Q1 2024 Enova International Inc Earnings Call

Participants

Lindsay Savarese; IR; Enova International Inc

David Fisher; Chairman of the Board, Chief Executive Officer; Enova International Inc

Steven Cunningham; Chief Financial Officer; Enova International Inc

David Scharf; Analyat; JMP Securities LLC

John Hecht; Analyst; Jefferies LLC

John Rowan; Analyst; Janney Montgomery Scott LLC

Presentation

Operator

Good day and welcome to the Enova International First Quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star, then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Lindsay Saturday. Please go ahead.

Lindsay Savarese

Thank you, operator, and good afternoon, everyone, and now released results for the first quarter 2024 ended March 31st, 2020. For 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 dot Inova.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.

David Fisher

Thanks and good afternoon, everyone. I appreciate you joining our call today. I'll begin with an overview of our first quarter results and then I'll discuss our strategy going forward. After that, I'll turn the call over to Steve Cunningham, our CFO, to discuss our financial results and outlook in more detail this year. Most went eight years since it was founded 10 years as a public company. We work hard to reap the benefits of that experience during the first quarter as skillful teams continue to execute incredibly well. Combining our diverse product offering through world-class machine learning analytics and technology, we deliver another quarter consistent and profitable growth. Originations were seasonally strong, down only 3% sequentially and up 30% compared to Q1 of last year.
Revenue fared well also increasing 26% year over year and 5% sequentially to 677. As you may recall, first quarter seasonality, particularly in our consumer business, typically results in sequential origination and revenue decline in Q4, driven by tax refunds this year continued seasonality tempered by a severe originations, which grew 4% sequentially. As a result, we trended generated $1.4 billion in originations during the quarter, marking 10 consecutive quarters of over $1 billion in originations.
Even with our 20 years in business, we've been able to consistently generate strong growth all at the same time. And that's really managing credit as a result of strong revenue growth, prudent credit management and cost efficiency. In Q1, adjusted EBITDA increased 18% year over year and 15% sequentially to $149 million, while adjusted EPS rose a bit more modestly due to higher interest expense, resulting primarily from higher Fed funds rate increasing 7% year-over-year and 4% sequentially to $1.91 similar to the last several quarters. Our diversified portfolio and efficient marketing continued to drive our growth our combined loan and finance receivables increased 23% year-over-year to a record $3.5 billion. Small business products represented 65% of this total portfolio and consumer 35%. Marketing was 18% of our total revenue compared to 73% in Q1 of last year, well within our target range, SMB revenue increased 22% year-over-year and 12% sequentially to a record $236 million, while consumer revenue increased 30% year over year, flat sequentially, reflecting typical first quarter Seasonale outside of our core products, we continued to generate strong growth in Brazil for quarter. Originations increased 29% sequentially and 83% year over year on a constant currency basis. While this continues to be a small part of Enova. We are excited about the opportunity to continue to grow.
Yes. As I mentioned, credit quality across our portfolio remains healthy. Total Company net charge-offs as a percentage of average, combined loan and finance receivables were 8.5% in Q1 compared to 9.7% last quarter. Notably, net charge-offs remained well below pre-COVID levels at 15.4% in Q1 of 2019 and 13.9% in Q1 of 2018 due to a combination of mix shift, good credits MANAGING Before closing, I'd like to take a few moments to discuss our strategy and outlook for the remainder of 2024.
We're encouraged by the strong start to the year and continued good credit across our portfolio from our SME and consumer customers for more sound footing, we're confident in our ability to further drive profitable growth. We believe our diversified portfolio puts us in unique position to take market share in the non-prime lending funding landscape. Our SMB business wins across a wide range of industries, providing good diversification across the macroeconomic environment, and we have both consumer line of credit and installment products that span the subprime and near-prime consumer side, as you've heard from us before, we're very disciplined when it comes to our unit economics approach to decision across both our SMB and consumer business. This capability has enabled us to meaningfully and profitably expand the intensity of support of small businesses and consumers for their capital needs by offering them safe, transparent and appropriate managed solutions.
Looking forward, we believe the current macroeconomic environment for know, consistent demand for our products, solid credit performance in our consumer business demand and credit are driven in large part by job and wage growth. And you know, the job market has been very strong for the last couple of years, which gives a little time to flow and wage growth has been solid as well. While inflation does have an impact, it's a much smaller factor for our customers and they're navigating persistent inflation well, I know this may be a surprise to some given all the focus on inflation over the last couple of years, how inflation impacts our customers' income by couple of percentage points a month. Well, the loss of a job is 100% of the. In addition, high employment rates increased our addressable market because we only lend to individuals with them further, as we've said many times before, some winter consumer customers are always in a recession, fear experienced and living paycheck to paycheck. We retain and manage variability in the finance as a result, the recession tends to have less of an impact for non-prime customers. And I'm Brian now on the SMB side, the two main drivers of their confidence in the economy and consumer spend on small businesses aren't concerned about inflation, strong consumer spending and the ability to increase prices are offsetting that. And we are seeing stable performance in that portfolio, both internal and external data show encouraging signs. We are mindful of the uncertainty that remains in the backdrop that we will continue to prudently manage our business, driven by our intense focus on unit economics, we've demonstrated our ability to quickly adapt to changes in the economy and to consistently produce same for adjusted results. Given this ability our company's solid fundamentals and our track record of strong profitability. We continue to believe our shares are undervalued and Steve will discuss in more detail from balance sheet and liquidity position remains strong, which gives us the financial flexibility to deliver on our commitments, it drive long-term shareholder value. In Q1, we were more aggressive with our share buyback than in prior quarters, which left the total shares repurchased of $139 million. And myself, this equates to 62% of the $300 million share repurchase program that we just launched in late October.
Looking ahead with our belief that our stock remains undervalued and are committed to returning additional capital to our shareholders while still maintaining significant liquidity to generate attractive growth to also continue to explore additional avenues to unlock shareholder value, but our near-term focus is to do so opportunistically.
Yes, overall, we are pleased to have started the year with a strong first quarter demonstrated by our solid growth, and we remain focused on further unlocking shareholder value. I'm pleased that our strong balance sheet and solid liquidity position is there some flexibility to continue to return capital to our shareholders going forward while maintaining significant liquidity to generate attractive growth. And we're confident that our focused approach to balance growth, along with our talented team from class machine learning technology and analytics, strong balance sheet, we'll drive profitable growth in 2024 and beyond.
With that, I would like to turn the call over to Steve to discuss our financial results and outlook in more detail. And following these remarks, I want to answer any questions you may have, please.

