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spk00: Greetings, and welcome to the OPFI second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jason Rosenthal, Vice President, Finance. Please go ahead.
spk05: Thank you, Operator. On today's call are Jared Kaplan, OPFI's Chief Executive Officer, and Shiven Shah, Chief Financial Officer. The company's second quarter 2021 earnings press release supplemental presentation in associated form 8K can be found at investors.opfi.com. During the call, the company will be discussing certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by OPFI'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 OPSI 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 SEC, including the sections entitled Risk Factors. In today's Remarks by Management, the company will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this afternoon's earnings press release. The results discussed on this call reflect Opportunity Financial LLC for the second quarter ended June 30th, 2021, achieved prior to the completion of the business combination with FG New America Acquisition Corp on July 20th, 2021. This call is being webcast live and will be available for replay for one month on our website. I would now like to turn the call over to Jared.
spk01: Thank you and good afternoon, everyone. Since this is our first call as a public company, before discussing our second quarter results, I will take a few minutes to review the OP5 story. Our multi-year mission is to facilitate financial inclusion for the 150 million everyday consumers who lack access to traditional financial options by providing the best available products and an unwavering commitment to our customers. We are working to create the digital financial services destination for the everyday consumer. This is the US median consumer. It's not a low-income consumer. Our average customer makes about 50 grand and has a bank account, but their bank has failed them at their greatest moment of need. Banks won't provide these consumers with credit due to a low traditional credit score. Perhaps their car broke down and they need to get it repaired to go to work, or maybe they must finance a healthcare deductible to receive urgent medical care. Filling the void left by larger banks, shrewd community banks have recognized the market opportunity for this vastly underserved consumer. But these smaller banks often lack the people, process, and technology to enter the market directly. That's where OP5 comes in. We power community banks by providing best-in-class outsourced marketing, underwriting, servicing, and technology to facilitate credit access for this everyday consumer. Instead of traditional credit scores, we develop proprietary scoring based on alternative data to determine an individual's ability and willingness to repay. This proprietary credit decisioning technology is about 30% more predictive than FICO. The result for the customer is a much better financing alternative than the markets of last resort. Products like payday loans, auto title loans, bank overdraft lines, tribal loans, and unregulated markets. We are now expanding our credit access platform with the goal of becoming an ecosystem for this consumer. By helping someone at their greatest moment of need, we can create tremendous gratefulness and loyalty. We believe credit access is also a catalyst to selling more to our customers, and we have recently launched new products that are directed at graduating customers back to mainstream credit. In the future, we hope to enable them to save and ultimately build wealth. This is our long-term vision to build the preeminent financial services destination for the middle income credit challenge consumer. Much like SoFi has built a platform for Henry's, the high earner, not yet rich community, we are doing the same for the everyday consumer. How are we going about building this? Our multi-year growth strategy will be a combination of re-accelerating volumes for our traditional installment business, coupled with a planned expansion of new products to lower the cost of credit access, as well as savings and investment products. In the near term, this includes our new salary cap and credit card products. Our historical bank-sponsored installment product, the OpLoan, is easy to understand. The average loan is $1,500 with a term of 11 months. It's a simple interest loan that amortizes over its life. There are no fees, no origination fees, no late fees, no prepayment penalties, and no NSSEs. We help our bank partners report payment history to the three major credit bureaus. When someone is difficulty paying, our customer advocates work with them to help find a payment plan that is more suitable. Customers receive a fair, transparent pathway to building credit. We recently launched SalaryTap, which is a natural extension of what we've accomplished to date with the Oplone product offering. This is our new payroll deductible installment loan with loan amounts starting at $2,000, 24-month terms, and interest rates of about 30%. The key product feature is securing repayment through payroll deduction, and that does two key things for us. First, it materially reduces the risk premium on each loan. Secondly, it allows Hop5 to facilitate a sub-36% APR product nationally. We began formally rolling out salary cap in Q2 and plan to distribute through both direct-to-consumer and B2B channels. While the current book is not material to our results, the early numbers are promising, and we expect to ramp the business over the next several quarters. Now, let's talk about the OpFight card. OpFight card is the first graduation product we offer to OpLoans customers, and it provides us entry into the large $21 billion non-prime credit card market. We believe the OpFi card can do to the non-prime credit card space what OpLoans has done to the payday loan space. Gain market share by utilizing alternative data underwriting to facilitate a better priced product for consumers, coupled with best-in-class mobile first digital technology and exceptional customer service. Last week, we officially launched the card to select OpLoans customers who have repaid their loans in full. Upon