Earnings Call Transcript - ENVA Q1 2025

Operator, Operator

Hello and welcome to the Enova International First Quarter 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Lindsay Savarese, Investor Relations. Please go ahead.

Lindsay Savarese, Investor Relations

Thank you, Operator, and good afternoon, everyone. Enova released results for the first quarter 2025 ended March 31, 2025, 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 of various important risk factors, including those discussed in our earnings press release and in our annual report on Form 10-K, quarterly reports on Forms 10-Q and current reports on Forms 8-K. Please note that any forward-looking statements that are made on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, Enova reports certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation 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, CEO

Thanks, and good afternoon, everyone. I appreciate you joining our call today. I'm pleased to report that we once again delivered strong results that met or exceeded our expectations, driven by healthy demand and stable credit across our product range. Quarter after quarter, we continue to demonstrate that our flexible online-only business model, well-diversified portfolio, world-class technology, proprietary analytics, and experienced team can deliver consistent results. Despite the recent volatility in the stock market and concerns about the impact of increased tariffs, our customer base remains stable as the macro trends for these customers are positive. Both internal and external data show that our non-prime customers remain on solid footing with a healthy job market and strong wage growth, particularly at lower income levels, and strong consumer spending benefits small and mid-sized businesses as demonstrated by the ongoing strength in our SMB portfolio. While the impact of the government's tariff policy on the U.S. economy is difficult to predict, we remain confident in Enova's future and our ability to navigate a wide range of operating environments. We are monitoring both demand and portfolio performance even more closely than normal and continue to see the level of demand we would expect, while payment performance remains in line or better than our expectations. Looking forward, the high payment frequency and relatively short duration of our portfolio provide fast feedback that we incorporate into ongoing decision-making, which positions us well to react immediately to changes in credit performance. Longer term, we continue to believe we have the right strategy in place to execute on our mission of helping hardworking people get access to fast, trustworthy credit while continuing to produce sustainable and profitable growth. We remain committed to our balanced approach, which has led to predictable outcomes and our strong track record of consistency. Our diversified product offerings provide resiliency against an outsized impact to any one portion of our customer base, while the short duration of our portfolio and rapid loss emergence ensure that we can quickly readjust our book to the current environment. As a result, we are confident that these advantages combined with 20 plus years of experience navigating a myriad of macroeconomic environments give us a strong foundation to build on this success. Now turning to the quarter. We once again generated greater than 20% year-over-year growth in revenue originations and adjusted EPS as our diversified online-only business model continues to attract customers and generate significant operating leverage. First-quarter originations increased 26% year-over-year and 1% sequentially to $1.7 billion. As a result of the strong origination growth, our combined loan and finance receivables increased 20% year-over-year to a record $4.1 billion. Small business products represented 65% of the total portfolio and consumer was 35%. We generated revenue of $746 million in the first quarter, an increase of 22% year-over-year and 2% sequentially. SMB revenue increased 29% year-over-year and 7% sequentially to a record $305 million. Our consumer revenue increased to $431 million, 18% higher than a year ago and down a less than expected 1% sequentially off a strong Q4. Profitability continued to grow even faster. Adjusted EPS increased 56% year-over-year driven by the operating leverage inherent in our online-only business, a lower cost of funds, and efficient marketing. Marketing expense was 19% of our total revenue, in line with our expectations and compared to 18% in Q1 of 2024. As I've mentioned, credit quality continues to be good across the portfolio due to the stability we have seen in the performance of our customers. The consolidated net charge-off ratio for the quarter declined to 8.6% from 8.9% last quarter, largely driven by a drop in our consumer business. Demand and credit in our consumer business continues to be powered by a strong labor market as rising wages and historically low levels of unemployment continue to benefit our customers. The latest job report highlights a resilient labor market. In March, the U.S. added 228,000 jobs, the fourth highest month for private payroll growth in the past two years, which was well ahead of expectations. In addition, new jobless claims have repeatedly come in below expectations. Also, as a reminder, we successfully navigated periods over the last two decades where the unemployment rate has been more than double where it is today. Over this period, we've helped almost 10 million customers get access to fast, trustworthy credit. Further, as we've said many times before, in many ways our customers are always in a recession. These hardworking people are experienced in living paycheck-to-paycheck and are sophisticated in managing variabilities in their finances. As a result, recessions tend to have less of an impact on our non-prime customers than on prime borrowers. Turning to our SMB business. For the third quarter in a row, we produced over $1 billion in originations. We continue to see solid demand in credit across this portfolio as well, and we continue to see more businesses proactively seeking out alternative lenders like us. We're proud to serve as a trusted partner when these businesses need capital to fuel their growth plans. Our SMB portfolio is intentionally well diversified across states, industries, product types, and across the credit spectrum. We have advanced algorithms that are constantly monitoring performance across all of those variables. As I mentioned above, the consumer is still in a strong position, which is an important driver of the success of small businesses. For example, in March, retail sales increased 1.4%, topping consensus. While it's difficult to predict how tariffs will impact SMBs and the overall economy, because of the diversity, size, and industry of our borrowers, we would not expect a substantial impact to our portfolio. However, with all the fluctuations in the market and in any part of the cycle, there are always risks and opportunities. We have a nimble model and short-duration products, where we can rotate in and out of industries quickly. Our analytics are focused on ensuring that we are underwriting into the right industries at the right time and making the right risk-adjusted decisions. And as you can see through our consistent results over the years, we have a very talented team that knows how to manage through changes in the environment. Before I wrap up, I'd like to take a few moments to discuss our strategy and outlook for 2025 and beyond. We are encouraged by the continued strong momentum and good credit performance across our portfolio. We're optimistic that our customers will manage the current economic landscape successfully, but in any event, we have the technology and people in place to ensure that we continue to produce sustainable and profitable growth, and we are confident that our focused growth strategy will continue to deliver value for both our customers and our shareholders. In addition, our solid balance sheet with more than $1.1 billion in liquidity provides us with the financial flexibility to successfully navigate a range of operating environments and to continue to deliver on our commitment to driving long-term shareholder value through both continued investments in our business as well as share repurchases. We look forward to updating you on our progress throughout the year. With that, I'd like to turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. And following Steve's remarks, we will be happy to answer any questions you may have.

