Enova International, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Good afternoon and welcome to the Enova International Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants will be listen-only mode. Please note this event is being recorded. I'd now like to turn the conference call over to Monica Gould, Investor Relations for Enova. Please go ahead.

[Monica Gould:]

Thank you, operator, and good afternoon, everyone. Enova released results for the fourth quarter and full year 2020, ended December 31, 2020, 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.

[David Fisher:]

Good afternoon, everyone and thanks for joining our call today. First, I will provide an overview of our fourth quarter and full year results. Then I'll discuss our strategy and outlook for 2021 and after that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. The adaptability of our sophisticated technology driven online business was evident in Q4 as we quickly reaccelerated originations while continuing to produce strong credit metrics even as COVID pandemic persisted. Total revenue in the fourth quarter increased nearly 30% sequentially to $264 million while declining only 24% year-over-year despite our significant pullback in originations from March to July in response to COVID. We also delivered yet another quarter of record profitability adjusted EBITDA rose 126% year-over-year to a record $149 million and adjusted EPS grew 160% to $2.39. Our performance navigating a difficult operating environment throughout 2020 would not have been possible without our experienced and talented team. Their hard work combined with the ability of our sophisticated machine learning analytics enabled us to quickly adapt to the changing environment pulling back on originations early in a crisis and then driving a strong recovery in growth in the second half of the year. for the full year total revenue declined to 8% to $1.1 billion while adjusted EBITDA rose 51% to $415 million and adjusted EPS grew 78% to a record $7.26. As we discussed in last two quarters, our prudent approach to originations early in the pandemic led to a contraction in our loan portfolio during Q2 and Q3. However, our ability to quickly accelerate originations during Q4 supported by the strong unit economics we've been seeing led to the first expansion in our loan portfolio since the pandemic began, with growth both in our legacy loan book and in the OnDeck book.

[Steve Cunningham:]

Thank you, David and good afternoon everyone. As David mentioned in his remarks, we're encouraged by the sequential growth in originations, receivables and revenue and the continued solid credit quality of the portfolio as we ended 2020. The resiliency of our direct online only business model, the strength of our powerful credit risk management capabilities driven by our world class analytics and technology and our solid balance sheet have given us the flexibility to not only manage through this challenging economic environment. But also to opportunistically and to our products and capabilities as we prepare for economic recovery. With the closing of the OnDeck acquisition during the fourth quarter, we were pleased to add a talented team, operating capabilities and product diversification that further enhance our ability to serve our customers to drive growth and shareholder value. One reporting note before I discuss our results. With the closing of the OnDeck acquisition during October beginning this quarter we're changing product groupings for ongoing reporting in our earnings supplement to two new categories; consumer loan and finance receivables and small business loans and finance receivables. Financial results for OnDeck since October 13 are included in our fourth quarter and full year 2020 results in the earnings supplement, but not in historical periods prior to the fourth quarter of 2020. Now turning to Enova's fourth quarter results. Total company revenue from continuing operations increased 29% sequentially to $264 million as the OnDeck acquisition drove sequential growth in small business revenues and revenue from our consumer businesses grew 2% sequentially. The first sequential increase in revenue since the COVID pandemic began. The addition of OnDeck and sequential growth in receivables from legacy Enova businesses increased total company combined loan and finance receivables balances on an amortized basis to $1.3 billion at the end of the fourth quarter up 87% from the third quarter and up 4% from the fourth quarter of 2019. Excluding $597 million of OnDeck receivables at December 31, total company combined loans and finance receivables balances on an amortized basis rose 2% sequentially with increases in both consumer and small business receivables.

[Operator:]

the first question is from David Scharf of JMP. Please go ahead.

[David Scharf:]

I guess a bit of a high level question on the market. This is the fourth earnings call since the onset of the pandemic and I know it's become somewhat of a cliché where an analyst is supposed to ask you about stimulus and did you see any change in patterns following the latest checks and we've got some more that look eminent. In the longer run that really doesn't tell us much about the business. But what I'm wondering David you talked a lot about machine learning and analytics. Have your underwriting models learned anything over the last year that tells you anything about when we emerge on the other side of this pandemic if perhaps your target market is larger or these are people that maybe could borrow more in a more normalized environment or in contrast is the last 12 months just so unusual that you can't really draw any conclusions? I'm just wondering if there's been anything about this better-than-expected credit performance across all of consumer asset classes from all lenders that have taught your models anything other than people respond positively to stimulus.

