Earnings Call: Q2 2021

Aug 10, 2021

Greetings, and welcome to the OPFI Second Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jason Rosenthal, Vice President, Finance. Please go ahead. Thank you, operator. On today's call are Jared Kaplan, OpSai's Chief Executive Officer and Shivan Shah, Chief Financial Officer. The company's Q2 2021 earnings press release, supplemental presentation and associated Form 8 ks could be found at investors. Opphi.com. During the call, the company will be discussing certain forward looking information. These forward looking statements are based on assumptions and assessments made by OpSized 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 Offside 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 SEC, including the sections entitled Risk Factors. In today's remarks by management, the company will be discussing non GAAP metrics. A reconciliation of these non GAAP financial measures to the most comparable GAAP measures can be found in this afternoon's earnings press release. The results discussed on this call reflect Opportunity Financial LLC for the Q2 ended June 30, 2021, achieved prior to the completion of the business combination with FG New America Acquisition Corp. On July 20, 2021. This call is being webcast live and will be available for replay for 1 month on our website. I would now like to turn the call over to Jared. Thank you, and good afternoon, everyone. Since this is our first call as a public company, before discussing our second quarter results, I will take a few minutes to review the OP PY story. Our multi year mission is to facilitate financial inclusion for the 150,000,000 everyday We are working to create the digital financial services destination for the everyday consumer. This is the U. S. Median consumer. It's not a low income consumer. Our average customer makes about $50 and has a bank account, but their bank has failed them at their greatest moment of need. Banks won't provide these consumers with credit due to a low traditional credit score. Perhaps their car broke down and they need to get prepared to go to work or maybe they must finance a healthcare deductible to receive urgent medical care. Filling the void left by larger banks, shrewd community banks have recognized the market opportunity for this vastly underserved consumer. But these smaller banks often lack the people, process and technology to enter the market directly. That's where Opdiv comes in. We power community banks by providing best in class outsourced marketing, underwriting, servicing and technology to facilitate credit access for this everyday consumer. Instead of traditional credit scores, We develop proprietary scoring based on alternative data to determine an individual's ability and willingness to repay. This proprietary credit decisioning technology is about 30% more predictive than FICO. The result for the customer is a much better financing in the markets of last resort. Products like payday loans, auto title loans, bank overdraft lines, tribal loans and unregulated markets. We are now expanding our credit access platform with the goal of becoming an ecosystem for this consumer. By helping someone at their greatest moment of need, we can create tremendous gratefulness and loyalty. We believe Credit Access is also a catalyst to selling more to our customers. And we have recently launched new products that are directed at graduating customers back to mainstream credit. In the future, we hope to enable them to save and ultimately build wealth. This is our long term vision to build the preeminent financial services destination for the middle income credit challenged consumer. Much like SoFi has built a platform for Henry's, the high earner not yet rich community, We are doing the same for the everyday consumer. How are we going about building this? Our multi year growth strategy will be a combination of reaccelerating volumes for our traditional installment business, coupled with a planned expansion of new products to lower the cost of credit access as well as savings and investment products. In the near term, this includes our new salary cap and credit card products. Our historical bank sponsored installment product, the app loan, is easy to understand. The average loan is $1500 with a term of 11 months. It's a simple interest loan that amortizes over its life. There are no fees, no origination fees, no late fees, no prepayment penalties and no NSSes. We help our bank partners report payment history to the 3 major credit bureaus. When We recently launched SalaryTap, which is a natural extension of what was accomplished to date with the op loan product offering. This is our new payroll deductible installment loan with loan amounts starting at $2,000 24 month terms and interest rates of about 30%. The key product feature is securing repayment through payroll deduction, and that does 2 key things for us. First, it materially reduces the risk premium on each loan. Secondly, it allows OP5 to facilitate a sub-thirty 6 percent APR product nationally. We began formally rolling out salary cap in Q2 and plan to distribute through both direct to consumer and B2B channels. While the current book is not material to our results, The early numbers are promising and we expect to ramp the business over the next several quarters. Now let's talk about the OpFi Card. OpFi Card is the 1st graduation product we offer to Opelon's customers and it provides us entry into the large $21,000,000,000 non prime credit card market. We