Q3 2022 OppFi Inc Earnings Call

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Good afternoon, and welcome to up five third quarter 2022 earnings call.

All participants are in listen only mode.

Minder This conference call is being recorded.

After management's presentation, there will be a question and answer session.

It is now my pleasure to introduce your host Sean smaller head of Investor Relations you may begin.

Thank you operator, good afternoon on today's call are Todd Schwartz, Chief Executive Officer, and Executive Chairman and Pam Johnson, Chief Financial Officer, Our third quarter of 2022 earnings press release and supplemental presentation can be found at investors.

Don Si dot com during.

During this call upside we will discuss certain forward looking information. These forward looking statements are based on assumptions and assessments made by our funds management in light of their experience and assessment of historical trends current conditions expected future developments and other fab.

Actors they believe to be appropriate.

Any forward looking statements made during this call are made as of today and <unk> undertakes no duty to update or revise any such statements whether as a result of new information future events or otherwise important factors could cause actual results developments and <unk>.

This decision to differ materially from forward looking statements are described in the company's filings.

Finally, with the Securities and Exchange Commission, including the sections entitled Risk factors in today's remarks by management. The company will discuss certain non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable.

<unk> GAAP measures can be found in the earnings press release issued earlier. This afternoon. This call is being webcast live and will be available for replay on our website I would now like to turn the call over to Todd.

Thanks, Sean and good afternoon, everyone Pam.

Campbell will review, our third quarter results and provide additional details about our financial performance and balance sheet before she does so I will cover four topics one the key highlights of our third quarter performance to an update on the key initiatives discussed on our second quarter call.

Three our macroeconomic outlook as well as quarter to date business trends before our early view of 2023.

Our third quarter performance was in line with our expectations and we're pleased by these results given the challenging overall economic environment. The key highlights year over year, our net originations increased by 11% to 183 million ending receivables grew by 39% to 400.

8 million total revenue expanded by 35% to 124 million marketing cost per new funded loan decreased by 26% to $188 operating expenses, excluding interest expense as well as add back and onetime items decreased.

Greece to 43 point.

$1 million or 34, 7% of total revenue from $44 2 million or 48, 1% of total revenue in the prior year period.

I am pleased to report some positive progress on the key initiatives, we discussed last quarter.

In mid July the most significant adjustments to credit models were made in the company's history. We're happy to report that these changes achieved the intended result based on early trends to be more specific the first payment default rates for new customers ended the third quarter, 26% lower than at the end of the second.

Quarter also the first payment default rate for refinance loans to existing customers ended the third quarter, 9% lower than at the end of the second quarter looking at the overall portfolio. The percentage of the total active portfolio that is up to 29 days delinquent ended the third quarter to pursue.

It gives us strong confidence in 2023.

While we were happy with the portfolio quality, becoming stronger we want to remind investors that the net charge off rate is likely to worsen sequentially in the fourth quarter consistent with our forecast as nonperforming loans continued to cycle through our platform.

The net charge off rate lags, new vintage performance since it is a function of the performance of loan vintages from prior quarters and the volume of current quarter originations.

The credit models continue to evolve with the addition of new attributes and data sources to further strengthen the accuracy of the underwriting platform. We anticipate these initiatives will serve as continued tailwind in 2023.

Our second quarter Conference call. We also discuss key marketing initiatives within our partner and direct mail channels to source higher quality originations, while lowering the average cost per newly funded loan I'm happy to report. These initiatives have been successful specifically, our marketing cost per new funded loans.

Climbed by 8% sequentially, while the weighted average risk or a risk based assessment of ability to repay improved by 17% sequentially, while originations for new customers decreased by 28% in Q3 year over year due in part to planned adjustments implemented in July works.

Cited that new originations for the lowest credit tier increased by 43%. We accomplish this by strategic upmarket targeting initiatives and our highest volume marketing channels, including partners and direct mail. Furthermore, in Q3 same day funding was added to the.

Platform.

We also implemented our renewed values based recovery strategy that enhance customer experience and significantly increase recoveries as part of this program, we launched a redesign easy to navigate self service portal with expanded capabilities and payment options for customers. This has proven to be very.

Cecil and well received.

Turning to our macroeconomic outlook and current business trends, we are closely monitoring the broader economy and the effects that persistent high inflation and unemployment rates can have on our customers. However, we are confident in our ability to navigate the environment and we are increasingly optimistic given the positive trends from our recent strategic.

Let's.

Speaking on business trends I'll now briefly discuss our quarter to date performance. The business continues to perform in line with our expectations, which provides us confidence to reiterate our full year guidance, we continue to experience robust demand, including within the lowest risk credit tiers and the addressable market.

