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Edited Transcript of ELVT.N earnings conference call or presentation 4-Nov-19 10:00pm GMT

Q3 2019 Elevate Credit Inc Earnings Call

FORT WORTH Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Elevate Credit Inc earnings conference call or presentation Monday, November 4, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher T. Lutes

Elevate Credit, Inc. - CFO

* Daniel Rhea

Elevate Credit, Inc. - Senior Communications Manager

* Jason Harvison

Elevate Credit, Inc. - COO, Treasurer, Company Secretary & Interim CEO

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Conference Call Participants

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* David Michael Scharf

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Giuliano Jude Anderes-Bologna

BTIG, LLC, Research Division - Director & Financials Analyst

* John Hecht

Jefferies LLC, Research Division - Equity Analyst

* Moshe Ari Orenbuch

Crédit Suisse AG, Research Division - MD and Equity Research Analyst

* Robert Paul Napoli

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology

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Presentation

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Operator [1]

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Greetings. Welcome to Elevate Third Quarter 2019 Earnings Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Daniel Rhea, Communications Manager. Thank you. You may begin.

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Daniel Rhea, Elevate Credit, Inc. - Senior Communications Manager [2]

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Good afternoon. Thanks for joining us on Elevate's Third Quarter 2019 Earnings Conference Call. Earlier today, we issued a press release with our third quarter results. A copy of the release is available on our website at elevate.com/investors.

Today's call is being webcast and is accompanied by a slide presentation, which is also available on our website. Please refer now to Slide 2 of that presentation.

Our remarks and answers will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our press release issued today, our most recent quarterly report on Form 10-Q and other filings we make with the SEC. Please note that all forward-looking statements speak only as of the date of this call, and we disclaim any obligation to update these forward-looking statements.

During our call today, we'll make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued today and our slide presentation, both of which have been furnished to the SEC and are available on our website at elevate.com/investors. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges and certain expenses.

Joining me on the call today are Interim Chief Executive Officer, Jason Harvison; and Chief Financial Officer, Chris Lutes.

I will now turn the call over to Jason.

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Jason Harvison, Elevate Credit, Inc. - COO, Treasurer, Company Secretary & Interim CEO [3]

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Good afternoon, and thanks for joining us on our third quarter earnings call. As you saw in the release, we are proud to report another quarter of strong profitability with adjusted EBITDA growth of 57%, which resulted in a record margin for Q3 of 15%. Year-to-date, our net income has grown over 185%, and we ended Q3 with diluted earnings per share of $0.11.

In my remarks today, I plan to give color on the key drivers of our profitability but also to update you on our pace of originations, which, as you know, have been consciously moderated this year in conjunction with the deployment of our new credit models. Lastly, I will provide a few key business updates.

Before I do, though, let me first reiterate our mission here at Elevate, which is to be the most trusted and preferred credit provider to the New Middle Class. I want to start the call here because the drivers of our profitability and our growth both stem from a very real need for non-prime credit that millions of consumers face daily. We believe our products are well positioned to continue to meet this vast and underserved market.

To be clear, we have certainly changed our philosophy with regards to growth. The addressable market remains vast, and we feel confident in our ability to grow market share. We have also learned a lot in the past year on our margin improvements and are very excited about what the future holds for Elevate and our shareholders.

First, let's speak to our profitability. In the third quarter, we drove nearly 600 basis points in year-over-year adjusted EBITDA margin improvement because of better credit quality and lower customer acquisition cost. Clearly, some of the benefit is due to our measured approach to growth in combination with our recently deployed credit models. That said, a significant driver of margin improvement is from a repeat customer base where both our credit and marketing costs are dramatically lower compared to a newly acquired consumer.

In Q3, we saw a historic number of originations by existing and former customers, and it's something we're proud to have grown over the past year. For context, repeat customer mix year-to-date is up roughly 300 basis points over last year. Again, the mix is skewed somewhat by our measured growth this year, but the most important takeaway is how accretive the incremental margin is on a repeat customer versus a newly acquired customer.

In short, this is the power of our operating leverage, and we believe that the profit potential applied to our growing customer base is the most compelling and exciting aspect of Elevate as we look to 2020 and beyond. Despite a slight dip in revenues year-over-year, we are pleased to see an 8.4% or $15 million uptick in revenues from Q2 to Q3 as we continue to push out our new models.