believe the Opdiv card can do to the non prime credit card space when Op loans has done to the payday loan space, gain market share by utilizing alternative data underwriting to facilitate a better price product for consumers, coupled with best in class mobile First, digital technology and exceptional customer service. Last week, we officially launched the card to select OppLoans customers who have repaid their loans in full. Upon approval, cardholders are instantly able to access their OpFund cards in the OpFund mobile app and directly add their card to their mobile wallets. This allows cardholders to access their card information immediately to begin making purchases online, in app and at the point of sale. Cardholders also receive a physical card that supports all payment types. We expect a deliberate rollout through year end before ramping originations in 2022. Now I will discuss our large Total addressable market. There are 60,000,000 people in the country that lack access to mainstream financial credit. We also know that about $115,000,000 went paycheck to paycheck and $150,000,000 have less than $1,000 in savings. This savings, DIRP, has been caused by years of flat income in the wake of material increases in the cost of healthcare, education, Housing and childcare. Without savings, credit access is vital when the unexpected strikes. The demand for small dollar credit theoretically best served by our traditional banking system. Large banks have the lowest cost of capital, are first in line to get repaid through deposits, can utilize transaction data to underwrite loans and can subsidize acquisition costs through cross sell of their deposits. However, Banks are not serving this customer. About 40% of our customers have primary checking accounts at the 3 largest banks. This shows that the largest banks, even those that market small dollar products, are failing this customer. Furthermore, although many credit unions supposedly offer Small dollar products, they are not meeting the need for subprime credit. Over 20% of our customers bank primarily at credit unions. In addition to banks and credit unions, near prime lending platforms are also clearly not serving this customer. We know this from securitization data and our own proprietary data. In our mission to enable the best available product, We've implemented a turn up referral program, which provides the opportunity for our customers to receive a lower rate product outside of Opfi's platform. Today, we refer the business to about 20 near prime lending platforms. However, even when we're trying to give the business away, less than 2% of customers to find a sub-thirty 6 percent APR alternative. Not all products greater than 36% APR are created equal, and we have the data and customer anecdotes to show that without the products on our platform, consumers would be forced to the markets of last resort. There are several key features of our platform that have enabled our success to date. Our credit decisioning technology is highly differentiated and unique. Our massive data set includes roughly 8,000,000,000 data points. We have received over 11,000,000 applications, facilitated over 1,800,000 loans and achieved 17,500,000 repayment events. We are continuously improving the platform through AI and machine learning so that we can facilitate more access while maintaining loss rates. Historically, We purchased the majority of receivables from our bank originating partners and kept them on our balance sheet. Whether you hold the receivable or sell them to 3rd parties, Credit performance determines your success. These products have short term durations and coupled with our credit risk management, Holding the receivables on balance sheet allows us to maximize unit economics. Importantly, as a result of our platform and approach, We have been able to set ourselves apart from other FinTechs, given that we've been GAAP net income profitable since 2015. This strong cash flow model is crucial to fund the additional build out of our future platform. We have a highly diversified digital marketing technology staff that is designed to drive new product growth. We have purposely built a variable cost go to market strategy. Many digital players still rely on direct mail to drive acquisition. Less than 20% of our business is direct mail. Our model has led to much more stable and predictable flow and ultimately has delivered an extremely low acquisition cost. Beyond our decisioning technology and marketing strategy, our unrivaled customer satisfaction and a tremendous employee culture drive our success. We maintain exceptional customer service metrics. I always tell people, don't just believe what I say. Go online and read what our customers say. On the Better Business Bureau or Google or LendingTree, they tell the story better than I ever could. The typical customer talks about being laughed out of a bank and denied multiple times before gaining credit access to our platform. A recent customer from Dumouries, Virginia told us, My experience was seamless from beginning to end. I appreciate the excellent customer service. This loan has changed my family's life and will allow us to move forward to become debt free in 2021 and get a higher credit score. Thank you so much for trusting that I will pay you back. This is one of the many impactful stories I hear every day from our customers. And you cannot provide exceptional customer service without exceptional talent. We have built a great place to work. We have