Oportun Financial Corporation (OPRT) Q2 2021 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Oportun Financial Corporation's Second Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Nils Erdmann, VP of Investor Relations. Mr. Erdmann, you may begin.

Thanks, and good afternoon, everyone. Joining me today to discuss Oportun's second quarter 2021 results are Raul Vazquez, Chief Executive Officer; and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer. I'll remind everyone on the call or webcast that some of the remarks made today will include forward-looking statements related to our business, future results of operations and financial position, planned products and services, business strategy and plans and objectives of management for our future operations. Actual results may differ materially from those contemplated or implied by these forward-looking statements, particularly given the uncertainties caused by the COVID-19 pandemic. And we caution you not to place undue reliance on these forward-looking statements. A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in our earnings press release and in our filings with the Securities and Exchange Commission under the caption Risk Factors, including our most recent quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 2020. 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 will present both GAAP and non-GAAP financial measures, which we believe can be useful measures for period-to-period comparisons of our core business and which will provide useful information to investors regarding our financial condition and results of operation. Unless stated otherwise, all of the metrics shared on this call will be on a fair value pro forma basis. Also, starting this quarter, there is no difference between our GAAP-reported metrics and fair value pro forma. A full list of definitions and reconciliations can be found in our earnings materials. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. A reconciliation of non-GAAP to GAAP measures is included in our earnings press release, our second quarter 2021 financial supplement and the appendix section of the second quarter 2021 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.

Good afternoon, everyone. And thank you for joining us. Q2 was another great quarter, demonstrating strong momentum across our business. In the quarter, we generated $138 million of total revenue, and $17 million of adjusted net income or $0.56 of adjusted EPS. Our aggregate originations came in at $433 million, up 175% year-over-year, and above our initial expectation of $425 million. Additionally, our growth continues in the third quarter, and we saw our portfolio surpass our 2019 levels in July. We're also currently delivering credit performance that is among the best in our 15 year history. Our annualized net charge-off rate was 6.4%, an improvement of 219 basis points relative to last quarter, and 414 basis points better than last year. Delinquency rates also performed incredibly well with those 30 plus day delinquencies at 2.5% at quarter-end. Based on the credit trends we're seeing, we're leaning into portfolio growth in the second half of the year, which is reflected in our increased aggregate originations guidance. Turning to our strategic objectives, we're making terrific progress, which I'm excited to share with you. These objectives include building upon the success of our digital first strategy, growing and expanding our new product lines, and advancing our strategic partnerships. I'll start with our digital first progress, highlighting our strengths as a digital lender, our customers utilization of our online services accelerated yet again in Q2, with 80% of new applicants choosing to apply online up from 59% one year-ago. Additionally, 79% of all payments were made outside of our stores in the quarter. Regarding our new product initiatives, volumes also continue to accelerate for our secured personal loan product. We ended the second quarter with $13.9 million in secured personal loan receivables up from $0.1 million at the end of Q2 '20 and up 160% sequentially. We rolled out our offering to customers in Florida at the start of July and are already seeing the product gaining significant traction there. We plan to launch into Texas market, our second largest market behind California in the next few weeks. I remain confident that our SPL portfolio is on track to reach our year-end receivables goal of $40 million. Credit card receivables grew 608% year-over-year to $19.4 million and are also tracking very well to meet our year-end goal of $50 million. We now have over 54,000 active customer accounts and our geographic footprint covers 44 states. Finally, with our strategic partnerships, one of the key advantages of our centralized and automated decisioning process is that 100% of applicants are evaluated with our AI driven risk engine, regardless of the channel or partner. This enables us to rapidly scale our Lending-as-a-Service, as we demonstrated with DolEx growing to 142 locations by the end of July. We were tracking ahead of our year-end objective of being an over 150 DolEx locations and are now raising our estimated year-end footprint to 175 locations. The exceptional digital capabilities offered by our Lending-as-a-Service platform are a key differentiator and enable us to grow faster, while also addressing our partners needs. I'm pleased to share with you that in July, we signed our second Lending-as-a-Service partner with another large money services business. We expect to formally announce the partnership in the weeks to come with an initial rollout anticipated in the fourth quarter, and the addition of over 100 new locations in the next 12 months. Turning now to our MetaBank partnership, I'm excited to share that our digital offering enabled by MetaBank is expected to launch in the coming weeks. As a reminder, this will enable us to be fully deployed across approximately 30 additional states by year-end starting with a dozen states this quarter. Through our partnership with MetaBank, we'll be nearly doubling the size of our addressable market and we will begin marketing simultaneously with our products availability in those states. Our second quarter results clearly demonstrate that we have returned to growth in our core, unsecured personal loan business, and that we also have several exciting growth vectors emerging. I'll now turn the call over to Jonathan, who will walk you through a more in-depth discussion of our financial results and provide our outlook for the third quarter and full-year. We will then open the line for your questions, Jonathan?

