Oportun Financial Corporation (OPRT) Q4 2022 Earnings Report, Transcript and Summary

Hello and welcome to the Oportun Financial Fourth Quarter 2022 Earnings Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dorian Hare, Vice President of Investor Relations. Please go ahead, Dorian.

Thanks, and hello everyone. With me to discuss Oportun's fourth quarter 2022 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, 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 upcoming Form 10-K filing for the current quarter ended December 31, 2022. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events other than as required by law. Also on today’s call, we will present both GAAP and non-GAAP financial measures, which we believe can be useful measures for the period-to-period comparisons of our core business, and which will provide useful information to investors regarding our financial condition and results of operations. A full list of definitions can be found in our earnings materials, available at the Investor Relations section on our website. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. A reconciliation of non-GAAP to GAAP measures is included in our earnings press release, our fourth quarter 2022 financial supplement and the appendix section of the fourth quarter 2022 earnings presentation, all of which are available at the Investor Relations section of our website at investor.oportun.com. In addition, this call is being webcast, and an archive version will be available after the call, along with a script of our prepared remarks. With that, I will now turn the call over to Raul.

Thanks, Dorian and good afternoon, everyone. Thank you for joining us. Today, I'd like to discuss our fourth quarter financial performance, share how we are managing through the macroeconomic environment, and provide an update on our strategic initiatives. Jonathan will then provide more details on our financial performance and our guidance, and I'll provide some closing remarks. Oportun delivered strong, top-line growth in the fourth quarter and was profitable on an adjusted basis. Let me start with the following summary on Slide 3 of our earnings deck. We delivered fourth quarter record revenue of $262 million, up 35% year-over-year. We exhibited diligent expense management with a 52% adjusted operating efficiency ratio. That's a new record for us as a public company and a key driver of our profitable quarter, with adjusted net income of $4.6 million, for adjusted EPS of $0.14. While our post-July vintages are performing better or near 2019 pre-pandemic levels and continue to grow as a proportion of our loan portfolio, our annualized net chargeoff rate of 12.8% was higher than our prior expectations due to underperformance of our back book of loans originated before our July credit tightening. The positive trends in our post-July vintages provide us with the expectation that Oportun will continue to see its loss rates trend toward our target range during 2023. On a full-year basis, 2022 was a resilient year in the face of a challenging macroeconomic backdrop. We grew total revenue by 52% to a record $953 million, while total originations grew by 27% despite significant credit tightening actions in the second half of the year. And Oportun was profitable on an adjusted basis, generating $69 million in adjusted net income and $2.09 in adjusted EPS. The initial 2023 guidance that Jonathan will detail with you reflects that although we still face headwinds in the first quarter, we anticipate strong performance starting in Q2, driven by prudent originations, lower losses and expense reductions. Now, let me update you in more detail about what we saw in Q4, starting with credit. Credit is the most important metric in our business. As a reminder, starting in July we initiated a set of actions, including significantly tightening our underwriting standards, to address the impact of inflation on our members. At the time we observed an uptick in delinquencies, particularly among borrowers with lower free cash flows and those with smaller loans with shorter maturities whom we had underwritten prior to or in the first half of 2022. This subset of borrowers, including new and some returning, struggled with the expiration of pandemic-era stimulus payments amidst rising inflation. As you can see from Slide 4, our post-July underwriting vintages continue to perform quite nicely. We've maintained our posture of reducing our exposure to new borrowers and increasing our proportionate exposure to more profitable, returning borrowers, who have already successfully repaid at least one loan to Oportun. In the fourth quarter, 27% of our loans were to new borrowers as compared to 28% in the third quarter and 51%, in the first quarter. This shift in underwriting has been integral towards our driving first payment defaults towards or below 2019 pre-pandemic levels. As of the end of 2022, our first payment default rate was markedly lower than where we started the year and stood at 0.6% in comparison to 1.0% in 2019. We initiated further credit tightening actions in November and December, following the July actions. On an overall basis, as you can see on Slide 5, the 30 plus day delinquency rates for our August through November 2022 vintages were each lower than the comparative monthly vintages initiated in 2019. Moreover, as the average life of our loans is only one year, the proportion of post-July underwritten personal loans on our balance sheet was already up to 39% as of the end of the fourth quarter 2022, and we anticipate it will be 81% by the end of 2023. So, we're very pleased with the results from our originations following our July credit tightening and our subsequent actions which position us to improve our credit performance throughout 2023. We remain highly focused on other key pillars of preparedness in this macro environment, including pricing, funding, liquidity