Earnings Call Transcript - OPFI Q3 2023

Operator, Operator

Good afternoon, and welcome to OppFi’s Third Quarter 2023 Earnings Conference Call. All participants are in listen-only mode. As a reminder, this conference call is being recorded. After management’s presentation, there will be a question-and-answer session. It is now my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. You may now 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 third 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 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 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’m very excited to discuss our third quarter results, which demonstrate that we are achieving the goals that we set out to accomplish. For the second consecutive quarter, our earnings significantly rebounded year-over-year while we generated solid revenue growth. Throughout this year, we have continued to make impactful adjustments to credit models with our bank partners that have resulted in improved credit performance and accelerated earnings growth. We believe the portfolio is as strong as it has ever been from a credit profile perspective, which gives me confidence in continued credit performance and earnings growth prospectively. I strongly believe our results indicate once again our ability to balance growth and risk while maintaining expense discipline. Pam will review our third quarter results in detail as well as discuss our full year guidance update, which includes raising our earnings outlook for the third time this year. Before she does, I will cover two topics: the key highlights from our third quarter financial performance and our progress on strategic business priorities for 2023. The third quarter was highlighted by substantial improvement in credit performance year-over-year, including net charge-off rate as a percentage of revenue, yield, and recoveries. The key highlights for the third quarter this year compared to last year are a strong 7.2% total revenue growth to $133.2 million, solid 7.6% growth in originations to $195.7 million, and significant rebounds in net income to $15.5 million from an approximate $1 million loss and adjusted net income to $13.8 million from an approximate $1 million profit. We achieved these results while maintaining discipline in our approach to underwriting considering the macro environment and our continued emphasis on profitability over portfolio growth. Now, I’d like to provide updates on our core strategic initiatives. For the third quarter, credit performance continued to improve as expected. The annualized net charge-off rate as a percentage of total revenue decreased 23% or 2 percentage points, falling to 42.4% from 54.8% in Q3 last year. In addition, the annualized net charge-off rate as a percentage of average receivables decreased 17% or 11 percentage points, falling to 54.5% from 65.9% in the year-ago period. Credit modeling enhancements and adjustments have created dynamic credit models that continue to improve early stage delinquency metrics as the portfolio shifts to the lowest risk segments. At the end of the third quarter year-over-year, the total first payment default decreased 9% and total delinquency rate declined 14%. As has been the trend this year, our recovery strategy performed well with a 58% increase compared to the third quarter last year. We also realized solid growth in yield, expanding to 129% compared to 120% in the year-ago period and thereby strengthening our unit level economics. This was achieved with a decrease in delinquent loans in the portfolio, lower enrollment in hardship and assistance programs, and a relative shift away from states with lower interest rates. Our product and marketing team are focused on cost-effective initiatives to attract greater lower risk origination volume, including SEO and direct mail, while also strengthening our relationships and fine-tuning our competitive strategy in the partner channel. For the third quarter, this resulted in our marketing cost per funded loan being steady year-over-year. We also continued to be vigilant on expenses. Total expenses, excluding interest expense as a percentage of total revenue increased less than 1% to 36.1% from 35.8% in Q3 last year. We have previously discussed our corporate development initiatives; while we are evaluating acquisition opportunities in adjacent customer or product categories, we will be patient to find the right fit. Concurrently, we are exploring other initiatives to create shareholder value given our strong balance sheet and the inherent options that it provides us. At its core, OppFi is a tech-enabled, mission-driven specialty finance platform that broadens the reach of community banks to extend credit access to everyday Americans. Through transparency, responsible lending, financial inclusion and an excellent customer service experience, the company supports consumers who are turned away by mainstream options to build better financial health. In summary, we expect to continue to grow profitably with origination growth, improved credit performance and prudent expense management. These dynamics combined with our strong balance sheet and excess funding capacity provide us with options next year to create additional shareholder value. We will remain disciplined with underwriting and expenses. We plan to share our detailed view of 2024 when we report Q4 results. Now I’ll turn the call over to Pam to review our Q3 financial performance and updated full year outlook.

