OppFi Inc. (OPFI) Earnings Call Transcript

Good morning, and welcome to OppFi's Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] I am pleased to introduce your host, Mike Gallentine, Head of Investor Relations. You may begin.

Thank you, and good morning, and welcome to OppFi's Fourth Quarter 2024 Earnings Call. Today, our Executive Chairman and CEO, Todd Schwartz; and CFO, Pam Johnson, will present our financial results before taking questions. You can access our earnings presentation on our website at investors.oppfi.com. During this call, OppFi may discuss certain forward-looking information. The company's filings with the SEC describe essential factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements. Please refer to Slide 2 of the earnings presentation for our disclaimer statements covering forward-looking statements and references to information about non-GAAP financial measures, which will be discussed throughout today's call. Reconciliations of those measures to GAAP measures can be found in the appendix to our earnings presentation. With that, I'd like to turn the call over to Todd.

Thanks, Mike, and good morning, everyone. Thank you for joining us today. When I returned as CEO, we laid out a 3-year plan to grow our 2021 operational and financial capabilities, and I'm happy to report we've exceeded those expectations. Our motto of operational excellence, coupled with continuous improvement, is taking effect in all facets of the business. OppFi made tremendous progress in 2024, propelling our company to deliver strong financial results in the fourth quarter and the fiscal year 2024, including record Q4 and annual total revenue. We expect these strong results to continue in 2025, and our yearly guidance anticipates up to a double-digit percentage increase in revenue and adjusted EPS driven by strong growth and continued operating efficiency. In addition, due to the solid performance so far in Q1, we are increasing our expectations for the Q1 2025 adjusted net income we shared during our last call by more than 2x. Pam will provide a detailed review of our fourth quarter financials and guidance for 2025. Before she does, I'd like to highlight a few company updates for the fourth quarter of 2024, the full year of 2024 and the year ahead, 2025. OppLoans remains one of the highest rated and most transparent loan platforms in our space. Our product and tech teams' continued innovation and use of AI tools led to a record auto approval percentage for our company. This number improved to almost 80% in Q4 2024 compared to 73% in Q4 2023, which improved funnel metrics, propelling our net revenue up 23% year-over-year. We expect this to continue to improve in 2025, building on our operational efficiency for future growth. The continuous refinement of our machine learning model helped improve the credit evaluation process and help identify and approve applicants with higher credit quality. As you may recall, OppFi launched Model 6 in 2024, which better identifies the risk of long-term charge-offs versus earlier versions that were more focused on upfront shorter-term repayment status. It also assists in targeting better-quality borrowers at the top of the funnel. The model also enhances risk separation and allows for seasonal segmentation and modeling throughout the year. In the fourth quarter of 2024, OppFi's net charge-off rates improved 10% as a percentage of revenue compared to the prior year. The model gives us the confidence to grow and weather different periods of economic volatility, and it bodes well for our future. OppFi sees a favorable environment for growth in '25. Our strong balance sheet, favorable macroeconomic tailwinds, strong credit trends and scalable growth levers position us well. We believe the potential of entering into additional partnerships, continued funnel improvements and direct response marketing initiatives will enable us to attract new high-quality customers who exhibit strong unit economics. As you may recall, Bitty was our first outside investment in the small business financing space. Similar to our consumer business, we continue to see a large supply-demand imbalance in the working capital space for small business. Bitty has experienced significant growth, and we believe it will continue to provide profitability and cash flow to OppFi in 2025. We are excited to continue working with Bitty as they seek to disrupt the space with best-in-class products, modeling and servicing. OppFi's balance sheet remains strong. Earlier this week, we used excess cash to extinguish our corporate debt. Last month, we extended our asset-based facility with Blue Owl, providing additional capacity. This is a testament to our financial strength and continued growth opportunities. Our corporate development team continues to look for complementary products where OppFi's best-in-class platform and technology can deliver exceptional value to consumers and businesses. OppFi will look for the highest and best uses of its capital to add accretive acquisitions and investments, invest in high ROI initiatives and reward shareholders. OppFi is building a leading mission-driven tech platform with a suite of best-in-class digital financial service products that addresses large supply-demand imbalances and credit access for consumers and businesses. Over the last 3 years, we have taken considerable steps to position OppFi as a leader in our space and fulfill our vision and strategic plan. Pam will now review our fourth quarter and full year results in detail and share our increased guidance for 2025. With that, I'll turn the call over to Pam.

