Q1 2020 Earnings Call

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Good day, and welcome to the enova international first quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation or be an opportunity to ask questions to ask a question. You may press star than one on your touchtone phone to withdraw your question, please press stars and to please note that our event is being recorded. I would now like to turn the conference over to Monica Google investor investor relations of Innova, please go ahead ma'am.

Thank you operator and good afternoon everyone and over released results for the first quarter of 2020 and did March Thirty One twenty twenty this afternoon after the market closed. If you did not receive a copy of our earnings, press release you may obtain it from the investor relations section of our website 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 suck today's discussion will contain forward-looking statements based on the business environment as we currently see it and as such does include certain risks and uncertainties, please refer a press release center.

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 month in addition to your scalp reporting. We report certain Financial measures that do not conform to generally accepted accounting principles. We believe these non-gaap measures enhance the understanding of our performance Bank reconciliations between these gaap and non-gaap measures are included in the table stand in today's press release as noted in our earnings release. We have posted supplemental financial information on a higher portion of our website. And with that I'd like to turn the call over to David.

Good afternoon, everyone. Thank you for joining our call today instead of our usual practice of providing an in-depth review of the quarter. I'm going to spend most of this call discussing a novice response to covid-19 and the economic crisis. We are all facing after that. I'll turn the call over to Steve Cunningham. Our CFO will discuss our financial results and Outlook page in more detail first. I hope that you your families and loved ones are safe and healthy. I would like to extend my heartfelt gratitude to our country's First Responders month and Healthcare professionals. I would also like to thank all of our employees for their continued hard work and teamwork through this difficult time to support not only our customers month, but also each other

our priority is

Safety and well-being of our employees and customers and fortunately given the advantageous nature of our online only business model. We believe we are well-positioned off to help them manage through this crisis.

Nova's nearly 1,300 team members across all corporate and contact center functions have been working remotely since mid-march aren't able technology and online mods have enabled us to continue to operate at high levels of productivity will full access to all of our data and tools this includes maintaining. Hi customer service levels life dedicated in-house contact center team across all contact Points phone email and chat.

Approximately 50% of emails and 30% of calls with our customers pertain to covid-19. But service levels remain high as new customer satisfaction scores took over 90% of customers indicating. They were satisfied with the solutions. We've worked on with them.

Returning to the quarter our performance through mid-march, exceeded our expectations and we were on track to again meet our revenue and earnings guidance based on strong origination and solid credit metrics. However, as a seriousness of the cobit car has increased in early March, we aggressively began to reduce origination and shift our Focus off to our existing customers and managing our portfolio of loans.

One thing that became apparent almost immediately is that this recession was not going to follow the typical course and most recessions the economy slowly deteriorates over a period of months. Give me a credit models time and adequate data to adapt but this appears to be the first time a recession is caused by unemployment office. Torica Lee. It has always been the exact opposite events in the world or the market cause growth too slow and eventually jobs are lost in every other recession unemployment peak near the dead but here we have the Peak at the beginning with over 25 million jobless claims filed in just the first month or so.

With the speed in which the employment and spending picture in the US is changing. Our underwriting models are not currently able to be predictive enough to make sound decisions as a result. We meaningfully cutback origination is across all of our products during the last half of March.

This resulted in us curtailing almost all paid marketing and focusing our resources on supporting our existing customer base and adjusting to the emerging risks and this economic environment.

the effect of these actions that origination for the month of March declined 16% from a year ago and in total we have now cut back origination 60 to 80% depending on

Adding OVA one of our core values is customer first. And since we know many of them will be impacted by covid-19. We are ensuring our policies will help them.

We've increased repainted flexibility temporarily stopped assessing late fees and we'll continue to work with customers on due date adjustments payment deferrals and adjusted payment plans.

In addition, we've made changes to our credit reporting process so that I can impacted customers does have a late payment any impact of their credit report is lessened by noting. The late payment was due to a disaster.

Today in part because of our past actions default rates has picked up only slightly.

Our customers are also benefiting from the significant stimulus at the state level. And from the two trillion dollar cares Act.

The hope is that this bill will help America avoid a deep and long economic recession.

In addition, we know that subprime customers are very accustomed to managing variations and their personal cash flows. I said, it's been said before and some ways. Our office hours are always in a recession.

While we are certainly anticipating further deterioration in credit quality in many ways recessions have less of an impact on our customers than on Prime borrowers money in terms of the impact of Innova both Steve and I will cover it in more detail, but we have a strong balance sheet and ample liquidity to whether this economic slowdown and are prepared to adapt to changes will also enable us to re accelerate quickly when conditions dictate.

