Enova International, Inc.
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Good day, and welcome to the Enova International First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Lindsay Savarese, Investor Relations for Enova International. Please go ahead.

[Lindsay Savarese:]

Thank you, operator, and good afternoon, everyone. Enova released results for the first quarter of 2021 ended March 31, 2021, this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com. With me on today’s call are David Fisher, Chief Executive Officer; and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

[David Fisher:]

Thanks, and good afternoon, everyone, and thank you for joining our call today. I’ll provide an overview of our first quarter results and then I will discuss our strategy and outlook for the remainder of 2021. After that, I’ll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. We started the year with a solid first quarter despite the ongoing pandemic. Our top line results were in line with our expectations and we delivered record first quarter profitability driven by solid credit performance, improving originations, and disciplined expense management. Revenue in the first quarter decreased 2% sequentially, reflecting typical Q1 seasonality and 28% year-over-year. Adjusted EBITDA rose 278% year-over-year to $137 million and adjusted EPS increased more than 8 times to $2.20, both first quarter records. Following a reacceleration during Q4, originations were down 5% sequentially, mostly due to typical first quarter seasonality, but they increased 7% year-over-year in Q1 as we ramped up marketing activities late in the quarter in response to improving macroeconomic factors, including the aggressive rollout of the COVID vaccines. As a result, originations from new customers increased to 33% of total originations, up from 28% in Q4 of 2020. Notably, we are seeing continued strong payment performance for new customers.

[A - Steve Cunningham:]

Thank you, David, and good afternoon, everyone. As David mentioned in his remarks, we continue to be encouraged by our historically strong credit quality, indications that the economic recovery is gaining momentum and recent signs that demand is improving. Our resilient direct online-only business model, nimble machine learning powered credit risk management capabilities and solid balance sheet have us well positioned to profitably accelerate growth as the economy recovers and originations return to pre-COVID levels. Now turning to Enova’s first quarter results. As you will note in my comments, our consolidated results when compared sequentially are as usual, heavily influenced by the typical first quarter seasonality of our consumer businesses. In addition, when compared to the year ago quarter, our consolidated results are heavily influenced by our acquisition of OnDeck last October. As expected, first quarter total company revenue from continuing operations of $259 million was down slightly from the fourth quarter of 2020 and declined 28% from the first quarter a year ago. Small business revenue increased 17% sequentially and more than tripled from the same quarter a year ago, while revenue from our consumer businesses decreased 8% sequentially following typical first quarter seasonality and declined 46% from the first quarter of 2020.

[Operator:]

We will now begin the question-and-answer session. And our first question will come from David Scharf of JMP. Please go ahead.

[David Scharf:]

Great, thanks. Thanks for taking my questions. Two things. First, obviously, we’re all trying to kind of gauge the trajectory of a recovery. There are a lot of unknowns. But I’m wondering, as it relates to the small business side, obviously, for consumer, it seems like demand snaps back fairly quickly when stimulus runs out. Can you give a little more color on the PPP loans? And maybe what percentage of the existing borrowers, if any, have taken any out? And sort of how long of a bridge maybe it provides to those borrowers? And just, I guess, put it into context relative to consumer stimulus. Is it a little longer dampening effect on demand? Or do you expect the small business to bounce back as quickly as consumer?

[David Fisher:]

Yes, Dave, good question. From the prior round of PPP, we saw demand bounce back actually very quickly. I think a lot of these small businesses are deep in the hole, and PPP certainly helps. But it’s mostly for payroll and doesn’t go much beyond that in terms of rent or building up inventory and those kinds of things. So I think the key for small businesses, as I mentioned in my comments, is the economy continue to open up, which there’s a lot of encouraging signs as I also mentioned, states continue to open up more and more and allowing retail businesses or small businesses to open up further. And I think that’s going to be the biggest driver, especially now that PPP is largely wound down. These businesses have not been operating at full capacity. They’ve not been fully stocked up. They’ve deferred maintenance. They’ve deferred rent. And as the economy improves and consumers begin shopping at the small businesses, again, they’re going to need to ramp up quickly, and we think is going to kind of spur a pretty strong demand for credit.

