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.

Thanks, Todd, and good morning, everyone. For the first quarter, total revenue increased 5.8% year over year to $127.3 million, with a 2.4% increase in total net originations to $163.5 million, and a 350 basis point improvement in yield to 129.5%. Total retained net originations decreased 2% to $152.5 million from $155.6 million in the year-ago period. based on one of our bank partners retaining a higher percentage of loans originated in some states. Total net originations are defined as gross originations net of transferred balance on refinanced loans, while total retained net originations are defined as the portion of total net originations with respect to which OPFI ultimately purchased a receivable from bank partners or originated directly. As previously disclosed, in late 2023, Upbyte transitioned fully to the bank partnership model and therefore currently does not originate any loans directly. From a mixed perspective, 57.7% of originations were to existing customers and 42.3% were to new customers. During the quarter, along with our bank partners, we continued our prudent approach to risk as we believe loans to existing customers are generally less risky than those to new ones. On an absolute basis, New customer originations for the quarter decreased by 1.7% year over year, while existing customer originations increased by 5.7%. The annualized net charge-off rate as a percentage of average receivables increased by 20 basis points, so 62.0% for the first quarter, compared to 61.8% for the prior year quarter. However, the annualized net charge-off rate as a percentage of total revenue decreased by 110 basis points, to 47.9% compared to 49% last year. Interest expense totaled $11.4 million or 9% of total revenue compared to $11.4 million or 9.4% of total revenue in the same period a year ago. Turning to expenses, total expenses were $57.9 million or 45.5% of total revenue compared to $53.5 million or 44.4% of total revenue in the first quarter last year. Included in the total expense figure were $6.2 million and $1.4 million of one-time expenses and other add-backs in the 2024 and 2023 periods respectively. The year-over-year increase was primarily due to the exit costs related to the credit card business as well as severance and legal costs. Excluding these items, total expenses were $51.7 million or 40.6% of total revenue in the first quarter this year, down from $52.1 million or 43.3% of total revenue for the same period last year. Adjusted net income was 8.8 million compared to 3.9 million for the comparable period last year. Adjusted earnings per share was 10 cents per share compared to 5 cents in the first quarter last year. This was significantly higher than our guidance for 5 cents due to a strong tax refund season, which resulted in better than expected credit performance, including recoveries. For the three months ended March 31st, 2024, OPFI had 86.2 million weighted average diluted shares outstanding for the calculation of adjusted earnings per share. Our balance sheet remains healthy with cash, cash equivalents and restricted cash of 88.7 million, total debt of 301 million and equity of 197.3 million as of the end of the first quarter. Unrestricted cash of 47.2 million at the end of the first quarter marked a 48.4% increase since year end 2023. It provides us confidence in our optionality for capital allocation strategic decisions. In addition, we had 613.7 million in total receivable funding capacity, including undrawn debt of 224.7 million. Turning now to our outlook. For full year 2024, we reiterate guidance for total revenue of $510 million to $530 million. We continue to focus on profitable growth. To provide additional perspective on how we are thinking about the second quarter, we expect total revenue to be relatively flat year over year. Shifting back to full year guidance, based on the stronger than expected first quarter, we have increased guidance for profitability. We now expect adjusted net income of $50 million to $54 million compared to the prior range of $46 million to $49 million. Based on an anticipated diluted weighted average share count of 86.5 million, we now anticipate adjusted earnings per share between 58 cents and 62 cents, compared to the prior range of 53 cents to 57 cents. With that, I would now like to turn the call over to the operator for Q&A. Operator?

At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. We will pause for a moment to allow questions to queue. And we will take our first question from David Scharf with Citizens JMP.

Good morning and thanks for taking my questions. To start off with, Todd, you made some references to you know, not only the transition to the bank partnership model, but some specific actions in terms of your partners expanding into maybe one or more states, retaining some more loans in a certain state. Maybe it's a good time, can you take a step back and can you just kind of bring us current on how many states you're operating in through your partners, how many partners there are, and broadly speaking, whether there are any notable changes to the terms of your partnership arrangements? Thank you.

Yeah. Hey, David, good morning. We currently maintain three bank partners and, you know, the banks are the originators in the different states. So it really is up to them on the structure. On the other side, some of the states due to some state laws that have passed in this cycle of legislation, the percentage ownership once the loan is sold to the SPE varies. But we're in 40 states, and I think we have a strong national footprint to serve our customers.

Got it. And hey, somewhat related, I know the the geographic mix may have partially contributed to the elevated revenue yield. In terms of thinking about the yield going forward, just trying to get a sense for whether we should think of the Q1 performance as sustainable, whether it's impacted by geographic mix, pricing leverage, just competitive backdrop. Or if it was just more a reflection of some of the delinquency trends. But as we think about the balance of the year and pricing leverage, is 130% kind of a ceiling? How should we be thinking about that?

