Q4 2019 Earnings Call
Greetings and welcome to the elevate credit fourth quarter 2019 earnings call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to our host Daniel Rail Chief Communications Officer. Thank you you may begin good afternoon, and thanks for joining us on elevates fourth quarter and full year 2019 earnings conference call earlier today, we issued a press release with our fourth quarter and full year 2019 results a copy of the release is available on our website.
<unk> elevate dot Com flash investors today's call is being webcast is accompanied by a slide presentation, which is also available on our website. Please refer now to slide to that presentation.
Our remarks that 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.
At least issued today, our most recent quarterly report on form 10-Q, and other filings we make with the FCC. 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 brick 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 FCC and are available on our website at <unk> Dot com slash investors.
We did 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, our Chief Executive Officer, Jason Harbison, and Chief Financial Officer, Chris Lids, I'll now turn the call over to Jason.
Good afternoon, and thank you for joining our fourth quarter and year end 2020 conference call I'd like to begin the call to quick review of 29 team because I think it to your that should says a lot about our approach the business and how we execute against our strategic goals.
You all know 2019 was a year of change for elevate and we both revamping implemented new credit models across her full slate of products.
Finally, we took a new approach to originations with a focus on measured growth and expanding profitability.
Most importantly, we continue to serve customers will be.
Please turn to slide three you'll note our platforms I'm now serve more than 2.4 million individuals we take a lot of pride. The fact that we have sabre customers more than $6.5 billion over less consumer friendly petty living products.
As we look back at our full year 2019, I know what speak for more than just Chris It myself when I say how proud we are the company in our results most notably we were cheap we achieved record net income for the four year.
If we turn to slide four let's quickly review the highlights the 20 Nike.
We drove 157% year over year increase in net income grew adjusted EBITDA of about 20% and drove margin margin expansion of nearly 400 basis points.
We ended 2019 with a full year adjusted EBITDA margin of 18.6%, which compares to our original long term goal, 20% margins for the business. We'd also remind everyone that when we set the goal back in 2015 or pull your EBITDA margins were closer to 4%.
As we mentioned over the past few quarters, the rising percentage of repeat customers in our mix is a sign that we're designing products customers want and need.
Customer satisfaction scores continue to rise in for 20 not team our portfolio wide satisfaction percentage was 92%.
We are humbled to see the comments, we get back from a consumers about how our products have been able then to overcome issues in their lives and rebuild their credit while receiving a lower right.
As Weve also noted the best part of our businesses, how our financials are aligned to these positive customer outcomes repeat customers tend to have lower charge offs and certainly cost less to acquire from a marketing perspective.
And our model credit and customer acquisition costs, our two biggest operating expenses.
On a 20 not team all they demonstrated the power of our scale across each.
First on credit we were pleased to see a 200 basis point improvement in our year end charge offs compared originations, which ended the year at record lows your 20%.
Second for acquisition cost we ended the year at $207 per customer, which is nearly 16% below last years 245 dollar mark immaterial, but materially below our longer term acquisition range up to 50 to 300.
We'll talk about our go to market strategy more in a minute, but it goes without saying that 20 not team was outstanding from a marketing efficiency standpoint.
On the whole the operating efficiency I spoke to drove record net income for elevate and our shareholders in a market as large as ours. We've seen many competitors attempt to do what we've done but a much smaller number of companies had been able been able to drive the ultimate profitability like we have.
As we've noted on our last few calls it elevates focus on profitability driven by responsible and measure topline growth is the right management philosophy, and we view our 20 not keen for your results because a strong indication of that few.
Now as we look ahead, the addressable market for elevate remains very large while our measured approach to growth will remain in place. We believe elevate has never been better positioned to go to market. Following the overhaul of our credit models.
If you flip to slide five and we talk about 2020, we're very excited about our opportunity to grow beyond our traditional direct mail marketing by further penetrating and scaling our use of the online credit partner channel.
To put some context around the opportunity the volume potential through the partner in digital channel as it is a larger him would eventually more scalable universe, the what's available via direct mail campaigns.
