Earnings Call Transcript - OPFI Q3 2025

Operator, Operator

Good morning, and welcome to OppFi's Third Quarter 2025 Earnings Conference Call. As a reminder, this conference call is being recorded. I am pleased to introduce your host, Mike Gallentine, Head of Investor Relations. You may begin.

Mike Gallentine, Head of Investor Relations

Thank you, operator. Good morning, and welcome to OppFi's Third 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 the 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 described 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. Reconciliations of those measures to GAAP measures can be found in the appendix to our earnings presentation and press release. With that, I'd like to turn the call over to Todd.

Todd Schwartz, CEO

Thanks, Mike, and good morning, everyone. Thank you for joining us today. OppFi achieved another record quarter of revenue, profitability, originations, and ending receivables. In addition, we are happy to report that we have renewed our credit agreement with Castlelake, improving operating leverage, pricing, and capacity. Given our continued outperformance in Q3, we are raising earnings guidance for the third time this year. I will discuss growth, credit, our Loan Origination Lending Application, LOLA migration, and Bitty, our SMB investment on the call. In the quarter, we achieved a 12.5% growth in net originations and a 13.5% increase in revenue year-over-year, with almost 50% of originations coming from new customers. Auto approval rates increased to 79% year-over-year, and customers continue to be approved at a higher rate than in prior quarters with no human interaction. We continue to see increased scale in our partnerships and direct response programs. We started testing Connected TV in Q4 and believe that this could contribute to growth in 2026 and beyond. This strong top-line growth, combined with prudent expense management, led OppFi to generate a record $41 million of adjusted net income for the quarter, representing 41% year-over-year growth. Regarding credit, Model 6 continues to perform well and better segment customers across risk segments. Throughout the quarter, we saw higher charge-offs in new loan vintages. However, by tightening higher risk segments and applying our risk-based pricing approach, we maintain strong unit economics while sustaining growth. The team leveraged AI tools, customer attributes, and repayment data to refit Model 6 into what we believe is the most reliable model to date, Model 6.1. This Model 6.1 refit is designed to identify riskier borrower populations better while incrementally improving volume. The model is also designed to enhance risk pricing across segments accounting for behavioral and seasonal volatility. In conjunction with our lending partners, we plan to roll out Model 6.1 refit in Q4 and fully implement it in Q1 2026. With LOLA, OppFi is building the origination system of the future. This will give us a clean architecture that is designed to take advantage of rapidly developing AI tools in originations, servicing, and corporate operations. The product and tech teams have been working hard and have officially begun the testing phase of our migration. We plan to continue testing LOLA throughout the fourth quarter and migrate in Q1 2026. Early indicators give us confidence that LOLA will help continue to improve funnel metrics, increase automated approvals, enhance efficiency in servicing and recoveries, better integrate major systems, and deliver reduced cycle times and greater throughput for our product, tech, and risk teams. Our investment in Bitty continues to perform well. In the third quarter of 2025, Bitty generated $1.4 million in equity income for OppFi. Bitty is a great partner that we have enjoyed working with and learning from in the SMB space. The company shares OppFi's business principles and corporate values and consistently uses technology to enhance operations and the customer experience. Bitty has identified significant additional growth opportunities and continues to capitalize on the ongoing supply-demand imbalance in the small business revenue-based finance space. Overall, OppFi delivered another strong quarter, both financially and operationally, outperforming expectations and allowing us to raise guidance for the third time this year. Looking ahead, we anticipate continued double-digit revenue and adjusted net income growth throughout the remainder of 2025 and into 2026. We believe OppFi is well on its way to executing its vision of becoming the leading tech-enabled digital finance platform that partners with banks to offer essential financial products and services to everyday Americans. With that, I'll turn the call over to Pam.