We are already rapidly readjusting our sophisticated analytics models to take into account uniqueness of the economic deterioration in a re acceleration plan.

Despite scaling back lending efforts during the end of q1. We delivered Revenue growth of 37% compared to the first quarter of last year and are flexible is this model allowed us directly reduce our operating costs to align with lower business activity.

Adjusted ebitda of $36 million and adjusted EPS of twenty-six cents compares to eighty million dollars and a dollar $27 per share in the first quarter of last month.

Our first quarter results include in approximately $60 reduction that we took to the fair value of our loans to reflect the increase risk due to The Cove it crisis off without this adjustment adjusted ebitda and adjusted EPS would have both been in line with our guidance.

Or domestic running businesses which included our large US subprime business credit and our small business financing products continue to drive our growth and profitability during the first quarter month.

Revenue

For these three businesses was that 38% year-over-year in q1 driven by a 78% increase in line of credit revenue and a 23% increase installment loan and finance receivables.

The composition of our total portfolio in the first quarter was 66% installment products 32% line of credit products and only 2% single Paper Products.

And are you near Prime product represented 51% of our portfolio at the end of q1 while small business now represents 16%

Turning to our smaller businesses and Brazil first quarter origination is increased 10% sequentially and 7% year-over-year on a constant currency business and lastly and over decisions a real-time analytics as a service business is continuing to gain traction as we actively filled out the pipeline.

Before I wrap up I'd like to discuss how we are operating at a Nova to whether this crisis the flexibility of our online platform are proprietary analytics off-balance-sheet resiliency and experience on our management team provides us with a substantial competitive Advantage. We also have a well-diversified product offering a without significant exposure to some of the more impacted States like New York and New Jersey and without significant concentration to the restaurant and hospitality industry in RSA Thursday for folio.

Thanks to our intensive recession Readiness preparation over the last two years combined with our flexible online platform. We were well-positioned to act quickly at the onset of the crisis. As I described earlier in our talented team is well prepared to navigate the ongoing uncertainties from an operations perspective. We have always had normal daily risk monitoring and response planning across all of our businesses. For example, we look at initial defaults delinquency rates ACH returns line utilization the credit profile of our applicants off and much much more.

Combined with the highest payment frequency across most of our portfolio. This allows us to have a near-real-time view of credit performance.

in part because of this we perform very well through the Great Recession of 2008 and our analytics and operational capabilities are much more sophisticated today that

Sitting here, we have over sixteen years and over thirty seven terabytes of data this includes data from over three hundred million unique customer interactions.

We are confident that the quality of our analytics to digest this data distributed over an online-only business model has and will continue to enable us to rapidly wage efficiently take real-time actions based on the data. We are saying

Mentioned previously. We already quickly readjusting our sophisticated analytics models to take into account the uniqueness of the economic deterioration. This includes not only took actions to manage our existing portfolio, but also decisions around how and when to re accelerate Monday.

Well, that will be based on a number of factors. It's important to understand that we do not need to see a full economic recovery, but simply for unemployment levels to stabilize at whatever that level.

I'm a financial perspective which Steve will discuss in further detail. We have a strong balance sheet and ample liquidity to manage us through an economic downturn. Our cash position is growing and our online only business model has significant operating leverage so we can adjust our expenses quickly to adapt to changes in our business activity as a result of market conditions.

Additionally, we benefit from higher margins and lower credit quality as a 9 Prime consumer lender versus a prime or super Prime lender.

And we have sufficient liquidity and operational capacity to expand lending once unemployment and economic conditions begin to stabilize.

Lastly are highly experienced management team is another key differentiator that sets us apart from our competitors. We have successfully operated multiple Industries wage multiple economic downturns. We know how to manage through these cycles and we have consistently demonstrated prudence and profitability.

Well covid-19 has created uncertainty in the short-term. We believe the long-term fundamentals of our business remains strong and that we are well-positioned to navigate through the downturn wage also remain committed to producing long-term sustainable and profitable growth and will swiftly resume lending efforts. Once the economy begins to stabilize.

With that, I'll turn the call over to Steve who provide more details on our financial performance and Outlook and following. His remarks will be happy to answer any questions that you may have.

Thank you, David and good afternoon. Everyone David mentioned in his remarks are Direct online only business model world-class analytics and technology and deep organizational fairness have allowed us to adapt quickly to current market conditions and will serve us. Well, we continue to adjust to the rapidly evolving and uncertain economic environment facing our country.

