Enova International's (ENVA) CEO David Fisher on Q1 2016 Results - Earnings Call Transcript

| About: Enova International, (ENVA)

Enova International, Inc. (NYSE:ENVA)

Q1 2016 Earnings Conference Call

April 28, 2016, 05:00 PM ET

Executives

Monica Gould - Investor Relations

David A. Fisher - President and Chief Executive Officer

Robert S. Clifton - Chief Financial Officer

Analysts

David Scharf - JMP Securities

Robert Ramsey - FBR Capital Markets & Co.

Henry Coffey - Sterne Agee Group, Inc.

Operator

Good afternoon and welcome to the Enova International first quarter 2016 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 ma’am.

Monica Gould

Thank you Frank and good afternoon everyone. Enova released results for the first quarter of 2016 ended March 31, 2016 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 A. Fisher

Thanks Monica and good afternoon everyone and thanks for joining our call today. We’re going to start-off today by giving a brief overview of the quarter and I’ll spend some time updating you on some of our initiatives and finally I will share our perspectives looking forward. After my remarks, I will turn the call over to Rob to discuss our financial results and guidance in more detail.

We had a good first quarter and we’re happy with the continued momentum we’re seeing at Enova. In addition to strong financial results, we achieved a number of milestones that position us well for future growth. We received four authorization for all of our businesses in the UK, we completed our first securitization and we launched a partnership with Republic Bank. I will discuss this partnership in more detail in a few minutes.

But first, for the quarter, revenue was a $174.7 million, an increase of 5.4% from Q1 of last year and above our guidance range of $150 to $165 million. Our U.S. business was again a strong contributor to our results. Q1 is generally a slower quarter for U.S. lending but we saw strong demands especially for installment loans and line to credit.

Solid credit performance was another highlight of the quarter as we were able to buck any larger macro economic trends that it seems some other vendors are experiencing. We were also very pleased by the continued growth of our new initiatives particularly in net credits our U.S. near prime products as well as our Brazilian operations and our two small business offerings.

Adjusted EBITDA for the quarter was $37.8 million, which was also above our guidance for $25 million to $35 million. The higher than expected EBITDA was driven by the good loan performance I just mentioned, as well as more efficient marketing spend across most of our products. We believe that our Q1 performance is conformation that our strategy is sound and our talented team is doing a great job of executing.

This is not new, but it has been difficult to say that last several quarters with all the changes in our businesses. For example, the rapid growth in net credit last year matched its true profit potential based on this strong unit economics we’re seeing in net credit lines. In addition, the drop in UK originations early last year and the wind down of the UK line of credit portfolio both as a result that changes in regulations and process in 2014, but it is difficult to see the successful adjustments we made in the UK market.

As we execute on this strategy, our business continues to become more diversified which gives us multiple opportunities for growth and significant hedges against regulatory changes. Our large sub-prime U.S. business generated another strong quarter of profitability. Even within this business, we’re becoming much more diversified with 25% of our U.S. sub-prime loan portfolio consisting a single pay product, 31% installment products and 44% from line of credit products.

Our UK business continues to recover and net credit has become a substantial business for us generating significant growth targeted at different credit segments of consumers and we are successfully developing our new initiatives into real and long-term opportunities highlighted by Brazil and small business financing.

With total company wide originations up over 11% from the prior year, our diversification strategy is working. This marks the third sequential quarter of year-over-year growth and the strongest growth we’ve seen in total originations since the fourth and new UK regulations went into effect in 2014.

The growth in our revenue and originations continues to be led by our installment loan and line of credit portfolio and reflect our focus on creating alternatives to our short-term single pay products. During the quarter, our total loan book grew 47% year-over-year, the largest contributors to this growth were net credit and our small business products, which led to a 44% year-over-year increase in U.S. installment loans and finance receivables revenue. In addition, installment loans and lines of credit now comprise 72% of our total revenue and 86% of our portfolio.

Net credit growth has continued at a rapid pace. With originations up 22% from the first quarter of last year and loan balances up 67%. Due to the sustained growth of our U.S. near-prime offering, more than 45% of our total U.S. loan portfolio is now near-prime loans and 46% of those loans have an APR at or below 36%.

In order to take advantage of the large market opportunity we see in the U.S. near-prime space, late in the first quarter we launched a net credit program with Republic Bank and Trust Company. This program leverages Enova’s online lending platform by providing technology, loan servicing and marketing services to Republic Bank with the objectives of expanding their online consumer lending.

