Q4 2023 Enova International Inc Earnings Call
Operator: Good afternoon, and welcome to the Inova International Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode.
Good afternoon, and welcome to the <unk> International fourth quarter 2023 earnings Conference call.
All participants will be in listen only mode.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key, then 1 on your telephone keypad.
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.
Operator: To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Lindsay Savarese, Investor Relations for Enova. Please go ahead.
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 summaries Investor Relations for Nova. Please go ahead.
Lindsay Savarese: Thank you, operator, and good afternoon, everyone. Enova released results for the fourth quarter and full year 2023 and did December 31, 2023, this afternoon after the market closed. 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.enova.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 is subject to risk and uncertainty. Actual results may differ materially as a result of 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 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, Enova reports certain financial measures that do not conform to generally accepted accounting principles.
Thank you operator, and good afternoon, everyone.
We released results for the fourth quarter and full year 2023, and at December 31st 2023. This afternoon after market close.
If you did not receive a copy of our earnings press release, you may have.
Investor Relations section of our website at IR that you know about that.
Dot com.
With me on today's call are David Fisher, Chief Executive Officer.
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 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.
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 you're not conform to generally accepted accounting principles.
Lindsay Savarese: 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, and good afternoon, everyone.
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, and good afternoon, everyone. I appreciate you joining our call today I'll begin with an overview of our fourth quarter results, then I'll discuss our strategy going forward after that I'll turn the call over to our CFO, you've kind of game, who will discuss our financial results and outlook in more detail.
David Fisher: I appreciate you joining our call today. I'll begin with an overview of our fourth-quarter results, and then I'll discuss our strategy going forward. After that, I'll turn the call over to our CFO, Steve Cunningham, who will discuss our financial results and outlook in more detail. We are pleased to end the year with another strong quarter of solid revenue and profitable growth. Our results are driven by the strength of our talented team, diversified product offerings, and world-class machine learning analytics and technology. A combination of these strengths has enabled us to successfully manage the uncertain macroeconomic environment we face in 2023, growing originations while managing credit to acceptable levels that generate unit economics above our target, our unwavering commitment to this balanced approach to growth, as well as to take share from our competitors in both our consumer and SMB business while effectively managing. Turning to the fourth quarter, we generated over $1.4 billion in origination, our ninth consecutive quarter of over $1 billion. As a result, our combined loan and finance receivables increased 16% year over year to a record $3.3 billion, driven by a 23% year-over-year increase and 13% sequential increase in origination.
We were pleased to end the year with another strong quarter of solid revenue and profitable growth.
Results are driven by the strength of our talented team diversified product offerings and world class machine learning analytics and technology.
The combination of these strength has enabled us to successfully manage the uncertain macroeconomic environment, we faced in 2023.
Growing origination, while managing credit to acceptable level that generate in unit economics above our targets.
Our unwavering commitment to this balanced approach to growth.
It's allowed us to take share from our competitors in both our consumer and SMB business.
I believe managing risk.
Turning to the fourth quarter, we generated over $1 $4 billion in origination our ninth consecutive quarter of over 1 billion.
As a result, our combined loan and finance receivables increased 16% year over year to a record $3 3 billion driven by a 23% year over year increase and 13% sequential increase in originations.
David Fisher: Strong demand and solid credit performance enabled us to be more aggressive with our marketing, particularly in our S&B business, which had record origination. Thank you, of course. However, as you have heard us discuss over the last year, we had a few 2022 vintages in our S&B portfolio where credit was worse than we anticipated. To be clear, as we previously explained, we still generated positive unit economics in those vendors, albeit below our target. To address this, we slowed growth in our S&B portfolio during the first three quarters of 2023 to give our machine learning models time to adjust. As these vintages matured, they led to higher charge-offs than expected in Q3 of 2023, which was one of the two factors that resulted in us missing consensus EPS last quarter for the first time in many years. But we were clear at the time that the worse-than-expected credit was limited to those 2022 vintages and would not be a continuing trend.
Strong demand and solid credit performance enabled us to be more aggressive with their marketing, particularly in our SMB business, which had record originations in Q4.
As you have heard us discuss over the last year, we had a few 2022 vintages in our F&B portfolio, where credit was worse than we anticipated to.
To be clear as we previously explained we still generated positive unit economics in those vintages, albeit below our targets.
To address this we slowed growth in our F&B portfolio. During the first three quarters of 2023 to give our machine learning models time to adjust.
As these vintages matured and lots of higher charge offs and expected in Q3 of 2023, which was one of the two factors that resulted in us missing consensus EPS last quarter for the first time in many years.
But we were clear at the time that the worse than expected credit was limited to those 2022 vintages I would not be a continuing drag.
David Fisher: As expected, we saw a major improvement in our S&V net charge-off ratio in the fourth quarter, which dropped to 4.8 percent from 5.5 percent in the third quarter. And despite the higher ROE targets we had in place during the year, we were able to increase S&B originations 19% sequentially and 12% year-over-year to a record $930 million in Q4. We felt confident to do this because the villages since those in late 22 were all performing well within our expectations.
As expected we saw a major improvement in our F&B net charge off ratio in the fourth quarter, which dropped to four 8% from five 5% in the third quarter.
And despite the higher ROE targets, we haven't placed during the year, we were able to increase F&B originations, 19% sequentially and 12% year over year to a record $930 million in Q4.
We felt confident to do that because there's just since those in late 'twenty two are all performing well within our expectation.
David Fisher: The other factor that led to the Q3 miss was more aggressive marketing spend in our consumer business in September. This marketing generated good results, but because the spend was at the end of the quarter, those results were largely not seen until Q4. During our future hearings call, we emphasized that these two issues were temporary and would not negatively impact future results.
The other factor that led to the Q3 less was more aggressive marketing spend in our consumer business in September.
This marketing generated good results, but because of the spend was at the end of the quarter. Those results were largely not seen until Q4.