Our consistent and disciplined focus on unit economically and delivered predictable and steadily increasing returns in recent years resulting in strong earnings. This earnings capacity provides a strong first line of defense to absorb an increase in credit losses caused by the current crisis.

in fact

David mentioned ahead of the rapid deterioration in the economic environment during late March. We were on track to deliver another solid quarter as reflected by strong year-over-year growth and receivables and Revenue.

Excluding some initial code related pressure already experienced that March Thirty One resulting in an adjustment of approximately sixty million dollars to the fair value of our portfolio to address. The issue certain credit environment is a quarter closed you would have once again delivered Financial results consistent with our guidance ranges.

Is that will explain in more detail the additional adjustment address risk to the fair value of the portfolio from some observed worsening of credit risk as well as our view of higher expected wage higher returns at March 31st.

In addition or solid cash liquidity and balance sheet position provide a significant flexibility will be a strength as we navigate economic uncertainties in the coming month.

Our balance sheet resiliency is supported by a strong tangible Capital position significant committed financing capacity was strong counterparty and low refinancing risk from thoughtful during a debt maturity.

We ended the first quarter with $214 of cash and marketable security including 171 million dollars unrestricted and had an additional $157,000 of available capacity on committed facilities were eligible collateral is available.

Additionally all of our unsecured debt and secured facilities have a maturity day or final amortization maturity of February 2022 or Beyond.

Our net cash flows from operations for the first quarter totaled $253 million dollars in a reduced origination environment. We expect a rapid Bill than our cash position in the next several months. Even if we experience increase the fault given the relatively short duration of our receivables Revenue yield and the frequency of contractual payment.

As of April 24th are cash and marketable securities balance had grown to 292 million dollars including 232 million dollars unrestricted and available capacity on committed to facility with a hundred and sixty 1 million dollars.

By the end of the second quarter you project the cash balance of at least 350 to 400 million dollars.

We estimate our cash balances available facility capacity and portfolio repayment characteristics would provide us with sufficient cash to operate indefinitely without additional external financing off even once we return to the meaningful growth rates experienced in recent years. We project a long Runway of available liquidity before needing to raise the big bonding.

Given the ongoing economic uncertainty resulting from the speed of the economic slowdown and joblessness that began in March and the timing of reopening the economy is social distancing restrictions are lifted off. We are not providing guidance for the second quarter of 2020 and we are withdrawing the full year 2020 guidance that we previously issued.

Before I turned the first quarter results, I want to remind everyone that beginning on January 1st of this year. We adopted fair value accounting for our receivables portfolio to comply with natural gas requirements for life of loan loss accounting.

The adoption required restatement of the existing Book value of receivables portfolio to fair value from January one which resulted in a $99 one-time non-cash wage increase to retain direct to recognize a fair value premium on the portfolio of 7% This represents the percentage that the fair value of the portfolio exceeds the outstanding principal.

The other notable change to reported results from the adoption of fair value accounting is related to our historical practice of deferring certain marketing and selling expenses and recognizing them over the life of the religious. 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.

Now during the first quarter results total company first quarter 2020 revenue from continuing operations increased 37% to $360 million dollars a month was above our guidance range of 328348000000 dollars.

Revenue growth is driven by a 29% year-over-year increase in total company combined loan and finance receivables balances, which ended the quarter at one point two billion dollars under name or ties cost base.

Line of credit account and installment loans continue to drive the growth in the overall book these products grew 69% and 20% year-over-year respect.

Together installment loans receivables purchase agreements and line of credit products now comprise 98% of our total portfolio and 93% of our total revenue.

Given the very small size of the short-term portfolio. We are now including those loans in the installment loans and our Pas product grouping for own going reporting.

Combined loan and finance receivables balances are an amortized basis declined 9% from your end primarily as a result of normal seasonality in the significant reduction in origination in the second half of March that David discussed.

David mentioned in the current economic environment until signs of credit stability are apparent. We will continue to restrict marketing to new customers and expect origination to be significantly below prior to age levels and largely from existing customers.

The net revenue margin for the first quarter was 35% below our guidance range of 45 to 55% The lower-than-expected margin was driven by a larger expect to change in the fair value for the receivables portfolio at March 31st.

and you

Recall the change in the fair value line item that we will include in the income statement beginning. This quarter is driven. Mostly By changes to key valuation assumptions including credit loss expectation a prepayment assumption and the discount rate.