The loans originated by Republic will have an APR below 36%. We launched this program with a pilot in a single state, so wasn’t material during the quarter. However, we continued to rollout in early Q2 and expect being over 10 states by the end of quarter. From there we intend adding additional states throughout the year.

Under the program, Republic has the ability to sell the loans and originate two net credits. As Rob will discuss in more detail shortly, our recent securitization positions us well to support this growth of the net credit portfolio. For those of you not familiar with Republic Bank, they are a state chartered commercial bank with over 4 billion in total assets supervised by the FDIC.

Turning to the international front, we are pleased with the progress we’ve made in the UK since the drop in originations in late 2014 and early 2015 from the changes we implemented there to comply with new regulations. We believe that business is now on stable footing and looking forward we expect to see meaningful growth. In addition, the business is solidly profitable and should provide over $20 million of the EBITDA contributing this year.

During the quarter, we made a decision to exit Canada and Australia as a lender due to the limited market opportunities we see in those countries. As a result, we have slowed originations and we’ll soon begin to wind down our loan portfolios. These businesses never became significant drivers of our growth or significant contributors to revenue and given the relatively small size and each of their challenging regulatory environments, we didn’t see this changing in the foreseeable future.

To give you a better sense of their size, Canada and Australia together comprised less than 2% of or Q1 revenue. While our operational cost there have also been relatively small, we want to focus all of our resources and our people and our highest growth opportunities.

Turning to our new initiatives, we’re making good progress with our installment loan product in Brazil. We’ve been aggressively ramping up growth in Brazil and the gross AR is up 91% just from the end of Q4. In China, we still see a significant opportunity there given the sizes of market and the proliferation of online lending, but we've remained cautious due to challenging regulatory environment and uncertainties around repatriating capital from China.

To address these issues, we have shifted our model from direct lending to providing services through Enova Decisions our analytics as a service business. In late March, we signed a two-year agreement with a former China joint venture partner for these services and a see great opportunity to address the growth in this market and deliver value at a relatively low cost.

We are also pleased with the growth of our small business financing initiatives, which include two complementary products. Our receivables purchase agreement product under the Business Backer brand and a line of credit product under our Headway brands.

We grew small business originations sequentially in the first quarter despite a typically seasonal softer loan demand at this time of the year and businesses regroup from the holiday season. As a result, our portfolio increased by more than 20% from the fourth quarter and our small business offerings now represent 13% of our total portfolio.

Now we want to turn briefly to the ongoing CFPB rule making. Our mission at Enova is to help hardworking people fulfill the financial responsibilities with fast, trustworthy credit. As detailed in a recent survey by the Federal Reserve Board, 47% Americans so they didn’t have sufficient savings to cover a $400 emergency. We believe that CFPB recognizes this need and we remain convinced that the CFPB will maintain access to credit for the many millions of Americans who need it, allowing us to continue fulfilling our mission.

As we’ve discussed in the past, we are confident in our ability to manage though the forthcoming regulatory changes in the U.S. and continue to believe that Enova will thrive under any likely regulatory construct and remain a large and profitable player in the industry. Over the last two years, we have successfully managed through substantial regulatory changes in the UK, our sophisticated analytics with more customer history than any other online lender will also be extremely valuable in addressing any required changes and our diversification efforts position us well to mitigate the impact from proposed rule changes on our overall business.

In terms of the CFPB’s process, the current consensus is at the proposed rules will be published in the next few months possibly as early as mid May. As a reminder, following publications 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 rules will not take effect until late 2017 at the earliest.

We’ve done significant preparatory work to be able to quickly access the impact of the proposed rules on our business. Accordingly, once the rules have published and we have an opportunity to review and evaluate them. We intend to properly communication assessment of their potential impact on our business to you.

To summarize, we are very pleased with our strong performance both from a financial standpoint as well our ability to achieve important milestone. And so far Q2 appears to be off to a good start with demand picking up earlier following the tax refund season than we’ve seen in recent years. Enova was one of the earlier entrants of the online lending market and has more than 12-years of lending experience. Our success is the testament to the strength from proprietary technology platform our advance analytics and our very talented employees.

