OppFi Inc (OPFI) 2022 Q3 法說會逐字稿

Good afternoon and welcome to OppFi's third quarter 2022 earnings call. (Operator Instructions) As a reminder, this conference call is being recorded. (Operator Instructions) It is now 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 third quarter of 2022 earnings press release and supplemental presentation can be found at investors.oppfi.com.

During this call, OppFi will discuss certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by OppFi's management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

Any forward-looking statements made during this call are made as of today and OppFi undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Important factors 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 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. Pam will review our third-quarter results and provide additional details about our financial performance and balance sheet. Before she does so I will cover four topics. One, the key highlights of our third-quarter performance. Two, an update on the key initiatives discussed on our second-quarter call. Three, our macroeconomic outlook as well as quarter-to-date business trends. And four, our early view of 2023.

Our third-quarter performance was in line with our expectations, and we're pleased by these results, given the challenging overall economic environment. The key highlights year over year are: net originations increased by 11% to $183 million; ending receivables grew by 39% to $408 million; total revenue expanded by 35% to $124 million; marketing cost per new funded loan decreased by 26% to $188; Operating expenses, excluding interest expense as well as add-back and one-time items, decreased to $43.1 million or 34.7% of total revenue from $44.2 million or 48.1% of total revenue in the prior year period.

I'm pleased to report some positive progress on the key initiatives we discussed last quarter. In mid-July, the most significant adjustments to credit models were made in the company's history. We're happy to report that these changes achieved the intended results based on early trends. To be more specific, the first payment default rate for new customers ended the third quarter 26% lower than at the end of the second quarter. Also, the first payment default rate for refinance loans to existing customers ended the third quarter 9% lower than at the end of the second quarter.

Looking at the overall portfolio, the percentage of the total active portfolio that is up to 29 days delinquent ended the third quarter 2% lower than at the end of the second quarter, effectively stabilizing. Based on these metrics, we feel confident that the quality of the loans in the portfolio will continue to strengthen as better-performing new vintage loans become an increasingly larger percentage of the portfolio and nonperforming loans continue to cycle out. This dynamic gives us strong confidence in 2023.

While we were happy with the portfolio quality becoming stronger, we want to remind investors that the net charge-off rate is likely to worsen sequentially in the fourth quarter, consistent with our forecast, as nonperforming loans continue to cycle through our platform. The net charge-off rate lags new vintage performance since it is a function of the performance of loan vintages from prior quarters and the volume of current quarter originations. The credit models continue to evolve with the addition of new attributes and data sources to further strengthen the accuracy of the underwriting platform. We anticipate these initiatives will serve as continued tailwinds in 2023.

Our second quarter conference call, we also discuss key marketing initiatives within our partner and direct mail channels to source higher quality originations while lowering the average cost per newly funded loan. I'm happy to report these initiatives have been successful. Specifically, our marketing costs per new funded loan declined by 8% sequentially, while the weighted average risk score, a risk-based assessment of ability to repay, improved by 17% sequentially. While originations for new customers decreased by 28% in Q3 year over year, due in part to planned adjustments implemented in July, we're excited that new originations for the lowest credit tier increased by 43%.

We accomplished this by strategic up market targeting initiatives in our highest volume marketing channels, including partners and direct mail. Furthermore, in Q3, same-day funding was added to the platform. We also implemented our renewed values-based recovery strategy that enhanced customer experience and significantly increased recoveries. As part of this program, we launched a redesigned, easy to navigate, self-service portal with expanded capabilities and payment options for customers. This has proven to be very successful and well received.

Turning to our macroeconomic outlook and current business trends. We are closely monitoring the broader economy and the effects that persistent high inflation and unemployment rates can have on our customers. However, we are confident in our ability to navigate the environment and we are increasingly optimistic given the positive trends from our recent strategic adjustments.

Speaking on business trends, I'll now briefly discuss our quarter-to-date performance. The business continues to perform in line with our expectations, which provides us confidence to reiterate our full year guidance. We continue to experience robust demand, including within the lowest risk credit tiers in the addressable market. We're likely benefiting from peers and upmarket lenders tightening credit in this uncertain environment, which is providing us a more opportunity to help customers that are being turned down by mainstream credit options, thereby growing our market share.

