Enova International, Inc. (ENVA) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks for joining us. We're here this afternoon with Enova. Steven Cunningham, the CFO, represents the company. Steve and I have known one another for many, many years. Steve, in addition to having spent quite a bit of time at Enova, has also worked at -- was both Treasurer and Chief Risk Officer at Discover, had been at Capital One, among other places, and -- where he and I actually met initially at the FDIC. So we do know one another for a long time, and very pleased to have him with us here today. I'm going to turn it over to Steve for a few minutes. Just to kick it off and give us a little background on the fourth quarter and where we are, and then we'll jump into questions. And if people have questions that they'd like to ask, feel free to e-mail me moshe.orenbuch@credit-suisse.com.

Thanks, Moshe. Really happy to be here. Thanks for giving me some time. I look forward to chatting with you, and thanks, everyone, for joining us today and your interest in Enova. Hopefully, you had a chance to see our fourth quarter and full year results. We're -- obviously, we're very excited about how the year ended. The fourth quarter, we saw a sequential growth in both originations, receivables and revenue, the first time in 2020. And I think we were able to demonstrate that our world-class technology and analytics enabled us to successfully navigate what I think most people would say was a very unusual year, with the pandemic and the economic downturn. We are very encouraged by the credit performance of the portfolio, which is driven even with our deliberate pullback and then increasing ramp and growth as we move through the year that the credit performance drove really good bottom line performance for us, which is very encouraging. And our flexible online-only model allowed us to adapt very quickly to the circumstances, and allowed us to avoid very disruptive costs, deliberate cost reduction activities. And instead, we're able to sort of navigate naturally as growth came down, and we focused on our investment to get through serving our customers and getting the business stabilized. So we felt like we exited Q4 with great momentum. And as we talked about on the call, we're off to a really good start early into the quarter, and we feel a lot of optimism. Obviously, there's a lot to work out as we get the economy and the pandemic hopefully behind us here over the coming quarters, but we feel very positive. And at the same time, we're able to opportunistically substantially diversify the company with the acquisition of OnDeck, which, as we talked about, is going very, very well. So lots of room for optimism from the Enova management team as we've got a great balance sheet, a great set of products that we think are really unmatched serving the consumer and small business, non-prime, non-bank customer set, and a technology and analytics capability and online-only model that we think has now demonstrated that it can successfully help us navigate the good times and the bad. So with that, I'll turn it back over to Moshe, and we'll chat up some questions here.

Thanks, Steve. So you did mention kind of sequential growth. And in the fourth quarter call, you mentioned that was not just driven by OnDeck, but that both the consumer and the small business portfolios did grow sequentially, which is strong performance. Maybe talk a little bit about the core kind of consumer portfolio first, and then we'll talk a little bit more about the commercial portfolio. But what was it that allowed for that growth in the quarter? How did -- talk about how your originations tracked and what your kind of aggressiveness towards that market is right now?

Yes. So I think you're right. We did see a quadrupling of originations, including OnDeck. But even without OnDeck, fourth quarter sequential originations doubled. We saw strength across both segments of our portfolio, the consumer and the small business side. I think the fourth quarter is typically our strongest quarter from a consumer point of view. There's less seasonality in the small business side, but we were encouraged by sort of a steady increase in monthly originations. And it felt like even though we were still below prior years, 2019, obviously, just demand, given the employment situation and the economic situation, aren't back to pre-pandemic levels, we definitely saw demand and an opportunity to take on that demand and originate more than we had seen since the pandemic had begun. So that was encouraging. And obviously, as we talked about on the call, the performance, typically, you saw we originated a lot of new customers as well, nearly 30%, which was the most that we had seen in a while. So we're -- what I like to see is investing some marketing dollars, not letting that drop to the bottom line, but creating more annuities for us. And I think we're able to do that. And those loans are performing very well, as you've seen in our net revenue margins. And so far, so good. We think that the consumer, in particular, is holding up very well through this trying time.

Okay. And when you look at the cost to originate those customers, how has it tracked during the course of 2020? And how do you think about it into 2021 on the consumer side?

