Enova International, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results. Enova operates an online lending and financing platform serving consumers and small businesses in the U.S., U.K. and Brazil.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $285.7m | $253.3m | $578.9m | $507.6m |
| Gross profit | $147.4m | $131.8m | $301.5m | $277.6m |
| Gross margin | 51.6% | 52.0% | 52.1% | 54.7% |
| Operating income | $50.3m | $43.1m | $117.4m | $104.8m |
| Net income | $25.1m | $18.2m | $60.1m | $46.1m |
| Diluted EPS | $0.73 | $0.52 | $1.74 | $1.32 |
| Adjusted EBITDA (non-GAAP) | $57.5m | $49.8m | $132.3m | $117.7m |
Q2 revenue rose 12.8% year over year; domestic revenue increased 19.0% to $254.2m, while international revenue fell 20.6% to $31.5m. Line-of-credit revenue grew 38.9%; installment-loan and RPA revenue grew 12.2%; short-term-loan revenue declined 27.0%. Q2 operating margin was 17.6% versus 17.0%, and net margin was 8.8% versus 7.2%. First-half net income growth reflected profitable growth, operating leverage, lower interest expense and a smaller debt-extinguishment loss.
First-half cost of revenue rose 20.6%, faster than revenue growth of 14.0%, contributing to the gross-margin decline. Management attributed the first-half margin pressure primarily to growth in installment portfolios and a higher proportion of new customers, who historically default more often than returning customers.
Cash flow: First-half operating cash flow was $414.8m versus $295.7m. Investing used $319.1m, including $308.2m net investment in loans and finance receivables and $10.9m in property and equipment. Financing used $83.8m, including net repayments on securitization facilities and the revolving credit agreement, and treasury-share purchases. The operating cash flow figure included a $61.5m favorable change in current income taxes; cash flow should therefore be assessed alongside the tax timing and lending portfolio movements.
Liquidity and debt: At June 30, cash and cash equivalents were $65.5m, restricted cash $23.0m, and total assets $1.383bn. Long-term debt carrying value was $785.5m (principal before issuance costs: $798.7m); total liabilities were $977.0m. The company reported no revolving-credit borrowings at quarter-end and compliance with debt covenants. After quarter-end, its $125m revolving facility was amended to extend maturity to June 30, 2022 and raise the advance rate to 65%; reported available borrowings as of July 29 were $123.8m. First-half weighted-average debt interest rate was 8.85%, down from 10.06%.
Material changes and developments
- Net loans and finance receivables rose to $892.6m from $750.1m a year earlier. The combined portfolio, net of allowance and guaranteed-loan liabilities, increased 17.5% to $912.3m.
- The allowance and liability for losses equaled 14.7% of combined gross receivables, compared with 13.8% a year earlier. First-half net charge-offs were $285.9m versus $230.5m.
- Domestic near-prime installment lending and small-business receivables expanded; short-term lending became a smaller share of revenue and portfolio balances. International revenue and profitability weakened: international operations reported a Q2 operating loss of $7.4m, versus income of $1.1m a year earlier.
- The company repaid its 2016-1 securitization facility in March 2019 and continued funding through other securitizations. Treasury shares purchased in the first half totaled $8.8m.
- Adoption of lease accounting in January 2019 added $22.3m of operating-lease right-of-use assets and $39.6m of lease liabilities at adoption. Operating lease liabilities were $37.7m at June 30.
Outlook, risks and unusual items
- The filing gives no specific numerical revenue, earnings or margin guidance. Management expects continued growth in domestic near-prime installment lending and says gross margin will remain sensitive to customer mix, product yields and originations. Management believes operating cash flows, cash, revolving credit and securitization capacity will fund operating needs and portfolio growth, but notes funding disruptions could raise borrowing costs or constrain lending.
- Regulatory and legal exposure is significant to the business. The company is subject to applicable lending laws and regulatory oversight, including a January 2019 CFPB consent order. It is defending a Virginia Attorney General lawsuit alleging consumer-protection and lending violations; the company says it cannot determine the likelihood or estimate a loss range.
- In the U.K., the company reported elevated complaints tied to historical lending, continuing complaint-related costs, and a review of possible options—including a scheme of arrangement—to reduce exposure. It ceased new Pounds to Pocket lending in February 2019 and is writing new installment business under On Stride.
- The IRS notified the company after quarter-end of an examination concerning its 2017 tax return and related carryback claim. The company had received a $45.7m expected refund in Q1 and reported $45.2m of unrecognized tax benefits at June 30; the amount and timing of resolution remain uncertain.
- Other risks include credit-loss estimation, consumer demand and competition, access to funding, interest and foreign-exchange movements, cyber and operational disruption, and compliance with international data-protection requirements. The company says adoption of the expected-credit-loss standard may increase its allowance and reduce retained earnings if it does not elect the fair-value option; the impact is not quantified.
- Controls and procedures were assessed as effective at June 30, 2019, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether receivable growth can be sustained without further deterioration in allowances, charge-offs or portfolio returns.
- The trajectory of U.K. complaints and costs, and developments in the Virginia litigation and CFPB consent-order compliance.
- The outcome and potential financial impact of the IRS examination and other unrecognized tax benefits.
- Liquidity and funding capacity under the amended revolving facility and securitization arrangements, including borrowing costs and covenant headroom.
- How much reported operating cash flow reflects recurring operations versus tax timing, and the eventual impact of expected-credit-loss accounting.