Enova International, Inc.

Good afternoon and welcome to the Inova International fourth quarter and full year 2020 earnings conference call. All participants will be in 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 touch tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Monica Gould, Investor Relations for Inova. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Inova released results for the fourth quarter and full year 2020 ended December 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 of Inova, and Steve Cunningham, Chief Financial Officer of Inova. This call is being webcast and will be archived on the Investor Relations section of Inova's website. Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements and, as such, is subject to risks and uncertainties. Please note that any forward-looking statements that are made 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, Inova reports 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. Thanks for joining our call today. First, I'll provide an overview of our fourth quarter and full year results. Then I'll discuss our strategy and outlook for 2021. And after that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. The adaptability of our sophisticated technology-driven online business was evident in Q4 as we quickly re-accelerated our originations while continuing to produce strong credit metrics, even as COVID pandemic persisted. Total revenue in the fourth quarter increased nearly 30% sequentially to $264 million, while declining only 24% year-over-year despite our significant pullback in originations from March to July in response to COVID. We also delivered yet another quarter of record profitability. Adjusted EBITDA rose 126% year-over-year to a record $149 million, and adjusted EPS grew 160% to $2.39. Our performance navigating a difficult operating environment throughout 2020 would not have been possible without our experienced and talented team. Their hard work combined with the ability of our sophisticated machine learning analytics enabled us to quickly adapt to the changing environment, pulling back on originations early in the crisis, and then driving a strong recovery and growth in the second half of the year. The result was that for the full year, total revenue declined just 8% to $1.1 billion, while adjusted EBITDA rose 51% to $415 million, and adjusted EPS grew 78% to a record $7.26. As we discussed the last two quarters, our prudent approach to originations earlier in the pandemic led to a contraction in our loan portfolio during Q2 and Q3. However, our ability to quickly accelerate originations during Q4, supported by the strong unit economics we've been seeing, led to the first expansion in our loan portfolio since the pandemic began, with growth both in our legacy loan book and in the on-deck book. In the fourth quarter, our book increased 87% sequentially and 4% from the fourth quarter of last year. Small business products represented 52% of our portfolio in Q4, while consumer accounted for 48%. Within consumer, line of credit products represented 29% of our consumer portfolio and Selma products accounted for 69%, and short-term loans represented just 2%. Fourth quarter originations more than quadrupled sequentially, while down 18% from a year ago. By way of comparison, third quarter originations were down 77% from the third quarter of last year, demonstrating how our nimble online business and rapidly adjusting analytics allows to quickly adjust the business to changing market environments. Another positive trend in Q4 was the increase in originations from new customers to 28% of total originations, up from 11% in Q3. As we continue accelerating originations, we expect that the proportion of new customers will continue to increase over the next several quarters given the demand we are currently seeing. We closed 2020 with month-over-month growth in revenue, AR, and originations for the first time since the pandemic began. And while it was difficult to make forward-looking predictions given the ongoing impacts from COVID, based on what we are seeing today, we expect growth in our originations to continue for the foreseeable future. On the consumer side of our business, taking into account typical Q1 seasonality and despite persistent elevated unemployment, we have had a solid start to 2021, following on the strong sequential growth in originations we produced in Q4. As the economy opens back up, we continue to believe that consumers will increase their spending potentially at elevated levels, as there will be pent-up demand. And as they do, they will need access to credit to support any temporary dislocations between their income and their expenses. Since those customers have been paying down debt during COVID, their personal balance sheet should be in a position where we can successfully lend to them. We saw the same dynamic following the financial crisis, which led to strong origination growth in 2010 and 2011. We are also mindful of any potential impacts from additional stimulus, but based on what we saw from the last round, we do not anticipate it being an impediment to our growth. Our analysis of the prior stimulus showed a marked improvement in credit and collections performance with little impact to customer demand. On the small business side, with the closing of the on-deck acquisition, we are excited to add a world-class brand, great products, and a talented team to Inova's diversified businesses. Our combined S&B products originated over $120 million in December alone, up 26% from November. In addition, we are not seeing much effect from PPP as originations have remained strong so far in 2021. So needless to say, we are very pleased so far with the on-deck acquisition. And as we view the economic landscape, we continue to believe that is an excellent time to be increasing our focus on SMB lending. As the economy emerges from the pandemic, we believe small businesses will be a huge beneficiary of the pent-up consumer demand I just mentioned. Today, much of consumer spending is at large businesses, such as grocery stores, big box stores, utilities, streaming entertainment, and Amazon, of course. But as the economy reopens, consumers will likely increase their spending at small businesses like hair salons, gyms, local retailers, and restaurants. Many of these small businesses have used up their savings trying to survive the pandemic. And they will need access to credit to rebuild inventory, rehire employees, et cetera. This could lead to a huge surge in demand that we are ready to fill. The integration of on-deck is also going well, and we are on track to deliver the forecasted $50 million of annual cost synergies, primarily from eliminated duplicative resources, as well as $50 million in run rate revenue synergies. We also continue to expect that the transaction will be accretive this year and generate EPS accretion of more than 40% when synergies are fully realized in 2022, possibly more as it now appears that our purchase price is even more attractive than we believed at the time we announced the deal. As a reminder, we paid $116 million for OnDeck in a mix of stock and cash. Benefiting from the strong credit performance of the legacy OnDeck portfolio, we are now expecting the value of their portfolio to be much higher than we modeled when we completed the deal. We originally thought that the legacy portfolio would have very little residual value. but we've already realized over $50 million in residual cash payments alone since the closing, and we now expect to receive at least $200 million of total cash from the acquired portfolio net of securitization repayments. In addition, it is likely that we will look to monetize our interest in ODX, OnDeck Canada, and OnDeck Australia, allowing us to focus on the core US SMB lending business. further reducing our net investment in ONDEC. While ODX has been able to sign some high-profile bank clients, divesting ODX will allow for more efficient use of capital as the business has over 70 employees but less than $10 million in revenue. The Australian and Canadian businesses are viable businesses in the respective markets but are small compared to ONDEC's U.S. operations and are unlikely to have a significant impact on Inova's overall growth. In addition, OnDeck only has partial ownership of those two businesses. In summary, we are very pleased with our strong fourth quarter and full-year performance. Our world-class analytics enabled us to successfully navigate an unusual year, and the strength of our business enabled us to further diversify with the opportunistic acquisition of OnDeck. Having successfully navigated 2020, our focus is squarely on accelerating growth in 2021. We have good momentum after an encouraging Q4 and start to 2021, and we are continuing to see very good credit in our portfolio, which gives us flexibility to further increase volume as the economy improves. We remain committed to helping hardworking people get access to fast, trustworthy credit. COVID has created uncertainty in the near term. However, our solid financial position and diverse product offerings position us well to continue to produce sustainable and profitable growth and drive shareholder value. With that, I'll turn the call over to Steve to 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. Steve?

