Earnings Call Transcript - OPRT Q3 2021

Operator, Operator

Greetings. Welcome to the Oportun Financial Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Nils Erdmann. Thank you. You may begin.

Nils Erdmann, Host

Thanks, and good afternoon, everyone. Joining me today to discuss Oportun's third 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, 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 is 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, 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 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, since the start of this year, 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 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 third quarter 2021 financial supplement and the appendix section of the third quarter 2021 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 archived version will be available after the call. With that, I will now turn the call over to Raul.

Raul Vazquez, CEO

Good afternoon, everyone, and thank you for joining us. I'm happy to share that Q3 was another great quarter for Oportun. We delivered strong year-over-year growth for all of our products, a historically low net charge-off rate, continued disciplined expense management and growing profitability. In the quarter, we generated $159 million of total revenue and $24 million of adjusted net income, or $0.78 of adjusted EPS. Our aggregate originations were $662 million, up 119% year-over-year and well ahead of our expectation of $600 million. This was our second consecutive quarter of triple-digit year-over-year originations growth. Demand for our products now exceeds the level of growth that we were experiencing pre-pandemic. While we continue to lean into growth, we are also delivering the best credit performance in our 15-year history. Our annualized net charge-off rate for Q3 was 5.5%, an improvement of 100 basis points relative to last quarter and 498 basis points better than last year. Delinquency rates also performed incredibly well, with those 30-plus-day delinquencies at 2.8% at quarter end. I'd now like to turn to the strategic objectives that I laid out at the beginning of the year, which also serve as some of our key performance measures. First, we continue to build on the success of our digital-first strategy. Second, we are scaling our new product lines and investing in our multi-product offering. Third, we've accelerated our expansion across the nation through our bank partnership with MetaBank. And fourth, we are advancing our Lending-as-a-Service partnership initiatives. I'll touch on each of these in turn, starting with the continued progress of our digital-first initiatives. Our customers’ utilization of our online services accelerated yet again in Q3, with 83% of new applicants choosing to apply online, up from 63% one year ago. This digital-first progress has also supported our objective to grow and broaden our customer base. In Q3, our active customers increased 24% year-over-year to 772,361, and the percentage of new applicants choosing servicing in English reached 82% compared to 60% in Q3 2020. Turning to our new products initiative for our secured personal loan product, we ended the third quarter with $29.6 million in receivables, up 113% sequentially and substantially above last year's level of $0.3 million. We rolled out our offering to customers in Texas, our second-largest market, in late September, and it was gratifying to see the product gain immediate traction and momentum accelerate throughout October. As of the end of Q3, our SPL portfolio was tracking well ahead of our target. I'm pleased to share that we are increasing our year-end receivables goal from $40 million to $50 million. We also saw excellent progress from our credit card product. Credit card receivables nearly doubled sequentially and grew 1,094% year-over-year to $38.2 million and are tracking very well to meet our year-end goal of $50 million. As of the end of October, we have over 94,705 active customer accounts across 45 states in the U.S. Third, through our MetaBank partnership, we have now expanded our unsecured personal loan product offering to 23 new states, bringing our footprint to 35 states. The results of this rollout have exceeded our expectations, and in the past month, we have effectively increased our addressable market by over 75%. Our partnership with MetaBank enables us to reach 50 million more hardworking people in the coming years, and we plan to continue our state expansion in the months to come. Finally, let me turn to our Lending-as-a-Service partnerships. Our platform has scaled rapidly with DolEx and expanded to 208 locations at the end of October, having exceeded our updated year-end objective of over 200 locations. We also recently announced the launch of our Lending-as-a-Service offering in 21 locations with Barri Financial Group, our second Lending-as-a-Service partner. We expect our loans to gradually be made available in over 200 Barri store locations across Texas and, over time, to extend to Barri’s locations in other states. In addition, we continue to explore additional relationships across multiple verticals and expect to announce further new partnerships in the months to come. In closing, the strength of our A.I.-driven digital platform is enabling us to lean into growth and take market share. As demonstrated by our progress and results this quarter, we are also successfully delivering on our strategy to extend our multi-product offerings across the U.S., becoming a national brand for inclusive, affordable financial products. 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 fourth quarter and full year. We will then open the line for your questions.

