OPFI - NYSE

Good morning, and welcome to OppFi's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] I am pleased to introduce your host, Mike Gallentine, Head of Investor Relations. You may begin.

Thank you, operator. Good morning, and welcome to OppFi's Second Quarter 2025 Earnings Call. Today, our Executive Chairman and CEO, Todd Schwartz; and CFO, Pam Johnson, will present our financial results, followed by a question-and-answer session. You can access the earnings presentation on our website at investors.oppfi.com. During this call, OppFi may discuss certain forward-looking information. The company's filings with the SEC describe essential factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements. Please refer to Slide 2 of the earnings presentation and press release for our disclaimer statements covering forward-looking statements and references to information about non-GAAP financial measures, which will be discussed throughout today's call. Reconciliations of those measures to GAAP measures can be found in the appendix to our earnings presentation and press release. With that, I'd like to turn the call over to Todd.

Thanks, Mike, and good morning, everyone. Thank you for joining us today. After a strong start to 2025, I'm proud to report that the second quarter was a record quarter for OppFi. The business achieved record quarterly revenue, adjusted net income and operating margin. Our Q2 results reinforce our belief that OppFi is unlocking its full growth potential and demonstrating that we are well positioned to continue increasing profitability and strengthening our balance sheet. Given our Q2 outperformance, we are increasing full year 2025 revenue, adjusted net income and adjusted EPS guidance. During the quarter, the company generated a 14% increase in total net originations, a 13% increase in revenue and a 59% increase in adjusted net income year-over-year. Our disciplined approach to growth and dynamic pricing led to this double-digit growth, and we anticipate that year-over-year growth will continue throughout 2025. Throughout the quarter, the underwriting model, Model 6 continued to perform well. In the second quarter of 2025, OppFi's net charge-off rate improved to 32% of revenue compared to 33% for the prior year. The model gives us the confidence that we will be able to continue to grow and weather different periods of economic volatility. OppFi continues to invest in product and technology initiatives to improve customer experience in originations and servicing. The auto approval rate improved to 80% in Q2 2025, up from 76% in Q2 2024, which in turn improved funnel metrics and propelled our net revenue up 16% year-over-year. OppLoans remains one of the highest-rated products in the industry, posting a 79 NPS score and a CSAT score of 89% throughout the quarter. We are proud to announce our new loan origination lending application named LOLA. Our product, tech and operation teams have been working diligently over the last year to build the loan origination system of the future. It's designed to significantly reduce loan application processing times and boost operational efficiencies. By integrating with AI tools, LOLA is expected to enhance customer experiences, improve satisfaction and increase automation, including auto approvals. Its modern architecture also allows for seamless integration with other major systems and tools, creating a cleaner data layer and providing deeper insights to fuel further innovation. Over the next 6 months, OppFi plans to migrate to LOLA. Our investment in Bitty continued to perform well in the second quarter of 2025. The business continued to add accretive profitability and cash flow to OppFi. Bitty is doing a great job utilizing technology to improve operations and the customer experience, identifying additional growth opportunities in new credit segments and capitalizing on the continued supply-demand imbalance in the small business lending space. Overall, OppFi had a strong quarter financially and operationally. We expect continued healthy revenue momentum and profitable growth throughout the remainder of 2025 and into 2026. We believe OppFi is well on its way to executing its vision of becoming the leading tech-enabled digital finance platform that collaborates with banks to offer financial products and services to everyday Americans. With that, I'll turn the call over to Pam.

