Q4 2024 Oportun Financial Corp Earnings Call
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Speaker Change: I'll now turn the conference over to your host Dorian Hare Senior Vice President Investor Relations. Thank you you may begin.
Speaker Change: Thanks, and Hello, everyone with me to discuss opportunities fourth quarter 2024 results are rule Vazquez, Chief Executive Officer, and Jonathan Coblentz, Chief Financial Officer, and Chief administrative officer.
Speaker Change: Everyone on the call or webcast in some of the remarks made today will include four.
Speaker Change: We're looking statements relating to our business future results of operations and financial position, including projected adjusted R. O E E.
And for products and services business strategy expense savings measures and plans and objectives of management for future operations.
Speaker Change: Actual 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.
Speaker Change: 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 in our filings with the Securities and Exchange Commission under the caption risk factors, including our upcoming Form 10-K filing for the year ended December 31 2024.
Speaker Change: 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 that as required by law.
Speaker Change: So 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.
Speaker Change: A full list of definitions can be found in our earnings materials are available at the Investor Relations section on our website non.
Speaker Change: non-GAAP financial measures are presented in addition to and not as a substitute for financial measures actually did in accordance with GAAP.
Speaker Change: A reconciliation of these non-GAAP to GAAP financial measures is included in our earnings press release, our fourth quarter 2024 financial supplement and the appendix section of the fourth quarter of 2024 earnings presentation, all of which are available at the Investor Relations section of our website at Investor Dot Opportune Dot Com. In addition, this call is being.
Speaker Change: Webcast.
Speaker Change: An archived version will be available after the call along with a copy of our prepared remarks with that I will turn the call over to Ralph Thanks, Dorian and good afternoon, everyone. Thank you for joining US we ended the fourth quarter with stronger than anticipated results demonstrating that we've turned the corner and improving our financial performance.
Speaker Change: And are entering 2025 with momentum discipline and focus we.
Speaker Change: We met or exceeded the guidance expectations that we set for the fourth quarter and every quarter throughout 2024.
Speaker Change: Before key headlines from Q4 in my view or a return to GAAP profitability improved credit performance are returned to originations growth and ongoing expense discipline.
Speaker Change: First and importantly, Q4 marked our return to GAAP profitability.
Speaker Change: Our $9 billion of net income with a $51 million year over year improvement and drove an Roe of 10%.
Speaker Change: Adjusted net income of $22 million with a $30 million year over year improvement and we generated an adjusted ROE of 25%.
Speaker Change: Moreover, we generated $41 million of adjusted EBITDA of $31 million increase from last year's levels and exceeded the top end of our guidance by 37%.
Speaker Change: We were able to achieve these results through improved credit performance are returned to originations growth and continued expense discipline.
Speaker Change: I'd like to reiterate that we expect to be profitable on a GAAP basis for full year 2025.
Speaker Change: Second regarding improved credit performance, our net charge off rate was 11, 7% an improvement of 55 basis points year over year, and the lowest level of losses since the third quarter of 2022.
Speaker Change: In dollars the positive trends continued as our net charge offs improved year over year for the fifth consecutive quarter in this instance by 12%.
Speaker Change: I'm also pleased with our ongoing progress in reducing 30, plus day delinquencies, which were four 8% for the quarter and better by 113 basis points year over year.
Speaker Change: It's the fourth consecutive quarter of year over year improvement.
Speaker Change: Third originations were $522 million during Q4, turning to growth at 19% year over year.
Speaker Change: Even with a conservative credit box, we increased the number of loans originated by 23%.
Speaker Change: And lastly, we reported $89 million in operating expenses down 31% year over year, which was our lowest quarterly figure since the second quarter of 2019.
Speaker Change: Without the benefit from one time items or <unk> 24, operating expense would've been approximately $95 million still below the $97 $5 million target, we set at the beginning of 2024.
Speaker Change: Building on our 2024 progress we will continue to advance our three key strategic priorities in 2025, which are improving credit outcomes fortify.
Speaker Change: Or defined business economics, and identifying high quality originations.
Speaker Change: Regarding credit outcomes, we expect to reduce our net charge off rate in 2025 by benefiting from our V 12 credit models for our full year and from our back book of loans shrinking to just 1% of our own portfolio by year end.
Speaker Change: We expect to attain an adjusted ROIC in the teens up from 8% in 2024 by generating 10%, 15% full year originations growth.
Speaker Change: Returning to revenue growth by year end and targeting a 5% full year decline in operating expenses.
Speaker Change: And we'll continue to identify high quality originations under our current conservative credit standards I reinvesting in marketing and targeting high quality new members, while continuing to support our best existing members.
Speaker Change: We are also prioritizing the growth of secured personal loans within our own portfolio I think offer superior unit economics compared to unsecured loans.
Speaker Change: In 2020 for secured personal loan losses ran approximately 500 basis points lower compared to unsecured personal loans.
Speaker Change: With fourth quarter revenue per load approximately 75% higher due to a larger average loan sizes.
Speaker Change: Finally, I'd like to provide a preview of 2025 guidance Jonathan will share with you that we are increasing our full year adjusted EPS expectations by 7% at the midpoint.
Speaker Change: Our updated adjusted EPS range is $1.10 to $1 30.
