Elevate Credit, Inc.
Q1 2020 Earnings Call Transcript

Published: 10 May 2020

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Elevate Credit First Quarter Earnings Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]I would now like to hand the conference over to Daniel Rhea, Director of Public Affairs. Please go ahead.

[Daniel Rhea:]

Good afternoon. Thanks for joining us on Elevate’s First Quarter 2020 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 elevate.com/investors. Today’s call is being webcast and is accompanied by a slide presentation, which is available on our website. Please refer now to Slide 2 of that presentation.Our remarks and answers will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements.These risks include, among others, matters that we have described in our press release today, including impacts related to COVID-19 and our most recent annual report on Form 10-K and other filings we make with the SEC. Please note that all forward-looking statements speak only as of the date of this call, and we disclaim any obligation to update these forward-looking statements.During our call, we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued today and our slide presentation, both of which have been furnished to the SEC and are available on our website at elevate.com/investors. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges and certain expenses.Joining me on the call today are our President and Chief Executive Officer, Jason Harvison; and Chief Financial Officer, Chris Lutes.I will now turn the call over to Jason.

[Jason Harvison:]

Good evening and thank you for joining our first quarter 2020 earnings conference call. First off, I’d like to offer our hope that everyone is well and safe. I’d also like to start with a heartfelt thank you and acknowledgment of the hard work of our talented employees over the last 2 months. It’s clearly a difficult time for us all, but I can tell you – I can’t tell you how proud I am to work with such great people. I’ll speak to some of our COVID-19 actions and plans in a minute.But before I do, let me very quickly review our first quarter metrics for grounding. I will start by noting that similar to peers in this space, Elevate was on pace for a very strong quarter prior to March, was on track to beat our forecast. All we mentioned for context is the first quarter numbers I’m about to summarize are not really indicative of any trend.With that said, as you saw from our press release and can see here on Slide 4, we reported the following first quarter results

[Christopher Lutes:]

