Q2 2023 OppFi Inc Earnings Call
Good afternoon and welcome Joe.
<unk> second quarter 2023 earnings conference call.
All participants are in a listen only mode.
As a reminder, this conference call is being recorded.
Management's presentation, there will be a question and answer session participants can submit questions at any time, but either emailed Lindsay bachelors at upside dotcom.
Selecting the ask a question feature on this slide what you asked.
Or at least any by dialing finally.
Suddenly sending by dialing you may be prompt to enter the queue watch through the prepared remarks. It is.
It's now my pleasure to introduce your host Sean smaller as head of Investor Relations you may begin Sir.
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 second quarter 2023 earnings press release and supplemental presentation can be found at investors dot off.
Si dot com.
During this call upside, we'll discuss certain forward looking information. These forward looking statements are based on assumptions and assessments made by authorized management in light of their experience and assessment of historical trends current conditions expected future developments and other factors they believe to be.
Yet.
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 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 United States 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 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 I'm very pleased with our second quarter results, which further demonstrate our focus on profitability in the second quarter of 2023 and more than doubled adjusted net income year over year, while achieving double digit revenue growth I believe this result, clearly indicates our ability to bal.
<unk> growth and risk while maintaining expense discipline.
Pam will review, our second quarter results in detail as well as discuss our full year guidance update which includes raising our earnings outlook before she does I will cover three topics one the key highlights from our Q2 2023 financial performance to our progress on strategic.
<unk> business priorities for 2023, and three an update on our corporate development initiatives.
Second quarter results were driven by improvement in credit performance due to adjustments made last year and recent modeling enhancements as well as continued total expense leverage and growth and recoveries. The key highlights for the second quarter of this year compared to last year or so.
Solid 14% total revenue growth, so $122 5 million the strong rebound in both net income with 90% growth to $18 1 million and adjusted net income with 138% growth to $16 3 million.
We achieved these results, while holding ending receivables steady at approximately $398 million further demonstrating our renewed focus on profitability over portfolio growth.
This and we realize additional gains and cost efficiency in both marketing and operations marketing cost per funded loan decreased 23% total expenses as a percentage of total revenue decreased by 16%.
Now I'd like to provide updates on our core strategic initiatives during the second quarter credit performance continued to strengthen net charge off rates improved year over year and sequentially. Both as a percentage of total revenue and average receivables net charge off rate as a percentage of total revenue decreased seven.
17% or seven percentage points falling to 36, 2% from 43, 5% in Q2 last year further illustrating the effects of credit modeling enhancements and adjustments at the end of the second quarter. The total first payment default rate decreased 23% and total delinquency.
Fee rate declined by 10%.
I want to take this opportunity to remind investors about the overall seasonality of the business. Since this affects sequential credit trends loan vintages originated during late first quarter early second quarter or historically weaker than other times of the year, which affects credit performance in the third and fourth quarters. Therefore, partly due to seasonality, we expect net charge offs.
Rates to increase sequentially in both the third and fourth quarters, while continuing to improve on a year over year basis.
This year, our recovery strategy continues to contribute strongly to our net charge off rate improvement during the second quarter recoveries increased 91% year over year to $6 5 million. Our plan. This year is to remain disciplined and prioritize strong unit economics and profitability over originations growth.
Last year's adjustments to credit modeling have yielded positive results our product and marketing teams continue to focus on cost effective initiatives to generate lower risk origination volume. We have worked hard to optimize our marketing funnel to lower origination cost and yield better quality, we remain very focused on realizing operate.
Efficiencies. This is demonstrated by the 16% improvement year over year for total expenses as a percentage of total revenue during the second quarter. We achieved this with more efficient marketing spend effective management of general administrative expenses and the previously announced streamlining of our customer support operations.
These improvements were made despite interest expense, increasing by approximately $3 million or 43% year over year.
Before I conclude my remarks, I'll provide a brief update on our corporate development initiatives as discussed on our Q4 2022 conference call in March diversifying the business is one of our strategic growth priorities.