Speaker Change: Reflecting a 53% to 81% increase over 2024 72.
Speaker Change: In summary, our results are a testament to our team's execution and we are at the beginning of a new chapter for opportunities.
Speaker Change: With the strong foundation, we worked diligently to build in 2024, we remain more focused than ever to drive growth and shareholder value in 2025.
Speaker Change: With that I will turn it over to Jonathan for additional details on our financial and credit performance as well as our guidance.
Jonathan: Thanks, Raul and good afternoon, everyone as Rob mentioned, you can see on slide six that we had a strong fourth quarter in which we met or exceeded the guidance expectations that we set.
Jonathan: We're confident that opportunity is poised to carry this momentum into 2025 by further enhancing our profitability, including by being GAAP profitable on a full year basis as we track towards our long term financial objectives as shown on slide seven opportune delivered total revenue of $251 million in the fourth quarter, we were <unk>.
Jonathan: Profitable at $9 million of net income with diluted EPS of <unk> 20 cents and we were profitable on an adjusted basis for the fourth consecutive quarter with adjusted net income of $21 $5 million for adjusted EPS of <unk> 49.
Jonathan: While maintaining credit discipline originations of $522 million were up 19% year over year sequentially originations were up 9% aligning with the typical seasonal pattern for a ramp throughout the year.
Jonathan: Total revenue of $251 million exceeded the top end of our guidance by $1 million and declined by 4% year over year due to the decline in average daily principal balance in our personal loans portfolio. As a result of prior credit tightening actions. This impact was partially offset by a 155.
Jonathan: Basis point increase in portfolio yield was 34, 2%.
Jonathan: Given the successful completion of the sale of our credit card portfolio in mid November its important to keep in mind that while the sale is accretive to the bottom line. Our credit card business contributed $4 million of total revenue were <unk> 24, and $34 million for the full year.
Jonathan: Our total net decrease in share value of $84 million was primarily driven by current period charge offs of $80 million, which improved 12% year over year.
Jonathan: Q4 interest expense of $74 million was up $22 million year over year, primarily due to a onetime $17 million noncash write off of deferred financing costs related to the repayment of our prior corporate financing facility as part of the November refinancing.
Jonathan: This amount was slightly below the $18 million estimate I indicated on our third quarter earnings call.
Jonathan: Net revenue was $93 million up 30% year over year.
Jonathan: As lower net charge offs and lower noncash fair value marks on our asset backed notes more than offset lower total revenues and higher interest expense, excluding the onetime noncash write off of $17 million in deferred financing fees included in interest expense that I mentioned, a moment ago net revenue would have been 110.
Jonathan: Million dollars up 53% year over year as a reminder, we elected to stop fair valuing new debt financings in 2023, and we expect the fair value impact to be minimal. After this year as prior financings approach maturity.
Jonathan: Turning now to operating expenses and efficiency, our $89 million in total operating expenses in Q4 reflected a 31% reduction from the prior year period I'd note that this figure includes approximately $6 million in one time benefits, including those related to capitalization previously accrued expenses.
Jonathan: Associated with our debt refinancing true ups related to estimated cost of exiting the credit card product and other benefits that we wouldn't expect to occur as part of a normalized run rate without the benefit of these one time items or <unk> 24 operating expense would've been approximately $95 million still below.
Jonathan: Our $97 $5 million target accordingly.
Jonathan: $97 $5 million in quarterly operating expenses during 2025, reflecting our $95 million exit rate also modest increased investment in marketing to drive origination scrubber.
Jonathan: Adjusted net income was $22 million, a $30 million improvement compared to the prior year quarter.
Jonathan: EPS of <unk> 49 was an increase of 70.
Jonathan: Versus last year.
Jonathan: The improvement was principally driven by our sharply reduced cost structure, along with higher net revenue.
Jonathan: Adjusted EBITDA, which excludes the impact of fair value Mark to market adjustments on our loan portfolio and notes was $41 million in the fourth quarter. This reflected a year over year increase of $31 million or 315% driven by our sharply reduced cost structure, along with lower net charge offs.
Jonathan: I'm pleased that our adjusted EBITDA margin increased year over year by 12, six percentage points from three 8% to 16, 3% our adjusted EBITA performance exceeded the high end of our guidance by $11 million, primarily on lower than anticipated operating expenses and net charge offs.
Jonathan: Let me now shift to more details on our strong Q4 credit performance. Another testament to the significant progress that we've made.
Jonathan: Our front book of loans originated since July 2022 continues to perform quite well, while our back book of pre July 2022 loans continues to roll off as you can see on slide eight of our earnings presentation. Our more recent credit vintages have outperformed their predecessors and as a result.
Jonathan: Losses on our front book 12, plus months. After disbursements are now running up to 500 basis points lower than losses on our backlog, whereas previously we had seen a 400 basis point improvement. This improvement is driven by our continued fine tuned for credit model.
Jonathan: Furthermore, you can see our annualized net charge off rate for the quarter by front book versus back book on Slide nine.
Jonathan: Q4, the front book had an annualized net charge off rate was 10, 5%, which is within the 9% to 11% net charge off range that we're targeting in our unit economics model importantly backlog continues to decline and as of the end of 2024, it was only 5% or year end loan.
Jonathan: Portfolio at 18% of gross charge offs.
