Oportun Financial Corp (OPRT) 2024 Q1 法說會逐字稿

Hello, and welcome to the Oportun Financial first quarter 2024 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Dorian Hare, Investor Relations. Please go ahead.

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'll remind everyone on the call or webcast that some of the remarks made today will include forward-looking statements relating to our business, future results of operations and financial position, planned products and services, business strategy, expense savings measures, statements regarding our senior secured term loan and plans and objectives of management for 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 on 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, in 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 our 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 2024 financial supplement and the appendix section of the first quarter 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 Lowell.

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 four 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 seven 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 with the first quarter of 2021.

Finally, our profitability is 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 three 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 shrink to 16% of our own 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 own 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% level 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, five 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 four states during 2023 due to our rebalancing of priorities and our 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 two 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.

Thanks, Raul, and good afternoon, everyone. As Ralph 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 sustainably increasing our profitability in 2024 and beyond by driving performance in our three 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, opportune 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'm 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 declined 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 noncash 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 was $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 expectations, 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 three 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 six 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 of 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 lower receivables base.

On Slide 14, you can see how impactful our 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 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.

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 following 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 Tambar, 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 JP Morgan, 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 four 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 opportune team for their solid execution in Q1 and our ongoing commitment to our recovery and mission. I also want to thank our shareholders for their continuing support and belief and opportunity.

With that, operator, let's open up the line for questions.

(Operator Instructions)

David Scharf, Citizens JMP.

Great. Good afternoon and thanks for taking my questions. Wanted to just dig in a little more into the guide on the expense base by year end, I think you had mentioned you've eliminated about 240 annualized of peak levels. When we look at the fourth quarter run rate, $97 million guide annualized. Based on everything that you're working on, whether it's reigniting secured personal loans or 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?

Yeah. 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. 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 debt with a little bit of growth, we'll be able to generate those results over time. 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.

Got it. Yeah, I was just rounding. And maybe just a follow up on that fourth quarter guide. And I know there's going to be some kind of shared resources. It's harder 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?

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

But I would say, David, this is Raul. 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 some 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 the row, the savings team is going to be a contributor of cash too 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 our team is doing.

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

Sure. Yeah, 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, at 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 10 times 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.

Great. Thanks.

Warehouse renewal.

Thank you, David.

[Matt Sherwood], Jefferies.

Hey, guys. Thanks for taking the question. Just to continue from David's question, are there any balance sheet management actions or modifications to debt payments or any upcoming on balance sheet items in general to highlight?

No, I would say, no.

Okay. And in terms of the STL 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?

We actually disclosed that in the press release. We said that the SBL product at the end of March was $101 million. So obviously, we just relaunched starting last quarter the expansion into additional states. So we certainly expect that will grow over the course of this year.

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

Okay, understood. Thanks very much, guys.

Thank you.

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

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

Thank you.

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.