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

Good afternoon, everyone. Thanks for joining us. We're here with the management of Enova. Enova is a leading nonprime consumer and small business lender. I would say one of the more interesting companies that we've met with over the years, in particular, having recently made a significant acquisition in the small business space. Steve Cunningham is their Chief Financial Officer, came to the company from -- in 2016 from Discover where he was the Chief Risk Officer and had been the Treasurer. He had a number of other positions and actually had been the Chief Financial Officer for Capital One's Auto Finance and Banking segments in the prior life. And so Steve, welcome. Really glad to have you here. Let's start on the consumer side. Maybe talk a little bit about what you're seeing from the current -- from the consumer on a current basis in terms of demand, credit quality. Can you talk about that a little bit, and then we'll try to get to the small business side as well.

Yes, sure. First, thanks for having me. It's great to be here, and thank you all for joining us. So I think we just had a call a couple of weeks ago where we were able to give a good update on what was happening across the company and in particular, on our consumer side of the business. So we were really pleased with how the quarter ended and how the year ended. We had seen as we move through 2021, sequential -- nice sequential growth in our consumer businesses. And as we closed out Q4, David spoke to it on the call, it started a little bit slow, but it finished strong, in particular in our near-prime installment business. And if you take a look at our earnings supplement, you can see originations for that particular product were pretty close to Q4 of 2019. So not far off from pre-COVID levels, which is very encouraging. Subprime continued to make great progress, not quite back to pre-COVID levels, but again, great sequential increases showing that demand is starting to come back. And as we highlighted, given the timing of our call, we were pleasantly surprised at how strong January was as well across the board. So we've been very pleased with the steady improvement in demand on the consumer side. And the credit continues to perform very well, very solid for us also. So you hear a lot about normalization, which is what you should expect to see from the very low levels that where we came from during the slowdowns around the recession and the pandemic. But it's a natural thing. If you think about in our consumer portfolio, our loss curves are very steep very early. So once you get past that initial period of loss emergence, the season book performs very, very well. So what you should expect to see in a normalized environment is new vintages coming on against a portfolio that is seasoning and you settle in at more normal delinquency and net charge-off rates, which -- if you wanted a point of comparison, go back and look at 2019. So we saw, as I mentioned, nice growth, nice sequential growth, but credit metrics that are still pretty far below where we were in the fourth quarter of 2019. So I think as we said, we're pleased with how that's going. It's -- those vintages are performing in line or better than we have expected.

Any difference between the near-prime and subprime that you would call out? Or anything else that you've kind of seen, if you've seen anything that's different than peers?

No, I think in terms of peers, I'm not sure we have many peers that cut across both as we do. So they tend to be a little bit more focused on specific products that we may offer. As I mentioned, I think we've seen near-prime demand come back a little faster than subprime, which kind of makes sense if you think about what's happened over the past few years with stimulus and the COVID lockdowns, but as I mentioned, there are signs of life. So I think in the subprime space, I would say we're tilted much more towards line of credit products, which there's a strong consumer preference for. The short-term payday product is very, very small, less than 2% of our activity.

And maybe if we could just talk the same about small business and if you can kind of give just a quick kind of background on how the acquisition has gone and what that does for Enova?

Yes. Well, we feel very good about the OnDeck acquisition. I mean I think financially, you can go back and take a look at how that works when we closed, but we've also seen the portfolio that we acquired perform better than we thought. And we also picked up a great brand, a great set of people and talent and a platform that we could complement our legacy small business brands as well. So we are -- the synergies we highlighted last year, our cost synergies were ahead of schedule, maybe a little better than what we thought from the $50 million of costs that we would expect, and I kind of give you a little view of guiding forward on fixed costs as a percent of revenue. It starts to look a little bit like pre-COVID days. So overall, we're very pleased, and it basically diversifies our company and will provide a meaningful source of originations for us. We're in all 50 states with a product set that's really not matched in the small business space. And a competitive set that's probably a bit more dominated by smaller privately funded companies that are more narrowly focused.

Maybe if you could just expand a little on what you see as the competitive. You mentioned the brand of OnDeck. What is it that really distinguishes a successful kind of small business. There have been quite a few of those companies that haven't been successful. And what is it going to take to -- for this one to work out well?