Jonathan: As Ron mentioned, we expect the backlog to further diminish to 1% of our portfolio at the end of 2025.
Jonathan: Finally, as you can see on slide 10, our net charge off rate of 11, 7% and <unk> 24 improved 55 basis points compared to last year.
Jonathan: Lowest rate since <unk> 'twenty chip. So in summary, we continue to feel very good about the quality of credit we are originating.
Jonathan: As shown on slide 13, I'm also confident in the stability of our hard working members an outcome driven by our credit underwriting model, which actively seeks to identify people with strong stability in their communities prior to approving alone to a new or existing borrower, we verify employment for all borrowers.
Jonathan: For our fourth quarter originations had a medium gross income of approximately $50000.
Jonathan: Additionally, our borrowers had an average of five seven years at their current job six four years at their current residents. Moreover.
Jonathan: 91% of our approved members had their loan proceeds disbursed to their U S bank accounts, rather than opting to received disbursement in the form of the check.
Jonathan: Regarding our capital and liquidity as shown on slide 14, we deleveraged by reducing our debt to equity ratio.
Jonathan: From eight seven times to seven nine times wherever quarter.
Jonathan: As we were GAAP profitable and utilized part of the $91 million of our operating cash flow to reduce debt outstanding by $49 million.
Jonathan: As of December 31, total cash was $215 million of.
Jonathan: With 16 items unrestricted and 155 million was restricted further bolstering our liquidity was $227 million in avail.
Jonathan: Available funding capacity under our warehouse lines and remaining whole lot sale agreement capacity of $45 million.
Jonathan: Following the fourth quarter in January we issued $425 million in ABS notes, which freed up $438 million in warehouse capacity for future originations. The transaction was a significant success being over seven times over subscribed and pricing at a $6, 95% weighted average yield 100.
Jonathan: 2007 basis points lower than our previous August 2024 transaction.
Jonathan: Our access to capital markets is well established since June of 2023 offers union has raised approximately $2 $8 billion in diversified financings, including online sales securitizations and warehouse agreements from fixed income investors and banks, we anticipate we will come to market a few more times this year with ABS deal.
Jonathan: Yes.
Jonathan: Turning now to our guidance as shown on slide 15, our outlook for the first quarter is total revenue of $225 million to $230 million annualized net charge off rate of 12, 3% plus or minus 15 basis points adjusted EBITDA of 18 to 22 million.
Jonathan: On a year over year basis, our Q1 guidance reflects a 9% decline in total revenue largely due to the absence of $12 million of revenue we generated from the credit card portfolio in the prior year quarter.
Jonathan: Excluding credit card revenue, our <unk> guidance reflects only a 5% decline on an organic basis and an approximately 7% year over year decline in the average daily portfolio balance.
Jonathan: Despite the revenue decline or a <unk> 25, adjusted EBITDA guidance at the midpoint of $20 million highlights. Our continued focus on operating expense management and as an $18 million improvement of <unk> $2 million.
Jonathan: We expect <unk> 'twenty fives annualized net charge off rate at the midpoint of our guidance increased by about 30 basis points year over year. However, as you can see on the bottom of slide 16, we expect <unk> 25 dollar net charge offs to decline in the 4% range and if 125 average daily portfolio.
Jonathan: <unk> remained flat year over year, rather than declining by 7% <unk> 25 annualized net charge off rate will be approximately eight basis points lower at 11, 5%.
Jonathan: We expect the elevated net charge off rate and <unk> 25 to be temporary as you will see from the full year guidance for net charge offs that I'll share with you in a moment, we expect the average annualized net charge off rate for Q2 through Q4 to be 11, 2%.
Jonathan: Our guidance for the full year is total revenue of $945 million to $970 million annualized net charge off rate of 11, 5% plus or minus 50 basis points adjusted EBITDA of $135 million to $145 million adjusted net income was 53.
Jonathan: The $63 million and adjusted EPS $1 10 to $1 30.
Jonathan: Despite an anticipated 3% decline in average daily principal balance in absence of $34 million in credit card revenue. The top end of our full year revenue guidance reflects modest growth over last year's $968 million total revenue excluding credit card.
Jonathan: As Rob mentioned, we anticipate returning to quarterly revenue growth on a reported basis prior to year end and we expect to grow full year, 2025 originations and our 10% to 15% target range. The midpoint of our full year 2025 annualized net charge off rate guidance at 11, 5% reflects a 50 basis point rich.
Jonathan: Duction from 'twenty 'twenty, four is 12% level and implies ongoing improvement. Following Q1 as you can see from the bottom of slide 16, we expect full year 2025, net charge offs in dollars to decline in the 7% range. Furthermore, where 2025 average daily principal balance to be flat.
Jonathan: With 2024, rather than to decline by approximately 3% as anticipated the net charge off rate would be 30 basis points lower at 11, 2%, even closer to our 9% to 11% target range.
Jonathan: Our full year 2025, adjusted EPS range is a 7% uplift at the midpoint from the preliminary expectations. We first provided in October of last year I'm pleased that with the full year operating expense is expected to decline in the 5% range. Our 2025, adjusted EBITDA and adjusted EPS at <unk>.
Jonathan: Patients at the mid points implies strong year on year growth of 33% and 67% respectively.
