Enova International, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Unaudited results for the three and nine months ended September 30, 2015, compared with the same 2014 periods. Enova provides online consumer and small-business financing, including short-term loans, lines of credit, installment loans and receivables purchase agreements (RPAs), in the U.S. and several international markets. It reports one business segment. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $165.2 | $205.2 | $477.2 | $615.1 |
| Gross profit / margin | $99.6 / 60.3% | $132.2 / 64.5% | $331.5 / 69.5% | $408.9 / 66.5% |
| Operating income / margin | $18.9 / 11.5% | $43.0 / 21.0% | $103.4 / 21.7% | $165.6 / 26.9% |
| Net income | $4.4 | $18.5 | $39.8 | $89.2 |
| Diluted EPS | $0.13 | $0.56 | $1.21 | $2.70 |
- Q3 cost of revenue was $65.6 million; operating expenses were $80.7 million. Net interest expense was $13.3 million. The Q3 effective tax rate was 18.8%, versus 37.8% a year earlier; the nine-month rate was 36.5%, versus 36.2%.
- For the nine months, operating cash flow was $205.5 million, down from $357.8 million. Investing cash outflow was $245.1 million, including $28.7 million of property and equipment purchases and $17.7 million for the acquisition. Financing cash flow was zero. Cash fell $40.8 million from year-end 2014 to $34.3 million.
- At September 30, cash was $34.3 million, net loans and finance receivables were $380.8 million, total assets were $820.2 million and stockholders’ equity was $199.3 million. Long-term debt was $494.7 million, principally 9.75% senior notes due 2021. The revolving facility had no borrowings at quarter-end; $6.6 million of letters of credit were outstanding. Management reported compliance with debt covenants.
- Combined owned and guaranteed loans and finance receivables, net of related loss allowances, were $415.5 million, up 23% year over year. The allowance and guarantee liability were 13.8% of gross combined receivables, down from 17.5%. Q3 net charge-offs were $51.0 million, versus $69.5 million.
Material changes versus prior comparable period
- Q3 revenue declined 19.5%; nine-month revenue declined 22.4%. International revenue fell 60.1% in Q3 and 59.0% for the nine months, primarily reflecting U.K. regulatory changes and the contraction of its lending business. U.S. revenue rose 6.0% in Q3 and 6.4% for the nine months.
- Q3 line-of-credit revenue fell 45.8%, while installment loan and RPA revenue rose 7.4%. For the nine months, line-of-credit revenue fell 38.6%; installment loan and RPA revenue was down 1.9%. Product mix shifted toward installment lending and RPAs.
- Q3 net income fell 76.1%, and nine-month net income fell 55.4%. Q3 gross margin weakened, while the nine-month gross margin improved, mainly because of lower loss experience in certain international products. Operating income declined in both periods.
- Q3 domestic near-prime installment growth supported originations: consolidated originations rose 21.8% from Q2, and the company reported its largest number of new-customer loan originations since Q4 2013. Management also cited record new-customer origination dollars.
Outlook, commentary, risks and unusual items
- Management expects U.K. regulatory changes—including stricter affordability assessments, underwriting and collections practices, and higher compliance costs—to continue weighing on results. It noted improved U.K. portfolio performance and lower loss rates, but said the ultimate effect depends on execution, competition and customer response. Management expects domestic near-prime installment loans to become a larger share of the portfolio.
- No formal earnings or revenue guidance is provided. Management forecast 2015 property and equipment expenditures of $32–$35 million and said operating cash flows, cash and facility borrowings should meet expected liquidity needs. It may also consider securitizing or selling receivables.
- The U.K. FCA authorization process remains a key risk; failure to obtain full authorization could require the company to cease one or both U.K. lending businesses. After quarter-end, the FCA announced a redress program for about 3,940 customers, estimated at $2.6 million, expected to conclude in early Q1 2016. The CFPB’s potential U.S. lending and arbitration rules were still proposals, with scope and timing uncertain.
- On November 5, 2015, after quarter-end, the company amended its revolving facility: capacity was reduced from $65 million to $60 million and the maximum leverage ratio was temporarily increased to 3.75:1 for Q4 2015 and Q1 2016. Available borrowings were reported at $53.4 million as of November 10.
- The Business Backer asset acquisition closed in June for estimated consideration of $26.8 million, including $17.7 million cash, a $3.0 million note and $6.1 million contingent consideration; total consideration may not exceed $71 million. A current officer has an ongoing ownership interest in the seller. Enova paid the seller $5.8 million during Q3 to settle customers’ existing RPA balances.
- Headquarters relocation and exit costs were $3.3 million for the nine months. The company said it did not expect further material relocation costs. The Kristensen class action resulted in judgment for Enova, but the plaintiff sought reconsideration and could appeal. A California regulator’s order against a subsidiary was contested, with a hearing scheduled for November 24, 2015; potential losses were not estimable.
- Other material risks include changes in consumer-lending laws, credit losses and reserve adequacy, funding and refinancing access, currency movements, litigation, payment-processing interruptions, cybersecurity and data-protection requirements. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and conditions attached to FCA full authorization, completion and cost of the U.K. customer redress program, and whether U.K. originations and revenue recover.
- Final CFPB rules and their effects on U.S. products, underwriting, marketing and arbitration agreements.
- Credit performance as the portfolio grows in near-prime installment loans and RPAs; monitor delinquencies, charge-offs and reserve adequacy alongside the lower reported reserve ratio.
- Liquidity and covenant headroom under the amended $60 million revolver, including the temporary leverage-ratio relief and ongoing cash needs.
- Resolution of the California regulatory proceeding and any further developments in the class action; assess the related-party acquisition and contingent consideration disclosures.