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spk01: Greetings. Welcome to the Elevate Credit Fourth Quarter and Full Year 2021 Earnings Conference 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 will now turn the conference over to your host, Daniel Ray, Director of Public Affairs. You may begin.
spk03: Good afternoon, and thanks for joining us on Elevate's fourth quarter and full year 2021 earnings conference call. Earlier today, we issued a press release with our fourth quarter and full year 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 Form 10-K and other filings we make with the SEC. Please note that all forward-looking statements speak only at the date of this call, and we disclaim any obligation to update these forward-looking statements. During our call today, we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued today and our slide presentation, both of which have been furnished to the SEC and are available on our website at investors.elevate.com. Joining me on the call today are our 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. Thank you, Daniel, and thank you everyone for joining us today.
spk02: Before I speak to our strong fourth quarter results, I'd like to start with a broader review of what Elevate has navigated and accomplished over the past years. Let's start with the things we didn't expect. As you know, Elevate and other participants in near-prime credit often face skepticism about the resilience of the model in the face of challenging credit. We certainly believe our decades of experience, especially within the last two years, we was very optimistic for the future and what we can deliver for stakeholders. It has been nearly two years since the pandemic began, and over that time, Elevate had its best every year credit performance and profitability in 2020, as well as best every year in growth in 2021. Best of all, we have managed through the pandemic by helping three of our most important stakeholders, consumers, employees, and shareholders. For consumers, we enhanced market-leading credit assistant programs when they needed it most. And similarly, we and the banks we support have been there to provide credit where other financial services firms have not, especially as the pandemic has persisted and government stimulus efforts have ended. For our employees, Elevate has also delivered. We were named a 2021 Best Workplace in Texas by Great Places to Work. We are focused on creating an exceptional workplace and launched a new partnership with Gallup to identify strengths and improvement opportunities to make Elevate an even better place to work. We also expanded employee resource groups, which are employee-led groups that help connect communities, raise broader awareness around diversity, equity, and inclusion, and enable us to leverage our differences. Lastly, we have adopted a hybrid work approach that is designed to enable collaboration while offering our employees great flexibility. For shareholders, we put our capital to work, repurchasing approximately 33% of shares outstanding over the last two years, or a total of 15 million common shares. Additionally, as you saw in recent filings, Elevate recently settled a longstanding legal matter tied to the spinoff of our predecessor company in 2014. We are happy to have the matter behind us, less because of the dispute itself, but more because of the freedom we now have with the capital our model generates and some of the exciting ways we can add value in the quarters and years ahead. From an equity standpoint, we are extremely fortunate to have a business that generates the free cash flow necessary to settle these legal disputes while also growing our core business and investing in new ideas, which I'll detail in a moment. We are obviously proud of how the company has navigated the past two years. We are even more excited about the strategies we're pursuing in the future. Candidly, we feel a lot of Elevate's strategic progress has been masked by the noise in the world of the past two years and the legal overhang. First, it's hard to overstate how important the overhaul of our tech stack and the approach to growth was back in 2018. Elevate effectively went from a direct mail-focused credit provider to an engine that can market and credit decision across a wide range of partner and consumer touchpoints. Best of all, with the Today card and the newest initiatives, Elevate has significantly broadened the credit spectrum that the Blueprint platform can serve including a new offering in our detail in a moment. The power of the Elevate Blueprint tech stack is immense, and I look forward to demonstrating this power and versatility with new offerings and partners in the near future. In our view, the pandemic has validated the strategic shift, and as a result, the years ahead for Elevate are brighter than they ever have been. Lastly, on the point of capital, the legal settlement only frees the company to pursue more value creation. Over the last two years, we certainly have not been constrained, as evidenced by our share repurchases. In fact, over that time, we have bought back approximately 33% of the company, given the significant value we still see in our stock. With the removal of the legal matter, our flexibility to deploy capital is even greater. We see substantial opportunity in the free cash flow the model generates, and we will always seek to deploy in a manner that prioritizes stakeholder value. With the recent expenses associated with the legal matters, recent new product investments, and portfolio growth, we will briefly pause our buyback with plans to return in the near future. I would also like to reiterate that our recent settlement included a repurchase of approximately 925,000 shares outstanding. I'm going to turn to our fourth quarter next, but as you can see, it's important to take a step back every once in a while and frame where we have been and, more critically, where we can go. With that, let's turn to slide five, and I can provide the highlights from another strong quarter for Elevate. Revenue grew 43% compared to the fourth quarter a year ago. The growth represents the continued impact of the loan receivables we've added this year and stable APRs. Combined loan receivable principal balances ended the year close to $560 million, which is 40% higher than a year ago and is now back above levels at the start of the pandemic. It is an important milestone, not just to validate the significant market demand, but also a testament to how well our team and our business model perform through a very volatile market. All three products experienced loan growth during the fourth quarter of 2021, we saw consistent distribution