Elevate Credit's (ELVT) CEO Kenneth Rees on Q4 2018 Results - Earnings Call Transcript

Elevate Credit (NYSE:ELVT) Q4 2018 Results Earnings Conference Call February 11, 2019 5:00 PM ET

Company Participants

Al Comeaux - Chief Communications Officer

Kenneth Rees - Chairman and Chief Executive Officer

Christopher Lutes - Chief Financial Officer

Conference Call Participants

David Scharf - JMP Securities

John Hecht - Jefferies

Eric Wasserstrom - UBS

Brian Hogan - William Blair

Operator

Greetings, and welcome to the Elevate Fourth Quarter and Full-Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to you, Al Comeaux, Chief Communications Officer. Thank you, please begin.

Al Comeaux

Good afternoon, and thanks for joining us on Elevate's fourth quarter and full-year 2018 earnings conference call. Earlier today, we issued a press release with our fourth quarter and full-year-2018 results. A copy of the release is available on our website at elevate.com/investors. Today's call is being webcast and is accompanied by a slide presentation, which is also available on our website.

Please refer now to Slide 2 of that presentation. Our remarks and answers will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements.

These risks include, among others, matters that we have described in our press release issued today, our most recent quarterly report on Form 10-Q and other filings we make with the SEC. Please note that all forward-looking statements speak only as of the date of this call, and we disclaim any obligation to update these forward-looking statements.

During our call today, we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued today and our slide presentation, both of which have been furnished to the SEC and are available on our website at elevate.com/investors. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges and certain expenses.

Joining me on the call today are our Chairman and CEO, Ken Rees; as well as our CFO, Chris Lutes. I will now turn the call over to Ken.

Kenneth Rees

Thank you, Al, and thank you all for joining us on our call today.

Starting on Slide 4, and as we detailed in our press release, 2018 was a year of significant improvement over 2017. We saw full-year revenue growth of nearly 17% and adjusted EBITDA growth of 33%. Our full-year adjusted EBITDA margin expanded by 177 basis points over 2017 to nearly 15% and we remain on path to achieve our long-term target of 20%. We also more than doubled our 2017 adjusted net income to end 2018 at $12.5 million despite some execution misses and a slower second half than originally anticipated, which we'll touch on in a second.

In addition to improved financial performance, we achieved important milestones in product coverage and channel diversification. Our partnership with FinWise Bank roughly doubled the state coverage of the flagship product RISE. The early growth and performance of the FinWise portfolio has been particularly strong and the bank originated $31 million in loans during the fourth quarter with customer acquisition costs less than $150. As I'll discuss later, this ability to rapidly expand and reach new markets many of our consumer credit options were limited and do it in a matter of just a few months demonstrates the advantages our technology platform gives us.

We also continue to be optimistic about the long-term potential of our credit card product, the Today Card. We feel this product represents an important expansion and diversification of our product line and the early results indicate strong demand. Our first cross-sell email campaigns have remarkably high response and activation rate of 8% across a combination of active and inactive RISE account holders. However, as we've said previously, credit cards are a new space for us and we'll be very measured in rolling it out.

And despite the need for further tuning of credit performance, we made excellent progress building out channels other than direct mail. Our non-direct mail channels accounted for 58% of customer acquisition in 2018, up from 46% in 2017. We believe this sets us up for strong future growth through these expanded channels.

Now turning to Page 5, we're addressing the challenges that caused our financial performance to fall behind our guidance for 2018. As we discussed in our October 2018 earnings call, three key factors slowed expected margin improvements. First, new scores and strategies that were anticipated to improve customer acquisition performance were delayed. This impacted Q3 2018 profitability more than anticipated and as a result we slowed Q4 2018 growth to focus on these improvements. These new underwritings, scores and strategies have now been developed and reviewed and appear very promising.

Second, although we continue to view non-direct mail channel expansion in particular by our strategic partners as a key strategy for the company, in retrospect we grew that channel too aggressively without enhanced underwriting capabilities specific for the new channels. It is important to note that the customer advantages [ph] acquired through these channels are profitable, but they had lowers margins and attracted through other channels. Improvements will support improved profitability in the partner channels are underway and are expected to support channel growth in the latter half of the year.