Thanks, Jason, and good afternoon, everybody. Clearly, there’s a lot to discuss. I’m going to focus my remarks on 3 things.First, I’ll provide more detail on our Q1 2020 results. Second, while we are not providing any financial guidance for full year 2020 earnings, I will share some thoughts on how I’m thinking the rest of 2020 may play out. And then, I’ll wrap by going over our liquidity and capital position.Turning to Slide 9. Combined loans receivable principal totaled $577.7 million at March 31, 2020, which was essentially flat with a year ago. At the product level, Rise loan balances of $323.6 million at March 31, 2020, were up $43.5 million or 15.5% from $280.1 million a year ago, this despite a decrease in our Rise California loan portfolio of almost $18 million from year-end 2019. Our Rise California loan portfolio totaled just under $40 million at the end of the first quarter of 2020, and we expect the majority of that loan balance to continue to pay down over the remainder of 2020.Offsetting the overall Rise loan growth were decreases in both the Elastic and UK Sunny loan portfolios. Elastic loan balances at March 31, 2020, totaled $224.7 million, down roughly $20 million from a year ago. Elastic was probably the product most impacted by COVID during Q1 2020 as customer multi-draw activity or line utilization was somewhat surprisingly low. Elastic originations were almost $10 million lower in March 2020 versus our expectations as of the beginning of the quarter, and this trend has continued into April.Switching to the UK. Our Sunny loan portfolio has decreased from $49.4 million at the end of the first quarter of 2019 to just $24.2 million at the end of the 2020 first quarter, a drop of over 50%. As has been discussed in prior conference calls, despite very low customer acquisition costs due to a lack of competition, we’ve continued to approve fewer new customers each quarter because of the ever stringent customer affordability regulations in the UK. We approved approximately 10,000 new customer loans in the first quarter of 2020 at a very low CAC of $102 but down from almost 30,000 new customer loans in the first quarter of 2019.Staying on this slide, Q1 2020 revenue totaled $177.5 million, down 6.4% from the first quarter of 2019. Almost all the decline in the Elastic and Sunny revenue resulted from the decrease in the loan balances that I just discussed. For the Rise product, revenue increased $8.4 million or 8.8% in the first quarter of 2020 versus a year ago. This resulted from loan growth primarily in the FinWise Bank loan portfolio, offset by a decline in the effective APR of the Rise product, which declined from 132% in the first quarter of 2019 to 123% in the first quarter of 2020.The average APR of a new Rise FinWise customer is approximately 130%, which is lower than the typical state-licensed Rise customer, but with a better credit profile. So the growth in the FinWise Bank loan portfolio continues to lower the average effective APR of the overall Rise portfolio.Looking at the bottom of this slide, both adjusted EBITDA and adjusted net income are down on a year-over-year basis. Half of the decrease in adjusted EBITDA resulted from our UK operations, which saw a $5.1 million decline due to lower revenue, along with a small increase in complaint expense associated with customer affordability claims. The remaining decrease in adjusted EBITDA was primarily due to an increase in the Rise loan loss reserve due to the year-over-year loan growth.Adjusted net income for the first quarter of 2020 totaled $7.6 million or $0.17 per fully diluted share compared to $13.4 million or $0.30 per fully diluted share a year ago. Including the impact of a $9.3 million write-off of goodwill associated with our UK entity and a $4.3 million non-operating loss related to a legal matter, we incurred a GAAP net loss of $4.9 million or negative $0.11 per fully diluted share for the first quarter of 2020.As Jason discussed, the write-off of the goodwill associated with the UK entity was a result of a required reassessment of goodwill impairment due to the decrease in our market capitalization, primarily resulting from COVID-19.Turning to Slide 10. The cumulative loss rates as a percentage of loan originations for the 2019 vintage is the lowest ever, with the new generation of risk scores and strategies that were rolled out in 2019 performing much better than the 2018 vintage, which remained relatively flat with the 2017 vintage.That said, COVID will have an impact on all vintages, but we’ll probably hit the 2019 vintage the hardest as most of the existing loan portfolio relates to that particular vintage. However, even if the 2019 vintage deteriorates by a hypothetical additional 50%, the losses would still be in line with the 2013 and 2014 vintages, which incurred close to 30% overall loss rates, as those 2 vintages were primarily composed of all new customers.On this slide, we also show the customer acquisition cost. For the first quarter of 2020, the CAC was $259, up from $221 in the first quarter of 2019. COVID had a negative impact on March direct mail customer acquisition and skewed the quarterly CAC much higher. Otherwise, we believe the CAC for the first quarter of 2020 would have been lower than $250.Slide 11 shows the adjusted EBITDA margin, which was 19% for the first quarter of 2020, down from 24% for Q1 2019. Not reflected in this margin is the decrease in the cost of funds for the debt facilities. As you recall, we amended the debt facilities over a year ago, but the full impact was not reflected in quarterly results until the third quarter of 2019. Interest expense as a percentage of revenue dropped from 10.1% in the first quarter of 2019 to 8% in the first quarter of 2020. And the overall effective cost of funds for the first quarter of 2020 was 10.4%.While we don’t have a slide, let me spend a minute discussing the loan loss reserve methodology and how the reserve is determined for customers that are using payment flexibility tools that Jason discussed, such as deferring payments. We did not have to adopt CECL at the beginning of the year, so the loan loss reserve methodology remained unchanged in Q1 2020. Loss factors are calculated by product and by delinquency status and sometimes even by the number of successful payments the customers made.For customers that have deferred payments between 30 and 60 days, the loans do not continue to age as past due while their payment is in deferral status. But this bucket of loan balances is monitored separately to determine if additional loan loss reserves are needed in addition to the reserves generated under the normal methodology.Additionally, the effective APR for Rise installment loans is lowered to account for the longer duration of the loans, and interest continues to accrue during the deferral period at that lower effective APR. For Elastic lines of credit, no fee is accrued during the payment deferral period. At March 31, 2020, loan balances with deferred payments totaled $26.4 million.Now let me discuss the remainder of fiscal year 2020. While we are not providing earnings guidance for the remainder of this year due to uncertainty caused by COVID, we are modeling various scenarios. The 2 biggest uncertainties from our perspective are when we and our bank partners can start lending again, which impacts forecasted revenue and marketing expense for this year and what will loss rates be on the existing loan portfolio.From an optimistic standpoint, I believe lending could begin soon with new customer volumes at half of our original Q3 expected lending volumes and at 100% of original expected lending volumes by Q4. Under this scenario, I would expect loss rates somewhere between 55% to 60% of revenues for the rest of this year or roughly 25% of prior loan originations, which would be a 10% to 20% deterioration in existing business as usual loss rates. Under this scenario, we believe that CACs would continue to trend between $250 and $300, while we maintain flat operating expense for the rest of the year.A more pessimistic scenario would be no loans to new customers for the rest of this year and loss rates running north of 60% of revenues due to the decline in revenue and continued impact of COVID on losses. In this scenario, there would be minimal direct marketing expense going forward, and operating expense would be expected to decline by at least 10% to 20% in the second half of 2020.Turning to liquidity and capital on Slide 12. One of the positives of our business model is the short-term nature of the loans. Q1 of every year is the seasonal slow period for loan growth due to the loan pay-downs resulting from customer tax refunds. COVID did not impact the normal Q1 2020 tax seasonality. There was a normal pay-down of the loan portfolio, and $45 million of debt was repaid during Q1 of 2020 with an additional $20 million of debt paid back in April of 2020 due to the slowdown in loan originations resulting from COVID beginning in mid-March.Due to the uncertainty associated with COVID, we chose not to prepay the $18.1 million of sub-debt, as we discussed on our last conference call. This sub-debt does not mature until February 1, 2021, and we believe we will be able to pay that debt upon maturity. All other debt facilities have a maturity of January 2024.On March 31, 2020, there was over $100 million of cash on our balance sheet more than at the end of last year. Our relationship with the primary lender, Victory Park Capital, remains strong as we have worked with them for 10 years. Given the current economic environment, loan originations to customers is minimal, so we believe that there is no need for additional debt for the next few quarters. All debt facilities were in compliance with all covenants at March 31, 2020.Lastly, I would like to briefly discuss the additional $20 million common stock repurchase plan authorized by our Board in February of 2020. While we believe this use of capital at the current stock valuation is compelling from a return on capital perspective, given the uncertainty of COVID, we are being prudent with our cash on hand.During the first quarter of 2020, we repurchased 4.2 million shares – $4.2 million of common shares under this repurchase program. We will keep this plan open, and in the event the uncertainty associated with COVID dissipates, we would look to actively repurchase our common stock under this plan at current price levels.With that, let me turn the call back over to Jason.

