Elevate Credit, Inc.
Q3 2019 Earnings Call Transcript

Published: 5 Nov 2019

[Operator:]

Greetings. Welcome to Elevate Third Quarter 2019 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.I will now turn the conference over to our host, Daniel Rhea, Communications Manager. Thank you. You may begin.

[Daniel Rhea:]

Good afternoon, and thanks for joining us on Elevate's third quarter 2019 earnings conference call. Earlier today, we issued a press release with our third 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 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 quarterly report on Form 10-Q 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'll 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 Interim Chief Executive Officer, Jason Harvison; and Chief Financial Officer, Chris Lutes. I will now turn the call over to Jason.

[Jason Harvison:]

Good afternoon and thanks for joining us on our third quarter earnings call. As you saw in our release, we are proud to report another quarter of strong profitability with adjusted EBITDA growth of 57%, which resulted in a record margin for Q3 of 15%. Year-to-date our net income has grown over 185% and we ended Q3 with diluted earnings per share of $0.11. In my remarks today, I will plan to give color on the key drivers of our profitability but also to update you on our pace of originations which as you know have been consciously moderated this year in conjunction with the deployment of our new credit models.Lastly, I will provide a few key business updates. Before I do though, let me first reiterate our mission here at Elevate, which is to be the most trusted and preferred credit provider to the new middle class. I want to start the call here because the drivers of our profitability and our growth both stand from a very real need for non-prime credit definitely in the consumer space daily. We believe our products are well positioned to continue to meet this vast and underserved market.To be clear, we have certainly changed our philosophy with regards to growth. The addressable market remains vast and we feel confident in our ability to grow market share. We have also learned a lot in the past year on our margin improvements and are very excited about what the future holds for Elevate and our shareholders.First, let's speak to our profitability. In the third quarter we drove nearly 600 basis points in year-over-year adjusted EBITDA margin improvement because of better credit quality and lower customer acquisition costs. Clearly some of the benefit is due to our measured approach to growth and in combination with our recently deployed credit models.That said a significant driver of margin improvement is from our repeat customer base where both our credit and marketing costs are dramatically lower compared to a newly acquired consumer.In Q3 we saw historic number of originations by existing and former customers and it's something we are proud to have grown over the past year. For context, repeat customer mix year to-date is up roughly 300 basis points over last year. Again, the mix is skewed somewhat by our measured growth this year, but the most important takeaway is how accretive the incremental margin is on a repeat customer versus a newly acquired customer.In short, this is the power of our operating leverage and we believe that the profit potential applied to our growing customer-based is the most compelling and exciting aspect of Elevate as we look to 2020 and beyond. Despite, a slight dip in revenues year-over-year, we were pleased to see a 8.4% or $15 million uptick in revenues from Q2 to Q3 as we continue to push out our new models.Turning to Slide 5, let's discuss our strategy updates. From the three core strategic goals I laid out last quarter we have continued to deliver strong results for our shareholders. First on credit, our charge-off as a percentage of both revenues and outstandings were both at historical lows of 45% and 13.1% respectively. This is a result of the deployment of our credit models earlier this year as well as the repeat customer impact that I mentioned earlier.Although we had to slow origination pace in order to implement our new models, we're extremely pleased with the resulting impact on our profitability and believe we can drive similar margins at higher origination volumes. While our growth has been slower, we have continued to maintain discipline related to growth and do not feel the urgency to chase that growth.With such an enormous addressable market, we are able to tune our credit models and