Jonathan: Next I'd like to update you on our progress towards our long term unit economic targets, while our long term targets are GAAP targets I'll be using adjusted metric actuals for comparison, because they remove nonrecurring items and provide a better sense of our future run rate it.
Jonathan: It's clear on slide 17 that we've made significant progress in Q4.
Jonathan: <unk> was 25%, which was a 33 percentage points year over year improvement increase was driven principally by cost reductions a higher loan yields and lower net charge offs full year 2000, and timing for as adjusted <unk> was 8%, 23% percentage point improvement over full year 2023.
Jonathan: Hi, all.
Jonathan: Although we're pleased that we reached the 20% to 28% adjusted <unk> range in the fourth quarter at 25%. It's our objective to attain this level on an annual basis Slide 18 shows how we will continue to focus on improving our credit performance, reducing expenses as a percentage of the principal balance and reducing leverage to dry.
Jonathan: Improvement in shareholder returns.
Jonathan: So back over to you.
Jonathan: Thanks, Jonathan Alright.
Jonathan: Alright finish I have an important announcement to share.
Speaker Change: Jonathan has decided to retire and will be stepping down as chief financial officer, and Chief administrative officer.
Speaker Change: On behalf of the entire opportunity I want to congratulate him and express my deepest gratitude for his more than 15 years of dedicated service.
Speaker Change: Jonathan joined opportunity in 2009, when our loan portfolio was $5 million and built a highly professional finance function we benefit from today.
Speaker Change: His contributions have been instrumental in our growth, including by helping to expand our loan portfolio to $3 billion and providing key leadership in taking us public in 2019.
Speaker Change: Jonathan will continue as our CFO until March 28th to support a smooth transition to Casey Mueller, who will serve as our interim CFO.
Speaker Change: We have engaged an executive search firm to conduct a thorough process to identify Jonathan successor, considering both internal and external candidates.
Speaker Change: <unk> has been with opportunities since 2018, joining us from one main to help make our finance function public company ready. He currently serves as our principal accounting officer and global controller with additional responsibility for <unk>.
Speaker Change: I'm confident in his ability to provide strong leadership, ensuring continuity and maintaining the momentum we've discussed today.
Speaker Change: On a personal note Jonathan it's been an incredible partner to me over the past 13 years, and I will Miss working with him I know I speak for everyone at opportunities and wishing him all the best in his next chapter.
Speaker Change: To close I'd like to emphasize three key points.
Speaker Change: First we're pleased with our return to GAAP profitability in the fourth quarter and with our quarterly GAAP Roe of 10% and adjusted ROE of 25%.
Speaker Change: Ed.
Speaker Change: We have clear line of sight towards substantially improving our profitability from 2024 as levels and we expect to be GAAP profitable on a full year basis.
Speaker Change: Confidence in our outlook, we've increased our full year 2025, adjusted EPS expectations to be $1 10 to $1 30.
Speaker Change: Reflecting 53% to 81% year over year growth and finally, we believe we will generate an adjusted ROE in the teens this year, while making progress towards 28% to 28% ROE on an annual basis.
Speaker Change: We see a bright future ahead for opportunity by remaining laser focused on improving credit outcomes fortifying business economics, and identifying high quality originations.
Speaker Change: I want to thank our talented employees for all that we accomplished together in 2024 and for their ongoing dedication to our mission of empowering members to build a better future.
Speaker Change: With that operator, let's open up the line for questions.
Speaker Change: Thank you and at this time, we will conduct a question and answer session.
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Speaker Change: While we poll for questions.
Speaker Change: Our first question comes from Rick Shane with J P. Morgan. Please state your question.
Rick Shane: Thanks for taking my question and first of all I'm not.
Speaker Change: Not big on congratulations on earnings calls, but Jonathan I do want to acknowledge that I know you've worked very very hard.
Speaker Change: To lead the company on such good footing and then that's got to be very satisfied and we are going to Miss working with you. So thank you very much.
Speaker Change: That's very kind of you to say, Rick and I will Miss working with you as well so thank you.
Speaker Change: Thank you.
Speaker Change: Well with that now I'm going to ask you some tough questions.
Speaker Change: That's true.
Speaker Change: Alright, I had I'd expect nothing less.
Speaker Change: Yeah exactly no I'm sure I'm sure of all the things you don't get into this.
Speaker Change: Part of this part of the Q&A is one of them.
Speaker Change: Look when we look at the guidance and again, we're still going through the numbers.
Speaker Change:
Speaker Change: What essentially happened for 2025 as you move to low end up 10 cents you live the high end up a nickel.
Speaker Change: The Knicks five cents of that really comes from a different expectation on share count.
Speaker Change: Can you tell us what's driving the share count expectation. If you said it I missed it I apologize, but also on the low end, what's the what are the other factors that are contributing to tightening that guidance.
Speaker Change: Sure.
Speaker Change: So first of all the share count is just an updated projection.
Speaker Change: I think you're referring to the fact that we had a 50 <unk> share count.
Speaker Change: When we gave the preliminary guidance and now it's $48 two.
Speaker Change: So that's just reflective of our view of future share awards and.
Speaker Change: Employee turnover, so nothing I actually don't view that as all that material change.
Speaker Change: In terms of.
Speaker Change: The.
