Enova International, Inc. — Q3 2018 Form 10-Q
Business context and period. Enova operates an online lending and financing platform serving consumers and small businesses, primarily in the U.S., U.K. and Brazil. This unaudited report covers the three and nine months ended September 30, 2018; comparisons are with the same 2017 periods unless noted. Amounts below are in millions of U.S. dollars unless otherwise stated.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $293.9 | $217.9 | $801.5 | $600.0 |
| Gross profit / margin | $130.1 / 44.3% | $110.5 / 50.7% | $407.7 / 50.9% | $331.0 / 55.2% |
| Operating income | $37.8 | $27.7 | $142.6 | $101.0 |
| Net income (loss) | $15.3 | $(3.4) | $61.4 | $22.4 |
| Diluted EPS | $0.43 | $(0.10) | $1.75 | $0.66 |
| Adjusted EBITDA (non-GAAP) | $44.4 | $34.2 | $162.1 | $119.7 |
- Q3 revenue grew 34.9%; U.S. revenue rose 38.3% and international revenue 18.0%. Installment loans and receivables purchase agreements (RPAs), and line-of-credit products, were the largest growth contributors.
- Cost of revenue rose 52.6% in Q3, faster than revenue, contributing to the 6.4 percentage-point decline in gross margin. Management attributed margin pressure to product and customer mix, including growth in installment lending and higher loss provisions for new customers.
- Q3 operating expenses were $92.3 million, up 11.4%; marketing increased to $36.0 million, primarily reflecting direct mail, lead-provider volume and television advertising. Net interest expense rose 10.7% to $20.2 million as average debt increased, partly offset by a lower average interest rate.
- Q3 net income included a $10.2 million income tax benefit and a $12.5 million loss on early debt extinguishment. The nine-month effective tax rate was 3.9%, versus 34.0% in 2017; the company cited the lower federal tax rate and timing of certain deductions.
- Operating cash flow for the first nine months was $468.2 million, versus $311.3 million; investing cash outflow was $517.1 million, mainly reflecting $505.9 million of net lending and finance-receivable investment. Financing provided $141.2 million. Cash, cash equivalents and restricted cash totaled $185.0 million at September 30, 2018, including $164.1 million unrestricted cash.
- Total assets were $1.426 billion and stockholders’ equity $352.7 million at September 30. Long-term debt was $951.1 million, compared with $765.4 million at September 30, 2017. The company reported compliance with debt covenants.
- Gross owned loans and finance receivables were $990.4 million, with a $151.6 million allowance. The combined owned and company-guaranteed portfolio, net of allowance and guarantee liability, was $866.6 million; the combined loss reserve ratio was 15.1%, up from 13.9% a year earlier. Q3 net charge-offs were $133.4 million, versus $86.5 million.
Material changes, outlook and risks
- Growth and mix: The portfolio grew substantially year over year, led by installment lending and lines of credit. Installment loans and RPAs generated 46.5% of nine-month revenue, compared with 42.7% in 2017; short-term loans’ share declined. Management expects domestic near-prime installment balances to represent a larger share of the portfolio.
- Debt refinancing: In September, Enova issued $375 million of 8.50% senior notes due 2025 and used part of the proceeds to repurchase 2021 notes. It redeemed the remaining $116.5 million principal of the 2021 notes in October, with a further $7.6 million extinguishment loss expected after quarter-end. The October 5 amendment increased the revolving credit limit to $125 million; available borrowings were $51.4 million as of October 30. The company also entered a new $150 million non-recourse receivables facility in October. These transactions support funding capacity but leave the company with significant debt and borrowing costs.
- Funding and guidance: Management expects operating cash flow, cash balances, the revolving facility and securitizations to fund operations and lending growth. It disclosed no numerical earnings or revenue guidance. Management may reduce lending or capital spending if funding disruptions occur.
- Regulatory and legal: Virginia sued a subsidiary in April 2018, alleging consumer-protection violations and seeking injunctive relief, restitution, penalties and costs. Enova disputes the claims; likelihood, liability and a reasonable loss range were not determinable. Ohio enacted lending restrictions effective April 27, 2019; management did not anticipate a material adverse effect. A change in Ohio law led a bank partner to suspend its lending program in May 2018, and Enova stopped purchasing loans through it.
- Other exposures: Enova cited U.K. Financial Ombudsman complaints concerning pre-2014 loans, with customer payments and complaint-handling costs potentially material. It also highlighted cybersecurity, privacy, regulatory, payment-processing, credit-loss, foreign-exchange and refinancing risks. The company exited Canada and Australia and recorded a $2.3 million foreign-currency translation loss in Q1 2018 during the wind-down.
Investor verification priorities
- Track whether rapid portfolio growth is accompanied by stabilizing loss reserves, charge-offs and gross margins, especially in installment and line-of-credit products.
- Review the Virginia lawsuit, U.K. ombudsman complaint trends and the effect of Ohio’s new lending law and bank-program suspension.
- Verify the completion and terms of post-quarter-end debt actions, including the 2021-note redemption, new securitization facilities and increased revolver capacity.
- Assess the sustainability of reported earnings and cash generation, including the unusually low effective tax rate, tax deduction timing and non-cash cost-of-revenue adjustments.
- Compare GAAP results with management’s non-GAAP adjusted earnings and EBITDA, and review the stated reconciliations and exclusions.