Pamela Johnson, CFO

Thanks, Todd, and good morning, everyone. As Todd noted, we achieved another record quarter, generating revenues of $155 million, an impressive 14% increase over third quarter 2024. Model 6 has been a significant contributor to this growth, empowering OppFi to expand its reach and grow its business effectively. Its enhanced predictive power has enabled us to better manage our loan economics through risk-based pricing and allow our bank partners to underwrite larger loan amounts for creditworthy individuals, helping fuel robust growth in originations and receivables balances. As Todd noted, in the third quarter of 2025, we observed an increase in net charge-offs as a percentage of revenue at 35%, up from 34% in third quarter '24. It's important to note that we believe this risk is appropriately priced into these loans. This strategy also contributed to our net revenue growth, reaching a quarterly record of $105 million, a 15% increase over third quarter '24, though the yield decreased slightly to 133% from 134% in third quarter '24. Our scale and focus on cost discipline also played a pivotal role in our strong performance. Continued operational improvements contributed to notably lower total expenses before interest expense, which declined significantly to 30% of revenue in the third quarter, a substantial improvement compared to 33% in the same quarter last year. As we noted previously, earlier this year, we proactively paid down our corporate debt and successfully upsized one of our main credit facilities at more attractive interest rates. These strategic moves helped reduce interest expense to 6% of total revenue, down from 8% in the prior year. Additionally, in early October, we announced the signing of another $150 million credit facility with lower interest rates than the previous one, positioning us to realize even lower interest expenses as a percentage of revenue in the future. As a direct result of increased revenue and strategic reductions in expenses, adjusted net income surged 41% to a quarterly record of $41 million, marking a significant increase from $29 million last year. Concurrently, adjusted earnings per share grew to $0.46 from $0.33 last year. On a GAAP basis, net income increased by 137% to $76 million, reflecting our higher revenues, lower expenses, and a $32 million noncash gain related to the change in the fair value of our outstanding warrants. Because our Class A common stock price decreased during the quarter, the estimated value of the warrants issued when we went public decreased, driving this noncash income. However, as we have consistently stated, this is a noncash item and does not impact the underlying profitability of the company. Looking at the balance sheet, we continue to maintain a robust financial position, ending the quarter with $75 million in cash, cash equivalents, and restricted cash, alongside $321 million in total debt and $277 million in total stockholders' equity. Our total funding capacity stood at a strong $600 million at quarter's end, including $204 million in unused debt capacity. During the third quarter, OppFi strategically repurchased 710,000 shares of Class A common stock for $7.4 million. Additionally, since the third quarter, OppFi has repurchased 317,000 shares of Class A common stock for $3.2 million as management continues to believe the share price does not reflect our underlying cash generation or our return on capital opportunity. Given our strong operating performance, driven by growth in net originations, revenues, and adjusted net income, we are pleased to provide the following updated full-year guidance. We are once again increasing our guidance. For total revenues, we are raising the bottom of the range to $590 million while leaving the top of the range of $605 million, up from the prior guidance of $578 million to $605 million. Adjusted net income is expected to be $137 million to $142 million, up from our prior guidance of $125 million to $130 million. Based on an anticipated diluted weighted average share count of 89 million shares, adjusted earnings per share are expected to be $1.54 to $1.60, up from our prior guidance of $1.39 to $1.44 per share. With that, I would now like to turn the call over to the operator for Q&A.

Operator, Operator

We'll take our first question from David Scharf with Citizens Capital Markets.

David Scharf, Analyst

Maybe I'll start off with credit since it's been so topical this reporting season. Just curious, obviously, you spoke to a strong performance. Just curious, are there any early indicators or metrics such as, first, any defaults or the like? I mean anything that gives you a sense that households that you're catering to are becoming a little more stressed than three months ago? Or is it pretty much the loss rates you reported speak for themselves?

Todd Schwartz, CEO

Yes, that's a good question. Thank you. We are continuously gathering and analyzing various data sources, including information from customers, bank accounts, and macroeconomic trends. The overall macroeconomic situation remains largely stable. While we hear about issues like auto loan delinquencies, our main focus is on how these factors impact our customers. Our bank data does not indicate any significant concerns. However, we did notice an increase in early payment statistics this quarter, which led us to make slight adjustments. It's important to remember that in 2022, without risk-based pricing, we struggled to properly price risk in these conditions. We are confident in maintaining strong unit economics through effective pricing and solid recoveries in this environment. Our Model 6 enables us to adapt dynamically, rather than adopting a set-it-and-forget-it approach. We are committed to aligning our offerings with customer needs and pricing them appropriately. While we may face some higher charge-offs in the fourth quarter, we anticipate that charge-offs as a percentage of revenue will decrease year-over-year. This reflects the current environment where constant vigilance and ongoing adjustments to pricing based on segments and risk are essential.

David Scharf, Analyst

Got it. No, that's helpful. You kind of delved into maybe my follow-up, which was maybe to get a little better context for risk-based pricing that Model 6 is going to enable more of. I guess at a high level, should we think about more risk-based pricing as you're currently leading yields on the table? Or is it you're leaving volume on the table that there are maybe consumers that are applying but not accepting the loan? Maybe give us a little context.

