OppFi Inc. Q4 FY2024 Earnings Call

Good morning, and welcome to OppFi's Fourth Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode. As a reminder, this conference call is being recorded. After management's presentation, there will be a question-and-answer session. For those listening by dial-in, you will be prompted to enter the queue after the prepared remarks. I’m pleased to introduce your host, Mike Gallentine, Head of Investor Relations. You may begin.

Thank you, and good morning, and welcome to OppFi's fourth quarter 2024 earnings call. Today, our Executive Chairman and CEO, Todd Schwartz; and CFO, Pam Johnson will present our financial results before taking questions. You can access our earnings presentation on our website at investors.oppfi.com. During this call, OppFi may discuss certain forward-looking information. The company's filings with the SEC describe essential factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements. Please refer to Slide 2 of the earnings presentation for our disclaimer statements covering forward-looking statements and references to information about non-GAAP financial measures, which will be discussed throughout today's call. Reconciliation of those measures to GAAP measures can be found in the appendix to our earnings presentation. With that, I'd like to turn the call over to Todd.

Thanks, Mike, and good morning, everyone. Thank you for joining us today. When I returned as CEO, we laid out a three-year plan to grow our 2021 operational and financial capabilities, and I'm happy to report we've exceeded those expectations. Our motto of operational excellence, coupled with continuous improvement is taking effect in all facets of the business. OppFi made tremendous progress in 2024, propelling our company to deliver strong financial results in the fourth quarter and the fiscal year 2024, including record Q4 and annual total revenue. We expect these strong results to continue in 2025 and our yearly guidance anticipates up to a double-digit percentage increase in revenue and adjusted EPS, driven by strong growth and continued operating efficiency. In addition, due to the solid performance so far in Q1, we are increasing our expectations for the Q1 2025 adjusted net income we shared during our last call by more than two times. Pam will provide a detailed review of our fourth quarter financials and guidance for 2025. Before she does, I'd like to highlight a few company updates for the fourth quarter of 2024, the full year of 2024, and the year ahead 2025. OppLoans remains one of the highest rated and most transparent loan platforms in our space. Our product and tech team's continued innovation and use of AI tools led to a record auto approval percentage for our company. This number improved to almost 80% in Q4 2024 compared to 73% in Q4 2023, which improved funnel metrics, propelling our net revenue up 23% year-over-year. We expect this to continue to improve in 2025, building on our operational efficiency for future growth. The continuous refinement of our machine learning model helped improve the credit evaluation process and helped identify and approve applicants with higher credit quality. As you may recall, OppFi launched Model 6 in 2024, which better identifies the risks of long-term charge-offs versus earlier versions that were more focused on upfront shorter-term repayment status. It also assists in targeting better quality borrowers at the top of the funnel. The model also enhances risk separation and allows for seasonal segmentation and modeling throughout the year. In the fourth quarter of 2024, OppFi's net charge-off rates improved 10% as a percentage of revenue compared to the prior year. The model gives us the confidence to grow and weather different periods of economic volatility and it bodes well for our future. OppFi sees a favorable environment for growth in '25. Our strong balance sheet, favorable macroeconomic tailwinds, strong credit trends and scalable growth levers position us well. We believe the potential of entering into additional partnerships, continued funnel improvements and direct response marketing initiatives will enable us to attract new high-quality customers who exhibit strong unit economics. As you may recall, Bitty was our first outside investment in the small business financing space. Similar to our consumer business, we continue to see a large supply-demand imbalance in the working capital space for small businesses. Bitty has experienced significant growth and we believe it will continue to provide profitability and cash flow to OppFi in 2025. We are excited to continue working with Bitty as they seek to disrupt the space with best-in-class products, modeling, and servicing. OppFi's balance sheet remains strong. Earlier this week, we used excess cash to extinguish our corporate debt. Last month, we extended our asset-based facility with Blue Owl, providing additional capacity. This is a testament to our financial strength and continued growth opportunities. Our corporate development team continues to look for complementary products where OppFi's best-in-class platform and technology can deliver exceptional value to consumers and businesses. OppFi will look for the highest and best uses of its capital to add accretive acquisitions and investments, invest in high ROI initiatives and reward shareholders. OppFi is building a leading mission-driven tech platform with a suite of best-in-class digital financial service products that addresses large supply-demand imbalances and credit access for consumers and businesses. Over the last three years, we have taken considerable steps to position OppFi as a leader in our space and fulfill our vision and strategic plan. Pam will now review our fourth quarter and full year results in detail and share our increased guidance for 2025. With that, I'll turn the call over to Pam.

