Q2 2022 OppFi Inc Earnings Call
It is now my pleasure to introduce your host Sean small ours head of Investor Relations. You may begin. Thank you operator and good afternoon on today's call are Todd Schwartz, Chief Executive Officer, and Executive Chairman and Pam Johnson Chief Financial Officer.
Our second quarter 2022 earnings press release, and supplemental presentation can be found at investors Diopside dotcom.
During this call oxide will discuss certain forward looking information. These forward looking statements are based on assumptions and assessments made by management in light of their experience and assessment of historical trends current conditions expected future developments and other factors.
They believed to be appropriate any forward looking statements made during this call are made as of today.
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 could differ materially from forward. Looking statements are described in the company's filings with Securities and Exchange Commission, including the sections entitled risk factors.
In today's remarks by management, the company will discuss non-GAAP financial metrics.
Reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in the earnings press release issued earlier today.
This call is being webcast live it will be available for replay on our website I would now like to turn the call over to Todd.
Yeah.
Thanks, Sean and good afternoon, everyone I'd like to cover three topics today, including the key financial and operational highlights from our solid second quarter, our view on the macroeconomic environment and its impact on our customers and provide a quick update on strategic initiatives underway that.
They're designed to position us for success in 2023 and beyond.
We are pleased with our financial and operational performance for the second quarter relative to our expectations continued strong customer demand led to a 57% year over year increase in originations marketing cost per funded loan dropped by 16% year over year to two.
$206 the auto approval rate increased by 12 percentage points year over year to 62%.
We reduced our operating expenses, excluding interest expense add backs and onetime items as a percentage of total revenue by three percentage points as a direct result of initiatives, we launched in the first half of the year.
We also upsized one of our credit facilities, resulting in over $600 million of current funding capacity.
And maintain our customer NPS score above 80 points.
With regards to the macroeconomic environment. It is clear to us that the 40 year high inflation is having a negative impact on our customers our average customer is employed.
College educated earns middle household income and has minimal savings the increased price of everyday necessities like gasoline groceries and home utilities has crunch these customers and their ability to service debt. Despite the strong labor market.
We originally expected that inflation would be transitory in line with previous economists' predictions. However, as we can see now inflation has persisted well beyond our expectation in early May we started to see the effects of inflation on credit performance, both in new loans as well as older vintage.
Refinance loans that were originated during last year's growth space. In response credit models were swiftly adjusted in May and again in July to target higher performing customers as inflation began accelerating.
These measures represent the most significant credit adjustments in our company's history as a result, the credit profile of new loans being funded through our platform has improved greatly since implementing these changes we are encouraged to see continued strong demand for our product amongst these higher quality borrowers going forward.
We will continue to diligently monitor macroeconomic changes and their impact on our customers and take action accordingly.
Even with these credit tightening measures our profitability in the second half of this year will be impacted by the delinquencies and charge offs of loans originated with the previous credit model in the first half of this year.
As a reminder, loans net charge offs in a given quarter are generally originated in the prior two quarters.
We now believe these loans from previous credit model will charge off at higher rates than initially expected, resulting in breakeven on an adjusted basis or a modest adjusted net loss for the full year.
Despite our disappointment about the second half we are confident that the lower risk receivables base. We anticipate at the end of 2022 will perform very well in 2023.
In addition to the credit measures I've described we're taking additional measures in marketing and operations that we expect will further position us for success in 2023 and beyond shift.
Shifting to our marketing efficiency initiatives. We believe there are significant opportunities to continue lowering our cost per newly funded loan.
We are optimizing our partner channels by removing higher cost lower quality partners and expanding higher quality ones. We have also taken steps to improve efficiency and direct mail and has seen significant reductions in cost per funded loan in this channel in Q2.
Within operations, we have implemented a number of enhancements to reduce delinquency and promote payments by redesigning our customer portal with more capabilities and payment options.
In addition, during the second half of this year, we are initiating new partnership models to provide financial health resources to our customers as well as testing new programs to help customers make them affordable payments avoid charge offs and minimize adverse credit score impacts.
Before I close my prepared remarks, I want to also highlight as previously disclosed that my family and I purchased $1 $9 million of class a common stock at an average price of $3 13.
During the most recent open trading window, we are prepared to continue supporting our buy shares when we see that the share price is disconnected from long term fundamentals.
While we are facing credit headwinds and the effects of the macroeconomic environment. We view these challenges as temporary speed bump that we are able to navigate we are confident that the actions. We're taking will improve our performance in 2023 and make the company stronger than ever.
With that I'll turn the call over to Pam to review, our second quarter results and updated guidance.