adjust originations at a rate we feel comfortable with while focusing on bottom line growth.Now turning to Slide 6. I like to highlight a few business updates. As you're all probably aware, California passed a law that caps interest rates on personal loans between $2,500 and $10,000. We believe that this action unfairly limits credit options to California non-prime consumers. As a result, we will stop originating loans through our direct lending channel in California once the law goes into effect. However, we do not believe that it'll have a material impact on our business due to our diversified operating model and additional opportunities.One of those opportunities is to expand our underwriting technology licensing to our three existing FDIC regulated bank partners in new geographies. In addition, we are continuously looking for additional banks that share our commitment to providing innovative consumer-focused products.Next, on our credit model rollout, I am pleased to update that all the models have been fully deployed and we were seeing early indications of improved credit quality across the Board. As noted, we plan to grow originations through these models at a measured pace with a focus on margins first. That said, we are encouraged by the results thus far and believed the models can be further leveraged to penetrate the broader market opportunity.As you know, much of our decision to overhaul our credit models was driven by the large volume opportunity that is available via the credit partner channel as compared to the direct mail marketing channel. That said, in the third quarter year-to-date, our mix was predominantly tilted towards direct mail, largely because we have more history and data across that channel and we're able to ramp volumes more quickly as a result. For 2020 we will look to expand the partner channels utilizing the advantages from our new models.In the UK, we continue to scale back growth due to the lack of regulatory clarity. In the interim, our business remains profitable and we see expanded, long-term potential. Sony continues to receive high customer satisfaction scores and stands out as a leader in this space. Our CAC was at all time lows in the UK and we intend to hold low volumes steady for the time being. Demand in the underserved market continues to grow while supply is limited.Lastly, I would like to quickly announce that Scott Greever has rejoined our team in the U.S., is Executive Vice President of our Rise, Sunny, and Elastic product. Scott was previously our UK Managing Director. Steve Grice has been promoted from Chief Technical Officer to UK Managing Director. I would like to congratulate both of them and their new and expanded roles.With that, let's turn to Slide 7 to talk about the rest of 2019 and our view of growth looking ahead to 2020. As you can see here, we have lowered our revenue guidance for 2019 by 2% at the midpoint based largely on our deliberate rollout of our credit models, particularly in the partner channel. I'd also note that much of the revenue decrease this year has been due to lower UK volumes and more notably because of a shift towards lower APRs and our Rise portfolio.On the APR point, it's important to clarify that these lower APRs are a function of the mix of our states and a percentage of repeat customers that have the ability to lower their rates with our credit-friendly products. The most important takeaway though is that even with a slower pace of originations and a shift to lower APRs, we were seeing a higher pool through to adjusted EBITDA and net income for the reasons I've spoken to a minute ago. As a result, we are pleased to announce an increase in our 2019 adjusted EBITDA net income outlook.For adjusted EBITDA we now expect $135 million to $140 million and for net income we now see a range of $28 million to $32 million, which represents an interest at the midpoint of 2% and 9% respectively.We will provide our official outlook for 2020 on the fourth quarter call, but we believe 2020 will be a year that we can leverage our credit models to reaccelerate growth. We'll have more to share next quarter, but before I turn the call to Chris, I just want to reiterate that we view the 170 million person market in the UK and U.S. as a massive opportunity. With our new philosophy, which is to be measured with a very strong eye on credit quality, margins and profitable growth, we're excited about the shareholder value we can drive in 2020 and beyond.Thanks so much. And with that, let me turn the call to Chris to detail the quarter.

