Oportun Financial Corporation (OPRT) Q3 2019 Earnings Report, Transcript and Summary

Greetings! Welcome to the Oportun Third Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Nils Erdmann, VP of investor Relations. You may begin.

Thanks. And welcome to Oportun's third quarter 2019 earnings call. Joining me today to discuss our results are Raul Vazquez, Chief Executive Officer; and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer. Before we get started, let me remind you that some of the remarks made today will include forward-looking statements. Actual results may differ materially from these contemplated or implied by these forward-looking statements. A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in today's earnings press release. 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. Also, on today's call we may present both GAAP and non-GAAP financial measures which we believe will provide useful information. Our reconciliation of GAAP and non-GAAP measures is included in our earnings press release, our third quarter 2019 financial supplement as well as the appendix section of the third quarter 2019 earnings presentation all of which are available on the Investor Relations website at investor.oportun.com. In addition, this call is being webcast, and an archived version will be available after the call on the Investor Relations portion of our website. With that, I will now turn the call over to Raul.

Thank you, Nils. And good afternoon. We appreciate you're taking the time to join us in your interest in Oportun. During today's call, I will provide an overview of Oportun followed by some third quarter highlights. I'll then layout our strategic drivers and key objectives for the remainder of the year and beyond. Jonathan will then present our strong third quarter financial results along with our fourth quarter and full-year guidance and then we'll open the line for questions. As this is our first earnings call as a public company and some of you may be new to Oportun, I'll begin by highlighting some of the key elements of Oportun's business specifically our mission, our growth opportunity, and our competitive advantages. At our core, Oportun is a high-growth company driven by our mission to provide inclusive affordable financial services and empower our customers to build a better future. We have a substantial market opportunity that we estimate to be 100 million people in the U.S. or either mis-scored by the credit bureaus or our credit invisible. To serve this large market, we apply our mission driven approach which starts with a deep understanding of our customers augmented by sophisticated data driven risk analytics and bolstered by purpose built technology including a full centralized and automated risk engine and deaccessioning platform. By combining these elements, we built a rapidly growing consistently profitable company with a strong credit culture. Since our founding in 2005, we've originated over 3.4 million loans and dispersed over $7.8 billion. Since 2016, we've grown annual revenue at a pace of over 30% per year whilst still producing a low and stable net lifetime low loss rate. Importantly, we've been profitable on a pre-tax basis for the last four consecutive years. Our customers are hardworking responsible individuals with modest incomes and limited savings who frequently need to rely on credit when they have unexpected or large expenses. This is where Oportun is able to step in and provide solutions that make a major difference for our customers. Our core offering is a simple to understand unsecured installment loan. We perform a detailed ability to pay analysis for every applicant and customize the size of our loans to maximize the likelihood of successful repayment. Our loans range in size from $300 to $10,000 with an average loan amount of just over $3800. Additionally, our loan terms range from six to 46 months with an average of 32 months. So, our customers have sufficient time to repay. We also focus on making the product as affordable as possible and exclude undesirable product elements that can increase loan cost such as prepayment penalties, balloon payments or add-on products. The dollar weighted average APR for our loans is 34% which translates the interest in fees that are on average 1/4th the cost of alternatives that are generally available to our customers and 1/7th the cost of the most expensive alternatives. By choosing Oportun, a customer's average savings are approximately $1000. For our customers who earn on average $42,000 a year, those are very meaningful savings and reflect the impact that our mission-driven approach can have. We're also proud to have helped over 795,000 customers established our credit history. We strive to make the application and servicing processes quick and convenient through our customer first omni-channel network. Customers can visit us in person at one of our 327 retail locations that are open seven days a week. They can speak to us over the phone via our contact agents or our customers can interact with us