We now have the credit models in Decisioning tools to tap into this volume and most importantly have tested the channel to make sure. We can do this without sacrificing our credit and our ultimate profitability.
To be clear, we continue to see significant growth opportunity in both our new credit partner channel as well or direct mail channels that said I'd like to emphasize our commitment to returns and margins our focus remains on profitability and growth of that profitability for our shareholders. We expect 2020 to be a continuation of that goal.
In that vein I'd also like to reiterate that our philosophy remains to grow originations at a measured pace, especially as we enter new markets or pursue new marketing channels credit performance is top line and elevate and despite the vast opportunity in front of as we plan with prudent as we think about origination growth.
And you can see the health of our customers and their financial well being because at the core of what we do every day, our corporate culture is aligned with our customers and we are fortunate that returns and our business and the profitability we delivered to our shareholders. It's also alondra customers wellbeing.
That said I'd like to quickly highlight slide six which provide the history of our average IDR across the portfolio.
Contrary to some opinions we have experienced the vast majority of our portfolio growth, providing lower cost loans to our ever expanding universe of customers.
Fact, the average hbr for our platform in the past six years has been cut in half.
In many cases these reductions are a direct result of consumer friendly features including our products that help customers rebuild their credit with lower rates tied to consistent payments.
Compared to legacy subprime lending bottles. We believe this is a night and day difference and the lives of our consumers. We take a lot of private consumers seem to agree is judged by a repeat customers and overall satisfaction scores.
On the regulatory from the new legislation that passed in California will result in a reduction in our California installment loan portfolio.
We will however continue to serve a small universe of customers in California.
As you know, we reward customers with lower interest rate products based on their payment performance.
Approximately 10% of the California portfolio is eligible for products with interest rates to comply with the new law is Arden tend to continue to serve these customers.
Turning to the UK Sunny remains profitable however, without the regulatory clarity, we do not intend to grow the portfolio in 2020, we do continue to see the benefit of maintaining our presence in the space at a preferred and responsible lender given the exit of many of our competitors.
Moving on to slide seven let's review our financial outlook for 2020.
We are forecasting full year 2020 revenue in a range of 750 to 770 billion. This growth forecast of zero to 3% reflects the regulatory pressures, we will experience in the California, and Sunny portfolios, which Chris will detail shortly.
We expect fiscal year adjusted EBITDA ought to be in a range of 135 to 145 billion. We're expecting continued strong profitability growth with net income growing between nine and 25% to between 35 and $40 million, which translates to a diluted EPS range of 80 to 90 cents. We believe the 2020 forecast reflects elevates continued coming.
Our street strategic priorities and we look forward to executing on these plans as we move through the year.
I would also like to briefly address our recently approved stock repurchase plan.
Our board of directors approved an increase of $20 million to our repurchase Pratt plan, bringing the total amount or shared that can be repurchase to 25 million, we see the value in our repurchase at our current stock price and its ability to improve returns now let me turn the call to Chris.
Thanks, Jason and good afternoon, everybody as we discussed during the prior quarter conference call. We were expecting relatively flat loan growth in 2019, as we rolled out the new credit models for our U.S. products and waited for more regulatory clarity in the UK regarding affordability complaints.
Looking at the top half of slide eight combined loans receivable principle as of December 31st 2019 were down $7.7 million or 1.2% on a year over year basis. However, loan balances were up $12.1 million for 1.9% on a sequential basis for the fourth quarter verse.
The third quarter 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 well. This approach impacts topline revenue growth. It has resulted in improved gross profit and margins.
The product level rise loan balances were up almost $41 million or 13% versus year ago. Additionally, rise loan balances grew approximately $23 million during the fourth quarter of 2019.
On the other hand elastic loan balances were down $37 million compared to a year ago, primarily due to a tightening and credit quality and this product over the past year.
While elastic new customer acquisition was very strong in 2018 with almost 100000, new customers acquired during that year credit quality deteriorated.
This past new year customer new customer acquisition was slowed with new customer volume dropping in 2019 by over 50% versus 2018, resulting in lower revenue, but significantly improved profitability in margins.
