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Enova International, Inc. (ENVA) Q4 2023 Earnings Call Transcript

Enova International, Inc. (ENVA)

Q4 2023 Earnings Conference Call

Company Participants

Lindsay Savarese - Investor Relations

David Fisher - Chief Executive Officer

Steve Cunningham - Chief Financial Officer

Conference Call Participants

David Scharf - JMP Securities

Moshe Orenbuch - TD Cowen

John Rowan - Janney

Alexander Villalobos - Jefferies

Presentation

Operator

Good afternoon and welcome to the Enova International Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Lindsay Savarese, Investor Relations for Enova. Please go ahead.

Lindsay Savarese

Thank you, operator and good afternoon everyone. Enova released results for the fourth quarter and full-year 2023 ended December 31, 2023, this afternoon after market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.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, Enova 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.

David Fisher

Thanks and good afternoon, everyone. I appreciate you joining our call today.

I'll begin with an overview of our fourth quarter results. And then I'll discuss our strategy going forward. After that, I'll turn the call over to our CFO, Steve Cunningham who will discuss our financial results and outlook in more detail.

We're pleased to end the year with another strong quarter of solid revenue and profitable growth. Our results are driven by the strength of our talented team, diversified product offerings and world-class machine learning analytics and technology. A combination of these strengths has enabled us to successfully manage the uncertain macroeconomic environment we faced in 2023, growing origination while managing credit to acceptable levels that generate unit economics above our targets. Our unwavering commitment to this balanced approach to growth has allowed us to take share from our competitors and both our consumer and SMB business while effectively managing risk.

Turning to the fourth quarter. We generated over $1.4 billion in originations, our ninth consecutive quarter of over $1 billion. As a result, our combined loan and finance receivables increased 16% year-over-year to a record $3.3 billion driven by a 23% year-over-year increase and 30% sequential increase in origination. Strong demand and solid credit performance enabled us to be more aggressive with our marketing, particularly in our SMB business which had record originations in Q4.

As you have heard us discuss over the last year, we had a few 2022 vintages in our SMB portfolio where credit was worse than we anticipated. To be clear, as we previously explained, we still generated positive unit economics in those vintages albeit below our targets. To address this, we slowed growth in our SMB portfolio during the first 3 quarters of 2023 to give our machine learning models time to adjust as these vintages matured and led to higher charge-offs than expected in Q3 of 2023 which was one of the 2 factors that resulted in us missing consensus EPS last quarter for the first time in many years. But we were clear at that time that the worse-than-expected credit was limited to those 2022 vintages and would not be a continuing drag.

As expected, we saw a major improvement in our SMB net charge-off ratio in the fourth quarter which dropped to 4.8% from 5.5% in the third quarter. And despite the higher ROE targets we had in place during the year, we were able to increase SMB originations 19% sequentially and 12% year-over-year to record $930 million in Q4. We felt confident to do this because the vintages since those in late '22 were all performing well within our expectations.

The other factor that led to the Q3 miss was more aggressive marketing spend in our consumer business in September. This marketing generated good results but because the spend was at the end of the quarter, those results were largely not seen until Q4. During our Q3 earnings call, we emphasized that these 2 issues were temporary and would not negatively impact future results. As you can see from our strong Q4 originations and solid credit, we proved to be correct in this regard which clearly demonstrates the ability of our team and world-class machine learning algorithms to quickly address credit risk and opportunities to drive strong long-term performance.

Similar to the last several quarters, our diversified portfolio continues to drive our growth. Small business products represented 62% of our portfolio, up from 61% last quarter and SMB revenue increased 9% year-over-year and 8% sequentially. Consumer products represented 38% of our total portfolio while consumer revenue increased 27% year-over-year and 5% sequentially. As I mentioned, credit quality across our portfolio remains solid. Total company net charge-offs as a percentage of average combined loan and finance receivables were 9.7% in Q4 compared to 9.4% last quarter.

Notably, net charge-offs remain well below pre-COVID levels of 15.6% in Q4 of 2019 and 16.1% in Q4 of 2018 from a combination of mix shift and good credit management. Revenue in the fourth quarter of $584 million increased 20% year-over-year and 6% sequentially. Adjusted EBITDA of $130 million increased 9% year-over-year and 8% sequentially and adjusted EPS of $1.83 increased 4% year-over-year and 22% sequentially.

As Steve will discuss in more detail, the reason EPS growth lagged revenue growth was almost entirely because of higher interest expense as a result of the 500 basis points increase in the Fed funds rate over the last 18 months. If rates come down over the next couple of years as it's now expected, this will result in a nice tailwind for our future earnings.

Overall, it was a great quarter, as demonstrated by our industry-leading performance. This further reinforces our belief that there's still a disconnect between our business fundamentals and our current valuation. As I've discussed on our prior few calls, we remain committed to unlocking further shareholder value. In December, we successfully completed our most recent bond issuance of $400 million in senior notes. This bond issuance, combined with the retirement of our 2024 senior notes in early January and the successful consent solicitation on our 2025 notes in Q3, increased the amount of stock we were permitted to buy back under the terms of those notes. As Steve will discuss in more detail, this enabled us to buy back significantly higher levels of shares in the fourth quarter and we remain committed to returning capital to our shareholders going forward while still maintaining significant liquidity to generate attractive growth.

Of course, we will also continue to explore a number of additional alternatives to unlock shareholder value. And our solid liquidity position and proven ability to access the capital markets gives us the flexibility to continue to deliver on this commitment....

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