Oportun Financial Corporation Q1 2023 Earnings Call
[music].
Welcome to opportune financial corporations first quarter 2023 earnings conference call.
All lines have been placed on mute to prevent background noise.
After the Speakers' remarks, there will be a question and answer session.
Senior Vice President of Investor Relations, Mr. Herr you may begin.
And Hello, everyone with me to discuss opportunities first quarter 'twenty 'twenty. Three result, a rule Vazquez, Chief Executive Officer, and Jonathan Copeland's, Chief Financial Officer, and Chief administrative officer.
I'll remind everyone on the call or webcast at some of the remarks made today will include forward looking statements related to our business future results of operations and financial position planned products and services business strategy and plans and objectives of management for our future operations.
<unk> results may differ materially from those contemplated or implied by these forward looking statements and we caution you not to place undue reliance on these forward looking statements.
A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in our earnings press release, and our filings with the Securities and Exchange Commission under the caption risk factors, including at our upcoming Form 10-Q filing for the quarter ended March 31 2023.
Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events other than as required by law.
Also on today's call, we will present, both GAAP and non-GAAP financial measures, which we believe can be useful measures for the period to period comparison of our core business and which will provide useful information to investors regarding our financial condition and results of operations.
A full list of definitions can be found in our earnings materials available at the Investor Relations section on our website non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP.
A reconciliation of non-GAAP to GAAP financial measures is included in our earnings press release, our first quarter 2023 financial supplement in the appendix section of the first quarter 2023 earnings presentation, all of which are available at the Investor Relations section of our website at Investor Day Opportune Dotcom.
In addition, this call is being webcast and an archived version will be available after the call along with the script of our prepared remarks with that I will now turn the call over to rule.
Thanks, Tori and good afternoon, everyone. Thanks for joining us today I'll discuss our first quarter financial performance sure. How we're managing through this dynamic macroeconomic environment by minimizing cost and maximizing efficiency and I'll provide an update on our strategic initiatives.
Let me begin with our Q1 performance we.
We generated total revenue of $216 million exceeding our guidance range and up 21% year over year, reflecting higher than anticipated average daily principal balance and higher noninterest income from our savings product.
Our first quarter annualized net charge off rate of 12.1% also outperformed our guidance range of 12, 5% plus or minus 15 basis points. As a reminder, starting last July we began to significantly tighten our underwriting standards to address the impact of inflation on our members.
We're pleased that the first payment defaults and delinquencies on our post July vintages continue to perform near or better than 2019 pre pandemic levels.
Finally by driving higher revenue and exercising disciplined expense management, we produced a narrower adjusted EBITDA loss of $24 million compared to the $49 million to $44 million loss guidance range that we provided.
We are focusing on adjusted EBITDA in 2023, because it demonstrates the cash flow generation capability of the business and it is not impacted by swings in fair value.
Jonathan will cover Q1, adjusted net income and the impact of noncash fair value Mark to market changes.
Overall, we made good progress this quarter there is still work to be done and the entire team is focused on driving more value for our shareholders.
Let me shift now to how we are managing the business in this uncertain macroeconomic environment.
The headline is that we are taking a conservative stance and are focused on the things that we can control while carefully monitoring the economic environment.
I'll go into more detail regarding what that means for us starting with expenses.
First we are fully committed to optimizing our cost structure, we delivered a 48% Q1 adjusted operating efficiency ratio over 1300 basis points better than Q1, 2022 and our third consecutive quarterly record for efficiency.
However, we believe additional expense reductions are necessary to ensure opportunity is best positioned for sustainable profitable growth.
In addition to the cost reduction measures we enacted in February we announced today that we are taking further measures to lower our expenses and optimize our efficiency.
Specifically, we are reducing our expense base by another 255 employees as well as further reducing contractor and vendor spending.
Aggregated with the actions we took in Q1, we have reduced our corporate staff by 28% this year. These.
These actions will generate annualized savings of $78 million to $83 million, which combined with the February actions will result in total annualized savings of $126 million to $136 million by the end of the year.