Lastly, I'm pleased to report that the other item that impacted 2018 financial results, UK Complaints, has come down significantly. We are now seeing Complaint volumes back at lower levels than their peak in Q3 2018. However, given the ongoing regulatory uncertainty around this issue we'll be keeping the balances of Sunny our UK product flat through at least the first half of 2019.

As a result of these factors, you'll notice that the guidance for 2019 reflects strong improvement in net income for the year, but lower top line growth than we've historically generated as we focus on margin improvement and delivering our next generation of underwriting scores and strategies to support long-term growth.

And now, I'll turn the call over to Chris for a detailed review of our financial performance.

Christopher Lutes

Thanks Ken and good afternoon everybody. I'm going to discuss both Q4 2018 and fiscal year 2018 results. Additionally, I'll elaborate on the amended debt facilities with Victory Park Capital that we highlighted in a separate press release also issued today. Looking at the top half of Slide 6, our Q4 2018 revenue totaled $207.3 million, up 7.2% from the fourth quarter of 2017, but slightly less than $210 million which was the low end of our revenue guidance for the quarter. On a year-over-year basis combined loans receivable principal were up $30.2 million or 4.9%.

As Ken just discussed, in Q4 2018 we decided to slow new customer acquisition and resulting loan growth across all three products except for RISE loans originated by FinWise Bank. Looking at each of our three products, first Sunny UK loan balances were kept relatively flat during the fourth quarter of 2018 due to the uncertainty we discussed last quarter regarding UK Complaints.

While our UK complaint volume dropped approximately 50% in Q4 2018 from its peak in August of 2018 we continue to remain cautious about materially increasing Sunny loan balances until there is more regulatory certainty regarding the UK complaint process. Revenues from Sunny loans were down about $700,000 in Q4 2018 versus the prior quarter, primarily due to a slight drop in the average UK FX rate. RISE loan balances were up modestly at December 31, 2018 versus both the prior sequential quarter end and year-end 2017. We experienced very strong loan growth during the fourth quarter of 2018 from our new FinWise Bank partnership originating $31 million in loans from one direct mail drop.

Initial credit quality results look good and the loans are performing slightly better than our targeted first payment default rates. Additionally, the CAC was very low sub $150. Any time we roll out an existing product to new states we expect good credit quality and a high customer response rate resulting in a low CAC, but the resulting FinWise performance was better than expected. This loan growth from the new FinWise partnership helped to offset the slowdown in growth from our state license RISE loan portfolio.

Lastly, the Elastic product also experienced modest loan growth and revenue growth during the fourth quarter of 2018. However, despite the slower growth, Elastic revenues were still up 22% on a year-over-year basis. We do not expect Elastic loan balances to materially grow until its new credit model is rolled out during the first half of 2019.

Despite the slower loan growth during the fourth quarter of 2018, fiscal year 2018 revenues of $786.7 million were up 16.9% from $673.1 million in the prior-year. This is up from a year-over-year growth rate of 16% in 2017. Looking ahead to fiscal year 2019, we expect flat year-over-year revenue growth during the first half of 2019 as we roll out and tune our new generation of credit models and strategies for both Elastic and RISE. For the second half of 2019 we expect annualized revenue growth of 5% to 10%.

Looking at the bottom half of Slide 6, we are very pleased with the year-over-year growth in our profitability for both Q4 2018 and fiscal year 2018. Adjusted EBITDA for the fourth quarter of 2018 totaled $31.9 million up almost 28% from the fourth quarter of the prior year and fiscal year 2018 adjusted EBITDA totaled $116.1 million up 33% on a year-over-year basis. Bottom line net income for the fourth quarter of 2018 was $4.1 million or $0.09 per diluted share up from adjusted net income of $0.3 million or $0.01 per diluted share in the fourth quarter of 2017 after excluding the impact of the federal tax law change last year.