You're talking about our -- yes. Well, I think it starts with, number one, it is a -- it's an indirect business largely today. So we work very closely in partner marketing with affiliates, a number of brokers and sales organizations across the country. And so being able to provide them and their customers, which become our customers, that fast and easy experience. Number one is being able to -- to be successful, you need to be able to make a good risk-based decision and be able to fund that loan. These are scrappy customers who expect to be able to move quickly. So if you can't provide that, you could be in trouble. On top of that, you need really good analytics to be able to do that in an online manner to make those good risk decisions, which we have and be able to service them after the fact. So things don't always go as planned. One of our abilities to do so well through the downturn was proactively working with our customers and having the wherewithal in our walls to be able to identify those customers that we knew that we could work with to work out and try to move them forward in the journey as well.

Got you. And moving back on the consumer side. You actually said it's -- that there aren't many of your competitors that are both kind of near-prime and subprime. And one of the things that's always been the most interesting about Enova is that you've got a bunch of different verticals. And when you think about like the near-prime product, like -- I mean how do you think about staying competitive against -- there are a number of larger players than yourself, and yet you talked about some strong success in growth in that business.

Yes. It's a great question. So number one, we have a very strong brand, NetCredit. It's been around for a long time. You may not see our advertisements, but -- if you're up early on weekdays and Watch Comedy Central or something like that, you might see NetCredit -- and have seen a number of them. And a lot of the customers that come to NetCredit are our former customers from our CashNet business. So they recognize that we've done a great job serving them. They graduate to our NetCredit brand. So great brand presence. We have a great product offering and we have great customer service. If you just -- we have some of this information in our IR deck, but our Trustpilot scores and customer satisfaction are very high, not just for NetCredit, but across the board. So I think it's that and the online-only convenience really make -- really sort of set us apart.

One of the -- another area that kind of distinguishes you in this space is that you've got international -- you're addressing international markets and many of your, I don't know if you'd call them peers, I guess, have retreated from the international space. And can you just talk a little bit about where you are, how you chose those markets? And why that's worked for you but hasn't really worked for some of the others.

Yes. So the only international market on the consumer side that we're in today is Brazil. And I'll just tell you, the recipe that we think about for staying in a market. And we've been in the U.K., we've been in Canada, and we've been in Australia on the consumer side, but those didn't work out. But if you think about the recipe, it needs to be a large market with not -- with a lot of fragmentation. So it's not highly dominated by incumbents. A culture of borrowing and repaying, not everywhere in the world has that culture, great data that you can build analytical tools off of. So Brazil is a great example of credit bureaus in a regulatory environment that you can have some level of predictability and knowledge of. So -- if you think about the markets that we stay in or would be interested in entering, but those are kind of the boxes you need to check. We did make a smaller acquisition. So in addition to Brazil, we're very excited about our other growth areas, small Pangea, which is more money transfers globally from the U.S. It's an adjacency that overlaps with a lot of our customers in the non-prime consumer space as well. So very small, just like Brazil, but we're excited about the potential for both of those to grow as we move forward and get the world economy back on track. We do have -- we've talked about with OnDeck, they were in Canada and Australia, and we're planning to long-term exit those markets and focus on our core domestic small business products.

Got you. Got you. I mean you just did mention small business, again, are there -- can you talk about the products that you're currently offering? And are there -- is there an opportunity to broaden that product set? Like what is it that your customer really needs right now from their small business line?

Yes. I mean I think there are definitely opportunities for adjacencies. When you think about card and banking services and the like, we're always looking at ways that we can do that, what's the most effective way to do that and not just on the small business side, but also on the consumer side. So if you look at our track record of acquisitions or start-ups, it tends to be the adjacencies. OnDeck aside, we typically do not do a lot of overlapping types of acquisitions, and they tend to be smaller so that we can test them, build them and grow them along with -- alongside the rest of our legacy businesses.

Got you. Got you. So -- maybe when you think about the U.S. consumer, could you talk a little bit about the various -- or the types of marketing channels that you use? Like what has been successful? You talked -- already talked a little bit about on the small business side. But can you switch to the consumer side talking about that a little bit?

Sure. It's definitely -- over the past decade or so. So we use a combination of digital acquisition. So that would be pay-per-click, search engine optimization, banners or typical approach there. We use partnership marketing as well. So there are dozens of lead providers and other affiliates that we work with to attract new customers into the franchise. And we do our own direct -- so direct mail, traditional advertising, direct mail, mass media and the like to bring people in directly as well. So we've tilted -- in the consumer space, we've tilted over the years to much more of the direct and that would be more traditional advertising and digital acquisition versus the partnership or lead providers.