Changes to fair value assumptions for the for the portfolio at March 31st were driven primarily by two key consideration.

First credit risk appearing in portfolio metrics including delinquency the modification at the end of the quarter and second a change in the discount rate to capture the greater uncertainty portfolio performance in the current operating environment.

Let me start with credit.

The first quarter the ratio of net charge-offs is the percentage of average combined Loan in finance receivables with 16.8% compared to 15.4% in the prior year quarter month.

Similar to recent quarters, we expected some year-over-year increase in this ratio given a recent success with attracting new customers.

In addition this ratio was slightly elevated for both of our product groupings as we saw some small impacts from the rapid deterioration and economic conditions during the last half of March.

similar connect charge off other customer credit metrics on March 31st is showing signs of deterioration the only slightly

During the last two weeks of March more than three-quarters of our portfolio had at least one payment contractual. We do giving us quick visibility to any early issues.

Percentage of total portfolio receivables past these 30 days or more increased to 7.5% at the end of the quarter from 6% a year ago. And we also sell a small uptick in off stage delinquencies as well.

Additionally as we work to support our customers the proportion of receivables balance is at the end of the quarter tied to customers that we have granted request for payment deferrals or modifications were meaningfully higher across our businesses.

As we've done in the past from originally focused natural disasters, we believe this is the right approach given the unprecedented speed of change in the economic environment and the timing of government response is to stabilize seamers businesses.

Well not considered delinquent. We expect customers that have received deferrals or modifications to present higher default risk than typical non-delinquent customers that continue to pay on time.

Therefore we adjusted the fair value of these loans downward to reflect the increased risk.

We also increased the discount rate used in the fair value calculation by 500 basis points to capture the increased uncertainty and portfolio performance arising from the combination of the speed of the economic slowdown and joblessness. I began in March.

In summary the combination of a slight increase to delinquencies in the back half of March increased risk attributed to deferral the modifications at the end of the quarter in the increase in the discount rate to address greater uncertainty reduce the fair value of the portfolio to 103% of principal at March 31st from the aforementioned opening. Value Asian on January 1st of one hundred and seven per-cent.

this is the

Primary reason our profitability metrics were below our guidance ranges for the first quarter.

As of late last week virtually all of our receivables have had at least one contractual payment due since mid-march and more than half have had three or more contractual payments due simply.

A frequent contractual payments across our portfolio not only speed conversion of 2 cash is I previously mentioned but also allows more opportunities to interact with and support customer hardships. It provides more data too quickly refine analytical approaches or operating in the current environment.

Late last week. We have seen some deterioration in our credit metrics since the first quarter ended in an increase in the rate of customers seeking relief, and they work through the impact and the covid-19 crisis.

Although it's still too early to identify any discernible Trend. We have started to see some sign that does metrics are beginning to stabilize.

Given the aforementioned duration and payment frequency characteristics of our portfolio the significant reduction in new origination and our 60-day charge on policy. We expect them rapid Financial recognition of credit risk in the coming months.

On the other hand, we recognize this timing ultimately depends on the duration of the ongoing covid-19 demek and they also vary as we work to support impacted customers off.

Turning to operating expenses during the first quarter of 2020 total operating expenses including marketing for $94 or 26% of Revenue compared to $69 or 26% of Revenue in the first quarter of 2019.

Is that previously mentioned in a fair value accounting? We no longer defer certain marketing and selling expenses which increased operating expenses for the first quarter of 2020 compared to a year ago.

Marketing expenses in the first quarter with thirty-five million dollars or 10% of Revenue compared to $19 or 7% of Revenue in the first quarter of 2019 approximately six million dollars of the year-over-year increase in marketing expenses during the first quarter was attributable to the adoption of fair value accounting.

Our marketing programs continue to demonstrate efficiency prior to the deliberate reduction in a reservations during late March when we see all paid marketing.

Operations and Technology extensions, 231 million dollars or 9% of Revenue in the first quarter compared to $21 or 8% of Revenue in the first quarter of 2019 wage or higher primarily do the volume related variable expenses and increases in certain small business origination expenses that were previously deferred prior to adoption of fair value Accounting Office.

General and administrative expenses were twenty-eight million dollars or 8% of Revenue in the first quarter compared to $29 or 11% of Revenue in the first quarter of the prior year and we're lower primarily due to lower personnel-related and legal costs.

Like in the operating leverage in our business model in the near-term periods of reduced originations where we are focused on supporting our existing customers. We expect total operating expenses to decline age in range in the mid-to-upper teens is percentage of Revenue before they re normalize and the mid twenty was the percentage of Revenue.

