Enova International, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited results. Enova operates an online lending and financing platform serving consumers and small businesses, primarily in the United States, with operations in the U.K. and Brazil during the period.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $329.5 million | $293.9 million | $908.4 million | $801.5 million |
| Gross profit / margin | $158.2 million / 48.0% | $130.1 million / 44.3% | $459.8 million / 50.6% | $407.7 million / 50.9% |
| Operating income | $54.4 million | $37.8 million | $171.8 million | $142.6 million |
| Net income | $27.1 million | $15.3 million | $87.2 million | $61.4 million |
| Diluted EPS | $0.78 | $0.43 | $2.53 | $1.75 |
| Interest expense, net | $18.2 million | $20.2 million | $55.8 million | $59.3 million |
Q3 revenue grew 12.1%; domestic revenue rose 19.7% to $300.6 million while international revenue fell 32.5% to $28.9 million. Line-of-credit revenue grew 48.3%, while short-term-loan revenue declined 39.8%. For the first nine months, revenue grew 13.3%, driven by domestic growth; international revenue decreased 22.8%. Management attributed the Q3 profit increase to business growth, operating leverage, lower interest expense and reduced debt-extinguishment losses.
Margins and credit: Q3 gross margin improved to 48.0%, while the nine-month margin edged down to 50.6%. Q3 cost of revenue was $171.3 million. Net charge-offs were $153.3 million for the quarter and $439.2 million for the nine-month period. The combined allowance and guarantee liability was 14.5% of gross receivables at quarter-end, versus 15.1% a year earlier.
Cash, debt and liquidity
- At September 30, 2019, cash and cash equivalents were $69.9 million and restricted cash was $20.7 million, totaling $90.7 million. Total cash, cash equivalents and restricted cash was $185.0 million a year earlier and $77.3 million at December 31, 2018.
- Net loans and finance receivables were $1.001 billion, up from $838.8 million at September 30, 2018. Gross company-owned receivables were $1.174 billion, with a $172.4 million allowance.
- Carrying value of long-term debt was $873.7 million, versus $951.1 million a year earlier and $857.9 million at year-end 2018. The company reported compliance with debt covenants. Its weighted-average debt interest rate was 8.74% for the nine months, compared with 9.80% in 2018.
- For the first nine months, operating cash flow was $605.9 million, investing cash outflow was $587.0 million, and financing cash inflow was $2.6 million. Investing outflow mainly reflected net lending and $16.5 million of property and equipment purchases.
- The $125 million secured revolving credit facility had $25 million drawn at quarter-end. As of October 28, 2019, the company reported $123.8 million of available borrowings and $341.4 million outstanding under securitization facilities.
Material developments, outlook and risks
- U.K. exit: After quarter-end, Enova announced plans to exit the U.K. market. An insolvency practitioner was appointed administrator on October 25, 2019. The company expected a one-time after-tax charge of approximately $74 million, including approximately $43 million in cash charges, and planned to report the U.K. business as discontinued operations beginning in its 2019 annual report. Management cited a challenging and uncertain regulatory environment and unsuccessful discussions with U.K. regulators.
- Funding after quarter-end: On October 17, Enova issued approximately $200 million of asset-backed notes through a subsidiary, backed by consumer installment receivables and not guaranteed by Enova.
- Other outlook: Management expected operating cash flows, available cash, credit facilities and securitizations to meet operating and working-capital needs. It expected portfolio mix—particularly customer mix, product yields and originations—to affect gross margin. No specific earnings or revenue guidance was provided.
- Regulatory and legal exposure: Risks include consumer-lending laws and enforcement, the January 2019 CFPB Consent Order, U.K. historical-lending complaints and exit costs, and a Virginia Attorney General lawsuit alleging consumer-protection violations. The company said it could not estimate a reasonably possible loss range for the Virginia case and intended to defend it.
- Tax uncertainty: Unrecognized tax benefits were $51.3 million at September 30. An IRS examination of the 2017 return and related carryback claim began in Q3; Enova had received an expected $45.7 million refund earlier in 2019. The company said the outcome could materially change tax uncertainty.
- Other risks: Credit-loss estimates, regulatory changes, funding access and costs, interest and currency movements, cybersecurity, and potential claims or expenses associated with the U.K. administration. Enova also noted California AB 539, effective January 1, 2020, which caps certain loan rates and prescribes terms.
Most important facts for investors to verify
- Progress, final cost and potential additional claims from the U.K. administration; compare actual charges with the estimated $74 million after-tax charge.
- U.S. portfolio growth and credit performance, particularly line-of-credit and small-business receivables, charge-offs and allowance adequacy.
- Liquidity and refinancing capacity as lending balances grow, including securitization availability, debt maturities and covenant compliance.
- Outcome and financial effect of the Virginia litigation, CFPB requirements and the IRS examination.
- Whether the reported improvement in quarterly margin and earnings persists, given higher operating costs and the changing product and geographic mix.