Q3 2021 Elevate Credit Inc Earnings Call
Greetings and welcome to the elevate credit third quarter 2021 earnings 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 telephone keypad. Please note. This conference is being recorded I'll now turn the conference over to your host.
Daniel you may begin.
Good afternoon, and thanks for joining us elevated third quarter 2021 earnings conference call earlier today, we issued a press release with our third quarter results.
A copy of the release is available on our website at investors elevate dot com today's call is being webcast is accompanied by a slide presentation, which is also available on our website. Please refer now to slide two of that presentation.
Our merchant answers will include forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward. Looking statements. These risks include among others matters that we have described in our press release issued today, including impacts related to COVID-19, and our most recent annual report on form 8-K.
The 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 interim available on our website at investors <unk> com.
Joining me on the call today are our president and Chief Executive Officer, Jason Harvison interim Chief Financial Officer, Jack <unk>, and Chief Strategy Officer, Chris Lynch I will now turn the call over to Jason.
Good afternoon, everyone and thank you for joining us today.
As you saw in our press release on originations earlier this quarter the demand environment for elevates all suite of credit solutions has improved dramatically because it not only a testament to macro conditions, but also a positive reflection on our work in marketing channels underwriting models and customer friendly features.
As a result, we were very pleased with our third quarter results, which was our strongest quarter in recent memory highlighted by near record originations of 88000 consumers well nearly four times the level of last year as the economy continues to bounce back.
First of all growth in originations was broad based across products and customer types, including a healthy mix of returning borrowers and new customers to the platform.
On a unit economic basis in the third quarter, new loans on the books fit within credit parameters, we along with the banks we support have created.
It is difficult to speak to a new normal on credit we do expect loan loss reserves and charge offs returned to similar levels to 2019, and the short term, notably in Q4 loan loss reserves will tick up due to a heavier mix of new customers.
The loan season growth moderates and the mix of new to repeat consumer shifts the vast credit Britain has made over the last two years should be reflected in your credit metrics by mid 2022.
As we mentioned for the past few quarters, the near Prime credit market is very healthy with strong consumer confidence and economic growth.
So with that let me start on slide four with highlights from our strong third quarter.
The portfolio grew sharply as consumers have re entered the marketplace, both compared to last year and on a sequential basis.
Compared to last year combined loans receivable of $513 million were up 36%.
Compared to last quarter, the portfolio grew 28% as.
As a result revenues also grew rapidly in the third quarter up nearly 20% over last year to 113 million.
As mentioned the growth was strong across each product led by the today card where revenues more than doubled compared to 2020 and rise revenues increased over 20%.
Lastly, as I mentioned the unit economics of the business are compelling in a current environment.
Customer acquisition cost of $221 across the portfolio remained very attractive, especially in the current credit environment, which remains healthy.
I will detail the timing impact of growth in the near term profitability, but it is clear to us that the origination activity. We were driving today should be high return and drive elevate back to our EBITDA margin target of 15% to 20% in the coming years, depending on the pace of growth.
Bottom line, we are very pleased with the third quarter results.
This period of heavy investment of growth does lead to short term losses as you know, we realize all marketing and loan loss reserve upfront and we'll see charge offs increase with newer customers. In fact, the bulk of the return of loans put on the books today will not be appreciated until mid 2022.
Building back the portfolio is an important step forward for elevate and we're very excited how the quarter played out.
As I just noted our consolidated portfolio grew 28% sequentially or 36% year over year to $513 million.
Youll recall, we mentioned last quarter do we began seeing a sharp inflection in demand in late May and June of this year and has continued through the majority of the third quarter.
Elevate in the bank's utilizing our platform originated a near record 312 million alone in this quarter, which we were proud to work for a number of reasons.
To give some context, while the broader demand environment has improved we believe a significant driver of strong originations. This past quarter has to do with many of the internal improvements that we've made here at elevate over the past few years, but simply we were serious late last year. When we expressed that elevate was well positioned through the pandemic as we ever had been this of course includes new.
Models customer friendly features and products tailored to the needs of everyday Americans.
Seasonality of back to school expenses on families. Certainly also played a role and we'd like to emphasize that we do not anticipate growth continuing at this pace throughout the rest of the year and into early 2022, we will continue to have a heightened focus on credit quality and return to a more moderate growth in Q4 and beyond.
Clearly the macro environment has been good for consumer credit, but we would estimate that nearly half the growth. This past quarter was driven by incremental enhancements in the channels underwriting and customer experience, while we have and we will see loan loss and credit tick up slightly due to new customers. We anticipate the new normal to be near 2019 levels as the portfolio seasons.