Steven Cunningham, CFO

Thank you, David, and good afternoon, everyone. As David noted in his remarks, we're pleased to deliver another solid quarter of top and bottom line financial performance. We started 2025 with strong growth in originations, receivables, and revenue, along with solid credit, operating efficiency, and balance sheet flexibility. Turning to our first quarter results. Total company revenue of $746 million increased 22% from the first quarter of 2024, slightly exceeding our expectations, driven by 20% year-over-year growth in total company combined loan and finance receivables balances on an amortized basis. Total company originations during the first quarter rose 26% from the first quarter of 2024 to just over $1.7 billion. Revenue from small business lending increased 29% from the first quarter of 2024 to $305 million as small business receivables on an amortized basis ended the quarter at $2.7 billion or 20% higher than the end of the first quarter of 2024. Small business originations rose 27% year-over-year to $1.2 billion. Revenue from our consumer businesses increased 18% from the first quarter of 2024 to $431 million as consumer receivables on an amortized basis ended the first quarter at $1.5 billion or 20% higher than the end of the first quarter of 2024. Consumer originations grew 22% from the first quarter of 2024 to $508 million. For the second quarter of 2025, we expect total company revenue to be flat to slightly higher sequentially, resulting in year-over-year revenue growth of around 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. In line with our expectations, the consolidated net revenue margin was 57% for the first quarter, unchanged from last quarter and the first quarter of 2024, and reflects continued solid credit performance. The consolidated net charge-off ratio for the first quarter of 8.6% is also consistent with the first quarter of 2024. Importantly, we expect future credit performance to remain stable as reflected by the year-over-year improvement in the consolidated 30-plus delinquency rate as well as the stability in the consolidated fair value premium. Small business credit performance remains strong. Compared to the first quarter of 2024, consistency in the net charge-off ratio, the net revenue margin, fair value premium, and improvement in the 30-plus delinquency rate all reflect expected stable credit performance. Consumer credit also remains solid as our credit metrics remain within historical ranges and reflect typical seasonal patterns in recent mix shifts, which I'll discuss in a moment. Consumer net revenue margin for the first quarter was 50%, unchanged from the year-ago quarter. As is typical for the first quarter, the consumer net charge-off ratio declined sequentially 90 basis points to 15.2% and is slightly higher than the first quarter of 2024, mainly from mix shifts in our recent originations. As I mentioned late last year, we saw strong demand in our cash net consumer business as a result of some product changes that improved the customer application experience. That demand continued through earlier this year as we thoughtfully took market share in that customer segment, resulting in a higher percentage of new customers to Enova. As you know, attracting new customers to our company is important to our long-term success as many new customers become repeat customers that deliver strong lifetime economics as they utilize our market-leading products offered across a wider spectrum of the non-prime segment than many of our competitors. As a result of this mix shift in recent cash net vintages and the recent strong consumer demand overall, the consumer 30-plus delinquency ratio was flat sequentially and slightly higher than the year-ago quarter, which is consistent with our expectations given the influence of those recent vintages as they season normally. Our unit economics framework considers the lifetime return on equity of our vintages, which incorporates not just the level of credit risk, but the pricing for the risk being taken. This risk-return profile will be reflected in the level and trend of our fair value premiums. At the end of the first quarter, the consumer portfolio fair value premium remains steady at levels we've seen over the past two years, indicating a stable risk-return profile and strong unit economics for our recent consumer originations. Looking ahead, we expect the total company net revenue margin for the second quarter of 2025 to be in the 55% to 60% 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. Total operating expenses for the first quarter, including