Likely benefiting from peers and upmarket lenders tightening credit in this uncertain environment, which is providing us more opportunity to help customers that are being turned down by mainstream credit options, thereby growing our market share for.

For example, you may recall that <unk> offers a turnoff program for applicants who opt in we'll check the market of near Prime lenders before presenting options through our platform. The match rate the percentage of opted in consumers who were accepted by turnover provider and moved on in their application reached an all time low.

Oh, and a 60% lower than it was at the start of 2022.

We believe this will result in strong demand for lower risk originations.

I will now provide an initial overview of our current outlook for 2023, we are confident that profitability will rebound in 2023 with the quarterly cadence accelerating throughout the year. The first half of the year is likely to be impacted by elevated yet improving net charge off rates as the loan vintages from Q.

One in Q2 of 2022 wont fully cycled through our platform until early Q2 of 2023, we anticipate providing full year 2023 guidance. When we report the fourth quarter results.

For 2023, we are focused on these core areas to optimize the business and maximize shareholder value.

One continuing to enhance the credit model with data and technology to pursuing growth efficiency initiatives to further scale expenses.

Three expanding initiatives to increase collections and recoveries and four strengthening our platform differentiation in the marketplace, including optimizing the customer experience.

As stated previously my family and I plan to continue to support <unk> buy shares when we believe there is a disconnect between its market price and what we believe is the true long term fair value.

During the third quarter open trading window, my family and I purchased approximately 273000 shares for $717000 with an average price of $2 62 per share with these purchases my family has purchased approximately 800.

And 82000 shares for $2 6 million at an average price of $2 97 year to date.

Before turning the call over to Pam I want to reiterate our key message that despite macroeconomic pressures the business has stabilized with higher quality loans to new and existing customers lower early delinquency rates and a portfolio that is becoming stronger as older vintage nonperforming loan cycle out do.

Two adjustments to the credit model these dynamics provide us with confidence and optimism with that I'll turn the call over to Pam.

Thanks, Todd and good afternoon, everyone, turning now to our third quarter results total revenue increased 35, 1% year over year to $124 $2 million, we generated an 11% year over year increase in originations to $182 7 million, while lowering our marketing cost per new funded loan by 'twenty.

Six 4% or $67 compared to the prior year period to $188 origination.

Origination growth was driven by continued strong demand, which created higher application volume, partially offset by the effects of credit model adjustments and therefore are re prioritizing certain marketing partners.

Speaking of marketing, we continue to be more efficient at lowering our cost to produce funded loan. This improvement was driven by growth in low cost marketing channels, such as email referrals and search engine optimization totaled.

Total net originations of new loans as a percentage of total loans decreased to 51% down 130 basis points year over year, and 590 basis points sequentially. The shift in mix is driven by adjustments in the credit model. Moreover, our investments in automation resulted in the audio approval rate increasing from 58.

1% to 69, 6%.

The annualized net charge off rate as a percentage of average receivables was 66, 4% for the third quarter of 2022 versus 51, 4% for the second quarter of 2022, and 35, 8% for the prior year quarter. The year over year increase reflects elevated charge offs relating to the initial impact of inflation.

<unk> and lower quality loan vintages originated prior to credit adjustments enacted in July in addition, credit adjustments have decelerated origination growth and therefore impacted the denominator of the net charge off rate.

Turning to expenses operating expenses for the third quarter, excluding interest expense as well as add backs in onetime items decreased to $43 1 million or 34, 7% of total revenue from $44 $2 million or <unk> 48, 1% of total revenue in the prior period.

Therefore, we leveraged expenses lowering this percentage of total revenue by approximately 13 percentage points as a result of our initiatives implemented earlier this year.

Adjusted EBITDA totaled $13 2 million for the third quarter down from $31 8 million in the prior year quarter as higher revenues were more than offset by elevated net charge offs, which was partially mitigated by lower operating expenses.

Interest expense for the third quarter totaled $9 $1 million or seven 3% of total revenue compared to $6 4 million or 7% of total revenue in the same period a year ago.

We generated adjusted net income of approximately $800000 for the third quarter compared to $17 4 million for the comparable period last year.

For the three months ended September 32022 up <unk> had $84 1 million weighted average diluted shares outstanding excluding $25 5 million earn out shares.

Adjusted earnings for the third quarter or <unk> <unk> per share our balance sheet remains healthy with cash cash equivalents and restricted cash of $55 million total debt of $342 6 million gross receivables of $407 7 million and equity of $165 5 million.

As of quarter end, we have ample liquidity available to support our future growth plans with $558 million in total funding capacity.

During Q3 upside repurchased approximately 88000 shares for $300000 at an average price of $3 46 per share.

Year to date, the company has repurchased approximately 704000 shares for $2 4 million at an average price of $3 47 per share.

