OppFi Inc. Q4 FY2023 Earnings Call

Good afternoon, and welcome to OppFi's Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants are in listen-only mode. As a reminder, this conference call is being recorded. After management's presentation, there will be a question-and-answer session. It's my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. You may begin.

Thank you, operator. Good afternoon. On today's call are Todd Schwartz, Chief Executive Officer and Executive Chairman; and Pam Johnson, Chief Financial Officer. Our fourth quarter and full year 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 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 United States 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.

Thanks, Shaun, and good afternoon, everyone. We're excited to begin 2024 and leverage our strong 2023 to continue achieving profitable growth. 2023 marked our ninth consecutive year of net income, with annual records for total revenue and ending receivables. We achieved what we said we would do, and credit improvements and operating efficiencies led us to raise full year earnings guidance three times. In addition, our solid fourth quarter enabled us to exceed our final full year earnings guidance for 2023. In 2024, we plan to maintain our strategy to be disciplined with underwriting, emphasizing profitability over portfolio growth, while simultaneously aiming for further operating efficiency throughout the company. Pam will review our fourth quarter results in detail as well as introduce guidance for Q1 and full year 2024. Before she does, I will cover four primary topics: one, the highlights from our Q4 and full year 2023 financial performance; two, progress in our strategic business areas during Q4 2023; three, commentary on our macroeconomic outlook for '24; and four, our discussion of our 2024 priorities. Fourth quarter results were driven by revenue growth, credit performance improvements, and expense leverage. Specifically, the key highlights for fourth quarter 2023 compared to the prior year are: strong 10.7% total revenue growth to $132.9 million; disciplined 3.3% net originations growth to $191.9 million; the annualized net charge-off rate as a percentage of total revenue improved by 12.9 percentage points to 46.4%; and prudent expense management with total expenses, excluding interest expense as a percentage of total revenue, down 5.6 percentage points to 33.8%. This led to solid rebounds in profitability. Net income of $1.9 million, up from a loss of $5.2 million, and adjusted net income of $8.9 million, up from a loss of $2.8 million. Our financial highlights for full year 2023 compared to the prior year are: record total revenue of $508.9 million, a 12.4% increase; record ending receivables of $416.5 million, a 3.6% increase; the net charge-off rate as a percentage of total revenue declined to 43.5%, an 8.1 percentage point improvement; and disciplined expense management with total expenses, excluding interest expense, as a percentage of total revenue of 6.2 percentage points to 35.4%. As a result, profitability improved sharply, with net income of $39.5 million compared to $3.3 million, and adjusted net income of $43.3 million from $5 million. Adjusted net income margin was 8.5%, 50 basis points higher than implied by the midpoint of our guidance. We achieved these results despite interest expense increasing by $11.6 million or 33% year-over-year and a macroeconomic environment marked by sticky inflation that hurt the financial health of our customers. Our strategy to balance growth and risk while maintaining expense discipline contributed meaningfully to this transformational year for OppFi. Now, I'll discuss our progress during the fourth quarter with our strategic business areas. Credit performance continued to improve year-over-year as expected. In addition to improvement in the annualized net charge-off rate as a percentage of total revenue already mentioned, earlier stage delinquency trends also improved compared to the same period last year. The total first payment default rate decreased by 40 basis points and the total delinquency rate declined by 90 basis points. We also realized solid expansion in yield of 8.4 percentage points to 126.8% compared to 118.4% in the year-ago period. We are pleased that credit modeling enhancements and adjustments made throughout the 2023 appear to have had the intended effect and our portfolio mix continued to shift to the lowest risk segments. Our values-based recovery strategy also ended 2023 strongly with a 40.8% increase year-over-year in the fourth quarter for recoveries of previously charged-off loan balances. Our marketing team remains focused on cost-effective initiatives to generate higher quality origination volume. As a result, the marketing cost per funded loan was down 6.3% year-over-year in the fourth quarter. In addition, the platform also expanded geographically with bank partners entering new states. We also realized operating cost leverage year-over-year with a focus on making each department more efficient. Further, we continued our work on corporate development opportunities by evaluating potential partnerships and acquisitions as a means to create further shareholder value. As a result of this work, we've refined our criteria for what we would view as an attractive opportunity. Now, I'll briefly discuss how we're thinking about the macroeconomic environment. We expect the economy in 2024 to be similar to how it was in 2023, with sticky inflation and interest rates higher than historic norms. As we have communicated during the past couple of years, persistent above-normal inflation hurts customers more than recessions do because they have more difficulty budgeting for everyday expenses, especially when living paycheck to paycheck with limited to no savings. To further illustrate this point, a recent Wall Street Journal article said it's been 30 years since food comprised this much of Americans' incomes. Nonetheless, we note that employment trends appear relatively strong for customers. In summary, we think current macroeconomic conditions help and hurt customers, and therefore, the net effect for OppFi is uncertain. While we are cautious due to these macroeconomic headwinds and our elevated interest expense, we believe that we're well-positioned to operate in this type of environment. We intend to pursue the same strategy and discipline in 2024. We expect to continue focusing on profitability over growth, and we plan to achieve this by maintaining prudent risk tolerances, emphasizing disciplined growth, and scaling operating expenses efficiently. In conjunction with the banks that partner with us, a new credit model is expected to be launched in Q2 that will incorporate an updated dynamic risk model intended to drive lower-risk origination volume and reduce credit losses. We also anticipate further geographic expansion as bank partners enter new states. In addition, we're planning for marketing to focus on top-of-funnel optimization with new analytic insights. Similar to last year, we are also focused on reviewing every function to manage expenses and achieve operating efficiencies, including vendor spending and process improvements. Moreover, we will be patient with corporate development to find the right fit for accretive partnerships or acquisitions. In summary, before turning the call over to Pam, I will reiterate my confidence in our long-term strategy. We ended 2023 with a strong balance sheet, including unrestricted cash of $31.8 million, which nearly doubled year-over-year. This provides us the optionality to deploy cash to create additional shareholder value. Our confidence in the business will be demonstrated by our participation in investor events during 2024 to communicate our story with a more targeted approach.

