Q4 2019 Earnings Call

Call over to David and like to know that today.

This discussion will contain forward-looking statements based on the business environment as we currently see it as such doesn't include certain risks and uncertainties. Please refer to our press release 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 your Gap reporting. Report certain Financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhancing understanding where performance reconciliations between gaap and non-GAAP measures are included in the tables had in today's press release as noted on our earnings release. We have posted supplemental financial information on the IR portion of our website down.

I'd like to know that all the results discussed on this call including comparisons to Prior. And guidance will be presented on.

And continuing operations basis and exclude any one time charges and results related to the discontinuation discontinued operations in the UK unless otherwise noted down exited the UK Market in Q4 2019. And with that I'd like to turn the call over to Dave and good afternoon everyone. Thank you for joining our call today. I'm going to start by giving you a brief overview of the fourth-quarter and full-year and then I'll update you on our strategy and not look for 20 20 after that. I'll turn the call over to Steve Cunningham or CFO will discuss our project results and guidance in more detail.

We delivered another quarter of strong growth capping off a great year for a Nova compared to the fourth quarter of last year. We delivered 25% Revenue growth 34 percentage of wage growth and 67% adjusted EPS growth before year results were similarly strong with Revenue growing 21% adjusted ebitda growing 36% and adjusted EPS growing 71% We believe this exceptional growth demonstrates our teams strong execution our ability to adapt to changes as well as the large potential of our industry.

for the past

16 quarters, we've consistently delivered results within or above our guidance ranges. And this was true again in Q4 with Revenue tapping our guidance. This was due in part from very high new customer growth which were able to generate an attractive unit economics. In fact loans to new customers represented 38% of total origination up from 30% in Q4 of last year. This was the highest fourth-quarter percentage we have ever seen

The hi new customer growth result in an adjusted ebitda and EPS slightly below our forecast due to higher provisioning.

Well near-term the new customer growth slightly impacted our bottom-line results this growth shows that we are continuing to take market share and based on our models. These customers look to be very accretive to earnings over time.

In addition gross margins were in line with Q4 of last year even with the high percentage of new customers, which shows credit performance remained stable further Evidence Enosburg charge-offs as a percentage of average total receivables improved on a year-over-year basis and are well in line with our expectations.

overall

We are not seeing any signs of credit deterioration and no indications that this is likely to change soon.

We believe that capturing this new customer demand in Q4 with the right business decision given the very attractive unit economics. We could have pulled back marketing and origination is at the end of the quarter to drink higher levels of short-term profitability, but we decided that would have been wrong for the business long-term just to reserve a few million dollars of Q4.

And as a result of us taking this additional volume, we now have stronger Tailwind heading into twenty-twenty.

RQ for performance was driven by our focus on a 5 growth of businesses namely r u s subprime business. Are you near Prime offering are you a small business financing month installment loan business in Brazil, and in over decisions are analytics-as-a-service business are domestic lending businesses, which include our large business office that credit and our small business financing products continue to drive our growth and profitability revenue for these three businesses was up 27% year-over-year in Q4 be covered by a driven by a 63% increase in line of credit Revenue the 13% increase in installment loan and finance receivables Revenue.

the composition of

A revenue in the fourth quarter with 51% line of credit products or t 1% installment products and then only 8% single pray products and our us portfolio now consists of 65% installment products 31% line of credit and only 4% single pay products.

Or large US subprime consumer business generated another good quarter of growth and profitability.

With our ability to develop and distribute products that are attractive to customers changing desires and needs We believe We Are ideally positioned to grow beyond our single-digit market share in the US are netcredit product continues to be one of our highlights with loan balances increasing 30% year-over-year to $610 and origination is increasing 65% for the full year origination screw 38% underlying the great momentum we have with net credit as we take share from incumbents brick-and-mortar lenders.

in a small business before capped off a tremendous year

We we grew origination a hundred and 38% year-over-year and small business now represents 14% of our books. We continue to see strong demand a nice and stable credit for a small business products at attractive unit economics.

