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spk06: Welcome to Opportunity Financials Corporation's fourth quarter 2021 earnings conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer session. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Nils Erdmann, Vice President of Investor Relations. Mr. Erdmann, you may begin.
spk03: Thanks, and hello, everyone. Joining me today to discuss OPPORTUNE's fourth quarter 2021 results are Raul Vasquez, Chief Executive Officer, and Jonathan Koblitz, 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 most recent quarterly report on Form 10-Q and our upcoming Form 10-K filing for the year-ended December 31st, 2021. 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 is 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 2021, 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 fourth quarter 2021 financial supplement, and the appendix section of the fourth quarter 2021 earnings presentation, all of which are available at the investor relations section of our website at investor.opportune.com. In addition, this call is being webcast and an archive version will be available after the call. With that, I will now turn the call over to Raul.
spk04: Good afternoon, everyone, and thank you for joining us. I'm incredibly proud of our results for the fourth quarter in 2021. We set out to return to growth, scale our new products, and enhance our digital platforms. We executed on all these priorities and delivered one of our strongest financial performances to date. At a high level, in 2021, we achieved record originations of $2.3 billion, up 70% from last year. The strength of our originations and demand for our credit products is carried over into 2022. This record originations level was driven by new borrowers. represented over 47% of our total loans, up from 35% a year ago. We believe this was due to our gaining market share as we expanded across the U.S., and this growth will drive our revenue expansion in 2022. We increased our full-year total revenue to a record $627 million and delivered adjusted net income of $79 million for adjusted EPS of $2.60. In addition, One of the most significant achievements of last year was our acquisition of Digit, which we completed in late December and believe is a truly transformative transaction. The acquisition unlocks significant value by enabling us to deepen relationships with our members, accelerates and diversifies our revenue growth, and aligns with our vision of being the leading AI-driven digital-first platform that helps hardworking individuals meet their borrowing, saving, banking, and investing needs. In terms of our strategic priorities, we also made significant progress last year that will drive growth in 2022. Our unsecured personal loan product is integral to our growth and success. We added 26 states to our footprint last year and are poised to grow in 2022 and beyond as we gain market share in these states where we've only just begun operating with MetaBank. For our secured personal loan product, we ended the fourth quarter with $58 million in receivables, up 97% sequentially, and well ahead of our year-end target of $50 million. A significant contributor to our success was the enhancement of our loan origination platform, which integrated secured and unsecured personal loans into a single acquisition funnel. We also saw excellent progress from our credit card product, Receivables nearly doubled sequentially and grew over 1,000% year-over-year to $67 million, well exceeding our year-end goal of $50 million. Our personal loan offering also expanded rapidly last year through our lending as a service partnerships. We scaled our network to include 208 Dolex locations and 50 Bari Financial Group stores. And in 2022, we expect to more than double this number to over 500 lending-as-a-service locations. Moreover, we plan to extend our lending-as-a-service channel to additional partners, including both retail and fully digital businesses. In mid-January of this year, we announced the first of these, an all-digital lending-as-a-service partnership with Sezzle. This new partnership with a leading buy-now, pay-later solution provides enhanced flexibility for consumers and enables Sezzle's online merchants to offer additional affordable payment plans like ours to shoppers. When deployed, OPPORTUNE's responsible lending product will be available for larger purchases as a checkout option through Sezzle, which we believe will allow us to reach more new members. We will have more to share about this exciting partnership as we get closer to launch. Heading into 2022, I am thrilled by the momentum of our business. Our three strategic priorities for 2022 that support our outlook for strong, profitable, and sustainable growth are as follows. Number one, grow our members. Two, increase multi-product relationships. And three, enhance our platform capabilities. I will now cover each of these priorities in more detail. First, let me tell you how we plan to grow our members. The growth we delivered with our three credit products in 2021 gives us confidence that we can accelerate our growth with the addition of Digit's four digital banking products, Digit Savings, Digit Direct, Digit Investing, and Digit Retirement. With this expanded suite of seven products, we now offer borrowing, saving, banking, and investing products through our platform and gain opportunities to establish long-term and more durable relationships with our customers. This is why Digit refers to its customers as members, and going forward, every opportune borrower and opportune credit card holder will also now become a member of our growing community. In 2022, we aim to expand our members through investment in various digital and direct member acquisition channels. As of the end of Q4, we have approximately 1.5 million members. Our goal is to grow this space across our direct-to-consumer channels, as well as through our expanding network of lending as a service partners. Now, I'll talk about how we plan to increase our multi-product relationships with our members. The combination of our profitable lending economics with Digit's business creates two compelling dynamics, enabling cross-buying of our seven products and the ability to offer product configurations at more attractive price points. Our ability to enable cross buying is evidenced by the fact that as of the end of last year, over 7% of our credit card holders also had a personal loan with us, and in January, this had increased to 9%. We intend to build on this success this year by developing a unified experience that increases the number of products available to members and prospects. Our ability to address multiple financial needs for our members will lead to increased lifetime value as they take advantage of our seven diverse product offerings. Third and finally, we are enhancing platform capabilities across our business. We will accelerate our member growth by building a seamless integrated acquisition funnel across all our products. This will increase member conversion and decrease cost of member acquisition by affording the broadest possible opportunity to begin relationships with members. For example, if an applicant comes to us and we aren't initially able to approve them for a loan or credit card, we can still establish a relationship with one of our digital banking products. This is a significant opportunity considering that last year, millions of people applied for our credit products and we had close to 10 million visitors to our website. We believe enhanced platform capabilities will generate higher levels of engagement, increased multi-product adoption, and greater member lifetime value. In closing, our business has never been as strong and as well positioned for growth as it is today, and I have great confidence in our ability to execute on these priorities. 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 first quarter and full year. Jonathan?