[Chris Lutes:]

Thanks Jason and good afternoon everybody. As we discussed during the prior quarter conference call, we were expecting relatively flat loan growth this year as we rolled out the new credit models for our U.S. products and await more regulatory clarity in the UK regarding affordability complaints.Looking at the top half of Slide 7, combined loans receivable principal as of September 30, 2019 were down $5.2 million or 1% on a year-over-year basis. However, loan balances were up $27.5 million on a sequential basis for the third quarter versus the second quarter of 2019. This reflects the more measured approach to growth, we are taking limiting new customer acquisition during the early rollout of the new credit models in the first half of 2019 and then gradually expanding the marketing each month.While this approach impacts top line revenue growth, it has resulted in improved gross profit and margins. We expect we will continue with this approach as we move forward through the rest of this year. At the product level, Rise loan balances were up $28 million versus a year ago driven by growth in the FinWise portfolio. Additionally, Rise loan balances grew almost $21 million during the third quarter of 2019.While Elastic loan balances at the end of Q3 2019 are down $32.2 million compared to a year ago. They did grow approximately $10 million during the third quarter of 2019. And Sunny UK loan balances are down compared to both the third quarter of 2018 and the second quarter of 2019 due to continued lack of clarity on the regulatory front with affordability complaints.While we were hopeful we might have clarity, for now, our assumption is that we will continue to hold loan balances flat with our September 30, 2019 balance for the rest of this year.Staying on this slide, our Q3 2019 revenue totaled $192.8 million, down 4.3% from the third quarter of 2018. This decrease was a combination of two factors. First, the overall APR for our Rise product declined from 139% in the third quarter of 2018 to 126% in the third quarter of 2019. The average APR of a new Rise, FinWise customer is approximately 130%, which is lower than our typical state license Rise customer, but with a better credit profile.While we are losing some top line revenue growth due to a lower APR for the Rise, FinWise customer, we are generating just as much if not more gross profit because losses are lower on these customers and they also have a lower CAC. While Rise revenue was down $1.5 million on a year-over-year basis in the third quarter of 2019, Rise revenue less net charge-offs were actually up $3.3 million on a year-over-year basis, an increase of roughly 7%.Elastic has a similar story. Gross revenue was down $4.1 million, but net revenue is up $1.3 million on a year-over-year basis. Additionally, sequential quarter revenue growth was up $13.9 million or 9% for our U.S. products during the third quarter of 2019.Lastly, our UK products Sunny experienced a $3.5 million decline in revenue during the third quarter of 2019 as compared to a year ago. Almost half of this decline was due to a drop in the FX rate and the remainder due to a decline in the average loan balances resulting from continued concern with affordability complaints. On a consolidated basis, net revenue, revenue less net charge-offs increased $4.6 million or approximately 5% during the third quarter of 2019 versus a year ago.Looking at the bottom half of Slide 7, we are very pleased with the year-over-year growth in our profitability. Adjusted EBITDA for the third quarter of 2019 totaled $29 million, an increase a 57% from the prior year third quarter. For the first three quarters of 2019, adjusted EBITDA totaled $107.6 million, up 28% from $84.2 million in the first three quarters of 2018. Bottom line net income for the third quarter of 2019 was $4.8 million or $0.11 per fully diluted share, up from a net loss of $4.2 million or negative $0.10 per fully diluted share in the third quarter of 2018.From my perspective, the third quarter 2019 net income of $4.8 million was even further impressive because it included $2.8 million in pretax expense associated with FX and non-operating losses and the severance package for our prior CEO.Net income for the first three quarters of 2019 totaled $23.9 million, an increase $15.9 million or 185% from $8.4 million in the first three quarters of 2018. As a result of all of this, we are revising our fiscal year 2019 revenue guidance down to $740 million to $750 million, but increasing our net income and diluted earnings per share guidance to $28 million to $32 million or $0.63 to $0.72 fully diluted per share respectively. While we are also are narrowing our adjusted EBITDA guidance from $130 million to $140 million to the upper half of our previous guidance range are $135 million to $140 million.Turning to Slide 8, our cumulative loss rates as a percentage of loan originations for our 2018 vintage remains 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 continuing to ramp our new generation of credit scores and strategies and are hopeful that we can drive loss rates lower in coming years.On this slide, we also show our customer acquisition cost. For the third quarter of 2019, our CAC was $184 down from $225 in the third quarter of 2018. We believe both our fourth quarter and fiscal year 2019 CAC will be sub $225 down from the prior historical range of $250 to $300 primarily benefiting from the expanded state coverage of rise originated by FinWise Bank and continued marketing efficiency and also diminish competition in the UK.Slide 9 shows our adjusted EBITDA margin, which was 15% for the third quarter of 2019, up from 9% for Q3 2018. The adjusted EBITDA margin for the first nine months of 2019 was 19%, up from 15% a year ago. All this expansion happened within our gross margin, which increased due to lower loan loss provisioning and marketing spend.Additionally, the decrease in our cost of funds for our debt facilities has also resulted in an expanded net income margin so far in 2019. On roughly the same amount of average debt in both the third quarters of 2018 and 2019, interest expense for the third quarter of 2019 was $5.2 million lower than the third quarter of 2018.Lastly, I would like to briefly discuss the $10 million common stock buyback plan authorized by our Board of Directors. We believe this buyback will help minimize dilution from ongoing employee stock grants, while being small enough to not impact daily liquidity in our common stock. We believe this use of capital at the current stock valuation is compelling from a return on capital perspective. We began buying back shares in early August before we were precluded from purchasing additional shares through the end of the quarter due to regulatory reasons.With that, let me turn the call back over to Jason.

