Elevate Credit, Inc. (NYSE:ELVT) Q2 2022 Earnings Conference Call August 9, 2022 5:00 PM ET
Company Participants
Daniel Rhea – Director of Public Affairs
Jason Harvison – President and Chief Executive Officer
Steven Trussell – Chief Financial Officer
Conference Call Participants
Moshe Orenbuch – Credit Suisse
Operator
Good afternoon, ladies and gentlemen, and welcome to Elevate Credit’s Second Quarter 2022 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s conference is being recorded.
I would now like to turn the conference over to Daniel Rhea, Director of Public Affairs. Please go ahead.
Daniel Rhea
Good afternoon, and thanks for joining us on Elevate’s second quarter 2022 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 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 economic conditions in our most recent annual report on Form 10-K and other filings 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 investors.elevate.com.
Joining me on the call today are President and Chief Executive Officer, Jason Harvison; and Chief Financial Officer, Steve Trussell.
I will now turn the call over to Jason.
Jason Harvison
Good afternoon. Thank you, Daniel, and to everyone on the call. I’m going to begin the call with some high-level observations about trends year-to-date, both for Elevate and for the consumer finance market more broadly. Then we’ll provide a summary of our results for the quarter and our outlook for the rest of 2022.
If we turn to Slide 4, we’ll begin with the first half of 2022, wherein generally speaking, our results have been in line with our original expectations. That said, we, like many others, have seen some signs of softening credit showing at the end of June and through July as inflation has started to impact the portfolio.
I’ll speak to credit and [indiscernible] in a second. But in terms of demand, the combination of inflation, particularly fuel costs and groceries and the lack of federal stimulus this year are driving incremental demand across the full spectrum of our products. While this dynamic broadens an addressable market that is already very large, Elevate will remain committed to a measured and return-focused approach to growth.
We have recently made the cautionary, in our view, very prudent decision to follow down growth in the near-term, given the uncertain path of inflation in the range of credit outcomes that exist with certain borrowers. That said, we believe our core philosophy to focus on returns, paired with our market-leading borrower flexibility and fraud tools, position Elevate well to navigate the market. As you know, Elevate has developed products and capabilities to increase our ability to provide credit solutions selectively across a wider set of credit bands. Better yet, these opportunities become immediately actual as volatility eases.
Let me comment on inflation as it impacts customers. As I mentioned, the pressure of rising inflation became increasingly apparent in credit trends beginning in late June and through July. At this point, we believe it is prudent to assume that our current level of inflation will drive software credit performance compared to our original forecast. We will speak more to vintage level differences, but the bulk of the heightened level of delinquencies is being seen in 2021 loans where inflation-related assumptions were much lower and higher level of savings rate were prevalent. On the other hand, the 2022 vintage is performing in line or better than expected due to our recent adjustments and credit models.
Turning to credit. In July, we have seen moderately higher-than-anticipated delinquency rates across all products. To be clear, the vintages and our unit economics remain within our historical bands, albeit above our initial credit performance targets. But if the current rate of inflation continues, we believe credit performance could continue to soften. We, like every other business in the world, operate in real time and while the recent decline in gas prices and some of the headlines have improved, we believe it is prudent to preserve returns over growth.
For this reason, we have modified our full-year 2022 outlook to assume a lower rate of origination and revenue growth and have withdrawn our full-year earnings and EBITDA guidance. Steve will provide the details in a minute, but strategically, I will say that our change in outlook is 100% in line with the value creation philosophy that has been in place at Elevate since I became CEO in 2019.
If you flip to Slide 5, let me take a minute to share some of the data that we follow closely as part of our non-prime tracker specifically as it relates to the impact of inflation. As you can see in the chart at the left, gas prices very quickly presented strain to consumers in the first and second quarters of 2022 for both prime and non-prime Americans. And if we look at the right side of this page, one can see that even the majority of prime borrowers are now saying that one or more factors are causing a lot of strain under month-to-month finances.