For example, you may recall that OppFi offers a TurnUp program for applicants who opt in, we'll check the market of near prime lenders before presenting options through our platform. The match rate, the percentage of opted in consumers who were accepted by TurnUp provider and moved on in their application reached an all-time low and is 60% lower than it was at the start of 2022. We believe this will result in strong demand for lower risk originations.

I will now provide an initial overview of our current outlook for 2023. We are confident that profitability will rebound in 2023 with the quarterly cadence accelerating throughout the year. The first half of the year is likely to be impacted by elevated yet improving net charge-off rates as the loan vintages from Q1 and Q2 of 2022 won't fully cycle through our platform until early Q2 of 2023. We anticipate providing full year 2023 guidance when we report the fourth-quarter results.

For 2023 we are focused on these core areas to optimize the business and maximize shareholder value. One, continuing to enhance the credit model with data and technology. Two, pursuing growth efficiency initiatives to further scale expenses. Three, expanding initiatives to increase collections and recoveries. And four, strengthening our platform differentiation in the marketplace, including optimizing the customer experience.

As stated previously, my family and I plan to continue to support OppFi shares when we believe there is a disconnect between its market price and what we believe is the true long-term fair value. During the third-quarter open trading window, my family and I purchased approximately 273,000 shares for $717,000 with an average price of $2.62 per share. With these purchases, my family has purchased approximately 882,000 shares for $2.6 million at an average price of $2.97 year to date.

Before turning the call over to Pam, I want to reiterate our key message that despite macroeconomic pressures, the business has stabilized with higher-quality loans to new and existing customers, lower early delinquency rates and a portfolio that is becoming stronger as older vintage nonperforming loans cycle out due to adjustments to the credit model. These dynamics provide us with confidence and optimism.

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

Thanks, Todd, and good afternoon, everyone. Turning now to our third quarter results, total revenue increased 35.1% year over year to $124.2 million. We generated an 11% year-over-year increase in originations to $182.7 million while lowering our marketing cost per new funded loan by 26.4% or $67 compared to the prior year period to $188. Origination growth was driven by continued strong demand, which created higher application volume, partially offset by the effects of credit model adjustments and therefore reprioritizing certain marketing partners.

Speaking of marketing, we continue to be more efficient at lowering our cost per new funded loan. This improvement was driven by growth in low-cost marketing channels such as e-mail, referrals and search engine optimization. Total net originations of new loans as a percentage of total loans decreased to 50.1%, down 130 basis points year over year and 590 basis points sequentially. The shift in mix was driven by adjustments in the credit model.

Moreover, our investments in automation resulted in the auto approval rate increasing from 58.1% to 69.6%. The annualized net charge-off rate as a percentage of average receivables was 66.4% for the third quarter of 2022 versus 51.4% for the second quarter of 2022 and 35.8% for the prior year quarter. The year-over-year increase reflects elevated charge-offs relating to the initial impact of inflation and lower quality loan vintages originated prior to credit adjustments enacted in July. In addition, credit adjustments have decelerated origination growth and therefore impacted the denominator of the net charge-off rate.

Turning to expenses, operating expenses for the third quarter, excluding interest expense as well as add-backs and one-time items, decreased to $43.1 million or 34.7% of total revenue from $44.2 million or 48.1% of total revenue in the prior period. Therefore, we leveraged expenses lowering this percentage to total revenue by approximately 13 percentage points as a result of our initiatives implemented earlier this year.

Adjusted EBITDA totaled $13.2 million for the third quarter, down from $31.8 million in the prior year quarter as higher revenues are more than offset by elevated net charge-offs, which was partially mitigated by lower operating expenses.

Interest expense for the third quarter totaled $9.1 million or 7.3% of total revenue compared to $6.4 million or 7% of total revenue in the same period a year ago. We generated adjusted net income of approximately $800,000 for the third quarter compared to $17.4 million for the comparable period last year. For the three months ended September 30, 2022, OppFi had 84.1 million weighted average diluted shares outstanding, excluding 25.5 million earn-out shares.

Adjusted earnings for the third quarter were $0.01 per share. Our balance sheet remains healthy with cash, cash equivalents and restricted cash of $50.5 million, total debt of $342.6 million, gross receivables of $407.7 million and equity of $165.5 million as of quarter end. We have ample liquidity available to support our future growth plans with $558 million in total funding capacity. During Q3, OppFi repurchased approximately 88,000 shares for $300,000 at an average price of $3.46 per share. Year to date, the company has repurchased approximately 704,000 shares for $2.4 million at an average price of $3.47 per share.

