Elevate Credit, Inc.
Q1 2018 Earnings Call Transcript

Published: 1 May 2018

[Operator:]

Greetings and welcome Elevate First Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I'd now like to turn the conference over to your host, Al Comeaux, Chief Communications Officer. Thank you. You may begin.

[Al Comeaux:]

Good afternoon and thanks for joining us on Elevate's first quarter 2018 Earnings Conference Call. Earlier today, we issued a press release with our first quarter 2018 results a copy of the release is available on our Web site at elevate.com/investors. Today's call is being webcast and is accompanied by a slide presentation which is available on our Web site as well. 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 Web site 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 Chairman and CEO, Ken Reese as well as our CFO Chris Lutes. I'll now turn the call over to Ken.

[Ken Reese:]

Thank you, Al. And thank you to our analysts and investors on this call for your interest in Elevate. We're very pleased to report a great start to 2018 both in terms of growth and profitability. As always I'd like to begin this presentation with a reaffirmation of our mission to use technology and advanced analytics to be the most responsible lender in our space and to make a positive impact in the lives of our customers. Slide 3 of our presentation shows we've now provided more than $5.5 billion in credit to nearly 2 million non-prime consumers. We call them the new middle class and our products [saved our] [ph] customers more than $3 billion over what they would have paid for legacy products like payday loans. To get some context on the expanding impact of our products of the $3 billion we've saved our customers nearly $1 billion is just in the past year alone helping customers fund their lives with responsible credit products is what drives us to innovate and to grow. Today I walk through the summary financials and discuss some of the key business highlights for the last quarter. Then hand things over to Chris to present the detailed financial results for first quarter. Turning first to Slide 4, as you read in the headlines on press release with very strong quarter for growth. Year-over-year revenue grew 24% to $194.9 million and loans receivable grew by 28%. As we noted on last quarter's call consumer demand for each of our products RISE, Elastic and Sunny has been very strong since our seasonal peak in Q4 of last year and it's continued to drive our growth in Q1. The turnaround from Q1 of 2017 where most of our growth was coming from a single product, in Q1 of this year, the revenue for each of our product grew by at least 15%. Q1 adjusted EBITDA was even stronger growing 49% over last year. This is the result of both the strong revenue growth as well as an expansion in EBITDA margins. Our EBITDA margin was 19% for the quarter up 320 basis points over last year. While we're very happy with this performance on a year-over-year basis, I should remind analysts and investors that due to the seasonal nature of our business we expect our margins will drop in Q2 as we provisioned for the growth of business exiting the tax season. Credit quality for each of our products has been excellent this year. Default rates and overall charge off rates are all well within our target ranges reflecting the effectiveness of our underwriting models and our portfolio management strategies. As anticipated and as we guided on our fourth quarter call, our customer acquisition costs ran at the higher end of our $250 million to $300 million range. Based on a strong consumer demand and growth trends we saw in December, we proactively decided to market aggressively in the first quarter. Our strategy paid off and resulted in 32% higher growth for new customers with even better credit quality than a year ago. So we executed very well in the quarter, but from a longer term perspective what you're also seeing is the business just beginning to scale and it's in a market that underserved and potentially twice as large as the market for prime credit. Fundamentally, we believe our long-term business strategy of more responsible online products enabled by technology and advanced analytics paying off and Elevate is well positioned to continue to grow and take market share from legacy providers. On that note, let's turn to Slide 5 and review a few of our key business highlights for the quarter. First, as I mentioned our credit quality and customer position volumes are extremely strong right now. Our advanced analytics team released new risk models for both the RISE and Sunny products that are performing quite well and validate our ongoing investment in machine learning and big data techniques. We expect more improvements in underwriting an account management going forward across all of our products and in support of new ones. We're excited to have in place a partnership with MasterCard for a planned credit product which we expect to officially launch later this year. Elevate and MasterCard share an ethos for financial inclusion and together we'll break new ground in the credit card space by offering a product that Prime features for non-prime customers and credit limits provide far more utility than traditional sub-prime credit cards. We'll have more to share here in future quarters, but as you can tell we're excited about the opportunity. Speaking of financial inclusion and innovation, we're proud to have been named the finalist for financial inclusion by Lendit Fintech conference this year. We are selected as one of six innovative fintech leaders and view the recognition of further validation of our model and our potential to disrupt financial services in our target market. And now, I will hand it over to Chris to provide additional detail on our financial performance.