approval, Cardholders are instantly able to access their OpFi card from the OpFi mobile app and directly add their card to their mobile wallets. This allows cardholders to access their card information immediately to begin making purchases online, in-app, and at the point of sale. Cardholders also receive a physical card that supports all payment types. We expect a deliberate rollout through year-end before ramping originations in 2022. Now I will discuss our large total addressable market. There are 60 million people in the country that lack access to mainstream financial credit. We also know that about 115 million live paycheck to paycheck, and 150 million have less than $1,000 in savings. This savings dirt has been caused by years of flat income in the wake of material increases in the cost of health care, education, housing, and child care. Without savings, credit access is vital when the unexpected strikes. The demand for small dollar credit is theoretically best served by our traditional banking system. Large banks have the lowest cost of capital, are first in line to get repaid through deposits, can utilize transaction data to underwrite loans, and can subsidize acquisition costs through cross-sell of their depositors. However, banks are not serving this customer. About 40% of our customers have primary checking accounts at the three largest banks. This shows that the largest banks, even those that market small dollar products, are failing this customer. Furthermore, although many credit unions supposedly offer small dollar products, they are not meeting the need for subprime credit. Over 20% of our customers bank primarily at credit unions. In addition to banks and credit unions, near prime lending platforms are also clearly not serving this customer we know this from securitization data and our own proprietary data in our mission to enable the best available product we've implemented a turn up referral program which provides the opportunity for our customers to receive a lower rate product outside of OPFI's platform today we refer the business to about 20 near prime lending platforms however Even when we're trying to give the business away, less than 2% of customers find a sub-36% APR alternative. Not all products greater than 36% APR are created equal, and we have the data and customer anecdotes to show that without the products on our platform, consumers would be forced to the markets of last resort. There are several key features of our platform that have enabled our success to date. Our credit decisioning technology is highly differentiated and unique. Our massive data set includes roughly 8 billion data points. We have received over 11 million applications, facilitated over 1.8 million loans and achieved 17.5 million repayment events. We are continuously improving the platform through AI and machine learning so that we can facilitate more access while maintaining loss rates. Historically, We purchased the majority of receivables from our bank-originating partners and kept them on our balance sheet. Whether you hold the receivable or sell them to third parties, credit performance determines your success. These products have short-term durations, and coupled with our credit risk management, holding the receivables on balance sheet allows us to maximize unit economics. Importantly, as a result of our platform and approach, we have been able to set ourselves apart from other fintechs. Given that we've been GAAP net income profitable since 2015, this strong cash flow model is crucial to fund the additional build-out of our future platform. We have a highly diversified digital marketing technology stack that is designed to drive new product growth. We have purposely built a variable cost go-to-market strategy. Many digital players still rely on direct mail-to-drive acquisition. Less than 20% of our business is direct mailed. Our model has led to much more stable and predictable flow and ultimately has delivered an extremely low acquisition cost. Beyond our decision and technology and marketing strategy, our unrivaled customer satisfaction and a tremendous employee culture drive our success. We maintain exceptional customer service metrics. I always tell people, don't just believe what I say. Go online and read what our customers say on the Better Business Bureau or Google or LendingTree. They tell the story better than I ever could. The typical customer talks about being laughed out of a bank and denied multiple times before gaining credit access to our platform. A recent customer from Dumry's, Virginia told us, my experience was seamless from beginning to end. I appreciate the excellent customer service. This loan has changed my family's life and will allow us to move forward to become debt-free in 2021 and get a higher credit score. Thank you so much for trusting that I will pay you back. This is one of the many impactful stories I hear every day from our customers. And you cannot provide exceptional customer service without exceptional talent. We have built a great place to work. We have a diverse employee base that cares about our customers. And we're very proud of the work environment we have built that enables such great customer stories. In fact, Recently, we were listed on the Forbes America 2021 list of America's best startup employers and built-in 2021 best places to work in Chicago. Finally, I wanted to briefly touch on our Q2 financial highlights. During the second quarter, as the economy reopened and stimulus waned, we saw a rapid acceleration of consumer spending that drove an increase in the demand for short-term credit. We spent much of the pandemic improving our AI conversion technology, and our platform was prepared to convert this increased demand at better than historical levels. The results are strong growth sequentially, year over year, and compared to the same period in 2019. Q2 originations of 144 million grew 44% sequentially, 84% year over year, and 20% over Q2 2019. This drove our quarters ending receivables to $260 million, a 19% year-over-year growth and 29% over 2019. Receivable growth is a leading indicator of future revenue growth. Most of the Q2 growth was back in weighted as customer