Enova International, Inc. Q2 FY2024 Earnings Call

Good day and welcome to the Enova International Second Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Ms. Lindsay Savarese, Investor Relations for Enova. Please go ahead, ma'am.

Thank you, operator, and good afternoon, everyone. Enova released results for the second quarter 2024 ended June 30, 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 report on Form 10-K, quarterly report on Form 10-Q, and current reports on Form 8-K. Please note that any forward-looking statements that are made on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. In addition to US 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.

Thanks, and good afternoon, everyone. I appreciate you joining our call today. I'll begin with an overview of our second quarter results, and then I'll discuss our strategy going forward. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. We are pleased to have produced another strong quarter of financial results, driven by the strength of our talented team, our world-class machine learning analytics, our flexible online-only business model, diversified product offerings, and solid balance sheet. We believe we are in a strong position heading into the back half of 2024, with considerable momentum in a conducive macro-economic environment and stable credit across our entire product range. In Q2, originations increased 27% year-over-year and 2% sequentially to $1.4 billion. Strong demand across both the small business and consumer sides of our business, combined with continued solid credit performance, enabled us to be moderately more aggressive with originations and generate strong year-over-year growth. As a result of the strong originations growth, our combined loan and finance receivables increased 25% year-over-year to a record $3.6 billion. Small business products represented 64% of the total portfolio and consumer was 36%. The growth in receivables led to a 26% year-over-year increase and a 3% sequential increase in revenue to $628 million. As a result of strong revenue growth, combined with skillful credit management and cost efficiency, adjusted EBITDA in Q2 increased 29% year-over-year and 9% sequentially to $163 million and adjusted EPS increased 28% year-over-year and 16% sequentially to $2.21. SMB revenue increased 32% year-over-year and 6% sequentially to a record $252 million, while our consumer revenue increased 22% year-over-year and 1% sequentially to $368 million. Our growth continues to be driven by our diversified product offering and efficient marketing. In Q2, marketing was 19% of our total revenue, in line with our expectations for the quarter and flat to Q2 of last year. As I mentioned, credit quality across our entire portfolio remained solid. Total company net charge-offs as a percentage of average combined loan and finance receivables was 7.7% in Q2 compared to 8.5% last quarter, which remains well below pre-pandemic levels. Before closing, I'd like to take a few moments to discuss our strategy and outlook. We're encouraged by the strong start to the first half of the year. Recently, there's been significant talk from both pundits and our competitors about an uncertain macro environment, but our Q2 performance as well as internal and external data confirmed that both our SMB and consumer customers remain on solid footing as our customers continue to benefit from job growth, low unemployment rates, easing inflation, and rising real wages. As we've discussed previously, demand and credit in our consumer business are driven largely by jobs and wage growth. The job market continues to be strong with rising wages and historically low levels of unemployment. We've been running profitably for over 20 years during many fluctuations in the job market. This has included periods in which the unemployment rate has been more than triple where it is today. It's also important to highlight that we are underwriting to customers who are underserved by the mainstream financial institutions. And when you hear the large banks commenting on what they're seeing in their customer bases, it is frequently not applicable to ours. For small businesses, the two main drivers of growth are business owners' confidence in the economy and consumer spending. Small businesses continued to show resilience with our outlook remaining positive as they successfully navigate challenges related to inflation and managing cash flow. In conjunction with Ocrolus, we recently released the second iteration of our small business cash flow trend report. This offers key insights into small business cash flow trends, inflation challenges, and growth opportunities. Our research shows that small businesses feel increasingly optimistic about future growth as expenses decrease. Further, external data points show optimism as well. In June, we saw US small business confidence increase to a six-month high according to the National Federation of Independent Businesses. As I mentioned, our confidence in the conducive economic environment isn't just theoretical. You can see it in our Q2 results with originations, receivables, revenue, EBITDA, and EPS, all up 25% or more year-over-year. While we feel good about the current environment, we believe one of the key reasons we've been able to generate strong results over the years in a variety of economic environments and why we've been able to take market share in the non-prime lending landscape is due to our deep experience and expertise, our diversified portfolio, and our sophisticated and disciplined approach to managing risk. We are very disciplined when it comes to our unit economics approach to decision-making. Further, the short duration of our portfolio and nimbleness of our model allows for more controlled outcomes relative to others. These capabilities have enabled us to meaningfully and profitably expand our business and as a result, support both small businesses and consumers with their capital needs by offering them safe, transparent, and appropriate lending solutions. We also benefit from diversification within our SMB and consumer businesses. Our SMB businesses operate in all 50 states across 900-plus industries, and our portfolio is diversified within those industries and states without significant concentration. On the consumer side, we have a wide breadth of products and segments that service non-prime and subprime consumers. To wrap up, we continue to believe there's significant upside to our valuation, given our consistent and strong results, solid balance sheet, and business fundamentals. We remain committed to returning capital to our shareholders while still maintaining significant liquidity to generate attractive growth. We ended Q2 with nearly $900 million of total liquidity. This gives us the flexibility to continue to deliver on this commitment to drive long-term value for our shareholders. As we've stated previously, we will continue to explore avenues to unlock shareholder value, but our near-term focus is to do so through opportunistic stock buybacks. Overall, we are pleased to have delivered another strong quarter, and we believe that we are well positioned to deliver sustainable and profitable long-term growth. We are confident that we have the right strategy, products, proven machine learning and credit risk management capabilities, and a strong balance sheet in place to build on our success in 2024 and into 2025. While both our internal and external data show positive signs, we are mindful that the macro-economic environment can change. We remain balanced in our approach to generating growth and managing risk and believe this will allow us to successfully navigate any such changes. 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 happy to answer any questions you may have.