During our Q3 earnings call. We emphasized that these two issues were temporary and would not negatively impact future results.
David Fisher: As you can see from our strong Q4 origination and solid credit, we proved to be correct in this regard, which clearly demonstrates the ability of our team and world-class machine learning algorithms to quickly address credit risk and opportunities to drive strong, long-term performance. Similar to the last several quarters, our diversified portfolio continues to drive our growth. Small business products represented 62% of our portfolio, up from 61% last quarter, and S&B revenue increased 9% year-over-year and 8% sequentially. Consumer products represented 38% of our total portfolio, while consumer revenue increased 27% year-over-year and 5%. As I mentioned, credit quality across our portfolio remains sub-standard.
As you can see from our strong Q4 origination and solid credit we prove to be correct. In this regard, which clearly demonstrates the ability of our team and world class machine learning algorithms to quickly address credit risk and opportunity to drive strong long term performance.
Similar to the last several quarters, our diversified portfolio continues to drive our growth.
Small business products represented 62% of our portfolio up from 61% last quarter.
<unk> revenue increased 9% year over year and 8% sequentially.
Consumer products represented 38% of our total portfolio, while consumer revenue increased 27% year over year and 5% sequentially.
As I mentioned credit quality across our portfolio remains solid.
David Fisher: The total company net charge-offs as a percentage of average combined loan and finance received loans were 9.7% in Q4, compared to 9.4% last quarter. Notably, net charge-offs remain well below pre-COVID levels of 15.6% in Q4 of 2019 and 16.1% in Q4 of 2018, from a combination of makeshift and good credit management. Revenue in the fourth quarter of $584 million increased 20% year-over-year and 6% sequentially. Adjusted EBITDA of $130 million increased 9% year-over-year and 8% sequentially. An adjusted EPS of $1.83 increased 4% year-over-year and 22% sequentially. As Steve will discuss in more detail, the reason EPS growth lagged revenue growth was almost entirely because of higher interest expense as a result of the 500 basis points increase in the Fed funds rate over the last 18 months.
The total company net charge offs as a percentage of average combined loan and finance receivables were nine 7% in Q4 compared to nine 4% last quarter.
Notably net charge offs remain well below pre COVID-19 levels of 15, 6% in Q4 of 2019.
And 16, 1% in Q4 of 2018 from a combination of mix shift and good credit management.
Revenue in the fourth quarter of $584 million increased 20% year over year and 6% sequentially.
EBITDA was $130 million increased 9% year over year, and 8% sequentially and adjusted EPS of $1.83 increased 4% year over year and 22% sequentially.
As Steve will discuss in more detail. The reason EPS growth lag revenue growth was almost entirely because of higher interest expense as a result of the 500 basis points increase in the fed funds rate over the last 18 months.
David Fisher: If rates come down over the next couple of years, as is now expected, this will result in a nice tailwind for our future earnings. Overall, it was a great quarter, as demonstrated by our industry-leading performers. This further reinforces our belief that there's still a disconnect between our business fundamentals and our current valuation. As I've discussed on our prior few calls, we remain committed to unlocking further shareholder value. In December, we successfully completed our most recent bond issuance of $400 million in senior notes.
If rates come down over the next couple of years as its now expected. This will result in a nice tailwind for our future earnings.
Overall, it was a great quarter as demonstrated by our industry leading performance.
This further reinforces our belief that there is still a disconnect between our business fundamentals and our current valuation.
As I've discussed on our prior a few calls we remain committed unlocking further shareholder value.
In December we successfully completed our most recent bond issuance of $400 million in senior notes.
David Fisher: This bond issuance, combined with the retirement of our 2024 senior notes in early January and the successful consent solicitation on our 2025 notes in Q3, increased the amount of stock we were permitted to buy back under the terms of those. As Steve will discuss in more detail, this enabled us to buy back significantly higher levels of shares in the fourth quarter, and we remain committed to returning capital to our shareholders going forward, while still maintaining significant liquidity to generate attractive growth. Of course, we will also continue to explore a number of additional alternatives for shareholder value, and our solid liquidity position and proven ability to access the capital market give us the flexibility to continue to deliver. Before I wrap up, I'd like to take a few moments to discuss our strategy and outlook for 2020. We're encouraged by the strong momentum and good credit across our portfolio as we enter the year, as our Q4 results show, and based on internal and external data, both our small business and consumer customers are on solid footing. At a macro level, the U.S. has the strongest economy of any developed nation, and the much-predicted 2023 recession failed to occur.
This bond issuance combined with the retirement of our 'twenty 'twenty four senior notes in early January and the successful consent solicitation on our 2020 five notes in Q3.
Increase the amount of stock we were permitted to buyback under the terms of those notes.
Steve will discuss in more detail this enabled us to buyback significantly higher levels of shares in the fourth quarter and we remain committed to returning capital to our shareholders going forward, while still maintaining significant liquidity to generate attractive growth.
Of course, we will also continue to explore a number of additional alternative talking about shareholder value and our solid liquidity position and proven ability to access the capital markets.
It was us that flexibility to continue to deliver on this commitment.
Before I wrap up I'd like to take a few moments to discuss our strategy and outlook for 2024.
We're encouraged by the strong momentum and good credit across our portfolio as we enter the year.
As our Q4 results show and based on internal and external data.
Both our small business and consumer customers are on solid footing.
At a macro level the U S. That's the strongest economy of any developed nation in the much predicted 2023 recession failed to appear.
David Fisher: Our customers continue to benefit from job growth, low unemployment rates, easing inflation, and rising real wages. Looking ahead, while still very early in the year, we're off to a good start with strong origination volumes across our product lines. However, there is no arguing that uncertainty remains in the macro environment.
Our customers continue to benefit from job growth low unemployment rates easing inflation and rising real wages.
Looking ahead, while still very early in the year, we're off to a good start with strong origination volumes across our products.