and cost controls. We continue to pursue loan portfolio pricing actions to mitigate the increased costs of funds we're experiencing in this rising rate environment, while remaining committed to our 36% APR cap. We now expect that by the end of 2023 our portfolio yield will be over 200 basis points higher than the end of 2022. We closed a $300 million securitization, our fourth of the year, in November, and we believe our access to the securitization market remains strong. We are making progress in reducing our charge-off rate, but given the performance of our back book, expected higher cost of funds given Fed actions to combat persistent inflation, and the uncertain future macro environment, we have recently taken two additional measures to bolster our liquidity position. We have delayed $42 million of amortization on our residual financing facility, and we have upsized and amended our senior secured term loan by up to $75 million. Jonathan will detail these changes with you later. Let me shift now to operating expenses. We are pleased to have met our target for flat second half adjusted operating expenses versus the first half of the year by reducing sales marketing costs and limiting headcount growth, while continuing to grow our revenue. Accordingly, our fourth quarter adjusted operating efficiency improved by over 1,200 basis points year-over-year to 52%, which is the lowest level in our history since becoming a public company in 2019. As we entered 2023, we remained focused on reducing operating expenses. I recently made the decision to reduce our corporate staff by 10% and eliminated a number of contractor relationships as part of an overall plan to streamline operations. These actions will result in $48 million to $53 million in total annualized expense savings. Shifting now to our long-term strategic priorities, I'd like to provide you with our key areas of focus for this year and into 2025 as we've laid out on Slide 7. Our first priority is to fortify our core business economics. I've talked to you about how our underwriting focus has been on returning members rather than on new members, and we look forward to the second quarter and beyond when we anticipate lower charge-offs. We're also focused on substantially improving our profitability and our ROE. We expect the expense discipline and record-low adjusted operating efficiency levels we exhibited in the second half of 2022 to carry into this year and beyond. Our second priority is to strengthen our core unsecured personal loan product, with a focus on improving unit economics. As I mentioned earlier we are increasing yield and are focused on reducing costs associated with our personal loans business. Our unsecured personal loan portfolio will continue to be the most profitable component of our business, and we will leverage data, technology and AI to responsibly grow it. Our third priority is to build our member engagement platform. We're continuing to enhance our platform capabilities to meet the everyday financial needs of hardworking people, which will extend member lifecycles and enable us to service them with more personal loans over time. At the center of this engagement initiative is our Oportun Mobile App, which we previously referred to as the Unified App. Released in February, the Oportun Mobile App combines our credit products with our digital saving, banking and investing products. I'll talk more about the mobile app in a moment. Finally, our fourth strategic priority is to develop our product suite. This includes our focus on credit cards, secured personal loans, and our lending-as-a service partner channel. As a reminder, we indicated on our August earnings call that we would deliberately moderate growth in our secured personal loan and credit card products as part of our credit tightening actions. While in the near-term we will be focused on improving the credit performance of these portfolios and limiting originations, we continue to believe that secured personal loans and credit cards are complementary to our overall product suite. And we continue to make great progress with our lending-as-a-service partner channel, from which we can efficiently increase our applicant pool and selectively add high quality new members even while we tighten our credit standards. During the fourth quarter, we scaled our partner network to include 590 locations, up from 258 a year ago, and well in excess of the 500 locations we had targeted by year-end. I'm also pleased to share with you that our partnership with Sezzle, the Buy Now, Pay Later company and our first digital Lending-as-a-Service relationship, is active as of February. Oportun will be providing financing for Sezzle's customers who need a larger loan, for whom a traditional Buy Now, Pay Later loan is not a fit. To elaborate further on the new Oportun Mobile App that I mentioned earlier, we're very excited about its release because it is a major milestone towards building our member engagement platform to help hardworking individuals meet their borrowing, saving, budgeting, and spending needs. Over 275,000 members have already used our app. Many of you will recall that in November of 2021 when we announced the acquisition of Digit, our Digital Banking platform, we began to refer to our customers as members. The implicit strategy shift was that the Digital Banking products would allow for ongoing engagement with existing and new borrowers with whom we could formulate multiproduct relationships. With the Oportun Mobile App's launch and the seamless customer experience it provides, we are now well-positioned to accelerate the synergies we contemplated when we acquired Digit, through increased cross-selling, higher conversions and lower customer acquisition costs. With that, I'd like to turn it over to Jonathan for additional details on our fourth quarter financial performance and our initial 2023 guidance.

