OppFi - Q1 2023

Transcript

Operator (participant)

Good afternoon, welcome to OppFi's first quarter 2023 earnings conference call. All participants are in a listen-only mode. As a reminder, this conference call is being recorded. After management's presentation, there will be a question and answer session. Participants who joined the webcast could also submit questions at any time by either emailing [email protected] or selecting Ask a Question feature on this live webcast. For those listening by dial-in, you will be prompted to enter the queue after the prepared remarks. It is now my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. Thank you. You may begin.

Shaun Smolarz (Head of Investor Relations)

Thank you, operator. Good afternoon. On today's call are Todd Schwartz, Chief Executive Officer and Executive Chairman, and Pamela Johnson, Chief Financial Officer. Our first quarter 2023 earnings press release and supplemental presentation can be found at investors.oppfi.com. During this call, OppFi will discuss certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by OppFi's management in light of their experience and assessment of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and OppFi undertakes no duty to update or revise any such statement, whether as a result of new information, future events or otherwise.

Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors. In today's remarks by management, the company will discuss certain non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in the earnings press release issued earlier this afternoon. This call is being webcast live and will be available for replay on our website. I would now like to turn the call over to Todd.

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Thanks, Shaun, good afternoon, everyone. I am very pleased to report continued strength in our business. In the first quarter of 2023, we achieved Adjusted Net Income that exceeded our guidance with solid year-over-year growth. I believe this result clearly indicates our ability to rebound and deliver profitable growth. Pamela will review our first quarter results in detail as well as discuss our full year guidance update. Before she does, I will cover two topics. One, the key highlights from our Q1 2023 financial performance. Two, an update on strategic business initiatives for 2023. First quarter results were driven by improvement in credit performance. As a result of credit model adjustments made in the middle of 2022, total expense leverage and better than expected recoveries and payments. This enabled us to exceed our first quarter guidance for Adjusted Net Income and achieve year-over-year growth.

The key highlights for the first quarter this year compared to last year are 9% growth in ending receivables to $370.2 million, 20% growth in total revenue to $120.4 million, net income of $3.9 million, and Adjusted Net Income of $4.4 million. We realized further gains in cost efficiency in both marketing and operations, with the 9% decrease in marketing costs per new funded loan and the 8% point decrease in total expenses as a percentage of revenue. I'd like to provide updates on our previously discussed core strategic initiatives for 2023. Credit performance continues to strengthen.

As we anticipated after credit adjustments were made last year, we experienced sequential improvements in Vintage-Level First Payment Default beginning in Q3, and then improvements in portfolio-level total delinquency rates starting in Q4. I'm pleased to report Net Charge-Off Rates, both as % of revenue and average receivables improved in Q1 sequentially. We expect Net Charge-Off Rates to end 2023 significantly lower than last year. In the first quarter, the First Payment Default rate decreased 20% year-over-year and 9% sequentially. This was down 30% from the peak last year. The total delinquency rate decreased 20% from the fourth quarter of 2022 and 3% year-over-year. The Net Charge-Off Rate as a % of total revenue decreased 18% or 11% points, falling to 48.9% from 59.8% in Q4 last year.

We attribute part of this success to our values-based collection strategy. During the first quarter, recoveries doubled to $6.4 million year-over-year. This also represented a 40% increase sequentially. Portfolio quality remains our priority. We made the strategic decision to focus on profitable growth by tightly managing credit. As a result, we are emphasizing credit performance over origination growth to achieve consistent earnings growth. We continue to diligently monitor leading indicators closely and additional credit adjustments will be made as needed. Our marketing initiatives continue to unlock pockets of growth to drive cost-effective, low-risk origination volume. We continue to focus on optimizing our diverse channel mix across SEO, direct mail, and long-standing partners. One of the other areas of focus for 2023 is continuing to improve our operational efficiency. We recently streamlined our customer support operations to maximize efficiency while improving customer experience.

This is evidenced by our Net Promoter Score of 80 that we achieved in Q1. In summary, I'm very pleased with our Q1 performance that exceeded our earnings guidance and delivered year-over-year growth. Given our Q1 performance and greater confidence in the remainder of the year, we raised our guidance for full year Adjusted Net Income and earnings per share. With that, I'll turn the call over to Pamela.