[Jason Harvison:]

Thanks, Chris. I would like to reiterate my pride for what our teams have accomplished in such a short time period. I remain optimistic on our prospect to generate shareholder returns and to continue to serve non-prime consumers. While we are currently in an uncertain time, I know we will get through this. And to that end, I’d like to review what we still believe are the key components of Elevate’s value proposition. First, we really do have a differentiated approach, both in business model and with how we help non-prime consumers. COVID-19 crisis or not, we think being 100% online is a significant advantage. Similarly, the positive impact we have with our customer-friendly product features have won us new customers in the past. And we believe that will only increase as we help consumers through these difficult times.Second, Elevate is a profitable and cash-flow-generative business. We have generated strong EBITDA growth and free cash flow consistently, and expect to do so in the future as well. On a related point, Elevate has a strong liquidity position.The market opportunity to help non-prime consumers has always been very large, and we take a lot of pride in our company’s ability to serve this population. Our management team has been in place for many years now and has a deep understanding of the non-prime lending space. While COVID brings a new unprecedented challenges, we are confident in our ability to emerge a stronger company.With that, I thank you for your support and interest, and I’ll turn it back to the operator.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Moshe Orenbuch from Credit Suisse. Please go ahead.

[Moshe Orenbuch:]

Great. Thanks. I guess a couple of things. I mean, maybe could you just maybe talk a little bit about the process of the deferrals? I mean, you [Technical Difficulty] 60%-some-odd of them kind of go back to performing status. Like what are the – how should we think about the evolution of that, and how it goes between your more optimistic scenario and your more pessimistic scenario, Chris?And did I hear you that we don’t charge any interest on that or just not additional interest? I guess, I didn’t – I wasn’t sure how you describe that.

