OppFi Inc. (OPFI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Opportunity Financial and FG New America Acquisition Corp. Conference Call. We appreciate everyone joining us today. The information discussed today is qualified in its entirety by the information contained in the Form 8-K, including the Exhibits 3Q that was filed by FG New America Acquisition Corp. today with the SEC, which may be accessed on the SEC's website at www.sec.gov. In conjunction with today's discussion, we will be referring to an investor presentation, a copy of which was filed as Exhibit 99.2 to the aforementioned Form 8-K. You are encouraged to follow along and carefully review the disclaimers included therein. Please note that this call has been prerecorded, and so a Q&A session will not be conducted as part of today's presentation. Before we begin, I would like to note that this call may contain forward-looking statements including FG New America's and Opportunity Financial's expectations of future financial and business performance and conditions, the industry outlook and the timing and completion of the transaction. Forward-looking statements are inherently subject to risks, uncertainties and assumptions, and they are not guarantees of performance. You are encouraged to read the Form 8-K and the accompanying press release and investor presentation as well as FG New America's other filings with the SEC for a discussion of the risks that can affect the business combination and the business of Opportunity Financial after completion of the proposed transaction. Hosting today's call is Joe Moglia. And now let me turn it over to Mr. Moglia.

Hi, everyone. I'm Joe Moglia, Chairman of Fundamental Global New America and the former Chairman and CEO of TD Ameritrade, and former football coach at Coastal Carolina. I'm thrilled to introduce Opportunity Financial, or OppFi. I think you will find them to be a financial technology company that has differentiated themselves from others in the industry. And it's that differentiation, we believe, will give them a competitive advantage. Today, I'm joined by OppFi CEO, Jared Kaplan; and CFO, Shiven Shah, whom our team has got to know well over the last few months. I have also personally enjoyed spending time with Ted and Todd Schwartz, the founding family. OppFi is providing services to consumers that are living paycheck to paycheck and do not have access to traditional financial services. When I began at Ameritrade in 2001, our market cap was $700 million, and our mission was to bring financial literacy to every family in America. Similarly, OppFi's mission is to bring financial inclusion to the everyday consumer. Today, they achieve that by providing access to credit and down the road to a full platform of financial services. Here are some of the highlights that attracted us to OppFi. First, we believe fintech is poised to take real market share over the next 5 to 10 years, and OppFi will be a beneficiary of this trend. They operate in a vastly underserved market, and we believe they are poised to expand market share through their scalable technology, customer acquisition expertise and focus on customer service. Second, they have a unique platform growth opportunity. We believe OppFi's target customer base needs better access to lending, savings and education products to help them improve their long-term financial well-being. Third, we think there is an opportunity for industry consolidation that can be highly accretive and fuel long-term growth of the OppFi platform for many years into the future. Now let me touch on the proposed transaction. The implied pro forma equity value of about $800 million translates into what we believe are favorable valuation multiples. And there are some comparables at the end of the deck that we encourage you to review. We are optimistic that the merger will be fully funded through on cash trust and is anticipated to close in the first half of the year. As a final point, the financial's operating history and opportunities ahead are compelling in their own right. However, over the span of my entire career, the most important decision I made have been on people. This is a management team that I truly respect. They are sophisticated enough to have a well thought out strategy for now and the future. But they are wise enough to simplify that strategy so it can be executed efficiently. Now I'm proud to introduce you to OppFi CEO, Jared Kaplan.

Thanks, Joe. Flipping to Slide 7, our mission is to provide financial inclusion to what we are calling the everyday consumer. And we do that through facilitating fair, transparent products and terrific customer service. We are focused on median income consumers with a job and a bank account, who have been abandoned by the traditional mainstream credit players. Slide 8 walks through the macro backdrop. 80% of the country is living paycheck to paycheck, and nearly 60% of the U.S. population have less than $1,000 in savings. This is a result of years of limited growth in income, combined with a sharp rise in the cost of living, everything from health care to housing to medical care and child care. And about 20% of the country lack access to traditional credit because standard credit providers deem their credit score too low. This means 60 million people in the U.S. are in a difficult situation when they need credit for some unexpected issue, but can't get it. And that's where we come in. Turning to Slide 9. We have built a proprietary financial technology platform that empowers community banks to provide credit access to this customer segment. Banks contract with us for our turnkey, outsourced marketing, data and proprietary technology to digitally acquire and service these everyday consumers. Consumers receive fair transparent credit that is structured to rebuild financial health. Our bank approve proprietary algorithms, ignore traditional credit scores, which are typically not the most accurate predictor of this consumer's ability and willingness to repay. All of this is delivered in whatever way the customer desires, including good old-fashioned human customer service. On Slide 10, we are in the beginning of a 5- to 10-year journey to become the digital financial services destination for the everyday consumer. It starts with the credit access, because there is a large need and we believe we are able to facilitate the best options for the everyday consumer after a near prime lender isn't willing to underwrite a loan. Products on the OppFi platform are structured to help customers rebuild credit. It is our intent that as customers begin to improve their financial health, we can start to graduate them to additional near prime products. To that point, most