Q2 2021 OppFi Inc Earnings Call
[music].
Greetings and welcome to the up 5 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 <unk>.
Rosenthal Vice President Finance. Please go ahead.
Thank you operator.
On today's call are Jerry Caplin, outsized, Chief Executive Officer, and <unk> Shah Chief Financial Officer, The company's second quarter 2021 earnings press release supplemental presentation and associated form 8-K can be found at investors that upside dot com <unk>.
During the call the company will be discussing certain forward looking information.
These forward looking statements are based on assumptions and assessments made by <unk> 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 offer undertakes no duty to update or revise any such statements 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 afternoons earnings press release.
The results discussed on this call reflect opportunity financial LLC for the second quarter ended June 32021 achieved prior to the completion of the business combination with <unk> New America acquisition Corp. On July 20th 2021.
This call is being webcast live and will be available for replay for 1 month on our website.
I would now like to turn the call over to Jared.
Thank you and good afternoon, everyone.
This is our first call as a public company before discussing our second quarter results I will take a few minutes to review the 5 story.
Our multiyear 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 U S media and consumer.
It's not a low income consumer.
Our average customer makes about 50 Grand and has a bank account.
The bank has found them at their greatest moments of meat.
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 prepared to go to work or maybe they must financed 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 kinship.
But these smaller banks often lack the people process and technology to enter the market directly.
That's where <unk> comes in.
Power community banks by providing best in class outsourced marketing.
Underwriting servicing and technology.
Facilitate credit access for this everyday consumer.
Instead of traditional credit scores, we developed 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 results when the customer is a much better financing alternatives in 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 a goal of becoming an ecosystem for this consumer.
By helping someone that their greatest moment of need we can create tremendous gratefulness and loyalty.
We believe credit Axis is also a catalyst to selling more to our customers.
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 well.
This is our long term vision to build the preeminent financial service a destination for the middle income credit challenged consumer.
Much like sulfide has built a platform for henry's earn or not yet rich community.
We're doing the same for the everyday consumer.
How are we going about building this.
Our multiyear growth strategy will be a combination of re accelerating volumes for 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 App alone, it's easy to understand.
The average loan is $1500 with a term of 11 months, it's a simple interest loan that amortize over its life. There are no fees no origination fees no late fees no prepayment penalties and no NSF fees, we help our bank partners report payment history to the 3 major credit bureaus with so.
1 is difficulty paying our customer advocates work with them to help find a payment plan that is more suitable custom.
Customers receive a fair transparent pathway to building credit.
We recently launched salary cap, which is a natural extension of what we've accomplished to date with the op loan product offering.
This is our new payroll deductible installment loan with loan amounts starting at 2024 month terms and interest rates of about 30%.
The key product features securing repayment through payroll deduction.
And that does 2 key things for us first in materially reduces the risk premium on each loan secondly, it allows up 5 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 B to B 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 op by time.
<unk> targets. The first graduation product, we offered off loans customers and it provides us entry into the large $21 billion non prime credit card market.
We believe the up 5 card can due to the non prime credit card space went off loan system to the payday loan space gain.
<unk> market share by utilizing alternative data underwriting to facilitating better priced product for consumers.
Coupled with best in class Mobile first digital technology and exceptional customer service.
Last week, we officially launched the car just elect op loans customers who've repay their loans in full.
Upon approval cardholders are instantly able to access their off line cards, and the op by mobile App and directly Albert 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.
<unk> also received the 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.
$150 million of less than a $1000 in savings.
This savings has been caused by years of flat income in the wake of material increases in the cost of health care education housing and childcare without savings credit access is vital when the unexpected strikes.
The demand for small dollar credit theoretically best served by our traditional banking system.
Large banks had 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 account.
At the 3 largest banks.
This shows that the largest banks, even those that market small dollar products are failing at this customer.
Furthermore, although many credit union supposedly offer small dollar products, they're not meeting the need for subprime credit over 20% of our customers primarily in credit unions.
In addition to banks and credit unions near Prime lending platforms are also clearly not serving those customers.
We know this from securitization data and our own proprietary data.
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 our EIS 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 went out the products on our platform.
Consumers would be forced to the market 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 dataset 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 of notes we are.
10, initially 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 and 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 fin techs given that we've been GAAP net income profitable since 2015, the strong cash flow model is crucial to fund the additional bill.
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 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 mail.
Our model has led to a much more stable and predictable flow and ultimately has delivered an extremely low acquisition cost.
Beyond our Decisioning 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 when I say go online and read what our customers say on the better business Bureau, or Google or lending tree. They tell the story better than I ever could tip.
Typical customer talks about being laughed out of a bank and denied multiple times before gaining credit access through our platform.
A recent customer from Dumfries, 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.
So much for trusting that I will pay you back.