Pam Johnson, CFO

Thanks, Todd, and good afternoon everyone. Q3 was a strong quarter as credit metrics continued to improve, resulting in back-to-back quarters of solid performance. Total revenue increased 7.2% to $133.2 million. Net originations increased 7.6% year-over-year to $195.7 million due to greater customer demand in the lowest credit risk segments of our adjustable market. New customer originations for the quarter decreased by 5% year-over-year, while existing customer originations increased by 20.2%. The annualized net charge-off rate as a percentage of average receivables improved to 54.5% compared to 65.9% for the prior quarter. As a percentage of total revenue, the annualized net charge-off rate decreased to 42.4% from 54.8% in the comparable period last year. Turning to expenses, total expenses, including interest expenses, were $60.1 million, or 45.1% of total revenue compared to $53.6 million or 43.1% of total revenue for the third quarter of 2022. The year-over-year increase was primarily the result of higher interest expense. Interest expense totaled $12.1 million or 9.1% of total revenue compared to $9.1 million or 7.3% of total revenue for the same period last year. The increase was due to higher interest rates on our credit facilities utilized to fund originations over the past year. Adjusted EBITDA totaled $33 million for the quarter, a 149.8% increase from $13.2 million for the comparable period last year. Adjusted net income was $13.8 million compared to $0.8 million for Q3 last year. Adjusted earnings per share was $0.16 compared to $0.01 for the same period last year. For the three months ended September 30, 2023, OppFi had 85.3 million weighted average diluted shares outstanding on an adjusted basis. Our balance sheet remained strong with cash, cash equivalents, and restricted cash of $66 million, total debt of $344.3 million, ending receivables of $415.9 million, and equity of $189.8 million as of quarter end. We believe we have ample liquidity available to support our current growth plans with $591 million in total capacity to fund receivables at the end of the third quarter. Turning now to our outlook. For full year 2023, we are reaffirming guidance for total revenue of $500 million to $520 million, which implies growth of 10% to 15% year-over-year. In addition, we are increasing guidance for adjusted net income to between $40 million and $42 million from the $29 million to $35 million prior range. As a result, we are also raising our outlook for adjusted earnings per share to between $0.47 and $0.49 from the $0.34 to $0.41 previous range. Before concluding our prepared remarks, I will provide a brief update on our proactive Investor Relations strategy for the remainder of the year. We are very excited by our substantial earnings turnaround this year and are confident in our long-term growth strategy. We plan to amplify our message and communicate our story to a broader audience, both institutional and retail investors, through investor conferences, non-deal road shows, and other opportunities. In addition, to further our engagement with retail investors, we recently launched our participation on the Webull Corporate Connect platform where we can directly communicate with investors to highlight corporate news and answer questions. With that, I would now like to turn the call over to the operator for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from David Scharf from JMP Securities. Please go ahead.

David Scharf, Analyst

Great, thanks. Good afternoon. Thanks for taking my questions. Todd, we’re obviously seeing the benefits of the credit tightening you implemented last year and more disciplined underwriting, certainly translating into improved unit economics. Just big picture, we’re kind of at the tail end of a reporting season where a lot of non-prime lenders have been communicating little easing of the pace of credit normalization, but still highlighting a lot of economic uncertainty. What are you seeing, if anything, that signals potentially leaning into marketing and customer acquisition a little more? I just want to make sure I kind of accurately interpret your view heading into next year in terms of the health of the consumer or whether you’re still maintaining a pretty cautious outlook.

Todd Schwartz, CEO

Yes, thanks for the question, David. It’s a good question. And it becomes a little more challenging when you look back to the three prior years, like last year being a tough one with inflation, 2021 being the stimulus of COVID and 2020 being COVID. So we look back to 2019; that’s how we’ve been. And we look at the loss curves compared to how they're performing today. There’s a lot of growth out there, but obviously we have to be very disciplined and I think we would need a sustained period where we were confident that loss curves look like 2019 and consider some macro factors as well to be able to lean into growth again. We’re also still able to grow, though. I want to point out that we’re still going to grow at 10% to 15% this year. We just have a much higher quality book of business right now. And we’ve been able to maintain acquisition cost. So, really happy to do that as well. But as you look in the economy, there are a bunch of mixed signals. You have unemployment that is still really low, but then you have things like wars going on. So we’re not prognosticators of the economy, but we look at some key factors. We also base it upon our past experience. One of the great things is that we’ve been around since 2011, 2012 and we pull on that information and our team’s experience, frankly, to make those decisions.

David Scharf, Analyst

Got it. No, completely understood. Hey, switching to the funding side, you highlighted the capacity you have right now, but can you just remind us about the fixed versus variable component of your facilities and how we ought to be thinking about sort of the near-term average borrowing rate in the next few quarters?

