OppFi Inc. Q4 FY2021 Earnings Call

Good afternoon. On today's call are Todd Schwartz, OppFi's Executive Chairman and Chief Executive Officer; and Shiven Shah, Chief Financial Officer. The company's fourth quarter and full year 2021 earnings press release and supplemental presentation can be found at investors.oppfi.com. During the call, the company 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 statements, 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 SEC, including the section entitled Risk Factors. In today's remarks by management, the company will discuss non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this afternoon's earnings press release. This call is being webcast live and will be available for replay for one month on our website. I would now like to turn the call over to Todd.

Thank you, and good afternoon, everyone. First, I want to say how proud and excited I am to return as CEO of OppFi and lead this dynamic company in its next phase of growth. As some of you know, 10 years ago, I founded OppFi with a compelling mission to help millions of consumers who are locked out of mainstream options to gain access to credit. The goal is clear, provide simple credit to help people with unforeseen expenses and help millions build a better financial path. Today, I remain as passionate about this mission for financial inclusion as I did in 2012, and I'm extremely confident in our future. As I will detail in the next few minutes, this year, we are focusing on our core business, which we believe will position us to continue to achieve consistent profitable growth. Therefore, we are pursuing initiatives we believe represent the best allocation of capital and yield the highest return on investment to unlock the potential to further expand our market share and continue to lead our industry. As OppFi's Executive Chairman, CEO and the largest shareholder, I want to underscore that OppFi's Board of Directors is committed to maximizing long-term stockholder value. To this end, we recently announced our $20 million corporate share repurchase authorization that we intend to utilize when we believe OppFi's share price is disconnected from the long-term value and potential of the company. In addition, my family and I are and have been strong believers in the long-term potential of OppFi and are prepared to further invest and support the stock when we see such a disconnect in the market. Now, I would like to go over three topics before I turn over the call to our CFO, Shiven. Number one, offer some reflections on our record for 2021; number two, speak about the macro outlook for 2022; and three, discuss our key product enhancements specific to the installment loans business for 2022. We are very pleased with our record results and strong profitability in 2021. We continue to have a strong profitable core business with robust demand on the heels of the economic recovery and increased consumer spending. For the year, we generated $351 million of revenue, in line with guidance and $66 million of adjusted net income, consistent with the higher end of our expectation. We ended the year with a strong balance sheet with $62 million of cash, $158 million of unused debt capacity and $473 million of total funding capacity to fund future growth. As we anticipated, we are seeing a shift in the macro environment with consumer spending, financing trends normalizing to the pre-pandemic levels. The end of federal stimulus programs, including child tax credits, decades high inflation and increased consumer spending are accelerating demand for credit from our customers. In addition, the strong labor market is creating more employee qualified borrowers. This normalization of demand drove the second consecutive quarter of record originations in the fourth quarter, resulting in record volumes for the year. We also ended the year with record receivables, which establishes a strong baseline for which we grow in 2022 and beyond. While it's early, we have seen this acceleration of demand continue thus far in 2022. In January and February combined, we generated a 51% year-over-year increase in originations. This trend is better than expected from historical seasonality trends. At the same time, demand is returning to pre-pandemic levels. As a result, we are proactively managing our expected credit performance to ensure that all customers to whom we facilitate credit meet our risk-return criteria. Recently, we rolled out our new next-generation credit model that we believe will enable us to target more prospective customers while achieving our target return hurdles. In the second half of 2021, we also made several product and operational enhancements that we believe will have a meaningful impact on growth and profitability in 2022. First, our market-based offers. We are introducing market-based offers to profitably grow our core loans business that incorporates different rates, terms and loan amounts following promising testing in the fourth quarter of 2021. We saw certain channels and price points generate 2.5x volume increases with lower credit risk versus our traditional product. We believe this initiative will enable us to expand our market share and reach customers we have not historically served, all while reducing credit risk. Second, tech-enabled efficiencies and automation. We continue to leverage our proprietary technology platform and artificial intelligence systems to automate the loan approval process. This not only enhances the customer experience with speed but also improves operational efficiency. The percentage of automated loans more than doubled in 2021. These loans are funded with zero human interaction. We expect to continue this upward trend in 2022, which should drive increased operational scale and efficiency. Third, credit enhancements. As mentioned earlier, we recently introduced our next-generation credit model, which will allow us to target qualified customers more effectively. When credit began to normalize in Q4, we implemented optimized underwriting parameters in our new model that have resulted in a decline in early-stage delinquency. Of course, in addition to these initiatives, we continue to work on improving the user experience, increasing conversion rates and acquiring customers efficiently. To this end, we are excited to further leverage our industry-leading customer service as exemplified by our Net Promoter Score of 85. In 2022, we are highly focused on maximizing our core OppLoans product as we believe we can gain market share with the enhancements that I outlined, unlocking profitable sustained growth. In summary, we are excited by our key initiatives and the resurgence of consumer demand and are confident about our future as well as our ability to serve more customers by facilitating safe, reliable credit options. With that, I'll turn the call over to Shiven to review our fourth quarter and full year 2021 results as well as provide commentary on our outlook for 2022.

