Elevate Credit, Inc.
Q2 2018 Earnings Call Transcript
Published:
- Operator:
- Greetings, and welcome to the Elevate Credit's Second Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Al Comeaux, Chief Communications Officer. Thank you, Mr. Comeaux, you may begin.
- Al Comeaux:
- Good afternoon, and thanks for joining us on Elevate's Second Quarter Earnings Conference Call. Earlier today, we issued a press release with our second quarter 2018 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've 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 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 Rees; as well as our CFO, Chris Lutes. I'll now turn the call over to Ken.
- Kenneth Rees:
- Thank you, Al, and thank you to our analysts and investors on this call for your interest in Elevate. We're very pleased to continue our momentum with another strong quarter of growth and improved credit quality across each of our offerings. Similar to last quarter, we're most excited about how our growth is driving increased operating leverage and margin expansion. Before I catch on the specific highlights for Q2, I'd like to restate, as I usually do, our commitment 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. As Slide 3 shows, we've now extended more than $5.9 billion in credit to more than 2 million nonprime consumers. We've come to call the 170 million consumers in the U.S. and U.K. who are credit constrained, the new middle class. And we're proud to announce on this call that Elevate products have now saved our customers more than $4 billion over what they would've paid for legacy products like payday loans. And we're developing creative new ways to reach this huge market and serve their needs. We'll talk more in a bit about the latest we're expanding our potential target market with our newest offerings, the Today Card. Now, if we turn to Slide 4, we had another very strong quarter with year-over-year revenue growth of 23% to $184.4 million as loans receivable also grew by 23%. As I mentioned, we're seeing broad-based consumer demand for each of our products RISE, Elastic and Sunny and it's been relatively consistent for the past 6 to 9 months. For the second straight quarter, we're excited to see year-over-year growth of at least 15% for each of our three products. Our Q2 adjusted EBITDA growth was even stronger, growing 45% over last year. This improvement in operating leverage reflects the impact of former customers returning for additional credit, ongoing improvements in credit quality and the scalability inherent in our technology driven approach. Specifically, the adjusted EBITDA margin for Q2 expanded by 240 basis points over last year to 15.6%. You will note that our Q2 adjusted EBITDA margin of 15.6% came down from 19% in Q1. This merely reflects the seasonality of our business as we grow out of the tax season. On an annualized basis, we continue to expect annual adjusted EBITDA margins to trend upwards towards our long-term target of 20%. And Chris will discuss in greater detail, credit quality remains very strong across each of our products. 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. It's important to note the improvements in credit quality are not based on either lowering our approval rates by tightening credit standards or by slowing growth. In fact, we are seeing particularly strong approval rates and new customer acquisition -- excuse me, new customer originations in the first half of 2018 are 30% higher than the first half of 2017. We feel that the credit improvements reflect the fact that better quality customers are finding our products and switching away from higher cost, more punitive and less convenient products. Additionally, marketing costs remain well within our targets. Customer acquisition costs for the quarter have actually come down and are lower than Q2 last year as well as Q1 of 2018. We expect continued strong new customer acquisitions throughout 2018 within our target range of $250 to $300. Overall, we believe the acceleration in growth, not just for Elevate, but for our online industry peers as well as a strong sign that a secular shift is happening from consumers in how they seek and utilize credit. Nonprime consumers like everyone else and like in every other sector of the market are demanding the convenience of online loan products and are looking for products that can help them lower the cost of their credit and help them rebuild their damaged credit. We expect these dual trends from brick-and-mortar to online and from high cost short term to more responsible forms of credit to continue and to drive ongoing growth and improvements