Enova International, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. Enova operates an online lending and financing platform serving consumers and small businesses in the United States, the United Kingdom and Brazil. Products include short-term loans, lines of credit, installment loans and small-business receivables purchase agreements (RPAs). The company reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $192.3 million | $174.7 million |
| Gross profit / gross margin | $110.4 million / 57.4% | $105.1 million / 60.2% |
| Operating income / operating margin | $38.1 million / 19.8% | $31.8 million / 18.2% |
| Net income | $13.9 million | $9.9 million |
| Diluted EPS | $0.41 | $0.30 |
| Operating cash flow | $119.9 million | $98.6 million |
| Investing cash flow | $(44.8) million | $(81.6) million |
| Financing cash flow | $(20.5) million | $52.2 million |
At March 31, 2017, cash and cash equivalents were $97.0 million, restricted cash was $25.6 million, net loans and finance receivables were $515.5 million, and total assets were $985.4 million. Long-term debt, net of issuance costs, was $631.1 million; total liabilities were $726.9 million and stockholders’ equity was $258.5 million. Average debt outstanding for the quarter was $638.4 million, with a weighted-average interest rate of 10.79%. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue rose 10.1%; on a constant-currency basis it increased 11.9%. Domestic revenue grew 14.8% to $164.7 million, while international revenue declined 11.6% to $27.6 million.
- Line-of-credit revenue increased 21.4% to $59.5 million and installment-loan/RPA revenue increased 9.8% to $85.1 million. Short-term loan revenue was essentially flat at $47.4 million.
- Gross profit increased 5.0%, but gross margin fell 2.8 percentage points to 57.4%. Management attributed the margin pressure mainly to growth in new domestic customers, who historically default at higher rates than returning customers. International gross margin also declined, to 59.3% from 70.8%.
- Operating income rose 19.5% as total operating expenses decreased 1.3%. Operations and technology costs increased, partly offset by lower marketing and general and administrative expenses.
- Net income increased 40.4%. The effective tax rate fell to 34.3% from 43.6%, primarily due to the tax effect of share-based compensation.
- Net loans and finance receivables increased 20.4% year over year to $515.5 million. The combined gross portfolio, including guaranteed third-party loans, was $621.3 million; combined net receivables were $536.8 million.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no formal earnings or revenue guidance. Management expects near-prime installment loans and small-business financing to become a larger share of the portfolio, and says it plans to expand its bank-partner program. Management believes operating cash flow, cash balances, credit facilities and securitization capacity will fund operating needs and portfolio growth.
- Funding: The $35 million revolving credit facility matures June 30, 2017. Enova said it was reviewing options and intended to replace it by maturity; available borrowings were $29 million as of May 1, 2017. The company had no revolver borrowings at March 31 and had $6.0 million of letters of credit outstanding. Securitization balances were $151.0 million as of May 1, 2017.
- Credit performance: Cost of revenue was $81.9 million, up from $69.6 million, and net charge-offs were $98.8 million versus $70.0 million. The allowance and guarantee liability totaled 13.6% of combined gross receivables, versus 13.2% a year earlier. Management noted growth in newer customer portfolios and said loss costs can vary with product mix and seasonality.
- Regulation: Maryland legislation passed in March and April 2017 would cap fees, charges and interest on unsecured open-end loans at an effective 33% annual rate, with a potential July 1, 2017 effective date if not vetoed. Enova said the impact of forthcoming U.K. price-comparison rules was uncertain; lender obligations were scheduled to take effect May 23, 2017. The filing identifies regulatory changes, enforcement, litigation and limits on loan pricing or products as material business risks.
- Legal matter: A putative class action alleging unauthorized text messages under the Telephone Consumer Protection Act remained on appeal after summary judgment for Enova. The company said it could not estimate a reasonably possible loss range or determine the likelihood of an unfavorable decision.
- Other items: Operating cash flow includes significant noncash adjustments, including $81.9 million of cost of revenue and $10.4 million of deferred income taxes; it should not be read as equivalent to net earnings. Enova had no outstanding derivatives at quarter-end. It continued winding down its Canadian and Australian operations.
Most important facts for investors to verify
- Whether the revolving facility was refinanced or replaced before its June 30, 2017 maturity, and the resulting availability, pricing and covenants.
- Subsequent delinquency, charge-off and recovery trends, especially for newer domestic installment, line-of-credit and RPA vintages, and the adequacy of loss allowances.
- The final status and business impact of Maryland legislation and U.K. price-comparison requirements, along with any other state or federal regulatory developments.
- Whether international revenue and margins stabilize as the company exits Canada and Australia and adapts to U.K. regulation.
- How much reported operating cash flow reflects recurring cash generation versus noncash expense adjustments and receivables-related timing.
- Any material development in the TCPA appeal or other litigation and contingencies.