Q2 2021 Oportun Financial Corp Earnings Call
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Based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
Also on today's call, we will present, both GAAP and non-GAAP financial measures, which we believe can be useful measures for period to period comparisons of our core business and which will provide useful information to investors regarding our financial condition and results of operations.
<unk> stated otherwise all of the metrics share on this call will be out of fair value pro forma basis also since the start of the sheer theres no difference between our GAAP reported metrics and fair value pro forma of.
A full list of definitions and reconciliations can be found in our earnings materials and 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 measures is included in our earnings press release, our second quarter of 2021 financial supplement in the appendix section of the second quarter of 'twenty 'twenty..1 earnings presentation, all of which are available on the Investor Relations website at Investor day at opportune Dot Com and.
In addition, this call is being webcast and an archived version will be available after the call on the Investor relations portion of our website.
With that I will now turn the call over to Raul.
Good afternoon, everyone and thank you for joining US Q2 was another great quarter, demonstrating strong momentum across our business in the quarter, we generated $138 million of total revenue and $17 million of adjusted net income or <unk> 56 of adjusted EPS.
Our aggregate for originations came in at $433 million up 175% year over year and above our initial expectation of $425 million.
Additionally, our growth continues in the third quarter and we saw our portfolio of surpassed for 2019 levels in July.
We are also currently delivering credit performance that is among the best in our 15 year history, our annualized net charge off rate was 6.4% an improvement of 219 basis points relative to last quarter, and 414 basis points better than last year.
Delinquency rates also performed incredibly well with our 30 plus day delinquencies at 2.5% at quarter end.
On the credit trends, we're seeing we are leaning into portfolio of growth in the second half of the year, which is reflected in our increased aggregate originations guidance.
Turning to our strategic objectives, we are making terrific progress, which I'm excited to share with you.
These objectives include building upon the success of our digital first strategy growing and expanding our new product lines and advancing our strategic partnerships.
I'll start with our digital first progress.
Highlighting our strength of the digital lender, our customers' utilization of our online services accelerated yet again in Q2 with 80% of new applicants choosing to apply online up from 59% 1 year ago. Additionally.
Additionally, 79% of all payments were made outside of our stores in the quarter.
Regarding our new product initiatives volumes also continue to accelerate for art secured personal loan product. We ended the second quarter was $13.9 million in secured personal loan receivables up from 0.1 million at the end of Q2, 'twenty and up 160% sequentially.
We rolled out our offering of customers in Florida at the start of July and are already seeing the product gaining significant traction there.
I am pleased to share with you that in July we signed our second lending as the service partner with another large money services business.
We expect to formally announced the partnership in the weeks to come with an initial rollout anticipated in the fourth quarter and the addition of over 100 new locations in the next 12 months.
Turning now to our Medibank partnership I'm excited to share that our digital offering enabled by Medibank is expected to launch in the coming weeks. As a reminder, this will enable us to be fully deployed across approximately 30 additional states by year end, starting with the dozen states this quarter.
Through our partnership with Meadowbank, we will be nearly doubling the size of our addressable market and we will begin marketing simultaneously with our products availability in those states.
Our second quarter results clearly demonstrate that we have returned to growth in our core unsecured personal loan business and that we also have several exciting growth vectors of emerging.
I'll now turn the call over to Jonathan who will walk you through a more in depth discussion of our financial results and provide our outlook for the third quarter and full year.
We will then open the line for your questions Jonathan.
Thanks, Raul and Hello, everyone. We generated excellent results in the second quarter. We grew our portfolio delivered strong profitability and produce strong credit results among our best in the history of the company.
Our aggregate originations were $433 million, reflecting loan demand that has surpassed our historic pre pandemic levels. The.
The impact of stimulus checks dissipated early in the second quarter, while loan application volume in the originations accelerated throughout the quarter and continued through July.
Total revenue was $138 million.
101 basis point increase in the fare value price of our loans to 105.9% as of June 30 based.
Based upon current trends in our loan portfolio. We are now projecting historically strong credit performance.
The 2 million dollar Mark to market increase in our asset back notes resulted from of 28 basis point decrease in the weighted average price to 100.6%.
Turning to expenses operating expense in our personal loan business, excluding certain non recurring charges increased 6 per cent year over year to $92 million as we continue to make technology investments and remain disciplined with other spending.
Operating expenses associated with new products screwed of $10.2 million.
In the second quarter, we also incurred for $9 million of costs associated with our retail network optimization that we noted on our prior call. We do not expect to incur additional material expenses related to the retail network optimization going forward.
