Q2 2023 Enova International Inc Earnings Call
Good afternoon, and welcome to the Nova International Second quarter 2023 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.
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I would now like to turn the conference over to Lindsey summaries Investor Relations Free Nova. Please go ahead.
Thank you operator, and good afternoon, everyone and never released results for the second quarter 2023, and then June 30th 2023. This afternoon. After market close 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 Dot com.
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 as such is subject to risks and uncertainties actual results may differ materially as a result from various important risk factors.
Including those discussed in our earnings press release and in our annual report on Form 10-K quarterly reports on forms 10-Q and current reports on forms 8-K. Please.
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 Andover 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.
Thanks, Good afternoon, everyone. I appreciate you joining our call today I'll start with an overview of our second quarter results and then I'll discuss our strategy and outlook for the remainder of 2023.
After that I'll turn the call over to Steve Cunningham, our CFO will discuss our financial results and outlook in more detail.
The second quarter, we were once again able to deliver strong top and bottom line numbers are consistent performance is a result of our talented team executing on our balanced approach to growth by leveraging our world class machine learning algorithms and technology.
Cross our diversified product offerings, enabling us to quickly adapt to the current macroeconomic backdrop.
The result was an over originating more than $1 billion for the seventh quarter in a row.
Additionally, we're pleased to see solid credit quality across all of our businesses.
Revenue in the second quarter was just shy of half a billion dollars, which is a 22% increase year over year and 3% sequentially.
Demonstrating our ability to generate strong growth.
Certain market environments.
As a result of strong revenue growth and diligent credit management, adjusted EBITDA, and adjusted EPS increased 24% and 5% year over year to $126 million.
One dollar and 72 cents respectively.
In line with our expectations and typical seasonality for our business adjusted EBITDA was flat compared to Q1 of this year and adjusted EPS was down 4% sequentially.
Given the continued uncertainty in the macroeconomic environment, we are maintaining the higher than typical ROE targets across our products as we've discussed in prior quarters.
That being said strong demand, especially on the consumer side of our business combined with continued solid credit performance.
Enabled us to be more aggressive with the originations.
Our combined loan and finance receivables increased 20% year over year to $2.9 billion, driven by a 2% year over year increase and 5% sequential increase in originations.
Strong demand and our balanced approach of growth contributor to efficient marketing in the quarter decreased to 19% of our total revenue from 22% in Q2 of last year.
So much of the past few quarters, our diversified portfolio continues to drive our growth.
Well because those products represented 62% of our total portfolio up from 57% in Q2 of last year.
SMB revenue increased 27% year over year, it was down 2% sequentially as we continue to maintain good credit.
Our unit economic targets.
And our Q1 call.
We discussed that in general not all of our products move in lockstep, there may be quarters, where we've tightened our underwriting in either our consumer or SMB business to bring our results in line with our ROE target.
As a result of a conscious decision to raise our unit economic targets and our proven ability to manage our portfolio, we're continuing to generate strong U unit economics in our SMB portfolio.
As we have targeted those higher <unk> and unit economic targets.
As Steve will discuss in more detail. We are pleased to have recently raised more than $500 billion of funding just to support our S. M B business and our receivables growth reinforcing the strength of our performance.
Of that portfolio.
Turning to our consumer business, which performed exceptionally well in Q2.
Consumer revenue increased 19% year over year, and 8% sequentially driven by strong demand for our consumer line of credit products.
Credit metrics are very strong across our portfolio evidenced by the fact that our consumer net charge off rate declined to the lowest levels. We've seen in the past several years.
This is to be expected given our focus on prudent underwriting coupled with all the positive consumer economic data.
Job growth remains strong wages or continue to rise and inflation is easing.
In line with our expectations and consistent with the prior few quarters.
The percentage of the consumer installment loan portfolio decreased in Q2, while they're in line of credit products increased as a percent of total consumer logs.