Thanks, Raul, and hello everyone. We generated excellent results in the second quarter. We grew up portfolio, delivered strong profitability and produce strong credit results among our best in the history of the company. Our aggregate originations were $433 million, reflecting loan demand that has surpassed our historic pre-pandemic levels. The impact of stimulus checks dissipated early in the second quarter, while loan application volume and originations accelerated throughout the quarter, and continued through July. Total revenue was $138 million down 3% year-over-year reflecting lower receivables due to reduced originations in 2020 as a result of the pandemic. Total revenue was comprised of $129 million of interest income, and $9.7 million of non-interest income. As our originations continue to rapidly rebound, we expect to see growth in our portfolio, which will drive growth in total revenue. Net revenue was $120 million, up 226% year-over-year, net revenue improved for the prior-year due to lower charge-offs and our improved charge-off outlook which increased the fair value of our loans. Interest expense of $12.2 million was down 18% year-over-year, primarily driven by the decrease in our cost of debt to 3.3% versus 4.2% in the year-ago period, as we have issued $875 million of asset back notes thus far this year at a weighted average interest rate of 1.9%, refinancing our more expensive prior securitizations. For our net change in fair value, we had a $5.9 million net decrease in fair value, which consisted of a $19.6 million mark-to-market net increase on our loans and our debt and current period charge-offs of $25.7 million. For the mark-to-market, the reduction of our life of loan charge-offs from 8.6% at the end of the first quarter to 7.6% at the end of the second quarter was the primary driver of the 101 basis point increase in the fair value price of our loans to 105.9% as of June 30. Based upon current trends in our loan portfolio, we're now projecting historically strong credit performance. The $2 million mark-to-market increase in our asset backed notes resulted from a 28 basis point decrease in the weighted average price to 100.6%. Turning to expenses, operating expense in our personal loan business, excluding certain non-recurring charges increased 6% year-over-year to $92 million as we continue to make technology investments and remain disciplined with other spending. Operating expenses associated with new products grew to $10.2 million. In the second quarter, we also incurred $4.9 million of costs associated with our retail network optimization that we noted on our prior call. We do not expect to incur additional material expenses related to the retail network optimization going forward. Additionally, we recognized $3.3 million of impairment charges on our right of use asset related to our leased office space in San Carlos, California due to our decision to move to a remote first work environment and downsize our corporate office space, we believe we will be able to sublease this space, which would generate other non-interest income over the next five years starting next year because the optimization and impairment were non-recurring events, we've excluded these charges from our non-GAAP metrics. Our customer acquisition cost was $153, down significantly from $413 in the year-ago period. This decrease was due to our higher loan origination volume. We're continuing to ramp our marketing to fuel our product and partnership growth initiatives and meet increasing customer demand as the economy expands. Our net income on a GAAP basis was $7.2 million, versus a net loss of $34.2 million in the prior-year quarter. This equated to GAAP earnings per diluted share of $0.24, versus a net loss per diluted share of $1.26 in the prior-year quarter. On a non-GAAP basis, we delivered adjusted EPS of $0.56, based on adjusted net income of $17 million versus an adjusted net loss per share of $1.29 and adjusted net loss of $35.1 million in the prior-year quarter. Adjusted EBITDA was $4.5 million compared to $4.8 million in the prior-year quarter. Our investment in new products impacted our adjusted EBITDA by $7.9 million and absent these investments, our adjusted EBITDA would have been $12.4 million. Adjusted return on equity was 14.2% versus negative 29.9% in the prior-year quarter. Turning now to credit, our second quarter results were among the best in our company's history. Our annualized net charge-off rate was 6.4%, a 414 basis point improvement versus the prior-year period. And at June 30, our 30 plus day delinquency rate was 2.5%, 118 basis points better than the prior-year period. The strength of our credit performance gives us confidence in our growth outlook for 2021 and beyond. Regarding our capital and liquidity as of June 30, total cash was $358 million. This number is temporarily elevated by $171 million of restricted cash in a pre-funding account for our 2021-B securitization that we use to purchase loans over the next several months. As of June 30, our debt-to-equity ratio was 3.3 times and all of our $400 million warehouse line was undrawn and available to fund our growth. During the quarter, we took advantage of the favorable credit market and issued $500 million of three-year fixed rate asset backed notes, our largest transaction to-date, the notes were priced at a weighted average interest rate of 2.05%. Additionally, we expect to announce later this month, the expansion and extension of our warehouse capacity. Looking ahead to the third quarter and the second half of 2021, we expect our historically strong credit trends and the continuing economic recovery to shape our 2021 performance. With that context, our outlook for the third quarter is aggregate originations of approximately $600 million. Total revenue of approximately $152 million, adjusted EBITDA between $3 million and $5 million, adjusted net income between $12 million and $14 million and adjusted earnings per diluted share between $0.40 and $0.46. For the full-year 2021, we're increasing our guidance assumptions as follows. Aggregate originations of at least $2.125 billion, total revenue between $602 million and $606 million, adjusted EBITDA between $7 million and $10 million, adjusted net income between $55 million and $58 million and adjusted earnings per diluted share between $1.83 and $1.93. We expect our 3Q annualized net charge-off rate to be 6.7% plus or minus 10 basis points. And for the full-year, we're lowering our projected rate to 7.4% plus or minus 10 basis points. In summary, we delivered a strong quarter and have a positive outlook for the remainder of the year. I'll now turn it back over to Raul for some final comments before we open the line for questions.

