Enova International, Inc.

Good day, and welcome to the ANOVA International Third Quarter 2024 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 Cassidy Fuller, Investor Relations. Please go ahead. Thank you, Operator, and good afternoon, everyone. Inova released results for the third quarter 2024 and it's September 30th, 2024, 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 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. 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 outlook 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 stable credit and solid growth across the portfolio. Our experienced team, world-class machine learning algorithms and technology, and diversified product offerings have enabled us to maintain strong performance and swiftly adapt to changing macroeconomic conditions. As a result, we again generated annual growth above 25% in revenue, originations, adjusted EBITDA, and adjusted EPS in the quarter. In Q3, originations increased 28% year-over-year and 15% sequentially to $1.6 billion. Notably, for the first time in our history, we originated over $1 billion in small business loans up 33% year-over-year and 14% sequentially, while consumer originations increased to a record $569 million, up 19% year-over-year and 16% sequentially. As a result, our combined loan and finance receivables increased 23% year-over-year to a record $3.8 billion. Small business products represented 62% of the portfolio, and consumer was 38%. We generated revenue of $690 million in the quarter, an increase of 25% year-over-year and 10% sequentially. Our profitability metrics grew even faster, capitalizing on our strong operating leverage and diligent credit management and cost efficiency. Adjusted EBITDA increased 42% year-over-year and adjusted EPS increased 63%. Our growth continues to be driven by our diversified portfolio and efficient marketing. SMB revenue increased 38% year-over-year and 7% sequentially to a record $269 million. while our consumer revenue increased 18% year-over-year and 12% sequentially to a record $411 million. Marketing expense was 20% of our total revenue in line with our expectations and down slightly compared to Q3 of last year. As I mentioned, credit quality remains strong across our entire portfolio, and we are encouraged by the solid results reported this year across the portfolio combined with the stability and strength we have seen in the performance of our customers. Total company net charge-offs as a percentage of average combined loan and finance receivables decreased to 8.4% in Q3 compared to 9.4% in the third quarter of last year. We've built a long track record of generating strong growth with consistent credit across varying economic conditions, And we believe the current macroeconomic environment is conducive for us to continue generating these results. While commentators continue to offer differing opinions on the health of the macroeconomic environment, our data demonstrates that both our consumer and small business customers are performing well. From a monetary policy perspective, the Fed now seems committed to lowering rates over the next couple of years, And as Steve will discuss, this creates a significant tailwind for further net income and EPS growth. As we've discussed previously, demand and credit in our consumer business are driven largely by jobs and wage growth. The latest jobs report once again demonstrated that the labor market remains strong, driven by the largest monthly increase in employment in 12 months, combined with increasing wages. Further, the strength in the labor market is concentrated in the same demographic as our target customers. As you know, we focus on customers who are underserved by mainstream financial institutions that view them as too risky and too difficult to underrate. While our experience and superior analytics have enabled us to excel in this segment of the market, and we have demonstrated that these customers can be very predictable with higher yields relative to prime customers, providing more margin for fluctuations in credit performance. On the SMB side, as I mentioned, we had our first quarter of over $1 billion in originations. The main drivers of this growth are consumer spending and confidence from small business owners in this current economy. In conjunction with Oculus, we recently released the third iteration of our Small Business Cash Flow Trend Report, which offers key insights into small business cash flow trends, inflation challenges, and growth opportunities. In line with previous findings, our research shows that small businesses feel increasingly optimistic over the next 12 months as they successfully navigate challenges like inflation and cash flow management. The survey also found that small businesses are becoming less reliant on traditional financial services, such as banks, as nearly 75% of small businesses thought out alternative lenders as their primary funding option. And supporting our own research, the National Federation of Independent Businesses announced that its Small Business Optimism Index climbed one point to 91.5 in September, the highest level in almost a year. Before closing, I would like to take a moment to discuss our progress in unlocking shareholder value. For the past couple of years, we have emphasized the disconnect between our valuation and our strong and consistent results, solid balance sheet, and business fundamentals. Reflecting our continued strong results, we are pleased to have seen our valuation increase this year better reflecting the strengths of our business. That