Q3 2023 OppFi Inc Earnings Call

Good afternoon, and welcome to <unk> third quarter 2023 earnings Conference call. All participants are in listen only mode. As a reminder, this conference call is being recorded after management's presentation. There will be a question and answer session participants can submit questions at any time either.

Emailing investors at up five dot com or for those listening by dialing you will be prompted to enter the queue. After the prepared remarks. It is now my pleasure to introduce your host Sean some small ours head of Investor Relations you may now begin.

Thank you operator, good afternoon on today's call are Todd Schwartz, Chief Executive Officer, Executive Chairman and Pam Johnson, Chief Financial Officer, our third quarter 'twenty to 'twenty three earnings press release and supplemental presentation can be found at investors don't op fight.

Dot com during this call op side, we 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 <unk>.

Other factors they believe to be appropriate.

Any forward looking statements made during this call are made as of today and I'll play 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 now.

To turn the call over to Todd.

Thanks, Sean and good afternoon, everyone I'm very excited to discuss our third quarter results, which demonstrate that we are achieving the goals that we set out to accomplish for the second consecutive quarter, our earnings significantly rebounded year over year, while we generated solid revenue growth.

This year, we have continued to make impactful adjustments to credit models with our bank partners that have resulted in improved credit performance and accelerated earnings growth.

We believe the portfolio is as strong as it has ever been from a credit profile perspective, which gives me confidence and continued credit performance and earnings growth prospectively.

I strongly believe our results indicate yet again, our ability to balance growth and risk while maintaining expense discipline.

Pat will review, our third quarter results in detail as well as discuss our full year guidance update which includes raising our earnings outlook for the third time. This year before she does I will cover two topics.

Key highlights from our third quarter financial performance.

And our progress on strategic business priorities for 2023.

The third quarter was highlighted by substantial improvement in credit performance year over year, including net charge off rate as a percentage of revenue yield and recoveries.

The key highlights for the third quarter this year compared to last year, our strong 7.2% total revenue growth to $133 2 million.

Solid seven 6% growth in originations to $195 7 million and significant rebounds in net income for $15 5 million from an approximate 1 million loss and adjusted net income to $13 8 million from an approximate 1 million profit.

We achieved these results while maintaining disciplined in the approach to underwriting considering the macro environment and our continued emphasis on profitability over portfolio growth.

Now I'd like to provide updates on our core strategic initiatives for the third quarter credit performance continued to improve as expected.

The annualized net charge off rate as a percentage of total revenue decreased 23% or 12 percentage points falling to 42, 4% from 54, 8% in Q3 last year.

In addition, the annualized net charge off rate as a percentage of average receivables decreased 17% or 11 percentage points falling to 54, 5% from 65, 9% in the year ago period.

Credit modeling enhancements and adjustments have created dynamic credit models that continue to improve early stage delinquency metrics as the portfolio shifts to the lowest risk segments at the end of the third quarter year over year. The total first payment default decreased 9% and total delinquency rate declined 14%.

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As has been the trend this year, our recovery strategy performed well with a 58% increase compared to the third quarter last year. We also realized solid growth in yield expanding to 129% compared to 120% in the year ago period, and thereby strengthening our unit level economics. This was achieved.

Cheap with a decrease in delinquent loans in our portfolio lower enrollment and hardship and assistance programs and a relative shift away from states with lower interest rates are.

Our product and marketing team are focused on cost effective initiatives to attract greater lower risk of origination volume, including S. C O and direct mail, while also strengthening our relationships and fine tuning our competitive strategy in the partner channel for the third quarter. This resulted in our marketing cost per funded loan being steady year over year. We also continue to be vigilant.

On expenses total expenses, excluding interest expense as a percentage of total revenue increased less than 1% to 36, 1% from 35, 8% in Q3 last year. We have previously discussed our corporate development initiatives well, we are evaluating acquisition opportunities in adjacent customer our product categories, we will.

Be patient to find the right fit concurrently we are exploring other initiatives to create shareholder value given our strong balance sheet and the inherent options that it provides us.

At its core op side as a tech enabled mission driven specialty finance platform that broadens the reach of community banks to extend credit access to everyday Americans.

Through transparency responsible lending financial inclusion and an excellent customer service experience. The company supports consumers who are turned away by mainstream options to build better financial health.

In summary, we expect to continue to grow profitably with originations growth improved credit performance and prudent expense management. These dynamics combined with our strong balance sheet and excess funding capacity provide us with options next year to create additional shareholder value.

We will remain disciplined with underwriting and expenses, we plan to share a detailed view of 2024, when we report Q4 results now.