Got you.

We're sort of -- we say this we're agnostic to the marketing channel. The way we think about -- our marketing team does a great job of obsessing and optimizing our cost to acquire. But we tend to think about capital allocation within an NPV type framework, lifetime value. So we might be willing to pay a touch more to acquire an account. If we think the NPV after you consider pricing, credit losses and servicing costs we can cover our hurdle rate, we'll be willing to do that. So you will hear us -- we don't disclose those types of things because it's part of a broader unit economic framework that we make those decisions on.

And as you look out -- does any one of your products across the company kind of stand out as being a leader in 2022? Or how do you see the balance of the growth, I guess?

Yes. I think there's opportunities for all of them, all subprime, near-prime and small business areas, just given where we are, if we can continue the momentum in the economic recovery, I think there's great opportunity for all 3 to do very well. There could be adjustments quarter-to-quarter because of some of the seasonality. But we're not sitting back targeting any certain mix. We do allocate the capital where we see opportunities along the way. And it's been pretty consistent. If you just look at the small businesses is about just slightly over half of our receivables portfolio and origination sort of tracking similarly with seasonality aside.

One of the things that investors have been talking about and still probably a little early to have a strong opinion on is how this year's tax refund season is going to work for a couple of different reasons, how it's going to impact consumer demand, how it's going to impact credit quality. Is that -- can you kind of give us your thoughts at this stage?

Yes. We talk about the tax refund season like it's normal. My time at Enova I think this is the fifth or sixth one. I don't think there's been maybe 1 or 2 that hasn't had some sort of noise around it. So on the call, we talked a little bit about January -- being pleasantly surprised around the strength of January. So some of that probably has to do with just the strength of the economy and demand returning. Some of that could be the timing of the tax refund season. I mean at that point in time, we felt like there's a chance that it could be more muted, which could more or less just smooth our seasonality between first quarter and second quarter. But it's hard to be certain what exactly is happening. So I think as we move through the first quarter, there'll be, I'm sure, lots of eyes on what's happening with that IRS data to sort of flush out what's actually happening. But for the most part -- to the extent that you have a normal season that's delayed, it could just more move volume around the reporting periods to the extent that, it's a smaller refund season that's extended. Obviously, that will lead to more demand. And those are -- I think either one of those is what's happening with the overall economy in terms of recovery, we're also seeing some secular gains beyond just the seasonality as well.

And anything that you kind of see any look into your customers financial picture that you can see like where do they stand today versus perhaps where they were either pre-pandemic or during the pandemic?

Yes. I think in general, the sense is that going into a recovery because people tend to sort of retreat a little bit small businesses, individuals. There tends to be a stronger credit profile going into recovery. I don't think this one is any different. And there could be a little bit more, given the amount of stimulus that's floated around, balance sheets could be in an even stronger position. So that's not something that we're banking on in terms of how we're underwriting or thinking about the credit box. But -- if you just look at what I described earlier with the credit metrics, given some of our growth, we're definitely seeing credit holding up very well, which would sort of speak to that early recovery type of credit performance that you would expect.

Got you. Well, that's encouraging. When you think about being tactical and managing the -- your customer, your portfolio. And obviously, this is going to be different, I mean, on both the consumer and on the small business side. But how do you think about the process or the steps that you would take if the -- if either of those portfolios kind of looked a little less good than what you were hoping? Like how do you manage that? What steps do you take?

Yes. So I think we had a good lesson in that in late first quarter 2020. So I think if you go back and take a look, when you see things not going well, first, let me just say, we've actually -- back in 2018, a few of us have kind of been around through a few recessions. So we already started working on playbooks for the end of the cycle. So to make sure that we were not in the throes of chaos making those decisions. So we had very well developed. What are you looking for? When do you make -- when do you take steps to adjust along the way? Obviously, this looks a lot more like a hurricane versus a traditional slow burn recession. So I think the beauty of our operating model being online only and low fixed costs. So we have a ton of variable costs, number one. So when we slam the brakes on, the expense base slows down dramatically, well ahead of revenue and our fixed costs are adjustable over time as well, much more so than if we were to have a large branch network. On the credit side, obviously, I mentioned some of our efforts before. We would definitely be proactively looking for opportunities to work with our customers. We did that extensively across the board in terms of modifications, both folks reaching out to us and reaching out to them if things were completely coming off the rails. And then I would say lastly, in our financials, we haven't sort of said the skies are completely clear. So we still have some expectation that the credit quality that we saw at the end of the fourth quarter is fully predictive. So we are prepared financially in our fair value calculations that if things don't go as planned, we have -- we do have some flexibility as it relates to recognizing additional losses beyond what we might have expected.