spent stimulus and COVID restrictions began to unwind. So the majority of that revenue should be recognized throughout the remainder of the year. Adjusted revenue for the quarter of $78 million grew 6% over Q2 2020, and 36% over Q2 2019. It's important to note that despite the strong originations rebound, we are still below what we would consider a normalized demand environment. Although the recent surge of the Delta variant on top of unemployment benefits, advanced child tax credits, and a continued moratorium on home and student loan payments are tempering consumer credit. We believe the return of normalized demand is a matter of when, not it. But the timing remains uncertain given these factors. We will, however, remain disciplined in our approach to profitable growth as stimulus programs sunset and the pandemic officially ends. Stimulus programs and increased savings rates naturally hedge our business. These factors drive better credit, and combined with our growth, we need profitability to remain strong in Q2, with $17.9 million of adjusted income up 11 times versus $1.6 million in Q2 2020. We also made some key hires in the quarter, including Neville Crawley, who joined us as president. As we enter this next phase, we are evolving our organization to support our future growth and strategic transition from a monoline lending platform to our goal of becoming the premier digital financial services destination for the everyday consumer. Neville was the former CEO of global FinTech platform Kiva. He brings more than two decades of extensive leadership in financial services, product and technology. We are tremendously proud of the financial technology platform we have built and our commitment to serving consumers excluded from the traditional banking system through fair, transparent products and an extraordinary customer experience. We are very excited to transition to a public company and strengthen our position as the financial champion for the nearly 150 million everyday consumers in the United States. We continue to innovate our array of products, technology and capabilities and look forward to introducing those to consumers in the years ahead. With that, I would now like to turn the call over to Shivan to review our financials.
spk04: Thanks, Jared, and good afternoon, everyone. As Jared highlighted in his remarks, during the second quarter, we continued to see favorable trends in credit quality and originations, which drove strong profitability, continuing the momentum from the first quarter. Prior to going into more details on our second quarter results and full year outlooks, I would like to start by walking through a couple of key financial drivers of our business model, starting with the unit economics of our installment loan product. Our flagship product, the Oplone, is a fully amortizing 11-month, $1,500 installment loan. After banks originate the product through our platform, we buy back the majority of economic interest. We earn interest on those receivables. There are no other fees. Our goal is full transparency and ensuring customers have the ability to repay which underpins our proprietary credit model. Our customer takes about two and a half loans out over the life, which on average is approximately 11 months. The average customer will have a net charge-off rate of about 38% as a percent of revenue, although we have seen significantly lower loss rates recently driven by healthier customer balance sheets as a result of the government stimulus programs. Apart from cost of credit, the other main variable cost driver is our cost of customer acquisition, which has historically been in the $200 range. About 80% of our acquisition channels, which include our third-party referral relationships, search engine optimization, customer referrals, and remarketing, are based on a variable cost per funded loan, meaning we pay a fixed amount when we fund a loan. The other two variable cost drivers are sales costs and cost of financing. About half of our sales costs are from reporting data and tools to support our bank partners' underwriting models, and the other half are related to our customer service team, which have played a key role in driving our NPS scores. Our debt financing assumes an 82% loan-to-value and 8% cost of financing, which we have driven lower by about 500 basis points over the past five years across a diversified set of lenders. This leads to an average over... $600 contribution margin over the customer life and a multiple on invested capital of over two times. Next, I wanted to turn to our operational leverage and our focus on automation. As Jared mentioned, our Bain partners now auto-approve over 50% of their originations through our platform. That's up from 0% three years ago and 26% at the end of 2020. This has driven an improvement in the conversion rate for our applications to funded loans to 24% at the end of the second quarter versus 14% at the same time in 2019. Now, I'd like to turn to our second quarter 2021 financial results. I would like to note that all comparisons to 2020 from an income statement perspective are based on a pro forma fair value adjusted view for 2020 to be able to present a like for like comparison. You will recall that on January 1st, 2021, the company transitioned to the fair value accounting method for its receivables from the incurred credit loss application method. We had a solid financial performance in the second quarter, highlighted by strong profitability, robust originations and receivables growth, and a healthy balance sheet. Second quarter revenue was $78 million, an increase of 6% from the second quarter a year ago and down 7% sequentially, ending receivables balance on an amortized basis for $260 million at the end of the second quarter, up 6% sequentially and 19% higher than the second quarter a year ago. The sequential drop in revenue was due to seasonality from the tax season as well as government stimulus, which affected customer demand in the first quarter and the beginning of the second quarter. This has impacted the beginning receivables in the second quarter and drove a 7% decline in average receivables from the first quarter to the second quarter