I want to highlight the work we've done to reduce costs in a few ways.
In terms of our 2023 operating expense forecast, we expect that all of the expense reduction efforts will translate to a Q4 2023 opex of approximately $125 million for a new run rate cost space. When we exit 2023 up approximately.
$500 million.
We can also look at Opex ratio, which is our ratio of annualized operating expenses to one principal balance.
As you can see on slide six our adjusted Opex ratio was 16, 4% in Q1.
370 basis point improvement from 21% in Q1 2019.
Our Q1 2023, adjusted Opex ratio would have been 14.7% pro forma further cost reductions.
Finally, we can compare the growth in our expense base to the growth in revenue and growth in the portfolio.
On an absolute basis, we expect that our anticipated annualized Q4, 'twenty three expense base will be 38% above 2019 operating expenses, whereas our full year revenue 2023 guidance will be 62% to 67% higher than 2019 told.
Revenue in the owned portfolio is 101% higher than 2019.
Their unique considerations with each metric, but all of these metrics highlight the work we've done to position the business for future success.
Let me now shift to we're thinking on originations in this environment.
We've been sharing for several quarters, we are focused on quality not quantity of originations that was evident in our Q1 originations of $408 million, which were down notably from the same period last year.
I've also shared that we were pleased with the performance of our origination since we tightened our credit standards in July 2020 to.
That said, we believe it's prudent in this uncertain environment to be conservative with our level of originations and we've continued to tightening credit since our last earnings call in March as such our current view for origination levels. This year is lower than what we envisioned when we last spoke to you.
Turning to credit in this environment the performance of our portfolio has two distinct drivers the post July origination vintages, which we refer to as our front book and the originations made prior to our significant private credit tightening, which we refer to as the back book.
The front book represents the loans that we've originated over the last nine months and despite continued inflation is performing at levels that are near or better than 2019 performance.
The back book continues to represent the bulk of our delinquencies and charge offs are Q1 loss performance was 40 basis points better than the middle of our guidance range, because our collections and analytics teams successfully manage the late stage delinquency buckets, thereby keeping those delinquent loans from turning into Q1 losses.
Yes.
We continue to carefully manage the back book, but some of the loans that didn't charge off in Q1 continue to be delinquent.
And in light of much lower tax refunds. This year some of the expected Q1 losses may simply shift into Q2.
Therefore, our Q2 guidance reflects a higher level of losses in Q1, but the top end of our full year guidance for losses has not changed.
Wrapping up my comments on credit given that the average life of our back book loans is only one year I am confident that we will successfully worked through this challenge in 2023.
To quantify this for you our forecast reflects that the level of pre July underwritten loans on our balance sheet will decrease from $1 $6 billion at the end of the first quarter to $1 $2 billion at the end of the second quarter and to zero point $7 billion at the end of the year.
The final point I want to share regarding how we are managing the business in this environment relates to pricing.
We are reaffirming our view that portfolio yield at the end of this year will be approximately 200 basis points higher than the level at the end of 2022.
We have increased yield while remaining committed to our 36% APR cap and keeping our members loan payments very close to what they're used to paying off.
Our low first payment default rates and delinquency rates of recent vintages indicate that our pricing decisions are not impacting credit performance.
Before turning things over to Jonathan I want to spend a few minutes discussing our strategic initiatives and how we're allocating capital in this environment.
First and foremost, we're allocating capital to the two most proven and profitable parts of the business.
As you can see on slide seven of our earnings presentation, 85% of our G&A spend is allocated to the core unsecured personal loan business, which we believe is appropriate for the largest and most profitable component of our business.
We will continue to leverage data technology, and AI to grow it at prudent levels and enhance its profitability in future years.
Approximately 10% of our G&A spend is allocated to our savings product, which is profitable on a cash flow basis at that level of investment.
Second we're maintaining optionality for future growth opportunities with minimal current investment.
Our strategy to develop and offer a suite of financial products to drive higher member lifetime value and more profitable relationships with validated by the initial levels of member adoption and early financial results.