This is 1 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 2020, 1 best places to work in Chicago.
Okay.
Finally, I wanted to briefly touch on our Q2 financial highlights.
During the second quarter as the economy reopens and stimulus Wayne 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 and proving our AI conversion technology and our platform was prepared to convert this increased demand better than historical levels. The results of our 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 as a leading indicator of future revenue growth. Most of the Q2 growth was back end weighted as customer spent stimulus and COVID-19 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 is important to note that despite the strong originations rebound.
Still below what we would consider a normalized demand environment. Although the recent surge in the Delta variant on top of unemployment benefits advance child tax credits and a continued moratorium on home and student loan payments are temporary and consumer credits. We believe the return of normalized demand as a matter of when not if.
But the timing remains uncertain given these factors we will however remain disciplined in our approach to profitable growth stimulus programs sunset in the pandemic officially ends.
Stimulus programs increased savings rates naturally hedge our business. These factors drive better credit and combined them with our growth and profitability remained strong in Q2.
$17.9 million of adjusted net 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 mono line lending platform to our goal of becoming deeply near digital financial services destination for the everyday consumer Neville was the former CEO of global Fintech platform keep.
He brings more than 2 decades of extensive leadership and 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 <unk> to review our financials.
Thanks, Sharon and good afternoon, everyone as Gerald 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 outlook 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 off loan is a fully amortizing 11 months 1500 dollar installment loan.
After banks originate the product through our platform.
That's the majority of economic interests, we earn interest on those receivables there are no other fees or goes full transparency and ensuring customers have the ability to repay which underpins our proprietary credit model.
Our customer takes about 2 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, but 80% of our acquisition channels, which include our third party referral relationships.
Search engine optimization customer referrals and remarketing, our based on our variable cost per funded loan, meaning we pay a fixed amount when we fund the loan.
The other 2 variable cost drivers are our sales costs and cost of financing.
But half of our sales costs from reporting data and tools to support our bank partners' underwriting model 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 5 years across a diversified set of lenders.
This leads to an average of over 600 dollar contribution margin over the customer life and a multiple on invested capital over 2 times.
Next I wanted to turn to our operational leverage and our focus on automation.
As Jared mentioned, our bank partners now auto approved over 50% of their originations through our platform.
Thats up from zero percent 3 years ago, and 26% at the end of 2020. This has driven an improvement in the conversion rate for our application 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 income statement perspective.
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 1.2021, 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.
<unk> receivables balance on an amortized basis were $260 million at the end of the second quarter up 6% sequentially and 19% higher than the second quarter a year ago.
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 impacted the beginning receivables in the second quarter and drove a 7% decline in average receivables from the first quarter second quarter. This year as the second quarter receivables growth was.
Back weighted.
Company originations continued 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 help drive our growth in the quarter with new custom.
Our origination growth up 80% quarter over quarter, and 104, 3% year over year and closer to 2019 levels.
But still slightly down as demand remained only at about 75% of pre COVID-19 levels.
Growth in new customers are especially impactful if they can drive the cross sell of additional products in subsequent periods.
Company origination growth was also driven by improved operating efficiency of the company's auto approval rates increase 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'll turn to the change in fair value line, which consists of 2 main components.
The first is net charge offs in the second or changes to the portfolio 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 coupons and the discovery I'll discuss those items in more detail in a moment.
First.
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 5 years.
This represented an improvement from the 31% net charge off ratio in the first quarter and well below the 40.8% net charge off ratio for the second quarter of 2020.
Looking ahead, we expect net charge off ratio 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 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 younger portfolio.
Stemming from 44% sequential originations growth.
In addition, the company's weighted average interest rate in this 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 premiums increased by $23.8 million driven by a $58 million receivables dropped 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 our fair value Mark to trend upwards, as we should see tailwind and valuation inputs, including weighted average maturity due to origination growth and discount rate.
Coming to 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 Companys 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 1 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 originations 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 at 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're 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.
Periods, such as our last 1 where origination growth outpaced revenue growth marketing expenses will be higher as a percentage of revenue and should come down when gold studies.
Customer operation expenses for the second quarter totaled $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 2020 sequential growth of 2.8% and 13, 6% growth versus the <unk>.
Second quarter of 2020, we're 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.
Allow us to hold customer center head count 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 and customer center 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.
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 1 time, an add back 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 2020.
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 functions 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.
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 book.
In 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 net charge offs returned to pre COVID-19 levels, coupled with increased marketing spend in line with expected origination group.
Interest expenses, excluding debt amortization for the second quarter totaled $5.7 million or 7% of revenue compared to $4.1 million or 5% of revenue last year, and $4.9 million or 7% of revenue for the second quarter of 2020, the increase in interest expense versus the previous quarter. It was driven by a normalized.
<unk> of debt levels.