There's no arguing that uncertainty remains in the macro environment, but.
David Fisher: But we are confident in our strategy and optimistic about the opportunity ahead of us. Meanwhile, it appears that consumer and small business confidence in the economy is improving. We believe our business is resilient no matter the economic environment. As we discussed previously, in some ways, our consumer customers are always in a recession. They are experienced at living paycheck to paycheck and sophisticated at managing volatility in their finances. As a result, recessions tend to have less of an impact on our non-prime customers than on prime borrowers.
But we are confident in our strategy.
Mr about the opportunity ahead of us.
Well it appears that consumer and small business confidence in the economy is improving.
We believe our business is resilient no matter the economic environment.
As we discussed previously in some ways our consumer customers are always in a recession.
They are experienced been living paycheck to paycheck and sophisticated at managing variability in their finances.
As a result recessions tends to have less of an impact on our non prime customers and I'm prime borrowers.
David Fisher: For our S&B business, we went to a very diversified mix of established small businesses, including more than 900 different industries. We also continue to benefit from strong brand presence and low levels of competition. All of these factors, combined with our sophisticated recession monitoring framework, give us confidence in our strategy and our ability to continue to grow our share in the non-prime credit market. In sum, we've demonstrated over the years our ability to operate well in a variety of economic environments. Our performance in 2023 was a continuation of that success, made possible by the world-class team we have built at Enova. This led Inova to rank among the computer world's best places to work for the 11th consecutive year.
For our SMB business, you went to a very diversified mix of established small businesses, including more than 900 different industries.
We also continue to benefit from strong brand presence and low levels of competition.
All of these factors combined with their sophisticated recession monitoring framework give us confidence in our strategy and our ability to continue to grow our share non prime credit market.
In sum we've demonstrated over the years, our ability to operate well in a variety of economic environments.
Performance in 'twenty, two 'twenty three with the continuation of that fix that made possible by the world class team, we have built that in Nova.
That's why I didn't know how to rank them all computerworld best places to work for the 11th consecutive year.
David Fisher: I want to thank the entire team for the challenging and impactful work they do to help hardworking people get access to fast, trustworthy credit. While our greatest asset is our people, our flexible, online-only business model, nimble, machine-learning-powered credit risk management capabilities, diversified product offerings, and solid balance sheet are key to our success and position us well to continue to drive profitable growth, effectively manage risk, and further unlock shareholder value. With that, I'd like to turn the call over to Steve, who will discuss our financial results and outlook in more detail, and following Steve's remarks, we'll be happy to answer any questions you may have. Thank you, David, and good afternoon, everyone.
I want to thank the entire team for their challenges and impactful work they do to help hardworking people get access to fast trustworthy credit.
Our greatest asset is our people our flexible online only business model nimble machine learning powered credit risk management capabilities diversified product offering and solid balance sheet are key to our success and position us well to continue to drive profitable growth.
Effectively manage risk and further unlock shareholder value.
With that I'd like to turn the call over to Steve will discuss our financial results and outlook in more detail and following steves remarks, we'll be happy to answer any questions you may have.
Steve.
Thank you David and good afternoon, everyone.
Steven Cunningham: We ended 2023 with positive momentum; strong growth in originations, receivables, and revenue, along with solid credit and operating efficiency, drove another quarter of solid financial performance. We continued to successfully access multiple funding markets during the fourth quarter, and our ample liquidity and strong balance sheet enabled us to create long-term shareholder value by originating a record number of loans and returning significant capital through share repurchase. Turning to our fourth-quarter results, total company revenue grew 6% sequentially, in line with our expectations of 5% to 7% sequential, and increased 20% from the fourth quarter of 2022 to $584 million. The year-over-year increase in revenue was driven by the growth of the total company combined loan and finance receivables balance, which on an amortized basis increased 16% from year in 2022 to a record $3.3 billion at December 31st.
We ended 20 twenty-three with positive momentum strong growth in originations receivables and revenue along with solid credit and operating efficiency drove another quarter of solid financial results.
We continued to successfully access multiple funding markets during the fourth quarter, and our ample liquidity and strong balance sheet enabled us to create long term shareholder value by originating a record number of loans and returning significant capital through share repurchases.
Turning to our fourth quarter results total company revenue grew 6% sequentially in line with our expectations of 5% to 7% sequential growth and increased 20% from the fourth quarter of 2000 $22 million to $584 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 16% from year end 2022 to.
To a record $3 $3 billion of December 31st.
Steven Cunningham: Total company originations during the fourth quarter rose 23% from the fourth quarter of 2022 to $1.4 billion. Small business revenue increased 9% from the fourth quarter of 2022 to $211 million in small business receivables on an amortized basis, ending the quarter at $2.1 billion, or 14% higher than the end of the fourth quarter of last year. As small business originations rose 12% year over year to $928 million. Revenue from our consumer businesses increased 27% from the fourth quarter of 2022 to $364 million. Consumer receivables, on an amortized basis, ended the fourth quarter at $1.3 billion, or 20% higher than the end of the fourth quarter of 2022. Consumer originations grew 48% from the fourth quarter of 2022. $498 million.
Total company originations during the fourth quarter rose, 23% from the fourth quarter of 2022 to $1 $4 billion.
Small business revenue increased 9% from the fourth quarter of 2000 $22 million to $211 million in small business receivables on an amortized basis ended the quarter at $2 $1 billion were 14% higher than the end of the fourth quarter of last year and small business originations rose 12.
Year over year to $928 million.
Revenue from our consumer businesses increased 27% from the fourth quarter of 2000 $22 million to $364 million as consumer receivables on an amortized basis.
Ended the fourth quarter at $1 $3 billion or 20% higher than.
At the end of the fourth quarter of 2022.
Consumer originations grew 48% from the fourth quarter of 2000 $22 million to $498 million.