Thanks, Todd, and good morning, everyone. As Todd noted, we had another quarter with record results. These are due in large part to the proprietary Model 6 credit software. Model 6 has helped us expand our reach and grow our business in a highly capital- efficient and profitable manner. Its enhanced predictive power has enabled the ability to confidently underwrite larger loan amounts for creditworthy individuals. This ability to increase the average loan size while maintaining rigorous risk standards directly fueled the growth in originations, which Todd mentioned. The impact of Model 6 extends beyond just loan size. We have also seen an improvement in the auto approval rates. This enables deserving borrowers to more easily access credit, thereby enhancing the customer experience, increasing operational efficiency and improving customer satisfaction. The synergy between expanding originations driven by larger and more efficiently approved loans and disciplined credit performance is clearly reflected in the healthy growth of our finance receivables, which increased 13% to $438 million year-over-year. This growth is supported by the improved predictive accuracy of Model 6, which has properly aligned loan prices and terms with risk driving revenue. As a result of the machine learning improvements incorporated into Model 6, which helps underwrite better performing loans and increased finance receivables, total revenue reached a quarterly record of $142 million, representing a 13% increase year-over-year. The revenue growth, coupled with a lower net charge-off rate, drove a significant 16% increase in net revenue to $100 million. The net result of these positive effects was a 130 basis point improvement in the average yield to a quarterly record 136%. Our focus on cost discipline also played a key role in our strong performance. Continued operational improvements contributed to lower total expenses before interest expense, which declined to 39% of revenue in the second quarter compared to 45% in the same quarter last year. As we noted during the first quarter earnings call, we proactively paid down our corporate debt, which reduced interest expense to 7% of total revenue, down from 9% in the prior year. As a result of the increases in revenue and reductions in expenses, adjusted net income increased 59% to a quarterly record $39 million, up from $25 million. At the same time, adjusted earnings per share grew significantly to $0.45 from $0.29 last year. On a GAAP basis, our net income decreased by 59% to $11 million, primarily due to a $33 million noncash charge, reflecting the change in fair value of our outstanding warrants. Because our Class A common stock price increased during the quarter, the estimated value of the warrants issued when we went public also increased, driving this noncash expense. Moving to the balance sheet. We maintained a strong position, ending the quarter with $78 million in cash, cash equivalents and restricted cash, alongside $306 million in total debt and $218 million in total stockholders' equity. Our total funding capacity was $603 million at quarter end, including $219 million in unused debt capacity. We expect our healthy momentum to continue into the second half of 2025. Given our strong operating performance driven by growth in originations and a focus on operating efficiencies, we are providing the following updated full year guidance. For the full year 2025, we now expect total revenues to be between $578 million and $605 million, representing a 10% to 15% increase compared to 2024. We are again increasing our adjusted net income guidance to be between $125 million and $130 million, representing a 51% to 57% increase compared to 2024. Based on an anticipated diluted weighted average share count of 90 million shares, we are increasing our adjusted earnings per share guidance to be between $1.39 and $1.44. With that, I would now like to turn the call over to the operator for Q&A. Operator?

[Operator Instructions] And our first question will come from David Scharf with Citizens Capital Markets.

First one, a little more high level for both Todd and Pam. I mean, obviously, you've delivered on everything and more of kind of your restructuring over the last couple of years on both the expense and credit side as well as volume. And this is not a back-ended way of trying to force you into providing future guidance. But is there a long-term margin structure or operating model we ought to think about? Or maybe more specifically, is there a target ROE or net margin over the next 3, 5 years that you have in mind for the business based on all the changes you've made?

Yes. Thanks, David. Thanks for the question. I think we -- when we went on this journey, when I come back as CEO back in 2022, we had laid out roughly what we thought those could be. We were a long way from home at that point, but we kind of told you, hey, this is what we think we're going to achieve, and we've achieved it. When -- I think we're very satisfied where we're at today. We think that the business is performing incredibly well. Now it does ebb and flow, right, depending on some macro factors. There's some clouds out there that we're looking at with tariffs and stuff like that with the consumer on inflation and unemployment. But we -- if we can bump that, if we're achieving a 20% margin, that is a very healthy margin, and that is probably exceeding our expectations, and we feel really, really good there. One of the things this year, we wanted to return to growth, and that was a big priority for us. And I think the team has done a really great job executing on that. It's a combination of not only recruiting new customers with our great service and auto approvals, but also finding the right price and the right size of origination for our customers. So it's a nice balance. So we have a nice kind of combination right now of growth and profitability that we will look to continue to achieve here throughout '25 and beyond.

