Enova International, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Enova operates an online lending and financing platform serving consumers and small businesses in the U.S., U.K. and Brazil. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $189.9m | $172.5m | $382.2m | $347.2m |
| Gross profit / margin | $110.0m / 57.9% | $107.1m / 62.1% | $220.4m / 57.7% | $212.2m / 61.1% |
| Operating income / margin | $35.2m / 18.5% | $28.8m / 16.7% | $73.3m / 19.2% | $60.7m / 17.5% |
| Net income / diluted EPS | $11.9m / $0.35 | $8.2m / $0.25 | $25.7m / $0.75 | $18.1m / $0.54 |
- Q2 cost of revenue was $79.9m, up 22.0%; net interest expense was $17.0m, up 6.2%. Six-month net interest expense was $34.2m, up 7.2%.
- Six-month cash from operating activities was $186.1m, versus $180.5m. Investing activities used $168.5m, versus $225.7m; financing activities used $15.9m, versus providing $45.1m. Cash and cash equivalents increased to $46.2m from $39.9m at year-end 2016.
- At June 30, total assets were $1.002bn, liabilities $727.3m, and stockholders’ equity $274.6m. Net loans and finance receivables were $564.0m; restricted cash of $26.6m is not generally available for ordinary use.
- Long-term debt, net of issuance costs, was $638.7m: $496.0m in Senior Notes and $152.0m in securitization notes. The company reported covenant compliance. Its new asset-backed revolver has a $40m limit, matures May 2020, and had no borrowings at June 30; $6.0m of letters of credit were outstanding. Reported availability was $24.0m as of August 1.
Changes versus comparable periods
- Q2 revenue grew 10.1%; domestic revenue rose 12.6%, while international revenue declined 1.1%. On a constant-currency basis, Q2 revenue grew 11.8%. Six-month revenue also increased 10.1% (11.9% constant currency).
- Growth came principally from domestic line-of-credit and installment-loan products. Q2 line-of-credit revenue rose 17.0%; installment-loan and RPA revenue rose 12.1%. Short-term loan revenue was nearly flat.
- Q2 net income increased 45.0%, and six-month net income increased 42.5%. Expenses declined year over year, but cost of revenue increased faster than revenue, reducing gross margin by 4.2 percentage points in Q2 and 3.4 points for the six-month period.
- Management attributed margin pressure primarily to growth in new customers and domestic short-term, subprime installment and small-business credit portfolios, which require higher loss provisions. International gross margin also fell sharply: 60.8% in Q2 versus 76.1% a year earlier.
- Net owned receivables grew 15.1% year over year to $564.0m. Combined net receivables, including loans guaranteed for third-party lenders, rose 13.6% to $590.1m. Combined allowance and guarantee liability equaled 12.7% of gross balances, unchanged year over year; Q2 net charge-offs were $78.8m versus $58.6m.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management expects portfolio growth, including near-prime installment lending, to continue and says gross margins will be affected by customer mix, product mix and U.K. and near-prime originations. Management expects cash flows, cash balances, credit facilities and securitizations to fund operating needs, while noting funding access and costs could change.
- Regulatory risks include the CFPB arbitration rule issued July 10, 2017, which could limit class-action waivers for covered contracts beginning March 19, 2018; its fate was uncertain at filing. Maryland’s 33% effective-rate cap on new unsecured revolving plans took effect July 1, 2017. The U.K. FCA retained its high-cost-credit price cap but planned further reviews and consultation on creditworthiness rules.
- The company highlights risks from laws and enforcement, litigation, payment processing, credit losses, refinancing and capital access, foreign exchange, cybersecurity, and regulatory changes. It had no outstanding derivatives at June 30 and reported no material change in market-risk exposure since year-end.
- A purported class action under the Telephone Consumer Protection Act remained on appeal after judgment for Enova; the company said potential loss could not be estimated and intends to defend the case. Management did not expect routine litigation to materially affect financial position, results or liquidity.
- The company completed its annual goodwill review with no impairment. It reported no material impact from adopting the share-based-payment accounting update. The exit liability related to its former headquarters relocation was fully settled by June 30.
Key investor verification points
- Track credit performance: provisions, charge-offs, delinquency and allowance adequacy as newer customer cohorts and receivables grow.
- Assess whether revenue growth can be sustained without further gross-margin compression, especially in domestic near-prime lending and international operations.
- Review the effect of the Maryland rate cap, CFPB arbitration rule and subsequent FCA actions on product availability, compliance costs and litigation exposure.
- Verify liquidity and funding capacity, including revolver availability, securitization renewal terms, covenant headroom and debt-service costs.
- Monitor the TCPA appeal and any other material legal or regulatory developments; the filing provides no clear estimate of potential loss for that appeal.