Elevate Credit, Inc.
Q4 2020 Earnings Call Transcript

Published: 8 Feb 2021

[Operator:]

Greetings, and welcome to Elevate Credit, Inc. Full-Year Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Daniel Rhea, Director of Public Affairs. Please go ahead, sir. You may begin.

[Daniel Rhea:]

Good afternoon, and thanks for joining us on Elevate’s fourth quarter and full-year 2020 earnings conference call. Earlier today, we issued a press release with our fourth quarter and full-year 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 also available on our website. Please refer now to Slide 2 of that presentation.

[Jason Harvison:]

Good afternoon, everyone, and thank you for joining us today. Today, I’d like to spend some time on 2020 and how Elevate both exceeded as a business and help customers in what was a challenging year for all of us. I’ll then provide thoughts on the year ahead, including our growth strategy and some product updates. Lastly, I’ll discuss Elevate’s strong balance sheet and give an update on how we’re putting capital to work for shareholders. Before those topics, let me start on Slide 4 and give some highlights from our fourth quarter. Our financial results are similar to the past few quarters as muted demand continued to dampen revenues, but very strong credit bolstered adjusted earnings and adjusted EBITDA. Specifically, fourth quarter revenue of $90.7 million was down 45% compared to a year ago, but was just down 3.7% sequentially. The most important takeaway in our view though, was that our loan balance in the fourth quarter were up 6% over last quarter. Turning to profitability, Elevate had another very strong quarter with adjusted EBITDA of $26.5 million and adjusted earnings of $8.9 million. Strong credit and lower marketing costs again drove profitability. And as a result, adjusted EBITDA margin for the quarter remained above historical trend at 29.2%. Payment assistant tools continue to help customers in their time of need, whether that be due to COVID or not. We anticipate these features continue to help keep credit strong across the portfolio.

[Chris Lutes:]

Good afternoon. From a financial performance standpoint, Q4 2020 played out pretty much as we expected excluding the large legal accrual Jason discussed. We continue to see strong credit quality and for the first time all year, we saw quarterly loan growth. Turning to Slide 8, combined loans receivable principal totaled just under $400 million at December 31, 2020, down 34% from a year ago; but on a sequential quarter basis, loan balances were up almost $23 million. At the product level, RISE loan balances totaled $228 million at the end of 2020, down $122 million or 35% from $350 million a year ago. Our RISE California loan portfolio accounted for almost a third of that decrease as the portfolio in that state dropped to $14 million at the end of the fourth quarter of 2020, a decrease from $58 million a year ago, as we stopped lending in that state at the beginning of 2020. total RISE loan balances at the end of 2020 were up $13 million from the third quarter of 2020. elastic loan balances at December 31, 2020, totaled $157 million, down $95 million or 38% from a year ago, but were up roughly $5 million from September 30, 2020. We have also disclosed Today Card balances for the first time in this press release. loan balances for this credit card product totaled $14 million at the end of 2020, more than tripling from a year ago. this product has a stated APR less than 36%. The Today Card had over 8,000 new customers in 2020 at a very impressive customer acquisition cost of only $52 per customer. The product was slightly gross profit positive in the second-half of 2020 with revenues exceeding loss provision, marketing and other costs to sales. We expect to continue to ramp up loan balances in this product in 2021 as we continue to roll out improved credit models, focused solely on this near prime customer. staying on this slide, revenue for the fourth quarter of 2020 was down 45% from the fourth quarter a year ago. For the RISE product, revenue decreased $48 million or 47% in the fourth quarter of 2020 versus prior year. Roughly, two thirds of the revenue decline for RISE resulted from a drop in average loan balances while the remainder related to a decline in the effective APR of the RISE product, which declined from 124% in the fourth quarter, a year ago to 100% in the fourth quarter of 2020. 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 effect of APR for customers that have deferred payments on their loan balances. for elastic, most of the $26 million decline in revenue resulted from the decrease in average loan balances.

[Operator:]

At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Moshe Orenbuch with Credit Suisse. You may proceed with your question.

[Moshe Orenbuch:]

Great. So, congratulations on getting through as a difficult year and being able to use capital to both return from the standpoint of both debt and equity. Maybe if you could kind of just start a little bit in the past, I guess, there was a lot of – it was difficult to know how the consumer would behave and now you seem to have a perspective on the performance post the first quarter, maybe is there like something that you’re seeing or what your customers are telling you that gives you the confidence that post that they will come back in the bar and you’ll be able to get to that 10% to 15% loan growth?