Got it. Got it. Understood. And more granularly on the quarter, you referenced -- and I apologize, I haven't done the math myself, but that the latest credit models have enabled you to -- it sounds like notably increased the average origination size. Can you give some context around that, sort of what the average loan size has increased by? Or how much originations in the quarter was due to just increasing the average loan amount as opposed to just the number of originations?

Yes. I mean, I think the way we're thinking about it is, you've had significant inflation. Obviously, inflation today is less than it was a couple of years back, but that inflation has stopped. Prices have not fallen down. And so what's really happened is our top end price of $4,000 was one of the largest originations we made. That had not been adjusted in almost 10 years where we had not really taken into account for inflation. And so we are now able to incrementally, I would say, increase that up to closer to $5,000, which allows for the updating of prices and inflation in today's economy. And then also incremental term. But these are all incremental things that we're doing. So it's probably 10% increase in size. And so it's not like we're only relying on just raising the amount of the origination. It's a combination of doing that and then also making sure that our current customers are paying us and they're staying current. And then also there's a large population of customers that have been successful in our product and paid in full that are coming back to us at great rates as well. So it's a combination of things.

So David, our average -- our average loan size, David, has increased by about $100 for the year-over-year. But again, these newer larger loans are just now infiltrating the portfolio, right? And so you're just starting to really get the initial impact of those. But an average loan size right now is about $100 more than it was during the 6 months last year.

Just -- sorry, if I can squeeze in just one more on originations. I see in your slide deck, there's a reference to sort of the growth in the percentage of loans retained by bank partners. Is that something that was contractual? Or is it concentrated with one partner? Is it just kind of the demand they just want to retain more? Can you maybe provide a little more context?

Depending on the state, we abide by all federal and state laws. Depending on some of the states, banks retain different percentages. And so that just means for the quarter, there were some growth, maybe more growth in those states. So that's how they retain more.

Our next question will come from Kyle Joseph with Stephens.

Congrats on a nice quarter. Just want to dive into credit a little bit more. Obviously, your charge-offs are heading in the right direction, and you saw a good expansion in your net revenue margin. But I just want to get your thoughts on the macro, the health of the underlying consumer, kind of any trends you're seeing on the DQ or first payment default trends and then layer that in with kind of some of the commentary around larger originations and how you expect that to impact credit going forward?

Yes, it's a good question. I think we saw a strong start to the year. I think coming into the summer months, we're being pretty -- we're still being cautious. I mean we've never -- we've always been very slow to ever change the credit box, we're still running, I would say, pretty tight. The good news is, we've been able to still achieve growth and continue to push down the charge-offs as a percentage of revenue. I think similar to the Fed waiting and seeing on lowering interest rates, we're waiting and seeing a couple more things here in today's economy to make sure that we're seeing the FPDs and also long-term charge-off rates that we need to work within the confines of our structure. So -- but yes, it's still -- we're still running relatively, I would say, tight compared to years past back in 2018, '19, where much more risk segments were available at the current charge-off rates. So we've kind of largely unchanged that, and we'll continue to be cautious and read and react. I mean that's the nice thing about Model 6 now is our ability to dynamically read and react to situations. And we've said it a couple of times on the earnings call, it also focuses more on long-term charge-off rate than short-term volatility in the FPD numbers.

Got it. Really helpful. And then just shifting to expenses a bit. Obviously, the quarter really highlighted the operational leverage in the model. But you're seeing kind of accelerating origination growth that has far outpaced at least marketing expense growth. To me, that signals a relatively healthy market. But how you're thinking about the market overall, how you're thinking about marketing expenses given kind of competitive factors in the market?

Yes. I mean if you look at 2024 and '23, we averaged right around $200 MCPF, and that has increased. And I kind of talked about it in the first quarter that there were some marketing initiatives that we were going to be unlocking this year [ in direct ] response partnerships and some investment in some of our organic search methods as well. So we've started to roll that out. Our cost for the quarter was 220. So we're definitely making those investments, but we're being smart about it. But those -- we think that there's continued investment for Q3 and Q4 that we'll see in MCPF. But the good news is, so far, we've been happy with the results and continuing to learn and find new methods and channels that we work -- that work for us on a scalable way.

Got it. Helpful. And then, yes, just one last one for me, if you don't mind. Just I want to get your sense for -- or your expectations for yields given some of the dynamics in the portfolio. Obviously, credit has been good, kind of a shift towards larger loans. Obviously, some of that's probably graduating consumers into higher or larger loan balances. But -- and then at the same time, you're seeing pretty good year-over-year yield expansion, but just kind of unpack that and give us a sense for where you see yields trending for the portfolio over time.

Yes. We think it's going to be stable, incrementally increasing to stable. I think we're -- one of the things we implemented last year was more of a risk-based pricing approach for different segments based on credit risk. And so that's been starting to -- that was rolled out starting last year and is now starting to take shape in the portfolio. But we feel like it's at a stable level to slightly increasing.

Our next question will come from Mike Grondahl with Northland Securities.

Another very nice quarter. Pam, maybe the first one for you. You guys had mentioned like roughly 10% higher average loan size, maybe $100 year-over-year. Do you expect the average loan size to keep creeping up? Have you kind of fully absorbed that increase? Or how should we think about that the next couple of quarters?

I would say incrementally, it will creep up a bit. We, again, really haven't seen, I'd say, the full rollout of these larger loans yet at the level that we could be making them. So I think you'll see an incremental increase.

Not huge, but -- got it. Got it. Nothing's changed materially in terms of your average loan size, but it's creeping up a little bit. And I think Todd said, hey, adjust -- we're kind of adjusting it for inflation, I think, is what I heard, which makes sense. Secondly, on credit quality. Last week, we kind of had a reset from the government in the jobs data, June, July. Did you guys see that at all? Like did that cause you guys to rethink a little bit about leaning into growth? I'm just curious kind of how you feel about the macro right now?

Yes. I mean, listen, the job numbers get revised every month later and then -- and they're not even what they -- so if they get worse, and it's something we watch. It's a macro indicator that we watch unemployment, we watch inflation. Those are the 2 big ones for us that we kind of -- it's not something we're going to like dynamically change a model because of some macro indicator that may not even be fully accurate. But it is definitely something we're watching here going into the growth months of the year. I think you have to always be careful in watching what's going on in the economy. Things are changing pretty quickly in today's environment. So you can't read and react to everything, but it's definitely something that will inform us. And then also, we have very, very good early data to kind of see cracks or see problems kind of well before any economists or anyone due to the repayment rates kind of and the default frequencies we see so we can read and react as needed.

Got it. And does that data still look really good?

Yes. I mean, so far, I mean, like this is -- coming off of a tax refund season, you're going to start to see higher losses for the second half. It's something that we model and are prepared for, but it's something we're always closely watching, especially on new loan originations. It is something you have to be careful with because of the environment changes, things can change as well.

Perfect. And then can you guys call out what the collection amount was in 2Q? I know 2 years ago, give or take a little bit, you revamped collections, started being more active there. And I know you've had a lot of success. How was collections in 2Q?

Just to understand your question, Mike, are you talking about recoveries like post charge-offs?

Yes, yes.

I've got that handy, Mike. Last year, Q2, our recoveries were $8.4 million. And this year, they're $10.692 million. So again, major increase.