Turning to Slide 5. Let's discuss our strategy updates. From the 3 core strategic goals I laid out last quarter, we have continued to deliver strong results for our shareholders. First, on credit, our charge-offs as a percentage of both revenues and outstandings were both at historical lows of 45% and 13.1%, respectively. This is a result of the deployment of our credit models earlier this year as well as a repeat customer impact that I mentioned earlier.

Although we had a slower origination pace in order to implement our new models, we are extremely pleased with the resulting impact on our profitability and believe we can drive similar margins at higher origination volumes. While our growth has been slower, we have continued to maintain discipline related to growth and do not feel the urgency to chase that growth. With such an enormous addressable market, we are able to tune our credit models and adjust originations at a rate we feel comfortable with while focusing on bottom line growth.

Now turning to Slide 6. I'd like to highlight a few business updates. As you're all probably aware, California passed a law that caps interest rates on personal loans between $2,500 and $10,000. We believe that this action unfairly limits credit options to California non-prime consumers. As a result, we will stop originating loans through a direct lending channel in California once the law goes into effect. However, we do not believe that it'll have a material impact on our business due to our diversified operating model and additional opportunities.

One of those opportunities is to expand our underwriting and technology licensing to our 3 existing FDIC-regulated bank partners in new geographies. In addition, we are continuously looking for additional banks that share our commitment to providing innovative consumer-focused products.

Next, on our credit model rollout, I'm pleased to update that all the models have been fully deployed, and we're seeing early indications of improved credit quality across the Board. As noted, we plan to grow originations through these models at a measured pace with a focus on margins first. That said, we are encouraged by the results thus far and believe the models can be further leveraged to penetrate the broader market opportunity.

As you know, much of our decision to overhaul our credit models was driven by the large volume opportunity that is available via the credit partner channel as compared to the direct marketing channel. That said, in the third quarter and year-to-date, our mix was predominantly tilted towards direct mail largely because we have more history in data across that channel and we're able to ramp volumes more quickly as a result. For 2020, we will look to expand to partner channels, utilizing the advantages from our new models.

In the U.K., we continue to scale back growth due to the lack of regulatory clarity. In the interim, our business remains profitable, and we see expanded long-term potential. Sunny continues to receive high customer satisfaction scores and stands out as a leader in the space. Our CAC was at all-time lows in the U.K., and we intend to hold low volumes steady for the time being. Demand in the underserved market continues to grow while supply is limited.

Lastly, I would like to quickly announce that Scott Greever has rejoined our team in the U.S. as Executive Vice President of our RISE, Sunny and Elastic products. Scott was previously our U.K. Managing Director. Steve Grice has been promoted from Chief Technical Officer to U.K. Managing Director. I would like to congratulate both of them in their new and expanded roles.

With that, let's turn to Slide 7 to talk about the rest of 2019 and our view of growth looking ahead to 2020. As you can see here, we have lowered our revenue guidance for 2019 by 2% at the midpoint based largely on our deliberate rollout of our credit models, particularly, in a partner channel. I'd also note that much of the revenue decrease this year has been due to lower U.K. volumes and more notably because of the shift towards lower APRs in our RISE portfolio. On the APR point, it's important to clarify that these lower APRs are a function of the mix of our states and a percentage of repeat customers that have the ability to lower their rates with our credit-friendly products.

The most important takeaway, though, is that even with a slower pace of originations and a shift to lower APRs, we were seeing a higher pull-through to adjusted EBITDA and net income for the reasons I've spoken to a minute ago. As a result, we are pleased to announce an increase in our 2019 adjusted EBITDA net income outlook. For adjusted EBITDA, we now expect $135 million to $140 million. And for net income, we now see a range of $28 million to $32 million, which represents an increase at the midpoint of 2% and 9%, respectively.

We will provide our official outlook for 2020 on the fourth quarter call, but we believe 2020 will be a year that we can leverage our credit models to reaccelerate growth. We'll have more to share next quarter, but before I turn the call to Chris, I just want to reiterate that we view the 170-million-person market in the U.K. and U.S. as a massive opportunity. With our new philosophy, which is to be measured with a very strong eye on credit quality, margins and profitable growth, we're excited about the shareholder value we can drive in 2020 and beyond.

Thanks so much, and with that, let me turn the call to Chris to detail the quarter.