The chart also shows how federal stimulus and high levels of savings in 2021 stabilized trends, but now in 2022, we are seeing the uptick alongside rising inflation, primarily from gasoline, grocery costs and housing costs. While inflation has been on our radar for much of the year, we had seen the impact on 2021 loans until late June of this year. Our 2022 vintage is performing better because of changes we made to our underwriting throughout the year. These changes in metrics are the primary reason we decided to moderate growth starting in late June.
We are closely monitoring the fiscal health of the consumer as it relates to credit. As mentioned, we do expect credit performance to become more stressed going forward, but we do not foresee a shock or significant underperformance on loans for two key reasons. Both prime and non-prime borrowers entered the period of inflation with higher level of savings at any point in recent history and continue to see strong employment rates.
Should we note further strain on consumers, we have best-in-class flexibility tools across all the products on the platform that we are able to push out in a more proactive manner as needed. These tools were developed pre-COVID, then battle tested. And we are now rolling out our next-generation AI-enhanced payment flexibility tools that meet consumers’ needs in times of enhanced volatility.
We do see potential upside in the model and the ability to lend to broader credit bands as the market stabilizes and prime borrowers tightened further. Strangely, our opportunity to grow is broadening, but the environment, as it relates to credit stabilization, is the overwriting factor in our decision-making.
So to summarize what we know today: one, while we see modest softness on credit at present, we anticipate slightly more pronounced delinquencies in the second half of the year; two, even with softening credit performance, we believe the loan to the portfolio will generate returns similar to pre-COVID vintages; three, we plan to be more cautious in these growth originations in the back half of the year, but we also see broadening opportunity to be selective and make loans to high credit borrowers given the wider market of American seeking loans. At present, all three of the products currently on the platform are seeing strong demand even as we slow new originations.
With that backdrop for context, let’s now turn to Slide 6 to summarize our second quarter results. As mentioned, Elevate performed largely in line with our expectations for the quarter and year-to-date. As a note, remember that our year-over-year comparison will continue to look skewed on growth and charge-offs given the replenishment of the portfolio following the pandemic. Our combined loan principal receivable grew by 33% from the lows of last year and now totaled $532 million.
Growth was broad-based across all products with rise in Elastic growing approximately 23% and 34%, respectively. The Today Card product continues to see high demand in the portfolio more than doubled compared to a year ago and now represents over $50 million of outstanding or about 10% of our total portfolio. As a result, our revenue for the second quarter of $118 million grew 39% from the growth in average loan receivables year-over-year despite a slight drop in APR from the increasing portfolio mix of the Today Card.
Our customer acquisition cost, or CAC, were down an aggregate 26% year-over-year. These costs totaled approximately $300 per loan in the second quarter, which is at the upper end of our target range. On CAC, I’d like to emphasize that the recent increase we have shown in our results is not a function of demand. The higher CAC we’ve experienced year-to-date has come primarily from our continued selectivity in underwriting originations and a higher mix of new customers.
Adjusted EBITDA for the quarter totaled $12.3 million, which was up 6% compared to a year ago. Our adjusted EBITDA margin was 10.5% for the quarter. Steve will further detail our outlook, but as I previously mentioned, we believe it is prudent to lower our growth expectations for full 2022 given the stresses in the economy and the impacts to our customers.
With that, let me take a second to fully introduce Steve Trussell, our new Chief Financial Officer. Steve has been with us since May and comes to Elevate with a significant amount of consumer finance experience, which is over 17 years at Discover Financial. We are lucky to have Steve to be a part of what I believe is a very deep bench, including Chris Lutes and Chad Bradford.
With that, I’ll turn it over to Steve.
Steven Trussell
Thanks, Jason, and good afternoon, everyone. It is great to join my first earnings call with Elevate. So turning over to Slide 7, I’ll start by discussing the loan portfolio. Combined principal loans receivable totaled $532 million as of June 30, 2022, up 33% from $399 million a year ago and up 4% sequentially from where we ended the first quarter. Overall, this was in line with our previous outlook for Q2 2022.
