Enova International Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 10 speakers on the call.

Operator

Hello, and welcome to the Enova Third Quarter 2023 Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lindsay Savarese, Investor Relations for Enova.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Enova released results for the Q3 2023 ended September 30, 2023, 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 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.

Speaker 1

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 ks, quarterly reports on Forms 10 Q and current reports on Forms 8 ks. 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.

Speaker 1

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.

Speaker 2

Thanks, and good afternoon, everyone. I appreciate you joining our call today. I'll begin with an overview of our Q3 results and then I'll discuss our strategy going forward. After that, turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. We're pleased to produce another strong quarter with record originations and revenue driven by solid demand and stable credit.

Speaker 2

The skillful execution of our team combined with our world class machine learning analytics and technology has allowed us to continue to do well in the current macro While there is a lot of uncertainty in the economy today, both internal and external data Lead us to believe that both our consumer and small business customers are navigating it well. Inflation continues to moderate, while the labor market and wage growth continue to be very strong. And while prime and super prime borrowers are facing higher interest expense Due to the increase in the Fed funds rate, we have not raised our pricing. As a result, we generated more than $1,000,000,000 in originations for the 8th straight quarter, driven by growth in both our consumer and small business products, even as we balance growth and credit during this uncertain economic environment. Originations grew 13% sequentially to over $1,200,000,000

Speaker 3

as we

Speaker 2

were moderately more aggressive with originations during the Q3, especially in our consumer businesses where Q3 consumer originations were up 19 sequentially. We also generated strong revenue growth with revenue of $551,000,000 equating to 21% year over year and 10% sequential growth. Adjusted EBITDA increased 5% year over year, but was down 5% sequentially. And adjusted EPS was down 14% year over year and 13% sequentially, lagging our expectations for the quarter. There were 2 primary drivers Underlying the lower than expected EPS in Q3.

Speaker 2

First, as I mentioned, we continue to lean into the solid demand and good credit metrics with increased marketing spend. And our marketing activities continue to be efficient with marketing at 21% of revenue compared to 22% of revenue in Q3 of last year. While marketing as a percentage of revenue declined year over year, it was slightly elevated compared to our expectation. Given the stronger than anticipated consumer demand we were seeing during Q3, we made the decision to increase our marketing spend to capture this at attractive unit economics. Marketing spend is one of the levers we use intra quarter and we do so on a daily and weekly basis.

Speaker 2

As is evident from the strong origination growth we generated in the quarter, this was largely successful. However, much of the origination growth came late in the quarter, resulting in us incurring the additional marketing expense, but not generating much incremental revenue in the period to offset. However, these additional loans should drive additional revenue and income over the next few quarters. The second driver of the lower than expected profitability in Q3 was continued credit normalization in our SMB portfolio. Let me be clear, credit performance in that portfolio as a whole remains good.

Speaker 2

However, as I mentioned in each of the last two quarters, We did see slightly higher than expected defaults in Vintage's from the second half of twenty twenty two. As you would expect, Our underwriting models adjusted based on this data and VINAGES since January of this year are back in line with our expectations. But since there is a 9 to 12 month emergence period for charge offs in our small business products, charge offs from those second half twenty twenty two vintages We're at their peak in Q3 of this year. We expected this and included in our forecast, but we're just off The upside of this is that we now expect lower SMB charge offs in Q4, particularly given that early I also think that it's important to point out that while charge offs from those 2022 SMB vintages were higher than our expectation, Those vintages still generated solid ROEs above our cost of capital. So to be clear, Inovo overall is in great shape and we're feeling good about Q4 and next year.

Speaker 2

Our strong growth and solid credit metrics position us well for future success. We just misforecasted these two items this quarter. We've been very consistent with our forecasting, guidance and results over the last several years, and we believe this quarter will prove to be an aberration. In addition, we continue to demonstrate Importance of having a diversified portfolio. As we've discussed in the past, this diversification enables us to lean into products with the strongest unit economics That's further resiliency to our balanced approach to growth.

