Earnings Call Transcript - OPFI Q1 2023

Operator, Operator

Good afternoon and welcome to OppFi’s First Quarter 2023 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. And it is now my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. Thank you, sir. You may begin.

Shaun Smolarz, Head of Investor Relations

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 first quarter 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 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 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.

Todd Schwartz, CEO

Thanks Shaun and good afternoon everyone. I am very pleased to report continued strength in our business. In the first quarter of 2023, we achieved adjusted net income that exceeded our guidance with solid year-over-year growth. I believe this result clearly indicates our ability to rebound and deliver profitable growth. Pam will review our first quarter results in detail as well as discuss our full year guidance update. Before she does, I will cover two topics. One, the key highlights from our Q1 2023 financial performance; and two, an update on strategic business initiatives for 2023. First quarter results were driven by improvement in credit performance. As a result of credit model adjustments made in the middle of 2022, total expense leverage, and better-than-expected recoveries in payments. This enabled us to exceed our first quarter guidance for adjusted net income and achieved year-over-year growth. The key highlights for the first quarter this year compared to last year are 9% growth in ending receivables to $370.2 million, 20% growth in total revenue to $120.4 million, net income of $3.9 million, and adjusted net income of $4.4 million. We realize further gains in cost efficiency in both marketing and operations with a 9% decrease in marketing cost per new funded loan and an 8 percentage point decrease in total expenses as a percentage of revenue. Now I'd like to provide updates on our previously discussed core strategic initiatives for 2023. Credit performance continues to strengthen. As we anticipated, after credit adjustments were made last year, we experienced sequential improvements in vintage level first payment defaults beginning in Q3 and then improvements in portfolio level total delinquency rates starting in Q4. Now I'm pleased to report net charge-off rates both as a percentage of revenue and average receivables improved in Q1 sequentially. We expect net charge-off rates to end 2023 significantly lower than last year. In the first quarter, the first payment default rate decreased 20% year-over-year and 9% sequentially. This was down 30% from the peak last year. The total delinquency rate decreased 20% from the fourth quarter of 2022 and 3% year-over-year. The net charge-off rate as a percentage of total revenue decreased 18% or 11 percentage points falling to 48.9% from 59.8% in Q4 last year. We attribute part of the success to our values-based collection strategy during the first quarter; recoveries doubled to $6.4 million year-over-year. This also represented a 40% increase sequentially. Portfolio quality remains our priority. We made the strategic decision to focus on profitable growth by tightly managing credit. As a result, we are emphasizing credit performance over origination growth to achieve consistent earnings growth. We continue to diligently monitor leading indicators closely, and additional credit adjustments will be made as needed. Our marketing initiatives continue to unlock pockets of growth to drive cost-effective low-risk origination volume. We continue to focus on optimizing our diverse channel mix across SEO, direct mail, and long-standing partners. One of the other areas of focus for 2023 is continuing to improve our operational efficiency. We recently streamlined our customer support operations to maximize efficiency while improving customer experience. This is evidenced by our Net Promoter Score of 80 that we achieved in Q1. In summary, I'm very pleased with our Q1 performance that exceeded our earnings guidance and delivered year-over-year growth. Given our Q1 performance and greater confidence in the remainder of the year, we raised our guidance for full year adjusted net income and earnings per share. With that, I'll turn the call over to Pam.

Pam Johnson, CFO

Thanks, Todd, and good afternoon, everyone. Q1 was a strong quarter as our credit performance clearly continued to improve. Total revenue increased 19.5% to $120.4 million. Net originations decreased 1.9% year-over-year to $160 million. This reflects the credit adjustments made in the third quarter last year. New customer originations for the quarter decreased by 17.9% year-over-year, while existing customer originations increased by 15.9%. Our annualized net charge-off rate as a percentage of average receivables was 61.8% for the first quarter compared to 55.8% for the prior year quarter and a decrease from 71% in the fourth quarter of 2022. As a percentage of revenue, the annualized net charge-off rate for the first quarter was 48.9% compared to 47.2% in the comparable period last year and an improvement from 59.8% in the fourth quarter of 2022. We expect the net charge-off rates to continue to improve throughout the year. Turning to expenses. Total expenses for the first quarter totaled $53.5 million or 44.4% of total revenue compared to $52.9 million or 52.5% of total revenue for the first quarter of 2022. The year-over-year increase was primarily the result of higher interest expense, partially offset by lower direct marketing spend driven by decreased cost per funded loan. Interest expense for the first quarter totaled $11.4 million or 9.5% of total revenue, compared to $7.4 million or 7.4% of total revenue for the same period a year ago. The increase was due to higher interest rates on our credit facilities utilized to fund originations growth over the past year. Adjusted EBITDA totaled $20.1 million for the first quarter, a 78% increase from $11.3 million for the comparable period last year, driven by both lower net charge-offs and operating expenses. Adjusted net income was $4.4 million for the first quarter, a significant increase from approximately $650,000 for the comparable period last year. Adjusted earnings per share compared to $0.01 for the first quarter last year. This exceeded our guidance of approximately breakeven. For the three months ended March 31, 2023, OppFi had 84.4 million weighted average diluted shares outstanding. Our balance sheet remains strong with cash, cash equivalents, and restricted cash of $71.4 million, total debt of $331.6 million, gross receivables of $417.5 million, and equity of $164.1 million as of quarter end. We believe we have ample liquidity available to support our current growth plans with $546.4 million in total capacity to fund receivables at the end of the first quarter. Turning now to our outlook. For full year 2023, we affirmed guidance for total revenue of $500 million to $520 million, which implies growth of 10% to 15% year-over-year. In addition, we increased our expectations for adjusted net income to between $24 million and $30 million from the $22 million to $28 million prior range. As a result, we are also increasing our guidance for adjusted diluted earnings per share to between $0.28 and $0.35 from the $0.26 to $0.33 previous range. While we're not providing formal guidance for the second quarter, I would like to share our current view based on our pacing quarter-to-date. We continue to manage the business for profitable growth. With this strategy, we expect total revenue for the second quarter to increase mid to high-single-digits year-over-year, and we anticipate revenue growth to accelerate in the second half of the year to achieve our full year guidance. With that, I would now like to turn the call over to the operator for Q&A.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of David Scharf with JMP Securities. Please proceed with your questions.

