Q1 2021 Oportun Financial Corp Earnings Call
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Good afternoon, and welcome to the opportune financial corporations first quarter of 2021 earnings conference call. All the lines haven't been placed on mute to prevent background noise. After the speaker's remarks, there will be of question and answer session. Today's call is being recorded for opening remarks introductions I liked the turn the call over to the news.
Erdmann VP of Investor Relations Mister early you may begin.
Thanks, and good afternoon, everyone. Joining me today to discuss opportunities first quarter of 2021 results are rolled Vasquez, Chief Executive Officer, and Jonathan Copeland's, 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 related to our business.
Future results of operations and financial position, playing the products and services business strategy 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, particularly given the uncertainties caused by the COVID-19 pandemic and we caution you not the place.
[noise] undo rely on some of these forward looking statements are more detailed discussion of of the risk factors that could cause. These results of the different materially are set forth on our earnings press release and did our filings with the Securities and Exchange Commission under the caption risk factors, including our most recent quarterly report on form 10-Q in our annual report on form 10-K for the year ended December 31st.
2020.
Any forward looking statements that we make on this call of based on assumptions as of today and we undertake no obligation to update the statements as a result of new information or future of events.
Also on today's call, we will present, both gap and non-GAAP financial measures, which we believe can be useful measures for period. The period comparisons of our core business and which will provide useful information to investors regarding our financial condition and results of operation unless stated otherwise all of the matrix share. It on this call will be on a fair value pro forma basis also starting this car.
<unk> there is no difference between our GAAP reported metrics and fair value pro forma a full list of definitions and reconciliations can be found in our earnings materials non-GAAP financial measures of presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. A reconciliation of non-GAAP. The gap measures is included in our earnings press release on.
First quarter of 2021 financial supplement and the appendix section of the first quarter of 2021 earnings presentation, all of which are available on the Investor Relations website at Investor Dot opportune Dot com.
In addition, this call is being webcast in an archived there version will be available after the call on the Investor Relations portion of our website and with that I will now turn on the call over to rubble.
Good afternoon, everyone and thank you for joining us.
We were off to a great start this year and I'm proud of the many of accomplishments, we can point to like the first quarter for.
For financial and operational performance with the continuation of several of trend exiting twenty-twenty as well as progress of that was consistent with the growth initiatives I outlined during our last earnings call.
Well the first quarter of financial results reflect the strength of our business as we generated $135 million of total revenue and $12 million of adjusted net income for 41 sense of the just the EPS.
Aggregate originations with $335 million and we cross the 10 billion dollar Mark in originations in February representing over 4 million loans that we've made the hard working people so far in the 15 year history.
We experienced some impact the demand volume in early January and again in the mid March relating the stimulus payment, but by mid April disbursement and applications, we're realigning with historical trends.
In terms of of credit we delivered favorable results that outperformed our pre pandemic of levels demonstrating the efficacy of of AI driven models as well as signaling the continued U S economic recovery and the benefits of the stimulus.
For the first quarter, our annual like net charge off rate was 8.6 per cent an improvement of 72 basis points relative to last quarter, and 31 basis points better than last year.
Now let me tell you about how we are innovating to grow our business and address marketing.
Specifically I will share of the progress we are making on our digital first strategy new products and our strategic partnerships.
Let me start with the digital per strategy, which I emphasized on our last ratings call because of all the investment in digital capabilities gives us a path for continued growth in a more capital of efficient manner.
Gross trends in the first quarter continued to show our customers increasing utilization of her on line services.
The Q1 68 per cent of new applicants chose to apply on line up from 51 per cent one year ago.
Additionally, 76 per cent of all payments were made outside of our stories, whereas the figure was 62 per cent one year ago.
We successfully completed or retail network consolidation prior to the end of the first quarter and I'm pleased to report that we accomplish this with minimal impact for loans production.
Cause I already have mentioned, we will utilize the portion of the cost savings from this effort to further enhance our AI driven digital platform and accelerate our digital gross.
This reinvestment will focus on providing our customers with even more choices flexibility and new digital experiencing.
Regarding our new product initiatives, we set two consecutive disbursement milestones with her secured personal loan product in February and March and volume continues to accelerate.
We ended the first quarter with $5.4 million insecure of personal loan receivables, representing 170 per cent quarter over quarter gross.
We are seeing dramatic increases in demand for S. B L as well as overall engagement levels of that show the product is gaining traction with our customers.
This is encouraging on several levels both in terms of the product market for it as well as the economics for the S. P L.