I'm pleased with our second quarter performance, and we are on track to achieve all the strategic priorities we outlined for 2021. This is made possible by our hard working employees, our dedicated partners and the support of our shareholders and I'm grateful for their continued commitment for furthering our mission of financial inclusion. As our products become increasingly available across the U.S., we continue to solidify our position as the leading provider of responsible and affordable credit products to hardworking people. Thank you. And now we welcome your questions and comments, operator?

Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question comes from the line of John Hecht with Jefferies. Please go ahead.

Good afternoon guys. Thanks for taking my questions and congrats on a good quarter. Just there's a lot going on with channel expansion here. And through the slides you can see, what the - effectively backing with the DolEx channel. But I know you're also launching the MetaBank channel kind of as we speak here, maybe can you tell us this the second half origination maybe give us some commentary or details on how much of that might come from the traditional Oportun channels versus some of the newer channels you're developing?

Yes, hi John. This is Raul. So we're happy to talk about that. Really, the way to think about it is the bulk of the growth is still being driven by the traditional business. We feel that in the last year, we demonstrated how resilient our business is, how strong the tools are, and our ability to be flexible and adjust the businesses needed. And you're now seeing really in particular, this quarter, our pivot back to growth. And that's being driven by the business that you know that we've had for 15 plus years, DolEx and MetaBank, we think of as exciting growth opportunities that are on top of that. And DolEx is still early, we're thrilled that we're at 142 locations, we're ahead of our schedule, we took up our expectations from 150 to 175. So we're excited about what that's going to be. In MetaBank, we expect to have launched in the coming weeks. But like DolEx, that's going to start relatively small, and then we'll lean into it and scale it. So exciting opportunities for future growth, but they're not driving the growth, it's the traditional business.