[Christopher Lutes:]

Yeah, hi, Moshe, it’s Chris. I’ll take it, and then Jason can add any higher-level color. Yeah, we – really, it’s just the Rise product right now that we have a lot of recent going back. And I think the chart in the deck shows going all the way back into January, kind of the weekly performance of customers that have historically deferred payment.Granted, clearly, with COVID, the amount of deferred payments went up somewhat dramatically in late March and has remained relatively flat in April at roughly about, I think, 10% of the Rise portfolio. And what we saw historically, whether related to the old way before COVID-19 and now even with COVID looking at payments all the way through the end of April for customers that have deferred payments that we’re seeing roughly about 60% to 65% of those customers actually perform on the deferred payment.And then of the remaining amount that’s not preferred, you’re right, they would be technically still – I wouldn’t say brought back to current, they’re still in the current status, but they’re still considered deferred unless they’ve completely caught up. But for the remainder that don’t, we’re seeing that roughly about another 25% end up deferring a second time, taking advantage of another 30-day to 60-day deferral period and then the rest would roll delinquent.The way I would translate that and into looking at losses is, roughly, if you’ve got 10% of the Rise portfolio right now in deferral status or customers that have deferred payments, at least 60% of those are good. So that remains the remaining 40%. Of that, just roughly, from my perspective, we typically cure and we haven’t really any change in our cure rates for customers that go past due.So I would assume of that remaining 40%, that we would be able to collect on roughly about 20%. So you’re looking at about maybe 20% of the $25 million in total that would be potentially at risk. If you look at it as a percentage of the total loan portfolio, that’s roughly about 2% of the total loan portfolio that we think we may see an uptick in losses, which again would then go back to my kind of more optimistic scenario that that’s roughly about a 10% to 20% deterioration in business as usual, assuming that we typically lose around 20% to 22% of losses as a percentage of originations for any vintage.I’ll stop there and make sure that that kind of answers your question related to the deferrals. And if it does, I can then move on to the second piece, which is related to how we’re handling the revenue aspect of deferrals. Those, okay.Yeah, so from a revenue perspective – okay, good, so from a revenue perspective, both products are treated differently, primarily because of the differences in the loan system. But for Rise, for an installment loan product where a customer is deferring the payment in accordance with the accounting rules, what we’re doing is, is that the customer truly is deferring the payment or extending the maturity of the loan.It’s not like what we’re seeing with a lot of mortgage companies, where they’re allowing a customer to defer for 3 months, but then in month 4, they’ve got to do a catch-up for all 4 months. Our customers, when they defer 30 days, were technically tacking on a 30-day extension onto the end of the loan. So as a result of that, we are automatically modifying the effective APR lower, and we’ll continue to accrue interest for the Rise installment loan, even while they’re in deferral period, but at that lower effective APR.For Elastic, it’s slightly different being a line of credit product and because of the way – there, we’re partnering with a bank and per the bank’s request. What we’ve done is essentially have the system not accrue any fees for the Elastic product while it’s in deferral. So technically, if a customer is deferring 15 days or 30 days, there’s not going to be any fees that accrue on that particular – and that’s the way it’s been with that particular product really since day 1. So we’re really not changing anything related to COVID. But we’re definitely seeing an increase.So I think what we’ll probably see going forward is that the effective APR on a quarterly basis for the Elastic product will probably initially drop a little bit. But technically, really, over the life of the loan for both Rise and Elastic, it’s not going to change the amount of true fee revenue or cash revenue that we would collect from a customer. It’s just more of a timing issue from an accounting perspective.

[Moshe Orenbuch:]

Okay. And then maybe if we were to think about – obviously, the pace of recovery is unclear. But you talked about higher losses for the balance of the year. I guess the question is how long would that high loss tail kind of go on from, I guess, whenever – if you were thinking in this more optimistic scenario that perhaps employment was improving by the third quarter, like how many more quarters would you see, going into 2021, of that higher loss tail?