Thanks, Todd, and good morning, everyone. Looking at the fourth quarter of 2024, we are pleased to report that the results reflect continued strong demand for loans, good credit performance and disciplined cost management. For this discussion, all results are for the fourth quarter of 2024 compared with the fourth quarter of 2023. Total revenue increased 2.1% to $135.7 million, supported by an impressive 320 basis point improvement in the average yield to 130%. Net originations grew 11.3% to $213.7 million, with retained net originations rising 6% to $192.5 million as origination growth outpaced the percentage of loans retained by our bank partners. Our strategic focus on growing our customer base through new targeted credit and marketing initiatives that exhibit economically attractive profit characteristics continued to drive results. New customer originations increased by 8.8%, while displaying improved credit risks as shown by the increased yield and lower charge-offs. This strategy contributed to a substantial improvement in credit quality with the annualized net charge-off rate as a percentage of average receivables decreasing by 430 basis points to 54.5% and improving by 450 basis points to 41.9% as a percentage of total revenue. The revenue growth coupled with the improved credit quality that Todd spoke about earlier, driving the higher yield and improved charge-off rate, drove the significant 22.9% increase in net revenue to $80.8 million. Cost discipline also played a key role in strong performance. Total expenses before interest expense declined to $45.1 million or 33.2% of total revenue, down from 33.8%. Continued improvements to our automated loan approvals contributed to effective cost control. For the fourth quarter, 79.5% of loans were approved in seconds with no human intervention, up 630 basis points from the fourth quarter of 2023. Interest expense improved to 8.1% of total revenue, down from 9.1% last year, driven by the paydown of our higher interest corporate debt and a reduction in rates. As a result, adjusted net income more than doubled to $20.3 million from $8.4 million, while adjusted earnings per share grew to $0.23 from $0.10 in the fourth quarter of last year. We maintained a strong balance sheet, ending the quarter with $88.3 million in cash, cash equivalents and restricted cash alongside $318.8 million in total debt and $234.2 million in total stockholders' equity. OppFi also paid down another $10 million on its corporate debt in the fourth quarter of 2024, and reduced it by another $20 million in the first quarter of 2025, paying it off months ahead of schedule. Our total funding capacity at year end was $613 million, including $206 million in unused debt capacity, excluding our paydown of debt and expansion of our Blue Owl facility in the first quarter of 2025. Now looking at the full year results, which represent the full impact of the strategic initiatives that Todd discussed. Total revenue increased to $526 million, up 3.3% compared with 2023. This was towards the high end of our guidance of $510 million to $530 million. With the revenue growth, improved yield and charge-off rates we realized during the year, net revenues increased 17.7% to $321.5 million. GAAP net income increased significantly to $83.8 million, up from $39.5 million in 2023 and diluted EPS for the full year was $0.36 compared with a loss of $0.06 in 2023. Adjusted net income increased to $82.7 million compared with $41.5 million in 2023. This also exceeded our raised 2024 guidance of $74 million to $76 million. Adjusted EPS was $0.95 compared with $0.49 in 2023. This also significantly exceeded our raised EPS guidance of $0.85 to $0.87. The company delivered strong full year results, exceeding guidance and estimates, driven by the successful implementation of numerous strategic initiatives and operational improvements throughout the year. These efforts enhanced efficiency, expanded market opportunities and strengthened financial performance, underscoring the company's ability to execute its long-term strategy and deliver shareholder value. These strong 2024 results also provide the template for the expected 2025 growth highlighted in our full-year guidance, which I will now discuss. Given our strong 2024 operating performance, driven by our improved model, which strengthened the credit quality of originations, refinements in our seasonal modeling and the focus on operating efficiencies and cost discipline, coupled with the testing of additional marketing partners in 2025 and the healthy start to the year, we are providing the following guidance for the entire year and the first quarter of 2025. For the full year 2025, total revenue of $563 million to $594 million, an increase of 7% to 13%, adjusted net income of $95 million to $97 million, an increase of 15% to 17%. And based on an anticipated diluted weighted average share count of 90 million, adjusted earnings per share would be between $1.06 and $1.07. In 2025, we expect less seasonality in our results than in prior years, driven by the stabilization and growth of yield, predictable credit trends and the full-year impact of our operating efficiencies. Additionally, we expect a more stable interest rate environment to contribute further to our consistent performance throughout the year. We anticipate this impact will be most pronounced in the first and fourth quarters with those quarters contributing more than in prior years. We expect our momentum to continue in the first quarter, with adjusted net income expected to be $22 million to $24 million more than double our previous guidance. With that, I would now like to turn the call over to the operator for Q&A.

