Enova International, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted. The filing is unaudited.
Business context
Enova operates an online lending and financial-services platform for consumers and small businesses, principally in the United States and Brazil. It offers installment loans, lines of credit, receivables purchase agreements and related services. Its U.K. businesses, placed into administration in October 2019, are reported as discontinued operations.
Effective January 1, 2020, Enova elected the fair value option for its loan and finance receivable portfolio. The change materially affects presentation and comparability: portfolio fair-value movements are recorded in earnings, rather than using the prior-period allowance and cost-of-revenue presentation.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $204.5 | $305.6 | $819.9 | $829.5 |
| Net revenue / gross profit | $181.8 | $143.4 | $440.7 | $425.0 |
| Income from operations | $122.0 | $57.5 | $237.7 | $188.6 |
| Net income | $93.7 | $27.1 | $147.2 | $87.2 |
| Diluted EPS | $3.09 | $0.78 | $4.72 | $2.53 |
Q3 revenue fell 33.1% year over year, while net income rose 245.8%. Management attributed the earnings improvement primarily to better reported credit performance, reduced marketing and variable costs, and cost-containment measures. Q3 net revenue margin was 88.9%, compared with prior-year gross profit margin of 46.9%; these measures are not directly comparable given the accounting change. For the first nine months, net revenue margin was 53.8%, versus gross profit margin of 51.2% in 2019.
The Q3 fair-value change was a loss of $22.8 million; for the first nine months it was a loss of $379.2 million. The nine-month figure includes the transition to fair-value accounting and is not comparable to prior-year cost of revenue. The effective tax rate was 9.4% in Q3 and 17.3% for the nine-month period; Q3 included an $11.6 million discrete tax benefit from remeasuring unrecognized tax benefits.
Adjusted EBITDA, a non-GAAP measure, was $136.1 million in Q3 2020 versus $64.3 million in Q3 2019, and $266.6 million for the first nine months versus $209.8 million. Adjusted EBITDA margin was 66.6% and 32.5%, respectively, for those 2020 periods.
Cash flow, balance sheet and liquidity
- Cash from continuing operating activities was $623.5 million for the first nine months, versus $568.6 million in 2019. Net cash provided by investing activities was $17.1 million, compared with $566.8 million used in 2019; the change primarily reflected lower loan originations and acquisitions. Financing activities used $186.1 million, including net debt repayments and $54.6 million of treasury-share purchases.
- At September 30, cash and cash equivalents were $490.0 million and restricted cash was $45.0 million, totaling $535.1 million. Total assets were $1.634 billion and stockholders’ equity was $573.7 million.
- Reported long-term debt, net of issuance costs, was $863.5 million; principal balances totaled $873.6 million. Debt included $250 million of 8.50% notes due 2024, $375 million of 8.50% notes due 2025 and securitization notes. The revolving credit facility had no borrowings at quarter-end. Enova reported compliance with debt covenants.
- Management reported $332.0 million of committed, undrawn funding capacity at September 30 and said liquidity was sufficient for the foreseeable future under its stressed-case modeling. As of October 26, the filing reported additional OnDeck-related borrowing capacity following the acquisition; those post-quarter amounts are not part of September 30 balances.
Material changes and management commentary
- Originations were deliberately reduced in response to COVID-19. Q3 average loan origination amount fell to $330 from $644 a year earlier. Q3 revenue declined across sub-prime, near-prime and small-business portfolios, while the remaining portfolio was more seasoned.
- At quarter-end, combined loans more than 30 days delinquent were 3.7% of balances, down from 7.0% a year earlier. Management said Q3 charge-offs and delinquencies were below pre-pandemic levels, but increased anticipated future charge-offs in fair-value models and retained elevated discount rates because of economic uncertainty.
- Enova offered payment deferrals, fee waivers and other repayment flexibility to affected customers and adjusted underwriting, loan sizes and durations. Management cautioned that pandemic developments, unemployment and government responses could change borrower performance and portfolio values.
- OnDeck acquisition: Enova completed its acquisition of OnDeck on October 13, 2020, after the reporting date. Consideration included approximately $111.5 million in cash and Enova shares, plus approximately $4.2 million related to employee equity awards. Enova issued 5.6 million shares. Acquisition accounting was incomplete when the filing was prepared; pro forma financial information was not available. Q3 included $6.6 million of transaction costs.
- Enova repurchased $54.6 million of stock during the first nine months. The filing also describes material legal and regulatory uncertainties, including Virginia litigation and potential changes to consumer-lending rules.
Outlook, risks and contingencies
The filing gives no numerical earnings or revenue guidance. Management expects to fund operations through operating cash flow, cash balances, credit facilities and securitizations, while retaining the ability to reduce lending, spending or capital investment if funding conditions weaken. Key uncertainties include COVID-19 impacts on customers and credit losses, fair-value model assumptions, access to capital and refinancing, consumer-lending laws and regulation, and successful integration and realization of anticipated OnDeck synergies.
A Virginia Attorney General lawsuit against a subsidiary alleges violations of the Virginia Consumer Protection Act related to lending and collections. Enova disputes the claims, intends to defend the case, and said it could not determine the likelihood or estimate a reasonably possible loss range. Virginia SB 421 was scheduled to take effect January 1, 2021, with rate and fee limits that could affect lending economics. The CFPB rescinded the Small Dollar Rule’s ability-to-repay provisions; payment provisions remained stayed, with their effective date uncertain.
Important facts for investors to verify
- How much Q3 and year-to-date profitability reflects sustainable credit performance versus unusually low originations, cost reductions and the fair-value accounting change.
- The assumptions behind Level 3 loan valuations, especially expected losses, prepayments, servicing costs and elevated discount rates, and how actual collections compare with those estimates.
- Borrower performance as pandemic-related support changes, and whether delinquencies and charge-offs remain below historical levels.
- Post-acquisition OnDeck debt, liquidity, purchase accounting, integration costs and realization of expected synergies; these were not fully reflected in September 30 balances.
- Developments in the Virginia lawsuit, state lending limits and CFPB payment-rule timing, as well as available liquidity under applicable facility conditions.