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spk01: Greetings and welcome to the Elevate Credit Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to your host, Daniel Wright. You may begin.
spk02: Good afternoon. Thanks for joining us on the Elevate Third Quarter 2021 Earnings Conference Call. Earlier today, we issued a press release with our third quarter results. A copy of the release is available on our website at investors.elevate.com. Today's call is being webcast and is accompanied by a slide presentation, which is also available on our website. Please refer now to slide two of that presentation. Our remarks and answers will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our press release issued today, including impacts related to COVID-19 and our most recent annual report on 410 and other filings we make with the NCC. Please note that all forward-looking statements speak only as the date of this call and we disclaim any obligation to update these forward-looking statements. During our call today, we'll make reference to non-GAAP financial measures. for complete reconciliation of historically any obligation to update these forward-looking statements. During our call today, we'll make reference to non-GAAP financial measures for complete reconciliation of historical non-GAAP .com. Joining me on the call today are President and Chief Executive Officer Jason Harbison, Interim Chief Financial Officer Chad Bradford, and Chief Strategy Officer Chris Lutz. I will now turn the call over to Jason.
spk03: Good afternoon, everyone, and thank you for joining us today. As you saw in a press release on originations earlier this quarter, the demand environment for Elevate's full suite of credit solutions has improved dramatically. This is not only a testament to macro conditions, but also a positive reflection on our work in marketing channels, underwriting models, and customer-friendly features. As a result, we are very pleased with our third quarter results, which was the strongest quarter in recent memory, highlighted by near-record originations of 88,000 consumers, up nearly four times the level of last year as the economy continues to bounce back. Best of all, growth and originations was broad-based across products and customer types, including a healthy mix of returning borrowers and new customers to the platform. On a unit economic basis in the third quarter, new loans on the books fit within credit parameters we, along with the banks we support, have created. While it is difficult to speak to a new normal on credit, we do expect loan loss reserves and charge-offs to return to similar levels to 2019. In the short term, notably in Q4, loan loss reserves will tick up due to a heavier mix of new customers. As the loan season growth moderates in the mix of new-to-repeat consumer shifts, the vast credit improvements made over the last two years should be reflected in the credit metrics by mid-2022. As we mentioned for the past few quarters, the near-prime credit market is very healthy with strong consumer confidence and economic growth. So with that, let me start on slide four with highlights from our strong third quarter. The portfolio grew sharply as consumers have reentered the marketplace, both compared to last year and on a sequential basis. Compared to last year, combined loans receivable of $513 million were up 36%. Compared to last quarter, the portfolio grew 28%. As a result, revenues also grew rapidly in the third quarter, up nearly 20% over last year to $113 million. As mentioned, the growth was strong across each product led by the Today card, but revenues more than doubled compared to 2020, and rise revenues increased over 20%. Lastly, as I mentioned, the unit economics in the business are compelling in the current environment. Customer acquisition costs of $221 across the portfolio remain very attractive, especially in the current credit environment, which remains healthy. Chad will detail the timing impact of growth on the near-term profitability, but it's clear to us that the origination activity we are driving today should be high return and drop elevated back to our EBITDA margin target of 15% to 20% in the coming years, depending on the pace of growth. Bottom line, we are very pleased with the third quarter results. This period of heavy investment of growth does lead to short-term losses. As you know, we realize all marketing and loan loss reserves up front will see charge-offs increase with newer customers. In fact, the bulk of the return on loans put on the books today will not be appreciated until mid-2022. Building back the portfolio is an important step forward for Elevate, and we are very excited how the quarter played out. As I just noted, the consolidated portfolio grew 28% sequentially, or 36% year-over-year to $513 million. You'll recall we mentioned last quarter that we began seeing a sharp inflection in demand in late May and June of this year and has continued through the majority of the third quarter. Elevate and the banks utilizing our platform originated a near-record $312 million in loans in this quarter, which we are proud for for a number of reasons. To give some context, while the broader demand environment has improved, we believe a significant driver of strong originations this past quarter has to do with many of the internal improvements that we've made here at Elevate over the past few years. Put simply, we were serious late last year when we expressed that Elevate was well-positioned through the pandemic as we ever have been. This, of course, includes new models, customer-friendly features, and products tailored to the needs of everyday Americans. Seasonality of back-to-school expenses on families certainly also played a role, and we would like to emphasize that we do not anticipate growth continuing at this pace throughout the rest of the year into early 2022. We will continue to have a heightened focus on credit quality and return to more moderate growth in Q4 and beyond. Clearly, the macro environment has been good for consumer credit, but we would estimate that nearly half the growth this past quarter was driven by incremental enhancements in the channels, underwriting, and customer experience. While we have and