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Enova International, Inc. (NYSE:ENVA) Q1 2023 Earnings Call Transcript

Enova International, Inc. (NYSE:ENVA) Q1 2023 Earnings Call Transcript April 25, 2023

Enova International, Inc. beats earnings expectations. Reported EPS is $1.79, expectations were $1.53.

Operator: Good afternoon and welcome to the Enova International First Quarter 2023 Earnings Conference Call. . I would now like to turn the conference over to Lindsay Savarese of Investor Relations. Please go ahead.

Lindsay Savarese: Thank you, operator, and good afternoon, everyone. Enova released results for the first quarter 2023 ended March 31, 2023, this afternoon after market closed. If you did not received 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 and, as such, is subject to risks and uncertainties. Actual results may differ materially as a result from various important risk factors, including those discussed in our earnings press release and in our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Please note that any forward-looking statements that are made 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, Enova reports certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. And with that, I'd like to turn the call over to David.

David Fisher: Thanks, and good afternoon, everyone. I appreciate you joining our call today. I'll start with an overview of our first quarter results, and then I'll discuss our strategy and outlook for 2023. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. We once again delivered strong results. Our balanced approach to growth, combined with our diversified product offerings, had enabled us to successfully navigate the current macroeconomic backdrop. Thanks to the skillful execution of our world-class team, we're able to generate more than $1 billion in originations for the sixth quarter in a row. Revenue in the first quarter of $483 million increased 25% year-over-year, demonstrating our ability to drive profitable growth while remaining focused on maintaining stable credit in this environment.

Q1 revenue was flat sequentially due to normal first quarter seasonality. As a result of strong revenue growth and diligent credit management, adjusted EBITDA increased 19% year-over-year and 5% sequentially to $126 million, and adjusted EPS increased 7% year-over-year and 2% sequentially to $1.79. While demand is seasonally weakest in Q1, it remained relatively solid this year. Our customers across both consumer and small business are underserved by traditional banks, and they need access to capital during a variety of economic environments. That being said, in Q1, we prioritized remaining strong credit metrics as opposed to maximizing origination growth, especially early in the quarter. Our combined loan and finance receivables increased 28% year-over-year to $2.8 billion.

Originations increased 2% year-over-year but were down 9% sequentially in line with typical Q1 seasonality. Marketing was very efficient in the quarter and decreased as a percentage of our total revenue to 17% from 24% last year, evidencing the solid demand I just mentioned. Similar to the past few quarters, the growth came from our SMB business and our consumer line of credit products, demonstrating the clear importance of having a diversified portfolio. Today, small business products represent 65% of our portfolio, up from 56% in Q1 of last year. SMB revenue increased 47% year-over-year and 1% sequentially. Given our strong brand presence, minimal competition and diverse portfolio, we continue to see a long runway ahead to drive meaningful volume.

Our consumer business has also performed well in Q1. Consumer revenue increased 13% year-over-year, was down 2% from a strong Q4, again, reflecting typical Q1 seasonality. In line with our expectations, a percentage of consumer installment loans in our portfolio decreased in Q1, while our line of credit products increased as a percentage of total consumer loans. We have continued to deemphasize our longer-term near-prime installment loans and have emphasized instead our shorter duration and smaller dollar line of credit consumer products, resulting in higher payment frequency and a relatively short duration of our portfolio. This gives us a more real-time view into credit performance. In addition, last year, we made the decision to wind down our short-term single pay for payday products.

We made our final single-pay loan in Q2 of last year, and all single-pay loans had run off our books by the end of Q3. In Enova’s early years, single-pay loans were the large majority of our business. However over the years, their significance dwindled largely due to customer preference for other products we offer. This move will allow us to simplify our operations and focus on our faster-growing products. Prior to discontinuance last year, they represented less than 2% of our total portfolio. Given how small of a contribution this product had on our overall results, exiting it has had no material impact on our business, as you can see from our results over the past few quarters. Turning to credit performance. Overall credit was very good in the quarter and is looking even better heading into Q2 as we continue to successfully manage credit through numerous changes in the macroeconomic environment, leading to continued solid profitability.


