Enova International, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted.
Business context and reporting period
Enova operates an online lending and financing platform serving non-prime consumers and small businesses, primarily in the United States and Brazil. It reports one operating segment. Its UK businesses entered administration in October 2019 and are presented as discontinued operations.
Beginning January 1, 2020, Enova elected the fair value option for its entire loan and finance receivables portfolio. Accordingly, current-period portfolio fair-value changes are recorded in earnings, while 2019 results used an allowance and cost-of-revenue model. This limits direct period-to-period comparability.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $253.1 | $259.4 | $615.3 | $523.9 |
| Net revenue / gross profit | $132.4 | $136.0 | $258.9 | $281.6 |
| Net revenue / gross profit margin | 52.3% | 52.4% | 42.1% | 53.8% |
| Income from operations | $86.6 | $58.2 | $115.6 | $131.1 |
| Net income | $48.0 | $25.1 | $53.5 | $60.1 |
| Diluted EPS | $1.58 | $0.73 | $1.69 | $1.74 |
| Net interest expense | $20.4 | $18.1 | $40.8 | $37.6 |
- Q2 revenue declined 2.5% year over year. Installment-loan and RPA revenue fell 15.0%, partly offset by 13.4% growth in line-of-credit revenue. Management cited lower sub-prime originations and growth in near-prime and small-business balances.
- Q2 operating income rose 48.8% and net income rose 91.6%, principally as marketing expense fell to $3.0 million from $25.9 million, alongside lower operating and technology and G&A costs. Q2 Adjusted EBITDA, a non-GAAP measure, was $94.2 million versus $65.2 million; adjusted EBITDA margin was 37.2% versus 25.1%.
- For the first half, revenue increased 17.5%, largely from 44.7% growth in line-of-credit revenue. Net income declined 11.0%; management attributed the decrease primarily to COVID-related reductions in portfolio fair value, partly offset by expense management.
- Fair-value changes reduced reported revenue in the income-statement presentation by $120.7 million in Q2 and $356.4 million for the first half. In the first-half comparison, the resulting 42.1% net revenue margin is not directly comparable with the prior-year gross margin under the former accounting method.
- Six-month cash provided by operating activities from continuing operations was $483.7 million, versus $386.1 million. Investing activities used $57.3 million, and financing activities used $141.9 million. Operating cash flow includes substantial noncash fair-value adjustments and portfolio cash movements.
- At June 30, cash and cash equivalents were $321.5 million and restricted cash was $43.5 million. Long-term debt carrying value was $906.6 million, against $917.8 million of listed principal balances; the company reported compliance with debt covenants. Management reported $310.7 million of committed, undrawn funding capacity and said it believed liquidity was sufficient for the foreseeable future.
- Company-owned receivables had a fair value of $799.7 million and principal balance of $767.6 million at June 30. Total stockholders’ equity was $476.2 million. Enova repurchased $54.6 million of shares in the first half.
Material changes, outlook, and risks
- COVID-19 response and portfolio: Enova shifted employees to remote work, offered payment deferrals and other customer relief, tightened underwriting, and reduced loan and draw sizes. Originations were deliberately curtailed. Management said Q2 delinquencies and charge-offs moved closer to pre-pandemic levels, but customers receiving deferrals or modifications were considered higher risk.
- Management increased anticipated future charge-offs in its June 30 fair-value models and maintained elevated discount rates because of uncertainty about stimulus depletion, unemployment benefits, and the pandemic’s trajectory. Fair value relies on Level 3, unobservable assumptions, so revised estimates could materially affect earnings.
- Funding: Enova accessed committed funding lines in March to preserve liquidity. Management stated that no recourse debt was due before June 2022 and no non-recourse secured lending facilities matured before February 2022. It noted that funding disruption, increased borrowing costs, or covenant pressure could constrain lending and liquidity.
- Regulation and litigation: The CFPB rescinded the Small Dollar Rule’s ability-to-repay provisions in July 2020; payment-related provisions remained stayed, with their effective date uncertain. Virginia lending legislation was scheduled to take effect January 1, 2021, including rate and fee limits. Enova is defending a Virginia Attorney General lawsuit; it could not estimate a reasonably possible loss range.
- Tax uncertainty: Unrecognized tax benefits were $45.3 million at June 30, including $16.7 million that could favorably affect the effective tax rate if recognized. A Joint Committee on Taxation review of certain tax returns and refund claims could change tax uncertainty materially.
- Subsequent event: On July 28, 2020, Enova agreed to acquire OnDeck Capital in a cash-and-stock transaction, subject to shareholder and regulatory approvals and customary closing conditions. The transaction was expected to close in 2020.
- The filing provides no formal earnings or revenue guidance. Management’s liquidity assessment is an outlook statement, not a quantified earnings forecast.
Important facts for investors to verify
- How COVID-related deferrals, unemployment support, and future credit losses affect receivable fair values, charge-offs, and earnings.
- The valuation assumptions and sensitivity of the Level 3 loan portfolio, particularly loss rates and discount rates.
- Available funding capacity, securitization terms, debt maturities, and covenant headroom under stressed conditions.
- The status and potential financial impact of the Virginia litigation, Virginia law changes, CFPB payment rules, and tax review.
- OnDeck transaction approvals, closing, financing, and expected integration effects.
- Comparability of GAAP results across periods and the company’s non-GAAP measures, including Adjusted EBITDA and adjusted earnings per share.