Enova International, Inc.

Good day and welcome to the Innova International First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Monica Gould, Investor, Investor Relations of Innova. Please go ahead, ma'am.

Thank you, Operator, and good afternoon, everyone. Innova released results for the first quarter of 2020 and did March 31, 2020, this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.inova.com. With me on today's call are David Fisher, Chief Executive Officer, and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it, and as such, does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. And with that, I'd like to turn the call over to David.

Good afternoon, everyone. Thank you for joining our call today. Instead of our usual practice of providing an in-depth review of the quarter, I'm going to spend most of this call discussing Inova's response to COVID-19 and the economic crisis we are all facing. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. First, I hope that you, your families, and loved ones are safe and healthy. I would like to extend my heartfelt gratitude to our country's first responders and healthcare professionals. I would also like to thank all of our employees for their continued hard work and teamwork through this difficult time to support not only our customers, but also each other. Our priority is the safety and well-being of our employees and customers. And fortunately, given the advantageous nature of our online-only business model, we believe we are well positioned to help them manage through this crisis. Innova's nearly 1,300 team members across all corporate and contact center functions have been working remotely since mid-March. Our nimble technology and online model have enabled us to continue to operate at high levels of productivity with full access to all of our data and tools. This includes maintaining high customer service levels with our dedicated in-house contact center team across all contact points, phone, email, and chat. Approximately 50% of emails and 30% of calls with our customers pertain to COVID, but service levels remain high, as do customer satisfaction scores, with over 90% of customers indicating they were satisfied with the solutions we've worked on with them. Turning to the quarter, Our performance through mid-March exceeded our expectations, and we were on track to again meet our revenue and earnings guidance based on strong origination and solid credit metrics. However, as the seriousness of the COVID crisis increased in early March, we aggressively began to reduce originations and shift our focus to our existing customers and managing our portfolio of loans. One thing that became apparent almost immediately is that this recession was not going to follow the typical course. In most recessions, the economy slowly deteriorates over a period of months, giving our credit models time and adequate data to adapt. But this appears to be the first time a recession is caused by unemployment. Historically, it has always been the exact opposite. Events in the world or the market cause growth to slow and eventually jobs are lost. In every other recession, unemployment peaked near the end. But here we have the peak at the beginning with over 25 million jobless claims filed in just the first month or so. With the speed in which the employment and spending picture in the U.S. is changing, our underwriting models are not currently able to be predictive enough to make sound decisions. As a result, we meaningfully cut back originations across all of our products during the last half of March. This resulted in us curtailing almost all paid marketing and focusing our resources on supporting our existing customer base and adjusting to the emerging risks in this economic environment. The effect of these actions led originations for the month of March declined 16% from a year ago. And in total, we have now cut back originations 60 to 80% depending on product. At Enova, one of our core values is customer first. And since we know many of them will be impacted by COVID-19, we are ensuring our policies will help them. We have increased repayment flexibility, temporarily stopped assessing late fees, and will continue to work with customers on due date adjustments, payment deferrals, and adjusted payment plans. In addition, we've made changes to our credit reporting process so that if an impacted customer does have a late payment, any impact to their credit report is lessened by noting the late payment was due to a disaster. To date, in part because of our fast actions, default rates have ticked up only slightly. Our customers are also benefiting from the significant stimulus at the state level and from the $2 trillion CARES Act. The hope is that this bill will help America avoid a deep and long economic recession. In addition, we know that subprime customers are very accustomed to managing variations in their personal cash flows. As has been said before, in some ways, our customers are always in a recession. So while we are certainly anticipating further deterioration in credit quality, in many ways, recessions have less of an impact on our customers than on prime borrowers. In terms of the impact of Inova, both Steve and I will cover it in more detail, but we have a strong balance sheet and ample liquidity to weather this economic slowdown. And our proven ability to adapt to changes will also enable us to reaccelerate quickly when conditions dictate. We are already rapidly readjusting our sophisticated analytics models to take into