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spk00: Greetings, and welcome to Opportune Financial's second quarter 2023 earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doreen Hare, Investor Relations. Thank you. You may begin.
spk05: Thanks, and hello, everyone. With me to discuss OPPORTUNE's second quarter 2023 results are Raul Vasquez, Chief Executive Officer, and Jonathan Koblentz, 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 operations and financial position, plan 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 question 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-Q filing for the quarter ended June 30, 2023. 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 future condition and results of operations. A full list of definitions can be found in our earnings materials available in the investor relations section of 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 financial measures is included in our earnings press release, our second quarter 2023 financial supplement, and the appendix section of the second quarter 2023 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 archived version will be available after the call, along with a copy of our prepared remarks. With that, I will now turn the call over to Raoul.
spk04: Thanks, Dorian, and good afternoon, everyone. Thanks for joining us. Today, I'll discuss our second quarter financial performance and update you on opportunities areas of focus. Let me begin with five highlights from our Q2 performance. First, we returned to profitability in Q2 with $2 million in adjusted net income driven by strong top-line performance in the steps that we took earlier this year to streamline our operating expenses. We've now reported positive adjusted net income in 11 of the last 12 quarters. Our adjusted EBITDA, which also turned positive at $4 million, was within our guidance range and, more importantly, We expect to deliver $35 to $40 million in adjusted EBITDA in Q3. Second, our credit outlook is improving as a result of our tightened credit posture. Our annualized net charge-off rate of 12.5% outperformed our guidance due to effective collection and recovery efforts, as well as our tighter credit standards. We expect Q2 to have been the peak level and we project that our loss rate will decline by approximately 80 basis points in Q3 based upon our midpoint guidance. As a reminder, we initiated our credit tightening in July of 2022 due to heightened inflation present at that time and are continuing to see improvements within our portfolio. Third, we're seeing the tangible benefits and results of our cost savings initiatives. You'll recall that we enacted a combined set of initiatives in February and May to produce $126 to $136 million in annual life expense savings. Those actions are taking hold and resulted in total operating expenses of $136 million for Q2, a 7% sequential and a 14% year-over-year decline. We increased revenue by 18% and set a new quarterly record of $267 million while expenses were down 14% year over year. This demonstrates the resilience of our business and also highlights the impact of our efforts to increase yield. We see yield continuing to rise in the second half of the year. Finally, Since our last earnings call, we've entered into two new whole loan sale agreements that validate the quality of our originations and will provide a total of up to $700 million of additional liquidity and funding over the next year. I'm pleased with our performance and grateful for the efforts of our team to produce a strong quarter. Our focus remains on creating a leaner and more efficient company And we're excited about the second half of 2023, which Jonathan will detail for you when he provides guidance. Before handing off to Jonathan, I want to spend a few minutes reiterating our strategic priorities and how we're allocating our spending to the two most proven and profitable parts of the business, unsecured personal loans and our savings product, which is key to our member engagement platform. 85% of our corporate expense is allocated to the core unsecured personal loan product, which is appropriate for the largest and most proven component of OPPORTUNE. We will continue to leverage data, technology, and AI to grow it at prudent levels and enhance this product's profitability. Approximately 10% of our corporate expense is allocated to our savings product and our member engagement platform which continues to be profitable on a cash flow basis at that level of investment. Within this category, we're leveraging our new OPPORTUNE mobile app, fully launched in Q1, which will drive increased cross-selling, higher conversions, and lower customer acquisition costs over time. I'm pleased to share that 550,000 members have now signed up to use the app, with more to come now that we'll start marketing it more broadly and have translated the app into Spanish. We're maintaining optionality for future growth opportunities by allocating only 5% of our corporate expense on developing the rest of the product suite. Consistent with our focus on operating efficiently, we have decided to phase out our checking account products so we can shift resources to more accretive products. We will continue to evaluate our other products and initiatives to ensure they are the best use of resources and capital. In summary, I'm proud of the team's strong execution and continued focus on driving shareholder value while delivering on our mission to empower our now more than 2 million members to build a better future. With that, I will turn it over to Jonathan for additional details on our second quarter financial performance and our updated 2023 guidance.