We have succeeded during significant changes in regulation and drastic changes in the economy including the great recession. We believe that our strategy to grow our core offerings while diversifying it to new profitable products that is working we know regulatory changes are coming in the U.S. and we believe we are well prepared and will emerge a winner. In the meantime, our UK business is doing well and our new initiatives are driving growth and beginning to contribute meaningful to our bottom-line.

Now, I will turn the call over to Rob Clifton our CFO to go over the financials in more details and following Rob’s remarks, we’ll be happy to answer any questions that you may have. Rob.

Robert S. Clifton

Thank you David and good afternoon everyone. I will first review our financial and operating performance for the first quarter and then provide our outlook for the second quarter 2016. We are pleased to report our first year-over-year increase in revenues since the third quarter of 2014, when new regulations began to have a significant effect in the United Kingdom. This performance is a testament to our ability to navigate changes in regulatory environment and diversify our product offerings.

Total revenue of $174.7 million in the first quarter increased 5.4% from $165.7 million in the first quarter of last year and came in above our guidance range. The increase in revenue was driven by our domestic operations primarily our installment loans and receivable purchase agreements or RPA products which rose 44.5% in the current quarter compared to the prior year quarter.

Total originations volume also increased on a year-over-year basis up 11.3% in the first quarter. Similar to the fourth quarter, we saw a higher mix of new customer originations relative to total originations on a year-over-year basis. This is positive long-term, because new customers drive additional future revenue.

On a constant currency basis, revenue increased 7% compared to the prior year quarter. Sequentially, revenue was essentially flat despite the fact that we typically see a seasonal decline in demand during Q1 due to the tax refund season in the U.S., domestic revenue accounted for 82% of total revenue in the quarter and rose 21% on a year-over-year basis to $143.4 million. This increase continues to be driven by the growth in our domestic and installment product primarily led by our near-prime net credit brand.

On a year-over-year basis, UK loan originations increased 33% during the first quarter on an efficient marketing spend. While we haven’t seen any major changes in the competitive landscape in the UK during the first quarter, we did see several competitors pull back on their advertising levels.

Year-over-year international revenues declined 33% to $31.2 million and accounted for 18% of total revenue in the first quarter. The decline is primarily due to the changes in the regulatory environment in the UK that occurred after March 31, 2014. If we exclude the revenue contribution from the discontinued UK line of credit product, international revenue increased 14.7% on a year-over-year basis in the first quarter.

Moving on to asset levels, we ended the quarter with total combined loans and finance receivables balance outstanding of $523 million up 47% from the $356 million in the first quarter of last year. Domestic loans and finance receivable balances were up 61% on strong growth from our net credit installment loan portfolio and our small business offerings.

International loan balances were essentially flat on a year-over-year basis and rose 1% sequentially marking the third quarter of sequential growth since UK regulations began to take effect in 2014. On a constant currency basis, international loan balances were up 4% year-over-year. Excluding the discontinued UK line of credit balance of $16.7 million at March 31, 2015, our international loan balance was $63.2 million at the end of the prior year quarter. This results in a pro forma year-over-year increase of 26.5%.

Turning to gross profit margin, first quarter gross profit margin for the total company decreased to 60.2% for the current quarter from 76.7% for the prior year quarter. The decrease in gross profit margin was primarily driven by the growth of our domestic installment loan, RPA and line of credit portfolios as well as higher mix of new customers, which require higher loss provisions, because new customers default at a higher rate than returning customers with a successful history of loan repayments. As well as the gross profit contribution in the prior year quarter from the wind down of the UK line of credit product.

Although the growth in our domestic near-prime installment portfolio contributed to the lower gross profit margins as the portfolio continues to scale and the underlying longer term loans continue to season, we expect to achieve increased marginal profitability. We expect the consolidated gross profit margin will continue to be influenced by the mix of loans and financings to new and returning customers, the mix of lower yielding and higher yielding loans in financing products in loans originations for our international operations. We expect our consolidated gross profit margin to remain in the range of 55% to 63%.

Domestic gross profit margins declined to 57.8% from 71.5% in the prior year quarter for the reasons previously noted. Our International gross profit margin declined to 70.8% from 90% in the prior year quarter. The decrease in international gross profit margin reflects an anticipated return to more normalized gross margins after stricter underwriting standards from regulatory changes in the UK in 2014, the lowered originations and loan balance levels.