recently, we launched a payroll deduction secured installment loan late last year and are in the early stages of scaling that in both B2C and B2B2C channels. In the second half of this year, we expect to launch a credit card, which we believe will be another fantastic graduation product for some of our loan customers. We believe the OppFi Card will also open up new geographies for our business and go upmarket a bit. Our technology-driven platform, we believe, will enable us to continue to expand into even more services for customers. These could include near prime installment loans, mobile banking, point-of-sale lending and longer term, if we're able to help a customer rebuild their financial health, how great would it be to get someone to mortgage on their first home. On Slide 11, we walk through some key company highlights. We grow rapidly, generating a 100% plus CAGR for revenue over the last 5 years, with strong profitability. We've reached significant scale as we facilitate over $2 billion of issuance, covering more than 1.5 million loans. There has also been tremendous sustained demand as we have seen over 2.5 million applications per year, of which 80% are mobile-generated. It's all powered by our proprietary credit & technology platform combined with fantastic customer satisfaction, which is highlighted by our NPS score of 84 and outstanding online customer reviews. And don't take our word for it. Slide 12 highlights some customer ratings and quotes with our customer experience and satisfaction, a tremendous differentiator. The typical customer talks about being laughed out of a bank or denied multiple times before gaining credit access to our platform. We like to think of ourselves as the Zappos of fintech. And turning to Slide 13, we've created a great place to work to enable that culture. We have over 550 employees today, up from 15 in 2015, that comprise a highly diverse and inclusive population. We also wholeheartedly believe that great customer service is seeded by tremendous employee satisfaction. Transitioning from the qualitative to the quantitative, I will touch on a few financial metrics on Slide 14. We expect our strong revenue growth to continue, projecting revenue of approximately $875 in 2023. That implies a 45% annual growth rate going forward. Our 2021 projections assume a return to pre-COVID demand in the second half of this year. Our expected growth is coupled with our expectation for strong profitability. We believe we will achieve $127 million in adjusted net income in 2023 at a 15% margin. We've been GAAP net income-profitable since 2015 and have maintained the philosophy in today's market of only growing the business as fast as the bottom line scales. This has allowed us to fund growth over that time solely from cash flow from operations and debt capital. Our profitability is driven by low acquisition costs, stable credit and low cost of capital. There is an opportunity to grow revenue faster at lower margins, but we think this balanced approach serves us best. On Slide 15, we lay out the growth in our unique customers. Since the first quarter of 2017, our customer base has grown 10x to almost 600,000, and we expect growth of over 50% in 2021 to nearly 900,000. Approximately 85% of this year's growth is expected to come from our legacy installment product, with the other 15% expected to come from our newer credit card and payroll deduction products discussed earlier. Turning to some of our investment highlights. Starting with the market opportunity on Slide 18. There are approximately 60 million Americans that lack access to traditional credit. About 30% of them have the ability to repay and qualify for installment loans on our platform. So that suggests our current market penetration rate is less than 1%. Obviously, that leaves plenty of room to grow within our current product set, not to mention the additional new products that we are planning to bring to market. Turning to Slide 19. We believe the winners in this marketplace will win on acquisition costs. We've turned the traditional marketing funnel on a tad. Most platforms are highly reliant on direct mail, and what I classify as third-party affiliates or websites that take a customer through their own application, and then will sell it off multiple times to other parties. We try to do it exactly in reverse. We lead with search engine optimization, e-mail marketing and customer referrals. That drives about 25% of our business. In addition, about half of our business is derived through key strategic partners, some of which are listed on the bottom of the slide. Our strategies have driven decreasing cost per funded loan over time as shown on the chart on the right side of the slide. Slide 20 focuses on the underwriting process adopted by our bank partners. Our proprietary algorithms, which focus on alternative data look beyond traditional credit scores to instantly identify borrowers who have the ability and willingness to repay. Approximately 75% of decisions using our platform are automated as we are able to sort the amounts of customer behavior data, bank data and other alternative data in real time to determinate a customer's credit worthiness. That's all driven by our technology stack, which we highlight on Slide 21. We leverage our proprietary data, and we've employed AI and machine learning to drive the whole process. We've also created a servicing platform to maintain connections with the customer in the manner at which they choose to do business, either straight through on their own or with the help of one of our loan advocates. We believe our customer experience is second to none. As shown on Slide 22, our Net Promoter Score, or NPS, is in the mid-80s, which is really strong. I think part of that is driven by our willingness to pick up the phone since our number is clearly displayed on our website, but another part of it is our willingness to help someone in an urgent situation and taking a very transparent handholding approach to make sure they understand and choose the right products. And our unit economics for customer lifetime value are very strong as we lay out on Slide 23. Our average $1,500 loan with an average customer life of 11 months delivers a 2x multiple on invested capital with a lifetime value of over $500. As we discussed earlier, these unit economics are fueled by our cost of acquisition, underwriting and financing strategies. On Slide 24, we illustrate our journey to building up the platform. This year, we're focused on the payroll deduction business as well as the credit card business. We're also looking at the near-prime space quite closely and plan to do some piloting with other products in the near future. Over time, we may grow