Hello, He has executed well against our three tiered growth strategy. So far in 2021 first by re engaging with former customers second by expanding direct mail channels Lastly, the third year of growth leveraging the strategic partner channel is the most exciting and new growth channel for elevate.
Over $20 million of the consolidated portfolio growth came from this new channel. We will look at continuing to scale. This in 2022 but to be blunt, we got little incentive to push this further in a quarter already bursting with traditional growth interim credit.
First of all we believe theres plenty of white space for growth across each of these tiers in 2022.
We have delivered exceptionally well against this three pronged approach.
Let's turn to slide five and talk about our elevate continued to drive growth to more and more consumers with our growing platform and brands here.
Here, we detailed the today card as it continues to be the fastest growing products today card. As you know is a credit card offering from near Prime customers would have largely been excluded from the market about traditional banks and credit card providers.
The card is a market leader due to credit line size and customer flexibility features not often found in near Prime cards.
Portfolio grew by 64% compared to a quarter ago and now has originated over 46 million in the past nine months ultimately today it could be as big as $100 million in receivables by the end of 2022.
Best of all is that today provides a number of advantages to elevate beyond its rapid growth.
With a lower credit risk products, we have been able to decrease our companywide funding cost today card funding has been lowered by nearly 300 basis points.
Similarly, with our credit facility backing the today card. We further diversified elevates funding sources last and most importantly, we believe the J card and its higher utility as a credit card compared to an installment loan product allows elevate to broaden the addressable market both from a credit perspective and from a consumer perspective in fact, we have seen formal rise and elastic.
In return today for everyday use compared to emergency use cases.
We know the market for both use cases are large and given our technical capability paired with national scale and product depth. We believe the best days of grow that elevate remain ahead of us and for the banks we serve.
Nearly 100 million of Outstandings are 20% of the overall portfolio is that in your prime rates and.
And this continues to grow the blueprint platform is nimble and able to serve consumers and banks and a vast multitude of price points. We're excited about where this will take us serving everyday Americans and in fact, we've recently heard from a number of new banks, who may be interested in utilizing the platform.
Last before I turn the call over to Chad to review our financials I'll just mention a few announcements.
First our board approved an increase in our share repurchase authorization of 25 million. This is an expansion of our buyback plan over the last two years, which is accounted for a buyback of approximately 31% of the shares outstanding. The Bottomline here do we continue to see a dislocation in the value of elevate and our current market valuation. We believe it continues to be an issue.
Our holders best interest repurchase shares.
With that I'll say, thank you for your time I turn the call over to Chad Brown, our new interim CFO to detail our financial results for the quarter, while Chad is new to this call chat has been an with elevate for the last nine years as our Chief Accounting Officer has a deep understanding of our space.
Thanks, Jason and good afternoon everybody.
Turning to slide six I'll start with discussing the loan portfolio growth, which is the most exciting part of the elevate story right now.
Coming out of the pandemic portfolio growth has exceeded our expectation.
Combined loans receivable principal totaled $513 million as of September 32021.
$145 million or 36% from $377 million a year ago.
This total was up $114 million or 28% from June 30 of this year.
All three products experienced double digit loan growth during the third quarter of 'twenty, one and with a mixed up near former and multi draw customers, but the new customers distributed between direct mail and strategic partner marketing channels.
It's broad diversity of growth in marketing channels and product gives us optimism going into 2022 and beyond.
Credit quality remained strong with past due balances at 9% of combined loans receivable principal at the end of the 21 third quarter, which is consistent with historical past few percentage it prior to the pandemic.
Staying on this slide revenue for Q3, 21 was up 20% from the third quarter a year ago.
Two an increase in the average outstanding portfolio of balance.
We expect fourth quarter revenue to increase based on the growth that we're experiencing within the loan portfolio.
As a reminder, as we market and originate loans to new customers, we incur upfront marketing and credit provisioning that.
Looking at the bottom of the slide adjusted EBITDA and net earnings were compressed during the third quarter. Our 'twenty one due to these upfront costs as we experienced increased demand and strong loan origination volume during the quarter.
In addition, we incurred a discrete tax expense of $1 6 million related to a recent change in tax regulations in the state of Texas that impacted our research and development state tax credits.
As a result, we incurred a net loss of $11 million or a loss of 33 per share for the third quarter with a net loss of 1 million or a loss of four cents per share for the full nine months period.
Excluding the discrete tax expense in Q3 21.
We had an adjusted net loss of $9 4 million.
Or a loss of 28 per share for the third quarter.
But the adjusted net income of 248000, a one cent per share for the full nine month period ended September 30th.
On slide seven the cumulative loss rate as a percentage of loan originations for the 2020 of that edge, that's the lowest loss rate ever due to the tightening of underwriting slowed.
Slowdown in new loan origination.
Increased government stimulus and improved payment flexibility tools.