So then we should think about those other challenges really kind of more contributors to next year's originations then?

That's correct. We think right now, not only are we having a really good return back to our growth, but we're setting ourselves up really nicely for a strong 2022.

Okay, and then as the MetaBank ramps and as the card in auto products ramp. Is there anything we should see to kind of yield or call it product margins or does everything kind of fall to pretty much the same type of metrics?

We're going to try to have it all fall back to the same kind of metrics, we manage the business on a portfolio basis, we want to try to simplify the story as much as we can for our investors. So we really think about managing margin at kind of a company level, and we're going to see everything kind of come back to the same metrics.

Okay. And then final question is, we talked more and more about the AI underwriting model. I know you guys spend a lot of time developing different enhancements. I think you guys, I think you do a major one every year, if I recall, maybe can you talk about the most recent color developments in the model and how you kind of - how that enhances the overall performance?

Absolutely. So we've had several enhancements to the models in the last year, I'll give you a couple of examples, as you know, historically, about half of our customers when they come to us don't have a credit score. So we've developed a model that we call the ADS model. It's all built off of alternative data. So none of what seeds that model comes from the credit bureaus or any of those records. So in the last year, we enhanced, we created new versions of our ADS models, we created new versions of our marketing models, we created an updated version that we use to drive our collections. So there's really been work that's taken place across the business, and upgraded models for credit card as well that are giving us a lot of confidence to continue to lean into the credit card growth that you saw us describe this quarter. So to your point, there's a lot of work that's taking place behind the scenes to keep improving our tools and upgrading our models.

Okay, thanks very much, guys.

Thank you, John.

Our next question comes from the line of David Scharf with JMP Securities. Please go ahead.

Great, thank you. Good afternoon, everyone, and appreciate you taking my questions. So just two things to follow-up on. One, maybe Jonathan, you can address this as we think about sort of the jumping off point, if you will, for expense run rate. Starting with the $110 million of OpEx, obviously, you highlighted some one-time related costs, such as the location, closures optimization, the lease impairment, I would imagine a lot of the new product investments are ongoing. But can you clarify that because if I do keep that in, it sounds like perhaps $102 million is sort of a current, sort of quarterly rate we should be thinking of and then scaling it up with customer acquisition as originations grow, or should it be an even lower number, if some of those new product investments are one-time of the nature?

Yes, that's a great question, David, I'm happy to answer it. So first of all, as you saw in our core business, we've been doing a really good job of controlling expense, and we only grew OpEx and personal loan 6% year-over-year. And so we're going to, certainly we're going to see growth in marketing expense for the core business. We're continuing to see the same seasonal trends that we've seen historically. And so we expect increase demand. And so there definitely will be increased marketing expense, we'll continue to have roughly the same level of new product expense. So, from that perspective, I think that gives you a good idea of what OpEx could look like going forward. And obviously, we've provided guidance, so you can triangulate around that as well.

Okay, great. And maybe just a follow-up on the product front, can you give some color in terms of the nature of the customers that the 54,000 active accounts and credit card and on the secured side auto? Are these primarily all new customers to Oportun or they prior borrowers that you directly marketed to, or they add on borrowers now with two products, little more flavor in terms of sort of how the TAM is being expanded with respect to the new borrower profile?