As a reminder, we have continued to deemphasize or longer term near prime installment loans and are focusing on a shorter duration and smaller dollar consumer line of credit products, giving us a more real time view into credit performance, given the higher payment frequency and relatively short.
Short duration.
Turning to credit performance overall credit was strong in the quarter as we continued to successfully manage credit through the current macroeconomic environment.
Two continued solid profitability.
Net charge offs were seven 6% in the second quarter down from eight 2% last quarter.
Notably net charge offs net charge offs remained well below pre COVID-19 levels of 11, 8% in Q2 2019.
15, 9% in Q2 2000 and Nathan.
And some are stable strong results.
Teenage approve time and time again that we are skilful operators and a variety of environments.
Our flexible online only business model nimble machine learning powered credit risk management capabilities diversified product offerings, and solid balance sheet position us well to continue to drive profitable growth, while also effectively managing risk.
Yeah.
Our sophisticated technology and analytics are prime to quickly adapt to any changes in the economic environment, which combined with our vast experience puts us in a unique competitive position to take market share in the nine prime lending landscape.
Yeah.
To wrap up as Steve will discuss in more detail, we've been very thoughtful about building a strong balance sheet and ended the quarter with $1.1 billion of total liquidity.
This gives us the flexibility to continue to deliver on our commitment to driving long term value for our shareholders.
We have demonstrated our ability to drive consistently strong results and a variety of macroeconomic environments.
Yeah. We continue to believe there is still a disconnect between our business fundamentals and our current valuation.
As such we.
We will continue to work with external advisors to gauge various alternatives.
While we are exploring all options to further unlock shareholder value and they're not set on any one plan yet.
We remain committed to repurchasing shares and bonds and are confident that there's more that can be done.
With that I would like to turn the call over to Steve who will discuss our financial results and outlook in more detail.
Following Steve's remarks, we'll be happy to answer any questions you may have.
Thank you David and good afternoon, everyone. We're pleased to report another solid quarter of top and bottom line financial results that are in line with or better than our expectations as we continued to consistently deliver.
<unk> financial performance.
Over the past four years, we have meaningfully diversified and derisked, our business navigated significant macroeconomic swings and absorbed a rapid rise in market interest rates, while maintaining strong profit margins.
Through the first half of 2023 compared to the same period during 2019.
Nearly doubled our revenue and reduced our net charge off rate by almost half.
Delivering a solid after tax adjusted earnings margin of 11, 6%.
This is a testament to our experienced teams ability to consistently deliver strong shareholder value.
<unk>, our flexible online only business model diversified product offerings World class machine learning risk management algorithms and our strong balance sheet.
Turning to our second quarter results total company revenue increased 22% from the second quarter of 2022.
$499 million.
The year over year increase in revenue was driven by the growth of total company combined loan and finance receivables balances, which on an amortized basis increased 20% from the end of the second quarter of 2022 to $2 $9 billion at June 30th X total company originations this quarter rose to $1.1 billion.
Small business revenue increased 27% from the second quarter of 2000 $22 million to $190 million small business receivables on an amortized basis ended the quarter at $1 $8 billion or 30% higher than the end of the second quarter of last year.
Small business originations of $712 million increased 5% from the second quarter a year ago.
Revenue from our consumer businesses increased 19% in the second quarter of 2020 to.
$302 million as consumer receivables on an amortized basis ended the quarter at $1.1 billion or 7% higher than the end of the second quarter 2022.
As David mentioned with the strong consumer demand and credit performance were seeing moderately more aggressive with consumer originations this quarter, which grew 38% sequentially $401 million.
Demand for our consumer line of credit products remains strong as originations for these products comprised 73% total quarter consumer originations grew.
<unk> grew 42% sequentially, 74% from the second quarter 2022.
Looking ahead to the third quarter, we expect total company revenue to grow between five and 10% sequentially, depending upon the level timing and mix of originations growth during the quarter.