a diverse employee base that cares about our customers, and we're very proud of the work environment we have built that enables such In fact, recently we were listed on the Forbes America 2021 list of America's Best Startup Employers and built in 2021 best places to work in Chicago. Finally, I wanted to briefly touch on our Q2 financial highlights. During the Q2, as the economy reopened and stimulus waned, we saw a rapid acceleration of consumer spending that drove an increase in the demand We spent much of the pandemic improving our AI conversion technology and our platform was prepared to convert this increased demand at better than historical levels. The results are strong growth sequentially, year over year and compared to the same period in 2019. Q2 originations of $144,000,000 grew 44% sequentially, 84% year over year and 20% over Q2 2019. This drove our quarter's ending receivables to $260,000,000 a 19% year over year growth and 29% over 2019. Receivable growth is a leading indicator of future revenue growth. Most of the Q2 growth was back end weighted as Customer spent stimulus and COVID restrictions began to unwind. So the majority of that revenue should be recognized throughout the remainder of the year. Adjusted revenue for the quarter of $78,000,000 grew 6% over Q2 2020 and 36% over Q2 2019. It's important to note that despite the strong originations rebound, we are still below what we would consider a normalized demand environment. Although the recent surge of the Delta variant on top of unemployment benefits, advanced child tax credits and a continued moratorium on home and student loan payments are tempering consumer credit. We believe the return of normalized demand is a matter of when not if, but the timing remains uncertain given these factors. We will, however, remain disciplined in our approach to profitable growth as stimulus programs sunset and the pandemic Stimulus programs and increased savings rates naturally hedge our business. These factors drive better credit and combined with our growth I mean profitability remains strong in Q2 with $17,900,000 of adjusted net income, up 11 times versus $1,600,000 in Q2 2020. We also made some key hires in the quarter, including Neville Crawley, who joined us as President. As we enter this next We are evolving our organization to support our future growth and strategic transition from a monoline lending platform to our goal of becoming the near digital financial services destination for the everyday consumer. Neville was the former CEO of global FinTech platform, Kiva. He brings more than 2 decades of extensive leadership in financial services, product and technology. We are tremendously proud of the financial Technology platform we have built and our commitment to serving consumers excluded from the traditional banking system through fair, transparent products and an extraordinary customer experience. We are very excited to transition to a public company and strengthen our position as the financial champion for the nearly 150,000,000 everyday consumers in the United States. We continue to innovate our array of products, Thanks, Jared, and good afternoon, everyone. As Jared highlighted in his remarks, during the Q2, We continue to see favorable trends in credit quality and originations, which drove strong profitability, continuing the momentum from the Q1. Prior to going into more details on our Q2 results and full year outlook, I would like to start by walking through a couple of key financial drivers of our business model, Starting with the unit economics of our installment loan product. Our flagship product, the OP loan, Is a fully amortizing 11 month $1500 installment loan? After banks originate the product through our platform, We buyback the majority of economic interest. We earn interest on those receivables. There are no other fees. Our goal is full transparency and ensuring customers have the ability to repay, which and ensuring customers have the ability to repay, which underpins our proprietary credit model. Our customer takes about 2.5 loans out over the life, which on average is approximately 11 months. The average customer will have a net charge off rate of about 38% as a percent of revenue, although we have seen significantly lower loss rates recently driven by healthier customer balance sheets as a result of the government stimulus program. Apart from cost of credit, the other main variable cost driver is our cost of customer acquisition, which has historically been in the $200 range. About 80% of our acquisition channels, which include our 3rd party referral relationships, Search engine optimization, customer referrals and remarketing are based on a variable cost per funded loan, meaning we pay a fixed amount when we fund the loan. The other two variable cost drivers are sales costs and cost of financing. About half of our sales costs from reporting data and tools to support our bank partners' underwriting models and the other half are related to our customer service team, which will play a key role in driving our NPS scores. Our debt financing assumes an 82% loan value and 8% cost of financing, which we have driven lower by about 500 basis points over the past 5 years across a diversified set of lenders. This leads to an average over $600 contribution margin over the customer life and a multiple on invested capital of over 2 times. Next, I wanted to turn to our operational leverage and our focus on automation. As Jared mentioned, our bank partners now auto approved