We are most interested in potential accretive acquisitions in adjacent customer or product categories, where we believe we can leverage our core competencies and brand equity to create value and serve more customers. We believe there are opportunities in the market and are starting to see more realistic valuation expectations.
In summary, the strength of our business during the first half of the year gives me confidence that our strategic decision, making last year put us on the right path and is generating positive results. This confidence is why my family and I continued to purchase shares during the recent open trading window. Following our Q1 earnings release.
We also expect to be more proactive with investor relation activities in the second half of this year with plans to meet with investors at conferences and related events.
With that I'll turn the call over to Pam.
Thanks, Todd and good afternoon, everyone Q2 was a solid quarter as credit performance continued to improve during the seasonally strongest period of the year.
Total revenue increased 13, 5% to $122 $5 million net originations decreased 10, 8% year over year to $200 6 million due to our strategic focus unprofitable growth that emphasizes quality over quantity and the narrow credit box to open to the lowest risk credit segments in the addressable.
Market.
New customer originations for the quarter decreased by 33% year over year, while existing customer originations increased by 13, 8%.
Our annualized net charge off rate as a percentage of average receivables was 46, 6% for the second quarter compared to 51, 9% for the prior year quarter and 61, 8% in the first quarter of 2023 as a percentage of total revenue in the annualized net charge off rate for the second quarter was 36, 2% compared to $43.
5% in the comparable period last year and 49% in the first quarter of 2023.
To reiterate what Todd discussed earlier, we now expect the net charge off rates to increase sequentially in the third and fourth quarters due to seasonally weaker loan vintages from earlier this year, while improving in both of those quarters on a year over year basis for the full year, we anticipate significant improvement from last year.
Turning to expenses total expenses for the second quarter totaled $56 2 million or 45, 9% of total revenue compared to $58 8 million or 54, 5% of total revenue for the second quarter of 2022 a.
The year over year decrease was primarily the result of lower direct marketing spend due to the mix shift partially offset by higher interest expense.
Interest expense for the second quarter totaled $11 2 million or nine 2% of total revenue compared to $7 9 million or seven 3% of total revenue for the same period last year. The increase was due to higher interest rates on our credit facilities utilized to fund originations over the past year adjusted.
Adjusted EBITDA totaled $35 7 million for the second quarter of 78, 7% increase from $20 million for the comparable period last year, driven by both lower net charge offs and operating expenses.
<unk> net income was $16 3 million for the second quarter more than doubling from $6 8 million for Q2 last year.
Adjusted earnings per share was <unk> 19 cents compared to eight cents for the second quarter last year for the three months ended June 30th 20, twenty-three up I had $84 8 million weighted average diluted shares outstanding.
Our balance sheet remains strong with cash cash equivalents and restricted cash of $62 1 million total debt of $331 9 million ending receivables of $397 8 million and equity of 177 million as of quarter end. We believe we have ample liquidity available to support our current growth plans.
With $537 1 million in total capacity to fund receivables at the end of the second quarter in late July We also announced the upsizing our revolving credit facility with affiliates of <unk> capital management to $250 million. We appreciate at Elias confidence in us and the strengthening of our business relationship.
Kris capacity will be used to fund receivables growth, which we expect to generate incremental profitable growth.
Turning now to our outlook for full year 2023, we are reaffirming guidance for total revenue of 500 million to $520 million, which implies growth of 10% to 15% year over year.
In addition, we are increasing guidance for adjusted net income to between $29 million and $35 million from the 24 million to 30 million. Prior range. As a result, we are also raising our outlook for adjusted earnings per share to between 34 cents in 41 cents from the 28% to 35 cent previous range.
Well, we're not providing formal quarterly guidance I'd like to share additional details for how we're thinking about the second half of the year.
Expect to resume year over year originations growth in the third and fourth quarters for revenue, we're anticipating low to mid single digit growth in Q3, and then acceleration to low double digit growth in Q4.
With that I would now like to turn the call over to the operator for Q&A operator.
Thank you.
Conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Tom.
Zander question queue, you May press Star two if you would like.
<unk> from the keel for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment please for questions.
Yeah.
Yeah.
Our first question comes from David Scharf with JMP Securities. Please go ahead.
