Elevate Credit, Inc.
Q1 2019 Earnings Call Transcript

Published: 30 Apr 2019

[Operator:]

Greetings, and welcome to the Elevate Credit First Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Daniel Rhea, Manager of Communications. Please go ahead.

[Daniel Rhea:]

Good afternoon, and thanks for joining us on Elevate's first quarter 2019 earnings conference call. Earlier today, we issued a press release with our first quarter 2019 results. A copy of the release is available on our website at investors.elevate.com. Today's call is being webcast is accompanied by a slide presentation, which is also 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 issued today, 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 today, 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 investors.elevate.com. 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 Chairman and CEO, Ken Rees; as well as our CFO, Chris Lutes. I will now turn the call over to Ken.

[Ken Rees:]

Thank you, Daniel, and thank you all for joining us on our call today. Starting on Slide 3 and as noted in our press release, 2019 marks the 5th anniversary of Elevate as a company. We're very proud of what we've accomplished in this short period of time, but are even more proud of the savings and service we provide to the 170 million credit constrained consumers in the U.S. and UK that we call the new middle class. Elevate has now originated more than $7 billion in loans to 2.2 million customers and have saved those customers and estimated $5.2 billion over what they would have paid using payday loan alternatives. Helping these underserved consumers is why we come to work each day and these figures are proof positive that our technology enabled consumer friendly approach is making an impact. The past five years have also been highly successful in terms of our product portfolio and our financial growth. We launched our four current products and develop successful lending relationships with three U.S. banks. The response to these industry leading products has been so great that grew our revenues more than 1000% from $72 million in 2013 to $787 million in 2018. Over the same period, our adjusted EBITDA expanded from a loss of $47 million to a gain of $116 million and most recently, we earned $13 million of net income in 2018, which was double our adjusted net income in 2017. In 2019, we believe we can double net income yet again. Despite this incredible growth over the past five years, we feel that Elevate is just getting started. We look forward to driving further profitable growth in the next five years and beyond. Our financial performance in Q1 of 2019 demonstrates just how powerful our technology enabled business model can be. Slide 4 lists some of the highlights of our first quarter performance. We started out the year very strong by generating more net income in Q1 than all of 2018. $0.30 per share for Q1 2019 versus $0.28 per share for full year 2018. First and foremost, this performance was driven by excellent credit quality. In fact, our past due principle balances are at an all time low, less than 10% of our overall portfolio. In order to improvements in credit quality come at the cost of higher customer acquisition costs. Customer acquisition cost for the quarter was $221, 25% lower than the same period of 2018. I'd also like to highlight the strong performance of our newest bank partner FinWise. We launched with them in Q4 of 2018 and their loan portfolio was already more than $45 million as of the end of Q1 2019. It's also important to note that although we lowered our cost of capital under the new and expanded credit facility, the new pricing wasn't effective until late February. So it had only limited positive impact on Q1 performance. Hence we expected it will be a larger driver of improved earnings throughout the rest of the year. And as discussed previously, we're deprioritizing top line growth in favor of net income and margin growth in the first half of the year as we roll out new credit models and strategies. As a result, revenue and combined loan receivable principle for the quarter were approximately flat with 2018. Elevate strong Q1 performance is reassuring given that followed some setbacks in the second half of 2018. So let me turn to Slide 5 to give an update on how we're addressing the challenges we faced. First, we're pleased to report that the testing and deployment of our updated credit models and strategies is progressing as planned and we expect to leverage these models with high origination growth in the back half of 2019. We've also implemented a new suite of fraud tools that have lower defaults and our new credit models and strategies are expected to drive further improvements. These had been completed and are showing very strong lift over the previous generation of credit models. Although we're still in the process of tuning and deploying the models and strategies across all products and channels. The early impact on improved credit quality are obvious in Q1 results, we are primarily focused on direct mail and organic traffic improvements in the first half of 2019 and expect to roll out the new models and strategies to our affiliate partners in support of expanded growth in the second half of the year. Lastly, we're pleased to report the compliant binds rule related to our UK Sunny installment loans had slowed significantly. That said, we're continuing to constrain new loan growth in the market until we get more clarity on how regulators plan to address these complaints going forward. Over the long-term, however, we're confident that Sunny is well positioned to remain a strong leader in this market. With that, let me turn it over to Chris to review our financials and credit performance in greater detail.

