Q1 2023 OppFi Inc Earnings Call
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Good afternoon, and welcome to <unk> first quarter 2023 earnings conference call.
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It's my pleasure to introduce your host Sean small ours hasn't been bad.
The relation.
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 first quarter 2023 earnings press release and supplemental presentation can be found at investors.
Dot at Si Dot com.
During this call oxide will discuss 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.
These forward looking statements made during this call are made as of today and oxide 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 did.
Elements and business decisions to differ materially from forward looking statements are described in the company's filings with the Securities and Exchange Commission, including the sections entitled risk factors.
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 GAAP measures can be found in the earnings press release issued earlier. This afternoon. This call.
Being webcast wives and be available for replay on our website.
I'd like to turn the call over to Todd.
Thanks, Sean and good afternoon, everyone I am very pleased to report continued strength in our business in the first quarter of 2023, we achieved adjusted net income that exceeded our guidance with solid year over year growth I believe this result, clearly indicates our ability to rebound.
And deliver profitable growth.
Pam will review, our first quarter results in detail as well as discuss our full year guidance update.
Before she does I will cover two topics one the key highlights from our Q1 2023 financial performance to an update on strategic business initiatives for 2023.
First quarter results were driven by an improvement in credit performance as a result of credit model adjustments made in the middle of 2022.
Total expense leverage and better than expected recoveries in payments. This enabled us to exceed our first quarter guidance for adjusted net income and achieved year over year growth.
The key highlights for the first quarter of this year compared to last year or 9% growth in ending receivables to $370 2 million.
20% growth in total revenue to 124 million net.
Net income of $3 9 million and adjusted net income of $4 $4 million.
We realize further gains and cost efficiency in both marketing and operations with the 9% decrease in marketing cost per new funded loan and the eight percentage point decrease in total expenses as a percentage of revenue.
Now I'd like to provide updates on our previously discussed core strategic initiatives for 2023.
Credit performance continues to strengthen as we anticipated after credit adjustments were made last year, we experienced sequential improvements in vintage level first payment defaults beginning in Q3, and then improvements in portfolio level total delinquency rates starting in Q4 now.
I'm pleased to report net charge off rates, both as a percentage of revenue and average receivables improved in Q1 sequentially. We expect net charge off rates to end 2023 significantly lower than last year.
In the first quarter, the first payment default rate decreased 20% year over year and 9% sequentially. This was down 30% from the peak last year.
The total delinquency rate decreased 20% from the fourth quarter of 2022, and 3% year over year.
Net charge off rate as a percentage of total revenue decreased 18% or 11 percentage points falling to 48, 9% from 59, 8% in Q4 last year.
We attribute part of this success to our values based collection strategy during the first quarter recoveries doubled to $6 4 million year over year.
This also represented a 40% increase sequentially portfolio quality remains our priority. We made the strategic decision to focus on profitable growth by tightly managing credit as a result, we are emphasizing credit performance over origination growth to achieve consistent earnings growth we continue.
To diligently monitor leading indicators closely and additional credit adjustments will be made as needed.
Our marketing initiatives continue to unlock pockets of growth to drive cost effective low risk origination volume.
We continue to focus on optimizing our diverse channel mix across our CEO direct mail and long standing partners.
One of the other areas of focus for 2023 is continuing to improve our operational efficiency. We recently streamlined our customer support operations to maximize efficiency, while improving customer experience. This is evidenced by our net promoter score of 80 that we achieved in Q1.
In summary, I'm very pleased with our Q1 performance that exceeded our earnings guidance and delivered year over year growth.
Given our Q1 performance and greater confidence in the remainder of the year, we raised our guidance for full year adjusted net income and earnings per share.
With that I'll turn the call over to Pam.
Thanks, Todd and good afternoon, everyone Q1 was a strong quarter as our credit performance clearly continued to improve.
Total revenue increased 19, 5% to $124 million.
Net originations decreased one 9% year over year to 160 million. This reflects the credit adjustments made in the third quarter last year.
New customer originations for the quarter decreased by 17, 9% year over year, while the existing customer originations increased by 15, 9%.
