Participants

Lindsay Savarese; IR; Enova International, Inc.

David Fisher; CEO; Enova International, Inc.

Steven Cunningham; CFO; Enova International, Inc.

David Scharf; Analyst; JMP Securities LLC

Moshe Orenbuch; Analyst; TD Cowen

John Rowan; Analyst; Janney Montgomery Scott LLC

Alexander Villalobos-Morsink; Analyst; Jefferies LLC

Presentation

Operator

Good afternoon, and welcome to the Enova International Fourth Quarter 2023 earnings conference call.
All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question. You may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Lindsay February's 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 close. 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 dot nova.com.
With me on today's call are David Fisher, Chief Executive Officer. I'm Steve Cunningham, Chief Financial Officer 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. Our 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 Forms eight 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, Pete Cunningham, who will discuss our financial results and outlook in more detail.
We are 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 originations 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 in both our consumer and SMB business, our 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 13% sequential increase in originations. Strong demand and solid credit performance enabled us to be more aggressive with our marketing, particularly in our SMB business. We 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 three 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 two factors that resulted in us missing consensus EPS last quarter for the first time in many years, but we were clear at the time that the worse than expected credit was limited to those 2022 vintages. It 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 a 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 two 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. While 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% sequential. As I mentioned, credit quality across our portfolio remained solid. So 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 remained 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 credits 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 the 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 and Q. three increase the amount back we were permitted to buy back under the terms of those, 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. It gives us that flexibility to continue to deliver on this.
Before I wrap up, I'd like to take a few moments to discuss our strategy and outlook for 2021. We're encouraged by the strong momentum and good credit across our portfolio as we enter the year as our Q4 results show and based on internal and external data, both our small business and consumer customers are on solid footing at a macro level, the U.S. has the strongest economy of any developed nation, and the much predicted 2023 recession failed to appear. Our customers continue to benefit from job growth, low unemployment rate, easing inflation and rising real wages.
Looking ahead, while still very early in the year, we are off to a good start with strong origination volumes across our products. There's no arguing that uncertainty remains in the macro-environment, but we are confident in our strategy and optimistic about the opportunity ahead of us.
While it appears that consumer and small business confidence in the economy is improving. We believe our businesses are resilient, no matter the economic environment. As we discussed previously, in some ways, our consumer customers are always in a recession, they are experienced and living paycheck to paycheck and sophisticated at managing variabilities in their finances. As a result, recessions tend to have less of an impact on our non-prime customers than on prime borrowers for our SMB business, we lend to a very diversified mix of established small businesses, including more than 900 different industries. We also continue to benefit from strong brand presence and low levels of competition. All of these factors, combined with our sophisticated recession monitoring framework, give us confidence in our strategy and our ability to continue to grow our share, the nonprime credit markets.
In sum, we've demonstrated over the years our ability to operate well in a variety of economic environments. Our performance in 2023 was a continuation of that success made possible by the world-class team we have built at Enova. This led us to rank among Computerworld, Best Places to Work for the 11th consecutive year. I want to thank the entire team for the challenging and impactful work they do to help hard-working people get access to fast. Trustworthy credit for our greatest asset is our people, our flexible online-only business model, nimble machine learning, powered credit risk management capabilities, diversified product offerings and solid balance sheet. Our key to our success and position us well to continue to drive profitable growth, effectively manage risk and further unlock shareholder value.
With that, I'd like to turn the call over to Steve to 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.

