This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Good day and welcome to the Inova International first quarter 2022 earnings 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 the star then one. Please note that this event is being recorded. I would now like to turn the conference over to Cassidy Fuller, Investor Relations. Please go ahead.
spk00: Thank you, Operator, and good afternoon, everyone. Inova released results for the first quarter 2022 and in March 31st, 2022, 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 has been 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 and, as such, is subject to risks and uncertainties. Actual results may differ materially as a result from various important risk factors, including those discussed in our earnings press release and in our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Forms 8-K. 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, ANOVA reports certain financial measures that do not conform to generally accepted accounting principles. We believe that 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.
spk01: Good afternoon, everyone. Thanks for joining our call today. I will first provide an overview of our first quarter results, and then I will discuss our strategy and outlook for the remainder of 2022. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. We are pleased to start the year on such a positive note with a seasonally robust first quarter highlighted by stronger than expected demand. Originations were particularly strong in our SMB and near prime businesses. We also continue to see good credit quality across all of our businesses, well below pre-COVID levels. Net charge-offs of 7.6% in the first quarter were less than half those in the first quarter of both 2020 and 2019. Given these dynamics, we meaningfully leaned into the demand with our marketing efforts. Marketing spend was 24% of revenue in Q1. While this is higher than historic levels, a portion of the increase is due to our switch to fair value accounting, where no marketing costs are deferred to future periods resulting in higher marketing costs as a percentage of revenue and periods of strong growth. Steve will provide a bit more detail on this impact, which we've discussed in prior quarters. But more importantly, at these current levels of spend, our expected unit economics on our recent vintages remain well above our targets. But as always, we'll keep a close eye on these metrics to ensure we produce sustainable and profitable growth over the long term. As a result of the strong demand and our successful marketing, total company originations for the first quarter totaled just over $1 billion, nearly flat sequentially from a very strong Q4, and more than double originations during the first quarter of 2021, while our portfolio grew 71% to $2.2 billion in the quarter. Originations from new customers remained strong at 44% of total originations showing our ability to continue to take share across our non-prime lending businesses. As evidenced by the strong loan growth in Q1, combined with the continued strong credit metrics across our portfolio, our customer base remains resilient despite some of the turbulence in the macroeconomic environment, including concerns over inflation. A large contributor to the stability of our customer is healthy wage and job growth. Americans are experiencing the highest level of job security on record by many measures. New claims for unemployment benefits are trending at their lowest level since 1968, a sign of how few layoffs are happening in the tightest labor market in half a century. In addition, wages have grown almost 6% over the past year, far faster than the normal 2% annual growth over the last couple of decades. Low unemployment plus inflation generally mean consumers may need loans for additional capital to manage through unexpected spikes in expenses, but are earning money to pay back those loans. And overall, our customers appear to be managing well through the current rise in inflation. A recent analysis we performed on our customers' electronic base statement data has shown that while expenditures on a typical basket of goods has increased, there was enough of a cushion in discretionary spending to absorb the higher costs of things like groceries and gas. Therefore, we do not see much risk to portfolio health from inflation. This is further evident to the point that we've made many times in the past. Non-prime consumers and small businesses are very sophisticated at managing their finances, and in many cases, better than prime customers. We're also seeing strength in small businesses who've been beneficiaries of the economy reopening as the pandemic wanes. Credit performance speaks for itself in that portfolio, and we continue to monitor real-time cash flows of our SMB customers, as well as external data to monitor industries in order to adjust our pricing and exposure against the current trends and the macro environment. And a final point on inflation. Given the spreads in our average APRs over our cost of capital, small increases in the Fed funds rate will not have a meaningful impact on our profitability. As Steve will discuss in more detail, the strong performance and long-term stability of our portfolio means we continue to be able to secure low-cost financing as needed. The result is that we actually expect our overall cost of funds this year to be meaningfully lower than prior years, even with the recent and expected rise in rates. As you may recall, first quarter seasonality typically results in a sequential revenue decrease from the fourth quarter driven by tax refunds. However, as a result of the strong origination growth this year, revenue in the first quarter increased 49% year over year and 6% sequentially to $386 million. And benefiting from the strong credit performance, we produced solid bottom line returns as well with adjusted EBITDA of $106 million and adjusted EPS of $1.67, both up 4% from the fourth quarter. As we've discussed in depth, our highly diversified portfolio provides us additional protection against changes in the macroeconomic environment, changes in regulation, and changes in the competitive environment. In the first quarter, small business products represented 56% of our portfolio, while consumer accounted for 44%. Within consumer, line of credit products represented 28% of our consumer portfolio, installment products accounted for 70%, and short-term loans represented less than 2%. We continue to expect the mix between consumer and small business to fluctuate over time based on both macroeconomic factors and seasonality. In summary, we are very encouraged by the momentum in the business. We are seeing the strong demand we witnessed in Q1 continue into the first part of this quarter. And longer term, we are very confident that our highly flexible online-only business model and well-diversified portfolio will enable us to continue to capture market share. In addition, we believe that our long track record of quickly adapting to changes in market conditions and our nimble team will enable us to continue to effectively manage risk and growth. Now I would like to turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. Following Steve's remarks, we would be happy to answer any questions that you may have. Steve?