via mobile or online. If they choose mobile or online, we provide a seamless end-to-end digital experience that allows them to complete a full application process without needing to speak to one of our employees. Customers can even start the application process in one channel and finish it in another. When you combine the design of our loans, the amount customers save by choosing Oportun and the convenience of our omni-channel network, it's easy to understand why our Net Promoter Score or NPS has consistently averaged over 80 since 2016. That puts us in the company of respected brands such as Apple, the Ritz-Carlton, USAA and American Express and is also significantly higher than the credit card and banking averages of 39 and 35 respectively. Our omni-channel capabilities and our outstanding NPS are possible because of our proprietary centralized technology platform. We utilize the same digital application in every one of our channels, which allows us to make fully centralized approval decisions in seconds with no manual exceptions or overrides. This is because every application is run through our fully automated risk engine which utilizes both our proprietary alternative data credit scores and our ability to pay ratios which we calculate from income that has been verified for 100$ of our loans. This enables centralized positioning regardless of the channel the customer chooses. As a financial services firm that is powered by technology and headquartered in Silicon Valley, we are able to draw from the top talent in the region to step our technology risk analytics and data science teams. Roughly half of our corporate employees in the U.S. work in those teams are focused on enhancing the capabilities of our technology platform which we believe is an unparalleled investment among companies serving people with little or no credit history. The foundation of our deaccessioning platform is the peta byte of data we've accumulated during our 13 years of lending which we analyze in detail to determine what's most relevant in predicting risk or fraud among applicants who have little or no credit information. This has led to our risk engine producing superior credit performance across economic cycles even when serving consumers that most companies cannot underwrite. In summary, we built a mission-driven technology enabled company that's profitable, growing quickly and making a difference in the lives of millions of customers. We know our plans and success can only be realized by delivering long-term value to our shareholders and we appreciate your support as we build a better future for customers and their families. Now, we'll discuss some of the highlights of our performance this quarter and then outline our strategic drivers. I'm pleased to report that we had a strong third quarter. Overall, we delivered growth in both originations and revenue while continuing to see stable credit performance which brought significant bottom-line results. As Jonathan will explain in more detail, in addition to our GAAP results, we also evaluate performance based on fair value pro forma results which we believe presenting more consistent view of the underlying trends of the business. On a GAAP basis, total revenue for the third quarter was $153.9 million and grew 20% year-over-year. On a fair value pro forma basis, total revenue was $153.6 million up 22% year-over-year. Our managed principle balance at end of period was $2 billion up 25% year-over-year driven by strong originations during the quarter. Our third quarter credit performance was stable with our annualized net charge-off rate at 8.1%. Jonathan will cover the year-over-year comparisons for losses and delinquencies later in the call but I would highlight that our goal is to optimize for greater customer access growth and profitability not just to operate at the lowest loss rate possible. Overall, our credit performance remained in line with our expectations and we continue to demonstrate the value of our data-driven centralized underwriting. Finally, operating expenses for the third quarter excluding certain one-time stock based compensation expenses grew more slowly than in the second quarter. This lower OpEx growth contributed to our improving profitability matrix including fair value pro forma adjusted EBITDA in fair value pro forma adjusted net income which were $18.6 million and $15.3 million respectively. Our Q3, diluted earnings per share or EPS were impacted by a one-time allocation of net income to the preferred stock that converted to common stock in the IPO. This caused our GAAP EPS to be zero for the nine months ended September 30 and negative for the quarter. Jonathan will provide you with the accounting detail. Excluding the impact of these one-time IPO related items, we generated diluted adjusted EPS of $0.64 for Q3. Now that I have shared some of our financial highlights, I will outline our growth strategy which is five key drivers. 