Enova International, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results; dollar amounts below are U.S. dollars. Enova operates an online lending and financing platform serving consumers and small businesses, primarily in the United States and Brazil. The U.K. businesses, placed into administration in October 2019, are reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $362.3 million | $264.4 million |
| Net revenue / gross profit | $126.5 million | $145.6 million |
| Net revenue / gross profit margin | 34.9% | 55.1% |
| Income from operations | $29.1 million | $73.0 million |
| Net income | $5.5 million | $35.0 million |
| Diluted earnings per share | $0.17 | $1.02 |
| Adjusted EBITDA (non-GAAP) | $36.2 million | $80.3 million |
| Adjusted EBITDA margin (non-GAAP) | 10.0% | 30.4% |
| Net interest expense | $20.4 million | $19.5 million |
- Revenue rose 37.0%, led by line-of-credit revenue, up 77.8%, and installment loan and RPA revenue, up 9.0%. Line-of-credit accounts generated 51.3% of revenue; installment loans and RPAs generated 48.0%.
- The reported revenue and margin measures are not directly comparable across periods: beginning January 1, 2020, Enova elected fair value accounting for its loan portfolio. Q1 2020 includes a $235.7 million negative fair-value change instead of the prior-period presentation of $118.9 million in cost of revenue. The filing attributes lower earnings primarily to COVID-related fair-value reductions, alongside the accounting change.
- Operating cash flow was $252.5 million, including $252.8 million from continuing operations. Investing cash outflow was $186.9 million, including $178.2 million net cash outflow for loans and finance receivables. Financing provided $57.3 million; this included net borrowing under credit and securitization facilities and $41.7 million of share repurchases.
- At March 31, cash and cash equivalents were $161.1 million and restricted cash was $42.7 million. Total cash, cash equivalents and restricted cash were $203.8 million. Management reported $156.8 million of committed, undrawn funding capacity at quarter-end; available borrowings under the revolving credit agreement were $18.8 million as of April 30, 2020.
- Long-term debt was $1.092 billion net of issuance costs; principal balances totaled $1.104 billion. Debt included $625 million of 8.50% senior notes due 2024 and 2025, $373.9 million of securitization notes and $105.3 million outstanding on the revolving credit facility. The weighted-average debt interest rate was 8.15%. Enova reported compliance with debt covenants at March 31.
Material changes and operating trends
- Revenue increased $97.8 million year over year, but income from operations fell 60.1% and net income fell 84.4%. Marketing expense increased to $34.6 million from $19.1 million and operations and technology expense rose to $31.3 million from $20.6 million. Enova said the fair-value election moved certain origination costs into current-period expenses, in addition to higher spending associated with growth.
- At March 31, the fair value of company-owned loans and finance receivables was $1.093 billion against $1.061 billion of principal. The portfolio is valued using Level 3 inputs and internally developed discounted-cash-flow models.
- More than 30-day delinquency was 7.5% across the combined portfolio, compared with 6.0% a year earlier and 6.7% in Q4 2019. Installment loan and RPA delinquency was 6.0%, versus 5.5% a year earlier; line-of-credit delinquency was 10.5%, versus 7.6%. Line-of-credit net charge-offs were 27.6% of average balances, compared with 21.1% a year earlier.
- Enova repurchased 2.27 million shares under its announced program during the quarter for approximately $41.7 million. About $15.2 million remained authorized for repurchases at March 31.
Outlook, risks and unusual items
- Enova provided no specific financial guidance in the supplied filing text. Management said it had modeled stressed scenarios and believed available liquidity was sufficient to operate for the foreseeable future. It also noted no recourse debt maturities before 2024 and no non-recourse secured lending facility maturities before February 2022.
- COVID-19 had begun affecting results and credit indicators near quarter-end. Enova moved nearly all employees to remote work, offered affected customers fee waivers and flexible repayment options, tightened underwriting, and reduced loan and draw sizes and durations. It increased the portfolio discount rate by 500 basis points to reflect heightened cash-flow uncertainty and market risk.
- Management warned that the pandemic’s duration and economic effects remain uncertain and could increase defaults, reduce demand or funding access, pressure liquidity and debt covenants, and further reduce loan fair values. The valuation depends on significant, subjective assumptions; changes in assumptions or actual outcomes could materially affect earnings.
- Virginia SB 421, passed by the state legislature in March, would cap rates and fees on certain products and was scheduled to take effect January 1, 2021. The filing also describes a Virginia attorney general lawsuit alleging consumer-protection violations; Enova disputes the claims, and it could not estimate a loss range or determine the likelihood of an unfavorable outcome.
- Unrecognized tax benefits were $53.5 million at March 31. A Joint Committee on Taxation review of certain 2018 tax returns and refund claims could lead to significant changes in tax uncertainty, potentially within 12 months. The Q1 discontinued-operations loss of $0.3 million included an impairment charge related to expenses deemed non-reimbursable by the U.K. administrators.
Important facts for investors to verify
- How COVID-era customer repayment behavior, delinquencies and charge-offs develop, particularly in line-of-credit portfolios.
- The fair-value model assumptions and sensitivity to losses, prepayments, servicing costs and discount rates; reported Q1 margins and earnings reflect a new accounting basis.
- Liquidity availability and borrowing capacity under the revolving and securitization facilities, including any covenant headroom and funding-market changes.
- The outcome and potential financial effects of the Virginia litigation, Virginia rate-cap legislation and the tax review.
- The sustainability of revenue growth and the effect of increased marketing and operating costs, alongside share repurchases, on cash and capital.