Steven Cunningham: For the first quarter of 2024, we expect total company revenue to be flat to slightly higher sequentially, resulting in year-over-year growth and consolidated revenue in excess of 20%. This expectation will depend upon the level, timing, and mix of originations growth during the course. Now turning to credit, which is the most significant driver of net revenue and portfolio fair value. Credit remained solid in the quarter and reflected our typical seasonality, resulting in a consolidated net revenue margin of 56% for the fourth quarter, which was in line with our expectations of 55 to 58 percent. In addition, the fair value premium remains stable for the small business portfolio and improves slightly for the consumer portfolio, resulting in a nearly a percentage point increase in our consolidated company fair value ratio to 115, as is typical for the fourth quarter due to seasonality.
For the first quarter of 'twenty 'twenty four we expect total company revenue to be flat to slightly higher sequentially.
Elting and year over year growth in consolidated revenue in excess of 20%.
This expectation will depend upon the level timing and mix of originations growth during the quarter.
Now turning to credit, which is the most significant driver of net revenue and portfolio fair value.
Credit remains solid in the quarter and reflected our typical seasonality, resulting in a consolidated net revenue margin of 56% for the fourth quarter.
Which was in line with our expectations of 55% to 58%.
In addition, the fair value premium remained stable for the small business portfolio and improved slightly for the consumer portfolio, resulting in nearly a percentage point of increase in our consolidated company fair value ratio to 115%.
As is typical for the fourth quarter due to seasonality with total company ratio of net charge offs as a percentage of average combined loan and finance receivables rose sequentially to nine 7% from nine 4% last quarter.
Steven Cunningham: The total company ratio of net charge-offs as a percentage of average combined loan and finance receivables rose sequentially to 9.7 percent from 9.4 percent last quarter. Compared to the fourth quarter of 2022, the increase in the consolidated net chargeoff rate was driven by the return of a more typical seasonal pattern for our consumer portfolio during 2023, for the first time since before the COVID pandemic. As you'll recall, consumer credit losses typically follow a sequential pattern of growth through the year, tend to peak in the 4th quarter, and are at their lowest in the 2nd quarter.
Compared to the fourth quarter of 2022, the increase in the consolidated net charge off rate was driven by the return of a more typical seasonal pattern for our consumer portfolio during 2023.
First time since before the Covid pandemic.
As Youll recall consumer credit losses, typically follow the sequential pattern of growth through the year.
Tend to peak in the fourth quarter and are at their lowest during the second quarter we.
Steven Cunningham: We expect credit losses for our consumer portfolio to continue to follow this seasonal pattern during 2024, but the level will depend upon the timing and level of consumer originations throughout the year. As we expected, the net charge-off ratio for our small business portfolio declined to 4.8 percent from 5.5 percent last quarter. We expect the quarterly net charge-off ratio for our small business portfolio to generally range from 4 to 5 percent. The consolidated ratio of receivables passed through 30 days or more at the end of the quarter was flat sequentially, reflecting a continued solid outlook for future credit. The percentage of total portfolio receivables passed through 30 days or more was 8% on December 31, compared to 7.9% at September 30.
We expect credit losses for our consumer portfolio to continue to follow the seasonal pattern during 2024.
It will depend upon the timing and level of consumer originations throughout the year.
As we expected the net charge off ratio for our small business portfolio declined to four 8% from five 5% last quarter.
We expect the quarterly net charge off ratio for our small business portfolio to generally range from 4% to 5%.
The consolidated ratio receivables past due 30 days or more at the end of the quarter was flat sequentially, reflecting continued solid outlook for future credit performance.
The percentage of total portfolio receivables past due 30 days or more 8% at December 31st.
Third to seven 9% at September 30.
Steven Cunningham: Looking ahead, we expect the total company net revenue margin for the first quarter of 2024 to be relatively flat sequentially as the impact of lower sequential consolidated originations from the aforementioned expected seasonality is exhausted by sequential improvement in the Consolidated Net Charge Office. This expectation will depend upon portfolio payment performance and the level, timing, and mix of origination growth during the first quarter. [inaudible] and Thoughtful Expense Manager.
Looking ahead, we expect the total company net revenue margin for the first quarter of 2024 to be relatively flat sequentially as the impact of lower sequential consolidated originations from the aforementioned expected seasonality is offset by sequential improvement in the consolidated net charge off rate.
This expectation will depend upon portfolio payment performance.
And the level of timing and mix of originations growth during the first quarter.
Now turning to expenses fourth quarter operating costs were driven by efficient marketing activities supporting our strong sequential growth continued leverage inherent in our online only model.
Steven Cunningham: Total operating expenses for the fourth quarter, including marketing, amounted to $218 million, or 37% of revenue, compared to $176 million, or 36% of revenue, in the fourth quarter of 2022, excluding the one-time $15 million cost associated with the CFPB settlement. Total operating expenses would have totaled $203 million, or 35% of revenue. As David noted, fourth-quarter marketing spend remained efficient and effective and was within our expected range; marketing costs increased to $122 million or 21% of revenue, compared to $97 million or 20% of revenue in the fourth quarter. We expect marketing expenses as a percentage of revenue to range in the upper teens for the first quarter, but it will depend upon the growth and mix of origination. Operations and technology expenses for the fourth quarter increased to $47 million, or 8% of revenue, compared to $45 million, or 9% of revenue, in the fourth quarter of 2022, driven by growth in receivables and originations over the past year, given the significant variable component of this expense category.
Portfolio expense management.
Total operating expenses for the fourth quarter, including marketing were $218 million or 37% of revenue.
Compared to $176 million or 36% of revenue in the fourth quarter of 2022.
Excluding the onetime $15 million of costs associated with the CFPB settlement.
Total operating expenses would have totaled $203 million or 35% of revenue.
As David noted fourth quarter marketing spend remained efficient and effective and was within our expected range.
Getting costs increased to $122 million or 21% of revenue.
