Q4 2022 Pintec Technology Holdings Ltd Earnings Call

Raul Vazquez: While remaining committed to our 36% APR cap, we now expect that by the end of 2023, our portfolio yield will be over 200 basis points higher than the end of 2022. We closed a $300 million securitization, our fourth of the year, in November, and we believe our access to the securitization market remains strong. We're making progress in reducing our charge-off rate, but given the performance of our back book, expected higher cost of funds, given Fed actions to combat persistent inflation and the uncertain future macro environment, we have recently taken two additional measures to bolster our liquidity position. We have delayed $42 million of amortization on our residual financing facility, and we have upsized and amended our senior secured term loan by up to $75 million. Jonathan will detail these changes with you later. Let me shift now to operating expenses.

Raul Vazquez: We are pleased to have met our target for flat H2 adjusted OpEx versus the H1 of the year by reducing sales and marketing costs and limiting headcount growth while continuing to grow our revenue. Our Q4 adjusted operating efficiency improved by over 1,200 basis points year over year to 52%, which is the lowest level in our history since becoming a public company in 2019. As we entered 2023, we remained focused on reducing OpEx. I recently made the decision to reduce our corporate staff by 10% and eliminated a number of contractor relationships as part of an overall plan to streamline operations. These actions will result in $48 to $53 million in total annualized expense savings.

Raul Vazquez: Shifting now to our long-term strategic priorities, I'd like to provide you with our key areas of focus for this year and into 2025, as we've laid out on slide seven. Our first priority is to fortify our core business economics. I've talked to you about how our underwriting focus has been on returning members rather than on new members, and we look forward to the Q2 and beyond when we anticipate lower charge-offs. We're also focused on substantially improving our profitability and our ROE. We expect the expense discipline and record low adjusted operating efficiency levels we exhibited in the H2 of 2022 to carry into this year and beyond. Our second priority is to strengthen our core unsecured personal loan product with a focus on improving unit economics.

Raul Vazquez: 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 hardworking 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. I'll talk more about the mobile app in a moment.

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.

Raul Vazquez: 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 cards are complementary to our overall product suite. 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: 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.

Raul Vazquez: During Q4, 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. I am also pleased to share with you that our partnership with Sezzle, the buy now, pay later company, and our first digital lending-as-a-service relationship, is active as of February. Oportun will be providing financing for Sezzle's customers who need a larger loan for whom a traditional buy now, pay later loan is not a fit. To elaborate further on the new Oportun mobile app that I mentioned earlier, we are very excited about its release because it is a major milestone towards building our member engagement platform to help hardworking individuals meet their borrowing, saving, budgeting, and spending needs. Over 275,000 members have already used our app.

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.

Raul Vazquez: Many of you will recall that in November 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 multi-product relationships. With the Oportun mobile app's 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, I'd like to turn it over to Jonathan for additional details on our Q4 financial performance and our initial 2023 guidance.

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.

Jonathan Coblentz: Thanks. Good afternoon, everyone. As Raul mentioned, we are pleased with the resilience that Oportun continued to exhibit in Q4. Although we still face challenges in Q1 of this year from our pre-July back book, I am optimistic about the improvements we anticipate to follow and how they will position us for strong future growth and profitability. In Q4, we generated $262 million of total revenue, as shown on slide nine, and $4.6 million of adjusted net income or $0.14 of adjusted EPS. Revenue upside and expense discipline enabled us to be profitable, while higher charge-offs resulted in a slight earnings shortfall in comparison to our November guidance. Our aggregate originations were $610 million, down 29% year over year, and below our prior guidance of between $650 and $700 million for the quarter.

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.

Jonathan Coblentz: This reflects the further credit tightening actions we took in November and December and our ongoing focus on high-quality originations. Total revenue of $262 million was above the guidance range and up 35% year-over-year, with upside reflecting outperformance in our digital banking business. 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. 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. At the end of Q4, 82% of our debt was fixed rate, providing us with some protection from rising interest rates.

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.

Jonathan Coblentz: 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. For the mark-to-market, the fair value price of our loans increased to 101.5% as of 31 December and resulted in a $23 million mark-to-market increase. The $21 million mark-to-market increase in our asset-backed 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 Q4. Turning to expenses, we maintained 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 H2 versus H1 expense.