Fiscal year 2018 net income totaled $12.5 million or $0.28 per diluted share more than double the $5.5 million in adjusted net income or $0.16 per diluted share for fiscal year 2017 after excluding the impact of the federal tax law change last year. Looking ahead to fiscal year 2019 we would expect net income in the first half of the year to be lower than the second half due to the slowdown in revenue growth during the first half of 2019 and timing of loan loss provisioning. We are expecting a delay in the tax refund season this year and this could impact the loan loss provisioning rate by reducing loan paydowns during the first quarter of 2019 resulting in less release of loan loss reserves.

Turning to Slide 7, our cumulative loss rates as a percentage of loan originations for our 2018 vintage is slightly worse than our 2017 vintage, but still better than vintages prior to 2017. This is one of the reasons we are prioritizing the work on our new generation of credit scores and strategies so that we can continue to drive loss rates lower in coming years. On this slide we also inserted a new graph on CAC. We continue to be pleased with our CAC and believe that it is one of the biggest anticipated drivers of our expected margin expansion in 2019.

We believe our fiscal year 2019 CAC will drop into the $200 to $225 range primarily benefiting from the expanded state coverage of RISE through the FinWise Bank partnership although we may see some quarterly volatility in the CAC. As mentioned earlier, the fourth quarter 2018 CAC for RISE FinWise in these new states was less than $150. While we don't expect those high response rates to last throughout all of 2019, we do believe the combined RISE CAC will drop towards the historical Elastic CAC range as Elastic has benefited from marketing across 40 states.

Turning to Slide 8, our fiscal year 2018 adjusted EBITDA margin was 14.8%, up from 13% a year ago. All this expansion happened within our gross margin which increased to 35% in fiscal year 2018 from 33% for the prior year. Our operating expense leverage saw only slight improvement as we invested in both the FinWise Bank and Today Card product launches in the second half of 2018. As discussed earlier, we believe continued margin expansion will happen during fiscal year 2019 in both the marketing and operating expenses line items. Additionally, we believe that the decrease in our cost of funds will also result in an expanded net income margin in 2019.

Lastly, turning to Slide 9, I would like to discuss the amended VPC debt facilities for our products which we announced in a separate press release today. Terms for the amended facilities include the following: Pricing is three-month LIBOR plus 7.5% for all product facilities effective February 1, 2019 for the RISE and Sunny facilities and effective July 1, 2019 for the Elastic CAC ESPV facility. The $35 million in subordinated debt pricing is unchanged.

The existing debt totaling $528 million excluding the sub debt will have pricing fixed at roughly 10.3% until maturity in 2024 as the current five-year swap rate is less than three months LIBOR. Only future draw-downs on the facilities will have interest rate risk that will be tied to three-month LIBOR on the date of drawdown.

Our products now have over $1 billion in available commitments and combined debt facilities, a $350 million commitment for RISE state license and Today Card, a $150 million for the RISE FinWise Bank special purpose vehicle, $350 million for the Elastic Republic Bank SPV, €100 million for Sunny UK and $35 million for the existing subordinated debt. We will have approximately $500 million in available capacity under these facilities. None of the facilities will have unused commitment fees.

There's a 20% revolver in Q1 of each year for each product facility and a 25 basis point reduction in the cost of funds for each product facility in both 2020 and 2021 subject to meeting certain net income thresholds. The 2020 threshold is $22 million in net income in fiscal year 2019. The net income threshold for the 2021 reduction has not yet been determined. The maturity date on the amended facilities is January 1, 2024 except for the $35 million in sub debt which continues to have a maturity date of February 1, 2021.

No payment other than monthly interest is due until then. There is a three-year no call provision and prepayment penalties in the last two years until maturity. There is a $2.4 million amendment fee payable in the first quarter of 2019 which we anticipate we will be able to amortize over the five-year life of the facilities and there are no other prepayment penalties. There are expanded covenants and we are currently in compliance with all of them.

Now let me turn the call back over to Ken.

Kenneth Rees

Thanks Chris. Turning to Page 10, I'll review our 2019 guidance. As Chris mentioned, the slower growth we generated in Q4 2018 will continue during the first half of 2019. We expect to keep revenues fairly flat during the first half of the year and grow them by 5% to 10% in the second half of the year resulting in expected revenues for 2019 between $811 million and $834 million. This forecast for growth in 2019 reflects our measured approach to rolling out and tuning our enhanced underwriting models and strategies across all products and channels. However, we expect very strong growth in adjusted EBITDA net income during 2019.

