Good afternoon, everyone. Welcome back. We're very pleased to be here with the management of Enova. Enova is a leader in non-prime consumer finance and small business lending, both. We're very pleased to have Steve Cunningham, the CFO, with us. Steve has been with Enova since 2016. Before that, he was the Chief Risk Officer at Discover and a couple of iterations before that at Capital One. So I've known Steve for several decades and consider him a very trusted advisor and seasoned kind of industry professional. So with that, Steve, can you talk a little bit? Enova has been constructive on demand for your product with the consumer. And this has been a very confusing environment for investors in terms of how to think about what's really going on with the consumer kind of on an underlying basis.
Can you talk a little bit about where that is in terms of demand for your product and how you're seeing it from a credit perspective as well?
Sure. Well, first of all, thanks for having me, Moshe, and thanks for the kind words. It's good to be here with you again. So yeah, I think we've talked about for a couple of quarters, we've seen health of both our consumers and small businesses has been good. Demand for credit has been steady and in line with our expectations. And by that, what I mean is on the consumer side, we expected, as we saw in 2023, really for the first time in a while, sort of a typical seasonality, which is stronger growth in the back half of the year and sort of the typical falloff in the first half of the year.
I think what we've seen in terms of demand in our consumer portfolio is following exactly what I said on the call a little while, a few weeks ago around following that typical seasonal pattern. Same thing. That typically means post-tax refund, post-Q1, you start to see that uptick in demand and growth that would underlie our guide that we put out and that you typically see for the rest of the year. For the SMB side, there's not as much seasonality, but we've also seen nice sequential and year-over-year growth in small businesses. Again, I think it's a reflection of what we've seen in some of the research that we've done, which is there's optimism in that space, plans for growth, plans to hire.
So obviously, it's a cautious group, but the underlying fundamentals in terms of consumer spending has been good, which is a big driver of SMBs. But obviously, we're keeping a close eye on any type of macro noise that could impact us going forward. But I think we feel like we're pretty optimistic given what we've seen in the credit performance has tracked in line with our expectations as well, which is peaking Q4 net charge-off rates for consumer. And we expect those to trough in Q2, which is our typical seasonality, and a steady SMB net charge-off rate of between 4% and 5% each quarter, with probably drifting a little bit higher towards 5% just given our strategic focus, not any type of credit issues, more of our strategic opportunities that we see.
So maybe let's drill into both of those just a little bit. One of the things you have talked about is the moderating impact of inflation on your consumer base. I would say any given day, we probably hear varying things. And I know that at an earlier session, an investor asked about a large retailer who had said they've seen that impact. So maybe just kind of throwing that out there, what is it that you're seeing in terms of today in terms of the impact on inflation? And if there's any change, what are you doing in response to it?
Yeah. So I think we've seen, number one, the employment markets have been for our customers are strong. And I think it's important to make sure that we're talking about the same customer sets. We begin underwriting into customers who have very limited capabilities to acquire credit. They've been pretty much abandoned by the mainstream financial institutions, either because maybe they've had a disruption in their life or an emergency and have damaged their credit. We give them an opportunity, and we go all the way down to right around 36% APR where the banks and others really stop. So a lot of times when you hear people talk about non-prime, they're talking about customers that are probably not exactly overlapping with our customers. Our customers tend to be in recession. It's a common term. They need credit to sort of make ends meet here and there.
They're pretty sophisticated about how they do that. But I think what we've seen in some of the surveys that we've asked, and even in some of our electronic bank statement data, job growth and the jobs availability has been good. You can work multiple jobs. And I think that's still the case, even though we've seen some slight softening. There's still plenty of job opportunities for the hourly and blue-collar space. And we've seen real wage growth in those areas as well. While spending has sort of been keeping pace with some of the income growth, we haven't really seen big changes in the balances in their accounts or the instances of overdrafts and things like that.
We feel like compared to a job disruption, I think these folks have been managing some price inflation pretty well, either through substitution or the ability to work through more jobs to increase their income.
Right. The retailer is reflecting their consumption patterns rather than their debt repayment, I guess, as well.
Exactly.
Yeah. So the comment that you made on the small business side, could you talk a little bit about what characterizes these borrowers? And how do you protect your risk-adjusted returns? Talk a little bit about the decision to go after a slightly higher loss content.
Yeah. I mean, our typical SMB profile, if you take a look at our investor deck, you can see for the most part, they've been in business for quite a while. They tend to have revenue of less than $1 million, so kind of off the radar screen for a lot of your typical banks. But these are established companies. They're scrappy. They need credit. We're underwriting into around 900 different industries based on NAICS codes. And we're constantly taking a look at what's happening across these industries. We've talked about those industries that we're kind of staying away from or being more cautious in terms of risk adjustment right now, which is trucking and real estate-related and those types of. And you can see how that's rotated.
