OppFi Inc. Q1 FY2024 Earnings Call

Good morning and welcome to OppFi's First Quarter 2024 Earnings Conference Call. As a reminder, this conference call is being recorded.

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 first 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 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 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.

Thanks, Shaun, and good morning, everyone. We are very pleased to report our first quarter 2024 results, which exceeded our earnings guidance and enabled us to raise our full-year earnings outlook. When we introduced our full-year guidance in March, we had limited visibility into 2024 based on the seasonality of the business. However, our profitability accelerated to end the quarter with a strong tax refund season, and we continue to see favorable credit trends in our portfolio. Pam will review our first quarter results in detail and revised guidance for full year 2024. Before she does, I will cover 4 primary topics: one, highlights from our first quarter of 2024; two, progress on our operational initiatives; three, commentary on our macroeconomic outlook; and four, discussion of our capital allocation strategy. First quarter results were driven by revenue growth and continued credit performance improvements and expense leverage. Our key highlights for the quarter compared to the prior year period are: solid 5.8% total revenue growth to $127.3 million, a strong 3.5 percentage point increase in revenue yield to 129.5%, a meaningful 33.5% increase in recoveries, and a 1.1 percentage point improvement in the net charge-off rate as a percentage of total revenue to 47.9%. In addition, we continue to carefully manage expenses to realize greater operational efficiency. On a GAAP basis, total expenses as a percentage of total revenue increased 110 basis points year-over-year to 45.5%. However, when excluding one-time expenses and other add-backs, such as severance costs and exiting the credit card business, this percentage decreased by 270 basis points year-over-year to 40.6%. This led to profitability increasing by more than 100% year-over-year; net income of $10.1 million, an increase of $6.2 million from $3.9 million; and adjusted net income of $8.8 million, an increase of $4.9 million from $3.9 million. Additionally, we ended the quarter with a strong balance sheet that we believe positions us to achieve our strategic objectives. Total cash, cash equivalents, and restricted cash was $88.7 million, up 20% from year-end. Of this, unrestricted cash was $47.2 million, which increased 48.4% in the first quarter sequentially. Given our confidence in maintaining a strong balance sheet and generating free cash flow, we were proud to announce the company's first-ever special dividend in the amount of $0.12 per share to demonstrate our commitment to rewarding our stockholders. Now I'll discuss our progress during the first quarter with our core operational functions. During the first quarter, we experienced strong customer payment activity driven by: one, the underwriting testing and implementation done last year; two, tax refund season; and three, recoveries. All of these factors contributed to our improved credit performance year-over-year. We identified higher-risk applicants to deny and stronger ones to approve that would have been denied otherwise. This trend has continued through April, the early part of Q2. Early-stage delinquency trends improved compared to the same period last year with the total first payment default rate lower by 40 basis points and the total delinquency rate decreasing by 70 basis points. In addition, recoveries of previously charged-off loan balances increased 33.5% year-over-year. We and our bank partners are excited to launch a new credit model in the second quarter. The model incorporates additional customer cash flow and behavior inputs that are designed to more accurately evaluate the risk of the applicants. As a result, we expect future originations to carry less risk, and therefore, our credit performance to improve over the long term. Turning to marketing. The total cost per funded loan was down 12% compared to the same period in 2023. During the first quarter, the addressable market expanded further as bank partners entered new states. In terms of customer experience, we recently launched an enhanced chatbot feature powered by artificial intelligence capabilities that we've named OppAI. We believe this will improve the customer experience and increase operational efficiency. We also celebrated National Financial Capability Month by announcing our collaboration with Zogo to provide customers with a gamified financial literacy app to help them further improve their financial health. OppFi is a mission-driven company, and we are excited by the new social impact relationship. Our Net Promoter Score for the quarter remained strong at 77. Now I'll briefly discuss how we're thinking about the current macroeconomic environment. Based on recent macroeconomic data points and consumer finance surveys, we believe our previously discussed view has been validated. We believe core inflation remains sticky and interest rates are unlikely to be reduced until the fourth quarter or early 2025. According to research by United Way, 29% of American households have members who are employed but income-constrained and asset-light. In other words, these are households whose members work and earn more than the poverty line but struggle to pay for basic needs. Sticky inflation disproportionately affects these consumers, and the share of these households has steadily grown. In addition, recent VantageScore data indicate lower-income U.S. consumers are struggling to make loan payments, which is causing banks to tighten their credit standards. While we believe this upmarket tightening may present selective growth opportunities for us as more applicants may fall into the credit box for OppLoans, we will remain cautious on originations given overall macroeconomic uncertainty. We won't chase growth merely for growth's sake. With that said, I want to emphasize we are deeply committed to profitable growth and believe we have numerous levers to continue to create shareholder value. In this current environment, improvements in credit performance and operational efficiency have enabled us to grow earnings, generate significant free cash flow, and strengthen our balance sheet. This influenced the decision of our Board of Directors to declare the $0.12 per share special dividend and approve a new $20 million share repurchase program. We plan to use cash to repurchase stock when we believe our stock price is disconnected from its intrinsic value and unreflective of the long-term earnings potential of OppFi. In addition, we remain committed to pursuing opportunities for potentially accretive partnerships or acquisitions that fit with our company mission to facilitate credit access to underbanked Americans. We believe all these factors help demonstrate OppFi's unique value proposition for investors. OppFi presents the opportunity to invest in a closely held, founder-led family business in the public markets that is committed to both returning value to stockholders and creating new value. Part of the reason for my return as CEO two years ago was to execute my multi-year strategic vision for OFI. Now that the core business has stabilized and our balance sheet is solid, we are working to fill some of the significant supply-demand imbalances that exist in the financial marketplace across customer types that traditional banks do not service. We believe through accretive partnerships and acquisitions, OppFi has the potential to be transformed into a platform to offer additional types of alternative digital financial products and services.

