Enova International, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results. Enova operates an online lending and financing platform serving consumers and small businesses, primarily in the U.S., as well as the U.K. and Brazil.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $253.3m | $189.9m | $507.6m | $382.2m |
| Gross profit | $131.8m | $110.0m | $277.6m | $220.4m |
| Gross margin | 52.0% | 57.9% | 54.7% | 57.7% |
| Income from operations | $43.1m | $35.2m | $104.8m | $73.3m |
| Net income | $18.2m | $11.9m | $46.1m | $25.7m |
| Diluted EPS | $0.52 | $0.35 | $1.32 | $0.75 |
| Net interest expense | $19.4m | $17.0m | $39.0m | $34.2m |
- Q2 revenue rose 33.4%; growth was led by installment loans and receivables purchase agreements (+46.4%) and line-of-credit accounts (+35.4%). Domestic revenue increased 35.2%; international revenue increased 24.6% (32.7% total revenue growth on a constant-currency basis).
- Revenue growth outpaced gross-profit growth, reducing Q2 gross margin by 5.9 percentage points. Management attributes margin pressure in part to growth in installment lending and new customers, who historically have higher early-stage losses. Operating income increased 22.4% in Q2.
- For the first half, revenue increased 32.8% and net income 79.3%. The effective tax rate fell to 21.5% from 34.6%, largely reflecting the U.S. federal tax-rate reduction; the first-half comparison also includes a $4.7m pretax debt-extinguishment loss in 2018.
- Management-reported non-GAAP Q2 adjusted earnings were $20.8m ($0.59 per diluted share), versus $14.0m ($0.41); adjusted EBITDA was $49.8m versus $41.6m. Adjusted EBITDA margin declined to 19.6% from 21.9%. These company-defined measures supplement, not replace, GAAP results.
Cash flow, balance sheet and debt
- At June 30, cash and cash equivalents were $47.4m and restricted cash was $28.9m. Net loans and finance receivables were $750.1m; total assets were $1.183bn, total liabilities $849.6m, and stockholders’ equity $333.6m.
- Six-month operating cash flow was $295.7m, investing cash outflow $283.6m, and financing cash outflow $33.6m. Cash, cash equivalents and restricted cash ended the period at $76.3m, down $21.9m from year-end. Loan originations and acquisitions were $786.8m, against $510.2m of repayments. Operating cash flow includes significant noncash loan-loss expense and should be considered alongside portfolio investment.
- Long-term debt carrying value was $762.8m, compared with $638.7m a year earlier and $788.5m at December 31, 2017. It included $293.2m of 9.75% senior notes due 2021, $250.0m of 8.50% notes due 2024, $179.1m of securitization notes, and $53.0m drawn on a revolving credit facility. The company repurchased $50.0m principal of 2021 notes for $53.7m cash and recorded a $4.7m extinguishment loss.
- The $75m revolving credit facility matures in May 2020 and is secured by domestic receivables. The company reported compliance with debt covenants at June 30. As of July 30, available borrowings under that facility were $11.4m; securitization-facility borrowings were $195.4m.
Portfolio, outlook and material developments
- Net owned receivables grew 33.0% year over year to $750.1m. Gross owned receivables were $871.9m and the allowance was $121.8m, or 14.0% of gross owned balances, versus 12.9% a year earlier. Combined owned and guaranteed receivables net of related loss reserves were $776.7m. Net charge-offs were $111.8m in Q2 versus $78.8m a year earlier.
- Gross delinquent owned receivables were $83.0m, including $73.9m on non-accrual, compared with $58.0m and $52.5m, respectively, a year earlier. The filing describes reserve estimates as based on historical loss experience and recent trends; actual losses may differ.
- Management expects installment loans to remain a larger share of the portfolio and says future gross margins will depend on customer mix, product yields and originations. It expects operating needs and working-capital growth to be funded by operating cash flow, the revolving facility and securitization or sale of receivables. No specific earnings or revenue guidance is provided.
- After quarter-end, Enova entered a new non-recourse receivables facility with a $150m maximum, LIBOR plus an initial 4.00% margin, and maturity in 2023. Eligible receivables collateral must equal 1.25 times the amount drawn.
- Ohio enacted House Bill 123 on July 30, 2018, imposing limits on certain small loans, effective 270 days later. Management did not anticipate a material adverse effect. Separately, a change in Ohio law led the bank partner to suspend lending and Enova to suspend loan purchases through its bank program in May.
- Virginia’s Attorney General sued a subsidiary in April, alleging state consumer-protection violations concerning communications, collections, loan agreements and rates, and seeking an injunction, restitution and penalties. Enova disputes the claims; likelihood and potential loss could not be estimated. A separate TCPA class action was resolved in Enova’s favor and became final in 2018.
- Other key risks include consumer-credit regulation and enforcement, U.K. Financial Ombudsman complaints and related costs, credit losses and reserve adequacy, access to funding, foreign-exchange movements, payment processing, litigation, and cybersecurity or technology disruptions. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track loss rates, delinquencies, charge-offs and reserve coverage as the receivables portfolio expands, particularly in installment lending and among new customers.
- Verify the ongoing effect of weaker gross margins on operating profitability and cash generation; compare GAAP results with the company’s adjusted earnings and EBITDA measures.
- Review available borrowing capacity, securitization terms and covenants, and the funding implications of portfolio growth and elevated debt.
- Monitor implementation and business impact of Ohio House Bill 123, the Virginia lawsuit, and U.K. Financial Ombudsman complaints.
- Assess the sustainability of reported growth and liquidity, including the distinction between unrestricted cash and restricted cash and the cash absorbed by new receivables.