Enova International - Earnings Call - Q2 2019

Transcript

Speaker 0

Good day, and welcome to the Inova International Second Quarter twenty nineteen Earnings Conference Call and Webcast. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Monica Gould, Investor Relations for Inova.

Please go ahead.

Speaker 1

Thank you, Stan, and good afternoon, everyone. Inova released results for the second quarter ended June 3039, 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 based on the business environment as we currently see it, and as such, include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward looking statements that we make 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, we report 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. And with that, I'd like to turn the call over to David.

Speaker 2

Thanks, Monica. Good afternoon, everyone, and thanks for joining our call today. I'm going to start by giving a brief overview of the second quarter, and then I'll update you on our strategy. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and guidance in more detail. We produced another quarter of solid revenue growth, again driven by our balanced, focused growth strategy, coupled with strong execution, stable credit performance and efficient marketing.

This led to strong profitability with adjusted EBITDA and EPS exceeding our guidance. In fact, second quarter results marked the fifteenth consecutive quarter that we've delivered financial results that met or exceeded our guidance. Second quarter revenue of $286,000,000 increased 3% over a difficult comp from a strong Q2 last year and was primarily driven by growth in our U. S. Businesses.

Second quarter adjusted EBITDA increased 16% to $58,000,000 and adjusted EPS increased 37% to $0.81 per share as we continue to generate significant operating leverage. As has been the case for the last couple of years, our Q2 financial performance was supported by robust new customer acquisition. During the quarter, loans to new customers represented 35% of total originations, the highest we've seen since 2004 and up from 28% in Q2 of last year. As we've mentioned in the past, these new customers expand our returning customer base and revenue potential going forward. Even with the high percentage of new customers in the quarter, gross margins were essentially flat year over year, evidencing the strong credit performance we are seeing.

Credit quality remains good across our entire portfolio with charge offs well in line with our expectations. Our sophisticated Colossus decision engine has allowed us to effectively maintain excellent credit quality with advanced real time decisioning that evaluates and rapidly makes credit and other determinations throughout the customer relationship, including automated decisioning regarding marketing, underwriting, customer contact and collections. Classes currently processes more than 100 models and over 1,000 variables. Our proprietary models are built on our more than fifteen years during that time and the use of data from numerous third party sources. We continually update our underwriting models to manage default risk and to structure loan and financing terms.

We believe this sophisticated platform gives us unique visibility into current credit trends. And while we have been in an upward economic cycle for ten years now, we are not seeing any signs of credit deterioration in our portfolio that would indicate and nothing that would indicate that this is likely to change soon. Companywide originations in the quarter increased 3% compared to a strong Q2 of last year and were up 13% sequentially. And total AR was up 19% year over year and 9% sequentially. We believe our strong operating performance is attributable to our focus on our six growth businesses, namely our U.

S. Subprime business, our U. S. Near prime offering, our U. K.

Consumer brands, U. S. Small business financing, our installment loan business in Brazil and Enova Decisions, our Analytics as a Service business. As we have demonstrated in the past, our diversified product offerings give us the ability to focus our growth where we see the most attractive opportunities. Our domestic businesses, which include our large U.

S. Subprime business, net credit and our small business financing products, were the primary growth drivers during Q2, with domestic revenue up 19% year over year, benefiting from a 39% year over year increase in line of credit revenue and a 13% increase in installment loan and finance receivables revenue. Our large U. S. Subprime consumer business generated another good quarter of growth and profitability.

Originations were flat versus a strong Q2 last year, but the portfolio remains well diversified. Over the last five years, single pay products have decreased from 28% to 13% of our portfolio, while line of credit has increased from 38% to 57%. The remaining 30% of our U. S. Subprime business is installment products.

With our ability to develop and distribute products that are attractive to customers' changing desires and needs, we believe we are ideally positioned to grow beyond our single digit market share in The U. S. Net credit loan balances increased 21% year over year to $495,000,000 and originations increased 32%. Our U. S.

Near prime products represented 46% of our total portfolio at the end of Q2 compared to 45% in Q2 of last year and remain among the fastest growing products in our portfolio as we take share from incumbent brick and mortar lenders in this space. Our second quarter U. K. Revenue decreased 18% year over year on a constant currency basis, primarily driven by the repositioning of our U. K.