Now turning to credit net revenue margin for the second quarter, a 60% was in line with our expectations.
Credit quality, which is the most significant driver of net revenue and portfolio at fair value remained solid.
Credit metrics for the total company continue to reflect our balanced approach to growth in this macroeconomic environment.
Strong consumer credit performance and the ongoing seasoning and normalization of our small business portfolio.
The total company ratio of net charge offs as a percentage of average combined loan and finance receivables for the second quarter seven 6% compared.
Compared to eight 2% last quarter.
The consumer quarterly net charge off ratio declined to the lowest non pandemic level, we've seen since 2017.
As a percentage of total portfolio receivables past dues 30 days or more was seven 7% at June 30th.
Married to seven 1% at March 31st.
Driven by the continued seasoning of recent large quarterly vintages in our small business portfolio, which was partially offset by improvement in the delinquency rate for our consumer portfolio.
As we've previously noted and as we've seen over the past year in this macroeconomic environment, we expect there could be some quarter to quarter variability in credit metrics in that revenue margin in the near term for our consumer and small business portfolios.
This may include temporarily falling above or below typical ranges as our portfolio seasoned its credit metrics move off of the unsustainably low levels that we experienced last year and as we actively manage credit and our balanced approach to growth.
With this expectation as David noted, we increased our ROE targets across our portfolios last year to ensure we have additional cushion and the profitability profile of our loans to protect against potential credit variability in market environments like we're in now.
Similar to the consumer portfolio net revenue margin last year.
Small business net revenue margin this quarter of 57% just below our target of 60 to 70 per center.
Vintages season, and credit metrics move off of the unsustainably low levels that we experienced last year.
As we've previously discussed.
Active we manage small business credit and our balanced approach to growth and would expect and have no concerns about credit metrics moving slightly above or below our targets for a short period of time.
The lifetime credit loss outlook for our small business portfolio continues to reflect stability at the end of the second quarter with a fair value premium as a percentage of principal of 190%.
Remaining consistent with levels reported over the past year.
As David mentioned and as I'll discuss in more detail in a moment strong fundamentals of our small business portfolio are also reflected in our ability to raise more than $500 million. It's cost effective funding in recent months through funding partners in the capital markets.
For small business receivables growth.
Turning to consumer credit or consumer net revenue margin of 62%. This quarter reflects the continued strong performance of our consumer products, including some of the best credit metrics and Barrick and fair value premiums that we've ever seen.
As a result of the aforementioned trends in our small business and consumer portfolios. The fair value of the consolidated portfolio as a percentage of principal increased two percentage points sequentially.
112% at the end of the second quarter.
Looking ahead with overall credit performance remaining relatively stable. We expect total company net revenue margin for the third quarter of 2023 to be steady at around 60%.
Future net revenue margin expectation will depend upon portfolio payment performance.
Level timing and mix of originations growth.
Now turning to expenses, our operating cost this quarter reflect efficient marketing activities continued leverage inherent in our online only model.
Also expense management.
Total operating expenses for the second quarter, including marketing $179 million or 36% of revenue.
Compared to $168 million or 41% of revenue in the second quarter of 2022.
With the acceleration in consumer originations or marketing spend for the second quarter increased to $96 million or 19% of revenue compared to $92 million or 22% of revenue in the second quarter 2022.
We expect marketing expenses as a percentage of revenue to range from the high teens to low 20 percents in the near term.
But it will depend upon the growth and mix of originations.
With growth in receivables in originations over the past year operations and technology expenses for the second quarter increased to $47 million or 9% of revenue compared.
Compared to $42 million or 10% of revenue in the second quarter of 2022.
Given the significant variable component of this expense category.
Increases in the T cost should be expected in an environment, where originations and receivables are growing.
You should range between nine and 10% of total revenue.
Fixed costs continue to reflect our focus on operating efficiency and thoughtful expense management.
General and administrative expenses for the second quarter increased to $36 million or 7% of revenue from $34 million or 8% of revenue in the second quarter of 2022.