marketing, were 33% of revenue compared to 34% of revenue in the first quarter of 2024 as we continue to see the benefits of our efficient marketing activities to leverage inherent in our online-only model and thoughtful expense management. Efficient first quarter marketing spend drove higher than expected originations and was in line with our guidance range for the quarter. Marketing costs increased slightly to 19% of revenue, or $139 million, compared to 18% of revenue, or $111 million in the first quarter of 2024. We expect marketing expenses to be around 20% of revenue for the second quarter, but it will depend upon the growth and mix of originations. Operations and technology expenses for the first quarter declined to 8% of revenue, or $62 million, compared to 9% of revenue, or $54 million, in the first quarter of 2024, 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 8.5% of total revenue. Our fixed costs continue to scale as we focus on operating efficiency and thoughtful expense management. General and administrative expenses for the first quarter increased to $42 million, or 6% of revenue, versus $40 million, or 7% of revenue in the first quarter of 2024. While there may be slight variations from quarter to quarter, we expect G&A expenses in the near term will range 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 first quarter with $1.1 billion of liquidity, including $318 million of cash and marketable securities and $810 million of available capacity on debt facilities. Our cost of funds declined to 8.9%, or 23 basis points lower than the fourth quarter, primarily as a result of strong execution on recent financing transactions and the impact of the first full quarter of a lower SOFR since the Federal Reserve's 100 basis point reduction in the Fed funds rate late last year. During the first quarter, we acquired 617,000 shares at a cost of $63 million, and we started the second quarter with share repurchase capacity of approximately $57 million available under our senior note covenants. Given the recent volatility in the stock market and in the share prices of financial companies, including Enova, we used nearly all of our available buyback capacity during the first quarter. If the recent reduction in our valuation persists through the second quarter from this ongoing volatility, we intend to use most, if not all, of our second quarter capacity to opportunistically repurchase shares. Our effective tax rate for the first quarter was 20% compared to 25% for the first quarter of 2024. The decline was driven by tax benefits on stock compensation from share price increases, a decrease in interest expense accrued on our uncertain tax position reserves, and favorable state rate changes. While there may be variations from quarter to quarter, we expect our full year effective tax rate to be in the mid-20% range for 2025. Finally, we continued to deliver solid profitability this quarter. Compared to the first quarter of 2024, adjusted EPS, a non-GAAP measure increased 56% to $2.98 per diluted share. To wrap up, let me summarize our near-term expectations. For the second quarter, we expect consolidated revenue growth to be flat to slightly higher sequentially with a net revenue margin in the 55% to 60% range. Additionally, we expect marketing expenses to be around 20% of revenue, O&T cost of around 8.5% of revenue, and G&A cost around 6% of revenue. With a more normalized tax rate, these expectations should lead to adjusted EPS for the second quarter of 2025 at slightly higher sequentially and over 35% higher than the second quarter of 2024. For the full year, we expect growth in originations compared to the full year of 2024 of at least 15%. The resulting growth in receivables with stable credit and continued operating leverage should result in full year 2025 growth for revenue that is slightly faster than originations growth and adjusted EPS growth of at least 25%. Our second quarter and full year 2025 expectations will depend upon the path of the macroeconomic environment and the resulting impact on demand, customer payment rates, and the level, timing, and mix of originations growth. We are confident that the demonstrated ability of our talented team has us well positioned to adapt to an evolving macro environment. Our resilient direct online-only business model, diversified product offerings, nimble machine learning-powered credit risk management capabilities, and solid balance sheet support our ability to continue to drive profitable growth while also effectively managing risk. And with that, we'll be happy to take your questions.

