Elevate Credit, Inc.
Q4 2021 Earnings Call Transcript

Published: 15 Feb 2022

[Operator:]

Greetings. Welcome to the Elevate Credit Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Daniel Rhea, Director of Public Affairs. You may begin.

[Daniel Rhea:]

Good afternoon, and thanks for joining us on Elevate's Fourth Quarter and Full Year 2021 Earnings Conference Call. Earlier today, we issued a press release with our fourth quarter and full year results. A copy of the release is available on our website at investors.elevate.com. 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, including impacts related to COVID-19 and 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'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 investors.elevate.com. Joining me on the call today are our President and Chief Executive Officer, Jason Harvison; Interim Chief Financial Officer, Chad Bradford; and Chief Strategy Officer, Chris Lutes. I will now turn the call over to Jason.

[Jason Harvison:]

Thank you, Daniel, and thank you, everyone, for joining us today. Before I speak to our strong fourth quarter results, I'd like to start with a broader review of what Elevate has navigated and accomplished over the past years. Let's start with the things we didn't expect. As you know, Elevate and other participants in near-prime credit often face skepticism about the resilience of the model in the face of challenging credit. We certainly believe our decades of experience, especially within the last two years leave us very optimistic for the future and what we can deliver for stakeholders. It has been nearly two years since the pandemic began, and over that time, Elevate had its best ever year credit performance and profitability in 2020 as well as best ever year growth in 2021. First of all, we have managed through the pandemic by helping three of our most important stakeholders

[Chad Bradford:]

