Q3 2021 Enova International Inc Earnings Call
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The Nova International third quarter 2021 earnings Conference call, all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Lindsey salaries Investor Relations for Nova. Please go ahead.
Thank you operator, and good afternoon, everyone and never released results for the third quarter up 2021 ended September 30th 'twenty 'twenty. One this afternoon after the market.
If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at IR Dot and know about dotcom.
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 note that today's discussion will contain forward looking statements and all that is subject to risks and uncertainties.
Actual results may differ materially as a result, I'm very important risk factors, including those discussed in our earnings press release and in our annual report on Form 10-K quarterly reports on Form 10-Q, and current reports on form 8-K.
Please note that any forward looking statements that are made on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
In addition to U S GAAP reporting and Nova reports certain financial measures that do not conform to generally accepted accounting principles.
We believe these non-GAAP measures enhance the understanding of our performance reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release.
As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website and with that I'd like to turn the call over to David.
Good afternoon, everyone. Thanks for joining our call today I'll first provide an overview of our third quarter results and then I will discuss our strategy and outlook for the remainder of 2021 and into next year.
After that I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail.
In the third quarter, we again delivered strong results as our diversified business model World Class machine learning analytics, and our terrific team, we're able to take advantage of the improving economic environment.
Similar to Q2, we saw strong and improving demand combined with good credit quality across all of our businesses.
Given these dynamics, we continue to lean in heavily with our marketing efforts as a result, our marketing spend over the last two quarters has been well over 20% of revenue, which is meaningfully higher than in prior years.
Despite this increase we are very comfortable that this investment will generate strong returns.
As we've discussed we use our advanced machine learning analytics to constantly monitor expected loan level unit economics at a very detailed level.
At our current customer acquisition costs with the strong credit metrics in our portfolio. The expected unit economics on a recent vintages remained well above our targets.
As always we will keep a close eye on these metrics as we continue to grow.
As we are committed to producing sustainable profitable growth over the long term.
Third quarter originations were up 26% sequentially building on our strong Q2 over six times higher than the third quarter of last year, when we significantly scaled back originations during the pandemic.
This is the second consecutive quarter, we have produced sequential growth above 25%.
In addition, originations from new customers increased to a record 43% of total originations up from 39% in Q2 of 2021 and well above 11% in Q3 of 2020, as we believe our broad and diverse product offering combined with effective marketing across a wide range of channels.
Is resonating very well with customers.
In the third quarter consumer products accounted for 47% of our portfolio and small business products represented 53%.
Within consumer line of credit products represented 33% of our consumer portfolio installment products accounted for 65%.
In short term loans represented just 2%.
We continue to expect the mix between consumer and small business to fluctuate over time based on both macroeconomic factors as well as seasonality.
We are pleased with the diversified nature of our portfolio and do not have specific targets for the optimal mix between consumer and small business funding.
Instead, our strategy is to optimize that mix based on the economic environment at the time to maximize our unit economics and the returns we generated on our invested capital.
Thanks to the skillful execution of our team during the last 18 months since the pandemic began.
We believe we are continuing to take share in both the SMB and consumer markets with our diversified product offerings and consumer friendly online only mark.
As the economy continues its recovery, we're seeing consumers increased their spending which is driving demand for credit.
In addition, as we've been predicting.
All businesses have been beneficiaries of the pent up consumer demand and the resulting increased spending.
We are encouraged by these dynamics heading into the end of the year, which is typically our seasonally strongest quarter for growth.
And we now have considerable tailwind heading into 2022.
Given that we expect to see continued strong origination growth and elevated marketing spend for at least the fourth quarter and likely into 2022.
During the quarter, we made the decision to wind down and over decisions to allow us to strategically focus our efforts on our remaining businesses, which we believe have larger growth opportunities and are better aligned with our core competencies.
And nowhere decisions would have required significant increased investment to scale to the next level and we believe we are better served by directing our capital resources and our people on the highest growth opportunities ahead of us.
We are currently in various stages of experimentation and development with about a half dozen new initiatives. In addition to the ones. We have presumed previously discussed.
While in Nova decisions was growing, albeit at a slow pace. It was never a significant driver of our overall growth it did not significantly contribute to our results.
Additionally, we do not expect any major cost to wind down the business.
In contrast, Brazil, one of our other new initiatives is having a nice resurgence in growth.
As we've discussed in the past new legislation in Brazil last year.
Difficultly improved our ability to electronically fund and collect from our customers.
The new rules became effective March one and since then we've been testing and troubleshooting of new processes with large Brazilian banks.
With most of those issues now resolved we are focusing on quickly increasing origination volume and have seen promising initial results.