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.

Jonathan Coblentz: As you can see on the right side of slide nine, adjusted operating efficiency at 52% was a year-over-year improvement of over 1,200 basis points and was, as Raul mentioned, a new post-IPO record. 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 Q4, our sales and marketing expenses were $21 million, down 2% sequentially and down 43% year over year as part of our continued cost-cutting focus. Our customer acquisition cost was $152, up 13% from the prior year period as lower marketing expenditures were offset by lower aggregate originations due to credit tightening. 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: 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.

Jonathan Coblentz: Adjusted EBITDA was a $33.5 million loss in Q4, a $57 million decrease compared to a gain of $23 million in the prior year quarter. The decline was primarily driven by higher net charge-offs and the fair value mark on loans sold during the most recent quarter. Adjusted return on equity was 3% versus 18% in the prior year quarter. For the last 12 months, adjusted ROE averaged 12%. Turning now to credit, as shown on slide 10, our Q4 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%. 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. Losses were $5 million higher than the top of our Q4 guidance range of 12.15%.

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%.

Jonathan Coblentz: As we said on our Q3 earnings call, our credit performance has been and will continue to be driven by two different portfolio dynamics: the loans we've been originating since July under significantly tighter credit standards and the loans originated prior to that. 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 Q1 and Q2 and being markedly lower in the H2 2023. Regarding our capital and liquidity, as of 31 December, total cash was $204 million. Net cash flow from operations for the Q4 was $89 million, up 48% year-over-year. Our debt-to-equity ratio was 5.3 times. As of 31 December, $430 million of our combined $750 million in warehouse lines was undrawn and available to fund our growth.

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.

Jonathan Coblentz: As Raul talked about, we recently amended our two corporate debt facilities as follows. First, we amended our residual financing facility. We deferred $42 million of scheduled principal payments into 2024 that otherwise would've been due through July of this year. Second, we upsized and amended our senior secured term loan to be able to borrow up to an additional $75 million. We borrowed the first $21 million on 10 March and will receive $14 million more by the end of the month. We expect to borrow additional $25 million amounts in April and June, subject to the approval of our lenders. Furthermore, in consideration of these actions, the rates we pay on these two facilities have increased by three percentage points each. We have issued warrants for common stock representing approximately 5% of the company to the senior secured term loan lender in connection with the initial draw.

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 .

Jonathan Coblentz: We would issue additional warrants for approximately 2.5% upon each of the two further conditional draws. 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. We believe our future performance will more than make up for the associated costs. Turning to our expectations for Q1 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 charge-off rates coming down, the Federal Reserve moderating their interest rate hikes, and the macroeconomic outlook improving.

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

Jonathan Coblentz: 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. While we expect profitability to improve starting in Q2, 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 Q1 of 2023. We will look to reinstate our adjusted net income and adjusted EPS guidance in the future when the macroeconomic environment has stabilized. Given the decision not to guide at this time to adjusted net income and adjusted EPS, we are reintroducing our adjusted EBITDA guidance.

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.

Jonathan Coblentz: We continue to believe that adjusted EBITDA is a useful metric because it represents the cash flow generation capability of the business, and it isn't impacted by swings in fair value. While we still expect that Q4 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% to 9% charge-off rate in H2 of the year. At this time, we do expect significant improvement of over 200 basis points and to approach a charge-off rate of 10% by H2. This change in expectations is caused by our back book recently performing worse than previously expected. In addition, we've observed indications from the latest IRS reporting that average refunds are trending around $400 lower than last year.

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.

Jonathan Coblentz: We believe this could be impacting the ability to pay of members with lower free cash flow. Finally, we are not providing origination guidance at this time because if the macro environment were to worsen, we plan to tighten credit, which would reduce our loan volumes. What we can share is that we generally expect at most single-digit growth in our owned receivables balance this year as we keep credit tight and plan to restart whole loan sales. In terms of guidance, our outlook for the Q1 is total revenue of $245 to 250 million, annualized net charge-off rate of 12.5% ± 15 basis points, adjusted EBITDA of -$49 to 44 million.

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.