Thanks, Todd and good afternoon, everyone, turning now to our second quarter results totaled.
Total revenue increased 38% year over year to $108 million, we achieved a 57% year over year increase in originations to $226 million, while lowering our marketing cost per new funded loan by 16% or $39 to $206 compared to the prior year period.
Origination growth was driven by increased demand, resulting in higher application volume and an increase in the funded rates defined it as funded loans overqualified apps are more efficient marketing results reflect continued strategic growth and lower cost marketing channels, such as email referrals and search engine optimization as well as lower and more efficient spending.
On direct mail and higher customer conversion rates totaled.
Total net originations of new loans as a percentage of total loans increased 56% up over 14 percentage points from the second quarter of last year.
In addition, our investments in automation resulted in the audit approval rate, increasing 12 percentage points year over year to 62%.
The annualized net charge off rate as a percentage of average receivables was 51% for the second quarter of 2022 versus 56% from the first quarter of 2022 and 28% for the prior year quarter.
Year over year increase reflects credit trends worse than pre pandemic levels.
Turning to expenses operating expenses for the second quarter, excluding interest expense as well as add backs and onetime items increased 30% to $49 million or 45% of total revenue from $38 million or 48% of total revenue in the prior year period.
These expenses increased due primarily to higher marketing cost to fund originations more investments in technology and greater professional fees.
<unk> expenses increased expenses declined as a percentage of our total revenue as a result of lower marketing cost per new funded loan as well as operational cost efficiency initiatives implemented earlier this year.
Adjusted EBIT totaled $20 million for the quarter down from $32 million versus the prior year quarter as higher revenues were more than offset by elevated charge offs and increased operating expenses as expected our adjusted EBITDA margin compressed, 219% compared to 41% in the year ago period.
Interest expense for the second quarter totaled $8 million or 7% of total revenue compared to $6 million or 8% of total revenue in the year ago period.
We generated adjusted net income of $7 million for the second quarter compared to $18 million for the comparable period last year.
As of June 32022, up I had $84 3 million weighted average diluted shares outstanding excluding $25 5 million earn out shares adjusted earnings for the second quarter were <unk> <unk> per share.
Our balance sheet remains healthy with cash cash equivalents and restricted cash of $58 million total debt of $337 million gross receivables of $402 million in equity of $166 million, we have ample liquidity.
Quiddity available to support our future growth plans with $608 million in total spending capacity.
In June we announced that we more than doubled one of our credit facilities without a liar to $200 million from 75 million.
Part of this upsizing to refinance debt tied to one of our other credit facilities.
During the second quarter, we repurchased approximately 330000 shares of class a common stock for $1 $1 million and an average of $3 31 per share during the first half of 2022, we repurchased approximately 616000 shares at an average $3 48 per share.
For total up $2 $1 million.
Turning to our full year outlook, given limited visibility and uncertainty considering the current macroeconomic environment. We are reiterating total revenue guidance of 20% to 25% growth year over year.
Maintaining guidance for operating expenses as a percentage of total revenue up 43% to 47% excluding interest expense add backs and onetime items.
And Ah revising adjusted net income expectations downward.
We now expect to breakeven on an adjusted basis or reported modest adjusted net loss for the full year due to persistent high inflation that cause significant credit deterioration in the latter half of the second quarter and early third quarter.
We anticipate the net charge off rate to increase in the third and fourth quarters as older vintage loans are charged off during those periods.
We anticipate having a more specific update for our full year expectations. When we report third quarter results for now we are withdrawing our previously issued guidance for metrics other than the total revenue growth and operating expenses as a percentage of total revenue.
Notwithstanding this revised outlook for 2022, we remain very optimistic about 2023, we expect to exit 2022 with a healthy portfolio given the significantly tightened credit model and run off of the higher risk loans from the first half of this year.
With that we would now like to turn the call over to the operator for Q&A operator.
Thank you ladies and gentlemen, the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time, if youre using a speaker phone we asked that while posing your question. If you pick up your handset to provide favorable film quality once again, ladies and gentlemen, if you do have a question our COO.
Comment Please press star one on your telephone keypad at this time, please hold as we poll for questions.
And our first question comes from David Scharf from JMP Securities. Please go ahead David.
Great. Thank you.
Yes, Hi, Todd and Pam Thanks, Thanks for taking my questions.
Not surprisingly wanted to follow up.
On the commentary regarding the credit outlook and macro trends and.
First off wondering Todd.
Just kind of the tail end of a reporting season, and which we've heard.
A pretty broad.
Spectrum of commentary from a lot of different subprime lenders about the impacts of inflation.