Given this Market backdrop. We think SMB can have another year of strong growth in 2020 and is quickly becoming a very material part of our business.

in Brazil, fourth-quarter origination declined 7% sequentially and 40% year-over-year on a constant currency basis as we've discussed previously intentionally slowed originates in Brazil while we reconfigured our operations to handle new debiting practices implemented by the banks are

we've made good progress on this work and should benefit even further from new debit rating regulations recently issued by the Central Bank in Brazil, which would allow us to resume higher levels of growth there or in the near future.

as a result

Even though Brazil remains one of our smaller businesses today. We still believe it represents a large opportunity and fits well with our diverse products offerings.

Lastly and over decisions are real time analytics as a service business is gaining traction as we actively build out the pipeline.

Before I wrap up I want to provide a brief regulatory update as we mentioned on our last earnings call California passed a law that caps interest rates at roughly 38% on personal loans between $2,500 and $10,000.

Continue to operate in California with products that comply with that new law. You currently have to Consumer products and Market in addition to our small business offerings and we believe there are a couple of factors that will be able to launch in the first half of this year.

As we stated last quarter and as you will see in our guidance, we do not expect that. This law will have a material impact on our business as we believe will offset any volume loss from the wind down of our thoughts are subprime installment product through other products in California.

Reminder California subprime installment only accounted for 3% of our origination in 2019.

On the federal side last February the cfpb published a proposed rule, which would rescind the ability to repay a portion of its small dollar rule among other Provisions narrow the scope of the rule.

In addition to see if you'd be pushing in implementation date back to November 2020. Also in December of last year a Texas Court continued it stay home and the compliance for the payments portion of the rule until April at this year. In which point it is believed that the cfpb will revisit that portion of the rule as well.

Finally to see if you'd be recently announced guidelines on the abusive portion of you dab that will help lenders like us offer compliant products and services.

Given the scope of the new proposed rules the flexibility of our online platform our Diversified product offerings and our extensive experience navigating regulatory changes. We believe we are well-positioned to succeed under any likely cfpb will make it.

Wrap up to four capped off another terrific year for Nova. We have shown our ability to generate strong growth quarter after quarter and year after year. We expect them. They're great year in 2020.

We will continue to focus on the growth of our five existing businesses and in addition following our exit from the UK. We now have more bandwidth to explore new opportunities both organically and through smart targeted acquisitions.

We believe that's focused forward-looking approach or position as well to produce long-term sustainable and profitable growth.

With that, I'll turn the call over to Steve will provide more details on our financials and guidance and following Steve's remarks will be happy to answer any questions that you may have you David good afternoon every month. I'll start by reviewing our financial and operating performance for the fourth quarter of 2019 and then provider Outlook and guidance for the first quarter and the full year twenty-twenty is David mentioned. We are pleased to report another quarter of solid financial performance fourth quarter Financial results reflect the strong demand across our diverse product offerings in our ability to leverage our solid balance sheet operating leverage and disciplined focus on unit economics to deliver both significant growth and profitability.

We accelerated.

Every year receivables growth during the quarter is we captured strong Demand with highly effective and efficient marketing and stable credit which drove attractive unit economically 6we believe this will create significant shareholder value in the quarters to come is we experienced one of the best fourth-quarter receiver receivables growth rates in our history.

As we announced on our third quarter earnings call we exited the UK market during October 2019 as a result during the fourth quarter. We recorded a one-time after-tax charge on a line with our prior guidance of $74 million dollars, including one time charges of $52 million dollars related to the exit of that business.

If Monica noted in the introduction in my remarks today, fourth quarter, 2019 and full year 2019 results and comparisons to Prior periods are presented on a continuing operations basis and exclude this charge and the results of discontinued operations related to the UK unless otherwise noted.

Total company fourth quarter 2019 Revenue increased 25% $345 million dollars above our guidance range of $329 to $300 million dollars Revenue growth was driven by a 33% year-over-year increase in total company combined loan and finance receivables balances which grew to 1.3 billion hours.