Thanks, and good afternoon everyone. As Raul mentioned, we're pleased with the resilience that Oportun continued to exhibit in the fourth quarter. Although, we still face challenges in the first quarter of this year from our pre-July back book, I am optimistic about the improvements we anticipate to follow and how they will position us for strong future growth and profitability. In the fourth quarter, we generated $262 million of total revenue as shown on Slide 9, and $4.6 million of adjusted net income, or $0.14 of adjusted EPS. Revenue upside and expense discipline enabled us to be profitable, while higher charge-offs resulted in a slight earnings shortfall in comparison to our November guidance. Our aggregate originations were $610 million, down 29% year-over-year and below our prior guidance of between $650 million to $700 million for the quarter. This reflects the further credit tightening actions we took in November and December, and our ongoing focus on high-quality originations. Total revenue of $262 million was above the guidance range and up 35% year-over-year, with upside reflecting outperformance in our Digital Banking business. Net revenue was $143 million, down 11% year-over-year due to a net decrease in the fair value of the Company's loans and increased interest expense, partially offset by increased revenue. Interest expense of $36 million was up 211% year-over-year, primarily driven by increased debt issuance to fund our growth, and the increase in our cost of debt to 5% versus 2.5% in the year-ago period. At the end of the fourth quarter, 82% of our debt was fixed rate, providing us with some protection from rising interest rates. For our net change in fair value, we had an $83 million net decrease, which consisted mainly of current period charge-offs of $99 million. For the mark-to-market, the fair value price of our loans increased to 101.5% as of December 31, and resulted in a $23 million mark-to-market increase. The $21 million mark-to-market increase in our asset-backed notes resulted from a 47 basis point decrease in the weighted average price to 92.5%, due to the increase in interest rates and credit spreads during the quarter. Turning to expenses, we maintained strong discipline as we said we would on our prior call with adjusted operating expenses only increasing 1% sequentially. This allowed us to meet our objective for flat second half vs. first half expense. As you can see on the right side of Slide 9, Adjusted Operating Efficiency at 52% was a year-over-year improvement of over 1,200 basis points and was, as Raul mentioned, a new post-IPO record. We’ve carried this expense discipline into 2023. As you heard Raul mention, we expect to save $48 million to $53 million in annualized run rate savings from our recently announced plan to streamline operations. In the fourth quarter, our sales and marketing expenses were $21 million, down 2% sequentially and down 43% year-over-year, as part of our continued cost cutting focus. Our customer acquisition cost was $152, up 13% from the prior year period as lower marketing expenditures were offset by lower aggregate originations due to credit tightening. We delivered adjusted net income of $4.6 million, compared to $26 million in the prior year quarter, and adjusted EPS of $0.14 versus $0.82, respectively. Adjusted EBITDA was a $33.5 million loss in the fourth quarter, a $57 million decrease compared to a gain of $23 million in the prior-year quarter. The decline was primarily driven by higher net charge-offs and the fair value mark on loans sold during the more recent quarter. Adjusted Return on Equity was 3% versus 18% in the prior year quarter. For the last 12 months, Adjusted ROE averaged 12%. Turning now to credit as shown on Slide 10, our fourth quarter annualized net charge-off rate was 12.8%, compared to 6.8% in the prior year period, while the full year rate was 10.1%. As a reminder, last year’s charge-off rate was abnormally low due to strong consumer balance sheets, including the impact of government stimulus amidst the pandemic. Losses were $5 million higher than the top of our fourth quarter guidance range of 12.15%. As we said on our third quarter earnings call, our credit performance has been and will continue to be driven by two different portfolio dynamics: the loans we’ve been originating since July under significantly tighter credit standards and the loans originated prior to that. We continue to expect 4Q 2022 to be the peak charge-off level during the current credit cycle, with our charge-off rate declining in the first and second quarters and being markedly lower in the second half of 2023. Regarding our capital and liquidity, as of December 31, total cash was $204 million. Additionally, net cash flow from operations for the fourth quarter was $89 million, up 48% year-over-year. Our debt-to-equity ratio was 5.3 times. Also as of December 31, $430 million of our combined $750 million in warehouse lines was undrawn and available to fund our growth. As Raul talked about, we recently amended our two corporate debt facilities as follows: first, we amended our residual financing facility. We deferred $42 million of scheduled principal payments into 2024 that otherwise would have been due through July of this year. Second, we upsized and amended our senior secured term loan to be able to borrow up to an additional $75 million. We borrowed the first $21 million on March 10 and will receive $14 million more by the end of the month. We expect to borrow additional $25 million amounts in April and June, subject to the approval of our lenders. In consideration of these actions, the rates we pay on these two facilities have increased by 3 percentage points each. Furthermore, we have issued warrants for common stock representing approximately 5% of the company to the senior secured term loan lender in connection with the initial draw. We would issue additional warrants for approximately 2.5% upon each of the two further conditional draws. In this uncertain macro environment, forecasting losses on our back book has been challenging, and recognizing that further macro headwinds could additionally pressure our portfolio, we felt it was prudent to increase our liquidity position with these actions. We believe our future performance will more than make up for the associated costs. Turning to our expectations for the first quarter and full year 2023 as shown on Slide 12, we remain focused on prudent, profitable growth and our forecast reflects that our tightened credit posture will persist until we see our charge-off rates coming down, the Federal Reserve moderating their interest rate hikes, and the macroeconomic outlook improving. I want to let you know that for the time being we will not be providing guidance for Adjusted Net Income and Adjusted EPS because of the potential for increased volatility in the fair values of our loans and ABS notes. While we expect profitability to improve starting in 2Q, setting us up for a strong 2024, we expect the non-cash fair value mark-to-market to cause us to have a significant loss in the first quarter of 2023. We will look to reinstate our adjusted net income and adjusted EPS guidance in the future when the macroeconomic environment has stabilized. Given the decision not to guide at this time to adjusted net income and Adjusted EPS, we are reintroducing our adjusted EBITDA guidance. We continue to believe that adjusted EBITDA is a useful metric because it represents the cash flow generation capability of the business, and it isn’t impacted by swings in fair value. While we still expect that the fourth quarter of 2022 was our peak charge-off rate, and we expect to see improvement throughout 2023, I do want to point out that we now do not anticipate returning to our 7% to 9% charge-off rate in the second half of the year. At this time, we do expect significant improvement of over 200 basis points and to approach a charge-off rate of 10% by the second half. This change in expectations is caused by our back book recently performing worse than previously expected. In addition, we’ve observed indications from the latest IRS reporting that average refunds are trending around $400 lower than last year. We believe this could be impacting the ability to pay of members with lower free cash flow. Finally, we are not providing originations guidance at this time because if the macro environment were to worsen, we plan to tighten credit which would reduce our loan volumes. What we can share is that we generally expect at most single-digit growth in our owned receivables balance this year, as we keep credit tight and plan to restart whole loan sales. In terms of guidance, our outlook for the first quarter is, total revenue of $245 million to $250 million, annualized net charge-off rate of 12.5% plus or minus 15 basis points, adjusted EBITDA of $49 million to $44 million. Our guidance for the full year is, total revenue of $975 million to $1,000 million, annualized net charge-off rate of 11.5% plus or minus 50 basis points, adjusted EBITDA of $52 million to $60 million. In summary, we continue to take the necessary steps to manage our back book, diligently manage our expenses, and make high quality loans. And above all, we are focused on improving our profitability. With that, I will now turn it back over to Raul before we open the line for questions.

