Q2 2021 Enova International Inc Earnings Call
Within consumer line of credit products represented 35 per cent of the consumer portfolio in <unk>.
<unk> products accounted for 67% in short term loans represented just 3%.
We expect the mix between consumer and SMB to fluctuate over time based on both seasonality and Macroetch.
Economic factors and were pleased with the diversified nature of our portfolio going forward.
From an operational perspective, as we mentioned on our last earnings call. The integration of on deck is essentially complete.
On <unk> performance continues to exceed our expectations.
We will easily exceed our forecast for $50 million of annual cost synergies, primarily from eliminated duplicative resources as well as $15 million and run rate net revenue synergies.
We also continue to expect that that transaction will be accretive in 2021 and generate EPS.
<unk> accretion of more than 40% in 2022.
And as we discussed last quarter.
While we originally thought that on deck for the legacy portfolio would have very little value. We now expect to receive over $220 million of total cash from the acquired portfolio net of securities.
<unk> payments.
In fact, we've already realized over $100 million from the legacy portfolio.
Turning to our recent acquisition of Pangaea, which we closed in mid March of this year, we have gained another product and high growth business in our portfolio.
Since closing.
We've been able to leverage our online business expertise and analytics technology and marketing capabilities to rapidly accelerate <unk> growth.
While <unk> results are currently not material to <unk> overall revenues.
Believe the market opportunity is vast and.
And we are.
Our decision to continue to grow in that space.
In summary, we are encouraged by the strong momentum we are seeing improving.
The improving economy combined with our highly scalable and flexible machine learning technology provide tailwind heading into the back half of 2021.
<unk> and beyond.
We are focused on producing sustainable and profitable growth and now accelerating our growth as the economy recovers.
We will continue to lean into demand and help hardworking people across the nation get access to fast trustworthy credit.
Now I'd like to turn the call over to Steve Cunningham, Our CFO, who will discuss our financial results and outlook in more detail.
And following Steve's remarks, we'll be happy to answer any questions that you may have Steve.
Thank you David and good afternoon, everyone.
As David mentioned in his remarks, we continue.
To be encouraged by our historically strong credit quality and the meaningful increase in originations across our businesses as demand continues to improve.
We originated more receivables this quarter than any second quarter in our company's history.
Ended the second quarter with the largest receivables portfolio in our company's history.
<unk> and continue to deliver near record profits.
The ability of our talented team to successfully navigate a challenging operating environment and to smoothly integrate on deck over the past year.
Has us well positioned to grow meaningfully from here as we leverage our resilient direct online only business model nimble machine.
<unk> powered credit risk management capabilities and solid balance sheet.
Now turning to <unk> second quarter results as Youll note in my comments, our total company and small business results when compared to the year ago quarter.
Are heavily influenced by our acquisition of on debt last October.
As expected.
<unk> second quarter total company revenues from continuing operations was $265 million, an increase of 2% sequentially from 5% from the second quarter a year ago.
Total company combined loan and finance receivables balances on an amortized basis for $1.4 billion at the end of the second.
Learning border.
12% sequentially and 73% higher than the second quarter a year ago.
Total company originations were $681 million up 35% sequentially and originations from new customers with 39% of total originations are highest percentage.
Second third quarter of 2019, as we were able to accelerate our marketing activities and attract a higher proportion of new customer demand as the economy opened up in the second quarter.
Small business revenue increased 13% sequentially and was nearly 6 times higher than the same quarter a year ago.
<unk> small business receivables on an amortized basis totaled $786 million at June 30 of.
12% sequential increase and more than 6 times higher than the end of the second quarter of 2020.
Our small business originations increased 24% sequentially for $401 million.
Revenue from our consumer businesses decreased 4% sequentially and declined 26% from the second quarter of 2020.
Consumer receivables on an amortized basis ended the quarter at $640 million up 12% sequentially.
And down 9% from the year ago quarter.
Consumer originations for the quarter totaled $280 million, 52% higher sequentially.
Due to seasonality and recovering demand and were more than 3 times higher than the second quarter of 2020.
Year over year changes in consumer revenue receivables and originations.
Reflect our pullback in originations with the onset of the Covid pandemic last year.
The sequential growth rates for total company and consumer revenue were influenced by accelerating originations growth as we move through the second quarter.