Thanks, Todd, and good afternoon, everyone. To start, I would like to note that our 2020 income statement is presented on a pro forma fair value adjusted view to present like-for-like comparison. You will recall that on January 1, 2021, the company transitioned to fair value accounting for its core installment receivables. Turning now to our results. Despite a challenging macroeconomic backdrop, 2021 adjusted net income increased 19% year-over-year to $66 million, in line with our original outlook at the time of our business combination announcement in February of last year. This is a testament to the resiliency of our business model through varying economic cycles. Adjusted revenue increased 9% to $351 million, while adjusted EBITDA grew 16% to $117 million. In addition, originations were up 23% year-over-year to $595 million, driving a 22% increase in ending receivables to $338 million. Strong financial performance during the fourth quarter led to record full-year earnings and the high end of our guidance ranges for adjusted net income and ending receivables. More specifically, revenues of $96 million were up 11% compared to the fourth quarter of 2020 and increased 4% from the prior quarter. Our ending receivables balance on an amortized cost basis was $338 million at the end of the year, up 15% from September 30 and up 22% compared to the end of 2020. Much of that growth was tied to accelerating origination volumes, which totaled $187 million for the fourth quarter, up 25% year-over-year and up 14% sequentially. From a mix perspective, more than half of the quarter's originations were extended to new customers versus 43% in the fourth quarter of 2020. On an absolute basis, new customer loan originations for the quarter increased by 51% compared to the prior year quarter and were up 14% sequentially. Our annualized net charge-off ratio was 53% for the fourth quarter of 2021 versus 36% for the third quarter and 31% for the prior year quarter. Charge-offs continued to normalize as expected in the fourth quarter with our 2021 net charge-off ratio coming in at the midpoint of our previous guidance range of 35% to 40%. While the child tax credit program initially muted the upward trajectory of delinquencies, the impact aided later in the year. Moreover, on behalf of our bank partners, in the second half of 2021, we tested new channel partners as well as extended testing and credit facilitation to newer customer segments. We are no longer facilitating the origination of loans to these segments. And we believe this charge-off trend will likely dissipate by the second quarter. We project first-quarter losses will trend similar to the fourth quarter 2021. Looking ahead, we expect improvement in our net charge-off ratio beginning in the second quarter and therefore, trend towards pre-pandemic levels as the year progresses. We have seen improvement in delinquency trends from January and February origination that we believe bodes well for future loss rates. Turning to expenses. Operating expenses for the fourth quarter, excluding interest expense as well as add backs and one-time items totaled $44 million or 46% of revenue compared to $44 million or 48% of revenue for the prior quarter and $38 million or 44% of revenue for the fourth quarter of 2020. The year-over-year increase was primarily driven by more than 50% year-over-year growth in new loan origination and the corresponding impact on direct marketing and acquisition expenses. Following a detailed review of our cost structure, we are implementing operating cost efficiency initiatives that will result in a reduction in our cost base of approximately $15 million on an annualized after-tax basis, of which only a portion we expect to realize this year. More broadly, we expect to continue to reduce overhead and unit-level costs with a goal of driving higher incremental margins over time as we more fully leverage our technology platform. We expect first-quarter 2022 operating expenses, excluding interest expenses as well as add backs and one-time items as a percentage of revenues to remain in line with the fourth quarter of 2022 before improving in the second half of the year as we realize savings from our efficiency initiatives. For 2022, we are projecting operating expenses, excluding interest expenses as well as add backs and one-time items to be 43% to 47% of revenue. Adjusted EBITDA totaled $20 million for the quarter, down $11 million sequentially and $14 million versus the prior year quarter as higher revenues and relatively flat expenses were more than offset by increased charge-offs. As expected, our adjusted EBITDA margin continued to normalize through the fourth quarter, reflecting rising net charge-offs and higher volume-related expenses. For the quarter, our adjusted EBITDA margin came in at 21% compared to 35% in the third quarter and 40% for the fourth quarter of 