Business, as we discussed in our Q1 earnings call, to focus on installment offerings as well as us moderating originations while we and other lenders in The U. K. Work to reach resolution with our regulator, the FCA, and the Financial Ombudsman Service on how to effectively resolve the rise in customer complaints to the ombudsman over the last couple of years. As discussed in Q4, we relaunched OnStride, our installment product in The U. K, which led to installment loan revenue increasing 14% year over year and 21% on a constant currency basis.

Our customers like the variety of durations and the wide range of APRs that Onstride offers, and we believe this repositioning, coupled with our dominant market share, positions us well for future growth in The UK if a sustainable complaint framework can be established. Turning to small business. As we discussed on our last couple of calls, we are seeing strengthening of demand for our small business products at attractive unit economics, leading us to be more assertive in expanding. Our products are clearly gaining traction with customers, resulting in originations increasing 140% year over year, and small business now represents 12% of our book at the end of Q2. As with our consumer products, credit remains good in our small business portfolio, and we are seeing no signs of deterioration.

Looking back, we've demonstrated a prudent approach to growing this business, and we remain committed to pursuing further growth to the extent unit economics are attractive. In Brazil, second quarter originations declined 18% year over year on a constant currency basis and increased 2% sequentially. As we discussed in our Q1 earnings call, we have intentionally slowed originations while we reconfigure our operations to deal with new debiting practices implemented by the banks in Brazil. We still continue to see a large opportunity in Brazil given its huge population, growing middle class and stable regulatory environment. Lastly, Inova Decisions, our real time analytics as a service business, continues to gain traction and provides a unique avenue for growth for Inova.

Before I wrap up, I want to provide a brief regulatory update. On the federal level, there's not much news to report regarding the CFPB as the CFPB reconsiders the ability to repay provisions of the small dollar rule and the compliance date for those provisions having been extended to November 2020. In addition, there's currently a judicial stay out of Texas on the entire rule. The next hearing in the Texas case is August 2. If this day is lifted, the payment provision of the small dollar rule will go into effect on August 19.

We do not expect the payment rules to have a significant impact on our business if they do go into effect in August. At the state level, we closely monitor and are engaged in legislative efforts to both protect our ability to serve our customers in existing states and expand access to credit in new states. As we have discussed before, our flexible online platform can address changes in regulations to offer the products people want in a highly compliant manner. One potential change is a California bill that will cap interest rates at roughly 38% on personal loans between $2,500 and $10,000 This bill has passed the Assembly and the first two of three committees in the Senate. We expect it will be heard in the third committee during the August.

And the last day for the Senate to act on this bill is September 13. We currently offer three products in California, a single pay product, a subprime instalment product and a near prime instalment product. If the bill passes in its current form, we will need to wind down our subprime instalment product in California. But this product was only about 2.5% of originations last quarter. The bill will not impact our single pay product, and we will likely convert our near prime product to a bank partner program, which will allow us to continue to operate in California at similar rates to what we charge today.

So while we do not think the California bill is the right answer for consumers who need access to credit, We also do not believe it will have a material impact on our business. More specifically, the bill would not be effective until next year, so it will have no impact on 2019. And if we do need to wind down the subprime installment portfolio next year, we would actually expect to see an improvement to our gross margin in 2020. And longer term, we think our near prime products in California could see increased demand from the elimination of subprime installment lending as well as over 36% title lending. More broadly on the state side, in the past few years we've seen legislatures in several states open up credit access for customers while a few have restricted access.

States including Florida, Mississippi, New Mexico, Oklahoma and Texas have all introduced new bills or reaffirmed existing laws and just a few states including Maryland, Ohio and South Dakota reduced or restricted consumer access. Overall, we have supported efforts in states to change from only allowing short term single payment products to offering the choice of longer term multi payment products that provide consumers with flexibility and opportunity to bill credit. We have identified product opportunities in several more states, but we do believe that after a fair amount of recent state legislative activity, it is likely to diminish. Overall, the flexibility of our online platform and our proprietary analytics continue to provide us with a significant advantage in adapting to changes and diversifying our product offerings. We've continued our strong path in 2019 and are raising our outlook for the year, as Steve will describe in more detail.