Pamela Johnson (CFO)

Thanks, Todd. Good afternoon, everyone. Q1 was a strong quarter as our credit performance clearly continued to improve. Total revenue increased 19.5% to $120.4 million. Net originations decreased 1.9% year-over-year to $160 million. This reflects the credit adjustments made in the third quarter last year. New customer originations for the quarter decreased by 17.9% year-over-year, while existing customer originations increased by 15.9%. Our annualized Net Charge-Off Rate as % of average receivables was 61.8% for the first quarter, compared to 55.8% for the prior year quarter, and a decrease from 71% in the fourth quarter of 2022.

As a percentage of revenue, the annualized Net Charge-Off Rate for the first quarter was 48.9%, compared to 47.2% in the comparable period last year. An improvement from 59.8% in the fourth quarter of 2022. We expect the Net Charge-Off Rates to continue to improve throughout the year. Turning to expenses. Total expenses for the first quarter totaled $53.5 million or 44.4% of total revenue, compared to $52.9 million or 52.5% of total revenue for the first quarter of 2022. The year-over-year increase was primarily the result of higher interest expense, partially offset by lower direct marketing spend driven by decreased costs per funded loan.

Interest expense for the first quarter totaled $11.4 million or 9.5% of total revenue, compared to $7.4 million or 7.4% of total revenue for the same period a year ago. The increase was due to higher interest rates on our credit facilities utilized to fund originations growth over the past year. Adjusted EBITDA totaled $20.1 million for the first quarter, a 78% increase from $11.3 million for the comparable period last year, driven by both lower net charge-offs and operating expenses. Adjusted Net Income was $4.4 million for the first quarter, a significant increase from the approximate $650,000 for the comparable period last year. Adjusted Earnings Per Share was $0.05 compared to $0.01 for the first quarter last year.

This exceeded our guidance of approximately break even. For the three months ended March 31st, 2023, OppFi had 84.4 million weighted average diluted shares outstanding. Our balance sheet remains strong with cash equivalents, and restricted cash of $71.4 million, total debt of $331.6 million, gross receivables of $417.5 million, and equity of $164.1 million as of quarter end. We believe we have ample liquidity available to support our current growth plans, with $546.4 million in total capacity to fund receivables at the end of the first quarter. Turning now to our outlook.

For full year 2023, we affirm guidance for total revenue of $500 million-$520 million, which implies growth of 10%-15% year-over-year. In addition, we increase our expectations for Adjusted Net Income to between $24 million and $30 million from the $22 million-$28 million prior range. As a result, we are also increasing our guidance for Adjusted Diluted Earnings Per Share to between $0.28 and $0.35 from the $0.26-$0.33 previous range. While we're not providing formal guidance for the second quarter, I would like to share our current view based on our pacing quarter to date. We continue to manage the business for profitable growth.

With this strategy, we expect total revenue for the second quarter to increase mid to high single digits year-over-year, and we anticipate revenue growth to accelerate in the second half of the year to achieve our full year guidance. With that, I would now like to turn the call over to the operator for Q&A. Operator?

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question and joined us via phone, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. If you have joined us via the webcast, please refer to the Ask a Question box on the webcast player. One moment please while we poll for your question. Our first questions come from the line of David Scharf with JMP Securities. Please proceed with your questions.

David Scharf (Managing Director and Senior Equity Research Analyst)

Hi, good afternoon. Thanks for, thanks for taking my questions. Hey, Todd, curious, just taking a step back, the trends in credit are obviously very encouraging. Overall, I think the kinda trends seem to be very consistent with most of the other non-prime lenders we've talked to this quarter in terms of, you know, improvements post credit tightening and moderation of origination volumes. You know, can you just maybe share some thoughts on how you're thinking about the macro outlook? There's so many different variables and uncertainties. Specifically, you know, are there certain metrics or telltale signs like, you know, it's sort of uncharted territory we're in.

I'm wondering what are some of the things you would need to see to get comfortable, switching back to, you know, more, not necessarily aggressive, but more growth mode?

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Yeah. Thank you. That's a, that's a good question. Well, so first of all, you know, right now with the macroeconomic backdrop, the, the positive of all this is that there is very low unemployment, and I think there's been a lot of surprise of the job growth that we've seen. We are, you know, obviously benefiting from that. Customers are employed and paying. I think, though, to your point, due to the backdrop, we are being conservative in the segments that we're originating on behalf of our bank partners. The way we think about this is, you know, last year things started to look really good in the beginning of 2022, and then we saw what happened.

I think, you know, our strategy here is we're gonna really focus on the dependable segments, the segments that we know we can count on for profitable growth and a consistency of returns. You know, that's really how we've decided to play it. The good news is we've been able to find growth there, and we've been able to do it at or below the acquisition cost that we're targeting. I think that may be due to some tightening going on above us and also some less competition that we were seeing kind of in late 2021 and early 2022.