Thanks, Todd, and good morning, everyone. For the first quarter, total revenue increased 5.8% year-over-year to $127.3 million with a 2.4% increase in total net originations to $163.5 million and a 350 basis point improvement in yield to 129.5%. Total retained net originations decreased 2% to $152.5 million from $155.6 million in the year ago period based on one of our bank partners retaining a higher percentage of loans originated in some states. Total net originations are defined as gross origination net of transferred balance on refinanced loans, while total retained net originations are defined as a portion of total net originations with respect to which OppFi ultimately purchased a receivable from bank partners or originated directly. As previously disclosed, in late 2023, OppFi transitioned fully to the bank partnership model and therefore currently does not originate any loans directly. From a mix perspective, 57.7% of originations were to existing customers and 42.3% were to new customers. During the quarter, along with our bank partners, we continued our prudent approach to risk as we believe loans to existing customers are generally less risky than those to new ones. On an absolute basis, new customer originations for the quarter decreased by 1.7% year-over-year, while existing customer originations increased by 5.7%. The annualized net charge-off rate as a percentage of average receivables increased by 20 basis points to 62.0% for the first quarter compared to 61.8% for the prior year quarter. However, the annualized net charge-off rate as a percentage of total revenue decreased by 110 basis points to 47.9% compared to 49% last year. Interest expense totaled $11.4 million or 9% of total revenue compared to $11.4 million or 9.4% of total revenue in the same period a year ago. Turning to expenses. Total expenses were $57.9 million or 45.5% of total revenue compared to $53.5 million or 44.4% of total revenue in the first quarter last year. Included in the total expense figure were $6.2 million and $1.4 million of one-time expenses and other add-backs in the 2024 and 2023 periods, respectively. The year-over-year increase was primarily due to the exit costs related to the credit card business as well as severance and legal costs. Excluding these items, total expenses were $51.7 million or 40.6% of total revenue in the first quarter this year, down from $52.1 million or 43.3% of total revenue for the same period last year. Adjusted net income was $8.8 million compared to $3.9 million for the comparable period last year. Adjusted earnings per share were $0.10 per share compared to $0.05 in the first quarter last year. This was significantly higher than our guidance for $0.05 due to a strong tax refund season, which resulted in better-than-expected credit performance, including recoveries. For the 3 months ended March 31, 2024, OppFi had 86.2 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 $88.7 million, total debt of $301 million, and equity of $197.3 million as of the end of the first quarter. Unrestricted cash of $47.2 million at the end of the first quarter marked a 48.4% increase since year-end 2023 and provides us confidence in our optionality for capital allocation strategic decisions. In addition, we had $613.7 million in total receivable funding capacity, including undrawn debt of $224.7 million. Turning now to our outlook. For full year 2024, we reiterate guidance for total revenue of $510 million to $530 million. We continue to focus on profitable growth. To provide additional perspective on how we are thinking about the second quarter, we expect total revenue to be relatively flat year-over-year. Shifting back to full-year guidance. Based on the stronger-than-expected first quarter, we have increased guidance for profitability. We now expect adjusted net income of $50 million to $54 million compared to the prior range of $46 million to $49 million. Based on an anticipated diluted weighted average share count of 86.5 million, we now anticipate adjusted earnings per share between $0.58 and $0.62 compared to the prior range of $0.53 to $0.57.