spk01: Thanks, Raoul, and good afternoon, everyone. As Raoul mentioned, OPPORTUNE delivered strong performance in the second quarter. We achieved these results by continuing to take a conservative stance focused on the things we can control. As shown on slide seven, OPPORTUNE delivered record total revenue of $267 million and returned to profitability, delivering $2 million of adjusted net income. For originations, we continue to be focused on quality rather than quantity. That was evident in our Q2 aggregate originations of $485 million, which were down 45% year over year, yet up 19% from the first quarter as we were able to make more high quality loans. In particular, we drove the sequential growth by successfully marketing to our best customers. Total revenue of $267 million for year over year growth of 18% outperformed our guidance range due to higher than anticipated originations and higher portfolio yield as our pricing increases have started to take effect. Our 32.2% portfolio yield increased by 83 basis points from Q1 to Q2. We remain on track for year-end portfolio yield to be approximately 200 basis points higher than the level at the end of 2022. We have increased yield while remaining committed to our 36% APR cap without burdening our members with significant changes to their payment amounts. Net revenue was $119 million down 18% year-over-year, primarily due to higher net charge-offs and higher interest expense compared to 2022. Interest expense of $41 million was up 24 million year-over-year, primarily driven by increased debt issuance and the increase in our cost of debt to 6% versus 3% in the year-ago period. The fair value price of our loans increased to 100.7% as of June 30th. and resulted in a $14 million mark-to-market increase. This was essentially offset by a $13 million mark-to-market increase in our asset-backed notes, which contributed negatively towards our earnings, resulting from a five basis point increase in the weighted average price to 94.1% and continued amortization of several of our ABS deals. For our net change in fair value, we had a $106 million net decrease which consisted mainly of current period charge-offs of $93 million. Turning now to operating expenses and efficiency, as Raoul mentioned earlier, we are seeing the benefits of the actions that we've taken to optimize our cost structure. Our 43.4% adjusted operating efficiency and improvement of 1,860 basis points year over year set our fourth consecutive post-IPO record. Our $136 million in total operating expenses during Q2 was the lowest quarterly figure we've reported since 2021. Driven by our expense savings measures enacted earlier this year, which included a 28% reduction in our corporate staff, we remain on track to further reduce our operating expenses to approximately $125 million in the fourth quarter. And we expect to maintain this strong expense discipline into 2024 and beyond. I'd like to highlight for you on slide 8 how our expense reductions indicate that OPPORTUNA is now significantly more efficient. Our OPEX ratio or annualized operating expenses to average daily principal balance was 18.2% as of 2Q23, 330 basis points better than the quarter prior to our IPO. Our adjusted OPEX ratio which excludes stock-based compensation expense and certain non-recurring charges, was even lower at 15.5% for 2Q23. In the second quarter, our sales and marketing expenses were $19 million flat sequentially and down 41% year over year as part of our expense discipline. For the quarter, we recorded adjusted net income of $2 million compared to a $4 million net profit in the prior year quarter. and an adjusted EPS of 6 cents versus a prior year net earnings per share of 11 cents. Adjusted EBITDA was $4 million in the second quarter, a sequential improvement of $29 million compared to last quarter's $24 million adjusted EBITDA loss. On a year-over-year basis, it reflected a $9 million increase compared to the negative $4 million in adjusted EBITDA we reported in the prior year quarter, driven by our revenue growth and cost discipline. Now, on slide 9, let me discuss Q2 credit performance. Our annualized net charge-off rate of 12.5% was 13 basis points below the low end of our guidance range due to effective collection and recovery efforts. This compared to 8.6% in the prior year period and 12.1% in the first quarter. As a reminder, we anticipated a sequential increase in net charge-off rate due to seasonality and a shift in late-stage delinquencies. While Q2 losses were higher than Q1, our risk-adjusted yield, which deducts charge-offs from portfolio yield, increased by 40 basis points to 19.7%. Additionally, I'm pleased by the 80 basis point sequential improvement we expect in our loss rate at the midpoint of our Q3 guidance, which I'll detail for you shortly. As a reminder, the credit performance of our portfolio has two distinct drivers, the post-July 2022 origination vintages made over the last 12 months after our significant credit tightening, which we refer to as our front book, and also the originations made prior, which we refer to as our back book. The front book, despite continued inflation, is performing at levels that are near or better than 2019. You can see this on slide 10 of our materials, which shows that first payment defaults are coming in at roughly half the level they were prior to credit tightening. and have since then tracked closely with pre-pandemic levels. You can also see the strong performance of the front book on slide 11, which shows that both the loss and delinquency rates for recent loan vintages are tracking lower than their