Looking ahead, we remain focused on managing the business to balance growth with profitability. We've made a lot of progress strengthening our businesses and believe we are well positioned to capitalize on the growth opportunities ahead of us. With that, I'll turn the call over to Steve, our CFO, who will provide more details on our financials and guidance. And following his remarks, we'll be happy to answer any questions that you may have. Steve?

Speaker 3

Thank you, David, and good afternoon, everyone. I'll start by reviewing our financial and operating performance for the 2019 and then provide our outlook and guidance for the third quarter and the full year 2019. As David mentioned, we are pleased to report another quarter with top and bottom line results above our expectation. Second quarter twenty nineteen financial performance demonstrated our continued ability to deliver meaningful receivables and revenue growth in combination with strong credit performance, operating leverage and a declining cost of funds. Total second quarter twenty nineteen revenue increased 13% to $286,000,000 above the top end of our guidance range of $265,000,000 to $285,000,000 On a constant currency basis, revenue increased 14% year over year.

Revenue growth was driven by a nineteen percent year over year increase in total company combined loan and finance receivable balances, which grew to $1,100,000,000 Installment loans and line of credit products continues to drive the growth in total loans and finance receivables balances, which grew 1846% year over year respectively. Installment loans, receivables, purchase agreements and line of credit products now comprise more than 94% of our total receivables portfolio and 87% of our total revenue, demonstrating our customers' preference for these products. Domestic revenue increased 19% on a year over year basis and declined slightly sequentially as is typical of our seasonality to $254,000,000 in the second quarter. Domestic revenue accounted for 89% of our total revenue in the second quarter. Revenue growth in our domestic operations was driven by a 39% year over year increase in line of credit revenue and a 13% increase in installment loan and RPA revenue.

Continued strong demand for these products drove our domestic combined loan and finance receivables balances up 23% year over year. International revenue decreased 21% from the year ago quarter to $31,000,000 primarily due to the repositioning and management of our international businesses that David mentioned as well as from currency headwind. On a constant currency basis, international revenue decreased 16% on a year over year basis. Total international loans decreased 11% compared to the second quarter of last year. International installment loan balances increased 7% year over year, while international short term loan balances decreased 48% year over year.

On a constant currency basis, international loan balances decreased 8% year over year. Turning to gross profit margins, our second quarter gross profit margin for the total company was in the high end of our guidance range at 51.6% and was flat to the prior year quarter. Improved year over year credit quality supported the strength of our gross profit margin even with the recent increase in the proportion of originations from new customers. Net charge offs as a percentage of average combined loan and finance receivables decreased in the second quarter to 12.2% from 12.9% in the prior year quarter. We saw year over year declines in the net charge off ratios for each of our three loan category.

As David mentioned, originations from new customers across all of our businesses were 35% of the total during the second quarter, the highest quarterly proportion we've seen since our first year of operation and up from 28 in the second quarter of last year. Over past four quarters, originations from new customers have totaled 30% of total company originations. At the end of the second quarter, the allowance and liability for losses for the consolidated company as a percentage of combined gross loan and financing receivables was 14.7%, which is flat sequentially and up from the year ago quarter of 13.8% reflecting the expected continued seasoning of new customer receivables originated in recent quarters. As we've described in the past, a higher mix of new customers and originations typically requires higher loss provisions upfront as new customers default at a higher rate than returning customers with a successful history of payment performance. For 2019, we continue to expect our consolidated gross profit margin to be in the range of 45% to 55%.

We typically see gross profit margin in the upper end of our guidance range during the first half of the year as we experience seasonally lower growth followed by sequential declines during the second half of the year as we move into our seasonally higher growth period. In addition to this seasonality, our gross profit margin will also be influenced by credit performance, the mix of new versus returning customers and originations, and the mix of loans and financings in the portfolio. Our domestic gross profit margin was 52% in the second quarter, flat to the second quarter of last year and down sequentially from 56% in the 2019. Our international gross profit margin was 46% in the second quarter and was in line with our expectations. This compares to 51% in the prior year quarter.

The decrease in international gross profit margin from the year ago quarter was driven primarily by the seasoning and growth of our new installment product in The UK that David mentioned earlier. We continue to expect our international gross profit margin for the remainder of 2019 to be in the range of 45% to 55%. Continued cost discipline and operating leverage inherent in our scalable online model also contributed to profitability in excess of our expectations this quarter as revenue growth continues to meaningfully outpace non marketing operating expenses. During the 2019, total operating expenses including marketing were $93,000,000 or 33% of revenue compared to $85,000,000 or 34% of revenue in the 2018. We continue to see efficiency in our marketing spend which declined as a percent of revenue year over year.

