Enova International Inc

NYSE:ENVA

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and welcome to the Enova International First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note, this event is recorded.

I would now like to turn the conference over to Lindsay Savarese. Please go ahead.

[Lindsay Savarese, executive]

Thank you, operator, and good afternoon. Enova released results for the first quarter 2024 ended March 31, 2024, 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.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 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 on Form 10-K, quarterly reports on Form 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. 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.

[David Fisher, executive]

Thanks, and good afternoon, everyone. I appreciate you joining our call today. I'll begin with an overview of our first quarter results, and then I'll discuss our strategy going forward. After that, I'll turn the call over to Steve Cunningham, our CFO, to discuss our financial results and outlook in more detail.

This year marks 20 years since Enova was founded and 10 years as a public company. We work hard to reap the benefits of that experience. And during the first quarter, our [ talented ] team continue to execute incredibly well, combining our diverse product offering to world-class machine learning analytics and technology to deliver another quarter of consistent and profitable growth.

Originations were seasonally strong, down only 3% sequentially and up 30% compared to Q1 of last year. Revenues fared well also increasing 26% year-over-year and 5% sequentially to $610 million. As you may recall, first quarter seasonality, particularly in our consumer business, typically results in sequential origination and revenue decline in the fourth quarter, driven by tax [ result ]. This year, consumer seasonality tempered by a [ SMB ] originations, which grew 4% sequentially. And as a result, we generated $1.4 billion in originations during the quarter out of 10 consecutive quarters of over $1 billion in originations.

Even with our 20 years in business, we've been able to consistently generate strong growth while at the same time successfully managing credit risk. As a result of strong revenue growth, prudent credit management and cost efficiency in Q1, adjusted EBITDA increased 18% year-over-year and 15% sequentially to $149 million while adjusted EPS rose a bit more modestly due to higher interest expense, resulting primarily from higher Fed funds rate, increasing 7% year-over-year, 4% sequentially to $1.91.

Similar to the last several quarters, our diversified portfolio and efficient marketing continues to drive our growth. Our combined loans and finance receivables increased 23% year-over-year to a record $3.5 billion. Small business products represented 65% of this total portfolio and consumer, 35%. Marketing was 18% of our total revenue compared to 17% in Q1 of last year, well within our target range. SMB revenue increased 22% year-over-year and 12% sequentially to a record $236 million while consumer revenue increased 30% year-over-year sequentially, reflecting typical first quarter seasonality.

Outside of our core products, we continue to generate strong growth in Brazil where first quarter originations decreased 29% sequentially and 83% year-over-year on a constant currency basis. While this continues to be a small part of Enova, we are excited about the opportunities to continue to grow [ this over ].

As I mentioned, credit quality across our portfolio remains solid. Total company net charge-offs as a percentage of average combined loan and finance receivables were 8.5% in Q1 compared to 9.7% last quarter. Notably, net charge-offs remained well below pre-COVID levels of 15.12% in Q1 of 2019 and 13.9% in Q1 of 2018 due to a combination of mix shift and good credit management.

Before closing, I'd like to take a few moments to discuss our strategy and outlook for the remainder of 2024. We're encouraged by the strong start to the year and continued good credit across our portfolio. Both our SMB and consumer customers remain on solid footing, and we're confident in our ability to further drive profitable growth. We believe our diversified portfolio puts us in a unique competitive position to take market share in the non-prime lending landscape. Our SMB business went across a wide range of industries, providing good diversification across the macroeconomic environment. And we have both consumer line of credit and installment products that stay in the subprime and near-prime consumer segment.

As you've heard from us before, we're very disciplined when it comes to our unit economics approach to decision across both SMB and consumer businesses. This capability has enabled us to meaningfully and profitably expand businesses, potentially support both small businesses and consumers with their capital needs by offering them safe, transparent and appropriate leading solutions. Looking forward, we believe the current macroeconomic environment will yield consistent demand for our product's solid credit performance.

In our consumer business, demand and credit are driven in large part by jobs and wage group. As you know, the job market has been very strong for the last couple of years, which shows a little signs of slowing. And wage growth has been solid as well. While inflation does have an impact, it's a much smaller factor for our customers, and they're navigating persistent inflation well.

I know this may be a surprise to some given all the focus on inflation over the last several years. When inflation impacts our customers' income by a couple of percentage points at most, while loss of a job is 100% of the -- in addition, high employment rates increased our addressable market as we only went to individuals with a group. From here, as we've said many times before, in some ways, our consumer customers are always in a recession. They are experiencing living paycheck to paycheck, [ in participating ] and managed variability in their finances.