David Scharf, Analyst

Hi, good afternoon. Thanks for taking my questions. Todd, I'm kind of curious. Just taking a step back, the trends in credit are obviously very encouraging. Overall, I think the trends seem to be very consistent with most of the other non-prime lenders we've talked to this quarter in terms of improvements post-credit tightening and moderation of origination volumes. Can you just maybe share some thoughts on how you're thinking about the macro outlook? There are so many different variables and uncertainties. Specifically, are there certain metrics or telltale signs? It's sort of uncharted territory we're in, and I'm wondering what are some of the things you would need to see to get comfortable switching back to more, not necessarily aggressive, but more growth mode.

Todd Schwartz, CEO

Yes. Thank you. That's a good question. Well, first of all, right now with the macroeconomic backdrop, the positive of all this is that there is very low unemployment. I think there's been a lot of surprise at the job growth that we've seen. So we are obviously benefiting from that. Customers are employed and paying. I think to your point, due to the backdrop, we are being conservative in the segments that we're originating on behalf of our bank partners because the way we think about this is last year, things started to look really good in the beginning of 2022, and then we saw what happened. So I think our strategy here is we're going to really focus on the dependable segments, the segments that we know we can count on for profitable growth and a consistency of returns. That's really how we've decided to play it. The good news is we've been able to find growth there, and we've been able to do it at or below the acquisition costs that we're targeting. I think that may be due to some tightening going on above us and also some less competition that we were seeing kind of in late 2021 and early 2022.

David Scharf, Analyst

Got it. That was kind of a sort of a follow-up. I was curious what observations you're seeing on the competitive front? Specifically, just here we are a couple of months after the last call, and we've seen more rate increases. Are funding constraints, are you sensing that that's becoming more of a hindrance to potential competitors that you might be seeing more kind of inbound traffic, even if you're not necessarily funding those loans? Any sense that the current rate environment has been working in your favor?

Todd Schwartz, CEO

I think so. I think what you're seeing is some of the lenders above us, typically called the peer-to-peer space, have definitely tightened just from looking at earnings transcripts and seeing that they're not able to provide, necessarily, pass on the cost to investors to get them a higher rate of return. We're getting the benefit of that. I also think just in our segment, there's been some shakeup that happened in 2022 that we need to be getting an advantage. Additionally, we were able to complete a large-scale facility last year to give us ample room to grow and have also improved our cash position by over $20 million in the quarter. So we have ample room to grow our appetite there, and we're improving the game, looking for high-quality originations that we think can provide credit access to our customers.

David Scharf, Analyst

Got it. Just switching to the numbers. Should we view the guidance change? I mean, is that predominantly kind of flowing through the first quarter or upside, or is there anything else that you would characterize as changing on the margin from the last call?

Todd Schwartz, CEO

Yes. I think that's right. I think obviously flowing through the first quarter. It's also our confidence in our operating leverage, our credit, and our ability to still find pockets of growth. So it's a little bit of both, but I think we felt comfortable revising slightly up and showing strength through the first quarter, which obviously was a big decision factor in that.

David Scharf, Analyst

Got it. Then just the last question, probably more theoretical given everything we just talked about on the macro environment. But can you provide, I guess, the math around with existing funding in place, any covenants or limitations on how much can be drawn just based on what you could draw right now in combination with your sort of 12-month forecast of loan repayments? Trying to get a sense of what sort of the maximum origination capabilities are based on planned repayments and current borrowing, not suggesting that's what you're going to do, but just to help us frame that.

Todd Schwartz, CEO

Yes. I mean, if you're asking like do we have ample capacity, ample cash, and ample room to grow at our guidance of 10% to 15%? Absolutely. I mean, we could grow faster than that. But like I said, we're being conservative, focused on operating leverage and credit performance, and we want the probability of return to be very high for our bank partners on these originations. So yes, I mean, there is room to grow further out. But in this environment, to your point earlier, I think we feel very comfortable with that range. And we believe that's something we can achieve with a high degree of probability and a high degree of return that the returns will come through.

David Scharf, Analyst

Great. That's all I have. Thank you.

Todd Schwartz, CEO

Thanks, David.

Operator, Operator

Our next questions come from the line of Mike Grondahl with Northland Securities. Please proceed with your question.