Despite a roughly $9 million decrease in topline revenue for fiscal year 2019 versus fiscal year 2018, elastic gross profit was up $27 million in 2019 versus 2018, an increase of almost 30%.
Inelastic was the most profitable product this year.
Turning to the UK Sunny loan balances are down $15 million are over 30% compared to a year ago due to continued lack of clarity on the regulatory front.
Well complaint volumes have been stable for most the fiscal year 2019, we continue to have discussions with our main regulator. The FDA regarding affordability assessments for both new and existing Sunny customers, which has resulted in decreased loan originations during the year.
The product was profitable during fiscal year 2019, but the continuing decrease in sunny loan balances is straining our ability to continue to generate a profit.
We need to reach an agreement with the FDA on an affordability assessments during fiscal year 2020 to enable us to begin growing the sunny loan portfolio again in order for this to be a viable ongoing product.
This is not a situation were rising complaint expenses are impeding our ability to generate a profit, but rather our ability to come to an agreement with our regulator related to both new and existing customer affordability assessments in underwriting.
In other words, which new customers can we acquire and how often can we lend to existing customers.
Staying on this slide Q4, 2019 revenue totaled $186.9 million down 9.8% from the fourth quarter 2018.
Almost all of the decline in the elastic and Sunny revenue resulted from what I just discussed.
For the rise product revenue decreased $2.4 million in the fourth quarter of 2019 versus a year ago.
This resulted from a decline in the effect of BPR of the rise product, which declined from 138% in the fourth quarter of 2018% to 124% in the fourth quarter of 2019.
The average JPR of a new rides fin wide customer is approximately 130%, which is lower than the typical state license rights customer, but with a better credit profile well. This results in topline revenue growth due to a lower a PR for the rise spend wise customer the gross profit is higher because losses or.
Lower on these customers and they also have a lower CAC.
While rise revenue was down on a year over year basis in the fourth quarter of 2019 rides revenue less net charge offs were actually up $900000 on a year over year basis.
As we head into fiscal year 2020, both loan balances and related revenue will be impacted by the new legislation passed in California, and the continued regulatory discussions with the F.C.A. in the UK.
I'll address both of those on the next slide but first let's look at the bottom half of slide eight.
We're very pleased with the year over year growth in our profitability adjusted EBITDA for the fourth quarter of 2019 totaled $31.2 million a slight decrease from the fourth quarter of 2018.
However for fiscal year 2019, adjusted EBITDA totaled $138.7 million up 20% from $116.1 million in fiscal year 2018.
Net income for the fourth quarter of 2019 totaled $8.3 million or 19 cents per fully diluted share more than doubling the 4.1 million or nine cents per fully diluted share in the fourth quarter 2018.
Net income for fiscal year, 2019 totaled $32.2 million or 73 cents per fully diluted share almost tripling 12.5 million or 28 cents per fully diluted share in fiscal year 2018.
Well not depicted on this slide return on average equity for fiscal year, 2019 was 23.6% compared to 11.7% in fiscal year 2018.
The debt to equity ratio at December 30, Onest 2019 declined to 3.6 from 4.8, a year ago and free cash flow for fiscal year, 2019 totaled 58.5 million compared to 15.5 million in fiscal year 2018.
On slide nine we depict the expected impacted the ongoing regulatory discussions in the UK and the legislative change in California on fiscal year 2020 revenue.
We ended fiscal year 2019, with $58 million in California State licensed rise installment loans, we will be able to lend to a portion of those customers under the new California legislation on an ongoing basis.
However by the end of fiscal year 2020, we expect the rise, California portfolio to be under $10 million in loan balances, resulting in a year over year loss of revenue of approximately $40 million.
Further the expected continued slow down or even decrease in sunny UK loan balances could result in an additional 25 to 30 million dollar loss of revenue in fiscal year 2020 versus fiscal year 19.
If we adjust fiscal year 2019 revenue for these two items the expected revenue guidance range for fiscal year, 2020 would be 10% to 13% revenue growth over adjusted revenue for fiscal year 2019.