David Scharf (Managing Director and Senior Equity Research Analyst)

Got it. I was kind of a sort of a follow-up. I was curious, you know, what observation you're seeing on the competitive front, and specifically just, you know, here we are a couple months after the last call and, you know, we've seen more rate increases. Are funding constraints? Are you sensing that that's becoming more of a hindrance due to potential competitors, that you might be seeing more, kinda inbound traffic, even if you're not necessarily funding those loans? You know, any sense that the current rate environment's kinda been working in your favor?

Todd Schwartz (CEO, Executive Chairman, and Founder.)

I think so. I think what you're seeing is some of the lenders above us are typically called the peer-to-peer space, has definitely tightened just from looking at earnings transcripts and looking at their, you know. They're not able to provide necessarily, pass on the cost to investors to get them a higher rate of return. We're getting the benefit of that. I also think just in our segment, there's been some shakeup, you know, that's happened in 2022 that we may be getting an advantage. Also, you know, we were able to complete a large-scale facility last year to give us ample room to grow and have also improved our cash position by over $20 million in the quarter. We have ample room to grow.

Our appetite is there and, you know, we're in the game and we're, you know, looking for high-quality originations that we, you know, think can provide credit access to our customers.

David Scharf (Managing Director and Senior Equity Research Analyst)

Got it. Hey, just switching to the numbers. Should we view the guidance change, I mean, is that predominantly just kind of flowing through the first quarter upside, or is there anything else that you would characterize as changing on the margin from the last call?

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Yeah. I think that's right. I think it's obviously flowing through the first quarter. It's also our confidence in our, you know, in our operating leverage and in our credit, right? In our ability to still find pockets of growth. It's a little bit of both. You know, I think we felt comfortable, you know, revising slightly up and showing strength through the first quarter, which obviously, you know, was a big decision factor in that.

David Scharf (Managing Director and Senior Equity Research Analyst)

Got it. Just the last question, it's gonna probably more theoretical given everything we just talked about on the macro environment. You know, can you provide, I guess, the math around with existing funding in place, any covenants or limitations on how much can be drawn? You know, just based on kinda what you could draw right now in combination with your, you know, sort of 12-month forecast of loan repayments. Trying to get a sense of what sort of the maximum origination capabilities are, you know, based on planned repayments and current borrowing. Not suggesting that's what you're going to do, but just to help us frame that.

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Yeah. I mean, if you're asking, like, do we have ample capacity, ample cash, and ample room to grow at our guidance of 10%-15%? Absolutely. I mean, we could grow faster than that, but that's all that like I said, we're being conservative and focused on operating leverage and credit performance. We want probability of return to be very high for our bank partners on these originations. Yes, I mean, there is room to grow further. In this environment, to your point earlier, I think we feel very comfortable with that range and feel like that's something we can achieve with a high degree of probability and a high degree of return, that the returns will come through.

David Scharf (Managing Director and Senior Equity Research Analyst)

Great. That's all I have. Thank you.

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Thanks, David.

Operator (participant)

Thank you. Our next question comes from the line of Michael Rondahl with Northland Securities. Please proceed with your questions.

Owen Rickert (VP and Senior Equity Research Analyst)

Hi, guys. This is Owen on for Michael. I just have two quick ones. Were there any issues with tax season? Secondly, are there any new products to highlight or improvements to existing ones incremental to last quarter?

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Yeah, can you just repeat the second question, Owen, please?

Owen Rickert (VP and Senior Equity Research Analyst)

Yeah. Are there any new products to call out or highlight or any improvements to existing ones from last quarter?

Todd Schwartz (CEO, Executive Chairman, and Founder.)

The first one was tax season. It was a very successful tax season. Part of this though was due to the technology enhancements we made in the second half of last year to our payments, payment settlement portal. We revamped our whole recovery strategy, as we call it, a value-based recovery strategy. This yielded significantly better results than we've ever had in the history of the company, which was very successful and led to, you know, outsized performance compared to our budget, which was great. It was a successful tax season and behaved more normally than we've kind of seen in, like, the last two to three years. That was great.

As far as the product goes, we, you know, still have, the, you know, the core installment product with our bank partners. That is our primary product. When you say updates to the product, are you talking about just specifically about the product or like something about how we're growing it?

Owen Rickert (VP and Senior Equity Research Analyst)

Yeah. Yeah.

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Maybe just be a little bit more clear.

