OppFi Inc.

Good morning, and welcome to OPSI's fourth 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 -and-answer session. For those listening by dial-in, you will be prompted to enter the queue after the prepared remarks. I am pleased to introduce your host, Mike Gallentine, Head of Investor Relations. You may begin.

Thank you and good morning, and welcome

to OPSI's fourth quarter 2024 earnings call. Today our Executive Chairman and CEO, Todd Schwartz, and CFO, Pam Johnson, will present our financial results before taking questions. You can access our earnings presentation on our website at .opfi.com. During this call, OPSI may discuss certain forward-looking information. The company's filings with the SEC describe essential factors that could cause actual results, developments, and business decisions to differ materially from forward-looking statements. Please refer to slide two of the earnings presentation for our disclaimer statements covering forward-looking statements and references to information about non-GAAP financial measures, which will be discussed throughout today's call. Reconciliations of those measures to GAAP measures can be found in the appendix to our earnings presentation. With that, I'd like to turn the call over to Todd.

Thanks Mike, and good morning everyone. Thank you for joining us today. When I returned as CEO, we laid out a three-year plan to grow our 2021 operational and financial capabilities, and I'm happy to report we've exceeded those expectations. Our motto of operational excellence coupled with continuous improvement is taking effect in all facets of the business. OPSI made tremendous progress in 2024, propelling our company to deliver strong financial results in the fourth quarter in the fiscal year 2024, including record Q4 and annual total revenue. We expect these strong results to continue in 2025, and our yearly guidance anticipates up to a double-digit percentage increase in revenue and adjusted EPS driven by strong growth and continued operating efficiency. In addition, due to the solid performance so far in Q1, we are increasing our expectations for the Q1 2025 adjusted net income we shared during our last call by more than two times. Pam will provide a detailed review of our fourth quarter financials and guidance for 2025. Before she does, I'd like to highlight a few company updates for the fourth quarter of 2024, the full year of 2024, and the year ahead 2025. Oplones remains one of the highest rated and most transparent loan platforms in our space. Our product and tech teams continued innovation and use of AI tools led to a record auto approval percentage for our company. This number improved to almost 80% in Q4 2024 compared to 73% in Q4 2023, which improved funnel metrics, propelling our net revenue up 23% year over year. We expect this to continue to improve in 2025, building on our operational efficiency for future growth. The continuous refinement of our machine learning model helped improve the credit evaluation process and help identify and approve applicants with higher credit quality. As you may recall, OPFI launched Model 6 in 2024, which better identifies the risks of long-term charge-offs versus earlier versions that were more focused on upfront, shorter-term repayment status. It also assists in targeting better quality borrowers at the top of the funnel. The model also enhances risk separation and allows for seasonal segmentation and modeling throughout the year. In the fourth quarter of 2024, OPFI's net charge-off rates improved 10% as a percentage of revenue compared to the prior year. The model gives us the confidence to grow and weather different periods of economic volatility and it bodes well for our future. OPFI sees a favorable environment for growth in 2025. Our strong balance sheet, favorable macroeconomic tailwinds, strong credit trends, and scalable growth levers position us well. We believe the potential of entering into additional partnerships, continued funnel improvements, and direct response marketing initiatives will enable us to attract new high-quality customers who exhibit strong unit economics. As you may recall, Biddy was our first outside investment in the small business financing space. Similar to our consumer business, we continue to see a large supply-demand imbalance in the working capital space for small business. Biddy has experienced significant growth and we believe it will continue to provide profitability and cash flow to OPFI in 2025. We are excited to continue working with Biddy as they seek to disrupt the space with -in-class products, modeling, and servicing. OPFI's balance sheet remains strong. Earlier this week, we used excess cash to extinguish our corporate debt. Last month, we extended our asset-based facility with Blue Owl, providing additional capacity. This is a testament to our financial strength and continued growth opportunities. Our corporate development team continues to look for complementary products where OPFI's -in-class platform and technology can deliver exceptional value to consumers and businesses. OPFI will look for the highest and best uses of its capital to add accretive acquisitions and investments, invest in high ROI initiatives, and reward shareholders. OPFI is building a leading, mission-driven tech platform with a suite of -in-class digital financial service products that addresses large supply-demand imbalances and credit access for consumers and businesses. Over the last three years, we have taken considerable steps to position OPFI as a leader in our and fulfill our vision and strategic plan. Pam will now review our fourth quarter and full-year results in detail and share our increased guidance for 2025. With that, I'll turn the call over to Pam.