Jonathan Coblentz, CFO

Thanks and good afternoon, everyone. We generated excellent results in the third quarter, largely due to our performance across all of the growth initiatives that Raul mentioned. In addition, continued enhancements to our A.I.-enabled marketing and underwriting capabilities resulted in the best credit outcomes in our 15-year history, and another quarter of strong profitability. For the quarter, our aggregate originations were $662 million, up 53% sequentially, reflecting loan growth that has surpassed our historic pre-pandemic levels. Loan application volume and originations were strong throughout the quarter, and we continue to see excellent demand for October. We now have 813,536 active customers, and our managed receivables balance at the end of October was $2.29 billion, which was the highest level in our history. Total revenue was $159 million, up 16% year-over-year, reflecting higher receivables due to increased originations. Total revenue was comprised of $145 million of interest income and $14 million of non-interest income. As we continue to ramp up origination volume across all our products, we expect to see further growth in our portfolio which will drive additional growth in total revenue. Net revenue was $140 million, up 51% year-over-year. Net revenue improved from the prior year due to higher total revenue, lower interest expense, and lower charge-offs. Interest expense of $10.6 million was down 20% year-over-year, primarily driven by the decrease in our cost of debt to 2.8% versus 3.9% in the year-ago period, as we have issued $1.4 billion of asset-backed notes thus far this year at a weighted average interest rate of 2.1%, refinancing our more expensive prior securitizations. We also negotiated a lower cost of funds on our new warehouse line of credit. For our net change in fair value, we had a $9 million net decrease in fair value, which consisted of a $14.6 million mark-to-market net increase on our loans and our debt and current period charge-offs of $23.9 million. For the mark-to-market, our life of loan charge-offs declined 6 basis points to 7.5% at the end of the third quarter, resulting in the fair value price of our loans staying consistent at 105.9% as of September 30. The 0.7 million mark-to-market increase in our asset-backed notes resulted from a 16 basis point increase in the weighted average price to 100.7%. Turning to expenses, operating expenses in our personal loan business, excluding certain non-recurring charges, increased 10% year-over-year to $96.7 million, primarily driven by our increased investment in marketing to drive growth and increase our market share, as well as initiatives to further enhance our technology. Operating expenses associated with new products grew to $14.6 million. Our customer acquisition cost was $152, down significantly from $207 in the year-ago period. This decrease was due to our higher loan origination volume. We are 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 was $23 million versus a net loss of $6 million in the prior year quarter. This equated to earnings per diluted share of $0.75 versus a net loss per diluted share of $0.22 in the prior year quarter. On a non-GAAP basis, we delivered adjusted net income of $23.8 million versus $4.2 million in the prior year quarter and adjusted EPS of $0.78 versus $0.15, respectively. Adjusted EBITDA was $18.1 million compared to negative $1.2 million in the prior year quarter. Adjusted return on equity was 19% versus 3.7% in the prior year quarter. Turning now to credit. Our third quarter results continued to be among the strongest credit performances in our history. Our annualized net charge-off rate was 5.5%, a 498 basis point improvement versus the prior year period. At September 30, our 30-plus-day delinquency rate was 2.8%, 71 basis points better than the prior year period. Both metrics demonstrate the efficacy of our A.I. driven models as well as signaling the continued U.S. economic recovery. Regarding our capital and liquidity, as of September 30, total cash was $224 million. Our debt to equity ratio was 3.3x and $71 million of our $600 million warehouse line was undrawn and available. In October, we repaid our warehouse line, making it available to fund future growth by taking advantage of the favorable credit market and issuing $500 million of three-year fixed-rate asset-backed notes. The notes were priced at a weighted average interest rate of 2.48%. Looking ahead to the fourth quarter, we expect our strong credit and the rebounding economy will enable us to continue to deliver strong performance. Our outlook for the fourth quarter is aggregate originations of approximately $800 million, total revenue of between $183 million and $185 million, adjusted EBITDA between $8 million and $10 million, adjusted net income between $20 million and $22 million and adjusted earnings per diluted share between $0.66 and $0.73. For the full year 2021, we are increasing our guidance as follows. Aggregate originations of at least $2.23 billion, total revenue between $616 million and $618 million, adjusted EBITDA between $31 million and $33 million, adjusted net income between $73 million and $75 million and adjusted earnings per diluted share between $2.42 and $2.49. We expect our Q4 annualized net charge-off rate to be 7.3% plus or minus 10 basis points. And for the full year, we are lowering our projected rate to 7.1% plus or minus 10 basis points. As our guidance implies, we expect net charge-offs to show a modest seasonal increase that we typically see in Q4, while continuing to remain below pre-pandemic levels. In summary, we delivered another strong quarter and have a very positive outlook for the remainder of the year. We continue to focus on the strategic objectives that Raul highlighted, and on delivering growth at attractive returns while generating value for our shareholders. With that, I will now turn it back over to Raul for some final comments before we open the line for questions.

