Enova International's (ENVA) CEO David Fisher on Q2 2016 Results - Earnings Call Transcript

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Enova International Inc (NYSE:ENVA) Q2 2016 Results Earnings Conference Call July 28, 2016 5:00 PM ET


Monica Gould - Investor Relations, Managing Director of The Blueshirt Group, LLC

David Fisher - Chairman of the Board, President, Chief Executive Officer

Steven Cunningham - Chief Financial Officer, Executive Vice President, Treasurer


David Scharf - JMP Securities

Bob Ramsey - FBR

John Rowan - Janney

Tom White - Macquarie


Good evening and welcome to the Enova International second 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 also note that this event is being recorded.

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

Monica Gould

Thank you Andrea and good afternoon everyone. Enova released results for the second quarter of 2016 ended June 30, 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 Steven Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

Before I turn the call over to David, I 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 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 would like to turn the call over to David.

David Fisher

Good afternoon everyone. Thanks for joining our call today. I am going to start by giving a brief overview of the quarter and I will update 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 our new CFO, Steven Cunningham, to discuss our financial results and guidance in more detail.

We are again pleased with the solid performance we generated during the second quarter and the continued momentum we are seeing at Enova. In addition to another quarter of strong financial results, we are successfully executing on our strategy of growing our core businesses, while further developing our new initiatives to generate additional future growth. We attribute for continued success to the quality of our talented employees and our extensive experience serving subprime and nearprime borrowers.

We have been in business for over 12 years, longer than any other online lender and during this time, we have successfully navigated a number of economic cycles as well as substantial regulatory changes. This experience, combined with a growing diversification of our business, positions us very well to manage through the forthcoming regulatory changes in the U.S., which I will talk about in more detail shortly.

But before I get to that, for the second quarter, revenue was $172.5 million, an increase of 18% from Q2 of last year and above our guidance range of $155 million to $170 million. The second quarter is not always a strong quarter for lending, but we saw good demand across almost all of our products. In particular, we were able to attract a large number of new customers, both in the U.S. and the U.K.

As I briefly mentioned a moment ago, solid credit performance was another highlight of the quarter, as we were able to manage the larger macroeconomic trends that apparently negatively impacted other online lenders. Clearly, managing our credit performance is an area where the sophistication of our analytics and the experience of our team are demonstrating their value.

Adjusted EBITDA for the quarter was $35.2 million, which was also above our guidance of $23 million to $33 million. The higher than expected EBITDA was driven by a combination of strong customer demand, good credit performance and efficient marketing.

Total company wide originations were up 15% from the prior year. This marks the fourth sequential quarter of year-over-year growth and the strongest growth we have seen in total originations since the new U.K. regulations went into effect in 2014. The growth in our revenue and originations continues to be led by our installment and line of credit portfolios as we create and customers embrace alternatives to our short-term single pay products.

Our total loan book grew by almost 50% year-over-year. The largest contributors to this growth were net credit and our small business products, which led to a 39% year-over-year increase in U.S. installment loan and finance receivables revenue. In addition, installment loans and lines of credit now comprise 73% of our total revenue and 86% of our portfolio.

We think our recent success positions us well for the future and as we look forward, our strategy remains centered on focused growth. This involves maintaining consistent profitable growth in our two large core businesses, namely U.S. and U.K. subprime lending, while actively growing the new initiatives we have seen the most promise lately, namely NetCredit which is our U.S. nearprime business, Brazil and our small business products.

Our large subprime U.S. business generated another strong quarter of profitability. Despite its size, the business continues to grow and is becoming more diversified with 27% of our U.S. subprime portfolio consisting of single pay products, 28% installment products and 45% from line of credit products.

In the U.K., we are successfully growing our business again, following the regulatory changes that were implemented there in 2014 and early 2015. U.K. loan originations were 23% higher than Q2 of last year, 33% on a constant currency basis. We are now the number one lender in the U.K., having taken market share from our competitors since the new rules became effective. In addition, our U.K. business is profitable with over $15 billion of EBITDA contribution so far this year.

As a second component of our strategy, we are focused on the expansion of our new initiatives to further diversify our revenue base and provide future growth, all while reducing regulatory risk. NetCredit's growth has continued at a rapid pace with originations up 27% from last quarter and 55% over the second quarter of last year. Loan balances are now $232 million, which is 68% higher than Q2 of last year.