[Chris Lutes:]

Thanks, Ken and good afternoon, everybody. Looking at the top half of Slide 6 on a year-over-year basis combined loans receivable principle were up $7.7 million or 1.4%. As we discussed during the prior quarter conference call, we are expecting relatively flat loan growth during the first half of 2019 as we rollout the new credit models for our U.S. products and await more regulatory clarity in the UK regarding affordability complaints. Thus our marketing to new U.S. customers was fairly limited during Q1 2019 and focus primarily on Rise, FinWise bank customers. As a result, we did see the FinWise loan portfolio increased from approximately $28 million at the end of 2018 to $47 million at the end of March 2019, very strong loan growth given the normal seasonal paydown of loans during the tax refund season. For the other U.S. products, the state license Rise portfolio and the Elastic product, there was limited new customer marketing and we saw normalized taxes and paydown of loan balances. Additionally, Sunny UK loan balances were kept relatively flat during the first quarter of 2019. Overall, our loan portfolio decreased $73.4 million from December 31, 2018 to March 31, 2019, a decline of 11% compared to a decline of 8% in the first quarter of 2018. Our Q1 2019 revenue totaled $189.5 million, down 2.1% from the first quarter of 2018. While the overall average combined loans receivable principal portfolio increased about $10 million on a year-over-year basis. The decrease in revenue was related to a decline in our average effective APR, which dropped from 130% in the first quarter of 2018 to 126% in the first quarter of 2019, primarily due to the slowdown in new customer marketing, as new customer loans typically have a higher APR. Looking ahead to the remainder of fiscal year 2019, we continue to expect flat to slightly declining year-over-year growth during the first half of 2019, as we roll out and tune our new generation of credit models and strategies for both Elastic and RISE. For the second half of 2019, we continue to expect annualized revenue growth of 5% to 10%. Looking at the bottom half of Slide 6, we are very pleased with the year-over-year growth and our profitability for Q1 2019. Adjusted EBITDA for the first quarter of 2019 totaled $44.7 million, up approximately 21% from the prior year first quarter. Further, our adjusted EBITDA margin for Q1 2019 increased to 24%, up from 19% a year ago. Bottom line net income for the first quarter of 2019 was $13.4 million or $0.30 per fully diluted share, up from $9.5 million or $0.22 per fully diluted share in the first quarter of 2018. Looking ahead to the remainder of fiscal year 2019, we expect net income in the second and third quarters of the year to be lower than first quarter of 2019, due to increased marketing spend and loan loss provisioning as we roll out the new credit models and start to see loan growth. Despite the strong net income experienced in Q1 2019, we are leaving full year net income guidance of $25 million to $30 million unchanged. Turning to Slide 7, our cumulative loss rates as a percentage of loan originations for our 2018 vintage is relatively flat with our 2017 vintage and the early read on the 2019 vintage is that it is performing better than both 2017 and 2018. That said, we are now rolling out our new generation of credit scores and strategies and are hopeful that we can continue to drive loss rates lower in coming years. On this slide, we also show our customer acquisition cost or CAC. For the first quarter of 2019, our CAC was $221 down from $295 in the first quarter of 2018. We continue to be pleased with our CAC and believe that it is one of the biggest anticipated drivers of our expected margin expansion in 2019. We believe our fiscal year 2019 CAC will drop into the $225 to $250 range down from the prior historical range of $250 to $300. Primarily benefiting from the expanded state coverage of RISE through the FinWise Bank partnership and continued efficiency and diminish competition in the UK, although, we may see some quarterly volatility in the CAC. Slide 8 shows our adjusted EBITDA margin, which was 24% for the first quarter of 2019, up from 19% a year ago. All this expansion happened within our gross margin, which increased the 45% in Q1 2019, up from 38% for Q1 2018 due to lower loan loss provisioning and marketing spend. As discussed in last quarter's conference call, we believe continued margin expansion will happen during fiscal year 2019. Additionally, we believe that the decrease in our cost of funds will also result in an expanded net income margin in 2019. Lastly, turning to Slide 9, I would like to summarize the amended debt facilities for our products, which we previously announced in a separate press release issued in February of 2019. Terms for the amended facilities include the following

[Ken Rees:]

Thanks, Chris. Turn to Page 10. Let me summarize our roadmap for 2019. As Chris mentioned, with the completion of our lower costs and significantly expanded credit facilities more than a $1 billion, we believe Elevate's balance sheet is very well positioned to drive growth in 2019 and beyond. Although, we expect to continue to use 2019 as a transition year to focus on getting the full benefit of new origination models rolled out across all products and all channels and advance of significant new portfolio growth. Lastly, as I noticed earlier, we plan to keep Sunny installment loan balances relatively flat in the UK, until we get more regulatory clarity. As detailed in Slide 11, we are reaffirming our prior guidance for full year financial results. We remain on track to deliver full year revenues from $811 million to $834 million, adjusted EBITDA of $130 million to $140 million and net income of $25 million to $30 million or $0.55 to $0.65 cents per share. Overall, we're pleased with our results as far as 2019 and believe Elevate well positioned to more than double 2018s net income. Just as importantly, we're excited to be able to reaccelerate growth in the second half of the year. Thank you so much. And with that, let me turn it back to the operator for your questions.