That said.
We have reduced the levels of capital allocated across all of those products to approximately 5% of our total G&A in the near term and will prudently ramp up growth initiatives when the macroeconomic backdrop inevitably improves.
In summary, while we continue to carefully monitor the economic environment. We are focused on the things we can control expense levels prioritization of our core business conservative originations collections efforts and pricing.
We plan to extend this approach to each of these areas into 2024 and anticipate that our sharply reduced cost structure lower credit losses, and pricing initiatives will fortify our business economics and substantially enhance our margins and efficiency.
For the remainder of 2023, we plan to maintain our conservative stance, which will be reflected in our guidance given the uncertain environment.
With that I will turn it over to Jonathan for additional details on our first quarter financial performance and our updated 2023 guidance.
Thanks, and good afternoon, everyone.
As Rolla mentioned opportune delivered solid performance in the first quarter versus our expectations.
I'm optimistic that opportune will emerge as a more sustainably profitable business given our front book strong performance, our more efficient cost structure and shrinking back book.
In the first quarter, we generated $260 million of total revenue up 21% year over year as shown on slide eight and 88 million of adjusted net loss or $2 60 or.
Adjusted net loss per share.
Higher net charge offs noncash fair value Mark to market declines and higher interest expense drove the earnings decline, partially offset by revenue growth and lower operating expenses.
Our aggregate originations were $408 million down 49% year over year, reflecting our ongoing credit tightening actions and our focus on high quality originations.
Net revenue was $5 million down 98% year over year, primarily due to noncash charges, including a net change in fair value decline of $216 million. This included the noncash impact of declining fair value Mark to market adjustments on our ABS notes in our loans of $86 million.
And net charge offs of $92 million higher interest expense also contributed to the net revenue decline, which was partially offset by the higher total revenue.
The fair value price of our loans decreased to 100.3% as of March 31, and resulted in a $37 million mark to market decrease.
Reduction in fair value of our loans was driven by an increase in our assumption for remaining cumulative charge offs due to higher charge offs in our backlog, partially offset by a lower discount rate due to lower interest rates and tighter credit spreads for our ABS notes.
The 49 million dollar mark to market increase in our asset backed notes, which contributed negatively towards our earnings resulted from a 158 basis point increase in weighted average price to 94, 1%.
Interest expense of $39 million was up $25 million year over year, primarily driven by increased debt issuance and the increase in our cost of debt to five 5% versus two 6% in the year ago period.
Turning to expenses, we maintained strong discipline with adjusted operating expenses declining, 8% sequentially and 5% year over year.
As you can see on the right side of slide eight adjusted operating efficiency at 48% was an improvement of over 1300 basis points year over year.
This figure will continue to improve as the 126 million to 136 million of annualized run rate savings from our cost optimization efforts take hold over the course of the remainder of this year.
In the first quarter, our sales and marketing expenses were $19 million.
Down, 10% sequentially and down 44% year over year as part of our expense discipline.
Our customer acquisition cost was $192 up 27% from the prior year period as lower marketing expenditures were offset by lower aggregate originations due to credit tightening our CAC varies with the origination volumes given the fixed cost associated with our retail net.
Work.
As I indicated on our prior earnings call, we expected the noncash fair value mark to market to cause us to have a loss in the first quarter of 2023 for the quarter. We recorded an adjusted net loss of $88 million compared to 53 million dollar of net profit in the prior year quarter and adjusted <unk>.
Net loss per share of $2 60.
Versus the prior year net earnings per share of $1.58.
Adjusted EBITDA was negative $24 million in the first quarter with $58 million decrease compared to $34 million in the prior year quarter, but better than our guidance range of negative <unk> 49 to negative $44 million.
The year over year decline was primarily driven by higher net charge offs and interest expense along with the impact of loan sales.
We believe that our profitability will be markedly improved during the remaining three quarters of 2023 as reflected in the guidance that I will share in a few minutes.