this year as the second quarter receivables growth was back-weighted. Company originations continue to rebound during the quarter as customer demand accelerated. Total originations were $144 million, up 44% sequentially, 84% from the second quarter a year ago, and 20% from the second quarter of 2019. New customers helped drive our growth in the quarter, with new customer origination growth up 80% quarter of a quarter and 143% year over year and closer to 2019 levels, but still slightly down as demand remained only at about 75% of pre-COVID levels. Growth in new customers are especially impactful as they can drive the cross-sell of additional products in subsequent periods. Company origination growth was also driven by improved operating efficiency as the company's auto-approval rate increased from 41% in the first quarter to 51% in the second quarter. This led to a greater than 11% conversion rate of applications to funded loans for new originations, up from 8% a year ago. We are projecting ending receivables at year-end to be up over 50% from the second quarter. As a result, we expect total company revenue to increase in the third and fourth quarters of 2021 and have a growth rate of over 20% in the second half of the year versus the first half. Next, I will turn to the change in fair value line, which consists of two main components. The first is net charge-offs, and the second are changes to the portfolio's fair value. The latter is driven by the change in ending receivables over the reporting period, as well as the change in the fair value mark as a result of updates to key valuation inputs. These include the weighted average life of the portfolio, future credit loss expectations, prepayment assumptions, weighted average coupon, and the discovery. I'll discuss those items in more detail in a moment. The company's annualized net charge-off ratio as a percentage of average receivables was 28.4% for the second quarter, which represented the lowest ratio of any second quarter in the last five years. This represented an improvement from the 30.1% net charge-off ratio in the first quarter and is well below the 40.0% net charge-off ratio for the second quarter of 2020. Looking ahead, we expect net charge-off ratios to approach historical levels in the low 40% range by the fourth quarter of the year. Second, change in fair value premium increased by $8.6 million from the previous quarter, driven by a growth in ending receivables of $15.1 million and an improvement in the fair value premium from 109.3% to 110.4% as the remaining life of the portfolio increased, driven by a younger portfolio stemming from 44% sequential origination growth. In addition, the company's weighted average interest rate in its portfolio increased by 230 basis points from the previous quarter as a result of change in state mix. The discount rate of 21.6% remained in line with the prior period. Versus the second quarter of last year, change in fair value premium increased by $23.8 million, driven by a $50.8 million receivables drop in the second quarter of last year as demand was abnormally low during the early stages of the COVID-19 pandemic. Going forward, we expect the fair value mark to trend upwards as we should see tailwinds in valuation inputs, including weighted average maturity due to origination growth and discount rate from becoming a publicly traded company. To summarize, the change in fair value line item is benefiting from historically low net charge-off ratios and an increase in the fair value of the company's receivables portfolio as a result of origination and receivables growth. Turning now to expenses, Total operating expenses for the second quarter, excluding interest expense and add-backs and one-time items, were $37.5 million, or 48% of revenue, compared to $32.1 million, or 38% of revenue last year, and $25.0 million, or 34% of revenue, for the second quarter of 2020. This increase was primarily driven by an acceleration of origination in the second quarter and the corresponding impact on direct marketing and acquisition expenses. Marketing expenses increased to $11.4 million, or 15% of revenue, for the second quarter from $7.9 million, or 9% of revenue, last quarter, and from $5.2 million, or 7% of revenue, for the second quarter of 2020. As demand accelerated and a higher percentage of originations were from new customers. Percent of originations from new customers was 42% for the second quarter, up significantly from 34% last quarter and 32% from the second quarter of 2020. With the increased demand we are seeing from customers, we continue to see the mix of new originations increase and expect marketing expenses as a percentage of revenues to trend slightly above the mid-teens as a percentage of revenue. This percentage fluctuates based on origination growth relative to revenue growth, In periods such as our last one, where origination growth outpaced revenue growth, marketing expenses will be higher as a percentage of revenue and should come down when growth steadies. Customer operations expenses for the second quarter total $9.9 million, or 13% of revenue, compared to $9.6 million, or 11% of revenue last quarter, and $8.7 million, or 12% of revenue for the second quarter of 2021. Sequential growth of 2.8% and 13.6% growth versus the second quarter of 2020 were well below origination growth over those periods as the business continued driving efficiency and automation. As I mentioned earlier, the company's automatic approval rate increased to 51% for the second quarter versus 41% for the prior quarter and 19% for the second quarter of last year. This allowed us to hold customer center headcount steady sequentially and year-over-year. Looking ahead, we expect customer operations expense percentage growth to be less than half of origination percentage growth sequentially as we continue to gain scale on customer-centered costs. Technology, product, and analytics expenses for the second quarter totaled $6.5 million, or 8% of revenue, compared to $5.8 million for 7% of revenue last quarter and $4.7 million, or 6% of revenue, for the second quarter of 2020. The company continues to invest in technology resources to support enhancements