OppFi Inc (OPFI) 2023 Q4 法說會逐字稿

Good afternoon and welcome to Applied'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 and you can submit questions at any time by either e-mailing investors at applied.com. We're selecting the ask-a-question feature And just lastly for those listening, but all in, you will be prompted to enter the queue after the prepared. It is now my pleasure to introduce your host, Sean small Head of Investor Relations. You may begin.

Thank you, operator, and 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 dot unfi.com.

During this call, UPS, I will discuss certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by up-sized 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 Uplay undertakes no duty to update or revise any such statement, 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, Sean, 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 three times. In addition, our solid fourth quarter enabled us to exceed our final full year earnings guidance for 2023 and 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 to progress in our strategic business areas during Q4 2023. Brief commentary on our macroeconomic outlook for 24 and for 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 Q4 of 2023 compared to the prior year. Our strong 10.7% total revenue growth to $132.9 million discipline 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 rebound 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. Our 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 percentage point improvement in disciplined expense management with total expenses excluding interest expense as a percentage of total revenue by 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 and 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 macro economic 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 upside.

Now I'll discuss our progress during the fourth quarter with our strategic business areas. Credit performance continuing 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 2023 appear to have had the intended effect and our portfolio mix continued to shift to the lowest risk segment. 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 remained 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 realize operating costs 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 comprise this much of Americans incomes. Nonetheless, we note that employment trends appear relatively strong for customers.

In summary, we think current macroeconomic conditions both helped and hurt customers and therefore, the net effect for our five 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 reduced 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, the 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 2020 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 yields 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 is 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 $0.1 per share during the three months ended December 31st, 2023 of five 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 manage 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 of 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 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. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two, if you'd like to remove a question from the queue For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star One moment please while we poll question, the first question we have is from Mike Grondahl of Northland Securities. Please go ahead.

Yes, 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 in how you're feeling about the macro. It sounds like Todd said, too, that 24 will be, you know, a lot about emphasizing profitability over growth so just a little bit more color there would be helpful.

Sure, Mike. Thanks a good question. I don't it comes again from the macroeconomic environment we're seeing. We're not we have certainly tightened the credit. But to to manage to that environment, we're not seeing necessarily a lot of improvement in the customer up 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 anymore to that?

Yes, I'll just chime in. I think I had mentioned it on the last call. We have a we have dynamic modeling in place now by Mike. So what that means is is we know the vintages, there's seasonality to vintages throughout the year. You go into the fourth quarter, some of the lowest loss E&O vintages of the year?

I think I think that's that's what was choosing Pam was referring to on the call was if you look at the repayment rates on a on February, March vintages, it's tax refund season. And and typically those are some of the lowest quality vintages of the year. So I think that's that's what she's referring to when she said, that's I want to clarify, but you know, we have more of a dynamic modeling now as we've worked on testing and rebuilding the model and we deploy it throughout the year and 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, you know, right now we're enjoying the benefit of lower acquisition costs. We're being very efficient on our funnel. So we're happy to see that right now. But I would 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, second one being our lowest risk customers, you're seeing less degradation from 19 then than you would in a segment three. However, we have not seen that sustained and we've we've kept our product and our price and our commitment to credit access at the same. So we're not 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 I think that's that's really what I what we would need to see to really turn growth.

Now that being said, Mike, on the fourth quarter, we had very effective swap and swap-outs with some segments and stuff, and so we are finding ways to grow. We also mentioned in the call geography expansion our bank partners have chosen to expand on debt. So there are other ways to grow, right? It doesn't just mean expanding the credit box.

Got it.

I mean, taking now one step further, I mean, is this sort of a 50 to $0.6 adjusted EPS business until you grow? Like do you have other level levers to drive adjusted EPS other than growth.

I mean it absolutely, you know, we're seeing, you know, 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 to our P&L but we're doing that because we're in this for the long term is to really align and be conservative and then come out when the growth there and be ready for it.

But there are several levers that we can we can point at operational efficiencies. We're just getting started there. I mean, there's tremendous efficiencies that we're finding. We're also really focused on on the but the customer funnel, we found some really interesting stuff we're working on on the funnel side to look at address bottlenecks and then also more throughput. So we feel really good that we have the levers to drive growth even despite record high interest rates for our business for the life of our business.

And then also some unfavorability on fair market value.

Got it.

Okay.

Question we have is from Zachary Oster of JMP Securities. Please go ahead.