Speaker 2

In the Q3, our small business products represented 61% of our portfolio and consumer was 39%, roughly in line with Q3 of last year. Outside of our core products, we're now producing very strong growth in Brazil after a few years of adapting to changes in the banking regulations there. In Q3, we generated record originations, which were almost 300% higher than Q3 of last year. While still a small business for us, we are excited about the potential for this business going forward. Before I wrap up, I'd like to spend a few moments talking about our progress and unlocking shareholder value.

Speaker 2

We've been very thoughtful about building a strong balance sheet and ended the quarter with nearly $1,000,000,000 in excess liquidity, which we believe gives us significant flexibility to accomplish this. As I mentioned on our earnings call last quarter, While we are looking at a number of possible alternatives, given the current economic environment and high interest rates, Our near term focus is to return capital to our shareholders through opportunistic stock buybacks. As Steve will discuss in more detail, we are pleased to successfully complete the consent solicitation on our 2025 senior notes, which increase the amount of stock we are permitted to buy back under the terms of those notes. Following the successful consent solicitation, Our Board of Directors has authorized a new $300,000,000 share repurchase program, which is the largest in our history and equates approximately 20% of our outstanding shares at current prices. Overall, we believe these actions will help us on our path to the disconnect between our business fundamentals and our current valuation.

Speaker 2

Looking ahead, we remain committed to repurchasing shares and bonds, but also continue to explore additional options to further unlock shareholder value. In sum, our flexible online only business model, nimble machine learning powered credit risk management capabilities, Diversified product offerings and solid balance sheet position us well to continue to drive profitable growth, effectively manage risk and further unlock shareholder value.

Speaker 4

With that, I would like

Speaker 2

to turn the call over to Steve, who will 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. Pete?

Speaker 3

Thank you, David, and good afternoon, everyone. We delivered another solid quarter of financial results driven by record levels of quarterly originations and revenue. Our diversified product offerings, machine learning risk management algorithms and our strong balance sheet continue to allow us to nimbly lean into market Turning to our Q3 results. Total company revenue increased 21% in the Q3 of 2022 to a record $551,000,000 The year over year increase in revenue was driven by the growth of total company combined loan and finance Receivables balances, which on an amortized basis increased 15% from the end of the Q3 of 2022 The $3,100,000,000 on September 30. Total company originations this quarter rose to a record 1,300,000,000 Small Business revenue increased 13% from the Q3 of 2022 to $195,000,000 Small business receivables on an amortized basis ended the quarter at $1,900,000,000 or 17% higher than the end of the Q3 of last year as small business originations totaled $783,000,000 Revenue from our consumer businesses increased 26% in the Q3 of 2022 to $348,000,000 Consumer receivables on an amortized basis ended the 3rd quarter at $1,200,000,000 or 14% higher at the end of Q3 of 2022.

Speaker 3

As David mentioned last quarter, with the consumer demand and credit performance we're seeing, especially in our line of credit products. We continue to be moderately more aggressive with consumer originations this quarter, which grew 19% sequentially 21% from the Q3 of 2022 to $479,000,000 Consumer line of credit products comprised 74% of total quarter consumer originations and grew 21% sequentially and 82% in the Q3 of 2022. Looking ahead to the Q4, we expect total company revenue to grow between 5% Resulting in revenue growth for the full year of 2023 compared to 2022 in excess of 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.

Speaker 3

Credit remained solid in the quarter, resulting in a consolidated net revenue margin of 58% in the 3rd quarter, which is generally in line with our expectations of around 60%. In addition, expectations for lifetime credit losses, are reflected by changes in fair value premiums for our portfolios remain stable for the consumer portfolio And improved slightly for the small business portfolio, resulting in a 2 percentage point increase in our consolidated company fair value ratio to 114%. As we've discussed in previous quarters, order to quarter net charge off rates, delinquency rates And net revenue margins for our portfolios are heavily influenced by the seasoning of origination benefits along their expected loss curves. As a result, these metrics may temporarily fall above or below typical ranges as we've seen from both our consumer and small business portfolios over the past year. And will be influenced by sequential changes in the growth and mix of originations arising from our typical origination seasonality as well as our balanced approach to growth in this macro environment.