Steven Cunningham

Thank you, David, and good afternoon, everyone. We're pleased with our start to 2024 as strong growth in originations, receivables and revenue, along with solid credit and operating efficiency drove another quarter of better than expected financial results.
During the quarter, we also executed the largest quarterly return of capital through share repurchases in our company's history as our balance sheet flexibility continues to support the creation of long-term shareholder value from both portfolio growth in significant capital returns.
Turning to our first quarter results, total company revenue of $610 million increased 26% from the first quarter of 2023 as total company combined loan and finance receivables balances on an amortized basis increased 23% from the end of the first quarter of last year to a record $3.5 billion at March 31. Total Company originations during the first quarter rose 30% from the first quarter of 2023 to $1.4 billion. Small Business revenue increased 22% from the first quarter of 2023 to $236 million as small business receivables on an amortized basis ended the quarter at $2.2 billion or 23% higher than the end of the first quarter of last year. Small business originations rose 25% year over year to $960 million. Revenue from our consumer businesses increased 30% from the first quarter of 2023 to $365 million as consumer receivables on an amortized basis ended the first quarter at $1.2 billion or 23% higher than the end of the first quarter of 2023. Consumer originations grew 43% from the first quarter of 2023 to $417 million. For the second quarter, we expect total company revenue to increase slightly sequentially, resulting in year-over-year growth in consolidated revenue in excess of 20%. This expectation will depend upon the level 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. Credit remained solid in the quarter reflected our typical seasonality, resulting in a consolidated net revenue margin of 57% for the first quarter, which was slightly higher than our expectations. In addition to consolidated consumer and small business, fair value premiums were generally unchanged from last quarter, reflecting a stable outlook for future credit performance. The continued solid outlook for future credit is also reflected in sequentially stable consolidated ratio receivables past due 30 days or more at the end of the first quarter as is typical for the first quarter due to consumer seasonality, the total Company ratio of net charge-offs as a percentage of average combined loan and finance receivables decreased sequentially to 8.5% from 9.7% last quarter.
Consumer portfolio net charge-off ratio declined to 14.9% for the first quarter compared to 17.3% last quarter and 15.2% in the first quarter of 2023. As David noted, consumer credit losses typically follow the sequential pattern of portfolio growth through the year, peaking in the fourth quarter and reaching their lowest point during the second quarter. We expect credit losses for our consumer portfolio to generally follow the seasonal pattern during 2024, but it will depend upon the timing and the level of consumer originations throughout the year.
The net charge-off ratio for our small business portfolio declined to 4.7% from 4.8% last quarter and was in line with our expected quarterly range of 4% to 5%. As we've discussed in the past, we make many changes each quarter across our businesses to optimize originations, credit performance and unit economics.
In our SMB business, we've identified opportunities that we believe will support continued strong growth, strong unit economics as we execute on these opportunities, we expect the SMB revenue yield to continue to move higher in the near term. In the quarterly small business, net charge-off ratio will likely remain around 5%.
Looking ahead, we expect the total company net revenue margin for the second quarter of 2024 to be in the upper 50% range. Expectation will depend upon portfolio payment performance level timing and mix of originations growth during the second quarter.