Yeah, I think that's probably on the higher end of the range. I mean, I think, you know, we had a really, really strong, you know, payment recovery period due to the operational efficiencies, you know, in the ops and recoveries, but also tax refund came in really strong. It was a strong and accelerated in March significantly. Sets us up well for the year. We're happy about that. I think we've also, you know, if you remember, there was some testing we did back in 22 and 21 that's finally burned off. We've exited Georgia, which was a lower yielding state. So some of that has also allowed for some increase in yield. I think that's, you know, we're very happy to see because you got to remember we're paying a much higher interest cost and there's some headwinds there. And we haven't raised price to this point. So this is really a good way to, and it's really just getting back to where we were in the 2019, 2021 era of yield. Got it, got it. And then maybe lastly for Pam,

When we eliminate the roughly $6 million of severance in card one-time expenses, just trying to get a sense for if that gives us a good sort of quarterly run rate of OPEX for the balance of the year, or is it seasonally low because it's tax refund season and we should increase that number going forward?

From an OpEx, it's a run rate.

Pardon? It may even go down a little bit going forward. Oh, okay.

Got it. Okay. Thank you very much.

Thank you. And we will take our next question from Mike Grondahl with Northland Securities.

This is Owen on for Mike this morning. Congrats on the quarter. And what drove out performance? What's going right? And what maybe is still a headache?

Yeah, I think, I mean, it's pretty clear, you know, we had really, really strong payments come in. You know, we lowered our acquisition costs year over year by $10. That's a help. We, while still increasing revenue by 5%, our charge us as percentage revenue went down. So, you know, all metrics, OpEx as a percentage of revenue went down. All metrics of the business informed year over year. And that's our goal, right? Every year is to get a little bit better and continuous improvement. And, you know, we feel it really sets us up well for this year. You know, we're really focused on, you know, we're starting to see some credit trends we like. things have really stabilized in the credit and think that, you know, obviously with some new geographies and with some, you know, nothing to report on, but, you know, some interesting conversations having on partnerships and growth strategies, there's definitely some, hopefully some pastures, greener pastures ahead where we're going to, you know, be able to originate more and, you know, have confidence that the customers are going to be you know, paying us back at the rates we think we can achieve. So I think when you look at, you know, in the first quarter, people came out and said we were, oh, we were really conservative or we almost had a little bit of a negative, you know, connotation to our earnings. It wasn't that. I think we were validated. You know, the Fed's not lowering rates. Inflation's been super sticky. They can't seem to get it below 3%. And we've always told people, like, this disproportionately affects our customers. So as far as challenges go, interest costs and sticky inflation, that would be the ones that, I mean, we can't control those. So everything we can control, you see we're addressing and performing really well. The things we can't control, we're just, you know, watching very closely and, you know, hopeful that the inflation will come down and, you know, eventually some relief on interest rates.

Got it. And then in terms of the competitive environment, are there any updates here, you know, on a quarter over quarter basis or is that pretty similar?

Yeah, I mean, I mean, listen, I said this before, like we are, we are experiencing tightening above us, you know, that's, that's allowing for, you know, some, some more segment one customers to come into the funnel. um but that doesn't offset to remind everyone that doesn't offset the tightening we've done on the back end which is you know we're still originating in a pretty pretty tight band of segments um you know i think you know we did some testing last year that was very successful some swap in swap out stuff we really really refined our cash flow underwriting model which has been very successful um So, you know, we're waiting for the day where we can, you know, in 2019, I remind everyone that was 40%, you know, of our new originations came from that segment, segment four. So we're waiting for the day where we feel comfortable and have the confidence to be able to start originating on behalf of the bank partners those segments again. But, you know, right now we feel really comfortable. Our acquisition cost is where we want it. We're still able to grow. And we're, you know, finding operational leverage every quarter. So, you know, we feel good about where we're at.

Great. Thank you, and congrats on the quarter. Thank you.

Thank you. Once again, if you would like to ask a question, please press star and 1 on your telephone keypad now. And we will take our next question from Dave Storms with StoneGate.

Morning. Appreciate you taking the questions. Just hoping we could start with maybe a little peek behind the curtain on the process for declaring that special dividend. Is that something you would revisit once a year, once a quarter, when cash levels get to a certain point? Just any clarity around that would be very helpful.