Jonathan Coblentz: Our guidance for the full year is total revenue of $975 million to $1 billion, annualized net charge-off rate of 11.5% ± 50 basis points, adjusted EBITDA of $52 to 60 million. In summary, we continue to take the necessary steps to manage our back book, diligently manage our expenses, and make high-quality loans. Above all, we are focused on improving our profitability. With that, I will now turn it back over to Raul before we open the line for questions.

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.

Raul Vazquez: 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 Q2. The leadership team and I remain confident in our ability to navigate the uncertain macro environment by making the necessary adjustments to create a more efficient and more profitable business. I look forward to reviewing our Q1 results with you on our next earnings call. With that, operator, let's open up the line for questions.

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.

Operator: Certainly. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star one at this time. If you'd like to remove yourself from the queue, please press star two. One moment, please, while we poll for questions. Our first question today is coming from Sanjay Sakhrani from KBW. Your line is now live.

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.

Sanjay Sakhrani: Thank you. Jonathan, you mentioned you expect the loss rate to come down pretty meaningfully in H2 this year. Could you give us some idea of whether or not you expect to get back to that targeted range of 7% to 9% in Q3 or in H2 this year? Just secondly, on a related point, you mentioned the tightening of credit potentially if things are volatile. Would that work against you guys achieving your charge-off rate expectations?

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?

Jonathan Coblentz: That's a great question, Sanjay. First of all, as I said in my remarks, we expect that the loss rate will decline by around 200 basis points. That is not enough to get us down to the 9% to 7% range. You can do the math on that. Towards the back half of the year, we're expecting to be in the tens. Tightening credit could reduce the denominator a little bit. I don't think that will move things all that much. Of course, we take the right actions as required by the macro environment.

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.

Sanjay Sakhrani: 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 credit metrics.

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.

Raul Vazquez: Yeah. Sanjay, this is Raul. I think to add to Jonathan's response, what we're really seeing is challenges in the back book. Those, as a reminder, were the originations we made prior to some big adjustments in the July timeframe. One of the things that we've been sharing is those originations included loans to individuals who just had lower free cash flow. As all of us were dealing with inflation, higher gas prices, higher food prices, they were the ones that got squeezed. That's the part of the portfolio that continues to put pressure on the overall loss rate and why, instead of the 7% to 9%, we expect it to be a bit higher and be in that 10% range in H2.

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.

Raul Vazquez: What gives us confidence right now is if you look at page five in our earnings deck, you look at the vintages that are shown on the left side that are the post-July vintages. All those vintages are at or better than the 2019 rates. That's on purpose. We wanted to target 2019 because that was a really good credit year for us. On the right side, what you see is the other thing that gives us confidence in terms of hitting those H2 numbers, which is the orange part of that right side of the slide, which is the back book. It becomes the smaller and smaller part of the portfolio in H2. At the end of Q2, it's only going to be about a third of the portfolio.

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

Raul Vazquez: When we get to the end of the year, it's less than 20%. 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 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.

Sanjay Sakhrani: Okay, wonderful. Thank you.

Jonathan Coblentz: Thank you.

Operator: Thank you. Next question is coming from Matthew Howlett from Jefferies. Your line is now live.

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.

Matthew Howlett: 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? Is it similar to the chart 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: 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.

Jonathan Coblentz: That's a great question, Matthew. First of all, it is not the same number. Slide 38 are our vintage charge-off curves. 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 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. What do you expect the remaining charge-off if that book just pays down? Is that helpful?

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?

Matthew Howlett: Yep, perfect. Just a quick follow-up. With the NCO guidance this year, you've already given us some color, 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, maybe unemployment assumptions, or just what else is in that number? Thanks.

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.

Raul Vazquez: 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. As we go through the year and work through the back book in the way that I mentioned with Sanjay, we start to get to that 10% range because the back book is a smaller and smaller portion of our overall portfolio. 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 supply issue in kind of the blue-collar part of the market, that there just aren't enough workers.

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...

Raul Vazquez: As a consequence, employment continues to look good. Wages continue to look good for that part of the market. Even with Fed actions, which obviously after the last few days are a little more uncertain, even with any Fed actions that may take place, we continue to believe that the employment market is going to be a good one.

Matthew Howlett: Great. Thanks very much. Appreciate it.

Raul Vazquez: Thank you.

Speaker 4: to be a good one.

Operator: Thank you. Next question is coming from Rick Shane from JPMorgan. Your line is now live.