Marketing expenses in the second quarter were $32,000,000 or 11% of revenue compared to $29,000,000 or 12% of revenue in the 2018. We expect marketing spend will range in the low to mid teens as a percentage of revenue for the remainder of 2019 as we enter our seasonal growth periods in the second half of the year. Operations and technology expenses totaled $32,000,000 or 11% of revenue in the second quarter compared to $27,000,000 or 11% of revenue in the 2018 and were higher primarily from volume related variable expenses and ongoing expenses associated with complaints in The UK. General and administrative expenses were $29,000,000 or 10% of revenue in the second quarter compared to $28,000,000 or 11% of revenue in the second quarter of the prior year. Strong growth, stable credit performance and cost discipline drove a 16% year over year increase in adjusted EBITDA, a non GAAP measure, to $58,000,000 in the second quarter.

Our adjusted EBITDA margin was 20.1% compared to 19.6% in the second quarter of the prior year. Our stock based compensation expense was $3,300,000 in the second quarter which compares to $2,800,000 in the 2018. Our effective tax rate was 22% in the second quarter compared to a 22.6% rate in the 2018. We expect our ongoing normalized effective tax rate to be in the mid-twenty percent range. Net income increased 39% to 25,000,000 or $0.73 per diluted share in the second quarter from net income of $18,000,000 or $0.52 per diluted share in the 2018.

Adjusted earnings, a non GAAP measure, increased 34% to 28,000,000 or $0.81 per diluted share from $21,000,000 or $0.59 per diluted share in the second quarter of the prior year. The trailing twelve month return on average shareholder equity using adjusted earnings increased to 28% during the second quarter from 25% a year ago. We continue to generate strong operating cash flow and ended the quarter with a solid balance sheet and liquidity position. During the second quarter, flows from operations totaled $194,000,000 and we ended the quarter with unrestricted cash and cash equivalents, dollars 66,000,000 and total debt of $786,000,000 Our debt balance at the end of the quarter includes $109,000,000 outstanding under our $350,000,000 of combined installment loan securitization facilities and we had no outstanding balances under our $125,000,000 corporate revolver at the end of the second quarter. On July 8, we announced the amendment of our corporate revolver to extend the maturity to June 2022 and to improve certain terms including the advance rate.

We continue to maintain an extended and laddered maturity structure across our term debt and installment loan warehouse facilities. Our cost of funds for the second quarter declined to 8.7%, a 150 decline from the same quarter a year ago as we recognize the cost benefits of transactions completed during 2018. The cost of funds improvement contributed $3,300,000 of pre tax operating income this quarter. Now I'd like to turn to our outlook for the third quarter and the full year 2019. Based on our outperformance in the quarter and recent trends, we are raising our profit guidance for the full year.

Our outlook reflects an expectation of continued recent receivables growth trends, including faster relative growth in consumer and small business installment, RPA, and line of credit products and accelerated growth in the mix of new customers and originations. We also expect stable credit trends, operating leverage and funding costs to improve year over year EBITDA margins and earnings per share in the second half of the year. Finally, guidance assumes no significant impacts to our businesses from regulatory changes or currency volatility. As noted in our earnings release, in the 2019, we expect total revenue to be between $320,000,000 and $340,000,000 diluted earnings per share to be between $0.62 and $0.84 per share, adjusted EBITDA to be between 55,000,000 and $65,000,000 and adjusted earnings per share to be between $0.7 and $0.92 per share. For the full year 2019, we now expect total revenue to be between $1,260,000,000 and $1,300,000,000 diluted earnings per share to be between $3.13 and $3.57 per share, adjusted EBITDA to be between $250,000,000 and $270,000,000 and adjusted earnings per share to be between $3.5 and $3.94 per share.

As David mentioned, we continue to demonstrate strong execution on our financial goals and we remain optimistic about our ability to generate meaningful growth and profitability in 2019 and beyond. And with that, we'd be happy to take your questions. Operator?

Speaker 0

We will now begin the question and answer session. Session. And The first question comes from David Shah, JMP Securities. Please go ahead.

