Enova International, Inc. Q3 FY2024 Earnings Call

Good day, and welcome to the Enova International Third Quarter 2024 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Cassidy Fuller, Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Enova released results for the third quarter of 2024 ended September 30, 2024, this afternoon after the 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 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. 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 third quarter results and then I'll discuss our outlook 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're pleased to have produced another strong quarter with record originations and revenue driven by stable credit and solid growth across the portfolio. Our experienced team, world-class machine-learning algorithms and technology, and diversified product offerings have enabled us to maintain strong performance and swiftly adapt to changing macroeconomic conditions. As a result, we again generated annual growth above 25% in revenue, originations, adjusted EBITDA, and adjusted EPS in the quarter. In Q3, originations increased 28% year-over-year and 15% sequentially to $1.6 billion. Notably, for the first time in our history, we originated over $1 billion in small business loans, up 33% year-over-year and 14% sequentially. While consumer originations increased to a record $569 million, up 19% year-over-year and 16% sequentially. As a result, our combined loan and finance receivables increased 23% year-over-year to a record $3.8 billion. Small business products represented 62% of the portfolio, and consumer was 38%. We generated revenue of $690 million in the quarter, an increase of 25% year-over-year and 10% sequentially. Our profitability metrics grew even faster, capitalizing on our strong operating leverage and diligent credit management and cost efficiency. Adjusted EBITDA increased 42% year-over-year and adjusted EPS increased 63%. Our growth continues to be driven by our diversified portfolio and efficient marketing. SMB revenue increased 38% year-over-year and 7% sequentially to a record $269 million. While our consumer revenue increased 18% year-over-year and 12% sequentially to a record $411 million. Marketing expense was 20% of our total revenue, in line with our expectations and down slightly compared to Q3 of last year. As I mentioned, credit quality remains strong across our entire portfolio and we are encouraged by the solid results we reported this year across the portfolio, combined with the stability and strength we have seen in the performance of our customers. Total company net charge-offs as a percentage of average combined loan and finance receivables decreased to 8.4% in Q3 compared to 9.4% in the third quarter of last year. We've built a long track record of generating strong growth with consistent credit across varying economic conditions. And we believe the current macroeconomic environment is conducive for us to continue generating these results. While commentators continue to offer differing opinions on the health of the macroeconomic environment, our data demonstrates that both our consumer and small business customers are performing well. From a monetary policy perspective, the Fed now seems committed to lowering rates over the next couple of years and, as Steve will discuss, this creates a significant tailwind for further net income and EPS growth. As we've discussed previously, demand in credit in our consumer business is driven largely by jobs and wage growth. The latest jobs report once again demonstrated that the labor market remains strong, driven by the largest monthly increase in employment in 12 months combined with increasing wages. Further, the strength in the labor market is concentrated in the same demographic as our target customers. As you know, we focus on customers who are underserved by mainstream financial institutions that view them as too risky and too difficult to underwrite, while our experience and superior analytics have enabled us to excel in this segment of the market, and we have demonstrated that these customers can be very predictable with higher yields relative to prime customers, providing more margin for fluctuations in credit performance. On the SMB side, as I mentioned, we had a first quarter of over $1 billion in originations. The main drivers of this growth are consumer spending and confidence from small business owners in this current economy. In conjunction with Ocrolus, we recently released the third iteration of our Small Business Cash Flow Trend report, which offers key insights into small business cash flow trends, inflation challenges and growth opportunities. In line with previous findings, our research shows that small businesses feel increasingly optimistic over the next 12 months as they successfully navigate challenges like inflation and cash flow management. The survey also found that small businesses are becoming less reliant on traditional financial services such as banks as nearly 75% of small businesses set up alternative lenders as their primary funding option. And supporting our own research, the National Federation of Independent Businesses