Excluding the discontinued UK line of credit product, our international gross profit was 65% in the current quarter, which is down sequentially from the 69% we achieved in the fourth quarter due primarily to higher growth in Brazil. We believe loan originations will continue to grow in the UK and depending on the level of originations and the mix of new and returning customers, we expect our international gross profit margin to remain in the range of 65% to 75%.

Turning to expenses, total expenses were essentially flat year-over-year at $73.2 million while marketing expense decreased 12.3% or $3 million to $21.2 million as our marketing spend was very efficient during the quarter. Adjusted EBITDA in non-GAAP measure total $37.8 million in the first quarter compared to $61.1million in the prior year quarter and also came in above our guidance.

Our adjusted EBITDA margin was 21.6% for the first quarter compared to 36.9% in the prior year quarter and 16.1% in the fourth quarter of 2015. On a sequential basis, adjusted EBITDA increased 34% from $28.3 million in the fourth quarter. Our stock based compensation expense was $2 million for the first quarter compared to $1.7 million in the prior year quarter due to additional restricted stock unit grants.

Net income totaled $9.9 million in the quarter or $0.30 per diluted share compared to net income of $24.5 million or $0.74 per diluted share in the prior year quarter. Our effective tax rate in the current quarter increased to 43.6% from 38.4% in the prior year quarter due to the significant decline in the intrinsic value of restricted stock units previously granted we evaluated and adjusted the deferred tax asset balance related to those units that have vested to-date resulting in the higher effective tax rate.

Vesting events in future period will also impact each period effective tax rate. We would expect that our full-year 2016 effective tax rate to approximate 40%. Adjusted earning and non-GAAP measure totaled $10.3 million in the quarter or $0.31 per diluted share compared to $26.2 million or $0.79 per diluted share in the prior year quarter.

We ended the quarter with cash and cash equivalents of $112.2 million in total debt of $594.4 million, which is now presented net of $14.5 million in debt issuance cost. Our debt balance includes $113.9 million outstanding under our $175 million securitization facility, which was closed in mid-January of this year.

Total borrowing under the securitization facility during the quarter were $135.1 million while repayments were $21.2 million because principal payments are being made on the dent outstanding based on waterfall of customer payments received, borrowing under the facility can exceed $175 million over the life of the facility. As a result, we believe that the current securitization facility will provide us for the long runway to support the anticipated growth of our net credit product.

As per our statement of cash flows, cash provided by operations increased to $98.6 million in the first quarter up from $87.9 million in the prior year quarter. During the quarter, we paid off the outstanding balance on our unsecured revolver and continue to maintain over $33 million of borrowing capacity on that credit facility. We believe our strong cash flows availability under our credit facility and availability under our existing securitization facility will be sufficient to satisfy our working capital needs in 2016.

With that, I would like to turn to our outlook for the second quarter and full-year 2016. As noted in our earnings release, in the second quarter of 2016 we expect total revenue to be between $155 million and $170 million and adjusted EBITDA to be between $23 million and $33 million. For the full-year 2016, we now expect total revenue to be between $680 million and $730 million and adjusted EBITDA to be between $125 million and $140 million.

Our outlook reflects continued strong growth in our net credit portfolio, a continued higher mix of new customers, no changes in the competitive landscape in the United Kingdom, the wind down of our loan portfolios in Canada and Australia and no impact to our U.S. business from proposed CFPB rule making since any new rules will likely not take effect until late 2017 or beyond.

We expect that the program that net credit launched with Republic Bank this quarter will incur a moderate loss in its first year as we make investments and marketing spend and build appropriate loan loss allowance on the loans and net credit purchases from Republic, but we see the program turning profitable in 2017. We expect to combine operations and NetCredit will continue to be profitable in 2016.

Lastly, I would like to note that in order to provide a better view into the contribution of our U.S. and international operations, we changed the presentation of our reportable segment information in the supplemental schedule to the company, our earnings press release, on our investor relations website. We did this to report corporate services separately from our domestic and international operations. Corporate services expenses, which primarily include personnel and other operating expenses for share function were previously allocated between domestic and international segments based on revenues that but now included under the heading corporate services.

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

David A. Fisher

Thanks everyone for listening to our prepared remarks. We will now open it up for any questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session [Operator Instructions] And our first question comes from David Scharf from JMP Securities.

