Enova International, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Unaudited consolidated results. Enova operates an online lending and financing platform serving consumers and small businesses in the U.S. and international markets.
Key financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $174.7 | $165.7 | +5.4% |
| Cost of revenue | $69.6 | $38.6 | +80.4% |
| Gross profit / margin | $105.1 / 60.2% | $127.1 / 76.7% | −17.3%; margin down 16.5 points |
| Operating income | $31.8 | $54.1 | −41.1% |
| Interest expense, net | $15.9 | $13.3 | +19.6% |
| Net income | $9.9 | $24.5 | −59.8% |
| Diluted EPS | $0.30 | $0.74 | Down $0.44 |
| Adjusted EBITDA (non-GAAP) | $37.8 | $61.1 | Margin: 21.6% vs. 36.9% |
The effective tax rate was 43.6%, compared with 38.4%. The filing identifies an $887,000 out-of-period tax adjustment related to restricted stock units vested in December 2015; management said it was not material to the previously issued 2015 statements.
Cash flow, balance sheet and funding
- Operating cash flow was $98.6 million, versus $87.9 million. Investing cash outflow was $81.6 million, versus $16.4 million, including $65.7 million of net cash invested in loans and finance receivables and a $13.7 million increase in restricted cash. Financing provided $52.2 million, primarily reflecting securitization borrowings net of revolver repayments and issuance costs.
- Cash and cash equivalents were $112.2 million at March 31, 2016; restricted cash was $20.9 million. Total assets were $915.2 million and stockholders’ equity was $217.6 million.
- Long-term debt was $594.4 million, including $495.0 million of senior notes and $113.9 million of securitization notes, net of debt issuance costs. The $500 million senior notes bear 9.75% interest and mature in 2021. The weighted-average debt interest rate was 10.81%.
- The new securitization facility had a $175 million maximum principal limit, an initial rate of 8.75%, and final maturity no later than October 2020. It is secured by designated receivables and related assets; noteholders generally have no recourse to Enova for shortfalls in receivable cash flows.
- The $40 million revolving facility was undrawn at quarter-end, with $6.6 million of standby letters of credit. The facility matures June 30, 2017. Enova reported compliance with debt covenants. As of May 5, 2016, available borrowings were reported as $33.4 million.
Material changes and operating drivers
- U.S. revenue rose 20.5% to $143.4 million, while international revenue fell 33.0% to $31.2 million. U.K. revenue declined to $25.9 million from $44.3 million, principally reflecting regulatory changes and the discontinued U.K. line-of-credit product.
- Installment-loan and receivables-purchase-agreement revenue increased 31.9% to $77.5 million, driven by growth in U.S. near-prime installment lending and small-business financing. Short-term-loan revenue fell 6.4%; line-of-credit revenue fell 12.0%.
- Cost of revenue rose to $69.6 million from $38.6 million. The filing attributes margin pressure to portfolio mix and growth, a higher share of new customers with higher expected losses, and lower recoveries relative to charge-offs. Net charge-offs were $70.0 million, versus $52.1 million.
- The combined allowance and liability for estimated losses was 13.2% of gross combined receivables, compared with 14.7% a year earlier. The filing attributes the lower ratio mainly to a greater near-prime installment-loan mix and, to a lesser extent, improved performance across most products.
- Net income’s decline was principally attributed to the prior-year quarter’s $19.3 million gross profit contribution from the U.K. line-of-credit portfolio. The company also reported higher interest expense as average debt outstanding increased.
Outlook, risks and unusual items
- Management expects operating liquidity to be funded by cash from operations, cash balances, the revolving facility and securitization or sale of receivables. It said these sources should be sufficient for future operating needs, while warning that funding disruptions could limit access to financing or increase borrowing costs.
- Management expected 2016 property-and-equipment expenditures of $11 million to $16 million, mainly for technology development and computer hardware. It planned to expand its bank-partner lending program and near-prime installment offering.
- Enova decided to wind down its Australia and Canada portfolios and exit both markets by the end of 2016, reallocating resources to other businesses.
- Regulatory risks include potential CFPB small-dollar lending rules and proposed restrictions on mandatory arbitration and class-action waivers. The filing says the scope and impact of future rules were uncertain. In the U.K., the FCA cost cap had changed product economics; Enova received full FCA authorization in January 2016.
- A putative class action concerning allegedly unauthorized text messages was appealed on May 3, 2016 after summary judgment for Enova. The company said the outcome and any potential loss could not be estimated. It also disclosed routine litigation and an IRS examination of its 2013 tax year.
- Foreign-exchange movements, consumer-credit performance, payment processing, cybersecurity, litigation, and changes in laws and regulation were identified among material risks. Management reported no material change in market-risk exposure since year-end.
- Other disclosed items: the company consolidated a new consumer-loan securitization VIE; reported an $887,000 tax adjustment; and noted the May 2016 resignation of its SVP–Operations, effective May 27.
Important facts for investors to verify
- Whether portfolio growth and product mix can support margins as credit-loss expense and net charge-offs rise.
- U.S. near-prime installment and small-business receivables growth, including their yields, loss performance and funding needs.
- Liquidity and covenant headroom under the revolver and securitization facility, including restrictions on pledged receivables and facility maturity terms.
- The effect and timing of CFPB rulemaking, arbitration restrictions, and applicable U.K. regulatory requirements.
- Progress and costs of the Australia and Canada exits, and developments in the appealed text-message litigation and tax examinations.