While there may be slight variations from quarter to quarter, we expect G&A expenses as a percentage of total revenue between seven and 8% in the near term.
Our effective tax rate was 25, 7% in the second quarter compared to 24, 9% from the second quarter of 2022.
We expect our effective tax rate to remain around 25%.
Our solid balance sheet and ample liquidity give us the financial flexibility to successfully navigate a range of operating environments and has allowed us to deliver on our commitment to driving long term shareholder value through continued investments in our business as well as share repurchases and open market repurchases and retirement of our.
Senior notes.
We ended the second quarter with $1 $1 billion of liquidity, including $272 million of cash and marketable securities.
$840 million of available capacity on facilities.
We continued to successfully access new cost effective funding to support our growth and financial flexibility.
During the quarter, we closed our first ever facility secured exclusively by small business lines of credit.
Two year $287 million secured warehouse was priced so for plus 420 basis points.
Additionally, last week, we reentered the term securitization market with our first on Dec deal since 2021.
The rated three year fixed rate 227 million dollar term transaction.
Price with a blended coupon of 7.7%.
Demonstrating our confidence in the continued strength of our business relative to our current valuation.
During the second quarter, we acquired 611000 shares at a cost of approximately $28 million and at June 30, we had $114 million remaining under our authorized share repurchase program.
During the quarter. We also opportunistically purchased an additional $26 million of our 'twenty 'twenty four senior unsecured notes in the yogurt market at a slight discount to par.
We had $180 million remaining would be 'twenty 'twenty four senior notes at June 30th.
Our cost of funds for the second quarter was eight 2%.
240 basis points higher than the second quarter of 2022.
Primarily due to the increases in sofa or at the same time period.
We expect our cost of funds to remain at a similar level for the remainder of this year, but will depend primarily upon changes and so forth.
And finally, we continued to deliver strong profitability this quarter with adjusted earnings a non-GAAP measure of $55 million and adjusted EPS grew 5% from the second quarter of 2022.
The $1.72 per diluted share.
To wrap up let me summarize our third quarter expectations.
We expect revenue to increase 5% to 10% sequentially as we continue to focus on an origination strategy that balances growth.
Risk against the current macro environment.
It should lead to continued stable credit, resulting in a total company net revenue margin of around 60%.
In addition, we expect marketing expenses as a percentage of revenue to range from the high teens to the low 20%.
Well the T cost to range between nine and 10% of revenue G&A cost to range between seven and 8% of revenue.
These expectations should lead to sequential adjusted EPS growth that is faster than revenue growth.
Our third quarter expectations will depend upon our customer payment rates and the level timing and mix of originations growth.
Barring a material change in the macroeconomic environment for the remainder of this year, we expect originations for the full year 2023 to grow around 10% compared to 2022.
As we maintain our focus on an origination strategy that balances growth and risk.
The resulting growth in receivables with stable credit and continued operating leverage should.
It should result in full year 2023 growth in both revenue and adjusted EPS compared to 2022 in excess of our expected originations growth rate.
Given the strong demand, we're seeing across products combined with our stable credit performance, we certainly could grow originations faster.
However, as we've discussed we think having a more balanced approach to growth and risk makes sense in the current environment.
Our expectations for the remainder of this year will depend upon the macroeconomic environment and the resulting impact on demand customer payment rates and the level of timing and mix of originations growth.
This quarter, we continued to demonstrate our ability to deliver strong financial results and then our balanced approach to growth is working well.
We remain confident that we are well positioned to quickly adapt to the evolving risks and opportunities in this macroeconomic environment.
And with that we'd be happy to take your questions.
Greater.
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 is from David Scharf with JMP. Please go ahead.
Hi, good afternoon, and thanks for taking my questions.
Hey, David.
Steve as well.
I was curious to get a little more color on your thoughts on.
Consumer origination approach going forward and specifically.