David Scharf

Hi, thanks for taking my questions. First off Dave, just curious the marketing spend in the quarter came in as you noted very efficiently it looked very light to us especially given the fact that demand seemed to pickup sooner than usual on a seasonal basis. Was there anything in your mind that we should think of it as being deferred marketing, is there going to be a material pickup later in the year just trying to gauge how we ought to think about that line item on an annual basis and whether Q1 is a good jumping off point or if it was unusually low.

David A. Fisher

I would not say it was unusually low, there is no deferred marketing other than a little bit on the NetCredit side, you will see us ramp up as part of the program with Republic Bank. In terms of dollars not as percentage of revenue though, in terms of percentage of revenue I think it was a pretty good where we were in Q1 it you know kind of I think where we see ourselves at least in the next few quarters?

David Scharf

Okay. Got it. That’s helpful. wondering if you can also comment and your take on the U.S. consumer in demand in recent quarter it seemed like sometimes it would be two to 2.5 months in the quarter you weren’t quite sure what the uptake would be. It sounded like you saw much more favorable demand than expected and also it sounds like that’s continuing into Q2 and I’m trying to get a sense of whether notwithstanding the formal guidance for potential bias to your revenue and origination target?

David A. Fisher

The Q1 there is always a drop from Q4 and we certainly saw that but the drop was in as severe as we’ve seen in past years. And we attribute that largely to good consumer demand has we don’t believe much change on the competitor front in the U.S. the Q2 early demand we’ve seen is encouraging, it’s early and so it’s hard to say where the rest of the quarter can go. It’s also important to remember at least from an EBITDA perspective if demand gets too strong it can actually hurt EBITDA in the short-term while helping in longer term, especially with a longer term product. So I think both of those affected severely in the quarter and the fact that demand can be strong enough that could actually start to negatively impacting EBITDAs is what you see reflected in the guidance.

David Scharf

Got it. And then one last question on the guidance, I’ll get back in queue. If I look at the midpoint of EBITDA for both Q2 and the full-year guidance, it looks like the second half is going to be largely flat with the first half. Is that correct and is there any reason just based on the ongoing origination growth in your comments about marketing coming in pretty efficiently.

David A. Fisher

Good questions. So Q3 is usually great origination quarter not a great profit quarter. So that‘s part of what you are seeing in that and Q4 is a little bit of a wildcard. We’ve had very strong Q4s and we’ve had ones that are less strong and that’s obviously extremely difficult to predict this far up. In terms of anything other than that demand, the other thing to think about is the program with Republic Bank. Early on in that program to the extent that Republic does sell us loans, there could be some early losses and we had a bunch of revision.

Again, not that those loans aren’t profitable, but just as we’re putting on a bunch of provision as we’re building up the portfolio. And so as that program ramps up in the back half of the year, as Rob mentioned, we could expect that portfolio to have some accounting losses for the year, even though it will be a very profitable. We expect it to be very profitable portfolio. So that I think that weighs on the second half guidance as well.

David Scharf

Got it. Thank you very much.

David A. Fisher

Alright David.

Operator

And our next question comes from Bob Ramsey from FBR. Please go ahead.

Robert Ramsey

Hey good afternoon. I just wanted to follow-up a little bit on David’s questions about the marketing efficiency. I think is it fair to sort of think about it consistent to this quarter as a percent of revenues. Looking at it that way, it was 12% of revenues I think this quarter and last year you all average 18% and it was actually higher in the back half of the year. Just wondering if you could give any additional color on what is driving the efficiency or that drop in marketing expense?

David A. Fisher

Okay. Yes, I think part of it is, we did see reduced competitive environment in the UK not in terms of the players, but in terms of their spend and so that’s kind of assumed and me or my statement of where spend might be in the rest of the year. Obviously if competitors in the UK began spending more, our marketing could become less efficient there, but we’ve also had really good efficient spend on our next credit product and so as that product grows, it’s helped us to keep those marketing costs well.

Robert Ramsey

Okay. Fair enough. And then congratulations on the bank partnership, I know that’s something of you guys have been working on for a while. I know you said you expected to still be I guess not quite profitable this year, but could you talk about sort of any thoughts around origination expectations as we go through 2016?

David A. Fisher

No, we’re not going to make any guesses on originations there, but it opens up a lot of additional states that we weren’t lending in the near-prime products. So we’re only in about 13 states before. As I mentioned in my prepared remarks, we’ll be in at least 10 we think by the end of Q2 and many more by the end of the year. So there is real significance volume that we could see from that program as it fully rolls out.