Speaker Change: Top line look I think this is a strong number for US right we continue to.
Speaker Change: Revenue is going to be up organically, we're doing what we said we were going to do in in terms of.
Speaker Change: Keeping originations originations she has been keeping operating expenses flat throughout the year at $97 5 million and the.
Speaker Change: The credit guide is as.
Speaker Change: As improve right 11, 5% plus.
Speaker Change: Plus or minus 50 basis points. So those are the main drivers and then.
Speaker Change: Obviously, we've continued to have good success in our financings, we did our first securitization of the year.
January it is 695% yield.
Speaker Change: So that's below our 8% unit economics target is that helpful. Robert.
I think just going back to the EPS range right. Rick first of all we feel really good coming into the year and that's reflected by taking the midpoint up 7% in terms of not necessarily taking them up by the same amount. It's just early in the year right and I think even when we look at some of the readings from the economy. This morning.
Speaker Change: It's clear that just werent have to watch things closely so I don't think there's anything to read into it aside from us recognizing it's early in the year and it makes sense to be a bit conservative.
Speaker Change: Got it it makes sense to me and Trust me, we are the cross currents that we're all trying to figure out in terms of how this impacts the consumer are pretty confusing at the moment.
Speaker Change: I know that we sometimes get caught up in the the change in direction on a minute by minute basis as well. So thank you guys.
Rick Shane: Thank you Rick.
Speaker Change: And our next question comes from John Hecht with Jefferies. Please state your question.
John Hecht: Afternoon, guys and congratulations on achieving all of the objectives and clearly the business it looks like it's making a turn.
Speaker Change: First question is as you lean into growth.
John Hecht: You guys have a lot of channels that you can.
John Hecht: You can utilize I've met a bank branches moneygram with some other retail partners.
John Hecht: Where do you think the growth.
John Hecht: Growth come through all those channels are you going to rely on one of those more than the other.
John Hecht: Yes.
John Hecht: Are all of those channels still active in it.
John Hecht: It presented a good opportunity for growth.
John Hecht: Yes, it's a great question John.
John Hecht: So yes, all the channels are active they work in combination with each other.
John Hecht: Really what we've seen in the past for example.
John Hecht: And our latest Investor presentation was that regardless of what channel someone started in almost three quarters of applicants used our mobile and digital channels in some way right. Even if they started in retail was started in the contact center. So we think each of the channels plays an important role in our originations numbers.
John Hecht: So we are bullish about all the channels, we have seen quite a bit of a strength in our retail channel in our contact centers I think our teams. There are doing just fantastic work they've become more productive in 2024 relative to 2023, they drew they drove a very healthy originations.
John Hecht: We've got the good fortunate, but I think entering 2025 with a lot of confidence in all of our channels, but in particular liking what we're seeing from retail in the contact center.
John Hecht: Okay.
John Hecht: That's helpful.
John Hecht: And then I guess second question give it I have went after this given our growth expectations for this year, how do we think of and then thinking about the rate environment, which now anticipates, maybe one federal funds shift.
John Hecht: How do we think about cost of capital over the course of this year given maturity runoff and so forth and then any targets for leverage over the next several quarters.
John Hecht: Sure.
John Hecht: John.
John Hecht: I think we're going to see two opposing factors driving our cost of funds on the one hand as our first securitization of the year that we did in January you had a $6 95% yield shows.
John Hecht: <unk>.
John Hecht: Reising, we're able to get on new data issuances in the asset backed market is very strong.
Speaker Change: On the other hand, so we would hope to come to market a few more times.
John Hecht: And.
John Hecht: You know, though that curve is relatively flat.
John Hecht: The benchmarks and we'll see where that goes.
John Hecht: Credit spreads in the asset backed market continue to tighten so thats favorable on the other hand, while 695% is a terrific yield in the current market.
John Hecht: We continue to have.
John Hecht: Debt at 2%.
John Hecht: That is running off right. Those are the deals we were able to do in 2021.
John Hecht: When rates were much lower.
John Hecht: So I think over the long term, we'll see.
John Hecht: Lower cost of funds, but.
John Hecht: Throughout this year, we may see slightly higher cost of funds before it becomes lower just because of the relative timing between financings and the write off and then your question about leverage we havent given specific guidance. We obviously took a nice step forward this past quarter and reducing debt to equity by eight tenths of a turn.
John Hecht: <unk>.
John Hecht: We would expect as we continue to have GAAP profitability and we also avail ourselves of the opportunity to prepay.
John Hecht: Our corporate debt, where we're allowed to make up to $60 million of prepayment without penalty.
John Hecht: That that those two combined factors will allow us to continue to improve our debt to equity ratio.
Okay.
Jonathan: Final question, Jonathan for you and I want to reiterate ricks.
Speaker Change: Congratulations and then are sorry to see you go it's been fun working with you, but I wish you all the best of luck and hopefully we keep in touch.
Speaker Change: But the last question is is there any considerations for fair value marks.
Speaker Change: This year last year, I think you had to get through some of the marks on the liabilities.
Speaker Change: There anything just on the fair value Mark this year, that's worthy of mentioning for Tempur.
Speaker Change: Temper a temporary.
Speaker Change: Impact.
Speaker Change: Sure So just at a high level.
Speaker Change: And then we don't give specific guidance about fair value marks the expectation is built into our bottom line.