Installment loans and line of credit products continue to drive the the growth and total company loans and finance receivables balances these products grew 19% and 73% year-over-year respectively installment loans receivables purchase agreements and line of credit products now comprise 96% of our total portfolio and 91% of our total revenue.

Our fourth-quarter gross profit margin was flat to the prior-year quarter at 43% solid credit quality and portfolio mix enabled us to maintain a stable gross profit margin despite acceleration in your over year growth of both Total receivables and origination from new customers during the quarter.

Strong analytics are delivering stable and predictable credit performance across the portfolio as net charge-offs is a percentage of average combined loan and finance receivables decrease in the fourth quarter to 15.2% from 15.8% and the prior-year quarter.

the Atlanta the allowance and liability for losses for the Consolidated company has a percentage of combined gross Loan in financing receivables declined to 14.1% from 15.3% in the fourth quarter of last year as we expect a continuation of recent solid credit trends

David mentioned origination from new customers across all of our businesses were 38% of the total during the fourth quarter up from 30% for the year ago quarter and in line with a previous quarter.

Turning to operating expenses. We continue to see efficiency in our marketing Spin and meaningful operating leverage in our non-marketing operating expenses.

During the fourth quarter of 2019 total operating expenses including marketing for $83 or 24% of Revenue compared to 74 million dollars or 27% of Revenue in the fourth quarter of 2018.

Marketing expenses in the fourth quarter with thirty-six million dollars or 10% of Revenue compared to twenty six million dollars or 9% of Revenue in the fourth quarter of 2018 total company origination a rose 18% during the quarter compared to a year ago with new customer origination is rising 48% demonstrating the efficiency of our marketing spin.

Operations and Technology expenses, total twenty-three million dollars or 7% of Revenue in the fourth quarter compared to twenty two million dollars or 8% of Revenue in the fourth quarter of 2018, and we're slightly higher due to volume related variable expenses.

General and administrative expenses were twenty-five million dollars or 7% of Revenue in the fourth quarter compared to $27 or 10% of Revenue in the fourth quarter of the prior year and we're lower primarily due to one-time adjustments that lower personnel-related costs.

Adjusted ebitda a non-GAAP measure Rose 34% year-over-year the $66 million dollars in the fourth quarter driven by strong growth stable credit our adjusted ebitda margin increased to 19% from 18% in the fourth quarter of the prior year.

Stock-based compensation expense was two point two million dollars in the fourth quarter, which compares to 3.5 million dollars in the fourth quarter of 2018. The lower amount was related to a forfeiture adjustment during a quarter and we expect stock-based compensation to return to more normal levels for 20 20.

Our effective tax rate was 26% in the fourth quarter, which was flat compared to the fourth quarter of 2018 for the full year 2019. Our effective tax rate was 25% off expect our ongoing normalized effective tax rate to be in the mid-to-upper 20% range.

We recognize net income from continuing operations of thirty million dollars or $0.87 per diluted share in the fourth quarter compared to ten million dollars or $0.28 per diluted share in the fourth quarter of 2018.

Adjusted earnings and non-GAAP measure increased 62% to $31 or $0.92 per diluted share from $19 or $0.55 per per diluted Chef in the fourth quarter of the prior year the trailing-twelve-month return on average shareholder Equity using adjusted earnings increase to 38% during the third quarter during the fourth quarter from 27% a year ago.

our ability

To drive increasing returns for shareholders while maintaining maintaining solid levels of tangible Capital reflects the strength of our operating model and our focus on unit economically and decision-making and gives us a significant flexibility for continuing to deliver on our commitment to creating value for our shareholders.