to our AI-powered underwriting engine, as well as support the scaling of new products. G&A expenses, excluding one-time and ad bets for the second quarter, totaled $9.6 million, or 12% of revenue, compared to $8.7 million, or 10% of revenue last quarter, and $6.4 million, or 9% of revenue for the second quarter of 2021. The increase in G&A expenses was driven by investments in personnel and infrastructure to support the company's augmentation of internal controls, operational risk, and compliance function as the company transitioned to becoming a public entity. We expect G&A expenses as a percentage of revenues to remain consistent with the second quarter for the remainder of the year. Adjusted EBITDA was flat sequentially and increased 255% from a year ago to $32 million for the second quarter. Sequentially, lower revenues and increased expenses, primarily related to increased volumes, were offset by an improvement in the change in fair value driven by strong credit quality and origination growth. First of the second quarter of 2020, adjusted EBITDA growth was driven by higher revenue and lower change in fair value as a result of a rebound in receivables growth this year. Our adjusted EBITDA margin for the quarter was 41% compared to 38% last year and 12% for the second quarter of 2020. We expect adjusted EBITDA margin to normalize for the remainder of 2021 as net charge-offs return to pre-COVID levels, coupled with increased marketing spend in line with expected origination growth. Interest expenses, excluding debt amortizations, for the second quarter total $5.7 million or 7% of revenue compared to $4.1 million or 5% of revenue last year and $4.9 million for 7% of revenue for the second quarter of 2020. The increase in interest expense versus the previous quarter was driven by a normalization of debt levels. We recognize adjusted net income of $17.9 million for the second quarter compared to $19.3 million the previous quarter and $1.6 million for the second quarter of 2020. Adjusted net income for the first half of the year was $37.1 million. Turning now to the balance sheet. Our balance sheet continues to remain healthy driven by strong free cash flows. With cash balances growing to $121 million and a net debt to equity of less than one time. Equity grew by $78 million year to date to $177 million as a result of the $69 million one-time fair value adoption impact and $42 million of retained earnings, excluding tax distributions, partially offset by tax distributions related to the 2020 tax year of $34 million. From a funding capacity standpoint, we have a diversified capital structure and over $500 million of funding capacity, which we believe will allow us to achieve our growth projections into 2022. I now want to turn to our 2021 guidance on our finance. As we mentioned in our first quarter earnings release, the company's original outlook for 2021 did not contemplate any 2021 government stimulus. However, now that we are seeing the effects of the 2021 stimulus, we are updating our guidance accordingly. We are updating our expected 2021 adjusted net income guidance by providing a range of $62 million to $66 million with the top end of the range in line with our previous expectations. We are also updating our outlook for adjusted EBITDA to a range of $120 million to $125 million. The midpoint implies an adjusted EBITDA margin of 34%, representing an improvement of 200 basis points versus our prior guidance. Our business has naturally hedged from a credit versus growth perspective, so in periods of slower than expected growth, our credit losses have historically declined, driving higher profit margins. While demand has continued to increase substantially, as indicated by our sequential and year-over-year originations growth, we now believe the recovery timeline may be a bit extended due to the surge of the Delta variant on top of the multiple incremental government stimulus programs. After a strong second quarter and first half of July, we started to see an impact on the second half of July due to these factors. Given our disciplined approach to underwriting, which has driven stable credit losses across growth cycles, We will not chase volume at the cost of profitability. On the revenue side, we are updating our full year 2021 guidance to a range of $350 million to $360 million given these timing-related factors. This assumes ending receivables that would approach 50% growth from second quarter levels. In providing this range, we have taken into account a downside growth scenario which contemplates an adverse impact on consumer demand due to macroeconomic factors related to the COVID-19 pandemic. We see potential upside to our guidance should the realized impact of these exogenous factors be less pronounced than we have assumed. We view these events as temporary in nature and do not believe that they will affect the long-term growth trajectory of our business. We also believe that the speed bump on the return to normalized consumer spending should have a favorable impact on credit as we saw in 2020 and the first half of 2021. We continue to remain very confident in the long-term prospects of our business and the need for our products. As our second quarter turn-up program data indicated, that still less than 2% of customers who opt into our turn-up program receive a lower-cost loan. This enhances our belief that we serve as the best available alternative for the everyday consumer who cannot access the traditional banking system. To conclude, we are very excited to announce the completion of our business combination with SG New America Acquisition Corporation on July 20, 2021. We couldn't have found a better partner than the SG&A team led by Joe Moglia, Larry Swetz, and Kyle Sermonera. Upon the close of the transaction, the combined company had 84.5 million shares outstanding, excluding 25.5 million earn-out units. The company also had 15.3 million warrants outstanding with exercise prices at $11.50 and $15 per share. Please refer to the share account slide in the company's earnings presentation for more detail. With that, we would now like to turn the call over to the operator for the Q&A section of our call. Operator?