Thanks, Todd, and good afternoon, everyone. I'll begin by echoing Todd's comments that we are very excited to have achieved our ninth consecutive year of net income in 2023, with record annual total revenue of $508.9 million, record ending receivables of $416.5 million, and a substantial rebound in profitability with net income of $39.5 million and adjusted net income of $43.3 million. Now, I'll detail our fourth quarter 2023 results. For the fourth quarter, year-over-year, total revenue increased 10.7% to $132.9 million, with a 3.3% increase in net originations to $191.9 million and an 840 basis point improvement in yield to 126.8%. From a mix perspective, 57% of originations were to existing customers and 43% were to new customers. This was partially due to risk management with originations to existing customers generally being less risky than those to new ones. On an absolute basis, new customer originations for the quarter decreased by 4.2% year-over-year, while existing customer originations increased by 9.7%. The annualized net charge-off rate as a percentage of average receivables improved by 11.4 percentage points to 58.8% for the fourth quarter of 2023 compared to 70.2% for the prior-year quarter. As a percentage of total revenue, the annualized net charge-off rate decreased by 12.9 percentage points to 46.4% compared to 59.3% last year. Total expenses, excluding interest expense, were $44.5 million or 33.8% of total revenue compared to $47.3 million or 39.4% of revenue for the same period in 2022. Adjusted EBITDA totaled $25.8 million, more than double the $9.9 million in the prior-year quarter. Interest expense totaled $12.1 million or 9.1% of total revenue compared to $10.7 million or 8.9% of total revenue in the same period a year ago. The year-over-year increase was due to higher interest rates on our credit facilities. Adjusted net income was $8.9 million compared to an adjusted net loss of $2.8 million for the comparable period last year. This was stronger than implied by our full year guidance due to the lower net charge-off rate as a percentage of total revenue. Adjusted earnings per share was $0.10 per share. During the three months ended December 31, 2023, OppFi had 85.7 million weighted average diluted shares outstanding for the calculation of adjusted earnings per share. Our balance sheet remains healthy, with cash, cash equivalents and restricted cash of $73.9 million, total debt of $334.1 million, and total stockholders' equity of $194 million as of year-end. In addition, we had $598.9 million in total receivable funding capacity at the end of 2023, including undrawn debt of $192.3 million. Turning now to our outlook. For the first quarter, we expect $0.05 in adjusted earnings per share based on 86 million diluted weighted average shares. Quarter-to-date, we have managed the business more tightly from a growth perspective. We anticipate the annualized net charge-off rate as a percentage of total revenue will increase year-over-year in the first quarter. The first quarter last year benefited from aggressive tightening to credit models during mid-2022, and therefore, the first quarter this year is more normal from a net charge-off rate perspective. Our business also has seasonality, which causes fluctuations quarter-over-quarter. The portfolio typically contracts in the first quarter, driven by tax refunds. As a result, the first quarter is generally the highest quarter for net charge-offs and smallest quarter for profitability. We anticipate accelerated profitability in the second and third quarters. For the full year 2024, guidance for total revenue is $510 million to $530 million. We expect adjusted net income of $46 million to $49 million, implying approximately 10% growth at the midpoint. Based on an anticipated diluted weighted average share count of 86.5 million, adjusted earnings per share would be between $0.53 and $0.57. With that, I would now like to turn the call over to the operator for Q&A.

