Q2 2023 Oportun Financial Corporation Earnings Call
Greetings and welcome to opportune financial second quarter 2000 twenty-three earnings call.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please first started zero on your telephone keypad. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Doreen hair Investor Relations. Thank you you may begin.
Hello, everyone with me to discuss opportune second quarter 2023 results are rule Vasquez, Chief Executive Officer, and Jonathan Copeland's, Chief Financial Officer Officer, and Chief administrative officer.
Ah 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 operations and financial position play on products and services business strategy and plans and objectives of management for our future operations.
Actual results may differ materially from those contemplated or implied by these forward looking statements and we questioned you'd not to place undue reliance on these forward looking statements.
More detailed discussion of the risk factors that could cause these results to differ materially are set forth in our earnings press release, and then our filings with the Securities and Exchange Commission.
Captain risk factors, including at our upcoming Form 10-Q filing for the quarter ended June 30th 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 gap and non-GAAP financial measures, which we believe can be useful measures for the period to period comparisons of our core business and which will provide useful information to investors regarding our future condition and results of operations.
A full list of definitions kidney found in our earnings materials available and the Investor Relations section of our website.
non-GAAP financial measures are presented in addition to it not as a substitute for financial measures calculated in accordance with GAAP. A reconciliation of non-GAAP to get potential measures is included in earnings press release, our second quarter of 2023 financial supplement and the appendix section of the second quarter of two.
Twenty-three earnings presentation, all of which are available at the Investor Relations section of our website at Investor Dot Opportune dotcom.
In addition, this call is being webcast and an archived version will be available after the call along with a copy of our prepared remarks with that I will now turn the call over to rebel.
Thanks, Dorian and good afternoon, everyone. Thanks for joining us today I'll discuss our second quarter financial performance and update you on opportunities areas of focus.
Let me begin with five highlights from our queue to performance.
First we return to profitability in Q2 with $2 million and adjusted net income driven by strong topline performance and the steps that we took earlier this year to streamline our operating expenses.
We've now reported positive adjusted net income in 11 of the last 12 quarters.
Justin EBITDA, which also turned positive at $4 million was within our guidance range and more importantly, we expect to deliver it $35 million to $40 million and adjusted EBITDA in two three.
Second our credit outlook is improving as a result of our tightened credit posture, our annualized net charge off rate of 12.5 per cent outperformed our guidance due to effective collection and recovery efforts as well as our tighter credit standards. We expect you to to have been the peak level and we project our loss rate will declare.
By approximately 80 basis points in Q3 based upon our mid point guidance as a reminder, we initiated our credit tightening in July of 2022 due to heightened inflation present at that time and are continuing to see improvements within our portfolio.
Third we're seeing the tangible benefits and results of our cost savings initiatives, you'll recall that we enacted a combined set of initiatives and February and may to produce $126 million to $136 million an annualized expense savings those actions are taking hold and resulted in total operating expenses.
$136 million for 227% sequential and a 14 per cent year over year decline.
Fourth we increased revenue by 18% and set a new quarterly record of $267 million.
While expenses were down 14% you over here. This demonstrates the resilience of our business and also highlights the impact of our efforts to increase yield we see yield continuing to rise in the second half of the year.
Finally, since our last earnings call, we've entered into two new whole loan sale agreements that validate the quality of our originations and will provide a total of up to $700 million of additional liquidity in funding over the next year.
I'm pleased with our performance and grateful for the efforts of our team to produce a strong quarter or.
<unk> focus remains on creating a leaner and more efficient company and we're excited about the second half of 2023, which Jonathan will detail for you when he provides guidance.
Before heading off to Jonathan I want to spend a few minutes reiterating our strategic priorities and how we're allocating are spending to the two most proven and profitable parts of the business unsecured personal loans and our savings product, which is key to our member engagement platform.
85% of our corporate expense is allocated to the core unsecured personal loan product, which is appropriate for the largest and most proven component of opportunity.
We will continue to leverage data technology, and <unk> to grow it at prudent levels and enhance this products profitability.
Approximately 10% of our corporate expenses allocated to our savings product and our member engagement platform, which continues to be profitable on a cash flow basis at that level of investment.
Within this category, we're leveraging our new opportune mobile App fully launched in Q1, which will drive increased cross selling higher conversions and lower customer acquisition costs over time.
I'm pleased to share that 550000 members have now signed up to use the app with more to come now that will start marketing it more broadly and if translated the app into Spanish.
