Enova International, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Unless otherwise indicated, amounts are in U.S. dollars. Enova provides online consumer and small-business financial services, including short-term loans, lines of credit and installment loans, in the U.S. and international markets. It became an independent, publicly traded company in November 2014 following its spin-off from Cash America.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $165.7 million | $208.5 million | Down 20.5% |
| Gross profit / margin | $127.1 million / 76.7% | $142.0 million / 68.1% | Profit down 10.5%; margin up 8.6 percentage points |
| Operating income / margin | $54.1 million / 32.6% | $67.1 million / 32.2% | Income down 19.4% |
| Net income / diluted EPS | $24.5 million / $0.74 | $40.1 million / $1.21 | Net income down 38.8% |
| Adjusted EBITDA (non-GAAP) | $61.1 million; 36.9% margin | $71.3 million; 34.2% margin | Down 14.4% |
| Operating cash flow | $87.9 million | $112.0 million | Down 21.5% |
| Cash and cash equivalents | $143.4 million | $56.2 million | At March 31 |
- Revenue fell primarily because international revenue declined $52.8 million, driven mainly by U.K. regulatory changes; domestic revenue rose $10.0 million, supported by near-prime installment lending. On a constant-currency basis, revenue declined 18.5%.
- Revenue by product: short-term loans $50.9 million (down 30.3%); lines of credit $55.7 million (down 23.8%); installment loans $58.8 million (down 5.9%). The U.S. generated $119.1 million of revenue, while U.K. revenue was $44.3 million.
- Cost of revenue decreased 41.9% to $38.6 million. Management attributed the higher gross margin mainly to improved portfolio loss experience, including lower delinquency and stronger collections, as well as tighter underwriting and a greater share of established borrowers.
- Interest expense, net rose to $13.3 million from $4.8 million. The weighted-average debt rate increased to 10.0% from 4.69%, reflecting the 9.75% senior notes issued in 2014 and a higher average debt balance. The effective tax rate was 38.4%, versus 35.7%.
- Cash from investing activities was a $16.4 million outflow, including $4.8 million net invested in consumer loans and $11.6 million of property and equipment purchases. Financing cash flow was zero; foreign-exchange effects reduced cash by $3.2 million. Cash increased $68.3 million during the quarter.
- At March 31, consumer loans, net, were $279.1 million. The combined owned-and-guaranteed portfolio, net of estimated losses, was $303.5 million, down 1.7% year over year. The allowance and guarantee-liability ratio was 14.7% of gross combined loans, versus 19.7% a year earlier; net charge-offs were $52.1 million, versus $75.7 million.
Debt, liquidity and capital spending
- Long-term debt had a $494.3 million carrying value, principally the $500 million of 9.75% senior unsecured notes due June 2021. The notes were issued at a discount and carry a 10.0% yield to maturity.
- The revolving credit facility was reduced from $75 million to $65 million in March 2015. It had no borrowings outstanding; $6.6 million of letters of credit were outstanding, and the company reported $58.4 million of available borrowings. The facility matures June 30, 2017.
- Enova reported compliance with debt covenants. Management said operating cash flow, cash balances and available borrowing capacity should fund operating liquidity needs; lending volumes could be adjusted if funding disruptions occur.
- Management anticipated 2015 property and equipment expenditures of $30–$35 million, mainly for headquarters relocation and technology investment. Q1 included elevated relocation-related capital spending.
Outlook, risks and unusual items
- U.K. regulation: FCA requirements, including the effective January 2015 cap on high-cost short-term credit (daily charge cap of 0.8% of principal and total charges capped at 100% of principal), drove tighter affordability checks, underwriting and collections practices. Enova stopped new U.K. line-of-credit accounts in late 2014 and stopped draws on existing accounts from January 1, 2015. Management expected year-over-year U.K. declines to continue for a significant portion of 2015 and expected the changes to weigh on results, while aiming to introduce additional short-term and installment products. Improved U.K. credit performance partly offset lower volume and revenue.
- The FCA’s independent review identified former practices that may have caused consumer detriment. Enova expected to agree to remedial action and said it did not expect redress to materially harm the business; further findings could lead to additional remediation, redress, fines, restrictions or authorization consequences.
- The CFPB had issued an outline of potential lending rules, not proposed or final rules. The scope, timing and effect of any eventual rules were uncertain; industry implementation was not expected before early 2017 or later.
- A California regulator’s January 2015 order alleged violations involving loan contract charges, account debits, company naming and advertising. The order included a $10,000 penalty and potential forfeiture of charges and fees on affected loans. Enova challenged the order; a hearing was set for August 31, 2015. The company said it could not estimate the likelihood or range of loss.
- A certified class action alleges unauthorized text messages in violation of the Telephone Consumer Protection Act. Summary judgment motions were pending; Enova said it could not estimate a possible loss and intended to defend the case.
- Other reported items include a $0.9 million foreign-currency transaction loss, a $2.4 million after-tax foreign-currency translation loss in comprehensive income, and $1.7 million of stock-based compensation expense. Derivatives produced gains that substantially offset losses on hedged foreign intercompany balances.
- Other risks cited include regulatory and legal developments, loan-loss estimation, collection-system access, funding and refinancing, foreign exchange, cybersecurity, and the costs of operating as a recently independent public company. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether U.S. growth and new products can offset continuing U.K. revenue and loan-volume pressure, and whether planned U.K. products can gain traction under FCA rules.
- Whether the lower reported loss ratios persist as loan vintages mature and the portfolio mix changes; review delinquency, charge-offs, recoveries and allowance assumptions.
- The effect of the FCA review, California order and TCPA class action, including any required customer redress, fines, restrictions or other financial exposure.
- Debt-service burden and liquidity: the 9.75% notes, $58.4 million reported revolver availability, capital spending plans and compliance with debt covenants.
- Comparability of Q1 2014: the prior-year period predates the U.K. regulatory changes and includes Cash America allocations, so it may not represent Enova’s standalone cost structure or future results. Adjusted EBITDA and adjusted earnings are non-GAAP measures and should be assessed alongside GAAP results.