being said, we are producing over 25% year-over-year growth across all key financial metrics. Yet our PE ratio on 2025 estimates is only 8.2 times, resulting in a PEG ratio of only 0.4 as of the end of Q3. As Steve will discuss, in the fourth quarter, which we're almost a third of the way through, We expect to again generate year-over-year growth in originations, revenue, and EPS in excess of 20%. Given this disconnect, we remain committed to opportunistic stock buybacks as our primary vehicle to unlock shareholder value. And we are very well positioned to do so. We've built a solid balance sheet as evidenced by the nearly $1.2 billion in liquidity at the end of Q3. Additionally, we extended the maturities on our senior debt from 2025 to 2029 through our recent issuance of $500 million of senior unsecured notes. These actions easily support the new $300 million share of repurchase program we announced in August, while also providing ample capital for growth and originations. Overall, we are pleased to have delivered another strong quarter with solid results across our business. We are confident in our ability to continue to generate meaningful growth, supported by stable credit and significant operating leverage both this year and beyond. Our diversified product offerings, world-class machine learning risk management algorithms, and nimble online-only model continue to meet our customers' needs. And both internal and external data demonstrate that our customers remain on solid footing. That being said, we are mindful that the macroeconomic environment can change, and so we are staying committed to a balanced approach to growing our business while managing risk. As we have discussed, this balanced approach is grounded in our extremely sophisticated unit economics framework. And so while we could certainly be growing faster, given our strong competitive position and stable credit, we believe we are positioned well for long-term success. With that, I would 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. Steve?

Thank you, David, and good afternoon, everyone. Our financial performance this quarter reflects the solid footing of our consumer and small business customers and the powerful combination of our diversified product offerings, scalable operating model, world-class risk management capabilities, and balance sheet flexibility. The result is our continued ability to deliver strong top and bottom line results that are in line or better than our expectations. Turning to our third quarter results, Total company revenue of $690 million increased 25% from the third quarter of 2023, as total company combined loan and finance receivables on an amortized basis increased 23% from the end of the third quarter of last year to $3.8 billion at September 30th. Total company originations during the third quarter rose 28% from the third quarter of 2023 to just over $1.6 billion. Revenue from small business lending increased 38% from the third quarter of 2023 to $269 million as small business receivables on an amortized basis ended the quarter at $2.4 billion, or 27% higher than the end of the third quarter of last year. Small business originations rose 33% year over year, and as David noted, exceeded $1 billion in a quarter for the first time in company history. Revenue from our consumer businesses increased 18% from the third quarter of 2023 to $411 million as consumer receivables on an amortized basis. Ended the third quarter at $1.4 billion, or 18% higher than the end of the third quarter of 2023. Consumer originations grew 19% from the third quarter of 2023 to $569 million. For the fourth quarter, we expect total company revenue to increase around 5% sequentially, resulting in year-over-year growth in fourth quarter consolidated revenue in excess of 20%. This expectation will depend upon the level, timing, and mix of originations growth during the quarter. Now turning to credit, which is the most significant driver of net revenue and portfolio fair value. As a reminder, consumer credit losses typically follow the sequential pattern of portfolio growth through the year, peaking in the fourth quarter and reaching their lowest point during the second quarter. The consolidated net revenue margin of 58% for the third quarter was at the upper end of our expectations and reflects strong credit trends. Credit metrics in the third quarter reflected our typical consumer seasonality and solid small business performance while improving from a year ago. The total company ratio of net charge-offs as a percentage of average combined loan and finance receivables increased sequentially to 8.4% from 7.7% last quarter, but declined from 9.4% during the third quarter of 2023, as the third quarter net charge-off ratios for both the small business and consumer portfolios were lower compared to a year ago. As discussed on our first quarter call, we identified opportunities within our S&B business that we believe would support continued strong growth with improved unit economics. Continue to see the benefits of this strategy in the third quarter as small business originations growth was strong, small business revenue yield continued to move higher sequentially, and the small business quarterly net charge offer ratio remained on the low end of our expected range. Expectations for our future credit performance remain stable as the consolidated consumer and small business fair value premiums were all largely unchanged from last quarter. Looking ahead, the aforementioned typical consumer credit seasonality and stable small business credit performance