We continue to generate significant positive operating cash flow and continue to have a solid liquidity position during the fourth quarter cash flows from continuing operations, total 249 a million dollars, and we ended the quarter with unrestricted cash and cash equivalents of forty-seven million dollars in total debt of $991 billion dollars our debt balance at the end of the quarter include $93 outstanding under R350 million dollars of combined installment loan securitization facilities and $72 outstanding under our $125,000 corporate revolver. Our cost of funds for the fourth quarter declined to 8.26% the 78 basis-point decreased from the same quarter a year ago as we continue to recognize the cost benefits of transactions completed over the past two years.

the cost of funds Improvement

. Approximately two million dollars a pre-tax income this quarter.

During the fourth quarter. We acquired 1.025 million shares at a cost of $23 billion dollars under our seventy-five million dollars a share repurchase program for the full year. We acquired 1.4 million shares at a cost of $30.

Before I turn to our guidance for the first quarter and the full year. I'd like to touch on the implementation of Life of loan loss accounting requirements beginning January 1st 2020.

And you know Gap allows companies adopting the new life of loan loss methodology to apply the fair value option on certain assets of the options available to comply we belong at the fair value option best reflects the value of our receivables portfolio and its future economic performance.

Fair value of lines more closely with how we view the business, especially since our marginal decision making process is anchored in unit economically that rely on risk-based pricing and discounted cash-flow methodologies that may also be utilized in Fair Value modeling.

and for our

This model where we are focused on driving growth with meaningful profitability financial performance under Fair Value should be generally positively correlated to portfolio growth.

Beginning January 1st, 2020 we will we will be utilizing the fair value option for our entire loan and Finance receivables portfolio adoption requires restatement of our existing Book value of the receivables portfolio to fair value, as of January one 2020, which will be recognized through an increase to retained earnings of approximately one hundred million dollars on an after-tax basis for financial reporting the most significant change to earnings will be related to recognizing the change in fair value of our receivables each quarter rather than a provision for expected life.

As a result the concept of gross profit and gross profit margin will be replaced by net revenue and net revenue margin.

Net revenue will be calculated by subtracting the change in the fair value of the receivables portfolio each quarter from recognize Revenue, which is based on the yield of the receivables portfolio off all other variables being held equal. We expect higher net revenue margins and periods of origination growth as we recognize embedded premiums on newly originated loans.

However, the net revenue margin will also be influenced by ongoing portfolio credit performance and expectations the mix of new versus returning customers and origination in the mix of loans and financing origination as well as the level of customer prepayments in any changes to discount rates during 2020. We expect the net revenue margin to range between 45% to 55% The other notable change to reported results related to our our historical practice deferring certain marketing expenses and recognizing them over the life of related loans.

These costs will no longer be deferred under Fair Value accounting. So we expect marketing expenses as a percentage of Revenue to be slightly higher going forward will range in the mid-to-upper teens.

The impact on other expense categories will remain largely unchanged in relative to revenue should continue to reflect the strong operating leverage. We've demonstrated in the past.

As with other Alternatives the adoption of fair value to comply with the new life of loan loss requirements will have no impact on cash earnings.

Now turning to our outlook for 2020 is noted in our earnings release our outlook for the first quarter and the full year twenty-twenty reflect the adoption of fair value, accounting and are presented on a continuing operations basis.

The Outlook reflects an expectation of stable credit Trends and continued recent domestic receivables growth Trends including faster relative growth in consumer and small business installment r p a long line of credit products as well as accelerated growth in the mix of new customers in origination.

We also expect recent Trends and operating leverage and funding costs to continue. Finally. Our guidance assumes no significant impacts to our businesses from new regulatory changes.

For the first quarter of 2020 we expect total revenue of 328 million dollars to $348 billion dollars adjusted ebitda of $85 million dollars thousand and five million dollars diluted earnings per share from continuing operations of a dollar and twenty-seven cents to a dollar and $0.71 and adjusted earnings per share a $1.35 to a dollar and $0.78.

the full year

20/20 we expect total revenue of 1418000000 to 1488000000.

Adjusted ebitda of 305 million to $365 diluted earnings per share from continuing operations the $4.21 to $5.50 and adjusted earnings-per-share $4.53 to $5.82.