Robert Ramsey

Okay. And given that I guess the focused program as you said in the sub-36% APR loans. Could you maybe talk a little bit about unit economics and that’s different than I guess sort of where your business today sits and sort of what should we think about in terms of losses and marketing costs on those products.

David A. Fisher

Unit economics in those loans are similar to the other loans in the NetCredit portfolio. The way we underwrite those products is they have to have lower loss rates to correspond with the lower APRs and so they are very similar from the unit economic standpoint and its good profitable business for us.

Robert Ramsey

Okay. I guess I know what they are on the NetCredit product either, is it similar gross margins to your overall business or is the NetCredit…

David A. Fisher

Yes, we’ve always talked about for really all of our products, we target low to midpoint of EBITDA margins and that’s kind of our way of managing risks and managing our use of our capital and so we expect that both for the NetCredit - for the entire NetCredit portfolio as well as sub-36 portfolios.

Robert Ramsey

Okay. Alright. Thank you.

Operator

[Operator Instructions] Next question comes from Henry Coffey from Stern Agee. Please go ahead.

Henry Coffey

Good afternoon and congratulations on a great quarter. It seems you’ve broken the pattern with moving forward again now. Is that a fair assessment, I mean there were some big changes in the UK, which shifted we got those working. It’s just an overly simplistic questions, but is it fair to assume that you’ve kind of broken the pattern and that now going forward absent something unusual from the CFPB it will just be continued progress?

David A. Fisher

Look we think we've been making continued progress. As I said earlier, I think a lot of that was masked by all of the changes that were going on. I think it was a very clean quarter in terms of there not being a lot of changes and so I think it was easier to see the progress we made. I think next quarter as we’ve lacked even more of the changes in the UK of last year that will be even more clear.

So we’ve been talking about our strategy, our diversification efforts being the right strategy to drive this business forward both in terms of additional growth, but also in terms of reducing regulatory risks. And I think it’s really becoming clear that it’s paying off and we look forward to the changes to regulations in the U.S. we think we’re extremely well prepared for that standpoint.

We have a nice diversified portfolio based by product type, customer type and geography. They have significant experience now adapting to a new regulations both on the state-by-state level in the U.S. and on the country level in the UK and so we think we’re extremely well positioned for the future.

Henry Coffey

David as you kind of start to move forward, we’ve got a set of old product, new product, old countries, new countries. If we were to jump forward and say two-years, can you give me a sense of what the primary products would be and which existing products would be sort of either very small or shrinking?

David A. Fisher

Sure. So, yes I think our UK business will keep growing, I think that will be steady growth, I don’t think it will be exponential growth unless the competitive dynamics in that market changes over there. So you can kind of look where that business is now, it’s stabilized and kind of nice steady growth from here. The U.S. sub-prime business will be smaller than it is today three-years out is my guess.

We haven’t seen any new CFPB rules, but that will be my guess. But it will still be a big business, it will still be a viable business. My guess is there will still be a single pay product as well as an installment and/or line of credit product, but combined somewhat smaller than it is today. I think NetCredit will be a very large business looking out probably our largest business, if we look at kind of three to five- years and then I think Brazil will also a very large business and significant contributor to the profitability of Enova.

Henry Coffey

As you look at the funding equation, right now it’s kind of a combination of cash and capital and then of course the securitization vehicle that you setup. Do you think you would be able to setup additional asset backed or securitization based facilities for funding other products so that there is less and less capital involved in the equation and more and more just traditional debt.

David A. Fisher

So the only one of our businesses is that generally is self funding that’s NetCredit. The other products are short-term enough and high interest rate enough that they are generally self funding and don’t require significant amounts in additional capital. Again, NetCredit is the one exception, we believe that there will be significant access to capital either to securitization market or a home loan market or other facilities.

Yes, there has been a little bit of choppiness but we think it’s more a company specifics, specific portfolio phase than any long-term market trend that improved conversation we’ve had over the last several weeks. So we remain optimistic about our ability to fund that NetCredit portfolio.

As Rob mentioned, we have significant runway for this year with our existing liquidity and securitization that we put in place. But that again ties back to the nice thing about our diversification efforts. We do have a business where we can use outside capital if its available, but we have a lot of businesses where that outside capital wouldn’t be required and it again gives us comfort to be able to weather a lot of different environments.

