Q2 2021 Elevate Credit Inc Earnings Call

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Greetings and welcome to elevate credit second quarter 2021 earnings conference call. At this time all participants are in a 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 touch.

And the phone keypad as a reminder, this conference is being recorded I would now like to turn this conference over to your host Mr. Daniel rate director of public Affairs. Thank you Sir you may begin.

Good afternoon, and thanks for joining us on elevate second quarter 2021 earnings conference call earlier today, we issued a press release with our second quarter results a copy of the release is available on our website at investors day and elevate dot Com today's call is being webcast and is accompanied by a slide presentation, which is also available on our website. Please.

Referring now to slide 2 of that presentation.

Our remarks and answers will include forward looking statements within the meaning of the private Securities Litigation Reform Act. These forward looking statements are subject to risk 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 release issued today, including impacts related to COVID-19, and our most recent annual report on form 10-K, and other filings we make with the SEC. Please note that all forward looking statements speak only as 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 for a 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 SEC and are available on our website at investors day elevate dot com.

We do 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 are president and Chief Executive Officer, Jason Harvison, and Chief Financial Officer, Chris leads and I'll now turn the call over to Jason.

Good afternoon, everyone and thank you for joining us today.

Hope everyone is having a good summer so far I'm.

And I'm happy to report that elevate certainly is when we were very pleased with and return to growth, we saw and the second quarter and from 2 July loans.

Hello, and demand continues to ramp across all products and we will now be on any headwinds from federal stimulus checks or the delayed tax season earlier this year.

And then all of last quarter the environment from your current credit had a goldilocks dynamic and the consumer confidence and economic growth are quite high and consumer balance sheets remain very healthy savings rates for high over the course of the pandemic.

Put simply we see a great opportunity to continue to grow but on this quarter. We have no plans to abandon the strategy measured pace with a focus on strong credit quality and returns.

With that as a backdrop, let me start on slide 4 with the highlights from our strong second quarter.

And you saw in our press release, the consolidated portfolio grew 13% sequentially to $399 million compared to $353 million at the end of March.

To give a little more color the majority of that growth occurred in late May and June which is encouraging as we look at the back half of the year.

Revenues for the quarter totaled $84.5 million, which was down 28% compared to a year ago.

Recall it will take some time for the revenue to catch up to our loan portfolio growth, but for context last quarters revenue compared on a year over year basis was down 45%.

And on a sequential basis, our revenue was effectively flat, which we believe is and encouraging inflection point.

Turning to profitability. We are also pleased by what we're seeing from a unit economic perspective as growth resumes.

Overall, our EBITDA totaled $11.6 million per the quarter and represents a margin of 13, 7%, which is in line with our expectations as we ramp up and scale the portfolio again.

Before I talk about the credit and marketing components of margin and the quarter. Let me first note the difference between our margins when the business is growing compared to the outsized profitability last year as the portfolio was flatter.

Last quarter for instance, you recall, our EBITDA margin was closer to 35%.

The main delta between the 2 are 2 major cost items credit and marketing.

Last year as you know credit with extremely strong based on our state of the art AI enabled credit models, and responsible saving and disciplined by consumers and <unk>.

Actually last year, we did not substantially market and given the challenges presented by the pandemic.

Fast forward to today, where originations require both credit provisioning and marketing dollars and the great news as I alluded to that both costs are well within our expected ranges to drive targeted returns.

Chris will speak more to credit, but overall the initial origination mix is tilted towards stronger credit, which is in line with a 3 tiered growth strategy, which I'll speak to in a minute.

Provisions as a percentage of revenues for quarter were just 32%, which continues to be at the lower end of our historical ranges.

This is mainly driven by strong origination growth with existing customers and a higher mix of loan growth and a rise brand compared to elastic.

Bottom line is we have room on credit or happy with a measured approach and believe we are putting high return loans on the book today.

Turning to marketing CAC for the quarter was $271, which is higher than a year ago, given the lack of marketing during the pandemic.

That said 271 remains well within the targeted ranges $2.50 to 300.

Again, the driver here is a strong mix of growth with existing customers, which comes at a lower cash and we've also had continued strength and a very popular today card, which has a targeted cash under $100 as the product continues to ramp and scale.