Got it. Great. And then just lastly, OpEx was pretty much flat year-over-year. I think it was roughly $45 million. How do we think about the growth there going forward? Should it track revenues? Should it be half of revenue growth? Any -- how do you guys think about it?

I don't think if we think about it necessarily as like a formula per se. I mean, we're going to invest when we see a high -- there's a need for it. And I think I mentioned for the first time, our LOLA system, our lending application, LOLA. We think that's a great investment and something that is going to propel us into the future, allows us to seamlessly integrate with AI tools. It also better integrates all our major systems and is like -- is really going to set us up really nicely here once we migrate for the next 10, 5, 10 years, if not beyond. So I think as far as like the corporate and our servicing. We think that with the team in place, we can definitely continue to scale without having to add maybe some incremental cost, but without having to add major costs. But our response to scaling and continuing to grow is to really, really focus on delivering value to our customers and really getting our -- all the technical debt and all the software that had been built in the past really cleaned up to give us a clean footprint going into this new world where we know that there's these cool AI tools that can benefit not only us operationally, but also our customer experience.

Got it. And I'm sorry, I'll squeeze one more in. Just with the robust free cash flow, any updated thoughts on capital allocation? I saw the dividend was what was incremental. How are you thinking about that?

Yes. We're continuing to explore opportunities and investment opportunities. And our goal, Mike, is to be a multiproduct platform for the alternative credit space to be the leader in that. And we're seeing some interesting stuff out there. Nothing to report, but we're really happy with the Bitty investment that's continuing to perform really well in the SMB space. We're continuing to look at adjacent spaces in point of sale continuing to look at the Earned Wage Access space is obviously a very, very hot space. The valuations are very full there, but they're getting a lot of credit. It seems like consumers really like the product, right? A lot of the product market fit there for consumers. So we're definitely active looking where it can make sense. It's going to be something that we make sure it really fits within our brand promise and our mission. We don't want to do anything just to say, hey, we did an acquisition. It really has to fit our footprint and our vision for being a multiproduct platform. But we're definitely looking at that closely.

Mike, I'd like to add that we would be considering stock repurchases if we feel like there's a mismatch between the value of the enterprise and the stock price.

Yes. Well, I would go ahead and say we do think it is disconnected. But yes, we think it's been very disconnected. That is another menu option for us as well to protect our share price when we think it's not valued correctly as well. So...

Our last question today will come from Dave Storms with Stonegate.

Just wanted to circle back to the LOLA initiative. How should we be thinking about that rollout over the next 6 months? And I guess what does success look like for that? Is it measured in costs or auto approval rates, the number of clicks to originate a loan? Just any more there would be great.

Yes. I mean I think success is we just continue to achieve the results we're getting right now with our current system. The real value is the ability to -- it's for the future to really unlock the full potential of all the new technologies in AI and plug them in without breaking the system and being able to seamlessly integrate them. It also really improves our data analysis and connects better into major systems. But it would be to continue to achieve the great results we're getting today and even build upon them incrementally better. But also it really just gives us that optionality to be able to deploy new tools in all facets of the business, marketing, credit, operations, even better for compliance and financials as well and data. So it really just helps us clean up a lot of the tech footprint we had over the last 10 years that we've built and improve on it.

That's perfect. And then just one more for me. Your guidance takes into account the second half being seasonally softer. Are you seeing anything in the macro that would throw off the seasonal distribution between 3Q and 4Q?

Can you be a little more specific just to make sure I answer your question correctly?

Yes, of course. So your guidance takes into account the second half being seasonally softer as it normally is. Should we expect 3Q and 4Q to be seasonally in line with the typical seasonal trends? Or are you seeing anything in the macro picture that might throw that off?

Yes. No, I think -- I mean, listen, I think as you start to grow more, there's costs associated with that. And obviously, charge-offs build a little bit until you kind of reset them next year. So I mean, I think we're seeing a pretty standard process there, but nothing to call out, out of the ordinary.