Thank you, David, and good afternoon, everyone. We're pleased to report another quarter of strong growth and top- and bottom-line financial results that were in line with or better than our expectations. A constructive operating environment has resulted in solid demand, stable credit, and cost-effective access to capital, while our diversified product offerings, scalable operating model, and world-class risk management capabilities continue to enable our consistent and differentiated financial performance. Turning to our second quarter results, total company revenue of $628 million increased 26% from the second quarter of 2023 as total combined loan and finance receivables balances on an amortized basis increased 25% from the end of the second quarter of last year to $3.6 billion at June 30. Total company originations during the second quarter rose 27% from the second quarter of 2023 to just over $1.4 billion. Revenue from small business lending increased 32% from the second quarter of 2023 to $252 million. Small business receivables on an amortized basis ended the quarter at $2.3 billion, which is 28% higher than the end of the second quarter of last year. Small business originations rose 29% year-over-year to $918 million. Revenue from our consumer businesses increased 22% from the second quarter of 2023 to $368 million as consumer receivables on an amortized basis ended the quarter at $1.3 billion or 20% higher than the end of the second quarter of 2023. Originations grew from the second quarter of 2023 to $491 million. For the third quarter, we expect total company revenue to increase more than 5% sequentially, resulting in year-over-year growth in expected third quarter consolidated revenue in excess of 20%. The expectation will depend upon the level of 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. The consolidated net revenue margin of 59% for the second quarter was in line with our expectations and reflects our strong credit trends. Credit in the second quarter reflected our typical consumer seasonality as did the total company's ratio of net charge-offs as a percentage of average combined loan and finance receivables decreased sequentially to 7.7% from 8.5% last quarter and was flat compared to a year ago. Additionally, the second quarter net charge operations for both small business and consumer were flat compared to the second quarter of 2023. As a reminder, 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 continue to expect credit losses for our consumer portfolio to generally follow the seasonal pattern during 2024, but it will depend upon the timing and level of consumer originations throughout the year. Expectations for future credit performance remain stable as the consolidated ratio of receivables that were past due 30 days or more at the end of the quarter declined both sequentially and compared to the year-ago quarter. 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. Looking ahead, we expect the total company net revenue margin for the second quarter of 2024 to remain in the upper 50% range. This expectation will depend on portfolio payment performance and the timing and mix of originations growth during the third quarter. Now turning to expenses. We continue to see the benefits of our efficient marketing activities, the leverage inherent in our online-only model, and thoughtful expense management as total operating expenses for the second quarter, including marketing, were 34% of revenue compared to 36% of revenue in the second quarter of 2023. Second quarter marketing spend remained efficient and was within our expected range. Marketing costs increased to $121 million, or 19% of revenue compared to $96 million or 19% of revenue in the second quarter of 2023. We expect marketing expenses will be around 20% of revenue for the third quarter but will depend on the growth and mix of originations. Operations and technology expenses for the second quarter increased to $55 million or 9% of revenue