Elevate Credit, Inc.
Q1 2021 Earnings Call Transcript

Published: 3 May 2021

[Operator:]

Greetings. Welcome to Elevate Credit First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I would now turn the conference over to your host, Daniel Rhea. Thank you. You may begin.

[Daniel Rhea:]

Good afternoon and thanks for joining us on Elevate’s first quarter 2021 earnings conference call. Earlier today, we issued a press release with our first quarter results. A copy of the release is available on our website at investor.elevate.com. Today’s call is being webcast and is accompanied by a slide presentation, which is also available on our website. Please refer now to slide two of that presentation.

[Jason Harvison:]

Good afternoon everyone and thank you for joining us today. I hope you're all healthy and looking forward to summer and a broader year ahead. At Elevate, we recognize that the world is still uncertain, but I can speak for the company and confidently say we're more encouraged as a business than we have been in some time. As Chris and I will detail in a moment, our first quarter results and the underlying credit trends we are seeing, combined with increasing demand, point in a very positive direction for Elevate. With that as a backdrop, let me start on slide four with the highlights from a strong first quarter. On slide four and from our press release, you can see that our results again display outsized profitability despite the expected year-over-year weakness in revenue. As you'll recall from Chris' commentary last quarter, we expected our first quarter revenues to be down similarly to the year-over-year compare in fourth quarter 2020 excluding our steady business. Our revenues of $89.7 million for the quarter were down 45% compared to first quarter 2020, excluding the U.K. discontinued operations. While the end result was in line with our expectations, we know that the underlying demand trends tell a more nuanced and encouraging story than in quarters past.

[Chris Lutes:]