Thank you, David. And good afternoon, everyone. As David mentioned in his remarks, we're encouraged by the sequential growth in originations, receivables, and revenue, and the continued solid credit quality of the portfolio as we ended 2020. The resiliency of our direct online-only business model, the strength of our powerful credit risk management capabilities driven by our world-class analytics and technology, and our solid balance sheet have given us the flexibility to not only manage through this challenging economic environment, but also to opportunistically enhance our products and capabilities as we prepare for economic recovery. With the closing of the on-deck acquisition during the fourth quarter, we are pleased to add a talented team, operating capabilities, and product diversification that further enhance our ability to serve our customers to drive growth and shareholder value. One reporting note before I discuss our results. With the closing of the on-deck acquisition during October, beginning this quarter, we are changing product groupings for ongoing reporting in our earnings supplement to two new categories, consumer loan and finance receivables, and small business loans and finance receivables. Financial results for on-deck since October 13th are included in our fourth quarter and full year 2020 results in the earnings supplement, but not in historical periods prior to the fourth quarter of 2020. Now turning to Inova's fourth quarter results. Total company revenue from continuing operations increased 29% sequentially to $264 million as the on-deck acquisition drove sequential growth in small business revenues. And revenue from our consumer businesses grew 2% sequentially, the first sequential increase in revenue since the COVID pandemic began. The addition of on-deck and sequential growth in receivables from legacy Innova businesses increased total company combined loan and finance receivables balances on an amortized basis to $1.3 billion at the end of the fourth quarter, up 87% from the third quarter and up 4% from the fourth quarter of 2019. Excluding $597 million of on-deck receivables at December 31st, total company combined loan and finance receivables balances on an amortized basis rose 2% sequentially with increases in both consumer and small business receivables. As David discussed, receivables growth was driven by increases in origination during the fourth quarter. Total company originations were $536 million during the fourth quarter, nearly four times third quarter originations and only 18% lower than the fourth quarter of 2019. Fourth quarter originations from Inova's legacy businesses more than doubled from the third quarter with growth from every brand. Originations in the on-deck brand grew 82% sequentially. Originations from new customers for the total company were 28% of total originations during the fourth quarter as we ramped up marketing to attract new customers. We're encouraged by the steady increase in monthly origination levels across all of our products through the end of the year. As we move into the traditional quarterly seasonal low point for originations in our consumer lending businesses, we expect total revenue for the first quarter of 2021 to be flat compared to fourth quarter levels before accelerating through the remainder of the year, but will depend upon the timing, level, and mix of originations as we move through 2021. The net revenue margin for the fourth quarter was 92%, up from 89% for the third quarter of 2020. and remains elevated as we continue to have strong credit quality, which increases the fair value of the portfolio. As you'll recall, the change in the fair value line item includes two main components. First, net charge-offs during the reporting period, and second, changes to the portfolio's fair value during the reporting period, resulting from updates to key valuation inputs, including future credit loss expectations, prepayment assumptions, and the discount rate. I'll discuss both of these items in more detail. First, for the fourth quarter, the total company ratio of net charge-offs as a percentage of average combined loan and finance receivables was 4.7%. Flat to the third quarter of 2020, significantly below the 15.6% ratio in the fourth quarter of 2019. Net charge-off ratios for both consumer and small business receivables were well below typical fourth quarter levels, demonstrating the ability of our sophisticated credit models to focus on lending to customers who can repay their obligations despite the challenging economic environment. Second, the fair value of the consolidated portfolio as a percentage of principal decreased to 98% at December 31st from 106% at September 30th. This was solely a result of the on-deck acquisition as the outlook for portfolio credit quality remained strong. The initial fair value of the on-deck portfolio at the transaction's closing in October was 85% of principal, resulting in a fair value at that time for Inova's entire consolidated portfolio, including on-deck, of approximately 95% of principal. Improved future credit loss expectations in our small business portfolio were the primary driver of the increase in the fair value of the consolidated