Coming out of a normal seasonally low first quarter, we expected an increase in the loan portfolio, which occurred as demand for new loan originations and multi draws on the Elastic line of credit products increased as we move beyond the higher tax refund paydown period.
In the quarter, we saw a sequential growth in new customer units of approximately 33% and returning customer unit growth of slightly over 9%. Relative to the same quarter last year, our growth levels of new customers were lower by approximately 34% as we shifted our approach on growth given the current economic environment. As a reminder, the second quarter of last year represented a turning point in our growth trajectory post COVID, as we significantly ramped up growth investments.
Staying on this slide, revenue for the second quarter was up 39% from the second quarter a year ago due to an increase in the average outstanding loan balance resulting from second half growth experienced in 2021 and the first quarter of 2022, while individual APRs were relatively consistent between the two periods.
The overall portfolio APR was down 3 points due to a higher mix of the Today Card, which now comprises approximately 10% of the combined loan portfolio. Looking at the bottom of the slide, adjusted EBITDA was $12.3 million for the second quarter of 2022 as compared to $11.6 million for the second quarter of 2021.
On a pro forma basis, which assumes the adoption of fair value loan accounting at the beginning of 2021, adjusted EBITDA for the second quarter of 2021 would have been approximately $8 million higher with pro forma adjusted EBITDA of $19 million. Relative to Q1 2022, adjusted EBITDA in the quarter improved by $14 million.
Looking at the bottom right, earnings was a net loss of $6.5 million for the second quarter of 2022, with net loss of $3 million reported for the second quarter of 2021. On a pro forma basis, which assumes the adoption of fair value loan accounting at the beginning of 2021, pro forma net income of approximately $3 million would have been reported for the second quarter of 2021, an increase of approximately $6 million from reported results. Relative to Q1 2022, net income improved by $7.4 million.
Consistent with Jason’s comments, based on taking a more cautionary stance on growth, we are revising our target range on loan growth to be flat to the low-single digits range and revenue growth year-over-year to be approximately 20% for full-year 2022. In addition, given the widening range of potential outcomes and our lack of visibility on the pace and shape of inflation and how it will impact our credit performance for full-year 2022, we are withdrawing our previous adjusted EBITDA and earnings guidance.
Again, to be clear, based on the current rate of inflation, we believe our more seasoned vintages will exhibit softer credit trends in the back half of 2022, but still in the range of our 2018 vintage. Clearly, we’ll be monitoring near-term delinquency trends and are working diligently with our customers to provide best-in-market service and assistance, but the range of potential trajectories make guidance challenging based on today’s information.
As we discussed in previous calls and in our recent annual report, we elected to adopt fair value accounting for the loan portfolio beginning January 1, 2022, as we early adopted the new life loan reserve requirements and apply the alternative fair value accounting model provided under the standards. The impact of adoption resulted in a net increase to retained earnings of approximately $99 million net of tax, which represents the reversal of the previously recognized loan loss provision and a fair value adjustment of the loan portfolio as of January 1.
At adoption on January 1, 2022, the fair value premium was approximately 10.2% across the combined loan portfolio and was 9.7% at the end of Q1 2022. The fair value premium increased approximately 40 basis points to 10.1% at the end of second quarter 2022 from Q1 levels due to a continued shift in the portfolio mix and credit performance of the portfolio, partially offset by a higher discount rate.
On a pro forma basis, the overall premium as of June 30, 2021, was approximately 13% as the loan portfolio was comprised of more mature loans and lower new loan originations during the COVID-19 pandemic period, in 2020 and the first half of 2021.
Turning to credits. Consistent with our expectations, total credit losses increased on both a dollar basis as well as a percentage of revenues year-over-year driven by the strong growth in loans in the second half of 2021 and their associated seasoning. Net charge-offs increased by $39 million from Q2 2021 as a percentage of revenues from 31% to 55%. Sequentially, net charge-offs decreased $12 million from Q1 2022 and decreased as a percentage of revenue from 62% to 55%.