over 50% of their originations through our platform. That's up from 0% 3 years ago and 26% at the end of 2020. This has driven an improvement in the conversion rate for our applications to funded loans to 24% at the end of the second quarter versus 14% at the same time in 2019. Now, I'd like to turn to our Q2 2021 financial results. I would like to note that all comparisons to 2020 from the income statement perspective are based on a pro form a fair value adjusted view for 2020 to be able to present a like for like comparison. You will recall that on January 1, 2021, the company transitioned to the fair value accounting method for its receivables from the incurred credit loss application method. We had a solid financial performance in the 2nd quarter, highlighted by strong profitability, robust originations and receivables growth and a healthy balance sheet. 2nd quarter revenue was $78,000,000 an increase of 6% from the Q2 a year ago and down 7% sequentially. Ending receivables balance on an amortized basis $260,000,000 at the end of the second quarter, up 6% sequentially and 19% higher than the 2nd quarter a year ago. The sequential drop in revenue was due to seasonality from the tax season as well as government stimulus, which affected customer demand in the Q1 and the beginning of the second quarter. This has impacted the beginning receivables in the 2nd quarter and drove a 7% decline in average receivables from the Q1 to the 2nd quarter this year as the 2nd quarter receivables growth was back weighted. Company originations continued to rebound during the quarter as customer demand accelerated. Total originations were $144,000,000 up 44% sequentially, 84% from the Q2 a year ago and twenty and we will be conducting a listen only mode. New customers helped drive our growth in the quarter, with new customer origination growth up 80% quarter over quarter and 143% year over year and closer to 2019 levels, but still slightly down as demand remained only at about 70 5% of pre COVID levels. Growth in new customers are especially impactful as they can drive the cross sell of additional products in subsequent periods. Company origination growth was also driven by improved operating efficiency as the company's auto approval rate increased from 41% in the Q1 to 51% in the 2nd quarter. This led to a greater than 11% conversion rate of applications to and to be up over 50% from the 2nd quarter. As a result, we expect total company revenue to increase in the 3rd and 4th quarters of 2021 and have a growth rate of over 20% in the second half of the year versus the first half. Next, I will turn to the change in fair value line, which consists of 2 main components. The first is net charge offs and the second are changes to the portfolio's fair value. The latter is driven by the change in ending receivables over the reporting period as well as the change in the fair value mark as a result of updates to key valuation inputs. These include the weighted average life of the portfolio, future credit loss expectations, prepayment assumptions, weighted average coupons and the discovery. I'll discuss those items in more detail in a moment. First, the company's annualized net charge off ratio as a percentage of average receivables was 28 point 4% for the Q2, which represented the lowest ratio of any second quarter in the last 5 years. This represented an improvement from the 30.1 percent net charge off ratio in the Q1 and is well below the 40.0 percent net charge off ratio for the Q2 of 2020. Looking ahead, we expect net charge off ratios to approach historical levels in the low 40% range by the Q4 of the year. 2nd, change in fair value premium increased by $8,600,000 from the previous quarter, driven by a growth in ending receivables of $15,100,000 and an improvement in the fair value premium from 109.3 percent to 110.4% as the remaining life of the portfolio increased, driven by a younger portfolio stemming from 44 percent sequential origination growth. In addition, the company's weighted average interest rate in this portfolio increased by The discount rate of 21.6% remained in line with the prior period. Versus the Q2 of last year, change in fair value premium increased by $23,800,000 driven by a $50,800,000 receivables drop in the Q2 of last year as demand was abnormally low during the early stages of the COVID-nineteen pandemic. Going forward, we expect the fair value mark to trend upwards as we should see tailwinds in valuation inputs, including weighted average maturity due to origination growth and discount rate from becoming a publicly traded company. To summarize, the change in fair value line item is benefiting from historically low net charge off ratios and an increase in the fair value of the company's receivables portfolio as a result of origination and receivables growth. Turning now to expenses. Total operating expenses for the Q2, excluding interest expense and add backs and one time items, were $37,500,000 for 48 percent of revenue compared to $32,100,000 or 38 percent of revenue last year and $25,000,000 or 34% of revenue for the Q2 of 2020. This increase was primarily driven by an acceleration of originations in the 2nd quarter and the corresponding impact on direct marketing and acquisition expenses. Marketing expenses increased to $11,400,000 or 15% of revenue for the Q2 from $7,900,000 or 9 percent of revenue last quarter and from $5,200,000 for 7% of revenue for the Q2 of 2020 as demand accelerated and a higher percentage of originations were