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.

Richard Shane: Thanks, guys, for taking my questions. 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: 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.

Raul Vazquez: Yes. The warrants are in the money. That's right.

Richard Shane: No. 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: 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.

Raul Vazquez: No, that's not the case, Rick. They were discounted.

Richard Shane: Okay. Got it. 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 count dilution?

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

Raul Vazquez: You should include them in the share count dilution.

Richard Shane: Okay. You're saying 100%? Okay. Fair enough.

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...

Raul Vazquez: Yeah.

Richard Shane: I get the implication. Second question is there was commentary related to the volatility and uncertainty of fair value marks in Q1 this year. The implication was that there will be negative fair value marks based on some of the commentary you provided. I'm curious, given that we are approaching or that you're indicating peak in charge-offs, 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?

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

Raul Vazquez: Rick, this is Raul. I'm going to hand it off to Jonathan in just one second. Just as a reminder for people that may not be quite as familiar with our business as you are. You may recall a few years ago, we used to provide guidance on adjusted EBITDA. It's something that we've done in the past. It's a metric that we like because it doesn't have the movement that GAAP net income and adjusted net income have due to the mark-to-market. 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: 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.

Raul Vazquez: 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. I'll let Jonathan go through the details on the rest of your question. Sure. Rick, the things that could drive that volatility are just how quickly the ABS market strengthens. As you saw on slide 36, the bond portfolio, which is a Level 2 asset, we use dealer marks and TRACE. This isn't judgmental. That's at a 92.5% price. We've seen the ABS market open up very strongly, which is good for future access. If credit spreads improve more quickly, it's hard to predict how quickly that'll happen.

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.

Richard Shane: Got it. more liability driven.

Raul Vazquez: Yeah.

Richard Shane: Last-

Raul Vazquez: Sorry. Go ahead.

Richard Shane: last quick question. I apologize. I've taken more time than I usually intend to. There's an interesting trend here. If we look at the multiplier, the weighted average life of the portfolio assumptions back over time, it's drifted up from call it three quarters to just now effectively a year. 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, 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?

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?

Raul Vazquez: Okay. 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 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.

Richard Shane: If you look, the 2021 vintage as of the end of 2022 is.

Raul Vazquez: Sure

Richard Shane: 50% amortized. That is exactly ±150 basis points from where the 2020 vintage stood at the end of 2021, the 2019 vintage stood at the end of 2020. I'm curious why. Again, part of the strategy has been to extend duration.

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.

Jonathan Coblentz: Correct.

Richard Shane: That's reflected in the multiplier. I'm actually curious why it's not showing up in the vintages.

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.

Jonathan Coblentz: Yeah. Sorry, go ahead, Raul.

Raul Vazquez: Rick, we may need to do a little bit more work.

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.

Jonathan Coblentz: Yeah

Raul Vazquez: to come back to you. 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. Those tend to be repeat borrowers, people that have had success in the past. Because they may be on their third or fourth loan with us, they have access to more capital. To your point, that does come with longer term. Just to be clear, the strategy is not to extend duration. It is to deploy capital to our best borrowers. A byproduct of that is certainly what you mentioned. On the second piece, 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.

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...

Raul Vazquez: 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.

Jonathan Coblentz: Just to add one thing on that point. Near term, if you look on page 36, the average life in years at the end of Q3 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 prepays slow down. You'd expect that even from very good customers who continue to pay perfectly on time. They're just looking to pay the contractual amount rather than maybe pay a little bit extra to pay down the debt faster.

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.

Richard Shane: Terrific. Hey, guys, thank you for all the time, and I appreciate all the answers.

Jonathan Coblentz: Thank you.

Raul Vazquez: Thank you for the questions, Rick.

Speaker 4: Thank you for all the time and I appreciate all the answers.

Operator: Thank you. Next question is coming from Harold Goetsch from Loop Capital Markets. Your line is now live.

Speaker 4: Hey guys, thank you for all the time and I appreciate all the answers. Thank you for your questions Rick.