account uniqueness of the economic deterioration in our reacceleration plans. Despite scaling back lending efforts during the end of Q1, we delivered revenue growth of 37% compared to the first quarter of last year. And our flexible business model allowed us to quickly reduce our operating costs to align with lower business activity. Adjusted EBITDA of $36 million and adjusted EPS of 26 cents compares to $80 million and $1.27 per share in the first quarter of last year. Our first quarter results include an approximately $60 million reduction that we took to the fair value of our loans to reflect the increased risk due to the COVID crisis. Without this adjustment, adjusted EBITDA, and adjusted EPS would have both been in line with our guidance. Our domestic lending businesses, which include our large U.S. subprime business, Net Credit, and our small business financing products, continued to drive our growth and profitability during the first quarter. Revenue for these three businesses was up 38% year-over-year in Q1, driven by a 78% increase in line of credit revenue and a 23% increase in installment loan and finance receivables revenue. The composition of our total portfolio in the first quarter was 66% installment products, 32% line of credit products, and only 2% single-pay products. And our UOS near-prime product represented 51% of our portfolio at the end of Q1, while small business now represents 16%. Turning to our smaller businesses, in Brazil, first quarter originations increased 10% sequentially and 7% year-over-year on accounts and currency business. And lastly, Inova Decisions, our real-time analytics as a service business, is continuing to gain traction as we actively build out the pipeline. Before I wrap up, I'd like to discuss how we are operating at Inova to weather this crisis. The flexibility of our online platform, our proprietary analytics, balance sheet resiliency, and deep experience on our management team provides us with a substantial competitive advantage. We also have a well-diversified product offering without significant exposure to some of the more impacted states like New York and New Jersey, and without significant concentration to the restaurant and hospitality industry in our SMB portfolio. Thanks to our intensive recession readiness preparation over the last two years, combined with our flexible online platform, we were well positioned to act quickly at the onset of the crisis, as I described earlier. And our talented team is well prepared to navigate the ongoing uncertainties. From an operations perspective, we have always had formal daily risk monitoring and response planning across all of our businesses. For example, we look at initial defaults, delinquency rates, ACH returns, line utilization, the credit profile of our applicants, and much, much more. Combined with the high payment frequency across most of our portfolio, this allows us to have a near real-time view of credit performance. In part because of this, we performed very well through the Great Recession of 2008, and our analytics and operational capabilities are much more sophisticated today than they were then. Sitting here, we have over 16 years and over 37 terabytes of data. This includes data from over 300 million unique customer interactions. We are confident that the quality of our analytics to digest this data distributed over our online-only business model has and will continue to enable us to rapidly and efficiently take real-time actions based on the data we are seeing. As I mentioned previously, we are already quickly readjusting our sophisticated analytics models to take into account the uniqueness of the economic deterioration. This includes not only actions to manage our existing portfolio, but also decisions around how and when to re-accelerate lending. While that will be based on a number of factors, it's important to understand that we do not need to see a full economic recovery, but simply for unemployment levels to stabilize at whatever that level may be. From a financial perspective, which Steve will discuss in further detail, we have a strong balance sheet and ample liquidity to manage us through an economic downturn. Our cash position is growing, and our online-only business model has significant operating leverage so we can adjust our expenses quickly to adapt to changes in our business activity as a result of market conditions. Additionally, we benefit from higher margins and lower credit quality as a nine prime consumer lender versus a prime or super prime lender. And we have sufficient liquidity and operational capacity to expand lending once unemployment and economic conditions begin to stabilize. Lastly, our highly experienced management team is another key differentiator that sets us apart from our competitors. We have successfully operated multiple industries and through multiple economic downturns. We know how to manage through these cycles, and we have consistently demonstrated prudence and profitability. While COVID-19 has created uncertainty in the short term, we believe the long-term fundamentals of our business remain strong and that we are well-positioned to navigate through the downturn. We also remain committed to producing long-term, sustainable, and profitable growth and will swiftly resume lending efforts once the economy begins to stabilize. With that, I'll turn the call over to Steve, who will provide more details on our financial performance and outlook. And following Steve's remarks, We'll be happy to answer any questions that you may have.