from new customers. Percent of originations from new customers was 42% for the 2nd quarter, up significantly from 34% last quarter and 32% from the Q2 of 2020. With the increased demand we are seeing from customers, we continue to see the mix of new originations increase and expect marketing expenses as a percentage of revenues to trend slightly above the mid teens as a percentage of revenue. This percentage fluctuates based on origination growth relative to revenue growth. In periods such as our last one, where origination growth outpaced revenue growth, Marketing expenses will be higher as a percentage of revenue and should come down when growth studies. Customer operations expenses for the Q2 totaled $9,900,000 or 13 percent of revenue compared to $9,600,000 or 11% of revenue last quarter and $8,700,000 or 12 percent of revenue for the Q2 of 2020. Sequential growth of 2.8% and 13 point percent growth versus the Q2 of 2020 were well below origination growth over those periods as the business continued driving efficiency and automation. As I mentioned earlier, the company's automatic approval rate increased to 51% for the 2nd quarter 41% for the prior quarter and 19% for the Q2 of last year. This allowed us to hold customer center headcount steady sequentially and year over year. Looking ahead, we expect customer operations expense percentage growth to be less than half of origination percentage growth sequentially as we continue to gain scale on customer centric costs. Technology, product and analytics expenses for the 2nd quarter totaled $6,500,000 or 8 percent of revenue compared to $5,800,000 or 7 percent of revenue last quarter and $4,700,000 or 6 percent of revenue for the Q2 of 2020. The Company continues to invest in technology resources to support enhancements to our AI powered underwriting engine as well as support the scaling of new products. G and A expenses, excluding one time and add backs, for the 2nd quarter totaled $9,600,000 or 12 percent of revenue, compared to $8,700,000 or 10 percent of revenue last quarter and $6,400,000 or 9% of revenue for the Q2 of 2020. The increase in G and A expenses was driven by investments in personnel and infrastructure to support the company's augmentation of internal controls, operational risk and compliance functions as the company transitions to becoming a public entity. We expect G and A expenses as a percentage of revenues to remain Adjusted EBITDA was flat sequentially and increased 2 55% from a year ago to $32,000,000 for the 2nd Sequentially, lower revenues and increased expenses, primarily related to increased volumes, were offset by an improvement in the change in fair value driven by strong credit quality and origination growth. 1st in the Q2 of 2020, adjusted EBITDA growth was driven by higher revenue and lower change in Our adjusted EBITDA margin for the quarter was 41% compared to 38% last year and 12% for the Q2 of 2020. We expect adjusted EBITDA margin to normalize for the remainder of 2021 as net charge offs and to pre COVID levels, coupled with increased marketing spend in line with expected origination growth. Interest expenses, excluding debt amortization, For the Q2, total $5,700,000 or 7 percent of revenue compared to $4,100,000 or 5 percent of revenue last year and $4,900,000 or 7 percent of revenue for the Q2 of 2020. The increase in interest expense versus the previous quarter was driven by a normalization of debt levels. We recognize adjusted net income of $17,900,000 for the 2nd quarter compared to $19,300,000 the previous Turning now to the balance sheet. Our balance sheet continues to remain healthy driven by strong free cash flows, with cash balances growing to $121,000,000 and a net debt to equity of less than 1x. Equity grew by $78,000,000 year to date to $177,000,000 as a result of $69,000,000 one time fair value adoption impact and $42,000,000 of retained earnings, excluding tax distributions, partially offset by tax distributions related to the 2020 tax year of $34,000,000 From a funding capacity standpoint, we have a 2021 did not contemplate any 2021 government stimulus. However, now that we are seeing the effects of the 2021 stimulus, we are updating our guidance accordingly. We are updating our expected 2021 adjusted net income guidance by providing a range of $62,000,000 to $66,000,000 with the top end of the range in line with our previous expectations. We are also updating our outlook for adjusted EBITDA to A range of $120,000,000 to $125,000,000 The midpoint implies an adjusted EBITDA margin of 34%, representing an improvement of 200 basis points versus our prior guidance. Our business is naturally hedged from a credit versus growth perspective, so in periods of slower than expected growth, Our credit losses have historically declined driving higher profit margins. While demand has continued to increase substantially, As indicated by our sequential and year over year originations growth, we now believe the recovery timeline may be a bit extended due to the surge of the Delta variant on top of the multiple incremental government stimulus programs. After a strong second quarter and first half of July, we started to see an impact on the second half of July due to these factors. Given our disciplined approach to underwriting, which has driven stable credit losses across growth cycles, we will not chase volume at the cost On the revenue side, we are updating our full year 2021 guidance to a range of $350,000,000 to $360,000,000 given these timing related