We recognize the adjusted net income of $17.9 million for the second quarter compared to $19.3 million, the previous quarter and $1.6 million.
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 1 time equity grew by $78 million year to date to $177 million as a result of the $69 million, 1 time fair value adoption impact.
And $42 million of retained earnings excluding tax distributions, partially offset by tax distributions related to the 2020 tax here 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 2021guidance on our financials.
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're updating our guidance accordingly.
Updating our expected 2021, adjusted net income guidance, but providing a range of $62 million to $66 million. The top end of the range in line with our previous expectations.
We're 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 is naturally hedged from a credit versus growth perspective, some periods of slower than expected growth.
Our credit losses are historically declined driving higher profit line.
While demand has continued to increase substantially as indicated by our sequential and year over year originations growth. We now believe the recovery time line may be a bit extended due to the surge of the delta variance 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 and 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 and providing this range we've taken into account a downside growth scenario, which.
Contemplate.
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 to be less pronounced than we have assumed.
We view these events is 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's still less than 2% of customers, who opt into our turn up program receive a lower cost alone.
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 a business combination with S. G. New America acquisition Corporation on July 20th 2021, we couldn't have found a better partner than the SG&A team led by Joe Moglia, Larry Sweats, and Kyle someone out.
Upon the close of the transaction the combined company had $84.5 million shares outstanding excluding $25.5 million or not.
The company also had $15.3 million warrants outstanding with exercise prices at $11.50, and $15 per share. Please refer to the share count side in the company's earnings presentation for more detail with that we'd now like to turn the call over to the operator for the Q&A section of our call operator.
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 2 if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your hand.
Set before pressing the star keys, 1 moment, please while we pull for questions.
Your first question comes from the line of David Scharf with JMP Securities. Please proceed with your question.
Hi, good afternoon. Thanks.
Thanks for thanks for taking my questions.
Hey, David.
Each year.
I'm wondering first first off just more of a high level.
Macro question.
You, obviously provided a lot of background behind.
Sort of a full year outlook and some of the exogenous factors, where obviously wrapping up and reporting season, where a lot of non prime subprime lenders.
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 think sort of the initial green shoots. If you will have returned to pre COVID-19 demand.
Can you sort of talk about.
Within the context of some of the qualifiers you've put out there.
That's number 1.
If you in fact are seeing through August 10th.
Any.
Any signs of that.
<unk> or other.
Otherwise you know so it's sort of impacting demand.
That's how it ended.
And in June and secondly.
50% increases in receivables at December 31.
Still a.
Extremely impressive crib trade, obviously versus just June 30th.
And are you willing to sort of comment on.
Perhaps how much that impressive figure may be discounted in your mind or.
Bye.
Well it sounds like being a little more cautious in some of these external factors. It just trying to kind of reconcile once again I think.
Some of the narratives out there that hey, maybe there's light at the end of the tunnel.
All the government stimulus and all of their compressive factors versus what sounds like maybe a little more.
Caution on your front.
Yeah happy to address it I think.
At the beginning of the year through to Q 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 you know.
We're definitely not at a level that we would consider normalized consumer.
Consumer spending normalized demand for credit despite that the business is going to grow nicely and.
The 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 even a month ago, we probably would have 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 we think about the future numbers, but to your point like the growth is still.
We're going to be strong I think we've certainly improved the platform.
From a conversion perspective quite a bit.
Compared to pre pandemic period, so that helps a lot.
There is certainly upside if if if some of these factors end up reversing more quickly than we have a perfect crystal ball into right Theres, 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 shifting any other additional color I mean I agree I think in terms of the guidance. We provided we wanted to take a pragmatic and a cautious approach.
We saw demand accelerate through the second quarter.
Obviously, 44% sequential growth in July was also a positive year over year performance, we our receivables are up over 20%. So the growth is there, but yes. The demand is not at pre COVID-19 levels. So we do see upside to what we provided and we wanted to be transparent and provide guidance that we think that you know it isn't a range even in the downside situation.
Got it.
That's very helpful. Obviously, a caution is warranted it's incredible how.
Everything we're seeing is remarkably different than it was just 2 or 3 weeks ago in terms of obviously the latest surge.
And maybe just 1 follow up.
You know the impressive increase in auto approval rates I don't know if this is a question that you are 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.
You know just just the AI algorithms are becoming more and more protected because trying to obviously ultimately get a sense for how high that number could go and what the implications are for margins.
Completely separate.
We fully believe youre going to be back at normalized credit as soon as you are back at normalized demand. So we wouldn't do anything short term to increase the approval rates in that type of return to normalcy and we just have been ultra focused over the last couple of quarters to continue to use.
Our data and our technology platform and our data science team and our product team too.
Approve automatically where we're confident and ultimately the banks are confident that the credit is going to be there.
As a bunch of dialysis you could think about a bunch of dialogue 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 in and certainly we have seen.
A greater desire and 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 theres still upside from here through year end to continue to improve that auto brewery.
Got it and I apologize if I can squeeze just 1 more in.
Are you able to.
Maybe quantify for us whether or not the guidance for year end balances just how much how material the contribution might be.
From from salary tap in card.
Yes, so salaries happened 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 would plan to scale the business pretty significantly.
In 2022 and beyond.
Got it great. Thanks, very much guys.
Thank you.
Your next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.
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.
Yeah, absolutely so.
We saw July receivables up over 20% year over year, and we feel that based on our projections.
The growth over <unk> will approach 50%.
The second quarter by the end of the year.
Got it I thought you said something else like you started to see something late July a little bit of a slowdown or some changed it maybe I misheard that.
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 an increase in extensions of moratoriums, we did see a little bit of a deceleration in growth in the second half of July but that's baked in.
Is it related to the Covid and the Delta variant.
Potentially.
Baked that into our 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 and Jared.
Clearly, you're working hard on salary cap and credit card.
I know you have a more expansive product journey.
What sort of next on the horizon.
Sort of a rough timeline for that.
Sure Yes.
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 is a laundry list of potential products there everything from.
Mobile banking to sub 36% installment lending to point of sale lending.
Overdraft fee protection products, Theres, a gamut of potential products out there.
For each of those we will evaluate.
<unk> not only the order but.
Whether we build it or we partner for launching it and what do we look at acquisitions.
And I would hope that as we exit the year early into 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 2 new products from the ground up both of which are super early but.
We are we are positive on the early indications.
And I think from the stories perspective.
Quicker, we are able to build out 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 this as a destination rather than a 1 stop shop to solve a acute problem I think will be awarded rewarded for it in the market. So theres a lot more to come there obviously Neville just just joined us.
Superior severely talented tremendous background. He is 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.
Got it thank you and shipping.
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.
Yeah, So I think a rough a rough guide from adjusted EBITDA is about 60.62 thirds would convert.
Got it.
Okay. Thanks, a lot.
Thanks, Mike.
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 1 moment, please while we pull for questions.
Your next question comes from the line of Chris <unk> with D. A Davidson. Please proceed with your question.
Hi, Thanks for answering my question and congrats on the results guys. So on the.
She origination outlook and some of the tea leaves here, it's really it sounded like a lot of the.
The things, we're watching the stimulus payments and the macro impact on demand.
Just wanted to just because the.
The amount of capital raised and it's taking place in Fintech and the amount of innovation.
Seeing in 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 <unk> perspective, just given where you guys sit.
Alright.
We've seen some interesting themes from the traditional banks I mean, you've seen a number of banks go to no fee accounts are lower fee accounts, you've seen some of them.
Takeaway overdraft you see some of them Notionally launched small dollar products, we haven't seen any of that impact.
Impact us competitively, we haven't seen any direct competitors come to the marketplace. The 1 thing we did see which is which is interesting that turn up program.
So today, we quoted the the percentage of customers that actually close alone when they go through that.
With that process, we did see a bit higher appetite on the glass of actually showing customers and 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 in the traditional credit score funnel will try to come down market a bit but they just can't get comfortable with this customer so.
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, so, but but nothing directly competitive that would.
Change any of our thinking as it relates to future future growth all of those comments are macro related some of actually all of which are just.
Matter of potential timing.
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 sheet, you're quite liquid consumers or are paying back their debts.
Any forward looking indicators are you seeing any changes in the margin.
Quality is a continuing to get better or just sort of stabilizing here.
Yeah, I mean in our guidance, where we expect.
Expect charge offs to re normalize as demand comes back and consumer balance sheet approach historical levels and then so we are guiding to net.
Net charge off rate as a percentage of receivables to be in the mid thirties kind of for a full year and that's baked into our guidance that we provided.
Yeah.
Okay, Great and then lastly, just maybe comment on I know, we said this earlier shipment, but just maybe some additional color around.
The idea of a federal rate cap.
And why we don't think that's that's highly likely at this point.
Yeah, so our likelihood of a fed rate path. So I would say just stepping back for to address regulatory in general.
I think when we look at the business, we acknowledged the regulatory risk we are incredibly focused on becoming a regulatory agnostic business are 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 would never tell you zero percent, but we think it's low for a number of reasons, including.
The current makeup.
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.
There are 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 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 this customer in the space.
Thanks, Joe that's great great results.
Thanks.
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.
So thank you everyone for joining us on our first call I really want to thank the <unk> team led by Joe Mowgli or they've been terrific partners through this process of a Schwartz family. Our majority owners have been terrific partners as we built out. This platform. We are on the very beginning stages of a multiyear journey.
Transformed 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 this space that changed the way you think about non prime 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.
This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.
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