portfolio from approximately 95 percent of principal at the closing of the ONDAG transaction on October 13th to 98 percent of principal at December 31st. The stability in delinquent receivables as a percentage of loan and finance receivable balances at the end of the quarter reflects strong customer payment rates and the continued solid credit profile of the portfolio. Excluding on-deck, the percentage of total portfolio receivables past two 30 days or more was 4.1% at December 31st, compared to 3.7% at the end of the third quarter and 6.7% at the end of the fourth quarter a year ago. The percentage of on-deck receivables past two 30 days or more declined during the quarter from 23.2% at closing to 15.6% at December 31st. In addition, this delinquency ratio at year end for Andova's legacy small business brand was flat to third quarter levels. The percentage of consumer receivables past due 30 days or more was 3.9% at December 31st compared to 3.5% at September 30th and 7.4% at the end of the fourth quarter a year ago. Consumer receivable delinquency levels, including early stage delinquencies, remain at historically low levels. To summarize, the change in fair value line item is benefiting from low levels of net charge-offs and a slight increase to the fair value of the portfolio as credit metrics and modeling at the end of the fourth quarter reflect a solid outlook for expected future credit performance, even with a significant increase in originations, especially from new customers. In order to reflect that the uncertainty in the economic environment could present increased risk of customer defaults, our fair value calculations for the fourth quarter continue to include downward adjustments at levels similar to the previous three quarters. In addition, the discount rate used in the fair value calculations remained unchanged and at the high end of our ranges. Looking ahead, we expect the net revenue margin for the first quarter of 2021 to range between 60% and 70% as significant fourth quarter origination season. As the economy recovers and demand and originations continue to rise, the net revenue margin should normalize at around 50% to 60% as newer and less seasoned loans become an increasingly larger proportion of the portfolio. The degree and timing of that normalization will depend upon the timing, speed, and mix of originations growth. and will likely occur over several quarters as originations begin to return to historical levels. Turning to expenses, as we expected and discussed last quarter, total non-marketing operating expenses were temporarily elevated this quarter from the on-deck acquisition, ahead of implementation of cost synergies from the transaction over the coming quarters. Fourth quarter operating expenses also include $13 million of one-time non-recurring expenses related to the ONDEC acquisition. As David mentioned, the ONDEC integration is going well, and we are on track to recognize deal cost synergies faster than our original expectations. We expect to realize $46 million of annual cost synergies from ONDEC's 2019 full-year operating expense base by year-end 2021, which should result in achieving 88% of our planned deal cost synergies in year two of the deal, versus our original 75% expectation. The rationalization of most corporate support functions and related infrastructure is largely complete, and planned steps to eliminate duplicate operating and technology costs, as well as to combine business operations, will follow during the rest of 2021. We still expect all remaining cost synergies to be fully phased in by the end of 2022. Excluding one-time non-recurring expenses related to the on-deck acquisition, total operating expenses for the fourth quarter, including marketing, were $102 million, or 39% of revenue, compared to $83 million, or 24% of revenue, in the fourth quarter of 2019. As expected, we saw marketing expenses increase to $28 million, or 10% of revenue, in the fourth quarter, from $5 million or 2% of revenue in the third quarter, but down from $36 million or 10% of revenue in the fourth quarter of 2019. We expect marketing spend will likely remain at roughly 10% of revenue in the first quarter, but will depend upon the level of originations. Operations and technology expenses for the fourth quarter totaled $31 million were 12% of revenue compared to $23 million or 7% of revenue in the fourth quarter of 2019. The increase was driven primarily by the addition of $12 million of on-deck ONT-related expenses. Given the significant variable component of this expense category, sequential increases in ONT costs should be expected in an environment where originations are accelerating and receivables are growing We expect that this will be offset to some degree as we realize expense synergies from the integration of the on-deck acquisition. Excluding the $13 million of one-time expenses associated with the on-deck acquisition, general and administrative expenses for the fourth quarter totaled $43 million, or 16% of revenue, compared to $25 million, or 7% of revenue, in the fourth quarter of 2019. The increase was driven by the addition of on-deck G&A related expenses. Looking ahead, excluding any one-time