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [4]

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Thanks, Jason, and good afternoon, everybody. As we discussed during the prior quarter conference call, we were expecting relatively flat loan growth this year as we rolled out the new credit models for our U.S. products and await more regulatory clarity in the U.K. regarding affordability complaints.

Looking at the top half of Slide 7. Combined loans receivable principal as of September 30, 2019, were down $5.2 million or 1% on a year-over-year basis. However, loan balances were up $27.5 million on a sequential basis for the third quarter versus the second quarter of 2019. This reflects the more measured approach to growth we are taking, limiting new customer acquisition during the early rollout of the new credit models in the first half of 2019 and then gradually expanding the marketing each month. While this approach impacts top line revenue growth, it has resulted in improved gross profit and margins. We expect we will continue with this approach as we move forward through the rest of this year.

At the product level, RISE loan balances were up $28 million versus a year ago driven by growth in the FinWise portfolio. Additionally, RISE loan balances grew almost $21 million during the third quarter of 2019. While Elastic loan balances at the end of Q3 2019 are down $32.2 million compared to a year ago, they did grow approximately $10 million during the third quarter of 2019. And Sunny U.K. loan balances are down compared to both the third quarter of 2018 and the second quarter of 2019 due to continued lack of clarity on the regulatory front with affordability complaints. While we were hopeful we might have clarity, for now, our assumption is that we will continue to hold loan balances flat with our September 30, 2019 balance for the rest of this year.

Staying on this slide. Our Q3 2019 revenue totaled $192.8 million, down 4.3% from the third quarter of 2018. This decrease was a combination of 2 factors. First, the overall APR for our RISE product declined from 139% in the third quarter of 2018 to 126% in the third quarter of 2019. The average APR of a new RISE FinWise customer is approximately 130%, which is lower than our typical state-licensed RISE customer but with a better credit profile.

While we are losing some top line revenue growth due to a lower APR for the RISE FinWise customer, we are generating just as much, if not, more gross profit because losses are lower on these customers, and they also have a lower CAC. While RISE revenue was down $1.5 million on a year-over-year basis in the third quarter of 2019, RISE revenue less net charge-offs were actually up $3.3 million on a year-over-year basis, an increase of roughly 7%.

Elastic has a similar story. Gross revenue is down $4.1 million, but net revenue is up $1.3 million on a year-over-year basis. Additionally, sequential quarter revenue growth was up $13.9 million or 9% for our U.S. products during the third quarter of 2019.

Lastly, our U.K. product, Sunny, experienced a $3.5 million decline in revenue during the third quarter of 2019 as compared to a year ago. Almost half of this decline was due to a drop in the FX rate and the remainder due to a decline in the average loan balances resulting from continued concern with affordability complaints. On a consolidated basis, net revenue, revenue less net charge-offs, increased $4.6 million or approximately 5% during the third quarter of 2019 versus a year ago.

Looking at the bottom half of Slide 7, we are very pleased with the year-over-year growth in our profitability. Adjusted EBITDA for the third quarter of 2019 totaled $29 million, an increase of 57% from the prior year third quarter. For the first 3 quarters of 2019, adjusted EBITDA totaled $107.6 million, up 28% from $84.2 million in the first 3 quarters of 2018. Bottom line net income for the third quarter of 2019 was $4.8 million or $0.11 per fully diluted share, up from a net loss of $4.2 million or negative $0.10 per fully diluted share in the third quarter of 2018.

From my perspective, the third quarter 2019 net income of $4.8 million was even further impressive because it included $2.8 million in pretax expense associated with FX and nonoperating losses and the severance package for our prior CEO. Net income for the first 3 quarters of 2019 totaled $23.9 million, an increase of $15.9 million or 185% from $8.4 million in the first 3 quarters of 2018.

As a result of all of this, we are revising our fiscal year 2019 revenue guidance down to $740 million to $750 million but increasing our net income and diluted earnings per share guidance to $28 million to $32 million or $0.63 to $0.72 fully diluted per share, respectively. While we also are narrowing our adjusted EBITDA guidance from $130 million to $140 million to the upper half of our previous guidance range or $135 million to $140 million.

Turning to Slide 8. Our cumulative loss rates as a percentage of loan originations for our 2018 vintage remains relatively flat with our 2017 vintage and the early read on the 2019 vintage is that it is performing better than both 2017 and 2018. That said, we are continuing to ramp our new generation of credit scores and strategies and are hopeful that we can drive loss rates lower in coming years.