Turning to slide 10, the cumulative loss rates as a percentage of loan originations for 29 for the 2019 vintage is the lowest ever with the new generation of risk scores and strategies that were rolled out in 2019, performing much better than the 2018 vintage which remained relatively flat with the 2017 vintage.
That said, we're continuing to ramp our new generation of credit scores and strategies and are hopeful that we can continue to drive loss rates lower in fiscal year 2020 and future years.
On this slide we also show the customer acquisition cost for the fourth quarter of 2019, the cap was $196 down from $202 in the fourth quarter of 2018.
For fiscal year, 2000, 2019, the CAC totaled $207 down from $245 in fiscal year 2018.
These decreases are the result of better marketing efficiency in the rise on elastic products and diminished competition in the UK.
Slide 11 shows the adjusted EBITDA margin, which was 17% for the fourth quarter of 2019 up from 15% for Q4 2018.
The adjusted EBITDA margin for fiscal year, 2019 was 19% up from 15% for fiscal year 2018.
All this expansion happened within the gross margin, which increased due to lower loan loss provisioning and marketing spend.
Additionally, the decrease in the cost of funds for the debt facilities has also resulted in an expanded net income margin for 2019 on roughly the same amount of average debt in both the fourth quarters of 2018 and 2019 interest expense for the fourth quarter of 2019 was almost $6 million lower than the fourth quarter.
2018.
I would like to end by discussing in more detail the fiscal year 2020 guidance and capital management, the Jason covered earlier.
First off we will not be adopting Cecil this year since we're a small business reporting company.
There is no impact on the expected fiscal year 2020 financial performance due to seasonal.
From a quarterly net income perspective, I expect fiscal year 2020 quarterly net income to be more of a hockey stick then in 2019, where it was more U shaped.
This would result from a smaller decline in the loan portfolio. During the first quarter of this year due to increased marketing to new customers versus a year ago. When we had not yet rolled out the new credit models.
While Q1 2020, we'll probably have a year over year decline in revenue. We expect Q2 through Q4 2020 to see quarterly year over year revenue growth. Despite the pay down of the California Rice portfolio and continued slow growth in the UK loan balances.
There may be some quarterly volatility in CAC and adjusted EBITDA margins due to new customer acquisition and loan growth and we expect the fiscal year 2020, adjusted EBITDA margin to be relatively flat with fiscal year 2019, due to the added marketing spend and loan loss reserve build resulting from loan growth.
We intend to hold operating expenses relatively flat with fiscal year 2019 outside of continuing slight increases in noncash stock based comp and depreciation expense.
Interest expense should decrease on a year over year basis due to fiscal year 2020, receiving the full year benefit of the prior reductions in the cost of funds on all products plus an additional built in 25 basis point reduction that was effective January onest 2020 for all debt facilities.
We also intend to pay off the remaining $18 million and sub debt. During the first quarter of 2020, we would incur a small 600000 penalty associated with this prepayment.
Lastly, I would like to briefly discuss the additional 20 million dollar common stock repurchase plan authorized by our board. We believe this use of capital at the current stock valuation is compelling from a return on capital perspective.
We've been buying back shares since August 2019, and so far in fiscal year 2020 have already fully utilize the $5 million authorized last July by the board for our fiscal year 2020, Tenbfive one plan.
We intend to establish a new Tenbfive one plan for this additional 20 million dollar authorization. Once we are in an open window from a legal and regulatory perspective.
The fully diluted EPS guidance for fiscal year, 2020 assumes no repurchases of stock at the low end of that range to be ultra conservative.
And would assume full utilization of the buyback ratably throughout fiscal year 2020 at the high end of that EPS range, we intend to begin buying again under this new 20 million dollar authorization as soon as we're able to implement the new Tenbfive one plan.
With that let me turn the call back over to Jason.
I'd like to conclude by highlighting the enormous nonprime market in the us and UK nonprime consumers deserve responsible loan products designed to fit their needs, we get up each day ready to meet that need and provide a better tomorrow for non prime customers.