We would expect the 2021 vintage to be near 2019 levels are slightly higher due to the new customer mix as we rebuild the portfolio.
On this slide we also show the customer acquisition costs, new customer loan volume for the third quarter of 'twenty, one with one of our highest quarters today.
We continue to manage our cat within our existing targets between 250 to $300 for the rise and elastic products and sub $100 for the Chegg hard through the end of the year.
Slide eight shows the adjusted EBIT margin, which was 3% for the 2021 third quarter.
We expect our adjusted EBIT margin should continue to be compressed through the end of this year due to the expected long growth and associated upfront.
We previously discussed.
Long term, we expect the adjusted EBIT margin to return to 15% to 20% depending on the pace of growth.
On slide nine we discuss our expectations for the remainder of 2021.
As we announced last month, we expect to end 2021, with combined loans receivable principal between $545 million to $575 million.
Based on this portfolio guidance, we expect revenues to be between $400 million to $420 million.
Adjusted EBITDA between $40 million to $50 million.
With the projected net loss of $12 five to $17 5 million.
Our updated earnings guidance is reflective of the earnings compression associated with the growth we're experiencing in the portfolio.
We think it's important to meet the market demand with the originations that meet our unit economics, as we rebuild our portfolio and the impacts of the Covid pandemic.
We anticipate the loan portfolio, the APR and Opex remained stable through the fourth quarter of 'twenty, one and our effective tax rate should be in the 20% to 25% range.
Turning to liquidity and capital on slide 10, our debt to equity ratio using total liabilities at September 30th 21 increased to $3.
We've used our debt facilities to fund the third quarter loan growth and expect to borrow to find the fourth quarter of 'twenty, one long growth, which will increase this ratio to four five by the end of the year.
Also incremental new borrowings under our rise and elastic debt facilities are priced at approximately 8%, resulting in an overall decrease in the weighted average cost of funds to nine 3% at September 32021 from 10, 2% at September 30, the prior year.
As previously announced we closed on a $50 million financing facility with an ability to increase the facility up to 100 million to fund continued growth at the today card product.
This new facility is a big win for elevate as we diversify our sources of capital and provides us with a lower cost of capital at 6.85% for the today card product, which has the lowest overall product APR.
The today card is well positioned to continue strong growth into 2022.
Lastly, during the third quarter of 'twenty, one, we repurchased almost $6 million or $1 6 million common shares under our existing common share repurchase program.
Since beginning our share repurchases in August 2019, we have repurchased almost $14 9 million shares or approximately 31% of all shares that were outstanding and issued a re issued since that point in time.
Our board of directors authorized a $25 million increased chart assisting program, providing for the repurchase of up to $80 million of our common stock through July 31 2024.
We'll also continue to buyback our common stock under the existing repurchase plan.
We view, our current stock valuation should be extremely attractive.
We're expecting to repurchase approximately one $5 million to $2 million in common shares per month during the remaining fourth quarter period subject to daily limitation.
With that let me turn the call back over to the operator to open it up for Q&A.
And at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is another question in queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before Christmas turkeys.
One moment, please while we poll for questions.
Okay.
Okay.
Yeah.
And our first question comes from Moshe Orenbuch with Credit Suisse. Please proceed with your question.
Great. Thanks.
And maybe you know maybe Chris you could spend a little bit of time, just going through some of the.
You know kind of what you're seeing from your borrowers have had a you know how to think about there.
Their appetite you had mentioned that the you know.
You've had a lot of opportunities, but maybe talk about you know.
What they're looking for the most in our you know what elevates go to provide for them.
Yeah sure Moshe Great question.
Well one thing that we've been monitoring throughout the last 18 months EBIT, even before the pandemic yet as you know the average balance of consumer's accounts checking accounts and we saw those come back to normal levels back in in the spring and in May in April April May I'm, sorry, Ed.
That gave us some indications that demand was going to pick back up.
We actually saw that play out through the summer and into the third quarter and beginning in the fourth quarter and so it was consumer demand picking back up consumer conference picking back up people getting back out we saw strong demand through the back to school timeframe, which is typically what we would see in the past you can go back to 2019 would see strong demand. There. So we're really starting to see some of those normal patterns of.
Borrowers get back out and live their lives.
The normal kind of demand curves.
Turning it back to the one spot we saw in 2019 and 2018, so that gives us some confidence that demand is going to be here for a period of time.
We're not seeing consumer balances dipped below the normal averages. So we continue to monitor our cash flow very closely on borrowers to make sure that affordability is there for them and you know when we look at the backdrop of the macro demand being strong that gives us some positive indications, but also what we've built over the last Oh.