Due to the sustained growth of our U.S. nearprime offering, 45% of our total U.S. loan portfolio is now nearprime loans and 49% of those loans have an APR at or below 36%. We expect NetCredit to generate over $20 million of EBITDA contribution this year with significant opportunity to meaningfully increase that contribution next year.

NetCredit's program with Republic Bank is progressing well and has grown from a single pilot state in Q1 to 10 states at the end of the second quarter. This is in line with the expectations we set on the Q1 earnings call. We expect expand to additional states throughout the year. As a reminder, 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. All loans originated by Republic under this program have an APR at or below 36%.

We are also continuing to make good progress with our installment product in Brazil. Our Brazilian loan portfolio was almost $12 million at the end of quarter, which is up almost 40% from the end of Q1. For the second half of the year, our focus in Brazil is to meaningfully increase origination levels. While our Brazil business will lose a couple million dollars this year, the loans we are originating in there are profitable on a unit economic basis, which will allow the business to generate positive EBITDA contribution next year.

We are also pleased with the growth of our small business financing initiatives, which include two complementary products, a receivables purchase agreement product under the Business Backer brand and a line of credit under our Headway brand. We grew small business originations 24% sequentially. As a result, our portfolio is now $80 million and represents 14% of our total.

Now I want to turn to the ongoing CFPB rulemaking. Following the issuance of the CFPB's proposed rule on small dollar landing in early June, we remain more confident than ever in our ability to remain a large and profitable player in the industry following the implementation of the final rule. Our sophisticated analytics with more customer history than any other online lender will allow us to quickly adapt and implement required changes.

And we have experience at this. In addition to the significant changes in U.K. regulation of the last two years, we have managed through dozens of regulatory changes at the U.S. state level. Our team has been hard at work developing the tools we will use to implement the new rule and we are proud of the great progress they have made in such a short time.

Moreover, our successful diversification efforts have the potential to substantially mitigate the impact from the regulations. On our June call to discuss the potential impact of the proposed CFPB rule, we estimated that based on our preliminary assessment at that time, approximately 60% to 65% of our Q1 2016 revenue will be subject to the final rule and that the revenue for the products subject to the rule could decline by 30% to 40%.

In other words, if the proposed changes were implemented then, approximately 18% to 24% of Q1 2016 revenue would be impacted. And while a slightly higher percentage of EBITDA would be impacted, a significant portion of our expenses as variable with origination volume, which will help ensure that our U.S. subprime business remains profitable following the implementation of the new rule.

Importantly, we have more than two years to adapt to the new rule. And by the time we need to be in compliance, we expect that the actual impact to our revenue could be substantially below the levels I just mentioned as we continue to execute on a diversification strategy and our growth initiatives expand.

Looking three to five years out, we believe that each of our growth initiatives NetCredit, Brazil and small business has the potential to become a really big business, each potentially exceeding $100 million in annual adjusted EBITDA. Clearly, the growth of these businesses could go a long way in offsetting the potential impacts of the proposed CFPB rule.

In addition, we believe that the CFPB rule could create an opportunity for Enova to gain substantial market share as storefront lenders struggle to implement the new rule and tribal lenders are forced to comply with Federal regulations for the first time. Today, we have less than 10% market share in the U.S. subprime market. So it is certainly conceivable that our market share could double or more.

In terms of the CFPB's process, the current consensus is that the rule may not become effective until late 2018, which is several months later than we had previously anticipated. As such, we expect a very minimal impact to our 2017 results.

Now, I would like to briefly turn to a few other macro topics that have arisen in our sector in recent weeks. First, Google implemented new policies for Google AdWords last week restricting the promotion of short-term loans around the world and loans with APRs over 36% in the U.S. Google AdWords accounts for just a small percentage of our new customer volume. So we do not anticipate significant direct impact to our business from this change.

In addition, we do not believe that these new policies will have any impact on customer demand and we believe that we are well positioned to capture that demand from other channels, given our large size and experience in marketing to subprime customers. The new policies are just put into place late last week, so we don't have a ton of data yet. But so far, we have been able to maintain good volumes across almost all of our marketing channels.

