OppFi Inc.

Good afternoon, and welcome to OPFI'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. Participants who join the webcast could also submit questions at any time by either emailing investors at opfi.com or selecting Ask a Question feature on this live webcast. For those listening by dialing, you will be prompted to enter the queue after the prepared remarks. It is now my pleasure to introduce your host, Sean Smolarz, Head of Investor Relations. Thank you. You may begin.

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.opfi.com. During this call, OpFi will discuss 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 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.

Thanks, Sean, 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 and payments. This enabled us to exceed our first quarter guidance for adjusted net income and achieve 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 the 9% decrease in marketing costs per new funded loan and the eight 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 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 this 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.

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 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 is primarily the result of higher interest expense, partially offset by lower direct marketing spend driven by decreased costs 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 is 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 the approximate $650,000 for the comparable period last year. Adjusted earnings per share was $0.05 compared to $0.01 for the first quarter last year. This exceeded our guidance of approximately break even. For the three months ended March 31, 2023, OPFI 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 affirm guidance for total revenue of $500 million to $520 million, which implies growth of 10% to 15% year over year. In addition, we increase 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?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question and join us via phone, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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. If you have joined us via the webcast, please refer to the Ask a Question box on the webcast player. One moment, please, while we poll for your questions. Our first questions come from the line of David Sharp with JMP Securities. Please proceed with your questions.

Hi. Good afternoon. Thanks for taking my questions. Hey, Todd, kind of curious, just taking a step back, the – The trends in credit are obviously very encouraging. And overall, I think the kind of trends seem to be very consistent with most of the other non-prime lenders we've talked to this quarter in terms of, you know, improvements post-credit tightening and moderation of origination volumes. You know, can you just maybe share some thoughts on how you're thinking about the macro outlook, there's so many different variables and uncertainties, and specifically, you know, are there certain metrics or telltale signs, like, you know, 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, you know, more not necessarily aggressive, but more growth mode?

Yeah, thank you. That's a good question. Well, so first of all, you know, right now with the macro economic backdrop, the positive of all this is that there is very low unemployment. And I think there's been a lot of surprise of the job growth that we've seen. And so we are, you know, obviously benefiting from that. Customers are employed and paying. I think, though, 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, you know, last year, things started to look really good in the beginning of 2022, and then we saw what happened. And so I think, you know, 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 we're a consistency of returns. And so 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 cost that we're targeting. And I think that may be doing to some tightening going on above us and also some less competition that we were seeing kind of in late 21 and early 22. Got it.

And that was kind of a sort of a follow-up. I was curious what observations you're seeing on the competitive front and specifically just, you know, here we are a couple months after the last fall and, you know, 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? You know, any sense that the current rate environment's kind of been working in your favor?

I think so. I think I think what you're seeing is some of the lenders above us are typically called the peer to peer space has definitely tightened just from looking at earnings transcripts and looking at their, you know, they're not able to provide necessarily pass out the cost to investors to get them a higher rate of return. And so we're getting the benefits. of that um i also think just in our segment there's been there's been some shake up you know that's happened in 2022 that we need to be getting an advantage and also you know we 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 dollars uh in the quarter so we have ample room to grow so our appetite is there and and you know we're in the game and we're uh you know looking for high quality origination that we think can provide credit access to our customers.

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

Yeah, I think that's right. I think it's obviously flowing through the first quarter. It's also our confidence in our operating leverage and 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 regard.

Got it. And 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 to, you know, just based on kind of what you have could draw right now in combination with your, you know, sort of 12-month forecast of loan repayments. Trying to get a sense of what sort of the maximum origination capabilities are, you know, based on planned repayments and current borrowing. Not suggesting that's what you're going to do, but just to help us frame that.

Yeah, 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 that's all that, like I said, we're being conservative and focused on operating leverage and credit performance. And we want probability of return to be very high for our bank partners on these originations. And so, yes, I mean, there is room to grow further. But in this environment, to your point earlier, I think we feel very comfortable with that range and feel like that's something we can achieve with a high degree of probability and a high degree of return that the returns will come through. Great.

That's all I have. Thank you.

Thanks, David.

Thank you. Our next questions come from the line of Mike Grondahl with North End Securities. Please proceed with your questions.

Hi, guys. This is Owen on for Mike. I just have two quick ones. Were there any issues with tax season? And secondly, are there any new products to highlight or improvements to existing ones incremental to last quarter?

Can you just repeat the second question, Owen, please?

Yeah. Are there any new products to call out or highlight or any improvements to existing ones from last quarter?