Thanks, Jonathan. As we’ve communicated, we believe our peak charge-off rates are behind us and the business will see steady improvement beginning in the second quarter. The leadership team and I remain confident in our ability to navigate the uncertain macro environment by making the necessary adjustments to create a more efficient and more profitable business. I look forward to reviewing our first quarter results with you on our next earnings call. With that, Operator, let’s open up the line for questions.

Certainly. We’ll now be conducting a question-and answer-session. [Operator Instructions] Our first question today is coming from Sanjay Sakhrani from KBW. Your line is now live.

Thank you. Jonathan, you mentioned you expect the loss rate to come down pretty meaningfully in the second half of this year. Could you give us some idea of like whether or not you expect to get back to that targeted range of 7% to 9% in the third quarter or in the back half of this year? And then just secondly, on a related point, you mentioned the tightening of credit potentially if things are volatile. Would that work against you guys achieving that sort of your charge off rate expectations?

That’s a great question, Sanjay. So first of all, as I said in my remarks, we expect that the loss rate will decline by around 200 basis points. But that is not enough to get us down to the 9% to 7% range. So you can do the math on that and towards the back half of the year, we’re expecting to be in the tens. Tightening credit could reduce the denominator a little bit, but I don’t think that will move things all that much. And of course, we take the right actions as required by the macro environment.

