OppFi - Q2 2024

Transcript

Shaun Smolarz (Head of Investor Relations)

Thank you, Operator. Good morning. On today's call are Todd Schwartz, Chief Executive Officer and Executive Chairman, and Pam Johnson, Chief Financial Officer. Our Second Quarter 2024 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 U.S. 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 morning. 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)

Thanks, Shaun, and good morning, everyone. We're excited to report record second quarter profitability and revenue, which substantially exceeded our expectations and enabled us to raise full-year earnings guidance by more than 20%. The strong profitability in the quarter was a result of operational and credit initiatives that drove strong loss, payment, and recovery performance, as well as improved operating achievement on key metrics and net profit margin. We're also proud that we have successfully executed many other strategic initiatives that we've previously outlined during the past several quarters. We've realized more operational efficiencies that continue to strengthen the core business and increase profitability. We've also returned value to stockholders through a special dividend and share repurchases. In addition, we strengthened the balance sheet by paying down debt and generating solid free cash flow.

And we've identified adjacent verticals to expand our reach in facilitating credit access, including closing our first investment in Bitty Advance last week. Pam will review our second quarter results in detail, our earnings guidance increase for full year 2024, and our earnings outlook for the third quarter. Before she does, I will cover three primary topics. One, highlights from the second quarter of 2024. Two, a discussion of the recently announced Bitty transaction. And three, a summary of recent capital allocation initiatives provided by our balance sheet. Total revenue increased 3.1% to $126.3 million, a company record for a second quarter. GAAP net income grew 53.1% to $27.7 million, another OppFi record for a second quarter.

Adjusted net income increased 56.2% year-over-year to $24.8 million, also a company record for a second quarter. Our key highlights for the quarter compared to the prior year are a solid 6 percentage point increase in revenue yield to 134.8%, a substantial 30% increase in recoveries, a 3.7 percentage point improvement in the annualized net charge-off rate as a percentage of total revenue to 32.5%, a 90 basis point improvement in total expenses as a percentage of total revenue to 45%. Net income margin increased by 710 basis points to 21.9%, and adjusted net income margin expanded by 660 basis points to 19.6%. Moreover, strong free cash flow generation continued to bolster the balance sheet.

In Q2, we generated $18 million of free cash flow, as defined by total cash provided by operating activities minus total cash used in financing activities. At the quarter-end, total cash, cash equivalents, and restricted cash was $80.8 million, including $46.6 million in unrestricted cash and an additional $223.2 million of available unused debt capacity on our financing facilities. As we have mentioned on these earnings calls during the past several quarters, we have been evaluating strategic opportunities that fit our mission to facilitate credit access to everyday Americans and would help us diversify OppFi with additional products and customers. We have focused on the small business financing market, as we believe there are supply and demand imbalances similar to the consumer market.

Like the everyday consumer that we serve with OppLoans, there are many small businesses that are underserved by traditional banks and lack access to sufficient credit to meet their working capital needs. According to a recent study by the Federal Reserve, 71% of medium- to high-credit-risk small business applicants for a loan, line of credit, or merchant cash advance have applied to a non-bank financing company, online lender, or community development financial institution. 50% of small businesses that are discouraged non-applicants cite lender requirements as being too strict and/or they were denied financing previously as reasons for why they did not expect to be approved and therefore did not apply for financing. We are excited by our equity investment in Bitty that includes options to acquire a majority stake and ultimately the entire enterprise in the future.

Craig Hecker, who has majority control of Bitty, is an industry veteran and leader, particularly within the small business finance space. I'm personally looking forward to collaborating with Craig and helping him and his team take Bitty to the next level of profitable growth by leveraging OppFi's expertise in data analytics, marketing and automation. This acquisition is intended to serve as the foundational piece of our new small business financing vertical. Bitty is a credit access company that offers revenue-based financing and other working capital solutions. Bitty generates income through origination and service fee income, and therefore does not have balance sheet or credit risk. As demonstrated by our strong profitable growth, solid free cash flow generation and first acquisition, we are carefully managing OppFi for earnings growth.