Yes. So we -- our marketing teams obsess about our cost of acquisition. For me, I take a step back because we're a bit more focused on unit economics. And by that, I mean, the cost of acquisition is one input into it. So generally speaking, and we have some slides in our investor deck, where you can see the philosophy of you want to make sure your originating receivables that are priced to cover cost of acquisition, cost of credit, marginal costs and generating an acceptable return after discounting your cash flows. So cost of acquisition is just one piece of that. So we don't disclose our cost of acquisition across. There's a couple of pieces in our investor deck where we talk about like for NetCredit, for example. But the reason for that is because it's one input into that broader decision. So there may be opportunities to spend a little bit more to drive high NPV type business. But in 2020, obviously, it's been a little challenging to figure out how demand was going to trend and how it's been trending. So while there may be a little bit of noise week-to-week and like what a cost of acquisition might be, I think the focus has probably been more on some of those predictable channels that require less lead time. You don't want to go out and do massive direct mail drops, which require a little bit more lead time, but it doesn't mean we're out of that market. It just means we're being a little bit more thoughtful about how we are originating through our organic lead and other direct channels to -- again, with the focus back on the unit economics. So cost of acquisition could move from week-to-week, but the focus is on positive NPV, positive lifetime value business that we're originating across the segments.

And how do you see that playing out in early 2021? Obviously, you've got consumers having received some of the stimulus money, potentially more. How do you see that in terms of both, their appetite from an origination standpoint and their pay downs, and putting that together into how that's going to affect the early part of 2021?

Yes. I mean that's -- it's the million-dollar question, right? I think a lot of us are not providing the guidance that we used to because there is still an evenness and there are a lot of factors coming in. I think the way -- if you take a step back, what we're focused on is, obviously, the longer term. We want to be in a position, as the economy recovers, to really start to turn that growth engine back to the pre-COVID levels when the demand is there. But I think in the very near term, I think we're all fans of whatever it takes to get the economy back on track, and to get it on track at a trajectory that's going to bring a lot of opportunities for our customers and for us and for the country in general. I think in the first quarter, typically, as I mentioned before, small business doesn't have a ton of seasonality. So on the consumer side, the first quarter tends to be the sort of lowest origination quarter for a number of reasons, post-holiday spending, tax season. But I think in general, the way I would say that I would think about stimulus and the impact on the near-term is, while it may soften demand in some corners for a short period of time, it will also probably improve the credit profile of the demand that is there. And so there is a -- there are some offsets there that sort of work through from a financial point of view that are probably net overall very positive, and sets the stage for that longer-term view, which is getting the economy back on a solid footing faster. So I think those are trade-offs that we're willing to sort of navigate through for a little bit.

Yes. I mean, I haven't seen any evidence of what I'm about to say, but I do think that with the consumer having a better forward look than they did when they got the stimulus money in early 2020, there may be different usages and different usage patterns that are more advantageous to lenders in this go-round. So it will be interesting -- certainly interesting to see.

So one thing I would add to that, to your point, unlike our company going into the recession, our small business book and our business is much larger. So if you think about how consumers have been spending as they become more positive if they have more money in their pocket, more liquidity, as the pandemic impacts start to reduce the amount of closures in the local economy, some of the small businesses are likely to be the beneficiaries of that in the near term, which means they're going to need capital to get going again. So I think while there may be some -- that's what I mean, there's some softness in some corners for a short period of time. There's going to be opportunities in others. And I think our much more diversified business now is going to be able to navigate this with -- again, one of our reasons for optimism is we think things are getting better, and our diversification is going to help us capture more of that as we move forward.

Makes sense. So let's talk about your small business effort, the OnDeck acquisition, and your combined kind of effort as you look out. You had mentioned earlier and on the fourth quarter that originations had improved and that they had kind of improved sequentially over time. Maybe just give us a little more granularity around that, and we'll kind of use that as a jumping off point for the discussion.