of new customers between direct mail and strategic marketing channels in the fourth quarter as we continue to diversify our marketing channel mix and add additional strategic partners. I would also note that Elevate and the banks we support purposely slowed down growth over the fourth quarter to optimize the mix of new versus repeat borrowers and originations. We were very pleased with the mix of originations year-to-date, but consistent with our returns-focused philosophy, we took the opportunity to moderate growth with a high mix of repeat customers that have lower CAC and better credit performance. Turning to credit, as we noted on our third quarter call, past due balances reverted back to historical averages, coming in at 10% for the fourth quarter, compared to historically low rates of 6% to 7% earlier in the year. We expect this rate to remain near 10% over the first quarter of 2022, but decrease into the 9% range over 2022, based on the increased mix of repeat borrowers I mentioned. Bottom line, the overall returns and margin profile of the loan book is very healthy, and we feel good about those trends over 2022 as well. Lastly, on profitability, as you know, 21 represents a year of recovering growth from the pandemic, and as a result, near-term EBITDA has been compressed, driven by initial customer acquisition costs and credit provisioning. For context, we think it's important for analysts and investors to remember that profitability is best viewed over the life of the loans. Based on our expectations for credit, we believe the 21 vintage represents a very attractive most margin profile in line with the long-term targeted range of 15 to 20%. Chad will review our outlook for 2022, but bottom line is 2021's growth has established a very strong foundation to continue to grow and scale the profitability of the business in 2022 and beyond. If we turn to slide six, I'd like to provide some context around a collaboration with Central Pacific Bank and the newly formed fintech, Swell, that we announced late last month. Swell will be part of Central Pacific Bank's growth beyond its core Hawaii footprint through a consumer banking app that includes services ranging from checking, savings, and credit. Elevate's credit technology, specifically the Blueprint platform, will embed within Swell to help Central Pacific Bank offer personal lines of credit at APRs below 24% across the mainland U.S. We are extremely proud that Central Pacific Bank chose to partner with Elevate on this exciting new offering. We believe that this investment and collaboration with Swell is an important milestone for Elevate in a number of ways. First, we believe the trust in our technology by a broadening set of bank partners validates our approach and our track record for performance. Second, we also feel validated in our strategic focus on Elevate's blueprint, which we believe positions our company as a leading partner for the rapidly growing banking-to-the-service market. Look for more to come this year on the product and brand front. I'll conclude my remarks with a summary of why we're so excited about Elevate's current position. First, the past two years have effectively battle-tested the model, and Elevate's financial performance was strong. Second, our core business continues to perform well with a broader set of marketing capabilities than DirectNow and an increasing number of bank partners. Lastly, we believe Elevate's technology capabilities, combined with a rapidly growing banking-as-a-service market and a large and growing population of underbanked Americans, positions elevate right at the intersection of two massive trends in financial services. With that, let me turn the call over to Chad.
spk00: Thanks, Jason, and good afternoon, everybody. Turning to slide seven, I'll start with discussing the loan portfolio growth, which was more moderate in the fourth quarter of 21 after the exceptionally strong growth we experienced in the third quarter. Combined loans receivable principal totaled $559 million as of December 31, 2021, up 159 million or 40% from 400 million a year ago. This total was up 46 million or 9% from September 30th of this year. Our end of year combined loans receivable principal balance places us at the midpoint of the guidance range we issued. What's remarkable is that within one year we returned to portfolio balances slightly above where the portfolio was positioned in March 2020 as the pandemic was taking effect in the U.S. In the fourth quarter, we intentionally moderated growth to ensure that we maintain the proper mix of new and returning customers to the portfolio, which allows us to achieve our charge-off metric of 45% to 55% of revenue. As we discussed during our last call, with the heavier mix of new customers entering the portfolio during the third quarter, we expect the credit performance of the portfolio to be at or slightly above the high end of our range. The new and returning mix of customers in the fourth quarter had a 70-30 mix as compared to an 80-20 mix during the third quarter. Credit quality remains consistent as the credit profile of the portfolio reverts back to a normalized mix of new and former customers with past due balances at 10% of combined loans receivable principal at the end of the fourth quarter of 21, which is consistent with historical past due percentages and aligns with our past due balances of nine to 10% during 2019. Staying on this slide, Revenue for Q4 21 was at 43% from the fourth quarter a year ago due to an increase in the average outstanding portfolio balance resulting from the third quarter of 21 growth while the APR was relatively flat between the two periods. Our full year 21 revenue was down 10% from the prior year due to a lower average balance for the full year of 21 as the portfolio growth has been concentrated in the second half of the year. and a lower portfolio APR, primarily coming from the RISE installment loan product. Looking at the bottom of this slide, adjusted EBITDA and adjusted earnings for the fourth quarter and the full year of 21 as compared to the prior year periods were compressed due to the upfront marketing and credit provisioning costs as the portfolio returned to growth during 2021, specifically in the second half of the year. In addition, we've experienced an increase in credit provisioning during the third and fourth quarters due to the higher mix of new loan originations within the portfolio, primarily due to the volume of new loan originations during the third quarter of 21. While we have an initial increase in credit losses on these loans within our fourth quarter results continuing into the first quarter of 22 as expected, these loans continue to meet our overall unit economics and will become more profitable as advantages age. As Jason previously discussed, we recognize legacy legal accruals as previously filed and announced with an after-tax amount of $19 million. As a result, we incurred a net loss of $32 million or a loss of $0.99 per share for the fourth quarter with a net loss of $34 million or a loss of $0.98 per share for the full year ended December 31, 2021. Excluding the one-time non-operating loss items associated with the legacy legal accruals, and the discrete tax expense associated with our Texas State R&D credits discussed last quarter, we had an adjusted net loss of $13.8 million or a loss of $0.42 per share for the fourth quarter with an adjusted net loss of $13.6 million or $0.40 per share for the full year ended December 31, 2021. On slide eight, The cumulative loss rate as a percentage of loan originations for the 2020 vintage is the lowest loss rate ever due to the tightening of underwriting, slowdown in new loan originations, increased government stimulus, and improved payment flexibility tools. We continue to expect the 2021 vintage to be at 2018 levels or slightly lower due to the new customer mix that entered the portfolio during the second half of 2021 as we rebuilt the portfolio. On this slide, we also show the customer acquisition cost. We continue to maintain our CAC targets that allow us to achieve our unit economics. These targets are between $250 to $300 for the rise in elastic products and sub $100 for the today card, continuing to diversify our marketing mix between direct mail, strategic partner, and digital channels. Slide nine shows the adjusted EBITDA margin, which was 11% for the full year of 2021 due to compressed earnings experienced in the strong new customer loan growth and the associated upfront costs we incurred on these loans related to marketing and credit provisioning related to a higher mix of new customer loans. Long-term, we expect the adjusted EBITDA margin to return to 15 to 20% depending on the pace of growth. On slide 10, I now want to address our planned adoption of fair value accounting for the loan portfolio beginning January 1, 2022. We have not had to adopt the life of loan reserve requirements, or CECL, that others had to adopt on January 1, 2020, due to our qualifications under certain relief provisions as a smaller reporting company, which will expire in January 2023. Under CECL, GAAP allows companies adopting the new life of loan reserve methodology to apply the fair value option on certain assets as an alternative accounting model. In evaluating between the life of loan reserve requirements in the fair value option, we believe that the fair value option best reflects the value of the combined loans receivable portfolio and its future economic performance. Fair value aligns more closely with how we view and manage business, especially since our portfolio decision-making process is anchored in unit economics that align with discounted cash flow methodologies that will also be utilized in fair value accounting. For our business where we're focused on driving growth with meaningful profitability, financial performance under fair value should be positively correlated to portfolio growth. Beginning January 1, 2022, we'll be utilizing the fair value option for the entire combined loans receivable portfolio. Adoption requires an initial measurement of the existing combined loans receivable portfolio at fair value as of January 1, 2022, which will be recognized as an increase to retain earnings. The premium associated with the combined loans receivable portfolio is currently estimated at 10%. This premium represents the percentage that the fair value of the portfolio exceeds the outstanding principle. The adoption of fair value to comply with the new lots of loan loss requirements will have no impact on cash earnings. For financial reporting, the most significant change to earnings will be related to recognizing the change in fair value of the combined loans receivable each quarter rather than a provision for loan losses. The change in fair value will be comprised of gross charge-offs, net of recoveries, and valuation impacts associated with changes in both the portfolio and valuation assumptions. Continuing on this slide, we'll discuss a few points regarding our outlook for 2022. With the change to fair value and its expected impact to our financial performance, we'll be able to provide a more complete guidance during our first quarter earnings call. We continue to manage the portfolio consistent with our unit economics and long-term metrics that we've previously discussed. We expect continued growth in the portfolio with end of year combined loans receivable principle increasing 15 to 20% from where we ended 2021. We would expect revenue to increase 20 to 25% due to the portfolio growth experience in the second half of 2021 and during 2022 while the APRs on the portfolio are expected to remain relatively flat year over year. Turning to liquidity and capital on slide 11, as previously announced, we closed on a $50 million financing facility with an ability to increase the facility up to $100 million to fund continued growth of the TodayCar product at a lower cost of funds. We continue to draw on all the facilities that fund the portfolio loan growth during the fourth quarter of 21 with a total debt balance of approximately $500 million at December 31, 2021. Also, incremental new borrowings under our rise in Elastic Debt facilities are priced at approximately 8%, and today card at 6.85%, resulting in an overall decrease in the weighted average cost of funds to 9% at December 31, 2021, from 10.2% at December 31, 2020. Lastly, during the fourth quarter of 21, we will purchase over $3 million, or approximately 1 million common shares, under our existing common share repurchase program. For the full year of 2021, we repurchased $27.5 million of common shares, or approximately 7.3 million common shares, representing approximately 19% of common shares outstanding as of the beginning of 2021. Since beginning our share repurchases in August 2019, we have repurchased approximately 33% of all shares that were outstanding and issued or reissued since that point in time. As part of the settlement of the legacy litigation, we will repurchase approximately 925,000 shares of Elevate stock that was contributed to the bankruptcy trust by a shareholder in Q1 2022. This will represent approximately 3% of our common shares outstanding at December 31, 2021. We'll evaluate further purchases under the share repurchase plan in the near term as cash allows. With that, let me turn the call back over to the operator to open it up for Q&A.