Compared to our unsecured personal loans the average S. P. L alone is roughly twice the size and 30, plus the day delinquencies are lower.
We are preparing to roll R. S. P O offering to customers in Florida in the next few weeks with the Texas market following in the third quarter.
That's momentum continues to build for S. B O product I'm confident that of a portfolio is on track to reach our goal of $40 million by year at.
Credit card is also executing the according to plan and we continued on geographic expansion of cross the U S and are now in 43 states as of today and.
In the first quarter credit card receivables group 276 per cent year over year for $8.2 million and we brought her active customer accounts to over 25000.
In summary of credit card portfolio of striking well to the our objective of growing to $50 million by the end of the year.
Third and finally, we expect the significantly expand our services and our geographic footprint with partners like total ex amount of bank of.
Partnership with the whole like is the initial application of of lending as the service offering and the Q1, we launched in 28 of the 150 Dole ex locations that are planned for 2021.
During the month of April we brought this count up to 71.
We are already and all of the dough likes locations in Florida, and we expect of open and all remaining locations in Texas thinking about Dolak store count to over 100 by the end of the second quarter.
On a partnership with Medibank will enable us to connect with potential personal loan customers and over 30, additional steak or soft launch across the digital channels will be getting a dozen states in the second half of the year and on aim is to be fully deployed across all of the remaining states on your end.
With Medibank, we will unlock incremental gross by bringing our best in class AI, driven marketing and underwriting capability to more customers across the U S. Nearly gobbling besides the barn addressable market.
We are currently building operational integrations with medibank and designing the customer experiences into a mobile and online channels as we get closer to lunch.
These partnerships enabled new experiences for our customers and help to expand the opportune mission and brand across the new channels the market places.
We are building platform integrations with Telework and operational integrations with that of bank and we expect to add new lending as of service partners throughout 2021.
Oh, the aspiration is to be the digital first lending platform of choice for retail partners and consumers, bringing financial inclusion to millions more hard working people.
We remain steadfast in a mission and that's a testament to that we've recently released on 2020 corporate and social responsibility report.
Lighting of the progress, we've made and driving social impact supporting the communities, we sort of and managing our environmental footprint.
The report outline to of priorities on the east important issues and illustrates that we live on mission inside the company as well as outside.
This includes our diverse workforce for the majority of our employees along with every level of management from frontline Supervisors to the board of directors identify as women for people of color.
I am proud of the report the positive impact we've had on the communities we serve and the company we have built.
At April as anticipated and already loan application volume and originations have accelerated.
Total revenue was $135 $3 million down 17% year over year, reflecting lower receivables due to reduced originations during 2020.
This was comprised of $127 $2 million of interest income and $8 $1 million of noninterest income.
As our originations continued to rebound, we expect to see growth in our portfolio, which will drive growth in total revenue.
Net revenue was $110 $2 million up 19% year over year.
Net revenue improved from the prior year due to lower charge offs, and our improved charge off outlook, which increased the fair value of our loans.
Interest expense of $13 $5 million was down 15% year over year, driven by a decrease in our average daily debt balance of 9% year over year and also driven by the decrease in our cost of debt to three 9% versus for 2% in the year ago period as we began.
On to refinance over $950 million of our asset backed notes that we can call this year and take advantage of favorable interest rates and market conditions.
For our net change in fair value as Youll see on our earnings deck, we have an $11 $6 million net decrease in fair value, which consisted of a $23 million mark to market net increase in our loans in our debt and current period charge offs of $34 $6 million.
For the Mark to market $21 6 million of the increase was driven by the reduction of our life of loan charge offs from 10.0% at the end of the fourth quarter to eight 6% at the end of the first quarter, which was the primary driver of the 143 basis point increase.
On our fair value price of our loans to 104, 9% as of March 31 based upon current trends in our loan portfolio. We are now projecting better credit performance than before the pandemic.
The one $5 million Mark to market increase in our asset backed notes resulted from a 26 basis point decrease in the weighted average price of our asset backed notes during the quarter the 109% as our older deals approach their call dates.
Turning to expenses operating expense in our personal loan business, excluding certain nonrecurring charges declined 3% year over year to 91 $5 million as we better leverage technology investments and disciplined with other spending.
Operating expenses associated with new products grew year over year by $2 7 million to $6 $9 million.
In the first quarter, we also incurred $7 $8 million of costs associated with our retail network optimization as of March 31, we had completed the closure of 136 retail locations and reduced our workforce through managed and operated those locations.
