OppFi Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to Opdiv'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. Participants who joined the webcast could also submit questions at any time by either emailing investorsopfied It is now my pleasure to introduce your host, Sean Smolars, Head of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Good afternoon. On today's call are Todd Schwartz, Chief Executive Officer An Executive Chairman and Pam Johnson, Chief Financial Officer, our Q1 2023 earnings press release and supplemental presentation can be found at investors. Opphi.com. During this call, OpFye will discuss certain forward looking information.

Speaker 1

These forward looking statements Are based on assumptions and assessments made by OpSized 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 Oxite undertakes no duty to update or revise Any such statement, whether as a result of new information, future events or otherwise, important factors It 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.

Speaker 2

Thanks, Sean, and good afternoon, everyone. I am very pleased to report continued strength in our business. In the Q1 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 Pam will review our Q1 results in detail as well as discuss our full year guidance update. Before she does, I will cover 2 topics.

Speaker 2

1, the key highlights from our Q1 2023 financial performance 2, an update on strategic business initiatives for 2023. 1st 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 Q1 guidance for adjusted net income and achieve year over year growth. The key highlights for the Q1 this year Compared to last year are 9% growth in ending receivables to 370,200,000 20% growth in total revenue to $120,400,000 net income of 3,900,000 And adjusted net income of $4,400,000 We realized further gains in cost efficiency in both marketing and operations with the 9% decrease in marketing costs per new funded loan and the 8 Percentage point decrease in total expenses as a percentage of revenue.

Speaker 2

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 percentage of revenue and average receivables improved in Q1 sequentially. We expect net charge off rates to end 2023 significantly lower than last year.

Speaker 2

In the Q1, 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 Q4 of 2022 and 3% year over year. The net charge off rate as a percentage of total revenue decreased 18% or 11 percentage points falling to 48.9 from 59.8 percent in Q4 last year. We attribute part of this success to our values based collection strategy.

Speaker 2

During the Q1 recoveries doubled to $6,400,000 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.

Speaker 2

We continue to diligently monitor Leading indicators closely and additional credit adjustments will be made as needed. Our marketing initiatives continue to unlock to drive cost effective, low risk origination volume. We continue to focus on optimizing our diverse channel mix across SEO, direct mail and long standing partners. 1 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.

Speaker 2

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 With that, I'll turn the call over to Pam.

Speaker 3

Thanks, Todd, and good afternoon, everyone. Q1 was a strong quarter as our credit performance clearly continued Total revenue increased 19.5 percent to $120,400,000 Net originations decreased 1.9 percent year over year to $160,000,000 This reflects the credit adjustments made in the Q3 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 Q1 compared to 55.8 percent for the prior year quarter and a decrease from 71% in the Q4 of 2022. As a percentage of revenue, the annualized net charge off rate for the Q1 was 48.9% compared to 47.2% in the comparable period last year and an improvement from 59.8 percent in the Q4 of 2022.

Speaker 3

We expect the net charge off rates to continue to improve throughout the year. Turning to expenses. Total expenses for the Q1 totaled $53,500,000 or 44.4 percent of total revenue compared to $52,900,000 or 52.5 percent of total revenue for the Q1 of 2022. The year over year increase was primarily the result of higher interest expense, partially offset by lower direct marketing spend driven by decreased cost per funded loan. Interest expense for the Q1 totaled $11,400,000 or 9.5 percent of total revenue compared to $7,400,000 or 7.4 percent of total revenue for the same period a year ago.

Speaker 3

The increase was due to higher interest rates on our credit facilities utilized to fund originations growth over the past year. Adjusted EBITDA totaled $20,100,000 for the Q1, a 78% increase from $11,300,000 for the comparable period last year, driven by both lower net charge offs and operating expenses. Adjusted net income was $4,400,000 for the Q1, A significant increase from the approximate $650,000 for the comparable period last year. Adjusted earnings per share was $0.05 compared to $0.01 for the Q1 last year. This exceeded our guidance of approximately breakeven.

Speaker 3

For the 3 months ended March 1, 2023, Opdiv had 84,400,000 weighted average diluted shares outstanding. Our balance sheet remains strong with cash, Cash equivalents and restricted cash of $71,400,000 total debt of $331,600,000 Gross receivables of $417,500,000 and equity of $164,100,000 as of quarterend. We believe we have ample liquidity available to support our current growth plans with $546,400,000 in total capacity to fund receivables at the end of the Q1. Turning now to our outlook. For full year 2023, we affirm guidance for total revenue of 500,000,000 net income to between $24,000,000 $30,000,000 from the $22,000,000 to $28,000,000 prior range.

Speaker 3

As a result, we are also increasing our guidance adjusted diluted earnings per share to between $0.28 $0.35 from the $0.26 to $0.33 previous range. While we're not providing formal guidance for the Q2, 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 2nd 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 and A.