Thank you. The first question we have is from Mike Grondahl of Northland Securities. Please go ahead.

Yeah. Hey, guys. Thank you. I don't know, Pam, could you kind of clarify or add some more color to your statement? I think you just said that you ratcheted back growth even more in the first quarter so far. Just trying to understand kind of your growth outlook and how you're feeling about the macro. It sounds like Todd said, too, that '24 will be a lot about emphasizing profitability over growth. So, just a little bit more color there would be helpful.

Thanks, Mike. That’s a good question. It relates to the broader economic conditions we are experiencing. We have tightened our credit criteria to adapt to this environment. We're not seeing significant improvements in customer repayment rates and similar metrics. Therefore, we are remaining cautious about growth. Our focus on profitability over growth will definitely be a priority for us this coming year. Todd, do you have anything to add?

I would like to add that we now have dynamic modeling in place. This means we are aware of the different vintages and their seasonal patterns throughout the year. For instance, in the fourth quarter, we typically see some of the lowest loss vintages. This relates to what Pam mentioned during the call about repayment rates for vintages from February and March, which coincide with tax refund season and are often among the lowest-quality vintages of the year. I wanted to clarify that point. We have improved our modeling and will apply it throughout the year based on market seasonality.

Got it. And we're outside. What would we or you need to see when you start that would help you push for growth a little bit? Like what needs to change? What would you need to see?

Currently, we are benefiting from lower acquisition costs and operating efficiently in our funnel, which is positive. However, I need to see sustained loss curves that resemble those of 2019 or are close to them, and we have not reached that point yet. As we look at the customer segments, our lowest risk customers show less degradation compared to 2019 than higher risk segments. Yet, we have not experienced that consistency. We have maintained our product offerings, prices, and commitment to credit access, meaning we are not increasing prices or passing costs to customers. We must operate within our current business limits. While we may consider testing pricing strategies in the future, we need to see particular indicators to drive growth. That said, in the fourth quarter, we had successful segment swap-ins and swap-outs, and we are discovering ways to grow. Additionally, our bank partners have opted to expand geographically, providing further opportunities for growth that do not solely rely on expanding the credit box.

Got it. I mean taking that one step further, I mean, is this sort of a $0.50 to $0.60 adjusted EPS business until you grow? Like, do you have other levers to drive adjusted EPS other than growth?

Absolutely. Just to clarify, our fair market value decreased by 200 basis points year-over-year. While other companies are increasing their values in this environment, we are taking a conservative approach. This has significantly impacted our profit and loss statement, but we are committed to the long term. Our aim is to be conservative now and position ourselves for growth when the opportunity arises. There are various strategies we can implement, starting with operational efficiencies. We are discovering substantial efficiencies that we can leverage. Additionally, we are focused on optimizing the customer funnel, identifying and addressing bottlenecks to improve throughput. We feel confident that we have the means to drive growth, even amidst historically high interest rates and some adverse impacts on fair market value.

The next question we have is from Zachary Oster of JMP Securities. Please go ahead.

Hi, good afternoon. Thank you for taking my question. I'm trying to understand the factors contributing to growth for next year. Is it primarily influenced by lower average yields, lower volume, or any other factors?

I'm sorry, can you just repeat the question? I missed the first part. I apologize.

I'm trying to get a better understanding of the factors influencing the revenue guidance for 2024. Are we looking at lower yields, decreased volumes, or a tighter credit box?

Currently, we expect the yield to remain strong at its current levels, primarily because we are not seeing favorable credit conditions. We are also cautious about pursuing growth by increasing costs, as this often leads to attracting higher-risk customers and results in paying more for less. Our assessment is closely tied to the macroeconomic outlook, which could change, and we are ready to adapt. Additionally, we are excited about launching our most effective model yet in the second quarter, which we believe will have significant capabilities, particularly in areas like swap-ins and swap-outs. The testing we have conducted over the past year and a half should enable more growth. For now, our observations are similar to last year, although we are exploring various strategies to enhance growth, including funnel efficiencies and expanding our geographic reach with bank partners in more states. This is our current perspective.

Got it. That makes sense. I have one more follow-up question regarding the charge-off rate specifically. We were wondering if you could provide more insight into its dynamics for the year and how that plays out throughout the year.

The charge-off rate as a percentage of revenue?

Yes.