Todd Schwartz, CEO

Yes. I mean, it’s really – we wish we had the interest rates of last year. We have a voting rate in our facilities based on SOFR, and SOFR, as you know, has increased about 400 basis points year-over-year. It’s something that we’re definitely feeling. But I think if you look at the business, even in probably the worst interest rate environment we’ve seen in 30 years, we’re still able to generate strong returns. And that really is if you look at our OpEx, the leverage on OpEx, if you look at our loss curves and you look at our acquisition discipline, any reduction in rate we’re going to benefit from. Now, I don’t know when that’s going to happen, but I think we’re going to probably forecast it to stay somewhat maintained at the certain levels that they are today for next year. But I do think that it would be a nice thing for next year if rates were able to come down because we would get that benefit.

David Scharf, Analyst

Got it. And just for modeling purposes, is there a number? I apologize – I don’t know what your spread is offhand. Is there a good weighted average cost of borrowing we ought to factor in near-term?

Todd Schwartz, CEO

Yes. I mean, weighted average is roughly 11% is what we’re currently paying.

David Scharf, Analyst

Got it. Got it. And then one final question, just on the marketing side, as you noted, the expense per funded loan held pretty steady. I think last year, there may have been a pretty big decline. There was something about the Q2 comp last year, but overall CAC levels should we pretty much assume that steady rate per funded loan going forward, or are there any other potential improvements near-term?

Todd Schwartz, CEO

Yes. I mean, there are minor fluctuations, but no, our goal is to keep it where it’s at and we think we have the funnel capabilities and the service capabilities to be able to maintain it. So that is our goal. And I think you see some others in the industry kind of chasing a little bit on the cost per. We’re not going to do that. We’re going to be pretty disciplined on our cost.

David Scharf, Analyst

Understood. Great. Thank you very much.

Todd Schwartz, CEO

Thank you.

Mike Grondahl, Analyst

Hey, guys, congrats on the progress. Do you like your cost structure where it is today kind of going into 2024? Any thoughts on that?

Todd Schwartz, CEO

Well, I mean, I think if you look, we’ve brought it down even further from last year. I think we were at 39% as a percentage of revenue in 2022, and I think we’re closer to 35%. So we’ve made significant progress. And that’s in an environment where you’re seeing inflation on all services, vendors, goods, and frankly, in wages. So we’re really proud that we’ve been able to scale OpEx in a year where most haven’t been able to. And listen, we’re always about continuous improvement here and always looking at things that we can be more efficient. There are some potential optimizations and efficiencies that we can look to next year to offset some of the increased costs, and we’re always going to be looking at that. But we feel really good. I think if you remember, when I came back as CEO, we were at 45% as a percentage of revenue. We’re now down in the 35% range as a percentage of revenue, 35%, 36%. And we feel really good that we’ve done a lot there and continue to push on that.

Mike Grondahl, Analyst

Got it. And then secondly, you guys are generating nice capital again. It looks like you’re going to be generating cash for a while here after you tighten credit. You’ve mentioned you’re looking at acquisitions a little bit. You’ve also mentioned you’re really patient. I don’t know; could you just talk about what you’re looking for in an acquisition? And you run the core business so well. You’ve tried to do a couple of things in the past, like new credit cards or maybe the payroll product that in a way didn’t work. So how are you just thinking about an acquisition versus returning capital to shareholders? Like, what kind of hurdle does that acquisition need to get over?

Todd Schwartz, CEO

Yes. I mean we could potentially even do both. So we’re considering all options. It’s good to have that optionality. I think when we’re looking at inorganic opportunities, the market’s coming to us. There are definitely more rational sponsors out there and companies that I believe anything we do, we’re going to have the unit economics figured out, which is different than when you do an in-house startup credit card and some of that salary-related stuff, that’s just kind of stuff that had to be proven out and had to build models off of data. So anything we look at, whether it’s in the kind of credit repair small business space, some of the themes I’ve mentioned before is going to be highly accretive to our business. It’s going to have some proof of concept already in unit economics that we know if you look at OppFi can be scaled, but we’ll be deliberative and patient for the right price and right fit, and must align with our values. We’re a credit access business and brand matters. We have one of the strongest consumer facing brands. So we have to find something that aligns with that and provides real value to the customers.

Mike Grondahl, Analyst

Okay. Fair. Thanks, guys.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Todd Schwartz for any closing remarks.

Todd Schwartz, CEO

Thank you, everyone, for joining us today. We look forward to speaking with you again early next year when we report Q4 results.

Operator, Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.