Got you. That's good. Okay. Maybe talk for a minute about the regulatory environment. Obviously, the diversification of the company probably makes you less susceptible to some of the things that go on in the regulatory environment. But anything that you would kind of point us to, to be looking for how do you think about it?

Yes. So we are licensed. So obviously, the states that we operate in we keep a very close eye on the activities from a legislative point of view that could affect our products or our lending activities. And you've seen over the years, there have been episodes of states, either changing products that are allowed or rates that are allowed. I think the good news is even prior to our OnDeck acquisition, if you just look at our track record, we've done a really good job of -- and this kind of gets back to our breadth, our footprint and our products and being able to navigate. Because I think typically, what you see in those situations is demand doesn't change, supply changes, and in some cases, there's ways to meet that demand if you've got supply opportunities that meet the new state requirements. So it's easy to see that as gloom and doom, but in some cases, changes at the state level can actually bring opportunities for more diversified players. So we keep a close eye on the active legislative activities. And in a lot of cases, they bring legislation and it never goes anywhere and sometimes it does. At the federal level, there had been a lot of action and concern coming into the new administration that there could be more radical shifts. That seems to be abating a bit these days. The federal rate cap was a constant discussion item. It actually had been brought up, I think, 17 sessions in a row -- congressional sessions in a row, but doesn't seem to have -- I haven't heard much about that in a long, long time. And then from a regulatory point of view, we are overseen by the CFPB. I think the new Chairman has made very clear his agenda. And obviously, we've worked with that agency both on an examination basis, and we work with them where they look for policy insights that cover our space. So obviously, as a regulated company, we spend a lot of time making sure we understand that risk and we're positioning ourselves to navigate it the best we can.

Got you. When you think about the mix of businesses within the company, I mean, do you have a perspective as to how it could evolve over the next multiyear period, 3, 5 years as to how big each of those 3 verticals or any others that you'd be thinking about?

Yes. I mean it kind of gets back to what I mentioned before, like you get back into a sort of a steady-state economic pattern where growth is sort of returning to normal and you're building off of year-over-year. You're taking -- the markets are growing at a normal rate, but you're taking share, and you can clearly see with our new customer acquisition that we are taking share from -- likely from more localized, less sophisticated players. But a lot of it will depend on demand, as I mentioned, like we will allocate capital to those areas where we can most economically serve those customers. And obviously, small business and near-prime have been growing very healthy. Subprime has been growing, not quite as quickly, but there's no reason to think that, that trend won't continue for the foreseeable future.

You bought OnDeck in a very opportunistic way. I mean you were -- I mean it wasn't the first -- your first entry into small business. But -- and you mentioned before that you don't really see that as a norm. But I mean, are there other things that you kind of have your eye on that you would say, I mean -- and obviously, maybe not as large as that, but are there opportunities, I mean, given how well that really has worked for Enova?

I mean we have always looked at deals, pretty much [indiscernible] anything taking a look at, but we've been very selective. I think this is one of those cases where we were in a position of strength. I think things have gotten much more expensive as the economy has recovered. Never say never. I mean there are opportunities that come up along the way. But as you know, deals are hard to get done. So it is in our order. I mean number one, from a capital point of view, we want to grow our existing businesses. We think we've got -- if you look at the combined OnDeck and Enova originations in 2019, we were somewhere $4.5 billion to $5 billion a year. We're not quite that run rate yet. So there's an opportunity, things continue. Ideally, as we move through this year, we get that run rate back and start to grow from there. To the extent that there are opportunities to fill in or provide adjacencies along the way, definitely do it. That -- invest in our organic businesses opportunistically, returning capital through share buybacks M&A kind of pecking order when you think about capital allocation.

You did just announce a buyback and not a small one at that. And so you talk a little bit about that process, how you came to that and how you're going to use it?