spk07: Thanks, and good afternoon, everyone. As Raul mentioned, we generated record results in the fourth quarter and for the full year, and we have terrific momentum going into 2022. I'll focus the majority of my remarks on our fourth quarter performance, while our full year results are covered in detail in our earnings press release and presentation. In the fourth quarter, we generated $194 million of total revenue and $26 million of adjusted net income or 82 cents of adjusted EPS. Our aggregate originations were $865 million, up 93% year over year, and well ahead of our expectation of $800 million. Loan application volume and originations were strong throughout the quarter. And as Raul mentioned, we continue to see strength in our aggregate originations in 2022. Total revenue of $194 million was up 38% year over year, reflecting higher receivables due to increased originations. As we continue to ramp up origination volume across all our products, we expect to see further portfolio growth, which will drive increases in our total revenue. Net revenue was $161 million, up 40% 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 $11.4 million was down 15% year over year, primarily driven by the decrease in our cost of debt to 2.5% versus 3.9% in the year-ago period. As over the course of the year, we issued $1.4 billion of fixed-rate term asset-backed notes at a weighted average interest rate of 2.2%. refinancing our more expensive prior securitizations. The lower cost of funds is also attributable to the better terms on our $750 million of warehouse lines of credit that we put in place during the year. For our net change in fair value, we had a $22.2 million net decrease in fair value, which consisted of a $12.1 million mark-to-market net increase on our loans and our debt, and current period charge-offs of $35.2 million. For the mark-to-market, the fair value price of our loans decreased slightly to 105% as of December 31 due to strong new loan growth. While this new loan growth increased our future charge-off assumptions, we are pleased with the credit quality of loans we are booking and excited about the impact on 2022, which I will share shortly when I discuss our guidance. As a reminder, new borrowers represented 47% of our total loans, up from 35% in 2020. The $11.2 million mark-to-market increase in our asset-backed notes resulted from a 90 basis point decrease in the weighted average price to 99.8% due to rising interest rates. Turning to expenses, our fourth quarter total operating expense was $140 million, an increase of 40%, as compared to $100 million in the prior year quarter. Adjusted operating expense, which excludes stock-based compensation expense and certain non-recurring charges, increased 38% year-over-year to $125 million. This was primarily from our increased investment in marketing to drive growth, as well as investments in our SPL and credit card products and initiatives to further enhance our technology. Our customer acquisition cost was $135, down 13% from $155 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 member demand. Our net income was $14.2 million versus $8.5 million in the prior year quarter. This equated to earnings per diluted share of 46 cents versus 29 cents, respectively. On a non-GAAP basis, we delivered adjusted net income of $25.6 million versus $17.5 million in the prior year quarter and adjusted EPS of 82 cents versus 60 cents, respectively. Adjusted EBITDA was $23.1 million compared to what was essentially breakeven in the prior year quarter. Adjusted return on equity was 18.2% versus 15.2% in the prior year quarter. Turning now to credit, our fourth quarter results were further evidence of our portfolio's continued strength. Our annualized net charge-off rate was 6.8%, a 257 basis point improvement versus the prior year period. And as of December 31, our 30-plus day delinquency rate was 3.9%, 19 basis points better than the prior year period. Both metrics demonstrate the efficacy of our AI-driven models as well as signaling the continued strong U.S. economy. Regarding our capital and liquidity, as of December 31, total cash was $193 million. Our debt-to-equity ratio was 3.6 times, and $352 million of our combined $750 million in warehouse lines was undrawn and available to fund our growth. Looking ahead, we are expecting that the significant expansion of our addressable market, products, channels, and now digital banking capabilities will drive growth in members and multi-product relationships, leading to significant revenue growth. In terms of guidance, our outlook for the first quarter is aggregate originations of approximately $625 million, total revenue, of between 195 and $200 million. Adjusted net income between 19 and $23 million and adjusted EPS between 56 cents and 67 cents. Our guidance for the full year is aggregate originations of at least $3.2 billion. Total revenue between 875 and $900 million. adjusted net income between $80 and $85 million, and adjusted EPS between $2.32 and $2.46. We are also introducing year-end receivables targets for our secured personal loan and credit card products. We are forecasting receivable targets of $140 million for our secured personal loans and $150 million for credit cards. We expect our first quarter annualized net charge-off rate to be 8.8% plus or minus 10 basis points and our full-year rate to be 8.8% plus or minus 15 basis points. This is within our historical net charge-off range of 7% to 9% and reflects the higher mix in 2021 of first-time borrowers who historically have had higher credit losses but who we expect will become valuable returning borrowers in 2022 and drive growth in originations and revenue. This is reflected in our full year 2022 guidance for originations growth of 39% and revenue growth of 40 to 44%. In summary, I'm extremely pleased with the opportunities for our business given our growing base of 1.5 million members, seven products, and our plans to enhance our platform capabilities. All of these will drive our revenue and profitability in 2022 and the years to come. With that, I will now turn it back over to Raul for some final comments before we open the line for questions.
