Enova International's (ENVA) CEO David Fisher on Q4 2015 Results - Earnings Call Transcript

| About: Enova International, (ENVA)

Enova International Inc (NYSE:ENVA)

Q4 2015 Results Earnings Conference Call

February 04, 2016, 5:00 pm ET

Executives

Monica Gould - Investor Relations

David Fisher - President, Chief Executive Officer, Director

Robert Clifton - Chief Financial Officer, Vice President, Treasurer

Analysts

Bob Ramsey - FBR

David Scharf - JMP Securities

Henry Coffey - Sterne Agee

John Rowan - Janney

Gregg Hillman - First Wilshire Securities

Operator

Good afternoon and welcome to the Enova International fourth quarter and full year 2015 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

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

Monica Gould

Thank you Gary and good afternoon everyone. Enova released results for the fourth quarter of 2015 ended December 31, 2015 this afternoon after the 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.enova.com.

With me on today's call are David Fisher, Chief Executive Officer and Robert Clifton, 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 would like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it and as such, does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make 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, we report 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 the 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 would like to turn the call over to David.

David Fisher

Thanks Monica and good afternoon. Thanks for joining our call today. I am going to start by giving a brief overview of the quarter. I will spend some time walking through our strategy and finally we will share our perspectives for the upcoming year. After my remarks, I will turn the call over to Rob to discuss our financial results in more detail.

We had a good fourth quarter and are happy with the momentum we are seeing in the business. For the quarter, revenue was $175.4 million, which was 6.2% higher than Q3 and came in at the high end of our guidance. A significant contributor to our revenue growth was solid result in our U.S. business. We were also encouraged by the continued growth of our new initiatives, particularly NetCredit, our U.S. near prime product, as well as our two small business offerings and our Brazilian operations.

Adjusted EBITDA for the quarter was $28.3 million, which was in the upper end of our guidance range, driven by the factors I just mentioned as well as more efficient marketing spend across the majority of our products.

In the second half of 2015, we grew our topline nearly 10% over the first half of the year while exiting the year with annual adjusted EBITDA run rate in excess of $100 million. We believe that our performance in the back half of 2015 and in particular Q4 demonstrates that our diversification strategy is working. Our large U.S. business generated strong profitability. We are showing our ability to quickly rebuild our U.K. business on substantial regulatory change and we are successfully developing our new initiatives into real long-term opportunities.

In Q4 total company wide originations were up over 5% from the prior year. This marks the second sequential quarter of year-over-year growth and the strongest growth we have seen in total originations since before the new U.K. regulations went into effect in 2014. Additionally, while revenue was down 10% year-over-year, this is less than half the gap of the first three quarters again demonstrating the success of our diversification strategy as growth from both our core U.S. business as well as our new initiatives offset lower revenue in the U.K.. The growth in our revenue and originations continues to be led by our installment loan portfolio. This reflects our focus on creating alternatives to our short-term single pay products.

During the fourth quarter, our total loan book grew 11% sequentially and 26% year-over-year and recently introduced new initiatives now make up nearly half of our portfolio. The strongest contribute to this growth was NetCredit. We are also starting to see meaningful growth form Brazil in our small business products.

NetCredit's growth has continued at a rapid pace with originations up 16% from the third quarter and loan balances up 18% sequentially and 80% year-over-year. We believe that near prime market in the U.S. is very large and ripe for disruption. And it has continued to pull back from customers who don't meet their increasingly restrictive definition of prime. We believe we have a much better product offering than the incumbent brick and mortar competitors who have historically filled this need.

Customers appreciate the speed, privacy and transparency of our NetCredit loans. In addition, our NetCredit product has no fees, requires no collateral and we don't hard-sell customers ancillary products like credit insurance. As a result, we believe customers find our loans much more compelling than those offered by the large brick and mortar lenders. Due to the continued growth of our near prime offering, more than 46% of our loan portfolio are near prime loans and 43% of those loans have an APR of below 36%.

And we recently announced, we successfully completed our first securitization in January. The purpose of that transaction is to provide additional capital to support the growth of NetCredit. This is a significant milestone for Enova and provides strong validation of the NetCredit portfolio and our underlying advanced analytics platform. Moreover, the offering lowers our cost of capital and provides a new source of funding that is flexible and sustainable to support our growth plans.