We're maintaining optionality for future growth opportunities by allocating only five per cent of our corporate expense on developing the rest of the product suite.
Consistent with our focus on operating efficiently, we have decided to phase out our checking account products. So we can shift resources to more accretive products.
We will continue to evaluate our other products and initiatives to ensure they are the best use of resources and capital.
In summary, I'm proud of the teams strong execution and continued focus on driving shareholder value, while delivering on our mission to empower are now more than 2 million members to build a better future.
With that I will turn it over to Jonathan for additional details on our second quarter financial performance and are updated 2000 twenty-three guidance.
Thanks, Raul and good afternoon, everyone as Raul mentioned opportune delivered strong performance in the second quarter. We achieve these results by continuing to take a conservative stance focused on the things we can control.
As shown on slide seven opportune delivered record total revenue of $267 million in return to profitability delivering $2 million or adjusted net income.
Four originations, we continue to be focused on quality rather than quantity that was evident in our queue to aggregate originations, a $485 million, which were down 45% year over year get up 19% from the first quarter as we were able to make more high quality loans.
In particular, we drove the sequential growth by successfully marketing to our best customers.
Total revenue of $267 million for your for your growth of 18% outperformed our guidance range to the higher than anticipated originations and higher portfolio yield as our pricing increases are starting to take effect.
Alright, 32.2% portfolio yield increased by 83 basis points from Q1 Q2.
We remain on track for your and portfolio yield to be approximately 200 basis points higher than the level at the end of 2022, we had increased yield while remaining committed to our 36% APR cap without burdening our members with significant changes to their payment amounts net revenue was 119.
Million dollars down 18% year over year, primarily due to higher net charge offs and higher interest expense compared to 2022.
Interest expense of $41 million was up 24 million euro per year, primarily driven by increased that issuance any increase in our cost of debt to 6% versus three per cent in the year ago period.
<unk> value price of our loans increased to 100.7% as of June 30th and resulted in a 14 million dollar Mark to market increase this was essentially offset by 13 million dollar mark to market increase in our asset back notes, which contributed negatively towards our earnings resulting from a five basis point.
Increase in the weighted average price to 94.1% and continued amortization of several of our a b S deals for a net change in fair value. We had a 106 million dollar net decrease which consisted mainly of current period charge offs of $93 million.
Turning now to operating expenses and efficiency as Raul mentioned earlier, we are seeing the benefits of the actions that we've taken to optimize our cost structure or 43.4% adjusted operating efficiency and improvement of 1860 basis points year over year set our fourth consecutive.
I've posted IPR record.
Our $136 million in total operating expenses during Q2 was the lowest quarterly figure we've reported since 2021.
Driven by our expense savings measures enacted earlier this year, which included a 28 per cent reduction or corporate staff <unk>. We remain on track to further reduce our operating expenses to approximately $125 million in the fourth quarter and we expect to maintain the strong expense discipline into 2020.
Four and beyond.
I'd like to highlight for you on slide eight how our expense reductions indicate that opportunity is now significantly more efficient or opex ratio or annualized operating expenses to average daily principal balance was 18.2% as as two 223 330 basis points better than the quarter prior.
To our I T O.
Are adjusted Opex ratio, which excludes stock based compensation expense in certain non-recurring charges was even lower at 15.5% for two 223.
And the second quarter, our sales and marketing expenses were $19 million flat sequentially and down 41% euro per year as part of our expense discipline.
For the quarter, we recorded adjusted net income with $2 million compared to a 4 million dollar net profit in the prior year quarter, and then adjusted EPS of six cents versus the prior year net earnings per share of 11 cents.
Adjusted EBITDA was $4 million in the second quarter, a sequential improvement of $29 million compared to last quarter's 24 million dollar adjusted EBITDA loss on a year over year basis. It reflected a 9 million dollar increase compared to the negative 4 million and adjusted EBITDA, We reported in the prior year Court.
<unk> driven by our revenue growth and cost discipline.
And the first quarter.
As a reminder, we anticipated the sequential increase in that charge off rate due to seasonality and a shift in late stage delinquencies.
While Q2 losses were higher than Q1, a risk adjusted yield, which the ducks charge offs from portfolio yield increased by 40 basis points to 19.7%.
Additionally, I'm pleased by the 80 basis points sequential improvement, we expect in our loss rate at the mid point of our queue three guidance, which I'll detail for you shortly.