Turning to guidance, we have reaffirmed our full 2022 outlook based on the third quarter performance in line with our expectations in the fourth quarter to date being on plan as well to review we have guided total revenue to increase 20% to 25% year over year operating expenses as a percentage of total revenue to be 43% to 47%.

Excluding interest expense add backs and onetime items and profitability on an adjusted basis to be breakeven or a modest net loss for.

For 2023, we remain optimistic that profitability will rebound and ramp up each quarter as the net charge off rate improved sequentially and growth efficiency initiatives further scale, our expenses with that we would now like to turn the call over to the operator for Q&A operator.

Thank you.

We will now begin the question and answer session.

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To ask a question. Please press star one now.

We have a first question from the line of David Scharf with JMP Securities. Please go ahead.

Hey, good afternoon. Thanks for thanks for taking my questions.

Hey.

One wanted to delve into a couple of things.

Todd the first is on the.

Just the customer acquisition outlook broadly you know we've heard from you.

You know vote, both some digital lenders as well as some other sort of digital oriented financial services or fintech companies that are.

Digital ad rates.

Were very favorable in the third quarter is there's a lot of competitors pulled back crypto pulled back.

Some funding constrained competitors may have advertised less.

What are you sensing the same thing I mean, some of that some of these other companies are signaling that.

You know AD rates may actually start kind of reverting back to the norm in picking up again should we view the third quarter CAC as a floor or is that something that is sustainable.

Yes, it's a good question.

I think I think it's a little bit of both right. So I think I think youre seeing.

Definitely you know I've mentioned on the call that we.

We had a turn up program and essentially the turn up program when the borrower comes to US one of our product features to screen them against our COO.

Consortium of lower cost partners of financing partners that could potentially provide credit to our borrowers at a lower cost debt that match rate hit an all time low in the quarter down almost 60%, which signifies that there is significant tightening happening.

The lenders above us and I think it's filtering all the way down from the banks.

It starts with the banks and kind of filters down to the non prime and then into our our our segment. So we're seeing we're seeing that I think I think you made the point about some some lenders have constraints with balance sheet.

And growth right now going through some challenges with credit and in the environment I think we're positioned really well, there and able to take some market share there as well.

I think youll, probably in fourth quarter, just due to the seasonally the probably the one of the best vintages of the years, you probably will see.

Some more competition increased competition coming from it but I feel like we have definitely some levers and some improvements in efficiencies that we can we're hopeful that it's going to be in line with our.

Our expectations and only slightly.

Around slightly above or slightly around where we're at now, but we obviously came in better than expected on that.

And we're happy that some of our initiatives have worked and we've got more efficient.

Got it got it and just just to clarify.

Definitional Lee Thank you referred to.

Our weighted average risk score being up 17% what it what exactly is that and was that.

And what periods or you're referring to is that the overall portfolio or the <unk>.

Third quarter, you know vintage.

A year ago, so well most companies segment their customers' base based on our ability to pay and risk and.

We found that our weighted average risk score has improved in the quarter on new loans.

So the.

Probability of success is obviously higher than the reliability of the charge off numbers and so.

<unk> to us having better quality.

And finding more segment, one borrowers, which is which is partially because of the statements I made earlier about some of the tightening going on above and then also our marketing efficiencies and being able to take market share.

Got it.

And maybe one last one.

I guess, a little little longer term.

I appreciate the color on sort of the expected trajectory during 2023, but.

Is there is there a normalized loss rate that we can think of for the business and N. I asked specifically within the context of.

You know everybody is struggling to assess what the new normal is you know, particularly for.

Lending models that were developed over the last five eight years.

You know there was a time of unprecedented.

Incredibly low interest rates incredibly slow inflation incredibly low unemployment and you know what once we emerge on the other side of any downturn, we're never likely to see that kind of a perfect storm again.

You know within that context should we be viewing sort of the kind of longer term normalized through the cycle net charge off rate for the business to be higher than maybe what was.

You experienced 19.

<unk> 19th Yeah.

Listen I think I think I've said this on previous calls.

We feel that.

When we get into the low forties potentially high Thirty's and we've also achieved that are historically the business, we feel really good about that as a percentage of revenue.

And we will always strive to kind of target that and hit those hit that metric.

Got it.

Great. Thanks, very much it's all I got.

Yeah.

Thanks for the question I appreciate it.

Thank you.

Again, if you wish to ask a question. Please press star followed by one on your thoughts drawn for now.

Participants who wishes to ask a question press star one.

Okay.

Thank you ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back over to Todd <unk>, CEO and executive Chairman for closing remarks.

Sure.

Thanks, everyone for joining us today, we look forward to speaking with you again during our fourth quarter earnings call Conference call.

Have a happy holiday season.

Thank you.

Ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

Okay.

Okay.

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