Elevate Credit, Inc. (ELVT) CEO Jason Harvison on Q2 2021 Results - Earnings Call Transcript

Elevate Credit, Inc. (NYSE:ELVT) Q2 2021 Results Conference Call August 3, 2021 5:00 PM ET

Company Participants

Daniel Rhea - Director, Public Affairs

Jason Harvison - President and CEO

Chris Lutes - CFO

Conference Call Participants

Moshe Orenbuch - Credit Suisse

Operator

Greetings and welcome to Elevate Credit Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 this conference over to your host, Mr. Daniel Rhea, Director of Public Affairs. Thank you, sir. You may begin.

Daniel Rhea

Good afternoon and thanks for joining us on Elevate's Second Quarter 2021 Earnings Conference Call. Earlier today, we issued a press release with our second quarter results. A copy of the release is available on our website at investors.elevate.com. 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, including impacts related to COVID-19 and our most recent annual report on Form 10-K 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'll 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 investors.elevate.com. 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 President and Chief Executive Officer, Jason Harvison; and Chief Financial Officer, Chris Lutes.

I will now turn the call over to Jason.

Jason Harvison

Good afternoon, everyone, and thank you for joining us today. I hope everyone is having a good summer so far, I'm happy to report that Elevate certainly is, and we are very pleased with the return of growth we saw in the second quarter and into July. Loan demand continues to ramp across all products, and we are now beyond any headwinds from federal stimulus checks or the delayed tax season earlier this year.

As I noted last quarter, the environment for near-prime credit had a goldilocks dynamic and that consumer confidence and economic growth are quite high and consumer balance sheets remain very healthy as saving rates were high over the course of pandemic. Put simply, we see a great opportunity to continue to grow but underscore that we have no plans to abandon the strategy of measured pace with a focus on strong credit quality and returns. With that as a backdrop, let me start on Slide 4 with the highlights from our strong second quarter.

As you saw in our press release, the consolidated portfolio grew 13% sequentially to $399 million compared to $353 million at the end of March. To give a little more color, the majority of that growth occurred in late May and June, which is encouraging as we look at the back half of the year. Revenues for the quarter totaled $84.5 million, which is down 28% compared to a year ago. Recall, it will take some time for the revenue to catch up to the loan portfolio growth, but for context, last quarter's revenue compared on a year-over-year basis was down 45%. And on a sequential basis, our revenue was effectively flat, which we believe is an encouraging inflection point.

Turning to profitability. We are also pleased by what we're seeing from a unit economic perspective as growth resumes. Overall, our EBITDA totaled $11.6 million for the quarter and represents a margin of 13.7%, which is in line with our expectations as we ramp up and scale the portfolio again. Before I talk about the credit and marketing components of margins in the quarter, let me first note the difference between our margins when the business is growing compared to the outsized profitability last year as the portfolio was flatter. Last quarter, for instance, you'll recall, our EBITDA margin was closer to 35%. The main delta between the two are our two major cost items: credit and marketing.

Last year, as you know, credit was extremely strong, based on our state-of-the-art AI-enabled credit models and responsible saving and discipline by consumers. Additionally, last year, we did not substantially market given the challenges presented by the pandemic. Fast forward to the day where originations require both credit provisioning and marketing dollars, the great news, as I alluded to, is that both costs are well within our expected ranges to drive targeted returns. Chris will speak more to credit, but overall, the initial origination mix has tilted towards stronger credit, which is in line with a 3-tiered growth strategy, which I'll speak to in a minute.

Provisions as a percentage of revenues for the quarter were just 32%, which continues to be at the lower end of our historical ranges. This is mainly driven by strong origination growth with existing customers and a higher mix of loan growth in the RISE brand compared to Elastic. Bottom line is we have room in credit, but are happy with the measured approach and believe we are putting high-return loans on the book today.

Turning to marketing. CAC for the quarter was $271, which is higher than a year ago, given the lack of marketing during the pandemic. That said, $271 remains well within the targeted ranges of $250 to $300. Again, the driver here is a strong mix of growth with existing customers, which comes at a lower CAC and we've also had continued strength in a very popular Today Card, which has a targeted CAC under $100 as the product continues to ramp and scale. In total, we believe the demand environment is strong and we are pleased with the ability to drive high-quality, high-return loan growth based on what we see in the market.

