Enova International, Inc.

Hello and welcome to the ANOVA International First Quarter 2025 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. Please note, this event is being recorded. I would now like to turn the conference over to Lindsay Sathery, Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. The NOVA release results for the first quarter of 2025 ended March 31, 2025, 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 Form 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'm pleased to report that we once again delivered strong results that met or exceeded our expectations, driven by healthy demand and stable credit across our product range. Quarter after quarter, we continue to demonstrate that our flexible online-only business model, well-diversified portfolio, world-class technology, proprietary analytics, and experienced team can deliver consistent results. Despite the recent volatility in the stock market and concerns about the impact of increased tariffs, our customer base remains stable as the macro trends for these customers are positive. Both internal and external data show that our non-prime customers remain on solid footing with a healthy job market and strong wage growth particularly at lower income levels. And strong consumer spending benefits small and mid-sized businesses, as demonstrated by the ongoing strength in our SMB portfolio. While the impact the government's tariff policy may have on the U.S. economy is difficult to predict, we remain confident in NOVA's future and our ability to navigate a wide range of operating environments. We are monitoring both demand and portfolio performance even more closely than normal and continue to see the level of demand we would expect while payment performance remains in line or better than our expectations. Looking forward, the high payment frequency and relatively short duration of our portfolio provides fast feedback that we incorporate into ongoing decision-making, which positions us well to react immediately to changes in credit performance. Longer term, we continue to believe we have the right strategy in place to execute on our mission of helping hardworking people get access to fast, trustworthy credit while continuing to produce sustainable and profitable growth. We remain committed to our balanced approach, which has led to predictable outcomes and our strong track record of consistency. Our diversified product offerings provide resiliency against an outsized impact to any one portion of our customer base, while the short duration of our portfolio and rapid loss emergence ensures that we can quickly readjust our book to the current environment. As a result, we are confident that these advantages combined with 20 plus years of experience navigating a myriad of macroeconomic environments gives us a strong foundation to build on this success. Now turning to the quarter, we once again generated greater than 20% year-over-year growth in revenue, originations, and adjusted EPS as our diversified online-only business model continues to attract customers and generate significant operating leverage. First quarter originations increased 26% year-over-year and 1% sequentially to $1.7 billion. As a result of the strong origination growth, our combined loan and finance receivables increased 20% year-over-year to a record $4.1 billion. Small business products represented 65% of the total portfolio and consumer was 35%. We generated revenue of $746 million in the first quarter, an increase of 22% year-over-year and 2% sequentially. SMB revenue increased 29% year-over-year and 7% sequentially to a record $305 million. Our consumer revenue increased to $431 million, 18% higher than a year ago, and down a less-than-expected 1% sequentially off a strong Q4. Profitability continued to grow even faster. Adjusted EPS increased 56% year-over-year, driven by the operating leverage inherent in our online-only business, a lower cost of funds, and efficient marketing. Marketing expense was 19% of our total revenue, in line with our expectations, and compared to 18% in Q1 of 2024. As I've mentioned, credit quality continues to be good across the portfolio due to the stability we have seen in the performance of our customers. The consolidated net charge-off ratio for the quarter declined to 8.6 percent from 8.9 percent last quarter, largely driven by a drop in our consumer business. Demand and credit in our consumer business continues to be powered by a strong labor market as rising wages and historically low levels of unemployment continue to benefit our customers. The latest job reports highlights a resilient labor market. In March, the U.S. added 228,000 jobs, the fourth highest month for the private payroll growth in the past two years, which was well ahead of expectations. In addition, new jobless claims have repeatedly come in below expectations. Also, as a reminder, We've successfully navigated periods over the last two decades where the unemployment rate has been more than double where it is today. Over this period, we've helped almost 10 million customers get access to fast, trustworthy credit. Further, as we've said many times before, in many ways, our customers are always in a recession. These hardworking people are experiencing living paycheck to paycheck, and sophisticated in 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. Turning to our SMB business, for the third quarter in a row, we produced over $1 billion in originations. We continue to see solid demand and credit across this portfolio as well. and we continue to see more businesses proactively seeking out alternative lenders like us. We're proud to serve as a trusted partner when these businesses need capital to fuel their growth plans. Our SMB portfolio is intentionally well diversified across states, across industries, across product types, and across the credit spectrum. We have advanced algorithms that are constantly monitoring performance across all of those variables. As I mentioned above, the consumer is still in a strong position, which is an important driver to the success of small businesses. For example, in March, retail sales increased 1.4 percent, topping consensus. While it's difficult to predict how tariffs will impact SMBs and the overall economy, because of the diversity, size, and industry of our borrowers, we would not expect a substantial impact to our portfolio. However, with all the fluctuations in the market and in any part of the cycle, there are always risks and opportunities. We have a nimble model and short duration products where we can rotate in and out of industries quickly. Our analytics are focused on ensuring that we are underwriting into the right industries at the right time and making the right risk adjusted decisions. And as you can see through our consistent results over the years, We have a very talented team that knows how to manage through changes in the environment. Before I wrap up, I'd like to take a few moments to discuss our strategy and outlook for 2025 and beyond. We are encouraged by the continued strong momentum and good credit performance across our portfolio. We're optimistic that our customers will manage the current economic landscape successfully. But in any event, we have the technology and people in place to ensure that we continue to produce sustainable and profitable growth. And we are confident that our focused growth strategy will continue to deliver value for both our customers and our shareholders. In addition, our solid balance sheet with more than $1.1 billion in liquidity provides us with the financial flexibility to successfully navigate a range of operating environments and to continue to deliver on our commitment to driving long-term shareholder value through both continued investments in our business as well as share repurchases. We look forward to updating you on our progress throughout the year. With that, I'd like to turn the call over to Steve Cunningham, our CFO. 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?