spk00: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Your first question comes from line of David Sharf with JMP Securities. Please proceed with your question.
spk06: Good afternoon. Thanks for taking my questions. Hey, Dan. Hey, Jared. I'm wondering, first off, just more of a high-level macro question. You obviously provided a lot of background behind sort of the full-year outlook and some of the exogenous factors. We're obviously wrapping up a reporting season where a lot of non-prime, sub-prime lenders have talked about the initial signs of perhaps a lot of government stimulus and so forth finally starting to wane. It's still a depressive factor on demand, but there's sort of the initial green shoots, if you will, of a return to pre-COVID demand. Can you sort of talk about, you know, within the context of some of the qualifiers you put out there, I guess, number one, if you, in fact, are seeing through, you know, August 10th, you know, any signs of, you know, Delta or otherwise, you know, sort of impacting demand or perhaps how it ended in June. And secondly, you know, a 50% increase in receivables at December 31st is still a, you know, extremely impressive growth rate, obviously, versus just June 30th. And are you willing to sort of comment on, you know, perhaps how much that impressive figure may be discounted in your mind or, you know, just by, you know, what sounds like being a little more cautious in some of these external factors? Just kind of reconcile once again, I think, you know, some of the narratives out there that, hey, maybe there's light at the end of the tunnel of all the government stimulus and all of the depressive factors versus, you which sounds like maybe a little more caution on your front.
spk01: Yeah, happy to address it. I think at the beginning of the year through 2Q, without some of the more recent data points, specifically as it relates to the surge in some of the consumer behavior related to it, and some of the decisions by the government to extend these stimulus programs, right? I mean, just the other day, The government talked about extending the moratorium on student loan payments, the moratorium on rental payments. And so we're definitely not at a level that we would consider normalized consumer spending, normalized demand for credit. Despite that, the business is going to grow nicely. And we hope here in the near future we get back to what we consider a normalized environment. But I think we're trying to be thoughtful as it relates to guidance versus where we are today. Even a month ago, we probably would have talked about it a bit differently with some of these new facts, and we are evaluating it on a day-to-day basis and trying to be thoughtful about how we think about the future numbers. But to your point, the growth is still going to be strong. I think we've certainly improved the platform from a conversion perspective quite a bit compared to pre-pandemic periods, so that helps a lot. And there's certainly upside if some of these factors end up reversing more quickly than we have a perfect crystal ball into, right? There's just a lot of uncertainty as it relates to this surge, how quickly it ends, and what that means for people getting out and about. Shiv, you got any other additional color on that?
spk03: Yeah, no, I agree. I think, you know, in terms of the guidance we provided, you know, we wanted to take a pragmatic and a cautious approach. You know, kind of we saw demand accelerate through the second quarter. obviously 44% sequential growth. July was also a positive year-over-year performance. Our receivables were up over 20%. So the growth is there, but, yeah, the demand is not at pre-COVID level. So we do see upside to what we provided, and we wanted to be transparent and provide guidance that we think that, you know, is in a range even in a downside situation.