Given all of the positives you've highlighted you know strong employment for a lot of the verticals in particular that employ your borrowers inflation is easing a lot of these borrowers have probably been adjusting to that.
For for months.
Can you talk about maybe what what incrementally you you were monitoring or would like to see.
To expand beyond you know I guess your phrase moderately aggressive you know origination growth last quarter, you know what what else is out there in your mind that that's sort of casting a pall of uncertainty that maybe keeps you you know a little more restrained than you could be.
Yeah, I, just think the overall risk in the economy and the recession risk going forward and you know what.
I think we like others aren't seeing anything, particularly troubling right now but.
You know, we've never seen economic environment quite like this one with the fed's aggressive stance you know could it slip the other way and be a harder landing that people expect I think that's kind of what we're looking out for and as we've talked about historically were doing that by setting a higher ROE targets and we have historically, but as I've also mentioned in the last two quarter.
We're also leaning into growth on the consumer side and have gotten more aggressive and I think you know our approach going into <unk>.
And the Q3 is to stay.
Reasonably aggressive in may and probably even a bit more aggressive and you'll kind of within our current ROE targets, but you know and increased marketing spend a bit shouldn't move the needle too much as a percentage of revenue because the growth should come along come along with it but I'm trying to increase the top of funnel is probably our biggest focus.
Right now on the consumer side, given all the positive metrics were saying.
Got it got it okay, and just just as a follow up.
Shifting to SMB.
It looks like.
Relative to last quarter.
You know I think you had talked about a 10% to 15% range for total originations.
Growth.
For the year now it's.
Modulator to greater than 10% is is the slight trimming of that outlook all F. N b related and if so is there anything different I mean, directionally. It seems like credit and everything else is performing as well as consumer but it does look like you pulled back.
Pitt.
The second quarter is there anything either competitively cost bonds or anything that makes you a little less aggressive than on the consumer side.
No I, just think given the larger loans in the law and slightly longer term and they have somebody inside versus consumer we just want to be a bit more a bit more cautious for that portfolio. There's plenty of demand credit metrics as we talked about in Q1, where you know a tad worse than we had thought they were going to be but you know when since normalize that and they were much better in Q2.
So we could be more aggressive for sure there's there's plenty of.
Demand within our ROE targets on the SMB side, we're just not we're just not convinced the risk reward is there right now again, given the uncertainty in the economy, an extra few percentage is that of origination growth for us. This year as you know pretty pretty inconsequential, you know are still growing.
Hum.
At a significant premium to our P. E. So you know that the risk reward of trying to eke out another $50 million of SMB growth in the in the back half of the year just doesn't seem worth to pay off that at this time.
But that's really it I mean, that's just.
You know I was trying to be smart operators, having a lot of experience doing that and really not any concerns with the portfolio or our demand at all were turning away plenty plenty of good demand and you know the credit metrics are improving improving every month. So again, just trying to be smart cautious operators.
Understood. Thanks, so much.
Again, if you have a question. Please press Star then one.
The next question is from John Rowan with Janney. Please go ahead.
Good afternoon guys.
Hey, John .
Just make sure I understood. So sequential revenue growth Youre, saying is 5% to 10% correct.
That's right okay.
Did you guys book any gains in the quarter for buying back bonds.
Bonds, if they were below par value I know, there's something we discussed last quarter.
We do not.
Okay and then.
As far as you know share repurchases go you know obviously you said was 114 million was remaining on Oh on the authorization correct.
That's right is that something you think you'd be dedicated to after that $114 million is exhausted and just remind me what the what the repurchases were in a dollar term for for the two Q.
Yeah, we were just under $30 million for the quarter for second quarter, and if you just yeah and the 114 is just the authorization that runs through the end of this year. If you just go back John over the past six years.
We have regular our board is regularly re authorized us to buyback and as David mentioned in his remarks capital returns, we view as a very a.
