OppFi Inc. (NYSE:OPFI) Q1 2023 Earnings Call Transcript May 11, 2023

OppFi Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $0.00662.

Operator: Good afternoon and welcome to OppFi’s First Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode. As a reminder, this conference call is being recorded. After management’s presentation, there will be a question-and-answer session. [Operator Instructions] And it is now my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. Thank you, sir. You may begin.

Shaun Smolarz: 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 2022 earnings press release and supplemental presentation can be found at investors.oppfi.com. During this call, OppFi will discuss certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by OppFi’s 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 OppFi undertakes no duty to update or revise any such statement, 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 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.

Todd Schwartz: Thanks Shaun 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; and two, an update on strategic business initiatives for 2023. First quarter results were driven by 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 this year compared to last year are 9% growth in ending receivables to $370.2 million, 20% growth in total revenue to $120.4 million, net income of $3.9 million and adjusted net income of $4.4 million. We realize further gains in cost efficiency in both marketing and operations with a 9% decrease in marketing cost per new funded loan and the 8 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. The net charge-off rate as a percentage of total revenue decreased 18% and or 11 percentage points falling to 48.9% from 59.8% in Q4 last year. We attribute part of the 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 SCO, 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.

Pam Johnson: 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 $120.4 million. Net originations decreased 1.9% 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 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 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 9.5% of total revenue, compared to $7.4 million or 7.4% 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 $20.1 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 $650,000 for the comparable period last year. Adjusted earnings per share, was compared to $0.01 for the first quarter last year. This exceeded our guidance of approximately breakeven. For the three months ended March 31, 2023, OppFi 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 ample 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 affirmed 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 $0.28 and $0.35 from the $0.26 to $0.33 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?

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of David Scharf with JMP Securities. Please proceed with your questions.

Q&A Session

Operator: Our next questions come from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Operator: Thank you. [Operator Instructions] Our next questions come from the line of William Buster with Solamere Capital Group [ph].

Operator: Thank you. There are no further questions at this time. I’d like to hand the call back over to Todd Schwartz for any closing comments.

Todd Schwartz: 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.

Operator: 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.