Speaker 4

Thank you. Good afternoon, guys. Thanks for taking my questions. So you know what, going to bypass questions on California. I'm sure whoever is second and third line will chime in.

But I had a couple things I wanted to ask about. One is just broadly speaking, maybe for Steve, a guidance related question. You know, historically, we've seen a pretty big falloff in earnings power seasonally in the second half, you know, particularly from q two to q three. And, you know, if I just take the midpoint of your q three guide, there's falloff at all. And is is there anything in particular you would note there why we don't seem to have as much of a seasonal drop off?

I I would have thought particularly with the expanding new customer acquisition profile that that pattern would at least hold? It seems like business is so strong that you're sort of, you know, defying that seasonal headwind.

Speaker 3

Yeah. So I, David, I sort of, in my remarks tried to address that a bit. So we've seen great credit, but we've also positioned our allowance for the expectation of increased losses if you just look at the allowance for loan losses. So we are definitely expecting some uptick in the back half of the year just given the recent growth in new customers and originations. I'd also say that we've got some businesses like small business and net credit that continue to scale very nicely.

And so as a result of that, I think you'll consider continue to see improved year over year EBITDA margins compared to maybe what you saw last year. And in fact, 2018 was a great year. It's a tough comp year. So while we've seen some nice growth, it will be hard to sort of deliver on top of those growth rates that we saw. And that's a bit of why we expect great growth and great new customer growth.

But you also know how that sort of impacts overall margins profitability for us. So that's sort of all baked in. And in my remarks, tried to address some of that, you know, sort of across the board.

Speaker 4

Got it. No, that's helpful. And, you know, just as a follow-up, the drop in short term loan balances, you know, both sequentially and year over year, mean, I know it's a deliberate strategy to reduce that product as a percentage of the overall mix, but it was pretty abrupt. Is that mostly, The UK pullback? Or is there just less demand or a deliberate shift in The US as well?

Speaker 2

It's definitely both. With the launch of the installment product, the relaunch of the on-site installment product in The UK, we've definitely shifted away from the single pay product. But The US, we've launched two more LOC states. We only have a few, single pay states left in The US. It's really becoming a fairly insignificant portion of our overall business.

Speaker 4

Right. Got it. And then lastly, sorry, it comes to kind of a regular quarterly question in terms of potential CECL adoption. I'm just wondering, without trying to pin you on any particular numbers, as far as reserving, can you talk about I believe you reserve generally for about ninety days of coverage. Within LOC installment, can you give us a sense for what the average duration is these days of the combined portfolio?

Speaker 3

Yeah, mean it hasn't really changed. It continues to be relatively short. And in fact, of the losses in terms of loss recognition, the emergence is pretty quick. So in our subprime business, you usually see a majority of your losses in the first ninety days. But we don't actually disclose overall duration of the portfolio or even by product, but I can tell you it hasn't meaningfully changed and subprime products remain much shorter than our net credit product.

Speaker 4

Right. Got it. Great. Thank you.

Speaker 0

Thank you. Your next question comes from John Rowan from Janney. Please go ahead.

Speaker 5

Good afternoon, guys.

Speaker 3

Hey. Hey, John.

Speaker 5

So, David, I know you you kind of addressed this in your opening remarks, but just I wanna drill down a little bit more. The UK, I know you said you relaunched on Stride, but, I mean, what's the what's the plan here? How to deal with the the FOS? You lost $7,000,000 in the quarter in The UK. That's $14,000,000 so far this year.

What's the pattern on compensation claims? What's the positioning that you're getting from the FDA when you approach them on some type of sustainable resolution to what's kind of an absurd situation?

Speaker 2

Yeah. So complaints aren't increasing, but they're not materially decreasing either. And we are working actively. It's partially the FCA, but it's really FOS, the Financial Ombudsman Service. We're working actively with both of them to try to come to a resolution that everyone can live with.

I don't think they want us talking about the details of those conversations in public, so we're not going to do that. But they are active ongoing conversations. Do we get there? I don't know. I'm hopeful.

I know the FCA thinks there is a valid role for high cost short term lending in The UK and is going to work hard to try to maintain an active market there. Elsa is the largest and leading lender and clearly the most compliant lender in The UK, I think they want to see us succeed. But whether or not we can reach a satisfactory resolution for everyone, only time will tell. And I think in the meantime though, because of our diversified strategy, The UK is becoming an increasingly small portion of our business. It has been losing money the last couple of years, certainly last few quarters.

