Q4 2022 Pintec Technology Holdings Ltd Earnings Call
Speaker 4: is to strengthen our core unsecured personal loan product with a focus on improving unit economics. As I mentioned earlier, we are increasing yield and are focused on reducing costs associated with our personal loan business. Our unsecured personal loan portfolio will continue to be the most profitable component of our business and we will leverage data technology and AI to responsibly grow it. Our third priority is to build our member engagement platform. We're continuing to enhance our platform capabilities to meet the everyday financial needs of hard-working people, which will extend member life cycles and enable us to service them with more personal loans over time. At the center of this engagement initiative is our Oportun mobile app, which we previously referred to as the unified app. Released in February , the Oportun mobile app combines our credit products with our digital saving, banking, and investing products.
Speaker 4: I'll talk more about the mobile app in a moment. Finally, our fourth strategic priority is to develop our product suite. This includes our focus on credit cards, secured personal loans, and our lending as a service partner channel. As a reminder, we indicated on our August earnings call that we would deliberately moderate growth in our secured personal loan and credit card products as part of our credit tightening actions. While in the near term we will be focused on improving the credit performance of these portfolios and limiting originations, we continue to believe that secured personal loans and credit card...
Speaker 4: complementary to our overall product suite.
Speaker 4: And we continue to make great progress with our Lending as a Service partner channel, from which we can efficiently increase our applicant pool and selectively add high quality new members, even while we tighten our credit standards.
Speaker 4: During the fourth quarter, we scaled our partner network to include 590 locations up from 258 a year ago and well in excess of the 500 locations we had targeted by year end.
Speaker 4: I'm also pleased to share with you that our partnership with Sezel, the Buy Now Pay Later company, and our first digital lending and service relationship is active as of February . Oportune will be providing financing for Sezel's customers who need a larger loan for whom a traditional Buy Now Pay Later loan is not a fit.
Speaker 4: To elaborate further on the new opportunity mobile ad I mentioned earlier, we're very excited about its release because it is a major milestone towards building our member engagement platform to help hard working individuals meet their borrowing saving budgeting and spending needs.
Speaker 4: Over 275,000 members have already used our app.
Speaker 4: Many of you will recall that in November of 2021, when we announced the acquisition of Digit, our digital banking platform, we began to refer to our customers as members. The implicit strategy shift was that the digital banking products would allow for ongoing engagement with existing and new borrowers with whom we could formulate.
Speaker 4: multi-product relationships.
Speaker 4: With the Oportun mobile apps launch and the seamless customer experience it provides, we are now well positioned to accelerate the synergies we contemplated when we acquired Digit through increased cross-selling, higher conversions, and lower customer acquisition costs. With that,
Speaker 4: I'd like to turn it over to Jonathan for additional details on our 4th quarter financial performance and our initial 2023 guidance.
Speaker 4: Thanks and good afternoon everyone. As Raul mentioned, we're pleased with the resilience that Oportun continued to exhibit in the fourth quarter. Although we still face challenges in the first quarter of this year from our pre-July backbook, I am optimistic about the improvements we anticipate to follow.
Speaker 4: how they will position us for strong future growth and profitability.
Speaker 4: In the fourth quarter, we generated $262 million of total revenue as shown on slide 9 and $4.6 million of adjusted net income or 14 cents of adjusted EPS. Revenue upside and expense discipline enabled us to be profitable while higher charge-offs resulted in a slight earning shortfall.
Speaker 4: In comparison to our November guidance.
Speaker 4: Our aggregate originations were 610 million dollars, down 29% year over year, and below our prior guidance of between 650 and 700 million dollars for the quarter. This reflects the further credit tightening actions we took in November and December and our ongoing focus on high quality originations.
Speaker 4: Total revenue of $262 million was above the guidance range and up 35% year over year, with upside reflecting out performance in our digital banking business.
Speaker 4: Net revenue was $143 million, down 11% year over year, due to a net decrease in the fair value of the company's loans and increased interest expense partially offset by increased revenue.
Speaker 4: Interest expense of $36 million was up 211% year over year, primarily driven by increased debt issuance to fund our growth and the increase in our cost of debt to 5% versus 2.5% in the year ago period.
Speaker 4: At the end of the fourth quarter, 82% of our debt was fixed rate, providing us with some protection from rising interest rates.
Speaker 4: For our net change in fair value, we had an $83 million net decrease, which consisted mainly of current period charge-offs of $99 million.
