Good afternoon, and welcome to the Enova International Q3 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Lindsay Savarese, Investor Relations for Enova. Please go ahead.
Thank you operator and good afternoon everyone. Enova released results for the Q3 of 2021 ended September 30, 2021 this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the investor relations section of our website at ir.enova.com. With me on today's call are David Fisher, Chief Executive Officer, and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the investor relations section of our website. Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements and as such is subject to risks and uncertainties.
Actual results may differ materially as a result from various important risk factors, including those discussed in our earnings press release and in our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Forms 8-K. Please note that any forward-looking statements that are made on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, Enova reports certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website.
With that, I'd like to turn the call over to David.
Good afternoon, everyone. Thanks for joining our call today. I'll first provide an overview of our Q3 results, and then I'll discuss our strategy and outlook for the remainder of 2021 and into next year. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. In the Q3, we again delivered strong results as our diversified business model, world-class machine learning analytics, and our terrific team were able to take advantage of the improving economic environment. Similar to Q2, we saw strong and improving demand combined with good credit quality across all of our businesses. Given these dynamics, we continued to lean in heavily with our marketing efforts. As a result, our marketing spend over the last two quarters has been well over 20% of revenue, which is meaningfully higher than in prior years.
Despite this increase, we are very comfortable that this investment will generate strong returns. As we've discussed, we use our advanced machine learning analytics to constantly monitor expected loan-level unit economics at a very detailed level. At our current customer acquisition cost with the strong credit metrics in our portfolio, the expected unit economics on our recent vintages remain well above our targets. As always, we will keep a close eye on these metrics as we continue to grow, as we are committed to producing sustainable and profitable growth over the long term. Q3 originations were up 26% sequentially, building on a strong Q2 and were over six times higher than the Q3 of last year when we significantly scaled back originations during the pandemic. This is the second consecutive quarter we have produced sequential growth above 25%.
In addition, originations from new customers increased to a record 43% of total originations, up from 39% in Q2 of 2021 and well above 11% in Q3 of 2020, as we believe our broad and diverse product offering, combined with effective marketing across a wide range of channels, is resonating very well with customers. In the Q3, consumer products accounted for 47% of our portfolio, and small business products represented 53%. Within consumer, line of credit products represented 33% of our consumer portfolio, installment products accounted for 65%, and short-term loans represented just 2%. We continue to expect the mix between consumer and small business to fluctuate over time based on both macroeconomic factors as well as seasonality.
We are pleased with the diversified nature of our portfolio and do not have specific targets for the optimal mix between consumer and small business lending. Instead, our strategy is to optimize that mix based on the economic environment at the time to maximize our unit economics and the returns we generated on our invested capital. Thanks to the skillful execution of our team during the last 18 months since the pandemic began, we believe we are continuing to take share in both the SMB and consumer markets with our diversified product offerings and consumer-friendly online-only model. As the economy continues its recovery, we are seeing consumers increase their spending, which is driving demand for credit. In addition, as we've been predicting, small businesses have been beneficiaries of the pent-up consumer demand and the resulting increased spending.
We are encouraged by these dynamics heading into the end of the year, which is typically our seasonally strongest quarter for growth, and we now have considerable tailwinds heading into 2022. Given that, we expect to see continued strong origination growth and elevated marketing spend for at least the Q4 and likely into 2022. During the quarter, we made the decision to wind down Enova Decisions to allow us to strategically focus our efforts on our remaining businesses, which we believe have larger growth opportunities and are better aligned with our core competencies. Enova Decisions would have required significant increased investment to scale to the next level, and we believe we are better served by directing our capital, resources, and our people on the highest growth opportunities ahead of us.
We are currently in various stages of experimentation and development with about a half dozen new initiatives in addition to the ones we have previously discussed. While Enova Decisions was growing, albeit at a slow pace, it was never a significant driver of our overall growth and did not significantly contribute to our results. Additionally, we do not expect any major cost to wind down the business. In contrast, Brazil, one of our other new initiatives, is having a nice resurgence in growth. As we've discussed in the past, new legislation in Brazil last year significantly improved our ability to electronically fund and collect from our customers. The new rules became effective March first, and since then, we've been testing and troubleshooting the new processes with large Brazilian banks. With most of those issues now resolved, we are focusing on quickly increasing origination volume and have seen promising initial results.
Before I wrap up today, I want to touch on the CID that we announced in our press release. The CFPB is investigating a handful of issues, several of which were self-reported by Enova. We have been cooperating fully with the CFPB, as we always do. This is a routine process with the CFPB, particularly in our industry, and we've been through it with them in the past. As a result, we anticipate being able to work with the CFPB to expeditiously complete this investigation. In summary, Q3 was another great quarter, and we are encouraged by the strong momentum we are seeing. The improving economy, combined with our highly scalable and flexible machine learning technology, provide tailwinds heading into the end of 2021 and beyond.