spk04: Thanks, Jonathan. 2021 was a transformative year for Opportune, and we've positioned ourselves to meet the growing financial needs of millions more hardworking people in 2022 and beyond. We will strive to deepen and extend our relationships with our members and to focus on offering them more of our products to meet their needs. I couldn't be more excited about our future and the significant opportunities we have to improve the financial health of our members. And I want to thank them, our employees, and our shareholders for placing their trust in us to further our mission and generate significant growth. Thank you, and now we welcome your questions and comments. Operator?
spk06: Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Sanjay Sakarani with KBW.
spk00: Please proceed with your questions. Hi, thanks for taking my questions. This is actually Steven Kwok filling in for Sanjay. My first question is just around the guidance. I was just wondering if you could just talk about within the guidance how much of the DIGIT is contributing to the revenues and to EPS. Thanks.
spk07: Yes, Steven. It's Jonathan. Thanks for the question. So we're not giving separate guidance for DIGIT. As we shared with the acquisition deck, they had an ARR run rate of about $40 million. And so we're certainly factoring in that starting point when we provided the total revenue guidance that we have.
spk00: Got it. And as we think about integrating everything, you talked about the ability to cross-sell. Can you just talk a little bit more about, as we think ahead, what is Are there new products that you create? What are some of the thought process around the acquisition? Thank you.
spk04: Sure. Steven, this is Raul. So we're not going to create new products. We think that this set of seven products that we have today is the right set of products to focus on. What we're really going to try to do is, first of all, use those seven products to be able to grow our member base faster. In particular, the fact that through Digit now we have some products that we can offer to people that may not be able to be approved for credit at this moment gives us another way to grow the membership base faster and then over time find additional products that might be useful. The second thing is really trying to create some integrated and unified experiences where we can help people understand the whole set of products we have and then using AI to be able to recommend the best product for that customer. And then finally, really trying to look for synergies across the platform. So that could be everything from leveraging the marketing capabilities and marketing channels that we've already developed, the lending as a service partnerships, and then certainly creating one funnel, one applicant funnel where every single person that deals with Opportune is able to be exposed to all of the relevant products. Within secured personal loan, we already have that kind of integrated funnel. So we've seen the big, big benefits that come from that in terms of cost-effective customer acquisition. So we think we've got all the right products already. Now we're just going to work on bringing them all together to create longer relationships and higher lifetime value.
spk00: Thanks. That's very helpful. And my last question is just around the credit. The charge-off that you're guiding to, a little bit of a pickup from what we're seeing this year. I was just Curious as to what are you seeing around the health of the consumer and understanding that you also talked about newer consumers that you're going after that could lead to the higher charge-offs as well. But just curious as to what you're seeing around your base today. Thanks.
spk04: Everything we see around the base makes us feel great about the guidance we've provided. As you can see in our guidance, we provided information Originations growth guidance of about 39% year-over-year, total revenue guidance of 40% to 44%. So the underlying trends in our business are really, really positive. To your point, Stephen, on a year-over-year basis, if you look at losses, the first thing I would say is we have to recognize that 2021 was artificially low because of stimulus. So we certainly signaled throughout 2021 that we thought our losses were too low and that we wanted to get back to that 7% to 9% range that we think maximizes growth and profitability. Second, we're really comfortable with the guidance that we're providing. And as you picked up in our comments, a lot of it is just mix. It's the fact that we took a lot of share last year, we think, in the 26 new states that we added to our business. And that gave us a chance to acquire a lot of new relationships. We mentioned that in 2020, only about a third of borrowers were new to the franchise. And in 2021, it was almost half. So we think that really helps position us well for 2022. And there is a slight impact on losses. But again, we continue to be really, really comfortable with the loans we're making and the composition of the portfolio.