Speaker Change: Guidance certainly.
Speaker Change: When we think about the loans right ultimately as you know that's driven by the discount rate, which is the combination of benchmark rates and credit spreads.
Speaker Change: Our loss expectation and.
Speaker Change: The average life and so.
Speaker Change: If we see credit continue to improve if we see rates and credit spreads continue to come down we should get some benefit there, we're not giving specific guidance, but yes that would all be favorable.
Speaker Change: Then of course on the asset backed notes.
Speaker Change: Though we no longer include their impact in adjusted net income.
Speaker Change: They do still run through gap and as Youll see on page 35 of the earnings deck. The remaining discount on the notes is $22 $3 million as of year end. So.
We would expect those notes to be down to a very low balanced by the end of the year.
Speaker Change: And to largely be prepaid by early 2026, just according to their terms.
Speaker Change: So that will be flowing through the P&L on a GAAP basis is as a negative over the course of the year.
Speaker Change: Okay I appreciate that thanks.
Speaker Change: Thank you John.
Speaker Change: Thank you and our next question comes from how Gulch with B Riley Securities. Please state your question.
Speaker Change: Jonathan well done thank you very much.
Speaker Change: Regulations on your retirement.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: On the origination side, you guys really came in well above what you guided to in another firm upstart reported similar kind of upside surprise and then I'm just wondering if you'd give us your color on.
Speaker Change: Uh huh.
Speaker Change: The top of funnel what happened there.
Speaker Change: I think maybe consumers saw a fourth rate cut that happened in December.
Speaker Change: That maybe got discovery happening in your digital channels.
Speaker Change: And at a higher rate maybe.
Speaker Change: Maybe lower lower rates also logging more volatile.
Speaker Change: Share with us what you saw with it.
Speaker Change: Throughout the quarter.
Speaker Change: Was it heavier maybe in December.
Speaker Change: Maybe consumers enquiring and plug them into enterprise they were approved for loans that they that you granted to them.
Speaker Change: Give us your thoughts on that.
Speaker Change: Yes, Hello. This is raul. Thanks for the question. So our decisions to drive growth are driven first and foremost by just what is our view on credit.
Speaker Change: So when you look at our presentation and see on page nine that the front book is running at about 10, 5% annualized losses back book continues to shrink. Our go forward view as Jonathan described right for the year is that losses are going to improve by 50 basis points right seeing those losses on the front book be within our <unk>.
Speaker Change: <unk> range of 9% to 11% gave us the confidence to lean into growth.
Speaker Change: So what we were able to do is we invested a bit more in marketing than we have the last couple of years to try to drive that growth. So top of the funnel from a demand perspective, we felt was already healthy and we poured a bit more on that in terms of driving marketing credit box isn't really opening up we like where our credit box says V 12 is helping to drive.
Speaker Change: These improved results so that it just it flowed through all the way down to that 19% originations growth. So we go into the year feeling confident in our ability to drive 10% to 15% originations growth for the full year.
Recognizing that that's going to help to drive revenue growth again in the back half of the year.
Speaker Change: And you know positioning us well not just for 2025, but assuming the economy remains constructive which today. We think it is right that means a good year for us in 2025, and hopefully some good momentum even going into 'twenty six.
Speaker Change: Yeah terrific. Thanks, Ralph could you could you repeat.
Make sure I caught the impact of the.
Credit card sale on Q1, and the full year.
Speaker Change: Definitely if you get a second.
Sure on the total revenue.
Speaker Change: Yeah Yeah.
Speaker Change: Yeah, Yeah, so what what what that what we said in our prepared remarks was that.
Speaker Change:
Speaker Change: When he was looking at our total revenue number for this year in 2025 years since credit cards.
Speaker Change: Got sold in November you really need to go back and look at ex credit card revenue numbers.
Speaker Change: And so for the full year, which really was only through mid November we had $34 million of total revenue from credit card and for the fourth quarter, we had $4 million of total revenue from credit cards.
Speaker Change: The last thing Youll see when we when we pushed the script out is for Q1, it's an absence of $12 million in revenue.
Speaker Change: Yes, it was a year right because that's how much revenue we had in the first quarter of 'twenty four okay. Perfect. That's what I needed. Thank you.
Speaker Change: Sure.
Speaker Change: Your next question comes from Gosh history with singular research. Please state your question.
Speaker Change: Good morning, Good afternoon, I guess can you hear me.
Speaker Change: Yes, we can.
Speaker Change: Yeah. Thank you.
Speaker Change: My question My first question is.
Speaker Change: Well congratulations on you are resolved by the way and the 19% year ago.
Speaker Change: Growth in origination as you continue you say that back into FY 'twenty, 510% to 15%. What is can you give us some color on what is driving that.
Speaker Change: Growth is it took some relaxation on your side or is it.
Is that a do met what was driving that demand.
Speaker Change: Yeah. It's a great question, we mentioned that if you remove the onetime benefits in Opex for Q4 that would give you about a $95 million run rate.
Speaker Change: I would just suggest that for models that you really target $97 5 million per quarter in Opex and that difference you can think of it as a modest investment in marketing right. So looking at at least the two and a half million dollar incremental expense in marketing and that's really what's going to drive the growth, it's not opening up the credit box.