Now turning to expenses. First quarter operating costs were driven by efficient marketing activities. The continued leverage inherent in our online-only model and thoughtful expense management. So operating expenses for the first quarter, including marketing, were $205 million or 34% of revenue compared to $166 million or 34% of revenue in the first quarter of 2023. First quarter marketing spend remained efficient and was within our expected range. Marketing costs increased to $111 million or 18% of revenue compared to $80 million or 17% of revenue in the first quarter of 2023. We expect marketing expenses to be around 20% of revenues for the second quarter, but will depend upon the growth and mix of originations. Operations and technology expenses for the first quarter increased to $54 million or 9% of revenue compared to $49 million or 10% of revenue in the first quarter of 2023, driven by growth in receivables and originations over the past year. Given the significant variable component of this expense category, sequential increases in O&T costs could be expected in an environment where originations and receivables are growing and should be around 9% of total revenue as fixed costs continue to reflect our focus on operating efficiency and thoughtful expense management.
General and administrative expenses for the first quarter increased to $40 million or 7% of revenue from $37 million or 8% of revenue in the first quarter of 2023. While there may be slight variations from quarter to quarter. We expect G&A expenses in the near term, we range between 6% and 7% of total revenue. Our balance sheet and liquidity position remains strong and gives us the financial flexibility to successfully navigate a range of operating environments while delivering on our commitment to driving long-term shareholder value through both continued investments in our business and share repurchases. We ended the first quarter with $738 million of liquidity, including $232 million of cash and marketable securities, $506 million of available capacity on facilities. During the first quarter, we acquired approximately 2.4 million shares at a cost of $139 million, and we started the second quarter with share repurchase capacity of approximately $65 million available under our senior note covenants. We expect to utilize most of that capacity during the second quarter, but the timing and amount will depend upon market and trading conditions. As expected, our cost of funds for the first quarter was 9.2% or approximately 140 basis point higher than the first quarter of 2023, primarily due to increasingly social and funding mix changes over the past year. We currently expect market interest rates to remain higher for longer this year and as a result, interest expense as a percentage of revenue will likely remain in the upper half of our expected range of 10% to 11% during 2024. That being said, the impact of lower market rates in the future should create longer-term tailwinds for Novoste profitability.
Finally, we continued to deliver solid profitability this quarter as adjusted EBITDA increased 18% from the first quarter of 2023 to $149 million. Adjusted earnings, a non-GAAP measure were $56 million or $1.91 per diluted share compared to $59 million were $1.79 per diluted share in the first quarter of last year.
To wrap up and summarize our near term expectations for second quarter, we expect consolidated revenue growth to increase slightly sequentially for the net revenue margins in the upper 50% range. Additionally, we expect marketing expenses to be around 20% of revenue, our TI costs of around 9% of revenue, G&A costs between 6% and 7% of revenue and interest expense as a percentage of revenue between 10.5% and 11%. These expectations should result in a 5% to 10% sequential increase or around a 20% year-over-year increase in adjusted EPS. For the full year, we expect growth in originations for 2024 compared to the full year 2023 of at least 15%. We continue to believe the resulting growth in receivables from stable credit and continued operating leverage. It results in full year 2024 growth from both revenue and adjusted EPS in the upper 10s or slightly higher and expected origination growth. Our second quarter and full year 2024 expectations will depend on the macroeconomic environment and the resulting impact on demand, customer payment rates and the level timing and mix of originations growth.
In closing, we remain in a strong position to continue to generate meaningful financial results this year and beyond. Our diversified product offerings, world-class machine learning, risk management algorithms, nimble, online-only model, solid balance sheet continued to differentiate our ability to deliver consistent financial results and return significant capital to shareholders through share repurchases. And with that, we'd be happy to take your questions.