[Christopher Lutes:]

Well, I don’t think we can really say with any certainty how long that may last. I mean, what’s interesting is, candidly, from my perspective, I think short-term, there will be an increase in losses, but it’s not going to be a dramatic or drastic increase in short-term losses, because customers are deferring, and roughly 60% of those customers are following through on their deferrals. So as I mentioned earlier, there’s a small percentage of the portfolio that is at risk where you’re going to see probably roughly a 2% uptick in the overall losses on the portfolio or a particular vintage over the next 3 to 9 months.So from that regard, I think that that’s kind of right in line. Candidly, what I’m – I think what we’re all probably more worried about in our industry is it’s not the losses, it’s the lack of being able to lend right now. And given the short-term nature of our loan portfolio, the amount of revenue that we’ll be generating over the course of the next several quarters, we need to, hopefully, at some point, soon begin lending again, both us and our bank partners, to start to get the loan portfolio growing again or at least staunching the losses.The portfolio has paid off pretty dramatically over the course of the first 4 months of this year. And so short-term, I’m more concerned about revenue. You’re right, longer term, if this persists, I mean, at some point, the losses could start to grow a little bit more. But short-term, I don’t view this as a loss issue, I view, this more as a short-term revenue issue.

[Moshe Orenbuch:]

Okay. Thanks.

[Operator:]

Thank you. [Operator Instructions] Your next question comes from Lance Jessurun from Jefferies. Please go ahead.

[Lance Jessurun:]

This is Lance on for John Hecht. Thanks for taking my question. First thing, I wondered if you could touch on any April trends that you’ve seen as the month has gone on and then as we start May in terms of credit originations from existing customers.

[Jason Harvison:]

Sure. Yeah, this is Jason. I’ll start, and then Chris can add color if he wants to add anything there. I think what we’ve seen and we’ve talked about a little bit with these deferral opportunities for consumers, we saw a pretty good uptick in late March, early April. But through the month of April, we’ve seen those actually start to flatten out and actually slightly decline. So I think that’s fairly positive for what we’re seeing consumers to be able to use the features when needed, but not go too overly aggressive with them.On the originations side, I think what we’re seeing there is, once again, consumers are just being responsible right now. I mean we’ve seen, both on new originations, obviously, we’ve pulled back on the marketing initiatives there for now, so not much on the new originations side. But even on the existing portfolios, you’re not seeing customers come back and re-borrow or multi-draw at the rates we saw even during the first quarter, which is typically a slow period.And so I think that’s where we’re seeing consumers really start to manage their access to credit and manage their expenses within their daily budget, which as we’ve talked about in the past, the non-prime consumer seems to be able to weather these kind of choppy times better than the prime consumer, and we’re seeing some of that right now in the early days.

[Lance Jessurun:]

Okay. Thank you. And then to follow-up, I was wondering if you could give any color on liquidity and near-term liabilities or possibly any covenants that you might have that might be at risk.

[Christopher Lutes:]

Yeah, from a liquidity perspective, as I mentioned in my analysis earlier, we ended the quarter with over $100 million of cash through April. That amount of cash on hand has gone up even more as the loan portfolio continues to pay down. And we paid down an additional $20 million of debt in April on top of the $45 million of debt that we paid down in the first quarter, and I would expect that we’re going to pay down even more debt here in May. So right now, liquidity is not an issue, and it sounds like that’s pretty consistent with what we’ve heard from other companies in our space right now that, as I mentioned, it’s more about trying to get the loan book growing again.

[Lance Jessurun:]

Sounds good. I appreciate it.

[Operator:]

Thank you. There are no further questions at this time. I would now like to hand the conference back to Jason Harvison for closing remarks.

[Jason Harvison:]

Yeah. I’d like to thank everyone for dialing in and listening to the first quarter earnings results. Also, once again I would like to thank the Board and the management team, the whole team here at Elevate. I think they’ve done a tremendous job navigating through some unprecedented times with having to work from home and operate in this environment and doing a great job taking care of the consumer. So look forward to speaking with everyone again to talk about our Q2 results in a few months. So I hope everybody stays safe, stays healthy, and we’ll talk soon. Bye.