Resulting in a larger than normal difference and ending and average receivables balances this quarter.
On a total company basis for originations for the month of June for.
54% higher than for the month of April and consumer originations for the month of June for 80% higher than for the month of April.
As a result for sequential growth in average receivables, which are a key driver of revenue growth.
Lagged the sequential growth in ending receivables we expect.
<unk> sequential average receivables growth will accelerate in the third quarter from the strong ending receivables position at June 30.
As a result of those dynamics, we expect total company revenue for the third quarter of 2021 to increase at a slightly higher rate.
In the 2% sequential growth in the second quarter.
We expect continued growth in revenue over the coming quarters, but are likely to see some quarter to quarter variations from the timing level and mix of originations from our typical seasonality.
As well as from the impact on relative demand across our consumer.
Small business products as the economic recovery continues.
The net revenue margin for the second quarter was 98% up from 92% in the first quarter and remains elevated as we continue to see strong credit quality, which increases the fair value of the portfolio.
As.
<unk> call the change in the fair value line item includes 2 main components during the reporting period first.
Net charge offs and second changes to the portfolio is fair value, resulting from updates to key valuation inputs, including future credit loss expectations prepayment assumptions and the discount rate.
I'll discuss both items in more detail.
First for the second quarter. The total company ratio of net charge offs as a percentage of average combined loan and finance receivables was 2.4%.
Among the lowest quarterly net charge off ratios in our company's history.
This quarter's net charge off ratio.
As youll recruit from for 2% in the first quarter and is significantly below the 15, 9% ratio for the second quarter of 2020.
Net charge off ratios for both consumer and small business receivables trended lower sequentially and remained well below year ago levels.
Solid.
And for performance of our portfolio continues to demonstrate the ability of our sophisticated machine learning credit models to focus on lending to customers, who can repay their obligations through economic cycles.
As well as the ability of our talented team to find solutions to support customers who are having difficulties.
I would credit the fair value of the consolidated portfolio as a percentage of principal increased to 103% at June 30th from.
From 101% at March 31.
The outlook for portfolio credit quality remains strong.
The improvement this quarter was driven by an increase in the fair value of the small biz.
Portfolio as a percentage of principal.
As credit metrics and modeling at the end of the second quarter reflect an improving outlook for the expected future credit performance of our small business receivables.
The fair value of the consumer portfolio as a percentage of principal declined this quarter from a historical high last quarter.
Quarter continues to reflect solid outlook for credit quality.
Change was driven primarily by the strong sequential growth in consumer originations, especially from new customers.
Sequential decline in delinquent receivables as a percentage of loan and finance receivables balance as at the end of the quarter.
<unk> also reflects strong customer payment rates and the continued solid credit profile of the portfolio.
The percentage of total portfolio receivables past due 30 days or more was 5.7% at June 30.
Compared to 7.6% at the end of the first quarter and for 5% at the end of the second.
<unk> quarter a year ago.
The percentage of small business receivables past due 30 days or more declined during the quarter from 10, 2% at March 31 to.
7.1% at June 30.
The decline was driven by continued improvement in delinquency levels.
Most all of our small business brands.
Percentage of consumer receivables past due 30 days or more was for 1% interest from <unk>.
<unk>.
Compared to 4.3% on March 31, and 4.4% at the end of the second quarter a year ago.
With the continued improvement in the economic environment, we lowered the discount rates.
And our fair value calculations by another 100 basis points this quarter.
With the change this quarter through the first half of 2021, we've lowered the discount rates used in our fair value calculations by 200 basis points or about 40% of the increase in the discount rates that we initiated in the first quarter of 2020.
Capture the uncertainty of the operating environment.
And for economic recovery continues to gain momentum, we expect continued reductions in the discount rates used in our fair value calculations over the coming quarters.
As well as reversals of downward adjustments that we've maintained on their fair value calculations over the past year.
For us to reflect the impact of near term economic uncertainty.
On the risk of higher than expected consumer defaults.
Summarize the change in fair value line item is benefiting from low levels of net charge offs and an increase to the fair value of the total company portfolio credit metrics and model.
At the end of the second quarter reflects a solid outlook for expected future credit performance.
Looking ahead, we expect the net revenue margin for the third quarter of 2021 to range between 65, 75%.