Thank you.
And thanks for taking my questions.
Hey, Todd.
Little bit of a I guess more of a philosophical or strategic question for you you know this whole earning season, the investors and analysts have been asking.
Managements about you know after credit tightening what what do they what do they need to see to get more aggressive or to open the credit box a bit but.
I'm more interested in kind of hearing your thoughts about how we ought to think about what your.
Kind of a longer term vision is for op Fi in terms of growth rate you know you you've talked a lot about.
Quality over quantity you know maximizing.
Returns over just topline or balance sheet growth.
Do you have a certain ceiling in your mind in terms of regardless of the opportunities out there.
How much you're willing to sort of grow the portfolio or rather is it going to you know continue to be sort of opportunistic depending on the cycle.
Yeah. Thanks, David Good question. So first of all you know I pointed this out on other calls.
Back in 2019, we were originating two segments that today, we originated zero of and we could double our addressable market essentially overnight, but its obviously theres cyclicality to the business in the consumer segment. The consumers had a great run we founded this business in 2012, we had a credit cycle for <unk>.
Seven straight years, where we had really really strong performance and then obviously with COVID-19 and everything else that happened.
Adjusted and that's what that's what's great about our team we're nimble we're able to adjust to the market dynamics right. Now you know I'm proud that we've been able to increase revenue and and you know and grow even even with them and with much stronger quality right on the credit side and you know I.
Also we're seeing you know, we're still being a little bit that we're being real discipline on the credit I do think though that there's going to be a time when the consumer the cycles out and we will be able to open up some more segments and like I said its it virtually doubles, our addressable market, 40% of our originations I mentioned new loans in 2019 came from those.
And we're no longer Virginia, So all that being said I think I'm really proud of the team and our marketing funnel optimization has been really great. We brought on some new partners, we have actually some strategic initiatives in the pipeline so open up potentially some some.
There's some new geographies, but we have nothing to report now, but you know we're working on some of that as well. So right now we're comfortable with where we're at and end with the credit origination we also.
We're able to find some model enhancements right, we were able to take some of the data from some of the losses last year and have been able to actually increase growth in certain in certain segments and pockets because of that data. So that's really exciting as well.
Got it no no. That's helpful. I mean, it kind of sounds like we're not gonna be drinking from a fire hose as soon as you see sort of macro factors change it it's going to be more measured.
And then kind of predictable growth going forward.
Yeah.
That's what I wanted to follow up you mentioned.
You know on the marketing side and I know I think in your prepared remarks or in the press release had talked about the.
Cutting cost per funded loan down over 20% can you just update us on sort of the channel mix I mean, we were.
You know direct mail versus digital you know, whether there's any kind of concentration with particular.
Sites like a lendingtree or so forth just yeah. So we don't we keep all of our partners at less than 10%. We really can you really make sure that we don't have you know that that type of risk or concentration as some others in the space. We've also direct mail is actually something that we have we see tremendous.
Amount of our ability to improve in our we really have been you know.
With Covid and with kind of what went on with the consumer some of the modeling.
Has become less predictive so we have huge room to improve and so we're achieving these results kind of even without that that muscle fully I would say it fully at 100%, but you know are really have some interesting things there to deploy in the upcoming quarters.
We have partnerships with some of the ones you mentioned one of our one one thing that's been really great is our C. O is up 65 are our search engine marketing observations have yielded 65% increase I believe in that and in applications and qualified apps. A referral program continues to be a really strong driver of high.
Quality.
London consumers that we're able to originate for on behalf of the bank partners.
And so we have a nice mix shift where we don't allow any one.
Partner or or or vertical to be too much of our of our current origination platform to keep it fully diversified.
Let.
Last question, just just on the guidance maybe clarification.
I was going to originally I scribbled down here to ask about.
Maybe what was behind the second half trajectory.
You know in terms of earnings being much more kind of front end loaded.
After the Q2 results, but you know Pam Kohn.
Commented about the loss rates.
E M.
Correct and that that's pretty much the predominant driver.
Is it more pronounced seasonality versus maybe what we had modeled them as the increase in loss rates seasonally in the second half.
