Enova International, Inc.

Hello and welcome to the ANOVA third quarter 2023 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 telephone keypad. 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 Lindsay Savarese, Investor Relations for Inova. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Inova released results for the third quarter, 2023, ended September 30, 2023, this afternoon after market close. 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 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, Innova 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.

Thanks, and good afternoon, everyone. I appreciate you joining our call today. I'll begin with an overview of our third quarter results, and then I'll discuss our strategy going forward. 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're pleased to produce another strong quarter with record originations and revenue driven by solid demand and stable credit. The skillful execution of our team combined with our world-class machine learning analytics and technology, has allowed us to continue to do well in the current macroeconomic environment. While there is a lot of uncertainty in the economy today, both internal and external data lead us to believe that both our consumer and small business customers are navigating it well. Inflation continues to moderate, while the labor market and wage growth continue to be very strong. And while prime and super prime borrowers are facing higher interest expense due to the increase in the Fed funds rate, we have not raised our pricing. As a result, we generated more than $1 billion in originations for the eighth straight quarter, driven by growth in both our consumer and small business products, even as we balance growth and credit during this uncertain economic environment. Originations grew 13% sequentially to over $1.2 billion as we were moderately more aggressive with originations during the third quarter, especially in our consumer businesses where Q3 consumer originations were up 19% sequentially. We also generated strong revenue growth with revenue of $551 million, equating to 21% year-over-year and 10% sequential growth. Adjusted EBITDA increased 5% year-over-year, but was down 5% sequentially. And adjusted EPS was down 14% year-over-year and 13% sequentially, lagging our expectations for the quarter. There were two primary drivers underlying the lower-than-expected EPS in Q3. First, as I mentioned, we continued to lean into the solid demand and good credit metrics with increased marketing spend. And our marketing activities continue to be efficient, with marketing at 21% of revenue compared to 22% of revenue in Q3 of last year. While marketing as a percentage of revenue declined year over year, it was slightly elevated compared to our expectations. Given the stronger than anticipated consumer demand we were seeing during Q3, we made the decision to increase our marketing spend to capture this demand at Attractive Unit Economics. Marketing spend is one of the levers we use intra-quarter, and we do so on a daily and weekly basis. As is evident from the strong origination growth we generated in the quarter, this was largely successful. However, much of the origination growth came late in the quarter, resulting in us incurring the additional marketing expense but not generating much incremental revenue in the period to offset it. However, these additional loans should drive additional revenue and income over the next few quarters. The second driver of the lower than expected profitability in Q3 was continued credit normalization in our SMB portfolio. Let me be clear, credit performance in that portfolio as a whole remains good. However, As I mentioned, in each of the last two quarters, we did see slightly higher than expected defaults in vintages from the second half of 2022. As you would expect, our underwriting models adjusted based on this data, and vintages since January of this year are back in line with our expectations. But since there is a nine to 12 month emergence period for charge-offs in our small business products, charge-offs from those second half 2022 vintages were at their peak in Q3 of this year. We expected this and included in our forecast, but we're just off a bit in the timing as we thought a bit more would come in early Q4 and not late Q3. The upside of this is that we now expect lower S&V charge-offs in Q4, particularly given that early stage delinquencies and vintages in this portfolio this year are well below those we saw in the late 2022 vintages. I also think that it's important to point out that while charge-offs from those 2022 S&D vintages were higher than our expectation, those vintages still generated solid ROEs above our cost of capital. So to be clear, Innovo overall is in great shape, and we're feeling good about Q4 and next year. Our strong growth and solid credit metrics position us well for future success. We just misforecasted these two items this quarter. We've been very consistent with our forecasting, guidance, and results over the last several years, and we believe this quarter will prove to be an aberration. In addition, we continue to demonstrate the importance of having a diversified portfolio. As we discussed in the past, this diversification enables us to lean into products with the strongest unit economics. That's further resiliency toward balanced approach to growth. In the third quarter, our small business products represented 61% of our total portfolio and consumer was 39%, roughly in line with Q3 of last year. Outside of our core products, we're now producing very strong growth in Brazil, after a few years of adapting to changes in the banking regulations there. In Q3, we generated record originations, which were almost 300% higher than Q3 of last year. While still a small business for us, we are excited about the potential for this business going forward. Before I wrap up, I'd like to spend a few moments talking about our progress in unlocking shareholder value. We've been very thoughtful about building a strong balance sheet at the end of the quarter with nearly $1 billion in excess liquidity, which we believe gives us significant flexibility to accomplish this. As I mentioned on our earnings call last quarter, while we were looking at a number of possible alternatives, given the current economic environment and high interest rates, our near-term focus is to return capital to our shareholders through opportunistic stock buybacks. As Steve will discuss in more detail, we are pleased to successfully complete the consent solicitation on our 2025 senior notes, which increased the amount of stock we were permitted to buy back under the terms of those notes. Following the successful consent solicitation, our Board of Directors has authorized a new $300 million share repurchase program, which is the largest in our history and equates to approximately 20% of our outstanding shares at current prices. Overall, we believe these actions will help us on our path to close the disconnect between our business fundamentals and our current valuation. Looking ahead, we remain committed to repurchasing shares and bonds, but also continue to explore additional options to further unlock shareholder value. In sum, our flexible online-only business model, nimble machine learning-powered credit risk management capabilities, diversify product offerings, and solid balance sheet. Position as well to continue to drive profitable growth, effectively manage risk, and further unlock shareholder value. With that, I would like to turn the call over to Steve. We'll discuss our financial results and outlook in more detail. And following Steve's remarks, we'll be happy to answer any questions you may have. Steve?