Before I wrap up today I want to touch on the C. I D that we announced in our press release.
The CFPB is investigating handful of issues several of which were self reported by Nova.
We've been cooperating fully with the C O P D as we always do.
This is a routine process with the CFPB, particularly in our industry, we've been through it with them in the past.
As a result, we anticipate being able to work with the CFPB to expeditiously complete this investigation.
In summary, Q3 was another great quarter, and we are encouraged by the strong momentum we are seeing.
The improving economy combined with our highly scalable and flexible machine learning technology provide tailwind heading into the end of 2021 and beyond.
Given this encouraging backdrop, 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 steves remarks, we will be happy to answer any questions that you may have.
Dave.
As David mentioned in his remarks, we're encouraged by the continued growth in originations.
Our ability to attract new customers as the economy and demand continue to recover.
Our diversified product offerings scalable online only business model machine learning powered risk management, and analytic capabilities and our solid balance sheet have us well positioned to generate profitable growth as the operating environment improves.
Now turning to <unk> third quarter results, our total company and small business results when compared to the year ago quarter are heavily.
Influenced by our acquisition of bond back last October.
Following the strong originations growth reported during the second quarter third quarter total company revenue rose 21% sequentially.
57% from the third quarter, a year ago to $320 million.
Total company combined loan and finance receivables balances on an amortized basis.
Were $1 $7 billion at the end of the third quarter up 17% sequentially and more than double compared to the third quarter a year ago.
Total company originations were $856 million up 26% sequentially.
Originations from new customers were 43% of total originations.
Higher percentage since our first year of operations.
The growth in new customers was driven by an acceleration of our marketing activities.
As David noted our small business products continue their recent trend of solid sequential growth during the third quarter.
Economy recovers.
Small business revenue increased 18% sequentially and was more than nine times higher than the same quarter a year ago, demonstrating how the on deck acquisition has created meaningful diversification because revenue.
Small business receivables on an amortized basis totaled $882 million at September 30th.
A 12% sequential increase and more than 10 times higher than the end of the third quarter of 2020.
Paul business originations increased 15% sequentially.
$462 million.
Our consumer business and saw accelerated growth during the third quarter, which is encouraging as we enter the fourth quarter.
Typical seasonal high point for consumer demand.
Revenue from our consumer businesses increased 23% sequentially and 12% from the third quarter of 2020.
Consumer receivables on an amortized basis.
Ended the quarter at $782 million up 22% sequentially.
26% higher than the year ago quarter with consumer originations increased 41% sequentially.
$395 million.
Subject to our typical seasonality, we expect continued growth in revenue over the coming quarters as the economic recovery continues.
As expected the net revenue margin saw some normalization in this quarter as originations growth continue, especially from new customers.
Hosting and less seasoned loans, becoming a larger proportion of the portfolio.
Net revenue margin for the third quarter was 77%.
Down from the 98% in the second quarter, although it remains well above our expected normalized range at $50 to 60%.
Credit quality, which is the most significant driver of portfolio at fair value remained solid.
The change in the fair value line item included two main components for the reporting period net charge offs and changes to the portfolio at fair value, resulting from updates to key valuation inputs.
<unk> future credit loss expectations prepayment assumptions and the discount rate.
I'll discuss those items in more detail.
First the total company ratio of net charge offs as a percentage of average combined loan and finance receivables for the third quarter.
It was four 2%.
Up from the second quarter's historically low net charge off ratio of two 4% and down from four 7% for the third quarter of 2020.
The third quarter net charge off ratio for small business receivables was 84 basis points, which was flat to the previous quarter.
Well below the year ago ratio of four 4% as we continued to see strong credit performance across all of our small business brand.
The sequential acceleration in consumer originations over the past two quarters, especially from new customers.
Credit normalization in the consumer portfolio was expected from unsustainably low levels, while the consumer net charge off ratio for the third quarter increased to.
Eight 1% from four points four 6% last quarter.
It remains well within our expectations and well below pre COVID-19 levels.
Second the fair value of the consolidated portfolio as a percentage of principal was 103% at September 30 unchanged from the prior quarter.
The fair value of the small business portfolio as a percentage of principal increased to 104% at September 30 from 100% at June 30, the credit outlook for the portfolio continues to improve.
The fair value of the consumer portfolio as a percentage of principal declined to 103% at September 30th.
Hi, there in recent quarters. The change continues to reflect solid credit outlook and was driven primarily by the strong recent growth in consumer originations, especially from new customers as less seasoned loans have become a larger proportion of the consumer portfolio.
