Q1 2024 OppFi Inc Earnings Call

Participants

Shaun Smolarz; Head of IR; OppFi Inc

Todd Schwartz; Chief Executive Officer, Executive Chairman; OppFi Inc

Pamela Johnson; Chief Financial Officer, Chief Accounting Officer; OppFi Inc

David Scharf; Analyst; Citizens JMP Securities, LLC

Michael Grondahl; Analyst; Northland Securities, Inc.

Presentation

Operator

Good morning, and welcome to OppFi's first-quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded. (Operator Instructions) It is now my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. You may begin.

Shaun Smolarz

Thank you, operator. Good morning. On today's call are Todd Schwartz, Chief Executive Officer and Executive Chairman; and Pam Johnson, Chief Financial Officer. Our first-quarter 2024 earnings press release and supplemental presentation can be found at investors.oppfi.com.
During this call, OppF, I will discuss certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by update management in light of their experience and assessment of historical trends. Current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today and applied 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 most comparable GAAP measures can be found in the earnings press release issued earlier this morning. 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.

Todd Schwartz

Thanks, Shaun, and good morning, everyone. We are very pleased to report our first quarter 2024 results, which exceeded our earnings guidance and enabled us to raise our full year earnings outlook. When we introduced our full year guidance in March, we had limited visibility into 2024 based on the seasonality of the business. However, our profitability accelerated to end the quarter with a strong tax refund season, and we continue to see favorable credit trends in our portfolio. Pam will review our first quarter results in detail and revised guidance for full year 2024. Before she does, I will cover four primary topics. One highlights from our first quarter of 2024 to progress on our operational initiatives, three commentary on our macroeconomic outlook and for discussion of our capital allocation strategy. First quarter results were driven by revenue growth and continued credit performance improvements and expense leverage.
Our key highlights for the quarter compared to the prior year period, our solid 5.8% total revenue growth to 127.3 million, a strong 3.5 percentage point increase in revenue yield to 129.5%, a meaningful 33.5% increase in recoveries and a 1.1 percentage point improvement in the net charge-off rate as a percentage of total revenue to 47.9% in addition, we continued to carefully manage expenses to realize greater operational efficiency. On a GAAP basis, total expenses as a percentage of total revenue increased 110 basis points year over year to 45.5%. However, when excluding one-time expenses and other add-backs such as severance costs in exiting the credit card business, this percentage decreased by 270 basis points year over year to 40.6%. This led to profitability increasing by more than 100% year over year. Net income was $10.1 million, an increase of $6.2 million from $3.9 million and adjusted net income of $8.8 million, an increase of $4.9 million from $3.9 million. Additionally, we ended the quarter with a strong balance sheet that we believe positions us to achieve our strategic objectives. Total cash cash equivalents and restricted cash was $88.7 million, up 20% from year end of this, unrestricted cash was 47.2 million, which increased 48.4% in the first quarter sequentially. Given our confidence in maintaining a strong balance sheet and generating free cash flow, we were proud to announce the Company's first ever special dividend in the amount of $0.12 per share to demonstrate our commitment to rewarding our stockholders.