As a result, the recessions tend to have a less of an impact to the non-prime customers [indiscernible] on the SMB side, the 2 main drivers of our confidence in the economy and consumer spending. Our small businesses are concerned about inflation. Strong consumer spending and the ability to increase prices are offsetting that, and we are seeing stable performance in that portfolio. While both internal and external data show encouraging signs. We are mindful of the uncertainty that remains in the macro economy, and we will continue to prudently manage our business. Driven by our intense focus on unit economics, we've demonstrated our ability to quickly adapt to changes in the economy and to consistently produce differentiated results.

Given the stability, our company's solid fundamentals and our track record of strong profitability, we continue to believe our shares are undervalued. And Steve will discuss in more detail, our balance sheet and liquidity position remains strong, which gives us the financial flexibility to deliver our commitment to drive long-term shareholder value.

In Q1, we were more aggressive with our share buyback than in prior quarters, which led to total shares repurchase of $139 million. This equates to 62% of the $300 million share repurchase program that we just launched in late October. Looking ahead, our belief that our stock remains undervalued. We are committed to returning additional capital to our shareholders while still maintaining significant liquidity to generate attractive growth. We will also continue to explore additional avenues to unlock shareholders value but our near-term focus is to do so through opportunistic [indiscernible].

Overall, we are pleased to have started the year with a strong first quarter, demonstrated by our solid growth. We remain focused on further unlocking shareholder value and we believe that our strong balance sheet and solid liquidity position gives us the flexibility to continue to return capital to our shareholders going forward while maintaining significant liquidity to generate attractive growth. And we're confident that our focused approach to balance growth, along with our talented team, world class machine learning technology and analytics and strong balance sheet will drive profitable growth in 2024 and beyond.

With that, I would 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 able to answer any questions you may have. Steve?

[Steven Cunningham, executive]

Thank you, David, and good afternoon, everyone. We're pleased with our start to 2024 as strong growth in originations, receivables and revenue, along with solid credit and operating efficiency, drove another quarter of better-than-expected financial results. During the quarter, we also executed the largest quarterly return of capital through share repurchases in our company's history as our balance sheet flexibility continues to support the creation of long-term shareholder value from both portfolio growth and significant capital returns.

Turning to our first quarter results. Total company revenue of $610 million increased 26% from the first quarter of 2023 as total company combined loan and finance receivables balances on an amortized basis increased 23% from the end of the first quarter of last year to a record $3.5 billion at March 31. Total company originations during the first quarter rose 30% from the first quarter of 2023 to $1.4 billion. Small business revenue increased 20% from the first quarter of 2023 to $236 million as small business receivables on an amortized basis ended the quarter at $2.2 billion or 23% higher than the end of the first quarter of last year. Small business originations rose 25% year-over-year to $960 million.

Revenue from our consumer businesses increased 30% from the first quarter of 2023 to $365 million as consumer receivables on an amortized basis ended the first quarter at $0.2 billion or 23% higher than the end of the first quarter of 2023. Consumer originations grew 43% from the first quarter of 2023 to $417 million. For the second quarter, we expect total company revenue to increase slightly sequentially, resulting in year-over-year growth in consolidated revenue in excess of 20%. This expectation will depend upon the level, timing and mix of originations during the quarter.

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 57% for the first quarter, which was slightly higher than our expectations. In addition, the consolidated consumer and small business fair value premiums were generally unchanged from last quarter, reflecting a stable outlook for future credit performance. Continued solid outlook for future credit is also reflected in the sequentially stable consolidated ratio receivables past due 30 days or more at the end of the first quarter.

As is typical for the first quarter due to consumer seasonality, the total company ratio of net charge-offs, as a percentage of average combined loan and finance receivables, decreased sequentially to 8.5% from 9.7% last quarter. The consumer portfolio net charge-off ratio declined to 14.9% for the first quarter compared to 17.3% last quarter and 15.2% in the first quarter of 2023.

As David noted, consumer credit losses typically follow the sequential pattern of portfolio growth through the year, peaking in the fourth quarter and reaching their lowest point during the second quarter. We expect credit losses for our consumer portfolio to generally follow the seasonal pattern during 2024. But it will depend upon the timing and the level of consumer originations throughout the year. The net charge-off ratio for our small business portfolio declined to 4.7% from 4.8% last quarter and was in line with our expected quarterly range of 4% to 5%.