Yeah. So... The first one was tax season. So it was a very successful tax season. Part of this, though, was due to the technology enhancements we made in the second half of last year to our payment settlement portal. We revamped our whole recovery strategy, as we call it, a value-based recovery strategy. This yielded significantly better results than we've ever had in the history of the company, which was very successful and led to, you know, outsized performance compared to our budget, which was great. But it was a successful tax season and behaved more normally than we've kind of seen in like the last two to three years. So that was great. As far as the product goes, We still have the core installment product with our bank partners. That is our primary product. When you say updates to the product, are you talking about just specifically about the product or something about how we're growing it?

Yeah, yeah.

Maybe just be a little bit more clear.

Yeah, more specific to the core product. Just anything incremental.

Yeah, I mean, so, I mean, I think the marketing team has done a great job of really not only working, you know, to adjust filters to find, you know, pockets of growth, but also working, maximizing our partnerships and relationships. And then really, really kind of refreshing and focusing on the things we can, you know, we control more, which is SEO, direct mail referrals. Those are all showing great momentum coming out of the first quarter and something that we're, you know, prioritizing. And also they happen to be, you know, lower-cost acquisition channels. So, you know, we're definitely putting a lot of effort and focus on that, and we feel that that can definitely differentiate us here.

Great. Thanks for answering my question.

Thank you. As a reminder, if you've joined us via the phone and would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of William Brewster with Solomar Capital Group. Please proceed with your questions.

Hey, Todd and team. First of all, I wanted to commend you for taking the reins and making some hard decisions. It's obvious through the credit book that you came in at the right time, and I appreciate what you've done. And I also want to applaud the slower growth. I am in the camp of profitable and good growth being the best growth. So thank you for that. I did want to ask, you know, it seems as though your MPS score has slipped a little. I was curious how you're thinking about that and some of the puts and takes. I know, you know, your family history is very MPS focused and curious how you're thinking about that.

Yeah. I mean, it's, you know, it's, it's, it's a, it's, it's one that obviously we track and closely monitor on a week to week basis. And, um, there is, there is some, um, that there is some movement in that number, um, you know, through the court, I think, I believe actually through most of the quarter, we were sitting at 82 to 83 and I think maybe it dipped a little. So, so it's what we kind of measure it, um, for you, you know, at the last day of the month. So, but you know, but our goal is always to keep that above 80. It's industry-leading, and I'm not aware of another financial service provider that kind of holds a score at that level. So we're very, very proud of that, something that we'll continue to focus on and continue to make sure that we keep it as high as possible. But, yeah, there is a little volatility in the number throughout the week-to-week, depending on the originations and the customers.

Okay. And one of the things that, you know, has come up, obviously, with the regional banking stuff, I just was curious, the stability of your funding relationships and how you're thinking about your bank partners. You know, if you wouldn't mind just kind of sharing your thoughts on that, that'd be awesome.

Yeah, I mean, it's top of mind and obviously something that we're, you know, focused on, you know, as far as our, you know, partners, liquidity partners, bank partners, not on the lending side, but just on the Treasury side. You know, we have no exposure to any of the banks that have, you know, gone away or are having difficulties. I think we stated that on the last quarter earnings call. So thank goodness for that. Our banking partners have not had any effects to our knowledge at all, you know, either. Obviously, we're in very close relationships with them and talk to them very, very frequently. But, you know, their balance sheets remain, you know, very strong and our partnerships remain very strong. So, you know, so far there really hasn't been any issues on that front.

Yeah, one of the interesting comments that one of your competitors had said is that the shorter duration loans are actually sort of a positive to their partners. So I was curious if you were hearing the same thing. So, you know, in a duration crisis, maybe some shorter duration loans could help.

Yeah. Yeah, no, I think in this environment, you know, with uncertainty, I think, you know, the shorter duration, that's the one thing about Opsido is we've never played with durations. I mean, there's incremental duration risk that, you know, is appropriate one month, two months out. But to, you know, change, drastically change your duration, there is risk in that. And you're not necessarily getting paid for that risk. And so, We're very careful. I mean, if you look at our business in the history of time, I think our duration, our average duration, our average life of loan on the books has been consistent and really has only incrementally changed kind of throughout the history of our business because it's not something that we, you know, really want to play with. And it's also, you know, in better times, it may not benefit you, but in tougher times or uncertain times like we are kind of today, I think it really is the appropriate and proven thing to do.

Yep. All right, cool. Well, I just want to publicly thank you for stepping in. You know, I know that you changed your life to come back to the company, and thank you for what you're doing.

Thank you. I appreciate it. I appreciate the kind words. Thank you.

Thank you. There are no further questions at this time. I'd like to hand the call back over to Todd Schwartz for any closing comments.

Well, I want to thank everyone for joining us today. We look forward to speaking with you again in August when we report our Q2 results. Have a great day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.