjusted payment plans. In addition, we've made changes to our credit reporting process, so that if an impacted customers don't have a late payment, any impact to their credit report is lessened by noting the late payment was due to a disaster. Today, in part because of our fast actions, default rates have ticked up only slightly. Our customers are also benefiting from the significant stimulus at the state level and from the $2 trillion CARES Act. The hope is that this bill will help America avoid a deep and long economic recession. In addition, we know that subprime customers are very accustomed to managing variations in their personal cash flows. As it's been said before, in some ways, our customers are always in a recession. While we are certainly anticipating further deterioration in credit quality, in many ways, recessions have less of an impact on our customers than on prime borrowers. In terms of the impact of Enova, both Steve and I will cover it in more detail but we have a strong balance sheet and ample liquidity to weather this economic slowdown. And our proven ability to adapt to changes will also enable us to reaccelerate quickly when conditions dictate. We're already rapidly readjusting our sophisticated analytics models to take into accounts, uniqueness of the economic deterioration in our reacceleration plans. Despite scaling back lending efforts during the end of Q1, we delivered revenue growth of 37% compared to the first quarter of last year. And our flexible business model allowed us to quickly reduce our operating costs to align with lower business activity. Adjusted EBITDA of $36 million and adjusted EPS of $0.26, compared to $80 million, and $1.27 per share in the first quarter of last year. Our first quarter results include an approximately $16 million reduction that we took to the fair value of our loans to reflect the increased risk due to the COVID crisis. Without this adjustment, adjusted EBITDA and adjusted EPS would have both been in line with our guidance. Our domestic lending businesses which include our large U.S. subprime business, net credit, and our small business financing products continue to drive our growth and profitability during the first quarter. Revenue for these three businesses was up 38% year-over-year in Q1, driven by a 78% increase in line of credit revenue, and a 23% increase installment loan and finance receivables revenue. The composition of our total portfolio in the first quarter was 66% installment products, 32% line of credit products, and only 2% single payer products. And our U.S. near prime product represented 51% of our portfolio at the end of Q1, while small business now represents 16%. Turning to our smaller businesses, at Brazil first quarter originations increased 10% sequentially and 7% year-over-year on a constant currency business. And lastly, Enova Decisions, our real time analytics as a service business is continuing to gain traction as we actively build out the pipeline. Before I wrap up, I'd like to discuss how we're operating at Enova to weather this crisis. The flexibility of our online platform, our proprietary analytics, balance sheet resiliency, and deep experience on our management team provides us with a substantial competitive advantage. We also have a well diversified product offering without significant exposure to some of the more impacted states like New York and New Jersey, and without significant concentration to the restaurant and hospitality industry in our SMB portfolio. Thanks to our intensive recession, readiness preparation over the last few years, combined with our flexible online platform, we were well positioned to act quickly at the onset of the crisis as I described earlier. And our talented team is well prepared to navigate the ongoing uncertainties. From an operations perspective, we have always had formal daily risk monitoring and response planning across all of our businesses. For example, we look at initial defaults, delinquency rates, ACH returns, line utilization, the credit profile of our applicants, and much, much more. Combined with a highest payment frequency across most of our portfolio, this allows us to have a near real time view of credit performance. In part because of this, we performed very well through the great recession of 2008 and our analytics and operational capabilities are much more sophisticated today than they were then. Sitting here we have over 16 years and over 37 terabytes of data. This includes data from over 300 million unique customer interactions. We are confident that the quality of our analytics to digest this data distributed over online only business model has and will continue to enable us to rapidly and efficiently take real time actions based on the data we are seeing. As I mentioned previously, we are already quickly readjusting our sophisticated analytics models to take into account the uniqueness of economic deterioration. This includes not only actions to manage our existing portfolio, but also decisions around how and when to reaccelerate one day. Well, that will be based on a number of factors, it's important to understand that we do not need to see a full economic recovery, but simply for unemployment levels to stabilize at whatever that level may be. From a financial perspective, which Steve will discuss in further detail, we have a strong balance sheet and ample liquidity to manage us through an economic downturn. Our cash position is growing and our online-only business model has significant operating leverage so we can adjust our expenses quickly to adapt to changes in our business activity as a result of market conditions. Additionally, we benefit from higher margins and lower credit quality as a non prime consumer lender versus a prime or super prime lender. And we have sufficient liquidity and operational capacity to expand lending once unemployment and economic conditions begin to stabilize. Lastly, our highly experienced management team is another key differentiator that sets us apart from our competitors if successfully operated multiple industries and through multiple economic downturns. We know how to manage through these cycles and we have consistently demonstrated prudence and profitability. While COVID-19 has created uncertainty in the short term, we believe the long term fundamentals of our business remain strong, and that we are well positioned to navigate through the downturn. We also remain committed to producing long term sustainable and profitable growth, and we'll swiftly resume lending efforts once the economy begins to stabilize. With that, I'll turn the call over to Steve who will provide more details on our financial performance and outlook. And following Steve's remarks, we'll be happy to answer any questions that you may have. Steve?