[Chris Lutes:]

Thanks Ken and good afternoon everybody. I'm real pleased with our Q1 2018 financial results. The company showed top line revenue growth in excess of our 20% target saw further expansion in the adjusted EBITDA margin despite heavy marketing expense and continue to maintain stable credit quality. Additionally, the benefits of the IPO and scaling the business are also apparent as our interest expense was flat year-over-year despite the strong growth in combined loans receivable principal. Turning to Slide 6, our revenue for Q1 2018 was $193.5 million that was up 24% from the first quarter of 2017. All three of our products had greater than 15% revenue growth on a year-over-year basis. Additionally, combined loans receivable principal at the end of the first quarter of 2018 grew $123 million or 28% from the prior year amount. This sets us up quite well for delivering year-over-year revenue growth in excess of 20% in Q2 2018. Staying on Slide 6, you can see that we realize very strong growth and net income and adjusted EBITDA as we continue to scale the company and grow revenue. Net income of $9.5 million for the first quarter of 2018 or $0.22 per fully diluted shares exceeded adjusted net income of $6 million for all of 2017 and was up 469% compared to net income of $1.7 million in the first quarter of 2017. Additionally, adjusted EBITDA totaled $37 million resulting in an adjusted EBITDA a margin of 19% versus adjusted EBITDA of $24.9 million or a 16% adjusted EBITDA margin a year ago. Before turning to Slide 7, I want to highlight the strong new customer growth we experienced during the first quarter of 2018. We added just over 70,000 new customer loans in Q1 2018 up 32% from over 50,000 a year ago. As we discussed during our February 2018 conference call in Q1 2018, we decided to market all three products rather aggressively. This resulted in customer acquisition cost or CAC of $295 million for Q1 2018 at the high-end of our targeted range of $250 to $300. In Q2 2018, we expect to continue to market all three products aggressively with even more marketing expense, but believe the CAC will trend down towards the midpoint of our range due to expected increased customer demand in our products during the latter part of the 2018 second quarter. Turning to Slide 7. Our cumulative loss rates as a percentage of loan originations continued to improve with our 2017 vintage performing better than the prior four years. This is the result of continued improvements in our underwriting and the ongoing maturation of the loan portfolio. We believe we can achieve targeted customer profitability by maintaining losses in the 25% to 30% range and are pleased to see the losses continue to trend down below that range. I also want to highlight some other key credit quality metrics that are not on this slide, but contained in the press release. Our resulting net charge offs as a percentage of revenue was 53% for Q1 2018 down from 59% in the first quarter of 2017. Total loan loss provision of 48% for Q1 2018 was at the low end of our targeted 45% to 55% range due to the continued improvement in credit quality. The ending combined loan loss reserve as a percentage of combined loans receivable at $331.18 million was 14% lower than a year ago when it was 16%. Based on all of these metrics, credit quality improved which we believe puts us in a strong position to continue to grow the loan book during the second quarter of 2018. Turning to Slide 8, in addition to the strong revenue growth, we are equally excited about our expanding margin profile. For Q1 2018 our adjusted EBITDA margin was 19% up from 16% in the first quarter of 2017 and continuing to trend towards our long-term target of 20%. While marketing expense as a percentage of revenue in Q1 2018 was up from a year ago due to the strong growth in new customer loans, our adjusted EBITDA margin in Q1 2018 expanded due to improvements in credit quality resulting in lower loan loss provisioning. Our operating expenses as a percentage of revenue continued to decline to under 20% of revenue during the first quarter of 2018 reflecting the efficiencies of our online model. Now I want to highlight a couple of other items related to Q1 2018 performance. First, the effective tax rate for the first quarter of 2018 up 33% was much higher than what we expected. This resulted from several items most of which are related to finalizing the impact of the new U.S. tax law from late 2017. Our effective tax rate for Q1 2018 included the true up of our final 2017 tax adjustments resulting from the new U.S. tax law as well as the related impact of the new U.S. tax law on our U.K. operations. For the rest of this year, we expect our effective tax rate to be approximately 25% to 27% slightly higher than our prior guidance due to the impact of paying U.S. taxes on our U.K. operations. I'll also note that we expect to pay minimal cash taxes in 2018 due to our net operating loss positions in both the U.S. and the U.K. Lastly, there were no material changes from a liquidity and funding standpoint during the first quarter of 2018. As highlighted in our 10-K, we did purchase an interest rate cap that will minimize the impact of any further increases in the LIBOR rate during 2018. We only borrowed an incremental $8 million during the first quarter of 2018 and our interest expense in the first quarter of 2018 was flat compared to the first quarter of 2017 reflecting the benefits of using IPO proceeds to pay down our debt. Now, let me turn the call back over to Ken for a review of our 2018 outlook and some final thoughts before we open it up for Q&A.