in credit quality and margins. Turning to Slide 5. We have also had a number of business highlights that I'd like to touch on. We celebrated our 2-millionth customer in the second quarter. We are proud to have helped so many people with products that provide immediate financial support while improving their long-term financial health. This is our mission of good today, better tomorrow. The center for financial services innovation, an organization that promotes financial health and collaboration in the financial services industry, named Elevate, a financial health leader. We see this as a recognition of all of our work to bring to market products that help consumers improve their financial health. And in line with this recognition as a responsible lender, we are announcing today that our current products have now saved customers more than $4 billion of what they would have paid for payday loans. To give you some perspective, we've saved customers more than $2 billion in the last 18 months alone. Finally, we launched our newest product, a credit card, and have more detail on Slide 6. Our Today MasterCard is a first of its kind credit card. Not only does it is of that prime rate, a meaningful credit limit and credit bureau reporting, part of our commitment to customer financial health. But it also offers product features that currently are reserved for prime users. The nonprime credit card landscape is full of cards with the $300 credit line as well as secured cards who require a deposit besides the line. And other products that really don't bring customers a prime experience. Nonprime consumers are climbing for something better. With our underwriting prowess, our knowledge of the nonprime market and our customer-driven approach to product design, we've developed a card that we believe nonprime consumers have been waiting for. They've told us they want a card with a credit line that's big enough for basic large purchases, things like an emergency car repair, a visit to the ER or even purchasing an airline ticket. Researched by our own center for the new middle class indicate that nonprime consumers largely can't cover an unexpected expense of $1200. As a result, we've built a capability to offer and manage credit lines of up to $3500. Nonprime consumers have also told us that they want the convenience of a full-service credit card. We've developed features that have been out of reach for nonprime consumers. Features like a mobile-first experience, bill pay with debit cards, family sharing, on-off capabilities and more. We believe it will be a winner for customers and a winner for our business. We're also very proud to have be expanding our bank partnership model by working with Capital Community Bank in Utah, a very forward-looking organization that have been great to work with. While we're excited to announce the launch, it's important to note that we do not expect any significant revenue impact in the current year. As when launching new products in the past, we're careful to test and refine the product and our models before moving into full growth mode. Our very successful Elastic product was in test for 18 months. But we believe we should start seeing appreciable portfolio growth from Today Card by the latter half of 2019. Before I turn it to Chris, I'd like to provide some color on recent regulatory news. As I'm sure you've seen, a bill in Ohio targeting small-dollar lending practices is likely to be signed into law. Without getting into the details of the legislation, we do want to highlight that we don't believe this legislation will have a material impact on our business for a couple of reasons. First, the law would only impact our RISE product, which we offer on a state-by-state basis. As we've noted in the past, we offer both RISE and our bank-originated line of credit product, Elastic, because we see a competitive advantage in having products that operate under diverse regulatory frameworks. Put more simply, we have options for our customers that many others don't, and we believe we can migrate most of our RISE customers in Ohio into an Elastic loan or a Today Credit Card. In fact, we believe there may be opportunities to actually expand our presence in Ohio, given the reduction in credit availability that's likely to result from this new law. Second, we note that our actual exposure in Ohio was somewhat limited. RISE Ohio represents less than 5% of our total consolidated loan balances, and almost 20% of Ohio customers are already at our lowest price point. And with that, I'll hand it over to Chris to provide additional detail on our financial performance in the quarter.