We expect fiscal year adjusted EBITDA to grow between 12% and 21% to between $130 million and $140 million. This represents an expansion in EBITDA margins from less than 15% in 2018 to nearly 17% at the midpoint of 2019 guidance. Given the positive impact of the amended debt facilities that Chris discussed, we are expecting continued very strong growth in net income in fiscal year 2019 at least doubling our net income from 2018 to between $25 million and $30 million. This will yield a diluted EPS of between $0.55 and $0.65 per share for fiscal year 2019.

Page 11 highlights the key objectives for Elevate in the first half of 2019 as we focus on the foundations for profitable growth in the latter half of the year. First, as Chris discussed, we completed the amended and expanded VPC credit facilities that will support accelerated growth with significantly lower cost of capital than our current levels. We will see the first drop in the cost of capital in February 2019 with the full benefits to be realized starting in July 2019.

We are very focused on deploying and tuning our next-generation of credit scores and strategies across all products and channels. This is not just a simple update to credit miles, rather we are integrating a number of new data sources, tools and techniques that weren’t available when we began our remarkable period of growth from $73 million in revenue in 2013 to nearly $800 million in revenue last year.

We're very excited about their potential to fuel even more growth at improved margins and we are taking a conservative approach to customer acquisition in the first half of the year to ensure we get the full benefits before accelerating growth again. This applies particularly to the partner channel. We remain that this is an exciting opportunity for long-term growth.

As an example, just one of our channel partners see 5 million credit applications each month from consumers with credit scores less than 640 which is where we believe our products are best positioned. We are continuing to improve our technology and underwriting to optimize this channel and expect that it will become an increasingly imp source of customer acquisitions in the latter half of the year.

Finally, we continue to monitor the UK regulatory situation. As I mentioned, the cost of responding to complaints related to our Sunny product in the UK has come down from its peak in Q3 2018, but these costs remain an impediment to achieving anticipated long-term margins for the product. Since UK regulations are still evolving we are maintaining our product portfolio balances until we feel there is more regulatory certainty. Having been said, we remain very optimistic about growth prospects for this product, which as we have stated in the past consistently wins customer awards for its superior product features and service levels.

Turning to Page 12, our perspective and optimism regarding the market opportunity for Elevate remains unchanged and we expect to reaccelerate growth after we implement the planned improvements in 2019. The market demand for nonprime credit continues to be very strong, yet is deeply underserved.

As has been broadly discussed, 40% of Americans are now living paycheck to paycheck with less than $400 in savings for a financial emergency and approximately 170 million adults in the U.S. and UK have a less than prime credit score or no credit score at all. Furthermore, income instability has increased in the past decades as shown by the growth in a gig economy and even the recent government shutdown. This has pushed consumers into the arms of largely store based payday lenders, time lenders and installment lenders that have high rates and/or aggressive collections practices.

Elevate's products on the other hand represent a new breed of more responsible credit options and are changing our customers lives for the better. We also believe our products provide strong regulatory and product diversification. We now have four products, three bank partners, and are operating in two countries. Our products span installment loans, lines of credit and credit cards and they are capable of fulfilling the full range of credit needs facing nonprime consumers.

We are proud of our consistent year-over-year growth in top line revenue and bottom line earnings. We are also proud to have served 2.2 million consumers in need of better credit options having saved them nearly $5 billion of payday loans. We expect to continue to drive long term earnings growth as we serve nonprime consumers in the U.S. and UK with more responsible online credit options.

And now, I'll open up the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of David Scharf with JMP Securities. Please proceed.

David Scharf

Hi, good afternoon. Thanks for taking my questions. Just a couple of things, one I think you partially answered this by lowering the CAC outlook to the $200 to $225 range. I mean that's a metric that pretty much every quarter you seem to be outperforming and I'm wondering as you think about with the doubling of the footprint with FinWise is this something that could realistically sort of secularly trend below $200 on a permanent basis, because up to now you've been quite cautious on that guidance and trying to get a sense for how much leverage there is longer-term?