Now, let me provide detail regarding Q1 credit performance, our first quarter annualized net charge off rate was 12, 1% compared to eight 6% in the prior year period, and 12, 8% in the fourth quarter, while the 70 basis point sequential decline outperformed our expectations in Q1 and the back book.
Continues to comprise the bulk of our loans our guidance will reflect that as rolla covered shifting previously expected losses will cause charge offs to be higher in Q2.
Regarding our capital and liquidity as of March 31, total cash was $202 million of which 74 million was unrestricted and 128 million was restricted and.
Additionally, net cash flow from operations for the first quarter was $77 million up 99% year over year, which supported net debt repayment, including required ABS note amortization along with loan originations. These activities resulted in a $2 million decline in total cash during the quarter.
Also as of March 31, $315 million of our combined $720 million and warehouse lines were undrawn and available.
Last week, we borrowed the second $25 million on the up to 75 million upsizing of our senior secured term loan.
As previously contemplated and discussed on our earnings call. The consideration for the second draw included Penny warrants for common stock representing approximately two 5% of the coffee. The funds are fulfilling their purpose of increasing our liquidity position amidst an uncertain macroeconomic backdrop, while we manage our.
Back book portfolio downward.
Yeah.
Turning now to our guidance our outlook for the second quarter is total revenue of $250 million to $255 million.
Annualized net charge off rate of 12, 8% plus or minus 15 basis points.
Adjusted EBITDA of $2 million to $7 million.
Our guidance for the full year is total revenue of $975 million to $1 billion in line with our prior guidance.
Annualized net charge off rate of 11, 6% plus or minus 40 basis points with the high end maintained and the low end increased by 20 basis points from our prior guidance.
Adjusted EBITDA of $70 million to $75 million up approximately $17 million at the midpoint from our prior guidance driven by $40 million and new expense reductions could be captured this calendar year, partially offset by higher net charge offs and non corporate interest expense.
Yes.
Before I turn the call back over to Raul I want to share with you that I have confidence that our decision to significantly reduce our expense base and maintain a conservative origination stance will allow us to navigate the current environment and become a more sustainably profitable business Raul back over to you.
Thanks, Jonathan as we've communicated while we performed solidly and made progress in the first quarter, we remain highly cognizant of the uncertain macro environment and the related credit implications.
The leadership team and I have made the necessary adjustments to create a more efficient and more profitable business with a significant expense reductions. We spoke about today opportune has enhanced its cash flow in comparison to our prior forecast, which we expect will carryover into 2024 and beyond.
With that operator, let's open up the line for questions.
Thank you.
And ladies and gentlemen at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the Q4.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from John Hecht with Jefferies. Please state your question.
Afternoon, guys. Thanks, very much I think you gave enough information.
With respect to the kind of net saves over the course of the year, but maybe can you just give us.
Some some detail about the cadence of the cost saves just so we get it in our models as accurately as possible.
Sure John It's Jonathan.
We said in our remarks that for the fourth quarter, we expected that our GAAP operating expense would be around one point excuse me about $125 million. So again $125 million. So from a modeling perspective, I think it would be very reasonable to assume that it.
Kind of stepped down from the current level over the next couple of quarters.
John This is Rob the other way to think about this from a modeling perspective is that we start to see the impact of the cost reduction about three months after.
We take the action. So the February action means that the expenses will really start to see I'm sorry, the savings of the February action, we start to see this month and really in June and the savings from the action that we took today, we'll start to see in August . So that's the other way to think about it in terms of same monthly.
Expense savings and what quarter you'd start to see the savings in.
Okay, that's very helpful.
And then you guys have a lot of different channels you can lean on for growth you got the bank partnerships. Some retail partners your own store base your own your own kind of organic digital channel.
There is like how do you think about the mix of that over the next few quarters, given that you're kind of you're fine.
Fine tuning your business is there any of those shows you're relying more on or less on given given the backdrop.
Well I think we would say right now the three channels that we're relying the most on our certainly our bank partnership channel.
Continues to be a channel that we're pleased with you know we're also pleased with our retail channel.