Speaker 3

Total company ratio of net charge offs as a percentage of average combined loan and finance Receivables through the Q3 was 9.4% compared to 7.6% last quarter and 8.4% in the Q3 of 2022. The net charge off ratio for the consumer portfolio increased sequentially settling at more typical levels From the low and unsustainable levels last quarter, it was below the rate for the Q3 of 2022. Sequential and year over year changes in the net charge off ratio for the small business portfolio were driven by the continued seasoning of that portfolio over the past year, as David discussed in his remarks. Importantly, the consolidated portfolio delinquency rate at September 30 was relatively stable, reflecting a continued solid outlook for future credit performance. The percentage of total portfolio receivables past due 30 days or more 7.9% at September 30 compared to 7.7% at June 30, driven by an increase in consumer delinquencies to more typical levels, offset by a decline in small business delinquency.

Speaker 3

Looking ahead, as As recent vintages season along their expected loss curves and small business net charge offs move lower, we expect the total company net revenue margin for the Q4 of 2023 to be between 55% 58%. Future net revenue margin expectation will depend upon portfolio payment performance and the level, timing and mix of originations growth. Now turning to expenses. 3rd quarter operating costs were driven by efficient marketing activity supporting our strong sequential growth, the continued leverage inherent in our online only model And thoughtful expense management. Total operating expenses for the Q3, including marketing, were $206,000,000 37% of revenue compared to $184,000,000 or 40% of revenue in the Q3 of 2022.

Speaker 3

As David noted, 3rd quarter marketing spend remain efficient, is in the higher end of our expected range and drove an acceleration in originations, especially later in the quarter. Marketing costs increased to $117,000,000 or 21 percent of revenue compared to $101,000,000 22% of revenue in the Q3 of 2022. We expect marketing expenses as a percentage of revenue to range in the low 20 percent for the Q4, but will depend upon the growth and mix of originations. Operations and technology expenses for the Q3 increased to $52,000,000 or 9% of revenue compared to $46,000,000 or 10 percent of revenue in the Q3 of 2022, driven by growth in receivables and originations over the past year. Given the significant variable component of this expense category, sequential increases in O and T costs should be expected in an environment where originations And receivables are growing, should be around 9% of total revenue.

Speaker 3

Our fixed costs continue to reflect our focus on operating Efficiency and thoughtful expense management. General and administrative expenses for the 3rd quarter increased only slightly to $38,000,000 or 7 percent of revenue and $37,000,000 or 8% of revenue in the Q3 of 2022. While there may be slight variations from quarter to quarter, we expect G and A expenses as a percentage of revenue of around 7% for the 4th quarter. Our solid balance sheet and ample liquidity gives us the financial flexibility to successfully navigate a range of operating environments It has allowed us to deliver on our commitment to driving long term shareholder value through continued investments in our business as well as share repurchases and open market purchases and retirement of our senior notes. We ended the Q3 with just under $1,000,000,000 of liquidity, including $204,000,000 of cash and marketable securities and $748,000,000 of available capacity on facilities.

Speaker 3

The stable credit performance of our portfolio continues to allow us to attract new cost effective funding. Last week, We increased the capacity of our secured corporate revolver by $75,000,000 to $515,000,000 with no change in terms. During the Q3, we acquired 693,000 shares at a cost of approximately $36,000,000 The recent bondholder approval of our request for additional share repurchase capacity under our 2025 senior note indenture And our confidence in the continued strength of our business relative to our current valuation. Our Board authorized a new $300,000,000 share repurchase program that will expire at the end of 2024. The new authorization replaces our existing authorization and following the retirement of our 2024 senior notes Will allow us to create even more meaningful opportunities to drive value for our shareholders.

Speaker 3

During the quarter, we also opportunistically purchased An additional $10,000,000 of our 20.24 senior unsecured notes in the open market. We had $170,000,000 remaining of 2024 senior notes at September 30. We'll likely retire all remaining 2024 senior notes by early 2024. Our cost of funds for the Q3 was stable sequentially at 8.3% or approximately 180 basis points higher than the Q3 of 2022, primarily due to increases in sulfur over the same time period. We expect our cost of funds to remain at a similar level in the near term, but will depend primarily upon changes in SOFR.