[Ken Reese:]

Thanks Chris. So you can see on Slide 9 and as we noted in our press release, we reiterate our 2018 outlook as follows. We project full year 2018 revenues in a range of $780 million to $820 million, which represents an acceleration in growth roughly 20% to the midpoint versus 16% growth for 2017. For adjusted EBITDA, we expect 2018 to fall on a range of $129 million to $150 million which implies in adjusted EBITDA margin of 16.8 or 300 basis points above our 2017 margins at the midpoint. Lastly, we project our full year 2018 GAAP net income to range between $20 million and $45 million which implied our profits were at least tripled over 2017 levels. In total, this implies a full year EPS range of $0.50 to $1.05. Before I turn this, some of our higher level strategic goals for 2018, I'd like to touch on a few important reminders of our second quarter. You can see on the right hand side of the slide. As we've discussed Elevate's growth and profitability is quite seasonal based on the influence of tax refunds in the U.S. market. That is when our customers will see their tax refunds in latter part of Q1, they tend to pay down their debt which lowers loan loss reserves and increases adjusted EBITDA. However, as our portfolio balances begin growing again we experience higher marketing costs of loan loss reserves which compress margins in Q2 and Q3, but typically result in peak revenues and earnings in Q4. We expect 2018 to follow this pattern, profitability should decline in Q2 as we provision for the new customer growth in the quarter. Although we expect strong year-over-year revenue growth, we expected as usual Q2 revenue will be lower than Q1 due to the tax season related reduction loans receivable. And finally, we continue to expect very stable credit trends and customer acquisition costs to remain in our target range of $250 to $300. I'll close with a brief overview of our strategic initiatives for 2018. There's a lot of product innovation underway this year. Obviously, we're very excited about the anticipated launch of new credit card with MasterCard later this year. As we mentioned in Q4, our outlook continues to reflect the expected cost of deploying the card, but with very little revenue. Our plan is still to match the initial growth conservatively in 2018 while we tune underwriting and customer acquisition channels in advance of more aggressive growth in 2019 and beyond. Additionally in the U.K., we plan to expand our market reach with lower priced installment loans that we intend to pilot later this year. In the U.S., we expect to add states for the right product. As mentioned in Q4, our marketing team is doing exciting things with digital channels such as steel fencing and we intend to continue to expand these efforts. In addition because of the strong consumer demand for our products, we'll be adding new strategic partnerships to drive more customer acquisition volumes. Our investment in Elevate Labs is paying off as evidenced by the performance of the recently released credit models and strategies. New data sources such as bank account transaction data and automated fraud tools are showing tremendous amount of potential in the business. As a result, we plan to increase our investment in analytics this year in support of continued strong growth across all of our products. And finally, we expect to announce new bank partnerships in 2018 for both existing products as well as new ones. I want to thank our incredible team both in the U.S. and the U.K. for delivering a great first quarter this year. Our first quarter results reinforce our expectation that 2018 will be a year of significant growth, margin expansion and product innovation. The 170 million people in the U.S. and U.K. who make up the new middle class deserve better options than the legacy products typically available to them. Our products represent a new generation of more responsible non-prime credit fueled by the investments we've made an industry leading technology and advanced analytics. We believe our unique commitment to better product for our customers will yield continued strong growth for 2018 and beyond. Thank you, again. And with that, let's open up line for questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Vincent Caintic from Stephens. Please go ahead.