Raul Vazquez, CEO

Thanks, Jonathan. And before we open the line for your questions, I want to take a moment to highlight the positive social impact that Oportun continues to make in the communities we serve. According to a recent financial health network study that we commissioned, alternative lending products available to people with little or no credit history on average cost six times as much as an Oportun loan. More specifically, online installment loans can be 24 times as expensive. I am proud of the savings we create for our customers. As of September 30, we have helped more than 2 million people save more than $2 billion in aggregate interest and fees. In closing, I am very pleased with our third-quarter performance and we are on track to deliver on the strategic priorities we outlined for 2021. We are capitalizing on the significant opportunities to bring our products and services to a broader base of hardworking people, thereby furthering our mission and generating sustainable profitability. Thank you. And now we welcome your questions and comments.

Operator, Operator

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Mark DeVries with Barclays. Please proceed with your questions.

Mark DeVries, Analyst

Thanks. Could you just discuss the outlook for credit into 2022? The economy probably continues to be a tailwind, but then you lose some of the non-recurring benefits from stimulus that undoubtedly help?

Raul Vazquez, CEO

Yes, Mark. This is Raul. So we're certainly not giving guidance for 2022. But hopefully what you see in both our Q3 and Q4 performance is that we're feeling great about the business. Just to provide a bit of context, if you've looked at the implied guidance from Q2 for the fourth quarter, it would have been 7.7%, and we're guiding to 7.3% plus or minus 10 basis points. Just to put that into comparison, if we look at the pre-pandemic numbers of 2018 and 2019, 2018 was 8.1%, 2019 was 9% in the fourth quarter of those years. So certainly, like you said, the stimulus efforts have helped. But we think a lot of this has been driven by the A.I. capabilities that if you look at our performance over the last year or two, we think we've absolutely demonstrated the superiority of looking at alternative data and the investments that we've made. So we're going into 2022 feeling really good about the way that we're executing and how credit looks.

Mark DeVries, Analyst

Okay. And then just turning to your Lending-as-a-Service partners, can you give us a little bit more context around the new partnership? How big you can expect that to get? And then you mentioned you got some others you're working on? How expensive could this get? And what impact might this have, if any, on your plans you might have had to open some of your own locations?

Raul Vazquez, CEO

So we're really excited about Lending-as-a-Service. From a mission perspective, we think of it as a way to serve customers that may not be aware of Oportun or wouldn't think of coming to us directly on one of our channels. From a business perspective, it is a fantastic way to leverage the intellectual property and the software that we've already built in a way that's accretive because there's very little marginal cost for us to deploy the software, and we're leveraging the physical investment that DolEx and Barri have made. We are leveraging the labor that they're paying for. And as a reminder, we only pay when a loan actually takes place. So it's still very early innings, but to be at over 200 locations with DolEx, we have already surpassed our goal for the year, and now 21 locations with Barri. We know that we can get to over 200 with them in the next year across a few states. We're really excited, Mark. It's still early innings. We feel that this is still the first inning, but the conversations that we're having with other companies, some of them digital, not the physical kind of format that we've had success with so far, and some in other verticals not necessarily in the money service business, really lead us to believe that this is going to be a valuable growth vector for us in the future.

Mark DeVries, Analyst

Okay.

Raul Vazquez, CEO

And you asked about one last part in terms of our own physical footprint. We like right now the combination of the channels. All of our channels grew quarter-over-quarter and year-over-year. So we think that the interplay right now in the combination for the channels is working well. You've known us for a while. So you know that we're continuously looking at how we can optimize the network? And we'll keep doing that. But we think things are working really well right now, both in terms of our own channels and this Lending-as-a-Service.

Mark DeVries, Analyst

Got it. That's helpful. Thank you.

Raul Vazquez, CEO

Thank you, Mark.

