Yahoo Finance OppFi Inc. (NYSE:OPFI) Q1 2024 Earnings Call Transcript
OppFi Inc. (NYSE:OPFI) Q1 2024 Earnings Call Transcript May 9, 2024
OppFi Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to OppFi’s First Quarter 2024 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. You may begin.
Shaun Smolarz: Thank you, operator. Good morning. On today’s call are Todd Schwartz, Chief Executive Officer and Executive Chairman; and Pam Johnson, Chief Financial Officer. Our first quarter 2024 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 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 morning. 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 morning everyone. We are very pleased to report our first quarter 2024 results, which exceeded our earnings guidance and enabled us to raise our full year earnings outlook. When we introduced our full year guidance in March, we had limited visibility into 2024 based on the seasonality of the business. However, our profitability accelerated to end the quarter with a strong tax refund season, and we continue to see favorable credit trends in our portfolio. Pam will review our first quarter results in detail and revised guidance for full year 2024. Before she does, I will cover four primary topics: one, highlights from our first quarter of 2024; two, progress on our operational initiatives; three, commentary on our macroeconomic outlook; and four, discussion of our capital allocation strategy.
First quarter results were driven by revenue growth and continued credit performance improvements and expense leverage. Our key highlights for the quarter compared to the prior year period are: solid 5.8% total revenue growth to $127.3 million, a strong 3.5 percentage point increase in revenue yield to 129.5%, a meaningful 33.5% increase in recoveries, and a 1.1 percentage point improvement in the net charge-off rate as a percentage of total revenue to 47.9%. In addition, we continue to carefully manage expenses to realize greater operational efficiency. On a GAAP basis, total expenses as a percentage of total revenue increased 110 basis points year-over-year to 45.5%. However, when excluding onetime expenses and other add-backs, such as severance costs and exiting the credit card business, this percentage decreased by 270 basis points year-over-year to 40.6%.
This led to profitability increasing by more than 100% year-over-year; net income of $10.1 million, an increase of $6.2 million from $3.9 million; and adjusted net income of $8.8 million, an increase of $4.9 million from $3.9 million. Additionally, we ended the quarter with a strong balance sheet that we believe positions us to achieve our strategic objectives. Total cash, cash equivalents and restricted cash was $88.7 million, up 20% from year-end. Of this, unrestricted cash was $47.2 million, which increased 48.4% in the first quarter sequentially. Given our confidence in maintaining a strong balance sheet and generating free cash flow, we were proud to announce the company’s first-ever special dividend in the amount of $0.12 per share to demonstrate our commitment to rewarding our stockholders.
Now I’ll discuss our progress during the first quarter with our core operational functions. During the first quarter, we experienced strong customer payment activity driven by: one, the underwriting testing and implementation done last year; two, tax refund season; and three, recoveries. All of these factors contributed to our improved credit performance year-over-year. We identified higher-risk applicants to deny and stronger ones to approve that would have been denied otherwise. This trend has continued through April, the early part of Q2. Early-stage delinquency trends improved compared to the same period last year with the total first payment default rate lower by 40 basis points and the total delinquency rate decreasing by 70 basis points.
In addition, recoveries of previously charged-off loan balances increased 33.5% year-over-year. We and our bank partners are excited to launch a new credit model in the second quarter. The model incorporates additional customer cash flow and behavior inputs that are designed to more accurately evaluate the risk of the applicants. As a result, we expect future originations to carry less risk, and therefore, our credit performance to improve over the long-term. Turning to marketing. The total cost per funded loan was down 12% compared to the same period in 2023. During the first quarter, the addressable market expanded further as bank partners entered new states. In terms of customer experience, we recently launched an enhanced chatbot feature powered by artificial intelligence capabilities that we’ve named OppAI.
We believe this will improve the customer experience and increase operational efficiency. We also celebrated National Financial Capability Month by announcing our collaboration with Zogo to provide customers with a gamified financial literacy app to help them further improve their financial health. OppFi is a mission-driven company, and we are excited by the new social impact relationship. Our Net Promoter Score for the quarter remained strong at 77. Now I’ll briefly discuss how we’re thinking about the current macroeconomic environment. Based on recent macroeconomic data points and consumer finance surveys, we believe our previously discussed view has been validated. We believe core inflation remains sticky and interest rates are unlikely to be reduced until the fourth quarter or early 2025.
According to research by United Way, 29% of American households have members who are employed but income-constrained and asset-light. In other words, these are households whose members work and earn more than the poverty line but struggle to pay for basic needs. Sticky inflation disproportionately affects these consumers, and the share of these households has steadily grown. In addition, recent VantageScore data indicate lower-income U.S. consumers are struggling to make loan payments, which is causing banks to tighten their credit standards. While we believe this upmarket tightening may present selective growth opportunities for us as more applicants may fall into the credit box for OppLoans, we will remain cautious on originations given overall macroeconomic uncertainty.