As the economy recovers and demand and originations continue to rise.
Modeling net revenue margin should normalize over several quarters.
Around 50% to 60% is newer and less seasoned loans become an increasingly larger proportion of the portfolio.
Our third quarter net revenue margin expectations, and the degree and timing of future normalization in the ratio will.
It will depend.
The timing speed and mix of originations growth.
Now turning to expenses.
Total operating expenses for the second quarter, including marketing for $129 million for 49% of revenue.
Compared to $108 million or <unk> 42 per cent of revenue.
Upon the quarter.
And $42 million or 17% of revenue in the second quarter of 2020.
Marketing expenses increased to $55 million for 21% of revenue in the second quarter from.
$29 million for 11% of revenue last quarter and from $3 million on a 1% of revenue.
Lastly on the second quarter of 2020.
We met rising customer demand to meaningfully increase originations for this quarter with an increasing proportion from new customers.
With the strong unit economics, where you're seeing from new originations and the expected increase in demand through the rest of the year as the economic recovery continues.
Continues.
We expect marketing spend in the near term will likely range in the upper teens as a percentage of revenue depending on the level of originations.
Operations and technology expenses for the second quarter totaled $30 million for 13% of revenue compared to $36 million for 14%.
Net of revenue last quarter.
And $17 million or 7% of revenue in the second quarter of 2020.
But when T costs were relatively flat sequentially as variable spending increases from rising originations and receivables this quarter were offset by reductions in non variable personnel expense.
Given the significant variable component of this expense category.
Increases in on Chi costs should be expected in an environment, where originations are accelerating and receivables are growing.
General and administrative expenses for the second quarter totaled $39 million for 15% of revenue.
Compared to $44 million or 17% of revenue last quarter, and $22 million or 9% of revenue in the second quarter of 2020.
As expected, excluding onetime nonrecurring expenses related to the on deck acquisition Geo.
G&A expenses declined sequentially.
Year over year increases in G&A costs were driven by the addition of on debt G&A related expenses.
Looking ahead, excluding any onetime items, we expect G&A spend to remain relatively flat for the remainder of 2021.
And it should decline as a percentage of revenue as these extensive scale.
Increases in originations and receivables.
Adjusted EBITDA, a non-GAAP measure decreased 2% sequentially and increased 43% from a year ago for $135 million in the second quarter for the reasons I previously discussed.
Adjusted EBIT margin.
Now with the quarter was 51 per cent compared to 53 per cent last quarter and 37% in the second quarter of 2020.
Adjusted EBIT margin should normalize for the remainder of 2021 as a result of continued marketing investments and the aforementioned growth related normalization and net revenue margin.
Margin and volume related expenses.
As previously noted the degree and timing of any normalization will depend upon the timing speeds and originations growth and will likely occur over several quarters as originations return to historical levels.
Our stock based compensation.
<unk> expense was $5.3 million on the second quarter, which compares to $3.7 million in the second quarter of 2020.
The increase is related to the on deck acquisition and as I've described in recent quarters the expense associated with the 2017 increase and the best in period for restricted stock units is now fully reflected.
And year over year comparisons.
Normalized stock based compensation expense should approximate $5 million per quarter going forward.
Our effective tax rate was 22% in the second quarter, which declined from 27 per cent for the second quarter of 2020.
The decline from.
So it was driven primarily from the increase in operating income relative to typical non deductible expenses.
We expect our normalized effective tax rate to remain in the mid to upper 20 per cent range.
We recognized net income from continuing operations of $80 million or $2.10 per diluted share.
A year a quarter.
Appeared to $48 million or $1.58 per diluted share in the second quarter of 2020.
Adjusted earnings on non-GAAP measure.
Increased to $86 million or $2.26 per diluted share from $51 million for $1.68 per day.
Particularly.
On the second share in the second quarter of the prior year.
Trailing 12 month return on average shareholder equity using adjusted earnings was 42% during the quarter compared to 29% a year ago.
We ended the second quarter with $467 million of cash and marketable.
<unk>.
Including $394 million in unrestricted cash and had an additional $534 million of available capacity on $916 million domestic committed facilities.
Debt balance at the end of the quarter includes $381 million outstanding under.
Committed facilities.