And we will take our first question from David Scharf with Citizens JMP.

To start off with, Todd, you made some references to not only the transition to the bank partnership model but some specific actions in terms of your partners expanding into maybe one or more states, retaining some more loans in a certain state. Maybe it's a good time. Can you take a step back and can you just kind of bring us current on how many states you're operating in through your partners, how many partners there are? And broadly speaking, whether there are any notable changes to the terms of your partnership arrangements?

Yes. David, we currently maintain 3 bank partners. And the banks are the originators in the different states. So it really is up to them on the structure on the other side. Some of the states, due to some state laws that have passed in this cycle of legislation, the percentage ownership once the loan is sold to the SPE varies. But we're in 40 states, and I think we have a strong national footprint to serve our customers.

Got it. And somewhat related, I know the geographic mix may have partially contributed to the elevated revenue yield. In terms of thinking about the yield going forward, just trying to get a sense for whether we should think of the Q1 performance as sustainable, whether it's impacted by geographic mix, pricing leverage, just competitive backdrop or if it was just more a reflection of some of the delinquency trends. But as we think about the balance of the year and pricing leverage, is 130% kind of a ceiling? How should we be thinking about that?

Yes, I believe that's likely at the higher end of the range. We experienced a very strong payment recovery period thanks to operational efficiencies in our operations and recoveries. Additionally, tax refunds were notably strong and accelerated significantly in March, positioning us well for the year, which we are pleased about. Also, if you recall, we conducted some testing back in 2022 and 2021, and that has finally concluded. We have exited Georgia, which was a lower-yielding state, and this has contributed to an increase in yield. We are very pleased to see this, especially considering we are facing a much higher interest cost and some headwinds, and we haven't increased prices yet. Therefore, this represents a positive movement towards the yield levels we experienced during the 2019-2021 period.

Got it. Got it. And then maybe lastly for Pam. When we eliminate the roughly $6 million of severance in card one-time expenses, just trying to get a sense for if that gives us a good sort of quarterly run rate of OpEx for the balance of the year. Or is it seasonally low because it's tax refund season and we should increase that number going forward?

From an OpEx perspective, it's a run rate. It may even decrease a little bit moving forward based on our...

And we will take our next question from Mike Grondahl with Northland Securities.

This is Owen on for Mike this morning. Congrats on the quarter. And what drove outperformance? What's going right? And what maybe is still a headache?

Yes, it's clear that we had exceptionally strong payments come in. We reduced our acquisition costs year-over-year by $10, which is beneficial. While still increasing revenue by 5%, our charge-offs as a percentage of revenue decreased. All metrics indicate improvement compared to last year, which is our goal each year: to make consistent progress. We believe this positions us well for the current year. We're focused on some positive credit trends we've started to notice, and the credit landscape has really stabilized. Additionally, we are having interesting discussions about partnerships and growth strategies that could lead to more opportunities. We anticipate being able to originate more loans with confidence that customers will repay us as expected. In the first quarter, some perceived us as overly cautious or even negative during our earnings call, but we have been validated. The Fed is not decreasing rates, and inflation remains stubbornly above 3%, which disproportionately affects our customers. Regarding challenges, high interest costs and persistent inflation are factors we cannot control. However, we are effectively managing what we can and remain optimistic that inflation will decrease and interest rates will eventually provide some relief.

Got it. And then in terms of the competitive environment, are there any updates here on a quarter-over-quarter basis? Or is that pretty similar?