On this slide, we also show our customer acquisition cost. For the third quarter of 2019, our CAC was $184, down from $225 in the third quarter of 2018. We believe both our fourth quarter and fiscal year 2019 CAC will be sub-$225, down from the prior historical range of $250 to $300, primarily benefiting from the expanded state coverage of RISE originated by FinWise Bank and continued marketing efficiency and also diminished competition in the U.K.

Slide 9 shows our adjusted EBITDA margin, which was 15% for the third quarter of 2019, up from 9% for Q3 2018. The adjusted EBITDA margin for the first 9 months of 2019 was 19%, up from 15% a year ago. All this expansion happened within our gross margin, which increased due to lower loan loss provisioning and marketing spend. Additionally, the decrease in our cost of funds for our debt facilities has also resulted in an expanded net income margin so far in 2019. On roughly the same amount of average debt in both the third quarters of 2018 and 2019, interest expense for the third quarter of 2019 was $5.2 million lower than the third quarter of 2018.

Lastly, I would like to briefly discuss the $10 million common stock buyback plan authorized by our Board of Directors. We believe this buyback will help minimize dilution from ongoing employee stock grants while being small enough to not impact daily liquidity in our common stock. We believe this use of capital at the current stock valuation is compelling from a return on capital perspective. We began buying back shares in early August before we were precluded from purchasing additional shares through the end of the quarter due to regulatory reasons.

With that, let me turn the call back over to Jason.

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Jason Harvison, Elevate Credit, Inc. - COO, Treasurer, Company Secretary & Interim CEO [5]

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Thanks, Chris. I would like to reiterate my excitement for the future of our company. My first 90 days in a new role have flown by. Our team has continued to identify new areas for innovation, including new partners, potential products and expanded geographies.

With that, we will now turn the call back over to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Bob Napoli with William Blair.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [2]

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Nice quarter. Good -- love to see those credit losses coming in lower. I think you're being disciplined. It's good to see. The -- California, any color you can give me on the -- give us on the amount of your business in California that -- and if you expect to have bank partnerships to replace that volume specifically in California? Or do you have the plans with bank relationships out -- additional relationships outside of that market?

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Jason Harvison, Elevate Credit, Inc. - COO, Treasurer, Company Secretary & Interim CEO [3]

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Yes. Bob, this is Jason. I'll answer that. I mean the way we see it, it's unfortunate that California has limited access for non-prime borrowers. We think getting restricted, that is not a great thing. The way we look at -- and we think the diversified operating model that we have will help mitigate any kind of loss of the direct lending business there. So towards the end of the year, we'll start to see some originating loans underneath the direct lending line that we have to California consumers. We look at other opportunities to offset that. One, we are seeing good results from our new models that rolled out. So that's going to open up new channel source both in the direct lending business and with our existing partners, bank partners that we market for.

But in addition to that, we do have a term sheet that we have signed with one of our existing bank partners to expand that relationship, and they're looking at multiple geographies, California being one of those. We're still working with them on when's the exact timing and what state they'll go into first will be. But we feel like between the new channels that we can open up and with the expanded geographies, the loss of the direct lending business in California should have a minimal impact to us going forward.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [4]

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And then as we look at -- think about 2020. Should we think about similar trends like relatively low growth but better credit? Or do you expect with your models be getting more confident in those models that you'll start to see -- I mean U.K., you said you're going to keep flat. But in the U.S., should we see growth resume on the top line with continuation of expanding margins on the bottom line?

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Jason Harvison, Elevate Credit, Inc. - COO, Treasurer, Company Secretary & Interim CEO [5]

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Yes. We'll give more color to that in the call for Q4 in February, but I think the way to think about it is we'll still be very disciplined early in the year, start to accelerate that growth to the back half of the year. Like I say, we're seeing good results so far, but we want to be measured about that. So I think we'll see that start to ramp up towards the back half of 2020 from a growth standpoint.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [6]

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And last question. Any thoughts on CECL on -- or when you're going to implement CECL? And any effect on the business when you do?