As a reminder, the credit performance of our portfolio has two distinct drivers. The post July 2022 origination benches made over the last 12 months after our significant credit tightening, which we refer to as our front book and also the originations made prior which we refer to as our back book.
The front book Despite continued inflation's performing at levels that are near or better than 2019, you can see this on slide 10 of our materials, which shows that first payment to faults are coming in at roughly half the level. They were prior to credit tightening and have since then track closely with pre pandemic levels.
You can also see the strong performance of the front Bookham slide 11, which shows that both the loss and delinquency rates for recent loan vintages are tracking lower than their respective pre pandemic vintages.
I'd also like to point out that we've continued to improve the credit quality of originations the percentage of underwritten loans with vantage scores of 660 or greater was 33% for two 222, but increased 40% during four Q22, and 47% during two two.
Two twenty-three this demonstrates our success at attracting an underwriting higher credit quality borrowers.
But that book continues to represent the bulk of our delinquencies in charge offs, but also continues to shrink back but declined by over $300 million in the second quarter to $1.3 billion and is anticipated to further decline to point $7 billion as of year end as the guidance I will share with you shortly.
Yes, we expect to see losses come down in Q3 and two four.
Regarding our capital and liquidity our business is generating a record amount of cash flow from operations and we've seen our cash position build since the end of the quarter.
<unk> cash flow from operations for the second quarter was a record $103 million up 93% year over year, which supported net debt repayment, including required a b S node amortization along with loan originations.
As of June 30th total cash was $202 million of which $73 million was unrestricted and $129 million was restricted as we started to sell home loans again total cash increased to $209 million as of July 31st of which 86 million was unrestricted.
$123 million was restricted.
Turning now to funding as Raul mentioned, we recently entered into two new whole loan flow sale agreements during the second quarter, we entered into a new agreement to sell up to $300 million a poll loans over 12 months to funds managed by Neuberger Berman.
Through July we've already sold $75 million of loans through this arrangement. Furthermore earlier. This month, we entered into a separate agreement to sell up to $400 million of whole loans over 12 months to castle Lake.
Together, we expect these two agreements will provide $700 million a substantial amount of funding positioning us to originate more of the high quality profitable loans that we have been making the.
These loans sales are being accounted for as asset backed borrowings on our balance sheet using amortize costs methodology, rather than fair value. In fact, we've made the decision to account for all knew that we issue in the future at amortized cost, which we believe will reduce our earnings volatility overtime.
Turning now to our guidance as shown on slide 13, our outlook for the third quarter is total revenue of $260 million to $265 million.
Annualized net charge off rate of 11.7% plus or minus 15 basis points at.
Adjusted EBITDA of $35 million to $40 million.
Our guidance for the full year is total revenue of $1.045 billion to $1.055 billion 62, and a half million dollars higher than our prior guidance at the mid point.
Annualized net charge off rate of 11.7% plus or minus 30 basis points with the high end of the range maintained and the low and increased by 20 basis points from our prior guidance.
And adjusted EBITDA of $70 million to $75 million consistent with our prior guidance.
Adjusted EBITDA of $70 million to $75 million consistent with our prior guidance.
We did not increase our full year adjusted EBITDA guidance, despite increasing revenue guidance because more of our total revenue is coming from high origination fees, which are shown in revenue, but not reflected in adjusted EBITDA until the origination fees are received from principle collections over time.
I want to highlight for you that our guidance reflects we will generate adjusted EBITDA of $90 million to $95 million in the last two quarters of 2023, which is more than we generated over the prior 16 quarters combined as a public company I'm optimistic that as the business continues to scale and we.
New to reap the benefits of underwriting in class discipline, we will continue to see sustainable profitable growth and significant value creation for our shareholders Raul back over to you.
Thanks, Jonathan before I open up the call for questions I want to highlight that we recently released or 2022, corporate responsibility and sustainability report and share some of the ways in which opportunities focused on addressing the biggest challenges facing U S consumers.
Opportunities extended more than $15.5 billion, a credit to hardworking individuals while helping to establish more than 1.1 million credit histories.
Likewise, our savings products has helped our members effortlessly saved more than $8.9 billion with the average member using our savings product setting aside over $1800 annually.
We've recently surpassed 2 million members in our services are available in all 50 states and our employees are passionate about giving back to the communities in which we operate in where we live having volunteered around 3500 hours since 2020 and supported 572 non-profit <unk>.
As you can see on slide 14th we received their various recognitions during 2022.