And total we believe the demand environment is strong and we are pleased with the ability to drive high quality high return loan growth based on what we see and the market.

Finally to wrap up the summary financials, we had a net loss of $3 million and the second quarter driven by the previously mentioned factors relating to growth.

More importantly, our model continues to generate very attractive free cash flow, which as our cost of capital growth and ability to return capital to shareholders, which I will touch on shortly.

Turning to slide 5 you will note the breakout of growth by product. We are very pleased to see strong growth and the last quarter across the board and as I mentioned this growth is heavily loaded to the last 45 days of the second quarter.

Lastly, while still a smaller portion of our portfolio and today card continues to see outsized growth up 42% compared to last quarter.

We believe there remains a large opportunity and this level of credit as many banks continue to be reluctant or pulling back from these consumer loans.

And point, a large national bank significantly cut the availability for personal lines of credit for its customers earlier this month.

First of all the today card continues to add very high return growth with lower APR is a great proof point that elevates model is scalable across a wide spectrum of near Prime credit.

Flow APR products continue to increase as a percentage of accounts and now represents nearly 1 and 5 accounts and.

We are extremely pleased with the quarter and believe elevate is very well positioned to capitalize on the environment, we see the rest of 2021 and beyond.

And that note, let's turn to slide 6 and I'll give an update on the approach to marketing and growth over 2021, as we see it today.

Recall from last quarter, we discussed a 3 tiered growth approach and conjunction with a bank that license our technology, beginning with existing customers expanding and further outreach to new customers via direct mail and and a further ramp through strategic partner channels.

We feel good that the second quarter played out in line with these plans as we saw a high degree of engagement from existing borrowers, especially in the core <unk> product with.

And with a slightly different and plan, but very encouraging is the early effectiveness, we have seen as we ramp and marketing through the strategic partner channel and.

And the second quarter and mix of originations from strategic partners compared to direct mill was closer to 41% compared to 13% and the past.

And the rise product alone, we saw roughly 50% of new loans originated from the strategic partner channel.

To clarify the differences here digital traffic comes from a mix of SCO and online ads, whereas we define the strategic partner traffic as those that come from and affiliate marketing agreement.

We broke out 2020 marketing mix here, but to add clarity. The 2019. This was also in line with that trend.

As we've noted in the past, we see significant volume opportunity through the strategic partner channel on top the long runway, we still have and direct mail.

First of all is even in the early days, we are seeing significantly improved credit from this channel compared to years past.

Also note that the use of strategic partner channels allows for faster reaction time to demand and other factors, while providing stable cash.

I would reemphasize, though that the approach will be measured and will follow the pattern and this 3 tier strategy.

Logically, we have the most visibility into and existing customers and from a product perspective. The rise installment loan product is a good risk adjusted place start, giving the structured payment schedules of those loans.

And the future we expect the second and third tier to growth will make up a bigger mix for context, and elastic and today card nearly all the originations and the quarter were driven by direct mail campaigns, but based on what we've seen from a credit perspective, we along with the banks. We support believes there is ample room to market through strategic partners and expand to a wider group of new consumers as the year.

Asses.

Let me now give a brief update on where credit stand within the legacy book and how elevates customer friendly payment flexibility tools helps from the customers through a tough time and 2020.

Checking account balances have trended in 2021 as anticipated and in and out back to pre pandemic levels.

We have reached an inflection point and consumer confidence where Americans are spending and the job market is healthy.

We believe this to be a positive bellwether to loan demand as I noted before we think theres a great balance of day of consumer confidence and credit discipline. All of this bodes well for growth and 2021 and beyond across each of the different products and geographies.

I would also like to touch on the ongoing payment flexibility tools. After deferrals are back to historical averages at or below 2%.

As we've noted before elevate is most proud of how we were able to help Americans with leading payment flexibility tools and.

And total nearly 20% of customers have more than 80000 people utilize some form of credit flexibility through the pandemic and best of all they did so at no incremental cost with a simple step of and online form.

Elevate was founded on has always been committed to the assistance of the underserved new Middle class and we think it's important to remain steadfast in this commitment, especially as we emerge from the pandemic on.