The supplemental financial information for the fourth quarter 2019 on the Nova's investor relations website has additional guidance details and perform of results for comparability of the Outlook two prior. And with that would be happy to take your questions operator.

We will now begin the question-and-answer session to ask a question. You may press star than one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press them to at this time. We'll pause momentarily to assemble our roster.

And our first question will come from David short of JMP Securities, please go ahead.

Good afternoon. Thanks for taking my questions. And thanks for the the additional disclosure Steven on the accounting the restatement off, you know, one of the start off just a quick kind of granular question on credit. Obviously, the very positive commentary wage is is no surprise. It's consistent with what we're hearing. Obviously from other consumer lenders one one metric that did sort of stick out a little what was the fourth quarter loss rate wage in in the line of credit product and given that it's you know far away your fastest-growing product. I just want to get a little more color on if that was concentrated in any particular cohort or geography or something.

Hi David, this is Steve. So that's

Particular product grouping has our consumer line of credit product as well. As our Headway line of credit product from small business those two products have seen Em are the the most new customer volume of any of our other products and I think if you look the year-over-year quarterly Trends have been up your over a year consistent with that expectation.

Okay, I mean it is those Seasons should you know that that move up to a 25% loss rate should should that therefore Trend down throughout this year. Do you think well, I definitely will as you season the portfolio, but if you continue to grow as quickly as those portfolios are growing with an increasing rate of new customers, you may see it, you know rise a little bit more before it levels off, but you're you're absolutely right is that levels off? You will see a leveling off and improvement over time got it and hey just just want one question on a value and then that'll help back in Q, you know, the the I guess as we think about the

the geography

Of the income statement, you know, you you highlighted a 45 to 55% sort of net revenue margin, which is strikingly analogous to age of the current gross profit margin.

You should what we think of is cost of Revenue right now. I mean is is that replaced by a change in fair value or or actual charge off on the p&l? So that that range is just strictly coincidental and as you know the change in Fair Value, there's a number of components that that go into that but one big thing that will be different David is like in our prior month in our prior Year's gross profit. You would typically see from q1 to Q4 either, you know, a pretty flat gross profit level or a declining gross profit level. You will not you will not see that in net revenue. I would expect all things being equal going forward. So even with even with that that margin that we're putting out to you, you'll see a little bit more lift as that comes down into even which is how you can see our even the margins are a little bit stronger than what you've historically seen under incurred accounting.

got it, you know and maybe just maybe just in terms of nomenclatures, even when we think of sort of

The the the reported line item between gross and net revenue. What will it be called when you report your first quarter, that'll be the change in Fair Value in the portfolio. It's essentially going to have net your charge-offs your day one gain on origination and the amortization of the premiums on your prior booking off right and and you're just marking to market the assets. Not not not your debt Securities, correct? Exactly. Just the loan the loan portfolio. Got it. Great. Thank you.

Our next question will come from John heck with Jeffries, please. Go ahead.

Thanks guys, the a couple more questions that very value accounting is is your entire portfolio migrating at time of day 1 to 5 for you or would those go go veiga? See portfolio is still be running a provision, you know type accounting as it winds down know the entire portfolio. So underneath the fair value option that bass be provided for life of learning lots of counting. We would move the entire historical book to fair value. And in my commentary I mentioned the results of that page is the hundred million dollar after tax increased to retained earnings to recognize the embedded premium in the historical book. So is that that hundred million Over the Edge by the kind of the loan balance? Is that the kind of day one game we should expect as you originally going forward. No, that's so the hundred million dollars is a few things in it off.

as you may know you have to

For example reverse out the allowance. You have to reverse out accrued interest I would say about on a in a remember the hundred million is after tax, but probably about 60% off of that is related to the premium on principle that is in the embedded book, which should be pretty close to what you would see on average on the Consolidated portfolio, which is, you know, five to 10% premium on credible and then

Can you get there? Maybe can you give us a sense for the changes?

