Enova International, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; the filing also reports fourth-quarter results. Enova is an online consumer and small-business finance company operating in the U.S., U.K. and Brazil, with short-term loans, credit lines, installment loans and receivables purchase agreements. It extended approximately $2.1 billion in credit during 2016.
Financial results and key metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $745.6 million | $652.6 million |
| Gross profit / margin | $417.6 million / 56.0% | $435.7 million / 66.8% |
| Operating income | $121.5 million | $124.4 million |
| Net income | $34.6 million | $44.0 million |
| Diluted EPS | $1.03 | $1.33 |
| Adjusted EBITDA / margin | $142.3 million / 19.1% | $155.7 million / 23.9% |
| Operating cash flow | $393.4 million | $283.9 million |
Revenue rose 14.2%, led by domestic growth of 22.1% to $623.0 million. International revenue fell 13.9% to $122.6 million; the U.K. contributed $103.5 million. Installment loans and RPAs generated 43.9% of revenue, credit lines 29.6%, and short-term loans 26.3%.
Cost of revenue increased 51.2% to $328.0 million, reflecting higher loan-loss provisions. Net charge-offs were $295.5 million, versus $213.3 million in 2015; the allowance and liability for losses rose to 14.6% of combined gross receivables from 12.9%. Management attributed margin pressure chiefly to growth in near-prime installment lending and a higher share of new customers, who historically default more often. Adjusted EBITDA is a non-GAAP measure.
Cash used in investing activities was $484.6 million, including $450.1 million net invested in loans and finance receivables. Financing activities provided $99.9 million. Year-end cash and cash equivalents were $39.9 million, with an additional $26.3 million of restricted cash. Net loans and finance receivables were $561.6 million, up from $434.6 million.
Long-term debt was $649.9 million, compared with $541.9 million a year earlier; debt to Adjusted EBITDA increased to 4.6x from 3.5x. Debt included $500 million of 9.75% senior notes due 2021 and securitization notes. The $35 million revolving facility had no borrowings at year-end and $6.6 million of standby letters of credit; it matures June 30, 2017. The company reported compliance with debt covenants at year-end.
Material changes and notable items
- U.S. revenue growth more than offset lower international revenue, which continued to be affected by U.K. regulation and a weaker pound.
- The domestic near-prime installment portfolio grew 43.1% year over year and represented about 40% of the receivables portfolio. Small-business financing also expanded.
- 2016 gross margin fell 10.8 percentage points. Higher credit costs and portfolio mix reduced gross profit despite increased revenue.
- Interest expense rose 24.1% to $65.6 million, reflecting higher average debt and securitization financing introduced during 2016.
- A $3.3 million gain from remeasuring contingent acquisition consideration benefited 2016 results. In 2015, the company recorded a $2.5 million out-of-period revenue reduction related to line-of-credit fee recognition.
- Enova wound down its Australian and Canadian lending operations and launched an analytics-as-a-service business. It also launched a U.S. bank partnership for installment loans with APRs at or below 36%.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided. Management said it intended to expand near-prime installment lending, including through additional bank partnerships, and expected 2017 capital expenditures of $12–16 million. Management stated that operating cash flow, cash balances, credit facilities and securitizations were expected to meet operating and funding needs; the revolving credit facility’s June 2017 maturity makes refinancing or replacement a near-term financing matter.
Key risks include extensive and changing consumer-lending regulation, credit losses and reserve-estimation risk, access to ACH and other payment systems, cybersecurity and operational disruption, foreign exchange exposure, and the ability to obtain affordable funding. The CFPB had proposed rules addressing high-cost lending, debt collection and arbitration; final scope and effects were uncertain. In the U.K., the FCA’s price cap and affordability requirements had constrained lending, and it was reviewing the high-cost-credit market. Enova received full FCA authorization in January 2016 but remained subject to regulatory oversight. A CFPB consent order remained in effect.
A U.K. redress program concluded in 2015, providing approximately $2.6 million to 3,940 customers. A class-action case alleging unauthorized text messages was on appeal after summary judgment in Enova’s favor; the company could not estimate a reasonably possible loss. Management said routine litigation was not expected to materially affect financial position, results or liquidity. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether growth in near-prime and small-business portfolios translates into improved seasoned loan performance and margins, given rising 2016 provisions and charge-offs.
- How final U.S. CFPB rules and further FCA action affect underwriting, pricing, collections, customer eligibility and U.K. revenue.
- The refinancing or replacement of the revolving facility before its June 30, 2017 maturity, and the cost and availability of continued securitization funding.
- Debt service capacity and covenant headroom as debt to Adjusted EBITDA rose to 4.6x.
- The outcome of the TCPA appeal and any other regulatory, litigation or contingent liabilities not quantifiable in the filing.