While we do not expect any significant impact on our originations from the new Google policies, we did make the decision to modestly increase marketing spend in Q3 primary on direct mail and TV to provide additional protection. As we guided to on our Q1 call, we spent more on marketing in Q2 than in Q1, although still 200 basis points less as a percent of revenue than in Q2 of last year and that marketing paid off. With the high level of new customers I discussed earlier, resulting in a lower than expected cost per loan. For Q3, it's likely that our marketing spend will be a couple hundred basis points more as a percentage of revenue than it was in Q2.

Next I want to turn to the U.K. decision to leave the EU. As many of you know, our only European business is in the U.K. We don't export our license to other parts of the EU and our primary regulator is the U.K. regulator, not EU. Hence we do not anticipate any disruption in our U.K. business for Britain's decision to leave the EU.

The one impact we have seen is from the weakening of the pound against the dollar. We had very little cash in the U.K. at the time of the vote, so we didn't have any significant losses from the sell-off, but the revenue we generate in U.K. today is worth less in U.S. dollars than it was before the vote.

To summarize our thoughts on the quarter. We are very pleased with our strong financial performance and progress on our diversification efforts. We had a very good start to the year and so far we are seeing that momentum continue into Q3. As we have discussed before, Enova was one of the first online lenders when we launched over 12 years ago and that experience combined with the strength of our proprietary technology platform, advanced analytics, our very talented employees is showing its true value.

We believe that our current strategy to grow our core offerings while diversifying into new profitable products is working. And while we know regulatory changes are coming in U.S., we believe we are prepared and will emerge a winner. In the meantime, our core businesses are doing well and our new initiatives are driving growth and beginning to contribute meaningfully to our bottomline.

Now I am happy to introduce Steve Cunningham, our new CFO, who will go over the financials in more detail. Steve has only been here a few weeks, but as you will hear, he has gotten up to speed quickly. Certainly, his deep financial services experience that we were attracted to is already paying dividends for us. Following Steve's remarks, we will be happy to answer any questions you may have.


Steven Cunningham

Thank you David and good afternoon everyone. I am really excited to be part of Enova. I have been very impressed with how the talented team here is leveraging the power and experience of our technology and analytical platforms to help hard-working people fulfill their financial responsibilities with fast trustworthy credit.

I will review our financial and operating performance for the second quarter and then provide our outlook for the third quarter and full year 2016. As David mentioned, second quarter results are a reflection of solid execution across our core U.S. and U.K. products, the continued growth of new diversification initiatives and stable loan performance.

Total revenue was $172.5 million in the second quarter, a 17.9% increase from the year ago quarter and above our guidance range of $155 million to $170 million. On a constant currency basis, total revenue increased 19.5% compared to the prior year quarter to $174.9 million.

Total company revenue rose with strong origination volume and increases in outstanding receivables balances. Total company origination volume increased 16.2% on a year-over-year basis and 15.6% sequentially in the second quarter. That drove in the total company loans and finance receivable balances of $595 million. That's up 48.7% from $400.3 million in the second quarter of last year and 13.8% sequentially.

New customer acquisitions continued to play a significant role in our performance. The dollar amount of new customer loan originations during the quarter was the highest in Enova's history with strong growth across all significant products.

Domestic revenue accounted for 81% of total revenue in the quarter and rose 24% on a year-over-year basis to $140.3 million. In particular, year-over-year revenue growth for domestic installment loans and receivables purchase agreements and for line of credit products increased 39% and 46% respectively, as both categories saw a significant year-over-year and sequential growth in both originations and ending balances. This was primarily led by increased demand for our domestic nearprime installment product and growth in portfolios serving the needs of small businesses, which drove domestic loan and finance receivable balances up 58% in the quarter.

International revenue declined 2% year-over-year to $32.2 million and accounted for 19% of total company revenue in the second quarter. The decline is primarily due to the changes in the regulatory environment in the U.K. that occurred after March 31, 2014. Excluding the revenue contribution from the discontinued U.K. line of credit product, international revenue increased 21.9% on a year-over-year basis in the second quarter.

International loan balances were up 9.4% year-over-year and were higher sequentially for the fourth quarter in a row. On a constant currency basis, international loan balances were up 26% year-over-year. Excluding the discontinued U.K. line of credit product, international loan balances increased 16% on a year-over-year basis in the second quarter as new and returning customer originations in our core U.K. business exhibited strong increases.