[Vincent Caintic:]

Hey thanks. Good afternoon guys. Nice strong start to the first quarter. And I guess with the first quarter EPS of $0.22 already being about 45% of the low-end of your 2018 EPS guidance range. What are -- I guess what are the puts and takes when you think about getting to the low end of your EPS guidance versus the high-end?

[Ken Reese:]

Actually, thanks Vincent. This is Ken. And I think as we talked about in Q4 of last year a lot of it comes to how fast we grow in the last part of the year as you recall, last year we saw so much strong demand that we were more than willing to take on the additional loan loss provision and the additional marketing expense because obviously that's what's fueling 2018 growth right now. So I think as we see towards the end of the year just how strong the consumer demand is and if we want to grow stronger than our current expectations that will help revenue, but will squeeze earnings a little bit in this year. So that's why at this point in the year, we think it makes sense to stick with the range that we guided everyone to at the end of last year.

[Vincent Caintic:]

Perfect. That's very helpful. And actually related to my next question, so what did you see that caused you to lean into demand stronger this quarter seems very strong. And when we think about your expanded marketing channels and their customer acquisition costs, do you want to lean more into that demand, is there a lot of demand out there you're seeing from the consumer, is that sustainable?

[Ken Reese:]

Absolutely it is. It's such a big market, 170 million people in the U.S. and U.K. Their options today aren't great. They're still primarily being served by brick and mortar outlets pay lenders title lenders. So we don't really see that consumer demand is going to be a challenge in certainly in the next couple of years. And I think last year candidly we probably left some growth on the table because we were a little conservative with our customer acquisition costs. So this year our strongest demand was in Q4 and across all of our three products that was the thing that was really remarkable this year, it wasn't driven primarily by a single product like last year, we saw really strong growth in all of our products and the best credit quality that those products have seen as well. So it only made sense to push on the gas a little bit to support the growth of the business over the next few years.

[Vincent Caintic:]

Perfect. Very helpful. Thanks Ken.

[Ken Reese:]

Thank you.

[Operator:]

Our next question is from Bob Napoli from William Blair. Go ahead.

[Bob Napoli:]

Thank you. Good afternoon. First question on the growth -- new account growth looking at the second quarter, you said you're going to have marketing is going to be up from the first quarter and CAC is going to drop in the middle part of the range. So you're thinking that you can grow new accounts by close to 50%. Does that sound reasonable around 90,000 accounts I guess?

[Chris Lutes:]

For the quarter Bob, is that what you're asking?

[Bob Napoli:]

Yes.

[Chris Lutes:]

Yes. That might be a little bit at the high-end in terms of the numbers but that's certainly what we're targeting. I mean right now based on what we saw in Q1, we will definitely spend more marketing expense in Q2. And we do expect the CAC to drop down to the midpoint of the range. So yes, we would probably be upwards of that roughly around that 90,000 count for the quarter.

[Ken Reese:]

Yes. Bob, you remember what happened last year and the other analysts were the tax season seemed to have linger and was down in Q2. That doesn't seem to have happened this year where we're coming out of the tax season little faster than anticipated and that's giving us good confidence for our ability to achieve the kind of growth we want to see in Q2.

[Bob Napoli:]

Great. The credit card business, are you partnering with a bank on the credit card business?

[Ken Reese:]

Yes, we are.

[Bob Napoli:]

When do you start this business? Okay. Do you know, so you already have -- you have not announced who that is yet or the same bank you're currently working with?