The sequential decline in delinquent receivables as a percentage of loan and finance receivables balances at the end of the quarter 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 with five 5% at September 30th.
Down slightly from five 7% at the end of the second quarter.
And higher than the three 7% ratio at the end of the third quarter a year ago, when the originations were well below current level.
The percentage of small business receivables past due 30 days or more declined during the quarter from seven 1% at June 30th.
Five 1% at September 30.
The decline was driven by continued improvement in delinquency levels and strong payment in recovery rates across all of our small business brand.
All business delinquency rates continue to trend towards more normal historical levels.
The percentage of consumer receivables past due 30 days or more was five 9% at September 30.
Third to four 1% at June 30, and three 5% at the end of the third quarter a year ago.
With the sequential acceleration in consumer originations over the past few quarters, especially from new customers. Some normalization in consumer delinquencies with expected from the unsustainably low levels recently observed.
With the continued improvement in the economic environment, we again reversed a portion of the downward adjustments to the fair value calculation.
That were implemented early in the pandemic.
As the recovery continues to gain momentum, we expect additional reversals of the downward adjustments in the coming quarters.
Summarize the change in fair value line item continues to be driven by strong growth in originations.
Relatively low levels of net charge offs and a stable total company fair value its credit metrics and modeling at the end of the third quarter continued to reflect the solid outlook for expected future credit performance for our rapidly growing portfolio.
Looking ahead, we expect the net revenue margin for the fourth quarter of 2021 to range between 65 and 75%.
As the economy recovers and demand and originations continue to ride the net revenue margin should normalize over several quarters at around 50% to 60% is newer and less seasoned loans become an increasingly larger proportion of the portfolio.
Our fourth quarter net revenue margin expectation and the degree and timing of future normalization in the ratio will depend upon the timing speed and mix of originations growth.
Now turning to expenses total operating expenses for the third quarter, including marketing $151 million or 47% of revenue.
Compared to $129 million or 49% of revenue last quarter.
$6 million or 27% of revenue in the third quarter of 2020.
Marketing expenses increased to $80 million or 25% of revenue in the third quarter.
From $55 million or 21% of revenue last quarter.
From $5 million or 2% of revenue in the third quarter of 2020 and.
Recaptured rising customer demand to meaningfully increase originations during the third quarter with an increasing proportion from new customers.
With the strong unit economics were seeing from new originations and the expected increases in demand through the rest of the year as the economic.
Economic recovery continues.
We expect marketing spend in the fourth quarter as a percentage of revenue to be similar to the third quarter.
Operations and technology expenses for the third quarter totaled $38 million or 12% of revenue compared to $35 million or 13% of revenue last quarter and $18 million or 9% of revenue in the third quarter of 2020.
Given the significant variable component of this expense category sequential increase in <unk> costs should be expected in an environment, where originations are accelerating and receivables are growing.
General and administrative expenses for the third quarter totaled $34 million or 10% of revenue compared to $39 million or 15% of revenue last quarter.
$34 million or 16% of revenue in the third quarter of 2020.
The sequential reduction in G&A expenses was driven primarily by continued recognition of cost synergies related to the <unk> acquisition.
We expect G&A expenses as a percentage of revenue to continue to decline over the near term.
These expenses scale with increases in originations receivables.
Adjusted EBITDA and <unk>.
Non-GAAP measure was $100 million in the third quarter.
Down, 26% sequentially and 27% from the year ago quarter for.
For the reasons I previously discussed.
Our adjusted EBIT margin, because the third quarter was 31% compared to 51% last quarter and 67% in the third quarter of 2020.
Adjusted EBIT margin should continue to normalize in the coming quarters as a result of ongoing marketing investments and the aforementioned growth related normalization and net revenue margins and volume related expenses.
As previously noted 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 returned to historical levels.
Our stock based compensation expense of $5 million in the third quarter, which compares to $3 $8 million in the third quarter of 2020.
The increase is related to the <unk> acquisition and as I've described in recent quarters.
The expense associated with the 2017, increasing the vesting period for restricted stock units now fully reflected in our year over year comparison.
Normalized stock based compensation expense should approximate $5 million per quarter going forward.
Our effective tax rate.
It was 24% in the third quarter, which increased from 9% in the third quarter of 2020.
The increase was from the one time tax benefits that lowered the effective tax rate in the prior year quarter.
We expect our normalized effective tax rate to remain in the mid to upper 20% range.
We recognized net income from continuing operations of $52 million or $1.36 per diluted share in the third quarter.
Compared to $94 million for $3.09 per diluted share in the third quarter of 2020.
And earnings.