1) Customer growth, 2) Data and technology, 3) Geographic expansion, 4) Our omni-channel network and 5) New products. I'll spend time during each earnings call giving you a sense of the advancements we've made in these areas and I'll start with our first driver, growth in customers. In Q3, we grew our customer base 16% year-over-year and the percentage of new applicants choosing servicing in English has grown to 55%. We are achieving our objective of growing our overall customer base by expanding our large Spanish preferring population while adding an equally important English preferring population. The 16% growth in our customer base combined with our high NPS scores highlights the progress we're making in building a large and loyal customer base. Our investments in data and technology which is our second driver establish an enduring foundation for future growth and efficiency. There are two accomplishments that I'll highlight from the third quarter. 1) In our retail locations, we are adding electronic signature capabilities that had been previously only available with our mobile solution. This allows us to improve our customers experience and the streamlines operational processes in our retail location. We anticipate completing this rollout to all our stores in the next few weeks. Second, we are making great progress on launching our next generation of risk models, we built the models and began implementation of the next major upgrade of the risk engine V10 during the third quarter. Based on our initial simulations, we believe that V10 will represent another improvements in our ability to manage credit risk in our new customer population especially in our fast growing mobile channel. We expect to shift to V9 to V10 in a phase manner and we'll provide another update in our next earnings call. Regarding our third driver, geographic expansion, our portfolio growth is strong across multiple geographies. We currently operate in 12 states and are evaluating ways to enter new geographic markets via state licensing or other means such as a bank partnership. Within our existing footprint, I want to highlight our two newest markets. We entered Florida roughly a year and a half ago and it is already 4% of our loan portfolio making Florida the fastest growing state in our history. In New Jersey, where we have been open for just about a year is already more than 1% of our loan portfolio. We also have significant expansion opportunities in both states as well as adding new customers in long time markets such as California and Texas. We also made good advances this quarter in our fourth driver, our omni-channel network. We added 32 retail locations in the last 12 months which is a 11% growth to end the quarter at 327 locations. And we continue to make advancements to our mobile capabilities, the Q3 mobile highlights include an improved and faster customer experience through the online notification and enhancements to our online servicing capabilities. These two highlights resulted in a solid improvements in mobile NPS scores which increased from 76 to 83 over the last year. Finally, let me update you on our progress in our fifth driver, new products. We plan to increase our addressable market by providing a broader sweeter products and services to address our customer's financial needs specifically with auto loans and credit cards. Starting with auto loans, we began testing a direct-to-consumer purchase loan for our customers in Q2 of 2019. Purchase loans are not expected to be big volume drivers but we introduced them first because it was the fastest product we could get to market to begin our learning agenda. We are currently testing at low volumes in order to validate our controls framework and to dial-in our product market fit. And thus far, I'm pleased to share that we have met all our milestones. We are learning a lot and using those learnings to inform our product roadmaps for auto. Based on those learnings, we launched auto refinancing loans this week. We are excited about the introduction of auto refi loans because we believe they will be a larger contributor to growth and purchase loans. We think the largest volume driver in auto however will be personal loans secured by a vehicle and we anticipate testing for that product will begin in 2020. Turning to our credit card product, we are making progress toward the soft launch of our cobranded credit card by the first quarter of 2020. And we are ready to announce our partners in that effort. We entered into an agreement with WebBank to be the issuer of our Oportun credit card. In addition, we entered into an agreement with Fiserv to serve as our credit card processing partner. I'm quite pleased with the progress we're making with our credit card product and I hope to have more details for you when we share our quarterly results for Q4 and are closer to launch. In summary, Q3 2019 was a stronger quarter for us and we're making great progress in fulfilling our mission. Now, I'll turn the call over to Jonathan who will walk you through a more in-depth discussion of our third quarter financial results and will provide our outlook for the remainder of 2019. Jonathan?