Our annualized net charge off rate as a percentage of average receivables was 61, 8% for the first quarter compared to 55, 8% for the prior year quarter and a decrease from 71% in the fourth quarter of 2022.
As a percentage of revenue the annualized net charge off rate for the first quarter was 48, 9% compared to 47, 2% in the comparable period last year and an improvement from 59, 8% in the fourth quarter of 2022, we expect the net charge off rates to continue to improve throughout the year.
Turning to expenses total expenses for the first quarter totaled $53 $5 million or 44, 4% of total revenue compared to $52 9 million or 52, 5% of total revenue for the first quarter of 2022 the year over year increase was primarily the result of higher interest expense, partially offset by.
Lower direct marketing spend driven by decreased cost per funded loan.
Interest expense for the first quarter totaled $11 4 million or nine 5% of total revenue compared to $7 4 million or seven 4% of total revenue for the same period a year ago.
The increase was due to higher interest rates on our credit facilities utilized to fund originations growth over the past year.
Adjusted EBITDA totaled $21 million for the first quarter, a 78% increase from $11 3 million for the comparable period last year, driven by both lower net charge offs and operating expenses.
Adjusted net income was $4 4 million for the first quarter, a significant increase from the approximate $650000 for the comparable period last year.
Adjusted earnings per share was five cents compared to one center for the first quarter last year. This exceeded our guidance of approximately breakeven.
For the three months ended March 31st 2023 up I had $84 4 million weighted average diluted shares outstanding.
Our balance sheet remains strong with cash cash equivalents and restricted cash of $71 $4 million total debt of 331 $6 million gross receivables of $417 5 million and equity of $164 1 million as of quarter end. We believe we have an.
The liquidity available to support our current growth plans with $546 $4 million in total capacity to fund receivables at the end of the first quarter.
Turning now to our outlook for full year 2023 we affirm guidance for total revenue of 500 million to $520 million, which implies growth of 10% to 15% year over year.
In addition, we increased our expectations for adjusted net income to between $24 million and $30 million from the 22 million to 28 million. Prior range. As a result, we are also increasing our guidance for adjusted diluted earnings per share to between 28 and 35 cents from the 26 to 33 cents previous range.
While we're not providing formal guidance for the second quarter I would like to share. Our current view based on our pacing quarter to date, we continue to manage the business for profitable growth.
With this strategy, we expect total revenue for the second quarter to increase mid to high single digits year over year, and we anticipate revenue growth to accelerate in the second half of the year to achieve our full year guidance with that I would now like to turn the call over to the operator for Q&A operator.
Thank you, we'll now be conducting a question and answer session.
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Our first questions come from the line of Jakob Scharf JMP Securities. Please proceed with your questions.
Hi, good afternoon. Thanks for thanks for taking my questions he had.
Got it.
Kind of curious just taking a step back the.
The the trends in credit or are obviously very encouraging.
In an overall.
I think the.
Kind of trends seem to be very consistent with most of the other non prime lenders. We've talked to you. This quarter in terms of you know improvements post.
Credit tightening.
And in moderation of origination volumes.
Could you just maybe share some thoughts on how you're thinking about.
The macro outlook there, there's so many different variables and uncertainties and in specifically you know are there certain a certain metrics or tell tale signs like you know, it's sort of unchartered territory, we're in and our and I'm wondering what are some of the things you would need to see.
To get comfortable.
Switching back to you know more.
Not necessarily aggressive, but we'll put more growth mode.
Yeah.
That's a that's a good question.
Well so first of all you know.
Right now with the macroeconomic backdrop.
The positive of all of this is that there is very low unemployment and I think theres been a lot of surprise of the job growth that we've seen and so we are obviously benefiting from that some customers are employed Tang I think though to your point due to the backdrop, we are being conservative and.
The segments that we're originating on behalf of our bank partners because the way. We think about this is as you know last year things started to look really good in the beginning of 2022 and then we saw what happened and so I think you know our strategy here is we're going to really focus on the dependable segments. The segments that we know we can.
Count on for profitable growth and.