On Slide 8, the cumulative loss rate as a percentage of loan originations for the 2020 vintage is the lowest loss rate ever for Elevate due to the tightening of underwriting, slowdown in new loan originations, increased government stimulus and improved payment flexibility tools. The 2021 vintage is still performing slightly better than 2018 levels. However, the strong growth in loan portfolio during the second half of 2021 continues to season and impact 2022 loss rates and earnings.
As a result of the heavier mix of new customer loans during the second half of 2021, our net charge-offs as a percentage of revenue during the second quarter of 2022 were at the top end of our long-term target range of 45% to 55%, but were in line with our expectations. Our quarterly net principal charge-offs as a percentage of our average combined principal loan receivable was 10% for the second quarter of 2022 and remains within our historical experience.
Past new principal balances totaled 10.3% of the principal loan portfolio as of June 30, 2022, down slightly from 10.6% as of March 31, 2022, and continue to remain within our historical range of 9% to 11%. On this slide, we also show the customer acquisition cost. We note that the first half 2022 customer acquisition cost is slightly above our target range, driven by our more measured approach to growth.
We continue to maintain customer acquisition targets that allow us to achieve our unit economics. These targets are between $250 and $300 for the RISE and Elastic products and sub-$100 for the Today Card. We continue to pursue diversity in our marketing mix between direct mail, strategic partner and digital channels. We expect to be within our target range for customer acquisition costs for the remainder of the year and on a full-year basis.
Shifting over to operating expenses. Operating expenses in total for the second quarter were just under $40 million, higher than the second quarter of 2021 by $1.3 million or 3% and versus the first quarter of 2022 by $1.6 million. The sequential increase in expense was primarily driven by higher depreciation expense as recent investments in our Blueprint platform came online as well as a modest increase in compensation and marketing investments as we grew the business.
Turning to liquidity capital on Slide 9. We ended the quarter with a total cash balance of $74 million. The company paid down its VPC debt facilities by approximately $25 million in the first quarter, while drawing down a net $12.5 million on its debt facilities in the second quarter of 2022 to fund loan growth.
The company had overall weighted average cost of funds of 9.1% as of June 30, 2022, down from 9.6% at June 30, 2021. The majority of our debt has a fixed rate until maturity in January of 2024. On the DPC facility, our new borrowings are priced at a three-month LIBOR plus 7%, subject to a 1% LIBOR floor.
Lastly, during the second quarter of 2022, we repurchased $2 million or approximately 760,000 common shares under our existing common share repurchase program. This represented approximately 2% of our common shares outstanding at the beginning of the quarter. We will continue to evaluate future purchases under the share repurchase plan as we continue to review our liquidity position to ensure we have adequate cash balances to fund expected loan portfolio growth and other cash requirements. Since beginning our share repurchases in August of 2019, we have repurchased approximately 36% of all shares that were outstanding and issued or reissued since that point in time.
With that, let me turn the call back over to the operator and open it up for Q&A.
Question-and-Answer Session
Operator
Thank you very much. My name is Dave, I will be the Q&A moderator for this session. [Operator Instructions] Our first question comes from the line of Moshe Orenbuch with Credit Suisse.
Moshe Orenbuch
Thank you. Can you hear me?
Jason Harvison
Yes, we got you, Moshe.
Moshe Orenbuch
Okay. Great. Thanks. So you mentioned a couple of things on the call. Maybe you could expand on them a little bit. You mentioned, Jason, payment flexibility tools and possibly lending to broader credit bands. Could you sort of talk about that a little bit?
Jason Harvison
Sure. When we go back to 2019, even just around that time even before, we started building in some flexibility tools into the platform, so if the consumer came up on a hardship if they could freeze the account, they could spread a payment out, skip a payment, some different ways to get consumers back on track if they had some sort of unexpected event while in product. And then during the pandemic in 2020, we actually made those self-service.