Thank you. We'll go first to David Scharf with Citizens. Your line is open. Please go ahead.

Great. Good morning, everybody. Thanks for taking my call and congrats on wrapping up just a tremendous turnaround year for the team over there. Hey. Listen, it's been an interesting earnings season where everyone has to ask the obligatory question about the macro outlook and kind of what assumptions on the consumer you're making. Maybe just at a high level, Todd, has anything changed in the last three months since the last call, as you think about both better versus lesser credit consumers you want to target, as well as just your overall feeling about macro uncertainty and what the impact of tariffs might be on certain employment sectors?

Thank you, David. It's challenging to draw a direct connection, but as I mentioned earlier, our Model 6 incorporates many lessons from last year when we experienced inflation. Generally, I believe concerns about inflation and tariffs are interrelated. Our Model 6, alongside the insights gained from last year, has better positioned us to navigate some fluctuations in consumer repayments. Overall, if we look at our growth trends, we're experiencing significant growth, and we believe there is substantial opportunity ahead. However, we are proceeding at a pace we are comfortable with, ensuring we maintain strong unit economics and focus on acquiring high-quality customers.

Got it, Dan. Can you provide a refresher on what has driven the increase in yields over the past year? Also, looking into 2025, what assumptions are behind the revenue guidance and does it indicate a shift in focus on the credit tiers you are pursuing?

We introduced some risk-based pricing in the second half of the year, which contributed to higher yields. Additionally, we have removed some lower-yielding customers from 2022 and 2023, which has also helped improve yields. Our better repayment rates and credit history are leading to increased yields as well. Overall, it's a combination of our receivables and the higher yields coming from our books that are driving more revenue.

Got it. And then maybe just one last one to squeeze in here. Given obviously a lot of the headlines coming out of Washington, is there any read on the pace of tax refund season for the critical Q1, sort of, pay down quarter versus prior years?

We are monitoring the situation closely as we are in the early stages. It may be too soon to compare this year with previous ones. We do not expect any delays or issues with refunds, which is our stance. Therefore, we are keeping a close eye on it and are hopeful for a normal repayment process.

Right.

Yeah.

Okay. Great. Thank you very much and congrats.

Thank you.

We'll go next to Mike Grondahl with Northland Securities. Your line is open. Please go ahead.

Hey. Thanks, guys, and congratulations on a really strong year. First question is really about 2025 looks like you guys are leaning in a little bit or we're going to see that inflection in the top line. I think you talked a little bit about macro, a little bit about a positive credit environment. But I don't know, could you just articulate again why you feel comfortable leaning into that growth in '25? And then secondly, it sounds like you're having good success on the marketing side, targeting some channels and whatnot. Could you kind of describe what's going right there and how that's working well?

