OppFi Inc. (NYSE:OPFI) Q4 2023 Earnings Call Transcript

OppFi Inc. (NYSE:OPFI) Q4 2023 Earnings Call Transcript March 7, 2024

OppFi Inc. beats earnings expectations. Reported EPS is $0.1, expectations were $0.07. OPFI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to OppFi’s Fourth Quarter and Full Year 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. [Operator Instructions] It’s my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. 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 fourth quarter and full year 2023 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 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.

Todd Schwartz: Thanks, Shaun, and good afternoon, everyone. We’re excited to begin 2024 and leverage our strong 2023 to continue achieving profitable growth. 2023 marked our ninth consecutive year of net income, with annual records for total revenue and ending receivables. We achieved what we said we would do, and credit improvements and operating efficiencies led us to raise full year earnings guidance 3 times. In addition, our solid fourth quarter enabled us to exceed our final full year earnings guidance for 2023. In 2024, we plan to maintain our strategy to be disciplined with underwriting, emphasizing profitability over portfolio growth, while simultaneously aiming for further operating efficiency throughout the company.

Pam will review our fourth quarter results in detail as well as introduce guidance for Q1 and full year 2024. Before she does, I will cover four primary topics: one, the highlights from our Q4 and full year 2023 financial performance; two, progress in our strategic business areas during Q4 2023; three, commentary on our macroeconomic outlook for ’24; and four, our discussion of our 2024 priorities. Fourth quarter results were driven by revenue growth, credit performance improvements and expense leverage. Specifically, the key highlights for fourth quarter 2023 compared to the prior year are: strong 10.7% total revenue growth to $132.9 million; disciplined 3.3% net originations growth to $191.9 million; the annualized net charge-off rate as a percentage of total revenue improved by 12.9 percentage points to 46.4%; and prudent expense management with total expenses, excluding interest expense as a percentage of total revenue, down 5.6 percentage points to 33.8%.

This led to solid rebounds in profitability. Net income of $1.9 million, up from a loss of $5.2 million, and adjusted net income of $8.9 million, up from a loss of $2.8 million. Our financial highlights for full year 2023 compared to the prior year are: record total revenue of $508.9 million, a 12.4% increase; record ending receivables of $416.5 million, a 3.6% increase; the net charge-off rate as a percentage of total revenue declined to 43.5%, an 8.1 [percent] (ph) point improvement; and disciplined expense management with total expenses, excluding interest expense, as a percentage of total revenue of 6.2 percentage points to 35.4%. As a result, profitability improved sharply, with net income of $39.5 million compared to $3.3 million, and adjusted net income of $43.3 million from $5 million.

Adjusted net income margin was 8.5%, 50 basis points higher than implied by the midpoint of our guidance. We achieved these results despite interest expense increasing by $11.6 million or 33% year-over-year and a macroeconomic environment marked by sticky inflation that hurt the financial health of our customers. Our strategy to balance growth and risk while maintaining expense discipline contributed meaningfully to this transformational year for OppFi. Now, I’ll discuss our progress during the fourth quarter with our strategic business areas. Credit performance continued to improve year-over-year as expected. In addition to improvement in the annualized net charge-off rate as a percentage of total revenue already mentioned, earlier stage delinquency trends also improved compared to the same period last year.

The total first payment default rate decreased by 40 basis points and the total delinquency rate declined by 90 basis points. We also realized solid expansion in yield of 8.4 percentage points to 126.8% compared to 118.4% in the year-ago period. We are pleased that credit modeling enhancements and adjustments made throughout the 2023 appear to have had the intended effect and our portfolio mix continued to shift to the lowest risk segments. Our values-based recovery strategy also ended 2023 strongly with a 40.8% increase year-over-year in the fourth quarter for recoveries of previously charged-off loan balances. Our marketing team remains focused on cost-effective initiatives to generate higher quality origination volume. As a result, the marketing cost per funded loan was down 6.3% year-over-year in the fourth quarter.

In addition, the platform also expanded geographically with bank partners entering new states. We also realized operating cost leverage year-over-year with a focus on making each department more efficient. Further, we continued our work on corporate development opportunities by evaluating potential partnerships and acquisitions as a means to create further shareholder value. As a result of this work, we’ve refined our criteria for what we would view as an attractive opportunity. Now, I’ll briefly discuss how we’re thinking about the macroeconomic environment. We expect the economy in 2024 to be similar to how it was in 2023, with sticky inflation and interest rates higher than historic norms. As we have communicated during the past couple of years, persistent above normal inflation hurts customers more than recessions do, because they have more difficulty budgeting for everyday expenses, especially when living paycheck to paycheck with limited to no savings.