announced that its Small Business Optimism Index climbed 1 point to 91.5 in September, the highest level in almost a year. Before closing, I would like to take a moment to discuss our progress in unlocking shareholder value. For the past couple of years, we have emphasized the disconnect between our valuation and our strong and consistent results, solid balance sheet and business fundamentals. Reflecting our continued strong results, we're pleased to have seen our valuation increase this year, better reflecting the strength of our business. That being said, we are producing over 25% year-over-year growth across all key financial metrics. Yet our PE ratio on 2025 estimates is only 8.2 times, resulting in a PEG ratio of only 0.4 as of the end of Q3. As Steve will discuss, in the fourth quarter which we're almost a third of the way through, we expect to again generate year-over-year growth in originations, revenue, and EPS in excess of 20%. Given this disconnect, we remain committed to opportunistic stock buybacks as our primary vehicle to unlock shareholder value, and we are very well-positioned to do so. We've built a solid balance sheet as evidenced by the nearly $1.2 billion in liquidity at the end of Q3. Additionally, we extended the maturities on our senior debt from 2025 to 2029 through our recent issuance of $500 million of senior unsecured notes. These actions easily support the new $300 million share repurchase program we announced in August, while also providing ample capital for growth and originations. Overall, we are pleased to have delivered another strong quarter with solid results across our business. We are confident in our ability to continue to generate meaningful growth, supported by stable credit and significant operating leverage both this year and beyond. Our diversified product offerings, world-class machine-learning risk management algorithms and nimble online-only model continue to meet our customers' needs. And both internal and external data demonstrate that our customers remain on solid footing. That being said, we are mindful that the macroeconomic environment can change, and so we are staying committed to a balanced approach to growing our business while managing risk. As we have discussed, this balanced approach is grounded in our extremely sophisticated unit economics framework. And so while we could certainly be growing faster, given our strong competitive position and stable credit, we believe we are positioned well for long-term success. 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. Our financial performance this quarter reflects the solid footing of our consumer and small business customers in the powerful combination of our diversified product offering, scalable operating model, world-class risk management capabilities, and balance sheet flexibility. The result is our continued ability to deliver strong top and bottom-line results that are in line or better than our expectations. Turning to our third quarter results. Total company revenue of $690 million increased 25% from the third quarter of 2023, as total company combined loan and finance receivables on an amortized basis increased 23% from the end of the third quarter of last year to $3.8 billion at September 30. Total company originations during the third quarter rose 28% from the third quarter of 2023 to just over $1.6 billion. Revenue from small business lending increased 38% from the third quarter of 2023 to $269 million, as small business receivables on an amortized basis ended the quarter at $2.4 billion or 27% higher than the end of the third quarter of last year. Small business originations rose 33% year-over-year and, as David noted, exceeded $1 billion in the quarter for the first time in company history. Revenue from our consumer businesses increased 18% from the third quarter of 2023 to $411 million as consumer receivables on an amortized basis ended the third quarter at $1.4 billion or 18% higher than the end of the third quarter of 2023. Consumer originations grew 19% from the third quarter of 2023 to $569 million. For the fourth quarter, we expect total company revenue to increase around 5% sequentially, resulting in year-over-year growth in fourth quarter 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. 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. The consolidated net revenue margin of 58% for the third quarter was at the upper end of our expectations and reflects strong credit trends. Credit metrics in the third quarter reflected our typical consumer seasonality and solid small business performance while improving from a year ago. The total company ratio of net charge-offs as a percentage of average combined loan and finance receivables increased sequentially to 8.4% from 7.7% last quarter but declined from 9.4% during the third quarter of 2023 as the third quarter net charge-off ratios for both the small business and consumer portfolios were lower compared to a year ago. As discussed on our first quarter call, we identified opportunities within our SMB business that we believe would support continued strong growth with improved unit economics. We continue to see the benefits of this