Enova International, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; filed February 26, 2018. Although the request references 2017 Q4, this is an annual report, with fourth-quarter results also disclosed. Enova is an online consumer and small-business lending and analytics company operating in the United States, United Kingdom and Brazil.
Business context
Enova originated, arranged or purchased short-term loans, lines of credit, installment loans and small-business receivables purchase agreements. It extended approximately $2.1 billion in credit or financing and processed approximately 3.9 million transactions during 2017. The company reports one operating segment. U.S. operations generated 84.1% of revenue; international operations generated 15.9%, primarily in the U.K.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $843.7 million | $745.6 million |
| Gross profit / margin | $447.1 million / 53.0% | $417.6 million / 56.0% |
| Operating income | $134.4 million | $121.5 million |
| Net income | $29.2 million | $34.6 million |
| Diluted EPS | $0.86 | $1.03 |
| Adjusted EBITDA / margin | $157.8 million / 18.7% | $142.3 million / 19.1% |
| Operating cash flow | $447.2 million | $393.4 million |
| Cash and cash equivalents at year-end | $68.7 million | $39.9 million |
| Loans and finance receivables, net | $704.7 million | $561.6 million |
| Long-term debt, carrying value | $788.5 million | $649.9 million |
- Revenue grew 13.2%; domestic revenue rose 13.9% and international revenue rose 9.5% as reported (15.6% on a constant-currency basis). Growth was led by lines of credit and installment loans/RPAs; short-term loan revenue was nearly flat.
- Cost of revenue increased 20.9% to $396.6 million. Net charge-offs rose to $373.4 million from $295.5 million. Management attributed the lower gross margin largely to growth in installment portfolios and the higher loss experience of new customers.
- Interest expense, net, increased to $74.0 million from $65.6 million, reflecting higher average debt outstanding. Debt to Adjusted EBITDA was 5.0x, versus 4.6x in 2016.
- Investing cash outflow was $527.1 million, mainly reflecting loan and receivable funding; financing cash inflow was $104.6 million. Cash increased by $28.8 million during the year. Restricted cash was $29.5 million.
- At December 31, 2017, gross combined loans and finance receivables, including loans guaranteed but not owned, were $861.9 million; related allowance and guarantee liability totaled $125.3 million. The net combined balance was $736.6 million.
- Fourth-quarter revenue was $243.7 million and net income was $6.9 million; third-quarter net loss was $3.4 million.
Material changes versus prior periods
- Revenue growth and higher operating income did not translate into higher GAAP net income: net income declined 15.5%, principally amid a $22.9 million loss on early extinguishment of debt and higher interest expense.
- Gross margin fell 3.0 percentage points to 53.0%, following a larger decline in 2016. The allowance and liability for losses as a share of gross combined receivables was broadly stable year over year, at 14.5% versus 14.6%.
- Near-prime installment receivables grew substantially: the domestic near-prime balance increased 32.9% and represented approximately 43% of the total loan and finance receivables portfolio at year-end. Management said it expects this share to continue increasing.
- International revenue recovered from 2016 but remained well below 2014 levels following U.K. regulatory changes. The U.K. generated $114.8 million of 2017 revenue.
- Adjusted earnings, a company-defined non-GAAP measure, were $46.9 million, or $1.37 per diluted share, compared with $37.5 million, or $1.12, in 2016. These figures include adjustments that should be considered alongside GAAP results.
Outlook, risks and unusual items
- Outlook: No formal earnings or revenue guidance is provided. Management plans to expand the near-prime installment business and its bank-partner program, and to continue investing in Brazil and analytics-as-a-service. Management stated that operating cash flows, cash balances, credit facilities and securitization funding were expected to meet operating and working-capital needs.
- Regulatory exposure: Consumer lending remains subject to extensive, changing federal, state and international regulation. The CFPB’s payday and certain high-cost installment loan rule was scheduled to apply to covered loans beginning August 2019, but the CFPB announced it would reconsider the rule. Enova said the final requirements and impact were uncertain.
- U.K. operations: FCA requirements, including affordability checks and a price cap, have constrained products and contributed to lower loan volumes and higher compliance costs. Enova previously provided approximately $2.6 million of redress to 3,940 U.K. customers under a concluded program; further regulatory or customer-complaint outcomes remain a risk.
- Debt and liquidity: Enova issued $250 million of 8.50% notes due 2024 and repurchased $155 million principal amount of 9.75% notes due 2021, recording a $22.9 million extinguishment loss. It also amended its securitization facility. The company reported compliance with debt covenants at year-end; substantial debt service, refinancing and capital-market access remain risks. A further $50 million principal amount of 2021 notes was redeemed in January 2018, with an estimated $4.7 million loss.
- Tax: The Tax Cuts and Jobs Act resulted in an estimated $7.5 million tax benefit from remeasuring deferred tax balances. The company noted that interpretations and state tax effects could change the estimate.
- Other risks and contingencies: Credit losses and reserve adequacy, access to ACH and other payment processing, competition, cybersecurity, foreign exchange and litigation are material risks. A TCPA class-action judgment in Enova’s favor was affirmed by the Ninth Circuit in January 2018; the plaintiff’s deadline to seek Supreme Court review had not expired when the filing was made.
- Controls and audit: Management and the independent auditor concluded internal control over financial reporting was effective as of year-end. The auditor issued an unqualified opinion on the financial statements.
Key facts for investors to verify
- Whether growth in near-prime installment lending produces improved mature-vintage losses and margins, as management expects.
- Subsequent charge-off, delinquency and allowance trends, particularly as new-customer portfolios season.
- The final scope, timing and business effects of CFPB and state rules, and ongoing FCA oversight and U.K. complaint costs.
- Debt repayment and refinancing capacity, securitization availability, covenant headroom and the meaning of the filing’s stated $8.0 million of available borrowings as of February 22, 2018.
- The eventual tax effects of federal tax reform and any resulting state or local tax adjustments.