Oportun Financial Corp

NASDAQ:OPRT

Earnings Call Transcript 2024-Q1

[Operator]

Hello and welcome to the Oportun Financial First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's my pleasure to turn the call over to Dorian Hare, Investor Relations. Please go ahead.

[Dorian Hare, executive]

Thanks and hello everyone. With me to discuss Oportun's first quarter 2024 results are Raul Vazquez, Chief Executive Officer and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer. I remind everyone on the call our webcast that some of the remarks made today will include forward-looking statements relating to our business feature results of operations and financial position plan, products and services, business strategy expense savings measures, statements regarding our senior secured term loan, and plans and objectives of management for our future operations. Actual results may differ materially from those contemplated or implied by these forward-looking statements and we caution you not to place undue reliance on these forward-looking statements.A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in our earnings press release and in our filings with the Securities and Exchange Commission under the caption Risk Factors including our upcoming form 10-Q filing for the quarter ended March 31, 2024. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events other than as required by law.Also on today's call, we will present both GAAP and non GAAP financial measures, which we believe can be useful measures for the period to period comparisons of our core business and which will provide useful information to investors regarding their financial condition and results of operations. A full list of definitions can be found in our earnings materials available at the Investor Relations section on our website. Non GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP.A reconciliation of non GAAP to GAAP financial measures is included in our earnings press release, our first quarter of 2024 financial supplement in the Appendix section of the first quarter of 2024 earnings presentation, all of which are available at the Investor Relations section of our website at investor.oportun.com.In addition, this call is being webcast and an archived version will be available after the call along with a copy of our prepared remarks. With that I will now turn the call over to Raul.

[Raul Vazquez, executive]

Thanks, Dorian and good afternoon, everyone. Thank you for joining us. Today, I'll discuss our first quarter performance and update you on our progress on key areas of focus. Let me begin with 4 highlights of our Q1 performance. First, we generated revenue of $250 million, outperforming the top-end of our guidance range by $12 million, or 5%. This outperformance was driven by a strong March with higher interest income and portfolio yield as the price increases we've been enacting took hold at a higher rate than anticipated.Second, our Q1 annualized net charge-off rate was 12% and at the low-end of our guidance range, 22 basis points lower sequentially and 7 basis points better than last year. Our quarterly net charge-offs measured in dollars declined year-over-year for the second consecutive quarter, in this instance by 7%.Third, our GAAP operating expenses were just under $110 million, down 15% sequentially and 25% year-over-year. The last time we reported quarterly GAAP operating expenses below $110 million was the first quarter of 2021.Finally, our profitability has markedly improved, with both our adjusted EBITDA and adjusted net income turning positive from year-ago losses. Adjusted EBITDA was $2 million, an improvement of $22 million year-over-year.We generated $4 million in adjusted net income, a $61 million improvement from the year-ago quarter. And, our GAAP net income improvement was even more substantial at $76 million.In summary, I'm proud of how the team executed and pleased that Q1 showed more signs of the expected business recovery that I outlined during the last earnings call.I'll now update you on progress we're making on our 2024 strategic priorities, which gives me confidence in our outlook. Starting with credit, I'll highlight 3 positive dynamics that we're seeing. First, as you can see on Slide 5 of our earnings presentation, the loss rates 12 or more months post-disbursement for our front book of loans continue to run approximately 400 basis points lower when compared to our back book of loans, with our Q1 2023 vintage now joining that group. Even more encouraging, we're now seeing that more recent front book vintages are outperforming their predecessors. As a reminder, the back book is comprised of loans originated prior to the first material tightening in July of 2022; the front book of loans is comprised of originations since then.Second, you can also see on Slide 6 that the back book shrank to 16% of our owned principal balance at the end of the first quarter, but disproportionately accounted for 40% of our gross charge-offs. We still expect the impact of the back book to diminish throughout 2024 and our back book to shrink to 3% of our owned principal balance at the end of this year.And third, starting in late January, we started experiencing positive trends in early-stage delinquencies, which continued in February and March. 1 to 29 day delinquencies are now running well below 2023 levels and the positive trends are starting to roll into 30 to 59 day delinquencies. We expect that these favorable trends will drive 30 plus day delinquencies further down in Q2 from the 5.2% during Q1 2024, which were already down over 60 basis points from Q4 2023.Improving credit outcomes is our top priority, and I'm pleased with the progress we've made and expect to continue to make this year.Relating to our priority to fortify business economics during 2024, I'd like to update you on our expense management progress. As you can see on Slide 7 of our earnings presentation, we are significantly more efficient today than we were during our IPO year 5 years ago. Adjusted OpEx as a percentage of average managed principal balance was down by almost 400 basis points to 13% in Q1 2024 versus 16.9% in Q1 2019. And, we've made substantial progress to get our GAAP operating expenses below $110 million for Q1 2024, remaining on track to achieve operating expenses of $97.5 million or below by Q4 2024.In summary, we outperformed our expectations for the first quarter, including a return to adjusted profitability, and remain keenly focused on expense management with even more profitability improvement on the horizon.Jonathan will share the details with you shortly, but I want to let you know that we are raising full year adjusted EBITDA guidance by 31% at the midpoint of the range.Shifting to our priority to identify high-quality originations, I'd like to highlight our prudent expansion in Secured Personal Loans, or our SPL product, which you can see on Slide 8. As a reminder, we launched SPL in the summer of 2020 and paused our originations in 4 states during 2023 due to our rebalancing of priorities and a desire to retool the partnership with Pathward. Available only in California as of the end of last year, we reintroduced Secured Personal Loans in our next 2 biggest states, Texas and Florida, at the end of the first quarter. We also relaunched SPL in Arizona and New Jersey earlier this month, and are rolling out the product in Illinois for the first time during this quarter. We are excited about the expansion of SPL because of its superior unit economics. Not only did losses last year run approximately 350 basis points lower for our Secured Personal Loans as compared to unsecured, but revenue per loan was over 50% higher, since, on average, SPL loans are over $3,000 larger.In addition, responsibly expanding secured lending, which is collateralized by members' autos, allows us to better serve our members. Our SPL product has allowed us to invite 3 of 10 applicants who we weren't able to approve for Unsecured Personal Loans to apply for an SPL loan.In summary, I am very pleased with our first quarter performance, yet we expect a better second quarter than our first quarter and our conviction remains strong to be profitable on an adjusted basis during 2024.With that, I will turn it over to Jonathan for additional details on our first quarter financial performance as well as our second quarter and full year guidance.