Our cost of funds for the second quarter was 7.8% versus 8.6% for the first quarter of 2021, 8% a year ago.
The decline in our cost of funds reflects the impact of recent transactions completed since the end of the first quarter.
Based.
So current market rates for domestic marginal cost of funds ranges from 2% to 5% depending on the facility utilized.
Our solid balance sheet, and ample liquidity have us well positioned to support originations on receivables growth as the economy recovers.
Due to the ongoing uncertainty in.
The economy, we are not providing detailed financial guidance at this time, however, as we return to meaningful growth in originations and receivables we.
We expect to invest more in marketing by leveraging our machine learning driven analytics to capture increased demand at attractive unit economics.
As I've mentioned in my remarks today this should lead to some.
Normalization in the net revenue margin growth related variable expenses and the adjusted EBIT margin from recent levels.
The degree and timing of any normalization will depend upon the timing speed and mix of originations growth and will likely occur over several quarters as originations begin to return to.
Exceed pre COVID-19 levels.
We remain confident in our ability to deliver meaningful and consistent top and bottom line growth as we leverage the benefits of the scale and efficiency of our direct online only operating model.
Rod in diversified consumer and small business product offerings from.
For any learning powered credit risk management capabilities, and our solid balance sheet.
And with that we'd be happy to take your questions.
For here.
We will now begin the question and answer session.
A question Press Star then 1 on their touched on.
Our machines are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question Press Star then 2.
And the first question comes from David Scharf with JMP Securities. Please go ahead.
Great Good afternoon, and thanks for.
If I my questions.
Terrific.
Commentary on on the increase in demand and I'm wondering.
If you can maybe maybe.
Given all the variables.
There are still unknown and.
Taking this pandemic.
Proceeds certainly understand not having guidance at this point, but I'm wondering.
You know in terms of you know when we would expect demand to fully normalize.
It looked like your originations in the quarter.
I'm still 40% below the.
The second quarter of 2019 this is for consumer loans.
But you had mentioned that the June volumes were considerably higher than in April and May I'm wondering you.
If you were do.
Quarter ties.
There were huge volumes can you give us a little more.
More sense for kind of how we exited the quarter relative to years ago.
And whether your expectation based on child tax credit and everything else we know.
You know, whether youre expecting the back half of the year to be pretty close.
For the back half of 2019 in terms of consumer originations.
Yeah.
Good good question.
We saw meaningful acceleration in the quarter. So June was much stronger than April.
Any kind of being a transitional amount. So we certainly exited the quarter at a run rate much higher than.
From a quarter similar to the commentary you gave.
About average they are versus ending a are for the for the quarter.
Making projections about the rest of the year is it's difficult we don't know what's going to happen with Covid Hoover over the next few months and.
The average on what degree of economy continues to open up for pauses or then reverts.
<unk> to debt, but Kevin.
Momentum we saw in Q2, and we're still seeing so far in Q3 and for what it's worth but there's every reason to believe that over time is.
You know pandemic winds down consumer demand will come right back to where to where it was before it's just again difficult difficult to predict because it's difficult to predict the pandemic.
On the other thing I would add to that it's on the child tax credit that's more of a member that's more of a timing issue then.
On an absolute.
The change in consumer demand it will just reduce the kind of seasonal impact of the tax return season next year. So.
So while it could shave a couple of percentage points off demand.
You know kind of through the breast <unk> 2021 and there will probably be higher demand during tax for tier turn season and for.
Channel too and that for for from an.
Operating perspective.
Less seasonality is actually better it's easier to operate the business. So you know.
And in total that shouldn't be.
On a negative for demand over time, and then and and reality should help us help us run the business for a lot more smoothly.
Got it.
Yes, it's helpful and maybe just wanted to follow up on the on the demand side.
With respect to the new borrowers youre, bringing on board I guess, it was 39% of <unk>.
Of originations.
Is there anything.
Anything different in the in the profile of that consumer versus 2019, whether it's your internal scoring.
Yeah.
Yep shopping for you yeah.
Nothing particularly obvious.
Yeah.
Kind of stay.
State mix is a little different states that have opened up more we're seeing more demand earlier and that's been true for months now so that that's not surprising.
And so as the economy continues to open into the states that have opened up slower.
