OppFi Inc. Q1 FY2025 Earnings Call

Good morning. And welcome to OppFi's First Quarter 2025 Earnings Conference Call. All participants are in a listen-only mode. As a reminder, this conference call is being recorded. Following management's presentation, a question-and-answer session will be held. 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, operator. Good morning, and welcome to OppFi's first quarter 2025 earnings call. Today, our Executive Chairman and CEO, Todd Schwartz, and CFO, Pam Johnson, will present our financial results, followed by a question-and-answer session. 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 and press release 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 and our press release. With that, I'd like to turn the call over to Todd.

Thanks, Mike, and good morning, everyone. Thank you for joining us today. After a strong finish to 2024, I am proud to report that the first quarter of 2025 was a record quarter for OppFi. The business achieved record quarterly revenue, adjusted net income, and operating margin. OppFi is now beginning to unlock its full growth potential, increasing profitability, and strengthening our balance sheet. Given our Q1 outperformance, we are increasing full year 2025 adjusted net income and adjusted EPS guidance. During the quarter, the company generated a strong 16% increase in originations and a 10% increase in revenue year-over-year. Our disciplined approach to growth and dynamic pricing led to this double-digit growth, and we anticipate this year-over-year growth will continue throughout 2025. In addition, OppFi continues to explore and test exciting new direct response initiatives and expand its marketing channel partners. As we mentioned on our Q4 2024 earnings call, we paid off our corporate debt in the first quarter of 2025. Additionally, we expanded our Blue Owl facility to accommodate increased capacity for future growth. In Q2, we also paid a special dividend of $21.7 million in total. We believe our strong balance sheet and cash position will allow us to continue to be opportunistic in determining how and when to deploy capital to reward shareholders and invest in high ROI initiatives and inorganic growth opportunities. Throughout the quarter, Model 6 continued to perform well. As a reminder, Model 6 was designed to more effectively identify the risks of long-term charge-offs compared to earlier versions that focused on upfront shorter-term repayment status. Additionally, it is designed to facilitate risk separation, enable seasonal segmentation, and support optimized targeting for new approvals throughout the year. In the first quarter of 2025, OppFi's net charge-off rate improved to 35% as a percentage of revenue, compared to 48% for the prior year. Our model gives us the confidence that we will be able to continue to grow and also weather different periods of economic volatility. OppFi continues to invest in product and technology initiatives to improve customer experience and originations in servicing. The auto approval rate improved to 79% in Q1 2025, up from 73% in Q1 2024, which in turn improved funnel metrics and propelled our net revenue up 44% year-over-year. OppLoans remains one of the highest-rated products in the industry, boasting an 80 NPS score and a CSAT score of over 90% throughout the quarter. Our investment in Bitty continued to perform well in the first quarter of 2025. The business continued to drive accretive profitability and cash flow to OppFi. We continue to see significant imbalance between supply and demand for working capital among small businesses. We are excited to be part of Bitty's growth ahead. Overall, OppFi had an extremely strong quarter financially and operationally. We expect continued strong revenue momentum and profitable growth throughout the remainder of 2025 and into 2026. OppFi is well on its way to executing its vision of becoming the leading tech-enabled digital finance platform that collaborates with banks to offer financial products and services to everyday Americans. With that, I'll turn the call over to Pam.