Question and Answer Session

Operator

Operator, we will now begin the question and answer session. To ask a question. You may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two at this time we will pause momentarily to assemble our roster.
The first question comes from David Scharf of Citizen's GMP. Please go ahead.

David Scharf

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

Steven Cunningham

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

David Scharf

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

Steven Cunningham

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

David Scharf

I can just squeeze one more in on the credit side, I'm just trying to get a sense for how much of the improvement from sort of pre-pandemic levels you would characterize? Is mix related just a much bigger proponent of SMB. So VERSUS kind of where the credit boxes now come in and whether there any expectations that issue perhaps P&O loosen up the consumer credit box over time, should we expect to return to 2019 levels for loan losses or is sort of a new benchmark, a lower benchmark going forward?

David Fisher

Yes, good question. David, was I think most of it is mix, but it's not just consumer versus less IndyMac's. It's often mixed within the consumer business. So 2018, 2019, Brazil doing lots of single-pay lending, which has obviously much higher default and charge-off rates now our consumer business is exclusively a line of credit and installment products, which has much lower loss rates. So you have that you look at those two different components of the mix shift, which has brought that down significantly.
In terms of our credit box, we will reasonably open right now. We're not wide open for sure, but we're not super tight. I mean the economic environment is, as I talked about in my prepared remarks, the economic environment is good for our customers and lots of jobs and good wage growth. And so we don't feel the need to be super conservative. We are probably like I said, we're not as aggressive as we could be, but were kind of a reasonably aggressive, maybe a 7.5 out of 10 or 8 out of 10 on the aggressiveness scale and which is normal, I mean, for us to be at like at five or below would mean something's wrong. So we're kind of where we'd like to be as kind of our sweet spot come kind of in this range for data only things are kind of smaller chains out a big one, but smaller changes, which Steve alluded to, we've had a shift within our SMB business to more higher yielding products. We just found higher returns there better our lease than at the very low end of kind of the yield spectrum from us and the more we get more competition with the banks. And so we're not totally out of that we're not out of the lower APR software. We've just shifted more towards kind of the middle to upper end of our APR range for the S and B products and so with those higher APRs from slightly higher defaults on ratio, you'll see over the next few quarters, just slightly elevated and compared to historic levels on default rates in the SMB business and eventually slightly higher net charge-offs as a percentage of ARR. But what will come along with that is higher yields and higher revenue. And so the ROEs on those products those originations are looking really, really good at it.

