Enova International, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. Enova operates an online lending and financing platform serving consumers and small businesses in the U.S., U.K. and Brazil. It offers short-term loans, lines of credit, installment loans and small-business receivables purchase agreements (RPAs).
Financial results and key metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $195.9m | $165.2m | $543.1m | $477.2m |
| Gross profit / margin | $100.6m / 51.3% | $99.6m / 60.3% | $312.7m / 57.6% | $331.5m / 69.5% |
| Operating income / margin | $28.1m / 14.3% | $18.9m / 11.5% | $88.8m / 16.3% | $103.4m / 21.7% |
| Net income / diluted EPS | $7.8m / $0.23 | $4.4m / $0.13 | $25.9m / $0.78 | $39.8m / $1.21 |
| Interest expense, net | $16.1m | $13.3m | $48.1m | $39.5m |
- Revenue mix and growth: Q3 revenue grew 18.6% year over year, or 21.4% on a constant-currency basis; domestic revenue rose 23.7%, while international revenue fell 3.0%. For the nine months, revenue grew 13.8% reported and 15.8% constant currency. Installment loans and RPAs were the largest growth driver.
- Credit costs and portfolio: Q3 cost of revenue rose 45.4% to $95.4m, reducing gross margin despite higher revenue. Net charge-offs were $74.3m in Q3 and $202.9m for the nine-month period. Combined allowance and liability for losses equaled 14.5% of gross receivables at September 30, versus 13.8% a year earlier. The company attributed pressure primarily to product-mix changes and a higher share of new customers, who historically default more often.
- Cash flow: Nine-month operating cash flow was $300.7m, versus $205.5m; investing cash outflow was $379.6m, versus $245.1m; financing cash inflow was $89.9m, versus none. Cash flow from operations benefited in part from higher cost of revenue, a non-cash expense, and changes in taxes payable. Cash and cash equivalents ended the period at $45.7m.
- Balance sheet and debt: Total assets were $975.1m, including $542.9m of net loans and finance receivables and $39.3m of restricted cash. Total liabilities were $742.0m and stockholders’ equity was $233.1m. Long-term debt, net of issuance costs, was $635.2m: $495.4m Senior Notes, $137.0m securitization notes and $15.0m revolver borrowings, before debt issuance costs. The Senior Notes bear 9.75% interest and mature in 2021; the securitization notes’ stated initial rate was 8.75%.
- Liquidity and covenants: The company reported compliance with debt covenants at September 30. The revolver commitment was reduced to $35m and the maximum leverage covenant was raised to 4.25:1.00 in a September amendment. As of November 1, available revolver borrowings were $13.4m. The company cited operating cash flow, its revolving facility and securitization financing as expected sources for operating needs and working-capital growth.
Material changes versus prior comparable period
- Q3 revenue growth translated into only modest gross-profit growth as cost of revenue increased substantially; Q3 gross margin declined 9.0 percentage points year over year.
- Nine-month net income fell 35.0%, and gross profit fell $18.8m, despite 13.8% revenue growth. The U.K. line-of-credit wind-down was a major factor: gross profit from that discontinued product was $4.7m for the nine months, compared with $27.6m in the prior-year period.
- Domestic near-prime installment and line-of-credit portfolios expanded; the net loan portfolio grew 42.6% year over year. Short-term loans’ share of the portfolio declined while installment and RPA exposure increased.
- Debt funding changed with the January 2016 launch of a consumer-loan securitization facility. On October 20, after quarter-end, its maximum principal amount was increased from $175m to $275m, with a revolving period extended to October 2017 and revised note pricing.
Outlook, risks and unusual items
- Outlook: The filing gives no formal earnings or revenue guidance. Management expects gross margins to remain sensitive to customer mix, product mix and U.K. originations, and expects domestic near-prime installment lending to become a larger share of the portfolio. Planned 2016 property and equipment expenditures were estimated at $11m–$16m.
- Regulatory risk: The CFPB’s proposed rules could impose ability-to-repay checks, loan-frequency limits and added disclosures on short-term and certain high-cost installment loans. Final rules were not expected until mid-2017, with implementation anticipated in mid-to-late 2018; the company said the effect could be material. The U.K. FCA rate cap and other requirements have already affected products and results, and the rate cap was due for review in 2017.
- Other risks: The filing highlights debt-collection regulation, litigation and enforceability of arbitration provisions, consumer-data and privacy rules, foreign exchange exposure, cyber and operational interruptions, customer acquisition and search-engine changes, and the wind-down of Australia and Canada. The company also noted Brexit-related uncertainty for cross-border data transfers.
- Litigation: A class-action TCPA case remained on appeal after judgment for Enova; the company could not estimate a reasonably possible loss range. Management said routine litigation was not expected to materially affect financial position, results or liquidity.
- Unusual accounting item: Enova recorded an $887,000 out-of-period increase to 2016 tax expense for an error in the 2015 deferred-tax provision, which management said was not material to the previously issued 2015 statements. The nine-month effective tax rate was 39.6%, versus 36.5%.
- Controls: Management concluded disclosure controls were effective as of September 30, 2016; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether portfolio growth can be sustained without further deterioration in gross margin, loss rates or charge-offs, particularly for newer near-prime and line-of-credit customers.
- The final scope and implementation of CFPB and U.K. regulatory requirements, and their effects on product availability, underwriting, collections and profitability.
- Capacity, pricing, covenants and performance triggers under the expanded securitization facility, alongside the $35m revolver and 2017 revolver maturity.
- The drivers of the sharp nine-month decline in gross profit and net income, including the U.K. line-of-credit wind-down and foreign-exchange effects.
- The outcome of the TCPA appeal and actual costs and timing of the Australia and Canada exits.