spk04: Thank you, David, and good afternoon, everyone. As David noted in his remarks, we delivered another solid quarter of top and bottom line financial performance. With our diversified product offerings, machine learning powered credit risk management capabilities, and effective marketing, allowed us to meet stronger-than-expected consumer demand with attractive unit economics. Turning to Inova's first quarter results, total company revenue for the first quarter rose 6% sequentially and increased 49% from the first quarter of 2021 to $386 million. Revenue was driven by the continued growth of total company combined loan and finance receivables balances, which on an amortized basis were $2.2 billion at the end of the first quarter, up 11% sequentially and 71% higher than the first quarter of 2021. As David noted, total company originations for the first quarter totaled just over $1 billion, nearly flat sequentially and more than double originations during the first quarter of 2021. Originations from new customers remain strong, totaling 44% of total originations, as our marketing activities remain highly effective. Small business revenue increased 15% sequentially and 75% from the first quarter of the prior year to $133 million. Small business receivables on an amortized basis totaled $1.2 billion at March 31st, a 20% sequential increase and 74% higher than the end of the first quarter of 2021. Small business originations increased to $659 million up 14% sequentially and more than double the first quarter of 2021. Revenue from our consumer businesses increased 2% sequentially and 37% from the first quarter of 2021 to $249 million. Consumer receivables on an amortized basis ended the first quarter at $963 million, up slightly from December 31st, and 69% higher than the first quarter of 2021, as consumer originations more than doubled from the prior year quarter to $382 million. Looking ahead, we expect total company revenue for the second quarter to be slightly higher sequentially. The net revenue margin for the first quarter was 70% and was at the high end of our expected range as credit quality which is the most significant driver of portfolio fair value, remains solid and in line with our expectations. The change in fair value line item included two main components, net charge-offs and changes to the portfolio's fair value, resulting from updates to key valuation inputs, including future credit loss expectations, repayment assumption, and the discount rate. I'll discuss both items in more detail. First, The total company ratio of net charge-offs as a percentage of average combined loan and finance receivables for the first quarter was 7.6%, up from 6.7% last quarter and up from 4.2% in the first quarter of 2021, but still well below the pre-pandemic rates of 16.8% and 15.4% during the first quarters of 2020 and 2019, respectively. As we've noted in previous quarters, with originations growing, less-seasoned receivables comprise a larger proportion of our portfolio, causing total company credit metrics to trend toward more typical historical levels as newer origination vintages track along their expected loss curves over time. These expectations are key inputs into our unit economics framework that has allowed us to consistently deliver solid margins and strong returns on shareholder equity. Even with nearly $3 billion in originations over the past three quarters, credit metrics for both our small business and consumer portfolios remain favorable to comparable pre-COVID periods as payment performance continues to be in line or better than our expectations. The first quarter net charge-off ratio for small business receivables was 1.9%, up from 80 basis points last quarter, but below the prior year ratio of 2.6%. and below pre-pandemic periods as we continue to see strong payment performance across all of our small business products. The consumer net charge-off ratio for the first quarter increased to 14.2% from 13.3% last quarter and 6% in the prior year quarter. With the growth in consumer receivables in recent quarters, especially from new customers, we expected this credit normalization in the consumer portfolio from unsustainably low levels. The consumer net charge-off ratio remains well below the pre-pandemic rates of 18.7% and 16.6% that we reported for the first quarters of 2020 and 2019, respectively. The fair value of the consolidated portfolio as a percentage of principal was 107% at March 31st, up from 105% at the end of 2021. The improvement in the fair value of the consolidated portfolio resulted mainly from improvement in our credit outlook, partially offset by an increase in discount rates. The percentage of total portfolio receivables past two 30 days or more was 5.2% at March 31st, down slightly from 5.3% at the end of 2021, and lower than the 7.6% ratio at the end of the first quarter a year ago. In addition to future credit loss expectations, every quarter we also evaluate discount rates and other key valuation assumptions used in our fair value models. As a result of this analysis for the first quarter, we increased the discount rates used in the fair value calculation by 50 basis points to incorporate observed market information. To summarize, the change in the fair value line item this quarter is driven primarily by relatively low