Operator, Operator

Today's first question comes from David Scharf with Citizens. Please proceed.

David Scharf, Analyst

Thank you for your time today. David, you covered a lot of ground in your opening remarks regarding the diversification of your small business borrower base. I'm curious about application flow and volume. Do you have any indication that small businesses or specific sectors might be increasing their inventory, which could be affecting loan demand, or is it too early to determine that?

David Fisher, CEO

Yes, it's always challenging to determine if there's any impact, but there are no signs of that. I believe demand follows normal seasonal trends. When discussions about tariffs intensified towards the end of Q1, we did not observe any increase in application volumes. It's hard to speculate on what those numbers might have looked like otherwise. While seasonality plays a role, different operating environments can also influence demand levels. Therefore, it's impossible to know for certain, but we did not witness any increases in application volume towards the end of the quarter as tariff discussions escalated.

David Scharf, Analyst

Got it. Helpful. As for how quickly you've been able to assess any shifts in behavior historically, considering they are short duration assets, could you remind us if most consumer and SMB loans have a payment frequency of two weeks or monthly? How often are you capturing that information?

David Fisher, CEO

Yes, a large majority of the payments are made weekly or bi-weekly. There are some that are monthly, both for consumer and small business loans, but the majority are weekly or bi-weekly. This allows us to quickly assess changes in performance. Additionally, our overall portfolios have relatively short durations, with both consumer and small business loans averaging around six months in term. Therefore, we do not face significant back book challenges if there are adverse changes in credit.

David Scharf, Analyst

Okay. Maybe if I can just squeeze in one just follow-up kind of clean up question for Steve. Given the decline in funding costs now and SOFR reduction now flowing through, can you give us a sense for how we ought to be thinking about second quarter interest expense either as a percentage of revenue on a dollar basis or just as a weighted average funding cost?

Steven Cunningham, CFO

Yes, I don't expect any rate cuts for the remainder of this year, so there shouldn't be much difference. Perhaps a slight decrease due to the funding we have coming up in the second quarter, but overall, I don't anticipate significant changes in the cost of funds. I believe it will remain pretty steady as a percentage of revenue in the near term.

David Scharf, Analyst

Okay. Just a follow-up on that. Since April 2, have you noticed any significant changes in spreads in the marketplace regarding debt securitizations?

Steven Cunningham, CFO

There are asset-backed security transactions being conducted by companies similar to ours. We finalized our transaction and pricing in mid-March, despite a lot of market noise at that time, and achieved very good results. The credit markets have been much steadier compared to the equity markets, which have been quite turbulent. Currently, I can't say the same about the credit markets.

David Scharf, Analyst

Got it. Great, thanks very much.

Operator, Operator

The next question comes from Moshe Orenbuch with TD Cowen. Please go ahead.

Moshe Orenbuch, Analyst

Great, thank you. Steve, you mentioned the fair value premiums and credit performance. Could you elaborate on how they are expected to perform in the current environment? I will have a follow-up question after that.

Steven Cunningham, CFO

Yes, I think I've addressed this previously. The fair value premiums are highly responsive to any changes in the expected lifetime credit performance across our various business lines. We experience rapid loss emergence, so for instance, in our subprime consumer segment, most lifetime expectations for a new vintage are realized within the quarter they are originated. This allows for quick feedback, as previously mentioned. When I refer to sensitivity regarding credit, it's essentially that a 10% shift in lifetime loss expectations would result in approximately a 400 basis point fluctuation in fair value premiums. As such, we've maintained stability across our portfolios, with consolidated metrics remaining relatively consistent in basis points, indicating that our outlook at the quarter's end is very stable. If conditions were to shift, we can respond promptly and would anticipate identifying any necessary adjustments if the environment declines, thus preventing significant volatility in fair value premiums on a consolidated level.