Non-GAAP measure decreased to $57 million or $1.50 per diluted share.
From $90 million or $2.97 per.
Per diluted share in the third quarter of the prior year.
Okay.
The trailing 12 month return on average shareholder equity using adjusted earnings was 33% during the quarter compared to 39% a year ago.
We ended the third quarter with $306 million of cash and marketable securities, including $229 million in unrestricted cash.
An additional $694 million of available capacity on $788 million in domestic committed facilities.
Our debt balance at the end of the quarter include the $94 million outstanding under committed facilities.
Our cost of funds for the third quarter was six 7% versus seven 8% for the second quarter of 2021.
And eight 4% in the same period a year ago.
The decline in our cost of funds reflects the impact of recently completed transactions that have lowered our marginal cost of funds.
During the third quarter, we also acquired nearly a half a million shares at a cost of approximately $15 million under our $50 million share repurchase program.
Our solid balance sheet, and ample liquidity have us well positioned to support originations and receivables growth.
The economy recovers.
We're not providing specific revenue and earnings guidance at this time, however, as noted in my comments today.
With the return of customer demand and meaningful growth in originations, we expect marketing to remain above 20% of revenue in the very near term.
Before normalizing to more typical mid teen level in 2022.
This should lead to some continued 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 mix of originations growth.
It will likely occur over several quarters as originations begin to return to or exceed pre COVID-19 levels.
We're encouraged by our recent results and excited by the opportunity 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.
Broad and diversified consumer and small business product offerings are.
A machine learning powered credit risk management capabilities, and our solid balance sheet.
And with that we'd be happy to take your questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from David Scharf with JMP Securities. Please go ahead.
Alright, Thank you and.
Good afternoon, Thanks for taking my questions.
Well listen maybe.
Maybe first off on the demand side.
I'm quite sure of the answer to this question is a resounding no just based on the strength of your originations.
But I am curious did you get any sense if the recent proliferation.
Just a lot of new point of sale financing products out there.
Subprime card products that are being launched or talked about by other lenders.
Just it just feels like the subprime consumer, which obviously is a broad category.
<unk> is increasingly being targeted with more financing options and like I say.
Certainly your demand and then the third quarter was exceptional but did.
Did you get any any sense that you know some some of the potential borrowers have other options or is the competitive landscape is as strong as ever in your mind.
Yeah, I think I think you said it right.
David It's kind of a resounding no I mean, there is a lot of noise, but I mean theres no large player in the subprime subprime credit card space. There's some you know small.
Small options out there, but they're always there always have been and it's mostly kind of high near prime borrowers not deep subprime borrowers.
And then you know obviously a lot of a lot of talk of buy now pay later, but that's almost exclusively prime and Super Prime there's really no.
No Big player, that's really done any kind of volume in the in the sub prime or near Prime space, where we focus most of our efforts and I think.
That's always been one of the things that's differentiated us and set us apart is our kind of conviction on that subprime and near Prime space, where there has been less competition and continues to be less competition.
Got it no no understood so still still needs to be asked every quarter.
Sure.
And maybe as a follow up.
Can you just remind us is I mean everybody's.
Wrapping with.
Obviously, the cadence of credit normalization I realize there's no crystal ball on that but but as we think about sort of an end point.
Of your sort of net revenue margin.
In a non recessionary environment.
You know the.
You know pre pandemic didn't have on deck can you sort of remind us how on deck and that portfolio sort of changes.
Perhaps the definition of a normalized net revenue margin is it actually going to be higher than it was pre pandemic.
Well, let me give you the high level answer and I'll, let Steve jump in with them with some specific so.
First of all when we talk about normalization normalization, but comes mostly from mix kind of adding a bunch of new customers as demand returns than credit actually getting bad and I think you can see that in our results. This quarter credit is incredibly good and our belief is that in credit credit will remain incredibly.
Good going forward, just given the macroeconomic factors yeah.
<unk> wages, you have near full employment.
It's a great environment for people to be able to take on credit and pet can pay it back and that's what you saw in our numbers. We had you know 43% 43% of our originations from new customers by far our records since our per share and for sharing business and yet still very very.
Strong net revenue margin and that's you know kind of an indication that credit across the board is very very good we've talked about normalized net revenue margins in the 50% to 60% range and subprime or F&B doesn't change it that much I mean, we really target her.
And our products to maintain pretty consistent margins across.
The various products that we offer so that's kind of a high level, Steve anything you want to add to that.
I think I think you've covered it well David I would just add that 50% to 60% is a fairly broad range and I think.
As David said.
Land in that range the way our unit economics work small business and consumer.