And I guess just follow-up, as we look back at some of the adjustments you’ve made, is it just that the backdrop was just very different from what you guys had seen before and some of the adjustments you’ve made give you more certainty in the future? I’m just trying to think about the volatility and how it might play through in the future in terms of the credit metrics.

Yes. Sanjay, this is Raul. I think to add to Jonathan’s response, what we’re really seeing is challenges in the back book. So those, as a reminder, were the originations we made prior to some big adjustments in the July timeframe. And one of the things that we’ve been sharing is those originations included loans to individuals who just had lower free cash flow and as all of us were dealing with inflation, higher gas prices, higher food prices, right? They were the ones that got squeezed and that’s the part of the portfolio that continues to put pressure on the overall loss rate and why. Instead of the 7% to 9%, we expect it to be a bit higher and be in that 10% range in the back half of the year. What gives us confidence right now is if you look at Page 5 in our earnings deck, you look at the vintages that are shown on the left side that are the post-July vintages and all those vintages are at or better than the 2019 rates. And that’s on purpose. We wanted to target 2019 because that was a really good credit year for us. And on the right side, what you see is the other thing that gives us confidence in terms of hitting those back half numbers, which is the orange part of that right side of the slide, which is the back book. It becomes the smaller and smaller part of the portfolio in the back half of the year. So at the end of the second quarter, it’s only going to be about a third of the portfolio when we get to the end of the year, it’s less than 20%. So we got a lot of confidence and we like what we’re seeing right now in the newer originations, we’re just having to work through the back book, but that becomes a smaller part of the business as the year goes on.

Okay, wonderful. Thank you.

Thank you.

Thank you. Next question is coming from Matthew Hurwit from Jefferies. Your line is now live.

Hi, guys. Just a quick technical question. On Slide 37, it looks like the remaining cumulative charge-offs line decreased this quarter. Could you just help me understand what this change or number represents? And is it similar to the chart of lifetime loan losses on Slide 38? Does it mean that’s where you expect the loss rate to be over the lifetime of the portfolio? Thanks.

That’s a great question, Matthew. First of all, it is not the same number. Slide 38 are vintage charge-off curves. So this is when – from the inception of a vintage of a time period, where do we think cumulative net charge-offs will be. In comparison, the remaining cumulative charge-off number is the same number as the CECL allowance number. It’s the – for a point in time for not just one vintage, but all of the outstanding portfolio that you have on the book. How do you expect – what do you expect the remaining charge-off if that book just pays down? Is that helpful?

Yes. Perfect. And then just a quick follow-up. With the NCO guidance this year, you’ve already given us some color, but maybe could you talk a little bit about the assumptions behind the range? What could get us to the top or the bottom? You mentioned tax refunds, maybe unemployment assumptions or just what else is in that number? Thanks.

Yes. So this is Raul. There are a couple of things built into that number. First of all, as we mentioned in our comments, we believe that peak losses are now behind us. We think Q4 was the peak. And as we go through the year and work through the back book in the way that I mentioned with Sanjay, we start to get to that 10% range because the back book is a smaller and smaller portion of our overall portfolio and the newer originations of which we really like the performance, those become more dominant. In terms of macroeconomic assumptions, we continue to expect employment for our member base to be good. I’m sure you read the same things that we do and they indicate that there is a supply issue in kind of the blue collar part of the market that there just aren’t enough workers. And as a consequence, employment continues to look good, wages continue to look good for that part of the market. So even with fed actions, which obviously after the last few days are a little more uncertain, even with any fed actions that may take place, we continue to believe that the employment market is going to be a good one.

Great. Thanks very much. Appreciate it.

Thank you.

Thank you. Next question is coming from Rick Shane from JPMorgan. Your line is now live.

Thanks guys for taking my questions. First on the warrants that are going to be issued, I assume that those warrants are at the money on day of issuance?

Yes. The warrants are in the money. That’s right.

No I’m assuming they’re issued at the closing stock price or some formula? Not in the money, but actually at the money. So they’re not discount warrants, they’re par warrants?

No, that’s not the case, Rick. They weren’t discounted.

Okay, got it. And have you provided or would you provide the degree at discount so that way we can start to think about how to calculate the share account dilution?

You should include them in the share account dilution.