Net charge-offs were 8.2% in the first quarter, down from 8.8% last quarter. Notably, net charge-offs remained well below pre-COVID levels of 15.8% in Q1 of 2019 and 13.7% in Q1 of 2018 from a combination of mix shift and good credit management. To give added perspective on how we manage credit, over the past 5 years, we've been using a sophisticated recession-monitoring analysis to assess the macroeconomic environment. This is what led us to increase our ROE targets across all of our products during the back half of 2022 to strike a more prudent balance between growth and risk. In addition, our sophisticated machine learning models, combined with our experienced team, are continually making small operational changes to address areas of concern and take advantage of opportunities.

We are literally making hundreds of small changes each quarter to optimize between originations and credit performance. It's important to understand that not all products move a. For example, in mid-2022, consumer defaults became elevated. Accordingly, we tightened our underwriting in late Q2 and into Q3 to bring these metrics back in line with our target. And the result was some of the strongest credit metrics we had ever seen by Q1. In contrast, credit metrics for the SMB portfolio consumer by a quarter or 2, as we saw much better than historical averages for most of 2022 in that business. However late in the year, as we saw the impact to our credit metrics of the portfolio normalizing to historic levels, we tightened the small business models and increased our focus on collections to ensure strong credit performance and unit economics.

Now, credit metrics across SMB look solid, although there will be a bit of a lag with net charge-offs into Q2, as Steve will discuss. Again, this demonstrates the importance of having a diversified portfolio, world-class machine learning algorithms, and a deep and experienced team. Looking forward, as a result of the current solid credit performance and strong demand we are observing, we believe there is opportunity to be moderately more aggressive with originations now, particularly on the consumer side. And in fact, volume has been quite strong so far in April. To wrap up, while other financial service companies have struggled to access liquidity in the current market environment, our solid balance sheet, more than $900 million of liquidity and proven ability to access the capital markets gives us the flexibility to continue to deliver on our commitment to drive long-term value for our shareholders.

The macroeconomic environment was obviously noisy in Q1, but not in Enova. We had another strong quarter, again demonstrating that it's not an overly risky business, but instead one that can operate well in a variety of economic environments. This consistent and industry-leading performance, combined with our strong recent results and lackluster stock price, has made it more clear to us than ever that there's meaningful upside to our current share price and that we need to do more to unlock shareholder value. We are working with external advisers to gauge various alternatives. In addition, as you may have noticed, we are providing more insights about our business to show its strength. Last quarter, we discussed how large and stronger SMB business has become.

And this quarter, we've discussed more on how we manage credit. We have not yet identified all the tactics we will take to unlock value, but we are confident that we have the right strategy, products, tech and analytics team and balance sheet in place to build on our success. With that, I would like to turn the call over to Steve, who will discuss our financial results and outlook in more detail. And following Steve's remarks, we'll be happy to answer any questions that you may have. Steve?

Steven Cunningham: Thank you, David, and good afternoon, everyone. Over the past several years, the powerful combination of our flexible online-only business model, diversified product offerings, nimble machine learning-powered credit risk management capabilities, its solid balance sheet has allowed us to deliver consistent and differentiated financial results across a range of operating environments. This can again be seen in our solid top and bottom line financial results this quarter, reflecting our ability to adapt and pivot in this uncertain macroeconomic environment. Turning to our first quarter results. As expected, total company revenue was flat sequentially and rose 25% from the first quarter of 2022 to $483 million.

The year-over-year increase in revenue was driven by the growth of total company combined loan and finance receivables balances, which, on an amortized basis, increased 28% from the end of the first quarter of 2022 to $2.8 billion at March 31. First quarter total company originations totaled $1.1 billion, up slightly from the same period a year ago and were driven by small business and our continued emphasis on originating shorter duration and smaller dollar line of credit consumer products as we continue to balance growth and risk across our businesses. Small business revenue increased 47% from the first quarter of 2022 to $194 million as small business receivables on an amortized basis ended the quarter at $1.8 billion or 48% higher than the end of the first quarter of last year.