compared to $47 million or 9% of revenue in the second 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 cost could be expected in an environment where originations and receivables are growing. It should remain 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 second quarter increased to $40 million or 6% of revenue from $36 million or 7% of revenue in the second quarter of 2023. While there may be slight variations from quarter to quarter, we expect G&A expenses in the near term will be around 6% of total revenue. Our balance sheet and liquidity position remain strong and gives us the financial flexibility to successfully navigate a range of operating environments while delivering on our commitment to drive long-term shareholder value through both continued investments in our business and share repurchases. We ended the second quarter with $891 million of liquidity, including $280 million of cash and marketable securities, and $611 million of available capacity on debt facilities. Our stable financial and credit performance have allowed us to consistently access funding from a diversified group of lenders and fixed income investors. During the second quarter, we completed three financing transactions totaling just over $1 billion with efficient and cost-effective terms, including a consumer term securitization, a small business term securitization, and the renewal of a warehouse secured by small business receivables. In addition, during the second quarter, we acquired more than 1 million shares at a cost of $62 million. And we started the third quarter with share repurchase capacity of approximately $30 million under our senior note covenants. Our cost of funds for the second quarter was steady at 9.3%, or roughly 120 basis points higher than the second quarter of 2023, primarily due to higher short-term interest rates. While there may be some quarter-to-quarter variations in the near term, we continue to expect interest expense as a percentage of revenue for the full year 2024 to remain in the 10.5% to 11% range. That being said, the impact of lower market rates in the future could create longer-term tailwinds for Enova's profitability. Finally, we continued to deliver solid profitability this quarter as our non-GAAP measures of adjusted EBITDA and adjusted EPS both increased 29% from the second quarter of 2023 to $163 million and $2.21 per diluted share, respectively. To wrap up, let me summarize our near-term expectations. For the third quarter, we expect consolidated revenue to increase more than 5% sequentially, with a net revenue margin in the upper 50% range. Additionally, we expect marketing, O&T, and G&A expenses to be around 20%, 9%, and 6% of revenue, respectively. These expectations should result in sequential growth in adjusted EPS of more than 5%. For the fourth quarter of 2024, we would expect revenue to increase around 20% compared to the fourth quarter of 2023. With stable credit and continued operating leverage, adjusted EPS for the fourth quarter of 2024 should increase between 20% and 25% compared to the fourth quarter of 2023. Our expectations for the remainder of this year will depend upon the macroeconomic environment and the resulting impact on demand, customer payment rates, and the level of timing and mix of originations growth. In closing, we remain optimistic that the macroeconomic environment will remain constructive. In any event, we're confident in our ability to generate meaningful financial results this year and beyond as we leverage our diversified product offerings, world-class machine learning risk management algorithms, and nimble online-only model to continue to meet customer needs while creating significant value for our shareholders. In addition, our solid balance sheet enables our ability to efficiently fund our growth while also supporting our ability to return significant capital to shareholders through share repurchases. And with that, we'd be happy to take your questions.