2020. Looking ahead, we expect margins to remain in the 20% to 25% range for 2022, with the first quarter expected to come in at roughly half of those levels due to the temporary elevated charge-off levels in the first quarter. We are confident that margins will expand as the year progresses, driven by our new underwriting model as well as realization of expense efficiency. Furthermore, we anticipate an additional step-up in profitability in 2023 and beyond as we realize the benefits of accelerating growth in higher quality originations with 30% as our long-term margin target. Interest expenses, excluding debt amortization for the fourth quarter totaled $6 million or 7% of total revenue compared to $4 million or 5% of total revenue last year. Interest expense increased versus the previous quarter as we funded receivables growth from cash flow from operations and debt. We expect interest expense as a percentage of revenue to remain at 7% for 2022. We generated adjusted net income of $11 million for the fourth quarter compared to $17 million for the prior quarter and $21 million for the fourth quarter of 2020. As of December 31, 2021, OppFi had 84.5 million total shares outstanding, excluding 25.5 million earnouts. Adjusted basic and diluted earnings per share for the fourth quarter was $0.13 and $0.78 for the year. Our balance sheet remains healthy, with cash of $62 million, total debt of $274 million, balance sheet receivables of $338 million and equity of $158 million. Our net debt-to-equity ratio remains well below 2x coupled with $470 million in funding capacity with ample liquidity available to support our future growth plans. Turning now to our outlook. As Todd discussed, the credit cycle is normalizing after being temporarily supported by lowering demand, reflecting the influx of cash from government stimulus programs. These factors will impact revenue, net charge-offs and earnings in 2022. That said, our more recent initiatives are designed to allow us to adjust to these changes and maximize returns and minimize credit risk in the long run. In summary, for 2022, we are introducing the following guidance ranges: total revenue and ending receivables growth of 20% to 25%, net revenue, defined as gross revenues less change in fair value margin between 60% and 65%, adjusted operating expenses, excluding interest expense, add backs and one-time items as a percentage of revenue between 43% and 47%, adjusted EBITDA margin between 20% to 25%, and adjusted net income margin between 8% and 12%. We are currently executing efficiency and process automation initiatives and anticipate realizing their full annualized benefits after 2022. In addition, we believe that in a 2022 steady-state environment with credit normalization and realization of all of our efficiency initiatives, we would achieve adjusted net income at least in line with our 2021 results, assuming conservative origination growth. Importantly, we expect adjusted net income to ramp up throughout the year as we realize the benefits of tighter underwriting parameters, origination volumes reaccelerating following tax season refund seasonality in the first quarter and operating efficiency initiatives that are underway and will continue through 2022. More tactically, net income will be impacted by an elevated charge-off in the first half of the year related to late 2021 vintages. As those loans run off, we expect lower net charge-offs beginning in the second quarter, driven by higher growth in lower risk customer segments with normalized credit performance. As a result, we believe the first quarter will be our weakest of the year with profitability muted. We anticipate adjusted net income margin for the quarter to be approximately breakeven. Looking to 2023 and beyond, we remain confident in the trajectory and sustainability of our earnings growth in light of several powerful tailwinds. First, we expect accelerating revenue realization related to strong growth in originations in 2022. Second, we anticipate our net income will benefit from a full year of $15 million after-tax operating cost efficiency savings. And third, credit trends are continuing to improve, reflecting a more normalized macroeconomic backdrop, which we believe we will benefit from as our underwriting and targeting initiatives increasingly take hold. In addition, we believe our balance sheet is well positioned to weather market disruptions with multi-year committed lines and ample capacity. We are increasingly focused on exploring off-balance sheet strategies that are more capital efficient and increase our borrowing and leverage capacity. We are very excited about this initiative since we would expect to generate the same financial returns with similar economic risks while simultaneously lowering the amount of loans held on our balance sheet and increasing our capacity to borrow to generate higher growth.