[Jason Harvison:]

Thanks, Chris. I would like to reiterate my excitement for the future of our company. My first 90 days in new rule have formed by our teams continue to identify new areas for innovation, including new partners, potential products, and expanded geographies.With that, we’ll now turn the call back over to the operator for your questions.

[Operator:]

[Operator Instructions] Our first question is from Bob Napoli with William Blair. Please proceed.

[Bob Napoli:]

Thank you and good afternoon. Nice quarter, good – love to see those credit losses coming in lower. I think you’re being disciplined. It’s good to see. The California, any color you can give me on the – give us on the amount of your business in California. And if you expect to have bank partnerships to replace that volume, specifically in California or do you have plans with bank relationships out – additional relationships outside of that market?

[Jason Harvison:]

Yes, Bob, It’s Jason. I’ll answer that. I mean, the way we see and it’s unfortunate that California has unlimited access for non-prime borrowers. We think getting restricted that is not a great thing. The way we look at it, we think that the diversified operating model that we have will help mitigate any kind of loss of the direct lending business there. So towards the end of the year, we’ll start to seize originating loans underneath the direct lending line that we have to California consumers. When we look at other opportunities to offset that, one we are seeing good results from our new models are rolled out.So that’s going to open up new channels towards both in the direct lending business and with our existing partners – our big partners that we market for. But in addition to that, we do have a term sheet that we have signed with one of our existing bank partners to expand that relationship and they’re looking at multiple geographies, California being one of those. We’re still working with them on when the exact timing, what state they’ll go into first will be. So we feel like, between the new channels that we can open up and with the expanded geographies, the loss of the direct lending business in California should have a minimal impact to us going forward.

[Bob Napoli:]

Thank you. And then as we look at, I think about 2020, should we think about similar trends, like relatively low growth but better credit. Or do you expect that with your models be getting more confident in those models that you’ll start to see? I mean, UK, you said you’re going to keep flat. But in the U.S. should we see growth resume on the top line with continuation of expanding margins on bottom line?

[Chris Lutes:]

Yes, we’ll give more color to that in the call for Q4 in February. But I think the way to think about it is, we’ll still be very disciplined early in the year, start to accelerate that growth to the back half the year. Like I said, we’re seeing good results so far, but we want to be measured about that. So I think we’ll see that start to ramp up for the back half of 2020 from a growth standpoint.

[Bob Napoli:]

Thanks. And last question any thoughts on CECL. When you’re going to implement CECL and any effect on the business when you do?

[Chris Lutes:]

Hi, Bob. It’s Chris. The FASB approved the proposal to the adoption of CECL for smaller reporting companies and we qualified for that. I think it’s the definitions of public float less than $250 million on the preceding June 30. So we qualify and I think if that ends up being finalized and that should be in November, if it’s finalized, the official word, I would expect that we will not adopt CECL and we’ll take advantage of differing adoption of CECL for at least a year. And I think it can go up to like three years of deferral as long as your public floats less than $250 million at June 30 every year.

[Bob Napoli:]

Great. Well I think you may not have that next year. Thank you very much. Appreciate it.

[Chris Lutes:]

Thanks Bob.

[Operator:]

Our next question is from David Scharf with JMP Securities. Please proceed.

[David Scharf:]

Hi. Good afternoon. Thanks for taking my questions as well. First I apologize. I know Bob just asked this, I was still a little unclear about the precise message about California. Obviously you’re going to see direct lending. Are you in fact going to – is the goal to replace all of that with a bank partnership? I know you talked broadly about expanding the number of states, but it was still a little unclear what exactly the California plan was.