Combined with the excess capital on our balance sheet, we anticipate that the $175 million facility we put in place will support us for much of 2016. That being said, it is likely we will put a second facility in place in the back half of this year to provide additional runway for the growth of NetCredit.

Our plan to accelerate the growth of NetCredit by establishing loan programs with a small number of banks remains a priority. These programs will focus on sub-36% APR loans and will have the similar margin profile and profitability characteristics as our direct loans. Most of these programs are scheduled to launch this quarter and we are on track to additional banks later this year. These relationships will enable us to rapidly expand the business into additional states with a goal of growing NetCredit's footprints from 13 states to more than 40.

On the international front, we achieved our third quarter of sequential loan origination growth following a drop in originations in late 2014 and early 2015 from the changes we implemented there to comply with the new regulations in the U.K. Over the past year, we have been focused on rebuilding our U.K. business and we believe we have gained meaningful market share as other lenders struggle to comply with the new regulations and to restructure their businesses to create sustainable and profitable business models.

As evidence of this success, if you exclude our discontinued line of credit product, international revenue is actually up slightly from a year ago. In addition and we are pleased to announce last Friday, we have received full authorization from our U.K. regulator all three of our products there, QuickQuid, Pounds to Pocket and On Stride Financial. We are very pleased to have been one of the first lenders in our sector to receive full authorization and this achievement demonstrates the depth of our compliance with the new regulations and rigorous commitment to maintaining robust policies and procedures.

Turning to our newer initiatives. We continue to make good progress with our installment loan product in Brazil. We took the business out of pilot phase during the fourth quarter and begin to more aggressively ramp up growth. While still relatively small compared to our more established products, they are more than doubled from the previous quarter as our team has done a great job of increasing loan volume while keeping marketing cost per loan low. As a result, the economics of the product remain very strong. As we have previously indicated, we expect a minimal drag on earnings this year as we expand Brazil and this expansion should lead to a more meaningful financial contribution from this product in 2017.

We are also excited about the progress we are making with our small business financing initiatives. As a reminder, we have two complementary products, a receivable purchase agreement product under the Business Backer brand and a line of credit product under our Headway brand. While there is plenty of competition in the small business space that we will keep our eye on as we move forward, we feel good about our prospects as we leverage our deep analytics expertise and marketing experience from our consumer businesses.

The combination of these new products and NetCredit's continued growth led to a 51% year-over-year increase in U.S. installment loan and finance receivables revenue. In addition, installment loans and lines of credit now comprise 70% of our total revenue and 84% of our portfolio.

Now I want to turn briefly to the ongoing CFPB rulemaking process. The current consensus is that the proposed rules will be published in late February or early March. As a reminder, following publication of the proposed rules there will be a common period followed by a CFPB response. Once final rules are published there will be an implementation period of up to a year. This makes it likely that the new roles will not take effect until late 2017 at the earliest.

While there hasn't been any additional information regarding the substance of what the CFPB will propose, we continue to believe that the proposed rules will strike a balance between protecting customers and providing access to credit for those who need it and can afford it. The result will likely be an industry that is a small percentage today but still very much viable.

As we demonstrated in the U.K. over the past 18 months, we believe that Enova will thrive under any likely regulatory construct. Given our ability to manage through substantial regulatory change, our lower operating cost structure compared to the storefront lenders and our advanced analytics and technology platform. Combining these factors with the success of our diversification efforts leaves us well positioned to mitigate the impact from proposed rule changes on our business. As a heads up, once the CFPB publishes its proposed rules and we have had an opportunity to review and evaluate them, we intend to properly communicate our assessment of the potential impact on our business.

Overall, we are very pleased with the progress we have made in 2015. On top of financial performance in Q4, we have now completed our first securitization and obtained full authorization in the U.K. After a noisy start to the year, largely the result of adapting to changes in regulation, we feel like we regained our stride in Q4 and that momentum has continued into 2016. This year, we will narrow our focus to executing on our existing initiatives, most notably NetCredit, our small business offerings and Brazil, as these initiatives look to provide us the largest and most profitable opportunities for growth in the near to intermediate term. While we remain encouraged by some of other prospects like China, we view these as longer term opportunities, will take more time to develop and will receive less of our resources.