Hi, good afternoon. Thank you for taking my question. And 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 were that it was kind of more driven by lower average yields or lower volume or any of those types of factors?

I'm sorry, could you just repeat the question?

I missed the first part.

I apologize since I was just trying to get a better sense of what the drivers are for the 2024 revenue guidance, the lower yield that has tighter volatile, lower volumes, tighter credit box.

Yes, I mean, I think currently the yields, no, we forecast the yield to stay strong where at its current levels, it's 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 that's 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 then 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, are our most powerful model yet is launching in the second quarter where we really really think that on the swap and 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. So but right now, what we're seeing is, you know, largely similar to last year, albeit we still have some levers that we're working on. And like I said, some final funnel efficiencies to propel growth and some geography expansion as well from the bank partners that we can service in more states. So but yes, we're that's kind of how we're looking at it.

Got us. I'm excited to have.

And then just one more follow-up question. And so just on the charge off rate specifically, we were kind of wondering if we can get more color on the dynamic of it with the year ends the kind of.

Yes, the way that it plays out throughout the year, the charge-off rate as a percentage of revenue?

Yes.

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

Got it.

Thank you very much.

The next question we have is from day storms of Stonegate. Please go ahead.

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

Yes, on the acquisition criteria, are you referring to like top of funnel? Like are the criteria?

I just want to get more specific on the question to make sure I answer correctly.

You my understanding was that when you were talking about uses of cash, as you look for towards external growth, you're updating your criteria there, or are you talking about on M&A?

I'm sorry, how is focused on originations on the loan side?

Well, I think yes, 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 outside brand, our vision around being being a tech-enabled platform that provides best in class and alternative digital alternative financial service products where that we where we see supply demand imbalance where the banks are not in 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 and a lot of my my second life before I came back as CEO is in private equity, doing that, 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 yes, 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 in and we're starting to we're looking around.

Understood.

That's very helpful. Thank you. And then just one more on 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, too to continue growing that, right?

Yes. 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 you really really happy with tech and product and the ability to increase that year over year on incrementally every year. That's a goal, right, is to continue to increase. I think one of the things it's so talked about is on the artificial intelligence front on the servicing side, there's great opportunity right during the fall in the funnel to be using some of these AI tools for better to better, really help people through the process and get them out, you know, 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 them 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, that's something that we we watch and track very closely.

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

Thank you.

Ladies and gentlemen, just a reminder, if you would like to ask a question, you're welcome to press star Next question. Davidson of BB&T Capital.

Okay.

I think during the question on just circling back on guidance. I guess the third question I had was you've launched some more states. It sounds like. And given that and I understand the outlook in 2024 is still spotty and sounds like I think you said even similar as 2023. Wouldn't it 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?

I mean, am I missing something there?

Yes. I mean, I mean, I think when you're launching new geographies, those are all new new originations pretty much you know, and I think we're being very cautious because our 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 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. And so we're just being pretty cautious. Now that's not to say that things can work out or get some favorable upside. But I think right now, the way we're is very is very strategic and very thoughtful because, you know, obviously, we're very sensitive to charge-off rates. And, you know, 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 it could benefit us significantly in 2025. But this year, we're forecasting it to be some growth, but obviously being very cautious because of the credit on the new stuff.

Yes, that makes sense, but that's helpful.

Thanks, Todd. And then the only other question I had was just on charge-offs and 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 that I'm sorry, a more challenging 2022 vintages, the vintages in the book that you would have been cycling through?

I'm just surprised it wouldn't be at least similar.

Yes, I wanted to clarify, so I'm 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 from. So I don't it's a little misleading when we say, you know, 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 the subsidized in first quarter 23, which we didn't if we were in a very, no more normalized environment. But seasonality wise on the first quarter is always going to be the low 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 you know, I think on it's overall the yield coming up as a percentage of revenue, as I mentioned, that we don't see that much difference from last year.

Okay.

Yes, we see that that's a minor minor lift. That's a very minor lift in the percentage of charges as of the charge-offs as a percentage of revenue, fairly minor.

So for the first Okay, that makes sense.

Thanks for clarifying.

Just a final reminder, if you would like to ask a question, you're welcome to press star and then one. We'll pause a moment if we have any further questions?

We have no further question. I would like to turn the floor back over to Todd.

So short for closing comments.

Yes. I wanted to thank everyone for joining today and the thoughtful questions. And we look forward to speaking with everyone again in May when we report our first quarter results.

Thank you.

This concludes today's conference. Thank you for joining us. You may now disconnect.