Finally, to wrap up the summary financials, we had a net loss of $3 million in the second quarter, driven by the previously mentioned factors relating to growth. More importantly, our model continues to generate very attractive free cash flow, which aids our cost of capital, growth, and ability to return capital to shareholders, which I'll touch on shortly.

Turning to Slide 5. You will note the breakout of growth by products. We are very pleased to see strong growth in the last quarter across the board. And as I mentioned, this growth is heavily loaded to the last 45 days of the second quarter. Lastly, while still a smaller portion of our portfolio, the Today Card continues to see outsized growth, up 42% compared to last quarter. We believe there remains a large opportunity in this level of credit as many banks continue to be reluctant or are pulling back from these consumer loans.

Case in point, a large national bank significantly cut the availability for personal lines of credit for its customers earlier this month. Best of all, the Today Card continues to add very high-return growth with lower APRs, a great proof point that Elevate's model is scalable across a wide spectrum of near-prime credit. Low-APR products continue to increase as a percentage of accounts and now represents nearly one in five accounts. In sum, we are extremely pleased with the quarter and believe Elevate is very well positioned to capitalize on the environment we see for the rest of 2021 and beyond.

On that note, let's turn to Slide 6 and I'll give an update on the approach to marketing and growth over 2021 as we see it today. Recall from last quarter, we discussed a 3-tiered growth approach in conjunction with the bank that license our technology, beginning with existing customers, expanding them to further outreach to new customers via direct mail, and then a further ramp through strategic partner channels. We feel good that the second quarter played out in line with these plans as we saw a high degree of engagement from existing borrowers, especially in the core RISE product.

What is slightly different than planned, but very encouraging, is the early effectiveness we have seen as we ramp the marketing through the strategic partner channel. In the second quarter, the mix of originations from strategic partners compared to direct mail was closer to 41% compared to 13% in the past. In the RISE product alone, we saw roughly 50% of new loans originated from the strategic partner channel. To clarify the differences here, digital traffic comes from a mix of SEO and online ads, whereas we define the strategic partner traffic as those that come from an affiliate marketing agreement. We broke out 2020 market mix here, but to add clarity, the 2019 mix was also in line with that trend.

As we've noted in the past, we see significant volume opportunity through the strategic partner channel on top of the long runway we still have in direct mail. Best of all is even in the early days, we are seeing significantly improved credit from this channel compared to years past. I would also note that the use of strategic partner channels allows for faster reaction time to demand and other factors while providing stable tech. I'd re-emphasize though, that the approach will be measured and will follow the pattern of this 3-tier strategy. Logically, we have the most visibility into existing customers, and from a product perspective, the RISE installment loan product is a good risk-adjusted place to start given the structured payment schedules of those loans.

In the future, we expect the second and third tiers of growth will make up a bigger mix. For context, in Elastic and Today Card, nearly all the originations in the quarter were driven by direct mail campaigns. But based on what we've seen from a credit perspective, we, along with the banks we support, believe there is ample room to market through strategic partners and expand to a wider group of new consumers as the year progresses.

Let me now give a brief update on where credit stands within the legacy book and how it Elevate's customer-friendly payment flexibility tools help some of the customers through a tough time in 2020. Checking account balances have trended in 2021 as anticipated and are now back to pre-pandemic levels. We have reached an inflection point in consumer confidence where Americans are spending and the job market is healthy. We believe this to be a positive bellwether to loan demand. As I noted before, we think there's a great balance today of consumer confidence and credit discipline. All of this bodes well for growth in 2021 and beyond across each of the different products and geographies.

I would also like to touch on the ongoing payment flexibility tools. Active deferrals are back to historical averages at or below 2%. As we've noted before, Elevate is most proud of how we are able to help Americans with leading payment flexibility tools. In total, nearly 20% of customers or more than 80,000 people utilized some form of credit flexibility through the pandemic, and best of all, they did so at no incremental cost with the simple step of an online form.