Henry Coffey

Great. Well congratulations and thanks for answering my questions.

David A. Fisher

Yes, thank you

Operator

[Operator Instructions] Our next question comes from David Scharf from JMP. Please go ahead.

David Scharf

Yes, thanks for letting me follow-up. A couple of questions on the gross margin front. One was to clarify the reiteration of a full-year range of 55 to 63, that was not domestic that was for consolidated, correct?

David A. Fisher

Yes that’s correct.

David Scharf

Okay. And as we think about international there is still some wind down, correct. I am just wondering that 65% to 75% range. Where should we think about that bottoming out when we look out a year?

David A. Fisher

So I think the international is going to stay in that range, obviously UK volumes and Brazil volumes are going to have an impact on it. So what has happened is the UK has stabilized, we really don’t have anything left on line of credit, I mean there is still some recoveries coming in every now and then, but so from a growth standpoint the short term products in the UK is growing faster than the installment.

And then as we talked about we’ve got that Brazil is growing at a pretty good clip. Now it’s starting at a smaller base, but I think that’s going to have an impact on the growth profit margins and so the 65% to 75% which has been a fairly consistent guidance, I think is really reflective of the full international business.

David Scharf

I see and what is your best guess why the short-term products going faster? I only asked, because I think a lot of us look to the UK as perhaps the behavioral template for how U.S. consumers may ultimately react to the CFCB rules that eventually come out. Is it just because short-term dropped off so much and it’s a smaller base or are you just finding that it’s just yielding more demand for that product and its likely to be the case in the U.S. as well.

David A. Fisher

So there is consumer demand for credit and credit for customers who don’t have good credit history and so can’t take credit from the banks and what regulation did in the UK was actually favor the short-term product. The regulator there actually thinks the short-term product is the best product out there, because it’s the lowest out of pocket form of credit for customers. If you look at a customer say you need to borrow $300 and they really only need it for two-weeks. They can borrow that $15 per $100 or so on a short-term product and only the out of pocket $30.

That’s cheaper than its going to be if they take out installment loan for six-months or a year and pay higher rate debentures for that period of time. And so with the regulator in UK looked at it is more of a fee product not a APR product even though everyone has to disclose APRs and so in that vein they actually in some ways in the regulations favor the short-term product. In the U.S.

Again, we don’t know what the rules are going to be, but I wouldn’t be surprised if some aspects of the rule and particularly the ability to repay underwriting sometime make the short-term product an attractive product for certain groups across the region. And while I’m not sure we would expect it to grow the way it did in the UK it is part of the reason why we don’t necessarily expect it to go away in the U.S. after the new rules.

David Scharf

Got it. And without getting specific David, just a general I’m curious have you changed as it relates to preparing for ATR underwritings. Have you changed any of the methodologies you’ve used in the U.S. maybe pulling some from what you’ve done in the UK or are you just waiting until the rules come out before you bother to take any upfront medicine.

David A. Fisher

I mean we’re always changing our underwriting models and we’re continuously updated and we certainly have continued improve the underlying technology that will make adapting to new regulations easier than it would have been even a year ago. In terms of the models and the actual models themselves, we don’t know what the rules are going to be. So there is only so much, there is very little we can do in advance. Again, although to make sure we have very good high performing models that are very flexible and allow us to quickly adapt to the new rules and that’s exactly what we have in place.

Henry Coffey

Got it. Just one last question on the financials. On the installment loans, it looks like the allowance rate ticked up sequentially looking at 10.6 to 11.7 credits seems to be performing quite well. Is that just a function of bigger mix of new borrowers versus repeat?

Robert S. Clifton

David yes, I think that’s certainly part of equation. We’ve had several quarters where it’s been stronger for new customers. I think you also have some of the influence of beyond NetCredit, because NetCredit actually continues to do very well there. So you have the influence of the RPAs that come from Business Backer as well as with a lot of high growth there, as well as on our higher cost products in the U.S. through cash net. So just really stronger demand than we expected and that mix was heavier in new customers.

Henry Coffey

Got it. Alright, thanks so much.

David A. Fisher

Yes. Thank you.

Operator

And this concludes our question-and-answer session. I would now like to turn it back over to David Fisher, CEO for any closing remarks.

David A. Fisher

I just want to thank everybody for their time today. We appreciate that and your questions and we look forward to updating you on our progress next quarter. Have a good evening.

Operator

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

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