levels of debt charge-offs, higher discount rates, and credit metrics and modeling at the end of the first quarter that continue to reflect a solid outlook for expected future credit performance for our rapidly growing portfolio. Looking ahead, we expect the net revenue margin for the second quarter of 2022 to range between 63% and 68%. In a stable economy with more normalized credit, and continued growth in originations, the net revenue margin should range between 55% and 65%, as less-seasoned loans become an increasingly larger proportion of the portfolio. Our future net revenue margin expectations and the degree and timing of future normalization in the ratio will depend upon the timing, speed, and mix of originations growth. Now, turning to expenses, Our operating expenses this quarter reflect higher marketing costs and strong customer demand that drove stronger than expected origination, as well as the continued scaling of our fixed costs. Total operating expenses for the first quarter, including marketing, were $168 million, or 44% of revenue, compared to $108 million, or 42% of revenue, in the first quarter of 2021. Marketing expenses totaled $93 million or 24% of revenue compared to $29 million or 11% of revenue in the first quarter of 2021. The level of marketing spend during the quarter reflects the effectiveness of our marketing programs to capture stronger than expected customer demand, especially from new customers with strong unit economics. As a reminder, under fair value accounting, We recognize marketing expenses in the period they are incurred instead of deferring a portion and recognizing them over the life of the loan, as we did prior to 2020, as many in the industry still do. Looking forward, we expect marketing expenses as a percentage of revenue to be approximately 20% next quarter, slightly higher during periods of higher seasonal demand later in the year, but will depend upon the growth and origination, especially from new customers. Operations and technology expenses for the first quarter totaled $41 million, or 11% of revenue, compared to $36 million, or 14% of revenue, in the first quarter of 2021. Given the significant variable component of this expense category, sequential increases in ONT costs should be expected in an environment where originations and receivables are growing and should range between 10% and 12% of revenues. General and administrative expenses for the first quarter totaled $35 million, or 9% of revenue, compared to $44 million, or 17% of revenue, in the first quarter of 2021. Excluding a one-time reduction to personnel-related costs, G&A expenses would have totaled approximately 10% of revenue. While there may be slight variations from quarter to quarter, We expect G&A expenses as a percentage of revenue to trim below 10% as we move through 2022 and as these expenses scale with growth. Our stock-based compensation expense was $5.4 million in the first quarter, which compares to $5.8 million in the first quarter of 2021. We expect normalized stock-based compensation expense should approximate $5.5 million per quarter going forward. Our effective tax rate was 23 percent in the first quarter, which decreased from 27 percent for the first quarter of 2021. The decrease resulted primarily from increased stock-based compensation deductions. While there may be slight variations from quarter to quarter, we expect our normalized effective tax rate to be in the mid to upper 20 percent range. We recognized adjusted earnings, a non-GAAP measure of $58 million. were $1.67 per diluted share compared to $1.61 per diluted share last quarter and $2.20 per diluted share in the first quarter of the prior year. The trailing 12-month return on average shareholder equity using adjusted earnings was 24% during the quarter compared to 45% a year ago. We ended the first quarter with $246 million of cash in marketable securities. including $132 million in unrestricted cash, and had an additional $404 million of available capacity on $1.2 billion of committed facilities. Our debt balance at the end of the quarter includes $769 million outstanding under committed facilities. During March, we added $234 million of additional funding capacity across all four of our existing consumer and small business securitization warehouse facilities. The ability to increase the capacity in each of our existing committed facilities at the same attractive terms reflects the strength of our partnerships with our bank lenders, as well as the solid credit performance of our portfolio. Our cost of funds for the first quarter was 5.9% versus 8.6% for the first quarter of 2021. And at the end of the first quarter, our marginal cost of funds ranged from 2.5% to 4.5%, depending on the facility utilized. Demonstrating our confidence in the continued strength of our business relative to our current valuation, during the first quarter, we acquired approximately 1.8 million shares at a cost of approximately $74 million. At March 31st, we had $72 million remaining under our $100 million share repurchase program. Our solid balance sheet and ample liquidity give us the flexibility to continue to deliver on our commitment to long-term shareholder value through both share repurchases and investments in our business to drive meaningful, sustainable, and profitable