Good afternoon everybody. Turning to slide nine, combined loans receivable principle totaled $353 million at March 31st, 2021, down $200 million or 36% from $553 million a year ago. This was a combination of a decrease in new customer loan originations as well as loan pay downs, primarily resulting from government stimulus payments to our customers. Principal loan balances declined by approximately $47 million during the first quarter of 2021, or roughly 12% from year end 2020. Breaking that down principal loan balances that were not delinquent or had not deferred a loan payment, in other words, our best performing customers, decreased only $20 million or 6% from year end 2020. On the other hand, principle loan balances with deferred payments declined from $35 million at year end 2020 to only $12 million, or 3% of the loan portfolio as of the end of q1 2021. Adding in delinquent customers, only 9% of our loan portfolio was delinquent or had deferred loan payments as of March 31st, 2021. This is by far the best credit quality we have ever had at Elevate. Staying on this slide, revenue for the first quarter of 2021 was down 45% from the first quarter or a year ago. For the RISE product, revenue decreased $50 million or 48% in the first quarter of 2021 versus prior year. The revenue declined for RISE resulted from both the drop in average loan balances and a decline in the effective APR of the RISE product, which declined from 123% in the first quarter a year ago to 100% in the first quarter of 2021. The APR was impacted by both a lack of new customer loans, which typically have a higher APR than more seasoned customers, as well as the impact of adjusting the effective APR for customers that have deferred payments on their loan balances. For Elastic, most of the $24 million decline in revenue resulted from a decrease in average loan balances. Looking at the bottom of this slide, while adjusted EBITDA was about 10% lower than the first quarter a year ago due to the decline in revenue, adjusted earnings for Q1 2021 increased $1.5 million from a year ago to $12.7 million due to lower interest expense. There was no difference between reported net income and adjusted earnings for the first quarter of 2021. Our fully diluted and adjusted EPS total $0.34 in Q1 2021 compared to $0.26 adjusted diluted EPS a year earlier. We had an annualized return on average equity, ROE, of 31% in the first quarter of 2021, even better than the 22.4% we realized in fiscal year 2020 based on continuing operations. On slide 10, the cumulative loss rate as a percentage of loan originations for the 2020 vintage is the lowest loss rate ever, due to the tightening of underwriting, slowdown in new loan originations, and improved payment flexibility tools. On this slide, we also show the customer acquisition cost. New customer loan volume continue to trend at about 50% of prior year volumes. So, the product CAC for RISE and Elastic is not indicative of future expectations. When customer loan demand picks up again in future quarters, we expect the CAC to continue to trend between $250 and $300 for the RISE and Elastic products, and should be sub $100 for the Today Card through the end of this year. Slide 11 shows the adjusted EBITDA margin, which was 35% for Q1 2021, up from 21.5% a year ago. Almost all the increase in the adjusted EBITDA margin resulted from lower loan loss provision. Long-term, we expected the adjusted EBITDA margin to return to approximately 20% in a more normalized growth model. Turning to liquidity and capital on slide 12, one of the positives of our business model is the short-term nature of the loans. At March 31st, 2021, cash on the balance sheet totaled over $140 million, despite paying down nearly $98 million of debt in January of 2021. Debt at the end of March 2021 totaled just over $340 million on roughly $167 million in equity, resulting in a debt to equity ratio of only 2.41 when including all liabilities. During the first three months of 2021, we also repurchase the $11 million or 2.5 million of common shares under our existing common stock repurchase program. This represents a 6.5% reduction in common shares outstanding since the beginning of the year. Since beginning our common share repurchases in August of 2019, we have repurchased 10.9 million shares, or approximately 23% of all shares there were outstanding and issued or reissued since that point in time. Now, let me discuss expectations for Q2 and the rest of the fiscal year 2021. While we are not providing revenue, adjusted EBITDA, or net income guidance for this year due to uncertainty caused by COVID and this most recent round of federal stimulus, we can provide some high level thoughts. The biggest uncertainty from our perspective is consumer loan demand, which impacts forecasted revenue, loan loss provisioning, and marketing expense for this year. We believe we are through most of the impact of the most recent round of federal stimulus payments made this past March as customer loan demand picked up in April. Focusing first on the current Q2 quarter, revenues should be down slightly from prior quarter, as we believe we are at the trough in average loan balances in April. We expect marketing expense will double in the second quarter of this year versus the first quarter of 2021, with new customer acquisition more than doubling due to a lower CAC than prior quarter. New customer loans originated from this marketing spend should result in increased loan balances at the end of the second quarter compared to March 31st, 2021 and the year-over-year loan balances will be approximately flat. Given the current strong credit quality, loan loss reserve levels at the end of the 2021 second quarter are expected to be relatively flat with the end of the prior quarter, even with the expected loan growth. Loss rate should also be relatively consistent with what we have seen in the past couple of quarters. We expect a slight increase in quarter-over-quarter op expense as we begin to scale the loan portfolio again. Interest expense and debt levels should remain relatively flat with the prior quarter. With the increased marketing spend and no expected material loan loss reserve release, we believe we will incur a slight net loss in Q2 of 2021 as loan growth compresses near-term earnings due to the upfront marketing expense and loan loss reserves. We will also continue to aggressively buyback our common stock under the existing repurchase plan. We are expecting to repurchase approximately $9.5 million in common shares during the second quarter of 2021, subject to daily limitations. For the second half of this year, we remain on track for year-over-year consolidated loan growth exceeding 10% by the end of 2021. The overall effective APR of the loan portfolio will continue to slightly decline as more loans are originated at near prime rates, such as the Today Card. We expect second half 2021 year-over-year revenue growth north of 10%. Loss rates will slowly increase as new customer loan origination accelerates throughout the year. Increased marketing spend and loan loss reserve build associated with expected loan growth in the latter part of the year, we'll continue to compress adjusted net income, just as it is expected to in Q2 of 2021. Operating expense levels for the second half of 2021 will be up slightly versus the first half of the year. While we could self-fund a portion of the expected loan growth this year, we intend to increase our leverage ratio to over three to one by the end of the year, and instead used our free cash flow to continue to buy back common stock under our existing repurchase program. As a result, interest expense, while down materially in 2021 from 2020, should continue to increase in the second half of the year. The effective tax rate is expected to be in the normalized 25% to 30% range, but our cash taxes paid should be minimal as we use the net operating loss from the 2020 write-off of our U.K. investment. With that, let me turn the call back over to the operator to open it up for Q&A.

[Operator:]

At this time, we will be conducting a question-and-answer session. Our first question is from Moshe Orenbuch of Credit Suisse. Please state your question.

[Moshe Orenbuch:]

Great. Thanks. Congratulations and -- I guess the maybe to expand a little on your discussion about the sequential growth in Q2, I see the chart on page five shows that you're probably not going to see a lot of pay downs after the end of April. But could you talk a little bit about -- about what you're already seeing from a new loan demand? Because that's obviously a pretty healthy increase and even more, kind of in the second half. Is there, kind of, anything -- kind of give us? And how should we think about the yield on that, kind of, by the end of the year, given the comments you made about the impact on the yield now?

[Jason Harvison:]

Hey Moshe, it's Jason, I'll take the first part of that and Chris can take the second part? It's great question. I think what we're seeing right now as we highlighted on slide five and slide six is just reopening of the markets and you're seeing consumers use the stimulus pretty quickly. I think that speaks to consumer confidence that they have. It's not like we saw last summer where they were holding on to those funds and kind of uncertain what was going to take place. I think we're seeing them get back out and start to re-engage and living their lives. And you see be responsible what we show on slide six of using that to pay down and exit some of the payment assistant tools. So, I think that that gives us the confidence that as things open back, consumers will get back out, continue to spend money, and have need for credit. And I think it creates a unique opportunity to where the consumer is in a different position financially, where they de-levered over the last year as well. So, we're hopeful with the credit quality will stay strong as well. So, we're now back reengaging with some of our marketing plans. We're starting to see response rates pick back up from the lows we saw and in February, March. And so that gives us the optimism as we go into the latter part of the second quarter and the second half of the year.