Thank you, David, and good afternoon, everyone. As David noted in his remarks, we're pleased to deliver another solid quarter of top and bottom line financial performance. We started 2025 with strong growth and originations, receivables and revenue, along with solid credit, operating efficiency, and balance sheet flexibility. Turning to our first quarter results, total company revenue of $746 million increased 22% from the first quarter of 2024, slightly exceeding our expectations, driven by 20% year-over-year growth in total company combined loan and finance receivables balances on an amortized basis. Total company originations during the first quarter rose 26% from the first quarter of 2024 to just over $1.7 billion. Revenue from small business lending increased 29% from the first quarter of 2024 to $305 million, as small business receivables on an amortized basis ended the quarter at $2.7 billion or 20% higher than the end of the first quarter of 2024. Small business originations rose 27% year over year to $1.2 billion. Revenue from our consumer businesses increased 18% from the first quarter of 2024 to $431 million as consumer receivables on an amortized basis ended the first quarter at $1.5 billion, or 20% higher than the end of the first quarter of 2024. Consumer originations grew 22% from the first quarter of 2024 to $508 million. For the second quarter of 2025, we expect total company revenue to be flat to slightly higher sequentially, resulting in year-over-year revenue growth of around 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. In line with our expectations, the consolidated net revenue margin was 57% for the first quarter, unchanged from last quarter and the first quarter of 2024, and reflects continued solid credit performance. The consolidated net charge-off ratio for the first quarter of 8.6% is also consistent with the first quarter of 2024. Importantly, we expect future credit performance to remain stable as reflected by the year-over-year improvement in the consolidated 30-plus delinquency rate, as well as the stability in the consolidated fair value premium. Small business credit performance remains strong. Compared to the first quarter of 2024, Consistency in the net charge-off ratio, the net revenue margin, fair value premium, and improvement in the 30-plus delinquency rate all reflect expected stable credit performance. Consumer credit also remains solid as our credit metrics remain within historical ranges and reflect typical seasonal patterns in recent mix shifts, which I'll discuss in a moment. Consumer net revenue margin for the first quarter was 50%. unchanged from the year-ago quarter. As is typical for the first quarter, the consumer net charge-off ratio declined sequentially 90 basis points to 15.2%, and is slightly higher than the first quarter of 2024, mainly from mixed shifts in our recent originations. As I mentioned late last year, we saw strong demand in our cash net consumer business as a result of some product changes that improved the customer application experience. That demand continued through early this year as we thoughtfully took market share in that customer segment, resulting in a higher percentage of new customers to Lenovo. As you know, attracting new customers to our company is important to our long-term success as many new customers become repeat customers that deliver strong lifetime economics as they utilize our market-leading products offered across a wider spectrum of the non-prime segment than many of our competitors. As a result of this mix shift in recent cash net vintages and the recent strong consumer demand overall, the consumer 30 plus delinquency ratio was flat sequentially and slightly higher than the year ago quarter, which is consistent with our expectations given the influence of those recent vintages as they season normally. Our unit economics framework considers the lifetime return on equity of our vintages, which incorporates not just the level of credit risk, but the pricing for the risk being taken. This risk return profile, will be reflected in the level and trend of our fair value premiums. At the end of the first quarter, the consumer portfolio fair value premium remains steady at levels we've seen over the past two years, indicating a stable risk-return profile and strong unit economics for our recent consumer originations. Looking ahead, we expect the total company net revenue margin for the second quarter of 2025 to be in the 55% to 60% range. This expectation will depend upon portfolio payment performance and the level, timing, and mix of originations growth during the second quarter. Now turning to expenses. Total operating expenses for the first quarter, including marketing, were 33% of revenue compared to 34% of revenue in the first quarter of 2024, as we continue to see the benefits of our efficient marketing activities, the leverage inherent