Turning to guidance, we have reaffirmed our full 2022 outlook based on the third-quarter performance in line with our expectations and the fourth quarter to date being on plan as well. To review, we have guided total revenue to increase 20% to 25% year over year. Operating expenses as a percentage of total revenue to be 43% to 47%, excluding interest expense, add-backs and one-time items, and profitability on an adjusted basis to be breakeven or a modest net loss. For 2023, we remain optimistic that profitability will rebound and ramp up each quarter as the net charge-off rate improves sequentially and growth efficiency initiatives further scale our expenses.

With that, we would now like to turn the call over to the operator for Q&A. Operator?

(Operator Instructions) David Scharf, JMP Securities.

Very good afternoon. Thanks for taking my questions. Wanted to delve into a couple of things. Todd, the first is on just the customer acquisition outlook broadly. We've heard from both some digital lenders as well as some other digital-oriented financial services or fintech companies that -- digital ad rates were very favorable in the third quarter as a lot of competitors pulled back, and crypto pulled back, some funding constrained competitors may have advertised less.

Were you sensing the same thing? I mean, some of these other companies are signaling that ad rates may actually start, kind of, reverting back to the norm and picking up again. Should we view the third quarter CAC as a floor or is that something that is sustainable?

Yes, it's a good question. I think it's a little bit of both, right? So I think you're seeing -- definitely I've mentioned on the call that we have a TurnUp program. And essentially, it's a TurnUp program when a borrower comes to us, one of our product features is to screen them against a consortium of lower-cost financing partners that could potentially provide credit to our borrowers at a lower cost.

That match rate hit an all-time low in the quarter, down almost 60%, which signifies that there is significant tightening happening with lenders above us. And I think it's filtering all the way down from the banks. It starts at the banks and kind of filters down to the non-prime and then into our segment.

So we're seeing that. I think you made the point about some lenders have constraints with balance sheet and growth right now, going through some challenges with credit and the environment, I think we're positioned really well there and able to take some market share there as well. I think you'll probably in fourth quarter just due to the -- it's seasonally the -- probably one of the best vintages of the year. So you probably will see some more competition -- increased competition coming from it.

But I feel like we have definitely some levers and some improvements and efficiencies that we can -- we're hopeful that it's going to be in line with our expectations and only slightly above or slightly around where we're at now. But we obviously came in better than expected on that and we're happy that some of our initiatives have worked and we've gotten more efficient.

Got it. And just to clarify, definitionally, I think you referred to a weighted average risk score being up 17%. What exactly is that and was that -- and what periods are you referring to? Is that the overall portfolio or the third-quarter vintage of new originations [versus] a year ago?

So, most companies segment their customers based on ability to pay and risk. And we've found that our weighted average risk score has improved in the quarter on new loans. So the probability of success is obviously higher in the reliability of the charge-off numbers. And so it points to us having better quality and finding more segment one borrowers, which is partially because of the statements I made earlier about some of the tightening going on above and then also our marketing efficiencies and being able to take market share.

Got it. And maybe one last one, I guess a little longer term. Appreciate the color on sort of the expected trajectory during 2023. But is there a normalized loss rate that we can think of for the business? And I asked specifically within the context of everybody is struggling to assess what the new normal is, particularly for lending models that were developed over the last five, eight years. There was a time of unprecedented, incredibly low interest rates, incredibly low inflation, incredibly low unemployment.

And once we emerge on the other side of any downturn, we're never likely to see that kind of perfect storm again. Within that context, should we be viewing sort of the kind of longer term normalized through-the-cycle net charge-off rates for the business to be higher than maybe what was -- you experienced in '19, '20?

Yes. Listen, I think I've said this on previous calls. We feel that when we get into the low 40s, potentially high 30s and we've also achieved that historically -- the business -- we feel really good about that as a percentage of revenue, and we'll always strive to kind of target that and hit that metric.

Got it, Great. Thanks very much. That's all I got.

Yeah. Thanks for the question. Appreciate it.

Thank you. (Operator Instructions) Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I'd like to turn the call back over to Todd Schwartz, CEO and Executive Chairman for closing remarks. Over to you, sir.

Thanks, everyone, for joining us today. We look forward to speaking with you again during our fourth quarter earnings call conference call. Have a happy holiday season.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.