I think we've made significant progress. One point we highlighted on the call is the year-over-year improvement. We anticipate that this will remain largely the same, with possible incremental gains. We will continuously seek ways to enhance this. However, as revenue growth slows, it does affect some of those figures as well as the percentage of receivables. Overall, we believe it will remain mostly consistent in that respect.

Got it. Thank you very much.

The next question we have is from Dave Storms of Stonegate. Please go ahead.

Good evening. Just wanted to start, you mentioned updated acquisition criteria. I was hoping you could dive into that a little bit more and just a general sense of what you're seeing in the M&A market.

Yeah. On the acquisition criteria, are you referring to like top-of-funnel, like the criteria? I just want to get more specific on the question to make sure I answer it correctly.

My understanding was that when you were discussing the uses of cash in relation to external growth, you were revising your criteria. Did I misunderstand that?

I apologize for the misunderstanding; I was focused on loan originations. We are learning a great deal about mergers and acquisitions. We have begun to focus on two or three sectors that align well with the OppFi brand. Our goal is to create a tech-enabled platform that offers top-notch alternative financial service products, addressing gaps where banks and large financial institutions fall short. It's crucial for us to find opportunities that are beneficial for our shareholders, our business, and our brand; everything needs to align. We are being cautious and thoughtful in our approach, drawing on my previous experience in private equity and our team's expertise to ensure we execute this correctly. We are gaining confidence as the market stabilizes and more viable opportunities arise, but there is nothing concrete to report at this time. We are actively exploring options.

Understood. That's very helpful. Thank you. And then just one more. On the auto approval rate, it took a nice step-up year-over-year, continues to grow. How do you think about the ceiling on this rate? And kind of what are the hurdles that you see over the next 12 months to continue growing that rate?

I believe we've made significant improvements, and I estimate we're around 72%. I'm really pleased with our technology and product capabilities and our ability to increase this year after year, which is our ongoing goal. One area that we're focusing on is artificial intelligence in servicing, as there is a great opportunity to utilize these AI tools effectively in the process to help customers get auto-approved. This involves ensuring we have all the necessary documentation and information to streamline the process and minimize manual underwriting. We're exploring various options and working closely with our tech and product teams to further develop this. It's definitely something we monitor very closely.

Understood. Thanks for taking my questions, and congrats on the year.

Thank you.

The next question we have is from Ross Davidson of Bennington Capital. Please go ahead.

Hi, I appreciate you taking my question. I wanted to follow up on guidance. It seems like you've expanded into more states. Given that and acknowledging that the outlook for 2024 remains uncertain and appears to be similar to 2023, wouldn't the new states you've entered contribute more to your revenue than what is currently implied? Am I missing something?

When entering new regions, we're mostly dealing with completely new loans. We're being very cautious because new loans carry the highest risk and can result in significant charge-offs. Each state is different, even though we've been in this business for a long time, so we're taking a careful approach. While there is potential for positive outcomes, our current strategy is to be very strategic and thoughtful, as we are sensitive to charge-off rates. We want to ensure that we don't introduce loans for our banking partners that may lead to delinquency issues. Therefore, we're progressing at a pace that we find comfortable. We have successfully undertaken this process in the past and believe it could yield substantial benefits in 2025. This year, we do expect some growth, but we're proceeding cautiously due to the credit risks associated with new loans.

That makes sense. That's helpful. Thanks, Todd. I have another question regarding charge-offs. Pam, did I hear you correctly that the current quarter will show an increase compared to last year? I want to confirm your reference to the 2022 tightening. However, didn't you still have more challenging 2022 vintages in the portfolio that you would be cycling through? I'm surprised it wouldn't at least be similar.

I wanted to clarify that while the dollar amount may be higher, the percentage of revenue is likely to remain similar. It's a bit misleading to say it's higher; I see it as being roughly the same proportion of revenue. The dollar amount reflects the major tightening we did midyear in 2022, which is not something we usually consider. We benefited from some subsidization in the first quarter of 2023, but we were in a more normalized environment then. Seasonally, the first quarter is always the lowest for profitability, with increases in the second, third, and fourth quarters. The fourth quarter is somewhat muted compared to the second and third because we start growing again due to seasonal factors. Overall, the yields as a percentage of revenue show little difference from last year.

We see just a minor increase in the percentage of charge-offs relative to revenue for the first quarter.

It seems we have no further questions at this time. I would like to turn the floor back over to Todd Schwartz for closing comments.

Yeah, I want to thank everyone for joining today and then the thoughtful questions. We look forward to speaking with everyone again in May when we report our first quarter results.

Thank you. This concludes today's conference. Thank you for joining us. You may now disconnect your lines.