during the fourth quarter did result in a total company net revenue margin for the fourth quarter of 2024 in the range of 55 to 58 percent. This expectation will depend upon portfolio payment performance and the level of timing and mix of originations growth during the fourth quarter. Now turning to expenses, total operating expenses for the third quarter, including marketing, were 34% of revenue compared to 37% of revenue in the third quarter of 2023. As we continue to see the benefits of our efficient marketing activities, the leverage inherent in our online-only model and thoughtful expense management. Third quarter marketing spend remained efficient and was in line with our expectations. Marketing costs increased to $141 million or 20% of revenue compared to $117 million or 21% of revenue in the third quarter of 2023. We expect marketing expenses will continue to be around 20% of revenue for the fourth quarter, but will depend upon the growth and mix of originations. Operations and technology expenses for the third quarter increased to $57 million or 8% of revenue compared to $52 million, or 9% of revenue in the third quarter of 2023, driven by growth in receivables and originations over the past year. 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. It should range between 8% and 9% of total revenue. Our fixed costs continue to reflect our focus on operating efficiency and thoughtful expense management. General and administrative expenses for the third quarter increased to $39 million, or 6% of revenue, and $38 million, or 7% of revenue, in the third quarter of 2023. While there may be slight variations from quarter to quarter, we expect G&A expenses in the near term will be around 6% of total revenue. Our balance sheet and liquidity position remain strong and give us the financial flexibility to successfully navigate a range of operating environments while delivering on our commitment to drive long-term shareholder value through both continued investments in our business and share repurchases. We ended the quarter with $1.2 billion of liquidity, including $262 million of cash in marketable securities and $925 million of available capacity on debt facilities. Our stable financial and credit performance has allowed us to consistently access funding from a diversified group of lenders and fixed-income investors. Since our last earnings call, we completed five financing transactions totaling $2.1 billion, including $1.2 billion of new proceeds with efficient and cost-effective terms. Issuances included an unsecured senior note, small business term securitization, the renewal and upsize of a warehouse secured by small business receivables, the renewal and upsize of a warehouse secured by consumer installment receivables, and the upsize of our secured corporate revolver. During the third quarter, we acquired 309,000 shares at a cost of $23 million. We started the fourth quarter with share repurchase capacity of approximately $68 million available under our senior note covenant. Our cost of funds for the third quarter was 9.6%, or 24 basis points higher than the second quarter. With the Federal Reserve's recent 50 basis point reduction in the Fed funds rate and expectations for continued reductions over the near term, we expect that our quarterly cost of funds is likely peaked. Additionally, the impact of expected lower market rates in the future could create longer-term tailwinds for Inova's profitability. Given the mix of our fixed and floating rate debt, We expect every 25 basis point reduction in SOFR to result in a benefit to adjusted EPS of approximately 10 cents over the 12 months following a rate reduction. During the quarter, we recorded a one-time non-cash and non-operational impairment charge of $17 million related to the write-off of our interest in a company to which, during 2021, we contributed the net assets of ONDAC's legacy platform as a service business. formerly known as ODX. Finally, we continue to deliver solid profitability this quarter. Adjusted EBITDA, a non-GAAP measure increased 42% from a year ago to $172 million. And adjusted EPS, a non-GAAP measure increased 63% from a year ago to $2.45 per diluted share. To wrap up, let me summarize our near-term expectations. For the fourth quarter of 2024, we would expect consolidated revenue to increase around 5% sequentially, or more than 20% compared to the fourth quarter of 2023, with a net revenue margin between 55% and 58%. Additionally, we expect marketing and G&A expenses to be around 20% and 6% of revenue, respectively, with O&T costs of 8% to 9% of revenue. These expectations should result in an increase in adjusted EPS of 25% or more compared to the fourth quarter of 2023. Our expectations for the remainder of this year will depend upon the macroeconomic environment and the resulting impact on demand, customer payment rates, and the level, timing, and mix of originations growth. We remain confident in our ability to generate meaningful financial results for the remainder of 2024 and beyond as we leverage our diversified product offerings, world-class machine learning risk management algorithms, and nimble online-only models to continue to meet customer needs while creating significant value for our shareholders. In addition, our solid balance sheet should provide tailwinds to our future profitability in a falling rate environment while enabling our ability to efficiently fund growth and supporting our ability to return significant capital to shareholders through share repurchases. And with that, we'd be happy to take your questions. Operator?