in our online-only model, and thoughtful expense management. Efficient first quarter marketing spend drove higher than expected originations and was in line with our guidance range for the quarter. Marketing costs increased slightly to 19% of revenue, or $139 million, compared to 18% of revenue, or $111 million in the first quarter of 2024. We expect marketing expenses to be around 20% of revenue for the second quarter, but will depend upon the growth and mix of originations. Operations and technology expenses for the first quarter declined to 8 percent of revenue, or $62 million, compared to 9 percent of revenue, or $54 million, in the first quarter of 2024, driven by growth in receivables and originations over the past year. Given the significant variable component of this expense category, sequential increases in annuity costs, it'd be expected in an environment where originations and receivables are growing and should be around 8.5% of total revenue. Our fixed costs continue to scale as we focus on operating efficiency and thoughtful expense management. General and administrative expenses for the first quarter increased to $42 million or 6% of revenue versus $40 million or 7% of revenue in the first quarter of 2024. While there may be slight variations from quarter to quarter, We expect G&A expenses in the near term will range around 6 percent 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 first quarter with $1.1 billion of liquidity including $318 million of cash in marketable securities and $810 million of available capacity on debt facilities. Our cost of funds declined to 8.9%, or 23 basis points lower than the fourth quarter, primarily as a result of strong execution on recent financing transactions and the impact of the first full quarter of a lower silver since the Federal Reserve's 100 basis point reduction in the Fed funds rate late last year. During the first quarter, we acquired 617,000 shares at a cost of $63 million. And we started the second quarter with share repurchase capacity of approximately $57 million available under our senior no covenants. Given the recent volatility in the stock market and in the share prices of financial companies, including Inova, we used nearly all of our available buyback capacity during the first quarter. If the recent reduction in our valuation persists through the second quarter from this ongoing volatility, we intend to use most, if not all of our second quarter capacity to opportunistically repurchase shares. Our effective tax rate for the first quarter was 20% compared to 25% for the first quarter of 2024. The decline was driven by tax benefits on stock compensation from share price increases. a decrease in interest expense accrued on our uncertain tax position reserves, and favorable state rate changes. While there may be variations from quarter to quarter, we expect our full-year effective tax rate to be in the mid-20% range for 2025. Finally, we continue to deliver solid profitability this quarter, compared to the first quarter of 2024, Adjusted EPS, a non-GAAP measure, increased 56 percent to $2.98 per diluted share. To wrap up, let me summarize our near-term expectations. For the second quarter, we expect consolidated revenue growth to be flat to slightly higher sequentially, with a net revenue margin in the 55 to 60 percent range. Additionally, we expect marketing expenses to be around 20 percent of revenue, ONT costs of around 8.5% of revenue, and G&A costs around 6% of revenue. With a more normalized tax rate, these expectations should lead to adjusted EPS for the second quarter of 2025 that is slightly higher sequentially and over 35% higher than the second quarter of 2024. For the full year, we expect growth in originations compared to the full year of 2024 of at least 15%. The resulting growth in receivables with stable credit and continued operating leverage should result in four-year 2025 growth for revenue that is slightly faster than originations growth and adjusted EPS growth of at least 25%. Our second quarter and four-year 2025 expectations will depend upon the path of the macroeconomic environment and the resulting impact on demand, customer payment rates, and the level, timing, and mix of originations growth. We are confident that the demonstrated ability of our talented team has us well positioned to adapt to an evolving macro environment. Our resilient direct online only business model, diversified product offerings, nimble machine learning powered credit risk management capabilities, and solid balance sheet support our ability to continue to drive profitable growth while also effectively managing risk. And with that, we'd be happy to take your questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then do. At this time, we will pause momentarily to assemble our roster. Today's first question comes from David Sharf with Citizens. Please go ahead.