[Ken Reese:]

It is not the same bank we're working with, but we do have a bank partner. We're looking to go live this summer. And we've announced a MasterCard relationship and we'll be announcing the banks shortly before we go live.

[Bob Napoli:]

But, it seems like a huge opportunity. I know that there are some others rolling out a sub-prime credit card or [indiscernible] private companies. But how quickly do you look to roll that out. This can be really a test year and we won't see any material till next year?

[Ken Reese:]

Yes. The way we really rolled out all of our products today is, we generally think that 6 to 9 months is an important period of time to tune the underwriting and the marketing channels not get ahead of ourselves. But once that happens historically at least we've been able to go pretty quickly into a pretty meaningful growth mode. So that would be our expectation this time. We're not going to get ahead of ourselves, but we do think this is an important year for figuring out exactly how that product all the details of the profitability et cetera because it's a little bit different from our other products. But are looking to likely following the tax season in 2019 really start expanding that product pretty aggressively. And we agree with you there there's a big need in this market. So many of the sub-prime credit cards only provide a few hundred dollars worth of availability to customers that doesn't get the job done for most people who need to buy things. So we think there is a big opportunity and it's an opportune we already know how to serve since the Elastic product for instance provides the line of credit for $2500 to $3500. So we think it fits right into our wheelhouse and serves an important unmet need right now.

[Bob Napoli:]

Just a quick numbers question, I will turn it over. The cash in your balance sheet grew quite a bit in the quarter. I mean why did -- I guess you could not have -- why did you have to borrow money in the quarter. Did you pay down some debt as opposed to borrowing money?

[Chris Lutes:]

Yes. Each of our products as a separate facility. We only borrowed an incremental $8 million during the quarter. The way it's structured this year and certainly we'll be looking to restructure the debt on a go forward basis most likely in the first quarter of next year. It's more -- once the money comes into the particular fund or the entity, it's not a revolver type. So we're stuck with having to pay interest on it even while it's idle cash during the latter part of Q1 into early Q2 until we start growing again. You'll see that cash balance start to drop pretty significantly into Q2 as we kind of utilize that cash to fund the loan growth in Q2 and I don't expect us to need incremental borrow again probably until the late Q3 time span at the earliest.

[Ken Reese:]

And you're making a good point that I probably reinforce what's coming next year in terms of improving the funding both in terms of price because at the current price of our debt is pretty expensive. We would look to trade that out likely first quarter next year. But, also the structure because as Chris mentioned because we have different trashes for the different products it tends to lead to somewhat more cash reserve. And so with more flexible funding we think we can both get the cost of capital down, but also structure in a way that allows us to or reduces our requirement to borrow.

[Bob Napoli:]

Thank you. Appreciate it.

[Operator:]

Your next question is from Michael [indiscernible] from Jefferies. Please go ahead.

[Unidentified Analyst:]

Good afternoon. Thank you for taking my questions and congrats on a strong quarter. The first question I have is on RISE, which saw a strong new customer growth as well as strong year-over-year performance in credit. I think charge offs were down 500 basis points or so year-over-year. Can you talk about some of the drivers behind this product? Is the underwriting model getting better at selecting credits or is there something going on at the customer level?

[Ken Reese:]

It's really how we're managing the product. I mean, one is as I mentioned in the call earlier, a number of new scores have come out for that product both in the direct mail models as well as the organic underwriting and that are performing extremely well actually candidly better than anticipated. And then, really on top of that we've been doing I think a better job of targeting the pricing for the different types of customers we serve because there's a pretty broad range in the APRs if we can offer our customers, we can really tune the pricing to the risk of the customer and ultimate allow us to serve a broader number of customers in that non-prime spectrum. So I think just the constant improvement in underwriting and analytics has started to yield the results we're seeing here.

[Unidentified Analyst:]

Okay. And then, how should we think about the ALL, given the composition of the new unused customers as we go into the second quarter. I know you had a healthy ramp in new customers this quarter, but as those become more seasoned should we expect that allowance to be flat or perhaps tick up as you continue to add new borrowers.