items, we expect G&A spend to decline during 2021 as we recognize synergies of the on-deck transaction and as we continue our focus on operating cost discipline. Adjusted EBITDA, a non-GAAP measure, increased 9% sequentially and more than doubled from a year ago to $149 million in the fourth quarter for the reasons I've previously discussed. our adjusted EBITDA margin for the quarter was 56%, compared to 19% in the fourth quarter of the prior year and 67% in the prior quarter. Adjusted EBITDA margins should begin to normalize during the first quarter of 2021 from the record levels seen during the second half of 2020 as a result of the continued marketing investments and the aforementioned growth-related normalization in net revenue margins and volume-related expenses. As previously noted, the degree and timing of any normalization will depend upon the timing, speed, and mix of originations growth, and will likely occur over several quarters as originations begin to return to historical levels. Our stock-based compensation expense was $7.2 million in the fourth quarter, which compares to $2.2 million in the fourth quarter of 2019. The increase is related to the on-deck acquisition, And as I described last quarter, expense associated with a 2017 increase in the vesting period for restricted stock units is now fully reflected in year-over-year comparisons. Normalized stock-based compensation expense should approximate $5 million per quarter going forward. Our effective tax rate was 10% in the fourth quarter, which declined from 26% for the fourth quarter of 2019. The decrease resulted from the $164 million bargain purchase gain recognized this quarter related to the acquisition of on-deck not being subject to taxation. We expect our normalized effective tax rate to remain in the mid to upper 20% range. We recognize net income from continuing operations of $231 million or $6.47 per diluted share in the fourth quarter. compared to $30 million or $0.87 per diluted share in the fourth quarter of 2019. Adjusted earnings, a non-GAAP measure, increased to $85 million or $2.39 per diluted share from $31 million or $0.92 per diluted share in the fourth quarter of the prior year. The trailing 12-month return on average shareholder equity using adjusted earnings increased to 42% during the quarter from 37% the year ago. Our net cash flow from operations for the fourth quarter totaled $118 million as we continue to see strong customer payment rates. We ended the fourth quarter with $388 million of cash in marketable securities, including $317 million in unrestricted cash, and had an additional $453 million of available capacity on our corporate revolver and other domestic committed facilities. Our debt balance at the end of the quarter includes $332 million outstanding under our $776 million of combined installment loan and small business securitization facilities. We had no borrowings outstanding under our $125 million corporate revolver. On December 24th, we renewed and extended a $100 million committed asset-backed revolving debt facility with Truist. to support growth and liquidity for ONDEC's term loan. The facility had the cost of one month LIBOR plus 250 basis points and a final maturity of December 2023. Our cost of funds for the fourth quarter was 10.5%. Interest expense for the fourth quarter included $5.6 million of non-cash costs from accelerating discount amortization as a result of prepayments of ONDEC facilities during the quarter. Excluding these additional discount amortization costs, our cost of funds would have been 8.3% for the fourth quarter. We continue to believe our cash position, available facility capacity, and operating cash flow will provide us with significant runway before needing to raise new external funding, even when we return to levels of originations experienced in recent years. Due to the ongoing uncertainty in the economy, we are not providing detailed financial guidance at this time. However, as we resume meaningful growth and originations in receivables, we expect to invest more in marketing by leveraging our machine learning driven analytics to capture increased demand to attractive unit economics. As I've mentioned in my remarks today, this should lead to some normalization in the net revenue margin, growth related variable expenses, and the adjusted EBITDA margin from levels we've seen during the second half of 2020. The degree and timing of any normalization will depend upon the timing, speed, and mix of originations growth and will likely occur over several quarters as originations begin to return to or exceed pre-COVID levels. We are confident the return to pre-COVID originations growth will allow us to deliver meaningful and consistent top and bottom line growth as we leverage the benefits of the scale and efficiency of our direct online operating model, our broad and diversified consumer and small business product offerings, our powerful credit risk management capabilities driven by our world-class analytics and technology, and our solid balance sheet. And with that, we'd be happy to take your questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. The first question is from David Scharf of JMP. Please go ahead.