growth. To summarize our outlook, With continued strong customer demand and meaningful growth in originations and receivables, we expect the net revenue margin to range between 63% and 68% next quarter and to normalize in the range of 55% to 65% over time. In addition, we expect marketing expenses of approximately 20% of revenue next quarter and to be slightly higher as a percentage of revenue during periods of higher seasonal demand later in the year. We also anticipate continued scaling of our fixed costs with growth. These expectations should lead to adjusted EBITDA margins in the mid-20% range. Adjusted EPS in 2022 should benefit from continued receivables growth, solid EBITDA margins, a lower portfolio cost of funds, and a declining share count with quarterly yearly year increases in adjusted EPS. expected to resume in the second half of 2022. The degree and timing of these expected trends and any normalization will depend upon the timing, speed, and mix of originations growth. We remain confident that the demonstrated ability of our talented team to adapt to any changes in the operating environment by leveraging our resilient, direct, online-only business model, diversified product offerings, nimble machine learning powered credit risk management capabilities, and our solid balance sheet has us well positioned to continue to drive profitable growth while also effectively managing risk. And with that, we'd be happy to take your questions. Operator?
spk07: And 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're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And at this time, we'll pause momentarily for the first question. And our first question will come from David Sharf with JMP Securities. Please go ahead.
spk03: Hey, thanks, and thank you for taking my questions. Hey, Dave, kind of wondering, you know what, I'll leave kind of credit in all the macro questions to others, which obviously remain very topical. Wanted to ask you a little bit about competition, though, and particularly small business. I guess, you know, it looks like the small business platform, mostly on deck. I mean, it's well over 50% of receivables now, but it's 34% of revenue. Obviously, it carries with it. lower average yields. So, you know, the trends in those yields obviously have a pronounced impact on our revenue modeling. Can you just update us on what's going on competitively, particularly in the context of, you know, maybe four or five years ago it seemed like you couldn't turn on satellite radio without hearing a million small business lending ads? I've recently seen On Deck on TV more. But if you can provide a little bit of context on sort of competition, pricing, market share outlook for that business, that would be helpful.
spk01: Yeah, sure, David. And I'm glad you heard the On Deck ads. We've definitely been ramping them up, hopefully with a little bit more diligence than, you know, On Deck was running ads three or four years ago before. But, you know, we've definitely jumped back into kind of broader-based advertising in that business, and it's been working really well. As you can see in the first quarter results, that's something we started in kind of late Q4. And so it's been working well. I'd say competition in that business and really in our consumer business as well, it's not something that changes constantly. I mean, these are big businesses that are complex, require lots of funding, underwriting models that take years to develop, and so just not much moves quickly on the competition side. So we saw some changes kind of around the time of COVID. First cabbage selling to American Express was a pretty big change. They were a big player in the industry and are now focused below 36%. Really, I'm kind of prime, prime small business, small businesses. And then with some companies exiting kind of during COVID, couldn't make it through, you know, kind of the first part of the COVID phase. And so, you know, that provided some tailwinds for us as well. But, you know, as you look forward, you know, for a new entrant to come into the space and make a splash is something that would take many, many, many years and really no signs of that occurring. So, you know, we feel really good about our market positioning in the small business space. But adding on deck to our two existing small business brands, we are clearly the largest player, you know, kind of in the non-prime small business lending space. And, you know, as we kind of increase our advertising and our scope, you know, we certainly expect that to continue.
spk03: Okay. So it sounds like we shouldn't feel any pressure to modify our kind of APR assumptions on that product from kind of the low to mid-force.
spk01: Yeah, we are not feeling APR pressure in our small business products.
spk03: Great, great. Hey, and one follow-up. It looks like, you know, notwithstanding very strong originations in above-trend marketing, both for the first quarter, you still managed to buy back almost 5% of the company. You know, I guess based on, you know, just your sort of internal outlook for volumes for the remainder of the year, just caging in, you know, demand right now, I mean, would you anticipate kind of re-upping the authorization, or do you kind of run into some funding bottlenecks as you start to see volumes grow even more?