As we've discussed in the past, we make many changes each quarter across our businesses to optimize originations, credit performance and unit economics. In our SMB business, we've identified opportunities that we believe will support continued strong growth and strong unit economics. As we execute on these opportunities, we expect the SMB revenue yield to continue to move higher in the near term and the quarterly small business net charge-off ratio will likely remain around 5%. Looking ahead, we expect the total company net revenue margin for the second quarter of 2024 to be in the upper 50% range. This expectation will depend upon portfolio payment performance, and the level timing and mix of originations growth during the second quarter.

Now turning to expenses. First quarter operating costs were driven by efficient marketing activities and continued leverage inherent in our online-only model and thoughtful expense management. Total operating expenses for the first quarter, including marketing, were $205 million or 34% of revenue compared to $166 million or 34% of revenue in the first quarter of 2023. First quarter marketing spend remained efficient and was within our expected range. Marketing costs increased to $111 million or 18% of revenue compared to $80 million or 17% of revenue in the first quarter of 2023.

We expect marketing expenses to be around 20% of revenue for the second quarter but will depend upon the growth and mix of originations. Operations and technology expenses for the first quarter increased to $54 million or 9% of revenue compared to $49 million or 10% of revenue in the first quarter of 2023 driven by growth in receivables and originations over the past year.

Given the significant variable component of this expense category, 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 first quarter increased to $40 million or 7% of revenue from $37 million or 8% of revenue in the first quarter of 2023.

While there may be slight variations from quarter-to-quarter, we expect G&A expenses in the near term will range between 6% and 7% of total revenue. Our balance sheet and liquidity position remains 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 both continued investments in our business and share repurchases.

We ended the first quarter with $738 million of liquidity, including $232 million of cash and marketable securities, $506 million of available capacity on facilities. During the first quarter, we acquired approximately 2.4 million shares at a cost of $139 million. And we started the second quarter, we share repurchase capacity of approximately $65 million available under our senior note covenants. We expect to utilize most of that capacity during the second quarter, but the timing and amount will depend upon market and trading conditions.

As expected, our cost of funds for the first quarter was 9.2% or approximately 140 basis points higher than the first quarter of 2023, primarily due to increases in SOFR and funding mix changes over the past year. We currently expect market interest rates to remain higher for longer this year and as a result, interest expense as a percentage of revenue will likely remain in the upper half of our expected range of 10% to 11% during 2024. That being said, the impact of lower market rates in the future should create longer-term tailwinds for Enova's profitability.

Finally, we continued to deliver solid profitability this quarter as adjusted EBITDA increased 18% from the first quarter of 2023 to $149 million. Adjusted earnings, a non-GAAP measure, were $56 million or $1.91 per diluted share compared to $59 million or $1.79 per diluted share in the first quarter of last year.

To wrap up, let me summarize our near-term expectations. In the second quarter, we expect consolidated revenue growth to increase slightly sequentially with a net revenue margin in the upper 50% range. Additionally, we expect marketing expenses to be around 20% of revenue, but with [ TCO ] of around 9% of revenue, G&A costs between 6% and 7% of revenue, an interest expense as a percentage of revenue between 10.5% and 11%. These expectations should result in a 5% to 10% sequential increase or around a 20% year-over-year increase in adjusted EPS.

For the full year, we expect growth in originations for 2024 compared to the full year of 2023 of at least 15%. We continue to believe the resulting growth in receivables with stable credit and continued operating leverage would result in full year 2024 growth for both revenue and adjusted EPS in the upper teens, or slightly higher than expected origination growth.

Our second quarter and full year 2024 expectations will depend upon the macroeconomic environment and the resulting impact on demand, customer payment rates and the level, timing and mix of originations growth.

In closing, we remain in a strong position to continue to generate meaningful financial results this year and beyond, our diversified product offerings, world-class machine learning risk management algorithms, nimble online-only model and solid balance sheet, continue to differentiate our ability to deliver consistent financial results to return significant capital to shareholders through share repurchases.

And with that, we'd be happy to take your questions. Operator?

[Operator]

[Operator Instructions]. The first question comes from David Scharf of Citizens JMP.

[David Scharf, analyst]

I wanted to start off just with the topic of capital returns, which you noted was a record during the quarter. It seems like regardless of sort of nuances in the macro environment or the mix of consumer versus SMB, the cash flow characteristics of your business model given short duration loans is always going to be very healthy. And just thinking about your comment, David, that you still feel that the stock is undervalued or attractively valued. After you exhaust the remaining $65 million, would you consider, based on kind of your liquidity position, seeking another consent from noteholders because it seems like that excess liquidity is just going to continue to build up.