Speaker 3

And finally, we continued to deliver solid profitability this quarter with an adjusted EBITDA margin of 22%. Adjusted earnings, a non GAAP measure, was $48,000,000 or $1.50 per diluted share compared to $57,000,000 or 1.7 $4 per diluted share in the Q3 of last year. As David mentioned earlier, our adjusted EPS was lower than expected for the quarter,

Speaker 5

largely due

Speaker 3

to our decision to lean into solid demand and good credit metrics with increased marketing during the quarter and the continued credit normalization in our small business Portfolio. To wrap up, let me summarize our 4th quarter expectations. We expect revenue to grow between 5% 7% As we continue to focus on an origination strategy that balances growth and risk against the current macro environment, This should lead to continued stable credit, resulting in a total company net revenue margin between 55% 58%. In addition, we expect marketing expenses as a percentage of revenue to be in the low 20%, O and T costs of around 9% of revenue G and A costs around 7% of revenue. These expectations should lead to sequential adjusted EPS growth 10% to 20% for the Q4.

Speaker 3

Our 4th quarter expectations will depend upon customer payment rates and the level, timing and mix of originations growth. Our 3rd quarter results continued to demonstrate the ability of our team to deliver levels of growth in revenue while maintaining solid credit and profit margins. Our strong financial position, diversified product offerings, Flexible balance sheet, competitive position and new opportunity to return meaningful capital to our shareholders As is well positioned to deliver on our commitment to driving long term shareholder value. With that, We'd be happy to take your questions. Operator?

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from David Scharf with JMP Securities. Please go ahead.

Speaker 5

Hi, good afternoon. Thanks for taking my questions. A couple of things I wanted to drill down in. First, Not sure if I've ever asked this before, but do credit trends in the small business Asset class ever historically serve as sort of a leading indicator for consumer. I'm just thinking about if a local dry cleaning chain is running into problems that might mean they have to lay off people 6 or 12 months Later, is there any correlation between the two segments in that regard?

Speaker 4

I mean, it's not as Correlated, it's not super correlated, but to the extent there is correlation, it's the other way around. So if the consumer falls on their face, small businesses are in big trouble.

Speaker 5

Okay.

Speaker 1

And we

Speaker 2

saw that during

Speaker 4

COVID. But if the consumer is still spending and doing well, the small businesses tend to be a big beneficiary of that incremental spend. We Talked about this before. The consumer has like somewhat fixed spending they have to do. They got to pay their mortgage or rent.

Speaker 4

They got to pay for their car. They got to pay for Their phone, their electricity, their power, their gas, like those all go to big companies, The big businesses, the incremental spend, do I take the dog to get his nails clipped or to get groomed? Do I go out to dinner one If you see consumer really, really starting to struggle, small businesses are likely to come next.

Speaker 5

Okay. Got it, Dan. Hey, just drilling down a little bit into the guide, the and I recognize it's there are A lot of variables, it's hard to nail it perfectly. The net revenue outlook, It seems to be trending a little more towards kind of the lower end of that 55% to 65% normalized Kind of range, it's obviously below 60 for 4th quarter. Given that it sounded like some of your expected Losses in SMB were actually more front end loaded in the Q3.

Speaker 5

Is this just a reflection The bigger mix of new borrowers, can you just give a little help on kind of what's behind maybe what seems like a little bit of a reduction in the 4th quarter

Speaker 6

Yes, it's a good question. I talked a little bit about it just to set up in the commentary where In our portfolios and at the consolidated level, as we are navigating the seasonality that we have in some of our portfolios or just some of the balance that we've been talking about, which can exacerbate some of that seasonality from period to period. You can see us move around in the range. That doesn't mean that credit quality is worsening. And so I will just tell you, like we can land in our typical Ranges for consumer and for small business, so small business we talked about should improve quarter over quarter.