Adjusted ebitda, a non-gaap measure declined 55% year-over-year to $36 million dollars in the first quarter to the reasons. I've previously discussed.

Our adjusted ebitda margin decreased to 10% from 30% in the first quarter of the prior year.

Our stock-based compensation expense was three point five million dollars in the first quarter which compares to 3.1 million dollars in the first quarter of 2019.

Our effective tax rate was 34% in the first quarter which increased from 24% for the first quarter of 2019. The increase is driven primarily by typical first quarter of the doctor bill extension being a higher proportion of lower first-quarter operating income.

We expect our normalized effective tax rate to be in the mid-to-upper 20% range. Also expect some near-term volatility depending on the trajectory of our future results.

We recognize net income from continuing operations of six million dollars or $0.18 per diluted share in the quarter compared to $39 from $1.13 per month per diluted share in the first quarter of 2019.

Adjusted earnings and non-gaap measure decreased to $9 or $0.26 per diluted share from $44 or $1.27 per diluted share wage first quarter of the prior year.

The trailing-twelve-month return on average shareholder Equity using adjusted earnings decreased the 25% during the first quarter from 28% a year ago.

Are dead balance at the end of the quarter includes two hundred twelve million dollars outstanding under R350 million dollars of combined installment loan securitization facilities in $105,000 outstanding under our 125 Million Dollar corporate revolver.

Cost of funds for the quarter declined to 8.15% and 88 basis-point decreased from the same quarter a year ago as we continue to recognize the cost benefit of transaction is completed over the past two years.

During the first quarter. We acquired 2.3 million shares at a cost of $41 under our $75 million dollars a share repurchase program.

In summary our online direct only model market-leading technology and analytics resilient balance sheet discipline Financial approach have positioned as well. I'm certainly is we've evaluated path of varying severity on how the current economic environment plays out. It's difficult to Envision a scenario where we Face a liquidity shortfall or where the valley of a portfolio does not leaning if we cover our liability.

And with that we'd be happy.

We take your question operator.

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys off all your question, please press * then two at this time. We'll pause momentarily to assemble our roster.

And our first question will come from John heck with Jeffrey's please go ahead sir.

You take some color on this. What can you tell you have a picture of a stimulated and it's been kind of activity I can see like, you know, God John we I heard you I mentioned me. I think you were referring we lost you with a bad connection their job, but I think what you were asking was in the trim that we may discuss at least through the end of last week. Have we seen anything discernable as it relates to stimulus and payments? That's the best I could pick up but I would basically say I think some of the month some of the reasons that we've seen some stabilization and very careful to highlight. We don't necessarily think this is a trend just yet, but some of the reasons that we've seen some of the stability likely has to do with Summer

Transfer payments that are entering the economy.

Okay, and hopefully my acting a little better now, I'm not sure the I guess it's a little bit related to that is you the marketing spend was even at an apple juice basis since before. Can you give us a sense for what the composition at? It was your first time customers before he tightened and he seen any strange patterns. They're like in first came back or anything.

I think sure on new customers were very similar running in the mid thirty percent that we you know have we have seen over the recent quarters and I don't think we would say we've seen anything differentiated as it relates to what we typically see from new versus returning customers. And I think they even that both highlighted we were beginning to see you suck stress at the end of the quarter and both of those and we've seen some, you know, continuing of that before that stability that that we highlighted sort of set in here as we get too too late April.

Yeah, I was just saying I would just had two quick things for that. One is the biggest reason for the large increase in marketing spending to one was that were no longer deferring any marketing spending the fair value of getting rules more than an absolute spend on an operational basis on an operational basis is it's is pretty consistent to what we've seen in the past. I would say 2nd we haven't seen any material a material difference and performance of customers either by vintage. SO the most recent vintage is or new versus existing in terms of the amount of deterioration took it as Steve and I both mentioned we have seen deterioration. Not anywhere near the magnitude we would have expected. It's actually very very manageable at this point and not a material difference in the in the amount of deterioration between new and existing obviously existing customers performed better in the absolute, but the relative change isn't isn't dead.

significant between the two

Based doing well their last question is just to keep your comment on the small business lending environment. I mean, I've Heard lots of different, you know stories about the variability in the market. I know it's not a very large portfolio for you guys, but I'm just I'm curious as to how that's being impacted cuz you just think that that the impact of small business given Force closures and so forth, you know, it must be interesting to observe.

