Enova International, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2015, compared with the same periods in 2014. Enova provides online consumer and small-business financing, including short-term and installment loans, lines of credit, and receivables purchase agreements (RPAs), in the U.S. and several international markets. The company had become independent following its November 2014 spin-off from Cash America.
Key financial metrics
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $146.3 | $201.5 | $312.0 | $409.9 |
| Gross profit | $104.7 | $134.6 | $231.9 | $276.7 |
| Gross margin | 71.6% | 66.8% | 74.3% | 67.5% |
| Operating income | $30.4 | $55.4 | $84.5 | $122.6 |
| Net income | $10.9 | $30.6 | $35.4 | $70.7 |
| Diluted EPS | $0.33 | $0.93 | $1.07 | $2.14 |
| Adjusted EBITDA (non-GAAP) | $41.1 | $61.3 | $102.2 | $132.6 |
- Revenue and earnings: Q2 revenue fell 27.4% year over year; six-month revenue fell 23.9%. Q2 operating income declined 45.2% and net income declined 64.5%. Six-month net income declined 49.9%.
- Margins: Gross margin rose, while gross profit dollars fell. Management attributed the margin improvement primarily to lower losses in the U.K. line-of-credit portfolio as it ran off, improved collections and recoveries, and stricter underwriting. Adjusted EBITDA margin was 28.1% in Q2 versus 30.4%; for six months it was 32.7% versus 32.3%.
- Revenue mix: Q2 U.S. revenue grew 4.3% to $113.4 million, while international revenue fell 64.6% to $32.9 million, primarily due to U.K. changes. For six months, U.S. revenue increased 6.7% and international revenue decreased 58.6%. Installment loans and RPAs represented 36.9% of six-month revenue, up from 30.1%.
- Credit quality: Combined loans and finance receivables, net of loss allowances and liabilities, were $347.6 million at June 30, up 6.8% year over year. The allowance and liability for losses were 13.2% of gross combined receivables, compared with 17.6% a year earlier. Six-month net charge-offs were $93.7 million versus $149.4 million.
- Cash flow: Six-month operating cash flow was $134.9 million, down from $237.9 million. Investing cash outflow was $116.7 million, including $17.7 million cash paid for an acquisition and $26.5 million of property and equipment purchases. Cash increased $21.1 million from year-end to $96.2 million. The filing does not provide quarterly-only cash flow figures.
- Debt and liquidity: Long-term debt was $494.5 million, principally $500 million of 9.75% senior notes due 2021. Cash was $96.2 million. The $65 million revolving facility was undrawn; after $6.6 million of letters of credit, available borrowings were $58.4 million. The company reported compliance with debt covenants.
Changes, outlook, risks and unusual items
- U.K. regulatory impact: FCA rules, including a cap on the total cost of high-cost short-term credit effective January 2, 2015, led Enova to stop offering U.K. lines of credit to new customers and stop draws on existing accounts. Stricter affordability and underwriting standards reduced U.K. loan volumes, balances and revenue. Management expected these year-over-year declines to moderate but continue through the rest of 2015; the company expected new installment products in late 2015 or early 2016 to help replace lost revenue. It cautioned that prior-year results did not reflect the full impact of the changes.
- Other regulation and compliance: The CFPB had published an outline of possible rules, not proposed or final rules; timing and effects remained uncertain. A July 2015 final Military Lending Act rule expands covered products and is scheduled to take effect in October 2016. Enova did not expect that rule to materially affect results, but acknowledged potential compliance costs. The company also disclosed a California regulator order under challenge, with a hearing scheduled for August 2015; potential liability could not be estimated.
- Management outlook: No earnings or revenue guidance was provided. Management anticipated 2015 property and equipment spending of $33–$38 million, primarily for headquarters relocation, technology development and hardware. It said operating needs were expected to be funded by operating cash flow and the revolver, while noting that lending volumes could be adjusted if funding disruptions arose.
- Acquisition: In June, Enova acquired assets of an RPA provider for $26.8 million of total estimated consideration: $17.7 million cash, a $3.0 million note and $6.1 million estimated contingent consideration. Further earn-outs could bring total consideration up to $71 million. The purchase-price allocation remained provisional; the acquired business was not material to the reported financial statements.
- Unusual costs: The headquarters move resulted in $3.5 million of Q2 charges, including remaining lease obligations and restoration costs. Management said it did not expect further material relocation costs. Q2 adjusted earnings were $14.4 million versus GAAP net income of $10.9 million; adjusted measures are non-GAAP.
- Legal matter: On July 20, 2015, after quarter-end, a court entered judgment for Enova in a class action alleging unauthorized text messages. The plaintiff could seek reconsideration or appeal. Management also reported routine litigation and said it could not estimate losses for the California matter.
Important facts for investors to verify
- Whether U.S. growth and new installment/RPA products can offset continued U.K. revenue contraction, and the timing and economics of anticipated U.K. products.
- Whether improved credit-loss metrics persist as portfolio composition changes; review delinquency, charge-offs, recoveries and allowance adequacy.
- Cash generation relative to lending needs, capital spending, debt service and the $58.4 million of reported revolver availability.
- Progress and final valuation of the RPA acquisition, including contingent earn-out exposure.
- Developments in FCA, CFPB, Military Lending Act and California regulatory matters, along with any resulting operating restrictions, remediation costs or customer redress.
- The assumptions behind non-GAAP adjusted earnings and EBITDA, especially the treatment of relocation costs and stock-based compensation.