Harold Goetsch: Hey, guys, I'd like to get a little color on your expense growth guidance and just if you exclude the write-off of the goodwill, you had about 30% total expense growth for the year. That takes into account the acquisition of Digit. Your expense structure in Q4 was actually lower than Q2 2022. That looks terrific. What can we expect in terms of maybe a range of growth? Is it flattish, mid-single-digit growth as you come out exiting the year, but kind of being flattish the H1? Talk to us about the pace and cadence of expense growth in 2023.

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?

Jonathan Coblentz: We actually see OpEx going down.

Speaker 5: Talk to us about the pace and cadence of expense growth in 2023. We actually see OpEx going down.

Harold Goetsch: Okay.

Jonathan Coblentz: If you think about it, we were flat H2 of last year. We only grew by 1% in the Q4. In February, we took significant expense reduction actions. We're continuing to stay tight on our sales and marketing budget, given that we're focused on a tight credit posture. When you combine the operational improvements, though we don't guide to it, we would expect to see lower OpEx and further improvement in our efficiency ratio.

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

Raul Vazquez: Yeah. Hal, this is Raul. Just to build on that a little bit, I am really proud of the team and just the discipline that has been demonstrated. Sales and marketing was down 43% year over year in Q4. CAC for the year was down 7%. We were able to deliver that kind of flat operating expense that we had committed to earlier in the year, and we are taking that discipline into this year. We have already said that the unfortunate reduction in force that was the right thing to do for our business is going to result in $48 to 53 million in annualized savings. If you really look at the way that we have guided for adjusted EBITDA, certainly we guided for negative adjusted EBITDA in Q1.

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

Raul Vazquez: What that means is for Q2 through Q4, so the remainder of the year after Q1, we're going to 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.

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.

Harold Goetsch: Yeah

Raul Vazquez: we expect it to go down. It also is our expectation that losses are going to go down in the back H2 of the year. 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 2023. It's what gets us excited about 2024. When we think about 2024 and 2025, we're getting down to our target range in losses. We continue to have this expense discipline because it's not just going to be for 2023. We're just going to take this as part of how we manage the business in future years. As the economy stabilizes at some point, we start to have originations growth again, and that generates higher levels of profitability.

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.

Raul Vazquez: We really think that this quarter is an inflection point in the business in having that expense discipline, the lower losses that'll come, and then at some point being able to start to grow the book again.

Harold Goetsch: Okay. If I could ask one follow-up. Tell us about the new app and what are some of the key performance indicators 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 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.

Raul Vazquez: The 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. Today, obviously, for all of us, that's the phones in our pockets. It's the apps that are on our phones. The Oportun app, we think, is the first step in creating this one-stop shop and 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. 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.

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.

Raul Vazquez: Having already over 275,000 people using our app and making payments in the app, we think indicates a really strong start. Yes, we do look forward to showing some metrics in the future, Hal. We want to give some thought to what those metrics will be, but we do expect to start to share more of those success metrics in the future.

Harold Goetsch: All right. Terrific. Thank you.

Raul Vazquez: Thank you.

Operator: Thank you. Next question is coming from David Scharf from JMP Securities. Your line is now live.

David Scharf: Hi. Good afternoon. Thanks for taking mine as well. First, just to get clarification, I know Rick asked about the warrants. In terms of understanding the full extent of the dilution, in your comments of the timeline based on the future draws, should we assume effectively 10% of what the year-end diluted outstanding count should be added to the count going forward?

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.

Raul Vazquez: 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. 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 fashion. For now, we would model the 5%.

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.

David Scharf: Was there a comment about successive 2.5% tranches at certain dates? I guess that's where I was confused. I'm trying to reconcile the intent to fully draw and how that dovetails with your single-digit AR growth expectation versus the 10%. Is it one or the other?

Speaker 10: and how that dovetails with your single digit AR growth expectation versus the 10% like

Jonathan Coblentz: Sure. Let me try to clarify. We can certainly talk more about this when we have a one-on-one later, David. In March, we'll have drawn $25 million, right? We'll have issued 5% warrants. The two additional draws are scheduled for April and June. They're also each $25 million, right? With each of those draws is 2.5% warrants. Does that help?

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.

Raul Vazquez: David, for Q1, right, for the Q1 EPS.

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.

Jonathan Coblentz: Yes

Raul Vazquez: you would model the 5%.

Jonathan Coblentz: Right.

Raul Vazquez: For Q2, you would assume the subsequent draws.