Speaker 5: For the mark-to-market, the fair value price of our loans increased to 101.5% as of December 31st and resulted in a $23 million mark-to-market increase.
Speaker 5: The $21 million dollar mark-to-market increase in our asset back notes resulted from a 47 basis point decrease in the weighted average price to 92.5% due to the increase in interest rates and credit spreads during the quarter.
Speaker 5: Turning to expenses, we maintain strong discipline as we said we would on our prior call with adjusted operating expenses only increasing 1% sequentially. This allowed us to meet our objective for flat second half versus first half expense.
Speaker 5: As you can see on the right side of slide 9, adjusted operating efficiency at 52% was a year-over-year improvement of over 1,200 base points and was, as Raul mentioned, a new post-IPO record.
Speaker 5: We've carried this expense discipline into 2023. As you heard Raul mention, we expect to save $48 to $53 million in annualized run rate savings from our recently announced plan to streamline operations. In the fourth quarter, our sales and marketing expenses were $21 million.
Speaker 5: down 2% sequentially and down 43% year over year as Part for our continued cost-cutting focus.
Speaker 5: Our customer acquisition cost was $152, up 13% from the prior year period.
Speaker 5: lower marketing expenditures were offset by lower aggregate originations due to credit tightening.
Speaker 5: We delivered adjusted net income of $4.6 million compared to $26 million in the prior year quarter and adjusted EPS of $0.14 versus $0.82 respectively.
Speaker 5: Adjusted EBITDA was a $33.5 million loss in the fourth quarter, a $57 million decrease compared to a gain of $23 million in the prior year quarter.
Speaker 5: The decline was primarily driven by higher net charge-offs and the fair value mark on loans sold during the most recent quarter.
Speaker 5: adjusted return on equity was 3% versus 18% in the prior year quarter.
Speaker 5: For the last 12 months, adjusted ROE averaged 12%.
Speaker 5: Turning now to credit, as shown on slide 10, our fourth quarter annualized net charge-off rate was 12.8% compared to 6.8% in the prior year period.
Speaker 5: Turning now to credit, as shown on slide 10, our fourth quarter annualized net charge-off rate was 12.8% compared to 6.8% in the prior year period, while the full year rate was 10.1%.
Speaker 5: As a reminder, last year's charge off rate was abnormally low due to strong consumer balance sheets, including the impact of government stimulus amidst the pandemic.
Speaker 5: Losses were $5 million higher than the top of our fourth quarter guidance range of 12.15%.
Speaker 5: we said on our third quarter earnings call our credit performance has been and will continue to be driven by two different portfolio dynamics.
Speaker 5: the loans we've been originating since July under significantly tighter credit standards and the loans originated prior to that.
Speaker 5: We continue to expect 4Q22 to be the peak charge-off level during the current credit cycle, with our charge-off rate declining in the first and second quarters and being markedly lower in the second half of 2023.
Speaker 5: Regarding our capital and liquidity, as of December 31, total cash was $204 million.
Speaker 5: Additionally, net cash flow from operations for the fourth quarter was $89 million, up 48% year over year.
Speaker 5: Our debt to equity ratio was 5.3 times. Also as of December 31, 430 million of our combined 750 million in warehouse lines was undrawn and available to fund our growth.
Speaker 5: As Raul talked about we recently amended our two corporate debt facilities as follows
Speaker 5: First, we amended our residual financing facility. We deferred $42 million of scheduled principal payments into 2024 that otherwise would have been due through July of this year.
Speaker 5: Second, we upsized and amended our senior secure term loan to be able to borrow up to an additional $75 million. We borrowed the first $21 million on March 10th and will receive $14 million more by the end of the month. We expect to borrow additional $25 million amounts in April and June .
Speaker 5: of the company to the Senior Secure Term Loan Lender in connection with the initial draw.
Speaker 5: we would issue additional warrants for approximately 2.5% upon each of the two further conditional draws.
Speaker 5: In this uncertain macro environment, forecasting losses in our back book has been challenging, and recognizing that further macro headwinds could additionally pressure our portfolio, we felt it was prudent to increase our liquidity position with these actions.
Speaker 5: We believe our future performance will more than make up for the associated costs.
