Enova International, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Enova operates an online lending and financing platform for consumers and small businesses, offering short-term loans, lines of credit, installment loans and receivables purchase agreements. It reports one operating segment and serves the U.S., U.K. and Brazil.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Revenue | $217.9 million | $195.9 million | +11.2% |
| Gross profit / margin | $110.5 million / 50.7% | $100.6 million / 51.3% | Profit +9.9%; margin down 0.6 percentage points |
| Operating income / margin | $27.7 million / 12.7% | $28.1 million / 14.3% | Income down 1.5% |
| Net income (loss) | $(3.4) million | $7.8 million | Declined, principally due to debt extinguishment loss |
| Diluted EPS | $(0.10) | $0.23 | — |
| Adjusted EBITDA (non-GAAP) | $34.2 million; 15.7% margin | $34.2 million; 17.4% margin | Approximately flat; margin down |
- Nine-month results: Revenue was $600.0 million (+10.5%); gross profit $331.0 million (+5.8%) and margin 55.2% versus 57.6%; operating income $101.0 million versus $88.8 million; net income $22.4 million versus $25.9 million; diluted EPS $0.66 versus $0.78. Adjusted EBITDA (non-GAAP) was $119.7 million versus $107.2 million.
- Revenue mix and growth: Q3 line-of-credit revenue rose 16.6% to $68.9 million and installment-loan/RPA revenue rose 16.6% to $98.9 million; short-term loan revenue fell 4.1% to $49.9 million. Domestic revenue grew 9.8%; international revenue grew 18.6%. Nine-month revenue was 84% domestic and 16% international.
- Credit performance: Cost of revenue was $107.3 million in Q3 versus $95.4 million. Net charge-offs were $86.5 million versus $74.3 million. The allowance and guarantee liability were $107.1 million at quarter-end, 13.9% of combined gross receivables, compared with 14.5% a year earlier. Owned gross receivables were $742.8 million, with a $105.1 million allowance; net owned receivables were $637.7 million.
- Cash flow and liquidity: For nine months, operating cash flow was $311.3 million, investing cash outflow $337.9 million and financing cash inflow $93.1 million. Cash and cash equivalents were $110.1 million at September 30; restricted cash was $29.9 million. The company had $765.4 million of reported long-term debt, including debt issuance costs. The $40 million asset-backed revolver had no borrowings and $8.0 million of letters of credit outstanding at September 30. Management reported compliance with debt covenants.
Material changes versus comparable periods
- Q3 revenue growth was led by lines of credit and installment loans/RPAs, while gross margin narrowed. Management attributed pressure to growth in new customers and installment portfolios, which carry higher initial loss provisions; domestic near-prime underwriting changes improved line-of-credit credit quality.
- Operations and technology expense rose 31.6% in Q3 to $27.2 million, and general and administrative expense rose 18.1% to $25.2 million. Higher transaction, underwriting and personnel costs contributed. Nine-month marketing expense declined, while operations and technology costs increased.
- In September, Enova issued $250 million of 8.50% senior notes due 2024 and repurchased $155 million principal of its 9.75% notes due 2021. The repurchase generated a $14.9 million pre-tax extinguishment loss, including an $11.3 million cash prepayment penalty. Debt balances and interest expense increased year over year.
- Loans and finance receivables, net, increased 17.5% year over year. Management expected near-prime installment loans to represent a growing share of the portfolio.
Outlook, risks and unusual items
- Management said operating cash flows, available cash, revolver capacity and securitization funding were expected to meet operating and working-capital needs. It noted that funding disruptions could increase costs or constrain lending; it could reduce lending volume, seek asset sales or securitization, or cut capital spending. No specific earnings or revenue guidance was provided.
- On October 20, 2017, after quarter-end, Enova amended and restated its 2016-1 securitization facility: maximum principal remained $275 million, with quarterly variable-note availability of $75 million and a possible increase to $90 million with lender consent; the latest maturity is April 2021. The notes bear interest at one-month LIBOR plus 7.50% and are non-recourse to Enova.
- The CFPB’s October 6, 2017 payday and certain high-cost installment loan rule may cover some products, with requirements expected to apply to contracts entered from mid-2019. Enova said the rule could require underwriting, payment-process and notice changes and could materially affect its U.S. business if effective. Legislative review and possible legal challenges remained possible.
- The U.K. FCA kept its high-cost short-term credit price cap unchanged in July 2017 but planned another review in three years; further consultations on creditworthiness and other consumer-credit rules could affect operations. Regulatory, licensing, consumer-protection and data-privacy changes are material risks.
- A putative class action alleging unauthorized text messages under the Telephone Consumer Protection Act remained on appeal after judgment for Enova. The company said it could not determine the likelihood of an unfavorable outcome or estimate a reasonably possible loss range.
- An out-of-period adjustment reduced both Q3 revenue and marketing expense by $0.7 million and $1.9 million, respectively, for amounts from prior periods; management considered the adjustment immaterial to the current and prior periods. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether rising charge-offs and new-customer losses remain consistent with management’s allowance assumptions, especially as installment balances grow.
- The sustainability of revenue growth alongside lower gross margins and higher operating and interest costs; distinguish GAAP results from adjusted, non-GAAP measures.
- Debt-service capacity, refinancing needs, securitization availability and the impact of the new 2024 notes and amended securitization terms.
- The eventual effect and implementation status of U.S. CFPB rules and U.K. FCA proposals on product availability, underwriting, payment collection and compliance costs.
- Developments in the TCPA appeal and any other material litigation or contingencies; the filing gives no clear loss estimate for the appeal.