[Jason Harvison:]

Yes, Moshe, this is Jason. I’ll pick that and Chris can maybe add some color. But I think some of the things that we’re seeing we talk about the ability to look at bank transaction data from consumers. And what we’re seeing is, their most recent stimulus that came through it seemed to flow through pretty quickly for the consumer. And also when we look back in Q4, we saw people start to get back in the marketplace, jobs were up some and people were out spending again, so we saw that demand picked back up. And so, while we do expect to have some dampening on demand in the first quarter with another round of stimulus coming ahead of us, we think the need for consumers are still going to be there when things open back up as they get back out in the marketplace. And so, we think we’re well positioned to be ready for that.

[Moshe Orenbuch:]

Maybe just to follow-up on that. And when you – when we think about the amount of the, I guess, your thoughts about how big the credit card products is going to be a year ago, I mean, a year from now, excuse me, and or what percentage of that 10% to 15% loan growth would be driven by the credit card? Like, how do you think about, how large that’s going to be?

[Chris Lutes:]

Hey, Moshe, it’s Chris.

[Moshe Orenbuch:]

Hey, Chris.

[Chris Lutes:]

What we’ve got in kind of the preliminary forecast with the high-level thoughts that I gave is the credit card product doubling year-over-year, so you’re looking at balances probably around $25 million to $30 million-ish at the end of this year. I think Jason and I know, we could probably grow that faster. So at least from a preliminary standpoint, we feel pretty good that we can double the portfolio on a year-over-year basis. And if we like the credit performance, we like the CAC and the profitability, we could certainly look to potentially grow it even faster.

[Moshe Orenbuch:]

And when you think about that, I mean, that CAC is lower than your overall CAC. I would assume that that’s a product that has, I mean, assuming that credit stays within your bands has got a better lifetime profitability, because that customer probably sticks around longer.

[Chris Lutes:]

Yes. Much – probably much better long-term profitability, certainly a much longer payback, initial payback period, just given the lower APR and the average loan balance that we’re seeing so far is around, I think, about $1,200 per customer. So that’s a little bit lower than what we typically see with RISE or Elastic customer. So we’re certainly generating lower revenue initially. But over the life, you’re right, I mean, if you go out three or four years, I think the lifetime customer profitability off of this customer looks very promising, especially at the CACs that we’re seeing right now.

[Moshe Orenbuch:]

Got it. Thank you.

[Operator:]

Our next question comes from the line of David Scharf with JMP Securities. You may proceed with your question.

[David Scharf:]

Thank you. Good afternoon, guys, and thanks for taking my questions. Hey, Jason, I guess maybe a little more of a strategic question, I’m looking at Slide 6, where you discuss the interest rate environment and specifically sort of the APR developments. And I clearly understand the math, I mean, as far as the effect at the Today Card and some of the other developments have on the average APR near-term. I’m just trying to get a sense, I mean, as we think about where you want to take the business mix over the next several years. I mean, is there a concerted effort to become more of a near prime lower APR lender? Or is this just kind of the by-product of sort of a one-off opportunity you saw in the card space? I’m just trying to get my arms around a, how you’re defining near prime APR in this slide; and b, whether this is going to be an ongoing evolution, notwithstanding the upward trend in yield that you’ll get once you start to add new customers once again?

[Jason Harvison:]

Sure. Sure. It’s a great question, David. And I think it’s a little bit of both. When we look at what we’ve done with the core products, I say that maybe – you’re talking about RISE and Elastic. We’re real proud of what their progress has been over the last four, five, six years to see the effect of APRs come down to be below 100% in the double digits. And I think that’s a byproduct of the payment assistant tools we built in for consumers to have better payment performance. It’s a function of the better underwriting has been put in place with more consumer data that we can leverage. And I think that’s always been part of the plan is to continue to drive down costs for consumers and continue to expand access to credit. And so I think you’ll continue to see that with those existing flagship products that are out in market today. But I think there’s also an opportunity to move closer towards near prime with the Today Card and taking some of those learnings that we’ve had over the last 10, 15 years on how to serve non-prime consumers and expand access to credit and give them – the nice thing about Today Card, it’s a card that gives them the benefit of having a promised type of transaction vehicle that the non-prime consumers not used to having. And I think that’s why we’re seeing the CAC be very strong, and we’re optimistic about what that could mean for us in the future. So we think it’s just a natural progression and an extension of the current products in market. We’ll continue to invest in RISE and Elastic, but also I think today provides a nice opportunity for Elevate.

[David Scharf:]

Got it. No, that’s helpful. And I may have missed this in the discussion on the Today Card or maybe even when you’re rolling it out. But can you – do you have any color on who these borrowers are? I mean, I’m curious whether, a, they’re entirely new to Elevate. I would imagine if they’re sub-minus 36% borrowers they are. And b, as you kind of look at their credit files, even if they’re thin files, if you have a sense whether or not they’ve ever had a general-purpose card elsewhere, whether they’re kind of augmenting existing card balances? Just a little more flavor on who this borrower is relative to who you’ve typically served?