Speaker 5: Turning to our expectations for the first quarter and full year 2023 as shown on slide 12, we remain focused on prudent profitable growth and our forecast reflects that our tightened credit posture will persist until we see our chargeoff rates coming down, the Federal Reserve moderating their interest rate hikes and other
Speaker 5: the macroeconomic outlook improving.
Speaker 5: I want to let you know that for the time being we will not be providing guidance for adjusted net income and adjusted EPS because of the potential for increased volatility in the fair values of our loans and ABS notes.
Speaker 5: While we expect profitability to improve starting in 2Q, setting us up for a strong 2024, we expect the non-cash fair value mark to market to cause us to have a significant loss in the first quarter of 2023.
Speaker 5: We will look to reinstate our adjusted net income and adjusted ES guidance in the future when the macroeconomic environment has stabilized.
Speaker 5: Given the decision not to guide at this time to adjusted net income and adjusted EPS, we are reintroducing our adjusted EBITDA guidance. We continue to believe that adjusted EBITDA is a useful metric because it represents the cash flow generation capability of the business.
Speaker 5: it isn't impacted by swings in fair value.
Speaker 5: While we still expect that the fourth quarter of 2022 was our peak charge-off rate and we expect to see improvement throughout 2023, I do want to point out that we now do not anticipate returning to our 7-9% charge-off rate in the second half of the year. At this time, we do expect significant improvement of over 200 basis points.
Speaker 5: to approach a charge-off rate of 10% by the second half. This change in expectations is caused by our back book recently performing worse than previously expected.
Speaker 5: In addition, we've observed indications from the latest IRS reporting that average refunds are trending around $400 lower than last year. We believe this could be impacting the ability to pay of members with lower free cash flow.
Speaker 5: Finally, we are not providing origination guidance at this time because if the macro environment were to worsen, we planned to tighten credit, which would reduce our loan volumes.
Speaker 5: What we can share is that we generally expect at most single-digit growth in our own receivables balance this year as we keep credit tight and plan to restart whole loan sales.
Speaker 5: In terms of guidance, our outlook for the first quarter is total revenue of $245 to $250 million.
Speaker 5: annualized net charge-off rate of 12.5% plus or minus 15 basis points.
Speaker 5: adjusted EBITDA of negative 49 to negative 44 million dollars.
Speaker 5: Our guidance for the full year is total revenue of $975 million to $1 billion.
Speaker 5: annualized net charge-off rate of 11.5% plus or minus 50 basis points.
Speaker 5: Adjust Ziva DA of $52 to $60 million.
Speaker 5: In summary, we continue to take the necessary steps to manage our back book, diligently manage our expenses, and make high quality loans.
Speaker 5: above all, we are focused on improving our profitability.
Speaker 4: With that I will now turn it back over to Raul before we open the line for questions. Thanks, Jonathan. As we've communicated, we believe our peak charge-off rates are behind us and the business will see steady improvement beginning in the second quarter. The leadership team and I remain confident in our ability to navigate the uncertain macro environment.
Speaker 4: by making the necessary adjustments to create a more efficient and more profitable business. I look forward to reviewing our first quarter results with you on our next earnings call. With that, operator, let's open up the line for questions.
Speaker 6: Certainly. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 at this time. If you'd like to remove yourself from the queue, please press star 2. One moment, please, while we poll for questions.
Speaker 6: Our first question today is coming from Sanjay Sakrani from KBW. The water line is now live.
Speaker 7: Thank you. Jonathan, you mentioned you expect the loss rate to come down pretty meaningfully in the second half of this year. Could you give us some idea of whether or not you expect to get back to that targeted range of 7-9% in the back half of this year? And then just secondly on a related point, you know, you're going to be able to get back to the target range of 7-9% in the back half of this year.
Speaker 7: You mentioned the tightening of credit potentially if things are volatile. Would that work against you guys achieving that, sort of your charge off rate expectations?
Speaker 5: That's a great question, Sanjay. So first of all, as I said in my remarks, we expect that the loss rate will decline by around 200 basis points, but that is not enough to get us down to the 9 to 7 percent range.
Speaker 5: So, you know, you can do the math on that and towards the back half of the year, we're expecting to be in the tens. You know, tightening credit could reduce the denominator a little bit, but I don't think that will move things all that much. And of course we take the right actions.
Speaker 5: as required by the MACRA environment.
Speaker 7: And I guess just to follow up, as we look back at some of the adjustments you've made, is it just that the backdrop was just very different from what you guys had seen before and some of the adjustments you've made give you more certainty in the future? I'm just trying to think about the volatility and how it might play through in the future in terms of the criteria.
Speaker 4: One of the things that we've been sharing is those originations included loans to individuals who just had lower free cash flow. And as all of us were dealing with inflation, higher gas prices, higher food prices, they were the ones that got squeezed. And that's the part of the portfolio that continues to put pressure on the overall.
Speaker 4: that are shown on the left side that are the post July vintages and all those vintages are at or better than the 2019 rates and that's on purpose. We wanted to target 2019 because that was a really good credit year for us and on the right side what you see is the other thing that gives us confidence in terms of hitting
Speaker 4: than 20%. So we got a lot of confidence and we like what we're seeing right now in the newer originations. We're just having to work through the back book, but that becomes a smaller part of the business as the year goes on.
Speaker 6: Okay, wonderful. Thank you. Thank you. Thank you. Your next question is coming from Matthew Hurwitz from Jeffries, your line is now live.
Speaker 5: Hi, guys. Just a quick technical question. On slide 37, it looks like the remaining cumulative charge-offs line decreased this quarter. Could you just help me understand what this change or number represents, and is it similar to the chart?
Speaker 5: of lifetime loan losses on slide 38? Does it mean that's where you expect the loss rate to be over the lifetime of the portfolio? Thanks.
Speaker 5: That is a great question, Matthew. First of all, it is not the same number. Slide 38 are vintage charge-off curves. So this is from the inception of a vintage of a time period, where do we think cumulative net charge-offs will be? In comparison, the remaining cumulative charge-off number is the same number.
Speaker 5: It's the same number as the CECL allowance number. It's the for a point in time for not just one vintage but all of the outstanding portfolio that you have on the book, how do you expect, what do you expect the remaining charge off if that book just pays down. Is that helpful?
Speaker 5: Yep, perfect. And then just a quick follow-up with the NCO guidance this year, you've already given us some color, but maybe could you talk a little bit about the assumptions behind the range, what could get us to the top or the bottom? You mentioned tax refunds.
Speaker 5: maybe unemployment assumptions or just what else is in that number. Thanks.
Speaker 4: Yeah, so this is Raul. There are a couple of things built into that number. First of all, as we mentioned in our comments, we believe that peak losses are now behind us. We think Q4 was the peak. And as we go through the year and work through the back booking in the way that I mentioned with Sanjay, we start to get to that.
Speaker 4: 10% range because the back book takes a smaller and smaller portion of our overall portfolio and the newer originations, of which we really like the performance, those become more dominant. In terms of macroeconomic assumptions, we continue to expect employment for our member base to be good. I'm sure you read the same things that we do and they indicate that there is a sub...
Speaker 4: to be a good one.
Speaker 8: Great, thanks very much. Appreciate it.
Speaker 6: Thank you. Thank you. Next question is coming from Rich Shane from JP Morgan. Your line is now live.
Speaker 4: Thanks for taking my question. First on the warrants that are going to be issued, I assume that those warrants are at the money on day of issuance.
Speaker 4: Yes, the warrants are in the money, that's right. I'm assuming they're issued at the closing stock price or some formula, not in the money but actually at the money. They're not discount warrants, they're par warrants.
Speaker 4: No, that's not the case, Rick. They were discounted. Okay, got it. And have you provided or would you provide the degree of discount so that way we can start to think about how to calculate the share account dilution? I think that's going to be seriousMen the thing is, then when Mike npm comment name the link to you serve is on the screen, and if you are on the platform, email me sudo
Speaker 5: You should include them in the share count solution.
Speaker 4: Okay, you're saying 100% so there, okay, fair enough. I get the implication. One question is...
Speaker 4: There was commentary related to the volatility and uncertainty of fair value marks in Q1 this year. And the implication was that there will be negative fair value marks based on some of the commentary provided.
Speaker 4: I'm curious given that we are approaching or that you're indicating peak and charge offs.
Speaker 4: What is changing? Is it the discount rate that's driving this or is there something else if we compare the fair value methodology on page 37? So, Rick, this is Raul. I'm going to hand it off to Jonathan in just one second, but just as a reminder for people that may not be quite as familiar with the
Speaker 4: have due to the mark to market. So just to let everyone know, this is guidance we've provided in the past. It's a metric that we think indicates the health of the business and the ability to generate cash of the business more accurately than adjusted net income does. It's just with this very uncertain environment. Again, we've seen it just in the last few days.
Speaker 4: We feel that that's validated our decision to hold off for now on adjusted net income until things are a bit more stable and predictable. But I'll let Jonathan go through the details on the rest of your question. Sure. So Rick, the things that could drive that volatility are just how quickly the ABS market strengthens. So as you saw on slide 36.
Speaker 5: The bond portfolio, which is a level two asset, we use dealer marks and trace, so this isn't a level two asset, that's at a 92.5% price.
Speaker 5: And so, you know, we've seen the ABS market open up very strongly, which is good for future access, but if credit spreads improve more quickly, it's hard to predict how quickly that will happen. Got it. Some more liability driven.
Speaker 4: Last question, I apologize I have taken more time than I usually intend to, but there is an interesting trend here. If we look at the multiplier, the weighted average life of the portfolio assumptions back over time.
Speaker 4: It's drifted up from call it three quarters to just now effectively a year.
Speaker 4: If we then go and compare slide 38, where you basically show the amortization of a vintage. For example, on slide 38, the 21 vintage is amortized down almost exactly 50%. If we compare that to the same slide from a year ago, two years ago, and three years ago.
Speaker 4: The amortization at this point in time is almost exactly the same. How do we reconcile the difference in amortization versus the difference in weighted average life assumption? How do we reconcile the difference in weighted average life assumption?
Speaker 5: Let me make sure I understand your question. You're looking at slide 38 and you were referencing which vintage that was halfway paid down.
Speaker 4: So if you look, the 21 vintage as of the end of 22 is essentially 50% amortized. And that is exactly plus or minus 150 basis points from where the 20 vintage stood at the end of 21, the 19 vintage stood at the end of 20. So I'm curious why.
Speaker 4: Again, part of the strategy has been to extend duration. That's reflected in the multiplier. I'm actually curious why it's not showing up in the vintages.
Speaker 4: I'm not, yeah, sorry, go ahead. Rick, we may need to do a little bit more work to come back to you, but the things that come to mind off the top of my head, first of all, the strategy is not to extend duration. The strategy is to provide more capital to our best borrowers.
Speaker 4: So those tend to be repeat borrowers, people that have had success in the past, and because they may be on their third or fourth loan with us, they have access to more capital, and to your point, that does come with longer term, but just to be clear, the strategy is not to extend duration, it is to deploy capital to our best borrowers, and a byproduct of that is certainly what you mentioned.
Speaker 4: On the second piece, you know, we'll get back to you, but certainly the strength of the economy, what payment rates look like, all of those things make a difference in the vintage. It's interesting that it happens to be the same, but let us do a little bit more work and get back to you on that. Just to add one thing on that point, near term, if you look on page 36...
Speaker 5: The average life in years at the end of the third quarter last year was 0.92 and now it's 1.00 I would attribute that mainly to the fact that in the current macro environment with inflation we've seen voluntary prepaid slow down and you'd expect that even from very good customers who would continue to pay perfectly on time.
Speaker 5: they're just looking to pay the contractual amount rather than maybe pay a little bit extra to pay down the debt faster.
Speaker 4: Thank you for all the time and I appreciate all the answers.
Speaker 4: Hey guys, thank you for all the time and I appreciate all the answers. Thank you for your questions Rick.
Speaker 6: Thank you. Next question is coming from Hal Goetz from Root Capital Markets. What role does this play in degree relations and how much of that work does bio Treasury interface improve the life of our sw Zh laughs.
Speaker 9: Hey guys, I'd like to get a little color on your expense growth guidance and just...
Speaker 9: Hey guys, I'd like to get a little color on your expense growth guidance and just, you know, in school...
Speaker 9: the write-off of the goodwill. You had about 30% total expense growth for the year. That takes into account the acquisition of Digit. And your expense structure in Q4 was actually lower than Q2-22, so that looks terrific.
Speaker 9: What can we expect in terms of maybe a range of growth? Is it a flattish, mid-single-digit growth as you come out exiting the year, kind of being flattish the first half?
Speaker 5: Talk to us about the pace and cadence of expense growth in 2023. We actually see OpEx going down.
Speaker 5: Right, because if you think about it, we were flat the second half of last year and we only grew by 1% in the fourth quarter and in February we took significant expense reduction actions.
Speaker 5: So and we're continuing to stay tight on our sales and marketing budget Given that you know, we're focused on a tight credit posture So when you combine the operational improvements Though we don't guide to it, we would expect to see lower OPEX and further improvement
Speaker 4: in our efficiency ratio. Yeah, Hal, this is Raul. Just to build on that a little bit, I'm really proud of the team and just the discipline that's been demonstrated. Sales and marketing was down 43 percent year over year, and Q4 tech for the year was down seven percent. We were able to deliver that flat operating expense that we had committed to earlier in the year, and we're taking
Speaker 4: is between or for Q2 through Q4, so the remainder of the year after the first quarter, we're gonna generate 96 to $109 million in positive adjusted EBITDA if you look at that guidance. That's a combination of the operating discipline that you just asked about and that Jonathan said, right, we expect it to go down.
Speaker 4: It also is our expectation that losses are going to go down in the back half of the year. So even with the modest revenue growth that we have, you have lower losses, you've got lower OPEX, and that generates that profit that we're looking forward to for the rest of 23. And it's what gets us excited about 2024.
Speaker 4: Because when we think about 2024 and 2025, we're getting down to our target range and losses. We continue to have this expense discipline because it's not just going to be for 23. We're just going to take this as part of how we manage the business in future years. And as the economy stabilizes at some point, we start to have originations growth again, and that generates higher levels of profitability.
Speaker 9: you know, the new app and what are some of the key performance indicators, you know, that you could share with us you're hoping to achieve with that and will you disclose some of those to us in future periods.
Speaker 4: So that app is something we're really excited about. One of the reasons that we went ahead with the acquisition was this vision that we had of creating a one-stop shop, of being able to offer all of these products to our members in a very convenient manner. And today, obviously, for all of us, that's the phones in our pockets. The apps that are on our phones.
Speaker 4: So the Oportun app we think is the first step in creating this one-stop shop, a very engaging platform for our members to come in through any product, whether they come in through savings and then need a credit product, or they come in with credit and then have an opportunity to build savings in an effortless way.
Speaker 4: So that's what we're so excited about. The metrics that we're tracking right now, since we just launched it first, is just usage. So having already over 275,000 people using our app and making payments in the app, we think indicates a really strong start. And yes, we do look forward to showing some metrics in the future. We want to give some thoughts to what those metrics will be, but we.
Speaker 10: Maybe I will just piggyback off of...
Speaker 10: Couple of the prior questions. First, just to get clarification, I know Rick asked about the warrants in terms of
Speaker 10: understanding the full extent of the dilution. In your comments of the timeline, based on the future draws, should we assume that the data is available to the public and the public is able to access the data?
Speaker 10: Effectively 10% of what the year-end diluted outstanding count should be added to the count going forward.
Speaker 4: Hi, David, this is Raul. We certainly intend to draw on that capital, but what I would say is right now it's the 5% that were in Jonathan's comments. And certainly if we continue to draw on that capital, then we trigger the additional warrants and we'll make sure that we message that appropriately, that we disclose that in the appropriate way.
Speaker 10: and how that dovetails with your single digit AR growth expectation versus the 10% like
Speaker 5: Is it one or the other? Sure, let me try to clarify and we can certainly talk more about this when we have a one-on-one later David. So in March we will have drawn 25 million and we will have issued 5% warrants.
Speaker 5: The two additional draws are scheduled for April and June . They're also each $25 million, right? And with each of those draws is 2.5% warrants.
Speaker 4: So David, I was trying to, for Q1, right, for the Q1 GPS, you would model the 5%, and then for Q2 you would assume the subsequent draws. Well, actually, it's a little less than that because it's average outstanding. So we can go through.
Speaker 10: Some of the details. But yeah, big picture as an investor. I'm probably looking at 10% dilution at the end of 23 versus the end of 22. Is that kind of a ballpark? That's right. Got it. Got it. That's what I'm seeing.
Speaker 10: Related to that, just based on the current liquidity environment, if in the second half of the current year or toward the latter stage,
Speaker 10: If there was something in the environment that signaled to you
Speaker 10: that origination activity should be
Speaker 10: origination activity should be.
Speaker 10: reaccelerated and it's, for example, you planned on growing your year-end balances double digits versus
Speaker 10: single digit is mentioned today.
Speaker 4: Based on your funding sources, in order to achieve that balance sheet growth, would that require additional warrant issuance? No, David. At this time, no. We would not anticipate that. David has known us now for some time and...
Speaker 4: We've got several ways that we can fund the growth of the portfolio. So no, we would not expect say raising cap in the scenario you described, we would not expect raising capital. In a manner that would indicate more dilution. No.
Speaker 10: Got it. And then maybe just a quick follow-up on the expense side. I know you spoke to the 23 outlook directionally and the cost savings that were announced last month. I guess bigger picture.
Speaker 10: We obviously focus on efficiency ratios, OPEX.
Speaker 10: as a percentage of managed receivables for all of our lenders.
Speaker 10: Is there a range, I mean, is there sort of a targeted operating model that you have in mind? As we've learned, given the macro backdrop that there are always going to be peaks and valleys of originations, but
Speaker 10: You know if an investor wants to know you know, what is kind of a normalized Targeted efficiency ratio for opportune if it's a call it a 10 to 12 percent
Speaker 10: You know AR grower kegger over a given three to four year period Is there a
Speaker 10: range we ought to think about, notwithstanding kind of the
Speaker 10: ought to think about notwithstanding kind of the unique.
Speaker 5: background we have right now? Sure, I think that's a great question, David. So first of all, you've seen us get much leaner and be very disciplined about OpEx.
Speaker 5: You know, we got down to 52% and that's as a percentage. I know you're using a different basis, but you know, our, our reported metric is as a percentage of total revenue. And that's an all time low for us since being a public company. When you combine we said 30 some point fifty increase output that would give it a Sean
Speaker 5: you know, continued revenue growth and actual op-ex reduction, you would expect that ratio to continue to go down and it could clearly get into the 40s. And I think when you talk about targets that we're not providing any guidance for future years, we want to continue to run the business lean as we focus on increasing profitability.
Speaker 5: which is where I will share with you when you look at adjusted EBITDA and what the, you know, what 2Q through 4Q should look like, implied by our guidance, it starts to get pretty interesting.
Speaker 10: Thank you very much.
Speaker 10: Thank you very much. Thank you, David. Thank you, David.
Speaker 4: Thank you. Next question is coming from Rick Shane from JP Morgan. Your line is now live. Back again, guys, and following up on really David's two questions. So when you think about the puts and takes for expenses for the year.
Speaker 4: You talked about the reduction from the reduction in force, but presumably there is an offset if we think about these being essentially penny warrants.
Speaker 4: which is at least how I'm taking what I heard earlier. There's probably a 12 to $15 million expense associated with issuing discount warrants. Is that the right way to think of it? So we've got the, and I don't necessarily like to say benefit from reduction in force, but the impact of the reduction in force.
Speaker 5: potentially offset by options expense or warrant expense? I think that is a good way of looking at it. I would also point out when we look at our future prospects, and again we are only giving you our view of 2023, but again looking at what is implied by Justice EBITDA about how we would exit the year and what that would mean for a run rate into 2024.
Speaker 5: we think our future performance will more than offset the expense of this particular transaction which has been very helpful to us in improving liquidity.
Speaker 5: Go ahead. Oh, I was gonna say and I understand in some ways that's why focusing on adjusted EBITs done providing that guidance this year is helpful because I know that the warrant expense will be added back. I assume it's treated the same way as stock based comp for employees.
Speaker 4: That's right, the warrants will receive equity treatment for accounting purposes. Rick, the thing I was going to add, you were talking about that expense relative to the reduction in force, but there were several actions that the team has taken, right? It's not just that one action on the OPEX side.
Speaker 4: to improve the profitability of the business. There are other things we're doing from a contact center perspective to become more efficient, deploying technology to try to automate the business more. We didn't spend as much time talking about this, it was in our comments to kick off the call. But when we compared December of 2022 to December of 2023, we expect yield to be 200 basis points higher.
Speaker 4: So on a book of about three billion, that is also we think a meaningful improvement in the business that we would seek to carry forward into 24 and 25 as well. So there are multiple actions that the team has taken to try to improve the profitability of our business that we think will pay dividends in Q2 through Q4 and in subsequent years.
Speaker 4: Okay, thank you very much. Thanks, Jonathan. Thank you.
Speaker 4: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Raul for any further closing comments. I just want to thank everyone once again for joining us on today's call and we look forward to speaking with you again soon.
Speaker 4: I'd like to turn the floor back over to Raul for any further closing comments. I just want to thank everyone once again for joining us on today's call and we look forward to speaking with you again soon. Thank you.
Speaker 6: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.