Yeah, so a few things there again. It's only in the scenes as a percentage of total portfolio. So very very much manageable for us. We were also very early much earlier than most competitors in stopping origination and tightening Down On It lines for existing customers. I think the other thing we benefit from is we are extreme Diversified by sector in our small business portfolio. And in particular, we do not have large exposures to entertainment hospitality and rushing and and so many other bit small businesses will actually have larger exposures are doing okay. So we do a fair amount of construction, which is held up obviously a little bit of weakness off that bouquet and trucking transportation and warehousing which of all done fairly well, so, you know, obviously that portfolio stress like, uh, like all

All others, um, but again defaults there have not increased anywhere near as much as we had expected lots of payment deferrals and modifications, but with the PPP checks coming in and States opening back up. We are somewhat encouraged that we haven't seen very high levels of default. Yeah.

Thanks guys very much.

Our next question will come from David short with JMP, please go ahead I get afternoon. Thanks for taking my questions as well. First off. Maybe just following up on the initial question about just some Trends in April it it sounds like you're speculating a lot of what you're seeing is likely being impacted by state and federal stimulus. It just curious just just to I I couldn't write down quickly enough in the metrics around the percentage of the portfolio that had one two, three payments due recently there since mid-march, but can you give us a sense for how long what percentage of your borrowers are I guess in for parents or have requested some form of relief from you just put things into context that way maybe

Yeah, let me grab the first part of that and then I'll hand it over to see for the second part in terms of April performance. I think the most interesting thing is that we haven't seen deterioration. We haven't seen a pop of improvement necessarily with the stimulus but we haven't seen the deterioration. We would have expected with the high levels of unemployment. It's actually been much steadier. Um, certainly in terms of default rate than we would have guessed and the Improvement we've seen a is in the deferral modification rates coming down overtime. Now part of that is just a lot of customers got the deferral they need and now they're moving on a part of that could also be the stimulus, but certainly we're not talking up the overall performance of the portfolio being better than we would have expected six weeks ago to stimulus because you know, it's actually been more wage.

Okay, and and appreciate the call. I'm glad to hear.

table, we haven't seen I

A sharp increases stimulus has has increased so I think we talked it up more to some of the comments I made around the recession worthiness of our customers know being very familiar with living paycheck-to-paycheck having a managed variability in cash flow and so being somewhat familiar with how to operate in an environment like this.

I didn't know that David. Yeah, I was just going to say David in terms of payment frequency a couple of the things that I throughout we're about three-quarters of the portfolio had a payment due in the office in the second half of March. So we got a handle on some of those things David mentioned very quickly and a little over half of our portfolio is had a payment due since mid-march, uh has had at least three or more payments do so you might recall I've talked about, you know, two thirds of our portfolio has a payment frequency of other week are faster essentially and keep in mind who we have a very short duration on our portfolio, even though contractual maturities for portfolio, like netcredit might look a little longer when you wait the the cash flows that come off of that portfolio. The weighted-average lies is very short and everything else is inside of that so that helps dead.

Hope this really get a handle on what's happening with the customer. It helps us, you know recover the more the portfolio and and cash collect more quickly. And so I think being able to work with customers is a win-win as we can help customers manage through what we hope it's sort of a short-lived situation while it also helps us to financially off.

Right in and actually that that foreshadowed kind of my next question which was sort of related to payment rate. I mean, I I guess with a with a month June 30th Target of of you know, 350 or 400 million in cash in combination with I think she said depending on product as much as 80% you know drop in origination there. There's a plug in there obviously for payment rate that that would help us kind of try to forecast at least near term the the drop off and the portfolio.

Your your your your comment about average life probably is is part of the answer. I mean is is there a ballpark sort of payment rate? Whether it's percentage of beginning balance per month. That's a good way to think about the life of the portfolio right now.

Well, I think as Steve mentioned the average life of the net credit portfolio is about the weighted. The weighted-average light is it was right around 12 months and then you're probably portfolio the the rest of the portfolio it's beneath that, you know some more like in the 10-month range. So that's probably what kind of using those weighted average lives is probably you know, the same way of thinking it we're below a year on the entire portfolio. Perfect. Perfect. Hey, if if you don't mind one last eight to give you an accounting question here on fair value package, but if if I oversimplify cuz the fair value line is primarily the mark-to-market adjustment Plus Credit losses, you know, you mentioned a sixty million dollar mark down.

and if I add that to 203 million of charge

You know, it gives me a change in Fair Value, you know closer to 263 versus the reported 238. Is there some other sort of Contra item in their Steve that that offsets those two months. Yeah. I mean we can we can go into more detail. But you know, there's that's not the only thing I've kind of generalized there are some puts and takes in there that might not get you exactly to that number that are a little bit more of a better a little bit smaller that I won't necessarily d-10. No worries.