Given this encouraging backdrop, we will continue to lean into demand and help hardworking people across the nation get access to fast, trustworthy credit. Now I'd like to turn the call over to Steve Cunningham, our CFO, who will discuss the financial results and outlook in more detail. Following Steve's remarks, we will be happy to answer any questions that you may have. Steve?
Thank you, David, and good afternoon, everyone. As David mentioned in his remarks, we're encouraged by the continued growth in origination and our ability to attract new customers as the economy and demand continue to recover. Our diversified product offerings, scalable online-only business model, machine learning-powered risk management and analytic capabilities, and our solid balance sheet have us well-positioned to generate profitable growth as the operating environment improves. Now turning to Enova Q3 results, our total company and small business results when compared to the year-ago quarter are heavily influenced by our acquisition of OnDeck last October. Following the strong originations growth reported during the Q2, Q3 total company revenue rose 21% sequentially and 57% from the Q3 a year ago to $320 million.
Total company combined loan and finance receivables balances on an amortized basis were $1.7 billion at the end of the Q3, up 17% sequentially and more than double compared to the Q3 a year ago. Total company originations were $856 million, up 26% sequentially. Originations from new customers were 43% of total originations, the highest percentage since our first year of operations. The growth in new customers was driven by an acceleration of our marketing activities. As David noted, our small business products continued their recent trend of solid sequential growth during the Q3 as the economy recovers. Small business revenue increased 18% sequentially and was more than 9 x higher than the same quarter a year ago, demonstrating how the OnDeck acquisition has created meaningful diversification in Enova's revenue.
Small business receivables on an amortized basis totaled $882 million at September 30th, a 12% sequential increase and more than 10 x higher than the end of the Q3 of 2020 as small business originations increased 15% sequentially to $462 million. Our consumer businesses saw accelerated growth during the Q3, which is encouraging as we enter the Q4, our typical seasonal high point for consumer demand. Revenue from our consumer businesses increased 23% sequentially and 12% from the Q3 of 2020. Consumer receivables on an amortized basis ended the quarter at $782 million, up 22% sequentially, and 26% higher than the year ago quarter, as consumer originations increased 41% sequentially to $395 million.
Subject to our typical seasonality, we expect continued growth in revenue over the coming quarters as the economic recovery continues. As expected, the net revenue margin saw some normalization this quarter as originations growth continued, especially from new customers, resulting in less seasoned loans becoming a larger proportion of the portfolio. The net revenue margin for the Q3 was 77%, down from the 98% in the Q2, although it remains well above our expected normalized range of 50%-60% as credit quality, which is the most significant driver of portfolio fair value, remains solid. The change in the fair value line item included two main components for the reporting period, net charge-offs and changes to the portfolio's fair value resulting from updates to key valuation inputs, including future credit loss expectations, prepayment assumptions, and the discount rate. I'll discuss both items in more detail.
First, the total company ratio of net charge-offs as a percentage of average combined loan and finance receivables for the Q3 was 4.2%, up from the Q2's historically low net charge-off ratio of 2.4% and down from 4.7% from the Q3 of 2020. The Q3 net charge-off ratio for small business receivables was 84 basis points, which was flat to the previous quarter, but well below the year ago ratio of 4.4% as we continue to see strong credit performance across all of our small business brands. With the sequential acceleration in consumer originations over the past two quarters, especially from new customers, credit normalization in the consumer portfolio was expected from unsustainably low levels.
While the consumer net charge-off ratio for the Q3 increased to 8.1% from 4.46% last quarter, it remains well within our expectations and well below pre-COVID levels. Second, the fair value of the consolidated portfolio as a percentage of principal was 103% at September 30th, unchanged from the prior quarter. The fair value of the small business portfolio as a percentage of principal increased to 104% at September 30th from 100% at June 30th, as the credit outlook for the portfolio continues to improve. The fair value of the consumer portfolio as a percentage of principal declined to 103% at September 30th from highs in recent quarters.
The change continues to reflect a solid credit outlook and was driven primarily by the strong recent growth in consumer originations, especially from new customers, as less seasoned loans have become a larger proportion of the consumer portfolio. The sequential decline in delinquent receivables as a percentage of loan and finance receivables balances at the end of the quarter also reflects strong customer payment rates and the continued solid credit profile of the portfolio. The percentage of total portfolio receivables past due 30 days or more was 5.5% at September thirtieth, down slightly from 5.7% at the end of the Q2, and higher than the 3.7% ratio at the end of the Q3 a year ago when the originations were well below current levels.
