Enova International, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. Dollar amounts are in U.S. dollars. Enova operates an online lending and financing platform serving consumers and small businesses in the U.S. and selected international markets.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $172.5m | $146.3m | $347.2m | $312.0m |
| Gross profit / margin | $107.1m / 62.1% | $104.7m / 71.6% | $212.2m / 61.1% | $231.9m / 74.3% |
| Operating income / margin | $28.8m / 16.7% | $30.4m / 20.8% | $60.7m / 17.5% | $84.5m / 27.0% |
| Net income | $8.2m | $10.9m | $18.1m | $35.4m |
| Diluted EPS | $0.25 | $0.33 | $0.54 | $1.07 |
| Net interest expense | $16.0m | $12.9m | $31.9m | $26.2m |
Q2 revenue rose 17.9%, led by U.S. growth in line-of-credit and installment/RPA products; on a constant-currency basis, revenue increased 19.5%. Six-month revenue rose 11.3% (12.9% constant currency). However, credit costs rose faster than revenue: Q2 cost of revenue increased 57.6% to $65.5m, and the six-month amount increased 68.6% to $135.0m. Management attributed margin pressure to growth in near-prime installment loans and RPAs, a higher share of new customers, and the loss of U.K. line-of-credit contribution.
Q2 U.S. revenue increased 23.7% to $140.3m; international revenue declined 2.0% to $32.2m. For the first half, U.S. revenue increased 22.1% to $283.8m, while international revenue fell 20.2% to $63.4m. Installment-loan and RPA revenue increased 32.4% for the half to $152.5m; short-term-loan revenue fell 5.2% to $94.2m.
Cash flow, balance sheet and funding
- Six-month operating cash flow was $180.5m, versus $134.9m a year earlier. Investing cash outflow was $225.7m, including $190.2m of net loan and finance-receivable investment and a $27.9m increase in restricted cash. Financing cash inflow was $45.1m. Cash and cash equivalents ended at $39.2m, down from $42.1m at year-end 2015; restricted cash was $34.6m.
- At June 30, total assets were $910.9m, net loans and finance receivables were $490.0m, total liabilities were $686.6m, and stockholders’ equity was $224.3m. Gross company-owned receivables were $563.8m, with a $73.8m allowance. The combined portfolio, including guaranteed loans, was $595.0m gross and $519.4m net of loss reserves.
- Long-term debt was $588.8m, including $495.2m of senior notes and $106.8m of securitization notes, net of issuance costs. The $500m senior notes bear 9.75% interest and mature in 2021. The new securitization facility carries an initial rate of 8.75%, has a $175m maximum principal amount, and matures no later than October 2020.
- The $40m revolving credit facility was undrawn at quarter-end, with $6.6m of standby letters of credit outstanding. The credit agreement matures June 30, 2017. The company reported compliance with debt covenants; a June 30 amendment temporarily increased permitted leverage ratios. Available revolver borrowings were reported as $18.4m as of August 2, 2016.
Material changes and management commentary
- Q2 net income fell 24.6%; first-half net income fell 49.0%. First-half gross profit declined $19.7m despite revenue growth. Management cited the wind-down of the U.K. line-of-credit product, whose gross profit fell to $3.5m in the first half from $30.3m a year earlier.
- Portfolio growth was concentrated in longer-term products: net loans and finance receivables increased 54.3% year over year. The domestic near-prime portfolio grew 68.1% year over year and represented over 38% of receivables; small-business receivables exceeded 13% of the portfolio. Short-term loans were less than 14% of the portfolio, versus over 21% a year earlier.
- Net charge-offs were $58.6m in Q2 and $128.6m for the first half. The combined allowance and guarantee liability was 12.7% of gross receivables, down from 13.2% a year earlier. Management noted portfolio mix, customer seasoning and underwriting as relevant drivers.
- Management expects gross margin to remain affected by customer and product mix and U.K. originations. It anticipates 2016 property and equipment spending of $11m–$16m. No quantified revenue or earnings guidance is provided.
- Enova intends to wind down its Australia and Canada operations and exit those markets by year-end 2016, citing their small size and limited operations. It launched a bank-partner installment-loan program in March 2016; the bank originates loans at APRs of 36% or less, and Enova provides technology, marketing and servicing.
Risks, contingencies and unusual items
- The CFPB’s proposed rules for payday, vehicle-title and certain high-cost installment loans could materially constrain U.S. products, require ability-to-repay assessments and increase compliance costs. Final rules were not expected until 2017, with implementation expected in 2018. Separate CFPB debt-collection proposals were preliminary, not final rules.
- U.K. regulation, including the high-cost short-term credit price cap and new comparison-site requirements, continues to affect operations. The U.K.’s vote to leave the EU adds uncertainty around future data-transfer arrangements. Google’s July 2016 policy also barred certain high-cost loan advertising on AdWords, creating customer-acquisition risk.
- A class-action case alleging unauthorized text messages remains on appeal after summary judgment for Enova; the company could not estimate a reasonably possible loss range. Management said routine litigation was not expected to materially affect the company.
- In Q1 2016, Enova recorded an $887,000 out-of-period increase in income-tax expense to correct a 2015 deferred-tax error; management said it was not material to the previously issued 2015 financial statements. The six-month effective tax rate rose to 41.3% from 38.2%.
- The company completed its annual June 30 goodwill assessment and reported no impairment. It also reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether CFPB rulemaking, debt-collection regulation, U.K. requirements and advertising-policy changes alter loan availability, customer acquisition, collections or compliance costs.
- Whether rapid growth in installment loans, RPAs and new-customer originations produces sustainable credit performance, reserves and gross margins.
- Whether the Australia and Canada exits are completed by year-end 2016 and at the anticipated cost.
- Liquidity and covenant headroom under the revolver and securitization facility, including the effect of higher debt costs and facility restrictions.
- Progress of the appealed litigation and the IRS examination of 2013–2014 tax periods; the filing does not provide a clear estimate of potential litigation exposure.