Thanks, Todd, and good morning, everyone. Looking at the fourth quarter of 2024, we are pleased to report that the results reflect continued strong demand for loans, good credit performance and disciplined cost management. For this discussion, all results are for the fourth quarter of 2024 compared with the fourth quarter of 2023. Total revenue increased 2.1% to $135.7 million, supported by an impressive 320 basis point improvement in the average yield to 130%. Net originations grew 11.3% to $213.7 million, with retained net originations rising 6% to $192.5 million as origination growth outpaced the percentage of loans retained by our bank partners. Our strategic focus on growing our customer base through new targeted credit and marketing initiatives that exhibit economically attractive profit characteristics continue to drive results. New customer originations increased by 8.8% while displaying improved credit risks, as shown by the increased yield and lower charge-offs. This strategy contributed to a substantial improvement in credit quality with the annualized net charge-off rate as a percentage of average receivables decreasing by 430 basis points to 54.5% and improving by 450 basis points to 41.9% as a percentage of total revenue. The revenue growth, coupled with the improved credit quality that Todd spoke about earlier driving the higher yield and improved charge-off rate, drove the significant 22.9% increase in net revenue to $80.8 million. Cost discipline also played a key role in our strong performance. Total expenses before interest expense declined to $45.1 million or 33.2% of total revenue, down from 33.8%. Continued improvements to our automated loan approvals contributed to effective cost control. For the fourth quarter, 79.5% of loans were approved in seconds with no human intervention, up 630 basis points from the fourth quarter of 2023. Interest expense improved to 8.1% of total revenue, down from 9.1% last year, driven by the paydown of our higher interest corporate debt and a reduction in rates. As a result, adjusted net income more than doubled to $20.3 million from $8.4 million, while adjusted earnings per share grew to $0.23 from $0.10 in the fourth quarter of last year. We maintained a strong balance sheet, ending the quarter with $88.3 million in cash, cash equivalents and restricted cash, alongside $318.8 million in total debt and $234.2 million in total stockholders' equity. OppFi also paid down another $10 million on its corporate debt in the fourth quarter of 2024 and reduced it by another $20 million in the first quarter of 2025, paying it off months ahead of schedule. Our total funding capacity at year-end was $613 million, including $206 million in unused debt capacity, excluding our paydown of debt and expansion of our Blue Owl facility in the first quarter of 2025. Now looking at the full year results, which represent the full impact of the strategic initiatives that Todd discussed. Total revenue increased to $526 million, up 3.3% compared with 2023. This was towards the high end of our guidance of $510 million to $530 million. With the revenue growth, improved yield and charge-off rates we realized during the year, net revenues increased 17.7% to $321.5 million. GAAP net income increased significantly to $83.8 million, up from $39.5 million in 2023, and diluted EPS for the full year was $0.36 compared with a loss of $0.06 in 2023. Adjusted net income increased to $82.7 million compared with $41.5 million in 2023. This also exceeded our raised 2024 guidance of $74 million to $76 million. Adjusted EPS was $0.95 compared with $0.49 in 2023. This also significantly exceeded our raised EPS guidance of $0.85 to $0.87. The company delivered strong full year results, exceeding guidance and Street estimates, driven by the successful implementation of numerous strategic initiatives and operational improvements throughout the year. These efforts enhanced efficiency, expanded market opportunities and strengthened financial performance, underscoring the company's ability to execute its long-term strategy and deliver shareholder value. These strong 2024 results also provide a template for the expected 2025 growth highlighted in our full year guidance, which I will now discuss. Given our strong 2024 operating performance, driven by our improved model, which strengthened the credit quality of originations, refinements in our seasonal modeling and the focus on operating efficiencies and cost discipline, coupled with the testing of additional marketing partners in 2025 and the healthy start to the year, we are providing the following guidance for the entire year and the first quarter of 2025. For the full year 2025, total revenue of $563 million to $594 million, an increase of 7% to 13%; adjusted net income of $95 million to $97 million, an increase of 15% to 17%; and based on an anticipated diluted weighted average share count of 90 million, adjusted earnings per share would be between $1.06 and $1.07. In 2025, we expect less seasonality in our results than in prior years, driven by the stabilization and growth of yield, predictable credit trends and the full year impact of our operating efficiencies. Additionally, we expect a more stable interest rate environment to contribute further to our consistent performance throughout the year. We anticipate this impact will be most pronounced in the first and fourth quarters, with those quarters contributing more than in prior years. We expect our momentum to continue in the first quarter with adjusted net income expected to be $22 million to $24 million, more than double our previous guidance. With that, I would now like to turn the call over to the operator for Q&A. Operator?

[Operator Instructions] We'll go first to David Scharf with Citizens.

Congrats on wrapping up just a tremendous turnaround year for the team over there. Listen, it's been an interesting earnings season where everyone has to ask the obligatory question about the macro outlook and kind of what assumptions on the consumer you're making. Maybe just at a high level, Todd, has anything changed in the last 3 months since the last call as you think about both better versus lesser credit consumers you want to target as well as just your overall feeling about macro uncertainty and what the impact of tariffs might be on certain employment sectors?

Yes. Thanks, David. I mean, listen, I think it's hard to tie it directly back, but I think I mentioned on the call our Model 6, which takes a lot of the learnings of '22 when we saw inflation. I mean, ultimately, I think tariffs could -- I think people are concerned about inflation. And obviously, that is something that would [indiscernible] I think our Model 6 and some of the learnings of '22 have better prepared us to kind of weather some volatility in consumer repayments. But overall, we're -- I think if you look at our growth trends, we're growing at a really nice clip, and we think there's a lot of growth out there. But we're going to -- we're going at a speed and a pace that we feel comfortable with that we know we have strong unit economics and we know that we're targeting really high-quality customers.

Got it. And along those lines, can you provide, well, maybe a refresher on what has driven the increase in yields over the past year? And looking into 2025, what assumptions are underlying kind of the revenue guide there and whether, yes, it reflects a change in focus on maybe the credit tiers you're going after?

Yes. I mean we launched a little bit of risk-based pricing in the second half of the year, which allowed for more yield. We also -- we still had in the book back from '22 and '23 some lower-yielding customers that have since been off the books, and so that's propped yield up; also better repayments, just better credit history, better repayment rates causing us to have some increased yield. But it's a nice blend of receivables in addition to a little bit more yield coming off the book causing more revenue.

Got it. And then maybe just one last one to squeeze in here. Given, obviously, a lot of the headlines coming out of Washington, is there any read on the pace of tax refund season for the critical Q1 sort of paydown quarter versus prior years?

Yes, I mean we're watching it closely. I mean we're right in the start and the middle of it. It's probably too early to assess if it -- compared to other years. We don't anticipate that refunds will be necessarily delayed or not given due to that. That's our position. So we're watching it closely and hoping for a normal [ repayment ]. Yes.

We'll go next to Mike Grondahl with Northland Securities.