Now I'll discuss our progress during the first quarter with our core operational function during the first quarter, we experienced strong customer payment activity driven by one, the underwriting testing and implementation done last year to tax refund season and three recoveries. All of these factors contributed to our improved credit performance year over year, we identified higher risk applicants to deny and stronger ones to approve that would have been denied. Otherwise, this trend has continued through April. The early part of Q2. Early stage delinquency trends improved compared to the same period last year with a total first payment default rate lower by 40 basis points and the total delinquency rate decreasing by 70 basis points. In addition, recoveries of previously charged-off loan balances increased 33.5% year over year. We and our bank partners are excited to launch a new credit model in the second quarter. The model incorporates additional customer cash flow and behavior inputs that are designed to more accurately evaluate the risk of the applicants as a result, we expect future originations to carry less risk and therefore our credit performance to improve over the long term.
Turning to marketing, the total cost per funded loan was down 12% compared to the same period in 2023. During the first quarter, the addressable market expanded further as bank partners entered new states. In terms of customer experience. We recently launched an enhanced chat bot feature powered by artificial intelligence capabilities that we've name up AI. We believe this will improve the customer experience and increased operational efficiency. We also celebrated National Financial Capability month by announcing our collaboration with Zygo to provide customers with a game of five financial literacy app to help them further improve their financial health of PHI as a mission driven company, and we are excited by the new social impact relationship. Our Net Promoter Score for the quarter remained strong at 77.
Now I'll briefly discuss how we're thinking about the current macroeconomic environment. Based on recent macroeconomic data points and consumer finance surveys, we believe our previously discussed view has been validated. We believe core inflation remains sticky and interest rates are unlikely to be reduced until the fourth quarter or early 2025. According to research by United Way, 29% of American households have members who are employed, but income constrained and asset light. In other words, these are households whose members work and earn more than the poverty line, but struggle to pay for basic needs, sticky inflation disproportionately affects these consumers and the share of these households has steadily grown. In addition, recent Vantage Score data indicate lower income. Us consumers are struggling to make loan payments, which is causing banks to tighten their credit standards. While we believe this up market tightening may present selective growth opportunities for us as more applicants may fall into the credit box for our loans, we will remain cautious on originations given overall macro economic uncertainty, we won't chase growth merely for growth's sake. With that said, I want to emphasize we are deeply committed to profitable growth and believe we have numerous levers to continue to create shareholder value in this current environment, improvements in credit performance and operational efficiency have enabled us to grow earnings, generate significant free cash flow and strengthen our balance sheet. This includes the decision of our Board of Directors to declare the $0.12 per share special dividend and approved a new 20 million share repurchase program. We plan to use cash to repurchase stock when we believe our stock price is disconnected from its intrinsic value and on reflective of the long-term earnings potential of Occi. In addition, we remain committed to pursuing opportunities for potentially accretive partnerships or acquisitions that fit with our company mission to facilitate credit access to underbanked Americans. We believe all these factors help demonstrate our unique value proposition for investors. Five presents the opportunity to invest in closely held founder-led family business in the public markets that is committed to both returning value to stockholders and creating new value. Part of the reason for my return as CEO. two years ago was to execute my multi-year strategic vision for up five now that the core business has stabilized and our balance sheet is solid. We are working to fill some of the significant supply demand imbalances that exist in the financial marketplace across customer types that traditional banks do not service. We believe through accretive partnerships and acquisitions, OppFi has the potential to be transformed into a platform to offer additional types of alternative digital financial products and services.