Now I'll turn the call over to Pam to review, our Q3 financial performance and updated full year outlook.

Thanks, Todd and good afternoon, everyone Q3 was a strong quarter as credit metrics continued to improve resulting in back to back quarters of solid performance total revenue increased seven 2% to $133 2 million net.

Net originations increased seven 6% year over year to $195 7 million due to greater customer demand and the lowest credit risk segments of our adjustable market.

Customer originations for the quarter decreased by 5% year over year, while existing customer originations increased by 22%.

Annualized net charge off rate as a percentage of average receivables improved to 54, 5% compared to 65, 9% for the prior quarter as a percentage of total revenue the annualized net charge off rate decreased to 42, 4% from 54, 8% in the comparable period last year.

Turning to expenses total expenses, including interest expense were $60 $1 million or 45, 1% of total revenue compared to $53 6 million or 43, 1% of total revenue for the third quarter of 2022 but.

A year over year increase was primarily the result of higher interest expense.

Interest expense totaled $12 1 million or nine 1% of total revenue compared to $9 1 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 EBITDA totaled 33 million for the quarter 149, 8% increase from $13 2 million for the comparable period last year.

<unk> net income was $13 8 million compared to <unk> 8 million for Q3 last year adjusted earnings per share was <unk> 16 cents compared to once that for the same period last year.

For the three months ended September 32023, I'll fly had $85 3 million weighted average diluted shares outstanding on an adjusted basis, our balance sheet remains strong with cash cash equivalents and restricted cash of $66 million total debt of $344 3 million ending receivables of 400.

$15 9 million and equity of $189 8 million as of quarter end.

We believe we have ample liquidity available to support our current growth plans with 591 million and total capacity to fund receivables at the end of the third quarter.

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 and.

In addition, we are increasing guidance for adjusted net income to between 40 million and 42 of them in the $29 million to $35 million. Prior range. As a result, we are also raising our outlook for adjusted earnings per share to between 47, and 49 cents from the 34% to 41 cent previous range.

Before concluding our prepared remarks, I will provide a brief update on our proactive investor relation strategy for the remainder of the year. We are very excited by our substantial earnings turnaround. This year and are confident in our long term growth strategy, we plan to amplify our message and communicate the story to a broader audience, both institutional and retail investors through investor conferences.

Non deal road shows and other opportunities. In addition to further our engagement with retail investors. We recently launched our participation and the Weeble corporate connect platform, where we can directly communicate with investors to highlight corporate news and answer questions with that I 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 to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Okay.

Our first question comes from David Scharf from JMP Securities. Please go ahead.

Great. Thanks, Good afternoon, thanks for taking my questions.

Todd.

We're obviously seeing.

You know the benefits of <unk>.

Kind of the the credit tightening you implemented last year and more disciplined underwriting.

Certainly translating into improved unit economics.

Picture I mean, we're kind of at the tail end of a reporting season, where a lot of you know.

Non prime lenders have.

You know been communicating you know little easy.

Easing of the pace of credit normalization, but you know still highlighting a lot of economic uncertainty.

What are you what are you seeing if anything that signals.

You know potentially leaning into marketing and customer acquisition, a little more you know just want to make sure I kind of you know.

Accurately interpret sort of what's your view heading into next year is in terms of the health of the consumer or weather.

You are still maintaining a pretty you.

Cautious outlook.

Yeah. Thanks for the thanks for the question David It's a good question.

And you know it becomes a little more challenging when you look back to the three prior years like last year being a tough one with inflation 21 being.

The stimulus of Covid in 2020 being Covid. So we kind of look back to 2019, that's how we've been and we look at the loss curves compared to you know performing today Theres a lot of growth out there, but obviously, we've got to be very disciplined and I think we would need a sustained period of where are we.

We're confident in loss curves.

Looking like 2019, and some macro factors as well to be able to lean into growth again.

We're also still able to grow though.

I want to point out that we're still going to grow at 10% to 15%. This year, we just have a much higher quality book.

Book of business right now and we've been able to maintain acquisition costs, So really happy happy to do that as well.

But you know as you look in the economy, there's a bunch of mixed signals.

Unemployment is still really low, but then you have these things like wars going on so we're not prognosticators of the economy and but we you know we look at some key factors but.

But we also base it upon our past experience one of the great things is that we've been around since 2011, and 12 and we pull on that information and our team's experience frankly to make those decisions.

Got it no no completely undrawn understood switching to the funding side can you highlight a D.

Capacity you have right now, but can you just remind us.

About the fixed versus variable component of your facilities and how we ought to be thinking about.

