OppFi Inc.

Good morning and welcome to Op5's first quarter 2024 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. For those dialing in, 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. You may begin.

Thank you, Operator. Good morning. On today's call are Todd Schwartz, Chief Executive Officer and Executive Chairman, and Pam Johnson, Chief Financial Officer. Our first quarter 2024 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 OPFI 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 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 most comparable gap measures can be found in the earnings press release issued earlier this morning. 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 morning, everyone. We are very pleased to report our first quarter 2024 results, which exceeded our earnings guidance and enabled us to raise our full year earnings outlook. When we introduced our full year guidance in March, we had limited visibility into 2024 based on the seasonality of the business. However, our profitability accelerated to end the quarter with a strong tax refund season, and we continue to see favorable credit trends in our portfolio. Pam will review our first quarter results in detail and revise guidance for full year 2024. Before she does, I will cover four primary topics. One, highlights from our first quarter of 2024. Two, progress on our operational initiatives. Three, commentary on our macroeconomic outlook. And four, discussion of our capital allocation strategy. First quarter results were driven by revenue growth and continued credit performance improvements and expense leverage. Our key highlights for the quarter compared to the prior year period are solid 5.8% total revenue growth to $127.3 million, a strong 3.5 percentage point increase in revenue yield to 129.5%, a meaningful 33.5% increase in recoveries, and a 1.1 percentage point improvement in the net charge off rate as a percentage of total revenue. to 47.9%. In addition, we continued to carefully manage expenses to realize greater operational efficiency. On a GAAP basis, total expenses as a percentage of total revenue increased 110 basis points year-over-year to 45.5%. However, when excluding one-time expenses and other add-backs such as severance costs and exiting the credit card business, This percentage decreased by 270 basis points year over year to 40.6%. This led to profitability increasing by more than 100% year over year. Net income of $10.1 million, an increase of $6.2 million from $3.9 million, and adjusted net income of $8.8 million, an increase of $4.9 million from $3.9 million. Additionally, we ended the quarter with a strong balance sheet that we believe positions us to achieve our strategic objectives. Total cash, cash equivalents, and restricted cash was $88.7 million, up 20% from year end. Of this, unrestricted cash was $47.2 million, which increased 48.4% in the first quarter sequentially. Given our confidence in maintaining a strong balance sheet and generating free cash flow, We were proud to announce the company's first ever special dividend in the amount of 12 cents per share to demonstrate our commitment to rewarding our stockholders. Now, I'll discuss our progress during the first quarter with our core operational functions. During the first quarter, we experienced strong customer payment activity driven by one, the underwriting, testing, and implementation done last year, two, tax refund season, and three, recoveries. All of these factors contributed to our improved credit performance year over year. We identified higher risk applicants to deny and stronger ones to approve that would have been denied otherwise. This trend has continued through April, the early part of Q2. Early stage delinquency trends improved compared to the same period last year, with the total first payment default rate lower by 40 basis points and the total delinquency rate decreasing by 70 basis points. In addition, recoveries of previously charged off loan balances increased 33.5% year over year. We and our bank partners are excited to launch a new credit model in the second quarter. The model incorporates additional customer cash flow and behavior inputs that are designed to more accurately evaluate the risk of the applicants. As a result, we expect future originations to carry less risk and therefore our credit performance to improve over the long term. Turning to marketing, the total cost per funded loan was down 12% compared to the same period in 2023. During the first quarter, the addressable market expanded further as bank partners entered new states. In terms of customer experience, we recently launched an enhanced chatbot feature powered by artificial intelligence capabilities that we've named OpAI. We believe this will improve the customer experience and increase operational efficiency. We also celebrated National Financial Capability Month by announcing our collaboration with Zogo to provide customers with a gamified financial literacy app to help them further improve their financial health. OpFi is a mission-driven company, and we are excited by the new social impact relationship. Our net promoter score for the quarter remains strong at 77. Now, I'll briefly discuss how we're thinking about the current macroeconomic environment. Based on recent macroeconomic data points and consumer finance surveys, we believe our previously discussed view has been validated. We believe core inflation remains sticky and interest rates are unlikely to be reduced until the fourth quarter or early 2025. According to research by United Way, 29% of American households have members who are employed but income constrained and asset light. In other words, These are households whose members work and earn more than the poverty line but struggle to pay for basic needs. Sticky inflation disproportionately affects these consumers, and the share of these households has steadily grown. In addition, recent Vantage Score data indicate lower-income U.S. consumers are struggling to make loan payments, which is causing banks to tighten their credit standards. While we believe this upmarket tightening may present selective growth opportunities for us, As more applicants may fall into the credit box for op loans, we will remain cautious on originations given overall macroeconomic uncertainty. We won't chase growth merely for growth's sake. With that said, I want to emphasize we are deeply committed to profitable growth and believe we have numerous levers to continue to create shareholder value. In this current environment, improvements in credit performance and operational efficiency have enabled us to grow earnings, generate significant free cash flow, and strengthen our balance sheet. This influenced the decision of our board of directors to declare the $0.12 per share special dividend and approve a new $20 million share repurchase program. We plan to use cash to repurchase stock when we believe our stock price is disconnected from its intrinsic value and unreflective of the long-term earnings potential of OPFI. In addition, we remain committed to pursuing opportunities for potentially accretive partnerships or acquisitions that fit with our company mission to facilitate credit access to underbanked Americans. We believe all these factors help demonstrate OPFI's unique value proposition for investors. OPFI presents the opportunity to invest in closely held founder-led family business in the public markets that is committed to both returning value to stockholders and creating new value. Part of the reason for my return as CEO two years ago was to execute my multi-year strategic vision for OPFI. Now that the core business has stabilized and our balance sheet is solid, we are working to fill some of the significant supply-demand imbalances that exist in the financial marketplace across customer types that traditional banks do not service. We believe through accretive partnerships and acquisitions, OpFi has the potential to be transformed into a platform to offer additional types of alternative digital financial products and services.