Speaker 6

We expect it to be in our typical sort of more normal 4% to 5% range and with consumer relatively stable. The seasonality that we've seen over the past couple of quarters and that we expect going into Q4 is going to be the difference. So if you take a look at the fair value of the portfolio, that's a little bit better indicator of What we're seeing in terms of the lifetime expectations after you consider the charge offs and the remaining delinquency stocks And what we think the overall performance of the portfolio will be as it's tracking along its expected loss curve.

Speaker 5

Got it. Hey, last question. I guess it's bigger picture in terms of obviously the Elevated demand kind of leaning in to meet more of that with marketing. How do you think about in this environment, just given So some of the uncertainties and to the extent that at least for a lot of your consumers, unemployment can't get any better.

Speaker 4

Do you get

Speaker 5

us are you worried that There's market share that you're going to lose if you don't bring in as heavily that it's once you lose that borrower, you don't get a second crack at them. Just trying to get a sense of the broader kind of macro thought process because Enova is Does stand out among a lot of the companies we follow, which is in terms of the positivity towards customer acquisition,

Speaker 4

Yes. Look, I mean, it's a balance. We want to get every customer we can, but we don't want to be too aggressive and Either spend too much to acquire those customers or build a portfolio of bad loans. And so that's the balance that we've managed super well Over the last 10 years or so, we are comfortable pulling back when we need to because the Flipside is way worse. It's better to lose some customers than to find yourself with a portfolio that's not looking so good.

Speaker 4

And given that the relatively short nature of especially well, even small business loans, both of them, the relatively short nature and Especially on the consumer side where people don't they're not always borrowing. They're coming in and out of the market based on credit needs, one time expenses, Dislocations between their income and expenses, we have the opportunity to get those customers back Over time, if we miss them the first time. So it's something we've gotten very good at over time and have learned that it's Better to be a little bit more conservative than more aggressive in most market environments.

Speaker 5

Great. Thanks so much, guys.

Speaker 4

Yes. Thanks, David.

Operator

Thank you. The next question comes from John Hecht with Jefferies. Please go ahead.

Speaker 7

Afternoon. Thanks guys. I mean, I just I guess sticking a little bit with the credit theme. Maybe can you talk about like payment rates and payment behaviors and even borrowing behaviors. And then beyond that kind of what is there something like in terms of mix Within the SMB category that may have influenced the kind of temporary pickup and losses and your comfort that they're going to decline Into the

Speaker 4

Q4. Yes. Let me talk at a high level and Steve will probably jump in with a couple of numbers. But let me be very clear. I tried to be in my script.

Speaker 4

I'll do it again. We look at payment rates every single day, every week, every month. And these loans that Charge off at a higher rate than we've seen over the last few years are all from the back half of twenty twenty two, like almost all of them. And We can see payment rates by vintage for all the loans since then, so all this year. And if you look at those payment curves, Every vintage this year is below every vintage last year.

Speaker 4

I mean, it's the curve looks like a giant spread out fan, which is what you When you're trying to improve is exactly what you want to see. Basically each month this year is better than the month before when you're looking at on Vintage Curves. So it wasn't mix, wasn't a change in product, wasn't a change in competition, So we got a little bit too aggressive with our originations in the back half, really 3 or 4 months of 2022, kind of late Q3 into Q4. And The loss emergence period in the small on the small business products is kind of 9 ish months. And we knew that and we Tried to forecast it and again we were just off by a little bit in terms of the timing.

Speaker 4

Kind of thought the hit we took in Q3 would be more spread between Q3 and Q4 Kind of September to October, if we weren't a public company, it wasn't calendar, it wasn't a calendar quarter, Wouldn't think twice about it, that they came like a couple of weeks earlier versus a couple of weeks later. They come in Q3 instead of Q4 and that's where we ended up. But when we look at The credit performance of the loans that we've originated over the last 9 months, they look very, very good and that makes us confident about Q4 and going forward. And the only other thing I'll add that I did say in my script also is even those loans that had higher charge off rates than we forecast at the time we originated them, Still positive ROEs. I mean, we still made money on these loans, just not as much as we would have thought we would have made.

Speaker 4

But Given the loss given the defaults and the loans we've originated since, so this year, right back we expect to be right back at our target early.

Speaker 5

Yes.