David Scharf

Great. Thanks very much.

Operator

Again, if you have a question, please press star then one next question comes from John Hecht with Jefferies.
Please go ahead.

John Hecht

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

David Fisher

Yes, yes, the seasonality is more muted in the SMB space. It exists, but it's much more muted on the consumer side because that the tax returns just have such a big impact on the consumer business, and that's much, much more muted than in the in the SMB space. So So nice thing about being a diversified business. The overall company wide seasonality isn't as strong as it was if we were a pure pure consumer business so that that works out really well.
Consumer business as we talked about, is pretty much back to pre-pandemic type seasonality. So we're really happy with the fourth, the first quarter, if anything, consumer overperformed a little bit to our expectations and absolutely no weakness in that business at all in Q1, just kind of back to those historic kind of seasonality trends.

John Hecht

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

David Fisher

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

John Hecht

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

David Fisher

Yes, you know, it hasn't changed a ton over the last kind of four or five years that the main channels for also what you would expect. We do a significant amount of direct mail, especially in the consumer business of view, I'm sure you've seen our TV both on the consumer SMB side, we've gotten heavier and heavier and TV. That's been an area of success for us for sure. Relative to say five to seven years ago. And I think certainly relative to to our competitors and then digital, I think has improved for us in ways that we probably wouldn't have guessed a few years ago. And a lot of that growth I think is that some kind of taking share away from leads leads has continued to shrink as the share of the total, which was fine. We'd like to control our own destiny. We love our lead partners. We work really well with them or some of their biggest clients in the world. And this great has great fruitful partnerships, but where we control our own destiny and we like that as well. I think one of the logic in terms of the efficiency that we've seen part of it just experience and doing more and more of that, we were kind of a leads only business eight, nine years ago. And so I'm kind of and kind of really hitting the sweet spot in terms of experience and being more multi-pronged in our marketing group. I think it's also a sign that the competitive environment's not super strong for us right now, which is I know a theme we've been talking about for a while. You certainly have seen many of our competitors start to stumble over the last three, four years, we've just continued to execute and been beneficiaries of that.

John Hecht

Wonderful. Thanks very much, guys.

Operator

Yes. Next question comes from John Rowan with Janney. Please go ahead.

John Rowan

Stephanie and guys, VM you've got loan growth in the quarter. Was there any benefit in there from the late refund season?

Steven Cunningham

And I know it's hard to say, but not a ton. I mean, I think it helps if you if you will, of the modulator, it would help January or March. I think mostly I don't think there's any big carryover into that. You're going to see in April on Q2 started off fine.
Now. I'm kind of I'm kind of right where we were expected to. So yes, it intra-quarter.
Yes. But for the quarter as a total not much some.

John Rowan

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

Steven Cunningham

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

John Rowan

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

David Fisher

Yes, John, thanks for the question. So here's how to think about Q2, some. So I gave you, we should see sequential growth, some slight sequential growth in revenue, which we don't always see if you go back in time, which again gets back to some of our diversification and the blended portfolio that we have. We're continuing our march up on the net revenue margin, which you should expect to see in Q2 as consumer gets a bit better with more originations and lower losses S & B's pretty steady. And then I think you typically see outside of the first quarter, we've been around 20% of marketing for 20% of revenue for marketing for awhile. And then as you mentioned, the O & T. and G. and A. guide, we continue to see some scaling there. So we will see some EBITDA growth when you do the math on all that. But I also talked a bit about interest expense. So I think you'll see and there will be some offset to the to that growth from interest expense, as I talked about, given that we think rates will be higher for longer. And so I gave a guide more towards the top end of our 10% to 11% interest expense to revenue range. And I think if you kind of take a look at the the EBITDA, which you kind of talked about and then take a look at below the line with interest expense that will get you a bit closer to the sequential adjusted EPS guide that I mentioned.

John Rowan

You got You answered my questions.
Thanks.
That's it for me.

David Fisher

Thanks, John.

Operator

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

David Fisher

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

Operator

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