Moshe Orenbuch, Analyst

Got it. You mentioned the expected impact from new customers. Can you elaborate on that? Will this process continue into the second quarter and the second half of the year? Will these customers generate a higher yield, considering the revenue margin on the consumer side remained stable or slightly decreased year-over-year? How should we interpret the effect on the revenue margin?

Steven Cunningham, CFO

Yes, I think regarding cash net, we have new customers, but they tend to charge off at a higher rate since we are less familiar with them. However, over the long term, customers we have better relationships with show strong unit economics due to our wide range of products that support their financial journeys. I expect that most of the year-over-year increases you've noticed tied to this mix will balance out in the second quarter. You might see a slightly higher year-over-year figure in Q2, but I anticipate it will stabilize in the latter half of the year, unless more new customers come in. On the yield side, we've maintained steady to good yields in cash net, but we've also seen strong performance in net credit. Consequently, some customers have moved to lower APR products, which reflects the overall impact. The year-over-year yield remains relatively flat due to these two factors.

Moshe Orenbuch, Analyst

Got it. So that benefit comes to you in the form of growth from both new customers and existing customers, as well as from their graduation. Is that the way we should understand it?

Steven Cunningham, CFO

Exactly.

Operator, Operator

The next question comes from Kyle Joseph with Stephens. Please go ahead.

Kyle Joseph, Analyst

Good afternoon, everyone. Thank you for taking my questions, and congratulations on a successful quarter. Reflecting on 2008, we can examine the performance of consumer portfolios, particularly in the non-prime segment, which have shown considerable resilience. While we lack empirical evidence about the small business segment, could you share your expectations regarding the credit performance of the small business portfolio and how you foresee it differing from consumer portfolios based on historical recessions?

David Fisher, CEO

Yes. I mean, Enova was around in 2008, so we have some data. And it wasn't that different than our consumer data. I mean what we really saw for both the businesses back then was a slowdown in lending was probably the biggest impact, more than major credit issues. Our small businesses are very small, and they tend to act in some ways more like sophisticated consumers than mid-sized businesses, so I think that's probably why we saw similar payment performance in 2008. Every recession is a little different, and so it's always difficult to predict exactly. But I think we'll just go back to what we've talked about before, is that we have a very diversified small business portfolio across states, across industries, across products, with short duration terms and very frequent payment performance and loss emergence. So given everything we're seeing now, that makes us very comfortable to continue doing what we've been doing over the last several years.

Kyle Joseph, Analyst

Great. That’s it for me. Thanks for taking my question.

David Fisher, CEO

Yes, thank you.

Operator, Operator

Thank you. The next question comes from John Hecht with Jefferies. Please go ahead.

John Hecht, Analyst

Thank you all. Good afternoon, and I appreciate you taking my questions. Most of them have already been addressed. I do have one more question. I know you've had a favorable competitive environment for several quarters. You mentioned an increased mix of new customers. I'm curious if this is also influenced by the competitive markets. Additionally, are there other areas, such as small businesses, where you're finding opportunities to take advantage of reduced competition?

David Fisher, CEO

Yes, I believe the strong growth we've experienced on both the consumer and small business sides over the past couple of years, especially in the first quarter, was notable. We anticipated this growth in both segments. It's usually a result of a favorable competitive environment, with no new entrants or threats in the last quarter, along with continuous product enhancements. We have made enhancements on both sides, which significantly impacted new customer acquisition this quarter. We expect this trend to continue, with more product improvements planned for the remainder of the year, and we aren't seeing any changes in the competitive landscape.

John Hecht, Analyst

Okay. Steve, regarding the buyback, you mentioned that if market conditions remain consistent, you would likely use most of the buyback in this quarter. Does that mean at the current stock price? Or if there is a drop from this point, will you be more aggressive in taking advantage of that? How should I interpret the levels you are considering for the repurchase?

Steven Cunningham, CFO

Yes. I mean, I think at these levels, we would be interested as well. So the stock has been kind of bouncing around for the past couple of months. But I would say even at these levels, we would be looking to take as much as we can out to support the valuation.

John Hecht, Analyst

Okay. And then final question, and forgive me, is on the guide. The OT expense, is that 8.5% of total revs or 8%?

Steven Cunningham, CFO

8.5%. I said around 8.5%. So plus or minus 8.5%.

John Hecht, Analyst

Okay, great guys. Thanks very much.

Operator, Operator

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

David Fisher, CEO

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

Operator, Operator

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