The first question will come from Moshe Orenbuch with TD Cowen.

Great. Thanks. Congratulations on the impressive numbers, especially in loan origination and growth. Steve or David, could you discuss the competitive landscape in your key business areas and share any additional insights on the strong credit performance that contribute to your positive growth outlook?

Yes, thank you for the question. I believe that competitively, not much has changed. There haven't been any new competitors entering the market, and we haven't observed our rivals becoming significantly more aggressive. There are always fluctuations, but no clear trends have emerged. As I mentioned earlier, in recent quarters, we've noted some uncertainty from other players in the industry, which may be inhibiting their progress. In contrast, we are experiencing the opposite situation. Regarding credit, we have been performing very well, and we believe our customers are in a strong position. Job growth remains steady, wages are increasing, and inflation is decreasing. Enova offers significant advantages for both consumers and small businesses. As a result, we have managed to achieve substantial growth, around 25% over the past year, without being overly aggressive. While we are embracing growth and don't shy away from it, we are not adopting an aggressive approach.

Thanks. And maybe as a follow-up, Steve, you mentioned that the fair value marks were basically flat. I guess they were a little better on the small business side and a little lower on the consumer side. Is there anything to kind of learn from that? Like are there differences in the products or differences in the way you're doing that and how we should kind of think about that also going forward?

No, I think the main point is that our product characteristics have remained stable. The mix has slightly shifted towards line of credit, but there hasn't been a significant change from one quarter to another. The stability in the fair value marks indicates that we anticipate the discounted risk-adjusted cash flows from the portfolio, which are primarily influenced by credit, to remain very stable.

The next question will come from David Scharf with Citizens JMP.

Hi, good afternoon. Thanks for taking my questions. I guess couple of things. One question for you, Steve, on the funding side, since you were in the market last quarter with, I guess, three different transactions for both consumer and SMB. Irrespective of the timing of Fed cuts, can you talk a little bit about just some of the qualitative feedback in spreads, just the price talk. I'm kind of curious if some of your fixed income investors are kind of sharing your more constructive outlook on your consumer or if spreads are reflecting maybe their broader outlook listening to some other lenders as well?

Yeah. I mean, I think there are a couple of things you can look at with our deals, especially the two term deals that we completed. We did both an SMB, small business, and a consumer, both of those trades compared to a year ago were nearly 100 basis points better with benchmarks that were pretty much the same. And so that gives you a little bit of an indication of maybe feeling better about the future. But I would also say if you just take a look at the high yield indexes for the unsecured, you can look at our unsecured bonds, even our 2028 notes that we issued late last year trading well above par, indicating some spread compression relative to benchmark. So it feels like the market is constructive, and that's I think, largely based on the outlook that the market is starting to see as it relates to potential rate paths and the impact on the economy and comfort with investing in the fixed income market.

Got it. Great news. Staying on the funding discussion, do you have any updates on the timing for refinancing the 2025 notes? Is there any visibility into the restricted payments covenant and whether you may be able to buy back a higher percentage of net income for buybacks compared to the current covenants?

Yeah, I mean, I think, like I mentioned last quarter, we will continue to be opportunistic if those 2025 notes approach the 12 months mark and it's by going current in September. But I think the current levels, even with improved spreads are a touch ahead of the coupon that we have on those bonds. So, if we're going to refi them early, we want to make sure we're making a good economic trade-off between additional interest expense and as you mentioned the covenant package that we might get. I think the 2028 notes that we issued late last year, I think that covenant package was more reflective of the company that we are today. And I would expect that any new issues would largely reflect that same covenant package, at least where we sit today. So in that case, I would think we would have at least the flexibility to do a higher return of our earnings each quarter so long as we're meeting the restrictions and the covenants under those indentures.

Understood. And then just one last question to clarify on the guidance. It cut out a little. It looks like the full year revenue growth outlook was taken up a bit. I believe it had been sort of high teens. now it's 20% give or take. Is there any change to the origination outlook? I think the last commentary was 15% or more growth on volumes. Is that still what you're expecting or is that taken up as well?

Yeah, last quarter I mentioned a growth in originations of at least 15% for the full year of 2024 compared to 2023. While I didn't specify it, I believe it's likely to be slightly higher, probably increasing to between 15% and 20%. As you pointed out, you can derive full-year revenue and adjusted earnings per share based on the guidance provided for the third and fourth quarters. Both revenue and adjusted EPS are expected to grow at a faster pace than originations, which we anticipate will be a bit higher than what we projected last quarter.

The next question will come from John Hecht with Jefferies.

Afternoon, guys. Congratulations on another good quarter and thanks for taking my questions. Just wondering about your repayment rates on different product lines. It looks pretty stable. But I'm wondering, are you seeing like some of the credit card companies are seeing slower revolving payment rates or are you seeing anything with respect to trends and penny raisers have been as stable as the consolidated numbers look?

It's been very stable, and I think given kind of what's going on in the macroeconomic environment, we're not seeing anything that would have us expect that to change meaningfully again. And people have the ability to pay us back. But there's not big excess amounts of cash coming into the economy right now that our people will be prepaying earlier. So it's been very steady.