- Christopher Lutes:
- Thanks, Ken, and good afternoon, everybody. Our Q2 2018 financial results showed top line revenue growth in excess of our 20% target, saw a further expansion in the adjusted EBITDA margin on a year-over-year basis and continued improvements in credit quality. Turning to Slide 7, our revenue for Q2 2018 was $184.4 million, up 23% from the second quarter of 2017. All 3 products had at least 17% revenue growth on a year-over-year basis. Additionally, combined loans receivable principal at the end of the second quarter of 2018 grew $108 million or 23% from the prior year amount. Staying on Slide 7, you can see that we realized very strong growth in adjusted EBITDA as we continue to scale the company and grow revenue. Adjusted EBITDA totaled $29 million for the quarter versus adjusted EBITDA of $20 million a year ago. Net income of $3.1 million for the second quarter of 2018 or $0.07 per fully diluted shares was flat with the second quarter of 2017. However, the second quarter of 2017 benefited from $4.3 million in pretax FX and nonoperating gains and also had a $1.4 million tax benefit. Before turning to Slide 8, I want to also highlight the strong new customer growth we experienced during the second quarter of 2018. We added over 85,000 new customers in Q2, 2018, up 28% from over 65,000 a year ago. This resulted in customer acquisition cost, or CAC, of $260 for Q2 2018 at the lower end of our target range of $250 to $300 and down from $294 in the second quarter of 2017. However, this strong growth of new customers does compress quarterly net income. For example, growing new customers at a 28% year-over-year pace versus a more normalized 15% rate for most other companies cost us an additional $4 million in upfront marketing and loan loss reserves or roughly $0.07 EPS after tax. In other words, we could have doubled our quarterly net income and EPS if we grew more slowly. But we like the credit quality we're seeing and the CAC is within our targeted range, so we intend to continue to acquire new customers that are faster pace while trying to balance profitability expectations. Turning to Slide 8, our cumulative loss rates as a percentage of loan originations continues to improve with our 2017 vintage performing better than the prior 4 years. The early read on our 2018 vintage is also promising as it is performing in line or slightly better than the 2017 vintage. This is the result of continued improvements in our underwriting and 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 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 50% for Q2 2018, down from 51% in the second quarter of 2017. Total loan loss provision of 48% for Q2 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 June 30, 2018 was 12.9%, lower than a year ago when it was 13.8%. Based on all these metrics, credit quality improved, which we believe puts us in a strong position to continue to grow the loan book during the second half of 2018. Turning to Slide 9, in addition to the strong revenue growth, we are equally excited about our expanding margin profile. For Q2 2018, our adjusted EBITDA margin was 15.6%, up from 13.2% in the second quarter of 2017 and continuing to trend towards our long-term target of 20%. Now, I want to highlight a couple of other items related to Q2 2018 performance. First, the effective tax rate for the second quarter of 2018 was only 3% as we were able to adjust the tax rate for the first half of 2018 to a more expected 27% compared to 33% in the first quarter of 2018. For the rest of this year, we expect our effective tax rate to be approximately 25% to 27%. 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 U.K. Lastly, there were no material changes from a liquidity and funding standpoint during the second 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 $4 million during the second quarter of 2018, related to our U.K. facility, and our interest expense in the second quarter of 2018 was down to 10% of revenues versus 12% a year ago. 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.
- Kenneth Rees:
- Thanks, Chris. As you can see on Slide 10, and as we noted in our press lease, we've now narrowed our 2018 outlook ranges as follows, we now expect full year 2018 revenues in a range of $790 million to $810 million, which represents growth of roughly 19% to the midpoint versus 16% growth in 2017. For adjusted EBITDA, we now expect a range of $125 million to $145 million, a 55% increase over 2017 at the midpoint. This implies an adjusted EBITDA margin of roughly 17% or almost 400 basis points above our 2017 margins at the midpoint. We see our full year 2018 GAAP net income between $25 million and $40 million, which implies that our profits would quadruple our adjusted net income from 2017. In total, this now implies a full year EPS range of $0.55 to $0.90. And finally, we continue to expect very stable credit trends and customer acquisition costs to remain in our targeted range of $250 to $300. We're vigilant about monitoring this and remain confident as ever about our customer acquisition cost outlook. As we usually do, I'd like to take a second to share our perspective on our upcoming third quarter on the right-hand side of the page. Following the typical seasonal trends in our business, we expect strong new customer growth in Q3 within target-customer acquisition cost. We also anticipate continued improvements in portfolio credit quality. We expect that the expanding loan loss provision and aggregate marketing spend will result in operating margins above Q2, however, lower than Q1. While we're very excited about the launch of our credit card with MasterCard and CCBank, we're focused on refining and calibrating customer profitability before scaling in the second half of next year. And finally, I'd like to highlight that our existing financing lines and facilities will remain in place through 2018. However, we expect to restructure our debt and significantly lower our financing cost by Q1 of 2019. It takes teamwork to deliver the terrific results we've achieved in the first half of 2018. And I want to thank our great teams, both in the U.S. and the U.K. for their commitment and passion. These results reinforce our expectation that 2018 will be a breakthrough year with significant growth, margin expansion and product innovation. We believe our unique commitment to better products for our customers, driven by industry-leading technology and analytics will yield continued strong growth for 2018 and beyond. Thank you, again, and with that, let's open up the line for questions.