Our diversification front, a product standpoint positions as well the service space into the future. We look forward to continued growth of the company and adding shareholder value in 2020, and with that I'll turn the call over for your questions.
Thank you.
Ladies and gentlemen at this time, we will conduct our question and answer session.
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My first question comes from David Scharf with JMP Securities. Please state your question.
Hi, good afternoon. Thanks for thanks for taking my questions.
The.
First.
Curious on the credit front.
Obviously, the this strong performance is consistent with what we're seeing from a lot of.
Subprime lenders, but.
It sounds like you've had a of very big improvement in the credit quality of the customers coming into the partner channel versus a year ago.
Are those at parity now.
With with your sort of you know direct mail direct acquisition or is there still room to improve there.
Yes, David is Jason I think we're seeing that come into line with the other channels.
You know what we were able due in 2019 was one put the new model in place. We also help reset the targets for what we're breaking down from a.
Net profitability on each of these accounts and also some new braunfels wouldn't equipment in place so that the combination of those three things don't together, we've solved some of the best credit quality ups in history the organization.
Okay got it and he switching gears a man I know kind of asked this last last quarter, maybe just a little bit of an update on.
<unk>.
Maybe timing in the UK.
Because I know a.
You know the regulators their 10 tend to have sort of a habit of dragging their feet.
And getting some some more visibility or clarity on in this case the affordability test do you have any.
Sort of drop dead date, if you will.
For for Wended decision will be made whether to.
You know keep maintaining that product because it because as you noted at the current level of scale you know it sounds like it doesn't make sense to continue with Sony I mean, do you have sort of a deadline in mind when you want to get kind of a go or no go a decision from the from the FDA.
Yes, one thing I will say that the team has done a good job.
Interacting with the FDA and having conversation there to keep progressing forward well, there's theres no set timeline with the FDA or internally.
But as Chris mentioned in his comments you know we've got to make sure the business as a decent scale. So that we can just be profitable it busy.
The four side to continue to get back in growth bone. So that's that's something we're going to be having more conversation at the same out over coming months.
Got it and one last one I appreciate all the all the color the granularity on on breaking out the revenue impact.
From the California legislation.
Should we be interpreting this says.
I mean as the existing bank partner than in California No.
Longer wanting to continue to underwrite there or is there.
Different.
Mechanical reason for for the fall off.
Well the well we outlined there was the rise portfolio, where we were licenses in the state there was impacted by the book to Bill the past and that's where that rise portfolio. We had about 10% sitting at a 36% a PR. So that we were able to continue to serve those under the new legislation was passed.
Okay got it thank you very much.
Thank you. Our next question comes from Brian Hogan with William Blair. Please state your question.
Yes. Thanks.
A question first one's actually on.
The margin.
Outlook I appreciate your and your flat.
Further comments on the flat margin I.
I guess.
Your longer term, 20% plus a margin should we expect it to get there eventually.
What does the progress and the Marcelo.
Hey, Brian it's Chris.
Yeah, I think the.
The guidance for 2020 is predicated back into getting in to two good growth mode, even including the pay down of the California portfolio that we talked about and even assuming a flattish growth in the UK. So the so that will probably compress the margins.
And keep them relatively flat with 2020, but no we have lots of upside in the margin when you look out beyond 2020.
Really across all components, I mean, our loss rates continue to perform better and better each year with each vintage.
Customer acquisition cost and you know is almost at historical lows for us and we don't see any any slowdown from that perspective, and then really what we haven't really tapped into yet the past couple of years, but that I tried to highlight in this call and we'll see a lot more benefit in 2021, once we start really driving.
The revenue growth will be the operating expense leverage.
And then the other factor that falls outside of the EBITDA margin, but certainly it's going to play a big role here in 2020 and beyond is the drop in the cost of funds and our ability to not only just see the overall interest rate drop but as we continue to throw off a tremendous amount of free cash flow, we're going to be able to continue to self fund a lot of loan growth on a go.
