OPFI - NYSE

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.

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.

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.

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?

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

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.

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?

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.

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?

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.

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?

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.

Got it. Okay.

The next question we have is from

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?

I'm sorry, can you just repeat the question? I missed the first part. I apologize.

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?

Yeah. I mean, currently, the yield -- no, we forecast the yield to stay strong where -- at its current levels. It really, really has to do with us not seeing the credit there. We're also not going to chase growth by paying more necessarily. We have a benefit quite some time and seen that when you do that, you end up just getting a lot more high-risk customers into the funnel and end up paying more for less. So, I think it really has to do with the -- what we're seeing on the macroeconomic outlook. Now things can change, and we're prepared, right? And we also have -- we mentioned our most powerful model yet is launching in the second quarter, where we really, really think that on the swap in, swap outs and on some of the other attributes of the model are going to be very powerful that we put it all together. All the testing we've been doing over the last year, year-and-a-half is going to allow for more growth. But right now, what we're seeing is largely similar to last year, albeit we still have some levers that we're working on. And like I said, some funnel efficiencies to propel growth and some geography expansion as well from the bank partners that we can service in more states. But yes, that's kind of how we're looking at it.

Got it. That makes sense. And then just one more follow-up question. Just on the charge-off rate specifically, we were kind of wondering if you can give more color on the dynamic of it for the year and the kind of -- the way that plays out throughout the year.

The charge-off rate as a percentage of revenue?

Yes.

Yeah. I mean I think we've made a lot of gains. One thing that we mentioned on the call is year-over-year significant improvement. We expect that to stay significantly the same, if not, incremental improvement there. We're going to always be looking for ways to improve that. But yes, as your revenue growth slows, obviously impacts some of those numbers and as a percentage of receivables as well. But we think it's going to be largely similar for -- on that aspect.

Got it. Thank you very much.

The next question we have is from Dave Storms of Stonegate. Please go ahead.

Good evening. Just wanted to start, you mentioned updated acquisition criteria. I was hoping you could dive into that a little bit more and just a general sense of what you're seeing in the M&A market.

Yeah. On the acquisition criteria, are you referring to like top-of-funnel, like the criteria? I just want to get more specific on the question to make sure I answer it correctly.

My understanding was that when you were talking about uses of cash as you look for -- towards external growth, you were updating your criteria there. Did I misinterpret that?

Sorry, you're talking about on M&A. I'm sorry, I was focused on originations on the loan side. Well, I think, yeah, I mean, I think we're learning a ton on the M&A side. We've really, really started to hone in on two or three verticals that we think are really interesting and very complementary to the OppFi brand. Our vision around being a tech-enabled platform that provides best-in-class alternative -- digital alternative financial service products, where we receive supply-demand imbalance where the banks are not and the large financial institutions are not fit that bill. It's really us just finding a situation that works for us that's highly accretive for our shareholders and for the business and for our brand, right? It all has to align. So, we're being patient. This is not something that we are just going to do haphazardly. We're going to be very thoughtful about it. We're pulling on a lot of my -- in my second life before I came back as CEO was in private equity, doing a lot of transactional stuff. So, pulling on a lot of that experience and a lot of our team's experience to make sure that we're going to get it right. So yeah, we're starting to get more confidence. The market is starting to get more rational. We're starting to see more opportunities that potentially can make sense. But nothing to report now, but we're hard at work, and we're starting to -- we're looking around.

Understood. That's very helpful. Thank you. And then just one more. On the auto approval rate, it took a nice step-up year-over-year, continues to grow. How do you think about the ceiling on this rate? And kind of what are the hurdles that you see over the next 12 months to continue growing that rate?

Yeah. I mean I think we've made the large-scale improvement. I think it's sitting somewhere in the neighborhood of -- I think we're at 72%. So really, really happy with tech and product and the ability to increase that year-over-year. Incrementally, every year, that's a goal, right, is to continue to increase that. I think one of the things still talked about is on the artificial intelligence front on the servicing side. There's great opportunity, right, during the -- in the funnel to be using some of these AI tools to better really help people through the process and get them auto approved. So that we have all the documentation and making sure that the customer -- we have all the information to be able to process in an automated fashion and prevent having to go to more manual style underwriting. So, we're looking at all options there and pulling on our tech and product teams to continue to incrementally build on that. But obviously, it's something that we watch and track very closely.

Understood. Thanks for taking my questions, and congrats on the year.

Thank you.

[Operator Instructions] The next question we have is from [Ross Davidson of Bennington Capital] (ph). Please go ahead.

Hi. Thanks for taking the question, guys. Just circling back on guidance, just further question I had was you've launched in some more states, it sounds like. Given that, and I understand the outlook in 2024 is still cloudy and sounds like, I think, you said even similar to 2023, wouldn't the states -- or why wouldn't the states that you're -- you've entered provide some uplift more than sort of what's implied by the revenue? Am I missing something there?

Yeah. I mean I think when you're launching new geographies, those are all new originations pretty much. And I think we're being very cautious because new originations, as you know, are the riskiest and provide the highest charge-offs. So, we're being very careful. And by the way, there is some differences. You go into a state for the first time -- we've been doing this a long time, but no two states are alike. So, we're just being pretty cautious. Now that's not to say that things can work out and we'll get some favorable upside. But I think right now, the way we're -- is very strategic and very thoughtful because, obviously, we're very sensitive to charge-off rates. And we don't want to be originating stuff on behalf of the bank partners that's going to potentially have delinquency issues, right? We don't want to get ahead of ourselves. So, we're just going at a pace that we feel very comfortable with. And we've done this quite a few times with great success, but I think could benefit us significantly in 2025. But this year, we're forecasting it to be some growth, but we're obviously being very cautious because of the credit on the new stuff.

Yeah, that makes sense. That's helpful. Thanks, Todd. And then, the only other question I had was just on charge-offs. Pam, did I hear you right, you said Q1 current quarter will be up from a year ago? And I guess I just wanted to make sure I understood that you referenced the 2022 tightening. But didn't you still have bad -- sorry, more challenging 2022 vintages in the book that you would have been cycling through? I'm just surprised it wouldn't be at least similar.

Yeah. I wanted to clarify -- so Pam, you can jump in as well, but I wanted to clarify that like as a dollar amount, it may be higher, but as a percentage of revenue, it's probably going to be similar. So, I don't -- it's a little misleading when we say it's higher. Like I'm seeing it being roughly similar or substantially similar to as a percentage of revenue. So, the dollar amount is -- really speaks to, in '22, we did a major tightening midyear, which is not something you ever really contemplate or do. And so, we got some of that benefit with some of a subsidized in first quarter '23, which we didn't -- we were in a very -- more normalized environment. But seasonality-wise, first quarter is always going to be the low quarter of profitability for the year, and then it accelerates in second, third and fourth. Fourth is a little -- is somewhat muted compared to second and third because you start growing again because of the fourth quarter seasonality. But I think it's -- overall, the yields coming up as a percentage of revenue, as I mentioned that we don't see that much difference from last year.

Okay.

We see just a minor lift -- just a very minor lift in the percentage of charges as a -- in the charge-offs as a percentage of revenue, very minor, so -- for the first quarter.

Okay. That makes more sense. Thanks for clarifying.

[Operator Instructions] It seems we have no further questions at this time. And I would like to turn the floor back over to Todd Schwartz for closing comments.

Yeah, I want to thank everyone for joining today and then the thoughtful questions. We look forward to speaking with everyone again in May when we report our first quarter results.