spk06: Got it. No, no, that's very helpful. Obviously, you know, caution is warranted. It's incredible how Everything we're seeing is remarkably different than it was just two, three weeks ago in terms of, obviously, the latest surge. Hey, maybe just one follow-up. You know, the impressive increase in auto approval rates, I don't know if this is a question that you're able to answer if it's quantifiable, but is that, you know, would you characterize that increase as somewhat of a function of the benign credit environment we're in, or is it completely... sort of related to just the AI algorithms becoming more and more perfected? Because trying to obviously ultimately get a sense for how high that number could go and what the implications are for margins.
spk01: Completely separate. We fully believe you're going to be back at normalized credit as soon as you're back at normalized demand. So we wouldn't do anything short term to increase the approval rates in that type of return to normalcy. I mean, we just have been ultra-focused over the last couple quarters to continue to use our data and our technology platform and our data science team and our product team to approve automatically where we're confident and ultimately the banks are confident that the credit is going to be there. And it's a bunch of dials. You could think about a bunch of dials over time. It's incredibly complex, but over time with more data, we are able to get more confidence to do that. And ultimately, you gotta do business the way that the customer wants to do business. And certainly we have seen a greater desire in customers going straight through. And so it's a very important part of the business to continue to improve over time. You'll never get to 100%, but they're still upside from here through year end to continue to improve that auto approval rate.
spk06: Got it. And I apologize if I can squeeze just one more in. Are you able to maybe quantify for us whether or not the guidance for year end balances, just how material the contribution might be from salary tap and card?
spk03: Yeah, so salary tap and credit card have both been launched. We think that the overall impact on receivables this year will be about less than 10% of the overall portfolio. We want to make sure we prove out the unit economics of those products, like we did with the installment product. And then we plan to scale those business pretty significantly in 2022 and beyond.
spk06: Got it. Great. Thanks very much, guys.
spk00: Thank you. Your next question comes from the line of Mike Grundahl with Northland Securities. Please proceed with your question.
spk07: Hey, guys. Thanks a lot, and good evening. Can you repeat what you said again about July and especially the second half of July? I just want to make sure I got that.
spk03: Yeah, absolutely. So, you know, we saw July receivables up over 20% year over year, and we feel that, based on our projections, that the growth of receivables will approach 50% versus the second quarter by the end of the year.
spk07: Got it. I thought you said something else, like you started to see something late July, a little bit of a slowdown or some change. Maybe I misheard that.
spk03: Yeah, so we saw accelerating growth sequentially through the second quarter and into the first half of July. With some of these stimulus programs and increases in extensions of moratoriums, we did see a little bit of deceleration in growth in the second half of July, but that's baked in. And that's related to the COVID and the Delta variant, potentially. So we baked that into our, you know, kind of taking into account that downside potential going into the second half of the year. But that's baked into that 50% that we've alluded to earlier. Perfect. Okay.
spk07: And Jared, clearly you're working hard on salary cap and credit card. but I know you have a more expansive product journey. What's sort of next on the horizon and sort of a rough timeline for that?
spk01: Sure. Yeah, we're going through a robust, comprehensive process that is customer-focused and customer-first to understand what the best order of next products look like. There's a laundry list of potential products there, everything from mobile banking to sub-36% installment lending to point-of-sale lending to overdraft fee protection products. There's the gamut of potential products out there. For each of those, we will evaluate not only the order, but whether we build it, whether we partner for launching it, and whether we look at acquisitions. And I would hope that as we exit the year early in the next year, we've got a beacon on the order there. And then depending on the way we get into those products will determine the speed. We do have our hands full now executing two new products from the ground up, both of which are super early, but we are positive on the early indications. And I think from the story's perspective, The quicker we're able to build up this full product suite, the quicker we're able to quantifiably show that we can graduate customers from a higher-cost product back to a mainstream product, and the quicker we can show that the member base stays with us for a longer period of time because they view it as a destination rather than a one-stop shop to solve an acute problem, I think we'll be rewarded for it in the market. So there's a lot more to come there. Obviously, Neville just joined us. He's superiorly talented, tremendous background. He's helping me lead a bunch of those initiatives, and I think you'll be hearing a lot more on our future plans there in the quarters ahead.
spk07: Got it. Thank you. And, Shivan, roughly your free cash flow conversion from adjusted EBITDA, what percent should we think of that as, 50% to 60%? What's a rough guide?
spk03: Yes, I think a rough guide from adjusted EBITDA is about two-thirds would convert.
spk07: Got it. Okay. Thanks a lot.
spk06: Thanks, Mike.
spk00: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. One moment, please, while we poll for questions. Your next question comes from the line of Chris Brendler with DA Davidson. Please proceed with your question.