Yeah. Listen, I mean, we're not prognosticators of the stock market or the macroeconomic conditions that are going on. I think, we really feel strongly about our underwriting model and the development of it over the last couple of years. Obviously, '22 was a little bit of a painful time, but with the one benefit from that is, we get a lot of the learnings coming out of that and helped us to get where we are today. We're going to always focus on quality over quantity, but we do think there's a lot of growth out there. We have really not deployed some scalable things, levers and direct response in brand marketing and other things that we think we're going to start to test into this year and think that it can yield some real growth, but with high-quality customers. We're never going to necessarily open the credit box and increase the risk of our portfolio. But we definitely think that there's opportunities out there with us, in our position, our balance sheet, and we are seeing strong credit trends right now. Obviously, there are some ominous clouds on the horizon with what's going on, but we'll watch it closely, and we have a really good read on it from getting data back pretty quickly. So, we can read and react or adjust as needed.

Got it. And then, on the marketing side, kind of where you're seeing the most success, what's working?

I believe that from a customer satisfaction perspective, the auto approvals have significantly improved our funnel metrics, enabling customers to navigate the process without any human intervention. This is something we have focused on and have seen substantial progress. From a customer experience angle, we feel confident about our ability to convert customers at a higher rate because of this. This confidence is driving our willingness to increase marketing spend in specific channels and also to activate channels we haven't utilized before, where we have previous experience but have been somewhat inactive. We see considerable growth potential there.

Got it. Cash balances are at $88 million at year-end, and it seems you paid down $20 million or $30 million in early 2025 on the debt using cash generated in 2024. It looks like you could potentially generate around $100 million or more in free cash in 2025. How do you plan to utilize that $100 million? Would you consider doing another Bitty, maybe share buybacks?

I think we have a variety of options to consider, and we're focused on utilizing our capital in the most effective way. As you mentioned, we've successfully reduced our corporate debt from when we went public in 2021, which was a high-cost debt at the corporate level. Eliminating that has given us more flexibility to pursue our goal of becoming a platform for alternative digital financial services. We're prioritizing growth and continuing to enhance our products and software, which presents high return on investment opportunities. We're also considering buybacks, dividends, and potential acquisitions similar to Bitty. Ultimately, we'll focus on options that offer the best returns for us.

Got it. Thank you.

We'll go next to Dave Storms with Stonegate. Your line is open. Please go ahead.

Good morning, and congrats on the really strong quarter and end to 2024. Just hoping we could start with one of the prepared remarks was that you're expecting less seasonality in 2025. Just hoping you could go a little further into what some of the drivers of that may be smoothed earnings profile are?

Our new model in corporate seasonal modeling that we implemented last year effectively accounts for seasonality and credit loss performance, which has contributed to smoothing out earnings so far in 2025. Additionally, the first quarter of 2024 experienced the final effects of elevated charge-offs from 2022. We believe this will result in a much smoother earnings stream this year, with strong income generation anticipated in the first and fourth quarters, more than in the previous year. Overall, this approach is helping to balance earnings throughout the year.

Understood. Very helpful. And then, while thinking about the model, how do you view like the upper bound of automation? Are you going to run into maybe an end to some of the low hanging fruit where you can grow that by 500 basis points a year or will you be able to just expand into new markets and continue to push automation?

I believe we can keep making gradual improvements year after year. Achieving complete automation may be unrealistic, although advancements in AI could change that. There will always be some areas requiring human involvement. However, our objective is to enhance that metric consistently. We see significant advantages in terms of operational efficiency and better funnel metrics. Additionally, customer satisfaction is notably higher when they go through the auto approval process, leading to a positive experience. This creates a beneficial situation for us, and it's a priority we are focusing on this year.

Understood. Thank you for taking my questions and good luck in 2025.

Thank you.

Thank you, ladies and gentlemen. This does conclude today's program. Thank you for your participation. You may disconnect at any time.