[Jason Harvison:]

Yes, David. So right now we have a term sheet with one of our bank partners to expand where they want to offer credit to. They are comfortable with going into California in a couple of new states. Right now we’re working with Oman is what the first state to go into. So we’ll have more color on that in the first call in February. But right now we’re optimistic that we can mitigate any loss to California from the direct lending side with the expansion of the new states with the bank partner that we have today that’s looking to open up a few new geographies with California being one of those – just looking at the topping.

[David Scharf:]

Got it. Understood. And listen, obviously tremendous margin leverage this quarter kind of running up and down the P&L and balance sheet seemed to be very much in line with what we’re looking for, but with the exception obviously on the marketing side, the CAC really stood out. Can you give us a sense for what percentage of originations came from repeat borrowers versus maybe one quarter and one year ago? So we can put that $184 figure into context.

[Chris Lutes:]

Hey David, it’s Chris. One thing to clarify, and I’m not sure we have that information handy. But really repeat origination doesn't come into play in calculating our CAC at all. All of our marketing dollars every quarter are allocated just to new customers. And so that $184 this quarter and what it was a year ago is our true marketing spend divided by the number of new customer loans only. So the repeat or former customer loans wouldn't factor into the CAC calculation at all.That said, the mix between news and formers definitely has an impact in terms of the credit quality on a go forward basis, because clearly, the former customers typically have a much lower risk of loss than our newer customers. But from an actual CAC standpoint, we allocate all marketing spend, just the new customer loans. So when a customer comes back for a second loan, there's no marketing spend associated with that customer at all.

[David Scharf:]

Got it. And that's helpful. And in – Chris, I know this may be difficult to answer, but it at least it the current scale of the business that CAC has a tremendous impact on the earnings power and just my back of the envelope with 75,000 new loans. If the CAC were at the midpoint of what you historically outlined as your range, if it were 225, for example, that would have been another $3 million of expense, which would have cut the pretax income in half. And it seems like you've been outperforming most quarters really since you've been public that CAC range. And I'm wondering, is there something structural either in just the efficiency of direct mail in the shifting mix to relying on bank partners? It seems like the earnings outlook is impacted so heavily by that figure. Should we be rethinking of structurally a lower targeted range?

[Chris Lutes:]

Yes. You hit on a couple of the main reasons from my perspective. I mean, clearly there's marketing efficiencies, primarily with direct mail. We've very good at it. Two, I think a big player in the reason for the continuing decline in the CAC has been the expansion to the bank ownership models, particularly with FinWise as we go into new states, where there's less competition. I think another thing as you can clearly look to the UK from – their year over CAC – year-over-year CAC has dropped significantly because of the decreased competition.And I would say with the Nova, just recently announcing that they're exiting the market that I would like to think that our CAC there. It can continue to potentially drop. So it's one of those things where, it's one thing we feel good about. There's certainly going to be a question as to whether we'd be willing to spend a little bit more on the marketing side to drive more volume and take slightly higher losses. But for now, Jason and I are very comfortable with our measured growth approach through the rest of this year. And then we think, we’ve kind of struck the right balance in terms of allocating marketing dollars and the CAC that we’re getting in the margin expansion that we’re getting versus trying to drive a little bit more volume.But looking ahead to next year, it’s still a little bit early. I think we’ll provide more guidance again in the February conference calls. We discuss Q4 results as to where we see that range for CAC in 2020. But for now, I feel pretty good that it will at least continue to trend south of the historical $250 to $300. And again, we feel good at one point. We feel good from a unit economic standpoint that we can make money off of a customer with a CAC potentially as high as $300 depending upon what state or what product. But recently, we’ve certainly been trending good, and I think we’ve done a really good job of managing the CAC this past year.

[David Scharf:]

Got it. Hey, just one quick one for you, Chris, the effective tax rate came in at just 22% this quarter, any unusual items or tax benefits and how should we be thinking about that going forward?

[Chris Lutes:]

No. I don’t think there was anything too unusual. There’s going to be the standard exclusions when you’re calculating it from a true tax perspective and given the small amount of when your net income sub $10 million on a quarterly basis, just a little bit can skew it. I would say going forward it’s still expected in the 25% range, maybe a little bit higher, but definitely south of 30%.