To summarize, we believe that our strategy to continue growing our core offerings while diversifying into new profitable product is working. We know regulatory changes are coming in the U.S. and we will be prepared. Our new initiatives are driving growth in our business and are starting to contribute meaningfully to our bottomline. We attribute this success to the strength of our proprietary technology platform and advanced analytics as well as our very talented employees.

Before I hand the call over to Rob, I wanted to point out that in order to provide more transparency into our business in response to investor and analyst requests, we are rolling out the additional KPIs on originations this quarter. You can find these in the supplemental financial information statements located alongside our earnings press release on our website. As our business continues to evolve, we will regularly evaluate whether we are providing all of the necessary information for investors to make informed decisions about our business.

Now I will hand the call over to Rob, our CFO, to go over the financials in more detail and following Rob's remarks, we will be happy to answer any questions that you may have. Rob?

Robert Clifton

Thank you David and good afternoon everyone. I will first review our financial and operating performance for Q4 and then provide our outlook for the first quarter and the full year 2016.

As was the case in the third quarter, new customer acquisitions played a meaningful role in our fourth quarter performance. The dollar amount of new customer combined originations during Q4 was the strongest in Enova's history and represented our highest percentage of total origination volume. Driven by stronger year-over-year total originations in the second half of 2015, our total combined loan and finance receivable balance outstanding increased $53.8 million during the current quarter to a record $536.1 million.

The larger portfolio base contributed to increased revenue during the quarter with revenue coming in at the high end of our guidance. This was after absorbing a $2.5 million out of period adjustment to modify our revenue recognition policy in order to recognize line of credit draw fees over the period the draw is outstanding. Historically, draw fees were recognized in income when they were assessed to the borrower, but since they are in essence a yield enhancement, we determine we needed to change our revenue recognition policy. Because the cumulative adjustment amount is not material to prior year's financial statements nor to the full 2015, we elected to record the full correction during the fourth quarter of 2015 and will disclose it is an out of period adjustment in our 2015 financial statements.

On a year-over-year basis, total revenue of $175.4 million in the fourth quarter declined 9.9% from $194.7 million in the fourth quarter of last year. This was driven primarily by regulatory changes in the United Kingdom and to a lesser extent the negative impact of currency fluctuations. On a constant currency basis, revenue declined 8.7% from a year ago. Sequentially, revenue increased 6.2% in the fourth quarter and we experienced growth across all installment and line of credit product categories, both domestically and internationally with the exception of our U.K. line of credit product, which was discontinued at the end of 2014 due to regulatory changes.

Domestic revenue accounted for 82% of total revenue in the quarter and rose 10% on a year-over-year basis to $144.1 million. This increase is from the continued growth in our domestic installment products, primarily led part by our near prime NetCredit brand. U.K. loan originations continued to build momentum with a modest increase in the fourth quarter over the third quarter, despite a more disciplined marketing spend.

Year-over-year international revenue declined 51% and accounted for 18% of our total revenue in the fourth quarter. The decline is primarily due to the changes in the regulatory environment in the U.K. that occurred after March 31, 2014.

As mentioned earlier, we ended the quarter with total combined loans and finance receivable balance outstanding of $536 million, up 26% from $425 million in the fourth quarter of last year. Domestic loan balances were up 49% on strong growth from our NetCredit installment loan portfolio and our small business loans and finance receivables.

International loan balances were down 32% on a year-over-year basis, as a result of the regulatory changes in the U.K., but rose 5% sequentially marking the second quarter of sequential growth since U.K. regulations began to take effect in 2014. To a lesser extent, the stronger dollar relative to the local currencies in the foreign markets we operate in contributed to the year-over-year decline in international loan balances. On a constant currency basis, international loan balances were down 27% year-over-year. Our U.K. line of credit portfolio continued to wind down and had a balance of only $46,000 as of December 31, 2015.

Turning to gross profit margins. Fourth quarter gross profit margin for the total company with 59.5%, down from 68.9% in the fourth quarter of last year, primarily driven by the growth of NetCredit and a higher mix of new customers, which require higher loss provisions as new customers default at a higher rate than returning customers with a successful history of loan performance. Although the growth in NetCredit's portfolio contributed to the lower gross profit margin in the current quarter, as the portfolio continues to scale and the underlying longer term loans continue to season, we will achieve increase incremental profitability.