respective pre-pandemic vintages. I'd also like to point out that we've continued to improve the credit quality of our originations. The percentage of underwritten loans with Vantage scores of 660 or greater was 33% for 2Q22, but increased to 40% during 4Q22 and 47% during 2Q23. This demonstrates our success at attracting and underwriting higher credit quality borrowers. The back book continues to represent the bulk of our delinquencies and charge-offs, but also continues to shrink. The back book declined by over $300 million in the second quarter to $1.3 billion and is anticipated to further decline to $0.7 billion as of year end. As the guidance I will share with you shortly suggests, we expect to see losses come down in Q3 and Q4. Regarding our capital and liquidity, our business is generating a record amount of cash flow from operations, and we've seen our cash position build since the end of the quarter. Net cash flow from operations for the second quarter was a record $103 million, up 93% year over year, which supported net debt repayment, including required ABS note amortization, along with loan originations. As of June 30th, total cash was $202 million, of which $73 million was unrestricted, and $129 million was restricted. As we started to sell whole loans again, total cash increased to $209 million as of July 31st, which $86 million was unrestricted and $123 million was restricted. Turning now to funding, as Raoul mentioned, we recently entered into two new whole loan flow sale agreements. During the second quarter, we entered into a new agreement to sell up to $300 million of whole loans over 12 months to funds managed by Neuberger Berman. Through July, we've already sold $75 million of loans through this arrangement. Furthermore, Earlier this month, we entered into a separate agreement to sell up to $400 million of whole loans over 12 months to Castle Lake. Together, we expect these two agreements will provide $700 million, a substantial amount of funding, positioning us to originate more of the high-quality profitable loans that we have been making. These loan sales are being accounted for as asset-backed borrowings on our balance sheet. using amortized cost methodology rather than fair value. In fact, we've made the decision to account for all new debt we issue in the future at amortized cost, which we believe will reduce our earnings volatility over time. Turning now to our guidance as shown on slide 13, our outlook for the third quarter is total revenue of $260 to $265 million annualized net charge-off rate of 11.7% plus or minus 15 basis points, adjusted EBITDA of $35 to $40 million. Our guidance for the full year is total revenue of $1.045 billion to $1.055 billion, $62.5 million higher than our prior guidance at the midpoint. Annualized net charge off rate of 11.7% plus or minus 30 basis points with the high end of the range maintained and the low end increased by 20 basis points from our prior guidance. And adjusted EBITDA of $70 to $75 million consistent with our prior guidance. Adjusted EBITDA of $70 to $75 million consistent with our prior guidance. We did not increase our full year adjusted EBITDA guidance despite increasing revenue guidance because more of our total revenue is coming from higher origination fees, which are shown in revenue but not reflected in adjusted EBITDA until the origination fees are received from principal collections over time. I want to highlight for you that our guidance reflects we will generate adjusted EBITDA of $90 to $95 million in the last two quarters of 2023. which is more than we generated over the prior 16 quarters combined as a public company. I'm optimistic that as the business continues to scale and we continue to reap the benefits of underwriting and cost discipline, we will continue to see sustainable, profitable growth and significant value creation for our shareholders. Raoul, back over to you.
spk04: Thanks, Jonathan. Before I open up the call for questions, I want to highlight that we recently released our 2022 corporate responsibility and sustainability report and share some of the ways in which OPPORTUNE is focused on addressing the biggest challenges facing U.S. consumers. OPPORTUNE has extended more than $15.5 billion of credit to hardworking individuals while helping to establish more than 1.1 million credit histories. Likewise, our savings product has helped our members effortlessly save more than $8.9 billion, with the average member using our savings product setting aside over $1,800 annually. We've recently surpassed 2 million members, and our services are available in all 50 states, and our employees are passionate about giving back to the communities in which we operate and where we live, having volunteered around 3,500 hours since 2020 and supported 572 nonprofits. As you can see on slide 14, we received various recognitions during 2022, including for the high degree of trust with which we engage with our customers, the sustainability of how we operate, and our use of AI for the betterment of our members. In closing, I want to share with you how proud I am of how the company performed during the quarter and amidst our significant cost-cutting efforts. Our people have proven to be highly resilient and are continuing to deliver excellence for our members and shareholders. I also want to reiterate that I'm very pleased with our second quarter progress, which signifies the emergence of a leaner, more profitable opportunity. And we've laid the foundation to carry the strong momentum into 2024 and beyond. With that, operator, let's open up the line for questions.