Thanks, Todd, and good morning, everyone. Looking at the fourth quarter of 2024, we are pleased to report that the results reflect continued strong demand for loans, good credit performance, and disciplined cost management. For this discussion, all results are for the fourth quarter of 2024 compared with the fourth quarter of 2023. Total revenue increased 2.1 percent to 135.7 million, supported by an impressive 320 basis point improvement and the average yield to 130 percent. Net originations grew 11.3 percent to 213.7 million, with retained net originations rising 6 percent to 192.5 million as origination growth outpaced the percentage of loans retained by our bank partners. Our strategic focus on growing our customer base through new targeted credit and marketing initiatives that exhibit economically attractive profit characteristics continue to drive results. New customer originations increased by 8.8 percent while displaying improved credit risks as shown by the increased yield and lower charge-offs. This strategy contributed to a substantial improvement in credit quality, with the annualized net charge-off rate as a percentage of average receivables decreasing by 430 basis points to 54.5 percent and improving by 450 basis points to 41.9 percent as a percentage of total revenue. The revenue growth, coupled with the improved credit quality that Todd spoke about earlier, driving the higher yield and improved charge-off rate, drove the significant 22.9 percent increase in net revenue to 80.8 million. Cost discipline also played a key role in strong performance. Total expenses before interest expense declined to 45.1 million, or 33.2 percent of total revenue, down from 33.8 percent. Continued improvements to our automated loan approvals contributed to effective cost control. For the fourth quarter, 79.5 percent of loans were approved in seconds with no human intervention, up 630 basis points from the fourth quarter of 2023. Interest expense improved to 8.1 percent of total revenue, down from 9.1 percent last year, driven by the paydown of our higher interest corporate debt and a reduction in rates. As a result, adjusted net income more than doubled to 20.3 million from 8.4 million, while adjusted earnings per share grew to 23 cents from 10 cents in the fourth quarter of last year. We maintained a strong balance sheet, ending the quarter with $88.3 million in cash, cash equivalents and restricted cash, alongside $318.8 million in total debt and $234.2 million in total stockholders' equity. OPFI also paid down another $10 million on its corporate debt in the fourth quarter of 2024 and reduced it by another $20 million in the first quarter of 2025, paying it off months ahead of schedule. Our total funding capacity at year end was $613 million, including $206 million in unused debt capacity, excluding our paydown of debt and expansion of our Blue Owl facility in the first quarter of 2025. Now looking at the full year results, which represent the full impact of the strategic initiatives that Todd discussed. Total revenue increased to $526 million, up .3% compared with 2023. This was towards the high end of our guidance of $510 million to $530 million. With the revenue growth, improved yield and charge off rates we realized during the year, net revenues increased .7% to $321.5 million. GAP's net income increased significantly to $83.8 million, up from $39.5 million in 2023. And eluded EPS for the full year was $0.36 compared with a loss of $0.06 in 2023. Adjusted net income increased to $82.7 million compared with $41.5 million in 2023. This also exceeded our raised 2024 guidance of $74 to $76 million. Adjusted EPS was $0.95 compared with $0.49 in 2023. This also significantly exceeded our raised EPS guidance of $0.85 to $0.87. The company delivered strong full year results, exceeding guidance and street estimates, driven by the successful implementation of numerous strategic initiatives and operational improvements throughout the year. These efforts enhanced efficiency, expanded market opportunities, and strengthened financial performance, underscoring the company's ability to execute its long-term strategy and deliver shareholder value. These strong 2024 results also provide the template for the expected 2025 growth highlighted in our full year guidance, which I will now discuss. Given our strong 2024 operating performance, driven by our improved model, which strengthened the credit quality of originations, refinements in our seasonal modeling, and the focus on operating efficiencies and cost discipline, coupled with the testing of additional marketing partners in 2025 and the healthy start to the year, we are providing the following guidance for the entire year and the first quarter of 2025. For the full year 2025, total revenue of $563 million to $594 million, an increase of 7% to 13%. Adjusted net income of $95 million to $97 million, an increase of 15% to 17%. And based on an anticipated diluted weighted average share count of $90 million, adjusted earnings per share would be between $1.06 and $1.07. In 2025, we expect less seasonality in our results than in prior years, driven by the stabilization and growth of yield, predictable credit trends, and the full year impact of operating efficiencies. Additionally, we expect a more stable interest rate environment to contribute further to our consistent performance throughout the year. We anticipate this impact will be most pronounced in the first and fourth quarters, with those quarters contributing more than in prior years. We expect our momentum to continue in the first quarter, with adjusted net income expected to be $22 million to $24 million, more than double our previous guidance. With that, I would now like to turn the call over to the operator for Q&A.