- Operator:
- [Operator Instructions]. Our first question comes from the line of Bob Napoli with William Blair.
- Robert Napoli:
- A question, I guess, on the refinancing opportunity and that -- your capital. Chris, can you maybe walk through what you think you can do in the first quarter of next year? And then, kind of midterm opportunities to bring that down? The cost of funds down materially further?
- Christopher Lutes:
- Sure, Bob. By February 1 of next year, the prepayment penalty for the RISE facility drops from where it is today. We'll still have a prepayment fee associated with it. It becomes a little bit more manageable, drops by a few million dollars between now and then. So what we would look to do at a minimum, some time roughly in that Q1 2019 time span, would be to restructure that potential facility, probably -- I don't know, if we necessarily need to increase the size. But we definitely would look to, one, lower the cost of funds down into the low teens would be our expectation. Today, I think it's currently our cost of funds of roughly about 15%. I could see it dropping roughly down into the 11% range. So we've had very nice cost of funds savings there. And then equally important today, we have Victory Park Capital leading that facility and then there's a few other lenders that are involved for additional fundings going forward. I mean, we would probably look to have the same type of, if not, more diversification related to that particular facility. And then the second piece would be after we renegotiate the RISE or restructure the RISE facility, we'd be potentially looking at the Elastic facility as well that has the similar type of existing cost of funds of roughly about 15%. And we'd like to think that we would get similar type of cost of fund savings on that particular facility as well. So at least initially, RISE, potentially all of it sometime in 2019.
- Robert Napoli:
- And then a follow-up question. Ken, congratulations on the strong new customer additions and the cost per account also looked very strong. What drove the improvement, I guess, in cost per account? And the growth rate of new customer additions?
- Kenneth Rees:
- You know, Bob, I don't think there's any one thing. It's just I would say ongoing tuning of each of our channels. I think we're really focused on how each of our channels direct mail and digital and future partnerships work together, such that a customer that may have gotten a direct mail offering then goes and searches for our products and potentially actually season an offer from one of our partners. That all works together. And I think we're getting better and better at optimizing the interactions between the multiple channels.
- Operator:
- Our next question comes from the line of Moshe Orenbuch with Crédit Suisse.
- Moshe Orenbuch:
- Great. Following up on Bob's question, like how should we think about your appetite to add customers, I mean, you're talking about the cost of adding the extra, growing at 28% instead of 15%? How should we think about that assuming that you get favorable economics for customer acquisition as we go forward?
- Kenneth Rees:
- Yes, Moshe, I mean for us, we're trying to, I think, optimize the balancing act between taking advantage of the very large growth opportunities we have ahead of us, while still increasing margin for the business. We think we can deliver on both. But that does mean that we don't want to grow sort of too fast. We think the growth scale that we're on right now is really sort of optimal for both taking advantage of what we think is an enormous opportunity to build leading brands in our space. But also, to continue to generate margin improvements and net income improvements. So we're going to try to really keep things right around that band we've suggested in the guidance.
- Moshe Orenbuch:
- Got you. And then say, kind of a separate question as you're now kind of launched on the Today Card, could you talk a little bit about -- you talked a little about the features that the consumer would enjoy. Can you talk a little bit about how that process is going to -- how that card will be the revenue and the risk will be shared between the two partners?
- Kenneth Rees:
- Yes, good question. I'll talk a little bit about why we are as confident as we are about Today versus say other cards that are out there, which have much lower lines. Because the Elastic product, which is our fastest-growing product has lines up to $3500. We feel really good about our ability to manage the -- a nonprime credit card with significantly larger lines than most of the nonprime cards that are out there. And I think ultimately that's going to be why customers are going to migrate to that product because they need more than just a few hundred dollars of availability. However, specifically in terms of how much the bank is retaining versus what we're retaining, we're not actually disclosing that at this point.
- Operator:
- Our next question comes from the line of Vincent Caintic with Stephens.
