Enova International, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited, compared with the three months ended March 31, 2017. Enova operates an online lending and financing platform serving consumers and small businesses in the U.S., U.K. and Brazil. Products include short-term loans, credit lines, installment loans and small-business receivables purchase agreements.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $254.3 million | $192.3 million | +32.3% |
| Gross profit / margin | $145.7 million / 57.3% | $110.4 million / 57.4% | Profit +32.0%; margin down 0.1 percentage point |
| Operating income / margin | $61.7 million / 24.3% | $38.1 million / 19.8% | Income +62.1% |
| Net income | $27.9 million | $13.9 million | +101.4% |
| Diluted EPS | $0.81 | $0.41 | +$0.40 |
| Adjusted EBITDA (non-GAAP) | $68.0 million; 26.7% margin | $43.9 million; 22.8% margin | +55.0% |
Revenue growth was led by installment loans and receivables purchase agreements (+43.5%) and line-of-credit revenue (+31.7%). Domestic revenue grew 29.3%; international revenue grew 49.8% as reported, or 36.6% on a constant-currency basis. Marketing expense rose 41.6% to $27.7 million, while total operating expenses rose 16.2% to $84.0 million. Interest expense increased 14.2% to $19.7 million.
The effective tax rate fell to 20.8% from 34.3%, primarily reflecting the reduction in the U.S. federal statutory rate to 21% and share-based compensation tax benefits. A $4.7 million pretax loss on early debt extinguishment and a $2.3 million foreign-currency translation loss related to winding down Canada and Australia affected reported earnings. Adjusted earnings and Adjusted EBITDA are non-GAAP measures defined by the company.
Balance sheet, credit quality and cash flow
- At March 31, 2018, total assets were $1.158 billion, including $703.1 million of net loans and finance receivables; total liabilities were $842.5 million and stockholders’ equity was $315.7 million.
- Cash and cash equivalents were $69.9 million, with a further $34.8 million in restricted cash. Combined cash, cash equivalents and restricted cash were $104.7 million, versus $122.6 million a year earlier.
- Long-term debt was $754.7 million, compared with $631.1 million a year earlier. Debt included $293.0 million of 9.75% senior notes due 2021, $250.0 million of 8.50% notes due 2024, $217.1 million of securitization notes and $8.0 million drawn on the revolving credit line. The company reported compliance with debt covenants.
- Gross company-owned loans and receivables were $817.4 million, up 36.5% year over year; the allowance was $114.3 million, or 14.0% of owned gross receivables. Including $26.6 million of loans guaranteed for third-party lenders, the combined net portfolio was $728.3 million. Combined charge-offs, net of recoveries, were $118.7 million, versus $98.8 million.
- Operating cash flow was $153.0 million, compared with $119.9 million. Investing activities used $111.4 million, principally reflecting $108.1 million of net cash invested in loans and receivables; financing activities used $40.6 million. Net cash, cash equivalents and restricted cash increased $6.5 million during the quarter.
Changes and management commentary
- Management attributed growth to strong demand, particularly for installment lending and credit lines. The near-prime domestic portfolio increased 41.1% year over year and represented 44.6% of the total loan and receivable portfolio. Management expected near-prime installment loans to become a larger share, citing demand and longer loan terms.
- International gross profit margin declined to 50.5% from 59.3%, while the domestic margin improved to 58.6% from 57.1%. Consolidated gross margin was nearly unchanged.
- The company repurchased $50.0 million principal amount of 2021 senior notes for $53.7 million plus accrued interest, recording the $4.7 million extinguishment loss. It issued $250 million of 2024 notes in 2017, partly to retire 2021 notes.
- On April 13, 2018, after quarter-end, the company amended its revolving credit agreement, increasing the facility limit from $40 million to $75 million; maturity and pricing remained unchanged. As of April 30, available borrowings were $17.0 million and securitization facility borrowings were $201.3 million.
- Management said operating cash flows, available cash, revolving-credit capacity and securitizations were expected to meet operating and working-capital needs. It noted that lending volumes could be reduced and other funding or spending actions taken if liquidity were disrupted. No formal earnings or revenue guidance is provided in the filing.
Risks, contingencies and unusual items
- On April 23, 2018, Virginia’s Attorney General sued a company subsidiary, alleging violations of the Virginia Consumer Protection Act concerning customer communications, collections, loan agreements and rates. The state seeks an injunction, restitution and civil penalties. Enova disputes the claims; the company said loss likelihood and amount could not be determined and no reasonably possible loss range could be estimated.
- The filing identifies regulatory and legal uncertainty as a material business risk, including rules affecting consumer lending, CFPB and U.K. FCA oversight, payment collection, litigation, and changes in laws or enforcement. It also highlights credit-loss estimation, funding and refinancing, interest and foreign-exchange rates, and dependence on secure technology and payment systems.
- The company expanded its stated risk disclosure concerning cyberattacks and data breaches, which could disrupt operations, impair collections, expose customer information, lead to litigation and harm its reputation. No material cyberattack or security breach had occurred to date, according to the filing.
- The company exited Canada and Australia and recorded the translation loss as it continued liquidation of related entities. A $1.6 million tax-effect reclassification between accumulated other comprehensive loss and retained earnings followed early adoption of ASU 2018-02; it did not represent operating income.
- The company stated that adoption of the expected-credit-loss standard, ASU 2016-13, is expected to increase its allowance for credit losses and reduce retained earnings at adoption; the impact was still being assessed.
Important facts for investors to verify
- Whether rapid portfolio growth is accompanied by stable loss performance: combined charge-offs increased, and the allowance ratio was 13.7% versus 13.6% a year earlier.
- How the Virginia lawsuit develops, including any court orders, estimated exposure or effects on lending practices and revenue.
- Whether funding capacity and liquidity remain adequate as loan originations grow, and the availability and cost of revolving and securitization financing.
- Whether international credit performance and margins recover, particularly given the year-over-year decline in international gross margin.
- The eventual effect of the expected-credit-loss accounting standard and ongoing regulatory changes on reserves, earnings and capital.