Additionally, we recognize $3.3 million of impairment charges on our right of use asset related to our least office space in San Carlos, California, due to our decision to move to a remote first work environment and downsize our corporate office space. We believe we will be able to sublease the space.
Which would generate other non-interest income over the next 5 years starting next year.
Because the optimization, an impairment where nonrecurring events, we've excluded these charges from our non-GAAP metrics.
Our customer acquisition cost was $153 down significantly from $413 in the year ago period.
This decrease was due to a higher loan origination volume, we are continuing to ramp or marketing to fuel our product in partnership growth initiatives and meet increasing customer demand as the economy expense.
Our net income on a gap basis was $7.2 million versus the net loss of 30 for $2 million in the prior year quarter.
This equated to GAAP earnings per diluted share of 24 cents versus the net loss per diluted share of $1.26 cents in the prior year quarter.
On a non-GAAP basis, we delivered adjusted EPS of 56 cents based on adjusted in that income of $17 million versus an adjusted net loss per share of $1.29 and.
And adjusted net loss of $35.1 million and the prior year quarter.
Adjusted EBITDA was $4.5 million compared to for $8 million and the prior year quarter of.
Our investment of new products impacted our adjusted EBITDA by $7.9 million and absent. These investments are adjusted EBITDA would of been $12 for a million dollars.
Total revenue of approximately $152 million.
Adjusted EBITDA between 3 and $5 million adjusted.
Adjusted net income between 12 and $14 million and adjusted earnings per diluted share between <unk> 40 and 46.
For the full year 2021, we are increasing our guidance assumptions are as follows aggregate originations of at least 2.1% to $5 billion.
Total revenue between 602 and $606 million.
Adjusted EBITDA between 7 and $10 million adjust.
Adjusted net income between 55 and $58 million and adjusted earnings per diluted share between $1.83.
And $1.93.
We expect our <unk> annualized net charge off rate to be 6.7% plus or -10 basis points and for the full year, we are lowering our projected rate to 7.4% plus or -10 basis points in.
In summary, we delivered a strong quarter and have a positive outlook for the remainder of the year I will now turn it back over to Raul for some final comments before we open the line for questions.
I am pleased with our second quarter performance and we are on track to achieve all of the strategic priorities, we outlined for 2021.
This is made possible by our hardworking employees, our dedicated partners and the support of our shareholders and I'm grateful for their continued commitment for furthering our mission of financial inclusion.
As our products become increasingly available across the U S. We continue to solidify our position as the leading provider of responsible and affordable credit products. So hard working people.
Thank you and now we welcome your questions and comments operator.
We feel the and the last year, we demonstrated how resilient our business is how strong the tools are and our ability to be flexible and adjust the business as needed and we have.
Now seen really in particular this quarter, our pivot back to growth and that's being driven by the business.
You know that we've had for 15 plus years.
Total Exxon Medibank, we think of as exciting growth opportunities that are on top of that and Dol ex is still early we are thrilled that we're at a 142 locations were ahead of our schedule, we took up our expectations from 150 to 175.
So we're excited about what that's going to be in Meadowbank, we expect to have launch in the coming weeks, but like total that's going to start relatively small and then we'll lean into it and scale it.
So exciting opportunities for future growth, but they are not driving the growth it's the traditional business.
So then we should think about the set of challenges really kind of.
That kind of more contributors to next year's originations then.
That's correct, we think right now not only of Rehabbing, a really good return back to our growth, but we're setting ourselves up really nicely for a strong 2022.
Okay.
And then as the medibank ramps and as the card and auto products ramp.
Is there anything we should see the kind of yield or call. It product margins or does everything kind of fall to pretty much the same type of metrics.
We're going to try to have it all fall back to the same kind of metrics.
We manage the business on a portfolio basis, we want to try to simplify the story as much as we can for our investors.
So we really think about managing margin at kind of a company level and we're going to see everything kind of come back to the same metrics.
Okay, and then final question as we talk more and more about the AI underwriting model I know you guys spent a lot of time developing.
Different enhancements.
I think you do a major 1 every year if I recall, maybe can you talk about the most recent call the developments in the model and how you kind of of how that enhances the overall performance.
Absolutely. So we've had several enhancements to the models in the last year I'll give you a couple of examples as you know historically about half of our customers when they come to US don't have of credit scores. So we've developed the model that we call the <unk> model.