Pamela Johnson

Thanks, Todd, and good morning, everyone. For the first quarter, total revenue increased 5.8% year over year to $127.3 million with a 2.4% increase in total net originations to $163.5 million and a 350 basis point improvement in yield to 129.5%. Total retained net originations decreased 2% to 152.5 million from one $55.6 million in the year ago period based on one of our bank partners retaining a higher percentage of loans originated in some states. Total net originations are defined as gross originations net of transfer balance on refinanced loans, while total retained net originations are defined as a portion of total net originations with respect to which upside ultimately purchased a receivable from bank partnership or originated directly, as previously disclosed in late 2023, upside transitioned fully to the bank partnership model and therefore, currently does not originate any loans directly from a mix perspective, 57.7% of originations were to existing customers and 42.3% were to new customers during the quarter, along with our bank partners, we continued our prudent approach to risk as we believe loans to existing customers are generally less risky than those to new ones. On an absolute basis, new customer originations for the quarter decreased by 1.7% year over year, while existing customer originations increased by 5.7%. The annualized net charge-off rate as a percentage of average receivables increased by 20 basis points to 62.0% for the first quarter compared to 61.8% for the prior year quarter. However, the annualized net charge-off rate as a percentage of total revenue decreased by 110 basis points to 47.9% compared to 49% last year. Interest expense totaled $11.4 million or 9% of total revenue compared to $11.4 million or 9.4% of total revenue in the same period a year ago.
Turning to expenses total expenses were $57.9 million or 45.5% of total revenue compared to $53.5 million or 44.4% of total revenue in the first quarter last year. Included in the total expense figure were 6.2 million and $1.4 million of one-time expenses and other add-backs in the 2024 and 2023 periods, respectively. Year over year increase was primarily due to the extra costs related to the credit card business as well as severance and legal costs. Excluding these items, total expenses were $51.7 million or 40.6% of total revenue in the first quarter this year, down from $52.1 million or 43.3% of total revenue for the same period last year. Adjusted net income was $8.8 million compared to 3.9 million for the comparable period last year. Adjusted earnings per share was $0.1 per share compared to $0.05 in the first quarter last year. This was significantly higher than our guidance for $0.05 due to a strong tax refund season, which resulted in better than expected credit performance, including recoveries for the three months ended March 31st, 2024 off, I had 86.2 million weighted average diluted shares outstanding for the calculation of adjusted earnings per share. Our balance sheet remains healthy with cash, cash equivalents and restricted cash of 88.7 million, total debt of $301 million and equity of $197.3 million as of the end of the first quarter. Unrestricted cash of 47.2 million at the end of the first quarter marked a 48.4% increase since year-end 2023 provides us confidence in our optionality for capital allocation strategic decisions. In addition, we had $613.7 million in total receivable funding capacity, including undrawn debt of $224.7 million.
Turning now to our outlook for full year 2024, we reiterate guidance for total revenue of 510 million to 530 million. We continue to focus on profitable growth. To provide additional perspective on how we are thinking about the second quarter, we expect total revenue to be relatively flat year over year.
Shifting back to full year guidance. Based on the stronger than expected first quarter, we have increased guidance for profitability. We now expect adjusted net income of 50 million to $54 million compared to the prior range of 46 million to 49 million based on an anticipated diluted weighted average share count of 86.5 million. We now anticipate adjusted earnings per share between $0.58 and $0.62 compared to the prior range of $0.53 to $0.57. With that, I would now like to turn the call over to the operator for Q&A.

Question and Answer Session

Operator

(Operator Instructions) David Scharf, Citizens JMP.

David Scharf

Hi, good morning and thanks for taking my questions here. To start off with Todd, you made some references two, not only the transition partnerships, terrific actions have your partners expanding into maybe one or more states retaining some more loans in this, maybe it's a good time. Can you take a step back and can you just spring many states you're operating in through your partners partners there, broadly speaking, whether there are your partnership arranged?

Yes, David, good morning. Rob, we currently maintain three bank partners and the banks are the originators in the different states. So it really is up to them on the structure.
On the other side, some of the states due to some state laws that have passed in this cycle of legislation. The percentage ownership once once the loan is sold to SB. varies, but we're in 40 states, and I think we have a strong national footprint to serve our customers.

David Scharf

Yes, somewhat related. I know the the geographic mix may have partially contributed to the elevated revenue year in terms of thinking about the yield going forward, just trying to get whether we Q1, whether it's impacted by geographic mix, pricing leverage is competitive. Q4 is just more a reflection of some of the delinquency trends. But as we speak, balance of the year, pricing leverage is 130% kind of a iLinc.

Todd Schwartz

How should we?
Yes, I think that that's probably on the higher end of the range.

I mean, I think, you know, we had a really, really strong payment recovery period due to the operational efficiencies in the ops and recoveries, but also tax refund came in really strong was strong and accelerated in March significantly. It sets us up well for the year. We're happy about that hub I think we've also if you remember, there were some testing we did back in 22 and 21 that finally burned off some. We've exited Georgia, which was a lower yielding states, some of that it also allowed for some increase in yield. I think that's, you know, we're very we're very happy to see because you got to remember we're paying a much higher higher interest costs. And there's some headwinds there, and we haven't raised price to this point. And so this is really a good way to and it's really just getting back to where we were in the in the 2019 2021 era of yield.
Got it.