either organically or through acquisition. One of the reasons why we're very excited with this transaction is the ability to accelerate the building of this platform. Slide 25 highlights our strong management team, one of the main reasons why we've been successful. While our team has done a tremendous job thus far, we still believe there's lots of room to continue to improve across the business. Turning to Slide 27. As mentioned earlier, we are serving the everyday consumer, which is the U.S. median consumer. This individual earns median income, and therefore, employed, has a bank account and they're educated. They just have typically little or no savings. So when an unbudgeted expense comes their way, they need help. Slide 28 walks through the process in more detail. A consumer often finds us after searching for credit online and coming across our great ratings. They apply to their mobile phone in about 5 minutes. During the approval process, we performed a diligent search on our customers' behalf for near prime sub 36% APR products. And 92% of the time, that customer receives no credit offers. That incredibly low 8% match rate really demonstrates the absolute necessity of these products as near-prime players do not underwrite this customer. In most cases, we provide instant decisions on next-day funding. As customers repay, the banks reward them over time with lower-priced products. And ultimately, we want to graduate into our credit card product, which will create even stronger lifetime value of loyalty. On Slide 29, we laid our value proposition compared to the marketplace. And it's not just price, but from a structural perspective as well. The product is easy to understand. The average loan is $1,500 with a term of 11 months. It's a simple interest installment loan that amortizes with each principal payment. There are no fees, no origination fees, no late fees, no prepayment penalties or no non-sufficient funds fees. I'd like to say that all of our metrics are outstanding, except for the collections metrics, and that's deliberate. With someone who's difficulty paying, our customer advocates work with them to help find a payment plan that is more suitable. Slide 30 lays out some key differences between our installment loans and lease-to-own products. Importantly, lease-to-own products are typically focused on a durable good, while our installment loans are available to finance any need and come with other favorable features. Financial education is also very important. As shown on Slide 31, we have launched our own online University, OppU. This is where customers and non customers can go and learn about what it takes to build credit and what it means to budget as well as how to better manage finances. Slide 32 focuses on SalaryTap, which is our payroll deduction product. This looks very similar to the installment product, except that customers agree to repay through salary allots. And when someone is able to use allotment as a repayment mechanism, it dramatically improves the security of the repayment. So these products can be offered at much lower rates. It's a win-win situation for both the customer and the company. Turning to Slide 33. We believe the credit card market is a massive opportunity and a great way to reward a customer that has repaid their installment. And the marketplace today looks a lot like the installment loan marketplace before OppFi penetrated that market. You have a handful of players who offer relatively low limits and high fees as a percentage of credit lines, with poor customer user experience and customer satisfaction. We believe the credit card market is right for a product like ours, which we expect to offer higher limits, lower fees as a percentage of credit line, a best-in-class mobile experience and a best-in-class customer service. With that, I will turn the call to our CFO, Shiven Shah, to discuss some of our future financial opportunities. Shiven?

Thank you, Jared. On Slide 35, I wanted to highlight a couple of important financial takeaways. Our growth strategy for 2021 to 2023 will be a combination of rapid growth returning to our traditional installment business, coupled with expansion of our new SalaryTap and credit card products. We assume a return to pre-COVID demand in the second half of this year with an overall annualized growth in receivables of 61% from 2020 to 2023 with a modest 44% growth in the installment business and the balance coming from the new SalaryTap and credit card profit. Historically, we've grown our receivables at more than 70% annually prior to COVID for the installment product alone. We believe that with the incremental potential from the new product opportunities, coupled with demand returning for our customer segment, we have the ability to outperform over time. Our customer typically borrows to finance a car repair or an unexpected health care deductible expense, and those demand drivers slowed during COVID over the last year. Furthermore, we believe the new SalaryTap and credit card products have the potential to be as large, if not larger, than our traditional installment business. We also plan to use our public currency to explore targeted acquisitions that may accelerate our entry into additional products for our target market. Finally, we expect our margins will remain stable over time as we are committed to executing our disciplined approach on the cost of acquisition, underwriting and financing drivers. Moving on to capital management on Slide 37, we have ample funding runway well into 2022 based on our estimates, with only about 30% utilized on our existing facilities as of year-end. We materially delevered our balance sheet in 2020 with our debt-to-equity ratio falling to below 1.5x, while we grew our book equity to over $100 million during the same period. Finally, as Joe mentioned, there are some benchmarking and valuation comps in the next couple of slides, which demonstrate that this transaction represents an attractive entry point for investors. Now back to you, Jared.

Thank you, Shiven. In summary, we are excited about the opportunities for OppFi in the coming years. We believe relative to other valuations in the fintech sector, OppFi represents significant value. We expect to continue to drive strong growth from our unique platform for a huge demographic of the market that is in need of credit solutions. We have proven that we can generate significant free cash flow while maintaining a highly satisfied customer base. All of this should provide a long runway of growth in the coming years with OppFi. We welcome any questions you have, and would like to thank you for your time and interest in the company. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.