[David Scharf:]

Got it. It’s certainly probably the best asset class to be tethered to right now. And then just as a follow-up, shifting to consumer. I know Steven commented about marketing spend eventually or, I guess, working its way back to sort of that mid to upper teen ratio to revenue. I’m just wondering, as you think about customer acquisition strategies emerging from the pandemic as the economy opens. I know pre-pandemic, Dave, when it was a very benign credit environment, you seem to have a strike while the iron’s hot mentality in terms of, there was a big percentage of loans coming to new customers. You felt like that was the time to go out and meet that demand. Is there any chance or is there any reason to perhaps spend an above trend amount on marketing as we emerge from the pandemic since there is going to be just such a rush of demand and you’re still in a pretty good environment credit wise?

[David Fisher:]

Yes. I think you – that’s almost – that’s exactly our sentiment, actually, David. We think there is going to be a rush for demand. We think it’s a great time for us to be able to fill that demand and actually take share. And so we’re not going to be afraid to spend maybe a teeny bit more heavily than we have in the past a little bit earlier. Now you know us super well that we are very disciplined with respect to all of our spend, including marketing spend. And that’s not changing. We’re not going to go out and do anything crazy. But if there’s a range of spend we could get comfortable with, we’ll probably be on the higher end. And look, if it’s not working, we can pull back very quickly. The spent isn’t long dated. It’s something we can adjust day-to-day, week-to-week. But I think all in, will be a little bit more on the higher end of our comfortable range because we do think demand is going to bounce back, we want to take share. And once such a good credit environment, and you’ve seen how strong credit continues to be, that unit economics are really strong, which allows us to spend a little bit more. I mean, we had incredibly high net revenue margins this quarter even with 33% – getting up to 33% new customers. So that certainly gives us the ability to lean in a little bit more heavily and a little bit earlier on the marketing spend.

[David Scharf:]

Got it. Great. Thank you.

[Operator:]

Your next question comes from John Hecht of Jefferies. Please go ahead.

[John Hecht:]

Afternoon, guys. Thanks very much. Some of this is, I guess, you talked about the difference in kind of the recovery demand between small business to consumer. But where do you guys see the portfolio in terms of mix over the next few quarters? And any meaningful changes there based on either kind of where you see opportunity and/or where the momentum is?

[David Fisher:]

Yes. So I think we see opportunity in both. And we expect them both to rebound over the next months and quarters. And as I mentioned in my comments, we think they could go somewhat hand-in-hand as the consumer gets out there and start spending. And, again, small businesses, we think, is a place that’s likely to be an outsized beneficiary of that kind of new consumer spending. They’ve been doing their spending at large businesses that hasn’t waned that much during the last 12 months of the pandemic. But the small business spending is what’s been hit. So again, we think that – we think it largely goes hand-in-hand. We don’t – so we don’t expect any huge change in mix over the next couple of quarters. Obviously, it can fluctuate from month-to-month and quarter-to-quarter. Small business has been a little bit steadier over the last quarter or so. So maybe there’s an opportunity for consumer to come back a little bit faster, but we’re talking around the margins now. We actually expect to see good momentum in both sides of the business.

[John Hecht:]

And then there was just a discussion about the marketing spend as a percentage of revenues. I’m wondering at the CAC level, any – are you changing kind of the mix of marketing, any changes that you expect with customer acquisition cost, given the fact that your other lenders are kind of trying to build their book as well?

[David Fisher:]

Yes. So I think in terms of mix, I think we’re leaning a little bit more heavily on direct marketing as opposed to partners. And I think – we think this is a nice opportunity. It’s something we’ve been working out for the last 5-plus years, is taking more control of our own destiny. And we’ve been successful at it. We think this is a nice opportunity to go even deeper there. So you’ll see, I think, the mix will kind of skew a little bit more toward the direct versus partner channels, which will benefit us long term. So it’s something we’re excited about. And then in terms of CAC, like I said, maybe slightly on the higher end, but again, nothing outrageous. Unit economics are higher now. So we do have the ability to lean in on the CAC without getting outside of our return threshold. So again, maybe a little bit higher and a little bit earlier. But again, as I said before, we’ve always been very disciplined on the expense side and that’s not going to change.

[John Hecht:]

Great. Thanks, guys.

[David Fisher:]

Yes. Thanks, John.

[Operator:]

And the next question will come from John Rowan of Janney. Please go ahead.

[John Rowan:]

Good afternoon, guys.

[David Fisher:]

Hey, John.

[Steve Cunningham:]

Hey, John.

[John Rowan:]

Steve, I just want to make sure I understand. The guidance for G&A expenses, that it’s lower in 2021 versus the $141 million you spent in 2020, is that correct?