Steven Cunningham

Thank you, David, and good afternoon, everyone. We ended 2023 with positive momentum, a strong growth in originations, receivables and revenue, along with solid credit and operating efficiency drove another quarter of solid financial results. We continued to successfully access multiple funding markets during the fourth quarter and our ample liquidity and strong balance sheet enabled us to create long-term shareholder value by originating a record number of loans and returning significant capital through share repurchases.
Turning to our fourth quarter results. Total company revenue grew 6% sequentially in line with our expectations of 5% to 7%. Sequential growth in increased 20% from the fourth quarter of 2022 to $584 million. A 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 16% from year-end 2022 to a record $3.3 billion at December 31. Total Company originations during the fourth quarter rose 23% from the fourth quarter of 2022 to $1.4 billion, while business revenue increased 9% from the fourth quarter of 2022 to $211 million as small business receivables on an amortized basis ended the quarter at $2.1 billion or 14% higher than the end of the fourth quarter of last year. As small business originations rose 12% year over year to $928 million. Revenue from our consumer businesses increased 27% from the fourth quarter of 2022 to $364 million as consumer receivables on an amortized basis ended the fourth quarter at $1.3 billion or 20% higher than the end of the fourth quarter of 2022. Consumer originations grew 48% from the fourth quarter of 2022 to $498 million for the first quarter of 2024, we expect total company revenue to be flat to slightly higher sequentially, resulting in year-over-year growth in consolidated revenue 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 credit remained solid in the quarter and reflected our typical seasonality, resulting in a consolidated net revenue margin of 56% for the fourth quarter, which was in line with our expectations of 55% to 58%. In addition, the fair value premium remained stable for the small business portfolio and improved slightly for the consumer portfolio, resulting in nearly a percentage point increase in our consolidated Company fair value ratio to 115%, as is typical for the fourth quarter due to seasonality. The total Company ratio of net charge-offs as a percentage of average combined loan and finance receivables rose sequentially to 9.7% from 9.4% last quarter compared to the fourth quarter of 2022. The increase in the consolidated net charge-off rate was driven by the return of a more typical seasonal pattern for our consumer portfolio during 2023.
For the first time since before the COVID pandemic. As you'll recall, consumer credit losses typically follow the sequential pattern of growth through the year. We tend to peak in the fourth quarter and are at their lowest during the second quarter. We expect credit losses for our consumer portfolio to continue to follow the seasonal pattern during 2024, but will depend upon the timing and level of consumer originations throughout the year. As we expected, the net charge-off ratio for our small business portfolio declined to 4.8% from 5.5% last quarter. We expect the quarterly net charge-off ratio for our small business portfolio to generally range from 4% to 5% consolidated ratio of receivables past due 30 days or more at the end of the quarter was flat sequentially, reflecting a continued solid outlook for future credit performance. The percentage of total portfolio receivables past due 30 days or more was 8% at December 31 compared to 7.9% at September 30.
Looking ahead, we expect the total company net revenue margin for the first quarter of 2024 to be relatively flat sequentially as the impact of lower sequential consolidated originations from the aforementioned expected seasonality is offset by sequential improvement in the consolidated net charge-off rate. This expectation will depend upon portfolio payment performance and the level timing and mix of originations growth during the first quarter.
Turning to expenses, fourth quarter operating costs were driven by efficient marketing activities, supporting our strong sequential growth continued leverage inherent in our online-only model and thoughtful expense management.
Total operating expenses for the fourth quarter, including marketing, were $218 million or 37% of revenue compared to %176 million or 36% of revenue in the fourth quarter of 2022. Excluding the one-time $15 million costs associated with the CFPB settlement, total operating expenses would have totaled $203 million or 35% of revenue. As David noted, fourth quarter marketing spend remained efficient and effective and was within our expected range. Marketing costs increased to $122 million or 21% of revenue compared to $97 million or 20% of revenue in the fourth quarter of 2022. We expect marketing expenses as a percentage of revenue to range in the upper 10s for the first quarter, but will depend upon the growth and mix of originations. Operations and technology expenses for the fourth quarter increased to $47 million or 8% of revenue compared to $45 million or 9% of revenue in the fourth quarter 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&T costs should be expected in an environment where originations and receivables are growing, it should be around 9% of total revenue.