Thanks, Todd, and good morning, everyone. As Todd noted, we are off to a fantastic start to the year. These results build upon the improved results that OppFi has generated since 2023 and are also a result of the significant operating improvements made over that period. Notably, we expect the operating changes and investments that OppFi has made to continue generating strong results for the foreseeable future, as evidenced by our increased guidance, which I will discuss shortly. For this discussion, all results are based on the first quarter of 2025 compared to the first quarter of 2024. Driven by strong loan demand and good credit performance, total revenue increased to a record $140 million, up 10%. Net originations grew 16% to $189 million, with retained net originations increasing 11% to $169 million. The increase resulted from growth in total net originations partially offset by an increase in the percentage of loans retained by our bank partners. Contributing to this increase in originations was an increase in average loan size driven by Model 6, which identified areas where there could be an increase in loan sizes for current and past customers. Our strategy of seeking profitable growth led to a substantial improvement in the credit quality of the customer base, resulting in a 15% decrease in gross charge-offs to $59 million and a 25% increase in recoveries to $11 million. This drove a significant improvement in the annualized net charge-off rate as a percentage of total revenue, decreasing to 35% from 48%, as noted by Todd. It also improved annualized net charge-offs as a percentage of average receivables from 62% to 47%. The revenue growth, coupled with the improved credit quality discussed by Todd earlier, resulted in a higher yield and an improved charge-off rate, driving a significant 44% increase in net revenue to $91 million. The net result of these positive effects was an impressive 630 basis point improvement in the average yield to a record 136%. Our focus on cost discipline also played a key role in our strong performance. Continued improvements to the automated loan approval process contributed to effective cost control. For the first quarter, 79% of loans were approved in seconds with no human intervention, up 5.2%. The higher auto approvals, along with continued operational improvements, contributed to lower total expenses before interest expense, which declined to $38 million, an 18% decrease. As Todd indicated, during the quarter, we proactively paid down our higher interest corporate debt, which reduced interest expense to 7% of total revenue, down from 9% in the prior year. As a result of the increases in revenue and reductions in expenses, adjusted net income increased 285% to a record $34 million, up from $9 million. At the same time, adjusted earnings per share grew significantly to $0.38, from $0.10 last year. We maintained a strong balance sheet, ending the quarter with $91 million in cash, cash equivalents, and restricted cash, alongside $288 million in total debt and $238 million in total stockholders' equity. Our total funding capacity was $616 million, including $237 million in unused debt capacity. We expect our strong momentum to continue into the second quarter, driven by robust revenue growth and adjusted net income. Given our strong start to 2025 and our operating performance driven by our growth initiatives, improved credit model, and focus on operating efficiencies, we are providing the following updated guidance. For the full year 2025, we expect total revenues of $563 million to $594 million, representing a 7% to 13% increase compared to 2024. This is unchanged from our previously issued guidance. We are increasing our adjusted net income guidance to $106 million to $113 million, up from the prior guidance of $95 million to $97 million, representing a 28% to 37% increase from 2024. Based on an anticipated diluted weighted average share count of $90 million, adjusted earnings per share are expected to be between $1.18 and $1.26, up from the prior guidance of $1.06 to $1.07. With that, I would now like to turn the call over to the operator for Q&A.

And we'll take our first question from Scott Buck of Wainwright.

Guys, thanks for taking my questions. I guess the first one is on the adjusted net income beat. I'm curious, what changed from the beginning of March when you reported 4Q results and gave the guidance from where you ended up at the end of the month?

Yes, thank you. During this time of year, we typically see a slight decline in receivables during the repayment season. We also do not have information regarding repayments related to tax refunds, and there's some seasonal modeling happening in the fourth quarter, which also introduces a bit of caution due to market fluctuations. Additionally, as you may recall, we raised our guidance significantly when we reported our results. However, overall performance exceeded our expectations across the board. We benefited from operational efficiencies realized from last year, strong credit performance, and a robust repayment season. Growth was evident, and yields remained strong as well. Overall, it was a very solid March and an impressive quarter for us.

Great. I appreciate that added color, Todd. And I'm curious, on the small business side with Bitty, are you guys seeing any hesitation or desire to wait to make these kinds of investments, given kind of a higher level of macro uncertainty, or are we all systems go there as well?

Yes, I think it's a great question and definitely a priority for us. In our discussions with Craig and the Bitty team, we are actively examining the underwriting process and identifying the sectors most affected by tariffs, such as transportation and retail, along with potential solutions. The positive aspect is that Bitty's revenue-based finance product has a short duration, allowing for adjustments as needed. Currently, committing to long-term terms presents increased risks, especially given the ongoing uncertainties. However, I believe Bitty is in a strong position to continue growing and to navigate the fluctuations caused by tariffs.

Great. I'm curious about the special dividend you announced towards the end of March. This isn't the first special dividend you've issued in recent years. What’s the reasoning behind considering a more regular quarterly dividend instead of just occasional specials?

Yes, I mean, we doubled it from the prior year. So we were glad to do that and show the financial strength. I mean, we also paid down debt. So, obviously, the business is generating strong returns in cash flow and wanted to reward shareholders. But I think we're going to preserve the flexibility so that we have capital at our discretion to kind of choose from the menu of items that are out there. We're actively looking at inorganic opportunities. We're actively looking at growth opportunities. And we think there's some high ROI options out there that we're exploring and want to make sure we have the capital so that anything we do is as non-dilutive as possible to shareholders and accretive to the business.

Could you provide some details about the criteria you are considering for inorganic opportunities? Specifically, what areas you are focusing on or what types of additions you are looking for? It seems that growth is a primary concern.

Yes, I mean, we still think that there's more opportunities in the SMB space. There are different flavors and different credit bands that there's some interest. In the consumer POS space, we're doing a lot of looking there. We think that it plays really nicely with our current core offering. And there's a lot of synergies and cross-sell opportunities. So those are kind of the areas that we're focused on for now. But yes, we're continuing to explore.