strategy in the third quarter as small business originations growth was strong, small business revenue yield continued to move higher sequentially and the small business quarterly net charge-off ratio remained on the low end of our expected range. Expectations for our future credit performance remained stable as the consolidated consumer and small business fair-value premiums were all largely unchanged from last quarter. Looking ahead, the aforementioned typical consumer credit seasonality and stable small business credit performance during the fourth quarter did result in a total company net revenue margin for the fourth quarter of 2024 in the range of 55% to 58%. This expectation will depend upon portfolio payment performance and the level of timing and mix of originations growth during the fourth quarter. Now turning to expenses. Total operating expenses for the third quarter, including marketing, were 34% of revenue compared to 37% of revenue in the third quarter of 2023 as we continue to see the benefits of our efficient marketing activities, the leverage inherent in our online-only model and thoughtful expense management. Third quarter marketing spend remained efficient and was in line with our expectations. Marketing costs increased to $141 million or 20% of revenue compared to $117 million or 21% of revenue in the third quarter of 2023. We expect marketing expenses will continue to be around 20% of revenue for the fourth quarter, but will depend upon the growth and mix of originations. Operations and technology expenses for the third quarter increased to $57 million or 8% of revenue compared to $52 million or 9% of revenue in the third 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, should range between 8% and 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 third quarter increased to $39 million or 6% of revenue from $38 million or 7% of revenue in the third 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 remains 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 quarter with $1.2 billion of liquidity, including $262 million of cash and marketable securities and $925 million of available capacity on debt facilities. Our stable financial and credit performance has allowed us to consistently access funding from a diversified group of lenders and fixed-income investors. Since our last earnings call, we completed five financing transactions totaling $2.1 billion, including $1.2 billion of new proceeds with efficient and cost-effective terms. Issuances included an unsecured senior note, small business term securitization, the renewal and upsize of a warehouse secured by small business receivables, the renewal and upsize of a warehouse secured by consumer installment receivables and the upsize of our secured corporate revolver. During the third quarter, we acquired 309,000 shares at a cost of $23 million, and we started the fourth quarter with share repurchase capacity of approximately $68 million available under our senior note covenants. Our cost of funds for the third quarter was 9.6% or 24 basis points higher than the second quarter. With the Federal Reserve's recent 50 basis point reduction in the Fed funds rate and expectations for continued reductions over the near term, we expect that our quarterly cost of funds has likely peaked. Additionally, the impact of expected lower market rates in the future could create longer-term tailwinds for Enova's profitability. Given the mix of our fixed and floating-rate debt, we expect every 25 basis-point reduction in SOFR to result in a benefit to adjusted EPS of approximately $0.10 over the 12 months following a rate reduction. During the quarter, we recorded a one-time non-cash and non-operational impairment charge of $17 million related to the write-off of our interest in the company to which during 2021, we contributed the net assets of OnDeck's legacy platform as a service business, formerly known as ODX. Finally, we continued to deliver solid profitability this quarter. Adjusted EBITDA, a non-GAAP measure increased 42% from a year ago to $172 million and adjusted EPS, a non-GAAP measure increased 63% from a year ago to $2.45 per diluted share. To wrap up, let me summarize our near-term expectations. For the fourth quarter of 2024, we would expect consolidated revenue to increase around 5% sequentially or more than 20% compared to the fourth quarter of 2023, with a net revenue margin between 55% and 58%. Additionally, we expect marketing and G&A expenses to be around 20% and 6% of revenue, respectively, with O&T costs of 8% to 9% of revenue. These expectations should result in an increase in adjusted EPS of 25% or more 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, timing and mix of originations growth. We remain confident in our ability to generate meaningful financial results for the remainder of 2024 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 should provide tailwinds to our future profitability in a falling rate environment, while enabling our ability to efficiently fund growth and supporting our ability to return significant capital to shareholders through share repurchases. And with that, we'd be happy to take your questions.