spk01: Great. Thanks for taking my question. Thank you, Stephen. Our next question comes from the line of Rick Shane with JP Morgan.
spk06: Please proceed with your question.
spk02: Hey, guys. Thanks for taking my question. And as always, we appreciate the thoughtfulness on the guidance. I am curious, when you think about some of the extreme dynamics that we're facing currently, one being the spike in oil prices, how you sort of think about that and inflationary pressures related to your consumer, given that, you know, for example, spending at the pump is disproportionately high for underbanked consumers.
spk04: Yeah, Rick, this is Raul. Thanks for the kind words about the thoughtfulness. I'll let the team know. We certainly appreciate you saying that. Certainly, what's happening from a macroeconomic perspective is something that we watch very, very carefully. The good news is that I have a ton of confidence in our team, and I have a lot of confidence in the AI-driven models that have helped us navigate two recessions as a company and have helped us navigate difficult times in the past. So it's something we're watching closely, but we think that that is absolutely something that we can handle, and our guidance reflects our confidence in those situations. The other thing I would just point out is at times when these situations present themselves, they actually help us from a demand perspective. Because if a customer does find that they need a little bit of extra money, given some of the inflationary pressures, and there is the strong labor and wage picture that there is today, it actually helps us both from a demand and ability to approve applicant's perspective. So, again, something we're watching closely, but not something that is concerning to us at all. And you see the confidence, again, that we have in our business and the trends reflected in our guidance, Rick.
spk02: Got it. That's helpful and makes sense. I am curious, given all of the different data points.
spk01: is a really, really attractive picture.
spk04: And when they then turn around and apply, the macroeconomic strength from an employment and wage perspective that we all see reported throughout every month is what's giving us the ability to really be able to drive this origination growth because we see an ability to pay in a lot of our applicants.
spk02: Great. Okay. Thank you very much for taking my questions this afternoon, guys. Thank you, Rick.
spk06: As a reminder, ladies and gentlemen, it is Star 1 to ask a question. Our next question comes from the line of John Hecht with Jefferies. Please proceed with your question.
spk05: Afternoon, guys. Thanks very much. First one, just model kind of accounting-oriented, is how do we think about share count? I know you guys, it sounds like with all the digit share issuance included in the end of quarter and Should we think about anything with respect to share count migration this year?
spk07: Jonathan, if you actually turn to page 18 of the deck, we've added that to the guidance. You'll see that our guidance for... I apologize. Yeah, no, no, no, no. But we wanted to add that given the share count has shifted. Now, that share count's number there is not just reflective of Digit. It's also our regular equity compensation impact.
spk05: Yep. Okay. That's helpful. And I apologize if it isn't there very loud and clear. And then, you know, second question is, you know, it's very strong revenue guidance and you clearly have a lot going on with new channels, new products, and then, you know, Digit. How do we think of this year in terms of, you know, the mix of new customer ads versus cross-sell versus just sort of the core traditional recurring customer, and how does that influence your cost of customer acquisition and other kind of metrics of the business?
spk04: That's a great question, John. This is Raul. We think this is just the start of a really exciting chapter for our company. Our unsecured personal loan business is growing at a high rate as we've entered these new markets where we're taking share. When you get a chance to really go through the deck, one of the things you're going to see on page 13 is not only did we achieve the goals that we had set for secured personal loan and credit card, but the year-over-year growth in receivables is higher for 2022 than what we had in 2021. So we feel like we're seeing acceleration in these new products that we're working on. And then to your point, we've added these four new products from Digit. So we're going to lean into all of these elements of growth. to be able to continue to acquire new customers because we know many of those then come back and they get larger loans, they get lower prices, which is a big benefit to them, but it really allows us to have that long-term relationship and that membership relationship that we want to have. And then we're going to continue to serve our repeat borrowers well and make them aware of the new products. So we're not really guiding in terms of what mix is going to look like by product or new versus repeat. But internally, what we're really doing is we've got people assigned to each of those growth opportunities, and we're really excited, as I mentioned earlier, about this new chapter. We really think that when we look to the years ahead, we're going to be able to expect and deliver high double-digit growth.
spk01: Great. Really appreciate that, Colin. Thanks very much. Thank you, John. There are no further questions in the queue.
spk06: I'd like to hand it back to management for closing comments.
spk04: Well, I want to thank everyone once again for joining us on today's call, and we absolutely look forward to speaking with you again soon.
spk06: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
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