Thank you, David, and good afternoon everyone. As David mentioned in his remarks, our direct online-only business model, world class analytics and technology and deep organizational preparedness have allowed us to adapt quickly to current market conditions, and will serve us well if we continue to adjust to the rapidly evolving and uncertain economic environment facing our country. Our consistent and disciplined focus on unit economics has delivered predictable and steadily increasing returns in recent years, resulting in strong earnings. This earnings capacity provides a strong first line of defense to absorb an increase in credit losses caused by the current crisis. In fact, as David mentioned ahead of the rapid deterioration in the economic environment during late March, we were on track to deliver another solid quarter as reflected by strong year-over-year growth in receivables and revenue. Excluding some initial COVID related pressure already experienced at March 31, resulting in an adjustment of approximately $60 million to the fair value of our portfolio to address the uncertain credit environment as the quarter closed, we would have once again delivered financial results consistent with our guidance ranges. As I will explain in more detail the additional adjustment address risk to the fair value of the portfolio from some observed worsening of credit risk, as well as our view of higher expected required returns at March 31. In addition, our solid cash, liquidity and balance sheet position provide a significant flexibility and will be a strength as we navigate economic uncertainties in the coming month. Our balance sheet resiliency is supported by a strong tangible capital position, significant committed financing capacity with strong counterparty, and low refinancing risk from thoughtful laddering of debt maturities. We ended the first quarter with $214 million in cash and marketable securities, including $171 million unrestricted and having additional $157 million of available capacity on committed facilities where eligible collateral was available. Additionally, all of our unsecured debt and secured facilities have a maturity date or final amortization maturity of February 2022 or beyond. Our net cash flows from operations for the first quarter totaled $253 million. In a reduced origination environment, we expect a rapid build in our cash position in the next several months, even if we experience increase the fall given the relatively short duration of our receivables, revenue yields and the frequency of contractual payments. As of April 24, our cash and marketable securities balance had grown to $292 million, including $232 million unrestricted and available capacity on committed facilities with $161 million. By the end of the second quarter, we projected cash balance of at least $350 million to $400 million. We estimate our cash balances, available facility capacity and portfolio repayment characteristics would provide us with sufficient cash to operate indefinitely without additional external financing. Even once we return to the meaningful growth rates experienced in recent years, we project a long runway of available liquidity before leading to raise big funding. Given the ongoing economic uncertainty resulting from the speed of the economic slowdown and joblessness that began in March and the timing of reopening the economy, social distancing restrictions are lifted, we are not providing guidance for the second quarter of 2020 and we are withdrawing the full year 2020 guidance that we previously issued. Before I turn the first quarter results, I want to remind everyone that beginning on January 1 of this year, we adopted fair value accounting for our receivables portfolio to comply with new GAAP requirements for life of loan loss accounting. The adoption required restatement of the existing book value of the receivables portfolio to fair value from January 1, which resulted in a $99 million, one-time non-cash increase to retained earnings to recognize the fair value premium on the portfolio of 7%. This represents the percentage that the fair value of the portfolio exceeds the outstanding principal. The other notable change to reported results from the adoption of fair value accounting is related to our historical practice of deferring certain marketing and selling expenses and recognizing them over the life of the related loan. These costs will no longer be deferred into fair value accounting, so we expect marketing expenses and percentage of revenue to be slightly higher going forward. Now turning to first quarter results, total company first quarter 2020 revenue from continuing operations increased 37% to $362 million and was above our guidance range of $328 million to $348 million. Revenue growth is driven by a 29% year-over-year increase in total company combined loan and finance receivables balances, which ended the quarter at $1.2 billion on an amortized cost