Turning to gross profit margins. Our second quarter gross profit margin for the total company was 62.1%. That compares to 71.6% in the second quarter of last year. The decline in gross margin was primarily the result of three factors.

First, continued strong growth in our domestic nearprime installment portfolio resulting in a higher mix of installment loans in the total portfolio. Second, a higher mix of new customers and new customers require higher loss provisions since they default at a higher rate than returning customers with a successful history of loan repayment. And third, the wind down of the U.K. line of credit product. Excluding the discontinued line of credit product, our consolidated gross profit margin was 61.2% for the current quarter compared to 67.1% in the prior year quarter.

We expect that consolidated gross profit margin will remain in the range of 55% to 63% and we will continue to be influenced by the mix of loans and financings to new and returning customers, the mix of domestic portfolio originations and growth in loan originations from our international operations.

Domestic gross profit margin was 58.8% in the second quarter compared to 64.6% in the prior year quarter for the reasons previously noted. Our international gross profit margin declined to 76.1% from 95.8% in the prior year quarter. The decrease in international gross profit margin is driven by the impact of the discontinued line of credit product as well as higher levels of originations, particularly from new customers.

Excluding the discontinued U.K. line of credit product, our international gross profit margin decreased to 71.6% for the current quarter from 78.1% a year ago. We expect our international gross profit margin to remain in the range of 65% to 75% and it will be driven by the level of growth in the U.K., the mix of new and returning customers and the pace of growth of Brazil.

Turning to expenses. Total expenses increased 5.2% year-over-year to $78.3 million. They were largely driven by domestic variable costs that were supporting growth in originations and loans and finance receivables. Marketing expenses increased due to higher domestic television advertising and direct mail cost, which were partially offset by lower international television advertising costs. Marketing expense as a percent of revenue decreased year-over-year to 14.8% from 16.9% last year.

Operations and technology expenses increased in the current quarter as a result of higher software costs as well as from increased underwriting and transaction costs as a result of higher origination volumes.

Adjusted EBITDA, a non-GAAP measure, totaled $35.2 million in the second quarter compared to $41.1 million in the second quarter of last year. It also came in above our guidance range of $23 million to $33 million. Our adjusted EBITDA margin was 20.4% in the quarter compared to 28.1% in the prior year quarter and 21.6% in the first quarter of 2016.

Our stock-based compensation expense was flat at $2.3 million for the second quarter.

Net income totaled $8.2 million in the quarter or $0.25 per diluted share compared to net income of $10.9 million or $0.33 per diluted share in the prior year quarter.

Our effective tax rate for the quarter ended June 30, 2016 increased to 38.2% from 37.7% for the quarter ended June 30, 2015. Our effective tax rate for the six months ending June this year increased to 41.3% from 38.2% for the six months ended June 30, 2015. We still believe that our full-year 2016 effective tax rate will approximate 40% as the rate continues to be heavily influenced by the significant decline in intrinsic value of previously granted restricted stock units resulting in adjustments to the deferred tax asset balance related to those units that have vested to-date.

Adjusted earnings, a non-GAAP measure, totaled $9.4 million in the quarter or $0.28 per diluted share compared to $14.4 million or $0.44 per diluted share in the prior year quarter. We ended the second quarter with cash and cash equivalents of $39.2 million and total debt of $588.8 million, which is now presented net of $13.3 million in debt issuance cost. Our debt balance includes a $106.8 million of outstanding under our $175 million securitization facility. We continue to believe that the current facility will provide us with runway to support the anticipated growth of our NetCredit product.

Our core U.S. and U.K. businesses are self funding and their strong operating cash flow characteristics allow us to largely self fund new initiatives, aside from NetCredit. We believe our strong operating cash flows as well as liquidity available under our credit facility and securitization facility will be sufficient to satisfy our working capital needs this year.

Now I would like to turn to our outlook for the third quarter and full year 2016. As noted in our earnings release, in the third quarter of 2016 we expect total revenue to be between $175 million and $190 million and adjusted EBITDA to be between $25 million and $35 million. For the full year 2016, we expect total revenue to be between $700 million and $740 million and adjusted EBITDA to be between $130 million and $145 million.