Operator? Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. We'll go first to David Sharpe with Citizens. Your line is open. Please go ahead.

Great. Good morning, everybody. Thanks for taking my call. And congrats on wrapping up just a tremendous turnaround year for the team over there. Hey, listen, it's been an interesting earnings season where everyone has to ask the obligatory question about the macro outlook and kind of what assumptions on the consumer you're making. Maybe just at a high level, Todd, you know, has anything changed in the last three months since the last call as you think about both better versus lesser credit consumers you want to target as well as just your overall feeling about macro uncertainty and what the impact of tariffs might be on certain employment sectors?

Yeah, thanks, David. I mean, listen, I think, you know, it's hard to tie it directly back, but I think, you know, I mentioned on the call our Model 6, which takes a lot of the learnings of 22 when we saw inflation. I mean, ultimately, I think tariffs could, you know, I think people are concerned about inflation and obviously that is something that would have happened. I think our Model 6 and some of the learnings of 22 have better prepared us to kind of weather some volatility in consumer repayments. But, you know, overall, we're, you know, I think if you look at our growth trends, we're growing at a really nice clip and we think there's a lot of growth out there, but we're going to, we're going at a speed and a pace that we feel comfortable with that we know, you know, we have strong unit economics and we know that we're targeting really high quality customers.

Got it, Dan. And along those lines, can you provide, well, maybe a refresher on what has driven the increase in yields over the past year and looking into 2025, what assumptions are underlying kind of the revenue guide there and whether it reflects a change in focus on maybe the credit tiers you're going after?

Yeah, I mean, we launched a little bit of risk-based pricing in the second half of the year, which allowed for more yield. We also, you know, we still had in the book back from 22 and 23 some lower yielding customers that, you know, have since been, you know, off the books and so that's propped yield up. Also better repayments, just better credit history, better repayment rates causing us to have some increased yield. But it's a nice blend of receivables in addition to a little bit more yields coming off the books and causing more revenue. Got

it. And then maybe just one last one to squeeze in here. You know, given obviously a lot of the headlines coming out of Washington, is there any read on the pace of tax refund season for the critical Q1 sort of pay down quarter, you know, versus prior years?

Yeah, I mean, we're watching it closely. I mean, we're right, you know, in the start, in the middle of it. It's probably too early to assess if it, you know, compared to other years. We don't anticipate that refunds will be, you know, necessarily delayed or not given due to that. That's our position. So we're watching it closely and, you know, hoping for a normal repayment.

Okay, great. Thank you very much and congrats.

Thank you. We'll go next to Mike Grundahl with Northland Securities. Your line is open. Please go ahead.

Hey, thanks, guys. And congratulations on a really strong year. First question is really, 2025 looks like you guys are leaning in a little bit or we're going to see that inflection in the top line. I think you talked a little bit about macro, a little bit about, you know, positive credit environment, but I don't know, could you just articulate again why you feel comfortable leaning into that growth in 2025? And then secondly, you know, it sounds like you're having good success on the marketing side, targeting some channels and whatnot. Can you kind of describe what's going right there and, you know, how that's working well?

Yeah, you know, listen, I mean, we're not, you know, prognosticators of, you know, the stock market or the macroeconomic conditions, you know, that they're going on. I think, you know, we really, you know, feel strongly about our underwriting model and the development of it over the last couple of years. Obviously, 22 was a little bit of a painful time, but with the one benefit from that is we get a lot of the learnings coming out of that and helped us to get where we are today. You know, we're going to always focus on quality over quantity, but we do think there's a lot of growth out there. We have really not deployed some scalable things, levers and direct response in brand marketing and other things that we think we're going to start to test into this year and think that it can yield some really growth, but with high quality customers, we're never going to, you know, necessarily open the credit box and, you know, increase the risk of our portfolio, but we definitely think that there's opportunities out there with us, you know, our balance sheet, and we are seeing strong credit trends right now. Obviously, there's, you know, some ominous clouds on the horizon, you know, with what's going on, but, you know, we'll watch it closely and, you know, we have a really good read on it from getting data back pretty quickly, so we can read and react or adjust as needed.