basis. Line of credit accounts and installment loans continued to drive the growth in the overall book. These products grew 69% and 28% year-over-year respectively. Together installment loans receivables purchase agreements and line of credit products now comprise 98% of our total portfolio and 93% of our total revenue. Given the very small size of the short term portfolio, we are now including those loans in the installment loans and RPAs product grouping for ongoing reporting. Combined loan and finance receivables balances on an amortized basis, declined 9% from year end primarily as a result of normal seasonality and the significant reduction in originations in the second half of March that David discussed. As David mentioned, in the current economic environment until signs of credit stability are apparent, we will continue to restrict marketing to new customers and expect originations to be significantly below prior year levels, and largely from existing customers. The net revenue margin for the first quarter was 35% below our guidance range of 45% to 55%. The lower than expected margin was driven by a larger than expected change in the fair value for the receivables portfolio at March 31. As you'll recall, the change in the fair value line item that we will include in the income statement beginning this quarter is driven mostly by changes to key valuation assumptions, including credit loss expectation, prepayment assumptions, and the discount rate. Changes to fair value assumptions for the portfolio at March 31, were driven primarily by two key considerations. First, credit risk comparing and portfolio metrics, including delinquencies and modifications at the end of the quarter. And second, a change in the discount rate to capture the greater uncertainty of portfolio performance in the current operating environment. Let me start with credit. For the first quarter, the ratio of net charge offs as a percentage of average combined loan and finance receivables was 16.8% compared to 15.4% in the prior year quarter. Similar to recent quarters, we expected some year-over-year increase in this ratio, given our recent success with attracting new customers. In addition, this ratio was slightly elevated for both of our product groupings as we saw some small impacts and the rapid deterioration in economic conditions during the last half of March. Similar to net charge offs, other customer credit metrics on March 31, was showing signs of deterioration but only slightly. During the last two weeks of March, more than three quarters of our portfolio had at least one payment contractually do giving us quick visibility to any early issues. The percentage of total portfolio receivables past these 30 days or more increased to 7.5% at the end of the quarter from 6% a year ago. And we also saw a small uptick in early stage delinquencies as well. Additionally, as we work to support our customers, the proportion of receivable balances at the end of the quarter tied to customers that we have granted request for payment deferrals or modifications were meaningfully higher across our businesses. As we've done in the past for more regional focused natural disasters, we believe this is the right approach given the unprecedented speed of change in the economic environment, and the timing of government responses to stabilize consumers and businesses. While not considered delinquent, we expect customers that have received deferrals or modifications to present higher default risks and typical non delinquent customers that continue to pay on time. Therefore, we adjusted the fair value of these loans downward to reflect the increased risks. We also increased the discount rate used in the fair value calculation by 500 basis points to capture the increased uncertainty and portfolio performance arising from the combination of the speed of the economic slowdown and joblessness that began in March. In summary, the combination of a slight increase to delinquencies in the back half of March, increased risk attributed to deferral and modifications at the end of the quarter and the increase in the discount rate to address greater uncertainty reduce the fair value of the portfolio to 103% of principal at March 31 from the aforementioned opening fair value position on January 1 of 107%. This is the primary reason our profitability metrics were below our guidance ranges for the first quarter. As of late last week, virtually all of our receivables have had at least one contractual payment due since mid-March, and more than half have had three or more contractual payments due since then. The frequent contractual payments across our portfolio not only speed conversion to cash, as I previously mentioned, but also allows more opportunities to interact with and support customers facing hardships to provide more data to quickly refine analytical approaches or operating in the current environment. Late last week, we'd seen some deterioration in our credit metrics since the first quarter ended, and an increase in the rate of customers seeking relief as they work through the impacts of the COVID-19 crisis. Although it's still too early to identify any discernible churn, we have started to see some signs that those metrics are beginning to stabilize. Given the aforementioned duration and payment frequency characteristics of our portfolio, with significant reduction in new origination and our 60 day charge off policy, we expect relatively rapid financial recognition of credit risk in the coming months. On the other hand, we recognize this timing ultimately depends on the duration of the ongoing COVID-19 pandemic may also vary as we work to support impacted customers. Turning to operating expenses. During the first quarter of 2020, total operating expenses including marketing were $94 million or 26% of revenue compared to $69 million with 26% of revenue in the first quarter of 2019. As I previously mentioned in a fair value accounting, we no longer defer certain marketing and selling expenses, which increased operating expenses for the first quarter of 2020 compared to a year ago. Marketing expenses in the first quarter were $35 million, or 10% of revenue, compared to $19 million, or 7% of revenue in the first quarter of 2019. Approximately $7 million in the year-over-year increase in marketing expenses during the first quarter was attributable to the adoption of fair value accounting. Our marketing programs continued to demonstrate efficiency prior to the deliberate reduction at originations during late March, when we seized all paid marketing. Operations and technology expenses totaled $31 million, or 9% of revenue in the first quarter, compared to $21 million or 8% of revenue in the first quarter of 2019 and were higher primarily due to volume related variable expenses, and increases in certain small business origination expenses that were previously deferred prior to adoption of fair value accounting. General and administrative expenses were $28 million, or 8% of revenue in the first quarter compared to $29 million or 11% of revenue in the first quarter of the prior year and were lower primarily due to lower personnel related and legal costs. Reflecting the operating leverage in our business model, in the near term periods of reduced originations where we are focused on supporting our existing customers, we expect total operating expenses to decline in range in the mid to upper teens as a percentage of revenue before they renormalize in the mid-20s as a percentage of revenue. Adjusted EBITDA a non-GAAP measure declined 55% year-over-year to $36 million in the first quarter for the reasons I've previously discussed. Our adjusted EBITDA margin decreased to 10% from 30% in the first quarter of the prior year. Our stock based compensation expense was $3.5 million in the first quarter, which compares to $3.1 million in the first quarter of 2019. Our effective tax rate was 34% in the first quarter, which increased from 24% for the first quarter of 2019. The increase was driven primarily by typical first quarter non deductible expenses being a higher proportion of lower first quarter operating income. We expect our normalized effective tax rate to be in the mid to upper 20% range. We also expect some near term volatility depending on the trajectory of our future results. We recognize net income from continuing operations of $6 million or $0.18 per diluted share in the quarter compared to $39 million or, or $1.13 per diluted share in the first quarter of 2019. Adjusted earnings and non-GAAP measure decreased to $9 million, or $0.26 cents per diluted share from $44 million or $1.27 per diluted share in the first quarter of the prior year. The trailing 12 month return on average shareholder equity using adjusted earnings decreased to 25% during the first quarter from 28% a year ago. Our debt balance at the end of the quarter includes $212 million outstanding under our $350 million of combined installment loan securitization facilities and $105 million outstanding under our $125 million corporate revolver. Our cost of funds for the quarter declined to 8.15%, an 80 basis point decrease from the same quarter a year as we continue to recognize the cost benefits of transactions completed over the past two years. During the first quarter, we acquired 2.3 million shares at a cost of $41 million under our $75 million share repurchase program. In summary, our online direct-only model, market leading technology and analytics, resilient balance sheet and disciplined financial approach has positioned us well. And importantly, as we've evaluated paths of varying severity on how the current economic environment plays out, it's difficult to envision a scenario where we face a liquidity shortfall or where the value of our portfolio does not meaningfully cover our liability. And with that, we'd be happy to take your questions. Operator?

[Operator Instructions] And our first question will come from John Hecht with Jefferies. Please go ahead sir.

[indiscernible]?

John, I heard you. I mentioned - I think you were referring we lost you with a bad connection there, John. But I think what you were asking was in the trends that we discussed at least through end of last week and we've seen anything discernible as it relates to stimulus and payments, rest I would pick up, but I would basically say I think some of the reasons that we've seen some stabilization and I'm very careful to highlight, we don't necessarily think this is a trend just yet, but some of the reasons that we've seen, some of the stability likely has to do with some of the transfer payments that are entering the economy.

Okay. And hopefully my connection is a little better now. Not sure. I guess it's a little bit related to that as you - the marketing spend was even at an apples-to-apples basis in Q4. Can you give us a sense for what the composition of it? Was your first time customers before you tightened, and have you seen any strange patterns or like in first payment defaults or anything?

Sure, our new customers were very similar running in mid-30% that we have seen over the recent quarters. And I don't think we would say we've seen anything differentiated as it relates to what we typically see from new versus returning customers. And I think Dave and I both highlighted, we were beginning to see stress at the end of the quarter, and both of those, and we've seen some continuing of that before that stability that we highlighted sort of set in here as we got to late April.

I would just add two quick things to that. One is the biggest reason for the large increase in marketing spend in Q1 was that we're no longer deferring any marketing spend under the fair value of getting roles more than an absolute spend on an operational basis. On an operational basis, it was pretty consistent to what we've seen in the past. I would say second, we haven't seen any material difference and performance of customers either by vintage so the most recent vintages or new versus existing in terms of the amounts of deterioration. As Steve and I both mentioned, we have seen deterioration not anywhere near the magnitude we would have expected it's actually very, very manageable at this point, and not a material difference in the amount of deterioration between new and existing, obviously, existing customers perform better than the absolute, but the relative change isn't significant between the two.

Okay, and appreciate the color and glad to hear everybody's doing well there. Last question is just if you could comment on the small business lending environment. I mean, I've heard lots of different stories about the variability in that market. I know it's not a very large portfolio for you guys, but I'm just - I'm curious as to how that's being impacted because you just think that that the impact of small business given foreclosures and so forth, you must be interesting to observe.

Yes, so a few things there. Again, it's only in the teens as a percentage of total portfolio, so very much manageable for us. We are also very early much earlier than most of our competitors and stopping originations and tightening down on lines for existing customers. I think the other thing we benefit from as we are extremely diversified by sector in our small business portfolio, and in particular, we do not have large exposures to entertainment, hospitality and restaurants. And so many other small businesses will actually have larger exposures are doing okay. So we do a fair amount of construction which is held up obviously a little bit of weakness that held up okay. In trucking, transportation and warehousing which have all done fairly well. So, obviously that portfolio stress like all others, but again, defaults there have not increased anywhere near as much as we had expected, lots of payments deferrals and modifications. But with the PPP checks coming in and states opening back up, we are somewhat encouraged that we haven't seen very high levels of default yet.

Our next question will come from David Scharf with JMP. Please go ahead.

First off, maybe just following up on the initial question about some trends in April, it sounds like you're speculating a lot of what you're seeing is likely impacted by State and Federal stimulus. Just curious - I couldn’t write down quickly enough and some metrics around the percentage of the portfolio that had 1 to 3 payments do recently since mid-March, but can you give us a sense for like what percentage of your borrowers, I guess in forbearance or have requested some formal relief from you just put things into context that way maybe.

Yes, let me grab the first part of that, then I will hand it over to Steve for the second part. In terms of the April performance, I think the most interesting thing is we haven’t seen deterioration, we haven’t seen a part of improvement necessarily with the stimulus, but we haven’t seen the deterioration we would have expected with the high levels of unemployment. It's actually been much steadier, certainly in terms of the default rate than we would have guessed and the improvement we've seen is in the deferral modification rates coming down over time. Now part of that is just a lot of customers got the deferral they need and now they're moving on. Yes but part of that could also be the stimulus, but certainly we're not chalking up the overall performance of the portfolio being better than we would have expected six weeks ago to stimulus because of its actually been more stable. We haven't seen a sharp increase as stimulus has increased. So I think we chalked it up more to some of the comments I made around the recession worthiness of our customers being very familiar with living paycheck, to paycheck having to manage variability and cash flow and so being somewhat familiar with how to operate in an environment like this.

And David yes, I was just going to say David in terms of payment frequency, a couple of the things that I threw out, were about three quarters of the portfolio had a payment due in the second half of March. So we got a handle on some of those things, David mentioned very quickly and a little over half of our portfolio has had a payment due since mid-March has had at least three or more payments due. And so you might recall, I talked about, two-thirds of our portfolio has a payment frequency of every other week or faster, essentially. And keep in mind too, we have a very short duration on our portfolio, even though contractual maturities for the portfolio like net credit might look a little longer when you wait the cash flows that come off of that portfolio, the weighted average life is very short and everything else is inside of that. So that helped us really get a handle on what's happening with the customer. It helps us recover more the portfolio and cash collect more quickly. And so, I think being able to work with customers is a win-win as we can help customers manage through what we hope is sort of a short lived situation while it also helps us to financially collect.

Right in it actually that foreshadow kind of my next question, which was sort of related to the payment rate. I mean I guess with a June 30th target of 350 million to 400 million in cash in combination with I think you said depending on product as much as 80% drop in origination, there's a plug in there obviously for payment rate. That would help us kind of try to forecast at these near term, the drop off in the portfolio. Your comment about average life probably is part of the answer. I mean, is there an ballpark sort of payment rate, whether it's percentage of beginning balance per month per quarter, that's a good way to think about the life of the portfolio right now?

While I think as Steve mentioned, the average life of the net credit portfolio is about the - the weighted average life is right around 12 months. And then your prime portfolio and the rest of the portfolio, it's beneath that somewhere like in the 10 month range. So that's probably we kind of using those weighted average lives is probably the best way of thinking that we're below a year on the entire portfolio.

Perfect, perfect hey if you don't mind. One last giving the accounting question here on fair value. But if I oversimplify kind of the fair value line is primarily the mark-to-market adjustment plus credit losses. You know you mentioned the $60 million mark down. And if I add that to 203 million charge offs, you know, it gives me a change in fair value, you know closer to 263 versus the reported 238. There is some other sort of contra-item in there, Steve that offsets those two?

Yes I mean we can go into more detail but that’s not the only thing I have kind of generalized there are some puts and takes in there might get you exactly to that number that are a little bit more made a little bit smaller that won’t necessarily detail.

Our next question will come from Vincent Caintic with Stephens. Please go ahead.

First question and so and it's another one on fair value assumptions, I just wondering if you could slightly detail what sort of macro-economic scenarios you're assuming in fair value in your fair value marks. And then, since this is kind of a new concept to us, how are you thinking about what your fair value adjustment would look like? And what would move it for the second quarter?

Steve you want to handles this?

Yes, sure. So as you heard Vincent in my remarks, I think what we tried to do, instead of trying to pull out the crystal ball and figure out, the timing and the shape of the recovery or some type of economic scenario. We felt the best way to accommodate the fair value adjustment was to look at where are we, at the end of March given again we had some quick visibility given the payment rates of the book. But also to take into consideration that volatility, just like you would in a typical sort of fixed income approach, and that discount rate so you would require a higher level of return in a period of increased volatility in your cash flows. And so that's the way we tried to tackle it. And I would, we looked at a bunch of different ways that the economy could play out. And as I mentioned, none of those you know - it was really hard for us to determine one that could create a real liquidity or solvency issue for us. So again, that's the way we've accommodated this quarter. And I think as we roll forward, as things become clearer and a little bit more stable and predictable, you could see a bit of a movement between those buckets in a fair value calculation where you could, you can, you required returns move in a different direction, whereas you start to see some of the credit rolling through that calculation if that makes sense.

Okay, yes that does make sense. And just to clarify, so sounds like things have stabilized maybe not improved, but not worsened. Currently, this hasn't changed much say from the end of April to today just I think usually your portfolio moves quicker than other guys. Have trends stabilize since the end of March, or it's sort of April?

Yes, I would say in terms of defaults. We saw, a tick up again, not huge. I want to make that clear when we call that pick up for a reason. It wasn't a massive spike. But we did see the pickup at the end of March. And that has remained very stable, actually, all the way through, really up until today. The bigger impact we saw in the beginning of the month of April was increased deferrals and loan modification. Especially during the you know, very end of March and the first couple weeks accelerating the first couple weeks of April, and that has not only stabilized but improved and come down somewhat. So, pretty good trends there with the stable, stabilizing - stabilized default rate and improving the deferral loan mod rate. Now I would say hard to predict where we go from here. A lot of them depend on where the economy goes from here. But yes it's looking kind of across the customer performance metrics, you would definitely call them stable at the moment.

Okay, great. That's really helpful. Second question, when you talk about tightening your underwriting and your origination volume declining. When you tighten your underwriting is that through pricing and so I just I'm wondering if the originations you're having right now the margins on that business is going up is usually I think, if you look at the prior recession, we saw the business that you were writing came down really, strong coming out of recession just wanting your thoughts there.

Yes, so primarily not through pricing meaning a little bit moving people through the kind of bucket of risk based pricing, more cherry picking, you know, the highest credit quality customers originating for them and originating them with very little market cost. So, while most of the tightening of the credit model isn't on pricing, we do think the originations we are doing now, probably have much better unit economics than typical because we really are cherry picking the best of the best then very, very little marketing. And then for the second part coming out of the recession, yes 2000 - late 2009 and 2010 was very, very strong years from our business. We have no reason to expect that this one is the different. And just to reiterate a point I made in my prepared remarks, we don't need a recovery to begin actively originating and actually originating some pretty aggressive levels. We just need unemployment rates and really, really more the new jobless claims to be the kind of more leading indicator than a lagging indicator, really new jobless claims to stabilize whoever maybe even if unemployment is 30%. Once the new jobless claims stabilize our underwriting models can very quickly get back to analyzing who is big credit quality and who's that credit quality. Obviously, the market is bigger when unemployment rates are 5%, I wonder at 30%. But we think there is going to be a huge amount of pent-up demand. And as employment improves over the next couple of years that's just grows the market, again, the addressable market. And so, we're hopeful that the recovery is very positive for the business like it was in after the Great Recession.

[Technical difficulty].

I mean more on the fair value, but I'm just trying to conceptualize what the cost of revenue looks like into 2Q. I know you're not giving guidance, but you kind of send it to me like the run rate for the number would be 235 less the 60 million in additional fair value adjustments which are putting out about 170. Am I thinking about that completely wrong, or is that correct just conceptually?

Steve?

Yes, sure. So I think, John there is, I think you're thinking about it generally correctly. There is a little bit of seasonality and all things being equal if we weren't dealing with the COVID crisis. You would see a little bit of seasonality not like you saw under our old accounting method, where you typically see a little bit of a drift up in the fair value at the end of Q1. And then see some of that drift back down in terms of Q2. So like I had mentioned on an earlier question, I think, depending on how we see, credit playing out from a year and the stability and predictability do - have we captured at all, there may be more to come, but that's yet to be seen, just one reason why we didn't give guidance. But you could definitely see a situation where the required returns may come down, as you start to recognize some of that, recognize some of the credit rolling through from folks who aren't able to repay. So we can talk more offline about, how to think about some of those things, but that's generally how you should be, thinking about.

Okay. And just you gave the guidance for the cash at the end of the quarter. And then, you know, kind of backfilling that into my model, it would indicate that there's a little bit of a - I mean, not gigantic, but there is a reduction in the loan portfolio sequentially between first quarter and second quarter. I mean, does that sound about right is this is the only way I can get you up to that level of cash by the end of 2Q?

Yes absolutely. I mean with - as we've mentioned we’ve cut back on origination 60% to 80% at the end of Q1 and haven't reaccelerated that yet. So that combined with the short average life of our portfolio is we were talking about a little earlier, would mean it's very likely the portfolio is smaller at the end of the quarter?

Okay. And then you mentioned that you're bringing paid marketing expenses down to zero effectively, how much is the marketing line is that paid number or is it all of it?

That's all of it. Now that line won't be exactly zero. They're still small bits of marketing we differ. There's some stuff that we couldn't cancel that we'll go through into Q1 put that line item it’s likely to be very, very low in Q2.

So the 34 goes to something nominal pretty fast?

Yes.

Okay. And then just, thinking about, your California book. I assume you started with large installment loans liquidating the portfolio on January 1. I mean, is that almost a blessing in disguise at this point? How much of that book did you liquidate? I mean, it kind of seems like, you know, it was a love that no one really wanted. But it kind of preempted possibly a bigger loss on that portfolio given the crisis?

Yes Steve, do you want to handle that one?

Yes I mean, I think John that we - I think we had plans to continue to navigate that market. So we weren't necessarily relying on California for some of our 2020 outlook, as we had previously mentioned on prior calls. I wouldn't call it a blessing by any means or either to get the economy and these markets going again and moving past this crisis, and once we do, we'll be ready to operate in all the states that where we have products that are ready to go.

Our next question will come from David Scharf with JMP. Please go ahead.

Thanks. Just one follow up, application volume - listen, we heard you loud and clear about the cessation and underwriting and until things stabilize, but trying to think longer-term whether this pandemic kind of serves as a catalyst with all the sheltering in place for perhaps accelerating even more the migration online. Notwithstanding the cessation in underwriting, has there been any noticeable change since mid-March, particularly since sheltered home in credit application volume and the inbound traffic?

Yes, I mean, it's down. Probably not down to your point, not as much as we would have expected given how much we cut marketing. So that's why it's difficult to say exactly when you turn off so much marketing so much quickly, you're expecting applications by the way down. I've never done that before. So we didn't have a great estimate of how much they were to be down. Clearly in the small business space, we're seeing huge demand. Still that was largely going unfilled in, and I think anecdotally we have the sense that there's still plenty of - that there is still plenty of demand out there. We're able to originate everything we want to originate, even with spending almost nothing on marketing right now. So it's a pretty good indication that there is strong demand that will likely only continue once the economy stabilizes and people will get back to work and back to spending a little more money.

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

Just thanks again everybody for joining our call today. I know these are difficult times for all and we certainly appreciate your time and your questions. So have a good evening. We'll speak with you soon.

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