And other factors some have been sort of pretty benign.
Others less so.
Your commentary is probably among the most pronounced and definitive.
At this point.
Or are you confident that it's strictly inflationary pressures or do you think there are potentially other factors that are impacting it.
Sumer payment patterns.
Yes.
David that's a good question.
I think if you look at last year.
We had thought that we've gotten through most most of the I had mentioned that in the first quarter call. Some of the originations we had made in the holiday season.
That were a little higher risk with different channel partners as those flow through the buckets.
We have a forecast.
And we haircut that forecast significantly at the beginning of the year.
But when you have an existing book of business. That's on your books deteriorate in a very quick period of time right like it all happened pretty much around the may timeframe at a three week period, where we saw significant deterioration quickly.
Then subsided and has stayed pretty stable, but we're being very conservative.
In our forecast we've tightened cigna.
Significantly.
And obviously thats going to sacrifice profitability this year, but we're not playing for a quarter or two quarters. We're planning to build the best business. We can over the long term. So anything we're doing now that may have short sided impact on the adjusted net income is going to is going to help us in 2023 by having higher quality receivables.
And we're also Pam.
Pam and I talked about it our acquisition cost and growth is there. So we have the growth and the acquisition cost.
And so the new loans have not been.
Necessarily the issue those have been coming down in line with plan and continuing to get better as the months have gone on we've really seen.
A quick rise in I think in May is really when the consumer started feeling it the hardest that's when inflation peaked at nine 1% and we definitely we are in a recession at that point.
And we've done some interviews with our customers in surveys and it's just it's just at the end of the day.
Utilization of payments on our customers they got to pay for food groceries housing.
And kids and stuff like that and so I think customers were stretch, but we feel really good that.
We're making all the right moves and that things are starting to get better.
Right now, we're seeing a lot of improvement and we're feeling good at cautiously optimistic is I guess, where we're at and some of the things David that we're going to see in the economy like states are starting to issue direct stimulus payments to customers. That's encouraging that's obviously a lot of the states that we arrange loans then on behalf of our bank partners are.
Eligible for those and we really feel good about some of the redesigns of the payment portals that we have about giving customers more options for working out payments. So we're seeing a lot of positive things, there and I feel really positive.
It's just it's just we had a little headwind there in the second quarter. So ultimately, though every other metric in the business is performing.
Than expected.
Got it got it and I appreciate the color and then maybe just.
Follow up.
Also related to credit.
I'm not sure. If this is an operational or a technology.
Focused question, but we.
We've obviously always looked at it.
Increasing auto approval rate is.
As always being a positive.
And.
I'm wondering.
As you think about some of the visibility challenges.
The tightening of underwriting.
<unk> is an ever increasing auto approval rates something.
I always want to see when credit might be.
Yeah.
That's a good question.
A ceiling on that rate.
That's a great question I mean, so really though David the underwriting process is the exact same for auto approvals that it is for someone who calls in the people that just means our technology is getting better. So we're taking out we're taking out bottlenecks in the in the underwriting process and making the technology better for the consumer so they can go through the application.
Process and get credit decisions without having to talk to someone.
It does not mean were loosening standards or changing our standards that just to be clear when it comes to auto approvals got.
Got it no no I appreciate the clarification.
Thank you and we'll take our next question from Chris <unk> from D. A Davidson. Please go ahead Chris.
Hi, Thanks, good afternoon.
Not surprisingly I want to follow up on the credit question as well.
Just like as you as you look into the.
The months.
Starting in May June July into August did it get worse and is there any.
Sure.
Can you stratify.
What's what are the issues might be from underwriting perspective is it.
Does that lower end or is it certain.
Income levels.
So, giving you the comfort that.
Some of the changes you've made or are going to have an improvement here since we're still kind of in the middle of this inflation picture.
Yeah, I mean back to what I was saying with David So as you can tell like after the first quarter earnings call. I was I was really bullish I liked what I was seeing on the credit side, we had a good second quarter, our gross charge offs as a percentage came down quarter over quarter by five or 6%.
And we beat acquisition costs to be beat origination so all positive.
Starting in May we saw a pretty quick decline in our existing book.
Which.
We're definitely lead to reduced profitability.
We made a significant tightening in the first week of May based on those early indicators science right. So the year has kind of gone its been pretty volatile, but I think the customers really started feeling the inflationary pressure in the in May and even into June and then in July we made another significant.
We actually may.
Some tightening to our refinance population which is pretty.
Conservatives did you considering those customers are definitely the lowest delinquency set of customers in the pay rates are much higher but we just wanted to be conservative and make sure that this was not going to be something that we had to deal with in the second half of the year.