Small business originations of $770 million grew 17% from the first quarter a year ago. Revenue from our consumer businesses increased 13% from the first quarter of 2022 to $281 million as consumer receivables on an amortized basis ended the first quarter at $1 billion or 3% higher than the end of the first quarter of 2022. Consumer originations of $291 million were lower sequentially due to tax return seasonality and were lower compared to the prior year quarter due to our emphasis during the uncertain economic environment on originating shorter duration and smaller dollar line of credit consumer products while reducing the exposure to longer duration and larger dollar near-prime consumer installment loans. As evidence of this, consumer line of credit receivables and originations in this quarter grew 57% and 53%, respectively, from the first quarter of 2022.

Consumer demand for these products remain strong, and the mix shift supports our ability to adapt more quickly in an uncertain macroeconomic environment. Looking ahead, as is typical for the second quarter, we expect total company revenue to be flat sequentially and will depend upon the level, timing and mix of originations growth during the quarter. Now turning to credit. The net revenue margin for the first quarter of 59% was on the high end of our expected range. Credit quality, which is the most significant driver of net revenue and portfolio fair value, remains solid. Credit metrics for the total company reflects strong consumer credit performance and the expected seasoning and normalization of our growing small business portfolio that we discussed last quarter.

Total company ratio of net charge-offs as a percentage of average combined loan and finance receivables for the first quarter was 8.2% compared to 8.8% last quarter, and the small business net charge-off ratio was steady and the consumer net charge-off ratio declined more than 100 basis points. The percentage of total portfolio receivables passed through 30 days or more was 7.1% at March 31 compared to 6.7% at the end of 2022, driven by the continued seasoning of recent growth in our small business portfolio, which was partially offset by improvement in the delinquency rate of our consumer portfolio. As discussed last quarter, the meaningful growth in our small business portfolio over the past year, credit metrics for that portfolio are settling at more normal levels as compared to the unsustainably low levels we experienced exiting the pandemic.

With that normalization, we expect some quarter-to-quarter variability in small business credit metrics and net revenue margin in the near term, including temporarily falling above or below typical ranges, can be especially evident in this uncertain macroeconomic environment where we could have slight quarter-to-quarter variations in growth and performance as we actively manage credit and our balanced approach to growth. Increased ROE targets across our portfolio that were implemented last year helped to ensure we have additional cushion in the profitability profile of our loans to protect against potential credit variability in market environments like we're in now. So even though our small business net revenue margin this quarter of 59% fell just below the low 60% to low 70% range that we would expect in a more normal operating environment, we still generated solid returns on the portfolio and delivered consolidated company results that were in line or better than our expectations.

The lifetime of credit outlook for our small business portfolio continues to reflect stability at the end of the first quarter with the fair value premium as a percentage of principal of 108%, remaining consistent with levels reported over the past year. Now turning to consumer. Performance and credit metrics for our consumer portfolio remain solid and are reflecting the aforementioned mix shifts towards line of credit loans. Consistent with that shift, we've seen a meaningful increase in the fair value of our consumer portfolio as a percentage of principal over the past year, including 5 percentage points this quarter to 117%, reflecting seasoning of the portfolio and a better-than-expected outlook for consumer lifetime credit losses versus original expectations.

As a result of the aforementioned trends in our small business and consumer portfolios, the fair value of the consolidated portfolio as a percentage of principal increased slightly to 111% at the end of the first quarter. Looking ahead with overall credit performance remaining relatively stable, we expect total company net revenue margin for the second quarter of 2023 to be around 60%. This future net revenue margin expectation will depend upon portfolio payment performance and the level timing and mix of originations growth. Now turning to expenses. Our operating costs this quarter reflect efficient marketing activities, the continued leverage inherent in our online-only model and thoughtful expense management. Total operating expenses for the first quarter, including marketing, were $166 million or 34% of revenue compared to $168 million or 44% of revenue in the first quarter of 2022.