David, this is Raul. There are two parts to that. I love that question. The first is, we have a thesis and you've heard this before that we've got customers that are really, really happy with us, right, our net promoter score as you know has been in the 80% range for years. And we know based on some analysis that we've done in the past that those customers even if they're really happy with us end-up going to another company to get their credit card or to get an auto loan. So one of the theses that we have is that, we can leverage all of the marketing and we can leverage our application funnel to put other products in that funnel, make customers aware of those products, and therefore, really effectively drive adoption of additional products. And the secured personal loan in particular was the first product that we tried to do that with where we put it in the same application funnel as our unsecured personal loan. And we're seeing great success in terms of leveraging that funnel. So one of the things that you're going to see us do, we're going to do this next with credit card is to try to figure out how can we create one experience for all customers present all these credit products, and then in particular, as we think about becoming a bank in the future, and having additional products, products to help someone save, products to help someone spend, products to be able to help them even budget over time? How can we continue to create one experience, one funnel, and then present as many products as possible, so that we can create more diversity in our revenue, we can create more products per customer, and we can create a longer more profitable life time? So we feel that that thesis has now been validated with the success that we're seeing in secured personal loans. And we're going to do that next with credit cards. So that would be part number one. Number two, in terms of your question, so what we have done to-date to be able to calibrate the models is to start primarily with customers that do not have another product. We wanted to get a sense of really clean underwriting, seeing if we offer someone a credit card who doesn't have a loan today, what are those response rates going to look like? How do we feel about product market fit? And then of course, how do we feel about the credit metrics. And so far on all three of our products, we're really, really happy with credit metrics. The next stage, which we're undertaking now is exactly what you said, which is inviting customers to have more than one product. And we've been working on that and working on the underwriting models for that. So that's the next stage for us. But we got a lot of confidence that we're going to be able to do that well, given how well our models and our tools have served us through two recessions and in the last 12 months in particular.

Got it, got it. It's very helpful, tremendous opportunity, obviously. Maybe just add one quick one, because you sort of raised it briefly, in passing in terms of the bank license application, obviously those regulatory wheels grind slowly, that process 12 to 24 months, but is there any update that you can provide in terms of which are best guesses and when that might actually get hopefully approved?

I think to your point, there's been a lot of change that has taken place. So we started this process with one Controller. And I think there have been two people now that have been in acting roles since then. So we continue to be optimistic, we continue to have very positive conversations with the OCC. But that's the extent of the update that I can provide right now.

Got it. Great, well, thank you.

Sure. Thank you, David.

Thanks, David.

Our next question comes from the line of Sanjay Sakhrani with KBW. Please go ahead.

Thank you, guys. I guess question on consumer behavior and your customers as we're moving past the stimulus and further away from the stimulus proceeds? Are you guys seeing any changes in behavior, whether it be form of repayment or sort of timing of repayment amounts? Obviously, you're starting to see some traction on loan growth. Maybe you could walk us through that? Thanks.

Yes, so everything we see makes us really, really optimistic. So we feel that whether it's on the demand side or in the payment curve side, Sanjay, we're seeing trends normalize, we're seeing things start to look much more like 2019. So that's really given us the confidence to lean into marketing and to lean into the growth that you saw us report, right, we look at the numbers that have been reported by other firms. And we look at the fact that we had a number of loans grow 222% year-over-year, origination dollars are 175% year-over-year. And we feel that we're really taking share and showing the differentiation in our business. And part of what's given us that confidence and leaning in that way is we had a lot of confidence in the economy right now. And the way the consumer is showing up, and all the curves are normalizing.

Okay. And then I guess a question on DolEx, I know it's early days, but anything you're seeing in terms of the cohorts or I mean seasons like they're performing sort of in line with your expectations and consistent with the rest of your business, but just curious if you're seeing anything in those cohorts?

What we're seeing is exactly what we expected. That's a customer that we understand well, so we're seeing credit, that looks fantastic. We're seeing a value proposition both with the partner in terms of the partners desire also to expand our presence and with the customer. That is giving us a lot of confidence that much is the new products are going to present an opportunity to grow our business even faster in future years, we think Lending-as-a-Service is going to do that too. We've talked in the past about the fact that we like that way the model is structured, it's someone else's real estate, it's someone else's labor. So it's absolutely variable for us and the economics are compelling. And we're really excited about the second partner that will announce that formally in the coming weeks. And as we've said, in prior quarters, we also like the way that our overall pipeline is shaping up for Lending-as-a-Service. So we're right, where we want to be Sanjay in terms of Lending-as-a-Service, in fact now we're a bit ahead of plan. And that's why we're ready now to say, we think we're going to end the year with at least 175. And with this new partner, we would expect to have 100 additional locations over the next year. And just to put that into context, if you resent a combine that say 175 from DolEx and then another 100 from the second partner, that then creates a distribution network through partners that would be larger than our current store footprint. So again, just a really exciting opportunity for additional growth.