will see loan loss and credit tick up slightly due to new customers, we anticipate the new normal to be near 2019 levels as the portfolio seasons. Elevate has executed well against our three-tiered growth strategy so far in 2021. First, by reengaging with former customers. Second, by expanding direct mail channels. Lastly, the third tier of growth, leveraging the strategic partner channel, is the most exciting and new growth channel for Elevate. Over 20 million of the consolidated portfolio growth came from this new channel. We will look to continue to scale this in 2022, but to be blunt, we had little incentive to push this further in a quarter already bursting with traditional growth and known credit. Best of all, we believe there's plenty of white space for growth across each of these tiers in 2022. In sum, we have delivered exceptionally well against this three-pronged approach. Let's turn to slide five and talk about how Elevate continues to drive growth to more and more consumers with our growing platform and brands. Here we detail the TodayCard as it continues to be the fastest growing product. TodayCard, as you know, is a credit card offering for near-prime customers that have largely been excluded from the market by traditional banks and credit card providers. The card is a market leader due to credit line size and customer flexibility features not often found in near-prime cards. The portfolio grew by 64% compared to a quarter ago and now has originated over $46 million in the past nine months. Ultimately, today it could be as big as $100 million in receivables by the end of 2022. Best of all is that today provides a number of advantages to elevate beyond its rapid growth. With a lower credit risk product, we have been able to decrease our company-wide funding costs. TodayCard funding has been lowered by nearly 300 basis points. Similarly, with the credit facility backing the TodayCard, we further diversified Elevate's funding sources. Last and most importantly, we believe that TodayCard and its higher utility as a credit card compared to an installment loan product allows Elevate to broaden the addressable market, both from a credit perspective and from a consumer perspective. In fact, we have seen formal rise in elastic customers turn to Today for everyday use compared to emergency use cases. We know the market for both use cases are large, and given our technical capability paired with national scale and product depth, we believe the best days of growth at Elevate remain ahead of us and for the banks we serve. Nearly 100 million in that outstanding or 20% of the overall portfolio is at near prime rates, and this continues to grow. The Blueprint platform is nimble and able to serve consumers and banks at a vast multitude of price points. We're excited about where this will take us in serving everyday Americans, And in fact, we have recently heard from a number of new banks who may be interested in utilizing the platform. Last, before I turn the call over to Chad to review our financials, I'll just mention a few announcements. First, our board approved an increase in our share repurchase authorization of $25 million. This is an expansion of our buyback plan over the last two years, which has accounted for a buyback of approximately 31 percent of the shares outstanding. The bottom line here is that we continue to see a dislocation in the value at Elevate and our current market valuation. We believe it continues to be in our shareholders' best interest to repurchase shares. With that, I'll say thank you for your time. I turn the call over to Chad Bradford, our new interim CFO, to detail our financial results for the quarter. While Chad is new to this call, Chad has been in with Elevate for the last nine years as our chief accounting officer with a deep understanding of our space.
spk00: Thanks, Jason, and good afternoon, everybody. Turning to slide six, I'll start with discussing the loan portfolio growth, which is the most exciting part of the Elevate story right now. Coming out of the pandemic, portfolio growth has exceeded our expectations. Combined loans receivable principle totaled $513 million as of September 30th, 2021, up $145 million, or 36% from $377 million a year ago. This total was up $114 million, or 28% from June 30th of this year. All three products experienced double-digit loan growth during the third quarter of 21 and was a mix of new, former, and multi-draw customers, with the new customers distributed between direct mail and strategic partner marketing channels. This broad diversity of growth in marketing channels and products gives us optimism going into 2022 and beyond. Credit quality remains strong with past due balances at 9% of combined loans receivable principal at the end of the 21 third quarter, which is consistent with historical past due percentages prior to the pandemic. Staying on this slide, revenue for Q321 was up 20% from the third quarter a year ago due to an increase in the average outstanding portfolio balance. We expect fourth quarter revenue to increase based on the growth that we're experiencing within the loan portfolio. As a reminder, as we market and originate loans to new customers, we incur upfront marketing and credit provisioning expense. Looking at the bottom of this slide, adjusted EBITDA and net earnings were compressed during the third quarter of 21 due to these upfront costs as we experienced increased demand and strong loan origination volume during the quarter. In addition, we incurred a discrete tax expense of $1.6 million related to a recent change in tax regulations in the state of Texas that impacted our research and development state tax credit. As a result, we incurred a net loss of $11 million or a loss of $0.33 per share for the third quarter, with a net loss of $1 million, or a loss of $0.04 per share for the full nine-month period. Excluding the discrete tax expense in Q321, we had an adjusted net loss of $9.4 million, or a loss of $0.28 per share for the third quarter, with adjusted net income of $248,001 per share for the full nine-month period ended September 30th. On slide seven, the cumulative loss rate as percentage of loan originations for the 2020 vintage is the lowest loss rate ever due to