Sure. Well, we are not a programmatic capital return, we tend to be more opportunistic. And if you go back and look. We've had a buyback in place for a number of years, and we use it more episodically. And by opportunistically, what I mean is where we've become indifferent between buying our company, and the types of returns where we think that we can generate because of where we think the valuation should be versus investing in another loan. That's kind of -- that's kind of how to think about where we buy. I think as we started to see the probability of things will get better before they get worse as we move through the back half of 2021. We felt like our valuation had not really caught up with the transformation. In many aspects we traded. We still trade it like a subprime consumer company, but we had a very large small business alongside. And I think -- the 2 of them together actually provide a lot of synergy versus having more of a monoline approach to either one of them. Because you can lean in and out of them, you can adapt to the change. So I think you saw where... [Technical Difficulty]

Just give me a second, I think to going to replace the [ end ].

Okay. So in the fourth quarter, our Board did authorize a $150 million buyback. We bought back about 2.5 million shares, almost $100 million in the fourth quarter. And we continued our progress through another announcement, our Board authorized a program last week, $100 million, and we had bought another $46 million or so through -- since the end of the year through the end of last week. So we're definitely trying to demonstrate that we feel bullish about the future of our company versus where the valuation sits and -- that tends to be how we think about the use of our buyback. There may be periods where we don't utilize it, but we're always in the market with some pricing [ grit ].

Got you. It's kind of an interesting dynamic. I mean you say how do you kind of convince people about the benefits, I guess, of that diversified model, that's really the challenge. And I think -- I mean I think that the history is it kind of allows you to not overinvest in a particular vertical when that competition happens. But I think the real challenge has been that there hasn't been as many successful small business companies in the public marketplace and so outside of the banking industry. I mean how do you see the path, if you will, to showing that, that model can work on a consistent basis.

Yes. And I think that may get back a little bit to what you said around the monoline. If you think about -- we're not new to small business. We have -- we had 2 brands prior to OnDeck. If you go back and look in particular, around the 2018 period, we were even seeing the benefits of diversification then. We didn't like what was happening in the small business space. That was -- it was pretty frothy. I think we used the word frothy on an earnings call. Risk-based pricing didn't work for our unit economics. So we were a bit more steady state. Our consumer business was really strong. So we were able to drive great returns with a sort of a flattish SMB business and a stronger consumer business as we saw some more rationalization in the space with OnDeck and the others starting to think a bit more about profitability and growth together that allowed us to come back in with our unit economics and provide even more steam and momentum to the overall business. So that's a good example of where if we see a rationality in the market, we can lean in and out of our various products and segments to continue our path forward. And that's kind of really what I was getting to in terms of it should reduce our volatility. And we've really prided ourselves on our track record of doing what we say we're going to do, and that's what we intend to do going forward to deliver those consistent results.

When you think about your consumer markets would you characterize any of the competition there as frothy like is that -- or is it not at that level?

Yes. I mean -- so I'm not sure if any of them are frothy at this point. When I hear the businesses talk about offer walls that have larger loan sizes and lower pricing, a little bit like, yes, we'll let that sort of resolve itself. But yes, I mean, I think right now, everyone is trying to get their engines restarted, try to balance the growth and the credit. And one thing about us is we typically won't be the fastest growth out there, we provide meaningful growth and meaningful returns. So we're -- our strategy around focused growth isn't about just growing, it's about doing both.

Got you. Maybe to kind of wrap it up, if you kind of step back, and Enova's always been extremely disciplined, and I hope everyone can appreciate it from your presentation and talk here today. But what factors -- what things did you learn as we came through this crisis? And obviously, very thankfully, things turned out a lot better than we were afraid of a little less than 2 years ago. But what lessons did you learn that make Enova a better, stronger company over time?

Yes. So I think, number one, that preparation helped us tremendously. So definitely the right call. Things never play out. We knew this going in, right? But things never play out exactly as you think. So having something to anchor back to, to help you make better decisions and being prepared to do that versus trying to do it in the throes of problems is really, really important. And that the timing is hard, right? Did we get back -- was the timing perfect in terms of when we restarted the engine versus what was actually happening? No, but I think that's okay. So don't try to time it perfectly because there'll be time and to some extent, when the market is volatile, it's better to be a little bit more deliberate in terms of what you're intending to do. And again, I think our business model and diversification gives us flexibility to do that.

Great. Well, with that, I will say thank you, Steve, and please join me in thanking Steve and Enova for their time today. Thank you.

Thanks.