[Ken Reese:]

It will probably tick up a little bit in Q2 because of the strong customer growth that we expect particularly for RISE. I mean a lot of our methodology is based on the number of successful payments of customers made plus past due status. So typically, we see it increase a little bit towards the end of Q2 and Q3. And then, it'll level out in Q4. But generally speaking over time by product, I think these rates are going to be very fairly stable and maybe even slightly declining in an overall consolidated, it's trending down a little bit because of more of the mix still tends to be Elastic in terms of growth versus RISE and Sunny and Elastic being a line of credit has a slightly lower reserve requirement lower APR typically a slightly better credit quality customer. So again to summarize Q2, it will probably tick up a little bit, but by product it will remain relatively flat to slightly declining over time and then consolidated if Elastic growth continues to outpace the other two products the consolidated number probably go down a little bit as well. Year-over-year, it'll probably drop would be my guess.

[Unidentified Analyst:]

Okay. Thanks. That's helpful. And then, I guess last one on guidance, given the new MasterCard and credit card product should we anticipate any type of marketing increase this year with the rollout of that. And is that currently incorporated in the guidance?

[Ken Reese:]

Yes. We believe the -- both the cost related to launching the product as well as marketing the first year are already in the guidance that's been provided. However, there's essentially no revenue in the guidance we're trying to be pretty conservative with the product.

[Unidentified Analyst:]

Thanks guys and congrats again.

[Ken Reese:]

Thank you.

[Chris Lutes:]

Thanks Mike.

[Operator:]

Our next question is from Moshe Orenbuch from Credit Suisse. Please go ahead.

[Moshe Orenbuch:]

Great. Thanks. You mentioned that you obviously do already provide a line of credit. So when you think about this card like what aspects will it have that are different. Maybe talk through that a little bit?

[Ken Reese:]

All right. Well, first and foremost, I mean there is the utility of being able to use the card for purchases rather than for advances on the line into your bank account. So we would expect there's going to be a lot of people who might not think of their needs in terms of a line of credit like Elastic, but fully understand their need for credit in terms of a credit card. I do think we'll use the product too. There will be some overlap between the customers that we serve through Elastic and the customers that will serve the new product. But generally speaking, we'll be moving a little bit north in the credit spectrum and be able to serve a broader set of customers with that product than what we do with the Elastic product and the RISE product.

[Moshe Orenbuch:]

But if you were giving it to a similar customer probably have a similar credit line and it's just that you're going to move it a little bit up the credit spectrum.

[Ken Reese:]

Yes. That's right, Moshe.

[Moshe Orenbuch:]

It makes more sense. Good. And then, you talked about additional bank partners, were you talking about the one for the card or are there others beyond that that you're looking to add?

[Ken Reese:]

Yes. Others beyond that we're looking to add another bank for -- as an originator of the Elastic product and hopefully be able to get that launched later this year. And we also believe that there's additional opportunities for banks to leverage the technology and analytics platform we built. So we're actively talking to another -- number of banks by helping them serve their own customers better with our platform and hopefully we'll make some headway with that this year as well.

[Moshe Orenbuch:]

Got it. And the additional bank partnerships where you'd be not doing it for their -- for their originations, but for your own that's to expand volume or geography or both? How do we think about what that gets you?

[Chris Lutes:]

Well, first and foremost, it would help from a regulatory diversification if ever something happened with the first bank partner for whatever reason you have multiple banks being able to originate the Elastic line of credit product. I would say just based on past experience too we've seen that it -- one plus one definitely doesn't equal two in terms of bank origination partners, but you do see an overall lift. They will be marketing the same elastic product -- same general geographies would be our guess, the bank is ultimately in control of that. But we would expect to see probably a slight pickup in demand by offering it through two versus all of it just through one.

[Moshe Orenbuch:]

Got it. Thanks and nice quarter.

[Ken Reese:]

Thank you.

[Operator:]

Our next question is from David Scharf from JMP Securities. Please go ahead.