Be conservative and kind of wait and see and be cautiously optimistic but.
I think I think we were making all the right steps.
As far as dealing with with with the Spike in delinquency I think what was surprising for on our end was the speed at which the deterioration kind of happens to the pass through rate climbs so significantly quickly and.
We did we did everything we can but on the new loan side, we feel really good I mean, that's something we can control because theres not existing principal already on our books. So when we evaluate new customers.
We feel really good about the weighted average risk scores down 1.15 points or one point, even higher one six points from last year, which is like a totally as a huge significant shifts and quality of new loans kind of add being added to the book right now.
Some of the highest quality or percentages of low the lowest segments has increased significantly in dollars and percentage.
And so we feel really good about.
What we're originating now I think the existing book and some of the pressures of the inflation net and the environment.
I think started to push the payment rates down a little and Thats, what we saw but like I said, we've seen some stabilization here, we see things getting better and we're cautiously optimistic.
Getting some of this back in the second half.
Okay I appreciate that.
So it doesn't sound like that.
The problems are still.
From a macro perspective I would've thought.
Inflation would be a little bit of issue first and then it leads to a crescendo from there is it persistent but it sounds like it was more of an immediate impact in May and then didn't necessarily get worse in July and August .
If that's correct and then.
Yes.
Credit facility Upsize was in June so just maybe the comments around the credit picture.
It's around that transaction was a that was a really positive sign.
Obviously, the lender, they're comfortable with the trends through June .
Maybe just any update there.
Timeline.
Yes, I mean the thing.
As we have great financing partners that we have had relationships with now for.
For pretty much the existence of the business.
And those relationships.
Formed.
Historically than we have been great partners. We were out ahead of this and we started tightening in November .
Originally started tightening in November of last year tightened again in January tightened again in May pretty significantly.
So I think.
Our partners Trust us and we have great relationships with them and so they believe in what we're doing.
That's that's been real real help for us as we continue to grow and expand and kind of go through some of this volatility.
Okay.
Okay, and then just to the first part of the question.
Yes.
<unk>, where we're seeing this like is there any insight in how have you tightened.
A matter of moving up in credit scores and then.
One more if I could.
Nathan is were actually much stronger than we expected this quarter. So is it really strong.
The demand I would think is really high and competitive conditions have improved so you can tighten and still hit your topline numbers.
Yes that is absolutely so not only that our acquisition cost has come down.
We are achieving ahead of plan on that almost 40 plus dollars year over year, I think there's even potentially some room for improvement there through the rest of the of the demand continues to be some of the strongest demand we've seen.
But you got to be careful right and so we opted to slow down that growth that we could be growing a lot faster, but we're still putting guidance in the 20% to 25% range and double down on quality here. So what's happening is we're seeing customers that the average credit score increased about 40 points over the 2012.
2021 pandemic, that's because people were not accessing credit they werent enquiring for credit we saw kind of our addressable market shrink. We're now seeing kind of the reversal of some of that where we're starting to see high quality customers kind of come back into into our space and qualify for our products. So like I said, we're originating the highest percentage in dollar amount of.
Of lower segment customers that we have probably since kind of the early days.
The business is lumpy kind of started to grow so feel.
Feel really good right I feel really good about that.
And I think everything we're doing on the recovery side on the payment side.
To continue to support our customers.
That need to make partial payments are.
At work with them through this tough time, we're doing and we're seeing great results, especially with some of the self service stuff that we've implemented and done some big technology releases.
Other thing.
We're doing that we've some of the other lenders.
You have started using bank data, we've been using the bank data in our underwriting.
For the.
For the better part of seven or eight years now so we have incredible historical data and so we've completely revamped.
Our revamped that credit model to really really focus on payment to income ratios I think ability to pay in this environment is vital for til.
Look at especially when the customers are kind of.
Dealing with a large I think it's 9% to $10000 of additional expenses per year and so there is some wage growth and we remain optimistic because unemployment remains low and so that is the.
That gives us a lot of.
Feeling good about about some of this is that there is low unemployment and our credit model.
And the enhancements that we've made over the year appear to be working very favorably.
Okay, great. Thanks, Tom.
Yeah.
As a reminder, that star one if you do have a question or comment.
Yeah.
Okay.
Okay, and there appear to be no further questions at this time I'd like to turn the floor back over to Todd Schwartz for closing remarks.
Okay. Thank you.
Well listen thanks, everyone for joining us today.
Confident in the changes, we're making to set us up for return to profitability. In 2023, we look forward to speaking with you again during our third quarter earnings conference call in November . Thank you.
Thank you ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
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