The $97 million or 20% of revenue in the fourth quarter of 2022.
We expect marketing expenses as a percentage of revenue to range in the upper teens for the first quarter, but will depend upon the growth and mix of originations.
Operations and technology expenses for the fourth quarter increased to $47 million or 8% of revenue compared to $45 million or 9% of revenue in the fourth quarter of 2022 driven.
Driven by growth in receivables in originations over the past year.
Given the significant variable component of this expense category sequential.
Steven Cunningham: Sequential increases in O&T costs should be expected in an environment where originations and receivables are growing and should be around 9% of total revenue. Our fixed costs continue to reflect our focus on operating efficiency and thoughtful expense management. General and administrative expenses for the fourth quarter increased to $49 million, or 8% of revenue, from $35 million, or 7% of revenue in the fourth quarter, excluding the one-time $15 million cost associated with the CFPB settlement.
Sequential increases in O N T costs should be expected in an environment, where originations and receivables are growing.
Would be around 9% of total revenue.
Our fixed costs continue to reflect our focus on operating efficiency and thoughtful expense management.
General and administrative expenses for the fourth quarter increased to $49 million or 8% of revenue from $35 million or 7% of revenue in the fourth quarter of 2022.
Excluding the onetime $15 million costs associated with the CFPB settlement.
G&A costs would have totaled $34 million or 6% of revenue.
Steven Cunningham: G&A costs would have totaled $34 million, or 6% of revenue. While there may be slight variations from quarter to quarter, we expect G&A expenses in the near term to range between 6 and 7 percent of total revenue. Our balance sheet and liquidity position remain strong and give us the financial flexibility to successfully navigate a range of operating environments while delivering on our commitment to driving long-term shareholder value through continued investments in our business. We ended the fourth quarter with $870 million of liquidity, using restricted cash held at year end to retire the 2024 senior notes that were called in early December. We held $211 million of cash in marketable securities and had $659 million of available capacity on facilities on December 31st.
While there may be slight variations from quarter to quarter, we expect G&A expenses in the near term will range between six and 7% of total revenue.
Our balance sheet and liquidity position remains strong and gives us the financial flexibility to successfully navigate a range of operating environments.
Delivering on our commitment to driving long term shareholder value through continued investments in our business.
Well as share repurchases.
We ended the fourth quarter with $870 million of liquidity.
Booting restricted cash held at year end to retire the 2024 senior notes that were called in early December.
We held $211 million of cash and marketable securities.
We had $659 million available capacity on facilities at December 31.
Our stable financial and credit performance has allowed us to consistently attract funding from a diversified group of lenders and fixed income investors.
During the fourth quarter, we upsized, our corporate revolver by $75 million issued a new 400 million dollar five year unsecured senior note.
Steven Cunningham: Our stable financial and credit performance has allowed us to consistently attract funding from a diversified group of lenders and fixed income investors. During the fourth quarter, we upsized our corporate revolver by $75 million, issued a new $400 million five-year unsecured senior note, and renewed a $233 million warehouse secured by small business receivables. Also, during the fourth quarter, we acquired approximately 1.35 million shares at a cost of approximately $66 million.
$233 million of warehouse secured by small business receivables.
Also during the fourth quarter, we acquired approximately 1.35 million shares at a cost of approximately $66 million.
When we started 2024 with share repurchase capacity of approximately $180 million available under our senior note covenants.
We expect to utilize most of that capacity during the first half of 2024, assuming market and trading conditions remain supportive.
Steven Cunningham: When we started in 2024, we shared a repurchase capacity of approximately $180 million available under our senior note. We expect to utilize most of that capacity during the first half of 2024, assuming market and trading conditions remain supportive. Our cost of funds for the fourth quarter was 8.7%, or approximately 170 basis points higher than the fourth quarter of 2022, primarily due to increases in SOFR over the same time period.
Our cost of funds for the fourth quarter was eight 7% or approximately 170 basis points higher than the fourth quarter of 2022.
I merely due to increases in sofa or at the same time period.
While we expect sofa to decline during 2024, we expect our average cost of funds for 'twenty 'twenty four to increase to around 9% it.
As the impact of higher rates and our recent senior note issuance roll through the year.
As a result interest expense as a percentage of revenue is expected to be between 10 and 11% during 2020 for.
That being said the impact of expected lower market rates should create longer term tailwind for Nova.
Steven Cunningham: While we expect SOFR to decline during 2024, we expect our average cost of funds for 2024 to increase to around 9% due to the impact of higher rates in our recent senior notice once rolled through the year. As a result, interest expense is a percentage of revenue, expected to be between 10% and 11% during 2024. That being said, the impact of expected lower market rates should create longer-term tailwinds. Our effective tax rate for the fourth quarter was 16 percent, driven by a decrease in our uncertain tax position, reserve, and related interest.
Our effective tax rate for the fourth quarter was 16% driven by a decrease in our uncertain tax position reserve and related interest the impact of share price increases an option grant exercising this quarter and favorable state tax rate changes.
While there may be slight variations from quarter to quarter, we expect our normalized effective tax rate to be in the mid to upper 20% range.
And finally, we continued to deliver solid profitability this quarter adjusted EBITDA increased 9% from the fourth quarter of 2000 $22 million to $130 million.
Adjusted earnings and non-GAAP measure were $57 million or $1.83 per diluted share compared to $57 million or $1.76 per diluted share in the fourth quarter of last year.
Steven Cunningham: The impact of share price increases and option grant exercising this quarter, and favorable state tax rates. While there may be slight variations from quarter to quarter, we expect our normalized effective tax rate to be in the mid to upper 20% range. And finally, we continue to deliver solid profitability this quarter as adjusted EBITDA increased 9% from the fourth quarter of 2022 to $130 million. Adjusted earnings, a non-GAAP measure, or $57 million, or $1.83 per diluted share, compared to $57 million, or $1.76 per diluted share in the fourth quarter of last year.