Speaker Change: So we don't think we need to do that we don't think that would be wise at this time, it's really about just being able to drive some additional demand through marketing efforts, which we really haven't been doing the last two years.
Speaker Change: Okay and how are you.
Speaker Change: Portfolio yield is.
Speaker Change: 34% can you give us some given given.
Speaker Change: The competitive space is it does it.
Speaker Change: How do you assess the competitive landscape in the personal loan market falls.
Speaker Change: FY 'twenty five.
Speaker Change: Yeah. So we think right now when we look at the behavior of the competition, everyone seems to be acting rationally, which we think is very helpful. For us as we think about 2025 and as we put together the guidance that we've shared.
I think as we all know right. The fed is pausing rate cuts a bit they continue to look at things closely and trying to figure out how many cuts they're gonna have and thankfully I think what we're seeing from competition is no. One is bringing down pricing irrationally I think pricing continues to reflect the higher cost of capital not just for us but for our competitors.
Speaker Change: So we think that the competitive picture is one that is.
Speaker Change: Again, rational and constructive and one in which we can drive growth.
Speaker Change: Awesome.
Speaker Change: I'll take the rest offline.
Speaker Change: Thank you again, congratulations and good luck Jonathan.
Speaker Change: Thank you. Thank you very much.
Speaker Change: Your next question comes from Brendan Mccarthy with Sidoti. Please state your question.
Brendan Mccarthy: Great Good afternoon, everybody and Jonathan first off congratulations on your retirement.
Speaker Change: I'm going to Miss working together Brett.
Speaker Change: Sure Sharon I wanted to start off just as a follow up on the operating expense question.
Speaker Change: Looking at the Opex adjusted Opex ratio here it looks like it's slowly trended down it's right around that 13% level in the fourth quarter 24, do you have a long term target for that measure.
Speaker Change: We do our long term target is what we have in our unit economics of 12, 5%.
Speaker Change: Yeah. So the progress Brendan that we expect to make in that it's going to be driven by by two factors really.
Speaker Change: Number one right we want to continue to look for opportunities to lower our operating expense right I think as we look at future years, that's continuing to figure out how do we become more streamlined more efficient how do we renegotiate multi year contracts right that werent up for negotiation last year. So on the numerator side, we're going to try to.
Speaker Change: Do everything we can to keep looking for reductions on Opex more importantly, I think on the denominator side, we're going to grow average daily principal balance right.
Speaker Change: <unk> will help us get from the 13, 1% down to the 12, 5% will really be both elements.
Speaker Change: Great Great. That's helpful. And then like you said, we're all probably 97 5 million is probably a reasonable run rate quarterly run rate for opex kind of going forward.
We think so in particular as we shift to growth mode right. So as we shift to grow that growth, there's going to be that incremental marketing expense.
Speaker Change: There'll be other parts of the organization that will have to make sure we're ready to support that level of growth. So we think it is it is the appropriate level as we shift back to growing the portfolio.
Speaker Change: Got it that's helpful and I wanted to ask a question on portfolio yield looks like it had a nice 155 basis point increase year over year in the fourth quarter.
Speaker Change: What factors really drove that increase and then maybe can you touch on your underwriting trends that you saw.
Speaker Change: Yeah, I mean, the main factors were obviously, we adjusted pricing as did many other consumer lenders this year.
Speaker Change: Higher origination growth, which we are we certainly had a high growth and strong growth in the fourth quarter, because that will drive more.
Speaker Change: More yield because of the recognition upfront origination fees and interest income.
Speaker Change: The other dynamic that helps us in terms of yield is that some of the loans that had longer terms are being paid off if someone were to come back in and wants to get a new loan that gives us an opportunity to reflect the new pricing as opposed to the pricing that they may have received say two three or even four years ago Brian.
Speaker Change: Great. That's helpful. And then one more question for me just on the back book annualized net charge off rate. It looks like it's kind of been maintained right around that mid 20% range is that a reasonable expectation going forward and just kind of looking at the back book as it rolls off at all obviously be favorable.
Speaker Change: For gross charge offs.
But I guess that kind of mid 20% range.
Speaker Change: We're not providing specific guidance on the back book its a very good question.
Speaker Change: Certainly when we provide our loss guidance that is inclusive of the portfolio. We have today, which includes flat back book loans and their run off as well as the new originations, we expect to make and how we expect them to perform so so certainly that's in there we don't have at a separate guide.
Speaker Change: Instead, I can I can share with you right. The one thing I will note is.
Speaker Change: Again since this is a closed pool. The back book that is just running off right as you get towards the tail gets smaller and smaller right. You can have denominator effects that can.
Speaker Change: Push up the percentage right. That's just the math you would expect that.
Yeah, we don't have a specific guidance, where it could go slightly higher for that reason certainly what we're looking forward to is as you will see on page nine of our investor deck rate, we expect that by the end of this year that'll be down to 1%.
It's disproportionate impact on losses will start to get smaller and smaller over time that's right.
Speaker Change: Got it that makes sense very helpful. Thanks, Rahul Thanks, Jonathan that's all from me.
Speaker Change: Very much.
Speaker Change: Thank you and just a reminder to ask a question press star one on your phone to remove yourself from the queue Press star two.