- Vincent Caintic:
- The first question, if you could talk about the EPS guidance range. Just the low end of the range came up by $0.05. And the top end, I think, came down by $0.15. Just wondering first if you could explain what caused the ends of the range to come up and down, respectively? And then if you could talk about the assumptions that are in the range? And maybe any probabilities you can give on where you might land?
- Kenneth Rees:
- Sure, I mean at a high level, first and foremost, just we're halfway through the year. And the year is shaping up pretty much exactly as we thought. So we're ending up just feeling more and more confident. We'll be right in the middle of that range as we had suggested at the beginning of the year. Chris, you may want to talk a little bit about what we see as potential upsides and potential downsides.
- Christopher Lutes:
- Yes, and Vincent, I'm not sure that I would agree with the assessment that from a mass perspective that the narrowing of the range was more on the -- that we narrowed the upside further down then the low end going up. I'm pretty sure we kept the midpoint consistent from a net income perspective. If there is a slight variance, maybe it's in the share count. But that's something that we can talk about later. But generally, I think we're still kind of comfortable with what we see as the analyst midpoint guidance out there from an EPS standpoint for the full year. As Ken said, I mean, one of the things as we get into Q3, but more in particular Q4, I mean, Q4 to the extent that we grow faster like we did last year, it could compress the Q4 quarterly earnings but would set us up for a really strong 2019, similar to what we experienced in Q1 of 2018. I mean, we're just going to have to see what the market presents and how we like the credit quality and the potential customer growth, but appreciate again, that given where we're at in our life cycle as a company and kind of what I highlighted here in Q2, that if we choose to grow rapidly because we like the customer acquisition cost and the credit quality, it could have a bit of an impact in terms of the Q4 profitability as well as the full year guidance.
- Kenneth Rees:
- Yes, and then on the flip side, ironically, the best way to see a higher earnings and EPS would probably just to slow down growth a little bit. One of the things that we don't do is defer marketing expenses and that's a nice way to keep the P&L clean on a go-forward basis. But it does mean when we jump up our growth, it does have an immediate term compression in margins. And we're really trying to manage that this year, and keep margins about where we want them. So we don't really anticipate at this point significantly greater or significantly lower rates of growth than we just mentioned in this guidance.
- Vincent Caintic:
- Okay. Great. That's very helpful. And secondly -- so first, congratulations on launching the new Today Card. Just kind of wondering if you could give us a sense of the opportunity set for receivables growth? And then to your point, it takes a little bit of time but any sense of the cadence for those receivables growth over time? And then what kind of economics may be per receivable dollar we should be expecting?
- Kenneth Rees:
- Yes, I mean, I think we'd like to actually get the product in market. Get a quarter or two of good understanding of the portfolio before we get too far ahead of our skis in terms of providing guidance on it. I mean from our perspective, it's an enormous opportunity. So many Americans that they have access to a credit card, it's just not a very good credit card for our customer bases. As we've said, you'll pay $100 origination fee every year and you'll only get $300 or $400 worth of availability on that card. That just doesn't fit the bill for most consumers. So we think our product serves an important need. We think our skill set managing lines of $3500 or more is going to allow us to have very profitable cards. And we think we've got a great partner in CCB. But if you could, let's have that question again next quarter when we've got a little bit more experience with how customers are responding, and how we're able to perform.
- Operator:
- Our next question comes from the line of John Hecht with Jefferies.
- John Hecht:
- What are the items that was -- varied from our model was the -- yes, I think, it was foreign exchange expense and some miscellaneous income. I'm wondering do you guys have any sense, given where, I guess, currencies are trading? What we should expect in the kind of near term from that?
- Kenneth Rees:
- John, I'm glad you raised that because that is really the one hit that we took this quarter that we weren't expecting, that the exchange rate did fall a bit. We don't hedge the exchange rate and aren't expecting it to -- at this point, to raise or fall. But with the ongoing challenges of the U.K. getting through Brexit and some of the uncertainty, I think there could be definitely some risk of exchange rate changes going forward. But we've built into our model a bit of downside. And Chris, I don't know if you can talk any more about the details of that?