Thank you. Good afternoon, and thanks for taking my questions. David, you actually addressed much of this in your opening remarks about the diversification of, you know, your small business borrow space. I am wondering, you know, is you just – everybody's obviously trying to get their arms around if and when we see, you know, changes in behavior from tariffs and potential inflation. Based on just application flow, application volume, did you get any sense that small businesses in particular or any verticals in particular might be stocking up on inventory, that it might be kind of pulling forward some loan demand, or is it just too difficult to tell at this point?

Yeah. Yeah, it's always tough to know if you'd be able to tell, but there's no indications of it at all. I think demand tracks typical seasonal patterns. When tariff talk became louder, you know, kind of late in Q1, we didn't see any spike in application volumes. You know, it's difficult to know what they would have been otherwise. And while there is seasonality, there's also just, you know, different operating environments have different levels of demand. So you're never going to know for sure, but we certainly didn't see any spikes in application volume, you know, kind of late in the quarter once tariff talk really started heating up.

Got it. Helpful. And then as far as, you know, just how quickly you've historically been able to kind of gauge any kinds of shifts in behavior. I mean, obviously, they're short-duration assets. But can you just remind us, for most consumer and SMB loans, are most of them two-week payment frequencies or monthly? Like, how often are you actually?

Yeah, the large majority are weekly or biweekly. There are some monthly, both on consumer and small business, but the large majority are weekly or biweekly. So we see You know, so we have very, very quick reads and changes in performance. And as you know, the overall portfolios are relatively short in duration as well, with both consumer and small business kind of around six months, weighted average terms. You know, so we never have a big back book that we're having to deal with if there's negative changes in credit.

Okay. Maybe if I can just squeeze in one just follow-up kind of cleanup question for Steve. You know, given the decline in funding costs now and SOFR reduction now flowing through, can you give us a sense for how we ought to be thinking about second quarter? interest expense either as a percentage of revenue on a dollar basis or just as a weighted average funding cost?

Yeah, I don't expect from here our outlook doesn't really have any rate cuts for the remainder of this year. So I wouldn't expect there to be much difference, maybe a slight tick down just on the cadence of the funding that we have. coming up in second quarter, but not an awful lot of change in the cost of funds. So I think pretty steady in terms of as a percent of revenue as you think about the near term.

Okay. Just a follow-up on that. Has there been, as you think about on-debt securitizations, I mean, since April 2nd, I mean, have you seen any material change in spreads in the marketplaces?

There are ABS transactions getting done from companies sort of adjacent to us and in our space. And remember, we did a – we priced and closed the transaction in mid-March. There was actually quite a bit of noise at that time, and we closed with very good performance. So I think the credit markets relative to the equity markets have been much calmer, both on the secured and the unsecured side. It's just – The equity market's been very noisy. I can't say the same about the credit markets right now.

Got it. Great. Thanks very much.

The next question comes from Moshe Orenbuck with TD Cohen. Please go ahead.

Great. Thanks. You talked a little, Steve, about the fair value premiums and credit performance. Maybe could you just expand a little bit on, you know, on how that, I guess, they, you know, are, you know, how they're likely to perform in the current environment and, you know, and maybe if you could, well, I'll follow up on another one after. Yeah, I mean, I think I've talked about this before. The fair value premiums are most sensitive to changes in the lifetime credit performance that we expect on our various lines of business. And as you know, we have very quick loss emergence. So for the most part, you know, for example, our subprime consumer business, most of the lifetime expectations for a new vintage are going to be in the quarter that they're originated in. So there's very fast feedback, as we've talked about. So that's... And a stable, when I talk about sensitive to credit, I mean, it's basically the way I think about it as like a 10% change in the lifetime loss expectation would lead to about a 400 basis point change in fair value premium. And so you can see we've been very stable across the portfolios and on a consolidated basis sort of bouncing around in basis points. which is telling you that, you know, the outlook where we sit at the end of the quarter is very, very stable. And if things were to change, like I mentioned, because we can react quickly, we would expect to quickly catch changes that we would need to make if the environment deteriorated, and therefore, you know, you wouldn't see a lot of volatility in those fair value premiums on a consolidated basis in particular. Got it. In terms of, you know, you also had talked a little bit about the having, you know, the expected impact from newer customers. Can you just kind of flesh that out a little bit more, both? Like, is that a process that continues, like, into the second quarter? Does it continue into the second half? And do those customers come in at a higher yield? Because the revenue margin on the consumer side was sort of flat to down a couple of ticks year over year. Like how should we think about the impact on the revenue margin as well? Yeah, so I think for what I was speaking to, which was cash net, the new customers there, we haven't had to talk about this in many years, but the new customers do charge off at a higher rate. We just don't know them as well. But over the life of the relationship we have with customers that don't, There's very strong unit economics, because as I mentioned, we have a broad set of products that they can continue their financial journey with. So I would expect most of the year-over-year increases that you've seen related to that mix will sort of wash through in the second quarter. So you may see a little bit, you know, it might be a little bit higher year-over-year in 2Q, and I would expect to see that moderate increase. in the back half of the year, assuming there's not, you know, more new customers coming in in the environment. And then on the yield side, I think what you're seeing is we definitely have seen steady to good yields on the cash net side, but we've also seen great performance on the net credit side. And as a result of that, we've had customers that have been able to graduate to lower APR products. And so I think what you're seeing is the net effect of that. The yield year over year is relatively flat because of those two dynamics. And so that benefit accrues to you in the form of growth, both from the new customers, continuous customers, and from that graduation. Is that the way we should think about it?

