Enova International, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. Enova is an online consumer and small-business lender operating in the U.S. and several international markets, with one reportable segment. It extended approximately $1.9 billion in credit during 2015.
Key financial results
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $652.6 million | $809.8 million |
| Gross profit / gross margin | $435.7 million / 66.8% | $543.1 million / 67.1% |
| Operating income | $124.4 million | $215.0 million |
| Net income / diluted EPS | $44.0 million / $1.33 | $111.7 million / $3.38 |
| Adjusted EBITDA / margin (non-GAAP) | $155.7 million / 23.9% | $235.8 million / 29.1% |
| Operating cash flow | $283.9 million | $429.9 million |
| Cash and cash equivalents, year-end | $42.1 million | $75.1 million |
| Long-term debt, year-end | $553.3 million | $494.2 million |
Investing cash outflow was $372.2 million, including $322.8 million net investment in loans and receivables, $17.7 million for the Business Backer acquisition, and $32.2 million in property and equipment. Financing cash flow was positive $56.6 million; cash declined $33.0 million during the year. Debt was principally $500 million of 9.75% senior notes due 2021 and $58.4 million drawn on the revolving facility at year-end.
At December 31, combined gross loans and finance receivables were $536.1 million, up from $424.8 million; combined net balances were $467.0 million. The allowance on company-owned receivables was $67.3 million, with a further $1.8 million liability for losses on guaranteed third-party loans. Net charge-offs were $213.3 million.
Changes from the prior comparable period
- Revenue fell 19.4%; international revenue declined 57.5% to $142.4 million, mainly reflecting U.K. regulatory changes and the winding down of U.K. credit lines. Domestic revenue rose 7.5% to $510.2 million, supported by near-prime installment lending and small-business financing.
- By product, short-term loan revenue declined 20.3% to $204.9 million and line-of-credit revenue fell 39.2% to $185.5 million. Installment-loan and RPA revenue increased 5.6% to $260.5 million. Installment loans and RPAs grew to 39.9% of revenue, from 30.5%.
- Operating income declined 42.1% and net income declined 60.6%. Interest expense rose 37.5% to $52.9 million as average debt and the weighted-average borrowing rate increased.
- Adjusted EBITDA margin decreased to 23.9% from 29.1%. Management attributed pressure on domestic gross margin to growth in near-prime installment lending and a higher mix of new customers; it noted that new loans typically have greater early loss risk.
- Fourth-quarter revenue was $175.4 million and net income was $4.2 million, compared with $194.7 million and $22.5 million, respectively, in fourth-quarter 2014.
Outlook, risks and notable items
- Outlook: No specific revenue or earnings guidance is provided. Management expected near-prime installment balances to continue growing and planned to expand the product through one or more bank programs. Estimated 2016 capital expenditures were $11 million to $16 million, primarily for technology development and computer hardware.
- U.K. regulation: The U.K. cost cap and stricter affordability, underwriting, collections and advertising requirements materially reduced lending volumes and revenue. Enova reported full FCA authorization in January 2016. An FCA-directed redress program covered 3,940 customers and provided approximately $2.6 million in loan balance waivers and cash refunds; the review was completed in late 2015.
- U.S. regulation: The CFPB was considering rules for high-cost short-term and other consumer loans, with the timing and effects uncertain. Expanded Military Lending Act requirements were scheduled to take effect October 3, 2016. Enova also remained subject to the CFPB’s 2013 Consent Order.
- Financing after year-end: In January 2016, Enova entered a receivables securitization, issued an initial $107.4 million term note secured by $134 million of loans, and obtained variable funding availability. Proceeds were used to repay the year-end revolver balance; the revolving commitment was reduced to $40 million. The securitization rate was initially 8.75%, and notes are secured by transferred receivables and related assets.
- Unusual and accounting items: Enova recorded a $2.5 million fourth-quarter revenue reduction after changing the recognition timing of certain line-of-credit fees; $2.8 million related to periods before 2015, which management said was not material to prior or full-year statements. Headquarters relocation and lease-exit costs were also incurred; the adjusted EBITDA reconciliation excluded $3.3 million for 2015.
- Contingencies and other risks: A California regulatory settlement required a $7,500 penalty and correction of contract and disclosure issues. In a certified TCPA class action, the court entered judgment for Enova, but a possible appeal remained. Major risks include further regulatory restrictions, credit losses, access to payment-processing systems, litigation, cybersecurity, foreign exchange exposure, and the ability to service or refinance debt. Management reported compliance with debt covenants at year-end and no anticipated common dividends.
Important facts for investors to verify
- Whether U.K. lending volumes, portfolio performance and compliance costs stabilized after the FCA changes, and whether additional supervisory action followed.
- Credit performance and seasoning of the rapidly growing near-prime installment and small-business RPA portfolios; compare subsequent charge-offs and reserves with the 2015 levels.
- Liquidity, covenant headroom, interest burden and the terms, performance triggers and borrowing capacity of the 2016 securitization and revolving facility.
- The trajectory of U.S. consumer-credit regulation, including CFPB rulemaking and Military Lending Act implementation, and any effects on product economics.
- The filing reports effective disclosure controls and internal control over financial reporting; however, The Business Backer, acquired in 2015, was excluded from management’s control assessment and the auditor’s internal-control audit.