[Jonathan Coblentz, executive]

Thanks Raul, and good afternoon everyone. As Raul mentioned, we had a strong first quarter and are positioned to improve upon our performance throughout the balance of the year. We remain focused on substantially increasing our profitability in 2024 and beyond by driving performance in our 3 differentiated, core products: Unsecured and Secured Personal Loans as well as our Savings product. We will continue to do so while reducing costs and maintaining our conservative credit posture.As shown on Slide 10, Oportun delivered total revenue of $250 million, and we returned to profitability with adjusted net income of $4 million, or adjusted EPS of $0.09. Continuing to operate under a tightened credit posture, originations of $338 million were down 17% year-over-year. Sequentially, originations were down 23% from the fourth quarter, aligning with the typical seasonal pattern following year-end. While dollar volume of originations and average loan size declined due to our tightening actions, I am pleased to share that better than expected demand for new members drove 16% year-over-year growth in the number of loans originated. These incremental loans were also better credit quality as the credit profile of our application pool improved. This sets us up well for future growth when these new members return for subsequent loans.The year-over-year revenue decline of 3% outpaced our originations decline by 14 percentage points. This outperformance resulted from our price increases as portfolio yield increased 113 basis points year-over-year, improving to 32.5%. We will continue to enhance yield throughout 2024 while remaining committed to our 36% APR cap.Net revenue was $79 million, up markedly year-over-year, due to reduced non-cash fair value marks and lower charge-offs, partially offset by higher interest expense. Our total net decrease in fair value of $117 million was primarily driven by current period charge-offs of $85 million. Total fair value mark-to-market adjustments were favorable by $3 million as the mark-to-market on our loan portfolio was largely offset by the mark-to-market on our remaining fair value asset-backed notes.As a reminder, we elected last year to stop fair valuing our new debt financings in our GAAP financials. Interest expense of $54 million was up $15 million year-over-year. This was primarily driven by increased debt outstanding and the increase in our cost of debt to 7.5% versus 5.2% in the year-ago period, reflecting the higher rate environment.Turning now to operating expenses and efficiency, we continue to see the benefits from our previously announced cost structure optimization initiatives. Our $110 million in total operating expenses in Q1 reflected a 25% reduction from the prior-year period. We will continue to drive our cost structure lower in 2024 with the $30 million of additional annualized operating expense reductions that we announced on our last earnings call. We continue to target $97.5 million in Q4 GAAP operating expenses.In the first quarter, our sales and marketing expenses were just over $16 million, down 17% year-over-year. And, I'm pleased to share that our CAC of $138 was down 28% year-over-year and at our lowest level since the second quarter of 2022. For the quarter, we recorded adjusted net income of $4 million, compared to a $58 million adjusted net loss in the prior-year quarter, and adjusted EPS of $0.09 versus a prior-year net loss per share of $1.70. This marked improvement in adjusted profitability was primarily driven by reduced operating expenses and credit losses, along with current period mark-to-market increases in our loan portfolio as our discount rate and remaining cumulative net-charge off expectation both declined.Adjusted EBITDA, which excludes the impact of fair value mark-to-market adjustments on our loan portfolio and notes, was $2 million in the first quarter. This reflected a strong year-over-year increase of $22 million, driven by our sharply reduced cost structure.Now, on Slide 11, let me discuss Q1 credit performance. Our annualized net charge-off rate of 12% was at the low-end of our guidance range. This compared to 12.1% in the prior-year period. Our 30 plus day delinquency rate declined year-over-year by 21 basis points and sequentially by 64 basis points to 5.2%. As Raul mentioned, our early stage delinquencies are running well below 2023 levels, and we expect our 30 plus day delinquency rate to continue to improve going forward. The last time the early-stage buckets were running below the prior year was 3 years ago, when 2021 levels were below 2020.Regarding our capital and liquidity, as shown on Slide 12, net cash flows from operating activities for the first quarter were strong at $86 million, up 12% year over year. As of March 31, total cash was $197 million, of which $69 million was unrestricted and $127 million was restricted. Further bolstering our liquidity was $607 million in available funding capacity under our warehouse lines and remaining whole loan sale agreement capacity of $258 million. I'm also pleased to share that since quarter end we signed a new agreement with one of our partners to sell an additional $150 million of whole loans over the next 6 months.Before I leave our discussion of capital and liquidity, I want to share that we are getting closer to completing our strategic review of our credit card product, and we continue to evaluate refinancing options on our senior secured term loan.Turning now to our guidance as shown on Slide 13, our outlook for the second quarter is: Total revenue of $245 million to $250 million, annualized net charge-off rate of 12.4% plus or minus 15 basis points. Adjusted EBITDA of $14 million to $17 million.Let me spend a minute providing you with a bit more color. First on revenue, the seasonally lower origination volume in Q1 means that our portfolio will decline slightly in Q2. However, expected higher portfolio yield will lead Q2 revenue to be only slightly down to flat compared to Q1.With respect to credit, we expect Q2 charge-offs in dollars to be flat-to-down sequentially, so the higher annual charge-off guide at the midpoint for Q2 is driven entirely by a lower receivables base.On Slide 14, you can see how impactful portfolio growth is to our annualized net charge-off rate. Finally on profitability, strong sequential adjusted EBITDA improvement from $2 million in Q1 to $15 million at the midpoint for Q2 reflects our ongoing cost discipline and the operational improvement we expect throughout the remainder of the year.Our guidance for the full year is: Total revenue of $985 million to $1.01 billion, annualized net charge-off rate of 11.9% plus or minus 50 basis points, adjusted EBITDA of $80 million to $90 million.I'm pleased that we're able to provide you with full-year guidance reflecting the continuation of the 2024 business recovery we initiated in Q1. Driven by our resilient top-line amidst credit tightening, prudent underwriting and further cost reductions, our full-year adjusted EBITDA guidance reflects $66 million of improvement over last year at the midpoint, or approximately 350% year-over-year growth.Raul, back over to you.

[Raul Vazquez, executive]

Thanks, Jonathan. Before I wrap up, I want to publicly welcome Scott Parker to Oportun's Board of Directors. Scott's appointment as an Independent Director follows Oportun's cooperation agreement with Findell Capital that was announced on April 22. Scott currently serves as chief financial officer of NationsBenefits, a leading provider of supplemental benefits and fintech solutions to the healthcare industry. A seasoned CFO, Scott previously led the finance function at Ryder System, OneMain Holdings, and at CIT Group. I also want to welcome Richard Tambor as a Board Observer. Rich has agreed to stand for election as an Independent Director at our 2024 Annual Shareholder Meeting. Rich previously served as the executive vice president and chief risk officer at OneMain Holdings. He was also previously the chief risk officer of Retail Financial Services at JPMorgan, chief risk officer of Small Business Services at American Express, and has held additional executive and risk-management related positions at other institutions.The Board and management team will benefit from Scott and Rich's perspectives and contributions as we continue to focus on disciplined execution and driving profitable, sustainable growth. Including Scott and Rich, we have added 4 highly qualified, independent individuals to participate in our Board meetings over the last year.To close, I'd like to emphasize that: We're pleased with our first quarter performance, which featured $76 million of GAAP net income improvement and a return to adjusted profitability. We are confident in our outlook and have raised our revenue and adjusted EBITDA guidance while reaffirming our expectation to be profitable on an adjusted basis this year.We expect to exit 2024 with an annualized cost structure that is $240 million below peak levels and the near elimination of our back book. And, we're intent on driving the business towards the 20% to 28% ROEs we talked about in March when we first presented our target unit economics model.Finally, I want to thank the Oportun team for their solid execution in Q1 and their ongoing commitment to our recovery and mission. I also want to thank our shareholders for their continuing support and belief in Oportun.With that, Operator, let's open up the line for questions.