Thanks, Raul. Before I start taking you through the details, I want to remind you that we began electing the fair value option to account for loans receivable held for investment originated an asset-backed notes issued on or after January 1st, 2018. Loans receivable on asset-backed notes issued prior to January 1st, 2018, continue to be accounted for our amortized cost. In order to better illustrate the trends in our business, we've created a view of the financials as if we had always elected the fair value option. We refer to this as our fair value pro forma view. Unless I state otherwise, all of the metrics that I will now share with you will be on a fair value pro forma basis for the purposes of comparison to prior year periods. Now, I'll run through the key drivers of our results for the third quarter. Total revenue was $153.6 million up 22% over the prior year quarter. Our managed principle balance at end of period grew 25% over the prior year quarter to reach $2 billion driven by growth in originations and average loan size. Aggregate loan originations for the quarter of $543.5 million grew 19% due to the expansion of our omni-channel network and our marketing efforts as well as increases in the term and loan amounts for returning customers. The evolution of our credit models has allowed to safely increase our average loan sizes over time and we've continued to reward returning customers with access to larger loan amounts with longer terms. Because we reward our returning customers with lower rates as well, we expected our portfolio yield to decrease slightly which it did from 34.4% in the third quarter a year ago to 33.8% for the most recent quarter. Our interest income for the third quarter increased to $139 million up 23% year-over-year. Non-interest income which includes cash gain on sale from our home loan sale program increased 16% to $14.6 million as direct result of the growth of our loan originations. We sell 15% of our core personal and originations and 100% of our access loans originated. Access loans are loans for customers who are just on the margin and qualifying for our core personal loans and we believe would otherwise have to resort to seeking a payday loan. We sell access loans at a lower price than our core personal originations. The growth in the volume of loan sold was offset by lower gain on sale premium of 10.1% versus an 11.6% in the prior year period. As a larger percentage of the loans we saw that part of our access loan program and as capitalized origination fees as a percentage of the loan balance have decreased as our average loan size has increased. Interest expense a $15.1 million was up 34% year-over-year. The higher interest expense was driven by our issuance of three ABS node offerings in the past 12 months and the issuance of non-investment-grade related tranches to increase our advance rate. We were able to access this debt capital efficiently as our cost to debt remain flat at 4.2% in Q3 2019 relative to the same period a year-ago. Net increase or decrease in fair value or net change in fair value includes our current period principle net charge-offs and mark-to-market on our loans and debt. We provided a summary of the net changing fair value in our Q3 2019 earning's presentation that is available through our Investor Relations website. As you'll see on Page 11 of the presentation, the third quarter $27.6 million net decrease in fair value consisted out a $7.9 million mark-to-market increase on our loans receivable. A $1.8 million mark-to-market decrease on our asset backed notes and current period charge-offs of $33.7 million. The $7.9 million increase in fair value on our loans receivable was driven by a quarter-over-quarter increase in the fair value price of our loans for 103.6% to 103.8% as of September 30th, 2019 due to improving lifetime loan loss rates and lower interest rates and credit spreads versus the prior quarter. Similarly, the $1.8 million in mark-to-market decrease in our ABS notes resulted from the increase in aggregate fair value premium of our ABS notes due to the issuance of our 2019 and securitization in August. Our third quarter net revenue which is our total revenue after interest expense and that change in fair value was $110.9 million up 48% year-over-year. The growth in that revenue was attributable to a net decrease in fair value of $27.6 million in Q3 2019 versus a net decrease of $39.8 million in the prior year quarter when an increase in trend in lifetime loan loss rates at the time reduced the value of our loans leading to negative mark-to-market. Our operating expenses for the third quarter of 2019 were $100.1 million up 36%. The cadence of investment cost adjusted operating efficiency a 57.9% to be a 100 basis points higher than the comparable quarter a year ago. Year-to-date however, operating efficiency is 30 basis points lower than the comparable nine month period in 2018. The increase in our operating expenses was consistent with our expectations and due to the timing of investments in the growth of our technology team public companies adding the sales and marketing in new products. For example, we increased our retail locations to 327 as of September 30th, 2019. Additionally, we added headcount on our technology team including engineers, data scientists and risk analysts. Our operating expenses for Q3 also includes the one-time impact of $7.9 million of stock comp expense related to the recognition of accumulated investing on RSUs triggered by the completion of the IPO. The call that we exclude stock based compensation from our calculation of adjusted operating efficiency. Our customer acquisition cost for the third quarter of 2019 is $128 modestly up from $124 in the prior year quarter. In additional to digital testing and expansion