Where most of the additional demand is coming it's not it's not even across the board. So that's that's really.
Really the primary difference.
Other than that other than that nothing significant it's the same customers. It really is it's the same customers that we had and types of customers. We had pre pandemic or you know what the same types of customers are coming back post pandemic.
Got it great. Thank you very much.
Yes, Thanks, David.
Okay.
The next question comes from John Hecht with Jefferies. Please go ahead.
Okay.
Afternoon, Congrats on a great quarter.
Thanks, John and thanks for taking my questions as well.
Well, so I E.
No because as you guys sort of seasoned into the on deck book.
I'm wondering can you maybe describe to us.
What kind of customer acquisition channel is different.
Between the cut and consumer segments in the small business segments in it over time.
Will those differences.
Migrated all from from what you've learned so far.
Sure. So I think the primary difference is.
On the consumer side, we have kind of leads and then direct stuff that we have.
Go out and control.
Well TV direct mail digital and.
The small business side you have their partner channel also known as <unk>.
And then you have direct.
For the historically I know, but if you go back you know for.
5.810 years ago was very much.
We'll weather driven so all for the large majority of our consumer business came from lead providers.
And you know kind of starting.
5 to 8 years ago kind of around the time I started we've made a big push into controlling more of our own destiny by doing a lot more.
Direct marketing activities and now it's completely flip flop for the large.
Majority of our.
Business on the consumer side has dropped.
That similar dynamic as we think is what will happen on the small business side. The good news about on that at least they had a direct channel and a pretty good direct channel because of their terrific brand on the small business side, where our small biz.
<unk> products had no direct channel it was all through it was all through I suppose.
So we gain that capability through on deck and certainly by leveraging the brand.
Our marketing capabilities that we developed on the consumer side through the direct channels.
We certainly expect to increase the proportion of our small business loans that come through the tracked channel overtime.
Okay.
Okay, that's great.
And then I know this as well I don't know if this is gonna be dip a question or not but do you guys have an opinion just based on what you're seeing right now.
The cadence of recovery in demand from the business small business versus the consumer.
Are they going to pursue different paths and the <unk>.
Similar question, but on on the normalization of credit quality do you guys have an opinion on that.
Sure on demand, we think they'll follow the same path.
It's kind of as we kind of we didn't reiterate what we said in our Q1 call on actually the Q4 call before that.
During our remarks, but what we said then is as the economy opens up the consumers are going to get back out there and start spending and where theyre going to start spending a small business, it's because during the pandemic Inc.
<unk> continued to spend at large businesses are still go on a cosco on Walmart and paying their cable bill on Pan.
Our cell phone bill for what they weren't doing is walking down the street and popping into the little boutique or taking their dog to get them on.
Their nails clipped her hair haircut or go into their local bars and restaurants.
That was really pulled back during the pandemic.
And I think as we got into June as economy really start opening up on the weather got better across the northern half for the country. You saw the consumer start to get out and small businesses were a huge beneficiary.
Of that so.
We saw a small.
Maybe pick up a month or 2 earlier I think small businesses anticipated. The same thing, we did and you're kind of looking at the stock back up and get their stores back in order and hire new employees.
Anticipation of.
Economy opening back up and the consumers coming in and then the consumer's followed.
Is that really started to happen with vaccination rates, increasing and mass mandate.
Being eliminated and on weather improving so you know.
Maybe a month or 2 difference, but you know on the Grand scheme of things kind of right on top of each other.
And then on the credit side.
So far we've seen great.
Great credit across both.
Both.
And even with very high percentages of of new customers. So.
I think over time you know.
Our view is they'll both come down to historic levels and it.
It would be pretty surprising at this.
The trend is too much different between consumer and small business.
Again could be off by a month or 2 over time, but and there's certainly some seasonality in those numbers as we get into kind of Q1, 'twenty 'twenty, 2 but would expect it to largely be the same.
Wonderful thanks, guys very much.
Yep. Thanks Jackie.
[laughter].
Again, if you would like to ask a question press Star then 1 to join the queue.
Sure.
Yeah.
Point.
Okay.
It appears we have another question so this.
Session.
In fact over to David Thank you for taking my closing remarks.
Great. Thanks, everybody for joining our call. The day, we look forward to speaking with you again next.
Next quarter have a great evening.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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