Jonathan Coblentz: Well, actually, it's a little less than that because it's average outstanding. We can go through some of the details.

David Scharf: Okay. Big picture as an investor, I'm probably looking at 10% dilution at the end of 2023 versus the end of 2022. Is that kind of?

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.

Jonathan Coblentz: That's right.

David Scharf: Sort of ballpark?

Jonathan Coblentz: That's right.

David Scharf: Got it.

Jonathan Coblentz: That's right.

David Scharf: Related to that, just based on kind of the current liquidity environment. If in H2 of the current year or towards the latter stage, if there was something in the environment that signaled to you that origination activity should be re-accelerated and if, for example, you planned on growing your year-end balances double digits versus single digit as mentioned today. Based on your funding sources, in order to achieve that kind of balance sheet growth, would that require additional warrant issuance?

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...

Raul Vazquez: No. No, David. At this time, no. We would not anticipate that. You've known us now for some time, and we've got several ways that we can fund the growth of the portfolio. 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 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.

David Scharf: Got it. Then maybe just a quick follow-up on the expense side. I know you spoke to the 2023 outlook directionally and the cost savings that were announced last month. I guess bigger picture. We obviously focus on efficiency ratios, OpEx, as a percentage of managed receivables for all of our lenders. 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. If an investor wants to know what is kind of a normalized, targeted efficiency ratio for Oportun, if it’s a, call it a 10% to 12%.

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

Raul Vazquez: AR grower CAGR over a given three to four-year period. Is there a range we ought to think about, notwithstanding kind of the unique backdrop we have right now?

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.

Jonathan Coblentz: Sure. I think that's a great question, David. First of all, you've seen us get much leaner and be very disciplined about OpEx. We got down to 52%, and that's as a percentage. I know you're using a different basis, but our reported metric is as a percentage of total revenue. That's an all-time low for us since being a public company. When you combine continued revenue growth and actual OpEx reduction, you would expect that ratio to continue to go down, and it could clearly get into the 40s.

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.

Jonathan Coblentz: I think when you talk about targets, though we're not providing any guidance for future years, we want to continue to run the business lean as we focus on increasing profitability, which as Raul shared with you, when you look at adjusted EBITDA and what Q2 through Q4 should look like implied by our guidance, it starts to get pretty interesting.

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.

David Scharf: Got it. Great. Thank you very much.

Jonathan Coblentz: Thank you, David.

Speaker 10: Thank you very much.

Operator: Thank you. Next question is coming from Richard Shane from JPMorgan. Your line is now live.

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.

Richard Shane: Back again, guys.

Jonathan Coblentz: Hi, Rick.

Richard Shane: Following up on really David's two questions. When you think about the puts and takes for expenses for the year, you talked about the reduction in force. Presumably there is an offset if we think about these being essentially penny warrants, 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? 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 potentially offset by options expense or warrant expense.

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.

Jonathan Coblentz: I think that's a good way of looking at it. I would also point out when we look at our future prospects, and again, we're only giving you our view of 2023, but again, looking at what's implied by adjusted EBITDA about how we would exit the year and what that would mean for a run rate into 2024, 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: 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.

Raul Vazquez: The other thing I would add, Rick.

Richard Shane: Understood.

Raul Vazquez: Oh, go ahead.

Richard Shane: I was going to say, I understand in some ways that's why focusing on adjusted EBITDA and 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 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.

Jonathan Coblentz: That's right. The warrants will receive equity treatment for accounting purposes.

Raul Vazquez: 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 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, and we didn't spend as much time talking about this. It was in our comments to kick off the call. When we compared December of 2022 to December of 2023, we expect yield to be 200 basis points higher. Right? On a book of about 3 billion, that is also, we think, a meaningful improvement in the business that we would seek to carry forward into 2024 and 2025 as well.

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.

Raul Vazquez: 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.

Richard Shane: Got it. Okay. Raul, thank you very much. Thanks, Jonathan.

Jonathan Coblentz: Thank you, Rick.

Speaker 4: Okay, thank you very much. Thanks, Jonathan. Thank you.

Operator: 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.

Raul Vazquez: I just want to thank everyone once again for joining us on today's call. We look forward to speaking with you again soon.

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.

Jonathan Coblentz: Thank you.

Operator: 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.

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.