Domestic gross profit margin declined to 55.7% from 62.6% in the prior year quarter for the reasons previously noted. Our international gross profit margin was 76.7% in the current quarter, down from 81.7% in the same quarter last year. The decrease in international gross profit margin reflects an anticipated return to more normalized gross margins. Excluding the discontinued U.K. line of credit product, our international gross profit margin was 69% in the current quarter, which is up sequentially from 67% we achieved in the third quarter. We believe loan originations will continue to grow in the U.K. and depending on the level of originations and the mix of new and returning customers, we expect our international gross profit margin to range between 65% and 75%.

Turning to expenses. Total expenses declined 1.6% year-over-year, driven by lower expenses primarily for our U.K. products. Total marketing expenses decreased $2.7 million or 7.7% to $32.5 million in the current quarter compared to $35.2 million in the prior year quarter.

Adjusted EBITDA, a non-GAAP measure, totaled $28.3 million in the fourth quarter compared to $54.8 million in the prior year quarter. Even after absorbing the $2.5 million out of period adjustment previously discussed, adjusted EBITDA of $28.3 million was on the high end of the guidance we provided on last quarter's call.

Our adjusted EBITDA margin decreased from 28.2% for the fourth quarter of last year to 16.1% for the current year quarter. On a sequential basis, adjusted EBITDA increased 12% from $25.2 million in the third quarter, while our adjusted EBITDA margin rose from 15.3%.

Our stock-based compensation expense was $3.1 million for the fourth quarter compared to $407,000 in the prior year quarter, when our first equity grant after the spinoff from Cash America was made late in the quarter.

Net income totaled $4.2 million in the quarter or $0.13 per diluted share compared to net income of $22.5 million or $0.68 per diluted share in the prior year quarter. As noted in our earnings release, the out of period adjustment to revenue reduced net income during the quarter by $1.6 million or $0.05 per diluted share.

Adjusted earnings, a non-GAAP measure totaled $6.2 million in the quarter or $0.19 per diluted share compared to $22.4 million or $0.68 per diluted share in the prior year quarter.

We ended the quarter with cash and cash equivalents of $42.1 million. Following the end of the quarter, we closed on the securitization facility and paid off our unsecured revolver. We continue to maintain over $33 million of borrowing capacity on that credit facility.

Moving to our cash flow statement. Cash provided by operations increased to $78 million in the fourth quarter, up from $71 million in the prior year quarter. We believe strong cash flow and securitization debt issuances will be sufficient to satisfy our working capital needs in 2016.

Let me take a moment to provide some additional color on our first securitization, a significant milestone for Enova. This facility was initially funded through the issuance of a term note for $107.4 million and secured by $134 million in NetCredit unsecured consumer installment loans representing an initial advance rate of 80% for this term note. The facility also includes a revolving note with availability of $20 million per month for potentially up to nine months following the closing.

Newly originated and seasoned NetCredit loans may be pledged under the revolver and at the end of each month the revolving debt will convert to one or more term notes. Because principal payments will be made on the debt outstanding based on a waterfall of customer payments received, borrowings under the facility may exceed $175 million. However, the maximum combined principal amount of the term notes in the revolver that may be outstanding at any time is limited to $175 million.

These nonrecourse notes bear interest in an annual rate equal to the one-month LIBOR subject to a floor of 1% plus a 7.75% applicable margin, which results in an initial rate of 8.75%. The initial and subsequent pool to pledge loans are subject to an initial advance rate in a targeted loan-to-value ratio. Both terms will vary based on the APR range of the underlying collateral.

NetCredit's loan originations level will determine whether the current securitization facility will meet NetCredit's liquidity needs for 2016 or whether we will add a second facility late in the year. Either way we are laying the groundwork for additional future facilities.

With that, I would like to turn to our outlook for the first quarter and full year 2016. As noted in our earnings release, in the first quarter of 2016, we expect total revenue to be between $150 million and $165 million and adjusted EBITDA to be between $25 million and $35 million. For the full year 2016, we expect total revenue to be between $675 million and $725 million and adjusted EBITDA to be between $120 million and $140 million.

Our outlook reflects continued strong growth in our NetCredit portfolio and continued higher mix of new customers, no changes in the competitive landscape in the United Kingdom and no impact to our U.S. business from proposed CFPB rulemaking since any new rules will likely not take effect until late 2017.