Yes. I mean, I gave some stats at the end of the third quarter and some stats at the end of the fourth quarter, yes. We've seen nice growth from the OnDeck platform and from our legacy small businesses as well. I would say, just in general, we're really excited about the combination. Obviously, OnDeck has invested very heavily in their platform and their brand over the years. And I think our combined organizations, they have a great team. Our combined organizations are going to be able to deliver on some of the economics that we talked about early on, and we updated on that. So we think we're ahead of schedule. In terms of the timing of recognizing on the cost synergies, a lot of the corporate service decisions and actions have already been taken. So the run rates going into 2021 are going to be really good. There's still -- obviously, the longer -- it will take a little bit longer on some of the technology and business combination steps, but the decisions have been made. But I think probably more importantly is the performance of the portfolio. So we ascribed sort of very little value to the highly securitized portfolio at the time of announcement. We were basically buying residuals in securitizations and some unsecuritized receivables. I think since then, as we talked about on the call, we've been able to -- we've already collected about $50 million since the close, and we think there's probably at least $200 million of cash overall that we'll collect on that portfolio. So if you just take a step back on that for a moment, that's $5 a share of cash that we weren't otherwise expecting as it relates to the transaction. So not only we're very excited about the economics, obviously, but probably even more excited about the opportunities it's going to present with our combined companies. Getting back to pre-COVID levels, we should be able to originate upwards of $5 billion a year across our platforms.

Right. And do you attribute that $5 in cash to just conservative expectations going in? Or did something change? How do we think about that? And is there any information content into how you think about the lending opportunities in 2021?

Yes. I mean, so you think about the time we announced the deal in July, right? So if you flashback, some of the data tapes we were probably looking at, I mean, it was at the peak of uncertainty and you do what you do at those points in time. With a lot of uncertainty, you definitely take a bit more of a conservative view. So I think in general, as we move through the back half of the year, not just us, but I think a number of observers of the industries have been positively surprised how resilient the consumers of small business have been through this, either through creativity of those individuals or the government support or the better shape that consumers were in relative to the last recession going into this one. So there's a number of factors. But it's hard to pinpoint any one of them other than our teams have worked hard to work with the customers, who are struggling, to figure out ways to help them better repay us and build those long-term customer relationships, so that they'll remember that as well. And I think it's definitely working.

Right. One of the hardest things always is to think about the competitive environment in that business because the business itself is extremely large, but not everybody competes at every end of it. And so when you think about the customers that you, Enova, would have served prior to this and then OnDeck had served before, how do you -- each of those customer bases, how do you think about the competitive dynamic? Obviously, Kabbage is a name that people know kind of walked away from the portfolio and sold the rest of the business to American Express. Any -- what can you say about the competitive environment in that space?

Yes. So there's been the obvious things like Kabbage. There's been some other players who obviously pulled back dramatically the capital coming in, slowed, some didn't make it. It's a little bit more dominated by some smaller private players. But I think in general -- like anecdotally, I think, in general, it feels like the demand -- there's going to be pent-up demand for capital in this space as things start to recover. And it feels like the supply has consolidated a bit in the areas that we play in, which I think is going to present great opportunities for us. But I think even broader from a competitive point of view, the scale that we now present is really not matched by anyone out there. The breadth of our balance sheet and just the diversification of the company overall is going to help us be able to deliver the best experience and best products for our customers as well as the partners who are helping us originate in this space. So we feel like demand is going to be big. We feel like supply is probably lower than it was and has been when we came into the pandemic and the downturn. And collectively, we're in a much better competitive position because of our scale and breadth of product now.

Right. And so is it fair to say that you think that small business will be the fastest-growing piece of your business in 2021?

I'm not sure I would say that necessarily. I think it's going to depend, right? As we talked about -- a little bit about, like, even if customers have a little bit more money in their pocket, if they're feeling bullish about the future, people have been pretty bored over the past year, right? They haven't traveled, they haven't been spending that much. So they may spend that, and they may start to borrow to do things that they have put off, right? And so is it going to be -- I think you'll find as we move through time, there may be periods of time, particularly in an uneven economic environment where one quarter one may be growing faster than another and vice versa. But it's kind of hard to say that you can see how the dynamics set up that regardless of whether one in the near-term is growing faster than the other that they're both collectively -- there's going to be lots of opportunity for significant growth in the broader -- beyond the near-term, in the longer term, which we think we're well positioned to capture.