factors. This assumes ending receivables that would approach 50% growth from 2nd quarter levels. In providing this range, we have taken into account a downside growth scenario, which contemplates an adverse impact on consumer demand due to macroeconomic factors related to the COVID-nineteen pandemic. We see potential upside to our guidance should the realized impact of these exogenous factors be less pronounced than we have assumed. We view these events as temporary in nature and do not believe that they will affect the long term growth trajectory of our business. We also believe that the speed bump on the return to normalized consumer spending should have a favorable impact on credit as we saw in 2020 and the first half of twenty twenty one. We continue to remain very confident in the long term prospects of our business and the need for our products. As our 2nd quarter turn up program data indicated, that's still less than 2% of customers who opt into our turnip program receive a lower cost loan. This enhances our belief that we serve as the Best available alternative for the everyday consumer who cannot access the traditional banking system. To conclude, We are very excited to have announced the completion of our business combination with SG New America Acquisition Corporation on July 20, 2021. We couldn't have found a better partner than the SG and A team led by Joe Moglia, Larry Swetz and Kyle Sermona. Upon the close of the transaction, the combined company had 84,500,000 shares outstanding, excluding 25,500,000 earn out units. The company also had $15,300,000 warrants outstanding with exercise prices at $11.50 $15 per share. Please refer to the ShareCon slide in the company's earnings presentation for more details. With that, we would now like to turn the call over to the operator to the Q and A section of our call. Operator? Thank you. At this time, we'll be conducting a question and answer line of David Scharf with JMP Securities. Please proceed with your question. Yes, good afternoon. Thanks for taking my questions. Hey, David. Hey. Hey, Jared, I'm wondering, first off, just More of a high level macro question. You obviously provided a lot of background behind Sort of the full year outlook and some of the exogenous factors, we're obviously wrapping up in a reporting season where a lot of non prime, subprime lenders have Talked about the initial signs of perhaps a lot of government stimulus and so forth finally starting to wane. It's Still a depressive factor on demand, but there's sync sort of the initial green shoots, if you will, of a return to pre COVID demand. Can you sort of talk about within the context of some of the qualifiers you put out there, I guess, number 1, if you in fact are seeing through August 10, Any signs of delta or otherwise sort of impacting demand or perhaps how it ended in June. And secondly, 50% increases in receivables at December 31 is Still an extremely impressive growth rate obviously versus just June 30. And are you willing to sort of comment on perhaps how much that impressive figure may be discounted in your mind or Just by what sounds like being a little more cautious in some of these external factors, it just kind of reconcile once again, I think Some of the narratives out there that, hey, maybe there's light at the end of the tunnel of all the government stimulus and all the depressive Factors versus what sounds like maybe a little more caution on your front? Yes, happy to address it. I think At the beginning of the year through 2Q without some of the more recent data points specifically as it relates to the surge in some of the consumer behavior related to it and some of the decisions by the government to extend these stimulus programs, right? I mean, just the other day, The government talked about extending the moratorium on student loan payments, the moratorium on rental payments. And so We're definitely not at a level that we would consider normalized consumer spending, normalized demand for credit. Despite that, the business is going to grow nicely. And we hope here in the near future we get back to what we consider a normalized environment. But I think we're trying to be thoughtful as it relates to Guidance versus where we are today, even a month ago, we probably would have talked about it a bit differently with some of these new facts. And we are evaluating it on a day to day basis and trying to be thoughtful about how we think about the future numbers. But to your point, like the growth is still Going to be strong. I think we've certainly improved the platform from a conversion perspective quite a bit compared to pre pandemic period, so that helps a lot. And there's certainly upside if some of these factors End up reversing more quickly than we have a perfect crystal ball into, right? There's just a lot of uncertainty as it relates to This surge, how quickly it ends and what that means for people getting out and about. Shivani, you got any other additional color on that? Yes. I agree. I think in terms The guidance we provided, we wanted to take a pragmatic and a cautious approach. Kind of we saw demand accelerate through the 2nd quarter, Obviously, 44% sequential growth. July was also a positive year over year performance. Our receivables were up over 20%. So the growth is there, but yes, the demand is not at pre COVID level. So we do see upside to what we provided. And we wanted to be transparent and provide guidance that we think that is in a range even in the downside situation. Got