[Chris Lutes:]

And this is Chris, with -- in regards to the average APR, I would expect it to remain relatively flat to increasing through the rest of this year. There's certainly going to be a lot of loan growth coming from our Today Card credit card product which is priced at roughly sub-36% stated rate with the effective. It's a little bit over that with the annual fee. But generally speaking, in particular, as we start to really continue to grow the RISE installment loan product, we see the average APR is being flat to slightly increasing from where we ended Q1.

[Moshe Orenbuch:]

Great. Thanks. And just as a follow-up, you talked about the new partner channels. I guess from the outside, it feels like partner banks are kind of pulling back. So, you're kind of saying the opposite, you're saying that you've got actual, kind of, strong demand from your partner banks. Can you, kind of, talk about that a little bit?

[Jason Harvison:]

Sure, and just to clarify a little bit Moshe, when we talk about the partner channel, that's more so on the front end acquisition side working with third-party partners in the marketplace. And so what we've done over the last year or so is gone and built the integration with the third-party partners, and the internal systems so that we can integrate fairly quickly and seamlessly, and also build the models behind that to make sure that we can provide the right offers to consumers, on our behalf or the banks that we work with. And so we were testing that through the second half of last year, what we've seen is good response, good performance on that, though, from an acquisition standpoint, and from a loss rate standpoint. And so that's what we spoke to in the prepared remarks. In March, we saw the non-direct mail channels actually outpaced direct mail channels for the first time in probably five years here at the organization. So, we're pretty excited about that diversification of the marketing mix and what that means as the funnels open up as we go forward.

[Moshe Orenbuch:]

Thanks.

[Operator:]

Our next question is from John Hecht of Jefferies. Please state your question.

[John Hecht:]

Afternoon guys. Thanks very much. Just wondering, kind of, at a high level, what -- the second half of the year, the loan growth kind of at a high level, what are you thinking from a macro perspective, is it sort of just general reopening of the economy and job creation or is there anything else to think about?

[Jason Harvison:]

Yes, I think it's just the general reopening of the market, people getting back out, living their lives. We're seeing -- like I said, earlier, we've seen the consumer confidence pick back up. So, we expect demand to grow. And so when we talk about the way we're approaching the opportunity, first, we've obviously seen pay downs over the last year, and remarketing to existing former customers, we think is the first tier to go after we have the tried and true channels like direct mail that we're going to continue to lead into how to drive that growth. But we're also pretty excited about the partner channels that I just spoke about, I think creates a new vertical for us with some good growth. You layer that in with new products, like the Today Card that we're trying to grow, we're pretty optimistic about seeing the demand pick back up.

[John Hecht:]

And then I mean, maybe just to catch us up on something we haven't spoke about for a while. Once you achieve that growth this year, what do you kind of envision as the call it more normalized or secular growth, as you get into next year or just in a normal environment?

[Jason Harvison:]

Yes, I think what we've talked about for the last -- before the pandemic hit, our target is in that 10% to 15% growth range. The market, obviously, is massive; we talked about it being half to two-thirds in the U.S. But we also want to make sure we have a keen focus on credit quality and make sure that it's measured and profitable growth. If those opportunities to go above and beyond that, we're not opposed to taking it. But I think at the same time, we want to make sure that we're delivering good results along with the growth.

[John Hecht:]

Okay. And then you talked about the different channels and the reason why CAC is a little bit elevated now, I guess, just because of general low activity. Through the second half of the year, how do you see the balance of the marketing channels? And what does that do to -- I guess maybe what level do you guys see CAC settling out at?

[Chris Lutes:]

Yes, I think CAC's going to continue to trend when we're in good growth mode in the $250 to $300 range. And that will be primarily related to the RISE and Elastic products. For the Today Card, it will definitely -- we believe still be sub $100 given the high response rates that we've been seeing on that particular credit product. But for RISE and Elastic, generally kind of the CAC still generally trend in the same range regardless of the marketing channel, whether it's direct mail, or the strategic partners. So, we feel really good that it will still be in what we've seen historically in that $250 to $300 range. Keep in mind, we could always theoretically drive it lower if we wanted to, but if we want good volumes and so both from a credit quality perspective and even from a CAC perspective, we're comfortable running loss is a little higher or CAC a little higher if we want to take the growth.

[John Hecht:]

Okay. Thanks very much, guys.

[Operator:]

Our next question is from David Scharf of JMP Securities. Please state your question.