Thank you, and good afternoon. Thanks for taking my questions. I guess a bit of a high-level question. On the market, you know, this is the fourth, well, it's the fourth earnings call since the onset of the pandemic. And, you know, I know it's become somewhat of a cliche where an analyst is supposed to ask you about stimulus and did you see any change in patterns following the latest checks? And we've got some more that look imminent. But, you know, in the longer run, that really doesn't tell us much about the business. But what I am wondering is, David, you talk a lot about machine learning and analytics. Have your underwriting models learned anything over the last year that tells you anything about when we emerge on the other side of this pandemic, if perhaps your target market is larger or these are people that Maybe you could borrow more in a more normalized environment. Or in contrast, is the last 12 months just so unusual that you can't really draw any conclusions? I'm just wondering if there's been anything about this better-than-expected credit performance across all consumer asset classes from all lenders that have taught your models anything other than people respond positively to stimuluses.

Yeah. So I, I mean, there's a bunch of questions embedded in there, but let me start kind of at the higher level and get to the, to the lower, the lowest level. I think, first of all, there's absolutely nothing we've seen. And I don't think there's any reason to believe that COVID has in any ways fundamentally changed your market. So if you fast forward, whatever period of time you want to into the future kind of post post pandemic, absolutely no reason to believe the market in general has changed. Um, The economy should get relatively back to normal. Sure, it may look a teeny bit different, but nothing that should meaningfully change the market for non-prime credit. So when you're thinking about the future of the business, I view this as a temporary dislocation, not any kind of long-term dislocation. um in terms of stimulus you touched on that i made you know i think i i did make the point in my remarks is that from the prior stimulus what we saw is not a huge impact on demand but a huge benefit to credit and so you know we don't expect anything materially different with the current round of stimulus and then finally with respect to our analytics models they've learned a tremendous amount and you know look there's big cycles over time but there's small cycles you know all the time, state by state, region by region, city by city. And, you know, how customers, you know, rebound to stresses to their income is something that our models now know how to do much better. We, again, the models, you know, almost all of our models now are machine learning. So this learning is happening extremely quickly, which is great for us. And it's things that they'll be able to lean back on when they see patterns, the models see patterns that are similar to the ones we saw during COVID, even if it's a much smaller amplitude than the dislocations we've seen over the past nine months.