[Operator]

[Operator Instructions] Our first question today is coming from David Scharf from Citizens JMP.

[David Scharf, analyst]

I wanted to just dig in a little more into the guidance on the expense base by year-end. I think you had mentioned you've eliminated about what, $240 million annualized off peak levels. When we look at the fourth quarter run rate, the $97 million guide annualized. Based on everything that you're working on, whether it's reigniting secured personal loans, other products, state expansion, is $400 million a target annualized expense level in your mind? Or in order to achieve that 20% to 28% ROE target, does that run rate have to come down further?

[Jonathan Coblentz, executive]

Yes. So David, we gave guidance, and we reaffirmed on this call that we are targeting our GAAP OpEx number for the fourth quarter of this year 2024 to be $97.5 million around there, right? So that's a little less than the $400 million. We think that as we indicated when we presented the unit economic model for the first time last time, which is represented on Page 21 of the deck that went out that with a little bit of growth, we'll be able to generate those results over time, right? And so I would say that as the business gets larger, OpEx may grow with inflation. But our intention is to run very lean and clearly, we'll be entering 2025 with a run rate that is below $400 million on the OpEx side.

[David Scharf, analyst]

And maybe just a follow-up on that fourth quarter guide. I know there's going to be some kind of shared resources. It's hard to put an exact number on it, but just to get some context, are you able to share sort of how much of that $97 million is allocated to digit or the former digit or the savings product, whatever, however you refer to it internally.

[Jonathan Coblentz, executive]

Yes, David, we don't provide that disclosure. So unfortunately, I'm not in a position to comment on that.

[Raul Vazquez, executive]

What I would say, David, this is Raul. Well, what I would say is, clearly, the reductions in staffing and budgets that we've executed have been across all product lines. So there have been pretty big reductions as well on kind of the savings product. We announced last year that we were closing several of the products that have been part of the acquisition. And for the second year in a row, the savings team is going to be a contributor of cash to the organization. And clearly, in this economic environment, the ability to generate significant amounts of cash is important. So we're pleased with the role that it's playing both in terms of cash generation. And then we mentioned in the last earnings call that people that were using -- borrowers that were using the savings app had delinquency rates that were 45% lower than those who were not. So we're also pleased with that benefit that is being driven by the work -- the good work that, that team is doing.

[David Scharf, analyst]

And maybe just one last follow up on funding. I -- in the press release, you had mentioned the warehouse line for the core personal loans. It's committed just for another 4 or 5 months, I guess, through September. Any update on renegotiations, new partners, as that comes to maturity in September?

[Jonathan Coblentz, executive]

Sure. Yes. No, great question. So we've already started working on a renewal, and we've got lots of interested parties. And so I would say I don't have a specific update to share right now, but the process is going very well. And that's actually not surprising in the least to me, given the improvement in our credit performance and given the fact that warehouse lenders principally look towards the takeout opportunity in the asset-backed market. And as you may recall, which we shared on the last earnings call in February, we came to market with a $200 million term ABS deal, and it was 10x oversubscribed and priced substantially tighter than expected. So the asset-backed market remains strong. We continue to have access, and that bodes well for a very successful secured personal line renewal, warehouse renewal.

[Operator]

Next question today is coming from Matt Hurwit from Jefferies.

[Matthew Hurwit, analyst]

Just to continue from David's question. Are there any balance sheet management actions or modifications to debt payments or any upcoming balance sheet items in general to highlight?

[Jonathan Coblentz, executive]

No, I would say no.

[Matthew Hurwit, analyst]

Okay. And in terms of the SPL product, are you able to share with us what percent of the portfolio that is at this time? Or if not, what sort of runway do you see for that product?

[Jonathan Coblentz, executive]

We actually disclosed that. It's in the press release. It's -- we said that the SPL product at the end of March was $110 million. So obviously, we've just relaunched starting last quarter, the expansion into additional states. So we certainly expect that, that will grow over the course of this year.

[Raul Vazquez, executive]

And Matt, that's on a managed portfolio of about $3 billion.

[Operator]

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further closing comments.

[Raul Vazquez, executive]

We want to thank all of you for joining us on today's call, and we look forward to speaking with you again soon.

[Jonathan Coblentz, executive]

Thank you.

[Operator]

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.