spk01: So we do not see any funding bottlenecks at all. As you saw during the quarter, as you heard Steve mention, we increased many, if not all, of our facilities during the quarter, the size of the facilities during the quarter, which is which is great. Even in, you know, a little bit of choppy markets, we had no problem whatsoever accessing additional capital. So we are not feeling any funding constraints. We don't expect to feel any funding constraints. And, you know, look, our stocks, you know, sold off over $10 during the quarter. And when we see stuff like that happen, we're going to continue to be opportunistic in terms of investing in it.
spk03: Got it. Great. Thank you very much.
spk07: And our next question will come from Benton Canetek with Stevens. Stevens, please go ahead.
spk05: Thanks. Good afternoon. Thanks for taking my questions. This first question, just kind of thinking about how the economics will be during kind of consumer credit normalization. And one question I've been getting from investors is the fair value mark. So I guess when... As the consumer credit normalizes and maybe also rising benchmark interest rates and rising inflation, I guess how should we think about the fair value as a percentage of principle going forward? Is there kind of a right level or maybe what a more normal level would be like going forward? Thank you.
spk04: Hey, Vincent. This is Steve. So if you take a look at consumer, I mean, we are seeing it normalize. You can see the stats over the past few quarters, and you can see how strong the fair value marks have hung in. And it gets back to the way we think about making marginal decisions. It ties in very well with the unit economics and the way we think about driving returns for the company. So there may be some variations from quarter to quarter, depending on seasonality, but I think you'll see the fair value marks settle in, you know, for consumers somewhere between 105 and 110 on average for the most part when we're sort of at a steady state growth pattern that you're used to seeing sort of looking back over time.
spk05: Okay. That's helpful. Thank you. And then another question on securitization markets. So I think your, you know, your funding was really impressive this quarter. You're able to upsize everything. And It really stands in contrast with, candidly, some other fintechs who've had trouble accessing the capital markets over the past quarter. So maybe if you could talk about in more detail sort of what you're seeing in terms of the demand for investors to fund your paper and contrast that with what you're seeing maybe with the capital markets generally. Thank you.
spk04: Yeah, sure. So, you know, we've followed, if you just sort of follow back over time, we've been very focused on continuing to diversify our liquidity stack using securitization and term markets and the revolver as well as occasionally senior notes. So we try to have that flexibility and we work very closely with our partners to make sure that we're not having to be in any one particular market at any one time. just given that they can be choppy at certain times. But we can access today, we can access those markets if we so choose to access those markets. We're not having to do anything. So that gives us the flexibility to continue to manage liquidity and provide that flexibility to do buybacks as well as grow the business, but also be able to manage our costs along the way. So you should expect us to continue to to focus on that. It's really a testament to how the portfolio is performing, right? In securitization markets, without that type of performance, you're not going to be able to do that. So it really speaks to the strength and predictability of what we've been able to accomplish over time.
spk05: Okay, great.
spk04: I appreciate it. Thank you. Sure.
spk07: And our next question will come from John Hecht with Jefferies. Please go ahead.
spk06: Afternoon, guys. Thanks very much. So you're growing nicely in all of your segments, but obviously this quarter you saw a little bit of increased growth relative to the other segments in the small business stuff. And Dave asked about competition. I'm wondering kind of from the other side, where do you think you're gaining market share? Is there a certain geography or certain types of industry or certain types of product base that you're kind of – I guess, more rapidly getting into the market, or is it just full expansion on all sides of that category?
spk01: Yeah, I think on the small business side, a lot of it's just awareness. OnDeck had been out of the market in terms of spending a lot on advertising for a while before we bought them just because of challenges in their business. And then during COVID, obviously, we weren't spending a ton of kind of broad-based marketing in the small business side. And now that we've kind of been more aggressive with the marketing spend, I think just awareness around small businesses that there are great online alternatives where they can get fast, easy access to capital to help grow their businesses and be successful is really resonating. And so I think... You know, it's small businesses just accessing capital more, so I think the market's increasing right now. Small businesses have a pretty strong appetite for growth, but also for kind of more traditional non-bank small business lenders. I think kind of the online approach with kind of the speed and ease and the transparency is really appealing to businesses.