Owen Rickert (VP and Senior Equity Research Analyst)

Yeah. More specific to the core product. Just anything incremental.

Todd Schwartz (CEO, Executive Chairman, and Founder.)

I think the marketing team has done a great job of really not only working, you know, to adjust filters to find, you know, pockets of growth, but also working maximizing our partnerships and relationships. Really kind of refreshing and focusing on the things we can, you know, we control more, which is SEO, direct mail, referrals. Those are all showing great momentum coming out of the first quarter and something that we're, you know, prioritizing. They happen to be, you know, a lower cost acquisition channels. You know, we're definitely putting a lot of effort and focus on that, and we feel that that can definitely differentiate us here.

Owen Rickert (VP and Senior Equity Research Analyst)

Great. Thanks for answering my question.

Operator (participant)

Thank you. As a reminder, if you've joined us via the phone and would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of William Brewster with Sullimar Capital Group. Please proceed with your questions.

William Brewster (Founder and Research Analyst)

Hey, Todd, and team. First of all, I wanted to commend you for taking the reins and making some hard decisions. It's, it's obvious through the credit book that you came in at the right time, and I appreciate what you've done. I also wanna applaud the slower growth. I am in the camp of profitable and good growth being the best growth. Thank you for that. I did wanna ask, you know, it seems as though your NPS score has flipped a little. Was curious how you're thinking about that and some of the puts and takes. I know, you know, your family history is very NPS focused and curious how you think about that.

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Yeah. I mean, it's, you know, it's one that obviously we track and closely monitor on a week-to-week basis. There is some movement in that number, you know, through the quarter. I think I believe actually through most of the quarter, we were sitting at 82 to 83, and I think maybe it dipped a little. It's what we kind of measure it for you know, at the last day of the month. But, you know, our goal is always to keep that above 80. It's industry leading and I'm not, you know, aware of another, you know, financial service provider that kind of holds a score at that level. We're very, very proud of that.

It's something that we'll continue to focus on and continue to be, to, you know, to make sure that we keep it as high as possible. Yeah, there is a little volatility in the number throughout the week to week, depending on the originations and the customers.

William Brewster (Founder and Research Analyst)

Okay. One of the things that, you know, has come up obviously with the regional banking stuff, I just was curious the stability of your funding relationships and how you're thinking about your bank partners. you know, if you wouldn't mind just kinda sharing your thoughts on that'd be awesome.

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Yeah, I mean, it's top of mind, and obviously something that we're, you know, they're focused on. You know, as far as our, you know, partners, liquidity partners, bank partners, not on the lending side, but just on the treasury side. You know, we have no exposure to any of the banks that have, you know, gone away or are having difficulties. I think we stated that on the last quarter earnings call. Thank goodness for that. Our banking partners have not had any effects, to our knowledge, at all, you know, either. Obviously, we're in very close relationships with them and talk to them very, very frequently. Their balance sheets remain, you know, very strong and our partnerships remain very strong.

You know, so far there really hasn't been any issues on that front.

William Brewster (Founder and Research Analyst)

Yeah. One of the interesting comments that one of your competitors had said is that the shorter duration loans are actually sort of a positive to their partners. I was curious if you were hearing the same thing. You know, in a, in a duration crisis, maybe some shorter duration loans could help. Who knows?

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Yeah, no, I think in this environment, you know, with uncertainty, I think, you know, the shorter duration. That's the one thing about OppFi, though, is we've never played with durations. I mean, there's incremental duration risk that, you know, is appropriate one month, two months out. To, you know, drastically change your duration, there is risk in that. You're not necessarily getting paid for that risk. So we're very careful. I mean, if you look at, our business in the history of time, I think our duration, our average duration, our average life of loan on the books has been consistent and really has only incrementally changed kind of throughout the history of our business.

It's not something that we, you know, really wanna play with. It's also, you know, in better times, it may not benefit you, but in time, tougher times or uncertain times like we are kind of today, I think it really is the appropriate and prudent thing to do.

William Brewster (Founder and Research Analyst)

Yep. All right. Cool. I just wanna publicly thank you for stepping in. You know, I know that you changed your life to come back to the company. Thank you for what you're doing.

Todd Schwartz (CEO, Executive Chairman, and Founder.)

Thank you. I appreciate it. I appreciate the kind words. Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I'd like to hand the call back over to Todd Schwartz for any closing comments.

Todd Schwartz (CEO, Executive Chairman, and Founder.)

I want to thank everyone for joining us today. We look forward to speaking with you again in August when we report our Q2 results. Have a great day.

Operator (participant)

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.