You can see that our big exposure right now is less than 15% of the portfolio, which is to a broad professional and technical-type services versus construction, which it was about 20% of the portfolio two years ago. But we lend across different segments at across about 50 percentage points. So as you move into the lower APR bands, those tend to be larger loans, which will start to drift. It could drift into where some of the edgier mainstream financial institutions might like to play. We've been in that segment for a long time, but we've also seen some great demand in what I would call more of the sweet spot up a little bit. Our typical, if you just look at our portfolio, our average revenue yield is around 45% or so. With a loan size, it's more like $45,000.
We've made some strategic decisions based on the demand and the conversion and the risk-adjusted ROEs that we think continuing to emphasize a bit more of that sweet spot for us makes a lot more sense. What you'll see from that is you'll see our yields nudge up a little bit. Our loss rates will be sort of in the upper end of that range that I talked about, that 4%-5% per quarter. That should lead to net revenue margins in the near term to being neutral to slightly better, same with fair values.
Got it. When you think about your competitors both on the consumer side and on the small business side, do you see them pulling back? Do you see them starting to lend again? Are there any kind of trends there that you'd want to share with us?
Yeah. It hasn't changed dramatically over the past few quarters. We do a lot of monitoring of, as you would expect, of direct mail and offers that we see on the wall across our different segments. We haven't seen sort of a significant shift in activity overall. You occasionally see names, and we have both private and public companies that we compete with. You see occasionally some activity for a period of time. Overall, it's been pretty steady. I think some of that is we offer a line of credit and an installment loan in both of the portfolios, both consumer and small business. The consumer preference towards line of credit has been very significant. It's an area where we focused in one of those areas where a lot of the competition just doesn't offer that product either.
Right. Right. Right. We've talked about that in the past. Same sort of thing with respect to kind of marketing channels, particularly in small business. Maybe talk a little bit about what's been successful, and is there anything that's different or evolving there?
No, we're pretty dynamic on the marketing front and have been for a long time. So the marketing team, obviously, is very focused on trying to minimize and optimize our marketing, which is great from my seat. But our marginal decisions are about good unit economics and things like NPVs that make sense. So you might be willing to spend a little bit more to attract good risk-adjusted cash flow that's out there. And I think so we look for those opportunities to how can we improve top of funnel and conversion all the time across our direct programs, which would include mass media, direct mail, pay-per-click banners, as well as through our partners. We have a network of affiliates and lead providers on both fronts as well.
So it's a constant tuning to make sure that we're optimizing, number one, that we're optimizing our NPVs, and we're doing that in a way that's minimizing the cost to acquire that risk-adjusted cash flow that we see. So I think we've talked about that spend relative to revenue. It tends to be around 20%. It's a little lower when in the consumer low points for seasonality and a little higher than that sometimes when we are in the throes of the holiday season when consumer borrowing is at its peak.
Any reason to think that should be not asking you for a forecast, but as you think about it kind of in the coming years, any reason to think that would be changing one direction or the other?
Yeah. I mean, I think we give obviously a very near-term look on that every quarter, which is pretty stable. I mean, over the long haul, you could see that potentially drift down a touch as a percent of revenue. But as a percent of originations, it's pretty steady. So as we continue to scale, there could be some opportunity, but it's not going to be. I continue to expect it to be at around 20% or so of revenue for the foreseeable future.
Right. You mentioned that in your small business portfolio, most of your customers or a lot of your newer customers are not kind of heavily sought after by banks. What are their alternatives? What are they choosing from as financing alternatives? And kind of how do you think about how big you'd like that to be at Enova? In other words, is it what are the gating factors as to how you think about how big that business should be over time?
Yeah. So I think, I mean, these customers, as we talked about, they're turned down by banks when they apply. A lot of them don't even try anymore. They have a checking account, but not credit capabilities. So a lot of times, they're going to have to turn to friends and family or their own personal wealth and those kind of things. But it's still largely an indirect business. So a lot of these small firms work with their advisors across the country to help them understand what kind of credit they might need and who are the best providers there. We have had many, many years in extensive networks or extensive relationships in those networks. And so those are really what they're left with.
So they're looking for fast, reliable, and trustworthy lenders that can help meet their needs when they need it, not when it's easier for the lender to do it. We think so long as we can continue to attract good ROEs and strong unit economics, we'll continue to grow. Moshe, you and I have talked about this over the years that if we don't see that, we'll choose not to grow. I think one of the benefits of our broader kind of unique broader at-scale model across consumer and small business is that we can lean in and out of the opportunities. And if things are getting frothy in a corner, we can stay out of that. But I think in this particular space, we feel like it's a large market. There's enough fragmentation, and we think we can grow at greenfield at a meaningful rate.