Great, I guess final question sort of relevant to recent topics. You are seeing a lot of these Buy Now Pay Later platforms scale and grow? And I'm just curious if you feel like it touches your customer, right? And the reason I ask is, there's this concern that, they're seeing loan stacking, as consumers take on Buy Now Pay Later loans from a number of these different platforms. And I guess, how much insight do you think you have to the extent that your customers have those types of loans?

Yes, so this is a space we're watching carefully. And the way that we look at it today is we don't think it really has impact in terms of demand for our product, we think that those loans tend to be smaller loans, right, the bulk of them still are kind of split four or split into six. So it's a very different use case than, say someone that borrows from us, that is borrowing almost a $3,000 on average, either because the card start, they want to combine it with other savings, buy a new car or medical attention. The other thing that I think was really interesting, and looking at some of the data that's come out about Afterpay and Square is, from what I've read, for example, the Afterpay customer is certainly more affluent than our customer is. So we do not think that this represents competition, if anything, we think as those players seek to create more, more engagement with our customers, Sanjay and to be able to take care of other use cases, we think it could present an opportunity for us to partner with them in the future, because we have an expertise in underwriting much larger loans that they haven't had to develop yet. So we see it as complementary. And we see it as a potential opportunity for Lending-as-a-Service in future years.

All right, great. Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of Rick Shane with JPMorgan. Please go ahead.

Hey, guys, thanks for taking my questions this afternoon. Look I appreciate the update on guidance. And I'm curious when you think about the changes to the guidance for the year. How much of what we saw in the second quarter, do you think was basically a pull forward of potential earnings versus how much is an upward adjustment? And I'm assuming the upward adjustments are really a function of the outlook on charge-offs more than anything else? Is that the right way to be looking at it?

Yes, Rick, it certainly as it combines with our fair value calculation. So a great question. So first of all, we took up all of our guidance across the board. So we certainly did pass through elements of what we had seen in a strong quarter. When you take a look at adjusted net income and adjusted EPS, where we had the largest speed, that was driven by the 101 basis point reduction in our remaining charge-off assumption, right. So that's the sort of same mechanics as allowance and provision and so that that does pull forward as you suggested, but given the higher growth that we're projecting, we certainly taken up the other metrics. And when you look at adjusted EBITDA, we've pretty much passed through all of the beat there and likewise, taken up our total revenue, range and originations.

Got it. Okay, that all makes sense. If we look historically at the fair value marks on the assets, you're now obviously at a high watermark, if we were to go back to, for example to Q4 2019, when the economic outlook was very favorable, you're now above that. Is that entirely a function of the cash flow math associated with the lower charge-off assumption? Or is there a mark related to markets in any way that we need to think about as well?

Yes, great question. The vast majority of it is the loss assumption. So prior to the pandemic, we had a remaining cumulative charge-off assumption that was in the nines, right. And so we're now at 7.6%, as of June 30. So that's a big difference. We are in a lower rate environment, we are in a tighter credit spread environment, we've benefitted from that, when we brought asset backed transactions to market. So that does contribute as well, but it's really just operating in a much lower loss environment. So with lower losses, you're going to have more cash flow from the loan and a higher value.

Got it, okay. Yes, I did notice there was a modest tweak down in your forward swap rates, but again, I'm assuming and you validated, it's really a function of that lower NCO rate going forward. Thank you guys very much.

Thank you.

Thanks, Rick.

There are no further questions at this time, I will turn the call back over to Raul Vazquez, Chief Executive Officer for closing remarks.

I want to thank all of you for joining us today on the call and we absolutely look forward to speaking with you again soon. Take care everyone. Bye-bye.

Thank you. That does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines.