Q3 2021 Oportun Financial Corp Earnings Call
Greetings welcome to the opportune financial third quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
Justin and answer session will follow the formal presentation.
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Please note. This conference is being recorded I will now turn the conference over to your host milk Erdmann. Thank you you may begin.
Thanks, and good afternoon, everyone. Joining me today to discuss opportunities third quarter 2021 results are role Vasquez, Chief Executive Officer, and Jonathan Cobalts, Chief Financial Officer, and Chief administrative officer.
Oh remind everyone on the call or like us, but some of the remarks made today will include forward looking statements related to our business future results of operations and financial position when products and services is the strategy and plans and objectives of management for our future operations.
Actual results may differ materially from those contemplated or applied 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 ended our filings with the Securities and Exchange Commission under the couch and 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 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 is required by law.
Also on today's call, we will present, both gap 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 operation.
Unless stated otherwise all of the metrics shared on this call will be on a fair value pro forma basis also since it started this year. There was no difference between our gap reported metrics and fair value perform.
A full list of definitions and reconciliations can be found at our earnings materials available at the Investor Relations section on our website.
Non-GAAP financial measures are presented in addition to you and not a substitute for financial measures calculated in accordance with that.
A reconciliation of non-GAAP to get measures is included in our earnings press release, our third quarter of 2021 financial supplement and the appendix section of the third quarter of 2021 earnings presentation, all of which are available at the Investor Relations section of our web site at Investor Dot Opportune Dot com.
In addition, this call is being webcast in an archived version will be available after the call.
With that I will now turn the call over to rebel.
Good afternoon, everyone and thank you for joining us.
I'm happy to share they chew three was another great quarter for the operator.
We delivered strong year over year growth for all of our products are historically low net charge off rate.
[noise] tenured disciplined expense management and growing profitability.
In the quarter, we generated $159 million of total revenue and $24 million of adjusted net income or 78 cents of adjusted N. P. S.
Or aggregate originations, where $662 million up 119% year over year, and well ahead of our expectation of 600 million.
This was our second consecutive quarter of triple digit year over year originations gross.
Demand for our products now exceeds at a level of growth that we were experiencing prepandemic.
While we continue to lean into gross we're also delivering the best credit performance in our 15 year history are annualize that charge off rate for Q3 was 5.5% an improvement of 100 basis points relative to last quarter, and 498 basis points better than last year.
Delinquency rates also performed incredibly well with those 30, plus day delinquencies at 2.8% a quarter and.
I would now like to turn to the strategic objectives that I laid out at the beginning of the year and which also serve as some of our key performance measures.
First we continue to build on the success of our digital first strategy.
We are scaling our new product lines and investing in our multi product offering.
Third we've accelerated our expansion across the nation through our bank partnership with matter Bank and fourth we are advancing are lending is a service partnerships initiatives.
I'll touch on each of these in turn starting with the continued progress of our digital first initiatives.
Our customers utilization of our online services accelerated yet again in Q3 with 83 per cent of new applicants choosing to apply online up from 63 and one year ago.
This digital first progress has also supported our objective to grow and brought in our customer base.
In Q3 are active customers grew 24% year over year to 772361, and the percentage of new applicants choosing servicing an English reached 82% as compared to 60 per cent and Chew 320 20.
Turning to our new products initiatives for our secured personal loan product. We ended the third quarter with $29.6 million in receivables up 113% sequentially and substantially above last year's level of zero point $3 million.
We rolled out are offering to customers in Texas or second largest market in late September and it was gratifying to see the product king immediate traction industry momentum accelerate throughout the month of October.
As of the end of Q3 R. S. P. O portfolio was tracking well ahead of our target and I'm pleased to share that we are increasing our year end receivables school from $40 million to $50 million.
We also saw excellent progress from my credit card product.
The card receivables nearly doubled sequentially and grew 1094% year over year to $38.2 million and are tracking very well to meet our year end goal of $50 million.
As of the end of October we have over 94705 active customer accounts in 45 states across the U S.
Third.
Through her Medibank partnership we have now expanded our unsecured personal loan product offering to 23, new states, bringing our footprint to 35 states.
The results of this rollout have exceeded our expectations and in the past month, we've effectively increased or addressable market by over 75 per cent.
A partnership with Medibank enables us to reach 50 million more hard working people in the coming years and we plan to continue our state expansion in the months to come.
Finally, let me turn to a lending as a service partnerships a platform is scaled rapidly with all Lex and expanded to 208 locations at the end of October having exceeded our updated here and objective of over 200 locations.