Cause of the closures were of nonrecurring event, we have excluded this charge from our non-GAAP metrics, we estimate remaining optimization of expense of $4 $7 million to be recognized in the second quarter as we vacate the closed retail locations.
Our customer acquisition cost was $208 up from $170 in the year ago period.
This increase was due to the lower loan origination volume, partially attributable to the stimulus impact on.
Also as we mentioned during our previous earnings call, we are ramping up our marketing to fuel our product and partnership growth initiatives.
Our net income on a GAAP basis was $3 million versus the net loss of $13 3 million in the prior year quarter.
This equated to GAAP earnings per diluted share of <unk> 10 versus the net loss per diluted share of <unk> 49 in the prior year quarter.
On a non-GAAP basis, we delivered adjusted EPS of <unk> 41 based on adjusted net income of $12 2 million.
Versus an adjusted net loss per share of <unk>, <unk> and adjusted net loss of $1 2 million in the prior year quarter.
Adjusted EBITDA was negative $2 3 million versus positive $17 9 million in the prior year quarter, our investment in new products impacted our EBITDA by $5 $9 million as illustrated in our first quarter earnings deck and absent. These investments our EBITDA would have been a pause.
<unk> $3 6 million.
Adjusted return on equity was 10, 6% versus minus 1% in the prior year quarter.
Turning now to credit our first quarter results were better than our performance pre pandemic.
Our annualized net charge off rate was eight 6%, a 31 basis point improvement versus the prior year period.
And at March 31, our 30, plus day delinquency rate was 3.0% 82 basis points lower than the prior year period, the strength of our credit performance gives us great confidence in our growth outlook for 2021 and beyond.
Regarding our capital on liquidity as of March 31, total cash was $183 $2 million.
Our debt to equity ratio was 3.0 times, and we had $335 million of Undrawn capacity on our $400 million warehouse line.
During the quarter, we took advantage of of favorable credit market issuing $375 million of.
Of two year fixed rate asset backed notes the notes were priced at a weighted average interest rate of 179%, representing our lowest cost of funds to date.
And just last week, we priced another securitization, which was our largest bond deal ever with $500 million of three year fixed rate notes. The deal is expected to close next week is our first ABS deal were secured personal loans are included as eligible collateral. The transaction also provides.
Ability and funding for our other key growth initiatives the transaction priced at a weighted average interest rate of 2.5%.
Looking ahead to the second quarter and the remainder of 2021, our originations and credit trends are showing sequential improvement.
We expect our normalized credit trends to carry forward into the second quarter as the stimulus impact abates and demand resumes following seasonal trends, we expect the continuing economic recovery will shape. Our 2021 performance with that context, we are now on a position to reinstitute our forward looking guidance.
Our outlook for the second quarter is aggregate originations of approximately $425 million total revenue of approximately $135 million.
The adjusted EBITDA between minus two and minus $1 million.
Adjusted net income between one and $2 million and adjusted earnings per diluted share between $3 <unk>.
For the full year 2021 aggregate originations of at least $2 $1 billion.
Total revenue between 600 and $605 million.
Adjusted EBITDA between zero and $5 million.
The adjusted net income between 50% and $54 million and adjusted earnings per diluted share between $1 69, and $1 82.
We expect our <unk> annualized net charge off rate to be six 8% plus or minus 10 basis points and for the full year, our projected rate of seven 6% plus or minus 15 basis points.
In summary, our first quarter results set us up well for a strong 2021 as we continued to execute on our strategic initiatives for sustainable growth, which will deliver attractive returns for our shareholders with that I will now turn it back over drought.
In closing I want to thank all of our employees, our customers and our partners for a great quarter.
<unk> is off to a great start this year and we remain confident of the goals we have outlined for 2021.
We will continue operating in a disciplined manner and pushing technological innovation to accelerate growth produce excellent credit outcomes.
And deliver shareholder value all while maintaining our principled approach to furthering our mission.
Thank you and now we welcome your questions and comments operator.
Thank you and at this time, we'll be conducting a question and answer session. If you'd like to ask the question. Please press star one on your telephone keypad.
<unk> tone will indicate your line is on the question queue.
You May press Star two if you would like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star of keys.
One moment, please while we poll for questions.
Our first question is from Sanjay <unk> with <unk>. Please proceed with your question.
Thank you.
Had a question on the.
The store closure than sort of the ongoing benefit to expenses or the ongoing run rate of expenses any color you could provide there.
Hey, Sean J Jonathan.
Yes.
What we had disclosed last quarter was we expected that we would have $19 million of annual savings.
And we continue to expect that.