And we'll take our next question from David Scharf from Citizens Capital Market.

Hi, good morning. This is Zach on for David. And congrats on the strong first quarter. I wanted to dig in a little bit on the yield and just the credit box. Obviously, the yield was a little bit above our expectations. So I wanted to see if we can kind of get a little bit more insight into just how the credit box is kind of today and what the potential is for credit loosening, particularly given macro trends.

Yes, I mean, I think we're not, we've held pretty firm on not loosening the credit box. We've been very disciplined on our growth approach. The increase in yield you're seeing is obviously just better retainment rates in the accrual and loans that are in accrual status. And then also you're seeing our risk-based pricing that we deployed last year along with Model 6, which is essentially better pricing risk for new customers on the front end and flowing through. So you're starting to see some increased yields coming from that.

Got it, understood. And then one more question just to kind of hop on the capital action side. Any kind of thought process behind potential share repurchases kind of picking back up with that?

Yes, it's definitely a consideration. We need to coordinate the timing with open windows and potentially 10b5-1 to ensure we're prepared. We are certainly looking at instances when we believe the share price is not reflecting our true value. Considering our business's current earnings potential and the improvements in our revenue metrics and operational efficiency, we believe we are undervalued. However, we also have many other appealing options available. Therefore, we continually evaluate the best use of capital for the business and where it could be most beneficial for both shareholders and the company overall.

Our next question is coming from Dave Storms of Stonegate.

Morning, thank you for taking my questions. Just wanted to start with what you're seeing as far as customer patterns. Are you seeing any pull forward of their buying patterns, borrowing activities for some of these forecasted macro events or anything like that?

Yes, no, I talked about SMB earlier. I mean, I think there's more direct impact there. I don't think we have any direct impact on our consumers as far as tariffs are related. We have not seen much change. We've seen a very stable customer base. If you actually look at the macro metrics of inflation within a four-year low, I think last week it was reported interest rates have come down from their highs, I think. Prices for major things like oil and food have come down. So, like, people are employed, right? Employment numbers were good. So right now if you take the moment in time, things are solid and stable and we're not seeing anything. Obviously, it's something we're watching extremely closely. This is also what happened in 2022. That was more of a shock inflation, but those learnings are really what developed Model 6, which we've deployed last year and it's designed to help smooth out some of the volatility and some of these macro things. But right now we're seeing mostly stability in the consumer.

Understood. Very helpful. Thank you. And then just on the cost discipline front, how many more levers do you think you have to pull here? And are there any examples you could give us?

I'm sorry, I missed the first part of the question. You said how many more levers on the growth?

Cost discipline.

On the cost front, it's deeply embedded in our culture to focus on continuous improvement and operating efficiency. We are always seeking ways to enhance efficiency. For instance, our auto approval rate improved from 73.4% to 78.6% year-over-year. This improvement is not due to a single factor but rather reflects more efficient business operations, allowing us to assist more customers without needing human intervention. We aim to incrementally improve every quarter while also finding ways to increase operational efficiency. With the advent of AI, we see significant opportunities to enhance our operations, but our goal is to do this responsibly. We are not simply aiming to replace human workers; instead, we want to improve customer experiences and satisfaction. We already lead the industry with our high customer satisfaction scores, which supports a smoother origination process and enhances our service to customers in the long run.

We'll take our final question from Mike Grondahl of Northland.

Hey guys, this is Luke on for Mike. Congrats on the great quarter. I just wanted to touch on how 2Q has been tracking so far, kind of specifically the month of April, and how your kind of outlook on the year has changed, or if at all with the sort of macro uncertainty.

Yes, I mean, I think it's consistent with my comments in the transcript that we see positive momentum for growth. We think we still have a lot of levers to unlock in our marketing channels. We're continuing to target lower-risk segments effectively. And we continue to think that we're going to be able to grow significantly this year. So we're excited and things are looking good.

Awesome. Yes. And then last one here, just what one or two things are you kind of most excited about for the remainder of the year?

I think we're executing on a larger vision, right, to be the digital financial platform of the future for alternative financial service credit products. And we're, like I said, in the last earnings call, that was phase one. We're now into the throes of phase two, where we're going to really unlock the earnings potential and growth of the business, but also be a multi-product platform for the future. And I'm excited to execute on that vision and continue to incrementally improve our models, improve our auto approval rates for our consumers, and continue to be the leader in the space.

This does conclude our question-and-answer session as well as our conference for today. You may now disconnect your lines. And everyone have a great day.