Our marketing activities remain effective and efficient with marketing spend for the first quarter of $80 million or 17% of revenue compared to $93 million or 24% of revenue in the first quarter of 2022. We expect marketing expenses as a percentage of revenue to be near 20% in the near term but will depend upon the growth and mix of origination, especially for new customers. With growth in receivables and originations over the past year, operations and technology expenses for the first quarter increased to $49 million or 10% of revenue compared to $41 million or 11% of revenue in the first quarter in 2022. Given the significant variable component of this expense category, sequential increases in O&T costs should be expected in an environment where originations and receivables are growing and should range between 9% and 10% of total revenue.

Our fixed costs continue to reflect our focus on operating efficiency and thoughtful expense management. General and administrative expenses for the first quarter increased to $37 million or 8% of revenue from $35 million or 9% of revenue in the first quarter of 2022. Excluding $2.5 million of onetime costs, mostly related to a lease termination, G&A expenses would have been flat to the first quarter of 2022. While there may be slight variations from quarter-to-quarter, we expect G&A expenses as a percentage of revenue of around 8% in the near term. We recognized adjusted earnings, a non-GAAP measure, of $59 million or $1.79 per diluted share for the first quarter compared to $58 million or $1.67 per diluted share in the first quarter of the prior year.

Our solid balance sheet and ample liquidity give us the financial flexibility to successfully navigate a range of operating environments and has allowed us to deliver on our commitment to driving long-term shareholder value through continued investments in our business as well as share repurchases and open market purchases and retirement of our senior notes. We ended the first quarter with $905 million of liquidity, including $304 million of cash and marketable securities and $601 million of available capacity on facilities. Our cost of funds for the first quarter was 7.8%, 190 basis points higher than the first quarter a year ago, primarily due to the 475 basis point increase in SOFR over the past year. Demonstrating our confidence in the continued strength of our business relative to our current valuation, during the first quarter, we acquired 375,000 shares at a cost of approximately $17 million.

At March 31, we had $141 million remaining under our authorized share repurchase program. In addition, during the quarter, we also opportunistically purchased $44 million of our 2024 senior unsecured notes in the open market at a slight discount to par. Without a material improvement in that current high cost to refinance our senior notes due to market volatility, we expect to leverage our liquidity position and to continue to purchase and retire our 2024 notes over the next 16 months, leading up to their September 1, 2024, maturity. To wrap up, let me summarize our second quarter expectations. As is typical for the second quarter of the year, we expect revenue to be flat sequentially as we continue to focus on an origination strategy that balances growth and risk against the current macro environment.

This should lead to stable credit, resulting in a total company net revenue margin of around 60%. In addition, we expect marketing expenses to be near 20% of revenue, O&T costs between 9% and 10% of revenue, and G&A costs of around 8% of revenue. These expectations should lead to an adjusted EBITDA margin in the mid-20% and flat to slightly higher adjusted EPS compared to the second quarter of 2022. Our second quarter expectations will depend upon customer payment rates and the level of timing and mix of originations growth. Barring a material change in the macroeconomic environment for the remainder of this year, we continue to expect originations for the full year 2023 to grow between 10% and 15% compared to 2022 as we maintain our focus on an origination strategy that balances growth and risk.

As we discussed last quarter, the resulting growth in receivables, stable credit and continued operating leverage should result in full year 2023 growth in both revenue and adjusted EPS compared to 2022 that is faster than our expected originations growth. Our expectations for the remainder of this year will depend upon the macroeconomic environment and the resulting impact on demand, customer payment rates and the level of timing and mix of originations growth. This quarter we continued to demonstrate that our balanced approach to growth is working. Our talented team, diversified product offerings and financial flexibility have enabled us to consistently meet or exceed our expectations for growth and profitability despite uncertainty in the macro economy, and we remain confident that we are well positioned to quickly adapt to the evolving macro environment.

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

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