Because that generates quite a bit of traffic without necessarily having to spend our outbound marketing in this environment and then finally online continues to be a good channel for us the reduction that we have taken in sales and marketing and we did share that sales and marketing is down about 45% year over year the bulk.
That cut is in digital so although online continues to be a strong channel for us we have seen reduced applications on loans there as we've cut the marketing there John .
Okay, and then you guys have talked about.
Obviously tightening and the benefits that we should see that over the coming quarters and months. It maybe how do you measure.
The incremental credit quality.
Maybe maybe specifically what terms or underwriting factors that he changed and how does how do we see that or how do you characterize that in the front book.
Yeah. So yeah, the things that we're really focused on in originations today or a really number one focusing on repeat borrowers those who have had success with our loans in the past and then number two across both repeat and new borrowers really focusing on those who have higher free cash flow.
Although inflation is coming down the decline is very slow right inflation continues to be persistent. So we think the best thing to do right. Now is continue to focus on those applicants who have high free cash flow in terms of what we look at to measure success. It's really some of the content that we put in the earnings deck and that's really.
Number one when we look at our originations over the last nine months you can see in the first payment default that's page nine of our earnings deck that they continue to be below 2019, that's the green line on that chart and you can see in that in that chart. The Green line continues to be below 2019, so that gives us confidence and then on pay.
10 of the deck. We also shared what the 30 plus day delinquency rates look like from September to January and all of those continue to be better at or near 2019 levels. So that's the other thing that really gives us confidence John when we think about the front book right. Those those loans that we made since the tightening and then finally there.
You didn't ask when we look at the overall picture, we look at a declining back book and we chose in this quarter to show it to you as just dollars to really try to.
Emphasizes the point of how much that back book is shrinking. So you can see that it was $1 $6 billion at the end of Q1, it will decline by $400 million. This quarter and then another $500 million and the remainder of the year. So as that continues to decline the front book becomes a bigger and bigger proportion of.
Our book overall, and we will start to see a better delinquency and losses picture emerge.
Great. Thanks, Thanks for all the detail. Thank you.
Thank you John .
Our next question comes from Rick Shane with J P. Morgan. Please state your question.
Thanks, guys really two questions.
One is that when we looked at the repayment rate for the first quarter. It seems a little bit lower than we would have necessarily expected.
Given seasonality and given some of the tightening in terms of credit.
Is that just noise or is there something going on there that we should be aware of.
Hey, Rick it's Jonathan I think that's consistent with what we've been saying about tax.
Tax returns tax refunds being lower for our customers.
So with less cash flow.
And you would see it seasonally lower payment rates.
And Rick this is Rob well as you know.
You've heard US say this over the years that tax refund tends to be one of the largest tracks that our members get all year and a data point that I read last week indicates that tax refunds and it ended up being 28% lower year over year. So as you can imagine if that's one of the biggest checks our members get and it's almost <unk>.
30% lower that would impact their ability to repay.
At a rate that we've seen historically in Q1.
Got it and obviously that rolls into the Q2 credit outlook, which makes sense.
That's right. The other thing obviously that stands out is when you look at the vintage curves.
Clearly underperformance of the 2021 vintage but what.
<unk> stands out to me is that normally by about this time to start to see the curve flattened now and it continues to really have a upward sloping trajectory win.
What should we be looking for to see that start to inflect.
Well I think that that's the part of the <unk> that we're actively managing Rick.
If you think about 2021 that was the vintage that really really felt the impact of high inflation. They felt the impact of just all the elements that we've been talking about.
Higher rents higher gas prices, that's the curve that we would've seen really start to flatten out in a normal tax season.
So you will have more information to provide next quarter, because that's really where our collections and analytics teams are focused it's just figuring out how do we get in touch with those members how do we figure out the best way to help them. So that that way they can get back to the normal payment behavior that we would expect to see.
Got it.
When we think about these things normally what we would be looking for is some.
Sort of.