Operator, Operator

Our next question comes from the line of Sanjay Sakhrani with KBW. Please proceed with your question.

Steven Kwok, Analyst

Thanks. This is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. The first one I had was just around loan growth. You guys have seen a nice rebound in loan originations. You're now above pre-pandemic levels. Can you talk about the demand where you're seeing the loan coming from and how we should think about the originations as we head into 2022?

Raul Vazquez, CEO

Yes, Steven, nice to hear from you. We think where the demand we're seeing right now, clearly it's an indication of the economic recovery. But we think it's even more than that. Over the last few years, we've invested in our digital channels, and you saw us share once again that now 83% of new applicants are choosing to apply online compared to 63% last year. We've also dropped our prices to 36% all in. So we think that the gap in terms of how much cheaper our product is relative to others is getting bigger. You heard me close with the fact that the updated study from the financial health network shows that our product on average is one-sixth of the cost, while online-only installment loans are 24 times more expensive when you look at interest and fees. So we think we've got a better product. We're investing more in marketing so that customers are aware that we exist. We've expanded the geographic footprint so that now we're reaching people that we weren't reaching a year ago. And we're doing it with a better combination of channels and a streamlined experience in mobile. So we think all of those things, along with the improvement in the economy, are helping. We feel really good not just about guidance but about what originations could look like in '22. As you know, revenue trails origination, so we think we're setting ourselves up very well for 2022. And potentially the year after that, as we keep leaning into channels, geographic expansion, and also diversifying and broadening our customer base. You saw on Slide 6 of our earnings deck that 82% of new customers are asking to be serviced in English. As we're expanding our geographic footprint, we're also broadening the customer base and appealing to even more customers.

Steven Kwok, Analyst

Got it. That's helpful. And I have a follow up on the bank charter. I know you guys voluntarily withdrew the application. Just wanted to see if there's an update on when there's a possible submission. And then, given the success that you're seeing on the Lending-as-a-Service side, is there really a need for a bank charter?

Raul Vazquez, CEO

So in terms of the bank charter, just to remind people why that was something that was of such interest to us and continues to be clear. Number one, the success that we're having right now offering multiple products really gives us confidence that we can meet more of the needs of our customers. So first and foremost, becoming a bank to us was of interest because from a mission perspective, we know we're helping customers with their borrowing needs, but we want to help them save, we want to help them spend, we want to help them budget, and over time we want to help them invest and create wealth. Being a bank is one of the ways to be able to offer all of those additional products. It's very consistent. We think now with leveraging the strengths that we've demonstrated with both secure personal loan and credit card growth that you've seen us deliver. We feel they're an underlying set of capabilities now that we both demonstrated and keep enhancing that we can apply to those additional products. That's one reason. Number two, we think it can allow us to go ahead and expand into a few more states that would allow us to have a broad nationwide footprint. That continues to be appealing to us. In all our conversations with the OCC, we thought were constructive. We don't have an update right now on when we would submit again. There's work we have to do on the application and the business plan to reflect this business that we have today, which is very different than what we described a year ago. Again, we really want to offer those products, and we want to have a longer, more meaningful relationship with our customers.

Steven Kwok, Analyst

Thanks for taking my questions.

Raul Vazquez, CEO

Thank you.

Operator, Operator

Our next question comes from the line of John Hecht with Jefferies. Please proceed with your questions.

John Hecht, Analyst

Good afternoon, guys. Thanks for taking my questions. Clearly, you're opening up a lot of new channels that your originations grew quite a bit. My assumption is because it's new channels and good originations growth that there's probably more new customers. I'm wondering, like in terms of the total new customers as a percentage of total originations, I'm wondering is that true? And if so, can you kind of remind us how many new customers become recurring, so we could just sort of get a sense for what these new cohorts might add to 2022?

Raul Vazquez, CEO

So, John, you're absolutely right. Given the fact that we've increased our footprint, we are seeing certainly more new customers than we were seeing last year. Last year, during the pandemic, as part of our efforts to make it through and thrive, one of the things that we did was focus more on repeat customers. We've now started to get back to more of our historical mix of new versus returning. But because of the incremental states, we've added 23 states through the MetaBank relationship. We are indexing even more towards new customers. In terms of disclosing how many of them become repeat customers, it is the overwhelming majority of them that perform well on the loan, and then are given an opportunity to continue working with us if they have that need. That dynamic of creating really happy first-time customers, as you know, our Net Promoter Score is about 79 or 80, creates a dynamic where many come back for larger loans with longer terms and lower rates. It's good for them and good for us, and that's part of what's giving us confidence that we're setting ourselves up well for both a good '22 and '23.