into new markets, we decided to increase our overall marketing investments as we experience more favorable revenue growth in the third quarter. We also incurred operating costs associated with our auto loan and credit card products. In Slide 12, the earnings debt provides some additional detail regarding these costs. For Q3 2019, we recognized $3.7 million of operating expense related to our new product investments. Before we get to our bottom-line results, let me explain the change in effective tax rate that we have this quarter. Our effective tax rate was 30% for Q3 2019 as compared to 27% in previous quarters. The increase was due to the one-time impact at the afore mentioned recognition of $7.9 million of stock compensation expense which decrease pre-tax income but was not deductible for tax purposes. We expect our effective tax rate in Q4 2019 to be between 27% and 28%. Now, let me take you through our bottom-line results. Adjusted net income was $15.3 million up from $2.4 million in the prior year period. As illustrated on Slide 13 of the earnings presentation, investments in other products reduced our adjusted net income by $2.6 million in the quarter on an after-tax basis. As in our investments in new products, we would have seen even higher adjusted net income year-over-year. Adjusted net income is the numerator for adjusted return on equity which was 14.6% for Q3 2019 versus 2.7% in the prior year quarter. Over time, we believe improvements in our operating efficiency will allow us to achieve high teen entirely on a consolidated basis even as we make investments in new products. We also managed to adjusted EBITDA which was $18.6 million for the third quarter compared to $21.8 million in the prior year quarter due to our investment in new products which totaled $3.7 million in Q3. Absent our investment in new products, we were seeing higher adjusted EBITDA year-over-year. Adjusted EBITDAs useful matric because there is a proxy for a pre-tax cash profitability. In addition to adding back taxes, depreciation and amortization, stock based compensation and one-time events, we also reversed the non-cash impact of fair value accounting and adjusted EBITDA. We call also that adjusted EBITDA does not add back interest expense. On a GAAP basis, we are reporting zero earnings per deluded share for the nine months ended September 30th 2019 and a net loss per deluded share of $6.39 for the third quarter. Despite the fact that we reported GAAP net income of $10 million and $38.4 million for the three and nine months ended September 30th 2019 respectively. The reason for this is that in accordance with GAAP, the allocated net income to convertible preferred stock holders due to a beneficial conversion feature triggered upon completion of our initial public offering. All of our convertible preferred stock mandatorily converted to common stock on the IPO and no preferred stock is outstanding as of quarter end, so there will be no impact to the fourth quarter related periods. Excluding the impact of these one-time IPO related items, we generated deluded adjusted EPS of $0.64 per Q3. Going forward, we plan to include deluded EPS in our guidance. Moving on to our credit performance, our 30 plus day delinquency rate was 3.8% compared to 3.5% in the prior year period. The 30 basis points difference relative to the prior year was consistent with the rate difference we experience in the second quarter of 2019. And net charge-offs this quarter were 8.1% which was lower than our expectations. As Raul stated earlier, we are focused on finding the right balance between demonstrating responsible lending while also optimizing full growth which should lead us to expand on bottom-line. Looking ahead, we continue to see stable credit performance in our portfolio and our current outlook for Q4 2019 in the next year remains positive. We also continue to maintain a strong liquidity position and fund our business with sustainable leverage. In July, we came to market with a $250 million three-year asset-backed note offering. We only sold the investment grade related tranches in our ABS offering and retained the subordinated bonds. Our cost of debt was 3.22% on these offering; our lowest pricing ever. As of September 30th 2019, cash and cash equivalents were $154.5 and restricted cash was $65.9 million. As of September 30th 2019, our debt to equity ratio was 3.3 times comparable with the prior year as our increased issuance of debt to fund loan growth was offset by the $60 million net proceeds we raised on IPO. We also now have 400 million of undrawn capacity on our warehouse line that is committed through October 2021. We continue to abide by our principle of maintaining 12 months or more liquidity runway. Taking into account our strong results in Q3 2019, we are announcing our guidance for the fourth quarter and full-year 2019 on a fair value pro forma basis. For Q4, total revenue between $163 million and $164 million; adjusted EBITDA between $15 million and $16 million; adjusted net income between $18 million and $19 million; and adjusted earnings per deluded share $0.61 and $0.65. For the full-year 2019, total revenue between $596 million and $597 million. Adjusted EBITDA between $72 million and $73 million; adjusted net income between $54 million and $55 million; and adjusted earnings per deluded share between $2.16 and $2.21. Given our stable loss performance, our Q4 guidance for annualized net charge-offs is 9.2% plus or minus 10 basis points. The increase from Q3 to Q4 is consistent with the prior year's 120 basis point increase for the comparable period. For the full-year, our guidance is net charge-offs of 8.5% plus or minus 10 basis points which is within our target range of 7% to 9%. With that, I will turn the call back over to Raul.

Thank you, Jonathan. I'm proud of the management team and employees at Oportun who have a strong mix of financial services in technology industry experience. Together, we have built a high growth profitable business and we have the depth and breadth of expertise required to execute the growth strategies that will continue to serve our customers and create value for our investors. We're proud of our achievements in the number of people we've served but we believe the best is yet to come and that we have wonderful opportunities for future sustainable long-term growth. Thank you all for your time. And with that, I welcome your questions and comments. Operator?

[Operator Instructions] The first question is from Sanjay Sakhrani of KBW. Please go ahead.

Thanks and good results. I guess first question on the origination volume. Obviously that was strong and it exceeded even our expectations. So, when we think about what's driving that, maybe Raul you could sort of break it down how much is coming from just strong demand versus some of the expansion opportunities. You're talking about both in terms of profile asset classes and then geographies as well?

Hi Sanjay, I'm happy to do it. So, you're absolutely right, we're really pleased with the overall demand that we're seeing from the customer and we think it's a couple of things. 1) As you pointed out we've done a nice job broadening our customer base. So, we've indicated that our strategy has to continue to add the population that prefers being serviced in Spanish. And adding the very large population that prefers to be serviced in English. So, that percentage got up to 55% of new applicants this quarter. So, we think part of the demand is just the very purposeful diversification of our customer base and we're starting to see the dividends of that. 2) The second thing is our investments in the omni-channel strategy and that is both what we're seeing as we've added new locations in particular in Florida and New Jersey which you heard us call out, we're really happy with what we're seeing there. Florida is the fastest growing state that we've seen in our history. And the customer continues to respond very well to our investments in mobile. So, we're also really pleased with the work that's being done in mobile. Then and finally, the marketing team that we have right now is the strongest marketing team that we've ever had. So, we continue to see really robust performance from our direct manual efforts but I recently did a deep dive with the group that's doing our digital marketing and that performance is fantastic and we continue to invest in that year-over-year. So, we think that all of those elements are contributing to that strong originations growth.

Okay, great. And then, I guess I've a follow-up kind of two part for Jonathan.

Sure.

Perhaps you can, is there of a chart or something that puts the 10 million GAAP net income to then minus 639 GAAP EPS per share. I just wanted to make sure I understood how we go from positive to negative. And then secondly, in terms of the share count we should use on a go-forward basis, maybe you could just give us some color as to what we should use on a go-forward basis. Thanks.

Sure. So first of all, we don’t have a chart and though you'll see it in the Q that we anticipate filing shortly. But I can take you through the map very quickly. Basically we had a beneficial conversion feature associated with one of our series of convertible preferred stock as I described. And we were required pursuing to GAAP to value that feature. And then allocate our positive GAAP net income to that first. And then so that basically zeroed out the year. And then the quarter, basically all of the income, you had a negative number there because it had to balance the year. So, that’s what's getting allocated to common in the quarter which is why you see a large number. The second thing is, while we IPO'ed close to the end of the quarter, you calculate EPS based on average share count and EPS is really only for common shares. And so, we had preferred shares outstanding up until the point in the IPO. So, our common share count was much smaller for the quarter. So, you basically had that $37 million impact being allocated across in a very small average share count which is why you got the $6.37 loss. Let me pause there before I address the share count question and just ask if that was helpful.

No, that is helpful, thank you.

Okay. And then on a go-forward basis as you saw in the guidance, we did provide guidance not just for adjusted net income but also for deluded adjusted EPS. And so, if you do the math there, you'd come out with around 28.8 million shares roughly.

Okay, great. Thank you.

The next question is from Rick Shane of JPMorgan. Please go ahead. Rick Shane, your line is open.

Hey sorry about that, guys. Thank you for taking my question. First, a sort of a nuance question related to the fourth quarter. When we think about origination volume and gain on sale, is there anything in the mix particular to the fourth quarter with seasonality and how they spend that we should think about that might drive the gain on sale down again?

That's a great question. We're not we're expecting trends in gain on sale to be consistent in the fourth quarter with what we saw in the third quarter, Rick.

Okay, great. So, no mix shift in terms of the types of loans that you're selling?

Not, yes not materially. We continue to sell 15% of our core originations on a random basis at a fixed price and then the access loans we sell all of them. So, that can cause the mix shift to change. But from a trend perspective, right now we're not seeing anything that would expect would lead us to believe that the gain on sale on a percentage basis should change overall.

Great, okay thank you. And then, sort of more high level, you talked about the strength in New Jersey, you talked about the strength in Florida. And we're seeing that in terms of the year-over-year volume gains. I'm curious if you attribute that to new stores or penetration of the existing stores. So, I'm kind of curious what to build up the potential demand just as we move into the fourth quarter and into 2020?

Hi Rick, it's Raul. That's a great question. We would say it's both. So, I think as you know what is that happening is we put new stores on the ground. It takes a few months for them to start to make those around the store where they're present. But once someone comes in and they become a new customer of ours, we're able to evaluate their performance and if they perform well, then they start to repeat cycle when loans get larger, our cost to acquire is lower, losses get lower. So, what's happening in Florida and New Jersey is we continue to add locations. For example in New Jersey, we added our sixth and or seventh location in the last few weeks. But to you point, some of the first locations in New Jersey that have been there about a year, they're in the repeat cycle now. So, they're driving faster growth because of those larger loans. Florida has been open over a year and a half now and that state is definitely in a situation now where they're starting to get into the repeat cycle and we're starting to see faster growth. So, it's a little bit of both and what you're going to see it continue to do is continue to place locations in those states where we feel that we still have a lot of opportunity to grow.

Got it, okay thank you. And then, and I realize that given the seasonality of originations, there is not a simple answer to this question. But realistically what is the timeframe to breakeven for a new store from sort of opening to breakeven. And the reason I ask that is that I think so much of the story is about leveraging, basically marginal profitability of each of the branches starting to impact the overall overhead, leveraging that overhead.

Yes. So Rick, we don’t specifically disclose what that matric is for the stores but the matric that we have disclosed that I think might be helpful is that on the payback period for a newly originated loan is about four months. And that means that after the loan's been outstanding for four months, we basically recouped our origination cost and that includes store as well as marketing costs in that calculation. So, hopefully that gives you a sense that stores can very rapidly get to profitability and scale.

And Rick, this is Raul. Yes, I think one of the things we disclosed in the past is one of the things that makes us feel good about long-term growth prospects is the balance is in the stores are building faster than they have historically. Because we're getting better and better at creating that wall of sound if you will with from a marketing perspective of combining our digital with our direct mail with the retail location. So, customers are becoming aware of our presence and finding us either via mobile or online or our location. So, that gives us a lot of bullishness as we think about our ability to continue to improve the bottom-line in future years.

Okay great, thank you. Certainly I'm old enough to get the wall of sound reference.

[Operator Instructions] The next question is from John Hecht of Jefferies. Please go ahead.

Afternoon guys and congratulations on the success part. You got a successful first quarter. First question, it's a little redundant from what Sanjay and Rick were asking. But just thinking about you guys have a fairly balanced growth opportunity here and you've got recurring customers, geographic expansions, new branches. How do we think about maybe the next year to with respect to the cohort growth of your install base versus some of the new opportunities? And then, can you give us a sense for maybe branch expansion particularly in Illinois and Florida where you mentioned the states are going very well in terms of growth.

