Overview

Elevate Credit Inc (ELVT) provide online credit solutions to consumers in the US and the UK who are not well-served by traditional bank products and who are looking for better options than payday loans, title loans, pawn and storefront installment loans. Non-prime consumers now represent a larger market than prime consumers but are risky to underwrite and serve with traditional approaches. We’re succeeding at it - and doing it responsibly - with best-in-class advanced technology and proprietary risk analytics honed by serving more than 2.4 million customers with $7.8 billion in credit. The company's current online credit products, Rise, Elastic and Sunny, and its recently test launched Today Card reflect its mission to provide customers with access to competitively priced credit and services while helping them build a brighter financial future with credit building and financial wellness features. The company call this mission "Good Today, Better Tomorrow."¹

The company earn revenues on the Rise and Sunny installment loans, on the Rise and Elastic lines of credit and on the Today Card credit card product. The company's revenue primarily consists of finance charges and line of credit fees. Finance charges are driven by its average loan balances outstanding and by the average annual percentage rate (“APR”) associated with those outstanding loan balances. The company calculate its average loan balances by taking a simple daily average of the ending loan balances outstanding for each period. Line of credit fees are recognized when they are assessed and recorded to revenue over the life of the loan. The company present certain key metrics and other information on a “combined” basis to reflect information related to loans originated by it and by its bank partners that license its brands, Republic Bank, FinWise Bank and Capital Community Bank, as well as loans originated by third-party lenders pursuant to CSO programs, which loans originated through CSO programs are not recorded on its balance sheet in accordance with US GAAP. See “—Key Financial and Operating Metrics” and “—Non-GAAP Financial Measures.”

The company use its working capital, funds provided by third-party lenders pursuant to CSO programs and its credit facility with Victory Park Management, LLC ("VPC” and the "VPC Facility") to fund the loans the company make to its Rise and Sunny customers and provide working capital. Since originally entering into the VPC Facility, it has been amended several times to increase the maximum total borrowing amount available from the original amount of $250 million to $491 million at September 30, 2019. See “—Liquidity and Capital Resources—Debt facilities.”

Beginning in the fourth quarter of 2018, the Company also licenses its Rise installment loan brand to a third-party lender, FinWise Bank, which originates Rise installment loans in 19 states. FinWise Bank initially provides all of the funding and retains a percentage of the balances of all of the loans originated and sells the remaining loan participation in those Rise installment loans to a third-party SPV, EF SPV, Ltd. ("EF SPV"). Prior to August 1, 2019, FinWise Bank retained 5% of the balances and sold a 95% participation to EF SPV. On August 1, 2019, EF SPV purchased an additional 1% participation in the outstanding portfolio with the participation percentage revised going forward to 96%. Elevate is required to consolidate EF SPV as a variable interest entity under GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 96% of the Rise installment loans originated by FinWise Bank and sold to EF SPV. These loan participation purchases are funded through a separate financing facility (the "EF SPV Facility"), effective February 1, 2019, and through cash flows from operations generated by EF SPV. The EF SPV Facility has a maximum total borrowing amount available of $150 million.

The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all loans originated and sells a 90% loan participation in the Elastic lines of credit. An SPV structure was implemented such that the loan participations are sold by Republic Bank to Elastic SPV, Ltd. (“Elastic SPV”) and Elastic SPV receives its funding from VPC in a separate financing facility (the “ESPV Facility”), which was finalized on July 13, 2015. The company do not own Elastic SPV but Elevate Credit has a credit default protection agreement with Elastic SPV whereby the company provide credit protection to the investors in Elastic SPV against Elastic loan losses in return for a credit premium. Per the terms of this agreement, under US GAAP, the Company is the primary beneficiary of Elastic SPV and is required to consolidate the financial results of Elastic SPV as a VIE in its consolidated financial results.

The ESPV Facility has also been amended several times and the original commitment amount of $50 million has grown to $350 million as of September 30, 2019. See “—Liquidity and Capital Resources—Debt facilities.”

The company's management assesses its financial performance and future strategic goals through key metrics based primarily on the following three themes:

• Revenue Growth.   Key metrics related to revenue performance that the company monitor by product include the ending and average combined loan balances outstanding, the effective APR of its product loan portfolios, the total dollar value of loans originated, the number of new customer loans made, the ending number of customer loans outstanding and the related customer acquisition costs (“CAC”) associated with each new customer loan made. The company include CAC as a key metric when analyzing revenue growth (rather than as a key metric within margin expansion).
• Stable credit quality.    Since the time they were managing its legacy US products, its management team has maintained stable credit quality across the loan portfolio they were managing. Additionally, in the periods covered in this Management's Discussion and Analysis of Financial Condition and Results of Operations, Elevate Credit has improved its credit quality. The credit quality metrics the company monitor include net charge-offs as a percentage of revenues, the combined loan loss reserve as a percentage of outstanding combined loans, total provision for loan losses as a percentage of revenues and the percentage of past due combined loans receivable – principal.
• Margin expansion.    The company expect that its operating margins will continue to expand over the near term as the company lower its direct marketing costs and efficiently manage its operating expenses while continuing to improve its credit quality. Over the next several years, as the company continue to scale its loan portfolio, the company anticipate that its direct marketing costs primarily associated with new customer acquisitions will decline to approximately 10% of revenues and its operating expenses will decline to approximately 20% of revenues. The company aim to manage its business to achieve a long-term operating margin of 20%, and do not expect its operating margin to increase beyond that level, as the company intend to pass on any improvements over its targeted margins to its customers in the form of lower APRs. The company believe this is a critical component of its responsible lending platform and over time will also help it continue to attract new customers and retain existing customers.