Speaker 3

Operator?

Operator

Thank you. We will now be conducting a question and answer session. Our first questions come from the line of David Sharp with JMP Securities. Please proceed with your questions.

Speaker 4

Hi, good afternoon. Thanks for taking my questions. Hey, Todd, Kind of curious, just taking a step back, the trends in credit are obviously very encouraging. And overall, I think the kind of trends seem to be very consistent with most of the other non prime lenders We've talked to you this quarter in terms of improvements post credit tightening and moderation of origination volumes. Can you just maybe share some thoughts on how you're thinking about The macro outlook, there are so many different variables and uncertainties.

Speaker 4

And specifically, are there Certain metrics or telltale signs like it's sort of uncharted territory we're in. And I'm wondering What are some of the things you would need to see to get comfortable switching back More, not necessarily aggressive, but more growth mode.

Speaker 2

Yes. Thank you. That's a good question. Well, so first of all, right now with the macroeconomic backdrop, The positive of all this is that there is very low unemployment and I think there's been a lot of surprise of The job growth that we've seen. And so we are obviously benefiting from that, from customers are employed and paying.

Speaker 2

I think though to your point due to the backdrop we are being conservative in the segments that we're originating on behalf of our bank partners Because the way we think about this is, last year things started to look really good in the beginning of 2022 and then we saw what happened. And so I think Our strategy here is we're going to really focus on the dependable segments, the segments that we know we can count on for profitable growth and a consistency of returns. And so that's really how we've decided to play it. The good news is we've been able to find growth there and we've been able to do it at or below the acquisition cost that we're targeting. And I think that may be due to some tightening going on above us and also some less Competition that we were seeing kind of in late 2021 early 2022.

Speaker 4

Got it. And that was kind of a Sort of a follow-up, I was curious what observations you're seeing on the competitive front and specifically just Here we are a couple of months after the last call and we've seen more rate increases. Are funding constraints are you sensing that that's becoming More of a hindrance due to potential competitors that you might be seeing more kind of inbound traffic even if you're not necessarily funding those loans? Any sense that the current rate environment has kind of been working in your favor?

Speaker 2

I think so. I think what you're seeing is some of the lenders above us are Typically called the peer to peer space has definitely tightened just from looking at earnings transcripts and looking at They're not able to provide necessarily pass on the cost to investors to get them a higher rate of return. And so we're getting the benefit Of that, I also think just in our segment, there's been some shakeup that's happened in 2022 that we need to getting in advance. And We were able to complete a large scale facility last year to give us ample room to grow and have also improved our cash position by over $20,000,000 in the quarter. So we have ample room to grow.

Speaker 2

So our appetite is there and we're in the game and we're looking for high quality originations that we think and provide credit access to our customers.

Speaker 4

Got it. And just switching to The numbers, should we view the guidance change? I mean, is that predominantly Kind of flowing through the Q1 upside or is there anything else that you would characterize It's changing on the margin from the last call?

Speaker 2

Yes, I think that's right. I think it's obviously flowing through the Q1. But it's in our operating leverage and our credit, right, and our ability to still find pockets of growth. So It's a little bit of both, but I think we felt comfortable revising slightly up and showing strength through the Q1, which obviously It was a big decision factor in that.

Speaker 4

Got it. And then just the last question. It's going to be probably more theoretical given everything we just talked about on the macro environment. But Can you provide, I guess, the math around with existing funding In place, any covenants or limitations on how much Can be drawn to you. Just based on kind of what you could draw right now in combination with your Sort of 12 months forecast of loan repayments.

Speaker 4

Trying to get a sense of what sort of the maximum Origination capabilities are based on planned repayments and current borrowing? Not suggesting that's what you're going to do, but just to help Frame

Speaker 2

that. Yes. I mean, if you're asking like do we have ample capacity, ample cash and Room to grow at our guidance of 10% to 15%? Absolutely. I mean, we could grow faster than that, but that's all that Like I said, we're being conservative and focused on operating leverage and credit performance, and we want Probability of return to be very high for our bank partners on these originations.

Speaker 2

And so yes, I mean there is room to grow further. In this environment, to your point earlier, I think we feel very comfortable with that range and feel like that's something we can achieve with a high degree of probability And a high degree of return that the returns will come through.

Speaker 4

Great. That's all I have. Thank you.

Speaker 2

Thanks, David.

Operator

Thank you. Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your questions.

Speaker 5

Hi, guys. This is Owen on for Mike. I just have 2 quick ones. Were there any issues with tax season? And secondly, Are there any new products to highlight or improvements to existing ones incremental to last quarter?

Speaker 2

Can you just repeat the second question, Owen, please?

Speaker 5

Yes. Are there any new products to call out or Highlight or any improvements to existing ones from last quarter?