[David Fisher:]

Yes, so I - and there's a bunch of questions embedded in there. But let me start kind of at the higher level and get to the lowest level. I think first of all there's absolutely nothing we've seen and I don't think there's any reason to believe that COVID has in anyways fundamentally changed the market. So if you fast forward whatever period that's on - you want into the future post pandemic absolutely no reason to believe the market in general has changed. The economy should get relatively back to normal, sure we'll continue bit different but nothing that should be meaningful change the market for non-prime credit. So when you're thinking about the future of the business. I view this as a temporary dislocation not any kind of long-term dislocation. In terms of stimulus, you touched on that I think I did make a point in my remarks is that, from the prior stimulus what we saw is not a huge impact on demand but a huge benefit to credit and so, we don't expect anything materially different with the current amount of stimulus. And then finally with respect to our analytics models they've learned a tremendous amount and look, there's big cycles overtime but there are small cycles all the time, state-by-state, region-by-region, city-by-city. How customers rebound to stresses to their income is something that our models now know how to much better. We again, the models almost all of our models now are machine learning. So this learnings have increased extremely quickly which is great for us and if things be able to lean back on when they see patterns, the model see patterns that are similar to the ones we saw during COVID even if it's much smaller amplitude than the dislocations we've seen over the past nine months.

[David Scharf:]

Got it, no that's helpful. Just to clear, I mean I was kind of speculating more on if the market is structurally better in the long-term, just based on the fact that models have been learning over the past year. It sounds like it maybe –one quick follow-up, completely understand the lack of guidance commentary as well as these comments about normalization taking place overtime. Based on the small business originations it looked like kind of exhibits it was about $290 million close to $300 million in the quarter. I know that OnDeck pre-pandemic it sort of been in the 550 to 650 per quarter range. Would you be willing to speculate on how long it would take to get back to those levels for the small business products or is there still just too much uncertainty?

[David Fisher:]

I mean I think there's just way too much uncertainty to be able to answer that. I mean, does the vaccine work great and the economy opens up soon or is there a new strain of the COVID virus that requires lockdowns during the summer. I mean, there's no way to know. But I think there's a couple trends that are super encouraging for us and we saw great sequential growth as we talked about throughout the call. I think I mentioned we did about $120 million of originations in small business in just December alone which is great, showing really strong growth there. Also commented that January 2021 started off strongly on consumer side which is great even though there were some increasing lockdowns kind of in December and January but we didn't see they get from that, which was also encouraging. We were confident both on the small business side where we've seen a bunch of competitors go out of business, we've also seen Kabbage get bought. But also on the consumer side we're very confident we have taken share through this pandemic and we think a lot of that is permanent as the market normalizes and the customer demand both consumer and small business increases. We think we have a lot of share in the market that we don't think has shrunk and so we think we're really well positioned as this pandemic winds down.

[David Scharf:]

Got it. Thanks a lot David.

[Operator:]

the next question comes from John Hecht with Jefferies. Please go ahead.

[John Hecht:]

You guys talked about the re-growing the kind of mix of new customers this quarter. I guess the question would be I assume well, I guess is there any difference in characteristic in how you're underwriting the new customers now relative to your pre-pandemic environment and is the opportunity get new customers now a reflection of the competition in anyway?

[David Fisher:]

Great questions. In terms of how do you think about the credit models generally? I think they're kind of opened up to levels that we saw pre-pandemic because the customer credit performance has been so good that a lot of restrictions we put on the models as the pandemic was unfolding in spring have largely been removed. I would say especially for some of our lower interest rate had higher dollar amount products. We do still have some extra verification going on kind of post credit model and that will likely continue as unemployment claims and jobless rates remain somewhat elevated so that is kind of layer added on top of the credit models. But generally pretty wide open. In terms of competition like I just mentioned we do think we've taken share and so we think, what our view of what's happening in the marketplace is that, our volumes are down less than demand is down which is encouraging. Yes, our volumes are obviously still down significantly year-over-year. But again as I mentioned everything, we see tells us that's temporary. We - nothing from our customer research from what we're seeing in applications from surveys tells us that either are the small business market or the consumer markets are going to be any smaller post pandemic than they were pre-pandemic. So the fact that we've taken share now which we think is sustainable even as the pandemic ends, is very encouraging for us.