David Scharf

Maybe last when we eliminate the bit 6 million, third one-time expenses so trying to get a sense for gives us a good start quarterly for the year.
Yes, yes.

Pamela Johnson

Should increase that number going forward from an OpEx. It's a run rate on time?

Correct.

Pamela Johnson

And it may even go down a little bit going forward based on some data.

Okay.

David Scharf

Thank you very much.

Operator

Mike Grondahl, Northland Securities.

Michael Grondahl

And this is Owen on for Mike this morning. Congrats on the quarter and for what drove the outperformance, what's going right?

And what maybe is still a headache?
Yes, I think I mean, it's pretty clear that we had really, really strong payments come in from. We've lowered our acquisition costs year over year by $10 from that's a help bomb. We while still increasing revenue by 5% on our charge-offs as a percentage of revenue went down. So all metrics, OpEx as a percentage of revenue went down and all metrics in the business and for and for year over year. And that's our goal right every years to get a little bit better and continuous improvement. And we feel it's really sets us up well for this year. We're really focused on are starting to see some credit trends we like and things have really stabilized in the credit and I think that, you know, obviously with some new geographies and with some nothing to report on. But some interesting conversations having on partnerships and growth strategies, there's definitely some some hopefully some some pastures, greener pastures ahead where we're going to be able to originate more and have confidence that the customers are going to be paying us back at the rates we think we can achieve. So I think I think when you when you look at we in the first quarter, people came out and said we were overly conservative or almost had a little bit of a negative connotation to our earnings. But it wasn't that I think we were we were validated, you know, the Fed's not lowering rates interest has sorry, inflation's been super sticky. They can't seem to get it below 3%. And we've always told people like this disproportionately affects our customers as far as challenges go, interest cost and sticky inflation. That would be the ones that I mean, though we can't control those. So everything we can control you see we're addressing and performing really well. The things we can't control we're just watching very closely and hopeful that the inflation will we'll come down and add eventually some relief on interest rates.
I got it.

Todd Schwartz

And then in terms of the competitive environment. Are there any updates here on a quarter-over-quarter basis or is that pretty similar?

Yes. I mean, I mean, listen, I said this before, like we are we are experiencing some tightening above us. You know, that's allowing for, you know, some some more segment, one customers to come into the funnel, but that doesn't offset to reminder, that doesn't offset the tightening we've done on the back end, which is, you know, we're still originating in a pretty pretty tight band of segments. I think you know it, we did some testing last year that was very successful, some swap and swap out stuff. We've really really refined our cash flow underwriting model, which has been very successful. So we're waiting for the day where we can in 2019, I remind everyone that was 40% of our new originations came from that segment segment for us, and we're waiting for the day where we feel comfortable and have the confidence to be able to start originating on behalf of the bank partners on those segments again. But right now, we feel really comfortable. Our acquisition cost is where we want it. We're still able to grow and we're finding operational leverage every quarter. So we feel good about where we're at.

Great.
Thank you and congrats on the quarter.
Thank you.

Operator

Dave storms, Stan

morning and appreciate you taking the questions.
I'm just hoping we could start with maybe a little bit behind the curve process for declaring that special dividend. Is that something you would revisit it's a year once a quarter when cash levels get to a certain point, just any clarity around that would be very helpful.

Yes. I mean, there's no there's no formula, but it's definitely something we would consider again, I mean, what's become apparent to us is, you know, as our know we hold receivables on to manage interest costs. Obviously, those can be put into a borrowing base, but we have a lot of even even beyond that, we have a lot of unrestricted cash and what's become clear to us is we're not getting value for that cash properly, right? And that's something that we didn't have.

Todd Schwartz

And we knew we were going to increase that cash by because of the recoveries and payment season coming.

And we felt it was great to reward reward shareholders that have been patient and have been supportive of the stock. And I feel really good about the fact that we are able to execute our first special dividend. But it is something absolutely that will be it's not formulaic like I mentioned or programmatic, but it is something we will consider depending on cash position and cash needs.
Very helpful.