I think I think it's the it it's the continued discipline of growing at a high single digit right is also also affects that number right as a percentage of revenue right. So we're going to be remain discipline and in a normalized environment. If there was maybe a little bit more growth out there, obviously that may be a little bit of a different conversation but.
We are we had a really strong.
Fourth quarter vintage coming into the first quarter of tax refund and we also are a real great story as our recoveries right of recoveries up 90% year over year, our values based recovery strategy that we implemented also our tech and product team <unk>.
Revamped the whole payments portal for our consumers and made it easier for consumers to interact with payments and our service delivery to be able to power that and so we we did a lot of the strategic decisions last year and they were very tough decisions and we kind of had told the street and our analysts and our investors.
Well that was going to be minimal profitability. We met we remained profitable for the year, but all of those things. We did you know kind of came better than expected in the second quarter and will then work continues to benefit from that in the third and fourth quarters, but yeah. I mean as you are as you start to originate throughout the year.
Theres, a little normalization on the losses, but we still we still are very very encouraged about our approach. Our opex is at the right level of where we think the business needs to be and I think you know with our acquisition costs and losses kind of trending normally where you know we're in a good spot.
Got it perfect. Thanks, so much.
Yeah.
The next question comes from Mike Grondahl of Northland Securities. Please go ahead.
Hey, guys. Thank you one thing you called out Besides you know improving credit and expense leverage with some recent modeling enhancements could you just describe kind of what those work.
Yeah, I mean without getting too technical.
Some of some of the stuff we've seen on an on.
Some of the customers income and and on the bank side of attributes have been very very helpful.
Obviously like with with with inflation, taking hold last year and people kind of having less discretionary to submit to pay their obligations. We took a lot of that data and analyze it very heavily and compared it back to years passed and that's one advantage. We have is we have a really really strong set of 10 years of data to pull from.
And find things that have become more predictive in this environment inflationary environment.
Albeit.
Unemployment remains low people are employed and so that's the positive here and we were able to derive some some additional attributes in our credit modeling that have helped.
Increase increase originations I mean, ultimately we are a credit access business and we're trying to find more borrowers that we can serve but we have to do within the confines of loss rates and what's acceptable for our business and so that's what's great about some of those modeling as you can increase some volume loss, reducing some losses and so you know.
So feel really good about the contribution of the credit team made there and we'll continue to to find more attributes and more analysis to.
To help put it in and it looks like you have ample liquidity.
How are you seeing the competitive environment today.
Yeah, I mean listen where we are we always judge our competitive by the match rates. So we have a turn up program, where when customers come to US organically, we first check them against a consortium of lower cost lenders before we engage right. There. That's one of our brand promise is to provide.
A lower rate or the best available product, if we can and that match rate has increased in the second quarter.
The first part of the year it was running at about 10%, it's kind of gone. So there is there is definitely some increased competition from lower.
No ATR providers.
Listen I as much as you know that that does inhibit our growth, although it's actually part of our brand process and we're happy for our customers that they can get a lower rate that really is kind of what we set out to do when we when we found it out five so it is part of the day I have to say, though if you look at our mix shift and you look at the debt the lower risk.
Segments, we've originated.
Significantly more of the lower risk credit despite that in the quarter and in the first quarter as well and Theyre performing you know on par with our expectations of having a much a higher quality book.
Yes.
Got it and then just lastly, it looks like.
Salary cap and the up five card you guys are kind of you know shutting down.
Any charge associated with that or cost savings, we should think about going forward.
We have a written that portfolio down Mike and you'll note that when you read our 10-Q.
It was originally held for sale, we are no longer marketing it.
And so you know winding it down.
That's what we're looking at.
Yeah.
Got it got it and then the people working on it or they reallocated or.
Is there any cost saves by winding those down or.
Minimal.
You know that the people you know most of the people who have been redeployed in other aspects of our business.
Got it okay. Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Okay.
Thanks, There are no further questions at this time.
Oh, sorry, just touch ports, CEO and executive chairman for closing comments.
Thanks, everyone for joining us today, we look forward to speaking with you again in November when we report third quarter results.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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