it. No, no, that's very helpful. Obviously, Caution is warranted. It's incredible how everything we're seeing is remarkably different than it was just 2, 3 weeks ago in terms of obviously the latest surge. And maybe just one follow-up. The impressive increase in auto approval rates, I don't know if this is a question that you're able to answer if it's quantifiable. But Is that would you characterize that increase as somewhat of a function of the benign credit environment we're in? Or is it completely sort of related to just the AI algorithms Becoming more and more perfected. Just trying to obviously ultimately get a sense for how high that number could go and what the implications are for margins. Completely separate. We fully believe you're going to be back at normalized credit as soon as you're back at normalized demand. So we wouldn't do anything short term to increase the approval rates in that type of return to normalcy. I mean, we just have been ultra focused over the last couple of quarters to continue to use our data and our technology platform And our data science team and our product team to approve automatically where we're confident and ultimately the banks are confident that the credit is going to be there. And it's a bunch of dials. You could think about a bunch of dials over time. It's incredibly complex. But over time with more data, We are able to get more confidence to do that. And ultimately, you got to do business the way that the customer wants to do business. And certainly, we have seen A greater desire in customers going straight through and so it's a very important part of the business To continue to improve over time, you'll never get to 100%, but there's still upside from here through year end to continue to improve that auto approval rate. Got it. And I apologize if I can squeeze just one more in. Are you able to Maybe quantify for us whether or not the guidance for year end balances, just how material the contribution might be from SalaryTap and Card. Yes. So SalaryTap and Card Card have both been launched. We think that the overall impact on receivables, this will be about less than 10% of the overall portfolio. We want to make sure we prove out the unit economics of those products like we did with the installment product. And then we plan to scale those business pretty significantly in 2022 and beyond. Got it. Great. Thanks very much, guys. Thanks, Dave. Thank you. Your next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question. Hey, guys. Thanks a lot and good evening. Can you repeat what you said again about July and especially the second half of July. I just want to make sure I got that. Yes, absolutely. So we saw July receivables up over 20% year over year. And we feel that based on our projections that the growth of receivables will approach 50% versus the Q2 by the end of the year. Got it. I thought you said something else like you Started to see something late July, a little bit of a slowdown or some change that maybe I misheard that. Yes. So we saw accelerating growth sequentially through the second quarter and into the first half of July with some of these programs and increases in extensions of moratoriums. We did see a little bit of deceleration in growth in the second half of July, but that's baked in And that's related to the COVID and the Delta variant potentially. So we baked that into our kind of taking into account that downside potential going into the second half of the year, but that's baked into that 50% that we alluded to earlier. Perfect. Okay. And Jared, clearly, you're working hard on salary tap and credit card. But I know you have a more expansive product journey. What sort of next on the horizon in sort of a rough timeline for that? Sure. Yes, we're going through a robust comprehensive process that is customer focused and customer first to understand what the best order of NeXT products look like. There's a laundry list of potential products there, everything from mobile banking to sub A 36% installment lending to point of sale lending to overdraft fee protection products, there's the gamut of potential products out there. For each of those, we will evaluate not only the order, but whether we build it, whether we partner for launching it and whether we look at acquisitions. And I would hope that as we exit the year early in the next year, we've got a beacon on The order there and then depending on the way we get into those products will determine The speed, we do have our hands full now executing 2 new products from the ground up, both of which are super early, but We are positive on the early indications. And I think from the Stories perspective, The quicker we're able to build up this full product suite, the quicker we're able to quantifiably show that we can graduate customers from a higher cost product back to a mainstream product And the quicker we can show that the member base stays with us for a longer period of time because they view that as a destination rather than a one stop shop to solve Acute problem, I think will be rewarded for it in the market. So there's a lot more to come there. Obviously, Neville just joined us. He's superiorly talented, tremendous background. He's helping me lead a bunch of those initiatives, and I think you'll be hearing a lot more on our future plans there in the quarters ahead. Got it. Thank you. And Shivan, Roughly, your free cash flow conversion from adjusted EBITDA, What percent should we think of that as? 50% to 60%, what's a rough