Elevate was founded on, it has always been committed to the assistance of the underserved new middle class, and we think it's important to remain steadfast in his commitment, especially as we emerge from the pandemic. On that note, I encourage you to each checkout and have it downloaded on June 15, it shines a light on the credit challenges many Americans still face today despite a stronger economy. To put it plainly, we are very proud to be the leader in credit flexibility and customer assistant tools and look forward to helping more and more Americans as we, along with the banks we support, onboard new customers in the quarters and years ahead.

I'd like to conclude my remarks on Slide 7 with a preview of some additional growth initiatives and how we are deploying capital at Elevate. First, on growth, we have a number of initiatives in place to drive better access and less friction for customers and banks to meet credit needs. One initiative that we can preview today is Blueprint, which is our revamped technology platform, which allows Elevate and the banks that license our technology to integrate and collaborate across each of the product offerings. Blueprint truly represents Elevate's future as the leading technological foundation for non-prime lending. This platform will propel future growth in quicker and more integrative ways, all while leading to lower-priced products and greater customer features.

In the past, each of the products have been running solid operating segments, which created some friction for both partners and for integrating customer-friendly features quickly. With Blueprint, we believe that friction is now gone, which allows for more nimble decisioning on the part of the bank partners and ultimately broadens the ability for new banks to license our brands or through the white-labeled use of our credit decisioning technology. We're excited about the possibility to open up our CAC capabilities to a wider audience and we'll update you along the way.

Beyond growth initiatives, I noted the strong free cash flow generated in our model. As we noted in previous quarters, we have been able to self-fund more and more of the growth with operating cash flow, which has helped reduce overall borrowing costs, which Chris will speak to. Beyond that, Elevate has been very active in capital return to shareholders via repurchase authorization. In the quarter, we are proud to have purchased 2.3 million shares at a cost of $8 million or $3.40 a share. Without commenting too specifically, we believe the returns offered in our own shares are very compelling, especially based on the growth and return opportunities we see in the portfolio. The key takeaway here is that we believe we have multiple channels to deploy capital at very attractive returns, and as a result, are very optimistic about the rest of 2021 and the years ahead for Elevate and its shareholders.

With that, I will say thank you for your time and turn the call over to Chris to detail our financial results for the quarter.

Chris Lutes

Good afternoon, everybody. Turning to Slide 8. Combined loans receivable principal totaled $399 million as of June 30, 2021, down $14 million or 3% from $414 million a year ago. However, this total was up $46 million or 13% for March 31 this year. All three loan products grew during the 2021 second quarter as customer loan demand picked up materially beginning in May. The combined loans receivable principal portfolio bottomed out in April at $340 million and grew almost $60 million from May through the end of June. Additionally, credit quality remained strong with past-due loan balances at only 7% of combined loans receivable principal at the end of the 2021 second quarter.

Staying on this slide, revenue for Q2 '21 was down 28% from the second quarter a year ago. We expect the strong growth in combined loans receivable principal that we experienced during the 2021 second quarter to continue throughout the second half of this year. As a result, we believe revenue has hit a trough in Q2 '21, and we expect revenue in the second half of this year to be 18% to 30% higher than what it was in the first half of the year. We are now forecasting fiscal year 2021 revenue between 380 and $400 million with combined loans receivable principal totaling between 475 and $500 million at the end of this year. We, along with the banks we support currently like the customer unit economics we are experiencing, and we'll look to add as many new customers as possible this year that meet our risk and CAC guidelines.

Looking at the bottom of this slide, adjusted EBITDA was compressed in Q2 '21 due to the direct marketing expense and loan loss reserve build associated with new customer loans. We expect this to continue throughout the second half of this year. Our net income for the first half of 2021 totaled $10 million or $0.27 fully diluted EPS. There was no difference between reported net income and adjusted earnings for the first half of this year.

On Slide 9, the cumulative loss rate as a percentage of loan originations for the 2020 vintage is the lowest loss rate ever due to the tightening of underwriting, slowdown in new loan originations, and improved payment flexibility tools. While still very early, we would expect the '21 vintage while trending lower now to be higher than 2020, given the increased volume of new customer loans expected to be originated this year.