And then just sticking with the kind of uses of cash you've mentioned before, you know, you are always looking for adjacent service business.
Good luck to grant. So vertically, if possible, assuming the value is correct, what kind of adjacent services businesses would you be targeting? Or would you be looking for and then M&A deal?

Yes. I mean, it's the first we look to like, Hey, where there are large addressable markets where there are supply demand and balances and banks are not covering it. So you know that the first things we've looked at our small business lending and, you know, consumer financing for goods, there's different models that kind of flow. And those are highly fragmented, large addressable markets where we think there's an absence of institutional capital institutional players like Shopify. We think with our branding, social impact and commitment to credit access, we can really have to get market share and as that world continues to go online and digitize get the benefit of it. So we're looking at different different options there. We're going to be very careful to do the right thing. And we're going to it's a it would be our first, obviously, acquisition as a company and something that we want to make sure we get right, we're not going to we want to do something that's highly accretive to us and is going to benefit the business long term. But, you know, I think I talked about it, but now that the business is stable, my attention has really has really started to focus on and getting growth again, partnerships on that side of the house. We've got a lot of that. We expanded some geographies actually, which was which is really great and set us up well for this year. But I really think that upsized brand and has the platform ability to really service a suite of digital alternative financial service products where there's a large supply demand imbalances and that banks are not going to really ever be there. And that's really the goal about PHI and the strategic vision.

Very helpful. And then one more for me, if I could on when you think about and for going to new customers versus existing customers, what's the initiation and the underwriting process? How does that differ? And I guess kind of with that, you mentioned your acquisition cost was down about $10 year over year. How much of that can be attributed to operational efficiencies and how much of that can be attributed to maybe the relative cheapness of underwriting and already existing Yes.

Todd Schwartz

There's a couple of questions there.

I just want to make sure I answer them, but I think I think, like you know, it's we've optimized the funnel, right? And we've really gotten more granular in the funnel and the costs have also gone. Direct mail has been one that we've really scaled back. We didn't we didn't drive mail in the first quarter, you don't really want to make sure that the unit economics of that are sound before we start to test into that again. But I think as far as the funnel we've also operationally on conversion, qualified rate. All the major metrics of the funnel have gotten better and the operational improvements around that. So we feel we feel good that it sets us up well for this year.

It's very helpful. Thank you for taking the questions and good luck in the second quarter.

Thank you.

Operator

Ross Davidson, managing capital.

Hi, good morning. Thanks for taking the question on Todd, I just wanted to do it quickly. Can I ask a follow-up on sort of the macro and how it how you think about your growth? Like you said, you know, inflation remains sticky, which you guys had sort of expected on. And as you think about sort of that segment for or even more just generally, do you feel like you have to see on inflation come down or how do you are or Are things stabilizing enough that you think that your sort of core consumer will will recover even if inflation doesn't further fall, at least in the short term?
Yes. No, it's not based on inflation. It's based on our our data, right, our credit performance data that we look at daily, weekly, Dom, we have really, really strong data that you know, and a lot of years of history where our confidence level, when when we see trends that are stable for some period of time, we would that we would be comfortable starting to starting to expand. But I think even without that expansion, there's a lot of opportunity. And I mentioned that the banks tightening above us. There's also we're exploring some some pretty significant partnerships. So there's a lot of there's a lot of room for growth just in the segments we are and at a price that we'll work with our unit economics. So I think and then obviously the geography expansion that I mentioned before. So we feel like even without that, we can still find growth and still really, really be have a positive positive on the growth side. This year. So I'm but that obviously, if we don't start to see that credit come in line with kind of more of the 2019 timeframe, I think that's obviously just it would be in addition to anything we're planning for this year.

Okay, great.

That makes sense. Thanks, Sophia.

Operator

Thank you. It appears that we have no further questions at this time. I will now turn the program back over to CEO, Todd Schwartz, for closing remarks.

Thank you, everyone, for joining us today on the call, and we look forward to speaking with everyone in August for the Q2 results. Have a great day.

Operator

Thank you.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect.