Elevate Credit, Inc.

Welcome to Elevate Credit's first quarter 2022 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star and zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Daniel Ray, Director of Public Affairs. Please go ahead.

Good afternoon and thanks for joining us on Elevate's first quarter 2022 earnings conference call. Earlier today, we issued a press release with our first 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 Form 10-K and other filings we make with the SEC. 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 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 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 thanks to everyone for joining us today. Elevate delivered strong year-over-year growth among all our products for the quarter. Even though we incurred a net loss, our Q1 2022 results were in line with our expectations heavily influenced by the loan growth opportunities that we took advantage of in the second half of last year at a high level the loan portfolio continues to season through the strong growth and new customers from q3 of last year i'll go to this further in a minute but ultimately as the mix of new to former customers skewed heavily towards new customers in the second half of last year we anticipated stress on credit into the first half of 2022. traditionally New versus former customers mix typically hover around 50-50 in any given quarter. In the third quarter of 2021, due to strong new customer loan growth, this jumped to a 70-30 mix. While that percent split has an impact on the consolidated earnings of the company, the unit economics of that vintage met or exceeded your expectations and are comparable to prior vintages with similar new versus former customer mixes. We remain excited on the growth experienced in 2021. We expect charge-offs to normalize beginning in the second half of this year with adjusted EBITDA margins returning to our long-term target of 20% by the end of this year. This should result in strong free cash flow and earnings per share for the second half of 2022. We continue to enhance underwriting models and real-time decision-making tools that should lead to overall improved unit economics even above the season of the portfolio previously mentioned. To summarize the quarterly results, revenues increased 38% to $124 million from the first quarter of 2021. At quarter end, the loan portfolio totaled $511 million, which is a 45% increase over a year ago and down slightly since year end due to seasonal tax paydowns. First quarter expectations of normal seasonal paydown patterns came to fruition. The loan portfolio decreased modestly compared to year end 2021, primarily driven by an early tax refund season and also impacted by return to a more measured growth philosophy, especially with borrowers that are new to Elevate. As you will note in our full year guidance, we anticipate a traditional shape growth and revenue curve as the year progresses. While loan balances will continue to increase during Q2, revenue will bottom out in Q2 due to the decrease in average loan balances resulting from the decrease in loans during the first quarter of 2022. We expect loan balances to grow between 25% and 31% over the last three quarters of this year. Lastly, on profitability, you'll begin to note the impacts of our change of fair value accounting. We recognize a 10% book value premium associated with this change. Chad will discuss the change of fair value accounting in detail, but we continue to believe that this change will be a better representation of the economics of our business. Before moving to the next slide, I would like to also highlight and welcome our new CFO, Steve Trussell. Steve joins us from Discover Financial Services and brings a strong depth of experience and new industry perspectives to our finance team. Steve will be particularly focused on capital management and forecasting while also evaluating our existing debt facilities. I would like to thank Chad Bradford for his tenure as interim CFO. Chad will remain as the chief accounting officer and a crucial member of the finance team. Chris Lutz will remain as our chief strategy officer. With that, let's flip to slide five and expand our view on the market backdrop so far in 2022. As we are all aware, 2022 has presented new challenges on many fronts, even as the pandemic threat has continued to diminish. First, demand for credit remains broad. In this current environment, we see demand across all product types is healthy through the remainder of the year. Post-tax season, we look to see tailwinds across our sector as a whole. On to the far bigger questions, inflation and credit quality. First, with inflation, we noted in bank account data that revenues and expenses have stabilized over the last month after seeing quite a bit of volatility early in the year. Expenses and strain on family finances began to peak in January and February as we saw grocery and gas prices in particular go up. Incomes, unfortunately, did not rise at similar rates. In fact, we noted a few dips, which could be related to the lack of availability of gig work with surging gas prices. April has brought a return to stability in both expenses and income, but it is a situation we're continually monitoring through bank account transaction data and our non-prime customer tracker. And to update on credit, non-prime Americans have a healthy balance sheet despite a strong recovery in consumer spending from the onset of COVID in 2020. At this point, we know this balance sheet may be inflated with the recent tax refund season, but the higher saving rates continue to persist. We know in bank data that checking account balances are above pre-COVID levels. Employment levels for the customer base are materially better than they were even three years ago, and wage growth and the fiscal responsibility have broadened the target market more than narrowed it in 2022 so far. We continue to be diligent in credit management, utilizing real-time bank transaction data and monitoring tools. We also have modeling tools and adjustments in place for near immediate changes to underwriting should they be needed. As we have consistently said, the market we serve is vast, and the need to chase growth for growth's sake is not a prudent use of our resources. We will be disciplined in our growth and focused on the fundamentals of our business model while delivering on our mission of helping non-prime consumers. Credit will always be the most important determinant of growth, but we believe the current Elevate borrower base remains very attractive from a unit economics perspective. I would also add that we remain in sync with the banks that utilize our platform and align on goals for the remainder of this year. In reviewing the dynamics between the products on slide six, I will start with Rise, which accounts for approximately 55% of the total portfolio. With Rise, the loss rates associated with the new customer mix are most pronounced. On this slide, we break out Q3 cumulative loss rates on a six months from originations timeline for new customers. With this backdrop, Q3 of 2021 is no different from past Q3s with strong growth and is achieving our targeted customer unit economics. To understand the metric, we need to look back and remember how the COVID pandemic impacted decisions about portfolio growth, including the rapid decline in loans receivable in 2020 and the rapid increase in late 21, including a great number of new borrowers to the platform. From a rough math standpoint, returning or former customers charge off at about half the rate of new customers. So while the unit economics are profitable at the onset for each, you can note the substantial difference in a rapidly growing portfolio with new customers. Credit, when broken down into new versus former buckets for comparison purposes, falls almost exactly in line with our expectations and modeling. All products have stable APRs, and as we mentioned last quarter, we in the Banksy support continue to see an opportunity to optimize growth. As you have heard as detailed, we are proud of the repeat borrower base. Repeat customers drive better returns because we can serve them with lower marketing costs and exhibit better credit performance, both of which enhance returns. Additionally, the consumers benefit from lower-priced loans. Based on our focus of disciplined growth, we continue to be encouraged that unit economics for all borrowers is well within our band of expectations. To touch on the other two products briefly, elastic demand was slightly weaker than expected in the quarter. You'll see this pronounced in the high seasonal CAC. The use case for elastic is slightly different than that of RISE, and we note limited multi-trial activity in the quarter due to tax seasonality. On the positive side, losses as a percent of revenue are below our targeted range. On the today card, which accounts for about 10% of the portfolio quarter end, we experienced some test segments that performed outside our expected performance ranges. This has led to higher losses than anticipated and due to the longer timeline of credit card products has led to a longer tail on the losses. However, starting in January, vintages are back in line with expectations and we continue to test and look to grow the product. I will conclude by highlighting my enthusiasm for the remainder of the year. We anticipate a return to profitability by the end of 2022 along with return to our stock buyback program. The tailwind of approving credit and a growing portfolio will position us for strong returns into the future. With that, I'll turn the call over to Chad.