To wrap up let me summarize our first quarter and full year 2024 expectations.
For the first quarter, we expect revenue to follow our typical seasonality and to be flat to slightly higher sequentially.
Seasonally lower originations are expected to offset improvement in the net charge off rate.
<unk>, a little change to the net revenue margins sequentially.
In addition, we expect marketing expenses as a percentage of revenue to be in the upper teens, but.
But when T cost of around 9% of revenue and G&A costs between six and 7% of revenue.
Interest expense as a percentage of revenue is expected to range between 10 and 11%.
Steven Cunningham: To wrap up, let me summarize our first quarter and full year 2024 expectations. For the first quarter, we expect revenue to follow our typical seasonality and to be flat to slightly higher sequentially. Seasonally, lower originations are expected to offset improvement in the net charge-off rate, resulting in little change to the net revenue margin sequentially. In addition, we expect marketing expenses as a percentage of revenue to be in the upper tier. O&T costs of around 9% of revenue, and G&A costs between 6% and 7%. Interest expense as a percentage of revenue is expected to range between 10 and 11 percent.
With a more normalized tax rate these expectations should lead to slightly lower adjusted EPS for the first quarter.
<unk> and compared to the first quarter of 2023.
Our first quarter expectations will depend upon customer payment rates and the level timing and mix of originations growth.
Now turning to our expectations for the full year of 2024.
A stable macroeconomic environment with no material changes in the employment situation and a moderating interest rate environment.
We would expect growth in originations for the full year 2024 compared to the full year of 2023 to increase by around 15%.
Steven Cunningham: With a more normalized tax rate, these expectations should lead to slightly lower adjusted DPS for the first quarter, both sequentially and compared to the first quarter of 2023. However, our first quarter expectations will depend upon customer payment rates and the level, timing, and mix of origination. Now turning to our expectations for the full year of 2024, assuming a stable macroeconomic environment with no material changes in the employment situation, in a moderating interest rate environment.
The resulting growth in receivables with stable credit and continued operating leverage should result in full year 2020 for growth for both revenue and EPS in the upper teens.
Slightly higher than the expected originations growth.
Our expectations for 2024 will depend upon the macroeconomic environment and the resulting impact on demand customer payment rates and the level timing and mix of originations growth.
Operator: We would expect growth and originations for the full year 2024 compared to the full year 2023 to increase by around 15 percent. Resulting growth in receivables, with stable credit and continued operating leverage, should result in full year 2024 growth for both revenue and the DPS in the upper team, slightly higher than the expected originations. Our expectations for 2024 will depend upon the macroeconomic environment and the resulting impact on demand, customer payment rates, and the level, timing, and mix of origination. In closing, we are in a strong financial position as we begin 2024. Our diversified product offerings, world-class machine learning risk management algorithms, nimble online-only model, and solid balance sheet have us well-positioned to drive profitable growth and deliver on our commitment to long-term shareholder 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 and then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key.
In closing we are in a strong financial position as we begin 2024.
Our diversified product offerings World class machine learning risk management algorithms nimble online only model and solid balance sheet have us well positioned to drive profitable growth.
And deliver on our commitment to long term shareholder value.
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.
If you are 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 J M. P. Please go ahead.
Hey, good afternoon, Thanks for taking my questions and I wanted to just.
Dig a little more into them.
Maybe some of the levers behind.
The strong origination outlook I know you know.
You, you've often guided to marketing expense.
And this.
20% or above.
And it looks like a pretty healthy increase in originations again in 2024.
Operator: To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from David Scharf with JMP. Please go ahead. Hey, good afternoon.
Yet marketing seemed pretty efficient just in the teens is that just a Q1 guide.
David Scharf: Thanks for the questions, and I wanted to just dig a little more into... maybe some of the levers behind the strong origination. You've often guided to marketing expense of 20% or above. And it looks like a pretty healthy, and Originations again.
Trying to get a sense, whether it's going to be pretty lumpy throughout the year or if this is just improvements in CAC and and other marketing efficiencies for the full year.
Hi, David So the marketing for Q1, the guide of upper teens as a percent of revenue is.
Steven Cunningham: Marketing seemed pretty efficient just now. Is that just a Q1 guide? I'm trying to get a sense whether it's going to be pretty lumpy throughout the year or if this is just... Hi, David. So the marketing for Q1, the guide of the upper teens percent of revenue, is against that expectation of our typical seasonality, particularly for the consumer portfolio, where we see lower levels of originations, typically our lowest point. But that's not implying that that's where we'll stick for the remainder of the year.
Against that expectation of our typical seasonality, particularly for the consumer portfolio, where we see lower levels of originations are typically our lowest point, but that's not implying that that's where it will stick for the remainder of the year. So.
As you've seen in our past results, our marketing spend will vary with growth and so you know with the guy that we've given for the full year it would not be.
Hanging around at the lower levels that we typically see during a low points of seasonality.
Got it.
Steven Cunningham: So, as we've seen in our past results, our marketing spend will vary with growth. And so, you know, with the guide that we've given for the full year, it would not be, you know, hanging around at the lower levels that we typically see during our low points. And as we think about the consolidated credit for the year, It sounds like you got the SMB portfolio back to kind of normalized levels at four to five percent. What should we be thinking about the consumer side, both in terms of, you know, the 17%-ish loss rate in the fourth quarter, which I know is seasonally high? You know, whether it's going to peak at a higher level than that this year. And secondly, just in terms of mix, if it's too whirly.
And as we think about the consolidated credit outlook.
For the year. It was it sounds like you got the SMB portfolio back to kind of normalized levels at 4% to 5%.
Loss outlook.
How should we be thinking about the consumer side, but both in terms of.
You know.
The 17% ish loss rate in the fourth quarter, which I know is seasonally high but.