John Hecht, Analyst

And then, I guess kind of a similar topic, good growth in card, good growth in auto. How do we are those new customers or how many of those are repeat or how do we just think about the mix of that and the opportunity set there?

Raul Vazquez, CEO

Many of those are new customers. But one of the things that we've also figured out how to do, and this is again one of the reasons that we believe the additional products that I was talking about that are more kind of banking products or neo-banking are of interest to us; we’ve been able to present multiple products in the same funnel. We are really trying to understand what the customers’ need is when they hit our website, how can we present different offerings and then find a product that meets their needs best, whether that's from a capital or a pricing perspective? With SPL in particular, we've been able to do that. We're really focused now on presenting credit cards in a similar fashion, and we had some really nice results this last quarter in terms of cross-selling credit cards to some of our best customers. It's a little bit of both. We are acquiring new customers, but we're also starting to put more than one product into the hands of some of our best performing customers.

John Hecht, Analyst

Okay. Could you provide more information about the counterparties from whom you sell a percentage of originations? There seems to be strong demand for this. Are you achieving good execution in that area, and what are your thoughts for the future regarding this aspect of the business?

Raul Vazquez, CEO

John, that's a great question. So first of all, demand for whole loans has never been higher. There is strong demand for the asset class given the attractive yield and pressure to do so for our loans, given the consistent credit performance and high risk-adjusted yield of our product. We will be evaluating options for our whole loan for a flow sale program at the beginning of next year, and certainly we'll be looking to diversify and expand the potential number of buyers. We think we have strong demand to be able to do that.

John Hecht, Analyst

Great. Thanks very much.

Raul Vazquez, CEO

Thank you, John.

Operator, Operator

Our next question comes from the line of Rick Shane with JPMorgan. Please proceed with your questions.

Richard Shane, Analyst

Hi, guys. Thanks for taking my question. To dovetail with what John was asking, historically, you guys have been conservative but very accurate in terms of your guidance. This quarter, you significantly outperformed your expectations, which to me is really a suggestion of how quickly the market is evolving. Given your ability to tweak the model very quickly, I'm curious what tactical changes you're making, given the sort of changing outlook that you're experiencing?

Raul Vazquez, CEO

That's a great question, Rick. To take the first part of it, you're right. When we look at our performance over the last year and a half, we think we've demonstrated strength in our model, we think we've demonstrated some of the advantages of our approach. What you're seeing this year, in particular, we think in this last quarter is we're leveraging our strengths. We're pressing our advantage to drive growth and profitability and take share, right. When we look in particular at some of these new states for us, we look at the competitive environment, we like how we stack up and we're leaning in. There are several things that we're doing from a tactical perspective. Number one, we are not only investing more in outbound marketing and really thinking about how do we create awareness of Oportun in our offerings and how much cheaper our products are, but there are a lot of really good data-driven investments. We've spent a lot of time talking to you all about how we use A.I. and machine learning in our underwriting. In the last year, we've tried to give you a sense of how that investment is now working its way through the rest of the company, particularly in marketing. We shared our response models and then the work that we do to optimize that leverages 100 billion data points. For example, our CMO was sharing an enhancement we've made to our attribution model to understand what's the return by vehicle, whether that's Facebook, Google, our website, DolEx, or retail locations? What is the interplay between each of those? How do we want to attribute value to each of them? As a consequence, how can we be much more dynamic in how we allocate our marketing budget? That degree of data-driven sophistication we think is an advantage in this space. Those are examples of both strategic and tactical decisions we're making week-over-week, month-over-month to drive this growth. Certainly, those things and then continuing to invest in our products, making digital more of an efficient funnel so our customers have a faster automated experience to get through this process and get on with their busy lives. A lot of innovation is taking place, Rick, and those are just a few examples.

Richard Shane, Analyst

Look, I really appreciate the thoughtful answer. It's very helpful in terms of context. Thank you.

Raul Vazquez, CEO

Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Raul Vazquez for closing remarks.

Raul Vazquez, CEO

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

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.