[Steve Cunningham:]

Yes. Well, I’m really talking about how to think about the absolute dollars as we move forward from here, right? So with the combination of synergies, recognition, and our own cost discipline, you should expect those absolute dollars to tick down through the rest of this year. And as we expect some return of growth as we move through the year, you’ll see those come down as a percent of revenue from where they are today.

[John Rowan:]

So they come down in absolute dollars and as a percent of revenue throughout the year?

[Steve Cunningham:]

Right. We’re, again, expecting that that growth is going to start to return as we move through the year.

[John Rowan:]

Okay. And then all of that, the OnDeck synergies, that all – that run rate is fully recognized by the end of the year. We shouldn’t expect any more decreases in G&A into 2022. Does that sound about right?

[Steve Cunningham:]

There could be sort of beyond our – remember, we talked about $50 million of synergies from OnDeck’s 2019 expense base. And as David and I both mentioned, we expect to overachieve on that. And then we expect there will be some longer tailed type items like real estate and data center rationalization that could spill into the second year, but we think we’ll be at, at least the $50 million run rate by the time we enter into 2022.

[John Rowan:]

Okay. And then I’m not sure if you guys have ever disclosed this, but if you haven’t, just say so. Have you given any – have you framed up exactly how much exposure you guys have to the bank partner model?

[David Fisher:]

Steve, do you want to?

[Steve Cunningham:]

When you say exposure, from what, with respect to what?

[John Rowan:]

Meaning what percent of your loans are issued through banks or percent of revenue? I’m just – if you haven’t disclosed it, that’s fine. I just wanted to ask, in case, you have – you are disclosing it.

[Steve Cunningham:]

We have not disclosed that level of detail around the bank partnership.

[John Rowan:]

Okay. All right. Thank you.

[Operator:]

Our next question comes from Vincent Caintic of Stephens. Please go ahead.

[Vincent Caintic:]

Hey, thanks. Good afternoon, guys. First question is on the competitive environment. I know it’s still the tough to generate receivables here. But in some of the consumer asset classes that we cover, it seems like even with some limited growth potential that some people are chasing receivables in limited growth areas. But I was wondering, maybe if the competition in your space is – do you see much competition? Is it disciplined? And as we come out of this, do you see the environment to be more or less competitive?

[David Fisher:]

Yes, sure. Good question. On the consumer side, the competition seem normalish. I think some of the online guys are trying to lean in harder to reaccelerate their lending. But the storefronts have just been decimated. A lot of them are in central business districts. People aren’t traveling there. Now a lot of them have shut down, especially the mom-and-pop storefronts. So that segment of the competition is largely gone and will probably never come back at any meaningful level. So that certainly helped on the consumer side and will likely continue to help going forward. On the small business side, early in the pandemic, many of the small business lenders suffered from very bad losses, at least 10 or 12 have gone out of business, including a couple of large ones. One of our largest competitors, Kabbage, got bought by American Express, and it’s no longer lending in the kind of same type of interest rates we’re lending at the same customer base. So I would say competition on the small business side is probably even later today than on the consumer side. It’s been – had a more meaningful drop in competition on the small business side than on the consumer side.

[Vincent Caintic:]

Okay. That’s very helpful. Thank you. And you’re one of a few that have good insights into both the consumer behavior and the small business, your competitor who bought Kabbage was talking about, so their consumers are maybe some recovery, it’s spending, but – and the small business maybe is even better at. So I was just kind of wondering, from your sense, are you seeing, I guess, relative between consumer and small business, just one area seem to be closer to a recovery than the other or is it sort of the same?

[David Fisher:]

Sure. Yes. Like I said before, I think they largely go hand-in-hand as the consumer starts spending, the small businesses are going to be the beneficiary. I think the spending on the consumer side is starting. We just haven’t seen as much of the benefit because of the last round of stimulus and tax return season. And so I think the small businesses are beginning to respond to that spending by doing some spending, to spending on their own. And so as we move into the next months and quarters, largely going hand-in-hand. If I had a guess, which was going to accelerate faster, I might say small business. But again, we’re on the margins here. I think they largely move together as the economy opens up.

[Vincent Caintic:]

Great. That’s all I had. Thanks very much.

[David Fisher:]

Yes. Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to David Fisher for any closing remarks.

[David Fisher:]

Thanks, everyone, for joining our call today. We appreciate your time, and we look forward to talking to you again next quarter. Have a good evening.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation and you may now disconnect.