It's all built off of alternative data so none of what feeds that model comes from the credit bureaus or any of those records. So in the last year. We enhanced we created new versions of our Eds models, we created new versions of our marketing models. We created an updated version that we use to drive our collections.
So theres really been work that's taken place across the business and upgraded models for credit card as well that are giving us a lot of confidence to continue to lean into the credit card growth that you saw us describe this quarter. So to your point, there's a lot of work that's taking place behind the scenes to keep improving our tools and upgrading of our models.
Okay. Thanks, very much guys.
Thank you John.
Our next question comes from the line of David Scharf with JMP Securities. Please go ahead.
In our core business, we've been doing of really good job of controlling expense. So we only grew.
Opex and personal loan 6 per cent year over year, and so we're going to certainly we're gonna see a growth in marketing of expense for the core business. We're continuing to see the same seasonal trends that we've seen historically and so we expect increased demand and so there definitely will be increased marketing expense will continue.
To have.
The Saint roughly the same level of new product expense. So from that perspective, I think that gives you a good idea of what opex could look like going for it and obviously we've provided.
Guidance, so you can triangulate around that as well.
Okay, Great and maybe just a follow up.
On the product front.
Can you give some color.
Terms of.
The nature of the customers. The the 54000 act of accounts of credit card and then on the secured side auto.
Or are these primarily.
All of new customers, the opportune, where they you know prior borrowers that you directly marketed to them or they add on borrowers now with 2 products.
The little more flavor in terms of sort of how the Tam is being expanded with respect to the new borrower profile.
David This is where I will there there are 2 parts to that I I love that question the.
The first is we have the thesis and you've heard this before the.
We've got customers that are really really happy with US right. Our net promoter score is you know has been in in the 80 per cent range for years, and we know based on some analysis that we've done in the past that those customers, even if they're really happy with us and of going to another company to get the credit card or to get an auto loan. So 1 of the the theses day.
We have is that we can leverage all of the marketing and we can leverage for application funneled to put other products in that funnel may customers aware of those products and therefore really effectively drive adoption of additional products and the secured personal loan in particular was the first proto.
That we tried to do that with what we put it in the same application funnel as our unsecured.
Personal alone and we're seeing great success in terms of leveraging that funnel. So 1 of the things that you are going to see US do we're gonna do this next with credit card is to try to figure out of how can we create 1 experience for all customers present all of these credit products and then in particular as we think about becoming a bank in the future and having additional products.
Products to help someone save products to help someone spend products to be able to help them even budget over the time, how can we continue to create 1 experience 1 funnel and then presented as many products as possible. So that we can create more diversity in our revenue we can create more products per customer and we can create a longer more profitable life.
But that's that's the extent of the update that I can provide right now.
Got it great well thank you.
Sure. Thank you David Thanks, David.
Our next question comes from the line of Sanjay <unk> with the K B W. Please go ahead.
Thank you guys.
I guess question on consumer behavior in your customers as we're moving past the stimulus and further away from the stimulus proceeds are you guys seeing any changes in behavior, whether it be form of repayment or sort of timing of repayment amounts obviously, you're starting to see some traction on loan growth maybe.
Maybe you could walk us through that thanks.
Yeah. So.
Everything we see makes us really really optimistic so we feel that whether it's on the demand side 1 of the payment curbside Sanjay.
Seeing trends normalize we're seeing things start to look much more of like 2019, So that's really given us the confidence to lean into marketing and to lean into the growth.
<unk> report right, we look at the.
The numbers that have been reported by other firms and we look at the fact that we had the number of loans grow 222% year over year original origination dollars of 175% year over year, and we feel that we're really taking share and showing the differentiation in our business and part of what's given us that confidence and lean.
In that way is we got a lot of confidence in the economy right now and the way the consumer is showing up in all of the curves of normalizing.
Okay.
And then I guess the question on Dol ex I know, it's early days, but anything youre seeing in terms of the cohorts are I mean.
It seems like Theyre performing sort of in line with your expectations and consistent with the rest of your business, but just curious if youre seeing anything in those cohorts.
What we're seeing is exactly what we expected that's a customer that we understand well. So we're seeing credit that looks fantastic we're seeing.
The value proposition both with the partner in terms of the partners' desire also to expand our presence and with the customer that is giving us a lot of confidence that much as the new products are going to present, an opportunity to grow our business even faster in future years, we think lending as the service is going to do that too we've talked in the past about the fact that we.
Like the.
The way the model of structured it's someone else's real estate at someone else's labor. So it is absolutely variable for us and the economics are compelling and we're really excited about the second partner.