[Operator:]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of David Scharf with JMP Securities. Please proceed with your question.

[David Scharf:]

Hi. Good afternoon and thanks for taking my questions. Maybe a couple things to start with that, Ken, obviously, it was a strong quarter on the credit front and it's certainly consistent with sort of a stable outlook that we've been hearing from a lot of lenders during this reporting season. I'm just wondering – I'm looking at my notes from the last earnings call a few months ago, and at that point I think you guided for a lower loan loss, a release of loan loss reserves in this Q1 than a year ago, and I'm wondering things came in a lot stronger on the provisioning front, but was there anything that unfolded and maybe the second half of the quarter or something related to tax refunds that will lead to the strong – low provision number?

[Ken Rees:]

Well. I think, we were, of course going into the year, we're trying to be somewhat conservative in our guidance. But really everything's coming together, in many ways, even better than anticipated. Some of the new fraud tools we've rolled out. The early results of the direct mail scores, and just overall, I think, macro conditions are leading to a really strong portfolio performance right now. As I mentioned, the current portfolio as a percentage of the overall portfolio as strong as it's ever been. Default rates across the board are at record lows and as we mentioned, we're looking at the early read on charge-offs as a percentage of originations and we feel like it's going to be from what we can tell the best performance yet. So just everything's coming together well from the core business and that's leading us to be have the kind of results we shown in terms of the loan loss provision.

[David Scharf:]

Got it. And maybe a follow-up on sort of the margin outlook thinking about a little longer term, even prior to the FinWise partnership, you had quite a number of quarters where the customer acquisition costs come in below that the initial guidance range. And now with FinWise, you've lowered it, the outlook considerably for the second half of this year. Do you think that, as we think about 2020 and beyond, I mean, is it possible that that closer to sort of $200 to $225 is sustainable level to think about or…

[Ken Rees:]

Yes. It's a great question. And Chris did suggest, we're actually already taking down our target range in which we had said was $250 to $300. We're already suggesting it's probably going to be more realistically that $225 to $250, and as we get into 2020 and 2021. I do think we're going to see it come down. The overall demand for the credit products are so strong, the benefits we're seeing with the new originations capabilities we believe will allow us to fund a higher percentage and continue to drive down customer acquisition costs. So yes, I mean, given the demand, it is strong as it is, we do see that over time, but I don't think it's going to be something that's going to be overnight. I think it's going to be measured from that $250 to $300 down to the $225 to $250 and then in the next couple of years, hopefully, getting closer to that $200 to $225 that you just referenced. Chris?

[Chris Lutes:]

Yes, I would agree with that.

[Operator:]

Thank you. Our next question comes from the line of Bob Napoli with William Blair. Please proceed with your question.

[Bob Napoli:]

Thank you. Thanks Ken and Chris, good afternoon. Question on the – I mean, you're rolling out new credit models and rolling out new credit models is always, it can be a little bit tricky and just like a little bit more color maybe on what is different about the credit models. And I think you're suggesting that – I mean, obviously, you're expecting better credit quality out of new credit models at the same time. You're bringing down your cost of acquisition cost. So maybe just give a little color on the changing credit models. How does that tie into even lower acquisition costs and how confident are you? How much testing have you done on these credit models?

[Ken Rees:]

Yes. Well, I mean certainly the performance of the company right now is at least from our perspective, strong proof that the core business is performing well and that the changes we've made so far are performing as expected or potential a little bit better. So some of the things, I mentioned, we have made a lot of headway in new fraud tools and fraud scores. And that's clearly having an impact on some of the early indicators of credit as we originate new customers in a positive fashion. The new scores for both direct mail and organic traffic have been developed and our testing out really well that the direct mail has been the primary focus of our rollout to date. But as we're starting to see some early reads on organic that's performing well also. For us so, because we are most focused on earnings growth this year. We're just being very measured in how we roll this out. So we're getting the tuning that we need for each of the channels and each of the products, not getting ahead of ourselves. And I think that's why we're seeing the results, we are.

[Bob Napoli:]

Thank you. Did the channel partnerships, I guess other marketplace lenders working with Credit Karma, LendingTree and others is an area where you pointed out in the past that the credit quality is generally not as good coming out of the marketplace lenders in channel partnerships, is that changing and I know – maybe are you now focusing incrementally more on direct mail relative to those marketplace lenders?