And that note I encourage you to each checkout and offered a vote on June 15th shines a light on the credit challenges many American still face today, despite a stronger economy.

To put it plainly we are very proud to be the leader and credit flexibility and customer assistant tools and look forward to helping more and more Americans as we along with our banks, we support onboard new customers and the quarters and years ahead.

I'd like to conclude my remarks on slide 7 with a preview of some additional growth initiatives and how we're deploying capital and elevate.

First on growth, we have a number of initiatives in place to drive better access and less friction for customers and banks and meet credit needs.

1 initiative that we can preview today as blueprint, which is our revamped technology platform, which allows elevate and the banks that license our technology to integrate and collaborate across each of the product offerings.

Blueprint truly represents elevate future as the leading technological foundation for non prime lending this platform will propel future growth and quicker and more integrated ways, all while leading to lower price products and greater customer features.

And the past each of the products have been run and solid operating segments, which creates some friction for both partners and for integrating customer friendly features quickly with blueprint. We believe that friction is now gone which allows for more nimble decisioning on the part of the bank partners and ultimately broadens the ability for new banks to license our brands offer.

The white label to use of our credit Decisioning technology.

We're excited about the possibility to open up our capabilities to a wider audience and we'll update you along the way.

Beyond growth initiatives I noted the strong free cash flow generated and our model.

As we've noted in previous quarters, we have been able to self fund more and more of the growth with operating cash flow, which has helped reduce overall borrowing cost, which Chris will speak to.

Beyond that elevate has been very active and capital returned to shareholders via a repurchase authorization and the quarter were proud to have purchased 2.3 million shares at a cost of $8 million or $3.40 a share.

Without commenting too specifically, we believe the returns offered and our own shares are very compelling, especially based on the growth and return opportunities, we see and the portfolio the.

The key takeaway here is we believe we have multiple channels to deploy capital at very attractive returns and as a result of very optimistic about the rest of 2021 and the years ahead for elevate and its shareholders with that I'll say. Thank you for your time and turn the call over to Chris to detail our financial results for the quarter.

Good afternoon, everybody turning to slide 8 combined loans receivable principal totaled $399 million as of June 32021 down $14 million and 3% from $414 million a year ago. However, this total was up $46 million and 13% from March 31 of this year all 3 loan products grew during the <unk>.

And in 'twenty, 1 second quarters customer loan demand picked up materially beginning in may the combined loans receivable principal portfolio bottomed out and April at $340 million and grew almost $60 million from may through the end of June. Additionally, credit quality remains strong with past due loan balances and only 7% of combined loans receivable principal.

At the end of the 2021 second quarter.

Staying on this slide revenue for Q2, 'twenty, 1 was down 28% from the second quarter a year ago, we expect a strong growth and combined loans receivable principal that we experienced during the 2021 second quarter to continue throughout the second half of this year. As a result, we believe revenue is hit a trough in Q2, 'twenty, 1 and we expect revenue and the second half of this.

Year to be 18% to 30% higher than what it was and the first half of the year. We are now forecasting fiscal year 2021 revenue between $380 million and $400 million with combined loans receivable principal totaling between $475 million and $500 million at the end of this year.

We along with the banks, we support currently like the customer unit economics, we are experiencing and we will look to add as many new customers as possible. This year that meet our risk and cash guidelines and looking at the bottom of this slide adjusted EBITDA was compressed in Q2 'twenty 1 due to the direct marketing expense and loan loss reserve build associated with new customers.

Loans, we expect this to continue throughout the second half of this year. Our net income for the first half of 2021 totaled $10 million or 27 fully diluted EPS. There was no difference between reported net income and adjusted earnings for the first half of this year.

On slide 9 the cumulative loss rate as a percentage of loan originations for the 2020 vintage is the lowest loss rate ever due to the tightening of underwriting slowdown and new loan originations and improved payment flexibility tools.

While still very early we would expect to 'twenty, 1 vintage while trending lower now to be higher than 2020, given the increased volume of new customer loans expected to be originated this year.

On this slide we also show the customer acquisition cost new customer loan volume for the second quarter of 2021 was our highest since the fourth quarter of 2019, we expect the cash to continue to trend between 250 and $300 from the rise and elastic products and should be sub $100 for the today card through the <unk>.