the tightening of underwriting, slowdown in new loan origination, increased government stimulus, and improved payment flexibility tools. We would expect the 2021 vintage to be near 2019 levels or slightly higher due to the new customer mix as we rebuild the portfolio. On this slide, we also show the customer acquisition cost. New customer loan volume for the third quarter of 21 was one of our highest quarters to date. We continue to manage our CAC within our existing targets between $250 to $300 for the rise in elastic product and sub $100 for the J card through the end of the year. Slide eight shows the adjusted EBITDA margin, which was 3% for the 2021 third quarter. We expect our adjusted EBITDA margin to continue to be compressed through the end of this year due to the expected long growth and associated upfront expenses as we previously discussed. Long term, we expect the adjusted EBITDA margin to return to 15 to 20% depending on the pace of growth. On slide nine, we discuss our expectations for the remainder of 2021. As we announced last month, we expect to end 2021 with combined loans receivable principal between 545 to 575 million. Based on this portfolio guidance, we expect revenues to be between 400 to 420 million, adjusted EBITDA between 40 to 50 million, with a projected net loss of 12.5 to 17.5 million. Our updated earnings guidance is reflective of the earnings compression associated with the growth we're experiencing in the portfolio. We think it's important to meet the market demand with originations that meet our unit economics as we rebuild the portfolio from the impacts of the COVID pandemic. We anticipate the loan portfolio APR and OPEX remain stable through the fourth quarter of 21, and our effective tax rate should be in the 20% to 25% range. Turning to liquidity and capital on slide 10, our debt-to-equity ratio using total liabilities at September 30th, 21, increased to 3.6. We've used our debt facilities to fund the third quarter loan growth and expect to borrow to fund fourth quarter 21 loan growth, which will increase this ratio to 4.5 by the end of the year. Also, incremental new borrowings under our rise in elastic debt facilities are priced at approximately 8%, resulting in an overall decrease in the weighted average cost of funds to 9.3% at September 30th, 2021, from 10.2% at the September 30th of the prior year. As previously announced, we closed on a $50 million financing facility with an ability to increase the facility up to $100 million to find continued growth of the TodayCard product. This new facility is a big win for Elevate as we diversify our sources of capital and provide those with a lower cost of capital at 6.85% for the TodayCard product, which has the lowest overall product APR. The TodayCard is well positioned to continue strong growth into 2022. Lastly, during the third quarter of 21, we repurchased almost $6 million or 1.6 million common shares under our existing common share repurchase program. Since beginning our share repurchases in August 2019, we have repurchased almost 14.9 million shares or approximately 31% of all shares that were outstanding and issued or reissued since that point in time. Our board of directors authorized a $25 million increase to our existing program, providing for the repurchase of up to $80 million of our common stock through July 31, 2024. We'll also continue to buy back our common stock under the existing repurchase plan, as we view our current stock valuation to be extremely attractive. We're expecting to repurchase approximately $1.5 to $2 million in common shares per month during the remaining fourth quarter period, subject to daily limitations. With that, Let me turn the call back over to the operator to open it up for Q&A.
spk01: And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. And our first question is from Moshe Orenbudge with Credit Suisse. Please proceed with your question.
spk04: Great, thanks. Maybe, you know, maybe Chris could spend a little bit of time just going through some of the, you know, kind of what you're seeing from your borrowers and how to, you know, how to think about their appetite. You had mentioned that, you know, you've had a lot of opportunities, but maybe talk about, you know, what they're looking for the most and, you know, what Elevate's going to provide for them.
spk03: Yeah, sure, Moshe. Great question. You know, one thing that we've been monitoring throughout the last 18 months, even before the pandemic hit, is, you know, the average balance of consumers' accounts, checking accounts. And, you know, we saw those come back to normal levels back in the spring and May and April. April and May, I'm sorry. And that gave us some indication that demand was going to pick back up. And we definitely saw that play out through the summer and into here in the third quarter and beginning in the fourth quarter. And so with consumer demand picking back up, consumer confidence picking back up, people getting back out, we saw strong demand through the back-to-school timeframe, which is typical of what we would see in the past. You can go back to 2019, we'd see strong demand there. So we're really starting to see some of those normal patterns of borrowers get back out, live their lives, see the normal kind of demand curves return back to normal like we saw in 2019 and 2018. So that gives us some confidence that demand is going to be here for a period of time. We're not seeing consumer balances dip below the normal averages, so we continue to monitor cash flow very closely on borrowers to make sure that affordability is there for them. And, you know, when we look at the backdrop of the macro demand being strong, That gives us some positive indications. But also what we've built over the last 12, 18 months with some of the newer channels and some of the newer models, it helps both from a conversion rate of approving more consumers coming through the funnel and also cashing that net water by having newer channels out there to help attract customers. So really happy about what we've done both on a channel expansion on the model side and And on the progression of the products, the flexibility built in to continue to serve customers and have positive outcomes with them.