[Jason Harvison:]

Sure, sure. It’s still somewhat early on in the life of that product. So I don’t know the data is not quite as rich as what we’ve have on other products. But I think from a demographic standpoint, we’re seeing them to be somewhat similar to the RISE and Elastic products, maybe just to touch more up the credit scale, but still in the non-prime category. They do have historical credit that they’ve had access to, whether it’s been maxed out or had some delinquencies there. So they’re getting a second chance. But it’s kind of the ability for us to take some of the learnings and understandings we’ve had with non-prime consumers and take a product out there that we think fits a need that’s not being met right now.

[David Scharf:]

Got it. Got it. And one last follow-up. I mean, I guess it’s more housekeeping. But the legal accrual, I mean, it sounds like it goes back quite a number of years, so probably isn’t germane to your business at all today. But is that something that’s expected to ultimately be a cash expense for the company? Can you provide just a little color on what that, I guess, legal reserve is for?

[Jason Harvison:]

Sure. I mean, I think you did hit on it there. It’s not related to our core business. It’s tied to the spin-off of our predecessor company. And so we’ll continue to fight that litigation that’s out there. We thought it was appropriate to go ahead and take a legal reserve at this time. And at the time that we either reach a settlement or there’s a final decision in that. There could be a cash outlay, but we thought that was the right number to accrue at this point.

[David Scharf:]

Got it. Great. Thank you.

[Operator:]

Our next question comes from the line of John Hecht with Jefferies. You may proceed with your question.

[John Hecht:]

Yes. A little bit more follow-ups from Moshe and David on the card book because it sounds like it’s got a lot of growth and momentum. What kind of – I know your overall business, I think you shoot for something around a 50% gross margin over the long-term. Is this product going to be similar to that? Or how do we think about the kind of unit level economics?

[Chris Lutes:]

Yes. Hi, John, it’s Chris.

[John Hecht:]

Hi, Chris.

[Chris Lutes:]

It probably – initially over the first 12 to 24 months, the operating margins are going to be similar to slightly lower than our RISE or Elastic customer. But over time, given the revolving nature of the product, that’s where it starts to generate probably longer term better margins. I think a key aspect of this as well is given the nature of the APR and that it’s a more prime-ish customer while certainly, as it starts to grow, we’ve been self-funding it so far, we’ll go out and get a much lower cost of funds to fund this product going forward. So generally speaking, I think this product so far from what we’ve seen with the initial loss results, the CAC and the performance, we think that longer-term, it could have unit economic margins better than our existing RISE and elastic customer, but it’s probably going to take a longer period of time to get there.

[John Hecht:]

Okay. And then you guys talk about, I think you gave some specific kind of expectations for growth in the card book. You mentioned RISE and elastic, and you talked about loan – the aggregate loan growth expectations for the year. How do you think about RISE? Which one of those has more momentum now? And how do you think about that trending over the year?

[Chris Lutes:]

It’s Chris again. I think RISE has a little bit more momentum right now. And so I think, when you look at the 10% to 15% overall growth target for the year, RISE will probably be at the higher end of that range. Elastic will probably be at the lower end of that range. But both products were expecting double-digit growth on a year-over-year basis.

[John Hecht:]

Okay. can you – you gave us some of the information about the deferrals. Can you give us a sense what the allowance level is for deferrals?

[Chris Lutes:]

And then I’ll also give one update too that we didn’t put in the press release. but the overall way, we’ve been handling the loan loss reserve for customers with deferrals is treating them as though they’re one to 30 days past due, which for us, because we haven’t adopted CECL since we’re a small reporting unit. That’s typically a loan loss reserve between 40% and 50% of the customer loan balance. And what we’ve seen on performance of those customers so far is that typically the loss rates probably in the 20% range. So, I think so far we’ve been conservative with the loan loss reserve factors is we get a little bit more experienced, we’ll continue to chew up those loss factors and probably bring that down in future periods if they continue to perform well. The other data point that I’ll put out that that’s really recent that we just didn’t have a chance to put it in the press release was, in January, with the amount of the – I guess the initial $600 stimulus checks. We did see the deferred loan balance; principal balances come down $10 million from year-end. So that was obviously, very positive from our perspective and should continue to show the strength and credit quality that we’re seeing. So, the customers did the right thing with the stimulus checks that they were receiving the $600. They took it. And for those that had deferred principal payments, they made their payments and are back in the current bucket.