And.
What we also shed was debt for this year in 2021.
Would use the portion of that $19 million that falls into this year, we'd reinvest that in our technology and AI initiatives.
Okay.
When we think about the wide range of 30. Thanks, I mean are you guys seeing an opportunity to potentially.
<unk> is even more or is this it for now.
Sanjay This is where I will I would say that's that's it for now.
I'm really proud of the way that the group executed the current store closures, we mentioned in our comments that we haven't really seen any impact at all from the closure of the stores. So right now we're really focused on the gross elements of the business. You may have seen if you look at on originations guidance on a year over year basis.
It's 169% higher than last year. So we feel like we've done what we wanted to do with the store closures and now we're going to focus really on on getting the business back to the really healthy growth rates, we've seen in the past.
Absolutely.
Just final question you guys mentioned, the better credit trends relative to pre pandemic levels.
Maybe you guys could speak to sort of what's driving that obviously you guys have been very prudent from an underwriting standpoint, but what do you consider of leaning into growth as a result or is it too early to do that.
We are absolutely leaning into growth. So we think the drivers where certainly the prudence as you pointed out debt.
But we demonstrated in the last 12 months and we shared in prior earnings calls what our first payment defaults look like so we felt like we made the right decision number two we've also talked about all of the innovation that took place last year and in particular some of the ways that we innovated in terms of being able to contact customers.
Kind of become delinquent because of our number one objective anytime someone becomes delinquent is to understand sort of get in touch with the customer understand what happened and then figure out the right approach to health net customers get back on track.
So of right part right party contact rates for example, right now of really high because of the innovation and all the different ways that we're reaching out to customers and making it easy for them to get in touch with us.
So as we look at what our delinquency numbers look like and we think about the strength of the economy. The.
The strengthening economy.
We're really really leaning into growth as you've described.
Okay wonderful thank you.
Thank you.
Yeah.
Okay.
And again as a reminder, if anyone asking the questions you May press star one on your telephone keypad. Our next question is from John Hecht.
Jeffrey.
Please proceed with your question.
Afternoon, guys. Thanks for taking my questions.
The first one is Q2.
<unk> given some good.
The detailed guidance around that.
And you may or may not be able to answer. This question, but can you give us a sense for like what were you commented on fair value marks and or new product expenses in that period or or can you just give us maybe say that day.
It may look similar to Q1 or any framing there for us.
Yes, that's of Great question John on.
Obviously, we've we've given origination guidance, we've given revenue guidance, we've given the bottom line as well.
Sure.
Fair value right.
The short end of the curve the interest rate environment.
And the credit spread environment remains favorable.
So we're not necessarily expecting anything.
And then.
From an opex standpoint.
We're continuing to invest and grow our business right as we called out.
On the travel and INR remarks, right, we're obviously growing our.
Our new initiatives.
The secured personal loan and credit card.
And.
With healthy growth on.
Opportunities in front of US, we will certainly be increasing marketing commensurate with that.
Okay, and that's all within the kind of exited the guidance. We provided sorry go ahead revenue.
But I was just going to add a little bit for that John if you'll permit me on page seven of the earnings presentation. One of the things. We really did this time was to unpack, what's happening with personal loan operating expense versus new product expenses. So one of the things. We wanted to highlight there was just we are being very disciplined on the personal loan side.
You saw that that was down 3% year over year the.
On new products.
We're super pleased with the gross you may have seen right, we share that quarter over quarter gross in secured personal loans was 170% year over year growth because of credit card now we can comp to prior year was 276%.
Gross so we're really pleased with product market fit the way that the customers responding to the offering and thats part of whats driving the gross and overall expenses because you saw that new products are up 64% year over year and that's what you should expect from us going forward, we'll keeping discipline of the personal loan side, obviously as the.
Economy strengthens we're going to invest more on marketing as Jonathan just described but in new product expenses, we don't want to be Penny wise pound foolish. We think we're seeing really great traction of these products and we want to drive that growth there as well.
Okay. That's good color.
Looking at the the year guidance, and then thinking about Q1 and Q2 of <unk>.
What you provided and what we know it really looks like you have got a big ramp acceleration.
Of all of all of the factors that drive revenues in growth to support on the second half of the year I am wondering.
How much of that is predicated upon the reopening of the economy that a lot of people are just expecting to happen in driver.
Drive low demand and how much of that is.
Tied to the growth initiatives that are just the distinct from the economic reopening.
If we're definitely warehouse.
It's definitely boats on so.