We believe earnings growth can be achieved given our disciplined expense management, better operational efficiency, and stronger credit performance, despite low to mid-single-digit revenue growth. As I discussed earlier, our solid balance sheet has provided us with optionality to allocate capital. In Q2, we returned cash to stockholders through a dividend and share repurchases. We announced and paid a $0.12 per share special dividend to our public Class A stockholders, as well as a $0.12 cent per unit special distribution to members of Opportunity Financial, LLC. After announcing a new 20 million share repurchase program, we purchased approximately $2.5 million of Class A common stock during the quarter at an average price of $3.27, and we have continued to repurchase shares in the third quarter.

In addition to returning capital to stockholders, we also paid down $10 million of debt on our corporate term loan. We're continuing to evaluate additional strategic opportunities in new and existing verticals that we believe would enhance our goal of further facilitating credit access. I believe OppFi has made tremendous progress during the past two and a half years. We have more work to do, and we look forward to building upon the foundation that we have set. In closing, we believe OppFi has the ingredients needed to build a leading credit access and financial services business with a suite of best-in-class digital financial service products for everyday Americans, where there are large addressable markets and a supply-demand imbalance in credit access. Our first step in executing on this vision was taken with our equity investment in Bitty to enter a small and medium business financing market.

With that, I'll turn the call over to Pam.

Pam Johnson (CFO)

Thanks, Todd, and good morning, everyone. For the second quarter, total revenue increased 3.1% year-over-year to $126.3 million, with a 2.4% increase in total net originations to $205.5 million and a 600 basis point improvement in total revenue yield to 134.8%. Total retained net originations decreased 3.1% to $189.3 million, since one of our bank partners now retains a larger portion of loans originated in some states. From a mix perspective, 55.6% of originations were to existing customers and 44.4% were to new customers. During the quarter, along with our bank partners, we continued to emphasize loans to existing customers, since those loans are generally less risky than to new customers.

Credit performance during the second quarter supported this strategy, as refinance loans to existing customers had lower delinquencies than loans to new customers. On an absolute basis, new customer originations for the quarter increased by 4.4% year-over-year, while existing customer originations increased by 0.9%. The year-over-year increase in new customer originations were the result of strategic credit and marketing initiatives intended to drive lower-risk new originations. The annualized net charge-off rate, as a percentage of average receivables, decreased by 280 basis points to 43.8% for the second quarter, compared to 46.6% for the prior year quarter. The annualized net charge-off rate, as a percentage of total revenue, decreased by 370 basis points to 32.5%, compared to 36.2% last year.

Turning to expenses, total expenses were $56.8 million, or 45% of total revenue, compared to $56.2 million or 45.9% of total revenue in the second quarter last year. Interest expense totaled $11 million, or 8.7% of total revenue, compared to $11.2 million, or 9.2% of total revenue in the same period a year ago. Adjusted net income was $24.8 million, compared to $15.9 million for the comparable period last year. Adjusted earnings were $0.29 per share, compared to $0.19 in the second quarter last year. For the three months ended June 30th, 2024, OppFi had 86.3 million weighted average diluted shares outstanding for the calculation of adjusted earnings per share.

We believe our balance sheet remains healthy, with cash, cash equivalents, and restricted cash of $80.8 million, total debt of $301.8 million, and total stockholders equity of $201.7 million as of the end of the second quarter. We ended the period with $605.8 million in funding capacity, including $223.2 million of unused debt capacity under financing facilities. Now, turning to our outlook. For the full year 2024, we are reiterating guidance for total revenue of $510 million-$530 million. We are currently pacing toward the midpoint of this range, $520 million.... We are raising earnings guidance by more than 20% for adjusted net income and adjusted earnings per share.