Speaker 2

Yes. So The first one was tax season. So it was a very successful tax season. Part of this though was due to the technology enhancements we made In the second half of last year to our payments settlement portal, we revamped our whole recovery strategy as we call it a value based Recovery strategy, this yielded significantly better results than we've ever had in the history of the company, which was very Successful and led to outsized performance compared to our budget, which was great. But it was a Successful tax season and behaved more normally than we've kind of seen in like the last 2 to 3 years.

Speaker 2

So that was great. As far as the product goes, we still have the Core installment product with our bank partners, that is our primary product. When you say updates to the product, are you talking about just Specifically about the product or like something about how we're growing it?

Speaker 5

Yes.

Speaker 2

Maybe just be a little bit more clear.

Speaker 5

Yes, more specific to the core product, if there's anything incremental?

Speaker 2

Yes. I mean, so I mean, think the marketing team has done a great job of really not only working to adjust filters Find pockets of growth, but also working, maximizing our partnerships and relationships. And then really, really kind of refreshing and focusing on the things we We control more, which is SEO, direct mail referrals. Those are all showing great momentum coming out of the first Quarter and something that we're prioritizing. And also they happen to be lower cost acquisition channels.

Speaker 2

We're definitely putting a lot of effort and focus on that and we feel that can definitely differentiate us here.

Speaker 5

Great. Thanks for answering my question.

Operator

Thank Our next Questions come from the line of William Brewster with Solimar Capital Group. Please proceed with your questions.

Speaker 6

Hey, Todd and team. First of all, I wanted to commend you Taking the reins and making some hard decisions. It's obvious through the credit book that you came in at the right time and I appreciate what you've done. And I also want to applaud the slower growth. I am in the camp of profitable And good growth being the best growth.

Speaker 6

So thank you for that. I did want to ask, it seems as though your NPS score has slipped a little. I was curious how you're thinking about that and some of the puts and takes. I know your family history is Very NPS focused and curious how you think about that.

Speaker 2

Yes. I It's one that obviously we track and closely monitor on a week to week basis. And There is some movement in that number through the quarter. I think I believe actually through most of the quarter we were sitting at 82 to 3. And I think maybe it dipped a little.

Speaker 2

So it's what we kind of measure it for you at the last day of the month. So But our goal is always to keep that above 80. That's industry leading and I'm not aware of another financial service provider that kind of Holds a score at that level. So we're very, very proud of that. It's something that we'll continue to focus on and continue to be to make sure that we keep it as high as possible.

Speaker 2

But yes, there is a little volatility in the number throughout the week to week depending on the originations and the customers.

Speaker 6

Okay. And one of the things that It's come up obviously with the regional banking stuff. I just was curious the stability of your funding relationships and how you're Your bank partners, if you wouldn't mind just kind of sharing your thoughts on that, that'd be awesome.

Speaker 2

Yes, I mean it's top of mind and obviously something that we're focused on. As far as our Partners, liquidity partners, bank partners, not on the lending side, but just on the treasury side. We have no Exposure to any of the banks that have gone away or having difficulties. I think we stated that on the last quarter earnings call. So thank goodness for that.

Speaker 2

Our banking partners have not had any effects to our knowledge Either obviously, we have very close relationships with them and talk to them very, very frequently. But their balance sheets remain very strong and our partnerships Very strong. So, so far there really hasn't been any issues on that front.

Speaker 6

Yes. One of the interesting comments that one of your competitors had said is that the shorter duration loans are actually Sort of a positive to their partners. So I was curious if you were hearing the same thing. So in a duration crisis, maybe some shorter duration loans could help.

Speaker 2

Yes. No, I think in this environment with uncertainty, I think the shorter duration that's the one thing about outside though is we've never played with duration. I mean, there's incremental duration risk that is appropriate 1 month, 2 months out. But to change It drastically changed your duration. There is risk in that.

Speaker 2

And you're not necessarily getting paid for that risk. And so We're very careful. I mean, if you look at our business in the history of time, I think our duration our average duration, our average life of Loan on the books has been consistent and really has only incrementally changed kind of throughout the history of our business, because it's not something that We really want to play with and it's also in better times, you may not it may not benefit you, but in tougher times uncertain times like we are kind of today, I think it really is the appropriate and prudent thing to

Speaker 4

do. Yes.

Speaker 6

All right. Cool. Well, I just want to publicly thank you for stepping in. I know that you changed your life to come back to the company and thank you

Speaker 2

for what you're doing. Thank you. I appreciate the kind words. Thank you.

Operator

Thank you. There are no further questions at this Tom, I'd like to hand the call back over to Todd Schwartz for any closing comments.

Speaker 2

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.

Powered by Quartr
Earnings Conference Call
OppFi Q1 2023
00:00 / 00:00