Enova International, Inc.

Good afternoon, and welcome to the Inova International Fourth Quarter 2023 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 telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Lindsay Severese, Investor Relations for Inova. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Inova released results for the fourth quarter and full year of 2023 and did December 31, 2023, this afternoon after 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.enova.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 Forms 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, 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.

Thanks, and good afternoon, everyone. I appreciate you joining our call today. I'll begin with an overview of our fourth quarter results, and then I'll discuss our strategy going forward. After that, I'll turn the call over to our CFO, Steve Cunningham, who will discuss our financial results and outlook in more detail. We are pleased to end the year with another strong quarter of solid revenue and profitable growth. Our results are driven by the strength of our talented team, diversified product offerings, and world-class machine learning analytics and technology. A combination of these strengths has enabled us to successfully manage the uncertain macroeconomic environment we face in 2023. Growing origination, while managing credit to acceptable levels that generate unit economics above our targets. Our unwavering commitment to this balanced approach to growth has allowed us to take share from our competitors and both our consumer and SMB business while effectively managing risk. Turning to the fourth quarter, we generated over $1.4 billion in origination, our ninth consecutive quarter of over $1 billion. As a result, our combined loan and finance receivables increased 16% year-over-year to a record $3.3 billion, driven by a 23% year-over-year increase and 13% sequential increase in origination. Strong demand and solid credit performance enabled us to be more aggressive with our marketing, particularly in our SMB business, which had record originations in Q4. As you have heard us discuss over the last year, we had a few 2022 vintages in our SMB portfolio where credit was worse than we anticipated. To be clear, as we previously explained, we still generated positive unit economics in those vintages, albeit below our targets. To address this, we slowed growth in our SMB portfolio during the first three quarters of 2023 to give our machine learning models time to adjust. As these vintages matured, and led to higher charge-offs than expected in Q3 of 2023, which was one of the two factors that resulted in us missing consensus EPS last quarter for the first time in many years. But we were clear at the time that the worse than expected credit was limited to those 2022 vintages and would not be a continuing drag. As expected, we saw a major improvement in our SMB net charge-off ratio in the fourth quarter, which dropped to 4.8% from 5.5% in the third quarter. And despite the higher ROE targets we had in place during the year, we were able to increase SMB originations 19% sequentially and 12% year-over-year to a record $930 million in Q4. We felt confident to do this because the vintages since those in late 22 were all performing well within our expectations. The other factor that led to the Q3 miss was more aggressive marketing spend in our consumer business in September. This marketing generated good results, but because the spend was at the end of the quarter, those results were largely not seen until Q4. During our Q3 earnings call, we emphasized that these two issues were temporary and would not negatively impact future results. As you can see from our strong Q4 originations and solid credit, we proved to be correct in this regard, which clearly demonstrates the ability of our team and world-class machine learning algorithms to quickly address credit risk and opportunities to drive strong long-term performance. Similar to the last several quarters, our diversified portfolio continues to drive our growth. Small business products represented 62% of our portfolio, up from 61% last quarter, and S&B revenue increased 9% year-over-year and 8% sequentially. Consumer products represented 38% of our total portfolio, while consumer revenue increased 27% year-over-year and 5% sequentially. As I mentioned, credit quality across our portfolio remains solid. the total company net charge-offs as a percentage of average combined loan and finance receivable were 9.7% in Q4 compared to 9.4% last quarter. Notably, net charge-offs remain well below pre-COVID levels of 15.6% in Q4 of 2019 and 16.1% in Q4 of 2018 from a combination of mixed shift and good credit management. Revenue in the fourth quarter of 584 million increased 20% year-over-year and 6% sequentially. Adjusted EBITDA of 130 million increased 9% year-over-year and 8% sequentially. And adjusted EPS of $1.83 increased 4% year-over-year and 22% sequentially. As Steve will discuss in more detail, The reason EPS growth lagged revenue growth was almost entirely because of higher interest expense as a result of the 500 basis points increase in the Fed funds rate over the last 18 months. If rates come down over the next couple of years, as is now expected, this will result in a nice tailwind for our future earnings. Overall, it was a great quarter as demonstrated by our industry-leading performance. This further reinforces our belief that there's still a disconnect between our business fundamentals and our current valuation. As I've discussed on our prior few calls, we remain committed to unlocking further shareholder value. In December, we successfully completed our most recent bond issuance of $400 million in senior notes. This bond issuance, combined with the retirement of our 2024 senior notes in early January and the successful Consent solicitation on our 2025 notes and Q3 increased the amount of stock we were permitted to buy back under the terms of those notes. As Steve will discuss in more detail, this enabled us to buy back significantly higher levels of shares in the fourth quarter, and we remained committed to returning capital to our shareholders going forward while still maintaining significant liquidity to generate attractive growth. Of course, we will also continue to explore a number of additional alternatives that will match shareholder value and our solid liquidity position and proven ability to access the capital markets gives us the flexibility to continue to deliver on this commitment. Before I wrap up, I'd like to take a few moments to discuss our strategy and outlook for 2024. We're encouraged by the strong momentum and good credit across our portfolio as we enter the year. As our Q4 results show, and based on internal and external data, both our small business and consumer customers are on solid footing. On a macro level, the U.S. has the strongest economy of any developed nation, and the much predicted 2023 recession failed to appear. Our customers continue to benefit from job growth, low unemployment rates, easing inflation, and rising real wages. Looking ahead, while still very early in the year, we're off to a good start with strong origination volumes across our products. There is no arguing that uncertainty remains in the macro environment, but we are confident in our strategy and optimistic about the opportunity ahead of us. While it appears that consumer and small business confidence in the economy is improving, we believe our business is resilient no matter the economic environment. As we discussed previously, in some ways, our consumer customers are always in a recession. They are experienced in living paycheck to paycheck and sophisticated at managing variabilities in their finances. As a result, recessions tend to have less of an impact on our non-prime customers than on prime borrowers. For our SMB business, we lend to a very diversified mix of established small businesses, including more than 900 different industries. We also continue to benefit from strong brand presence and low levels of competition. All of these factors, combined with our sophisticated recession monitoring framework, give us confidence in our strategy and our ability to continue to grow our share in the non-prime credit market. In sum, we've demonstrated over the years our ability to operate well in a variety of economic environments. Our performance in 2023 was in continuation of that success. made possible by the world-class team we have built at Inova. This led Inova to rank among computer world's best places to work for the 11th consecutive year. I want to thank the entire team for the challenging and impactful work they do to help hardworking people get access to fast, trustworthy credit. While our greatest asset is our people, our flexible online-only business model, nimble machine learning-powered credit risk management capabilities diversified product offerings, and solid balance sheet are key to our success and position us well to continue to drive profitable growth, effectively manage risk, and further unlock shareholder value. With that, I'd like to turn the call over to Steve, who will 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.