[David Scharf:]

Got it. Thank you.

[Operator:]

Our next question is from John Hecht with Jefferies. Please proceed.

[John Hecht:]

Afternoon guys. Thanks. Most of my questions have been asked. I’m wondering though, Chris, maybe can you tell us what kind of, what does, what do you guys perceive as your intermediate term kind of balance of new versus recurring or existing customers? Are we at that balance now or when do you think you'll get there?

[Chris Lutes:]

The balance certainly fluctuates both by product and based on the time of year with the seasonality aspect, this is the time of year where we would typically add a lot more new customers and grow a little bit faster. But clearly, I mean, it can be skewed pretty dramatically. Elastic being a line of credit product. I mean, regardless of how quickly we're adding new customers, you're still going to have a preponderance of originations and be from existing customers, given the nature of the line of credit product. For RISE, we typically like to see that new customer origination's really don't exceed much more than 50% on a quarterly basis. In terms of the overall mix, if we start driving north of 50% in terms of originations, you're probably going to see the credit quality weaken a little bit and be more towards the higher provision from a quarterly basis. So we're trying to keep it under 50%.

[John Hecht:]

Okay. And then with respect to the buyback, I did, did you give us a level or sort of intentions to in terms of using the buyback?

[Chris Lutes:]

Yes. It was Q3 as I said, I mean, I can't get into the specifics, but we polluted really from mid August through the rest of the quarter. We're hopeful or at least I'm hopeful once we get this call and kind of get back into our open window period that we'll be able to buy back beginning hearing Q4 in early November. I think what we said last time around, it was a $10 million authorization. We had $5 million authorized for this year and for next year, I'm not sure we can hit the full $5 million this year given kind of the daily limitations based on float. But we'll certainly look to maximize and fully utilize that $10 million over the course of this year and next year as quickly as we can, given more of a trade and we certainly think it's a good value return to shareholders.

[John Hecht:]

Yes. And then with respect to the UK, I know you're suggesting not growing there, but any update on where we are in resolution of those uncertainties and anytime where you guys would just step out of the market like some of your peers have?

[Jason Harvison:]

Yes. John, its Jason. I mean, one thing I think we benefit from is we have a profitable business even at the current complaint levels that are there. We took some actions to make sure we manage cost there pretty carefully and we have been in conversations with the FDA there. In the conversations, our competencies, I can't go into too much of them, but I would say they're incremental. So it slowly make progress, it's not going to be this kind of defining moment where everything comes to immediate clarity. But I think we will be benefited by having that positive net income coming from through the year.So we have a little bit longer runway to be able to try to work with the FDA to try to get that clarity. We think, given that the demand is there and so little supply out in the marketplace, we're willing to stick it out for a little bit longer, as long as we're showing profitability and it's not a drag on earnings for us or a distraction. So we're hopeful that we can get some closure there and be able to open up market back up again for us.

[John Hecht:]

Alright guys, thanks very much.

[Jason Harvison:]

Thanks, John.

[Operator:]

Our next question is from Moshe Ari Orenbuch with Credit Suisse. Please proceed.

[Moshe Ari Orenbuch:]

Thanks. Most of my questions actually have been asked and answered. I'm just wondering – I think your fourth quarter revenue guidance looks like it might imply slightly down revenues from the third quarter, seasonally, broadly, you would probably see a little bit of an uptick. Is there anything going on and – obviously the pace of growth is a bit slower, but we're still expecting it to be up a little and anything that can make things a little better perhaps than what you're guiding towards that…

[Chris Lutes:]

Yes. You are right, Moshe. It’s Chris. A big piece of that is going to be the UK. I mean, we definitely have consciously slowed down new customer originations probably beginning in September. And so loan balances have dropped a little bit and we're going to try and hold it flat. But that's going to be a big piece as to why it's coming down. Certainly with the FX rate bouncing up a little bit as they hopefully get closer to a Brexit resolution that might help. And I think we're just being a little bit conservative in the forecast as well for Q4, but until we fully roll out and kind of see the measured growth approach, I mean we're really focused on making sure we exit this year, good credit quality and that we're headed into next year feeling good about things. So I think for now, we're just going to continue to execute as we see, but revenue, however, top line revenue plays out, we're more focused on the bottom line results and we expect to see net income in Q4 higher than what it was in Q3.