Kenneth Rees

I think so. We're not committing to get it down there overnight because there is really always a balance between as we improve our underwritings we take that in terms of lower CAC or lower charge-off rates. We're trying to get that balance right. I mean, this year I think we didn’t make as much headway as we wanted with improvement in our underwriting. We're focused on making that a top priority for the first half of this year, but yes for the long-term we think margin expansion continues because both CAC goes down and charge-off rates go down.

David Scharf

Got it. And along those line, and the loss rate as well, it's – there are lot of moving pieces in the guidance this year with the slowdown and top line growth is a spillover from the 2018 origination trends. Is there any kind of handholding you can provide us for thinking about the implied loss rates in provision levels that support the earnings guidance you've provided?

Christopher Lutes

Yes, hi David, it's Chris. In Q1 as I tried to highlight in the guidance section we expect the provision rates to probably be higher than normal in Q1. With the delay in the tax season there is certainly the - we expect maybe not as much of a paydown in loan balances in Q1 is what we would normally expect, so not nearly as much of a release in loan loss reserves as we would realize. And then as we get into the Q2, Q3, Q4, you've got some level of increased provisioning related to the new customer loan growth acquisition that we expect. But I think also with the improvements in the underwriting models that we expect we were hopeful to see the charge-off rates over time drop as well from certainly where they are in Q4 of this past year.

Kenneth Rees

Right, and I think we're looking forward on a quarterly basis to be able to point to improvements, both in charge-off rates and in CAC that will help you understand what's driving the long-term margin improvements.

David Scharf

Got it and lastly, sort of a tricky question here, but I know in the past where there has been quarters of stepped up investment and origination activity, you've highlighted the near term dampening effect on earnings from the provisioning associated with that. As we think about the 2019 outlook, it is a more restrained top line outlook which I would imagine kind of helps near term earnings from a provisioning standpoint, I'm wondering how we ought to think about 2020 and I realized you've just provided 2019 guidance, but if we were to see a reacceleration into sort of mid-teens top line growth in 2020, given provisioning dynamics would there still be year-over-year earnings growth versus 2019?

Kenneth Rees

That's a great question.

Christopher Lutes

Yes David, let me take it first more from a tactical CFO level, then I'll turn it over to Ken from more of a high-level CEO perspective, because from the CFO perspective the one thing that's going to impact provision income next year is the FASB pronouncement with CECL going into effect as it still stands right now January 1. If you look at in the investor graphs that we provide as part of this presentation, we clearly show the historical loss rates and so you'll get a sense for if CECL were to be implemented the stepped up level of provisioning that we would have to take compared to our current loss reserves, meaning that if you look at historically it varies by product but the consolidated level, our historical principal loss rates as a percentage of originations are somewhere trending in the 20% to 25% range and our current level of loan loss reserve is roughly 14% to 15%.

So there is certainly beginning next year going to be a stepped up level of upfront provisioning that really all financial services companies are going to have to take it if that accounting pronouncement goes into effect. So that's one of the things that we still need to evaluate a little bit more before we provide 2020 guidance. So I just want to kind of get that out of the way first before I turn it over to Ken for more of a high-level CEO perspective.

Kenneth Rees

And yes, I mean, I can't speak to the CECL impact certainly as well as Chris can, but generally speaking what you're getting at is why we're focused this year on what we think are some step function improvements in the performance of the products because we think that by slowing down a bit this year, and we think about it and you know I mentioned this in the comments earlier, we grew from $73 million in revenue to almost $800 million this year in just five or six years, we're taking this year to open up the hood a little bit, make a lot of the improvements we wanted to make so that we can get back into a stronger top line growth mode in 2020 and beyond. So I think you're right, our expectation is that 2020 growth is higher than 2019 growth, but we believe we can do it with consistent margins and so that we wouldn't have to unduly squeeze margin by growing again.

David Scharf

Got it, very helpful, thank you.

Operator

Thank you. Our next question comes from the line of John Hecht with Jefferies. Please proceed.

John Hecht

Yes, I just wanted to get some more color on the delay in tax refunds. So first of all are you observing it at this point, are you seeing some of the – your customers get tax refunds this early and if so what's the kind of – how much different is it that would be expected? And historically have you ever gone through that and should we expect lower paydowns and higher losses or do we think about the ramifications of that?