Slowing of the year over year change in rate of delinquencies is there anything that when you look at that vintage from because again, we can see the charge offs, but we can't see the delinquency trends on a vintage basis.
Are there indications there that start to give you comfort that over the next three or six months that herb will start to flatten out other than just anything other than burnout.
Yeah, well, we've always felt that our members have a high willingness to pay their challenge anytime. They become delinquent is is a challenge say and the ability to pay so the couple of things that give me confidence Rick when I think about this number one is you know because you watch this very carefully and we all got information just a few day.
Does it go on this the employment market continues to be exceptionally strong.
Number two though I did mention earlier inflation is coming down slowly.
It's just it ends up being quite sticky. The good news is it is coming down right. So we think that a combination of a strong employment market with inflation starting to abate a bit and then the actions that we can take on our side, whether it's a temporary reduction in payments to other things just to help someone really improve their cash flow over the span of say.
30 days those are the sorts of things that we've seen help us in the past when someone who is dealing with a temporary problem and making their payments. So that that's really what gives us confidence as things are improving a bit economically while the job market stays very strong.
Okay very helpful. Thank you.
Rick.
Thank you and just your mine or to ask a question press star one to remove yourself from Q from the queue Press Star two.
Our next question comes from Sanjay, So Connie with K B W. Please state your question.
Hi, This is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. The first one I had was just around the the front book.
Loss rates that you expect them if I were just to do the math of the first half versus your full year guidance. It implies back half of the of about 10, 5% at the midpoint just curious as to.
How we should think about you know what part of that is from the front book versus the back book and from a longer term perspective, what it was just a more normalized charge off but you expect to get to.
Yes, Steve and Great question so.
I think our long term goal ultimately is to get back to a 7% to 9% charge off range, we have been pretty consistent about articulating that.
In terms of the second half of the year I agree at a high level, what your math in that our guidance comparing the full year two <unk> actuals and Q2 guide suggests lower levels of losses.
In.
In the second half of the year I want to state a specific number about that but you can do the math and kind of back into it and then the back book is still contributing but it is going to contribute loss right as Rolla mentioned, a moment ago and you can see this on slide 10 of our deck, we've shown the <unk>.
Expected dollar decline of the back book, it's about $1 6 billion at March 31st and by the end of the year. It's gonna have declined by $900 million to about $700 million outstanding So.
We expect.
Less and less contribution.
Got it and then just some curious as to within the full year charge off guidance what type of assumptions are you using on the macro side has anything changed relative to the prior guidance on that.
No I think from a macro perspective, we haven't changed our assumptions.
In terms of just continuing to see a strong employment market for our members.
I think as we've talked about in the past.
There are layoffs, certainly that are taking place throughout the industry, but our sense is that for our member right. Your typical kind of blue collar worker. The employment market continues to be quite strong. So we haven't changed our assumption regarding Ah.
Our robust employment market for our member.
Got it and then the final question I have is just surround the raised EBITDA by about $15 million to $20 million.
How much of that was attributed to this quarter, perhaps outperforming versus pack the remainder of the year being better. Thanks.
I didn't get it incorporates all of that right. We expect over $40 million of the expense saves that we announced the incremental expense saves to hit in 2023.
And that potentially offset by.
Potentially higher charge.
Charge offs and a potentially higher interest expense, we always look at a range of assumptions in setting guidance and consider multiple different scenarios and coming up with a total guide.
But Stephen I think underlying that is.
A really high degree of confidence that we have that our business is improving its profitability every single quarter starting in this quarter as you can tell with the guidance for adjusted EBITDA being positive and then to your point there are significant improvements.
In Q3, and Q4, which again are indicated by the full year guidance for adjusted EBITDA and the fact that we did raise that guidance. That's right. If you looked at what our guidance implies that suggests over $80 million of <unk>.
Adjusted EBITDA in the second half.
Got it great. Thanks for taking my questions.
Thank you.
Thank you there are no further questions at this time I'll hand, the floor back to Raul Vazquez for closing remarks.
I 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 and that concludes today's conference all parties may disconnect have a great day.