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [7]

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Bob, yes, it's Chris. The FASB has approved a proposal to defer adoption of CECL for smaller reporting companies, and we qualify for that. I think it -- the definition's a public float less than $250 million on the preceding June 30, so we qualify. And I think if that ends up being finalized, and that should be in November, if it's finalized, the official word, I would expect that we will not adopt CECL, and we will take advantage of deferring adoption of CECL for at least a year. And I think it can go up to like 3 years of deferral as long as your public floats less than $250 million at June 30 every year.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [8]

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Great. Well, I think, you may not have that next year.

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Jason Harvison, Elevate Credit, Inc. - COO, Treasurer, Company Secretary & Interim CEO [9]

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Thanks, Bob.

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Operator [10]

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Our next question is from David Scharf with JMP securities.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [11]

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First, I apologize I know Bob just asked this. I was still a little unclear about the precise message about California. Obviously, you're going to see direct lending. Are you in fact going to -- is the goal to replace all of that with a bank partnership? I know you talked broadly about expanding the number of states, but it was still a little unclear what exactly the California plan was.

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Jason Harvison, Elevate Credit, Inc. - COO, Treasurer, Company Secretary & Interim CEO [12]

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Yes. David, so right now, we have a term sheet with one of our bank partners to expand where they want to offer credit to. They are comfortable going into California in a couple of new states. Right now, what we're working with them on is what the first state to go into. So we'll have more color on that in the first -- in the call in February.

But right now, we're optimistic that we can mitigate any loss at California from the direct lending side with the expansion of the new states with the bank partner that we have today. That's where we're going to open up a few new geographies with California being one of those just looking at the timing.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [13]

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Got it. Got it. Understood. And listen, obviously, tremendous margin leverage this quarter, and kind of running up and down the P&L and balance sheet seem to be very much in line with what we are looking for. But with the exception obviously on the marketing side, the CAC really stood out. Can you give us a sense for what percentage of originations came from repeat borrowers versus maybe 1 quarter and 1 year ago, so we can put that $184 figure into context?

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [14]

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Hey, David, it's Chris. One thing to clarify, and I'm not sure we have that information handy, but really, repeat origination doesn't come into play in calculating our CAC at all. All of our marketing dollars every quarter are allocated just to new customers. And so that $184 this quarter and what it was a year ago is our true marketing spend divided by the number of new customer loans only. So the repeat or former customer loans wouldn't factor into the CAC calculation at all.

That said, the mix between news and formers definitely has an impact in terms of the credit equality on a go-forward basis because, clearly, the former customers typically have a much lower risk of loss than our newer customers. But from an actual CAC standpoint, we allocate all marketing spend just to new customer loans. So when a customer comes back for a second loan, there's no marketing spend associated with that customer at all.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [15]

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Got it. And no, that's helpful. And Chris, I know this may be difficult to answer, but at least at the current scale of the business, that CAC has a tremendous impact on the earnings power and in just my back of the envelop, with, 75,000 new loans. If the CAC were at the midpoint of what you historically outlined as your range, if it were $225, for example, that would have been another $3 million of expense, which would have cut the pretax income in half. And it seems like you've been outperforming most quarters really since you've been public that CAC range. And I'm wondering is there something structurally there in just the efficiency of direct mail, in the shifting mix to relying on bank partners? It seems like the earnings outlook is impacted so heavily by that figure. Should we be rethinking of structurally a low targeted range?

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [16]

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You hit on a couple of the main reasons from my perspective. I mean, clearly, there's marketing efficiencies, primarily with direct mail, we're very good at it. Two, I think a big player and the reason for the continuing decline in the CAC has been the expansion of the bank partnership models, particularly with FinWise, as we go into new states where there's less competition.

I think another thing is you can clearly look to the U.K. front. Their year over CAC -- year-over-year CAC has dropped significantly because of the decreased competition. And I would say with Enova just recently announcing that they're exiting the market that I would like to think that our CAC there can continue to potentially drop. So its one of those things where I -- it's one thing we feel good about. There's certainly going to be a question as to whether we'd be willing to spend a little bit more on the marketing side to drive more volume and take slightly higher losses. But for now Jason and I are very comfortable with our measured growth approach through the rest of this year. And then we think we've kind of struck the right balance in terms of allocating marketing dollars and the CAC that we're getting and the margin expansion that we're getting versus trying to drive a little bit more volume.