Your first question comes from Moshe Orenbuch.

Great. Thanks. Steve, can you share your thoughts on how you foresee the strong environment for originations continuing into 2025 on both sides of the business? What factors could cause changes, whether positive or negative? Could you elaborate on any competitive dynamics that might be at play?

Yes, certainly. We didn't specifically discuss 2025 in our comments, but we believe we have some momentum with our Q4 guidance. We expect this momentum to persist. Unless there is a significant change in the operating environment, we should be able to maintain this momentum into 2025. We'll provide more information in our next call. We're mindful of our growth pace, which allows us flexibility to adapt to changes in the macro environment or competition. However, we're confident in our competitive position, as we've highlighted in previous quarters, thanks to our diversified product offerings, online-only scale, and strong balance sheet. We definitely have momentum right now, but we'll share more details in a few months.

Got it. And just a follow-up on the consumer kind of credit front. The charge-offs in the quarter you had noted were kind of down on a year-on-year basis, but delinquencies were up and the charge-offs being down obviously kind of a good sign as many other lenders are seeing, it's tough for consumers to kind of get out of delinquency once they're in it. Just talk a little bit about how this quarter's delinquency rate is going to be reflected as you go forward and what it says about the portfolio performance?

Yes, sure. So the consumer delinquency rate typically increases sequentially. If you go back and look over time between Q2 and Q3, which it did this quarter as well, year-over-year, the comparison is a little different because we have had slight mix shift. We had some strong demand from our cash net business with great unit economics that over the past couple of quarters, we met that demand, which allowed that business to grow a little bit faster than net credit, and that mix shift will create a little bit of a dynamic in the delinquency ratio. But I will tell you, even though we don't disclose our one-plus delinquency rate, the one-plus rate for consumer actually was down year-over-year. So it's really reflecting that mix shift. In additional context, the fair value premium is also reflecting the fact that the unit economics framework for the risk-adjusted cash flows are incorporating that additional risk from the mix shift that I just mentioned with the flat fair value premium quarter-over-quarter.

Got it. Thanks very much.

You bet.

Your next question comes from David Scharf with Citizens JMP.

Great. Good afternoon. Thanks for taking my questions. Hi, wanted to dig in a little more just in terms of the product mix and, specifically, I think, Steve and Dave, you both had commented you're not growing as fast as you could and not to diminish the impressive growth in consumer. SMB is growing materially faster recently. And I'm wondering, A, if you could just provide a little more color on maybe what differences you're seeing that is driving such a stronger growth in origination volumes among small businesses versus consumer? And B, circling back to your comment about not growing as fast as you could, is that applicable to both products or is that mostly a commentary about the consumer?

Yes, David, those are good questions. It's mainly because our product in the small business area is less mature. In the consumer sector, we have several very established products that are not growing as quickly. On the other hand, we also have newer products on the consumer side that are experiencing rapid growth. However, this is balanced by the presence of older products that have stabilized growth rates in the consumer market. The small business sector is relatively new for us, and we have only actively pursued it since 2021. This contributes to the differences in growth rates we're observing. We are not noticing any significant changes in the overall market, and the competition remains fairly weak on both fronts. Regarding the potential for faster growth, that applies to both consumer and small business sectors. As we’ve discussed before, this leads us to raise our internal economic targets, focusing on return on equity, and we aim to push for higher targets than what might be needed purely from a theoretical perspective concerning the business's finances. We believe that adopting a cautious approach to these targets is appropriate given our rapid growth in a capital-intensive environment, and we feel that the stock doesn't reflect the potential for higher growth rates. Therefore, we are willing to accept a bit more leeway in our economic targets and grow at a pace that is still very attractive, even if it is slower than we could achieve otherwise.

Got it. No, that's great color. And to the extent you only get rewarded for growing so fast, there's no need to push the envelope, I guess. Maybe just one quick follow-up on funding. Steve, I appreciate the sensitivity analysis on the 25 bp change in SOFR. You had also, I believe, the last quarter or so, provided some outlook about how to think about funding costs in the context of percent of revenue. I think last time, it was 10.5% to 11%. Is that changing much in your mind? What should be kind of the base case we look at?

Yes. I mean, I think for the fourth quarter, that range is probably still applicable, but you'll start to see us move again depending on how much we grow, but we should be moving towards the lower end of that range as you move through the quarter. And as we get through the rest of the year, I'll provide a more wholesome view on next year depending on where we are with the outlook for rates at that time.

Great. Thanks so much.

You bet.

Your next question comes from John Hecht with Jefferies.

Good afternoon, guys. Congratulations on another great quarter.

Thank you.

Most of my questions have been addressed. One of them is regarding your mention of generally weaker competition, David. It seems that your strengths have positioned you favorably in what might be considered a softer market, but it could also be a market where you excel. I'm curious about your outlook on this situation. Do you foresee a point where competition might return? If so, in which product or segment do you expect that to happen? Or do you believe you are just establishing more sustainable advantages as time goes on?

Yes, I think that's a good point. We don't have many competitors, and those we do have are not particularly aggressive. This isn't an industry where new businesses can easily emerge and become strong competitors in a matter of months. There are significant start-up costs, and it takes a considerable amount of time to develop and refine underwriting models. Companies in this sector often incur substantial losses during their first 5 to 10 years. Therefore, the entry of new competitors tends to be gradual, and right now, there aren't many in either the small business or consumer sectors. That being said, we are aware of the competitive landscape and actively monitor it. However, we are not observing any emerging threats, and we enjoy a strong market share compared to the existing competitors, with no indication of any significant changes in the competitive environment.

Okay. That's super helpful. And then I guess as a related follow-up, just given that backdrop, with respect to the characteristics of the originations, obviously, we know the mix of SMB versus consumer, but is there anything that is worth calling out with respect to new versus recurring mix changes or the characteristics of the small SMB categories or is it pretty consistent?