spk01: At this time, we will be conducting a question and answer session. If you'd 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'd 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 star keys. One moment, please, while we poll for questions. Our first question is from Moshe Orenbook with Credit Suisse. Please proceed with your question.
spk04: Hi, this is Phuong filling in for Moshe, and thanks for the call, guys. My first question is on your revenue guidance. Assuming you guys don't change your accounting, is it comparable with your current standard of accounting? Can you walk us through what is your assumption into that revenue guidance and maybe loan growth from how you're seeing consumer demand? right now. Thanks.
spk00: Yeah, Hong, this is Chad. So thanks for the question. Yeah, so that revenue guidance is based off our existing, you know, core products and, you know, is based off an increase in our combined most receivable of 15% to 20%. And, you know, with the carryover of higher balances coming from 2021 and the growth in the current year, That's what's leading to the increase. The APRs are relatively flat as well in that assumption.
spk04: Gotcha. I mean, based on what you guys are seeing right now in terms of the tax refund, I mean, how do you imagine mean balance growth would progress throughout the year?
spk00: Yeah, right now we're modeling, you know, Q1 seasonality. with growth taking place in Q2 through Q4. You know, the open question, I think, with us and with others as well is just exactly how the Q1 seasonality plays out as an item that we're closely monitoring. Okay.
spk04: And if I may ask about your new initiative, I mean, the Swell product as well as today's cards. So just wondering, I mean, in terms of these new initiatives, I mean, how do we think about the contributions going forward and in the long run? And maybe if you could include some kind of a blueprint, how you plan to market that to more banks as well.
spk02: Yeah, this is Jason. Thanks for the question. Yeah, I think we're really excited about the announcement of the Swell partnership with Central Pacific Bank and the Swell team and also the continued growth in TodayCard. I think from the Swell perspective, It's a great chance for us at Elevate to show how the technology we've built over the last few years and the Blueprint technology stack can embed with some third parties and help them expand access to credit. And I think this is a great opportunity to help Central Pacific move to the mainland here in the U.S. And we see that just, you know, one, we have the business there that will help from a contribution from the licensing of the platform, but also the equity investment long term. So this is a little bit different kind of partnership than we've done in the past. So we're hopeful that not only will we see some revenue streams coming in from the license of our tech platform, but also over the years to come, some from the equity investment as well. And then on the today card, we saw some pretty good growth in 21 with that portfolio. And we're really excited about what that continued growth can be for us here in 22. It's still, we're not hitting the gas as hard as we could hit it with that portfolio. We want to make sure we're very measured with that, but we're seeing some good signs there and want to make sure that we continue to grow that at a very prudent pace. So excited about these two new opportunities. I think it adds to a nice mix with our core base, Verizon, Elastic, and how we work with banks there and those products, and it sets us up for a very strong 22 as we go through the year. Got you.
spk04: Thank you.
spk01: We have reached the end of the question and answer session, and I will now turn the call over to Jason Harbison for closing remarks.
spk02: Just wanted to thank everyone for joining us this afternoon for the fourth quarter call. I think when we look back on 21, we're very happy with those results. You know, coming into 2021, there was a lot of uncertainty about what the growth of the portfolios could look like, and seeing us end the year at around 40% growth in the portfolio balances with some new product launches. We've got to talk about the beginning of this year, and wrapping up some legacy litigation there I think sets us up from a nice foundation for 22 and really excited about what new technology, the new partnerships, and our core products can do this year. So look forward to talking more about that in future calls this year. Thanks so much for your time. Thanks so much for your investment, and we'll talk to you soon.
spk01: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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