We now expect adjusted net income of $63 million-$65 million, compared to our prior range of $50 million-$54 million. In addition, we now anticipate adjusted earnings per share of $0.73-$0.75, compared to the previous range of $0.58-$0.62. For the third quarter, we are introducing guidance of adjusted net income of $17 million-$19 million, and adjusted earnings per share of $0.20-$0.22. Based on seasonal differences, we also expect total revenue in Q4 to be slightly higher than in Q3, while the annualized net charge-off rate as a percentage of total revenue is anticipated to be substantially lower in Q3 than in Q4. Nonetheless, we anticipate year-over-year improvement in this annualized net charge-off rate in both of those quarters.

As a reminder, this rate is typically the lowest in the second and third quarters, while highest in the first and fourth quarters. I'll close my prepared remarks by announcing our participation at next week's Sidoti MicroCap Virtual Conference. Shaun and I plan to meet with investors on both days, August fourteenth and fifteenth, and our presentation will be on the second day at 1:45 P.M. Eastern Time. The webcast of our presentation can be accessed with a link on our investor relations website. With that, I would now like to turn the call over to the operator for Q&A. Operator?

Operator (participant)

Thank you. At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind, you may remove yourself from the question queue at any time by pressing star and two. Again, it is star and one, if you'd like to ask a question today. We'll take our first question from Mike Grondahl with Northland. Please go ahead. Your line is open.

Luke Horton (Equity Research Associate)

Hey, guys, this is Luke on for Mike. Congrats on the nice quarter. Just want to start here with yields being up about 6% year-over-year. Was just wondering how much of this was due to mix, or due to mix versus pricing?

Todd Schwartz (CEO)

Yeah, good, good question. I mean, a lot of it has to do with credit performance, right? We're getting less dropping out of accrual and more yield from paying customers. We had a very, very strong, you know, payments and recoveries in the second quarter. A lot of the initiatives that we launched in the second half of 2022 are now in full operation. We also, you know, had sunsetted some of the pricing testing we were doing last year, which also increased yield. But, you know, we were happy to see strong repayment rates and strong recoveries that yielded, you know, higher yields for the quarter.

Luke Horton (Equity Research Associate)

Got it. And then for the low-end consumer payment and borrowing trends, does the lower credit losses kind of mean that you guys can step on the growth pedal?

Todd Schwartz (CEO)

Yeah, I think, I mean, that certainly in the second half, you know, we're starting our confidence level and the stability of our credit, you know, with the launch of our new underwriting model. We feel confident that growth is out there, and we're starting to roll out our initiatives for growth in the second half. We're also feeling more comfortable with credit. Seasonally, you know, the second half of the year, the credit performs, you know, better than kind of some of the vintages in the first half, and so our confidence level and our growth initiatives are starting to deploy. So we think that there's some growth out there.

Luke Horton (Equity Research Associate)

Got it. And then just last one here. Any updates on the competitive environment or, or anything that's changed since last quarter?

Todd Schwartz (CEO)

Yeah, I mean, I think, you know, there, there's a lot of noise going on with, you know, the credit card late fees with buy now, pay later, with earned wage access. You know, we're just focused on our core customer. We're focused on driving value to our customer and providing, you know, the best available service at the highest NPS. And I think we continue to watch, you know, some of the other options in the market and some of the co-competition, but I feel really good about where we're operating our operating metrics and our prospects for growth.

Luke Horton (Equity Research Associate)

Yeah, that's helpful. Thank you guys for taking the questions, and congrats again on the quarter.

Todd Schwartz (CEO)

Thank you.

Operator (participant)

We'll take our next question from Dave Storms with Stonegate. Please go ahead. Your line is open.

Dave Storms (Director and Equity Research)

Morning, and thank you for taking my questions. Just hoping we could start with the Bitty transaction, and just high level, if you see any synergies in the near short term that, you're especially excited to take advantage of?