In the first quarter and even part of the second quarter, we held back on marketing investment we knew that the stimulus was going to dampen demand and I think that's been the story that everyone as mentioned industry wide, but as Jonathan and I. Both mentioned during our comments what we saw was about the middle of April we started to see of return.
To the normal trends from a demand perspective.
And that means that we're really leaning into all of the marketing elements now that we think the customer is also on a better place as the economy gets stronger. So there is certainly an element of that at the same time in particular, if you look at originations because as a reminder, right in our business in particular since we keep the loans on our balance sheet, we earn.
The interest income the.
Revenue lags the originations when we think about the drivers of originations. It is also on the growth initiatives that you asked about so one of the things that we're very excited about is our partnership with Medibank debt. We expect to have the soft launch of that in about the middle of the year, We will start with 12 states it'll be digital one.
And then by the end of the year, we would expect to be on all 30 States and then the new products are certainly going to ramp we've talked in secured personal loans, how Florida and Texas are on our roadmap for the next quarter or so.
And then credit card is already in the 40 plus states. So as we continue to see good credit reads, there, that's giving us more and more confidence too.
And really drive growth again through marketing and be able to have that $50 million of portfolio by the end of the year. So the growth initiatives are definitely a big part of our end of year guidance.
Okay, great. Thanks, guys.
Yeah.
Thank you.
And again on another quick reminder, if you have any questions you May press star one on your telephone keypad.
Our next question comes from the line of Melissa for them.
Letter with Jpmorgan. Please proceed with your question.
Hey, guys its actually Rick Shane I got dropped off and on dialed in on the list those line.
And I may have missed this in response to John's question again, I was off the line, but when we look at the guidance.
The context of first quarter results.
Top line is pretty similar EBITDA guidance is pretty similar to where you were.
Which suggests that there is some of <unk>.
Adjusting item debt is not recurring in the second quarter debt in the first explain the differential the.
Adjusting items are stock comp and.
The adjustments for a clue.
Closing the branches.
The implication and please tell me if im drawing the wrong conclusion is that in the second quarter expenses will be elevated basically on a GAAP basis comparable to the first quarter. The difference is that it's really investment as opposed to closing branches.
Okay.
Yeah, Rick I think the way Youre thinking about that is generally on the right direction that we do plan to increase the level of investment.
In the second he got it right and Thats non core at all of the things where I was describing just a moment ago in answer to John <unk> question about the growth opportunities in the new products as well as other things.
Perfect and when we think about it will that run because you guys have talked about both technology investment, which I know you expense as opposed to generally speaking capitalize and marketing how should we think about the allocation between the two because I know the strategy or the the plan is to reinvest.
A chunk of the $19 million of savings in the technology, but it sounds like theres going to be a pretty significant ramp in marketing as well.
Sure. So it's going to be both what we're expecting to see and this is implied from our originations guidance, which we've provided for the first time here.
Is a return to the seasonality in our business trends, which will then be amplified by the economic recovery.
And so in order to capture that opportunity and better serve customers will certainly the.
The expanding marketing and that's also true not just in personal loans now, but also with the new products. So it's the combination of those two things.
Got it written anything all of these this is raul.
If I could just because I like the question, you're asking and I think it gives us an opportunity to provide the clarity.
There are just expenses that are tied to the higher applications that are tied to higher marketing right. So we're certainly going to see higher AWS expenses, we're going to see higher at processing and credit report expenses.
As we are.
Our employee base is getting vaccinated, we're looking forward now to having some of our retail leaders visit our locations. We're looking forward to bringing our leadership team together. So there is going to be higher <unk> than what you saw at the beginning of the year.
There is also one of the comments that Jonathan showed was the fact that.
We price the securitization we are really excited about it it's $500 million you see the interest was two 5% so a big win from Jonathan and his team. There are deal fees that are going to hit this quarter. So there are elements that are one offs like the avs piece and then there are some other things that may not.
Seem obvious but are also tied to this returned the growth that we're really focused on.
That's helpful and I was actually wondering if there were some deal expenses in there as well given the size of that transaction and I guess, what's the other differences debt, whereas last quarter was the quarter, where balances were declining this is going to be a quarter, where end of period balances are likely to be up substantially.
Yeah based on our origination guidance you would you could certainly in for that.
Got it okay. Thank you guys very much.
Thank you Rick.
Yeah.
And it looks like we have reached the end of the question and answer session on now I'll turn the call over to all the <unk> for closing remarks.
Well I want to thank everyone for joining us on today's call and we look forward to speaking with you again soon thank you for everyone.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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