Got it. Okay. Thank you very much.

Our next question will come from Vincent with Stevens, please go ahead.

Hey, thanks. Good afternoon guys first question. So and it's another one at fair value assumptions. Just wondering if you could detail what sort of macroeconomic scenarios you're assuming in uh-huh fair value in your fair value marks. And then since this is a kind of A New Concept to us how your you thinking about what your fair value. So just look like what would move it for the second quarter?

See if you want handle those. Yes, sir. So you heard, you know Vincent in my remarks. I think what we tried to do instead of trying to you know, pull out the crystal ball and figure out, you know, the timing and and the shape of a recovery or some type of economic scenario. We felt the best way to accommodate the fair value adjustment was to look at where are we at the end of March given again, we had some quick visibility given the payment rates of the book but also to take into consideration that volatility just like you would in the in the typical sort of fixed income approach and that discount rates, you would require a higher level of return in a period of increased volatility in your cash flows. And so that's the way we tried to walk to tackle it and I would you know, we looked at a bunch of different ways, um that the economy could play out and as I mentioned none of those, you know aren't or it was really hard for us to determine wage.

One that could create a real liquidity or solvency issue for us. So again, that's the way we've accommodated this quarter. And I think is we roll forward life things become clearer and a little bit more stable and predictable. You could see a bit of a movement between those buckets in a fair value calculation where you could you can have your required reading and move in a different direction. Where as you start to see some of the credit rolling through that calculation if that makes sense.

Okay. Yeah that does make sense just to clarify so it sounds like things have stabilized maybe not improved but not worsened currently home has it changed much to say from the end of April to today cuz I think usually your portfolio moves quicker than other guys have Trent stabilized instead of Market or through Thursday. Yeah, I would say in terms of defaults. We saw, you know a kick up again not huge want to make that clear. I mean we called it take up for a reason. I'm in a massive Spike, but we did see the pickup at the end of March and that has made very stable actually all the way through really up until today, the bigger impact. We saw in the beginning of the month of April was increased deferrals and Loan modifications, especially during the you know, very dead.

March and the first couple of weeks accelerates

For the first couple of weeks of April and that has not only stabilized but improved and come down somewhat. So, um, you know, pretty good Trends their own stable stabilizing the stabilized default rate and improving, uh, the fertile alone mod rate. Now, it's you know, obviously hard to predict where we go from here a lot of depend on where the economy goes from here. But um, yeah, it's looking kind of across the you know, customer performance metrics. You would definitely call them stable at the moment.

Okay, great. That's really helpful. Second question. When you talk about tightening, you're underwriting and your origination volume declining when you tighten the writing you said through pricing and so I guess I'm wondering if the origination see you're having right now if the margins on that business is going on because usually I think if you look at the prior recession, we saw the business that you were writing being really strong coming after system. Just letting your thoughts there. Yeah, so primarily not through pricing me in a a little bit move people through the kind of buckets of risk-based pricing more cherry-picking, you know, the the highest credit quality customers originating to them and originating them with very little market wage. So, um While most of the tightening of the credit model isn't on pricing. Um, we do think the origination so we are doing now probably dead.

Have much better unit and economics than typical cuz we really are cherry-picked cherry-picking the best of the best spending very very little and marketing and then to the second part coming out of the recession. Yeah. Mm. You know late 2009-2010 was very very strong years from our business with no reason to expect that this wouldn't be different and just to reiterate a point I made in my prepared remarks. We don't need a recovery to begin actively originating and actually originating it's been pretty aggressive levels. We just need unemployment wage rates and really really more to new jobless claims to be even, you know, kind of more leading indicator than a lagging indicator really new jobless claims to stabilize wherever maybe even if unemployed 30% once the new job is claimed stabilize. Our underwriting models can very quickly get back to analyzing who's good credit quality. And who's that good credit quality off.

Obviously the markets bigger when unemployment rates are 5% the Wonder at 30% but we think there's going to be a huge amount of pent-up demand and as employment improves over the next couple of years that just grows the market again the addressable market and so, you know, we're hopeful that the recovery is very positive for the business like it was and after the Great Recession.

Okay, great. Thanks very much.