[David Scharf:]

Hi. Good afternoon. Thanks for taking my questions. Most have been addressed, so just a few clean up ones. One is, within the context of the marketing spend and the aggressive customer acquisition. Is there been any change in the channel strategy, I know previously there was a very measured discussion of TV and national TV. Can you update us maybe on how to think about the channel mix over time?

[Ken Reese:]

Yes. I think the strategy is very much in line with what we have always said would be a strong multi-channel acquisition. I think the difference is just in the past the direct mail has been so strong, it sort of dominated the other channels and we're now seeing the other channels really come on very strong, the affiliate channel for us, partnerships have been fantastic and we think are continuing to grow as well the digital campaigns are coming together pretty well in addition. And then, TV in the U.K. is a big driver for us. However, in the U.S. it hasn't been as successful for us, so will likely be, yes, assuming that we continue to see the sort of growth we're currently seeing in all the other channels probably expanding into U.S. TV not until probably 2019. But I mean net-net I think it's just we've always thought that multi-channel marketing approach made a whole lot of sense. And we're just seeing the benefits of the improved underwriting and the improved marketing management coming together as all the channels start growing.

[David Scharf:]

Got it. Got it. Okay. And wanted to make sure that we shouldn't be thinking about the second half of 2018, is a big ramp in U.S. TV spend, doesn't sound like it.

[Ken Reese:]

No. I think we feel really good about the other channels and want to make sure we're optimizing our focus on these ramping channels that have a lot of upside we believe. We'll be looking to probably expanding in TV in the U.S. in 2019.

[David Scharf:]

Got it. Got it. Maybe just a very broad sort of top down question on the quarter relative to your expectations. I mean I know how the numbers came out relative to some of our models, but I had written down I believe expectations for EBITDA margin in the quarter of about 14% to 15%. Was this primarily better relative to your internal plan; was it primarily better than expected credit performance on the provision side; or was marketing perhaps a little less aggressive than originally thought and it's going to carry over into Q2 instead. Can you maybe give us a little color there?

[Ken Reese:]

Chris can expand on it. From my perspective, revenue was about what we were expecting. We had pretty high ambitions for the quarter, but the overall credit quality was stronger than we anticipated. So that was definitely a good tailwind for us in the quarter. Chris?

[Chris Lutes:]

Yes. From my perspective charge offs came in lower than what I was expecting. I'm always going to try and be a little bit more cautious on the credit aspect in terms of my internal model and the guidance that I gave. So I was really pleased to see how it ended up for Q1 in terms of charge offs, and then, equally important just where the past two balances were in the overall credit quality at the end of the quarter. So, all of the margin upside came from improved credit quality with marketing dollars. We spent exactly what we wanted to spend.

[David Scharf:]

Got it. And in terms of the marketing cost if your key channel partners, is there any change to the price -- any material changes to pricing that you're seeing from any key partners?

[Ken Reese:]

Not really. I think the big differences as we mentioned is that we're -- I think trying more deeply across a wider number of channels in the past. Not that there's been a particular change in channel performance. It's just -- are feeling more comfortable accessing more customers through more channels than we did in the past.

[Chris Lutes:]

And I think the other thing that you're seeing at a consolidated level is just the effect of RISE and Sunny growing much stronger than they have in the past. RISE and Sunny being having higher APR loans, the CAC tends to be a little bit higher. They're running across multiple channels, Elastic benefits from being in 40 states. So from a geographic standpoint broader region is slightly better response on the direct mail. So really the CAC, there's also the impact of just rolling RISE and Sunny faster than what we did last year. And that's kind of causing the overall CAC to go up a little bit. But generally, as long as it's in that 250 to 300 range. We know we can make money especially early in the year a loan in Q1 is a lot more EBITDA accretive than it would be if we were putting it on in mid-Q4.

[David Scharf:]

Got it. Yes. Just one last question. I may have this written down somewhere, but can you remind me to the extent you were to finish the year at roughly the midpoint of your earnings guidance on a net income basis, give us a sense what the remaining NOL would be at year end, if you were…

[Ken Reese:]

We would have almost fully utilized it -- it would almost be fully utilized from a U.S. perspective, the U.K. there would still be a significant NOL.