To further illustrate this point, a recent Wall Street Journal article said it’s been 30 years since food comprised this much of American’s incomes. Nonetheless, we note that employment trends appear relatively strong for customers. In summary, we think current macroeconomic conditions, both help and hurt customers, and therefore, the net effect for OppFi is uncertain. While we are cautious due to these macroeconomic headwinds and our elevated interest expense, we believe that we’re well positioned to operate in this type of environment. We intend to pursue the same strategy and discipline in 2024. We expect to continue focusing on profitability over growth, and we plan to achieve this by maintaining prudent risk tolerances, emphasizing disciplined growth and scaling operating expenses efficiently.

In conjunction with the banks that partner with us, a new credit model is expected to be launched in Q2 that will incorporate an updated dynamic risk model intended to drive lower risk origination volume and reduce credit losses. We also anticipate further geographic expansion as bank partners enter new states. In addition, we’re planning for marketing to focus on top-of-funnel optimization with new analytic insights. Similar to last year, we are also focused on reviewing every function to manage expenses and achieve operating efficiencies, including vendor spending and process improvements. Moreover, we will be patient with corporate development to find the right fit for accretive partnerships or acquisitions. In summary, before turning the call over to Pam, I will reiterate my confidence in our long-term strategy.

We ended 2023 with a strong balance sheet, including unrestricted cash of $31.8 million, which nearly doubled year-over-year. This provides us the optionality to deploy cash to create additional shareholder value. Our confidence in the business will be demonstrated by our participation in investor events during 2024 to communicate our story with a more targeted approach.

Pam Johnson: Thanks, Todd, and good afternoon, everyone. I’ll begin by echoing Todd’s comments that we are very excited to have achieved our ninth consecutive year of net income in 2023, with record annual total revenue of $508.9 million, record ending receivables of $416.5 million, and a substantial rebound in profitability with net income of $39.5 million and adjusted net income of $43.3 million. Now, I’ll detail our fourth quarter 2023 results. For the fourth quarter, year-over-year, total revenue increased 10.7% to $132.9 million, with a 3.3% increase in net originations to $191.9 million and an 840 basis point improvement in yield to 126.8%. From a mix perspective, 57% of originations were to existing customers and 43% were to new customers.

This was partially due to risk management with originations to existing customers generally being less risky than those to new ones. On an absolute basis, new customer originations for the quarter decreased by 4.2% year-over-year, while existing customer originations increased by 9.7%. The annualized net charge-off rate as a percentage of average receivables improved by 11.4 percentage points to 58.8% for the fourth quarter of 2023 compared to 70.2% for the prior-year quarter. As a percentage of total revenue, the annualized net charge-off rate decreased by 12.9 percentage points to 46.4% compared to 59.3% last year. Total expenses, excluding interest expense, were $44.5 million or 33.8% of total revenue compared to $47.3 million or 39.4% of revenue for the same period in 2022.

Adjusted EBITDA totaled $25.8 million, more than double the $9.9 million in the prior-year quarter. Interest expense totaled $12.1 million or 9.1% of total revenue compared to $10.7 million or 8.9% of total revenue in the same period a year ago. The year-over-year increase was due to higher interest rates on our credit facilities. Adjusted net income was $8.9 million compared to an adjusted net loss of $2.8 million for the comparable period last year. This was stronger than implied by our full year guidance due to the lower net charge-off rate as a percentage of total revenue. Adjusted earnings per share was $0.10 per share. During the three months ended December 31, 2023, OppFi had 85.7 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 $73.9 million, total debt of $334.1 million, and total stockholders’ equity of $194 million as of year-end. In addition, we had $598.9 million in total receivable funding capacity at the end of 2023, including undrawn debt of $192.3 million. Turning now to our outlook. For the first quarter, we expect $0.05 in adjusted earnings per share based on 86 million diluted weighted average shares. Quarter-to-date, we have managed the business more tightly from a growth perspective. We anticipate the annualized net charge-off rate as a percentage of total revenue will increase year-over-year in the first quarter. The first quarter last year benefited from aggressive tightening to credit models during mid-2022, and therefore, the first quarter this year is more normal from a net charge-off rate perspective.

Our business also has seasonality, which causes fluctuations quarter-over-quarter. The portfolio typically contracts in the first quarter, driven by tax refunds. As a result, the first quarter is generally the highest quarter for net charge-offs and smallest quarter for profitability. We anticipate accelerated profitability in the second and third quarters. For the full year 2024, guidance for total revenue is $510 million to $530 million. We expect adjusted net income of $46 million to $49 million, implying approximately 10% growth at the midpoint. Based on an anticipated diluted weighted average share count of 86.5 million, adjusted earnings per share would be between $0.53 and $0.57. With that, I would now like to turn the call over to the operator for Q&A.

Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question we have is from Mike Grondahl of Northland Securities. Please go ahead.

Mike Grondahl: Yeah. Hey, guys. Thank you. I don’t know, Pam, could you kind of clarify or add some more color to your statement? I think you just said that you ratcheted back growth even more in the first quarter so far. Just trying to understand kind of your growth outlook and how you’re feeling about the macro. It sounds like Todd said, too, that ’24 will be a lot about emphasizing profitability over growth. So, just a little bit more color there would be helpful.

Pam Johnson: Sure, Mike. Thanks. Good question. It comes again from the macroeconomic environment we’re seeing. We’re not — we have certainly tightened the credit box to manage to that environment. We’re not seeing necessarily a lot of improvement in the customer repayment rates and things like that. So, we did — we’re still keeping everything fairly close as far as growth and being very cautious about it. Again, that emphasis of profitability over growth is one of our tenants for this next year, for sure. Todd, would you like to add any more to that?

Todd Schwartz: Yeah. I’ll just chime in. I think I had mentioned it on the last call, we have dynamic modeling in place now, Mike. So, what that means is we know the vintages. There’s seasonality to vintages throughout the year. You go into the fourth quarter, some of the lowest loss vintages of the year, I think that’s what she was — Pam was referring to on the call was if you look at the repayment rates on February, March vintages, it’s tax refund season. And typically, those are some of the lowest-quality vintages of the year. So, I think that’s what she’s referring to when she said this. I want to clarify. But we have more of a dynamic modeling now as we worked on testing and rebuilding the model. And we deploy it throughout the year based on some seasonality in the marketplace.

Mike Grondahl: Got it. And we’re outside. What would we or you need to see when you start — that would help you push for growth a little bit? Like what needs to change? What would you need to see?

Todd Schwartz: Well, right now, we’re enjoying the benefit of lower acquisition cost. We’re being very efficient on our funnel, so we’re happy to see that, right? But I would need to see sustained loss curves that mimic 2019 or even close to it, right? We’re not there yet. We’re seeing — obviously, as you go lower in the segment, segment one being our lowest risk customer, you’re seeing less degradation from ’19 than you would in a segment three. However, we have not seen that sustained. And we’ve kept our product and our price and our commitment to credit access the same. So, we’re not raising prices on customers. We’re not passing through. So, we have to operate within the confines of our business right now. And that’s not to say we might not employ some testing around pricing in the future, but I think that’s really what I — what we would need to see to really turn and grow that now.

That being said, Mike, in the fourth quarter, we had very effective swap in, swap outs with some segments and stuff, and so we are finding ways to grow. We also — I mentioned in the call geography expansion. Our bank partners have chosen to expand on [that] (ph). So, there are other ways to grow, right? It doesn’t just mean expanding the credit box.

Mike Grondahl: Got it. I mean taking that one step further, I mean, is this sort of a $0.50 to $0.60 adjusted EPS business until you grow? Like, do you have other levers to drive adjusted EPS other than growth?

Todd Schwartz: I mean absolutely. We’re seeing — just to be clear, Mike, we brought — our fair market value was brought down 200 basis points year-over-year. We’ve seen other companies have been raising theirs in this environment, which that’s not in line with our — we’re very conservative. And that was a significant hit to our P&L, but we’re doing that because we’re in this for the long term. This is to really align and be conservative and then come out when the growth is there and be ready for it. But there are several levers that we can pull on it. Operational efficiencies, we’re just getting started there. I mean there’s tremendous efficiencies that we’re finding. We’re also really focused on the customer funnel. We found some really interesting stuff we’re working on in the funnel side to look address bottlenecks and then also more throughput.

So, feel really good that we have the levers to drive growth despite record high interest rates for our business for the life of our business and then also some unfavorability at fair market value.

Mike Grondahl: Got it. Okay.

Operator: The next question we have is from Zachary Oster of JMP Securities. Please go ahead.

Zachary Oster: Hi, good afternoon. Thank you for taking my question. So kind of digging into the growth piece a little bit for next year. We’re trying to figure out if it’s really — what the drivers are within it, it’s kind of more driven by lower average yields or lower volume or any of those types of factors?

Todd Schwartz: I’m sorry, can you just repeat the question? I missed the first part. I apologize.

Zachary Oster: Yeah, sorry. So, I’m just trying to get a better sense of what the drivers are for the 2024 revenue guidance. Is it lower yields? Is it just tighter — lower volumes, tighter credit box?