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Enova International (NYSE:ENVA)
Q1 2019 Earnings Call
April 25, 2019 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


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.

Monica Gould -- Investor Relations

Thank you, Chantal, and good afternoon, everyone. Enova released results for the first quarter of 2019, ended March 31, 2019, 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 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 press 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.

David Fisher -- Chief Executive Officer

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'll 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. And 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've mentioned in the past, these new customers ultimately expand our returning customer base and revenue potential going forward. While our 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 a 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 reflects the seasonality we typically see in Q1 combined with our ongoing diversification into LOC and installment products.

This diversification can be seen in total A/R 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 in a year where we saw more typical seasonality in the first quarter, originations have accelerated as we've entered the second quarter. We've discussed on prior calls how managing growth can be challenging, but our experienced team is able to leverage our sophisticated analytics models to respond rapidly to changes in demand by adjusting our marketing spend and credit cut-offs.

Our past results have demonstrated our ability to manage these growth-versus-profitability trade-offs and we'll 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 6 growth businesses. Namely, our U.S. subprime business, our U.S.

near-prime offering, our U.K. consumer brands, U.S. small business financing, our installment loan business in Brazil, and Enova Decisions, our Analytics-as-a-Service business. Our large U.S.

subprime consumer business generated another strong quarter of growth and profitability. Originations increased 6% year over year and 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 is a significant opportunity for future growth in the U.S. given the large addressable market and our single digit market share.

Net credit 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 a constant 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 and a wider range of APRs and is resonating well with consumers there. Installment loan revenue in the 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 have 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 13% 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, our 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 decisioning. Before I wrap up, I want to provide a brief regulatory update. In March, a federal judge ordered a stay on the August 2019 compliance date for the small dollar rule.

As you know, earlier this year, the CFEB announced it is revisiting the ability to repay portions of that rule. The judge's 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 CFEB. As with the ability to repay provision, we believe the flexibility of our online platform, diversified product offerings 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 a bill, which we support, that proposed a set of consumer-oriented protections without restrictive rate caps. Our team will stay engaged 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 financials and guidance. And following his remarks, we'll be happy to answer any questions that you may have. Steve?

Steve Cunningham -- Chief Financial Officer

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 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 customers' 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 up 21% year over year. International revenue decreased 15% from the year-ago quarter to $35 million primarily due to the aforementioned repositioning of our U.K. 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 have 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 experience seasonally lower growth. Typical of this 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 products and vintages 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 was 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 receivables 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 in 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, as 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 and 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 while meeting customer demand. During the first quarter of 2019, total operating expenses including marketing were $83 million or 28% of revenue compared to $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 spend 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, a 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, a non-GAAP measure, increased to $39.9 million or $1.16 per diluted share from $35.4 million or $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'd 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 in originations typically increase from the first quarter low point and peak during the fourth quarter. As we move into our faster growth periods, seasonality typically generates 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 impacts 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-year 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 remain well positioned and are very optimistic about our ability to generate growth and increase profitability for the remainder of 2019.

And with that, we would be happy to take your questions. Operator? 

Questions and Answers:


Thank you. Your first question will be coming from John Hecht from Jefferies. Please go ahead.

John Hecht -- Jefferies -- Analyst

Good afternoon. Thanks, guys. I really just want to focus on the line of credit versus the installment loans. Both of them had good year-over-year growth, but it's clear that in terms of origination trends and this and that, that there's been higher factors tied to the line of credit.

I'm wondering, are those tied to some marketing, strategic marketing changes or consumer demand? Or are you just seeing different geographic pockets?

David Fisher -- Chief Executive Officer

So I think what you're seeing there is especially in counts as opposed 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 the combination of states passing new line of credit laws, opening up availability for us as well as us expanding into states that didn't have, didn't prior have line of credit, or short-term products that now do have, or 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 impacts.

In installment, you'll see that that's somewhat muted, in terms of dollar amounts, because of our larger net credit loans which is actually one of our fastest-growing businesses as you've seen over the last year or two.

John Hecht -- Jefferies -- Analyst

OK. Then maybe can you talk about what's say over the last year with respect to average balance of line of credit versus installment loan what's happened?

Steve Cunningham -- Chief Financial Officer

Our average balances haven't really meaningfully changed over the past year, John.

John Hecht -- Jefferies -- Analyst

OK. So it's mix. OK. 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? Is that just a one quarter migration as you move things in the U.K. or is there something longer term?

David Fisher -- Chief Executive Officer

It's 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, you obviously are booking a lot of those losses from new customers upfront. And that will take many quarters to normalize. It's really until the growth slows pretty meaningfully.

Long term it's a great thing as we've talked above. 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, to that flexibility seems to be really resonating in the U.K. So we've seen strong adoption, stronger than we expected.

And that's what led to the drop in the gross margins there.

John Hecht -- Jefferies -- Analyst

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 any different kind of efficacy rates and response rates you're seeing in these channels?

David Fisher -- Chief Executive Officer

We saw decent rates in Q1. Again, Q1 is more typical seasonality. I mean that's what we saw, that's what we typically saw in the past. Last year was definitely an anomaly.

It was a surprise to us, I think surprised everybody. So we're kind of getting back to that. We pulled way back in 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, of demand, post tax return season as would be expected. And we are 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 we're seeing good success in TV actually and so we're leaning in on the TV side. But these are fairly minor and longer-term mix shifts in terms of marketing.

They're 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.

John Hecht -- Jefferies -- Analyst

Guys, thanks very much and congrats on a good quarter.


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

David Scharf -- JMP Securities -- Analyst

Thank you and thanks for taking my questions this afternoon. David, I wanted to actually follow-up on the prior questions and 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 on marketing spend. I'm 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 based on the scale you're at now, is $23.5 million, I mean should we think of that as a floor on quarterly spend, that anything below that can't sustain this kind of growth?

David Fisher -- Chief Executive Officer

Yes. So a couple of things. Good question. We did not pull back on marketing in Q1 to try to achieve higher profitability.

We generated above our guidance range and profitability just through normal operations. We tried to make sure we were hitting our return thresholds with our marketing and not exceeding them. And just given the lower levels of demand because of the tax return season, that's where marketing played out. So unlike Q4 where we purposefully pulled back because of extremely strong levels of new customer growth, we did not do that in Q1, but still saw one of 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 in either absolute dollars or as a percentage of revenue to get much below that number. That was a 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 opportunities to accelerate that kind of in the middle of last year and it paid off so well that we ended up having to pull back in the back quarter of the year, the last quarter of the year.

Right now, we're seeing some good opportunities to deploy marketing dollars as we have kind of exited the tax return season and kind of moved into 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, because that's great growth for the future. Every marketing dollar we spend, we think we're spending at attractive unit economics and generating good returns for the business.

So if you're thinking about a range, we would not expect to go below where we were in Q1. Certainly not in the back three quarters of year, but really like in any quarter going forward, although crazy things can happen. And we will be happy to spend kind of in the upper teens if we find the right opportunities in some of the more growth quarters.

David Scharf -- JMP Securities -- Analyst

That's real helpful going forward. Hey, maybe a question, just a point of clarification. I wanted 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 a couple of percentage points, but still in the 45% to 55% range.

Yet a little later I thought David, you may have said that those margins aren't going to snap back overnight off that 28% level in the first quarter. And I'm trying to reconcile those if you could comment on how to think about the trend over the course of the year.

Steve Cunningham -- Chief Financial Officer

Yes. David, this is Steve. I think over the course of the year you'll see some of the return there. But again, it's not, it won't be overnight.

That's really what David was talking about as we're making some of these transitions and purposeful repositioning. 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, if there is 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 5 points. But again, you should expect to see some normalization based on our best view going forward today.

David Scharf -- JMP Securities -- Analyst

OK. Got it. Then hey, lastly for you, Steve, this is more just sort of a mechanical question. But it looks like your EBITDA guidance for the year was taken up by $7 million both at the high and the low end.

Yet the earnings guidance went up by about $0.40 which by my calculation that's roughly like $18 million pre-tax. Sort of wondering, is there sort of an $11 million reduction in sort of below the operating line assumptions? I can take it offline if it's easier, but I was just trying to reconcile.

Steve Cunningham -- Chief Financial Officer

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

And we also had some mix shifts across our financing instruments as well.

David Scharf -- JMP Securities -- Analyst

All right.


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

David Fisher -- Chief Executive Officer

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

Duration: 38 minutes

Call Participants:

Monica Gould -- Investor Relations

David Fisher -- Chief Executive Officer

Steve Cunningham -- Chief Financial Officer

John Hecht -- Jefferies -- Analyst

David Scharf -- JMP Securities -- Analyst

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