[Ken Rees:]

Yes. In terms of how we're rolling out the new scores, absolutely, it's first and foremost direct mail, secondarily, organic, third the affiliate partnerships. So we remain real optimistic about that channel, but we saw that we could make some pretty quick wins on the direct mail and organic side that's been the focus. And as we said, we'll really turn our focus to the affiliate channels, again, they're measured fashion, but in the latter part of the year in support of long-term growth.

[Bob Napoli:]

And then last question, can you give us some color on the mix of originations that you expect? How much out of direct mail versus other channels?

[Ken Rees:]

We don't really get to a lot of granularity around that. But in the latter part of last year, as you pointed out, we were focused on expanding the affiliate channel. That's now a pretty small percentage of our traffic, and we'll remain that way until the latter part of the year. So it's going to be – as mentioned primarily, a direct mail and standard digital campaigns through likely the third quarter, when we start really focusing on expanding to the other channels.

[Chris Lutes:]

The only thing I'll add Bob is that, in the UK the Lead Gen continues to be one of the primary channels there. So in our 10-K disclosure where I think we end up disclosing kind of the mix by marketing channel. The UK primarily makes up a good portion of that affiliate traffic and it'll continue to do so, especially with the decreased competition in the UK. I mean, if you look at the year-over-year customer acquisition costs, one of the biggest drivers for that drop was the UK customer acquisition cost dropping pretty significantly. And that's I think a big result of the decrease competition in the UK.

[Bob Napoli:]

Thank you. Appreciate it.

[Ken Rees:]

Thanks Bob.

[Operator:]

[Operator Instructions] Our next question comes from the line of Moshe Orenbuch with Credit Suisse. Please proceed with your question.

[Moshe Orenbuch:]

Thanks. And I apologize, I had to bounce between a couple of calls. So I ask something that's already asked, apology. The decline in balances in Elastic, is that something that we're going to see bounce back as the new credit models or kind of reduced and in there for a longer period of time or is there some other thing that's going?

[Ken Rees:]

Now, great question, Moshe. I mean, you're getting, some of it is just that the seasonal slow down that we have and also just the fact that as we rolled out the new credit models. We really focusing on direct mail, Rise and Rise Finwise and then rolling that out to the other products and other channels. So Elastic is a little bit behind Rise and Rise Finwise, partly just because the Rise Finwise, products that performing so well right now. We saw a great opportunity to grow that at a good customer acquisition costs in support of strong customer profitability. So Elastic will get more of the focus in the coming month.

[Moshe Orenbuch:]

Yes, that's fair. Maybe you just alluded to some of the developments in the UK from a competitive standpoint. Could you just maybe kind of flesh that out a little more. And is there – I mean, is there an opportunity that is going to be more significant as 2019 and 2020 progresses?

[Ken Rees:]

From my perspective, and Chris will expand on this. Certainly been a lot about people, Wonga leaving the market, Curo leaving the market. But we've been consistently profitable in that market. We seem to find that the complaints issue is not in the rear view mirror by any stretch of the imagination, but it's certainly under control and yielding to solid profitability of the other product. So we think we're well positioned to grow that business as the regulators give us more ultimate clarity there's still some uncertainty in that market. We feel – again, we're very well positioned to be – continue to be a leader in that business as some of these regulatory issues get resolved. But we don't see a reason to grow that portfolio aggressively right now, we're just going to keep things flat. Great business, we'll see how things turn out to the rest of the year.

[Moshe Orenbuch:]

Okay, great. Anything – maybe you can tell us about the development of the credit card product?

[Ken Rees:]

Yes. I mean, we're actually very happy with the progress. When launching a relatively new product, first and foremost, it's about customer response. And I think we mentioned this before, we've now had a couple of different cross-sell campaigns, the Today Card and we're seeing 8% of the customers we mail offers to will respond to offer and take the card. Those are very, very high, so it was higher than I've ever seen in my career response rate. So the demand is clearly there. We think the product is meeting an important niche in the market, being a higher availability of credit for credit constrained consumers. But given the variety of things we're trying to do as a company right now and the improvements we're making across all of our products, we're being – as you can expect pretty measured and how we roll out today. So, we're going to continue to keep working on the customer profitability, the various product features, making sure it's all really in place before we ramp up. And given our focus this year on largely today Elastic and Sunny, I wouldn't expect a tremendous amount of growth in that product until 2020.

[Moshe Orenbuch:]

Thanks very much.

[Ken Rees:]

Thank you, Moshe.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Ken Rees, CEO for closing remarks.

[Ken Rees:]

Well, thanks to everybody. I'm feeling exciting to deliver great Q1 results and obviously we're just one quarter end but we're pretty confident we're on track to have a great 2019. So, thanks to all the amazing people here at Elevate who are driving our earnings growth and consistently making our products and services better for our customers. Good night, everybody.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.