How should we consider the recent changes in small business lending that were mentioned last quarter? The yields, payer rates, and credit have shown more stability. Should we anticipate any shifts in the mix that might impact these metrics? That's really the question.

Yeah. So I think you should continue to expect that. I think if you look at the earnings supplement that we release and look at the annualized yield on the small business portfolio, you can see that what I mentioned last quarter, kind of that slow grind higher as we focus on those opportunities. In credit, it's held in fairly steady quarter over quarter. But we still think as we talked about last quarter, you should expect to see yields up a touch and the net charge-off rates on a quarterly basis, and SMB at around five, and we're sitting in the upper fours right now. So I think that the guidance still holds true as you look out.

Okay, thanks. And then last question, Steve, because I'm always curious, is maybe an update on Brazil or any other kind of newer expansionary projects you're working on.

Yeah, sure. We gave a bit of an update on Brazil last quarter. We hadn't talked about it much in the last couple of years just because there wasn't a lot of updates. As we said, that business is looking really good growing at 100% or so a year. Still small, though. So don't expect updates for us every quarter. But when they hit milestones over time, you know, I'm sure at least once a year, we'll give additional updates on that and more if something particularly interesting happens.

The next question will come from John Rowan with Janney.

Good afternoon, guys. One quick for me. I've always asked about competition and whether or not things like a Lacey role with the credit card, could impact demand for your product. But now the CFPB is also out with the interpretive rule on earned wage access products. And I just, you know, when you look at the two of them together, how do you think that that's going to impact demand for your products going forward?

Yeah, sure. It's really difficult to predict how much trading there will be from those products to ours and how those businesses are going to react. Certainly, on the earned wage access, it's going to be a long time before that's final and is impacting those businesses. But if you look at it from a high level, it can only be helpful, right? And the magnitude is harder for us to determine right now. It's certainly too early in both of them to say, but certainly beneficial to us in the long run.

The next question will come from Vincent Caintic with BTIG.

Hey, good afternoon and thanks for taking my question. First one, macro question. So David, I appreciate your comments you were making about how there might be macro concerns that are being expressed industry-wide, but that Enova is doing really well. I'm just curious, as you're hearing some of these other lenders who are maybe expressing concern and pulling back, the customers that you are seeing and the origination strength, are you seeing like a different cohort of customers than you're typically used to? So perhaps more better-quality credit or anything like that in small business or consumer. I'm just wondering if maybe the macro concerns and the tightening that's resulting from that might be benefiting you or it might be benefiting from that. Thank you.

It's a really good question. On the consumer side, our products and marketing are focused on attracting high-quality customers. This focus is reflected in our default numbers, which we are optimizing over time. We aim for charge-offs to be at an optimal level to help us meet our return on equity targets, rather than striving for zero charge-offs. While it can be challenging to see the impact daily, we are confident that our default numbers are stable and that we’re successfully meeting our charge-off targets, contributing to strong growth. On the small business side, we've been observing a noticeable change since the spring when banks began reducing their lending, which has also affected nonbank lenders. Our product design and varying pricing tiers make it easier to see this impact. We continue to serve lower-quality borrowers effectively, but we are also attracting more high-quality borrowers and customers in the small business sector.

Okay, that's very helpful. Thank you. Steve, I have a question about interest rates. With the increasing confidence that the Fed may lower rates soon, could you discuss how the business is sensitive to declining interest rates, the advantages of this, the impact on interest expenses, and the implications for fair value marks? Thank you.

We have not changed our outlook for interest rates. As mentioned last quarter, we anticipate one rate cut by the Fed later this year, and we are maintaining that outlook. Additional rate cuts would be beneficial, likely more so next year, as about 50% of our liabilities are floating rate. A decrease in short-term rates would provide some advantages, especially as we approach 2025, since we conduct all our funding in the securitization markets and in our warehouses for terms of three years or less. However, we are not expecting aggressive rate changes for the remainder of this year. Regarding fair value marks, due to the duration of our portfolio, they are not very sensitive to changes in discount rates. For instance, a 100-basis point change in the discount rate would result in approximately a 70-basis point change in the fair value mark, so it would require significant movement to alter our current position.

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

Thanks, everyone, for joining our call today. We 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.