Okay. You’re saying 100%, so they’re – okay, fair enough. I get the implication. Second question is, there was commentary related to the volatility and uncertainty of fair value marks in Q1 this year. And the implication was that there will be negative fair value marks based on some of the commentary you provided. I’m curious, given that we are approaching or that you’re indicating peak in charge-offs what is changing? Is it the discount rate that’s driving this? Or is there something else if we compare the fair value methodology on Page 37?

So I'm going to, Rick, this is Raul. I'm going to hand it off to Jonathan in just one second, but just as a reminder for people that may not be quite as familiar with our business as you are. You may recall a few years ago we used to provide guidance on adjusted EBITDA. So it's something that we've done in the past. It's a metric that we like because; it doesn't have the movement that GAAP net income and adjusted net income have due to the mark-to-market. So just to let everyone know, this is guidance we've provided in the past. It's a metric that we think indicates the health of the business and the ability to generate cash of the business more accurately than adjusted net income does. It's just with this very uncertain environment. Again, we've seen it just in the last few days. We feel that's validated our decision to hold off for now on adjusted net income until things are a bit more stable and predictable. But I'll let Jonathan go through the details on the rest of your question.

Sure. So Rick, the things that could drive that volatility are just how quickly the ABS market strengthens. So, as you saw on Slide 36, the bond portfolio, which is a Level 2 asset, we used dealer marks and trace. So this isn't judgmental. That's at a 92.5% price and so, we've seen the ABS market open up very strongly which is good for future access, but if credit spreads improve more quickly it's hard to predict how that, how quickly that'll happen.

Got it. So more liability driven. Last question, I apologize I've taken more time than I usually intend to, but there's an interesting trend here. If we look at the multiplier, of the weighted average life of the portfolio assumptions back over time, it's drifted up from call it three quarters to just now effectively a year. If we then go and compare Slide 38 where you see, you basically show the amortization of a vintage. And so for example, on Slide 38, the 2021 vintage is amortized down almost exactly 50%. If we compare that to the same slide from a year ago, two years ago and three years ago, the amortization at this point in time is almost exactly the same. How do we reconcile the difference in amortization versus the difference in weighted average life assumption?

Okay. Let me make sure I understand your question. So you're looking at Slide 38 and you were referencing which vintage that was halfway paid down?

So if you look, the 2021 vintage as of the end of 2022 is essentially 50% amortized. And that is – plus or minus 150 basis points from where the 2020 vintage stood at the end of 2021. The 2019 vintage stood at the end of 2020. So I'm curious why, and again the part of the strategy has been to extend duration that's reflected in the multiplier. I'm actually curious why it's not showing up in the vintages.

I'm not. Yes, I'm sorry. Go ahead Raul

Yes. Rick, we may need to do a little bit more work to come back to you, but the things that come to mind off the top of my head, first of all, the strategy is not to extend duration. The strategy is to provide more capital to our best borrowers. So those tend to be repeat borrowers, people that have had success in the past, and because they may be on their third or fourth loan with us, they have access to more capital. And to your point, that does come with longer term. But just to be clear, the strategy is not to extend duration. It is to deploy capital to our best borrowers. And a byproduct of that is certainly what you mentioned. On the second piece, we'll get back to you, but certainly the strength of the economy, what payment rates look like, all of those things make a difference in the vintage. It's interesting that it happens to be the same, but let us do a little bit more work and get back to you on that.

Well, just add one thing on that point near term, if you look on Page 36, the average life in years at the end of the third quarter last year was 0.92. And now it's 1.00. I would attribute that mainly to the fact that in the current macro environment with inflation, we've seen voluntary prepays slow down, and you'd expect that even from very good customers who are continue to pay perfectly on time, they're just looking to, pay the contractual amount rather than, maybe pay a little bit extra to pay down the debt faster.

Terrific. Hey guys, thank you for all the time and I appreciate all the answers.

Thank you for the questions, Rick.

Thank you. Next question is coming from Hal Goetsch from Loop Capital Markets. Your line is now live.

Hey guys, I'd like to get a little color on your expense growth guidance and just, if you exclude the write-off of the goodwill, you had about 30% total expense growth for the year, and that takes into account the acquisition of Digit, and your expense structure in Q4 was actually lower than Q2 2022, so it looks terrific. What can we expect, in terms of like maybe a range of growth? Is it flattish mid-single-digit growth? As you come out exiting the year? What kind of being flattish the first half? Talk to us about the pace and cadence of expense growth in 2023?

We actually see expense – OpEx going down.

Okay.