We'll announce that formally in the coming weeks.
And as we've said in prior quarters, we also like the way that our overall pipeline is shaping up for lending as the service.
So we're right where we want to be it's Andre in terms of lending of the as the service in fact, we're a bit ahead of plan and Thats why we are ready now to say, we think we're going to end the year with at least the 175 and with this new partner, we would expect to have 100 additional locations.
Over the next year and just to put that in the context, if you will than the combine the say 175 from double ex and then another 100 from the second partner that then creates a distribution network through partners that would be larger than our current store footprint.
So again, just a really exciting opportunity for additional growth.
Right I guess the final question sort of relevant recent topics.
You're seeing a lot of these buy now pay later platform scale and grow.
And I'm just curious if you feel like it touches your customer right.
And the reason I ask is.
There is the concern that youre seeing loan stacking as consumers take on buy now pay later loans from a number of these different platforms and I guess, how much insight do you think you have to the extent that your customers have those types of loans.
Yes. So this is the space we're watching carefully.
And the way that we looked at it today is we don't think it really is the impact in terms of demand for our product. We think that those loans tend to be smaller loans right. The bulk of them still are kind of split for or split into 6.
So it's a very different use case then.
Say someone the borrows from us that is borrowing almost of $3000 on average either because the carbon start they want to combine it with other savings by a new car or medical attention.
The other thing that I think was really interesting in looking at some of the data that's come out about after paying square is.
From what I've read for example, the after pay customer is certainly more affluent than our customer is so we do not think that this represents competition. If anything we think as those players seek to create more.
The more engagement with their customers entre and to be able to take care of the use cases, we think it could present, an opportunity for us per partner with them in the future because we have expertise in underwriting much larger loans that they haven't had the developed yet so we see it as complementary and we see it has the potential opportunity for lending as the service in future.
Yes.
Alright, great. Thank you.
Yeah.
As a reminder to register for a question. Please press the 1 followed by the for on your telephone.
Our next question comes from the line of Rick Shane with Jpmorgan. Please go ahead.
Hey, guys. Thanks for taking my questions. This afternoon.
Look I appreciate the update on guidance and.
I'm curious when you think about the changes to the guidance for the year.
How much of what we saw in the second quarter do you think was basically a pull forward of.
Potential earnings versus.
How much is an upward adjustment and I'm, assuming that the upward adjustments are really a function of the outlook on charge offs more than anything else is that the right way to be looking at it.
Yes, Rick I, certainly as it combines with our fair value calculation. So a great question.
So first of all we took up all of our guidance across the board. So we certainly did pass through elements of.
What we had seen in a strong quarter.
When you take a look at adjusted net income and adjusted EPS, where we had the largest speed that was driven by the 101 basis point reduction in our remaining.
The charge off assumption right. So that's the sort of same mechanics, as allowance and provision and so that does pull forward.
As you suggested.
But given the higher growth.
We are projecting we certainly taken out the other metrics and when you look at adjusted EBITDA.
We've pretty much pass through all of the beat there and.
And likewise taken up our total revenue range and originations.
Got it okay that all makes sense.
If we look historically at the fair value marks on the assets.
Now obviously at a.
High Watermark, if we were to go back to for example to Q4.
2019, when the economic outlook.
Very favorable year now.
Above that.
How is that entirely a function of the cash flow math associated with the.
Lower charge off assumption or is there a mark will.
Weighted to markets in any way that we need to think about as well.
Yes, great question. The vast majority of it is the loss assumption so prior to the pandemic.
We had a remaining cumulative charge off assumption that was in the nines right and so we're now at 7.6% as of June 30, So that's a big difference.
We are in a lower rate environment, we are in a tighter credit the credit spread environment, we benefited from that when we brought asset back transactions to market.
So that does contribute as well, but it's really just operating in a much lower loss environment, so with lower losses, youre going to have more cash flow from the loan and the higher value.
Got it okay, Yes, I did notice there was there was a modest tweak down in your forward swap rates, but again I'm assuming.
And the validated its really a function of that lower NCL rate going forward. Thank you guys very much.
Thanks, Rick.
There are no further questions at this time I will turn the call back over the role of Vazquez, Chief Executive Officer for closing remarks.
I want to thank all of you for joining us today on the call and we absolutely look forward to speaking with you again soon take care of everyone Bye bye.
Thank you that does conclude the conference call for today, we thank you all for your participation and ask that you. Please disconnect your lines.
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