Speaker 6

Hey, John, let me add a couple of things to think about as well. I mean, if you look at the quarterly metrics and I've talked about this before, you kind of have to look at those in combination with our fair values, which give a better view of the overall expectation of how we expect the portfolio to perform. So there can be some variability quarter to quarter. You can see our loss rate ticked up a touch above the 5% for the quarter For the reasons we talked about, delinquencies came down. And as we look out, the fair values of the portfolio actually ticked up a bit, Which is reflecting the fact that a very large amount of the portfolio now consists of those vintages that David mentioned that are from Early this year onward.

Speaker 6

So we expect that we're going to settle in at a more typical range from here as we've been adjusting. And obviously, we'll continue to adjust where we see uncertainty, but I think that's how you should think about from here, How the credit quality should play out for the S and B bond.

Speaker 7

Okay. That's very helpful. I appreciate that. And then Maybe talk about kind of your big buyback. I think that obviously that will be appreciated by the shareholders.

Speaker 7

Maybe do you have some sort of Is this going to be opportunistic? Is this going to be do you have any kind of cadence you're thinking about or some combination thereof?

Speaker 6

So I think our Board authorized the program to run through the end of next year. And I think we'll be looking very seriously at how we have typically done in the past of using that authorization to opportunistically Take shares out of the market. As you know, John, there's a number of different ways you can go about doing that. But I think overall, our plan is Once we have the 2024 senior notes retired, we'll be very active in terms of Trying to repurchase more actively than we have historically in the market.

Speaker 7

Yes. Okay. And then any so obviously you're leaning into marketing, leading into growth, particularly in its consumer, it seems like at this point. Is, I guess sort of 2 basic questions on that. Number 1 is, is part of that because you're seeing more because others in the segment are pulling back.

Speaker 7

And then the second is just I'm always curious is are you using pretty much the same channels of marketing or is there Any changes to how you're deploying marketing spend?

Speaker 4

No, nothing meaningful. No.

Speaker 7

And then what about the competitive environment? Is that enabling this more

Speaker 4

proactive? Yes. Yes. Sorry, I forgot about that first word. I think the competitive environment is still pretty benign, like we've been talking about For a while, nothing new on the small business side.

Speaker 4

I think we've seen, as we talked about competitors struggle with liquidity, also a couple move more towards the prime space in SMB. And then And consumer, again, no new entrants, lots of pulling back, lots of refocusing. So I would say pretty benign competitive environments on both sides.

Speaker 7

All right. Thanks very much guys.

Speaker 4

Yep.

Operator

Thank you. The next question comes from Vincent with Jeff I'm sorry with Stephens. Please go ahead.

Speaker 8

Hey, good afternoon. Thanks for taking my questions. First one on the marketing spend this quarter. First, just wondering, in terms of opportunities you're seeing, is it sort of more on the consumer side, more to the S and P or fairly equal? Like, what

Speaker 6

And then

Speaker 8

the direction of that marketing spend, is it sort of like direct mail or lead generation or any

Speaker 4

Yes. I mean, I think we saw opportunities in both. In small business, we're a little bit more Conservative in kind of our originations during the first half of the year. So that probably Resulted in seeing that more opportunities we went into Q3. And on the consumer side, We've been getting more aggressive all year in the face of good demand and very, very stable credit.

Speaker 4

And I think in Q3, we just saw strong again, a strong consumer with Super high employment rates, rising wages and a typical fairly good seasonal period that kind of hold back end of summer, back to school Season tends to be good from the consumer side. So you put that together, I think it was really very much demand driven on the consumer side. And then in terms of marketing spend, we've gotten very, very good over the last 7, 8 years about having a balanced approach to marketing. In the subprime consumer side, lead traditional lead providers Our portion of the business, but not a majority like they were many years ago for us. We do a lot of direct We do a lot of TV given our scale.

Speaker 4

We're one of the only players in the industry who is large enough to do TV at scale on the consumer side. And so really kind of all channels. On the small business side, Still a lot coming through the wholesale channel through ISOs, but we continue to grow our direct channel. It's a very fast growing channel for us. And Direct is the same stuff as we do on the consumer side.

