OppFi Inc.
Q3 2022 Earnings Call Transcript

Published: 9 Nov 2022

[Operator:]

Good afternoon and welcome to OppFi's Third Quarter 2022 Earnings 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. It is now my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. You may begin.

[Shaun Smolarz:]

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 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 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 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.

[Todd Schwartz:]

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, are 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

[Pam Johnson:]

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 costs 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 a 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 for new funded loan. This improvement was driven by growth in low cost marketing channels such as email, 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, the net charge-off rate. Turning to expenses, operating expenses for the third quarter excluding interest expense as well as add backs and onetime 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 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 end of September 30, 2022; OppFi had 84.1 million weighted average diluted shares outstanding excluding 25.5 million earn-out shares. Adjusted earnings through 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 data 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 onetime items and profitability on an adjusted basis to be breakeven or a modest net loss. For 2023 we remain optimistic. The 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:]

Thank you. [Operator Instructions] We have a first question from the line of David Scharf with JMP Securities. Please go ahead.

[David Scharf:]

Hey, good afternoon. Thanks for taking my questions. Hey, wanted to delve into a couple of things. Todd, the first is on the just the customer acquisition outlook broadly. We've heard from both some digital lenders as well as some other sort of digital oriented financial services or FinTech companies that have digital ad rates were very favorable in the third quarter. There is a lot of competitors pulled back, 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 is a floor or is that something that is sustainable?

[Todd Schwartz:]

Yes. It's a good question. I think it's a little bit of both, right? So I think, I think you're seeing definitely I mentioned on the call that we have a turn-up program and essentially the turn up program when, when a borrower comes to us, one of our product features is to screen them against a consortium of lower cost partners – 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 lenders above us. And I think it's filtering all the way down from the banks. It starts with 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 that 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 the fourth quarter just due to the – it's seasonally the probably one of the best vintages of the years. 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 around – 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.

[David Scharf:]

Got it. Got it. And just to clarify, definitionally I think you refer to a weighted average a 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 organizations a year ago?

[Todd Schwartz:]

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 that the probability of success is obviously higher and 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.

[David Scharf:]

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, and I asked specifically within the context of, everybody's struggling to assess what the new normal is, particularly for lending models that were developed over the last five, eight years, that 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 normalize through the cycle, the charge-off rate for the business to be higher than maybe what was – you experienced in [indiscernible]?

[Todd Schwartz:]

Yes. Listen I think – I think I've said this on previous calls, we feel that when we get into the low forties, potentially high thirties, 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.

[David Scharf:]

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

[Todd Schwartz:]

Yes. Thanks. Thanks for the question. Appreciate it.

[Operator:]

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.

[Todd Schwartz:]

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.

[Operator:]

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