You know, whether it's going to peak at a higher level than that this year and secondly, just in terms of mix. If it's too early to speculate on what the portfolio mix between small business and consumer might end the year at.
Yeah, So I think for for consumer credit like we mentioned on the call I think that typical seasonal pattern that you see where you trough in the second quarter of the year just based on origination patterns and you tend to peak in the fourth quarter.
Steven Cunningham: Yeah, so I think for consumer credit, like we mentioned on the call, I think that typical seasonal pattern that you see where you trough in the second quarter of the year, just based on origination patterns. And you tend to peak in the fourth quarter. 2023 was kind of the first time we'd seen that, you know, sort of full blown since the pandemic. And you can see it can move, you know, three to four percentage points trough to peak. But it's very stable, so that variability doesn't imply that there's a change in the credit outlook. I think what we're implying is that we expect it to be relatively stable. And then, on your question around mix, we don't expect a radical change in mix. So there is really nothing really meaningful between the two portfolios, but obviously, there can be quarter-to-quarter variability, particularly during periods of seasonality where consumer or small business may be growing faster.
2023 was kind of a first time, we've seen that you know sort of full blown since the pandemic you can see it can move three.
3% to four percentage points trough to peak.
But its very stable so that variability it doesn't imply that there's a change in the credit outlook.
What we're implying is that we expect it to be relatively stable.
And then I think on your question around mix, we don't expect a radical change in and mix. So nothing really meaningful between the two portfolios, but obviously there can be quarter to quarter variability, particularly during periods of seasonality, where consumer small business may be growing.
David Fisher: One may be originating a little bit faster than the other as we move through the quarters. Okay, very helpful. The next question is from Moshe Orenbuch with T.D. Cowan.
Faster, one may be originating a little bit faster than the other as we move through the quarters.
Got it got it okay very helpful. Thank you.
Thanks.
The next question is from Moshe Orenbuch with TD Cowen. Please go ahead.
Moshe Ari Orenbuch: Please go ahead. Great, thanks. You did talk about your, you know, kind of appetite to continue with respect to, you know, deploying capital back into share repurchase and your thoughts about, you know, the value of the stock. Could you talk a little bit about, you know, how you're thinking about that as you kind of enter 2024 and, you know, how that'll play out over the course of the year? Sure. Hi Mos
Great. Thanks, you did talk about your kind of appetite to continue with respect to deploying capital back into share repurchase and your thoughts about you know.
The value of the stock could you talk a little bit about you.
How you're thinking about that as you kind of enter 2024, and you know how that will play out over the course of the year.
Sure Hi, Moshe How're you doing so we talked a bit about it in the commentary that we.
Steven Cunningham: How are you doing? So we talked a bit about it in the commentary that we have about $180 million coming into early 2024 available under our Senior Note Covenants, and we expect to do... most of that in the first half of the year. But if you just sort of understand how we approach it, we have been more aggressive, and obviously we have signaled that now for a couple of quarters, but we're also very thoughtful about points where we buy. We've run a grid, as you all know, for quite some time. We'll continue to do that, but we'll be taking a bit more of an aggressive stance in terms of how we're approaching that. So we still feel like there's a valuation opportunity. If you just look where we are even today versus a 2025 estimate, just as an example, we're still lagging the S&P 600 and some of the consumer finance segments of that broader index. So we still think there's a valuation opportunity even at these entry points today. I got it.
We have about $180 million coming into early 'twenty 'twenty four available under our senior note covenants and we expect to do.
Most of that in the first half of the year, but if you just sort of understand how we approach it.
We have been more aggressive and obviously, we we have signaled that now for a couple of quarters, but we're also very thoughtful about points, where we buy we've run a grid.
You all know for quite some time, we will continue to do that but we'll be taking a bit more of an aggressive stance in terms of how we're approaching that so.
We are we still feel like there's a valuation opportunity if you just look.
Where we are even today versus a 2025 estimate just as an example, we're still lagging the S&P 600, and some of the consumer finance segments of that into our broader.
Broader index. So we still think there's a valuation opportunity even at these entry points today.
David Fisher: Thanks. Maybe kind of, you know, pulling up at a macro level, you know, the, you mentioned obviously, employment levels are still strong, and other indicators, and there is less concern about a recession. Are there, you know, other indicators that we should be tracking as we go through 2024, you know, to kind of see, both on the consumer and small business side, that would, you know, kind of give us an indicator whether you're going to be, you know, pushing harder on originations or pulling back? Yeah, I think origination and demand are driven, A, by employment, because you can only lend to people who are employed.
Got it thanks, maybe kind of pulling up at a macro level.
The you mentioned, obviously, you know unemployment levels are still strong and and other indicators and less concerned about a recession.
Are there you know are there other indicators that we would we should be tracking as we go through 2024, you know to kind of see.
Both on the consumer and small business side that would kind of give us an indicator of whether you're going to be pushing.
Harder on originations or pulling back some.
Yeah, I think you know originations and demand is driven Abe.
By employing it because we can only lend if people are employed and if people are feeling better about their future they'll lever themselves up and spend a little bit more in the short term.
David Fisher: And if people are feeling better about their future, they'll lever themselves up and spend a little bit more in the short term. So sentiment is definitely, it's sentiment and the labor market on the consumer side. On the small business side, I think there are two primary drivers. Again, small business sentiment, and there are a couple good surveys out there. But then there is also consumer spending. So much of small business revenue is driven by consumer spending. Big businesses aren't buying from small businesses. Governments aren't buying from small businesses either.
So sentiment is definitely it sentiment and the labor market on the consumer side on the small business side I think there's two primary drivers again small business sentiment and there's a couple of good surveys out there.
But doesn't that also consumer spending so much of small business revenue is driven by consumer consumer spending big businesses are buying from small businesses governments are buying from small businesses. It's a largely consumer so if the consumers is continues to spend which they occur.