No, John, it's been pretty consistent. We haven't seen a material change in our new versus returning customers across either of the portfolios.

All right. Thank you, guys, very much.

Thanks, mate.

Your next question comes from John Rowan with Janney.

Good afternoon, guys.

Hi, John.

Hi, sorry if this was asked already, but was there a reason why CSO loan balances went up so sharply sequentially?

I mean, those tend to be very specific to geographic regions. So you will time-to-time see where we might have demand or opportunities that line up with that unit economics framework that you'll see that occur, but it usually is not something that persists for a long period of time. It's usually pretty level.

Okay. And then, I just want to make sure I'm hearing you guys correctly because we're talking about, obviously, we're talking about stable credit, but obviously, the charge-off rate in consumer was up at 8.7% versus 7.8% last year. Can you just talk to that and whether or not that has anything to do with the increase in the CSO loan balances? Just kind of talking through that increase in the charge-offs specifically in the consumer book?

Yes. I think the number you're referencing, John, is 30-plus delinquency net charge-offs - will be down year-over-year. So as I mentioned just a few minutes ago, that's largely related to mix, and I had mentioned that we had seen some opportunities over the past couple of quarters with cash net versus net credit. And given the credit profile of that business, you would see delinquencies at a higher rate. So there's a little bit of mix shift going on there. CSO is largely in cash net. So yes, that could contribute to it. But as I mentioned, the fair value premiums are relatively flat quarter-over-quarter, which again is the view of discounted risk-adjusted cash flow in consumer. So it's tracking with our unit economics, and our one-plus delinquency for consumer was actually down year-over-year.

Okay. All right. Thank you.

You bet.

Your next question comes from Vincent Caintic with BTIG.

Hi, good afternoon. Thanks for taking my question. First for David, and it's kind of a follow-up on David Scharf's question about the originations. I mean, the growth rate is especially sequentially, is pretty impressive after what was also a strong second quarter, so I'm just trying to maybe parse out maybe what could be driving this because it seems like maybe the macro is okay, the SMB consumer is feeling a bit more confident and then conversely, your underwriting still seems pretty tight. So just wondering if maybe as we're thinking about fourth quarter and beyond, do you expect this kind of strong growth and acceleration to continue? And does anything need to change or say particularly positive in order to achieve that level of growth? Thank you.

Yes. If you look at the sequential growth, it's definitely due to two main factors. One is seasonality, as we typically see strong growth in Q3 compared to Q2. The other factor is the favorable macroeconomic conditions. Customers, consumers, and small businesses are confident enough to borrow money when necessary, and their financial health allows them to repay, which facilitates our lending process. Therefore, it’s really a mix of these two aspects. Looking ahead to Q4, Steve mentioned that we expect slightly lower year-over-year origination growth rates, but they will still be above 20%, which is very robust. As we approach a third of the way through the quarter, we remain optimistic about maintaining growth rates above 20%.

Okay. Great. That's super helpful. And then for Steve, you always appreciate the detailed fourth quarter guidance. I guess as we're thinking medium-term and with the growth rates you're achieving in the originations and revenue, just kind of wondering as you're thinking about the expenses, how operationally efficient can the business be? So I'm sort of thinking that as you're growing your fixed expenses, so the EPS should be growing even faster, is there anything you can do to maybe help us understand how much operating leverage you have in the business? Thank you.

Yes. Well, I think if you look over the past couple of years, you've seen that operating leverage in action, obviously, marketing is entirely variable. Our O&T costs, about 70% of those costs are variable. So there is some operating leverage as you continue to grow, but it's much more slow compared to our general and administrative expenses, which are all fixed. So you've seen the G&A expenses as a percent of revenue come down a fair amount over the past couple of years. There's no reason to think that we wouldn't continue to see some operating leverage in those expense categories as we move through time and continue to grow. That's really just how our expense philosophy works. We do spend money. Those expenses do grow year-over-year, but they grow at a much slower rate relative to revenue, and that's how we run the business. So you should expect there could be some opportunities as we move through time from here as well.

Okay. Great. Thanks very much.

Thank you. That does conclude our question-and-answer session and our conference for today. Thank you for attending today's presentation. You may now disconnect.