spk00: Thank you. Ladies and gentlemen, we will now 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 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 John Heck with Jefferies. Please proceed with your question.
spk02: Hey guys, thanks very much for taking my questions and congratulations on a beat and raise relative to the expectations prior to this quarter, so thanks. Just on the net charge off stuff, you guys started tightening over a year ago. Things are starting to stabilize. Are you able to discern how much of this is a function of the tightening or is there some attribution to the stabilization of inflation? And given that, is there, at what time would you be comfortable starting to think about loosening and leaning back into the market a little bit more aggressively?
spk04: Yeah, so, John, thanks for the question. This is Raul. We really think it's a combination of things. So certainly the tightening and the ongoing adjustments help. The stabilization of the economy helps. You may have noticed in the comments we shared also that the percentage of loans going to individuals that had Vantage scores of 660 or higher was 33% a year ago, 40% at the end of 2022, and now it's up to 47%. So I think as kind of lenders upstream from us tighten, that is giving us an opportunity to select loans better credit profiles, right, and we're certainly focused on doing that to improve the results. So that's something that we think is also helping us really deliver this step down in origination, I'm sorry, in losses, right, we'll be about 80 basis points better in this next quarter. And then in terms of opening up, we feel really good about the credit that we're originating right now, right? The whole loan sale agreements with Castle Lake and Neuberger indicate that the front book is high quality and people want to earn those. I'm sorry, they want to go ahead and own those assets, right? They want to own those loans. And as a consequence, we are starting to grow the portfolio a bit. So you saw that originations were up 19% quarter over quarter, about $77 million, and So that indicates on our side an ability to acquire that credit that we're going to feel really good about and starting to grow originations at kind of a modest and really smart level given what we're seeing in the economy.
spk02: Okay. And second question, and I know this is not the focus of your priorities right now, but you have invested in other categories of businesses. I think you slowed down. some of that investing recently just given the variability in the credit markets. Maybe specifically the credit card business, where do you see that? At what level would that be positive contribution? Is there still some sort of framework for us to think about the timing of that and that and maybe any of the other growth segments as well?
spk04: Sure. So in page four of the deck, what we presented was, you know, where is it that we're putting our corporate expenses? 85% of them are on the unsecured personal loan business, 10% in savings. And then to your point, John, we've got 5%. You could think of that as $16 to $17 million a year in corporate expenses. And that's what's being allocated to credit cards, secured personal loans, lending as a service. So what we're really focused on right now is evaluating each of those products and initiatives to ensure they're the best use of resources and capital. We announced that after that review, we decided that we were closing our checking account. We just didn't think it made sense to keep that in maintenance mode when we thought about what's the highest and best use of resources. We're going to be taking a look at the rest of those products as well, credit cards, secured personal loans, lending as a service. as part of an ongoing effort, John, just to make sure that it's the highest and best use of capital management time and the resources, especially after the reduction in force.
spk02: Yep, okay, that makes sense. And then final question, the flow agreements is the, and yeah, that is a good signal kind of in the credit market, not only the credit performance, but the interest from the counterparties to the investors is, Is the type of pricing you're getting on that consistent with where you were doing it, say, in 2019, or how do we think about the shift of that market?
spk01: That's a great question. Obviously, since 2019, interest rates and credit spreads are much higher. We continue to have very strong risk-adjusted yield. We've got a slide in the deck that talks about our unlevered yield after losses and servicing being about over 15%. So clearly, that's an attractive cash flow to investors. We're not sharing the specific economics, John, but we are selling loans at a premium. And I think in this current market, that's a really strong sign.
spk02: Yep. Thanks very much, guys. Thank you, John.
spk00: The next question comes from the line of Rick Shane with JP Morgan. Please proceed with your question.