The percentage of small business receivables past due 30 days or more declined during the quarter from 7.1% at June 30 to 5.1% at September 30. The decline was driven by continued improvement in delinquency levels and strong payment and recovery rates across all of our small business brands as small business delinquency rates continue to trend toward more normal historical levels. The percentage of consumer receivables past due 30 days or more was 5.9% at September 30 compared to 4.1% at June 30 and 3.5% at the end of the Q3 a year ago. With the sequential acceleration in consumer originations over the past two quarters, especially from new customers, some normalization in consumer delinquency was expected from the unsustainably low levels recently observed.
With the continued improvement in the economic environment, we again reversed a portion of the downward adjustments to the fair value calculations that were implemented early in the pandemic. As the recovery continues to gain momentum, we expect additional reversals of the downward adjustments in the coming quarters. To summarize, the change in fair value line item continues to be driven by strong growth in origination, relatively low levels of net charge-offs, and a stable total company fair value as credit metrics and modeling at the end of the Q3 continue to reflect a solid outlook for expected future credit performance for our rapidly growing portfolio. Looking ahead, we expect the net revenue margin for the Q4 of 2021 to range between 65%-75%.
As the economy recovers and demand and originations continue to rise, the net revenue margin should normalize over several quarters at around 50%-60% as newer and less seasoned loans become an increasingly larger proportion of the portfolio. Our Q4 net revenue margin expectations and the degree and timing of future normalization in the ratio will depend upon the timing, speed, and mix of originations growth. Now turning to expenses. Total operating expenses for the Q3, including marketing, were $151 million, or 47% of revenue, compared to $129 million, or 49% of revenue last quarter, and $56 million or 27% of revenue in the Q3 of 2020.
Marketing expenses increased to $80 million or 25% of revenue in the Q3 from $55 million or 21% of revenue last quarter, and from $5 million or 2% of revenue in the Q3 of 2020, and we captured rising customer demand to meaningfully increase originations during the Q3 with an increasing proportion from new customers. With the strong unit economics we're seeing from new originations and the expected increases in demand through the rest of the year as the economic recovery continues, we expect marketing spend in the Q4 as a percentage of revenue to be similar to the Q3.
Operations and technology expenses for the Q3 totaled $38 million or 12% of revenue, compared to $35 million or 13% of revenue last quarter, and $18 million or 9% of revenue in the Q3 of 2020. Given the significant variable component of this expense category, sequential increases in O&T costs should be expected in an environment where originations are accelerating and receivables are growing. General and administrative expenses for the Q3 totaled $34 million, or 10% of revenue, compared to $39 million or 15% of revenue last quarter, and $34 million or 16% of revenue in the Q3 of 2020. The sequential reduction in G&A expenses was driven primarily by continued recognition of cost synergies related to the OnDeck acquisition.
We expect G&A expenses as a percentage of revenue to continue to decline over the near term as these expenses scale with increases in originations and receivables. Adjusted EBITDA, a non-GAAP measure, was $100 million in the Q3, down 26% sequentially and 27% from the year-ago quarter for the reasons I previously discussed. Our adjusted EBITDA margin for the Q3 was 31% compared to 51% last quarter and 67% in the Q3 of 2020. Adjusted EBITDA margins should continue to normalize in the coming quarters as a result of ongoing marketing investments and the aforementioned growth-related normalization in net revenue margins and volume-related expenses. As previously noted, the degree and timing of any normalization will depend upon the timing, speed, and mix of originations growth and will likely occur over several quarters as originations return to historical levels.
Our stock-based compensation expense was $5 million in the Q3, which compares to $3.8 million in the Q3 of 2020. The increase is related to the OnDeck acquisition, and as I've described in recent quarters, the expense associated with the 2017 increase in the vesting period for restricted stock units is now fully reflected in our year-over-year comparison. Normalized stock-based compensation expense should approximate $5 million per quarter going forward. Our effective tax rate was 24% in the Q3, which increased from 9% in the Q3 of 2020. The increase was from the one-time tax benefits that lowered the effective tax rate in the prior year quarter. We expect our normalized effective tax rate to remain in the mid- to upper-20% range.
We recognized net income from continuing operations of $52 million, or $1.36 per diluted share in the Q3, compared to $94 million or $3.09 per diluted share in the Q3 of 2020. Adjusted earnings, a non-GAAP measure, decreased to $57 million or $1.50 per diluted share from $90 million or $2.97 per diluted share in the Q3 of the prior year. The trailing twelve-month return on average shareholder equity using adjusted earnings was 33% during the quarter, compared to 39% a year ago.