So consumers wouldn’t have to call in the call center, they could actually just go online. And for a current account, they could use one of these flexibility tools. And then for delinquent accounts, they could use different settlement opportunities and different offers that are out there that they can self-select on without interacting with a live agent. And so we actually use that time during 2020 to make all these tools more self-service and a little bit more robust. And so now as we sit here in 2022, those products have been – those features have been out for about three years. And consumers can use them at any time. And what we’ve seen recently is the usage of those hover around 1% to 2% of the active accounts. Now at the peak back in 2020 was about 10% to 15%. So you see consumers be very responsible with them, but we can use those to help target consumers to help them bridge a gap that’s out there.
Moshe Orenbuch
Got you. Okay. And I guess, you also mentioned lending to broader credit bands. I guess, are you thinking in higher credit direction? Like what’s the follow-up process? And how would you go out there?
Jason Harvison
Yes, Moshe, what we saw historically in recessionary-like times is prime lenders are seeing to tighten up fast and loosen up slow. And so that makes higher credit quality consumers down into the space where we operate and the banks we work with operate. So it creates a unique opportunity. We see a little bit higher credit quality consumers come in the space that we can work with and lend to. And just recently, if we look at our FICO score distributions of applicants coming to the door, we are starting to see that already. So I think it gives us the opportunity to take a very broad market already and see that somewhat expand as more prime consumers are squeezed out of the prime market into our market.
Moshe Orenbuch
Got it. And then at a high level, I mean, you mentioned, obviously, sequentially, you did have lower losses and the delinquencies were kind of stable, maybe down a little bit as a percent. You alluded to the fact that they might be getting a little worse kind of in the last few weeks. I mean I’m hoping you can kind of expand on that and maybe talk a little bit about what things could happen over the next couple of months that would make things less bad than what you’re thinking about now and what things would make it worse?
Jason Harvison
Yes. It’s a great question, Moshe. What we saw in the back half of the second quarter where some delinquency buckets ticked up slightly. And I think the factors that drove that; one, we spoke to inflation that we’ve seen broadly across all the industry – other lenders are talking about that. But I think also what we saw is consumers were also supported by the tax season this year, the tax returns were a little bit higher than anybody expected and somewhat delayed. And so I think what happens is consumers were supported by the higher cash balances coming out of the pandemics due to [indiscernible] than the tax returns that they had that were a little bit delayed helped them out through the summer. And then we saw that pressure with the inflation come in with those balances pulling back that delinquency buckets pick up in the back half of Q2. And so I think that’s what drove some of the pressure there.
Now when we track that going through July, doing this call here in August versus in July a lot, as we look at the delinquency buckets at the end of July. And we saw those stabilize. So I think that’s a good thing. And so as we go forward, it’s a very fluid market. We’ve already seen gas prices start to come down some, so we think that’s going to give some pressure to consumers. But I think we’re going to have to be very in tune with the cash flows of the consumers and what that excess spread they have there to cover their debt service. And so as we look at the vintages for 2022 that we’ve been booking, we’ve been pretty conservative with the banks we work with to have a pretty conservative approach to the loans that are coming on the books in 2022 and focus heavily on that cash flow piece. And we’ll see that continue through the second half of the year.
Moshe Orenbuch
Great. Thanks.
Operator
And there are no further questions at present time. I’ll turn the call back to our presenters. Please continue with your presentation or closing remarks. Thank you very much.
Jason Harvison
Just want to thank everyone for joining us this afternoon on our earnings call. I also want to thank all the employees here at Elevate for all their hard work and all they do to help continue to move the company forward. So looking forward to speaking here in a few months to talk about our Q3 results. So thanks, everyone, for joining us this afternoon. Take care.
Operator
And all that will conclude the call for today. We thank you very much for your participation. You may now disconnect.
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