Right. Because if you think about it, we were flat, right, second half of last year. And we only grew by 1% in the fourth quarter. And in February, we took a significant expense reduction actions. So – and we’re continuing to stay tight on our sales and marketing budget. Given that, we’re focused on a tight credit posture. So when you combine the operational improvements though we don’t guide to it, we would expect to see lower OpEx and further improvement in our efficiency ratio.

Hal. This is Raul. Just to build on that a little bit. I’m really proud of the team and just the discipline that’s been demonstrated. Sales and marketing was down 43% year-over-year in Q4. CAC for the year was down 7%. So we were able to deliver that kind of flat operating expense that we had committed to earlier in the year, and we’re taking that discipline into this year. So we’ve already said that, the unfortunate reduction in force that was the right thing to do for our business is going to result in $48 million to $53 million in annualized savings. And if you really look at the way that we’ve guided for adjusted EBITDA, certainly, we guided for negative adjusted EBITDA in Q1. But what that means is between or for Q2 through Q4, so the remainder of the year after the first quarter. We’re going to generate $96 million to $109 million in positive adjusted EBITDA if you look at that guidance. That’s a combination of the operating discipline that you just asked about and that Jonathan said, right, we expect it to go down. It also is our expectation that losses are going to go down in the back half of the year. So even with the modest revenue growth that we have, you have lower losses, you’ve got lower OpEx, and that generates that profit that we’re looking forward to for the rest of 2023. And it’s – what gets us excited about 2024, because when we think about 2024 and 2025, we’re getting down to our target range and losses, right? We continue to have this expense discipline because it’s not just going to be for 2023. We’re just going to take this as part of how we manage the business in future years. And as the economy stabilizes, at some point we start to have originations growth again, and that generates higher levels of profitability. So we really think that this quarter is an inflection point in the business in having that expense discipline, the lower losses that will come and then at some point being able to start to grow the book again.

Okay. And if I could ask one follow-up. Tell us about the new app and what are some of the key performance indicators that you could share with us you’re hoping to achieve with that? And will you disclose some of those to us in future periods?

So that the app is something we’re really excited about. One of the reasons that we went ahead with the acquisition was this vision that we had of creating a one-stop shop, but being able to offer all of these products to our members in a very convenient manner. And today, obviously for all of us, that’s the phones in our pockets, it’s the apps that are on our phones. So the Oportun app, we think is the first step in creating this one stop shop in a very engaging platform for our members to come in through any product, whether they come in through savings and then need a credit – come in through any product, whether they come in through savings and then need a credit product or they come in with credit and then have an opportunity to build savings in an effortless way. So that’s what we’re so excited about. The metrics that we’re tracking right now since we just launched it first is just usage. So having already over 275,000 people using our app and making payments in the app, we think indicates a really strong start. And yes, we do look forward to showing some metrics in the future, how we want to give some thought to what those metrics will be, but we do expect to start to share more of those success metrics in the future.

All right. Terrific. Thank you.

Thank you.

Thank you. Next question is coming from David Scharf from JMP Securities. Your line is now live.

Hi. Good afternoon. Thanks for taking mine as well. Maybe I’ll just kind of piggyback off of couple of the prior questions. First, just to get clarification, I know Rick asked about the warrants in terms of understanding the full extent of the dilution. In your comments of the timeline, based on the future draws, should we assume effectively 10% of what the year-end diluted outstanding count should be added to the count going forward?

David, this is Raul. We certainly intend to draw on that capital, but what I would say is right now it's the 5% that were in Jonathan's comments. And certainly if we continue to draw on that capital, then we trigger the additional warrants and we'll make sure that we message that appropriately, that we disclose that in the appropriate fashion. So for now, we would model the 5%.

But was there a comment about successive 2.5% tranches at certain dates? I guess that's why I was confused, like why – I'm trying to reconcile the intent to fully draw and how that dovetails with your single-digit AR growth expectation versus the 10%, like – is it one or the other?

Sure. Let me try to clarify. And we can certainly talk more about this when we have a one-on-one later, David. So in March we'll have drawn 25 million, right, and we'll have issued 5% warrants. The two draw – additional draws are scheduled for April and June. They're also each 25 million, right, and with each of those draws is 2.5% warrants. Does that...

That help...

So David, I was just trying to, for Q1, right. For the Q1 EPS you would model the 5%, and then for Q2 you would assume the subsequent draws, but actually it's a little less than that because it's average outstanding. So it'll – we can go through some of the details.