Including for the high degree of trust with which we engage with our customers the sustainability of how we operate and our use of AI for the betterment of our members <unk>.
In closing I want to share with you how proud I am of how the company perform during the quarter in the midst are significant cost cutting efforts.
Our people are proven to be highly resilient and are continuing to deliver excellence for our members and shareholders.
I also want to reiterate that I'm very pleased with our second quarter progress, which signifies the emergence of a leaner more profitable opportune.
And we've laid the foundation to carry the strong momentum into 2024 and beyond with.
With that operator, let's open up the line for questions.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session.
You would like to ask you a question you May press star one on your telephone keypad.
Confirmation tunnel indicate your line is and my question Q.
You May press Star too if you would like to remove your question from the queue.
Four participants using <unk> equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of John <unk> with the Jeffries. Please proceed with your question.
Hey, guys. Thanks.
Thanks, very much for taking my questions and congratulations on you know you kind of are being raised relative to the expectations. Prior to this quarter. So thanks, just just that the net charge offs up I mean, you guys started tightening yo.
Over a year ago things are starting to stabilize yeah. How much do you are you able to discern how much of this as a function of the tightening or is there some attribution to the stabilization of inflation and you'll given that is there.
And what time would you be comfortable starting to think about loose and lean back into the market a little bit more aggressively.
Yeah. So John Thanks for the question. This is where I will we really think it's a combination of things. So certainly the tightening in the ongoing adjustments help the stabilization of the economy helps.
You may have noticed in the comments, we shared also that the percentage of loans going to individuals that advantage scores of 660 or a higher was 33 per cent a year ago 40 per cent at the end of 2022 and now it's up to 47% so I take as kind of lenders.
Upstream from us tightened that is giving us an opportunity to select better credit poor profiles right and we're certainly focused on doing that to improve the results. So that's something that we think is also helping us really deliver this step down in originations I'm, sorry, and losses right will be about 80 basis points better.
And this next quarter and then in terms of opening up we feel really good about the credit that were Originative right now right. The whole loan sale agreements with castle like a neuberger indicate that the front book is high quality and people Wanna earned those I'm sorry, they want to go ahead and one of those assets right. They wanna own those loans and it's a <unk>.
Once we are starting to <unk> grow the portfolio a bit. So you saw that originations were up 19% quarter over quarter about $77 million. So that indicates on our side you know an ability to acquire that credit that we're gonna feel really good about starting to grow originations at kind of a modest then.
Really smart level of given what we're seeing in the economy.
Okay and second question and I know this is not.
Not the focus of of of your priorities right now, but you you have invested in other categories of businesses I think he's slowed down.
Some of that investing recently just.
Given the variability in the.
Credit markets.
Yeah, maybe like specific take the credit card business.
Where where do you where do you see that what level would that be positive contribution is there still some sort of framework for us to think about the timing of that and and that and maybe any of the other growth segments as well.
Sure. So I am page four of the deck, what we presented was where is it that we're putting our corporate expenses, 85% of them are on the unsecured personal loan business, 10% savings and enter your point John We've got five per cent. You can think of that is $16 million to $17 million a year in corporate expense.
<unk> and that's what's being allocated to credit card secured personal loans lending as the service. So we're really focused on right now is evaluating each of those products and initiatives to ensure the best use of resources and capital we announce that after that review, we decided that we were closing our checking account.
We just didn't think it made sense to keep that in maintenance mode. When we thought about what's the highest and best use of resources, we're gonna be taking a look at the rest of those products as well credit card secured personal loans lending as the service as part of an ongoing effort you know John just to make sure that it's the highest and best use of capital.
Management time, and the resources, especially after the reduction in force.
Okay that makes sense and then final question with slow agreements is the and yeah that that is it gets good signal kind of in the credit market that only the credit performance, but the interest from the Counterparties to the investors is is the type of pricing you're getting on that consistent with what were you were doing it <unk> 2019 or <unk>.
How do we think about the shift to that market.
Yeah. That's a great question, obviously since 2019 interest rates and credit spreads are much higher we continue to have very strong risk adjusted yield we've got a slide in the deck that talks about our unlevered yield after losses and servicing the in about over 15%. So <unk>.
Nearly that's an attractive cash flow to investors, we're not sharing the specific specific economics, John but we are selling loans at a premium and I think in this current market that's a really strong sign.
Yep, Thanks, very much guys.
And he was young.
[laughter].