No, no, that's helpful. And just to be clear, I mean, I was kind of speculating more on if the market is structurally better in the long term, just based on the fact that models have been learning over this past year, it sounds like. You know, it may be, hey, one quick follow-up, you know, and completely understand the lack of guidance commentary as well as Steve's comments about normalization taking place over time. You know, based on the, you know, the small business originations, it looked like in kind of the exhibits, it was about $290 million, close to $300 million in the quarter. I know that on deck pre-pandemic, it's sort of been in the 550 to 650 per quarter range. Would you be willing to speculate on how long it would take to get back to those levels for the small business product, or is there still just too much uncertainty?

I mean, I think there's just way too much uncertainty to be able to answer that. I mean, you know, does the vaccine work great and the economy opens up soon, or is there a new strain of the COVID-19 virus that requires lockdowns during the summer. I mean, there's no way to know. But I think there's a couple trends that are super encouraging for us. I mean, we saw great sequential growth as we talked about throughout the call. I think I mentioned we did about $120 million of originations in small business in just December alone, which is great, showing really strong growth there. Also commented that December started off fairly strong. I mean, January 2021 started off strongly on the consumer side, which is great, even though, you know, there were some increasing lockdowns in, you know, kind of in December and into January, but we didn't see a big hit from that, which was also encouraging. And, you know, we're confident both on the small business side where we've seen a bunch of competitors go out of business. We've seen cabbage get bought. But also on the consumer side, we are very confident we have taken share through this pandemic. And we think a lot of that is permanent as, you know, the market normalizes and, you know, the customer demand, both consumer and small business increases. We think we have a lot of share in the market that we don't think has shrunk. And so we think we're really well positioned as this pandemic winds down.

Got it. Thanks. Thanks a lot, Dave.

Yep.

Again, if you have a question, please press star, then 1. The next question comes from John Hecht of Jefferies. Please go ahead.

Afternoon, guys. Appreciate the comments and congratulations on a successful year and successful acquisition. You guys talked about regrowing the kind of mix of new customers this quarter. I guess the question would be, I assume, well, I guess is there any difference in characteristics in how you're underwriting the new customers now relative to pre-pandemic environment? And is the opportunity to get new customers now a reflection of the competition in any way?

Yeah. Yeah. Great questions. I would say in terms of how to think about the credit models generally, I think they're kind of opened up to levels that we saw pre-pandemic because just customer credit performance has been so good that a lot of the restrictions we put on the models as the pandemic was unfolding in the spring have largely been removed. I would say, especially for some of our lower interest rate and higher dollar amounts, products, we do still have some extra verification going on, kind of post-credit model, and that will likely continue as unemployment claims and jobless rates remain somewhat elevated. So that is kind of a layer added on top of the credit models, but generally pretty wide open. In terms of competition, like I just mentioned, we do think we have taken share. And so we think, you know, what we're, our view of what's happening in the marketplace is that our volumes are down less than demand is down, which is encouraging. Yes, our volumes are obviously still down significantly year over year. But again, as I mentioned, everything we see tells us that's temporary. We don't, nothing from Our customer research from what we're seeing in applications from surveys tells us that either the small business market or the consumer markets are going to be any smaller post-pandemic than they were pre-pandemic. So the fact that we've taken share now, which we think is sustainable even as the pandemic ends, is very encouraging for us.