Okay. But yes, big picture is an investor. I'm probably looking at 10% dilution at the end of 2023 versus the end of 2022. Is that kind of a ballpark?

That's right.

Got it. Got it. And related to that, just based on kind of the current liquidity environment, if in the second half of – of the current year towards the latter stage, if there was something in the environment that signaled to you that origination activity should be reaccelerated and it's, for example, you planned on growing your year-end balances double-digits versus single-digit is mentioned today, based on your funding sources would that in order to achieve that kind of balance sheet growth, would that require additional warrant issuance?

No. No David, at this time, no. We would not anticipate that. You've known us now for some time and we've got several ways that we can fund the growth to the portfolio. So no, we would not expect say raising cap – in the scenario you described, we would not expect raising capital in a manner that would indicate more dilution, no.

Got it. Got it. And then maybe just a quick follow up on the expense side. I know you spoke to the 2023 outlook directionally in the cost savings that were announced last month. I guess bigger picture, we obviously focus on efficiency ratios, OpEx – we obviously focus on efficiency ratios, OpEx as a percentage of manage receivables for all of our lenders. Is there a range, I mean is there sort of a targeted operating model that you have in mind? As we've learned given the macro backdrop that there are always going to be peaks and valleys of originations, but if an investor wants to know what is kind of a normalized targeted efficiency ratio for Oportun, if it's a, call it a 10% to 12% AR grower, CAGR over a given three to four-year period. Is there a range we ought to think about notwithstanding kind of the unique backdrop we have right now?

Sure. I think that's a great question, David. So first of all you've seen us get much leaner and be very disciplined about OpEx. We got down to 52% and that's as a percentage. I know you’re using a different basis, but our reported metric is as a percentage of total revenue. And that’s an all-time low for us since being a public company. When you combined, continued revenue growth and actual expend OpEx reduction, you would expect that ratio to continue to go down and it could clearly get into the 40s. And I think when you talk about targets, though we’re not providing any guidance for future years. We want to continue to run the business lean as we focus on increasing profitability which is Raul shared with you when you look at adjusted EBITDA and what 2Q through 4Q should look like implied by our guidance, it starts to get pretty interesting.

Got it. Great. Thank you very much.

Thank you, David.

Thank you. Next question is coming from Rick Shane from JPMorgan. Your line is now live.

Back again, guys? And following up on really David’s two questions. So when you think about the puts and takes for expenses for the year, you talked about the reduction from the reduction in force but presumably there is an offset if we think about these being essentially penny warrants which is at least how I’m taking what I heard earlier, there’s probably a $12 million to $15 million expense associated with issuing discount warrants. Is that the right way to think of it? So we’ve got the, and I don’t necessarily like to say benefit from reduction in force, but the impact of the reduction in force potentially offset by options expense or warrant expense.

Yes, I think that’s a good way of looking at it. I would also point out, when we look at our future prospects, and again we’re only giving you our view of 2023, but again, looking at what’s implied by adjusted EBITDA about how we would exit the year and what that would mean for a run rate into 2024. We think our future performance will more than offset the expense of this particular transaction, which has been very helpful to us in improving liquidity.

The other thing I would add Rick – go ahead.

Oh, I was going to say, and I understand in some ways that’s why focusing on adjusted EBITDA and providing that guidance this year is helpful because I know that the warrant expense will be added back. I assume it’s treated the same way as stock-based comp for employees.

That’s right. The warrants will receive equity treatment for accounting purposes.

Rick, the thing I was going to add, you were talking about that expense relative to the reduction in force, but there was several actions that the team has taken, right? It’s not just that one action on the OpEx side to improve the profitability of the business. There are other things we’re doing from a contact center perspective to become more efficient, deploying technology to try to automate the business more. And we didn’t spend as much time talking about this. It was in our comments to kick off the call. But when we compare December of 2022 to December of 2023, we expect yield to be 200 basis points higher, right, so on a book of about, $3 billion that is also we think a meaningful improvement in the business that we would seek to carry forward into 2024 and 2025 as well. So there are multiple actions that the team has taken to try to improve the profitability of our business that we think will pay dividends in Q2 through Q4 and in subsequent years.

Got it. Okay. Raul, thank you very much. Thanks Jonathan.

Thank you, Rick.

Thank you. We’ve reached end of our question-and-answer session. I’d like to turn the floor back over to Raul for any further or closing comments.

I just want to thank everyone once again for joining us on today’s call, and we look forward to speaking with you again soon.

Thank you.

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.