Thanks, Jason, and good afternoon, everybody. Turning to Slide 7. I'll start with discussing the loan portfolio growth, which was more moderate in the fourth quarter of '21 after the exceptionally strong growth we experienced in the third quarter. Combined loans receivable principal totaled $559 million as of December 31, 2021, up $159 million or 40% from $400 million a year ago. This total was up $46 million or 9% from September 30 of this year. Our end of year combined loans receivable principal balance places us at the midpoint of the guidance range we issued. What's remarkable is that within one year, we returned to portfolio balances slightly above where the portfolio was positioned in March 2020 as the pandemic was taking effect in the U.S. In the fourth quarter, we intentionally moderated growth to ensure that we maintain the proper mix of new and returning customers to the portfolio, which allows us to achieve our charge-off metric of 45% to 55% of revenue. As we discussed during our last call, with the heavier mix of new customers entering the portfolio during the third quarter, we expect the credit performance of the portfolio to be at or slightly above the high end of our range. The new and returning mix of customers in the fourth quarter had a 70-30 mix as compared to an 80-20 mix during the third quarter. Credit quality remains consistent as the credit profile of the portfolio reverts back to a normalized mix of new and former customers with past due balances at 10% of combined loans receivable principal at the end of the fourth quarter of '21, which is consistent with historical past due percentages and aligns with our past due balances of 9% to 10% during 2019. Staying on this slide, revenue for Q4 '21 was up 43% from the fourth quarter a year ago due to an increase in the average outstanding portfolio balance resulting from the third quarter of '21 growth, while the APR was relatively flat between the two periods. Our full year 2021 revenue was down 10% from the prior year due to a lower average balance for the full year of '21 as the portfolio growth has been concentrated in the second half of the year and a lower portfolio APR primarily coming from the RISE installment loan product. Looking at the bottom of this slide, adjusted EBITDA and adjusted earnings for the fourth quarter and the full year of '21 as compared to the prior year periods were compressed due to the upfront marketing and credit provisioning costs as the portfolio returned to growth during 2021, specifically in the second half of the year. In addition, we've experienced an increase in credit provisioning during the third and fourth quarters due to the higher mix of new loan originations within the portfolio primarily due to the volume of new loan originations during the third quarter of '21. While we have an initial increase in credit losses on these loans within our fourth quarter results continuing into the first quarter of '22 as expected, these loans continue to meet our overall unit economics and will become more profitable as the vintages age. As Jason previously discussed, we recognized legacy legal accruals as previously filed and announced with an after-tax amount of $19 million. As a result, we incurred a net loss of $32 million or a loss of $0.99 per share for the fourth quarter with a net loss of $34 million or a loss of $0.98 per share for the full year ended December 31, 2021. Excluding the one-time non-operating loss items associated with the legacy legal accruals and the discrete tax expense associated with our Texas state R&D credits discussed last quarter, we had an adjusted net loss of $13.8 million or a loss of $0.42 per share for the fourth quarter with an adjusted net loss of $13.6 million or $0.40 per share for the full year ended December 31, 2021. On Slide 8, the cumulative loss rate as a percentage of loan originations for the 2020 vintage is the lowest loss rate ever due to the tightening of underwriting, slowdown in new loan originations, increased government stimulus and improved payment flexibility tools. We continue to expect the 2021 vintage to be at 2018 levels or slightly lower due to the new customer mix that entered the portfolio during the second half of 2021 and as we rebuilt the portfolio. On this slide, we also show the customer acquisition cost. We continue to maintain our CAC targets that allow us to achieve our unit economics. These targets are between $250 to $300 for the rise in Elastic products and sub-$100 for the Today Card, continuing to diversify our marketing mix between direct mail, strategic partner and digital channels. Slide 9 shows the adjusted EBITDA margin, which was 11% for the full year of 2021 due to compressed earnings experienced in the strong new customer loan growth and the associated upfront costs we incurred on these loans related to marketing and credit provisioning related to a higher mix of new customer loans. Long term, we expect the adjusted EBITDA margin to return to 15% to 20%, depending on the pace of growth. On Slide 10, I'd now like to address our planned adoption of fair value accounting for the loan portfolio beginning January 1, 2022. We have not had to adopt the life of loan reserve requirements or CECL that others had to adopt on January 1, 2020, due to our qualifications under certain relief provisions as a smaller reporting company, which will expire in January 2023. Under CECL, GAAP allows companies adopting the new life of loan reserve methodology to apply the fair value option of certain assets as an alternative accounting model. In evaluating between the life of loan reserve requirements and the fair value option, we believe that the fair value option best reflects the value of the combined loans receivable portfolio and its future economic performance. Fair value aligns more closely with how we view and manage business especially since our portfolio decision-making process is anchored in unit economics that in line with discounted cash flow methodologies that will also be utilized in fair value accounting. For our business, where we're focused on driving growth with meaningful profitability, financial performance under fair value should be positively correlated to portfolio growth. Beginning January 1, 2022, we'll be utilizing the fair value option for the entire combined loans receivable portfolio. Adoption requires an initial measurement of the existing combined loans receivable portfolio at fair value as of January 1, 2022, which will be recognized as an increase to retained earnings. The premium associated with the combined loans receivable portfolio is currently estimated at 10%. This premium represents the percentage at the fair value of the portfolio exceeds the outstanding principal. The adoption of fair value to comply with the new life of loan loss requirements will have no impact on cash earnings. For financial reporting, the most significant change to earnings will be related to recognizing the change in fair value of the combined loans receivable each quarter rather than a provision for loan losses. The change in fair value will be comprised of gross charge-offs, net of recoveries and valuation impacts associated with changes in both the portfolio and valuation assumptions. Continuing on this slide, we'll discuss a few points regarding our outlook for 2022. With the change to fair value and its expected impact to our financial performance, we'll be able to provide a more complete guidance during our first quarter earnings call. We continue to manage the portfolio consistent with our unit economics and long-term metrics that we've previously discussed. We expect continued growth in the portfolio with end of year combined loans receivable principal increasing 15% to 20% from where we ended 2021. We would expect revenue to increase 20% to 25% due to the portfolio growth experienced in the second half of 2021 and during 2022 while the APRs on the portfolio are expected to remain relatively flat year-over-year. Turning to liquidity and capital on Slide 11. As previously announced, we closed on a $50 million financing facility with an ability to increase the facility up to $100 million to fund continued growth of the Today Card product at a lower cost of funds. We continue to draw on all the facilities that fund the portfolio loan growth during the fourth quarter of '21 with a total debt balance of approximately $500 million at December 31, 2021. Also, incremental new borrowings under our RISE and Elastic debt facilities are priced at approximately 8% and Today Card's at 6.85%, resulting in an overall decrease in the weighted average cost of funds to 9% at December 31, 2021, from 10.2% at December 31, 2020. Lastly, during the fourth quarter of '21, we repurchased over $3 million or approximately 1 million common shares under our existing common share repurchase program. For the full year of 2021, we repurchased $27.5 million of common shares or approximately 7.3 million common shares, representing approximately 19% of common shares outstanding as of the beginning of 2021. Since beginning our share repurchases in August 2019, we have repurchased approximately 33% of all shares that were outstanding and issued or reissued since that point in time. As part of the settlement of the legacy litigation, we will repurchase approximately 925,000 shares of Elevate stock that was contributed to the bankruptcy trust by a shareholder in Q1 2022. This will represent approximately 3% of our common shares outstanding at December 31, 2021. We'll evaluate further purchases under the share repurchase plan in the near term as cash allows. With that, let me turn the call back over to the operator to open it up for Q&A.