Todd Schwartz, CEO

It's both. In times of volatility and changing economic conditions, it enables us to accurately price risk, which provides us with that advantage. Additionally, it allows us to offer potentially lower prices for our lowest risk customers, enabling better targeting. We utilize this for both credit and losses as well as targeting and growth. It's a flexible strategy that can be adjusted based on the environment. We assess it in real-time on a weekly basis, especially in a situation like this where there is a lot of news. We are anticipating the upcoming Fed meeting and are monitoring the unit economic perspective for potential relief on interest rates. Currently, we are in an environment where we will continue to observe credit, but we still believe we can achieve growth with strong unit economics.

David Scharf, Analyst

Got it. Great. I apologize for the interruption. I have a quick follow-up on credit, particularly in light of the auto sector, which has been prominent in the news due to various company-specific events. I've noticed that auto subprime delinquencies have increased. Since you're collecting bank data, do you monitor the percentage of household budgets that are allocated to auto payments, given that affordability continues to be a challenge for both new and used vehicles?

Todd Schwartz, CEO

Yes, our ability to assess repayment is a key component in our modeling. While it's not limited to auto loans, it does play a critical role in evaluating repayment capacity. Customers need sufficient discretionary income to cover their monthly payments, which is a primary concern in our model. Our bank data hasn't indicated substantial declines in income or balances that would raise concerns, which is why we've made adjustments where appropriate and targeted lower-risk customers in the current environment. We're monitoring the situation closely, just like everyone else. Credit conditions have worsened compared to last year, especially in new segments, but we are managing to operate effectively with our existing pricing strategy.

Operator, Operator

Our next question comes from Mike Grondahl with Northland Securities.

Mike Grondahl, Analyst

On the origination side, could you talk a little bit about direct mail and then some of your thoughts on Connected TV that you mentioned?

Todd Schwartz, CEO

Yes. Thanks, Mike. I believe direct mail is a highly scalable opportunity for us that we're just beginning to explore. We are still in the early stages. It accounted for 4.2% of our originations, and it could easily surpass double digits if we chose to push it further. We're taking a deliberate and strategic approach, ensuring that our creative elements are solid and that our modeling is accurate. It can serve as a strong top-of-funnel strategy, especially if we can maintain a consistent flow of assets. This is a priority and a focus for us.

Mike Grondahl, Analyst

And then Connected TV?

Todd Schwartz, CEO

Yes, so we're really early innings of that, but it's something that we think it's controllable, scalable and it's also reaching a lot of our customers in a targeted fashion. So we're excited about it. It also allows us to get our brand out there and our creative. So our marketing team has been working hard on that, and we're going to be testing that throughout the quarter. But we'll have more to report on that in our Q4 earnings. But we think it's promising, and it's something that can help us scale and continue to grow next year.

Mike Grondahl, Analyst

Got it. And then you've been really disciplined on OpEx. I would call OpEx sort of basically flattish to up a tad, how much can you grow originations in the book without having a step function lift in OpEx? Like you've kind of done this now for 2-plus years, if not longer, bolted on more revenue and more loans on your existing platform and then really efficient, the throughput has been great. But how long can you continue to do that?

Todd Schwartz, CEO

Yes, that’s a great question. We are very confident in our ability to scale. At this point, things are becoming increasingly incremental in terms of originations and growth. We don’t foresee any issues; that’s why I continue to emphasize LOLA in these discussions. We made significant investments in research and development and software development over the past year to enable our continued growth and to construct the lending origination system of the future. This also facilitates the integration of new AI tools that are emerging, some of which are more advanced than others and ready for immediate use. The key is having a solid tech architecture without accumulating technical debt, allowing us to leverage these tools and enhance our corporate systems. Therefore, we don’t expect to need to increase fixed overhead significantly. The growth will mainly result in variable costs, and we believe this trend can persist, especially into next year.

Mike Grondahl, Analyst

Got it. And then one last question. I think in your prepared remarks, you said double-digit revenue and adjusted net income growth for the rest of 2025, obviously, implied by your guidance. But I think you also said and into 2026, is there anything you want to say about 2026? Are you sort of striving for double-digit top line? Anything there would be helpful.

Todd Schwartz, CEO

Yes. I mean listen, it's something that is credit dependent. I'll caveat that. But I will say that we have the levers, and I'm pretty confident within our wells, we have the levers to grow in double digits and feel confident we can do that. The only thing that would prevent us from doing that is we're not going to chase growth if credit is not there, it's just not something we're going to do. You know us now, we're very disciplined. So we won't chase growth to take on higher losses, but we do have the levers if that's what you're asking for next year for double-digit growth, absolutely.

Operator, Operator

We'll take our next question from Kyle Joseph with Stephens.

Kyle Joseph, Analyst

Just given everything going on with the portfolio in terms of new customer mix, the risk-based pricing. Just wanted to get your thoughts in terms of yield trends we should expect going forward?