Our fixed costs continue to reflect our focus on operating efficiency and thoughtful expense management and general and administrative expenses for the fourth quarter increased to $49 million or 8% of revenue from $35 million or 7% of revenue in the fourth quarter of 2022. Excluding the one-time $15 million costs associated with the CFPB settlement, G&A costs would have totaled $34 million or 6% of revenue. While there may be slight variations from quarter to quarter, we expect G&A expenses in the near term will range between 6% and 7% of total revenue. Our balance sheet and liquidity position remains strong and give us the financial flexibility to successfully navigate a range of operating environments while delivering on our commitment to driving long-term shareholder value through continued investments in our business as well as share repurchases. We ended the fourth quarter with $870 million of liquidity, excluding restricted cash held at year end to retire the 2024 senior notes that were called in early December, we held $211 million of cash and marketable securities and had $659 million of available capacity on facilities at December 31, our stable financial and credit performance has allowed us to consistently attract funding from a diversified group of lenders and fixed income investors during the fourth quarter, we upsized our corporate revolver by $75 million, issued a new $400 million five-year unsecured senior note and renewed a $233 million warehouse secured by small business receivables. Also during the fourth quarter, we acquired approximately 1.35 million shares at a cost of approximately $66 million and we started 2024 with share repurchase capacity of approximately $180 million available under our senior note covenants. We expect to utilize most of that capacity during the first half of 2024. Assuming market and trading conditions remain supportive.
Our cost of funds for the fourth quarter was 8.7% or approximately 170 basis points higher than the fourth quarter of 2022, primarily due to increases and so for the same time period, while we expect sulphur to decline during 2024 we expect our average cost of funds for 2024 to increase to around 9% as the impact of higher rates in our recent senior note issuance roll through the year. As a result, interest expense as a percentage of revenue is expected to be between 10% and 11% during 2024. That being said, the impact of expected lower market rates should create longer-term tailwinds for Knova.
Our effective tax rate for the fourth quarter was 16%, driven by a decrease in our uncertain tax position reserve and related interest the impact of share price increases and option grant exercising this quarter in favorable state tax rate changes. While there may be slight variations from quarter to quarter, we expect our normalized effective tax rate to be in the mid to upper 20% range.
And finally, we continued to deliver solid profitability this quarter as adjusted EBITDA increased 9% from the fourth quarter of 2022 to $130 million. Adjusted earnings, a non-GAAP measure were $57 million or $1.83 per diluted share compared to $57 million or $1.76 per diluted share in the fourth quarter of last year.
To wrap up, let me summarize our first quarter and full year 2024 expectations. For the first quarter, we expect revenue to follow our typical seasonality and to be flat to slightly higher sequentially. Seasonally lower originations are expected to offset improvement in the net charge-off rate resulting a little change to the net revenue margins sequentially. In addition, we expect marketing expenses as a percentage of revenue to be in the upper 10s. O&t costs of around 9% of revenue and G&A costs between 6% and 7% of revenue. Interest expense as a percentage of revenue is expected to range between 10% and 11% with a more normalized tax rate. These expectations should lead to slightly lower adjusted EPS for the first quarter, both sequentially and compared to the first quarter of 2023 our first quarter expectations will depend upon customer payment rates, the level timing and mix of originations growth.
Now turning to our expectations for the full year of 2024, assuming a stable macroeconomic environment. With no material changes in the employment situation and a moderating interest rate environment, we would expect growth in originations for the full year 2024 compared to the full year 2023 to increase by around 15%. The resulting growth in receivables was stable credit and continued operating leverage should result in full year 2024 growth for both revenue and EPS in the upper 10s or slightly higher than the expected originations growth. Our expectations for 2024 will depend upon the macroeconomic environment and the resulting impact on demand, customer payment rates and the level timing and mix of originations growth.
In closing, we are in a strong financial position as we begin 2020 for our diversified product offerings, world-class machine learning, risk management algorithms, nimble online-only model, solid balance sheet have us well positioned to drive profitable growth and deliver on our commitment to long-term shareholder value. And with that, we'd be happy to take your questions. Operator.