Kenneth Rees

It's also a little hard to tell. I mean, ever tax season is a little bit different. A couple of years ago we talked about the delay in the tax season then and I do believe that balances have not dropped in the way that they normally would during a tax season, I mean granted that it's only January, but, excuse me early February, but we would have seen probably more drop and due to early refunds and payoffs we're not seeing that. Exactly when that kicks back in, I don’t know, and if there is another shutdown of the government how does that impact things we can't say, but we agree with you that this is a different tax season.

I think it's slowing down the payoff season. We expected it will come eventually. We haven’t see it though translate into higher losses, so our charge-off rates are holding very good right now and we'll see how the rest of the tax season plays out, but we're not seeing the delay in the tax season equate to significant stress on the customers that are impacting their ability to repay the loan.

John Hecht

Okay. And then just thinking about it, you didn’t – it's clear given new versus recurring customers in the RISE asset products that you definitely focused on more recurring customers, shouldn’t we expect to see some credit quality improvement just on that basis alone, if you're recurring customer have higher - you have a little bit more understanding of their payments trends and if that's accurate when do you think that would affect the kind of loss rates throughout the course of 2019?

Christopher Lutes

Let me - certainly your point is right. The more seasoned customers are performing better. So, I mean, I think we're starting to see that already and it's leading to some of the lower charge-off rates that we are experiencing now and anticipate throughout the year. So that is a part of what we're delivering in terms of increased earnings in 2019.

John Hecht

Okay, so do you think at the product level you'll see lower charge offs than you did in 2018 and in 2019?

Christopher Lutes

Yes.

Kenneth Rees

Yes.

John Hecht

Okay. And then last question is Chris, you talked about the lower rate. You also talked about some advertising expenses. Do you have a sense for or can you give us any specific details about what the specific quarterly dollar of interest expense savings might be all else equal?

Christopher Lutes

Let me come at it at a different way to kind of help. I mean, we'll have the RISE and Sunny facilities along with the new FinWise facility reprice effective February 1 and I think the combined size of those facilities is roughly about $300 million or so. So you'll see $300 million of the debt beginning February 1, so already 11 days ago we retroactive it. That will reprice down immediately and then the Elastic facility, that kicks in July 1.

The amortization of the amendment fee, that $2.4 million goes over five years. That's going to have very little quarterly impact and we feel pretty comfortable that we'll be able to amortize that over five years rather than having to take that all in Q1. So you're going to see a nice immediate impact in Q1 and Q2 from the RISE, Sunny and FinWise debt facilities and then the full impact really won't be seen until July 1.

John Hecht

Okay.

Christopher Lutes

And then next year as I said, there are also…

John Hecht

You might step down, yes.

Christopher Lutes

Yes, we might step down as well, plus you'll have the Elastic for the full year. So over the course of the next two years you should see the interest expense, decline.

Kenneth Rees

And but I'll say the one thing that really does help us is this ability to have a bit more management of the seasonality of our business which I don't know if it really came out in Chris's comments, but historically when we go into the tax season and there's a lot of payoffs we continue to pay the maximum debt that we had drawn down in the previous year and this gives us a bit more flexibility to manage adds [ph] along with how our business works.

Christopher Lutes

Yes, we now have a revolver up to 20% of each facility that we can use to pay down during Q1 and not be forced to re-borrow right away and so that will allow us to hopefully for managing the cash appropriately drive down interest expense a little bit more in Q1 and Q2 where normally we would be paying interest on a lot of cash that wasn't deployed in the loans because of the seasonality pay downs.

John Hecht

Great, thank you guys very much.

Kenneth Rees

Thank you.

Operator

Thank you. Our next question comes from line of Eric Wasserstrom with UBS. Please proceed.

Eric Wasserstrom

Thanks. Just to follow up on the similar questions. I'm looking at the guidance that you've laid out on Slide 10, and just first with respect to the revenue outlook, how does the sequential, or I should say, annual increase in revenue compare with your expectations for the expansion in your balance sheet over that same timeframe?