[John Hecht:]

Okay. Very helpful information. And then you’re – you’ve paid some debt down your buying back stock, but you’re still – I think your debt-to-equity is around three times, I mean, how do you think about what your optimal kind of either leverage or capital structure target that you’re thinking about?

[Chris Lutes:]

Yes. It’s down now two to one in, at the end of January after the $97 million pay down that we had. if anything, I think we’re probably underleveraged a little bit and as I just mentioned, the Today Card, we’ve been self-funding that clearly, to the extent that that starts to grow materially, we’ll look to establish a formal lending facility for that. So that’ll get the leverage back up. I think right now that, from my preference, I’d probably by the end of the year; prefer a little bit more leverage, so that we can – given again, where the stock’s trading. And I know we’ve had a nice recent run-up, but we still believe that to the extent, possible if we can’t use free cash flow to generate good solid loan growth off of our three products, I’d prefer to borrow a little bit more and continue to actively buy back our stock, even on top of what we – the board just recently approved.

[John Hecht:]

Great. I appreciate all the information. Thanks, guys.

[Operator:]

Our next question comes from the line of Michael Diana with Maxim Group. You may proceed with your question.

[Michael Diana:]

Okay, thank you. Chris, you gave some good guidance there at the end of your prepared remarks, faster than I could write. Do you think you could just quickly review that?

[Chris Lutes:]

Sure. Yes. I mean, what we’re looking at is, I’ll start first with Q1, given the initial $600 stimulus check wave that kind of came through, and we saw a lot of that already flush out through customer checking accounts. So, we don’t think that there will be anything lingering there, but that combined with assuming another $1,400 of stimulus coming here sometime in Q1, we expect loan balances will drop about 15% to 20% during the first quarter from year-end balances. However, we do expect that from Q2 through the end of the year, we’ll be back in growth mode and we’re targeting by the end of the year to have year-over-year loan growth of about 10% to 15%. As I mentioned, probably the Today Card, we could look to see those balances at least double year-over-year. and then RISE will probably be at the higher end of that 10% to 15% range and the elastic product, probably at the lower end of that 10% to 15% range. but really, we expect all three products to have double-digit growth on a year-over-year basis. Revenue will obviously drop in Q1 versus a year ago, probably by the same, roughly 45% that we saw in Q4, as the loan balances kind of hopefully hit the trough at the end of Q1. Marketing expense will be down materially in Q1. We expect loan originations probably at about half of what they were in Q1 a year ago. Remember, COVID really didn’t impact loan originations till beginning of the second quarter of last year. So, on a year-over-year basis, loan originations will be down about 50% in Q1. but then, we’ll start to expect to see it grow significantly double-digit second quarter through the end of the year. We think loss rates will continue to be much stronger than we’ve seen historically, given the strong credit quality, the payment flexibility tools that we’ve rolled out. We do expect that in the second-half the year, as we start to grow the loan book, the increased marketing spend and the loan loss reserve build will compress adjusted net income versus what we saw last year. Op expense will be down a little bit for the full-year versus what we saw in 2020. And I think interest expense will be down pretty materially given that we just paid down almost a $100 million of debt here in January and we expect to self-fund a lot of the loan growth throughout the rest of the year. So all in all, we’re looking for a good double-digit growth, coming the latter part of the year and then doing whatever we can to maintain expenses, including interest expense, and trying to drive good margins.

[Michael Diana:]

Okay.

[Chris Lutes:]

We’ll also obviously – we also announced the $25 million stock buybacks. So, we’ll continue –we’ll start that beginning in February. That’s an expansion on top of the $30 million that we’ve already bought back over the course of a little over a year.

[Michael Diana:]

Right. And on tax, are you saying the effective tax rate is going to be close to zero?

[Chris Lutes:]

Yes. The cash rate will be zero, because we’ll be able to utilize the NOL, but we already booked the deferred tax asset related to that UK NOL on our books last year. So, the GAAP P&L tax expense will be a normal 25% to 30%, but the actual cash taxes paid will be minimal.

[Michael Diana:]

Yes. Okay, great. I appreciate it. Thank you very much.

[Operator:]

Ladies and gentlemen, we have reached the end of today’s question-answer-session. I would like to turn this call back over to Mr. Jason Harvison for closing remarks.

[Jason Harvison:]

To close, I’d like to thank the Elevate team for all the hard work in 2020 and making it such a successful year. I look forward to leading the team in 2021 and building on that success. So, thank you for all your time and we look forward to speaking to everyone here in a few months to cover our Q1 performance. Take care.

[Operator:]

Thank you for joining us today. This concludes today’s conference. You may disconnect your lines at this time.