Distance you have returns and so that's really how we've decided to play at the good news is as we've been able to find growth there and we've been able to do with that and at or below the acquisition costs that were targeting and I think that may may be doing different tightening going on above us and also some less competition that we were seeing kind of in late 'twenty one in early 'twenty.
Yeah.
Got it and then it was kind of a.
Sort of a follow up I was curious kind of what what observations.
What you're seeing on the competitive front and specifically just.
There were a couple of months after the last call and as you know we've.
Seen more rate increases.
Our funding constraints are you sensing that that's becoming more of a hindrance stupid to potential competitors that you might be seeing more kind of inbound traffic, even if you're not necessarily funding those loans.
You know any sense that the current rate environment has kind of been working in your favor.
I think so I think I think what you're seeing is some of the lenders above us are typically called the peer to peer space has definitely tightened just from looking at earnings transcripts and looking at they're they're they're not able to provide necessarily pass on the cost to investors to get them a higher rate of return and so we're getting the benefit.
Of that I also think just in our segment is that theres been some shakeup. That's happened in 2022 that we need to getting an advantage and also you know we were able to complete a large scale facility last year to give us ample room to grow and have also improved our cash position by over $20 million in the quarter. So we have ample.
The room to grow so our appetite is there and you know we're in the game and we're looking for high quality originations that.
That we think can provide credit access to our customers.
Got it and he just switching to the to the.
The numbers.
Should we view the the.
Guidance.
I mean is that predominantly just kind of flowing through the first quarter upside or is there anything else that.
You would characterize as.
It is changing on the margin from from the last call. Yeah. I think I think that's right I think it's it's obviously call them through the first quarter and it's also our confidence in our operating leverage on our credit and in our ability to still find pockets of growth. So it's a little bit of both but I think we felt comfortable.
Revising slightly up in and showing strength through the first quarter, which obviously was a big decision.
Decision factor in that.
Got it got it and then just the last question.
Probably more theoretical give it given everything we just talked about on the macro environment, but can.
You know can you provide I guess the math around.
With existing funding.
In in place any any covenants or limitations on how much can be drawn to you know just based on kind of what you.
Could draw right now in combination with your.
You know sort of 12 months forecast of of loan repayments trying.
Trying to get a sense of what sort of the maximum origination.
Capabilities are you know based on planned repayments and current borrowing.
Not suggesting that's what you're going to do but just just to help us frame that.
Yeah, I mean, if you're asking like do we have ample capacity ample cash and ample room to grow at or above our guidance of 10% to 15% absolutely I mean, we could we could grow faster than that but that's all that like like I said, we're being conservative and focused on operating leverage and credit performance and we want.
Probability of returned to be very high for our bank partners on these originations and so yes, I mean, there is room to grow further out but in this environment to your point earlier I think we feel very comfortable with that range and so that's something we can achieve with a high degree of probability.
And a high degree of return that's like returns will come through.
Great Great. That's all I have thank you.
Okay.
Thanks, David.
Thank you. Our next question is coming from the line of Mike Grondahl with Northland Securities. Please proceed with your questions.
Hi, guys. This is owen on for Mike.
Two quick one are there any issues with tax season and secondly.
Are there any new products to highlight our improvements to existing one incremental to last quarter.
Can you just repeat the second question Owen please.
Yeah or are there any new products to call out or highlight improvements to existing ones from last quarter.
Yeah, So that's fair.
The first one was tax season. So it was a very successful tax season.
Part of this though was due to the technology enhancements, we made in the second half of last year to our payments payment settlement portal, we revamped our whole recovery strategy as we call. It a value based recovery strategy. This yielded significantly better results than we've ever had in the history of the company.
Very successful in lighting and led to outsized performance compared to our budget, which was great. But it was a it was a successful tax season and behave more normally then we've kind of seen in like the last two to three years. So that was that was great as.
As far as far as the product goes.
We still have the you know the.
<unk> installment product with our bank partners that is our primary product.
We when you say updates to the product are you talking about just.
Specifically about the product or like something about how we're growing it yeah, yeah, maybe just get a little bit more clear.