Or in that range and that can also vary quarter to quarter, depending on how fast we're growing and how many new customer or the proportion of new customers in the mix as well so.
Our R.
Our view on that has not changed since the beginning.
And on that hasn't changed our view.
Where that normalized range should be over the long term as we get to back to sort of capacity.
Lending in our in our business.
Got it understood. Thank you very much.
Thanks, David.
The next question is from John Hecht with Jefferies. Please go ahead, hey, guys afternoon. Thanks, Yeah.
Hey, I guess, a little bit more on originations I mean, it was the biggest I think looking at our model the biggest quarterly increase in originations.
I guess just in terms of the persistence of that is I mean are you getting to the point, where the the quarter to quarter jumped won't be as extreme or is it just a really good kind of marketing and customer acquisition period, where that quarter on quarter jump might persist and how do we think about seasonality with respect to that is.
We get into next year.
I mean, obviously, there's only so many quarters in a row, you where you can have 20 plus percent sequential growth before the law. The law of large numbers catches up with you.
But Q4 is a sequentially a seasonally strong quarter for us and so when you look at dollar levels of originations. We do expect very good growth in the dollar levels of originations and in terms of Q4.
You know, we're obviously, it's difficult to predict for only one month into it and obviously a lot of the seasonal growth happens in the in the back half of the quarter and really in the back third of the quarter.
So it's difficult to predict exactly but everything we're seeing that tells us that the demand is going to remain remain good we haven't seen any signs of it petering off again, given the macroeconomic factors out there we would not.
I expect it to so I'm still very bullish and as you know we moved through the fourth quarter and head into 2022.
And then.
On the I guess, maybe discussion of marketing, making any changes to the different channels and the different kind of efficacy of each channel and customer acquisition cost trends.
Nothing major I mean, our goal with marketing really over the last five years has been to take more into our own our own hands and so we've continued to lean in heavily on direct mail television and digital.
But you know still have strong a strong volume from the lead channels and you know I would say no major.
No no major shifts you know really over the last you know your ear to continued optimization of course.
But no major shifts.
Alright, thanks, very much yeah. Thanks, John.
Again, if you have a question. Please press Star then one.
The next question is from John Rowan with Janney. Please go ahead.
Hey, good afternoon, good evening guys.
Hey, John.
Really just a quick question you said I believe at the beginning our marketing spend is going to be similar in the fourth quarter to the third quarter, but then the second piece of guidance.
References a number closer to 20%.
To figure out with marketing spend is going to be.
Similar to the third quarter on a dollar basis, but on a percentage basis and if you could just kind of go over the guidance that you gave for 2022 on the marketing expense reverting down to the mid teen level I want make sure I have it correctly.
Yeah sure so I, what I do expect and what we expect in the fourth quarter is as a percentage of revenue marketing.
Plus or minus will be pretty close we expect or what you saw in the third quarter.
So I think at the at the end of my remarks, I pointed to above 20%, which is what we've been seeing before it goes back to the mid teens as a percent of revenue.
That were a bit more used to.
Keep in mind, we haven't talked about.
You know some of the impacts of fair value accounting in quite a while but.
Compared to pre fair value there'll be a point or two higher.
Marketing as a percent of revenue just in terms of the way the accounting works, but there'll also be a little bit higher revenue recognition as well so it sort of sits in substrate, but you should expect to see.
About 20% fourth quarter being closer to the third quarter and at some point, we expect that to level back off too.
Mid teens as a percent of revenue run rate that we used to say.
Okay.
I mean every person.
Just kind of going back to the acquisition, we've seen contraction of the overall yield of the portfolio, which you would expect given the inclusion of our lower yielding portfolio, but it it stopped I actually went back up this quarter I'm, assuming that's because of the strong growth in consumer originations and is this you know where do we get a balancing act.
We're a balancing point if you will so that we're kind of running at a stable yield.
So I think we are running relatively stable. If you look at the small business products and the consumer products sort of in isolation, plus or minus they've been relatively stable and as we've highlighted I think as you move through the year quarter to quarter, particularly in a recovering economy, you're going to see some variation in the mix.
David talked about we're not targeting specific.
Composition of the portfolio, we're looking for opportunities that deliver value.
So I would encourage you to.
You look at consumer and small business separately, but the yields are much more stable and the.
The seasonality of the consumer for example, in Q4 will probably drive a little bit faster growth in small business, just typically which will change the consolidated yield the portfolio yields are pretty stable from quarter to quarter.
Okay. Thank you.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to David Fisher for any closing remarks.
Thanks, everyone for joining and listening in our call today, we look forward to speaking with you again next quarter have a good evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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