Our outlook reflects continued strong growth in our new initiatives, including NetCredit, a continued higher mix of new customers, no significant changes in the competitive landscape in the U.K., the wind down of our loan portfolios in Canada and Australia and no immediate impact to our U.S. business from proposed CFPB rulemaking since any new rules are not set to go into effect until late 2018. Any significant volatility in the pound from current levels could impact our results within this range.

Before I hand the call back over to David, I wanted to let everyone know that Rob Clifton, will be leaving Enova at the end of next week. He is headed back to the Lonestar state. Some of you know that Rob moved from Texas to join Enova in Chicago and that most of his family is in Texas. Recently a company that has known Rob for a long time asked him to do join in Texas as their CFO. Understandably, the opportunity to head home to Texas is something Rob and his family are excited about. Since joining Enova more than five years ago, Rob has been at the center of much of our growth, playing a critical role in our successful spin off, ensuring we meet our quarterly reporting obligations and helping us complete numerous financial transactions. Please join me in wishing him all the best.

With that, I will hand the call back over to David.

David Fisher

Great. Thanks Steve. That is the end of our prepared remarks for to. We will now open the call up to any questions.

Question-and-Answer Session


We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from David Scharf from JMP Securities. Please go ahead.

David Scharf

Good afternoon. Thanks for taking my questions. Dave, one is more just a clarification on the impact of the Google AdWords ban which you noted. Your reference to it representing an extremely small part of your new customer volumes, does that relate to just the ones the Enova directly acquirers? Or does that also relate to the 50% or more of your customers that come through lead gen? Do you have a sense what the overall impact is?

David Fisher

Sure. So I was referring to the ones we get directly. The ones we get from the lead providers, we don't typically have great visibility in how they acquire the leads that they are passing on to us. But as I mentioned, since the rule has become effective, we have maintained good volumes across almost all of our marketing channels, including leads us and lead providers are adapting to the new Google policies.

David Scharf

Got it. That's helpful. Shifting just to the credit side, it seems like sequentially and usually a tax refund season, Q1 is a good paydown quarter, but you definitely saw some very strong improvement in credit quality going from Q1 to Q2, particularly looking at the loss rates for both line of credit and installment. It seems almost a littler counterintuitive given how many new customers you are adding. Can you provide any color on just what you are seeing out there in terms of customer behavior, payment patterns and the like?

David Fisher

Yes. We are seeing just good solid credit performance and some of it in installment portfolio is the impact of our nearprime products, but really across all of our portfolios. Our models are working really well. We have added a ton of additional data fields over the last couple of years. I think a lot of that work is really paying off now with really strong performance. The new customer volume is strong and that could, in different circumstances, negatively impact credit, but we still get the bank of our business from returning customers, but we are seeing good credit performance across both of those pockets, both returning customers and new customers.

David Scharf

Got it. And I will ask just one more and get back in the queue. Steve had addressed this in his prepared remarks on your funding availability. I just want to be clear, based on how rapidly the NetCredit product is growing, which is not self funding, per se, should our takeaway be that based on the availability of the securitization facility as well as the undrawn credit facility that you feel comfortable with your current liquidity to meet the growth targets that are embedded in your full year guidance?

David Fisher

Yes. Absolutely. And the way we look at our business is, the bulk of our products, a large majority of our product are self funding. We don't need access to outside credit to grow them at any conceivable reasonable growth rate. The one product that doesn't fit into that pocket is NetCredit.

So we think about that as a completely separate business that requires separate funding. To-date, we have looked to our securitization facility for funding for that NetCredit business. We do, as Steve mentioned, still have plenty of headroom under that facility. But also as we have talked about, as we get into Q3 and end of Q3, beginning of Q4, we will be looking at additional capacity to fund NetCredit going forward.

The good news is that we seem to have good relationships with our existing lenders, investors under our NetCredit securitization, but even more importantly NetCredit product is working well with good credit. And so we think there is a pretty strong appetite for that product in the market today. As far as to change going forward, there is some kind of financial crisis down the road and securitization market were to dry up, again our remedy is to just slow the growth of NetCredit.

So the bulk of our other products, all of our other product are self funding. It's not the type of business where we could end up in a liquidity crunch. We can turn off new originations in NetCredit overnight. So we never liked to be reliant on third-party for anything in this world, but we think that we are in a pretty good place with where we are with NetCredit and how we view that growth going forward.