Yeah specific to the core product.
Was there anything incremental.
Yeah, I mean, so I mean, I think I think that the marketing team has done a great job.
Really not only working.
So to adjust filters to find pockets of growth, but also working maximizing our partnerships and relationships and then really really kind of refreshing and focusing on the things. We can control more which is S. C. O direct mail referrals those are all showing great momentum coming out of the first quarter and something that we're prioritizing and also they they happen.
B you know.
Lower cost acquisition channel. So we're definitely putting a lot of effort and focus on that and we feel that they can definitely differentiate us here.
Great. Thanks for answering my question.
[laughter].
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Our next questions come from the line of William Brewster with sell them. Our capital Group. Please proceed with your questions.
Hey, Ted and team first of all I wanted to commend you for taken the reins and making smart decisions, it's obvious through the credit book that debt.
You came in at the right time and I appreciate what you've done.
And I also want to applaud the slower growth I I am in the camp of profitable and good growth being the best growth. So thank you for that.
I did want to ask you know it seems as though your NPS score has slipped a little was curious how you're thinking about that and some of the puts and takes.
No you know your family history is a very MTS focused and curious how you're thinking about that.
Yeah, Yeah, I mean, it's you know.
It's it's a it's one that obviously, we track closely monitor on a week to week basis and.
There is some that there is some movement in that number.
You know through the quarter I think I believe actually through most of the quarter. We were sitting at 82 to 83 and I think maybe that's the window. So it's what we kind of measure. It for you you know at the last day of the month, so, but you know, but our goal is always to keep that above 80, that's industry leading and.
You know not not aware of another financial service provider that kind of a.
Holds a score at that level. So we're very very proud of that something that will continue to focus on and continue to be a you know.
Just to make sure that we keep it as high as high as possible.
But yeah, there is a little volatility in that number throughout the week to week, depending on the originations and the customers.
Okay, and one of the things that.
Come up obviously with the regional banking stuff I just was curious the stability of your funding relationships and how Youre thinking about your bank partners. You know if you wouldn't mind, just kind of sharing your thoughts on that that'd be awesome.
Yeah, I mean, it's it's top of mind, there and obviously something that we're focused.
Focused on it.
As far as our par.
Partners liquidity partners Bank partners.
Not on the lending side, but just on the Treasury side, we have no exposure to any of the banks that had.
Gone away or having having difficulties I think we stated that on the last quarter earnings call. So thanks, Thank goodness for that or our banking partners have had have not had any effects start knowledge at all you know either obviously, we're at very close relationships with them and talk to them very very frequently but their balance sheets remain.
You know very strong and our partnerships remain very strong so.
So far there really hasn't hasn't been any issues on that front.
Yeah, one of the interesting comments that one of your.
Competitors had said is that the shorter duration loans are actually.
Sort of a positive to their partner. So I was curious if you were hearing the same thing. So you know with an a and a duration crisis, maybe some shorter duration loans can help.
Yeah.
Yeah, No I think in this environment with uncertainty I think you know the shorter duration. That's the one thing about outside though is we've never played with durations I mean, theres incremental duration risk that that is appropriate one month two months out but.
So.
Change drastically.
Drastically changed your duration there is risk in that.
And you're not necessarily getting getting paid for that risk and so we're very careful I mean, if you look at our business in the history of time, I think our duration, our average duration or average life of loan on the books has been consistent and really has has only incrementally changed kind of throughout the history of our business because it's not something that.
We.
I really want to play with them. It's also and in better times, you may not it may not benefit you, but and tie in tougher times are uncertain times like we are kind of today I think it really is the appropriate and prudent thing to do.
Alright, cool well I I I just want to publicly thank you for stepping in you know I know that you changed your life to come back to the company and thank you for it to go on.
Thank you I appreciate it I appreciate the kind words. Thank you.
Thank you there are no further questions at this time I'd like to hand, the call back over to Todd sports for any closing comments.
Yeah.
Well I want to thank everyone for joining us today, we look forward to speaking with you again in August when we report our Q2 results have a great day.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.