Christopher Lutes

It will be a little bit less. I think the loan balances over the second half of the year should probably increase in the 10% to 15% percent range and the revenue will lag behind that. So if you have loan balances growing at 10% to 15% the second half of the year that should set us up nicely for 2020 in terms of expanded year-over-year revenue growth in 2020.

Eric Wasserstrom

Got it, okay, thank you. And then just, may be again sort of picking up on a couple of the related topics, Chris, you gave your guidance on the loss expectations and on the marketing costs. But I think in your prepared commentary you also talked about operating expense leverage although you're actually running pretty close to your target level. So I just wanted to clarify whether operating leverage was in fact going to be a contributor in your view to the 2019 EBITDA outcome?

Christopher Lutes

It's possible. As the CFO I always hope that there's some leverage. Ken is kind of shaking his head at me because - the answer is, I think there's some opportunity probably more so next year once we get back to double-digit year-over-year revenue growth, so that I think you'll start to see that more. This year the definite impact on the margin should be if that cap comes down like we expect it to, we should see that marketing expense as a percentage of revenue continue to decline.

Eric Wasserstrom

And then just on the small differences between the expected growth rate in net income versus diluted EPS is that - what primarily accounts for that difference?

Christopher Lutes

Part of that and an increase in weighted average shares outstanding albeit, I'm probably a little bit conservative right now based on I think we ended Q4 with slightly less than 44 million shares on a weighted average standpoint outstanding. I've got roughly about just under $46 million for the year. I don't necessarily know that will increase that, but I'm just being conservative, so that would be the difference.

Eric Wasserstrom

Of dilution rate. And then maybe just backing up to just the Slide 8 and based on the trends that we have just articulated, if we look at 2019 as approximately let's call it a 16.5 or 17 adjusted EBITDA margin and kind of understand where the sources of those - that improvement is coming from, it seems that you will be closer than to the end state like almost two thirds between the current level and the end state in 2019 is that basically correct?

Christopher Lutes

Yes, that's where we hope to be. I mean, I think if you get a little bit more improvement in losses as well as continued improvement in CAC and even some operating leverage, you're at the 20%. And that's not to say, I mean our long term target, this was set out and we went public three or four years ago or started that process of going public. I'd like to think that there might even be upside over top of that on a long term basis, but over the next couple of years we expect to get there.

Kenneth Rees

But I think the big caveat though is what and I can't remember whether it was David or John who asked that question you know gets to our growth rates, so that's for a slow growth getting to 20% is, I mean obviously you can tell we're in striking distance of it. The issue though is, how much margin we can retain as we get more into the high teens of level of growth that we'd like to see in 2020 and beyond.

Eric Wasserstrom

Yes, and I guess you know and this will be my last question and then I'll hop off. But what - particularly in a CISIL environment where effectively on an MPV basis you are going to be sort of in a loss position to begin and then you sort of have to earn your way out of it and I know that economically accounting shouldn't you know make any - much influence, but that is how it is going to change the dynamic of your income statement. I mean, does that change at all the attractiveness of a fast growth relative to slower growth which might enable you to generate better operating margins [indiscernible]?

Christopher Lutes

I think it's a very good point. There are a couple answers that hopefully fix that. One is just the evaluation of cash flow. Cash flow multiples are just as meaningful, I would argue probably more meaningful than PE [ph] multiples when you're dealing with the environment where you've got a major accounting change like this, and so hopefully that sort of mediates the or moderates the impact of CISIL on the at least investor outlook, but also we need to look at other opportunities to accelerate income streams from the growth that we have. So that's something that we need to continue to evaluate in a seasonal environment.

So we don't have any answers for that. It's definitely something in 2020 we'll have to figure out because you're right it is, it is a big change. It impacts, I mean obviously not just us, it's banks and everybody else and I think we all need to figure out how to communicate the fact that growth is still a good thing if it increases cash flows to the business.

Eric Wasserstrom

Great, thanks very much for taking all my questions.

Christopher Lutes

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Brian Hogan with William Blair. Please proceed.

Brian Hogan

Hey, good afternoon. A question on the U.K. regulatory discussions, I mean, what - can you characterize what kind of discussions you're having or are you just kind of waiting and seeing what they're - what the industry is going to do or what's kind of the status there?