You know, since you're not capitalizing expenses, you know what that means in terms of like a percentage uplifting expenses.

Yeah, so it's really just marketing John and we're we've guided in the past too low to mid-teens. We're guiding now to Mid to Upper teens for marketing. Okay?

and then

oh you have like just to give us a sense, you know directionally, you know, I know credit quality has been very stable not good embedded in that guidance and fair value changes support. Do you have a sense for you at the product level the direction of ncos just to give us the context?

Yeah, I mean in my in my commentary about guidance we expect to have those stable and predictable Trends. So that means you know in those areas where we do have more new customers like, oh we were just talking about would line of credit. You may see some uptick and expected uptick and that's part of our stable and expected credit Outlook. So we're not expecting there to be any credit or concerns or unexpected credit for the foreseeable future. Okay. So more or less than glowing eyes what we started 2019 albeit accounting for a strong customer growth in a certain products at certain times. Exactly. Okay.

Great guys. Thank you very much.

Thank you.

Again, if you have a question, please press * then 1 hour. Next question will come from John Rowan of Ginny, please go ahead good afternoon, So just to understand so they'll still be a provision expense but it's more charge-off figure than it is an allowance. Figure. That's that's what I'm taking mean. There's obviously other stuff in there, but the there will not be a provision expense provision would imply charge-offs plus any allowance for future losses. We will just be running incurred charge-offs through the fair value line and we'll still reporting that charge-off ratio is going forward but provision. It's just going off charge-offs not provision.

But the so the yield of the portfolio of the gross revenue, will that be a net yield off of your portfolio know because they're still the charge off figure in the line below correct? That's correct. It's just the way the revenue will reflect the yield on the underlying portfolio the change in Fair Value. There's a number of things that can go into it and we can talk offline. But the big things that go into the change of fair value or charge-offs the gain on origination from new origination and the amortization of the premium on previously booked premiums.

okay, and then

So I understand in the financial supplement the last page it gives pro forma, you know with and without the fair value. I'm just trying to make sense of this. I mean, is there a way to calm and maybe I'm just not understanding this correctly what the change to the current run-rate of learnings is with a fair value treatment. It might be in this sheet. I'm just not seeing it. Yeah. So on that last page of the supplement those columns labeled 2019 results pro forma those if we would have been if we would have adapted fair value in 2019. We're giving you what total revenue adjusted ebit and adjusted earnings-per-share would have been for q1 and for the full year so you can compare that with our current guidance.

Okay, and so when you think about the uplift in earnings next year, do you think that trying to handicap what is that? What what percentage of that is simply an accounting change that's proving your earnings and what part of that is a change in Behavior, which you know my result of guys taking on as you did in this quarter more more loan demand when in other quarters you've you know, you have you know passed on some demand in certain quarters in order to make the quarterly number. I'm just trying to handicap how much are the subside we're seeing for. The 2020 guide is just accounting and pushing numbers around versus how much of it is actually a benefit to the company because of the change in Behavior.

so John , this is why we

Gave you the pro forma comparisons because if you would have gone Apples to Apples. So for example for the full year guidance were showing Revenue under ProForm fair value for for all of 2019 would have been one point two billion dollars and you can see where our range compares to that so you can calculate a growth rate which would be related to the way we operate our business same logic applies to the other metrics on this page as well. So all of the growth is related to the operation of our business not related to accounting.

Okay, and then just lastly you guys mentioned going into California with a couple of additional products. You just give us an idea of the parameters of the products whether there's a bank partnership involved and what types of rates and you know structure of the loan products that you're considering.

Yeah, we're still working on that. So we don't want to disclose it mostly for competitive reasons but also because they're not final yet but there are opportunities both both within the new AV 539 law, but also kind of outside it froze to roll out additional compliance products in California, which we hope to do this year off.

Okay.

You're very much. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to CEO David Fisher for any closing remarks, please go ahead. Thanks everybody for joining the call today and for your questions. We look forward to talking to you again next quarter. Have a good evening.

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