[Moshe Ari Orenbuch:]

Great. Then we just echo with some of the earlier folks that said, and that is with a the better credit quality, it certainly is a lot more concurring and a lot more, I would say the earnings stream is a lot more resilience, so thanks.

[Chris Lutes:]

Yes.

[Operator:]

[Operator Instructions] Our next question is from Giuliano Bologna with BTIG. Please proceed.

[Giuliano Bologna:]

Thanks for taking my questions. I guess jumping off on a couple of different topics, when we look at the different products, it looks like it's obviously a little bit of shift in the product mix, but do you think the bank partnerships would target specific products between either RISE or Elastic, or do you have any preference in targets?

[Chris Lutes:]

From our stand point, inside Elevate, depending on how they're structured, we can try to target the same type of return. So we're almost indifferent. I think when you look from a consumer standpoint; consumers tend to favor a lot of credit product over the installed loan product. So as we've talked to our different partners, there's the one that we just signed the term sheet with is looking more towards installment loan product. We have some discussions with other bank partners that would be more of a 2020 mid-year – late 2020 launch that we're looking at installing.Sorry, I had a lot of credit products, I think it's – we're kind of on our side we're in different I when you look at the customer research, they skew slightly towards minor credit, but they both are great products and built – we try to build great features either for us or for bank partners, for certain non-profit consumer.

[Jason Harvison:]

And generally speaking, the unit economics are pretty similar for all sets of products regardless of the bank partnership.

[Giuliano Bologna:]

That makes sense. And then from a little bit of different perspective, but obviously if you continue along this trajectory, even if you were to grow assets low-double digits next year, you'd probably continue to see your leverage ratio come down, even if you exit on the buyback plan. Is there kind of a target of where you'd like to run the business in terms of leverage?

[Jason Harvison:]

Yes. I mean, certainly given where the stock price is and then with the amount of free cash flow that we're generating and you'll see in our queue, we had really good free cash flow for a company our size. In Q3 that we generated gives us the ability to both pay down the debt. It was one of the things that I worked on with VPC with the amended debt facilities. We do have in Q1 one of every year, 20% revolver facility now where we can pay down up to 20% of the debt at no prepayment penalty.So between the normal seasonality, the free cash flow that we're generating, I could see that leverage that, debt-to-equity dropping into the sub-three range over the course of the next couple of years. If we feel that that's the best utilization of capital and so that's one of the things that will just continue to take quarter-by-quarter, but it's certainly nice to have that flexibility of paying down debt or buying back shares.

[Giuliano Bologna:]

That sounds good. And then just a little bit of a clean-up question. You mentioned severance costs and FX costs in the quarter. Could you just mention that number again?

[Chris Lutes:]

Well, t was for the quarter, we had $2.8 million in total pre-tax expense, the FX and the non-operating losses are disclosed separately on the face of the P&L and then the difference between that $2.8 million, I think it was roughly $1.5 million in the FX and non-FX would be the severance a little over $1 million for the severance. Clearly, we feel good that we'll probably run an FX gain in Q4 given where the exchange rate is. We don't expect to severance Q4 and I don't think there'd be a non-operating loss either. So if anything we’ll – we should see that flip in Q4

[Giuliano Bologna:]

That sounds good. Thanks for answering my questions.

[Operator:]

Ladies and gentleman, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

[Jason Harvison:]

Yes. Well thanks everyone for joining us for the Q3 call. I'd like to – I couldn't be more excited about future of Elevate. I'd like to thank all of our employees for continued hard work and dedication. I look forward to speaking to everybody next quarter. Thanks so much.

[Operator:]

Thank you. We have reached the end of our program. You may disconnect your lines at this time and thank you for your participation.