On this slide, we also show the customer acquisition cost. New customer loan volume for the second quarter of 2021 was our highest since the fourth quarter of 2019. We expect the CAC to continue to trend between $250 and $300 for the RISE and Elastic products and should be sub-$100 for the Today Card through the end of this year.

Slide 10 shows the adjusted EBITDA margin, which was 14% for the 2021 second quarter. We expect our adjusted EBITDA margin to continue to be less than 15% throughout the second half of this year due to expected strong loan growth, as previously discussed. Long term, we expect the adjusted EBITDA margin to return to approximately 20% in a more normalized growth model.

Turning to liquidity and capital on Slide 11. The debt-to-equity ratio using total liabilities at June 30, 2021, was 2.6; lower than 3.1 a year ago. From my perspective, we are slightly under leveraged, and we will continue to borrow to fund expected loan growth during the second half of this year. I believe the debt-to-equity ratio will be between 3 and 4 by year-end 2021.

During the second quarter of 2021, we repurchased $8 million or 2.3 million of common shares under our existing common share repurchase program. Since beginning our common share repurchases in August of 2019, we have repurchased 13.3 million shares or approximately 28% of all shares that were outstanding and issued or reissued since that point in time.

Now, let me discuss expectations for the rest of fiscal year 2021. While I have touched upon certain aspects of our expectations earlier, let me provide a bit more detail. We expect to acquire between 40,000 and 50,000 new customers during both the third and fourth quarters of this year and within our $250 to $300 CAC range.

As I previously mentioned, combined loans receivable principal should end the year between 475 and $500 million. We expect APRs to remain relatively stable through the end of this year. Operating expense levels will remain relatively flat in the second half of the year as we leverage our existing online infrastructure, including the new Blueprint technology platform. Interest expense will be higher each quarter as we continue to borrow to fund loan growth and increase our debt-to-equity ratio. Our expected tax rate will be in our normalized 25% to 30% range. We will also continue to aggressively buy back our common stock under the existing repurchase plan. We are expecting to repurchase approximately $2 million in common shares per month during the third quarter of 2021, subject to daily limitations.

Let me conclude with stating my optimism for our company and industry. Elevate is well-positioned for growth and attractive returns in the current economic environment. Our new Blueprint technology platform will help propel new products and brands over the coming quarters. With that, let me turn the call back over to the operator to open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch

I know that you guys had said that the loan growth occurred kind of in the back half of the quarter, but anything you can kind of tell us about whether that's continued and -- because I'd love to get a little more comfort around the revenue pickup that you're talking about?

Chris Lutes

Yes. Moshe, it's Chris. Through July, I didn't have it in my script, but as we're closing the books, it looks like we added about another $30 million in loans across all three products. So we're at about $430 million roughly at the end of July. Now, I don't want people to extrapolate and assume that we're going to continue to grow $30 million per month the rest of the year. That's why I still feel good about the guidance I gave of $475 million to $500 million at the end of the year. We're certainly going to hit some seasonal lows in September and October, typically. But we feel pretty good about that guidance right now.

Jason Harvison

Yes. Moshe, this is Jason. One thing I'd add to that. One thing that we're watching for is if we could get some insights for this child tax credit now, it might impact demand. And since we have some visibility into consumer's accounts, we did some data pulls through the month of July, and we saw about 30% of the accounts that we evaluated got some form of credit into their checking account. And the average size of that was about $400 to $450, that was mid-July. By the time we pulled that data again by the end of July, those funds had already been used for consumer goods. And so what we saw was, those impacted a small portion of the population, and it seemed to kind of come in and go out pretty quickly. And so that gave us some optimism about the demand hanging around, which Chris just spoke to, we're still seeing strong demand out in the market.

Moshe Orenbuch

Great. Thanks, Jason. You actually anticipated my follow-up question. So, thank you very much.

Operator

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Jason Harvison for closing remarks.

Jason Harvison

Yes. Chris and I just want to thank everyone for your time and support this afternoon. We're excited about seeing the portfolios getting back into growth-building opportunities ahead. We hope everyone stays safe, and we look forward to talking to everyone at the end of the third quarter. Thanks so much. And have a good evening.

Operator

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.