18 months with some of the newer channels and some of the newer models. It helps both of them are from a conversion rate of putting more considered a proving more consumers coming through the funnel and also cashing that net water by having a newer channels out there to help attract customers. So really happy about with our what we've done both on the call that channel expansion on the motto side.
And on the progression of the products the flexibility built in to continue to serve customers and have positive outcomes with them.
Great and I guess, you know would there be something besides their balances dipping below normal and what else would you be looking for you know to a you know to say, okay, maybe maybe it's time to.
So to kind of either slow down a little or shift from you know from one product to another maybe a closedown instead of an open and kind of product.
Sure in the underwriting process, we're looking at taking a holistic view we are in the banks, we work with them looking at affordability checks and that's both looking at the cash inflows and cash outflows. In addition to the balances that are there our total indebtedness and so if we start to see those metrics shift then that's something that we'll look at it on tightening up credit.
Models are talking about account management strategies things like that so we have lots of rich data you know as we've incorporated the bank transaction data is it's great.
The underwriting on the front end of the loan but it is also very useful on the account management side as well it helps us manage the risk on the back end.
Gotcha.
Okay, and maybe just a kind of a technical question I think the low end of your guidance range for the fourth quarters kind of stable with where.
Where you were this quarter.
It seems like you're going to have some pretty decent you got into some pretty decent growth maybe could you talk through what it would take to get to the higher end of that guidance range.
How do you think about that.
Yes, sure Moshe just Chad thanks for the question Yeah. So.
Getting to the higher end of the range as you know that's depending on the level of growth that we're seeing during the quarter. So Peter discussed saw very strong growth.
Throughout Q3, we are seeing that growth continue into Q4, and you know traditionally speaking you know getting into the November December timeframe is.
Yes.
Our highest level of growth that we generally have during the fourth quarter. So so it's going to be dependent on the.
Continued growth in volume that we're expected to see for the remainder of the quarter.
Gotcha.
And maybe maybe one last one for me.
Could you.
Talk a little bit about what you're seeing kind of in the customer acquisition cost by product and.
And maybe with that elaborate a little on what you had said with respect to AR.
With respect to some of the new channels.
What it would take to kind of want to turn them on to a two to a higher you know a higher level of growth.
Yeah, Yeah, sure so related to CAC on a rise and elastic and now we're seeing very consistent cats across all the channels.
Within our $2 50, or 300, I mean, if you look at our chart actually you know for the quarter coming in slightly below our below our targets just based off the strong response that we're seeing but then also if you look at the today card you know continue to have very strong response.
On for that product to the direct mail channel at a sub 100 attack and so.
So very happy with the response rate and the volume associated with that and then in the motion on the on the channel perspective, you know one thing that we like about the partner channel.
There's some predictability there you know when we do a direct mail job, which is a big component of that.
The acquisition channels. It's it's some lead time there you got you have response models that predict what response rate will look like that that equates to an acquisition costs they've been fairly consistent for us, but with the partner channel, we're able to negotiate a cost per funded loan or a cost per acquisition. So we're fairly consistent with what that acquisition cost might.
B and negotiated that to be within our target. So you know we.
We can on the credit side, you know we can make adjustments.
Yeah weekly if not daily to that channel as well so it gives us a lot more control over how to manage that channel as we open it up.
Great and then as you kind of think about that you know.
It's.
Whether it's today or I mean, do you see any kind of changes in the mix of the.
Portfolio, obviously, you talked a little bit about the card potentially.
Potentially.
A $100 million by the end of next year are there any other kind of thoughts about.
The evolving mix of the portfolio over the course of the next year.
Yeah.
Yeah, I mean, I think when we look at the portfolios. We're definitely on a percentage basis are going to see a much more rapid growth out of it today got really excited with the acquisition cost there and the performance there and what that's looking like.
We continue to look for lower priced option for consumers.
To be more competitive in the marketplace to take market share. So are excited about what that looks like but I think as we look going forward into 2022 definitely going to see the today card be one of the bigger.
Pieces of growth for forces as we go forward.
Okay, great. Thank you very much.
And again as a reminder, if you have any questions you May press star one on your telephone keypad doing so I'm sure you're spot on the question in the queue.
Hum.
Okay.
And it appears we have reached the end of the question and answer session and I'll now turn the call over to Jason Harvison for closing remarks.
Just wanted to thank everyone for joining us this afternoon for the third quarter earnings call are excited about what we're seeing in the portfolios and the growth that's there and excited to see the bullet to get back to almost pre pandemic levels from an outstandings perspective, and the growth. We had ahead of us going to wrap up this year and going into 2022 I also want to thank the team.
Weird elevate for all the work they've done this year and as we wrap up the year Uh Huh.
Wrap up really successful year and excited about what's to come. So thanks, so much and have a good evening.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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