[David Scharf:]

Thank you and good afternoon. Really most of my questions are sort of follow-ups to what's previously been asked. I guess just want to make sure that I interpret correctly, sort of, the observation of positive underlying demand trends that you highlighted. Are you basing those entirely on just what we're seeing at a macro level based on kind of employment and savings rates and consumer confidence? Or is there anything, particularly throughout April that you saw tangibly in your business, in terms of response rates and application trends that are kind of lending insight to that conclusion?

[Jason Harvison:]

Yes, David, I think it's a great question. And I think it starts at the macro level, which we highlighted in some of the data that we shared here, thoughts on data while reading, which gave us the confidence to go back and re-engage some of the marketing campaigns in mid-April. And we have also seen, when we look at our response rates on the direct mail campaigns, those have picked back up from some of the lows we saw, obviously, at the end of last year, at the beginning of this year. So, that gives us some confidence that those response rates, but not 100% back to what we consider kind of a business as usual type level, but we've seen them pick back up and they are trending in the right direction, which gives us some confidence that the demand is going to be there, and we'll be able to hit the growth numbers we've laid out.

[David Scharf:]

Got it. And maybe just shifting, once again, to the topic of channel strategy. Just curious, direct mail has been an incredibly efficient channel for you and a number of other digital lenders over the years. And as you think about efforts to sort of build out more -- it sounds like more brand awareness and more services to kind of your redesigned, Elevate.com, but as you think about what's required to generate that degree of awareness and consumer engagement. Should we be thinking about channel partners, the Credit Karma's, Lending Trees and the like, out of necessity, kind of having the comprise over half of the channel mix in order to drive the kind of engagement that you're looking to?

[Jason Harvison:]

Yes, I think we think about the channel mix and as we go forward, you're right Dreadnought has been a fantastic channel for us, we'll continue to invest there and leverage the results that we see that are favorable from a CAC and loss rate standpoint. But we'll also see the opportunity to lean into these new what I'm calling the partner channels, which are groups like your Credit Karma's and your Lending Trees, that I think can help diversify that marketing mix. And the nice thing is, these are pretty much based on a cost per funded loan strategy. So, it's not like you have to have a big brand spend to go out and drive that volume, you're working with that third-party to pay a cost per funded on converting those loans to click through. Now, as we think about going forward past that, we are seeing the opportunity to move closer to the point of need of consumers and looking for more strategic partnerships. That's something we're working on right now. We've already talked about just yet, but I think that does create another channel for us, another opportunity for is that it's in the -- as we look to the second half of the year. And then lastly as we kind of think about the new Elevate.com, this is something that we're going to invest in over time. It's nothing -- we got the first phase of it out with some financial wellness tools, with a little bit of marketplaces out there. We think this will help both from a marketing efficiency standpoint and from a customer retention standpoint, giving customers not just credits to search for, but also ways to improve your overall financial health. And then later on it does create the opportunity for ancillary products, whether developed by Elevate or working with third-parties to create new revenue sources. So, I think it gives us a chance to take advantage of that opportunity, but not have to dive headfirst into it right out of the gate.

[David Scharf:]

Got it, understood. And lastly, just a quick question on the Today Card. Can you provide some -- little more color on really who this customer is? Who this new borrower is? Perhaps comparing sort of the average FICO of the new card holders and applicants to the typical RISE customer? Maybe some insights into whether or not the new borrowers as A card, how many of them are former Elevate borrowers versus entirely new. It's obviously a different -- substantially different APR and I would imagine there may not be that much overlap, but any insight there to be helpful.

[Jason Harvison:]

Yes, David, I think when we look at the demographics on the Today Card right now, it's still pretty early, so I don't know if this is going to hold true as we continue to grow and expand the portfolio size. But today, it tends to be a little bit more promise, so the FICO scores are a little bit higher than what we see on RISE and Elastic. And I think as those FICO score bands have a much more sizable universe to market towards, so gets us excited about the opportunity there. But we also see a little bit higher income as well with the Today Card customer compared to the other brands. So, I think that speaks to the ability to continue to have favorable marketing and acquisition costs, but also good payment -- repayment numbers on that product with a little bit higher FICO score and a little bit higher income, and it's a consumer that just being underserved and not having a sizable card with a good utility and good line size for them to go out and transact with.

[David Scharf:]

Got it. Okay, thank you.

[Operator:]

We have reached the end of the question-and-answer session. I will now turn the call back over to Jason Harvison and for closing remarks.

[Jason Harvison:]

I think Chris and I just want to say thanks to everyone for dialing in and listening today. And thanks to the team back here at Elevate for all the hard work they've done. Definitely it's been a year that was not that we have planned for, but really happy with how the team's performed, how they're taking care of the consumers, how they are taking care of each other, and build some foundations for us to really watch some new channels, new products, and extends current products as we go forward for the rest of 2021. So, excited about the year ahead and we'll talk to you next quarter.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.