[David Scharf:]

And how much is that? Just to give us a sense.

[Ken Reese:]

I think the U.S. was $43 million at the end of the quarter and I think the U.K. is $49 million at the end of the quarter in dollars.

[David Scharf:]

Got it. Got it. Perfect. Okay. Thanks so much.

[Operator:]

Our next question is from Michael Tarkan from Compass Point. Please go ahead.

[Michael Tarkan:]

Thanks for taking my question. Just big picture on the growth. I'm wondering sort of where is the growth coming from because I'm seeing you guys growing over 20% receivables. Your competitors are 20% to 40%. Are you taking more share further down the spectrum, are you seeing more opportunities further up the spectrum, just kind of curious where it's all coming from?

[Ken Reese:]

Good question. I mean I think first and foremost is, as I said earlier the majority of options that our customers have are not great. So in some ways, it's just a very easy value proposition to be able to offer a customer more money at a lower rate than a payday loan or a title loan. You don't have to give up access to your card. So in some ways what we're doing is easy. And then, I think also there just hasn't been that much innovation in this space and not much investment creating better products in this space. So, if you look at the number of new entrants that are trying to do interesting things in non-prime lending you're not going to see a whole lot of them. I think it's been easy for the more established providers in particular you've highlighted the public ones to be able to grow with better products than the majority of the ones that are needed. And I think we are continue to push ourselves to improve that by proposition as we've mentioned in the past, our average APR has dropped about 50% over the past few years as we capitalize on better analytics to improve the products and capture more market share at our target margins. But I think that's what we're seeing -- there is some a few sophisticated players that are now public and are now capitalizing on this really big unmet need to foster a lot of growth for I think the foreseeable future.

[Michael Tarkan:]

The dollars -- to get the sense of the dollars are shifting around, so it's more of a market share gain as opposed to the total dollars lent to the customer base picking up dramatically?

[Ken Reese:]

Well, it sort of depends what the market share gain is as you refer to it. I mean if you look at the overall market including brick and mortar online and title and storefront installment and things like that. I think that the biggest thing in my mind is just that this shift from brick and mortar online and the shift from sort of more expensive and more restrictive products like payday entitled to the unsecured lower priced products which we offer. And I think some of the other people in our space that are that are online and public are doing the same thing. So I think it's generally speaking what you're seeing is just a shift of the market now that there is awareness that there are better products that are out there that don't require you to walk into a branch that don't have the hassle of having to give up your title of your card and things like that and it just I think naturally is customers being aware of better options and shifting to using them.

[Michael Tarkan:]

Make sense. That's helpful. Last question for me is on the APRs. I know there's a mix going on, but how should we think about maybe APRs moving forward by product if rates keep rising? Thank you.

[Chris Lutes:]

I think they should be flat to potentially slightly rising. I mean we certainly have the ability to kind of control the mix of our products that if the Fed bumps up rates 1% or 2% over the next year or so certainly would impact. Although this year it won't impact our debt because we do have an interest rate cap in place but longer term it would. But from our perspective I think the rates have kind of stabilized, RISE may continue to slowly decrease over time as more and more of the portfolio continues to mature. But generally speaking, I think you're not going to see much of a dramatic shift in terms of APRs, the rest of this year.

[Ken Reese:]

I think its right. And even going into 2019, we would expect that the product APRs are going to be relatively consistent subject to maybe RISE dropping a bit more. But then, I think for our business as we discussed earlier we're right now showing pretty decent margins with essentially high cost capital and that's going to be changing next year. So we think our cost of capital as a percentage of revenues goes down next year due to both the expansion of the business, but just as importantly that the improvement in the cost of capital that we're going to get.

[Michael Tarkan:]

Thank you very much.

[Operator:]

Thank you. This concludes the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

[Ken Reese:]

Well, I hope you all agree that Q1 was a great start to the year and we're looking forward to making 2018 a really terrific growth -- terrific year for growth and earnings expansion. Thanks again for joining the call and your interest in Elevate.

[Operator:]

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