Lastly, we expect our NetCredit bank program will incur a moderate loss in its first year as we ramp the portfolio with investments in marketing spend and we build appropriate loan-loss allowances, but see it turning profitable in 2017. We expect the combined operations of NetCredit will continue to be profitable in 2016.

With that, I will hand the call back over to David for his additional remarks.

David Fisher

Thanks Rob and thanks everyone for joining us today. We will take your questions now. We look forward to updating you again on our progress next quarter.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from Bob Ramsey with FBR. Please go ahead.

Bob Ramsey

Hi. Good evening guys. Thanks for taking the question. First question before I forget. I think your last comment there, Rob, I didn't quite catch. You said NetCredit will have some loss given the growth initially in 2016, but then I thought you said combined NetCredit will be profitable in 2016? Was there a distinction between geography or something there I missed or I just missed some detail?

Robert Clifton

The real distinction is that that's a new initiative for us, the bank program or the bank partnership. So we have company originated loans in various states and we are going to in 2016 launch the bank program. So when we look at NetCredit in total, we still expect it to be profitable in 2016.

Bob Ramsey

Okay. I got it. So just the new business, if you looked at it on a vintage basis, a vintage would be in 2016, but the legacy book would be.

Robert Clifton

Yes.

Bob Ramsey

Okay. Great. Thank you guys for including the originations detail in the supplement. I know we have been looking for it for some time. So I certainly do appreciate that. Loan growth looked a lot better this quarter and obviously you guys have been talking about the U.K. turning for some time. But I am just kind of curious, how you are thinking about loan growth as we go through 2016? And could you maybe remind me how to think about seasonality on the NetCredit book? Given that it's so much bigger, I don't think it does the same degree of seasonality that the short-term product does. I would appreciate your perspective.

David Fisher

Yes. So we expect continued growth of our loan book, driven in the largest part by NetCredit, but we see continued growth in our U.S. business despite its large size and the continuation of the regrowth of our U.K. business and then we supplement that with our new initiatives, Brazil and our small business financing products. So really across all those products, all of we expect growth in 2016, leading to an expectation of a much higher loan book at the end of year. Hence the need for the first securitization and likely another facility this year.

Regarding your question on NetCredit and the seasonality of it. It certainly is less seasonal than our short-term product, but it's still, while at a smaller level, follows the general seasonality, Q1 being the slowest origination quarter, Q3 being the strongest with Q4 being the second strongest. But certainly less with the NetCredit book than the shorter term book. And given that the rapid growth we have seen in that product over the last two years, it's amassed much of that seasonality.

Bob Ramsey

Okay. Growth, obviously you guys expect to be good, but how should we think about the pace? Do you have more growth in percentage terms in 2016 than 2015, because you are obviously seeing the same degree of headwind from the U.K.? Or is that too much?

David Fisher

So it's a good question. If you look at our guidance and if you look at our guidance, our revenue and EBITDA guidance relative to the back half of 2015 when much of the impact of the regulatory change in the U.K. was baked in, you see some pretty substantial growth, kind of 30% EBITDA growth, strong revenue growth and largely as our product mix is stabilizing a little bit, the loan book growth will be in line with the revenue growth.

Bob Ramsey

Okay. I guess along those lines, there was a fair amount of yield compression this quarter and I am sure that's driven by the growth in the NetCredit book. But shall we think about the yield coming down at a similar pace as we go through 2016? I know in the past, you have talked about seeing less yield compression and I don't think we really have, just because of the growth in that book, but how are you thinking about the yield?

David Fisher

Just because of large numbers, the growth of NetCredit relative to total portfolio will slow and so you should see yield compression slow as well because that's really the primary factor in why those yield are coming down. We are not seeing substantial yield compression in our shorter term products.

Bob Ramsey

Okay. Do you have the NetCredit yield this quarter?

Robert Clifton

We don't have it broken out that way, but the overall installment portfolio yield was approximately 96%, which was just down slightly from Q3. So for the installment category, fairly stable.

Bob Ramsey

Okay. And I think last quarter you had given the NetCredit yield had ended September in very high 60s. Is it fair that you are still on that zip code?

Robert Clifton

Yes. I mean, over time that will come down as the bank program expands, but yes. No significant difference from Q3.

Bob Ramsey

How much of the NetCredit book or the total book is sub-36% today?

Robert Clifton

Yes. We gave that number. It's about 46% of the total book is NetCredit and 43% of the NetCredit loans are sub-36%.