Speaker 4

So it's all stuff we know how to do, TV, some direct mail, Plenty of digital and definitely our experience on the consumer side has helped us grow that direct channel Very quickly on the small business side.

Speaker 8

Okay, great. Yes, certainly been seeing more advertisements on CNBC lately.

Speaker 2

Good. That's great. That's great to hear.

Speaker 8

Yes, very effective. In terms of so leaning into A lot of opportunities there. You also have that big share repurchase authorization. If you could remind us in terms of the opportunities that and how you decide between Putting more capital towards loan growth opportunities versus your cheap stock?

Speaker 6

Yes, sure. So, first of all, we're not capital constrained, so we can do it all. And When you think about when we've become indifferent based on what we think the value of our firm should be given our performance in our outlook versus making another loan, and then you move from there, we can become as aggressively As you can be legally every day. So we do have a method that we've followed for many years. I would expect that we'll continue to At a minimum, continue to follow that with a larger repurchase program and there's other there could be other opportunities as well to tackle A larger buyback program, Budd.

Speaker 6

I think the key thing is we can continue to grow our business with meaningful rates and return capital to shareholders, While I'm generating good IRRs on all of

Speaker 8

it. Okay, great. And last one from me, Steve, on the fair values, so continue to increase, which I presume it means that the risk adjusted margins on the loans you're putting in continue to improve. I'm just wondering since I get the investor questions just what's built into that, the level of conservatism and The opportunities in terms of the ROEs that's, you're not able to generate any of your originations?

Speaker 6

Yes. So we don't I mean, as you can imagine, Vincent, we're not building in levels of conservatism in our fair value marks. We're trying to give the best view The value of the portfolios based on the credit quality, and a few other things that matter, less than credit quality. But at the end of the day, it's about What we think the lifetime credit performance of those portfolios is going to look like discounted back. With the short duration discounting doesn't matter as much.

Speaker 6

So I think the ROE hurdle rates that we've built in, that's Kind of where they start to show up a little bit because the cash flows of the portfolios, the richer they become On a net basis, so more cash flow for a given level of loss will get you a higher fair value, all things being equal. So Again, you can have some variations as I've talked about now for many quarters in your quarterly metrics from quarter to quarter, but Fair values have been fairly stable to kick to ticking up over time, reflecting that higher ROE hurdle and the stability in credit That we've been pointing to now for some time.

Speaker 5

Great. Very helpful. Thank you.

Operator

Thank you. The next question comes from John Rowan with Janney. Please go ahead.

Speaker 9

Good afternoon, guys.

Speaker 4

Hey, John.

Speaker 9

Just one quick question for me. Is So seeing over a 10,000 foot view, is this the environment that you looked at when you chose to do fair value accounting, right? You've got others that are pulling back. And yes, you missed earnings because you spent a lot more on marketing, but you didn't get the double whammy of having to build allowances for An asymmetric type growth rate. Is this kind of the where the benefit comes in fair value that you can go after all these incremental customers that are Not being that are not getting offers from other lenders, who may be pulling back for whatever credit reasons or because they would have to build allowances.

Speaker 9

I'm just trying to think it through a little bit.

Speaker 4

Yes. I think you've really seen it over the last 2 years as the books built back up following COVID. As the business is doing well, as we're growing and putting on good loans, the financial statements look good because of fair value. And let's say we had the great recession again and the book was bad, the financial statements would look bad. And that's what we would want everyone to see As opposed to under the old incurred method, when the business looked crappy and originations were slowing, all of a sudden you were making a lot of money by releasing provision, which Never made a ton of sense to us.

Speaker 4

So yes, we've been happy that we've been able to really accelerate our originations over The last couple of years coming out of COVID and had financial statements that reflected the positive trends in the business. All

Speaker 9

right. Thank you.

Speaker 4

Yes. Thanks, guys.

Operator

Thank you. This concludes our question and answer session. I would now like to hand the call back to David Fisher for closing remarks.

Speaker 4

Thanks everyone for joining our call today. We

Operator

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

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Earnings Conference Call
Enova International Q3 2023
00:00 / 00:00