Enova International, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Enova operates an online lending and financial-services platform serving non-prime consumers and small businesses, primarily in the U.S., with operations or lending activities in Brazil, Australia and Canada. Products include consumer and small-business installment loans, credit lines, receivables purchase agreements, and money transfers. The October 2020 OnDeck acquisition substantially expanded small-business lending; the March 2021 Pangea acquisition added international money transfers. Comparisons with 2020 are affected by the OnDeck acquisition and pandemic-related changes in lending and marketing.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $264.7 | $253.1 | $524.2 | $615.3 |
| Change in fair value of receivables | $(5.6) | $(120.7) | $(26.7) | $(356.4) |
| Net revenue | $259.1 | $132.4 | $497.5 | $258.9 |
| Operating income | $122.7 | $86.6 | $246.2 | $115.6 |
| Net income attributable to Enova | $80.2 | $48.0 | $156.1 | $53.5 |
| Diluted EPS | $2.10 | $1.58 | $4.13 | $1.69 |
- Q2 revenue increased 4.6% year over year, while net revenue rose 95.7%, principally because the fair-value charge was much smaller than in the pandemic-affected prior-year quarter. Q2 net revenue margin was 97.9%, versus 52.3%; operating income was 46.4% of revenue, versus 34.2%.
- Q2 consumer loan revenue fell 26.3% to $174.5 million; small-business loan revenue grew 473.1% to $85.6 million, primarily reflecting OnDeck. Marketing expense rose sharply to $55.3 million from $3.0 million as Enova increased spending to capture demand; the prior-year quarter had unusually low marketing spend.
- For the first half, revenue declined 14.8%, largely from lower consumer loan balances, while net revenue increased 92.1% and net income nearly tripled. First-half net revenue margin was 94.9%, versus 42.1%. The company attributed improved earnings mainly to better portfolio credit performance and the prior-year fair-value impact of COVID-19.
- Management’s non-GAAP adjusted earnings were $86.1 million and adjusted diluted EPS $2.26 for Q2; first-half adjusted earnings were $168.5 million and adjusted diluted EPS $4.46. Adjusted EBITDA was $134.9 million in Q2 and $272.0 million for the first half. These measures exclude specified items and are not substitutes for GAAP results.
Portfolio, cash flow, debt and liquidity
- At June 30, loans and finance receivables had a fair value of $1.409 billion and principal balance of $1.367 billion, up from $799.7 million and $767.6 million, respectively, a year earlier. Small-business lending represented 55.3% of the combined portfolio, versus 13.5% a year earlier, mainly due to OnDeck.
- Combined loans more than 30 days delinquent were 5.7% of the portfolio at Q2-end, versus 4.5% a year earlier. Consumer delinquency was 4.1% versus 4.4%; small-business delinquency was 7.1% versus 4.6%. Q2 net charge-offs as a percentage of average balances were 4.6% for consumer loans and 0.7% for small-business loans. Management cited portfolio seasoning, lower-risk originations, customer assistance and government stimulus as factors in improved credit results.
- Six-month operating cash flow was $219.9 million, compared with $483.4 million in 2020; investing cash outflow was $226.9 million, including loan growth, the Pangea acquisition and capital spending; financing cash inflow was $84.6 million. Cash, cash equivalents and restricted cash totaled $447.2 million at June-end, including $394.4 million unrestricted.
- Long-term debt on the balance sheet was $1.028 billion, net of issuance costs and discounts. Enova reported $533.9 million of committed and undrawn domestic capacity and $27.4 million in Australia at June 30; by July 29, it reported $290.1 million domestic and $24.5 million Australian capacity. It said it was in compliance with debt covenants and had no recourse debt maturities before September 2024.
- In May, Enova completed a $300 million small-business-loan securitization with a 2.07% weighted-average coupon and final maturity in 2027. It also amended its revolving credit facility, increasing commitment to $310 million, extending maturity to June 2025 and improving the advance rate and pricing. The facility was undrawn at June 30, apart from a letter of credit.
Outlook, risks and unusual items
- No specific financial guidance or earnings forecast is provided in the filing. Management said liquidity was sufficient for the foreseeable future based on stress scenarios and expected operating cash flow and funding sources.
- Management cautioned that pandemic effects remain uncertain. Delinquencies and charge-offs had improved, but government stimulus may have supported those trends; future performance could differ if support declines. Enova reduced its loan valuation discount rates by 100 basis points in each of Q1 and Q2 2021 as market credit spreads tightened, while keeping them above pre-pandemic levels. It also increased expected charge-offs in valuation models because management judged future losses could exceed historical experience.
- Regulatory exposure includes state and federal lending rules. Illinois’ Economic Equity Act, effective March 23, 2021, imposes a 36% consumer-loan rate cap and a “true lender” test; Virginia’s revised lending law took effect January 1, 2021. The CFPB had rescinded the Small Dollar Rule’s ability-to-repay provisions in 2020, but other regulatory requirements remain relevant.
- A Virginia Attorney General lawsuit against a subsidiary alleges consumer-protection violations related to lending and collections. Enova disputes the claims, but says it cannot determine the likelihood of an unfavorable outcome or estimate a reasonably possible loss. The company also identified general risks from regulation, litigation, funding access, cyber incidents, foreign exchange and integration of acquisitions.
- Other notable items include $0.8 million of Q2 nonoperating expense related to an incomplete transaction and a $39.1 million balance of unrecognized tax benefits at June 30. The Pangea acquisition’s purchase-price allocation remained preliminary.
Important facts for investors to verify
- Whether consumer and small-business delinquency, charge-off and collection trends remain favorable as stimulus effects fade and originations grow.
- The assumptions behind fair-value estimates for loans, which use internally developed models and significant unobservable inputs; changes in loss, prepayment, utilization, servicing-cost or discount-rate assumptions affect earnings and portfolio values.
- How much of the reported growth and improved earnings is sustainable apart from OnDeck acquisition effects, unusually low prior-year marketing and fair-value comparisons.
- Actual available borrowing capacity, collateral eligibility, securitization renewal terms and covenant headroom, including the change in reported undrawn capacity between June 30 and July 29.
- Developments in the Virginia litigation, tax examinations and state rate-cap or lender-partnership rules, and their potential effects on products and profitability.