- Christopher Lutes:
- Yes, I mean, what that FX loss is related to is that, I'd say, about 2/3 of the U.K. facilities denominated in debt facility with Victory Park Capital denominated in dollars rather than in pounds. And so that's the piece that ends up repricing on a quarterly basis. So to the extent that there's no change and it's a constant currency, will not have any impact. But to the extent that there is a weakening in the pound than there would be a little bit of exposure. But it's on roughly, I'm going to guess, USD 25 million of debt. It's not on a whole large piece, that's why really from my perspective, $1 million was a little bit of an outsized did here in Q1, with a drop in the rate, I think it was peaking as high as $1.4 million, $1.41 million somewhere in the earlier part of this year. And it's now kind of dropped into the $1.31 million range. It's not just a huge meaningful part of our overall asset base to really hedge. And especially, as I have mentioned, as we continue to look to restructure the debt that's certainly something that we'll probably going forward have that U.K. facility just be denominated in pounds. So it'll eliminate the FX risk associated with it. But that was a big swing in year-over-year. I mean, clearly in, I think, Q2 of last year it was a positive gain. And this year, it was $1.3 million pretax loss.
- John Hecht:
- Okay. And then it seems like the product level, RISE and Elastic, pretty good trajectory in new customers and credit and customer acquisition cost. I'm wondering can you give us a little bit -- yes, is there any more detail you missed on the new customers, any changing characteristics, any changes in geographical presence of the new customers or is it just kind of widespread success?
- Kenneth Rees:
- Not to gloss over, from our view, it is pretty much widespread success. We're seeing each of our products delivering very strong growth with improving credit quality and customer acquisition costs right where we run them. So we're just feeling and this is the expression we've used there, there does seem to be sort of a secular benefit to this industry. And I think others in our space are feeling it as well that it's in some cases, it's the brick-and-mortar customers that are realized and they can go online. In other cases, it's just customers realizing that there's lower cost, more responsible products that are out there. So I think we see that continuing for some time to come.
- John Hecht:
- And then finally maybe a quick update on the U.K. Any opportunities for new products there? Or is it just sort of reestablishing the industry after the changes that took place in 2012?
- Kenneth Rees:
- You know, right now they've been focused on that. And we've certainly benefited in a lot of ways from the changes that happened in the U.K. market with the new regulatory regime that came onboard. That really hurt some of the existing larger players and allowed us to grow and take pretty meaningful market share. I think we are looking at -- well, I wouldn't say I think, we are looking at lower APR products to supplement the, what they call, high-cost, short-term loans in the U.K. market. As we mentioned with the Today Card, we're being pretty measured about how we evaluate those. But I think we do believe there is an opportunity to expand and to just as we've done in the U.S., a broader set of products to serve that nonprime need.
- Operator:
- Our next question comes from the line of David Scharf with JMP Securities.
- David Scharf:
- So most of my questions have been answered. But Ken, I was curious to get a little more color on -- maybe some of the behavioral aspects in demand for Elastic, in particular. And in particular, it's your fastest-growing product. It obviously has different APR characteristics than RISE, as we think about modeling going forward. And is the higher growth rate in that product, more customer-driven on the demand side or are you emphasizing the inherently higher-quality borrower perhaps that Elastic attracts? I mean, is that a credit management strategy and your part is to focus on that? I'm just trying to get a sense for ultimately what's driving that growth above and beyond RISE's growth rate?
- Kenneth Rees:
- Yes, I mean -- first off, I'd say that we -- just in terms of how we think about growing the products. We do think about growing them independently. And we see each of them as having very significant growth opportunities on a go-forward basis. Elastic really benefits, if you ask me, just because it's in 40 states. So it's able to serve states that aren't well served by other products that are out there, that RISE can't serve, and that nonprime lenders struggle to serve. That's one of the advantages of having a diversified product offering. It allows us to provide credit in states that -- where consumers really struggle to get access to needed credit. I think what's interesting about Elastic, though is, it is still, for the most part, primarily a direct mail driven business. We've been very slow to add new channels to Elastic and working with the bank, everything we do is pretty constrained and pretty tightly monitored. So we're actually really excited about future growth opportunities in Elastic as we start adding all of the digital campaigns and affiliate partnerships and things that we've had a lot of success with RISE. So while Elastic has been a great growth story so far, I actually think it's going to see increased growth in 2019 and beyond.
