Enova International, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Enova is an online financial-services company providing consumer and small-business loans and financing in the U.S., U.K. and Brazil, alongside a small analytics-services business.
Business context and performance
Enova extended approximately $2.5 billion in credit or financing during 2018. Revenue was led by installment loans and receivables purchase agreements (47.6% of revenue), lines of credit (32.6%) and short-term loans (19.7%). The U.S. generated 85.0% of revenue; international operations generated 15.0%, primarily in the U.K. The company has one reportable segment.
Financial results
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $1,114.1 million | $843.7 million | +32.0% |
| Gross profit / margin | $543.1 million / 48.7% | $447.1 million / 53.0% | Profit +21.5%; margin down 4.3 points |
| Operating income | $183.1 million | $134.4 million | +36.2% |
| Net income | $70.1 million | $29.2 million | +140.0% |
| Diluted EPS | $1.99 | $0.86 | Up $1.13 |
| Adjusted EBITDA (non-GAAP) | $210.6 million | $157.8 million | +33.5% |
| Adjusted EBITDA margin (non-GAAP) | 18.9% | 18.7% | Up 0.2 points |
Revenue growth came from both domestic operations (+33.4%) and international operations (+24.9%). Lines of credit revenue rose 38.3%, and installment-loan and RPA revenue rose 38.5%. Higher credit-loss costs and a larger share of newer customers contributed to the gross-margin decline; management noted that new customers historically default more often than returning customers.
Fourth quarter: Revenue was $312.6 million, gross profit was $135.4 million, net income was $8.7 million and diluted EPS was $0.25. Revenue increased sequentially, but net income declined from $15.3 million in Q3.
Cash flow, portfolio and liquidity
- Operating cash flow was $684.8 million, versus $447.2 million in 2017. Investing cash outflow was $720.9 million, including $705.1 million net cash invested in loans and finance receivables; financing cash inflow was $22.5 million.
- Cash and cash equivalents were $52.9 million and restricted cash was $24.3 million at year-end. Loans and finance receivables, net, were $859.9 million.
- Gross combined loans and finance receivables were $1,053.0 million, including $29.7 million of third-party loans guaranteed under CSO programs. The combined loss allowance and liability was $165.5 million, or 15.7% of gross balances, up from 14.5% a year earlier. Net combined receivables were $887.5 million.
- Total debt on the balance sheet was $857.9 million, net of debt issuance costs; stated principal balances totaled approximately $874.3 million. Interest expense, net, was $79.3 million. Debt to Adjusted EBITDA was 4.1x, compared with 5.0x in 2017.
- Enova issued $375 million of 8.50% senior notes due 2025 and used part of the proceeds to retire the remaining $295 million of 9.75% notes due 2021. The revolving credit facility had a $125 million limit and $22 million drawn at year-end. The company reported $76.4 million of available borrowings as of February 22, 2019.
Material changes, outlook and risks
- Portfolio growth was concentrated in installment lending and lines of credit. Domestic near-prime installment balances grew 26.7% and made up approximately 45% of the portfolio at year-end. Management expected that product to become a larger share in 2019 and said seasoning and scale could improve its marginal profitability; no numerical earnings or revenue guidance was provided.
- The CFPB issued a January 2019 consent order requiring a $3.2 million civil penalty, without admission or denial. It concerned failure to provide loan extensions to 308 consumers and debiting approximately 5,500 consumers from the wrong bank account. Enova remains subject to order restrictions. The filing’s non-GAAP reconciliations separately identify a $0.633 million regulatory-settlement adjustment; investors should review the accounting and reconciliation.
- Ohio enacted new lending restrictions with an April 2019 implementation date. A bank partner suspended lending in Ohio in May 2018, and Enova suspended purchases through that program; the company said it planned to pursue additional partners and states.
- The CFPB small-dollar lending rule remained uncertain: the filing describes a court stay and February 2019 proposals to rescind underwriting provisions and delay compliance. Changes in federal, state and U.K. rules could restrict products, increase costs or reduce lending activity.
- U.K. regulation and customer complaints remain material risks. Enova disclosed prior FCA concerns, changes to underwriting and collections, a completed 2015 customer redress program, and continuing complaint-related payments and expenses. A Virginia attorney-general lawsuit alleges consumer-protection violations; the company said the outcome and potential loss could not be estimated.
- Other material exposures include credit losses and reserve estimation, dependence on ACH and other payment processors, debt service and refinancing needs, cybersecurity and privacy, foreign-exchange movements, and seasonal changes in lending and collections. The company reported compliance with debt covenants at year-end. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether portfolio growth can be sustained while credit-loss rates, charge-offs and gross margins stabilize as newer loans season.
- How the CFPB consent order, the Virginia litigation and U.K. complaint activity affect expenses, customer redress and ongoing operations.
- Available liquidity and covenant headroom, including the distinction between balance-sheet debt, principal debt and securitization obligations.
- The assumptions behind the allowance for losses and the 2019 adoption of the expected-credit-loss accounting standard.
- Whether management’s anticipated near-prime portfolio growth produces the expected profitability, given the absence of quantified guidance.