[Operator:]

At this time, we will be conducting a question-and-answer session. Our first question is from Moshe Orenbuch with Credit Suisse. Please proceed with your question.

[Unidentified Analyst:]

This is Hang filling in from Moshe. My first question is on your revenue guidance. I mean assuming you guys, I mean, launching your accounting, I mean is it comparable with your current standard of accounting? And I mean can you walk us through -- I mean, what is your assumption into that revenue guidance and maybe loan growth from how you're seeing consumer demand right now?

[Chad Bradford:]

Yes, Hang, it's Chad. So thanks for the question. Yes, so that revenue guidance is based off our existing core products and is based off an increase in our combined loans receivable of 15% to 20%. And with the carryover of higher balances coming from 2021 and the growth in the current year, that's what's leading to the increase. The APRs are relatively flat as well in that assumption.

[Unidentified Analyst:]

Got you. I mean based on what you guys are seeing right now in terms of the tax refund, I mean, how do you imagine mean balance growth progress throughout the year?

[Chad Bradford:]

Yes. Right now, we're modeling Q1 seasonality with growth taking place in Q2 through Q4. The open question being with us and with others as well is just exactly how the Q1 seasonality plays out and I don't know we're closely monitoring.

[Unidentified Analyst:]

And if I may ask about new initiatives, I mean the Swell product as well as Today Card, so just wondering, I mean, in terms of these new initiatives, I mean how do we think about the contribution going forward and in the long run? And I mean maybe if you could include some color on Blueprint how you bend to market that the more banks as well?

[Jason Harvison:]

Yes, this is Jason. Thanks for the question. Yes, I think we're really excited about the announcement of the Swell partnership with Central Pacific Bank and the Swell team and also the continued growth in today card. I think from the Swell perspective, it's a great chance for Elevate to show how the technology we've built over the last few years the Blueprint technology stack and embed with some third parties and help them expand access to credit. And we think this is a great opportunity to help Central Pacific move to the mainland here in the U.S. And we see that just when we have the business there that will help from a contribution from the licensing of the platform, but also the equity investment long term. So, this is a little bit different kind of partnership than we've done in the past. So, we're hopeful that not only will we see some revenue streams coming in from the license of our tech platform, but also over the years to come some from the equity investment as well. And then on the Today Card, we saw some pretty good growth in '21 of that portfolio, and we're really excited about what that continued growth can be for us here in '22. It's still -- we're not hitting the gas as hard as we could hit with that portfolio. We want to make sure we're very measured with that, but we're seeing some good signs there, and want to make sure that we continue to grow that at a very prudent pace. So, excited about these two new opportunities, I think it adds to a nice mix with our core base of RISE and Elastic and how we work the banks there, those products and it sets us up for a very strong '22 as we go through the year.

[Operator:]

We have reached the end of the question-and-answer session. And I will now turn the call over to Jason Harvison for closing remarks.

[Jason Harvison:]

Just wanted to thank everyone for joining us this afternoon for the fourth quarter call. I think when we look back on '21, we're very happy with those results. Coming into 2021, there was a lot of uncertainty about what the growth of the portfolio could look like. And seeing us end of the year at around 40% growth in the portfolio balances with some new product launches we've got to talk about at the beginning of this year and wrapping up some legacy litigation there, I think sets us up on a nice foundation for '22 and really excited about what new technology, the new partnerships and our core products and do this year. So look forward to talking more about that in future calls the rest of this year. Thanks so much for your time. Thanks so much for your investment, and we'll talk to you soon.

[Operator:]

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