Question and Answer Session

Operator

We will now begin the question and answer session to ask a question. You may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster.
Our first question is from David Scharf with JMP. Please go ahead.

David Scharf

Good afternoon. Thanks for taking my questions. And I wanted to just dig a little more into maybe some of the levers behind the strong origination outlook. I know you've often guided to marketing expense 20% or above, and it looks like a pretty healthy increase in originations again to 2024 yet done, marketing seem pretty efficient just in the 10s. Is that just a Q1 guide? I'm trying to get a sense whether it's going to be pretty lumpy throughout the year or if this is just improvements in Cadillac and other marketing efficiencies for the full year?

Steven Cunningham

Okay.
David, so the marketing for Q1, the guide of upper 10s as a percent of revenue is against that expectation of our typical seasonality, particularly for the consumer portfolio, where we see lower levels of originations, typically our lowest point, but that's not implying that. That's where we'll stick for the remainder of the year. So we've seen in our past results from our marketing spend will vary with growth and so with the guide that we've given for the full year, it would not be hanging around at the lower levels that we typically see during our low points of Seasonale.

David Scharf

And as we think about the consolidated credit outlook for the year, it was it sounds like you got the SMB portfolio back to kind of normalized levels at 4% to 5% loss outlook, how should we be thinking about the consumer side, both in terms of the 17%-ish loss rate in the fourth quarter, which I know is seasonally high and whether it's going to peak at a higher level than that this year.
And secondly, just in terms of mix, if it's too early to speculate on what the portfolio mix between small business and consumer might in the year?

Steven Cunningham

Yes. So I think for consumer credit, like we mentioned on the call, I think that typical seasonal pattern that you see where you trough in the second quarter of the year, just based on origination patterns and you tend to peak in the fourth quarter 2023 was kind of the first time we've seen that sort of full-blown since the pandemic, you can see can move from three to four percentage points trough to peak, but it's very stable. So that variability doesn't imply that there's a change in the credit outlook. I think what we're implying is that we expect it to be relatively stable. And then I think on your question around mix, we don't expect a radical change in mix. So nothing really meaningful between the two portfolios, but obviously there can be quarter to quarter variability, particularly during periods of seasonality where consumer small business may be growing a faster one, maybe originating a little bit faster than the other as we move through the quarters.

David Scharf

Got it.
Okay.
Very helpful.
Thank you.

Steven Cunningham

Thanks.

Operator

The next question is from Moshe Orenbuch with TD. Cohen. Please go ahead.

Moshe Orenbuch

Great, thanks. You did talk about your kind of appetite to continue with respect to deploying capital back into share repurchase and your thoughts about the value of the stock. Could you talk a little bit about how you're thinking about that as you kind of enter 2024 and pedal play out over the course of the year.

Steven Cunningham

Sure. Hi.
Motion Hadar. So we talked a bit about it in the commentary that we had about $180 million coming into early 2024 available under our senior note covenants. And we expect to do most of that in the first half of the year. But if you just sort of understand how we approach it. We have been more aggressive and obviously, we have signaled that now for a couple of quarters, but we're also very thoughtful about points of where we buy. We've run a grid, as you all know, for quite some time. We'll continue to do that, but we'll be taking a bit more of an aggressive stance in terms of how we're approaching that. So we are we still feel like there's a valuation opportunity. If you just look where we are even today versus a 2025 estimate just as an example, we're still lagging the S&P 600 and some of the consumer finance segments of that into are of that broader index. So we still think there's a valuation opportunity even at these entry points today.

Moshe Orenbuch

Got it.
Thanks. Maybe kind of pulling up at a macro level. The you mentioned, obviously unemployment levels are still strong and other indicators and less concern of a recession. Are there other indicators that we should be tracking as we go through 2024, you know, to kind of see and both on the consumer and small business side, that would kind of give us an indicator whether you're going to be pushing harder on originations or pulling back some.