Todd Schwartz (CEO)

Yeah, I mean, we're you know we just closed it last week, but you know I've gotten to know Craig pretty well. Think Craig is a you know a talented operator and obviously someone who has a lot of experience in the small business space. We think the collaboration between our two companies is gonna yield great results. You know, to remind everyone, Craig has a business that you know currently is an origination, so he's earning his income from origination and servicing. We think that has a lot of optionality, also has a really good digital platform. We believe in this digitization of small business and think there's a lot of growth there.

I think when you take a lot of the things, that we do well and the things that Craig's doing well, there's a lot of complementary, skill sets, and I think it's gonna, it's gonna yield great results. I think, you know, we've, we've done a lot of research on the SMB market, and we feel that, there is supply-demand imbalance, and we feel that there's, there's ability to not only take market share, but as the, addressable market continues to go online to search for working capital options, that there, there potentially is even growth, in the total addressable market. So, you know, we're excited. You know, we're gonna be... We think there's some accretion to earnings we, that we mentioned, in this year and then, you know, for the future.

But, you know, we feel really good about taking our time there. We've kind of started to talk about it for over a year and a half, and so I think we're just happy that we've, you know, fulfilled on our, and delivered on our promise that we're gonna, you know, create... You know, OppFi is gonna create a brand that has best, a suite of best-in-class digital financial service products that address supply-demand imbalance and credit access. And, you know, we feel like we're on our way. We have all the ingredients to be able to do that, and will yield great results for us.

Dave Storms (Director and Equity Research)

That's very helpful. Thank you. And then it sounds like you were pretty aggressive with acquiring new customers. Just curious as to what form, you know, that took. Were there any concessions? Did, you know, acquisition costs go up? And kind of what does that look like, you know, with that new vintage of new customers?

Todd Schwartz (CEO)

Yeah, it's actually no. Our acquisition cost year-over-year is down 3%, so we're being very disciplined. And to remind everyone, you know, the second quarter vintage typically has some of the highest charge-offs of the year on the other side of tax refund and payment season. But we are liking, you know, our... What we're seeing, our funnel is robust, and we think that we can still maintain that our CPS and continue and find growth here in the second half. We think that there's, you know, the market is starting to, you know, come in our favor, and we think that we're well positioned to take advantage of it.

Dave Storms (Director and Equity Research)

That's perfect. Thank you. And then just one more, if I could, from a macro level. You know, we're seeing unemployment tick up slightly, but, you know, there's almost certainty that the Fed will cut rates, you know, at least once this year. How do you factor that into underwriting going forward through the back half of the year?

Todd Schwartz (CEO)

Yeah, I mean, I think it's a good question. I think, you know, we'll—for us, inflation is probably the most painful for our customer. We experienced that in 2022 and had to, you know, and handled it. I think that unemployment is another concern, but I think there's also benefit when the Fed lowers rates, right? We'll be paying less interest costs, which is, you know, obviously a benefit to our PNL. But it's something we're, you know, gonna watch and obviously making sure that people are employed, you know, that's something that in our underwriting, we will be kind of watching weekly and making sure that we're not seeing large spikes in unemployment that could cause blips in our delinquency rates or credit.

Dave Storms (Director and Equity Research)

Understood. That's very helpful. Thank you for taking my questions, and good luck on the third quarter.

Todd Schwartz (CEO)

Thank you.

Operator (participant)

Once again, if you'd like to ask a question, please press the star and one keys on your telephone keypad. We can pause for a moment to allow any further questions to queue. There are no further questions on the line at this time, so I'll turn the program to Todd Schwartz, Chief Executive Officer, for any additional or closing remarks.

Todd Schwartz (CEO)

Thanks, everyone, for joining us today, and we look forward to reporting our Q3 results in November. Have a great day.

Operator (participant)

This does conclude today's program. Thank you for your participation, and you may now disconnect.