Vincent: Our next question comes from Vincent <unk> with BTG. Please state your question.
Vincent <unk>: Hey, good afternoon, thanks for taking my questions.
Vincent: I have two of them. So I'll just ask both now.
Vincent: Nice guidance for 2025 and above consensus estimates I'm just wondering if you could maybe talk about some of the sensitivities.
Vincent: So the macro something that guidance.
Vincent: And we've been seeing kind of a lot of a lot of.
Vincent: Changes, whether it politically or otherwise in the past.
Vincent: Just a couple of weeks, including with now inflation running at 3%. So just wondering if how sensitive. It is it does seem like a lot of your a lot of the guidance is sort of <unk>.
Vincent: Driven off of.
Vincent: The actions that you're taking.
Vincent: So that's question one and then question two related to.
Vincent: Prior comments about the industry kind of showing great growth trends that we've seen from a lot of other consumer finance companies and takes a lot of this growth as was alluded to earlier and I'm. Just wondering one of the investor questions that I'm getting is that.
Vincent: Whereas I guess, if if a fintech or somebody else is growing that much Ken opportune or are other lenders also be growing at the same amount or is there just kind of seen it.
Vincent: Tam where if somebody is growing then somebody else must be must.
Vincent: Must be losing that share or so forth I just wanted to get your thoughts on that thank you.
Vincent: Sure no. Thank you I'll take the first question Vincent and Ralph will cover the second one.
Vincent: First of all in setting guidance, we don't just look at one scenario, we look at multiple scenarios and so those scenarios factor in sensitivities.
Vincent: Positive and negative so that's already factored in when we.
Vincent: Do provide the guidance.
Vincent: As you heard <unk> say on the call right, we're watching the macro environment very carefully right.
Vincent: And.
Vincent: We did get a slightly uptick inflation number this morning.
Still feel very good about our credit that all the trends are very positive.
So it's nothing that we're concerned about now but.
Vincent: The key sensitivity would be.
Vincent: Any impact from inflation that could.
Speaker Change: Cause us to have to tighten and so in order to make sure that losses didn't go out but that would be an impact to originations, but again, we feel good about the guidance, we've presented and it does factor in multiple scenarios and all the trends right now are very favorable just add a little bit to that Vince and one of the reasons, we feel good about our.
Vincent: Billy do you underwrite say, even with inflation at 3%.
Vincent: As we've talked about right. We're using V 12, right now of our underwriting engine. The 12 was built with the largest dataset we've ever used and maybe most importantly kind of in response to your question. It was used including data from this inflationary period right. So what we were able to do with include our <unk>.
Vincent: Earnings in this period, where our borrowers and all of us have been dealing with higher inflation. So we think that that gives us an opportunity even if inflation were to move from where it is today start to kind of glide back up a little bit right. We feel that the underwriting that we've got in place today was built with that kind of environment in mind, we would certainly keep making.
Vincent: <unk> you see on page eight.
Vincent: Where we showed the vintages and the performance that our ability to make adjustments demonstrates the ability to keep improving performance, where you see Q3 of 2023 is better than the prior quarters Q4 of 'twenty three is better than Q3, and Q1 of 'twenty four it is better than Q4 of 23, so again that shows the ability to keep making.
Vincent: Adjustments as needed to react to the environment, Let me pause there and see if you have any follow up questions on <unk>.
Vincent: Number one before I go to number two.
Vincent: No that's great. Thank you.
Vincent: Sure. So on your second question in terms of in some ways I think it's a question of is it a zero sum game right from a growth perspective is that part of your question.
Speaker Change: Yeah, that's exactly it I think.
Speaker Change: When I talk to investors and covering consumer finance.
Speaker Change: There's this view that if if there's if there's just a lot of growth from especially from the Fintech side, it's taking away from brick and mortar or things. So that is a zero sum game to your point rather than.
Speaker Change: One where where there's enough growth in customers to serve so just wanted to get your opinion on that.
Speaker Change: So I think for US one of the things that we've been able to do well throughout our history is to really be able to find a niche that is not well served by others.
Speaker Change: So we're not a traditional subprime lender if someone's had a lot of experience with credit and for whatever reason it didn't work out we declined them early in the process because our models aren't built to underwrite those individuals'.
Speaker Change: We do best with people that have thin files or even no files when they first come to US right. We can underwrite someone who has no data at the bureaus no credit score whatsoever. So I think one of the things that we've been able to do is to stay out of that zero sum game.
That you were describing in that I understand certainly why it's driving the question because we've been taking individuals that have been in the informal economy or individuals that have relied only on very very expensive credit.
Speaker Change: So we think of that almost as a different pool than the pool will say that the traditional syntax.
Speaker Change: Our focus on.
Speaker Change: Okay, Great. That's that's very helpful. Thank you and my congratulations to Jonathan again, I know, we've been talking over the past decade, and so well.
Speaker Change: We will Miss you and and nice to leave investors with a nice gift of these results. Thank you.
Speaker Change: Thank you Vincent very kind of you.
Speaker Change: Thank you and there are no further questions at this time I'll hand, the floor back over to management for closing remarks.
Speaker Change: Well. Thank you again, everyone for joining us on today's call. We look forward to speaking with you again soon.
Speaker Change: Thank you. This concludes today's call all parties may disconnect have a good day.