David Fisher

Yes, I think originations the end demand is driven a buy employment because generally when people are employed and if people are feeling better about their future, though, lever themselves up and spend a little bit more in the short term. So sentiment is definitely it's sentiment and the labor market on the consumer side.
On the small business side, I think there's two primary drivers against small business sentiment and there's a couple of good surveys out there, but then also consumer spending. So much of Small Business revenue is driven by consumer spending. I think businesses are buying from small businesses. Governments are buying from small businesses, it's largely consumer. So the consumers continue to spend, which they clearly have been throughout the last year despite all of the warnings to the contrary, small businesses tend to do well. And I think that the longer that's continued and the less likely a recession is more confident. Small businesses have become. And I think that in large part explains our strong Q4 volume and our strong start to 2024.
On the SMB said.

Moshe Orenbuch

Great, thank you.

David Fisher

Yep.

Operator

Yes, again, if you have a question, please press star then one.
The next question is from John Rowan with Janney. Please go ahead.

John Rowan

Really, guys, I'm sorry, and I apologize if someone else asked this.
My phone cut out and had our rejoin the call. But as far as the we came through a rate hike cycle out material impairments to the fair value of the loans, obviously, the discount rate going up was offset by improved lifetime loss assumptions going forward, if the consumer holds up and we don't see no deterioration in the loss assumptions, does the fair value marks they just go up as rates come down and that discount rate gets reduced?

Steven Cunningham

Yes.
Hi, John. So we made a big adjustment in our discount rates back in the third quarter of 2022. And you're right, we do look at market rates, particularly short market rates and credit spreads are probably as equal or more important with our portfolio in terms of where we land with discount rates and we nudge those down just a touch this quarter. But keep in mind, the fair values are a bit less sensitive for discount rate than they are for credit. Just to for an example, about 100 basis points on the discount rate is only going to be about 70 basis points of fair value so not at not quite as sensitive, but overall as rates continue to come down, which would imply a group a good, a good opportunity for the economy. Spreads tend to come in as well, there would be an opportunity to continue to bring down discount rates in the fair value marks.

John Rowan

Okay.
And then just the charge-off rate in the consumer portfolio is like [17 point something percent], obviously higher than it was last year. I had the financial supplement doesn't really have the pre-COVID years. I could certainly go back and look at them on your website, but can you remind us how that charge-off compares to pre-COVID.

Steven Cunningham

Kind of similar, maybe a touch below, but that pattern that we talked about just a moment ago in terms of the seasonality of consumer through the year, you can see earlier this year at trough at around 13 and it can move 3 percentage points to 4 percentage points as you move through the year as you're moving through those different growth rates through seasonality. And we think we're back to that. But the rates that we're at today are comparable to maybe slightly a little bit better than where we were pre-COVID.

John Rowan

Okay.
All right.
Thank you very much.

Operator

For the next question is from Alexander the Lotus with Jefferies. Please go ahead.

Alexander Villalobos-Morsink

Thank you.
On a few of the questions were already answered with a fair value marks and our consumer confidence, but did want to get a little more detail on the originations mix for the quarter on new versus kind of like recurring customers? Thank you.

Steven Cunningham

Sure.
Well, we don't we don't talk about that metric as much as we used to, but it's been very stable now for some time. And for the most part, it's right around 40% new and has been for some time across the portfolio.

Alexander Villalobos-Morsink

Okay, perfect.
Thank you.
So much. Congrats on the quarter.

Steven Cunningham

Event. Thanks.

Operator

This concludes our question and answer session. I would like to turn the conference back over to David Fisher for any closing remarks.

David Fisher

Thanks, everyone for joining our call today. We certainly appreciate your time and we look forward to speaking with you again next quarter.
Have a good evening

Operator

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