We're not setting a specific target. It's been growing a bit faster than consumer. So it's been nudging up in terms of its contribution to receivables and earnings. But we think that could continue for a little while, but that's not necessarily the overall objective. It's about optimizing our unit economics across the portfolios.
Got it. Got it. And we talked about, okay, shifting back to the consumer for a second, you mentioned that the demand for the line of credit, and that's a product it's easier for to originate a closed-end loan. Obviously, there's less. Can you talk about what it is that allows you to be able to do that successfully while your peers are kind of just choosing not to? And I can think of a few that did it and didn't do it particularly well in the past, so.
Yeah. So we've had a line of credit product on the consumer side for many, many years. And we started in the CashNet business, which is the subprime side of the house. So we learned a lot from that. And we built the proprietary technology to ensure that we could build and service product and deliver on promises that customers want. And we expanded that over the past several years, full spectrum across all of our consumer segments. And so it's going to be difficult if you're starting that from scratch, trying to compete with us directly. And customers really like that product because of the utility. If you can't get a traditional credit card, it's the next best thing, right? And so we think the demand for that product has been really strong. The customer utility is really high.
We think in the payment hierarchy, if they're having to make decisions about what to pay, they're probably thinking about that line of credit maybe ahead of an installment payment.
Yeah. No doubt. No doubt. You've also kind of had a significant—I mean, today with the growth in small business, a little less significant, but still a significant international presence. Can you talk about how you're positioned now and how you think about whether there are other markets in which you'd consider expanding?
Yeah. Today, really internationally, we are from a lending point of view, we're really only in Brazil outside of the U.S. with the consumer products. We have been, as you mentioned, we have been in the U.K. We've been in Canada and Australia. I think the way we think about international markets, there's a few boxes that need to be checked. Number one, it needs to be a large addressable market for us. It needs to be fragmented enough that it's not consolidating and that you can go in and grow. Early movers is great for us. There needs to be a culture of borrowing and repaying. I mean, there's a lot of countries in the world where people just don't. They don't use credit. So that's important. And also having the data to build the analytical models that have made us so successful in our risk management approach.
And then lastly, I would say a regulatory regime that you can understand and manage and optimize against. So typically, the markets that we've been in and have left have not checked all of those boxes, whereas Brazil has checked all of those. And if we were to endeavor on any further additional international expansion, that would be going to have to think about our recipe for how to do that.
Gotcha. Okay. Maybe since you did mention that the regulatory landscape in potential new markets, maybe we could talk about that a little bit domestically. What are the issues that you're kind of watching currently? Are there things, concerns that you have or in the other direction? Are there regulatory changes that are out there that could present opportunities? Sort of how do you think about where that stands right now and perhaps even relative to other points in time?
Yeah. It's always a little bit of a mixed bag. I think the media tends to pick up on the more negative aspects of what's happening in the world and the impacts. But obviously, because we are state-licensed in most regards, we carefully watch states that may be considering changes to their products or product features. Either way, you find that there are states that in my eight years at Enova, there's been seven or eight states that have restricted product or pricing features, and there's been a handful that have gone the other way. You just never hear about those in the press.
Because we serve as bank partners, we also keep a close eye on what's happening with some of those developments there, which have been, some states are trying to pass certain rules that would limit or interrupt the National Banking Act, which they're not, they're all under fire for, and a lot of states have not been successful passing those as well. So we keep a close eye on that. We also work very closely with legislators and other folks in the states through our GR teams to make sure they're educated on the impacts that they're taking on.
More broadly, if you think about what's happening in adjacencies like a late fee on the credit card side, to the extent that there are in the riskier segments, customers that might lose access to their card because of changes to fee structures, they could become candidates for our line of credit product. So there are opportunities. And more broadly in states, because of our diversification and our breadth, in states where single products get eliminated, like a payday loan, which we're not in payday lending anymore, but some states have done that, the demand for credit doesn't change, but the supply for credit does change. And it actually ends up being opportunities for us where we can step in to provide an alternative product for a lot of customers that would already qualify for that.
We try to take a very balanced and cautious approach to it, but it always tends to be a bit of a mixed bag. We feel like right now we're in a pretty good shape, both federally and at the state level, as we look forward.
Gotcha. You've been both buying back quite a bit of equity and have talked about making changes to your debt covenants that could allow more. Talk a little bit about this at a high level first and then how that's likely to evolve. What are your how do you think about the amount of capital you generate and the amount of capital that you're going to return to shareholders?