Exactly. Great. Thanks very much.

Thank you. As a reminder, to ask a question, you may press star, then 1. The next question comes from Kyle Joseph with Stevens. Please go ahead.

Hey, good afternoon, guys. Thanks for taking my questions. Congrats on a good quarter. Just, you know, looking back at, you know, going back to 2008, we can look back and look at, you know, consumer portfolios and look at their performance in non-prime consumer portfolios. And, you know, non-prime portfolios have been fairly resilient. You know, we don't have any empirical evidence really on the small business side, but can you give us your expectations for, you know, the credit performance of the small business portfolio and any sort of differences you'd anticipate between that and consumer looking back at kind of historical recessions?

Yeah, I mean, OnTap was around in 2008, so we have some data, and it wasn't that different from our consumer data. I mean, what we really saw for both the businesses back then was the slowdown in lending was probably the biggest impact, more than major credit issues. You know, our small businesses are very small, and they tend to act in some ways more like sophisticated consumers than mid-sized businesses. So I think that's probably why we saw similar payment performance in 2008. Every recession is a little different, and so it's always difficult to predict exactly, but I think we just go back to what we've talked about before, is that we have a very diversified small business portfolio across states, across industries, across products, with short duration terms and you know, very frequent payment performance and loss emergence. So, you know, given everything we're seeing now, that makes us, you know, very comfortable to continue doing what we've been doing over the last several years.

Great. That's it for me. Thanks for taking my question. Yep. Thank you.

Thank you. As a reminder, you may ask a question by pressing star then 1 on your telephone keypad. The next question comes from John Heck with Jeffrey. Please go ahead.

Hey, guys. Thanks very much. Good afternoon. Thanks for taking the questions. You know, most of them have been asked and answered. I guess one of them, and I know it's been a very favorable competitive environment for you guys for a few quarters. You know, you did talk about a higher mix of new customers. I'm wondering, is that also a function of the competitive markets And then are there other pockets, like within small business, that you're seeing opportunity to lean in as well because of the drawback of competition?

Yeah, I think the strong growth we've seen both on the consumer and small business side, both over the last couple years, but certainly in the first quarter, was stronger growth. And we expect that it crossed both of those segments. is, as almost always, a combination of a conducive competitive environment. No new entrants, no new competitive threats in the last quarter in either of those, plus continued product enhancements. We had product enhancements on both sides that certainly made meaningful differences in the quarter on the new customer side. You know, that's something we expect to continue. Plenty more product enhancements planned for the rest of the year. And, again, not seeing any, you know, any changes on the competitive side at all.

Okay. And then, Steve, for the buyback, you know, you mentioned if kind of the market conditions stay consistent, right? then you would probably use most of the buyback in this quarter. Is that sort of saying, like, at the current stock price, or is there some sort of, you know, if it drops from here, you'll be more aggressive and take advantage of that? How do I read the kind of levels that you're thinking about from a repurchase perspective?

Yeah, I mean, I think at these levels, we would be interested as well. So the stock's been kind of bouncing around recently, you know, for the past couple of months, but I would say even at these levels, we would be looking to take as much as we can out to support the valuation.

Okay. And then final question, and forgive me, on the guide, the OT expense, is that 8.5% of total revs or 8?

8.5. I said around 8.5, so plus or minus 8.5. Okay.

Great, guys. Thanks very much.

Thank you. This concludes our open answer session. I would now like to turn the call back over to David Fisher for closing remarks.

Thanks, everybody, for joining our call today. We certainly appreciate your time and look forward to speaking with you again next quarter. Have a good evening.

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