Bob Ramsey

Okay. Great. Thank you. Last question and I will hop out, give someone else a chance. But your tax rate seems a little high this quarter and maybe you mentioned it. But was there something unusual there and what shall we use from a modeling perspective going forward?

Robert Clifton

Yes. I think it was just because of the lower pretax income and the more significant impact from permanent differences. So for the full year, it was up 37.4%. I think as I look out to 2016 and of course it will depend on where we come from a pretax standpoint, but I would generally say 38% is probably a close estimate.

Bob Ramsey

Okay. Thank you.

Operator

The next question comes from David Scharf with JMP Securities. Please go ahead.

David Scharf

Hi. Good afternoon. Maybe I will switch over to credit trends. Maybe just as a clarification of the one timer you had mentioned, Rob, but as I look at the loss rates and gross margins, for short-term they seem to actually hold up pretty stable sequentially. They look to improved for installment. But line of credit had a big drop from Q3. Did we actually see that $2.5 million adjustment fall into the cost of sales line item? Would that be the reason why LOC margins dropped so much?

Robert Clifton

No. The $2.5 million came out of revenue. So it was a reduction in revenue. But the big drop in line of credit is for two reasons. Number one, as we have been having a declining benefit from the U.K. line of credit product and so that's part of it. But then on the U.S. line of credit, we had pretty strong demand in Q4. So stronger growth there.

David Scharf

Okay. So just the upfront provisioning impact. Okay. Given that because of law of larger numbers, prior questions were addressing the growth rate will tail off a bit on origination side. And given that we have actually seen a few sequential quarters now of stability in gross margins among short-term product and improvement of NetCredit, just trying to understand if the gross margin outlook that's embedded in your 2016 EBITDA guidance is materially different from the percentage you have just put up in Q4?

Robert Clifton

It's a little bit lower but not substantially as NetCredit continues to grow and also as we anticipate adding, having a good year for new customer volume in 2016, but not significantly. We have finally gotten back to more historical levels of gross margins after the anomalies earlier in the year because of the runoff of the business in the U.K. And so mid-50s to 60s is where we always have been historically and that's kind of the range we see going forward.

David Scharf

Okay. Good. So we have seen the bulk of the normalization pretty much play out. Switching to demand, Dave, can you notwithstanding just the originations figures we have, but can you speak more qualitatively to what trends you are seeing in U.S. demand for the three separate products? Clearly short-term has been under some pressure and we have seen that from even low-end pawn borrowers as well. Are you feeling any benefits from gas prices? Any sense that some of these borrowers might actually want to lever up a little more? Or should we be looking at short-term originations as to being challenged?

David Fisher

We saw good short-term originations in Q4 on relative to our expectations. Remember, in Q3 we had a little bit of head fake where volume looked very good at the beginning of the quarter and then tailed off. It bounced back in Q4 and into the beginning of this year. So that demand is still there on the short-term product, which is very encouraging. And that short-term include the higher interest rate and including the higher interest rate line of credit products as well.

And then on the NetCredit product, it's such a big market opportunity that is just beginning to be tapped. The size of the opportunity, I think right now, is overwhelming. Any kind of changes in demand or even as I mentioned before, even overshadowing any normal seasonality. So we are still seeing very good demand for the NetCredit product.

And then on the U.K., I think similar to U.S. higher interest rate products, demand is good there. Competition has been relatively stable. We are still early in the authorization process. And we believe there will be companies that don't get authorized. That can change the dynamics there to the positive.

David Scharf

Got it. And the U.K., it looks like we have had, the pickup in origination volume, revenue is actually flatlined these three quarters where we have seen the build from the trough. Is this just a lag effect? Or is there a predominantly different yield outlook for the product there?

David Fisher

There is not materially different yield outlook. So you think you are seeing two things of the originations. One is the runoff of the line of credit product. So that's running off. And so that's counteracting the growth in the revenue. And then, the second, as we talk about, originations build first and then revenue. So we expect to see revenue build in the U.K. in 2016 based on a lot of the hard work that we did in 2015.

David Scharf

Got it. And then just lastly, can you bring us up-to-date on the balance sheet cash and debt levels where we are here in the month of February?