Fantastic. And are you seeing that in both the consumer and small business category? I mean, just from Amex buying Cabbage, you guys consolidating OnDeck. Is there more opportunity in either one of those, or is it fairly balanced over both?

I definitely think it's easier to see on the small business side, but we do think it's there on the consumer side as well. Obviously, the mom-pods, the brick-and-mortars on the consumer side not doing well at all And so we do think, you know, long-term, we have a structural advantage there. That's what led us to grab market share, and we'll continue post-pandemic. But, yeah, probably a bit more pronounced on the small business side, where just the business was more consolidated pre-pandemic, and there's been, I think, more dislocations during the pandemic there.

Okay, and then, David, fully appreciate your commentary that The near term is a little bit cloudy, but you think things will get back to normal over the longer term and not have changed much. If we get there, when we get there, do you guys have an anticipation for the mix between consumer and small business, or is that something you'll determine over time?

I think not only will we determine it based on the returns are, but I think sometimes the markets will determine it. I think there will be periods where small business is, for various reasons, stronger, and sometimes where consumers are stronger. Their seasonality is different, so obviously it will change throughout the year. Obviously on the consumer side, Q1 is significantly slower than Q4 on the consumer side, and that's less so. on the small business side. But from what we're seeing, small business is going to be a very large portion of our overall mix going forward. Every reason to believe it could be at least half of originations, if not more. And then, you know, kind of over the next few years, we'll see how the markets unfold. But obviously large opportunities for us in both of those spaces.

Great. Thank you guys very much.

Yep. Thanks, John.

This can, oh, I'm sorry, we have a question from John Rowan of Jannie. Please go ahead.

Hey, guys. Steve, can you maybe give us an idea? I know you said 1Q, you know, the gross profit margin could be, you know, as high as 70%. Just give us maybe an idea of how fast, I mean, we work down to that mid-50 range. I know you left it kind of open, but it makes a very big difference in the numbers whether or not we get there. you know, if we're looking at that as a realistic pin for the back half of the year, or if, you know, that's really an optimistic goal for 2022.

Thanks for the question, John. So I think beyond sort of Q1, it really will depend on, as we've said, you know, how quickly the economy recovers and demand and origination sort of get back to that pre-COVID level. So, just trying to give you some sense that when you start to see that growth return, it's not going to happen overnight. It's going to take several quarters even when you do get back to some level of growth that looks familiar. And that's why we're not providing very specific guidance beyond some line items for Q1. But hopefully that helps you sort of understand as you start to see that it will start to line up towards that longer-term 50 to 60 that we got it to.

Okay. And then as far as the cost interviews, that's – Can I just – I'm sorry, yeah.

Yeah, John, just let me add one thing to that. Just in terms of, you know, while we don't know the timing because we don't know the pace of the recovery, It could be. It is possibly realistic for the back half of the year. If you get a quarter of two of the kind of growth we saw in Q4, you know, kind of 30-ish percent sequential growth, you know, upper 20s to low 30% new customer mix, it can get back to that, you know, kind of mid-50s margin pretty quickly.

Okay. And then the... You know, the cost synergies that you're referencing, are we going to see most of that coming out of the G&A line? Because it sounds like the other lines are going to stay kind of at the 4Q run rate.

Yeah, well, most of our fixed costs, John, are in G&A. If you'll remember, operations and technology, roughly 70% of that is variable. So the answer is yes, you should see most of that come out of the G&A and some of the smaller components of ONT.

Okay, thank you very much.

Thanks, John.

This concludes our question and answer session. I would like to turn the conference back over to David Fisher for closing remarks.

Great. Thank you, operator, and thanks, everyone, for joining our call this quarter. We appreciate your time and appreciate your questions and look forward to catching up again next quarter. Have a good evening.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.