Yes so John, thank you, it's Raul. What I would say that you can expect from us is that kind of balanced methodical approach to grow. So, one of the things that we talk about here internally and we've been doing this for some time is to ensure that we're meeting our short term commitments while building for long-term success. So, this year we're on track to put down about 35 or so incremental locations that’s consistent with what we've done in prior years. We're still finalizing our 2020 plan but we would expect to be in that ballpark again. So, we're going to continue to put those new locations down so that that way we can build that cycle that I was describing earlier. And at the same time we'll start to see the dividends of our high NPS scores when we see customers come back and get access to those larger loans. I disclosed in the script also that we're incredibly happy with the progress that we're making in NPS and mobile and that has gone from 76 to 83 in the last year. So, we see more and more customers that want to actually interact with us that way and we're taking better-and-better care of them. So, we think that's going to help to continue to drive future growth. And then certainly the progress we're making in new products, we expect to see growth in that and it's ability to contribute to the topline in 2020. So, you'll continue to see balance growth and you'll continue to see the investments that we're having in this year add new factors of growth rates in both auto and credit cards in future years.

Okay. And then, second questions more like idiosyncratic question about rates and their effect. Rates set down more recently and there is some forecasting of further reduction of rates next year. How do we think about that I mean there is a certainly an uplift on the fair value, the loan portfolio tied to that and some offset in the debt. How do we think about that and how it effects your earnings going forward?

Sure. This is Jonathan, John. A great question. So first of all, we provided guidance for the fourth quarter and the full-year for adjusted net income which includes the impact of the fair value mark. And so, that guidance certainly takes into consideration our basically our forecast based on the forward curve for rates. And in fact, if you noted on the press release and the earnings talk we actually mentioned the forward rates that we use specifically. What's happened since the end of the quarter as you know is that on the very short end because our loans are about three quarters year duration that those rates had actually come down, which will benefit us. And then, on two years and longer which is where our asset-backed notes are, those rates have actually gone up slightly which also will benefit us. But we factored those elements into the guidance that we've provided for the quarter.

Okay, thanks. Sorry?

And then John, just have one quick thought on that and then circle back. I forgot to mention one piece. There is obviously the elements of kind of interest rates and then there is just the elements of the underlying performance of the loan. So, one of the things hopefully that you picked up in Jonathans comments is just the improved performance year-over-year in terms of the performance of the loans and that's really one of the things that drove our performance. So, just wanted to make sure that's not loss because certainly interest rates are a part of it. But a lot of the other things in terms of the high quality asset that we create are captured in that change in fair value. I forgot to answer one specific part of your prior question; I apologize. John, you asked about Florida and New Jersey. And so, specifically yes, we think there is still a lot of opportunity there. In terms of the number of locations that you would see us put down next year, it would be just proportionately in Florida and New Jersey because we've still only been there less than two years in Florida and about a year in New Jersey. So, your hypothesis is correct, that is an area that would get a higher investment from us relative to the other states.

Okay. And then, I appreciate all that color, it's very helpful. The final question is very high level. There's been some changes in terms of legislative landscape and then you have the elections in front of us and I'm wondering just how does that impact the competitive environment and does that afford you guys any opportunities going forward?

Yes. So that, that's a great question. We would say first of all when we look at a lot of the legislative activity, we think it's a really good thing for consumers and as you know we're a very much a mission-driven company that seeks to create positive outcomes for people that we deal with. So, we're absolutely supporters of the legislative activity that is meant to try to figure out how to keep people from borrowing at triple digit rates. So, that would be the first thing. In terms of just trying to think about how that legislative -- how those legislative efforts can impact us or our election. We built a business that does really well regardless of what's happening from a legislative perspective or who is in the White House. So, our business grew at a very high rate. When there was a democrat in the White House, our business continues to grow at a high rate with the republican in the White House. So, we think that our efforts that have our average APR be at 36% but that sorts I think that allow us to focus primarily on the business as opposed to having to be too concerned about what's happening from a legislative or electoral perspective. So, we're certainly keeping a close eye on those things but it's not anything that's keeping us up at night.

Alright guys great, thank you very much.

Thank you, John.

[Operator Instructions] There are no further questions at this time. I will now turn the call over to Raul Vazquez for closing remarks.

Well, on behalf of the opportunity, I want to thank you again for joining us on today's call. And we certainly look forward to speaking with you again soon. Thank you, everyone.

This concludes today's conference. And you may disconnect your lines at this time. Thank you, for your participation.