Our next question will come from John Rowan with Jenny, please go ahead. Good afternoon guys.

I mean more on the fair value, but I'm just trying to conceptualize what the cost of Revenue looks like into two Q. I know you're not giving guidance but it kind of sounded to me like the running a speed for the number would be the 235 less the $60 billion in additional fair value adjustments which would put it at about 170. Am I thinking about that completely off or is that correct? Just conceptually.

Yeah, sure. So I think John there is I think you're thinking about it. Generally correctly. There is a little bit of seasonality and all things being equal if we weren't dealing with with the covid-19. You would see a little bit of seasonality not like you saw under our old accounting method where you typically see a little bit of a drift up in the fair value at the end of q1 and then see some of that drift back down in terms of you know cute too. So like I had mentioned on an earlier question, I think depending on how we see, you know it playing out from here and in the stability and predictability, you know do have we captured at all? There may be more to come but that's yet to be seen which is one reason why we didn't get guys could definitely see a situation where the required returns may come down as you start to recognize some of that, you know, recognize some of the credit rolling through Thursday.

From folks who aren't able to repay so we can talk more, you know offline about you know, how to think about some of those things but that's generally how you should be. You should be thinking about a month. Okay, just you know, you get you the guidance for the cash at the end of the quarter and then, you know kind of backfilling you that into you know, my model it would indicate that there's a a little bit of a I mean not gigantic with there is a reduction in the loan portfolio sequentially between first-quarter and second-quarter. I mean that sound about right into the only way I can get you up to that level of cash by the end of 2q month.

Yeah, yeah. Absolutely. I mean with the adventure we've cut back at origination sixty to eighty percent at the end of q1 and I really accelerated that yet. So that combined with the short average life of our portfolios. We were talking about a little earlier would mean it's very likely Thursday or folio is smaller at the end of the quarter. Okay, and then you mentioned that you're bringing paid marketing expenses down to zero effectively. How much are the marketing line wage? Is is that paid number or is it all of it?

That's that's all of it. Now that line won't be exactly zero. They're still small bits of marketing. We defer there's some stuff that you know, we couldn't cancel that flow through and take you off. But that line item that's likely to be very very low in Q2 the 34 goes to something nominal. Okay, and then just say, you know thinking about you know, your California book, you know, I assume you started with the you know with a large installment loans liquidating the portfolio on January 31st. I mean is that almost a blessing in disguise at this point? How much of that book did you liquidate? I mean it kind of seems like, you know, it was a law that no one really wanted but it it kind of preemption could possibly a bigger loss on that portfolio given the crisis.

Yes.

Did you want to handle that one? Yeah, I mean, I think John that we I think we had plans to you know, continue to navigate that market wage. So we weren't necessarily relying on California for some of our 2020 Outlook as we had previously mentioned on prior calls, you know, I wouldn't call it a Blessing by any means I think we're eager to get the economy and these markets, you know going again and moving past this crisis. And once we do we'll be we'll be ready to operate and all of the states that you know, where we offer products that are ready to go. All right. Thank you very much.

Our next question will come from David Sharpe for J&P, please go ahead.

Thanks. Just just one one follow-up on application volumes. Listen, we we heard you loud and clear about the cessation and underwriting team and until things stabilize. But but trying to think longer term whether this pandemic kind of serves as a catalyst with all the Sheltering in place for phone apps accelerating even more than migration online notwithstanding the cessation in underwriting has there been any noticeable change since mid-month at home in in credit application volumes kind of inbound traffic. Yeah. I mean it it's down I'm not down to your point not as much as we would an expected given how much we cut marketing. So that's why you know, it's difficult to say exactly when you turn off so much marketing so much quickly You're Expecting application birth.

To be way down never done that before. So it's we didn't have a great estimate how much they would be down clearly the small business states were seeing huge demand still networks is largely going unfilled, but it you know, when I think anecdotally we have the sense that there's still plenty of that. There's still plenty of demand out there. We're we're able to rid of everything we want to originate even with spending almost nothing on marketing right now. So it's a pretty good indication that there there is strong demand that will likely only continue once the money economy stabilizes and you know people people get back to work and back to spending a little more money. Got it. Got it. Great. Thank you.

Yep.

This concludes our question-and-answer session. I would like to turn the conference back over to David Fisher for any closing remarks, please go ahead sir. It's just thanks again everybody for joining our call today. I know these are difficult difficult times for all and we certainly appreciate your time and your questions. So have a good evening and will speak with you soon.

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