A very good opportunity to return capital to our shareholders and as part of our focus on valuation so.
You should definitely not view the $1 14, as a as a constraint or a time bound on our capital return strategies.
Alright, Thank you very much.
Yeah.
The next question is from Vincent <unk> with Stephens. Please go ahead.
Good afternoon. Thanks for taking my questions first one just wanted to talk about what you're seeing with the competitive landscape.
And we're hearing.
Many companies talking about tightening just wondering if you're if you're seeing that and if you've ever seen potentially any benefits as a result of others tightening. Thank you.
Yeah, we've been talking about a fairly weak competitive landscape probably for the last two three quarters and we've seen no signs of that that changing a bit surprisingly actually but.
Sumer demand was very very strong and you know it.
It's not it's not a perfect science, what's competitive and what's market, but through some of our channels, we get good insights into the competitive dynamic than we've.
We've seen no major signs of increase in <unk> and even some tightening over the last quarter.
And same with F&B I think there's been no real new investment in that space with.
While at the same time, a couple of competitors.
Exiting over the last couple of years so.
Yeah, we weave in either of our businesses haven't seen any signs of the competitive environment, increasing and if anything.
Okay.
Yes.
Yeah.
That's right.
Hum.
Uh huh.
Hum.
What's your offerings.
Would you be able to frame, how much higher or sort of what what degree you've tightened or increased your returns on your new originations.
Yeah, like you know kind of 15.
15 is 10 to 15 percentage increases were certainly not doubling doubling or targets that you know 10 to 15, maybe 20% higher depending.
Hum on the on the product side.
We've talked about we really did that kind of in Q4, sorry in Q4 and in Q1. So that's not something that's new that we expect to constrained volumes in the back half of the year.
Okay, perfect and last one from me you talked about continuing to unlock value in exploring ways to do that it's nice to see the.
Share repurchases are getting a lot of great value from that any additional thoughts that you have that you're willing to share about unlocking value. Thank you.
Yeah, I mean, there are some well I get that.
As we've mentioned we've been talking to advisors about opportunities. We think there's somehow out there just in this market environment with higher interest rates businesses. Some business is struggling and various at various stages I don't think it's a perfect time to execute on those but you know if we've seen if we see a.
Other businesses weakened further that create bigger opportunities are as rates come back down we think there might be additional ones you know whether it's in the back half of this year, but in the earned a 'twenty 'twenty four but you know if not then there's not we're willing to be very very patient.
We will continue as Steve just mentioned to focus on other repurchases and we still have plenty of capital and we're not capital constrained. It also with a bigger opportunities come around.
Well, we'll continue to look and be prepared to execute on them.
Very helpful. Thanks, very much.
The next question is from Alexandra Villa Lobos with Jefferies. Please go ahead.
Good afternoon, and thank you for taking my question as well a lot of my other questions were answered, but did want to ask about the change in fair value marks for the quarter, just kind of a little bit more detail on kind of what happened versus prior quarter. Yeah. That's it.
Hey, Alex.
Thanks for the question. So first of all I'll start with SMB and F&B has been very steady.
On a fair value premium basis for the past four or five quarters, which is an indication of just how steady our lifetime credit loss outlook is for that business. So performing as we talked about in line with our expectations consumer has performed very well and there was a swap.
Right uptick in the fair value premium this quarter after some uptick last quarter as well and that's basically reflecting.
Credit continues to perform better than our expectations and again.
We have some pretty high return thresholds and our unit economics.
And the business continues to perform and when that happens the value of the portfolio will inquiries. So there's a bit about a move lower on our lifetime loss expectation on the consumer portfolio and that's being reflected in some of the slight uptick in fair value this quarter.
And that's really the consumer side, it's really what's driving the overall company at this point with the stability and and F&B.
Okay perfect. Thank you so much.
You bet.
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 us today, we appreciate your time and look forward to speaking with you again next quarter have a great evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.
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Okay.
Hum.
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