And of this year.

Slide 10 shows the adjusted EBITDA margin, which was 14% for the 2021 and second quarter.

We expect our adjusted EBITDA margin to continue to be less and 15% throughout the second half of this year due to expected strong loan growth as previously discussed.

Long term, we expect the adjusted EBITDA margin to return to approximately 20% and a more normalized growth model.

Turning to liquidity and capital on slide 11, the debt to equity ratio using total liabilities at June 32021 was $2.6 lower than $3, 1 a year ago.

From my perspective, we are slightly under leveraged and we will continue to borrow to fund expected loan growth during the second half of this year.

I believe the debt to equity ratio will be between 3 and 4 by year end 2021.

During the second quarter of 2021, we repurchased $8 million or $2.3 million of common shares under our existing common share repurchase program.

Since beginning our common share repurchases and August of 2019, we have repurchased 13.3 million shares or approximately 28% of all shares that were outstanding and issued or reissued since that point in time.

Now, let me discuss expectations for the rest of the fiscal year 2021.

While I have touched upon certain aspects of our expectations earlier, let me provide a bit more detail.

We expect to acquire between 40 and 50000, new customers during both the third and fourth quarters of this year and within our 250 to $300 cash range as.

And as I previously mentioned combined loans receivable principal should end the year between $475 and $500 million.

We expect <unk> to remain relatively stable through the end of this year.

Operating expense levels will remain relatively flat and the second half of the year as we leverage our existing online infrastructure, including the new blueprint technology platform.

Interest expense will be higher each quarter as we continue to borrow to fund loan growth and increase our debt to equity ratio.

Our expected tax rate will be and our normalized 25% to 30% range.

We will also continue to aggressively buyback of our common stock under the existing repurchase plan.

We are expecting to repurchase approximately $2 million and common shares per month during the third quarter of 2021 subject to daily limitations.

Let me conclude with stating my optimism for our company and industry elevate is well positioned for growth and attractive returns and the current economic environment, our new blueprint technology platform will help propel new products and brands over the coming quarters.

With that let me turn the call back over to the operator to open it up for Q&A.

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Pat.

Our first question comes from the line of Moshe Orenbuch.

And with Credit Suisse. You May proceed with your question.

Great. Thanks.

I know that you guys had said that.

The loan growth occurred kind of and the back half of the quarter, but anything you can kind of tell us about.

Whether that's continued and cash.

And I'd love to get a little more comfort around the revenue pickup that youre talking about.

Yeah, Hey, Moshe it's Chris.

Through July I didn't have it in my script, but as as we're closing the books. It looks like we added about another $30 million and loans across all 3 products and we're at about $430 million roughly at the end of July now I don't want people to extrapolate and and assume that we're going to continue to grow 30 million per month the rest.

A year and that's why I still feel good about the guidance I gave of $4.75 to 500 at the end of the year, we're certainly going to hit some seasonal lulls in September and October typically.

But we feel pretty good about that guidance.

Right now yes.

And Moshe this is Jason 1 thing I would add to that.

1 thing that we're watching for is if we can get some insights to this child tax credit and how it might impact demand.

And since we have some visibility and consumers accounts, we did some data pools through the month of July and we saw about 30% of the accounts that we evaluated that some form of credit into their checking accounts.

And the average size of that was about 400 of Florida and $50 that was mid July and by the time, we pull that data again and by the end of July those funds had already been used.

For consumer goods and.

And so what we saw was the impact of a small portion of the population and assume it's going to come in and go out pretty quickly and so that gave us some optimism about the demand hanging around which nutritious spoke to and we're still seeing strong demand and the market.

Great. Thanks, Jason and thank you actually anticipated my follow up question. So thank you very much.

Yeah.

Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Jason Harvison for closing remarks.

Yes, Chris and I just want to thank everyone for your time and support this afternoon and how we're excited about seeing the portfolio is getting back into growth mode and the opportunities ahead and we.

Hope everyone stays safe and we look forward to talking to everyone at the end of the third quarter. Thanks, So much and have a good evening.

Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.

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