To the extent we had it exit The UK, would actually be a positive for our financials right now and would free up some resources to focus on some other growth opportunities that we've been holding back So I think, again, we're going to have a balanced approach in The UK. We'd love to find a great resolution. It's a nice market for us, but it's not the biggest market in the world and we're not going to bend over backwards to make it succeed just for the sake of succeeding. So, we'll continue to work through it. Resolution is not gonna be imminent one way or the other.

These processes take time, especially with government entities, But

Speaker 3

it

Speaker 2

is something that is actively underway.

Speaker 5

So, I mean, it kind of sounds like the alternatives here are you get a deal worked out with the FOS, which one of your peers thought they had the deal worked out too. When they were at the altar, that deal got pulled away and they closed up shop in The UK. So it sounds like you're either going to get a deal or you might the other option is to just leave the market. Does that sound about right? I mean, you can't stay in the market and continue to offer the OnStride product, right?

Because you'd still be an operating company there and liable to the FOS for all those claims.

Speaker 2

That's correct. And look, mean, it's an economics decision. We're not wedded to The UK. We'd love to stay there. Again, we think it's an attractive market.

But if our resources can be better used somewhere else, then we do have other growth opportunities that we're not pursuing because we have limited resources, then we'll reposition The UK resources somewhere else and move on from that market.

Speaker 5

Okay. And then just to shift gears, I'm going stay on regulation for a second. California, I know you said it was 2.5% originations, probably doesn't impact 2020 as you roll off that loan portfolio. But as we look out maybe to 2021, I think the offset there maybe gets a little bit lower as you do have to get rid of that installment product. So two questions here.

I have some documents here from California Department of Business oversight, which shows and I'm just looking for confirmation, like a $49,000,000 loan portfolio, about 6% revenue contribution in 02/2018, and are actually relatively high loss rate. Does that do those numbers sound about right? I know these aren't GAAP documents. I'm not trying to pin you anything, but I'm just trying to get in the ballpark of, you know, what you would have to, roll off or what you would have to replace with a bank partner model.

Speaker 2

Yeah, I mean, keep in mind our installment loan book in The UK, I mean, in California is both subprime installment and near prime. There's a variety of interest rates, a lot of which we can replace with the bank partner model. No reason why we wouldn't be able to replace our California business with the bank program. So that's really the answer for us in California. Plus, can keep our single pay product.

The current bill doesn't impact the single pay product at all. So, we actually think if you look kind of beyond 2020, we don't think this is the right answer, but we actually think we can come out ahead with the kind of vacancy, with all the subprime installment lenders exiting the state and probably more importantly, the subprime title lenders exiting the state, it creates a huge opportunity for a near prime product in California. And obtaining these bank programs aren't easy. There's not going be nearly as much competition there. Financially, it could be a win.

From a regulatory standpoint, not a win, but financially, actually, could be a win for us if this California bill does indeed pass.

Speaker 5

Okay. Just last question here. Do you have a bank partner in place already, can you remind me, that will allow you to make higher rate loans that is kind of pass the product through their regulator?

Speaker 2

We do have a bank partner. A bank partner We do that does hire interest rate loans and kind of we'll have to do a couple of quick changes to our program with them to offer that in California, but we don't see any reason why we couldn't do that.

Speaker 5

Okay. Thank you very much.

Speaker 4

Yep.

Speaker 0

Thank you. Your next question comes from John Hecht from Jefferies. Please go ahead.

Speaker 6

Congratulations on a good quarter and thanks for all the detail. You guys have had several quarters of a high amount of new customer growth. I'm just wondering, has there been any change in kind of the behavior of the new customers as you refine your credit model? Are there first time payment defaults down or any other metrics that we should consider with respect to performance?

Speaker 2

Actually, not much, which is kind of a positive. We've been able to add a bunch of new customers with very stable credit. Credit, as we talked about, is looking really good across the entire portfolio and the higher levels of new customer growth hasn't impacted that at all. The new vintages are performing really, really well. And so at this point, we're very comfortable with the credit quality of the portfolio.

Speaker 6

Okay. Steve, I know you spent a lot of time over the past several quarters optimizing your liability structure and taking down rates. I was wondering, if the lower intermediate term rates have dropped if you look at the forward curve recently. Is there any further opportunities in the next, say, twelve months for you to take down rates even more than you have?