Robert Clifton

So on a pro forma basis, if we look at the year-end, we had cash at $42.1 million. We have the initial term note and the securitization in mid-January and that brought in approximately $107.4 million. When you set all that up and pay off the revolver, we ended the quarter on a pro forma basis with $88 million in cash plus we had $33 million available, a little over $33 million available on the unsecured revolver. Q1, as the tax season kicks in, so liquidity does increase throughout the quarter.

David Scharf

Got it. Thank you very much.

David Fisher

Yes. Thanks, David.

Operator

The next question comes from Henry Coffey with Sterne Agee. Please go ahead.

Henry Coffey

Thanks for taking my question. Can we start with something really stupid?

David Fisher

Sure.

Henry Coffey

You will always do, he says. What is getting your license the U.K. mean in terms of the ability to put on volume? Do you still have to sort of move slowly or is this an opportunity to accelerate growth?

David Fisher

Yes. So I think it means a couple of things. One it takes away the binary risk of us not getting a license. Second of all know, they look at all of our practices and procedures and if they have problems with anything we are doing, they would have told us as part of that process. And so it does give us a little bit of a green light to step on the gas. Basically says, okay, we are doing things the way that we should be doing. We can feel more comfortable about investing in that business and growing that business throughout the year.

Henry Coffey

And then, there will be certain parties that don't get licenses and there is always the issue of the illegal operators. Do they have mechanisms in place unlike we don't in the U.S. to shut down the offshore types that continue to intrude the market?

David Fisher

They do. They have been working on them. They have been talking a lot to the U.S. on how they can a shut a lot of those offshore guys out in the U.S. through stopping them from using the ACA system, which makes it very difficult to operate. And so we haven't seen a strong growth of the offshore lenders, illegal lenders in the U.K. the way we had in the U.S. before they largely got shut down about a year-and-a-half ago.

Henry Coffey

And then, when you look at the U.S. market, the shorter term loan products, do they have their own growth dynamic? Or you intentionally tighten down there?

David Fisher

So on the short-term single pay product in the U.S., we think that we still have a viable product that's growing there. We think there will still be a viable product there post-CFPB regulations. But we think the installment product and the line of credit product will be more easy to evolve into a post-CFPB product. And so we certainly have been emphasizing those on a state-by-state level where we can and because customers tend to prefer. We can offer the two side-by-side. We almost always customer preference for an installment or line of credit product over a single pay product.

Henry Coffey

And the biggest issue they are likely to come out with it is just avoiding ability to pay guideline. How does your U.S. product look from there to what maybe some of the stricter ability to pay guidelines, if any, put out?

David Fisher

So all of our underwriting is built around ability to repay. And so for us, once we know where the U.S. guidelines are about how they define ability to pay, it's just a matter of tuning our existing models to reflect those new rules. Similar to our success there in the U.K., the ability to quickly adapt our models the new regulatory environment there, we feel similarly confident about our ability to do it in the U.S. once we see the new rules.

Henry Coffey

Listen, thank you for answering my questions and congratulations. You have accomplished a bunch of milestones this quarter.

David Fisher

Thanks, Henry. I appreciate it.

Robert Clifton

Thank you.

Operator

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

John Rowan

Good afternoon guys.

David Fisher

Good afternoon, John.

John Rowan

Just first on the guidance. If I look at the EBITDA guidance for the first quarter and then extrapolate that through the rest of the year, it actually looks weaker in the first quarter than through the remainder of the year, just on balance. It seems counterintuitive to the typical seasonal patterns of this business. I just wondered if I am misreading it or if there are some different seasonal dynamic with NetCredit, because obviously you guys touched on that a little bit earlier.

David Fisher

Yes. John, so Q1 2015 adjusted EBITDA was $61.1 million. You have got to keep in mind that last year the run off for the wind down in the U.K. line of credit product was the strongest in Q1 and contributed approximately $19.3 million to the gross profit line. So when you take that out, you are looking at a Q1 of $41.8 million at the Q1 2015. With our guidance at $25 million to $35 million, which again reflects the stronger NetCredit as well as a higher mix of new customers. So I think you have got to keep that in context. Most of it's driven off of the U.K. line of credit product.

John Rowan

Okay. Marketing expenses, I was a little surprised at the sequential contraction. I would have thought near the December quarter, it would be up. And you also talked about ramping up marketing spend in 2016 to support the bank NetCredit product. I am just wondering, how do we look at that going forward? Is it again going to be typically weighted towards the back half of the year for marketing spend?