We would now like to turn the call over to the operator for Q&A.

And I guess, Todd, you haven't necessarily gone anywhere all these years, but welcome aboard anyway to the first earnings call.

Thank you.

Maybe one kind of macro question and then a follow-up. As we think about consumer demand and credit performance, I mean, obviously, the topic of credit normalization has been front and center for several quarters now among consumer lenders with the eventual dissipation of all the stimulus and so forth. But I'm wondering, are you seeing any incremental changes in consumer behavior either on the demand side or on the credit performance side as it relates to the emergence of steep inflation? And are those factored into kind of your underwriting models going forward, because obviously, it's been 15 years since we've seen really any inflation in four decades since we've seen it at these levels?

Yes, it's a great question and one that has been evolving over the last couple of years during the pandemic. However, I believe we are beginning to find some clarity. With the winding down of federal stimulus, we are moving towards a more normalized environment that resembles 2019. I can assure you that demand has returned, and we are addressing it. As the CEO, I view this as an ideal opportunity to focus on credit. When conditions are favorable and demand is strong, I consider how we can optimize our credit approach. That’s why in the second half of last year, we improved our credit model to better target borrowers, segment them appropriately, and avoid higher-risk customers. OppFi aims to help people succeed with our product and enhance their financial well-being. We report all payments to credit bureaus, which contributes to our strong net promoter score, and we are rewarded when our customers do well in our system. Thus, managing delinquency is a priority, and we remain vigilant about it as we grow. It's always at the forefront of our considerations.

And that's a great segue just to my follow-up, which I wanted to make sure I sort of understood correctly the commentary about maybe those late 2021 vintages because you had two consecutive quarters of record origination volumes, but combined with what seems like maybe some credit underperformance relative to finance. Were these channel-related or FICO band? A little more color maybe on who was targeted.

It's a great question. I'll be straightforward. The changes were made at the end of last year, and they became apparent in the first quarter. We have seen an increase in neobanks, which include new age digital bank customers like Chime. We experimented with different channels and customer banking styles, leading to a significant portion of that population being tested. Unfortunately, the results were mixed. We concluded that those customers might not be the right fit for us in the long term and wouldn't thrive within our system, which focuses on building financial health. Consequently, we decided to discontinue that approach. Looking ahead, we may reconsider it, but for now, given the increased demand and robust growth, we are in a position of leadership, allowing us to gain market share without venturing into riskier segments.

Next question, Chris Brendler with DA Davidson.

Todd, also welcome aboard in terms of the public forum. I want to start with credit just real quickly. Shiven you mentioned, I think delinquency trends looked encouraging. Can you give us a little more color there? I don't see we get delinquencies until we get the K.

We have noticed some normalization of credit and elevated credit loss in the first quarter. Recently, with our new underwriting model, we've observed growth along with a decrease in losses. We will share more statistics for Q2, but we anticipate positive trends moving into the second quarter, third quarter, fourth quarter, and beyond.

Yes. To add to that, early trends in loans are closely linked to the final vintage numbers. We have the most history, having been in this business for 10 years, so our data is quite reliable. That's an advantage for forecasting; when we observe trend lines, we can quickly determine where things are working effectively. So, yes.

The benefit of having short-term paper too. A separate question is the off-balance sheet securitization sounds interesting and compelling. What are the challenges? Why have you not done it earlier and just the overall health of the credit markets, given what's happening in the world these days?

That relates to our vision and explains why it's timely for us to revisit this strategy. We have a customer base and aim to offer a comprehensive suite of products. Our unique approach focuses on our expertise in servicing installment products. We believe our service and brand appeal to all credit segments. There are opportunities for us to originate and generate service and fee-based income in the sub-36% space. We have a strong brand for customer acquisition and excel in product-market fit and positioning. There seems to be a downturn in the sub-36% area, which allows us to tackle this segment, serving customers who may not meet the core installment criteria but still need support. This can lead to more of a fee and servicing-based model for our business, as well as significant growth opportunities for our customers. Therefore, it aligns perfectly with our overall narrative. Additionally, maintaining this as an installment loan is advantageous for our technology and infrastructure.

Just the last one, the most exciting part of this release, I think this buyback and given where the stock is, any reason why you wouldn't take advantage of that from a cash and liquidity perspective? It looks like you've got a pretty good sizable cash flow to go after that buyback.

Yes, that's the plan. We intend to strongly support our share price. The Schwartz family, including myself, is ready to defend it, and the company will also be involved in that effort. We believe the current valuation is not aligned with reality. There are others in the industry that went public through SPAC mergers and, while I won’t mention any names, they lack the financial strength, brand, and operational success that we have achieved. We feel like we have been unfairly categorized with them. At this point, we want to clearly distinguish ourselves and receive recognition for the excellent work we are doing, our talented team, and the strong brand we possess. Therefore, we will be standing firm in our service, and I believe this is a great initiative.

Next question, Brian Lombardi with Seaport.

I feel like maybe I missed part of the, I guess, intro, but I guess, welcome back to the management side. I want to try and get maybe a little bit of a narrative as to like where we were, where we are, how long are you committing to be with us? I think I'm kind of extrapolating, but I think I'm right when I could say, it sounds like you had a management that wanted to grow maybe got over at skis too much. You've got skin in the game, you want to run this like a business, you're rolling off some bad investments and you're going to get that back on track. Like am I wrong about that? And if I'm right about that, how long will you stay?