David Scharf

Got it. And this is just maybe a follow-on from that as I look at it, as I haven't dug into all the balance sheet items. But given how quickly NetCredit has been growing, including sequentially, how is the securitization balance? How does it actually get drawn down a bit from Q1? It looks like it actually closed with a lower balance than it was at the end of March.

David Fisher

Because the way it works, as those loans get paid down, the facility actually decreases in size giving us additional headroom under that facility. So it kind of has a mini evergreen feature built into it.

David Scharf

Got it. Okay. Thank you very much.


Our next question is from Bob Ramsey with FBR. Please go ahead.

Bob Ramsey

Hi. Good afternoon. You may have given this, but do you have the actual NetCredit balances and originations for this quarter?

David Fisher

Well, hang on one quick second.

Bob Ramsey

Sure. While you dig that up, I am curious about the yield as well.

David Fisher

Hang on.

Steven Cunningham

Is that originations for the quarter?

Bob Ramsey

And I guess maybe while you look for those numbers, I had one other question I had for you. I know David you mentioned, that there have been negative trends this quarter which had impacted other lenders in the space and obviously there was a fair amount of that. I am just curious on what you see as what you guys are doing differently? How you have really been able to grow your originations and balances while others have had to pull back? Compare and contrast a little bit about where you guys are succeeding where others are faltering?

David Fisher

Yes. I really think some of the other online lenders in the space just grew too quickly and their credit models weren't fully developed. They didn't have the data. They didn't have the experience to keep up with their growth in their originations volumes. And before Lending Club had some of their internally generated problems with their CEO, they were already having credit issues with their D and E tiers. We just have a lot more experience, having been at this for 12 years.

Through the hundreds of iterations that our credit models have been through, in many, many terabytes of internal customer data we have collected plus really I think one of our strength is our ability to go out and get external data and to integrate that into our model. So a combination of being a little bit more slow and steady but also that experience over time. It has paid off. But there were certainly times as we were growing our NetCredit business when we looked out at our competitors and saw how much quickly they were growing their nearprime portfolios and wondered if we should be going faster. But having done this before and having grown businesses before, we knew at the pace that we were comfortable with and we made sure not to push it and I think now that's starting to pay off.

Good. I think Steve, you have those numbers now, the total originations and the yield for the NetCredit?

Steven Cunningham

I do. Our total originations, $85 million. And the yield, just under 60%.

Bob Ramsey

Great. And do you have the balance at quarter-end?

Steven Cunningham

For all of NetCredit, $232 million.

Bob Ramsey

Great. I appreciate that. Last question and I will hop out. But I know you talked a little bit about financing and funding of the business. Could you maybe just touch on the change in the leverage ratio covenants that I think you guys had disclosed at the end of June or early July, for got the exact timing, but what it was that led to the change in those covenants?

David Fisher

Yes. Sure, Bob. If you go back and look at our facility, there was an original covenant at 3.0 to 1 and that was set back in mid-2014, really before we went through some of the changes in the U.K. And if you think back, we actually did modify that covenant in Q4 of last year and Q1 of this year. So rally what we did is continued to continue that trend of making sure that we prudently modify the covenant for the rest of this year.

Bob Ramsey

Okay. All right. Great. Thank you very much.

David Fisher

Thanks Bob.


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

John Rowan

Good afternoon guys.

David Fisher

Hi John.

John Rowan

Last quarter you gave a number, I just want to make sure I am framing this up correctly using the correct number. You gave a number of total revenue from new products, I think, you said earlier in the call, David, that it was 73%. Is that correct on an apples-to-apples basis?

David Fisher

I am not sure. No, I don't think I said in this call. I am not sure exactly what you are referring to. Total revenue from new products, the percentage of total revenue?

John Rowan

Yes. So just new initiatives, NetCredit new initiatives. I believe you said in the first quarter it was 23% of revenue. Am I missing something?

David Fisher

Yes. We will have to get back to you. I can't remember disclosing that in the first quarter. We didn't have that in the remarks this quarter. But we can get back on that.

John Rowan

And then to go back to the competitive front, did you see a pick up after Lending Club changed its pricing model? Or was it more from them pulling back? Or do you have any sense as to really what drove you up and frankly benefiting your competitive position?