Sort of the near term average.

[noise] borrowing rate in the next few quarters.

Yeah, well I mean, you know.

It's it's it's really.

We wish we had the interest rates have of last year, we are floating rate in our facilities.

It's based on so far and so far as you know has increased about 400 basis points year over year.

It's you know, it's something that we're definitely feeling but I think like if you look at the business.

Even in probably the worst interest rate environment. We've seen in 30 years, we're still able to generate strong returns right and that really is as if if you look at our opex leverage on Opex. If you look at our loss curves when you look at our acquisition discipline.

You know any any reduction in rate, we're going to get the benefit of now I don't know when that's going to happen I think we're gonna probably forecasted to stay probably at certain maintained at certain levels that they are today for next year, but I do think that.

That would be a nice the nice thing for next year, if rates were able to come down a little because we would get that benefit.

Got it and just for modeling purposes is there a number.

Apologize I don't know what your spread is off hand is there a good weighted average cost of borrowing we ought to factor in the near term.

Yeah, I mean, our weighted average like the rest of roughly 11% is what we're currently paying.

Got it got it and then one.

One final question.

Just on the marketing side, you know as you noted the expense per funded loan held pretty steady.

I think last year, there may have been a pretty big decline there was some something about the Q2 comp.

Last year, but overall.

Overall CAC levels should we pretty much.

Assume that that steady rate per funded loan going forward are there any other potential improvements are near term.

Yeah, I mean, there's minor fluctuations, but no no. Our goal our goal is to keep it where it's at and we think we can I think we have a fall capabilities.

And the service capabilities to be able to keep it there so that is our goal.

And take that.

You know you see some others in the industry kind of chasing a little bit on the on the cost per we're not going to do that we're gonna be pretty disciplined on our cost.

Understood great.

Great. Thank you very much.

Thank you.

Our next question comes from Mike Grondahl from Northland Securities. Please go ahead.

Hey, guys congrats on the progress.

Do you like your cost structure, where it is today kind of going into 'twenty for any thoughts on that.

Well I mean, I think if you if you look.

We've made.

We brought it down even even further from last year I think we were at 39% as a percentage of revenue in 'twenty, two and I think we're closer to 35. So we've made significant progress in your you know and that's in an environment Mike.

That youre seeing inflation.

You know on all services vendors goods.

And frankly, our wages and so we're really proud that we've been able to scale opex in a year, where most haven't been able to and listen we're always about continuous improvement and always looking at things that we can be more efficient.

And you know there are some potential you know optimizations and efficiencies that we can look to next year to offset some of the increased cost and you know where something we're always going to be looking at but we feel really good I think if you remember.

When I came back as CEO, we were at 45% as a percentage of revenue we're now down in the <unk>.

35% range as a percentage of revenue 35, 36, and you know feel really good that we've done a lot a lot there and continue to push on that.

Got it and then secondly.

You guys are generating nice capital again, it looks like youre going to be generating cash for a while here. After you had tightened credit.

You you've mentioned you're looking at acquisitions, a little bit you've also mentioned you're really patient.

I I don't know could you just talk about.

What you're looking for in an acquisition and you know you you run the core business, so well and in the past you've tried to do a couple of things new credit card.

Maybe the payroll product that that you know in a way it didn't work so.

How are you just thinking about an acquisition versus.

Returning capital to shareholders like what kind of hurdle does that acquisition need to get over.

Okay.

Yeah, I mean, and you know we could potentially even do both so [laughter] wherever we can.

Consider all the possibilities its good to have that Optionality I think you know when we're looking at inorganic opportunities the market's coming to us.

There's definitely more rational sponsors out there and companies that I I believe anything we do we're going to kind of have the unit economics figured out which is different than kind of when you do an in house startup credit card and some of the salary cap stuff, that's kind of stuff that had to be proven.

And they had to build models you know often data.

So anything we look at.

Whether it's in you know the the kind of credit repair small business space. Some of the some of the themes I've kind of mentioned before is going to be highly accretive.

So our business is going to have some proof of concept already in unit economics that we know if you look at a pie can be scaled.

It will be deliberative and patient.

For the right price and right fit in.

Random values that align with our values is important as well.

Where were you know a credit access business and brand matters, we have one of the strongest consumer facing brands. So we have to find something that aligns with that and provides real real value to the customers.

Okay Fair fair Thanks, guys.

Okay.

Yes.

Yeah.

This concludes our question and answer session I would like to turn the conference back over to Mr. Todd Schwartzman any closing remarks.

Thank you everyone for joining us today, we look forward to speaking with you again early next year when we report Q4 results.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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