spk06: Okay, that's helpful. And then Maybe if you could talk about, I mean, I guess this is sort of tied to the credit part of the equation, is just borrower behavior. I mean, what are small businesses borrowing for now relative to where they were a few months ago? And then consumer, I mean, we're hearing consumer borrowing, I guess the catalyst for borrowing may be changing because of inflation and so forth. I'm wondering if you're able to identify that and give us any thoughts on that.
spk01: Yeah. So I think on the small business side, it's really just for expansion as the economy continues to reopen. Some of these small businesses pulled back and really got hurt during COVID. And, you know, now, now that the economy is pretty wide open at the moment and consumers are back spending with them, they're still trying to, they're still trying to ramp back up. And so there's a lot of small business spending around that. And that's, that's driving a need for capital on the consumer side. It's, It almost feels like it's back to pre-COVID. You know, there's temporary dislocations between their income and their expenses. As I mentioned in my prepared comments today, we're not seeing a huge impact from inflation per se. We can see, you know, we have bank statement data for a large percentage of our consumer customers. Yes, we can see additional spending on food and gas as there has been some inflationary impact there, kind of offset by a slight pullback on discretionary spending. So kind of cash balances on the consumers are relatively steady from six months ago. So the spending needs, the credit needs on the consumer side is, again, back to those historic needs. Many of the consumers are living paycheck to paycheck, and when they have temporary needs, temporary dislocations between their income and their expenses, that's when they need to access credit. So I would kind of think about it as we're past COVID. We're past COVID impacts on the consumer side, and it's looking much more like 2018, 2019.
spk06: Great. I really appreciate that, guys. Thanks.
spk01: Yeah, sure. No problem.
spk07: And once again, if you would like to ask a question, please press star then 1. And our next question will come from John Rowan with Janie. Please go ahead.
spk02: Good evening, guys. I'm going to ask different versions of what was already asked. What is the remaining buyback authorization, if any?
spk04: Yeah, John, it's in the low 70s, around $73 million.
spk02: Okay. And just to kind of go back to the question on credit, so you're maintaining your guidance of 55% to 65% gross profit margin, but the fair value marks that you took, I guess, conceived a better credit outlook, right? You know, with guidance remaining unchanged, does that mean that we're just still within that range but maybe on a different side of the range? Or, you know, are there potentially more fair value positive marks to come, particularly on the consumer side where you said that the fair value would settle in between 105 and 110? It looks like you're at 105.6 for the quarter. I'm just trying to balance out what's driving that gross profit margin, whether it's, you know, the credit or whether or not there's more fair value marks to come.
spk04: Well, so, John, I think there's a couple things in there, right? So the fair value marks really are most sensitive to our outlook for credit performance over time, right? So If you go way back and look at when we originally adopted fair value, we were at, on January 1, 2020, which we were a little bit more consumer-oriented. We were at around 107, which is, you know, probably the last time we've been in sort of a normal steady-state environment. So that's kind of the way to think about what I said for consumer. And it can vary depending on our growth trajectory. So the seasonal pattern in consumer can drive a little bit of the variation in that range. but if you're continuing to see, you know, charge-offs that are in a consistent range and delinquencies that are in line with our expectations, those fair value marks are going to be in those, you know, sort of in that general vicinity. Same thing with small business. You should expect the same type. It's most sensitive to our outlook and modeling for future credit performance. So as we're adding more and those loans continue to perform, and you get into a more steady-state normalized environment, we'll settle into sort of those normal fair value ranges that you would expect. At the same time, on the net revenue margin, which I think you were also asking about, I talked about 55% to 65%. When you get to sort of that steady-state, you know, growth pattern that we expect to get to over time, you know, the consumer side of that equation is probably somewhere in the 50% to 60%. Range in the small business is probably somewhere in the low 60s to low 70% range. So I think that's how you should think about it. But at the end of the day, it's around the net revenue margin is going to be sensitive to charge-offs in the current period, which can be impacted by, you know, seasonality and the growth pattern. And fair value is going to be impacted similarly, but to a less extent and more driven by our outlook for credit over time.
spk02: All right. Thank you.
spk04: Yep.
spk07: And once again, if you would like to ask a question, please press star then one. And this will conclude our question and answer session. I'd like to turn the conference back over to David for any closing remarks.
spk01: Thanks, everybody, for joining our call today. We look forward to talking to you again next quarter. Have a great evening.
spk07: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Disclaimer