We also recently announced the launch of our lending is a service offering and 21 locations with part of your financial group or second lending is a service partner.
We expect our loans to gradually be made available and over 200, Bari store locations across Texas and over time to extend to baris locations in other states.
In addition, we continue to explore additional relationships across multiple vertical and expect to announce further new partnerships in the months to come.
In closing the strength of our AIG driven digital platform is enabling us to lean into growth and take market share.
As demonstrated by your progress and results. This quarter. We are also successfully delivering on our strategy to extend our multi product offerings across the U S, becoming a national brand for inclusive affordable financial products.
I'll now turn the call over to Jonathan who will walk you through a more in depth discussion of our financial results and provider outlook for the fourth quarter and full year. We will then open the line or your questions.
Jonathan.
Thanks, and good afternoon, everyone. We generated excellent results in the third quarter largely due to our performance across all of the growth initiatives that Royal mansion.
In addition continued enhancements to our a I enabled marketing and underwriting capabilities resulted in the best credit outcomes, and our 15 year history and another quarter a strong profitability.
For the quarter, our aggregate originations, where $662 million up 53% sequentially and reflecting loan growth that has surpassed our historic prepandemic levels.
Loan application volume and originations were strong throughout the quarter and we continued to see excellent and Anthro October.
We now have 813536 active customers and are managed receivables balance at the end of October was $2.29 billion, which was the highest level in our history.
Total revenue was $159 million up 16% year over year, reflecting higher receivables due to increased originations.
Total revenue was comprised of $145 million of interest income on $14 million of noninterest income.
As we continue to ramp up origination volume across all our products, we expect to see further growth in our portfolio, which will drive additional growth and total revenue.
That revenue was $140 million up 51% year over a year.
Net revenue improved from the prior year due to higher total revenue lower interest expense and lower charge offs.
Interest expense of $10.6 million was down 20% year over year, primarily driven by the decrease in our cost of that to 2.8% versus 3.9% in the year ago period, as we have issued $1.4 billion with asset backed notes. Thus far this year at a weighted average interest rate of.
2.1% refinancing are more expensive prior securitizations.
We also negotiated a lower cost of funds are new warehouse line of credit.
Barnett change in fair value, we had a 9 million dollar net decrease in fair value, which consisted of a 14.6 million dollar mark to market net increase on our lunch and our debt and current period charge offs of $23.9 million.
[noise] for the Mark to market, our life alone charge offs decline six basis points to 7.5% at the end of the third quarter resulted in the fair value price of our loans staying consistent at one O 5.9% as of September 30th.
The point 7 million dollar Mark to market increase in our asset back Noach resulted from a 16 basis point increase in the weighted average price to 100.7 per cent.
Turning to expenses.
Operating expense in our personal loan business, excluding certain non-recurring charges.
Increased 10% year over year to $96.7 million, primarily driven by our increased investment in marketing to drive growth and increase our market share as well as initiatives to further enhance our technology operating expenses associated with new products grew to 14.6.
Million dollars are.
Our customer acquisition cost was $152 down significantly from $207 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 expanse.
Our net income was $23 million versus a net loss of $6 million in the prior year quarter. This equated to earnings per diluted share of 75 cents versus an that lost per diluted share of 22 cents in the prior year quarter.
On a non-GAAP basis, we delivered adjusted net income of $23.8 million versus $4.2 million in the prior year quarter and adjusted E. P. S of 78 cents versus 15 cents respectively.
Adjusted EBITDA was $18.1 million compared to negative $1.2 million in the prior year quarter.
A gesture to return on equity was 19% versus 3.7% in the prior year quarter.
Turning now to credit or third quarter results continue to be among the strongest credit performance in our history or.
Our annualize that charge off rate was 5.5% a 498 basis for an improvement versus the prior year period, and it's September 30, or 30, plus stay delinquency rate was 2.8% 71 basis points better than the prior year period.
Both matrix demonstrates the efficacy of our a I driven models as well as signaling the continued U S economic recovery.
Regarding our capital and liquidity as of September 30, total cash was $224 million our debt to equity ratio was 3.3 times and 71 million of our 600 million dollar Wearhouse fine was undrawn and available and.
In October we repaid our warehouse line, making it available to fund future growth by taking advantage of the favorable credit market and issuing $500 million a three year fixed rate asset back notes the notes reprise through the weighted average interest rate of 2.48%.
Looking ahead to the fourth quarter, we expect our strong credit and the rebounding economy will enable us to continue to whoever strong performance.
Our outlook for the fourth quarter is aggregate originations of approximately $800 million.
Total revenue of between 183 and $185 million.
Adjusted EBITDA between eight and $10 million adjust.
Adjusted net income between 20 and $22 million and adjusted earnings per diluted share between 66 cents and 73 cents.
For the full year 2021, we are increasing our guidance as follows.
Aggregate originations is at least $2.23 billion.
Total revenue between 616 and $618 million Ah.
Adjusted EBITDA between 31 and $33 million would.
Adjusted net income between 73, and $75 million and adjusted earnings per diluted share between $2.42 and $2.49.
We expect our four Q annualize that charge off rate to be 7.3%, plus or minus 10 basis points and for the full year, we are lowering our projected rate to 7.1% plus or minus 10 days just points as our guidance implies we expect neck charge offs to show a.
Modest seasonal increase that we typically see in queue for while continuing to remain below prepandemic levels.
In summary, we delivered another strong quarter and have a very positive outlook for the remainder of the year. We continue to focus on the strategic objectives that Raul highlighted and on delivering growth at attractive returns, while generating value for our shareholders.
With that I will now turn it back over to Raul for some final comments before we open the line for questions.
Thanks to Jonathan and before we open the line for your questions I want to take a moment to highlight the positive social impact that opportune continues to make in the communities we serve.
According to a recent financial Health network study that we commissioned alternative lending products available to people with little or no credit history on average cost six times as much as an opportune loan and more specifically online installment loans can be 24 times that's expensive.
I am proud of the savings we create for our customers and as of September 30th we have helped more than 2 million people saved more than $2 billion in aggregate interest and fees.
In closing I am very pleased with our third quarter performance and we were on track to deliver on the strategic priorities, we outlined for 2021.
We're capitalizing upon the significant opportunities to bring our products and services to a broader base of hardworking people, thereby furthering our mission and generating sustainable profitability.
Thank you and now we welcome your questions and comments operator.
Thank you.
At this time really be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from the line of Mark Devreese with Barclays. Please proceed with your question.
[noise]. Thanks could you just discuss kind of be I'll look for credit into 2022 economy, probably continues to be you know a tailwind, but then you lose some of the you know some of the the non-recurring benefits from stimulus of it undoubtedly help.
Yeah, Mark this is where I will so we're certainly not giving guidance for 2022, but hopefully what you see both in our Q3 in our queue for performance is that we're feeling great about the business just to provide a bit of context, if you'd looked at the implied guidance from hue to for the fourth.
Quarter, it would've been seven seven per cent and we're guiding the 7.3, plus or minus 10 basis points just to put that in a comparison. If we look at the Prepandemic numbers of 2018, and 2019 2018 with 8.1% 2019 with 9% in the fourth quarter of those years. So certainly like you said the.
Stimulus efforts have helped but we think a lot of this is being driven by the AI driven capabilities that if you look at our performance over the last year or two we think we've absolutely demonstrated the superiority of looking at alternative data and the investments that we've made so we're going into 2022, feeling really good about the way that we're executing and how credit looks.
Okay, and then just turning to your your living as a service partners could you give us a little bit you know more context around the new partnership.
You know how big you can.
Expect that to get in and I think you mentioned that you got some others you're working on.
You know.
How expensive could this get in and and what impact might just have it fatty I'm kind of your plans you might've had to to open some of your own locations.
So what we're really excited about lending is a service from a mission perspective, we think of it as a way to be able to serve customers that may not be aware of opportune or what did you think of coming to us directly on one of our panels from a business perspective. It is a fantastic way to leverage the ITU the software that we've already bill in a way that's accretive.
Because there's very little marginal cost for us to deploy the software and we're leveraging the physical investment that no like somebody made we are leveraging the labor that they're paying for and as a reminder, we only pay when alone actually takes place. So it's still very early innings, but to be over 200 locations.
With <unk>. So we we've already surpassed our goal for the year and how 21 locations with party and we know that we can get through over 200 with them in the next year across a few states.
We're really excited Mark it's still early innings, we feel that this is still the first standing but the conversations that we're having with other companies some of them digital not the physical kind of format that we've had success with so far and some another vertical not necessarily in the money service business really lead us to believe that this is gonna be.
A valuable growth factor for us in the future.
Okay and have you in U S. Yeah, you asked about one last part in terms of our our own physical for Britain, we like right now the combination of the channels all of our channels grew kroger quarter over quarter and year over year. So we think that the interplay right now and the combination for the channels is working well you.
You've known as for Awhile. So you know that we're constantly looking at how can we optimize the network and we'll keep doing that but we we think things are working really well right now both in terms of our own channels and this lending is a service.
Got it that's helpful. Thank you thank.
Thank you Mark.
Our next question comes on the line of Sundays to Cry any with K B W. Please proceed with your question.
Thanks does that taste steam o'clock gently into Sanjay thanks for taking my question.
That's the first one I had was just around low growth do you guys have seen a nice rebound and lonely origination to your now about Prepandemic levels can you just talk about the demand where you see the the low income coming from and how we should think about.
The originations as we head into 2022.
Yep, Steven Nice to hear from you, we think where the demand we're seeing right now clearly, it's an indication of the economic recovery, but we think it's even more than that over the last few years, we've invested in our digital channels and your sauce sure. Once again that now 83 per cent of new applicants for choosing to apply online compared to 63 P.
<unk> Ah last year, we also dropped their prices to 36% all in so we think that the gap in terms of how much cheaper our product is relative to others is getting bigger and you heard me at the end of the comments close with the fact that the updated study from the financial Health network shows that our product on average is.
Uhm, one sixth of the cost right and online installment online only installment is 24 times more expensive when you look in interest and fees. So we think we've got a better product we're investing more in marketing. So that customers are aware that we exist. We've expanded the geographic footprint. So that now we're reaching people that we weren't reaching.
A year ago, and we're doing it with a better combination of channels a streamlined experiencing mogul uhm. So we think all of those things along with the improvement in the economy or helping and we do feel really good not just about guidance, but to your point, we feel really good about what originations could look like in 22 and did you know revenue.
Trails origination. So we think we're setting ourselves up very well for 2022 and potentially the year after that as we keep leaning into channels geographic expansion and also diversifying and broadening our customer base you saw on slide six of our earnings that 82% of new customers are asking to be serviced in.
<unk> so as we're expanding our geographic footprint, we're also broadening the customer base and appealing to even more customers.
Got it that that's helpful and I have a follow up on the the bank charter and you guys voluntarily puts true the application Uhm just wanted to see if there's an update on when there's a possible submission and then given the success that you see on the lending is a service side is it really.
A need for the a bank charter.
So in terms of the bank charter just to remind people why why that was something that was of such interest to us and continues to be just to be clear number one the success that we're having right now offering multiple products really gives us confidence that we can meet more of the needs of our customers.
So first and foremost becoming a bank to US was of interest because from a mission perspective, we know we're helping customers with their borrowing needs, but we want to help them save we want to help them spend we want to help them budget over time, we want to help them invest and create wealth and being a bank is certainly one of the ways to be able to offer all of those additional products.
And it's very consistent we think now with leveraging the strengths that we've demonstrated with purpose secured personal loan and credit card growth that you've seen us deliver so we feel there an underlying set of capabilities now that we've demonstrated in that we keep enhancing that we're gonna be able to apply to those additional products. So that's one reason number two we think it.
Can allow us to go ahead and expand into a few more states that would allow us to really have that broad nationwide footprints. So that continues to be of appeal to us and then certainly working with an agency like the O C. C from a regulatory perspective is also appealing.
We continue to be committed to the idea of offering those additional products broadening our geographic footprint in all our conversations with the O T. C. We thought were constructive we don't have an update right now on when we would submit again, there's work where you have to do on the application and the business plan to reflect this business that we have today, which is very.
Different than what we described a year ago, but again, we really want to offer those products and we want to have a longer more meaningful relationship with our customers.
Thanks for taking my questions.
Thank you.
Our next question comes from the line of John Heck with Jeffrey. Please proceed with your question.
Afternoon, guys. Thanks for taking my questions and clearly you're opening up a lot of new channels.
At your originations grew quite a bit.
Yeah. It's my assumption is because it's new channels and get originations wrote that there's probably more new customers and I'm wondering like in terms of the total Richard new customers as a percentage of total originations I'm wondering is that true and if so can you kind of remind us how many new customers become recurring so we can just sort of get a sense for what these.
New cohorts might add of 2022.
So John you're absolutely right given the fact that we've increased our footprint. We are seeing certainly more new customers that we were seeing last year last year. During the pandemic is part of our efforts to make it through and to really thrive through that period. One of the things that we did was we focus more on repeat customers. We've now.
Starting to get back to more of our historical mix of of new versus returning but because of the incremental states right. We've added twenty-three state through the medibank relationship we are indexing, even more towards those new customers in terms of disclosing how many of them become repeat customers right. It is the one.
<unk> majority of them that perform well on the loan and then are given an opportunity to go ahead and continue to work with us if they have that need and that dynamic of creating really happy first time customers is you know our net promoter scores about a 79 or 80, creating really happy first time customers then creates a dynamic where many.
Of them do have ongoing needs and come back for larger loans with longer terms and lower right. So it's good for them and good for us and that's part of what's giving a confidence that we're setting ourselves up well for both a good 22 and 23.
And then I guess.
Kind of a similar topic, you know get growth in car the growth in an auto.
How do we say are those new customers or how many of those repeat or how do we just think about the mix of that and the opportunity sit there.
Many of those our new customers, but one of the things that we've also figured out how to do and this is again one of the reasons that we believe the additional products that I was talking about that that are more kind of banking products or neo banking products are are of interest to us one of the things we've been able to do is to present multiple products in the same.
Funnel, so really trying to understand what is the customer's need when they hit our website. How can we present different offerings and then find a product that is going to meet their needs. The best weather, that's from a capital or a pricing perspective, so with S. P. L. In particular, we've been able to do that John we're really focused now on presenting credit card in a similar fashion and.
We had some really nice results. This last quarter in terms of cross selling credit card to some of our best customers. So it is a little bit of both we are acquiring new customers, but we're also starting to put more than one product into the hands of some of our best performing customers.
Okay, and if at my desk, one more just extra guys you sell a percentage of originations baby can you talk about the Counterparties. There I mean, it seems like there's a high demand for this at you are you getting good execution there.
Thoughts for the future on that that in that aspect of the business.
Hey, John that's a great question. So first of all demand for whole loans has never been higher they're strong demand for the asset class given the attractive healed and particularly so for our loans given the consistent credit performance and high risk adjusted yield of our product so we'll be evaluating.
Options for our whole forward flow sale program at the beginning of next year and certainly we'll be looking to diversify and expand the potential number of buyers and we think we have strong demand to be able to do that.
Great. Thanks very much.
Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad hour.
Our next question comes from the line a raccoon with J P. Morgan. Please proceed with your question.
Hey, guys. Thanks for taking my question and kind of to dovetail with what John with asking his.
Historically, you guys have been conservative, but very accurate in terms of your guidance. This quarter you significantly outperformed your expectations, which to me is really a suggestion of how quickly the market is evolving given the euro <unk>.
<unk> two.
Tweak the model very quickly I'm curious if tactic I'm curious what tactical changes, you're making given the sort of changing outlook that you're experiencing.
That's a great question, Rick So I I think to take the first part of it you you're right. When we look at our performance over the last year and a half we think we've demonstrated strength of our model. We think we've demonstrated some of the advantages of our approach and what you're seeing this year and in particular, we think in this last quarter is we're leveraging our street.
Since we're pressing our advantage to drive growth and profitability and taking sure alright. So when we look in particular at some of these new states for US we look at the competitive environment. We we like how we stack up and we are leaning in so there are several things that we're doing <unk> from a tactical perspective.
Number one we are not only investing more in outbound marketing and really thinking about how do we create awareness of opportune in our offerings and how much cheaper products are.
But there are a lot of really good data driven investments that are taking place in that area. We've spent a lot of time talking to you all about how we use AI and machine learning in our underwriting, but we've tried in the last year to give you a sense of how that kind of investment is now working its way through the rest of the company and in particular in marketing. So we shared in the past.
A response models and then the work that we do to optimize really Leverages 100 billion data points and as an example, one of the things that are CMO was sharing with me recently is an enhancement that we've made to our attribution model to understand what's the return by vehicle, whether that's Facebook or Google or.
Our website or <unk> or a retail location what is the interplay between each of those how do we want to attribute value to each of them and as a consequence, how can we be much more dynamic and how we allocate our marketing budget that degree of data driven sophistication. We think it's an advantage in the space. So that's an example of both something.
Strategic in how it's we're getting to a different set of tactical decisions that we're making in a week over a week month over month to try to drive this growth.
So certainly those things and then continuing to invest in in our products, making digital more of inefficient. One also that that way our customers are having a more automated experience and can get through this process faster and get on with their busy lives.
A lot of innovation, taking place where I can those are just a few of the examples.
Look I I really appreciate the thought lamps are very helpful. In terms of contact thank you.
Thank you.
Thank you ladies and gentlemen, we have reached the end of the question and answer session I will now to Nicole overtime, Alaska and for clothing I'm Mike.
Well, we want to thank everyone. Once again for joining us on today's call and we look forward to speaking with you again soon.
This concludes today's conference from you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.