We won’t chase growth merely for growth’s sake. With that said, I want to emphasize we are deeply committed to profitable growth and believe we have numerous levers to continue to create shareholder value. In this current environment, improvements in credit performance and operational efficiency have enabled us to grow earnings, generate significant free cash flow and strengthen our balance sheet. This influenced the decision of our Board of Directors to declare the $0.12 per share special dividend and approve a new $20 million share repurchase program. We plan to use cash to repurchase stock when we believe our stock price is disconnected from its intrinsic value and unreflective of the long-term earnings potential of OppFi. In addition, we remain committed to pursuing opportunities for potentially accretive partnerships or acquisitions that fit with our company mission to facilitate credit access to underbanked Americans.
We believe all these factors help demonstrate OppFi’s unique value proposition for investors. OppFi presents the opportunity to invest in closely held, founder-led family business in the public markets that is committed to both returning value to stockholders and creating new value. Part of the reason for my return as CEO 2 years ago was to execute my multiyear strategic vision for OFI. Now that the core business has stabilized and our balance sheet is solid, we are working to fill some of the significant supply-demand imbalances that exist in the financial marketplace across customer types that traditional banks do not service. We believe through accretive partnerships and acquisitions OppFi has the potential to be transformed into a platform to offer additional types of alternative digital financial products and services.
Pam Johnson: Thanks, Todd, and good morning, everyone. For the first quarter, total revenue increased 5.8% year-over-year to $127.3 million with a 2.4% increase in total net originations to $163.5 million and a 350 basis point improvement in yield to 129.5%. Total retained net originations decreased 2% to $152.5 million from $155.6 million in the year ago period based on one of our bank partners retaining a higher percentage of loans originated in some states. Total net originations are defined as gross origination net of transferred balance on refinanced loans, while total retained net originations are defined as a portion of total net originations with respect to which OppFi ultimately purchased a receivable from bank partners or originated directly.
As previously disclosed, in late 2023, OppFi transitioned fully to the bank partnership model and therefore currently does not originate any loans directly. From a mix perspective, 57.7% of originations were to existing customers and 42.3% were to new customers. During the quarter, along with our bank partners, we continued our prudent approach to risk as we believe loans to existing customers are generally less risky than those to new ones. On an absolute basis, new customer originations for the quarter decreased by 1.7% year-over-year, while existing customer originations increased by 5.7%. The annualized net charge-off rate as a percentage of average receivables increased by 20 basis points to 62.0% for the first quarter compared to 61.8% for the prior year quarter.
However, the annualized net charge-off rate as a percentage of total revenue decreased by 110 basis points to 47.9% compared to 49% last year. Interest expense totaled $11.4 million or 9% of total revenue compared to $11.4 million or 9.4% of total revenue in the same period a year ago. Turning to expenses. Total expenses were $57.9 million or 45.5% of total revenue compared to $53.5 million or 44.4% of total revenue in the first quarter last year. Included in the total expense figure were $6.2 million and $1.4 million of onetime expenses and other add-backs in the 2024 and 2023 periods, respectively. The year-over-year increase was primarily due to the exit costs related to the credit card business as well as severance and legal costs. Excluding these items, total expenses were $51.7 million or 40.6% of total revenue in the first quarter this year, down from $52.1 million or 43.3% of total revenue for the same period last year.
Adjusted net income was $8.8 million compared to $3.9 million for the comparable period last year. Adjusted earnings per share, was $0.10 per share compared to $0.05 in the first quarter last year. This was significantly higher than our guidance for $0.05 due to a strong tax refund season, which resulted in better-than-expected credit performance, including recoveries. For the 3 months ended March 31, 2024, OppFi had 86.2 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 $88.7 million, total debt of $301 million and equity of $197.3 million as of the end of the first quarter. Unrestricted cash of $47.2 million at the end of the first quarter marked a 48.4% increase since year-end 2023 and provides us confidence in our optionality for capital allocation strategic decisions.
In addition, we had $613.7 million in total receivable funding capacity, including undrawn debt of $224.7 million. Turning now to our outlook. For full year 2024, we reiterate guidance for total revenue of $510 million to $530 million. We continue to focus on profitable growth. To provide additional perspective on how we are thinking about the second quarter, we expect total revenue to be relatively flat year-over-year. Shifting back to full year guidance. Based on the stronger-than-expected first quarter, we have increased guidance for profitability. We now expect adjusted net income of $50 million to $54 million compared to the prior range of $46 million to $49 million. Based on an anticipated diluted weighted average share count of 86.5 million, we now anticipate adjusted earnings per share between $0.58 and $0.62 compared to the prior range of $0.53 to $0.57.
With that, I would now like to turn the call over to the operator for Q&A. Operator?
Operator: [Operator Instructions] And we will take our first question from David Scharf with Citizens JMP.
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