guide? Yes. So I think a rough guide from adjusted EBITDA is about 2 thirds would convert. Your next question comes from the line of Chris Brendler with D. A. Davidson. So on the Supervision outlook and some of the key leads here, it certainly sounds like a lot of the things you're watching are the stimulus payments and the macro impact on demand. Just wanted to just because of the amount of capital raising that's taking place in FinTech and the amount of innovation that we're seeing in lending space in particular. Are you seeing any changes to the competitive landscape as you think about This quarter's results and the outlook or is it still really sort of wide open from an Op5 perspective just given where you guys sit? We've seen some interesting themes from the traditional banks. I mean, you've seen a number of banks go to no fee accounts or lower fee accounts. You've Some of them take away overdraft. You see some of them notionally launch small dollar products. We haven't seen any of that impact us competitively. We haven't seen any direct competitors come to the marketplace. The one thing we did see, which is interesting, that turn up program. So today, we quoted the percentage of customers that actually close a loan when they go through that process. We did see a bit higher appetite on the glass of actually showing customers an offer. We usually are about 10% of the applicants that go through turn ups will see a offer. That's up to mid teens, but the close rate stayed the same. It's still less than 2%. So it appeared to us like you had some of those a bit upper in the traditional credit score funnel try to come down market a bit, but they just can't get comfortable with this customer. So We're watching that closely. We're also when we just mentioned to Mike, we're thinking a lot about moving upstream a bit with our installment products. We certainly have the data to do so and we'll be focused on that in the next couple of quarters. So but nothing directly competitive that would Change any of our thinking as it relates to future growth. All those comments are macro related, some of actually all of which are just A matter of potential timing. Okay, great. And then, net charge off right ticked down a little bit. Obviously, the positive side of stimulus and fiscal support is that your balance sheets are quite liquid, consumers are paying back their debts. Is there any forward looking indicators? Are you seeing any changes in the margin on credit quality? Is it continuing to get better or just sort of stabilizing here? Yes. I mean, in our guidance, we expect charge offs to renormalize as demand comes back And consumer balance sheet approach historical levels. And then so we were guiding the net charge off rate as a percentage of receivables to be In the mid-30s, kind of for a full year and that's baked into our guidance that we provided. Okay, great. And then lastly, if you just made a comment on I know you did this earlier, Shivan, but just maybe some additional color around The idea of a federal rate cap and why we don't think that's highly likely at this point. Yes. So likelihood of federal aircraft. So I would say just stepping back to address regulatory in general. I think when we look at the business, we acknowledge the regulatory risk. We are incredibly focused on becoming a regulatory agnostic business, very focused on diversifying our product suite, mostly from an offensive perspective and from the ability to graduate, but also from a defensive perspective as well. We think the probability of a national rate cap is low. I'd never tell you think it's really important that we use it to amplify the voice of the 150,000,000 customers that would be locked out if such Legislation was enacted. Rate caps don't do anything to call demand. They're a supply constraint. And there are really productive ways to And so we'd be big proponents for additional small dollar legislation, but we think a rate cap would have a tremendous amount of Unintended consequences and we've got the data to prove it and our customers tell the story all the time. So low probability, not 0, But we're focused on diversifying. At the same time, we're very focused on using our data and using our voice to make sure we get to the right answer for those customers in the space. Thanks, Jed. It's great results. Thanks. Thanks, Chris. Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Mr. Jared Kaplan, CEO for closing remarks. So thank you everyone for joining us on our first call. I really want to thank The FG team led by Joe Moglia, they've been terrific partners through this process. The Schwartz family, our majority owners have been Terrific partners as we built up this platform. We are on the very beginning stages of a multiyear journey to transform the way that people think about this consumer. There are many people on this call today that may not understand these products, right? They never use these products. And that's why our customers always tell the best story about what options are out there for them, why these products are so necessary. And if we do what we say we're going to do, I think we will be the players in the space that change the way you think about non prem credit, how you help someone in a really difficult time, How you graduate them back to a mainstream product in the near term, allow them to build some savings and ultimately allow them to generate wealth. That's our mission. That's what we're going to do. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.