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

Yes. When we measure -- I mean, the way we think about new customers, it's typically people we haven't seen in quite a while. It wouldn't be like somebody who's paid down and come back with returning customers are folks who haven't been in our franchise in years. So we know them -- the returning customers we know well. One of the things that we are doing is we're leaning a lot more into the new customer set more than we historically have. So we're mid-40% of originations are from new customers, whereas historically, it's been more like in the mid-30s. So that again is like our opportunity. Even though we're not growing as quickly as we could because we want to make sure that we are balanced more towards predictability versus just growing as quickly as we can. We're still taking share and being very thoughtful. We do recognize those customers have a riskier profile because you don't know them as well as your existing customers. And all that is considered when we're thinking about those risk selections and meeting our unit economics and ROE hurdles as well.

Got you. Okay. So let's talk a little bit about funding. I think that when we've looked at many of your kind of peers and competitors don't have as well established a funding platform as you do. And talk about what you're doing and how it gives you a competitive advantage?

Sure. Scott Cornelis, our Treasurer, is here with me today as well. So Scott, it's been instrumental in this. But from the early days, I mean, there's a couple of things that when I joined Enova, I recognize we're very important. Obviously, credit, I'll use the word obsessed. We obsess about credit and we obsess about liquidity, right? So we want to make sure that we're way ahead of what we might need. But we've been following basically a 3-pronged approach to liquidity. Securitization is very important. And for the most part, we've transitioned, our Consumer and small business facilities to bank back secured warehouses, so think pledge and draw. And in most markets in cases, we would then term those out through the securitization ABS markets. That's kind of been our mode. Our primary mode is very efficient. We've seen our spreads come down over the years, which has allowed us to maintain a cost of funds that's very competitive. We do have some senior debt out there because you can't securitize 100%. You need some term or some equity, obviously. So we think there's some term debt that's important. And then just for the variations that you have week-to-week, month-to-month, we have a large bank backed revolver as well, which helps us bridge market disruptions, seasonality, any working capital things that happen in the near term. So that's been our approach. It's worked really well. We ended the quarter with a little over $700 million in liquidity available. And those numbers have been pretty large as we've talked about, then we like to keep a lot in reserves so that we have flexibility to sort of navigate disrupted businesses or growth opportunities. So we feel like we're -- the financial flexibility is there, and we're going to continue to stay the course.

Maybe not a bad segue to a different topic, and that is you did take a big step when you bought OnDeck. And you've already said it's turned out a lot better than expectations. When you see those -- that type of disruption in the market, just talk a little bit about what made you so confident in that ability. And perhaps, do you anticipate that some of the volatility and variability we've seen today could create other opportunities for Enova?

Yes. So we're not a serial acquirer. We tend to be very value-oriented, and our acquisition strategies tend to focus more on adjacencies, and they tend to be small. Some of the acquisitions we've made, like in the money service business and some other very small things you don't even really see. We do talk about them now because they're growing and becoming more important. But OnDeck was a great example of where we had aspirations to grow more in small business. We felt like there were some opportunities by merging our 2 capabilities that we could accelerate that quite a bit. But we're typically not using M&A to buy other people's paper or customer list because we feel like we'll compete that away rather than try to buy it. So that tends to be where our M&A is focused on adjacencies. And you're right, in these markets where I'll say, even though we're not happy with our valuation today, the relative value of our currency gives us some opportunities, particularly if there's some quality platforms that haven't been fully recognized or maybe need some help, right? So yes, there are opportunities in markets like these, but we're always looking at opportunities, whether times are a little less uncertain like they are today or in the best of times as well.

Yes. And you alluded in the answers to a couple of the questions about your technology platform and what it allows you to do. But I was hoping to give you a little bit of time to expand on that because I think it sort of is the thing that everyone says they have relatively few companies can actually demonstrate the effects of it. And so I wanted to give you a chance to talk about that a little bit because I think it has been a key factor for Enova.

Yes. So our -- most of our corporate employees are technology people, right? So at the heart of it, we are a tech enabled financial services provider. So we spend a lot of time and attention and investment on our proprietary platforms, whether it's the -- all the way through the life cycle of a loan. So I think we try to be very thoughtful about where we make those investments, how we are making changes in those environments to keep them nimble. And I think the -- you think about what I just described with -- I'll just use credit as an example. Most of our loans are very quick. Every other week or faster repayment type frequencies, not monthly pays. So we have quick visibility into what's happening. So if you're looking at initial defaults on a vintage and we can see our technology gives us great self-service MIS, but we also formally look at it very frequently. So we can look at by marketing channel, by state, by product, the way you pay us, whatever it may be, to see if those expectations are in line. If they're not, one way or the other, we could make changes in our environment tonight. There's not a -- I've worked in organizations where there could be a 2-week lead time to make a change in the environment. That doesn't mean that we're uncontrolled. It's a highly controlled but a highly nimble environment as well. So a lot of -- there's been a lot of talk about machine learning and artificial intelligence over the past couple of years with some of the specs that have come out. We've been doing this for years. We're not out being flashy about it. And machine learning is really the key piece. We have some information in our IR deck that you can take a look. But machine learning is kind of the backbone of how we are using technology and models to drive better decisions throughout our customers' life cycle. And there are opportunities to use AI, but more so probably in the areas like fraud, where it can move very quickly and you're okay, maybe, call it, a stop versus using it, pure AI and like underwriting and something like that.

Got you. So in addition to those 2 -- I mean, those 2 kind of major product areas, you've also got business in other countries. You deliver those products internationally. Just talk a little bit about what excites you about a market. And are there any areas that you're thinking of developing internationally?