- David Scharf:
- Interesting. And I don't know if this is a figure you have available, but as we think about those borrowers, is there an equivalent of sort of an open to buy if you will on Elastic? I mean, I'm curious what the repeat borrower patterns have been and the drawdowns and just what your experience has been there and how much is available there?
- Kenneth Rees:
- I'm glad you highlighted that, David, because probably there is another aspect of these to high levels of growths, it's that customers like a line of credit better than installment loan. Especially, our customer base, nonprime customer, they want to have access to ongoing credit. And they want to be able to know that it's always available for them. So, you're right. This is -- Elastic is a credit card without a card in a lot of ways and customers, when they're approved or told what their credit limit is and they can continue to draw up to that credit limit and they tend to. We have usage caps in place for the product, but while they are not in that usage cap, they will tend to utilize the line to a pretty significant level.
- Christopher Lutes:
- Yes, it's consistently roughly about an 80% utilization rate for that product.
- David Scharf:
- Okay. And does it function like a credit -- I should know this. But is there a minimum monthly payment like you see on a credit card for Elastic or do you -- can you see balances for [indiscernible] of the level?
- Kenneth Rees:
- Yes, the benefit for being a responsible lender and for helping customers get out of debt. So unlike a credit card, we are always paying maybe a 4% reduction. And you never really get it down to zero. This product, if you do a draw on day 1 and you don't take any other draws, you'll be paid off in 10 months at the longest. So each month, you're making a pretty meaningful principal reduction on the product. So when customers are utilizing at the rates that Chris is talking about because they have real needs and are redrawing against the line rather than just sort of keeping the balances high and not making principal reductions.
- David Scharf:
- Got it. One last question on sort of the guidance range, which I calculated for the second half of the year. I think it equates to $0.26 to $0.61. Obviously, we understand the mechanics particularly loss, when we're dealing with smaller numbers how provisioning in marketing can result in wide variances. I'm wondering, Ken, when you referenced at this point sort of aiming for the midpoint if everything is coming as expected. Is the midpoint correspond to the type of new customer acquisition growth, the 28%-ish that we've been seeing in the first half? Or should that be considered kind of the high end of the second half growth and therefore, conversely, the lower end of earnings. I'm just trying to get a sense for what kind of new customer acquisition growth and therefore marketing and provision [indiscernible]
- Kenneth Rees:
- Yes, good question. I'll let Chris respond.
- Christopher Lutes:
- Yes, David, when we look at that, I would say that it is similar customer acquisition rates for Q3. In Q4, it's a little bit lower, primarily related to our U.K. product in December in the U.K., the customer payment pattern changes a lot of customers end up getting paid earlier in the month, and we typically like to slow down or new customer acquisition for our Sunny product in the U.K. by the first week of December. So that would really be the only meaningful change from a Q3 to Q4 standpoint. So in other words, we're expecting roughly the same amount of marketing expend in Q1 and a little bit lower in Q4 than what you saw in Q2 and Q3.
- David Scharf:
- So Chris, would I be correct in rephrasing that such that the lower end -- towards the lower end of the earnings guidance, that would potentially imply second half new customer growth in excess of sort of this may be mid-20%?
- Christopher Lutes:
- Yes, exactly right, David.
- Operator:
- There are no further questions in the queue. I'd like to hand the call back to management for closing comments.
- Kenneth Rees:
- All right. Well, I mean, we're very pleased with the quarter. Looking forward to continued growth in 2018, and I wanted to thank all of you for your ongoing interest and support of the company. Have a good night, everybody.
- Operator:
- Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
Other Elevate Credit, Inc. earnings call transcripts:
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- Q2 (2022) ELVT earnings call transcript
- Q1 (2022) ELVT earnings call transcript
- Q4 (2021) ELVT earnings call transcript
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- Q2 (2021) ELVT earnings call transcript
- Q1 (2021) ELVT earnings call transcript
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