Got it. And then on the marketing side, kind of, you know, where you're seeing the most success, what's working?

Yeah, I mean, I think, like, you know, we just from a customer satisfaction standpoint, the auto approvals have really, really, you know, helped, you know, with getting, you know, improved funnel metrics to allow for customers to go through without human interaction. I think that's something that we prioritize and have really seen strong gains in, but I think from a customer experience standpoint, we think that we're in a really good spot to convert customers at a higher rate due to that, and, you know, that's why our appetite for increasing marketing spend in certain channels and then also turning on certain channels that we haven't before that we have experience in, but we've just kind of been a little dormant in. We think there's a lot of growth.

Got it. And then maybe just lastly, you know, cash balances at $88 million at year end, then it sounds like you paid down $20 or $30 million in early 2025 on the debt, you know, and that was cash generated in 24. You know, it looks like you could generate, I don't know, roughly $100 million plus in in 25. How do you think about it? Do you want to do another biddy? Is it share buybacks? What do you think about uses for that $100 million?

Yeah, I mean, I think, you know, and I touched a little bit on the script, it's a menu, right? We have a menu of options, and I think we're going to do what we think is the highest and best use of our capital. I think you kind of listed out some of those options. The corporate debt, we were really happy. That's something that was taken out from when we went public back in 21. It was something, it was a higher cost corporate debt that was, you know, at the corporate level that we wanted to extinguish to give us ultimate flexibility to really kind of build out our vision of being a platform business for alternative digital financial service products. And this really gives us that flexibility. But yeah, we're going to be looking at number one growth, right? We're also, you know, developing, continuing to develop our product and software. So there's high ROI initiatives there. Buybacks is always an option. You know, there's dividends. There's a lot of, and then there's obviously inorganically looking for things like similar to biddy. So there's kind of a menu of options that we'll be looking at and definitely going to, you know, prioritize things where we think it has the highest ROI for us.

Got it. Got it. Thank you.

And as a reminder, ladies and gentlemen, if you'd like to ask a question today, please press star one on your telephone keypad. We'll go next to Dave Storms with Stonegate. If your line is open, please go ahead.

Good morning and congrats on the really strong quarter and end to 2024. Just so we can start with one of the remarks was that you're expecting less seasonality in 2025. Just hoping you go a little further into what some of the drivers of that maybe smoothed earnings profile are.

Yeah, it's really, you know, our new model of corporate seasonal modeling that we deployed last year that really, you know, accounts for seasonality and credit loss performance, which smooths out earnings, you know, so far in 2025. I think also, you know, the first quarter of 2024 was also kind of the last quarter of some of the elevated charge us that came out of 22. So but, you know, we feel like the earnings stream was going to be a lot more smoothed out this year and there's going to be strong income generations in the first and fourth quarter more so than

the year before. So it's smoothing it out throughout the year. Understood, very helpful. And then, well, thinking about the model, how do you view like the upper bound of automation? You know, are you going to run into maybe an end to some of the low hanging fruit where you can grow that by 500 basis points a year or will you be able to just expand into new markets and continue to push automation?

Yeah, I think it's something we can continue to incrementally improve. I think it's probably impossible to get to 100%. You know, there's going to be, you know, who knows with AI these days, maybe it is, but I think you're always going to have, you know, a subset that might take some human interaction. But, you know, our goal is to continuously improve that metric. You know, we think it has a lot of benefits from an operational efficiency from the funnel metrics and, you know, it also, our customer satisfaction when someone goes through from an auto approval standpoint is much higher. Customers, you know, really enjoy the experience. So, it's kind of a -in-win for us. So, that's definitely something we'll prioritize

and are looking at this year.

Understood. Thank you for taking my questions and good luck in 2025. Thank you. Thank

you, ladies and gentlemen. This does conclude today's program. Thank you for your participation. You may disconnect at any time.