David Fisher

So Q2 and Q3 marketing spend was high, as we were trying to regrow that U.K. business. And so once we established a solid footing there to gain the number one market share there, we were able to dial back some as we entered Q4. We also put some new marketing analytics models in place in the quarter that ended up being very effective for us. We continue to evaluate the effectiveness of those in early 2016. This will have a little bit of spend, additional spend, as we launch the NetCredit bank program. But at this point, certainly the percentage of revenue don't see the marketing levels getting as high as they were during the midpoint of 2015.

John Rowan

Okay. And just on the bank product, do you have any banks in the NetCredit product yet?

David Fisher

We haven't launched but we are extremely close.

John Rowan

Okay. And then one last question. This is really for the ABS market. There is basically one issuer out there right now that's doing weighted unsecured consumer loan ABS deals. I am wondering what your plans are in the future? I think we will see more lenders come to the market with rated deals and hopefully that will increase the number of buyers who are looking at the space. Are we still quite a ways away from you guys doing a rated deal? Or are we still going to be unrated for a while?

David Fisher

Yes. I wouldn't necessarily say so. I mean, there are several players in the near prime space that are doing public deals, some rated, some unrated. And it is an option we explored prior to putting this facility in place. We thought there was more certainty around the structure that we use. But now that we have the structure in place, we are going to evaluate where we think we can get the best economics and certainly from the research we have got, a rated deal is not off the table at all. It is certainly, we believe, a possibility.

John Rowan

Okay. Thank you.

Operator

[Operator Instructions]. The next question comes from Gregg Hillman with First Wilshire Securities. Please go ahead.

Gregg Hillman

Good afternoon. David, I was just wondering if NetCredit, how do you know you modeled the risks correctly in terms of bad debt on a go forward basis, particularly with some adverse economic scenarios? Is it [indiscernible] because for example, plus the length of loans, is like 11 months or is it longer than that?

David Fisher

So the initial terms of loan are three to five years. The average duration tends to be in between the two and three year range. It's a great question. So I think part of it is, we have gone slower in ramping up this product than some of our other competitors. And we have almost over three years of history now in these near prime products. So we have seen these products mature.

We have been able to gauge not only default rates by vintages but also equally importantly, we have gotten a better handle on the prepayment curves. Because the prepayment curves effect profitability almost as much as the default propensity does. In addition, it's important to remember, we have 12 years of experience originating consumer loans.

No, they don't look exactly like the NetCredit product. But consumers tend to like consumers as consumers move throughout different credit tiers through their life cycle. So we have a wealth of data about consumer behavior, including behavior through the deepest recession this country has seen since the great depression. That extremely valuable data, combined with the three years of now experiential data we have on the product that gives us a lot of confidence in evaluating that loan book looking forward.

Gregg Hillman

Has your experience in the U.K. helped the model lengths for the U.S.? Is it relevant? Since you have doing the installment loans longer there.

David Fisher

So I think our modeling in the U.K., we have been issuing installment loans there since 2007. We have also been issuing shorter term installment loans in the U.S. for many years. So all of that data goes into building our models for the NetCredit product.

Gregg Hillman

So basically you are confident that the U.K. continues this kind of ramp you have experienced in NetCredit without having a really bad loss experience in some sort of exceptional scenarios going forward. Do you think you are okay in just normal scenarios?

David Fisher

Yes. And again, I think two other important points to keep in mind on that. One is, this isn't necessarily a new product. What we are doing is taking share from a legacy brick and mortar lenders who have been issuing installment loans in this interest rate range for decades. If you think about Springleaf, one names on the world acceptances, they have been these products for decades. And so that this isn't something brand new that's completely unknown. I think the other thing we have in our favor is, we have brought in experience in these products in particular, our new COO Greg Zeeman has lots of experience in the near prime space from his stays at Household in HSBC. He is already adding value in terms of how we think about the NetCredit portfolio going forward.

Gregg Hillman

Okay. Thank you, Dave.

David Fisher

Yes. You are welcome.

Operator

[Operator Instructions]. As there are no further questions, this concludes our question-and-answer session. I would like the conference back over to David Fisher for any closing remarks.

David Fisher

All right. Thank you and thanks everybody for joining us again. We appreciate your time today and we look forward to talking to you again soon.

Operator

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

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