Yes. First, I'll say this is an indefinite move. I'm here to stay. I am energized and passionate about this and when I started this in 2012. It's always been the mission of providing access in safe, simple terms and helping people. And I'm more driven by that than ever. I'll tell you this, like I was doing other things, Managing Principal at Schwartz Capital. We have a couple different business lines under that. I had an honest conversation with first and foremost, my wife and then my immediate family and the Board and everyone was incredibly supportive of me coming back into the business and saw my passion and excitement. And it wasn't in a temporary way. It's indefinitely. And I'm here actually in the Chicago office today, had an unbelievable town hall with the team yesterday, and we're really connecting again and I feel really good about the situation.

Thank you. I believe that as long as we maintain stability, we are in a good position. However, I do think the recent past has not posed as much of a challenge for our business as the upcoming future might, even though we have faced difficulties. What can we learn or take comfort in, given that we may have made some poor loans while exploring new areas, and how will we address those? Despite the rising inflation, we remain confident because of our strategic decisions.

That's what it was. We identified the issue quickly, and we are no longer originating or facilitating on behalf of the bank partners. I can only express my confidence in the trend lines, the direction, and the volume, with new origination volume returning. We are very pleased to see a more normalized environment. Does that answer your question?

I think so. It's more of a field-type answer, but what I'm getting at is that I feel the challenges now are greater than they were recently, but those recent challenges create a ripple effect, and you're indicating that it was a relationship-based segment of business that you've ceased?

Yes, I am very confident in our model and our customer segmentation. It was a deliberate choice to focus on finding credit access for individuals turned away by traditional banks, which includes some of the neobank customer group. We conducted tests and explored new channel partners, but the results were mixed and did not align with our mission. Our mission is to provide credit access, ensuring that customers can succeed within our system. We report payments to credit bureaus and provide positive trade lines, enabling customers to succeed as we build relationships and help them transition to lower capital costs. If a customer is too high risk or not utilizing our system effectively, it’s likely not a good fit for our company, and we've made the decision to move on from those cases.

Yes, I think the discipline in the underwriting is really kind of what we're focusing on and we're not going to be chasing after growth in segments that are not profitable. So, we're really looking at unit economics and profile on early-stage delinquencies to see what the lifetime loss trends are going to be and we're committed to getting this charge-off ratio in line with historical levels.

Your next question comes from Mike Grondahl with Northland Capital Markets.

This is Mike on for Mike. Most of mine have been answered, but maybe if you can just talk a little bit on the newer products like salary cap and what the kind of competitive environment looks like today as we sit here?

The newer products are still in a testing phase as we work on finding the right market fit. There are different paths we can take as a business. One approach involves surrounding our customers with multiple products, which carries risks and uncertainties in terms of investment and financial performance. However, we have an impressive Net Promoter Score and strong customer relationships, along with a technology platform that can support installment loans. There is a significant opportunity with a market-based offering in the installment category and our core business, where we're seeing a substantial return on investment. This approach provides better service to our customers by aligning pricing, terms, and rates with their goals, enhancing our competitiveness in marketing partnerships and direct mail. We can operate under 36% with our installment product, and these initiatives can be implemented within our system without involving risky investments that lack proven returns. We're also exploring interesting small business installment options. Our existing products, like the credit card and salary cap, will continue to be tested for market fit, but there's much more we can do with our current installment product, which shows great potential for high returns. While high ROI is important, we also need to consider the likelihood of reaching it.

And then just maybe on timing and size of like investment spend as we look at 2022, what are your kind of high-level thoughts on that?

I just want to make sure I understood the question. Is it?

In terms of the timing for investment spending, we've analyzed our cost structure and identified significant efficiencies. We found about $15 million in cost efficiencies, which we plan to reallocate to enhance market-based offers and strengthen our core business. We are dedicated to increasing margins throughout the year and making strategic investments in our core product to generate those additional returns.

Thank you. I will now turn the floor over to management for closing remarks.

Thank you for those questions. I'm back, and I'm excited to reconnect with the team. The principles that brought us here will also lead us to the next frontier. Currently, the stock is at an extreme value. I acknowledge my bias, but I see significant potential for value and improvements. We're making operational enhancements and concentrating on credit and the right priorities. I'm thrilled to be back and looking forward to the journey. Thank you, everyone, and more updates will follow.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.