[John Hecht:]

And have you seen at both the consumer and small business category? AmEx buying Kabbage you guys consolidating OnDeck, is there more opportunity in either one of those or is it fairly balanced over both?

[David Fisher:]

And I definitely think it's easier to see on the small business side. But we do think it's there in the consumer side as well. Obviously, mom-pops, brick and mortars on the consumer side not doing well at all. And so we do think long-term we have a structural advantage there, that's what led us to grab market share and will continue post-pandemic. But yes, probably a bit more pronounced on the small business side where just the business was more consolidated pre-pandemic and there's been, I think more dislocations during the pandemic there.

[John Hecht:]

Okay, and then David fully appreciates your commentary that the near term is a little bit cloudy. But over, you think things will get back to normal over the longer-term deal and not have changed much. If we get there, when we get there. Do you guys have an anticipation for the mix between consumers and small business or is that something you'll determine overtime?

[David Fisher:]

I think not only we determine it - returns are. But I think sometimes the markets will determine. I think there'll be periods where small business is for various reasons stronger and sometimes where consumer is stronger rather. Their seasonality is different so obviously little change throughout the year and the consumer side Q1 significantly slower than Q4 on the consumer side and that's less so on the small business side. But from what we're seeing small business is going to be a very large portion of our overall mix going forward every reason to believe it could be least half of originations, if not more and then kind of over the next few years we'll see how the market is helpful. But obviously large opportunities for us in both of those phases.

[John Hecht:]

Great, thank you guys very much.

[Operator:]

I'm sorry, we have a question from John Rowan of Janney. Please go ahead.

[John Rowan:]

Steve, can you maybe give us an idea? I know you said 1Q, the gross profit margin could be as high as 70%. Just give us maybe an idea of how fast, I mean we work down to that mid-50 range. I know you left the kind open but it makes a very big difference in the number whether or not we get there. If we were looking that was a realistic pin for the back half of the year or if that's really an optimistical for 2022.

[Steve Cunningham:]

Thanks for the question, John. So I think beyond sort of Q1 it really will depend on as we said how quickly the economy recovers and demand and originations sort of get back to that pre-COVID level. So just trying to give you some sense that when you start to see that growth return, it's not going to happen overnight, it's going to take several quarters even when you do get back to some level of growth that looks familiar. And that's why we're not providing very specific guidance beyond some line items for Q1. But hopefully that helps you sort of understand as you'll start to see that it will start to line up towards that longer term 50 to 60 that we guided to.

[John Rowan:]

Okay and then as far as the cost synergies.

[David Fisher:]

Can I just?

[John Rowan:]

Sorry, yes.

[David Fisher:]

Yes, John. add one thing to that, just in terms of while we don't know the timing because we don't know the pace of the recovery. It is very possibly realistic for the back half of the year. If you get a quarter of two of the kind of growth we saw in Q4 kind of 30-ish percent sequential growth upper 20s to low 30% new customer mix, it can get back to that kind of mid-50s margin pretty quickly.

[John Rowan:]

Okay and then the cost synergies that you're referring. Are we going to see most of that coming out of the G&A line because it sounds like the other lines were going to stay kind of at the 4Q run rate?

[David Fisher:]

Steve, do you want to address this?

[Steve Cunningham:]

Yes, most of our fixed cost John in G&A if you remember operations of technology roughly 70% of that is variable, so the answer is yes, you should see most of that come out of the G&A and some of the smaller component of O&T.

[John Rowan:]

Okay, thank you very much.

[David Fisher:]

Thanks John.

[Operator:]

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

[David Fisher:]

Great thank you operator and thanks everyone for joining our call this quarter. We appreciate your time and appreciate your questions and look forward to catching up again next quarter. Have a good evening.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.