Enova International, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing reports annual results; fourth-quarter figures are included where available. Amounts are in U.S. dollars.
Business context
Enova is an online lending and financial technology company serving non-prime consumers and small businesses, principally in the United States, with consumer lending operations in Brazil. It offers short-term loans, lines of credit, installment loans, receivables purchase agreements, and decision-analytics services. The company reported one operating segment and extended approximately $2.2 billion in credit or financing during 2019.
Financial and operating performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $1,174.8 million | $972.6 million | +20.8% |
| Gross profit / margin | $571.9 million / 48.7% | $469.2 million / 48.2% | +21.9% gross profit |
| Operating income | $248.2 million | $175.5 million | +41.4% |
| Net income from continuing operations | $128.0 million | $63.6 million | +101.4% |
| Net income, including discontinued operations | $36.6 million | $70.1 million | −47.8% |
| Diluted EPS, continuing / total | $3.72 / $1.06 | $1.81 / $1.99 | — |
| Adjusted EBITDA and margin (non-GAAP) | $275.6 million / 23.5% | $202.0 million / 20.8% | +36.4% EBITDA |
Revenue growth reflected a 47.4% increase in line-of-credit revenue and an 11.9% increase in installment-loan and RPA revenue, partly offset by a 19.2% decline in short-term-loan revenue. Product mix shifted toward lines of credit, which provided 45.6% of revenue, and installment loans/RPAs, which provided approximately 44.5%; short-term loans contributed 9.7%.
Cost of revenue rose 19.8% to $602.9 million. Net charge-offs were $570.7 million, versus $466.4 million in 2018. The year-end allowance for owned loans and finance receivables was $176.9 million, or 14.3% of gross balances; the separate liability for guaranteed third-party loans was $1.5 million. Management cited stabilizing installment and short-term credit performance, partly offset by more new customers in the line-of-credit portfolio.
Continuing-operations cash provided by operations was $804.6 million. Total reported operating cash flow, including discontinued operations, was $848.6 million; investing cash outflow was $941.4 million and financing cash inflow was $95.5 million. Net cash, cash equivalents, and restricted cash totaled $81.0 million at year-end, of which $45.1 million was restricted. Capital spending was $20.1 million.
Year-end loans and finance receivables, net, were $1,062.7 million, up 36.2%. Total assets were $1,574.4 million and stockholders’ equity was $376.6 million. Long-term debt carrying value was $991.2 million (approximately $1,004.9 million before debt issuance costs); reported debt to Adjusted EBITDA was 3.6x, down from 4.2x. Net interest expense was $75.6 million, and the weighted-average debt interest rate was 8.61%.
In the fourth quarter, revenue was $345.3 million and gross profit was $146.8 million. Continuing-operations net income was $29.5 million, but total net loss was $50.6 million, principally reflecting the U.K. exit and discontinued-operations charge.
Material changes and unusual items
- Enova exited the U.K. market in October 2019; its U.K. businesses entered administration and were deconsolidated and classified as discontinued operations. The exit produced a $74.5 million after-tax charge, including $52.2 million of one-time cash charges. U.K. discontinued operations reported a $91.4 million net loss for 2019, including $97.5 million of impairment charges before tax.
- Continuing-operations profitability improved, but total net income fell because the U.K. discontinued-operations loss more than offset that improvement. The effective tax rate rose to 24.7% from 7.7% in 2018.
- Debt financing expanded: year-end debt increased to $991.2 million from $857.9 million. The revolving credit agreement was amended to extend maturity to June 2022 and increase its advance rate. Enova also issued asset-backed notes and used securitization funding.
- Enova repurchased $31.9 million of common stock during 2019. A new $75 million repurchase authorization replaced the prior authorization and runs through December 31, 2020. The company does not anticipate paying dividends in the foreseeable future.
- Beginning January 1, 2020, Enova adopted the expected-credit-loss accounting standard and elected the fair value option for loans and finance receivables. It estimated an approximately $100 million after-tax cumulative adjustment to opening retained earnings; subsequent fair-value changes will be recognized in earnings.
Outlook, risks, and contingencies
Management provided no formal revenue or earnings guidance in the supplied filing text. It expects continued investment in near-prime installment lending and anticipates that near-prime loans will comprise a larger share of the portfolio. The company also plans to develop its Brazil business and its small analytics-services offering. Management noted that seasonal demand and credit costs affect results and cash needs, with U.S. consumer demand typically strongest in the third and fourth quarters.
- Regulatory exposure: Consumer lending is subject to extensive federal, state, and international regulation. Enova remains subject to a January 2019 CFPB Consent Order and agreed to a $3.2 million civil penalty, without admitting or denying the allegations. The CFPB small-dollar lending rule’s status remained uncertain; its mandatory underwriting compliance date had been delayed and the rule was stayed indefinitely by a federal court.
- Legal contingency: Virginia’s Attorney General sued a subsidiary over alleged consumer-protection violations, seeking injunctive relief, restitution, penalties, and costs. Enova disputed the claims; the company said likelihood and potential loss could not be determined or reasonably estimated.
- Tax uncertainty: Unrecognized tax benefits were $53.6 million. Enova was under Joint Committee on Taxation review of certain 2018 tax returns and refund claims; the potential outcome and financial effect were unclear.
- Funding and credit risk: The business depends on continued access to debt markets, securitizations, payment processors, and ACH services. Credit losses, funding costs, covenant compliance, or reduced refinancing access could pressure liquidity. Restricted cash and assets within securitization entities are not freely available for general corporate purposes.
- Other risks: Changes in lending laws, customer demand, competition, economic conditions, cyber incidents, technology interruptions, third-party services, foreign exchange rates, and the administration of the former U.K. business could adversely affect results. Some securitization facilities bear LIBOR-linked rates; the company reported that it did not expect the transition from LIBOR to have a material effect.
Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end. The independent auditor issued unqualified opinions on the financial statements and internal controls. The auditor identified loan-loss estimation and uncertain tax benefits related to portfolio income and loss timing as critical audit matters.
Key facts for investors to verify
- Reconcile continuing-operations earnings with the reported total net loss impact of the U.K. exit, including the $74.5 million after-tax charge and ongoing administration costs or claims.
- Track portfolio growth, charge-offs, allowance adequacy, and credit performance by product—especially the rapidly growing line-of-credit portfolio and its new-customer mix.
- Review liquidity and debt funding capacity, including debt maturities, securitization borrowing terms, covenants, restricted cash, and availability under the revolving facility.
- Monitor developments in the CFPB Consent Order, small-dollar lending rule, state lending restrictions, and Virginia litigation.
- Assess the approximately $100 million estimated after-tax accounting transition adjustment and the effect of fair-value changes on 2020 earnings.
- Follow the tax authority review and changes in the $53.6 million unrecognized-tax-benefit balance.