We ended the Q3 with $306 million of cash and marketable securities, including $229 million in unrestricted cash, and had an additional $694 million of available capacity on $788 million in domestic committed facilities. Our debt balance at the end of the quarter includes $94 million outstanding under committed facilities. Our cost of funds for the Q3 was 6.7% versus 7.8% for the Q2 of 2021 and 8.4% in the same period a year ago. The decline in our cost of funds reflects the impact of recently completed transactions that have lowered our marginal cost of funds.
During the Q3, we also acquired nearly 500,000 shares at a cost of approximately $15 million under our $50 million share repurchase program. Our solid balance sheet and ample liquidity have us well positioned to support originations and receivables growth as the economy recovers. We're not providing specific revenue and earnings guidance at this time. However, as noted in my comments today, with the return of customer demand and meaningful growth in originations, we expect marketing to remain above 20% of revenue in the very near term before normalizing to more typical mid-teen levels in 2022. This should lead to some continued normalization in the net revenue margin, growth-related variable expenses, and the adjusted EBITDA margin from recent levels.
The degree and timing of any normalization will depend upon the timing, speed, and mix of originations growth and will likely occur over several quarters as originations begin to return to or exceed pre-COVID levels. We're encouraged by our recent results and excited by the opportunity to deliver meaningful and consistent top and bottom-line growth as we leverage the benefits of the scale and efficiency of our direct online-only operating model, our broad and diversified consumer and small business product offerings, our machine learning-powered credit risk management capabilities, and our solid balance sheet. With that, we'd be happy to take your questions. Operator?
We will now begin the question-and-answer session. To ask a question, you may press Star, then One on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then Two. At this time, we will pause momentarily to assemble our roster. Our first question comes from David Scharf with JMP Securities. Please go ahead.
Hi. Thank you, and good afternoon. Thanks for taking my questions. Listen, maybe first off, on the demand side, I'm quite sure the answer to this question is a resounding no, just based on the strength of your originations. I am curious. Do you get any sense if the recent proliferation, just a lot of new point-of-sale financing products out there, subprime card products that are being launched or talked about by other lenders, just, it just feels like the subprime consumer, which obviously is a broad category, is increasingly being targeted with more financing options. Like I say, certainly your demand in the Q3 was exceptional.
Did you get any sense that, you know, some of the potential borrowers have other options, or is the competitive landscape as strong as ever in your mind?
Yeah. I think you said it right, David. It's kind of a resounding no. I mean, there is a lot of noise, but I mean, there's no large player in the subprime credit card space. There's some, you know, small options out there, but there always have been. It's mostly, you know, kind of high near-prime borrowers, not deep subprime borrowers. You know, obviously a lot of talk of buy now, pay later, but that's almost exclusively prime and super prime. There's really no big player that's really done any kind of volume in the subprime or near-prime space where we focus most of our efforts.
You know, that's always been one of the things that's differentiated us and set us apart is our kind of conviction on that subprime and near-prime space where there has been less competition and continues to be less competition.
Got it. No. Understood. Still needs to be asked every quarter.
Sure.
You know, maybe as a follow-up, can you just remind us? I mean, everybody's grappling with obviously the cadence of credit normalization. I realize there's no crystal ball on that. As we think about sort of an endpoint of your sort of net revenue margin, you know, in a non-recessionary environment, you know, pre-pandemic you didn't have OnDeck. Can you sort of remind us how OnDeck in that portfolio sort of changes perhaps the definition of a normalized net revenue margin? Is it actually gonna be higher than it was pre-pandemic?
Let me give you the high-level answer, and I'll let Steve jump in with some specifics. First of all, when we talk about normalization becomes mostly from mix, you know, kind of adding a bunch of new customers as demand returns rather than credit actually getting bad. I think you can see that in our results this quarter. Credit is incredibly good, and our belief is that in credit will remain incredibly good going forward just given the macroeconomic factors. You have rising wages. You have near full employment. It's a great environment for people to be able to take on credit and pay it back. That's what you saw in our numbers.
We had, you know, 43% of our originations were new customers, by far a record since our first year in business, and yet still very, very strong net revenue margin. And that's, you know, kind of an indication that credit across the board is very, very good. We've talked about normalized net revenue margins in the 50%-60% range, and subprime or SMB doesn't change it that much. I mean, we really target our business and our products to maintain pretty consistent margins across the various products that we offer. That's kind of the high level. Steve, anything you wanna add to that?