Christopher Lutes

Well, as we said the issue that we had was the spike up in complaint volumes in the third quarter. That's come down pretty dramatically. Q4 complaint volumes were about half of what they were in their peak in Q3. But there's still uncertainty as to how the FASB and the FCA are going to deal with these complaints for the long term. So, we do not have any sort of broader regulatory concerns with that. We think our products are doing a very good job of underwriting customers.

We think we've got some of the most robust credit and affordability checks in the industry. We know that we have - our product is winning customer service and customer satisfaction awards. So really the only issue that's keeping us from getting back into a growth mode is just making sure we understand what - as the sort of a new administration comes for reviewing these complaint management companies that we understand what that regulatory environments is going to be like before we get back into growth mode.

Brian Hogan

Sure, are the UK operations profitable?

Kenneth Rees

Yes, it is.

Brian Hogan

All right, and then just to clarify some of your previous remarks on your margin expansion and the pace of that as you mentioned 16.5% and 17% margin 2019 and obviously depends on revenue or loan growth or what have you, but did you say 20% in a couple of years and hopefully more than that over the long term, but what's the pace of margin expansion and I guess you'll kind of get to?

Kenneth Rees

Yes, and not to kick the can too obviously on that question, but as I said it does get to the question of growth rates. So if we - at more modest growth rate, we can see being at 20% in the next couple of years. As we look to expanded opportunities which we think are still very strong for us as a company with having doubled the reach of the RISE product just the strong demand that's out there, what we're being able to do with a broad set of channels right now.

We may continue to keep margins about where they would be in 2019 for a few years before we try to drive future margin improvement. So it's not a very precise answer I apologize. But I think it's going to be - in particular as we look into the economic environment and the end of 2019 we may decide we want to ramp things up or keep things at a slower pace and we'll just have to see what the macroeconomic situation looks like in the latter part of the year.

Brian Hogan

And obviously more of a macro factor than I guess what would cause you to accelerate or just keep it steady?

Kenneth Rees

Well, macro obviously is a big part, but we certainly are seeing the opportunity to as we've said make some step function improvements and customer acquisition costs and charge-off rates, and assuming those are coming through and performing as well as we think that they will, that's the real incentive for us to spur growth in 2020.

Brian Hogan

All right, and just a real quick one, the tax rate you're assuming for 2019, I think I may have missed it?

Christopher Lutes

It will be in the 25% to 27% range.

Brian Hogan

All right. Can you discuss the regulatory environment in the United States, have you seen any changes there and obviously are either kind of re-thinking the small lower right.

Kenneth Rees

Right, like everybody we did see the change and that sort of watering down of the CFPB rule. We were fine with the rule as it was originally planned and we're fine with it now. We don't really see it having any impact either positive or negative in our business. More broadly speaking, I don't think we're aware of any big changes to the U.S. regulatory environment at least in the next couple of years.

Brian Hogan

All right, and then one last one from me is, the competitive environment in the United States and obviously I think you said the banks are kind of still on a – really focused on your market, but you can you kind of discuss your pure competition if you will and any changes on the bank front?

Kenneth Rees

Yes, I mean it seems like we've sort of evolved as a lot of industries do through a few large players and sort of a stable competitive environment. So I don't know that it's changed all that much. The bigger players were all seeing pretty good opportunities for continued growth. We aren't seeing any or at least I'm not seeing any disruptive products out there that would really impact our products.

And as far as the banks go, I think we're really pleased that what appears to be more interest from banks in partnering with Fintech providers like us. I mean the fact we're now up to three bank partners is a good thing we think. We'd like to continue to expand our bank partnerships and help banks in some cases serve their own customers with credit that leverage our technology platform and our analytics. So I think there's continued opportunity work with banks yet I don't really see a dramatic change in banks willingness to on their own provide credit to nonprime customers.

Brian Hogan

All right, thank you.

Operator

And thank you. We have no further questions in queue at this time. Allow me to hand the floor back over to closing remarks.

Kenneth Rees

All right well, thanks to all of you on the call for your interest in Elevate and to our employees and customers who have made our growth and success possible. Good night everybody.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.