[Steven Cunningham, executive]

David, thanks for the question. So as you know, with our retirement of our 2024 senior notes and the issuance of the 2028 senior notes. We had slightly better opportunities with some of the covenants around capital returns. And we would expect with that print when we come around to the 2025 senior refinance, which will be focused on here over the next year or so that we'll have an opportunity to align that covenant set with the 2028, which will give us a bit more room to do capital returns based on our earnings than what we have had historically.

[David Scharf, analyst]

Understood. And just mechanically, Steven, since you were buying throughout the quarter, can you give us a sense for what the diluted share count was at the end of the quarter versus the average that shows up on the P&L or even better, if you were to exhaust the $65 million remaining and throw in the 50% net income covenant limit, how we ought to think about what share count looks like at midyear?

[Steven Cunningham, executive]

Yes, I don't have the ending right in front of me, but you should be able to glean something from it. You can get our ending in the press release, which I don't have right in front of me. And then when we file our Q here shortly, you should probably be able to do some math to figure that out.

[David Scharf, analyst]

Okay. Got it. And if I can just squeeze one more in on the credit side. Just trying to get a sense for how much of the improvement from sort of pre-pandemic levels you would characterize is mix related, just a much bigger proponent of SMB versus kind of where the credit box is now in whether there are any expectations that as you perhaps loosen up the consumer credit box over time. Should we expect to return to 2019 levels for losses? Or is this sort of a new benchmark, a lower benchmark going forward?

[David Fisher, executive]

Yes. Good question, David. Look, I think most of it is mix, but it's not just consumer versus SMB mix. It's also mix within the consumer business. So 2018, 2019, we're still doing lots of single-pay lending, which has obviously much higher default in charge-off rates. Now our consumer business is exclusively line of credit and installment products, which has much lower loss rates. So you have that, kind of those 2 different components of the mix shift, which has brought that down significantly.

In terms of our credit box, we were reasonably open right now. We're not wide open for sure, but we're not super tight. I mean the economic environment, as I talked about in my prepared remarks, the economic environment is good for our customers, lots of jobs and good wage growth. And so we don't feel the need to be super conservative. We are probably -- like I said, we're not as aggressive as we could be but we're kind of reasonably aggressive, maybe a 7.5 out of 10 or 8 out of 10 on the aggressiveness scale, which is normal. I mean for us to be like a 5 or below would mean something is wrong.

So we're kind of where we'd like to be. It's kind of our sweet spot kind of in this range. But the only kind of smaller change, not a big one, but smaller changes is what Steve alluded to. So we've had a shift within our SMB business to more higher yielding products we just saw on the higher returns there, better ROEs than at the very low end of kind of the yield spectrum from SMB where we get more competition with the banks. And so we're not totally out of that. We're not out of the lower APR stuff, we've just shifted more towards kind of the middle to upper end of our APR range for the SMB products. And so with those higher APRs come slightly higher default. So you'll see over the next few quarters, just slightly elevated compared to historic levels, default rates in the SMB business and eventually slightly higher net charge-offs as a percentage of AR, but what will come along with that is higher yield and higher revenue. And so the ROEs on those products, those originations are looking really, really good.

[Operator]

[Operator Instructions]. The next question comes from John Hecht with Jefferies.

[John Hecht, analyst]

Congratulations on a good quarter. The first question is the strength in the originations and the kind of balance in the small business category, that kind of buck seasonal trends. Is that something -- should we think about seasonality different for that segment now? Or was this sort of just an outlier quarter where you were able to be more active?

[David Fisher, executive]

Yes. Seasonality is more muted in the SMB space. It exists, but it's much more muted than in the consumer side because the tax returns just have such a big impact on the consumer business. That's much, much more muted than in the SMB space. So it's a nice thing about being a diversified business. The overall company-wide seasonality isn't as strong as it was if we were a pure consumer business, so that works out really well.

Consumer business, as we talked about, is pretty much back to pre-pandemic type seasonality. So we're really happy with the fourth -- for the first quarter, if anything, consumer overperformed a little bit to our expectations. Absolutely no weakness in that business at all in Q1. Just kind of back to those historic kind of seasonality trends.

[John Hecht, analyst]

Okay. And then thinking about like, well, the originations, the composition of new versus recurring customers and then for the new customers, maybe, is the tightening in other parts of the market giving you a different type of characteristic of new customers? Or is it pretty much what you've been seeing over the past few years?

[Steven Cunningham, executive]

Yes. I don't think we've seen a big change in the types of new customers that we've seen and the mix of new customers has been pretty steady. We don't really talk about it as much as we used to, but it's been pretty steady and meaningful for a really long time now. So a really important part of building our franchise.