The next question comes from the line of <unk> <unk> J P. Morgan. Please proceed with your question.
Hey, guys. Thanks for taking my questions, John really started to touch upon what I was largely interested in uhm historically, you've sold about 10% of your production. It looks to me like implicitly depending upon how much we think volumes going to grow from here in <unk>.
Patience you just provided that you're gonna be selling up substantially higher percentage I'm guessing somewhere 25 to 35 per cent of production does that seem like it's in the ballpark at $700 million a year.
I I think that's fair wreck yeah. As you know we're not guiding two original nation. So we can't do the math precisely but that sounds like a reasonable estimate.
Got it okay. Thank you and then.
Any answer to John's question about the gain on sale Marge and you said that it was a positive gain on sale.
But that that.
Obviously starts at a very very modest number and they can go substantially higher.
I think historically, you've been pretty close to 10 point the difference between.
10 coins and profitable is the difference.
<unk> positive is the difference between substantially profitable and kinda breaking even I'm curious given what is the very favorable guide for the second half of the year. The best explanation of that would be the contribution <unk>.
From that volume I, just wanted to make sure that we are <unk>.
Thinking about the channel markers right, it's probably not as high as 10%, but it's probably not as low as 10 basis points.
So Rick I'm glad you asked this question I mentioned in my remarks, and maybe I should have emphasized it more but we are for GAAP accounting purposes treating these hold on sales as asset backed borrowings. So we're recording the proceeds we.
He received his adapt balance there'll be interest expense equal to management's estimate of the investor yield and then we'll continue to record revenue as if the loans were on balance sheet and they will continue to show up in our own balance sheet loans. So we won't actually have a a gain.
On sale or servicing fee income reported in noninterest income for this portfolio, but to your point the economics work the same way and we're definitely making money and nice money on these hold on sales and so it's a win win our investors get a high.
Quality asset at what for them is an attractive yield and we got to continue to originate high credit quality loans and and make money off of those lines and Rick just add a <unk>. This is <unk> just had a little bit because I think you were also talking in essence about our our guidance for adjusted EBITDA for the remainder of the year.
You know I I'm really bullish right now about the positioning of the company. We obviously you had to make some difficult choices in the beginning of the year, but we resetting ourselves up for a really strong back half of the year. So certainly the whole loan sales are going to contribute the reduction in expenses are contributing.
The improvement in yield is something that is contributing to a stronger back half of the year, having losses come down as you know I talked about a bit when John asked this question. All those things are lining up really to create is we mentioned in our remarks right Ah combine adjusted EBITDA at the end of the year that is higher than the last six.
<unk> quarters combined.
So I I'm really proud of the way that the team is executing and I think we're set up really well for the back half of the year in 2024, where it just feels to us like we really turned the corner through this good execution.
No looked at that clearly comes through and we are all ready sort of trying to solve into that 90 to 95 million Indian Jonathan. Thank you for the clarification I heard you say that but I did not in fact process. It the way that I should've I I was so sort of tunnel vision on the gain on sale hadn't thought of.
<unk> really need locations of what you're describing and <unk> I think you're right. It's not any one of those individual adjustments. It's the layering of them must be incremental revenue, which the lower cost on the operation side, it's the lower cost on the credit side, it's a little more operating leverage it.
And it really does it really does bill.
Well it'll it'll be interesting as we go through the model to <unk> to see all of that and then the other issue is I guess, the one account to make sure I have is how do you make that quote unquote sale, but keep <unk> below sale treatment do you.
Have to continue to reserve as if you own those loans and so oh, but you fair value. It how does that how's that going to work with a fair value accounting.
Okay. So those are a couple of great questions. So first of all from a gap standpoint.
We retain the option opportune retains the option to repurchase a small percentage of the the loans that we've salt and so because of that from a gap accounting standpoint, the loans do not qualify for deconsolidation in there on balance sheet, they're they're you know it's a C.
L for tax it's a sale for you know legally.
But in terms of fair value will fair value those loans, just like we share value of the rest of our portfolio. It doesn't really change anything there.
And just a quick clarification on the option to repurchase that is at our discretion that's at opportunities discretion correct correct.
Understood Okay more than extended my one question and follow up I apologize.
Okay. Thank you Rick.
As a reminder, ladies and gentlemen, it is star one to ask a question.
Okay, well I Wanna, Thank everyone for joining us on today's call and we look forward to speaking with you again soon thank you very much thanks, everyone.
And gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.