David Fisher: It's largely consumers. So if the consumer continues to spend, which they clearly have been throughout, you know, the last year, despite all the warnings, to the contrary, small businesses tend to do well. And I think the longer that continues, and the less likely a recession is, the more confident small businesses become. And I think that, in large part, explains our strong Q4 volume and our strong start to 2024 on the SMB side. Yep. Again, if you have a question, please press star then 1. The next question is from John Rowan with Janney. Please go ahead. Good evening, guys. I'm going to apologize if someone else asked this before.
Clearly have been throughout the last year. Despite all the warnings to the contrary are.
Small businesses tend to do well and I think that the longer that's continued in the less likely a recession is more confident small businesses have become.
That in large part explains our strong Q4 volume and our strong start to 2020 2024 on the SMB side.
Great. Thank you.
Yep.
Again, if you have a question. Please press Star then one the next question is from John Rowan with Janney. Please go ahead.
Good evening, guys I apologize if someone else asked this my phone cut out and had a rejoined the call.
John Rowan: My phone cut out, and I had to rejoin the call. But as far as we came through a rate-height cycle without, you know, material, you know, impairments to the fair value of the loans, obviously, the discount rate going up was offset by, you know, improved lifetime loss assumptions. Going forward, you know, if the consumer holds up and we don't see, you know, you know, deterioration in the loss assumptions, do the fair value marks just go up, as you know, rates come down, and that discount rate gets reduced? Yeah, hi, John.
But as far as the you know we we came through a rate hike cycle without you know material you know impairments to the fair value of the loans. Obviously, you know the discount rate going up was offset by you know improve.
Improved you know a lifetime loss assumptions going forward you know if the consumer holds up and we don't see you know no deterioration in the loss assumptions does the fair value marks. They just go up as you know rates come down and that discount rate gets reduced.
Yeah, Hi, John So we we made a big up adjustment in our discount rates back in the third quarter of 2022.
And you're right, we do look at market rates, particularly short market rates and credit spreads are probably as equal or more important with our portfolio in terms of where we land but discount rates.
Steven Cunningham: So we made a big adjustment in our discount rates back in the third quarter of 2022. And you're right, we do look at market rates, particularly short market rates, and credit spreads are probably as equal or more important with our portfolio in terms of where we land with discount rates. We nudged those down just a touch this quarter, but keep in mind that fair values are a bit less sensitive to the discount rate than they are for credit. Just as an example.
We nudge those down just a touch this quarter, but keep in mind. The fair values are a bit less sensitive for discount rate than they are for credit just for an example.
100 basis points on the discount rate is only going to be about 70 basis points of fair value. So.
Not at not quite as sensitive, but overall as rates continue to come down which would imply a good you know a good opportunity for the economy spreads tend to come in as well there would be an opportunity to continue to bring down discount rates and the fair value marks.
Steven Cunningham: A hundred basis points on a discount rate is only going to be about 70 basis points of fair value. Not quite as sensitive, but overall, as rates continue to come down, which would imply a good opportunity for the economy, and spreads tend to come in as well, there would be an opportunity to continue to bring down discount rates in the fair value market. Okay, and then just the charge-off rate in the consumer portfolio is like 17 point something percent, obviously higher than it was last year. The financial supplement doesn't really cover the pre-COVID years.
Okay, and then just the the term it's hard to offer it in the consumer portfolio, it's like 17 point something percent.
Obviously higher than it was last year or the financial supplement doesn't really have the the pre COVID-19 years I can certainly go back and look at them on your website, but can you remind us how that charge off compares to pre COVID-19.
Kind of similar maybe maybe a touch below but that pattern and we talked about just a moment ago in terms of the seasonality of consumer through the year you can see earlier this year a trough at around 13.
Steven Cunningham: I could certainly go back and look at them on your website. But can you remind us how that charge off compares to pre-COVID? Kind of similar, maybe maybe a touch below, but that pattern that we talked about just a moment ago, in terms of the seasonality of consumer through the year, you can see earlier this year, trough, at around 13, it can move three to four percentage points as you move through the year, as you're moving through those different growth rates through seasonality, and we think we're back to that, but the rates that we're at today are comparable to maybe just slightly a little bit better than where we were pre-COVID.
It can move three to four percentage points as you move through the year as you're moving to different growth rates through seasonality and we think we're back to that but the rates that we're at today are comparable to maybe even slightly a little bit better than where we were pre COVID-19. Okay. Alright. Thank you very much.
The next question is from Alexandra Villa Lobos with Jefferies. Please go ahead.
Thank you a few of the questions were already answered with a fair value marks and consumer confidence, but did want to get a little more detail on the originations mix for the quarter are new versus kind of like recurring customers. Thank you.
Steven Cunningham: Okay. All right. Thank you very much. The next question is from Alexander Villalobos with Jeffreys, please go ahead. Thank you. A few of the questions were already answered with Fair Value Marks and consumer confidence, but I did want to get a little more detail on the originations mix for the quarter, new versus kind of like recurring customers. Thank you. Sure, well, we don't talk about that metric as much as we used to, but it's been very stable now for some time, and for the most part, it's right around 40% new and has been for some time across the portfolio.
Yeah.
Sure well, we don't we don't talk about that metric as much as we used to but it's been very stable now for some time and for the most part it's right around 40% new and it has been for some time across the portfolio.
Okay perfect. Thank you so much congrats on the quarter.
You bet. Thanks.
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 our call today, we certainly appreciate your time and 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.
David Fisher: Okay, perfect. Thank you so much. Congratulations on the quarter. You bet, thanks.
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David Fisher: This concludes our question and answer session. I would like to turn the conference back over to David Fisher for any closing remarks. Thank you everyone for joining our call today. We certainly appreciate your time, and we look forward to speaking with you again next quarter. Have a good evening. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. BF-WATCH TV 2021, The Bulletproof Executive, 2013 BF-WATCH TV 2021, [inaudible]
Yeah.
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