[John Hecht, analyst]

And then the -- maybe the last question would be, how do you like -- the marketing spend relative to originations is becoming a lot more efficient and I know you guys have been optimizing your kind of the marketing tactics. But maybe can you give us an update on the channels of marketing and where you're finding some of the best efficacy of productivity?

[David Fisher, executive]

Yes. It hasn't changed a ton over the last kind of 4 or 5 years. The main channels for us are what you would expect. We do a significant amount of direct mail, especially in the consumer business. I'm sure you've seen our TV, both on the consumer SMB side, we've gotten heavier and heavier in TV. That's been an area of success for us for sure relative to, say, 5 to 7 years ago. And I think certainly relative to our competitors.

And then digital, I think, has improved for us in ways that we probably wouldn't have guessed a few years ago. And a lot of that growth, I think, is that -- kind of has taken share away from leads. I think the lead has continued to shrink as the share of the total, which is fine. We'd like to control our own destiny. We love our lead partners. We work really well with them. We're some of their biggest clients in the world. And that's great. There's a great proof of partnerships, but we control our own destiny. We like that as well.

I think one of the -- look, I think in terms of the efficiency that we've seen, part of it is just experience and doing more and more of it. We were kind of a leads-only business 8, 9 years ago. And so kind of really hitting the sweet spot in terms of experience and being more multipronged in our marketing. But I think it's also a sign that the competitive environment is not super strong for us right now, which is I know a theme we've been talking about for a while. You've certainly seen many of our competitors stumble over the last 3, 4 years, and we've just continued to execute and been beneficiaries of that.

[Operator]

Next question comes from John Rowan with Janney.

[John Rowan, analyst]

The loan growth in the quarter, was there any benefit in there from the late refund season?

[David Fisher, executive]

It's hard to say, not a ton. I mean, I think it helps -- if you looked at monthly either, it helped January, Feb, March, I think mostly, I don't think there's any big carryover into it that you're going to see in April. Q2 started off fine, kind of right where we would expect it to. So yes, intra-quarter, yes, but for the quarter, is it total? Not much.

[John Rowan, analyst]

Okay. And then I'm trying to square up the guidance for the second quarter. So correct me if I'm wrong, but you said that earnings growth would be, what is it, 5% to 10% sequential earnings growth, correct?

[Steven Cunningham, executive]

Yes, adjusted EPS, 5% to 10% sequential.

[John Rowan, analyst]

Okay. I'm just trying to square that up because the O&T -- the guidance for O&T and G&A seem very much in line with where they came in for this quarter, but the marketing guidance at 20% is higher than the 18% for this quarter. So I guess what I'm trying to ask is, where is -- what's going to drive that 5% to 10%? Obviously, revenue is going to be up slightly but you do have some slightly higher marketing expenses. And the only other variable here to kind of hone in on as to where there's -- that 5% to 10% growth is gross profit. And you said upper 50s. And I'm just trying to maybe narrow that down a little bit to make sure I can get to that operating EPS growth. I mean, are we talking high 50s north of where you were in the first quarter? Or is -- would you consider kind of the first quarter run rate high 50s? I know it's a long-winded question, but I'm just trying to triangulate correctly.

[Steven Cunningham, executive]

Yes, John, thanks for the question. So here's how to think about Q2. So I gave you -- we should see sequential growth, some slight sequential growth in revenue which we don't always see if you go back in time, which again gets back to some of our diversification and the blended portfolio that we have. We're continuing our march up on the net revenue margin, which you should expect to see in Q2 as consumer gets a bit better with more originations and lower losses and SMB is pretty steady. And then I think you typically see outside of the first quarter, we've been around 20% of marketing for -- 20% of revenue marketing for a while. And then as you mentioned, the O&T and G&A guide, we continue to see some scaling there.

So we'll see some EBITDA growth when you do the math on all that, but I also talked a bit about interest expense. So I think you'll see there will be some offset to that growth from interest expense, as I talked about, given that we think rates will be higher for longer. And so I gave a guide more towards the top end of our 10% to 11% interest expense to revenue range. And I think if you kind of take a look at the EBITDA, which you kind of talked about and then take a look at below the line with interest expense, that will get you a bit closer to the sequential adjusted EPS guide that I mentioned.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to David Fisher for any closing remarks.

[David Fisher, executive]

Thanks, everyone, for joining our call today. We really appreciate your time, and we look forward to speaking with you again next quarter. Have a good evening.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.