spk02: Hi, thanks. Thanks for your question. Congrats on the results, guys. So, on the superannuation outlook and some of the tea leaves here, it really sounds like a lot of the things you're watching are the stimulus payments and the macro impact on demand. I just wanted to just because of the amount of capital raising that's taking place in FinTech and the amount of innovation that we're seeing in the lending space in particular. Are you seeing any changes to the competitive landscape as you think about this quarter's results and the outlook, or is it still really wide open from an Op5 perspective, just given where you guys sit?
spk01: We've seen some interesting themes from the traditional banks. I mean, you've seen a number of banks go to no-fee accounts or lower-fee accounts. You've seen some of them take away overdraft. You've seen some of them notionally launch small-dollar products. We haven't seen any of that impact us competitively. We haven't seen any direct competitors come to the marketplace. The one thing we did see, which is interesting, that turn-up program, so today we quoted the percentage of customers that actually close a loan when they go through that go through that process, we did see a bit higher appetite on the glass of actually showing customers an offer. We usually are about 10% of the applicants that go through turn-ups will see a offer. That's up to mid-teens, but the close rate stayed the same. It's still less than 2%. So it appeared to us like you had some of those a bit upper in the traditional credit score funnel, try to come down market a bit, but they just can't get comfortable with this customer. So we're watching that closely. We're also, when we just mentioned to Mike, we're thinking a lot about moving upstream a bit with our installment products. We certainly have the data to do so, and we'll be focused on that in the next couple of quarters. But nothing directly competitive that would change any of our thinking as it relates to future products. future growth, all those comments are macro-related, actually all of which are just a matter of potential timing.
spk02: Okay, great. And then this charge-off rate ticked down a little bit. Obviously, the positive side of stimulus and fiscal support is that balance sheets are quite liquid. Consumers are paying back their debts. Are there any forward-looking indicators? Are you seeing any changes in the margins? on credit quality? Does it continue to get better or just start stabilizing here?
spk03: Yeah, I mean, in our guidance, we expect, you know, charge-offs to renormalize as demand comes back and consumer balance sheets approach historical levels. And then so we're guiding, you know, the net charge-off rate as a percentage of receivables to be in the mid-30s, you know, kind of for a full year, and that's baked into our guidance that we provided.
spk02: Okay, great. And then lastly, just a comment on, I know we talked about this earlier, Shivan, but just maybe some additional color around the idea of a federal rate cap and why we don't think that's highly likely at this point.
spk01: Yeah, so likelihood of a federal rate cap. So I would say, just stepping back to address regulatory in general, I think when we look at the business, we acknowledge the regulatory risk. We are incredibly focused on becoming a regulatory agnostic business, very focused on diversifying our product suite, mostly from an offensive perspective and from the ability to graduate, but also from a defensive perspective as well. We think the probability of a national rate cap is low. I'd never tell you it's 0%, but we think it's low for a number of reasons, including the current makeup of Congress. But now that we have this platform, I think it's really important that we use it to amplify the voice of the 150 million customers that would be locked out if such legislation was enacted. Rate caps don't do anything to quell demand. They're a supply constraint. And there are really productive ways to think about future regulation and legislation in the form of guardrails, in the form of the CFPB small dollar rule, We have lots of ideas. We've got ideas for legislation. And so we'd be big proponents for additional small-dollar legislation, but we think a rate cap would have a tremendous amount of unintended consequences, and we've got the data to prove it, and our customers tell the story all the time. So low probability, not zero, but we're focused on diversifying. At the same time, we're very focused on using our data and using our voice to make sure we get to the right answer for those customers in the space. Thanks, Jed. It's great. Great results.
spk03: Thanks.
spk00: Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mr. Jared Kaplan, CEO, for closing remarks.
spk01: So thank you, everyone, for joining us on our first call. I really want to thank the FG team led by Joe Moglia. They've been terrific partners through this process. The Schwartz family, our majority owners, have been terrific partners as we've built up this platform. We are on the very beginning stages of a multi-year journey to transform the way that people think about this consumer. There are many people on this call today that may not understand these products, right? They never use these products. And that's why our customers always tell the best story about what options are out there for them, why these products are so necessary. And if we do what we say we're going to do, I think we will be the players in the space that change the way you think about non-prem credit, how you help someone in a really difficult time, how you graduate them back to a mainstream product in the near term, allow them to build some savings, and ultimately allow them to generate wealth. That's our mission. That's what we're going to do. Thank you.
spk00: This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.
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