Todd Schwartz, CEO

Yes. We feel good that our yield's stable. It came down a little bit in Q3. That's typical this time of year, Q3, you're going to see some of your lower yields as you start to see some losses kind of come into the past dues when they drop out of accrual. We do hope that we'll see a nice rebound in Q4, and it's also been stable throughout the year, but we anticipate stability and an elevated yield coming through the book. And that is part of the risk-based pricing, right? We're better pricing risk across the segments. So we feel good about where we are with that.

Kyle Joseph, Analyst

Got it. Helpful. And then moving to the balance sheet and capital. Obviously, you guys have done a lot of work on the balance sheet year-to-date, and it's in a really good place, and then you guys are still generating strong cash flows despite portfolio growth, but just give us a sense for kind of your capital allocation priorities now that you have the balance sheet in a really good position.

Todd Schwartz, CEO

Yes, we've been buying back stock during open windows and through predetermined programs. We will continue to defend our share price, which we believe is undervalued. We feel like we aren’t active in trading. Hopefully, this time we can raise guidance again. Right now, our main focus is on defending our share price and ensuring that we are valued correctly in the marketplace. We are actively exploring M&A opportunities and considering how to use our cash for growth. Many options are available, and we are evaluating different scenarios to determine the best use of our resources.

Kyle Joseph, Analyst

Got it. I have one last question. I apologize if I missed it, but regarding the marketing spend, we saw a return to growth this year. I believe you mentioned that may be attributed to TV and direct mail. If you could explain what you're observing in terms of customer acquisition costs and how you expect marketing expenses to trend in the future and how that relates to portfolio growth. Clearly, they are interconnected.

Todd Schwartz, CEO

Yes. I mentioned earlier in Q2 that you should anticipate an increase in acquisition costs as we enter growth mode in the second half of the year. This aligns with what we've observed. We're likely seeing a rise of $20 to $30 per customer, and we are comfortable with that. Additionally, there may be further potential for customers in lower risk segments to cover the cost per sale while feeling confident about the unit economics and the additional growth it offers.

Operator, Operator

Our last question comes from Robert Lynch with Stonegate Capital Partners.

Robert Lynch, Analyst

Just have a few here. With net charge-offs as a percentage of revenue saw a slight increase in Q3, is this typical seasonality or mix? And could you get this back up to the 45% in Q4 that we saw last year? Seasonality and early indications for the holiday season coming up.

Todd Schwartz, CEO

Yes, there is a seasonal aspect to the business. You will notice the lowest charge-offs as a percentage of revenue typically occur in the second and third quarters, followed by an increase. Compared to last year, there is a slight rise. However, we expect an annualized reduction in charge-offs as a percentage of overall revenue. We took a conservative approach in 2024, possibly tightening a bit too much in the second quarter, which led to strong revenue and favorable charge-off percentages. We are confident that our current unit economics are solid, and we expect things to stabilize. Each quarter may show slight fluctuations, but we feel good about our current numbers and believe we can achieve strong returns within this range.

Robert Lynch, Analyst

Okay. Great. Really appreciate the color there. I've got maybe two more here, but you highlighted stronger recoveries from operational changes. Is the second half recovery run rate now above plan? And how confident are you that this level is sustainable into 2026?

Todd Schwartz, CEO

We have achieved a strong recovery as a percentage of gross charge-offs for two years now, and we believe it is very sustainable. It has been performing at or above plan every quarter, supported by an excellent process team and strategy. In the first year, we found it challenging to incorporate those results into our unit economics due to uncertainty about its stability, but it has proven stable. We are optimistic about continuing to maintain that recovery percentage on charge-offs. This has been a positive development for us.

Robert Lynch, Analyst

Awesome. And I've got just one more kind of unique question here. But on the recent shutdown, what impact did it have on any of the data you see coming in as well as your models with customer behavior, more for them and yourself as well? And how are you monitoring the situation and mitigating any of the effects going forward in real-time?

Todd Schwartz, CEO

Yes, we were ready for this question, as I anticipated it would come up earlier. We have implemented a hardship program for customers affected by the federal government shutdown. While we do have some exposure, it is minimal at this time due to the number of hardships typically experienced during this time of year because of weather events. This quarter, our largest hardship program offering relates to Q3 and the usual weather events. We are seeing some additional hardships stemming from the federal government shutdown, but nothing alarming that would necessitate a change in our operations or credit policies. We are monitoring the situation closely and will continue to do so as it develops.

Operator, Operator

It appears we have no further questions at this time. This does conclude today's program. Thank you for your participation, and you may disconnect at any time.