spk03: Hey, guys. Thanks for taking my questions. John really started to touch upon what I was largely interested in. Historically, you've sold about 10% of your production. It looks to me like implicitly, depending upon how much we think volume is going to grow from here and some of the indications you just provided, that you're going to be selling a substantially higher percentage. I'm guessing somewhere 25% to 35% of production. Does that seem like it's in the ballpark at $700 million a year?
spk01: I think that's fair, Rick. As you know, we're not guiding to origination, so we can't do the math precisely, but that sounds like a reasonable estimate.
spk03: Got it. Okay, thank you. And then in answer to John's question about the gain on sale margin, you said that it was a positive gain on sale, but that obviously starts at a very, very modest number, and they can go substantially higher. I think historically you've been pretty close to 10 points. The difference between 10 points and positive is the difference between substantially profitable and kind of breaking even. I am curious, given what is a very favorable guide for the second half of the year, the best explanation of that would be the contribution from that volume. I just want to make sure that we are thinking about the channel markers right, that it's probably not as high as 10%, but it's probably not as low as 10 basis points.
spk01: So Rick, I'm glad you asked this question. I mentioned in my remarks, and maybe I should have emphasized it more, but we are, for GAAP accounting purposes, treating these whole loan sales as asset-backed borrowings. So we're recording the proceeds we received as a debt balance. There'll be interest expense equal to management's estimate of the investor yield, and then we'll continue to record revenue as if the loans were on balance sheet, and they will continue to show up in our on-balance sheet loans. So we won't actually have a gain-on-sale or servicing fee income reported in non-interest income for this portfolio. But to your point, the economics work the same way, and we're definitely making money and nice money on these whole loan sales. And so it's a win-win. Our investors get a high-quality asset at what for them is an attractive yield, and we get to continue to originate high-credit quality loans and make money off of those loans.
spk04: And Rick, just to add a little bit, because I think you were also talking in essence about our guidance for adjusted EBITDA for the remainder of the year. You know, I'm really bullish right now about the positioning of the company. We obviously had to make some difficult choices in the beginning of the year, but we were setting ourselves up for a really strong back half of the year. So certainly the whole loan sales are going to contribute. The reduction in expenses are contributing. The improvement in yield is something that's contributing to a stronger back half of the year. Having losses come down is, you know, I talked about a bit when John asked this question. All those things are lining up really to create, as we mentioned in our remarks, right, a combined adjusted EBITDA at the end of the year that is higher than the last 16 quarters combined. so I'm really proud of the way that the team is executing, and I think we're set up really well for the back half of the year in 2024, where it just feels to us like we've really turned the corner through this good execution.
spk03: No, look, that clearly comes through, and we are already sort of trying to solve into that $90 to $95 million, and Jonathan, thank you for the clarification. I heard you say that, but I did not in fact, process it the way that I should have. I was so sort of tunnel vision on the gain on sale, hadn't thought about really the implications of what you're describing. And Raul, I think you're right. It's not any one of those individual adjustments. It's the layering of them. It's the incremental revenue. It's the lower cost on the operations side. It's the lower cost on the credit side. It's a little more operating leverage. It really does build. It'll be interesting as we go through the model to see all of that. And then the other issue is I guess the one accounting issue I have is how do you make that quote-unquote sale but below sale treatment? Do you have to continue to reserve as if you own those loans? And so, oh, but you fair value it. How's that going to work with the fair value accounting?
spk01: So those are a couple great questions. So first of all, from a GAAP standpoint, we retain the option, OPPORTUNE retains the option to repurchase a small percentage of the loans that we've sold. And so because of that, from a GAAP accounting standpoint, the loans do not qualify for deconsolidation and they're on balance sheet. you know, it's a sale for tax, it's a sale for, you know, legally. But in terms of fair value, we'll fair value those loans just like we fair value the rest of our portfolio. It doesn't really change anything there.
spk04: And just a quick clarification on the option to repurchase, that is at our discretion. That's at Opportunity's discretion. Correct. Correct.
spk03: Understood. Okay. I've more than extended my one question and follow up. I apologize. Thank you.
spk04: Okay. Thank you, Rick.
spk00: As a reminder, ladies and gentlemen, it is star one to ask a question.
spk04: Okay. Well, I want to thank everyone for joining us on today's call, and we look forward to speaking with you again soon. Thank you very much. Thanks, everyone.
spk00: 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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