Product Portfolio

Best-in-Breed Products

Rise

With millions of non-prime Americans living paycheck to paycheck who are too often turned away by traditional credit providers, RISE is a state-licensed online lender meeting their needs responsibly with unsecured installment loans and lines of credit. With features such as fast approval, flexible terms, rates that can go down over time, credit bureau reporting, free credit score monitoring and financial literacy courses, RISE is a path toward a brighter financial future.

Elastic

Many Americans live without a savings safety net to help manage life’s unexpected expenses. So Elastic, a bank issued line of credit, makes it easy for customers to access money as soon as the next Business Day. Customers can borrow as much as they need up to their Credit Limit. As payments are made, Available Credit is replenished. Elastic offers simple pricing without any hidden fees or prepayment penalty. Elastic made a commitment to responsible lending, so a portion of the Balance is due each Billing Cycle with any applicable fees. There is also a Cooling-Off Period designed to help customers on a road to better financial health.

Today

Millions of credit constrained Americans are in desperate need of a better product to meet their day-to-day credit needs. Today Card Mastercard is a first-of-its kind credit card that offers a prime experience to non-prime consumers. In partnership with Capital Community Bank and Mastercard, Today Card offers features previously unheard of in the non-prime credit space, including a mobile first experience, credit lines up to $3,500, credit monitoring and family line sharing. As Elevate’s first product with prime rates, Today Card continues its mission of providing customers a path to a better financial future.

Sunny

Sunny is a better alternative for the UK’s short-term borrowers. Whether customers need a few hundred pounds to bridge a short-term gap, or a larger sum to turn a plan into reality, Sunny lets them select the loan amount that’s exactly right for their circumstances. Sunny gives the customer maximum control and flexibility, encourages them to pay back as soon as they can with no penalties for early repayment, and is completely fee free. That combined with money tips available on the website, make Sunny a product committed to helping its customers become more financially healthy.

Industry Leading Analytics

As one of the first to develop a risk-based pricing model utilizing technology and risk analytics focused on the non-prime credit industry, Elevate is leading the next generation of more responsible online credit providers for the New Middle Class.

The company call its unique approach segment optimized analytics and it drives each and every Elevate product.

Resent development

On February 10, 2020  Elevate Credit announced results for the fourth quarter and full year ended December 31, 2019.²

Fourth Quarter 2019 Financial Highlights

• Net income: Net income for the three months ended December 31, 2019 totaled $8.3 million, or $0.19 per diluted share, more than doubling net income of $4.1 million, or $0.09 per diluted share, in the fourth quarter of 2018.
• Revenue: Revenues decreased 9.8% for the fourth quarter of 2019 totaling $186.9 million compared with $207.3 million for the fourth quarter of 2018. Despite the drop in top-line revenue, gross profit for the fourth quarter of 2019 increased $0.3 million to $71.3 million from $71.0 million in the fourth quarter of 2018 due to improved credit quality and lower customer acquisition costs.
• Combined loans receivable - principal: Combined loans receivable - principal totaled $640.8 million, a decrease of $7.7 million, or 1.2%, from $648.5 million at the prior year-end.
• Customer acquisition cost: The average customer acquisition cost was $196 in the fourth quarter of 2019, below the targeted range of $250-$300 and lower than $202 for the prior-year quarter. The total number of new customer loans decreased from approximately 67,000 in the fourth quarter of 2018 to approximately 52,000 in the fourth quarter of 2019.
• Adjusted EBITDA margin: The Adjusted EBITDA margin for the fourth quarter of 2019 was 16.7%, an increase from 15.4% in the prior year quarter. Adjusted EBITDA decreased slightly to $31.2 million, down from $31.9 million in the fourth quarter of 2018.

Fiscal Year 2019 Financial Highlights

• Net income: Net income for the year ended December 31, 2019 totaled $32.2 million, or $0.73 per diluted share, compared to net income of $12.5 million, or $0.28 per diluted share, in the prior year.
• Revenue: Revenues decreased 5.0% for the year ended December 31, 2019, totaling $747.0 million compared to $786.7 million for the prior-year period. Despite the drop in top-line revenue, gross profit for 2019 increased $31.9 million, or 12%, to $302.6 million from $270.7 million in 2018 due to improved credit quality and lower customer acquisition costs.
• Customer acquisition cost: The average customer acquisition cost was $207 for the year ended December 31, 2019, below the targeted range of $250-$300, and lower than $245 for the prior year. The number of new customer loans for the year ended December 31, 2019 totaled approximately 248,000, a decrease of 22% from approximately 316,000 for the prior year period.
• Adjusted EBITDAmargin:The Adjusted EBITDAmargin for the year ended December 31, 2019 was 18.6%, an increase from 14.8% in the prior year. Adjusted EBITDA increased to $138.7 million, up $22.6 million, or 20%, from $116.1 million in the prior year.

Outlook

For the full year 2020, the Company expects total revenue of $750 million to $770 million, net income of $35 million to $40 million, or $0.80 to $0.90 in diluted earnings per share, and Adjusted EBITDA of $135 million to $145 million.

References

1. ^ https://www.sec.gov/Archives/edgar/data/1651094/000165109419000060/elevate10-qxq32019.htm#s67EE8EA1A6B9494D711B0732B3F9D2BD
2. ^ http://investors.elevate.com/Cache/1001260581.PDF?O=PDF&T=&Y=&D=&FID=1001260581&iid=4641863