Yes. So right now, we are in Brazil, with an installment lending product. We've been there for a few years. It's a -- I'll use that as an example of what's the international recipe. So number one, it needs to be a large addressable market, which Brazil has a very large, what I would call, sort of underserved population. There needs to be a fragmentation. So it's not highly consolidated like U.S. credit cards, a highly consolidated industry. So there's room to take share without sacrificing returns. Good sources of data and analytics, in Brazil, for example, there's strong credit bureau. In fact, our person that runs that business is from 1 of the big 3. There also needs to be a good understanding of the regulatory environment and one that you think that you can sort of manage through. So typically, if you sort of take a step back, we were in the U.K. We were a very large player in the U.K., but there was some regulatory confusion. So we exited that market. We've also been in Canada and Australia, both on the Consumer and the SMB side and in China, in all of those markets we've decided to exit just because we don't think they check all the boxes, which means we don't think we can get them to a meaningful contribution to the overall Enova. So -- we're also very focused on how many things around our core that you can do at the same time, right, which I think is really important to give you flexibility through a range of operating environments, the best of times and the worst of times.

Got it. All right. I got a question here. Okay.

On the SMB side, can you just give us a little bit of color on what pricing looks like. I mean I sort of thought that as deposit costs for banks went up, they were going to get a little squeezed, but it seems like FHLB stepped in and given them all the liquidity they need? Like is there anything going on in pricing relative to the banks here? And how do you think that will play out?

Yes. I mean we don't really compete with banks. The typical APR, so the typical SMB loan that we have, it's unsecured. It typically has a personal guarantee of the proprietor. We're underwriting the business. The average loan size is usually around $40,000 to $50,000, but we'll do smaller and we'll do larger, including $100,000, $150,000 loans. The pricing typically is around 40% APR and the maturity is typically 12 to 14 months. So in cases where banks -- most of these customers have bank accounts, but they're not well served by the banks for one reason or another. Maybe they're viewed as too risky or too small, given the way banks go about C&I lending. And as banks increasingly have pulled back a bit, you'll see some of what they might view as their riskier customers actually come to us, they would be like some of our better customers in terms of the crossover. So that has also been a source of demand that we've seen in the broader SMB space as well.

Got it. Any other one. We've got another question here. .

I know you touched on your international strategy. Is there anything more you could share there? And does it potentially fit into overall acquisition strategy as well?

Yes. I mean we don't feel like we have to go bigger internationally. We think just given the size of our domestic market, in terms of the target market and our share, there's a lot of greenfield there. But we're constantly looking at those opportunities around the world. We also have a money service business that predominantly does money transfer businesses, similar customer to our Consumer franchise and sending money to Latin America, Philippines, Mexico. So we're learning more about those markets along the way as well. But right now, it's mainly exploratory in terms of whether we would make those moves or not. And obviously, we would update publicly once we've made some calls like that down the road.

Okay. Steve, can you just talk a little bit about the kind of flexibility of approach that we've talked about. What actually does happen when you see -- if you were to see something kind of not going as expected? Maybe talk about the steps that you take?

Yes. So number one, it depends on sort of the magnitude, right? And I think our organization is highly tuned around, as I mentioned, unit economics and credit performance is the big lever. So to the extent that -- and we -- like I mentioned, we can see things every day. So as you move through certain payment frequencies and you start to see things tilting away from you, worse than you thought. I think the immediate reaction is either if it's significant, start to understand like what do you do today to like make sure you get back on track instead of chasing it with more, but also spending the time after you've done that to make sure you're not oversteering and understanding where it's actually coming from. So I think it's -- it happens fairly quickly. But the goal is, again, to try to make sure that you're not just continuing to put more money out, while you diagnose like where to fine-tune your next steps with your credit modeling.

You alluded to the diversification also being a benefit kind of from a regulatory standpoint. As you kind of think about the regulatory environment, particularly as it relates to the consumer side of the business, anything that you would kind of call out in terms of either state activity or federal activity that is going to have an impact on your business or competitors of yours?

Yes. I mean, at the state level, there's -- in my time at Enova, there's always something going on in the states. And there's been a number of states that have made changes like capping rates or certain products. There's been states that have expanded, but through it all, we haven't really missed a. We kind of navigate through that. And it's not always a zero-sum game. So sometimes there's context required, but beyond sort of the normal legislatures staring at certain opportunities, there's not anything in particular that we're concerned about at the state level. I think at the federal level, federal rate caps is not something that we think is imminent given the makeup of Congress. And I don't think there was a lot of support for it before. I think some of the CFPB's focus is really not in our space anymore at the consumer level. They tend to be very focused on a few other things. And I think the recent conversation around fees and fee structures could lead to some opportunities for us. So to the extent that there are particularly banks that might serve similar customers that have to change their economics model, a touch that could actually push more people into products like a line of credit that we offer if they didn't qualify, let's say, for a credit card anymore, right? So -- we try to -- obviously, we're risk managers, and we're looking at the risk, but we're also looking at the silver linings underneath different actions that are going on. And I would just say at the SMB level, just as a reminder, there is really no similar focus at the state or federal level around usually caps. There's some data gathering and some disclosure work that's going on, but all stuff that we already as a large player in the industry that we're already accomplishing. So the regulatory risk in the SMB side is very low.

Good. I don't see any other hands. So with that, I take the opportunity to thank Steve for his time today and for his thoughts on Enova.

Thanks, Moshe. Thank you all.