spk04: Great. And I guess, you know, would there be something besides their balances dipping below normal? And what else would you be looking for, you know, to say, okay, maybe it's time to, you know, to kind of either slow down a little or shift from, you know, from one product to another, maybe a closed end instead of an open end kind of product?
spk03: Sure. In the underwriting process, we're looking at taking a holistic view. We in the banks we work with are looking at affordability checks, and that's both looking at the cash inflows and cash outflows in addition to the balances that are there, total indebtedness. And so if we start to see those metrics shift, then that's something that we'll look at on tightening up credit models, tightening up account management strategies, things like that. So we have lots of rich data. As we've incorporated the bank transaction data, it's great. on the underwriting on the front end of the loan, but it's also very useful on the account management side as well. It helps us manage risk on the back end.
spk04: Gotcha. Okay. And maybe just, you know, kind of a technical question. I think the low end of your revenue guidance range for the fourth quarter is kind of stable with where you were in this quarter. you know, it seems like you're going to have some pretty decent, you've gotten to some pretty decent growth. Maybe, you know, can you talk through what it would take to get to the higher end of that guidance range and, you know, how you think about that?
spk00: Yeah, sure. Most of this chat, thanks for the question. Yeah, so, you know, getting to the higher end of the range is, you know, it's depending on the level of growth that we're seeing during the quarter. So, you know, as we discussed, it's all very strong growth going, you know, throughout Q3. We're seeing the growth continue into Q4. And, you know, traditionally speaking, you know, getting into the November-December timeframe is, you know, is the highest level of growth that we generally have during the fourth quarter. So it's going to be dependent on the continued growth and volume that we're expected to see for the remainder of the quarter.
spk04: Gotcha. And maybe one last one for me. Could you, you know, talk a little bit about what you're seeing, you know, kind of in the customer acquisition cost by product and, you know, and maybe with that elaborate a little on what you had said with respect to, you know, with respect to the, you know, some of the new channels and what it would take to kind of want to turn them on to, you know, to a higher, you know, a higher level of growth.
spk00: Yeah, sure. So related to CAC on rise in elastic, you know, we're seeing very consistent CACs across all the channels within our, you know, 250 to 300. I mean, if you look at our chart, actually, you know, for the quarter coming in slightly below our targets just based off the strong response that we're seeing. But then also if you look at the today card, you know, continuing to have very strong response for that product, you know, through the direct mail channel at a sub-100 CAC. And, you know, so, you know, very happy with the response rate and that volume associated with that.
spk03: And then, Moshe, on the channel perspective, you know, one thing that we like about the partner channel is some of the predictability there. You know, when we do a direct mill drop, which is a big component of the acquisition channels, you know, it's some lead time there. You have response models that predict what response rates will look like that equate to an acquisition cost. They've been fairly consistent for us, but with the partner channel, we're able to negotiate a cost per funded loan or a cost per acquisition, so we're fairly consistent with what that acquisition cost might be and negotiate that to be within our targets. On the credit side, we can make adjustments weekly if not daily to that channel as well, so it gives us a lot more control over how to manage that channel as we open it up.
spk04: Great. And as you kind of think about that, you know, whether it's, you know, today, I mean, do you see any kind of changes in the mix of, you know, of the portfolio? Obviously, you talked a little bit about the state card, you know, potentially, you know, reaching $100 million by the end of next year. Are there any other kind of thoughts about, you know, the evolving mix of the portfolio over the course of the next year?
spk03: Yeah, I mean, I think when we look at the portfolios, we're definitely on a percentage basis are going to see much more rapid growth out of the Today card. Really excited with the acquisition cost there, the performance there, what that's looking like. Continue to look for lower-priced options for consumers to be more competitive in the marketplace and take market share. So excited about what that looks like. But I think as we look going forward into 2022, definitely going to see the Today card be one of the bigger pieces of growth as we go forward.
spk04: Okay. Well, great. Thank you very much.
spk01: And again, as a reminder, if you have any questions, you may press star 1 on your telephone keypad. Doing so will ensure you're spotted on the question and answer queue. And it appears we have reached the end of the question and answer session. And I'll now turn the call over to Jason Hirons for closing remarks.
spk03: Just want to thank everyone for joining us this afternoon for the third quarter earnings call. Excited about what we're seeing in the portfolios and the growth that's there. Excited to see the portfolios get back to almost the pre-pandemic levels from an outstanding perspective and the growth we had ahead of us going to wrap up this year and going into 2022. I also want to thank the team here at Elevate for all the work they've done this year and as we wrap up the year, to wrap up a really successful year and excited about what's to come. So thanks so much and have a good evening.
spk01: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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