But looking ahead to next year, it's still a little bit early. I think we'll provide more guidance again in the February conference call as we discuss Q4 results as to where we see that range for CAC in 2020. But for now, I feel pretty good that it'll at least continue to trend south of the historical $250 to $300. And again, we feel good -- one point, we feel good from a unit economic standpoint that we can make money off of a customer with a CAC potentially as high as $300 depending upon what state or what product. But for -- recently, we've certainly been trending good, and I think we've done a really good job of managing the CAC this past year.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [17]

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Got it. Yes. Just one quick one for you, Chris. The effective tax rate came in at just 22% this quarter. Any unusual items or tax benefits? And how should we be thinking about that going forward?

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [18]

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No. I don't think there was anything too unusual. There's going to be the standard exclusions when you're calculating it from a true tax perspective, and given the small amount of when your net income is sub $10 million on a quarterly basis, just a little bit can skew. And I would say, going forward, it's still expected in the 25% range, maybe a little bit higher but definitely south of 30%.

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Operator [19]

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Our next question is from John Hecht with Jefferies.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [20]

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Most of my questions have been asked. I'm wondering, though, Chris, maybe can you tell us what kind of -- what is -- what do you guys perceive as intermediate term kind of balance of new versus recurring or existing customers? And are we at that balance now? Or when do you think you'll get there?

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [21]

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The balance certainly fluctuates both by product and based on the time of year with the seasonality aspect. This is the time of year where we would typically add a lot more new customers and grow a little bit faster. But clearly, I mean, it can be skewed pretty dramatically. Elastic being a line of credit product, I mean, regardless of how quickly we're adding new customers, you're still going to have a preponderance of originations be from existing customers given the nature of the line of credit product.

For RISE, we typically like to see that new customer originations really don't exceed much more than 50% on a quarterly basis in terms of the overall mix if we start driving north of 50%. In terms of originations, you're probably going to see the credit quality weaken a little bit and be more towards a higher provision from a quarterly basis. So we're trying to keep it under 50%.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [22]

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Okay. And then with respect to the buyback, I did -- did you give us a level or sort of intentions in terms of using the buyback?

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [23]

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Yes, it was -- Q3, as I said, I mean I can't get into the specifics, but we included really from mid-August through the rest of the quarter. We're hopeful or at least I'm hopeful, once we get this call and kind of get back into our open window period that we'll be able to buy back beginning here in Q4 in early November.

I think what we said last time around was a $10 million authorization. We had $5 million authorized for this year and for next year. I'm not sure we can hit the full $5 million this year given kind of the daily limitations based on float. But we'll certainly look to maximize and fully utilize that $10 million over the course of this year, next year as quickly as we can. Given where we're trading, we certainly think it's a good value return to shareholders.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [24]

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Yes. And then with respect to the U.K., I know you're suggesting you're not growing there. But any update on where we are in resolution of those uncertainties and any time where you guys would just step out of the market like some of your peers have?

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Jason Harvison, Elevate Credit, Inc. - COO, Treasurer, Company Secretary & Interim CEO [25]

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Yes. John, its Jason. I mean the one thing I think we benefit from is we have a profitable business even at the current complaint levels that are there. We took some actions to make sure we manage cost there pretty carefully. And we have been in conversations with the FCA there. And the conversations are confidential. I can't go into too much of them. But I would say they're incremental. So as you slowly make progress, it's not going to be this kind of defining moment where everything comes to immediate clarity. But I think we benefit by having that positive net income coming through the year. So we have a little bit longer runway to be able to try to work with the FCA to try to get that clarity. We think given that the demand is there and there's so little supply out in the marketplace, we're willing to stick it out for a little bit longer as long as we're showing profitability. It's not a drag on our earnings for us or distraction. So we're hopeful that we can get some closure there and be able to open that market back up again for us.

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Operator [26]

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Our next question is from Moshe Orenbuch with Crédit Suisse.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [27]

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Most of my questions actually have been asked and answered. Just wondering, your -- I think your fourth quarter revenue guidance looks like it might imply slightly down revenues from the third quarter. Seasonally, normally, you would probably see a little bit of an uptick. Is there anything going on that's different? Obviously, the pace of loan growth is a bit slower, but we're still expecting it to be up a little. And anything that can make things a little better perhaps than what you're guiding towards?