Forward basis. In addition to buying back the shares and so as a result, I think you'll continue to see our interest expense as a percentage of revenue continue to drop.
In addition to just the natural cost of funds and as a result, I think the net interest margins really going to start to expand even more as we get into 2021.
Sure and then you kind of touch on your and your answer there but.
How do we think about long term growth as you know.
China is kind of a shift in retooled the business in credit profile and we're going to start seeing a reacceleration of growth how do we think about.
Longer term type growth rates.
That does an appropriate growth number longer term.
Yes, I think Chris highlighted some of his opening remarks, where if you.
Back out the impact of California in the UK.
The guidance for 2020 would be.
Attend a 13% type revenue growth I think when we look going forward, we won't give.
Yes, just yet but I think.
The high single digits kind of them.
Low 10% to 12% ranges as probably an area, we'd be looking to target to keep that focused on credit quality and measured growth.
Alright, Thanks, and then just can you touch on the regulatory environments.
Steve statewide at which we what do you focused on EMEA States in particular, obviously, California and at the National.
Discussion I'm just kind of.
Yeah regulatory environment. Please.
Yeah, I mean, obviously to the change in California was was one that.
We think impacted.
Not probably consumers not in a great way because it limited access to credit from the our hope is that other states will we'll watch and see what happens on what were those consumers go what products they end up using.
Right now as we do our outreach and government relations, we're not seeing anything else that's out there, but thats something we stay into into.
Hi, Thanks.
Thank you just your manner to ask a question press star one on your telephone keypad.
Our next question comes from John Hecht with Jefferies. Please state your question.
Afternoon, Thanks, very much guys.
Most of my questions have been assay I guess, one is just thinking about your commentary for the.
The rise product given the moving parts of California, but then some organic growth elsewhere.
How.
Well the rise portfolio.
Over the course of the year well it will it be static will shrink a little bit or how do we just think about the cadence there.
Yes, John this is Chris.
As I look out I think from a conservative standpoint, I think that it's going to remain relatively flattish I mean, if we're going to lose roughly.
Most 50 million of California State license rise loan balances as they pay down through the course of the year.
I think theres going to be other opportunities.
With us with the rise product not in California, excluding California that we'll be able to.
Kind of replenish what we lose in California, and overall kind of see a flattish is there upside on that yes, possibly as we explore some other states and then certainly as we get into next year. The rise portfolio on a normalized basis will be able to start growing again.
And then on the vast portfolio.
Like the kind of AOL.
Now is fairly stable.
Your charge offs, so theyve improved year over year, but they've also started moving into a more kind of range bound effect is that portfolio that is it's fairly you.
The run rate it reflects kind of mature portfolio transit hours, we expect any migration of those metrics over time now that's the portfolio the product that this year I expect to grow pretty substantially that will drive a lot of the topline revenue growth will be the elastic product we feel good about the new models that we worked on last year and rolled out.
And as a result, I mean, it was a very the loss rates are exactly where we want them. The CAC looks really good I think thats a product given the line to credit nature of it that we can grow that product pretty good here in 2020. So that's one product that I expect to get back into growth mode and drive a lot of our topline.
And and loan growth this year.
Okay.
And then.
And just sort of what we there is a hearing and DC about bank partnerships. Obviously, it's an important on what your business. What's your Guy's perspective on that it is or is that you think there is that a.
Any comment at this point in time about what you think is going on.
Yes, I mean, I think when we saw in those hearing that it's a complex issue. That's out there we're glad to see that there was good conversation from both south at all I think the focus there was that both side. The all saw that our rate cap could hurt.
Non prime borrowers by living access to credit.
Phil early to figure it I know, what's going to happen with a crystal ball looks like but I think there was we were happy season. Some good discussion take place.
Okay. Thanks, very much guys.
The.
Obama there appears to be no additional questions at this time I'll turn it back to management for closing remarks. Thank you.
Just wanted to thank everyone for the time. This afternoon. We're excited about that result from 2019 and I'd have to get 2020, often goodstart. Thanks, everyone.
Thank you. This concludes todays call up parties may disconnect have a great evening.