David Fisher

Yes. Look, we did see strong demand in Q1. Q1 is the first time we really noticed the shorter than expected demand and that was the same time when we started seeing, Prosper, Lending Club and then than later Avant have disclosed issues, credit issues and funding issues and those have an effect of slowing their lending. So it's certainly easy to, I would say that's causation and it very well maybe. It's very difficult to determine in consumer demand driven businesses where the demand is coming from.

We don't have a huge overlap in our customer base with those businesses, especially outside of NetCredit and as I mentioned before, we have seen good demand across all of our products. But the timing certainly does line up and I think we would be fooling ourselves to say that some of the strength in demand, particularly in NetCredit in Q1 and Q2, was from the pulling back from some of our competitors.

John Rowan

And do you think that, even some of the credit problems that you alluded to, at some of your competitors, do you think that there is any type of impact to your ability to access the ABS market? People are going to draw comparisons with your model. Obviously when Avant came out, they did [indiscernible] deal. It seemed like there was going to be more and more participation in the ABS market for unsecured consumer debt. I am just curious if you think there has been any change in that front as some of your competitors frankly have faltered? And that's it for me.

David Fisher

Yes. We don't think so. We are having good conversations out there and having steady profitable quarters behind us, having good credit in our portfolios, I think that's exactly the kind of product investors want. Yields in U.S. are incredibly low and people are dying to find good opportunities for yield. And that's what our ABS products can offer. So in the conversations we are having plus looking at the macroeconomic environment more broadly, we think that that market is still available to good issuers with good product.

John Rowan

All right. Thank you.

David Fisher



[Operator Instructions]. Our next question comes from Tom White of Macquarie. Please go ahead.

Tom White

Great. Thanks. Just I wanted to try and reconcile some of your comments about the competitive landscape and sort of you guys said about marketing expense in 2Q and looking forward. Presumably, when guys like Avant and some of from of your peers are sort of experiencing these disruptions, they are probably pulling back in marketing. So are you guys just kind of increasing marketing here to just opportunistically put the pedal down and fill the void left by the pull back of some of your competitors? Or is there some other dynamic that's forcing you guys to raise marketing? And then just on the CFPB stuff, I hopped on late, so I apologize if I missed this, but any update on discussions you guys might be having with states where maybe you are not operating? Any sense whether space states that maybe haven't allowed this type of product might shift gears given the fact that the ruling maybe provide a bit of cover for them to be so? Thanks.

David Fisher

So I think on the first question, I think we saw good opportunity to get customers and so we spent on marketing. Again, the bulk of our businesses do not compete with Lending Club, Prosper and Avant, whether it's our subprime single pay products in the U.S., our U.K. products, Brazil, small business. We are not competing with those businesses here. So it's not their pulling back, it wouldn't impact those businesses and I don't think we saw stuff pulling back of the competitors to our subprime businesses.

But do we think it helped NetCredit product in the quarter? For sure. And is there a very small overlap? With maybe some of our subprime products, yes. But we had an abnormally low percent of marketing, as a percentage of revenue in Q1. And so we expect it to be higher in Q2. It was higher in Q2. But we got a lot more customers. So it's much more efficient in Q2 than we expected.

Cost per funded account and a metric we watch internally was much lower in Q2 than we expected. So we saw good opportunity to get good high quality loans and we took it by spending that marketing money.

With respect to your second question, with the CFPB new rules, a couple of interesting things are going to happen with respect to the state where we don't operate today. I think one is, you have your legal and tribal lenders operating in the stats that the CFPB is pretty adamant that they are going to crackdown on those guys. I think the second is, look, it can't get any worse for us in those states and it has the opportunity to get better if those states say, okay look now there is Federal oversight that gives us some comfort to put in enabling legislation. And there are a number of states where that's a possibility.

And so I think we are more optimistic than we have been in recent years that we get three or four additional states. But that's probably closer to the implementation of the CFPB rules, two or three years out. In the meantime, it's likely to be a one-off. We did have a one-off this year. We added Mississippi, which is a really nice addition. There could be others in the interim. But yes, I do see it could be potentially being a catalyst to add a handful of states. We are never going to get all the states. I think the Northeast will continue to remain tough. But a few additional states can definitely have a meaningful impact.

Tom White


David Fisher



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

Great. Thanks so much for joining us today. We look forward to updating you on our progress next quarter. Talk to you guys soon. Thank you.


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

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