Speaker 3

I think, John, really unless there was a significant drop in the short end like on a one month LIBOR type basis, I mean that would be where the real opportunity is but that's not something we're really counting on. We think we'll continue to blend down with our existing rate as we've gotten rid of or refinance some of our higher cost credit even up through the first quarter of this year. And so, I think that'll continue to stabilize or even move down a little bit from where we are today.

Speaker 2

And especially as we see our net credit product and near prime products as the fastest growing portions of the portfolio, those we bring on at the lowest interest rates in our entire portfolio. And so just the kind of the faster growth of that business will bring down our average interest rate across the portfolio.

Speaker 6

Okay. And then final question, you mentioned the Analytics as a Service segment. I'm wondering, can you give us an update on revenue opportunities and trends there? Just give us an update on that category.

Speaker 2

Yes. There's not much to say. We continue to add customers a little bit slower than we would like. We'll Kind of maybe kind of end of this year ish, we'll evaluate whether it's growing fast enough for us to continue with that business. We've gained some traction.

It works. Selling into institutions isn't necessarily what we've historically done super well at Inova, although we've built a nice little sales team and we've given the runway kind of to go out and see how fast they can grow that business. And just the question is, the size of the rest of Inova, can it really be meaningful over time? So we'll probably reevaluate that again at the end of the year. We like the product and our customers like what we're doing.

And so we'll just see if we think it can be big enough to be meaningful.

Speaker 6

Great. Thank you very much, guys.

Speaker 4

Yep. Thanks.

Speaker 0

Thank you. Your final question comes from Vincent Caintic from Stephens. Please go ahead.

Speaker 7

Hey, thanks. Good afternoon, guys. So another good quarter of loan growth. I'm just wondering, so relative in the past, sometimes you had to manage between your growth versus the cost of that growth. I'm just wondering if this quarter, if you had to manage that at all, but leave any growth on the table if you're able to fully capture what was out there.

Speaker 2

Yeah, no, I think we largely captured it. I think there's more growth out there where it can be aggressive just given the credit quality we're seeing in the portfolio. But we didn't have to pull back in anything any meaningful way in the quarter, which you can see in the strong new customer growth numbers. And the nice sign is it's really continuing kind of as we enter Q3, like remaining really strong, new customer acquisition levels are remaining really strong. So we're pretty optimistic going through into the back half of the year.

And as Steve mentioned, kind of with the credit quality remaining really strong and actually the strong growth rates we had last year are providing a nice existing customer base that's driving enough profitability that we're hopeful we won't have to pull back on growth in the back half of the year.

Speaker 7

Okay, got it. And another question on California, so very helpful detail that you provided. So no effect on single pay, you sized up the subprime installment. On the near prime side, if you could just talk through the mechanics of that a little bit more. So maybe what's the size of the near prime installment in California?

And when you talk about bank partnerships, so just the mechanics of that, is that really like like for like in terms of if you were to switch these customers over, the interest rates would be relatively unchanged and the loss rates. So the economics would be unchanged for that. Thank you.

Speaker 2

Yes, sure. So we don't break out portfolios by state. But in terms of the conversion to a bank program, we give up a couple a couple percent of margin to the bank partner. But other than that, it's largely like for like. And again, I think given the increased opportunity in California from all the subprime installment letters that will leave the state, the storefront guys that won't be able to compete.

And again, the subprime and title lenders who are really impacted by this bill, such a large opportunity for net credit that almost happy to pay those couple points of margin to capture that opportunity.

Speaker 7

Got you. And sorry, just squeezing in one more. On the expense side, so just a quick one. Just noticed the operations and technology line was up 19% year over year. Just wondering if there's anything one timer there if that's a good run rate to go with going forward.

Speaker 3

Yeah, there were no one timers. It really was the two things that I mentioned, which is volume related costs, about 70% of that line item is variable. And the remainder of that is some increase in our year over year expense associated with The UK complaints.

Speaker 7

Okay, got it. Thanks very much.

Speaker 0

Thank you. This does conclude our question and answer session. I would like to turn the conference back to Mr. David Fisher for any closing remarks.

Speaker 2

Thanks everyone for joining our call today. We look forward to talking you again next quarter. Have a good evening everyone.