Enova International, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Enova operates an online lending and financing platform for consumers and small businesses in the U.S., U.K. and Brazil. It reports one operating segment.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $293.2 million | $254.3 million | Up 15.3% |
| Gross profit / margin | $154.1 million / 52.6% | $145.7 million / 57.3% | Profit up 5.8%; margin down 4.7 points |
| Operating income / margin | $67.1 million / 22.9% | $61.7 million / 24.3% | Income up 8.8% |
| Net income / net margin | $35.0 million / 11.9% | $27.9 million / 11.0% | Up 25.5% |
| Diluted EPS | $1.02 | $0.81 | Up $0.21 |
| Operating cash flow | $221.1 million | $153.0 million | Up 44.5% |
| Adjusted EBITDA (non-GAAP) | $74.7 million; 25.5% margin | $68.0 million; 26.7% margin | EBITDA up; margin down |
Revenue growth was led by domestic operations, up 21.1% to $258.0 million. International revenue fell 14.8% to $35.2 million; on a constant-currency basis it declined 7.5%. By product, line-of-credit revenue rose 33.4% and installment-loan/RPA revenue rose 16.3%; short-term loan revenue fell 13.2%. Cost of revenue rose 28.1%, faster than revenue, primarily reflecting higher credit-loss costs and portfolio growth.
Net cash from operations included a $49.5 million cash-flow benefit from current income taxes; the company separately reported receiving an expected $45.7 million IRS refund during the quarter. Investing activities used $104.2 million, including net investment of $99.3 million in loans and finance receivables. Financing activities used $77.9 million. Cash, cash equivalents and restricted cash totaled $118.2 million at quarter-end, including $25.4 million of restricted cash.
Balance sheet, debt and credit quality
- At March 31, 2019, total assets were $1.338 billion, total liabilities $959.2 million and stockholders’ equity $379.2 million. Net loans and finance receivables were $815.9 million, versus $703.1 million a year earlier.
- Long-term debt carrying value was $791.9 million, compared with $754.7 million at March 31, 2018 and $857.9 million at December 31, 2018. Stated principal across debt instruments was $806.0 million; weighted-average interest rates were 9.03% in Q1 2019 and 9.79% in Q1 2018. The company reported compliance with debt covenants.
- No borrowings were outstanding under the $125 million revolving credit agreement at March 31; letters of credit totaled $1.2 million. Available borrowings were reported as $27.8 million at April 29, 2019. Securitization-facility balances were $174.4 million at that date.
- The allowance for losses on company-owned receivables was $141.4 million, up from $114.3 million a year earlier. Combined allowance and guarantee liability equaled 14.6% of gross combined receivables, versus 13.7%. Q1 net charge-offs were $162.3 million, versus $118.7 million.
Material changes and notable items
- Domestic growth and increased demand for installment products and lines of credit more than offset weaker international results. The company said it expects domestic near-prime installment loans to make up a larger share of its portfolio.
- Gross margin fell as cost of revenue increased. International gross margin declined to 28.5% from 50.5%, with international operating results moving to a $7.2 million loss from $1.7 million income. Domestic gross profit increased, though domestic gross margin also declined.
- On February 25, Enova entered a new non-recourse securitization facility with an initial maximum of $50 million, expandable to $75 million subject to lender consent; $12.8 million was outstanding at quarter-end. The 2016-1 facility was repaid in full on March 29.
- The company adopted lease-accounting standards on January 1, recognizing $22.3 million of right-of-use assets and $39.6 million of operating lease liabilities at adoption. Quarter-end operating lease liabilities were $38.7 million.
- Enova repurchased $8.2 million of treasury shares in Q1. A new $50 million repurchase authorization was announced in January 2019, extending through December 31, 2020.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided. Management said operating needs and working-capital growth are expected to be funded through operating cash flow, the revolving credit agreement and securitization or sale of receivables. It noted that lending volume could be adjusted if funding disruptions arise. The company plans to invest in near-prime installment lending and expand its Brazil program; it ceased new Pounds to Pocket originations in February 2019, with new U.K. installment business to be written under On Stride.
- Regulatory and legal exposure includes the January 2019 CFPB Consent Order identified among forward-looking risk factors; this filing excerpt does not clearly describe its terms or financial impact. Virginia’s attorney general is pursuing a lawsuit alleging consumer-protection violations; Enova disputes the claims, and the company cannot estimate a reasonably possible loss.
- Management cited ongoing U.K. customer complaints as contributing to selling expenses. Brazil’s data-privacy law may increase compliance costs when effective; timing remained subject to proposed changes.
- Other key risks include changing lending laws and enforcement, credit losses and adequacy of reserves, access to funding and refinancing, ACH processing and collections, competition, cybersecurity, foreign exchange, and litigation. Enova reported no outstanding derivatives at March 31.
- Unrecognized tax benefits were $41.3 million. A Joint Committee on Taxation review of certain 2018 returns and claimed refunds could materially change the tax uncertainty; resolution within 12 months was considered reasonably possible.
- Q1 included a $2.3 million loss on early extinguishment of debt and $0.4 million of lease termination and cease-use costs. Adjusted earnings and Adjusted EBITDA are non-GAAP measures.
Important facts for investors to verify
- Whether rising credit costs and net charge-offs persist, and how portfolio performance compares across short-term, line-of-credit and installment products.
- Whether domestic growth can offset continuing international weakness and the significant decline in international gross margin.
- The cash-flow impact of the IRS refund, and the company’s recurring operating cash generation excluding tax-related timing effects.
- Available funding capacity, securitization terms and costs, and debt maturities, covenants and refinancing needs.
- The status and potential financial consequences of the CFPB Consent Order, Virginia litigation, U.K. complaints and tax review.
- The reconciliation and relevance of management’s non-GAAP measures to GAAP results; no formal numeric outlook is disclosed.