Yes, I have mentioned before that we are experiencing tightening at a higher level, which is allowing some additional segment 1 customers to enter the funnel. However, this does not compensate for the tightening we have implemented at the back end, where we are still originating within a narrow range of segments. Last year, we conducted some testing that yielded positive results, particularly with our refined cash flow underwriting model. We are looking forward to a time when we can start originating for bank partners in segments again, similar to 2019 when 40% of our new originations came from segment 4. For now, we feel confident; our acquisition costs are where we want them, we continue to grow, and we are finding operational leverage each quarter. Overall, we are pleased with our current position.

Great. And congrats on the quarter.

Thank you.

And we will take our next question from Dave Storms with Stonegate.

Just hoping we could start with maybe a little peek behind the curtain on the process for declaring that special dividend. Is that something you would revisit once a year, once a quarter, when cash levels get to a certain point? Just any clarity around that would be very helpful.

Yes, there's no set formula, but we would definitely consider it again. It's become clear to us that, as we hold receivables to manage interest costs, we have a significant amount of unrestricted cash. We're realizing that we're not getting proper value for that cash. We expected to see an increase in cash due to recoveries in the payment season, and we felt it was important to reward our supportive shareholders with our first special dividend. This is not a formulaic or dramatic decision, but we will take it into account based on our cash position and needs.

Very helpful. And then just sticking with the kind of uses of cash. You've mentioned before, you are always looking for adjacent services business. You'd love to grow vertically, if possible. Assuming the value was correct, what kind of adjacent services businesses would you be targeting? What would you be looking for in an M&A deal?

Yes. First, we focus on identifying large addressable markets where there are supply-demand imbalances not covered by banks. Our initial areas of interest are small business lending and consumer financing for goods, which are highly fragmented markets lacking institutional capital. We believe that with our brand, social impact, and commitment to credit access, we can capture market share, especially as this sector increasingly goes online and digitizes. We are exploring different options carefully and ensuring that our first acquisition aligns with our goals and benefits the business in the long term. Now that our business is stable, I am shifting my attention to regaining growth and establishing partnerships. Last year, we successfully expanded our geographic reach, which positions us well for this year. I am confident that OppFi's brand can effectively provide a range of digital alternative financial services where a significant supply-demand imbalance exists, and banks may not meet these needs. That's the essential goal and strategic vision for OppFi.

Very helpful. And then one more for me, if I could. When you think about bringing in new customers versus existing customers, what's the initiation and the underwriting process? How does that differ? And then, I guess, kind of with that, you mentioned your acquisition cost was down about $10 year-over-year. How much of that could be attributed to operational efficiencies? And how much of that could be attributed to maybe the relative cheapness of underwriting an already existing customer?

Yes, there are a couple of questions there that I want to address. We have optimized the funnel and become more detailed in our approach. We have also scaled back on direct mail. We did not drop mail in the first quarter, as we want to ensure that the unit economics are solid before we test it again. Regarding the funnel, our operational metrics related to conversion and qualified rates have improved, along with other key metrics. Overall, we believe this positions us well for the year ahead.

And we will take our next question from Ross Davisson with Banneton Capital.

Todd, I wanted to follow up on the macroeconomic situation and your growth perspectives. As you mentioned, inflation continues to be persistent, which you anticipated. Considering segment 4 and more broadly, do you believe that inflation needs to decrease for growth to continue? Or do you think things are stable enough that your core consumers will recover in the short term, even if inflation doesn't decline further?

Yes, it's not influenced by inflation. Our analysis is based on our credit performance data, which we monitor daily and weekly. We have robust data backed by many years of history, giving us confidence when we observe stable trends over time that we can begin to expand. However, even in the absence of that expansion, there are plenty of opportunities available. I noted that banks are tightening their standards, and we are also looking into significant partnerships. Therefore, there is ample opportunity for growth within our current segments and at compatible price points with our unit economics. Additionally, the geographical expansion I previously mentioned contributes to this. We believe that even without expansion, we can achieve growth and maintain a positive outlook for this year. If credit trends align more closely with what we saw in 2019, that would add to our current plans for the year.

It appears that we have no further questions at this time. I will now turn the program back over to CEO, Todd Schwartz, for closing remarks.

Thank you, everyone, for joining us today on the call. We look forward to speaking with everyone in August for the Q2 results. Have a great day.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.