Yeah. I think through the cycle, we tend to have an ROE that exceeds our asset growth. When you have that, you tend to naturally delever, which is not always a good thing. If you look at our tangible capital ratio, we've been slowly bringing it down from very high levels during the COVID period, and it's approaching more like 20% now. It's a high-quality problem. When you have a high ROE that exceeds your asset growth, that usually means you have some room to return capital without affecting your leverage. That's one piece of it. The second piece of it, we don't feel like our equity valuation has kept up with the significant evolution of the company. We still trade at very similar multiples to where we've been historically and to peers, public peers that are more narrow and mainly consumer-focused.
We think that that isn't an accurate reflection of the value that we've created. If you just take a look at how we look today versus several years ago, much more balanced and at scale across consumer and small business, we've substantially de-risked the credit profile of the company and the regulatory risk of the company as well. We feel like a share repurchases at these levels is very opportunistic and has a very high internal rate of return. As we look forward, the bond covenants that we have today, we just issued a senior note last fall, and that covenant package was sort of an update to what should be for us, given that we hadn't issued in that market since 2018. Obviously, we're a very different company now.
So we would expect future refinancings of upcoming maturities that we have would look very similar to the same covenant package. So it gives us the flexibility for more capital returns if we are operating with the right level of leverage and we find that there's some good internal rate of return and opportunism at buying the shares back at that level. So that's kind of a long-winded answer. It's a multi-pronged approach, and we tend to take an approach that's more grid-driven. We're not just buying every day. We tend to buy more at certain levels than we do at other levels.
Gotcha. Maybe talk about this idea that the company is a different company and that, I mean, when you say the risk, you've spread the risk. Do you think that's more from having the ability to kind of shift your originations across the various businesses and segments, or is it something else? What is it that makes that a less risky business model in your view?
Yeah. So I think having so first of all, small business, as I mentioned before, is much less homogeneous than consumer. We're operating across all 50 states in a large number of industries. So it's not a perfect offset, but there's some nice complementary advantages to that. On the consumer side, we have a lot of breadth of product and segments as well compared to some of the folks that we compete with who tend to play more narrowly. So all of that breadth does a few things. It allows us to, as you said, pick our spots to be more consistent. It also creates scale opportunities, which helps us be able to drive better economics.
By picking our spots and not doing things that we feel like we have to do, it drives much more consistency in credit, which is a big driver of our financing through the securitization market. So sort of across the board, it helps across all those fronts. The small business side of the shop is also much less regulated from a rate and product point of view than the consumer side. We feel like sort of across the board, we've moved the company into a much stronger position to be able to deliver consistently for the future.
Gotcha. Gotcha. Now, I think that's first of all, I think it's true, but I also think it's probably true that it isn't reflected, which I think is something we can kind of continue to talk about. You just alluded to the use of securitization and funding, and maybe just talk a little bit about what you're seeing in that market. I think after some turmoil in 2023 and maybe late 2022 when rates started to rise and in 2023, it seems like those markets are somewhat improved, but can you talk a little bit about what you're seeing and kind of Enova's positioning?
Yeah. I mean, we've been just even over the past couple of months, we've been able to renew facilities at terms very similar to where they were. We've also accessed term markets for both term securitization markets for both small business and for our NetCredit business with really great oversubscription, substantial improvements in pricing from deals even just as recently as last year. So I think there's a couple of things happening. Number one, if you've got consistency in your credit performance and stability, that helps a significant amount when you're talking about accessing these markets. And I think investors have been seeking more of that paper recently as well. So we've seen a lot of strength in both the warehouse facility and in the term markets for securitization as of late.
When you think about that, do you think of it as a strategic advantage for Enova versus some of the people against whom you compete?
I think absolutely. I mean, if you're all things being equal, if you're able to finance at a couple of percentage points lower, that's a lot more of your EBITDA that's going to accrete to EPS, which should ideally lead to a better multiple for you, right? So we've done a really good job over the years as our balance sheet approaches $5 billion of building some really robust capital markets programs with a lot of great partners. And it all gets back again to that consistency of our credit performance and the strong risk management that we have in the walls.
Yeah. Well, certainly it does. And it's that consistency that I think is the distinguishing factor. So okay. Basically, I think we're pretty much out of time. We have about a minute left. I would say I was going to ask, what do you think does the investment community not quite get about the Enova story? But I think we've just talked about that. So I would say at this point, I would just say thank you, Steve. It's wonderful to see you, and thanks for helping make our conference a success.
Thank you, Moshe. It's great to see you, and thanks for everyone for joining.