Yeah, I mean, there's no formula, but it's definitely something we would consider again. I mean, what's become apparent to us is, you know, we hold receivables to manage interest costs. Obviously, those can, you know, be put into a borrowing base. But, you know, we have a lot of, even beyond that, we have a lot of unrestricted cash. And what's become clear to us is we're not getting value for that cash properly, right? And that's something that, you know, we didn't have, you know, we knew we were going to increase that cash because of the recoveries and payment season coming. And we felt it was great to reward shareholders that have been patient and have been supportive of the stock and, you know, feel really good about the fact that we were able to execute our first special dividend. But it is something absolutely that will be You know, it's not formulaic like I mentioned or programmatic, but it is something we will consider depending on, you know, cash position and cash needs.

Very helpful. And then just sticking with kind of uses of cash, you've mentioned before, you know, you are always looking for adjacent services business. You know, you'd love to grow vertically if possible. Assuming the value is correct, what kind of adjacent services businesses would you be targeting? What would you be looking for? in an M&A deal?

Yeah, I mean, that's, you know, first we look to like, hey, where there are large addressable markets where there are supply, demand, and balances, and banks are not covering it. So, you know, the first things we've looked at are small business lending and, you know, consumer financing for goods. You know, there's different models that kind of flow and those are highly fragmented, large addressable markets where we think there's an absence of institutional capital, institutional players like OpFi. We think with our branding, social impact, and commitment to credit access, we can really get market share. And as that world continues to go online and digitize, get the benefit of it. So we're looking at different options there. We're going to be very careful. to do the right thing. And, you know, we're going to, you know, it would be our first, obviously, acquisition as a company. And it's something that, you know, we want to, you know, make sure we get right. We're not going to, we want to do something that's highly accretive to us and is going to benefit the business long term. But, you know, I think I've talked about it, but, you know, now that the business is stable, you has really started to focus on getting growth again, partnerships on that side of the house. We expanded some geography last year, which was really great and set us up well for this year. But I really think that OpFi's brand has the platform ability to really service a suite of digital alternative financial service products where there's, you know, large supply-demand imbalances and that banks are not going to, you know, really ever be there. And that's really, you know, the goal of Opify and the strategic vision.

Very helpful. And then one more for me, if I could. When you think about bringing in new customers versus existing customers, what's the initiation and the underwriting process? How does that differ? And then, I guess, kind of, With that, you mentioned your acquisition cost was down about $10 year over year. How much of that can be attributed to operational efficiencies and how much that can be attributed to maybe the relative cheapness of underwriting an already existing customer?

Yeah, there's a couple questions there.

I just want to make sure I answer them. I think, like, you know, we've optimized the funnel, right? And, you know, we've really gotten more granular in the funnel, and the cost has also gotten, you know, direct mail has been one that we've really scaled back. You know, we didn't drop mail in the first quarter. You know, really want to make sure that the unit economics of that are sound before we, you know, start to test into that again. As far as the funnel, we've also operationally, you know, on conversion, qualified rate, all the major metrics of the funnel have gotten better. And, you know, the operational improvements around that. So, you know, we feel good that it sets us up well for this year.

That's very helpful. Thank you for taking the questions and good luck in the second quarter. Thank you.

Thank you. And we will take our next question from Ross Davidson with Banneton Capital.

Hi, good morning. Thanks for taking the question. Todd, I just wanted to quickly just ask a follow up on sort of the macro and how you think about your growth. Like you said, you know, inflation remains sticky, which you guys had sort of expected. And as you think about sort of that segment four or even more just generally, do you feel like you have to see inflation come down or, you know, how do you or, you know, are things stabilizing enough that you think that your sort of core consumer will recover even if inflation doesn't further fall, at least in the short term?

Yeah, no, it's not based on inflation. It's based on our data, our credit performance data that we look at daily, weekly. We have really, really strong data that in a lot of years of history where our confidence level you know, when we see trends that are stable for some period of time, we would be comfortable, you know, starting to expand. But, you know, I think even without that expansion, there's a lot of opportunity. You know, I mentioned that the bank's tightening above us. There's also, you know, we're exploring some pretty significant partnerships. So there's a lot of, you there's a lot of room for growth just in the segments we are and at a price that we'll work with our unit economics. And then obviously the geography expansion that I mentioned before. So we feel like even without that, we can still find growth and still really be positive on the growth side this year. But obviously if we start to see that credit, you know, come in line with kind of more of the 2019 timeframe. I think, you know, that's obviously just would be an addition to anything we're planning for this year.

Okay, great. That makes sense. Thanks.

Thank you. It appears that we have no further questions at this time. I will now turn the program back over to CEO Todd Schwartz for closing remarks.

Thank you everyone for joining us today on the call. We look forward to speaking with everyone in August for the Q2 results. Have a great day.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.