No, I think you covered it well, David. I would just add that, you know, 50%-60% is a fairly broad range, and I think, as David said, where you land in that range, the way our unit economics work. Small business and consumer are in that range. It can also vary quarter to quarter, depending on, you know, how fast we're growing and how many new customer or the proportion of new customers in the mix as well. Our view on that has not changed since the beginning, and OnDeck hasn't changed our view of where that normalized range should be over the long term as we get back to sort of capacity lending in our business.
Got it. Understood. Thank you very much.
Yeah, thanks, David.
The next question is from John Hecht with Jefferies. Please go ahead.
Hey, guys. Afternoon, thanks. I guess a little bit more on originations. I mean, it was the biggest, I think, looking at our model, the biggest quarterly increase in originations. I guess just in terms of the persistence of that, I mean, are you getting to the point where the quarter-to-quarter jump won't be as extreme, or is it just a really good kind of marketing and customer acquisition period where that quarter-to-quarter jump might persist? How do we think about seasonality with respect to that as we get into next year?
I mean, obviously, there's only so many quarters in a row where you can have 20+% sequential growth before the law of large numbers catches up with you. Q4 is a sequentially, seasonally strong quarter for us. When you look at dollar levels of originations, we do expect very good growth in the dollar levels of originations in terms of Q4. It's difficult to predict. We're only one month into it, and obviously, a lot of the seasonal growth happens in the back half of the quarter, really in the back third of the quarter. It's difficult to predict exactly. Everything we're seeing tells us that the demand is gonna remain good. We haven't seen any signs of it petering off.
Again, given the macroeconomic factors out there, we would not expect it to. You know, still very bullish and as, you know, we move through the Q4 and head into 2022.
I guess maybe a discussion of marketing. Like, any changes to the different channels and the different kind of efficacy of each channel and customer acquisition cost trends?
Nothing major. I mean, our goal with marketing really over the last five years has been to take more into our own hands. We've continued to lean in heavily on direct mail, TV and digital. You know, still have strong volume from the lead channels. You know, I would say no major shifts really over the last year or two. Continued optimization, of course, but no major shifts.
All right. Thanks very much.
Yep. Thanks, John.
Again, if you have a question, please press star then one. The next question is from John Rowan with Janney. Please go ahead.
Hey, good evening, guys.
Hey, John.
Steve, I really just a quick question. You said, I believe at the beginning that marketing spend is gonna be similar in the Q4 to the Q3, but then the second piece of guidance, you referenced a number closer to 20%. Trying to figure out if marketing spend is gonna be similar to the Q3 on a dollar basis, but not a percentage basis, and if you just kinda go over the guidance that you gave for 2022 on the marketing spend reverting down to the mid-teen level. I just wanna make sure I have it correctly.
Yeah, sure. What I do expect and what we expect in the Q4 is as a percentage of revenue, marketing, you know, plus or minus will be pretty close, we expect, to what you saw in the Q3. I think at the end of my remarks, I pointed to above 20%, which is what we've been seeing before it goes back to the mid-teen as a percent of revenue that we're a bit more used to. Keep in mind, we haven't talked about, you know, some of the impacts of fair value accounting in quite a while. But compared to pre-fair value, there'll be a point or two higher, marketing as percent of revenue, just in the way the accounting works, but there'll also be a little bit higher revenue recognition as well.
It sort of set themselves straight. You should expect to see above 20%, Q4 being closer to Q3, and at some point, we expect that to level back off to our mid-teen as a % of revenue run rate that we're used to seeing.
Okay. Then, I mean, ever since, just kinda going back to the OnDeck acquisition, we've seen contraction of the overall yield of the portfolio, which you would expect given, you know, the inclusion of a lower-yielding portfolio. But it stopped and actually went back up this quarter. I'm assuming that's because of the strong growth in consumer originations. Is this, you know, where do we get a balancing act or a balancing point, if you will, so that we're kind of running at a stable yield?
I think we are running relatively stable if you look at the small business products and the consumer products as sort of an isolation. Plus or minus, they've been relatively stable. As we've highlighted, I think as you move through the year, quarter to quarter, particularly in a recovering economy, you're gonna see some variation in the mix. You know, David talked about we're not targeting specific composition of the portfolio. We're looking for opportunities that deliver value. I would encourage you to, you know, if you just look at consumer and small business separately, the yields are much more stable. You know, the seasonality of consumer, for example, in Q4 will probably drive a little bit faster growth in small business just typically, which will change the consolidated yield, but the portfolio yields are pretty stable from quarter to quarter.
Okay. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to David Fisher for any closing remarks.
Thanks, everyone, for joining and listening in our call today. We look forward to speaking with you again next quarter. Have a good evening.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.