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [28]

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Yes. You're right, Moshe. It's Chris. A big piece of that is going to be the U.K. I mean we definitely have consciously slowed down new customer originations probably beginning in September, and so loan balances have dropped a little bit. And we're going to try and hold it flat, but that's going to be a big piece as to why it's coming down. Certainly with the FX rate bouncing up a little bit as they hopefully get closer to a Brexit resolution that might help. And I think we're just being a little bit conservative in the forecast as well for Q4.

But until we fully roll out and kind of see the measured growth approach, I mean we're really focused on making sure we exit this year with good credit quality and that we're headed into next year feeling good about things. So I think for now, we're just going to continue to execute as we see. But revenue -- however top line revenue plays out, we're more focused on the bottom line results, and we expect to see net income in Q4 higher than what it was in Q3.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [29]

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Great. And would just echo what some of the earlier folks have said and that is a better credit quality certainly is a lot more comforting and a lot more, I would say, the earnings stream is a lot more resilient.

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Operator [30]

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(Operator Instructions) Our next question is from Giuliano Bologna with BTIG.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [31]

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I guess jumping off on a couple of different topics. When we look at the different products, it looks like there was a little bit of shift in the product mix. But do you think the bank partnerships would target specific products between either RISE or Elastic? Or do you have any preference on targets?

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Jason Harvison, Elevate Credit, Inc. - COO, Treasurer, Company Secretary & Interim CEO [32]

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From our standpoint inside Elevate, depending on how they're structured, we can try to target the same type of returns. So we're almost indifferent. I think you look from a consumer standpoint. Consumers tend to favor the line of credit product over the installment loan product. So as we've talked to our different partners, there's -- the one that we just signed a term sheet with is looking more towards an installment loan product. We have some discussions with other bank partners that would be more of a 2020 midyear, late 2020 launch that if we're looking in -- sorry, at line of credit products.

So I think it's -- we're kind of in -- on our side, we're indifferent. I think if you look at the customer research, they skew slightly towards line of credit. But I think both are great products, and we try to build great features probably (inaudible) for bank partners for certain non-prime consumers.

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [33]

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And generally speaking, the unit economics are pretty similar for all sets of products regardless of the bank partnership.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [34]

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That makes sense. And then from a little bit of different perspective, but obviously if you continue along this trajectory, even if you were to grow assets low double digits next year, you'd probably continue to see your leverage ratio come down even if you execute on the buyback plan. Is there kind of a target of where you'd like to run the business in terms of leverage?

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [35]

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Yes. I mean, certainly, given where the stock price is and then with the amount of free cash flow that we're generating, and you'll see on our Q, we had really good free cash flow for a company our size in Q3 that we generated, gives us the ability to both pay down the debt. It was one of the things that I worked on with VPC with the amended debt facilities. We do have in Q1 of every year a 20% revolver facility now where we can pay down up to 20% of the debt at no prepayment penalty. So between the normal seasonality, the free cash flow that we're generating, I could see that leverage debt to equity dropping into the sub-3 range over the course of the next couple of years. If we feel that that's the best utilization of capital. And so that's one of the things that we'll just continue to take quarter-by-quarter. But it's certainly nice to have that flexibility of paying down debt or buying back shares.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [36]

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That sounds good. And then just more -- a little bit more of a clean-up question. You mentioned severance cost and FX, cost in the quarter. Could you just mention that number again?

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Christopher T. Lutes, Elevate Credit, Inc. - CFO [37]

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Well, it was -- for the quarter, we had $2.8 million in total pretax expense. The FX and the nonoperating losses are disclosed separately on the face of the P&L and then the difference between that $2.8 million, I think it was roughly $1.5 million in the FX and non-FX would be the severance, a little over $1 million for the severance.

Clearly, we feel good that we'll probably run an FX gain in Q4 given where the exchange rate is. We don't expect a severance in Q4, and I don't think there'd be a nonoperating loss either. So if anything, we'll -- we should see that flip in Q4.

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Operator [38]

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And ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

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Jason Harvison, Elevate Credit, Inc. - COO, Treasurer, Company Secretary & Interim CEO [39]

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Yes. Well, thanks, everyone, for joining us for the Q3 call. I'd like to have -- I couldn't be more excited about the future of Elevate. I like to thank all of our employees for continued hard work and dedication. I look forward to speaking to everybody next quarter. Thanks so much.

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Operator [40]

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Thank you. We have reached the end of our program. You may disconnect your lines at this time, and thank you for your participation.