Oportun Financial Corporation

Hello, and welcome to the Opportune Financial third quarter 2023 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dorian Hare, Investor Relations. Please go ahead.

Thanks and hello everyone. With me to discuss OPPORTUNE's third quarter 2023 results are Roel Vasquez, Chief Executive Officer, and Jonathan Koblenz, 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, expense savings measures, and plans and objectives of management for 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-Q filing for the quarter ended September 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 financial condition and results of operations. A full list of definitions can be found in our earnings materials available at 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 third quarter 2023 financial supplement, and the appendix section of the third 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. 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 our host.

Thanks, Dorian, and good afternoon, everyone. Thank you for joining us. Today, I'll discuss our third quarter financial performance and update you on opportune areas of focus. Let me begin with the following summary of our Q3 performance. We increased revenue by 7% year over year and set a new quarterly record of $268 million. This top line performance demonstrates the resilience of our business. We reached our quarterly GAAP operating expense target of $125 million ahead of schedule. At $123 million in Q3, GAAP operating expenses were our lowest in two years and a 10% reduction sequentially. Additionally, we achieved another post-IPO record for adjusted operating efficiency of 40.8%, attributable to our prudent cost management. We're also working to ensure that Opportune is well-funded to grow in a responsible and sustainable fashion. We recently executed new personal loan financing agreements totaling up to $267 million with two of our primary funding partners. That brings our total executed funding agreements since June to $967 million and exemplifies the confidence that fixed income investors have in the quality of our loans. While there were highlights to be proud of in Q3, we know we still have work to do to deliver the value that we and our shareholders expect. Our performance versus our prior guidance was mixed. We outperformed the top end of the range for total revenue and fell within the range for annualized net charge-offs at 11.8%, which represented sequential improvement in our loss rate of more than 70 basis points. I am, however, disappointed that at $16 million, our adjusted EBITDA fell well short of the $35 to $40 million range we provided. This shortfall was driven by fair value adjustments to our adjusted EBITDA calculation and interest expense. Turning to credit, the dominant factor continues to be the performance of our back book of loans that was originated prior to the material tightening we made in July of 2022. We are seeing some of our members continue to struggle with the higher prices in our economy. And since our last earnings call, we have started to see some deterioration in our Q3 2022 vintage, which was the first quarterly vintage originated under our tighter criteria. As you can see on slide nine, After 12 months of performance, we are now seeing cumulative net charge-offs for that vintage of 6.1% or approximately 60 basis points higher than the comparable 2019 vintage. As you can also see on that page, Q4 2022 and the 2023 vintages continue to be in line with 2019 or slightly better. As I've mentioned in prior earnings calls, we didn't just tighten back in July 2022. We took more tightening actions with respect to our returning loans in December of 2022. And we have continued to make adjustments throughout 2023 to fine tune our performance as the macro backdrop remains uncertain due to the return of higher gas prices and ongoing inflation that are impacting our hardworking members to varying degrees. Given these trends and some softening in our late stage roll rates starting at the end of September, which contributed to our delinquencies increasing by 10 basis points year over year, we are taking up our guidance for full year 2023 net charge-off rate by 50 basis points above the midpoint of our prior range to reflect updated guidance of 12.2% plus or minus 10 basis points. The increase in expected losses drove a reduction in the fair value of our loans and along with unfavorable impact from our asset-backed notes at fair value, and other fair value adjustments contributed to our recording an adjusted net loss of $18 million for the quarter or an adjusted loss per share of 46 cents per share. Let me now shift to the actions we are taking to offset our increase in losses and enhance profitability. Today, we are announcing $80 million in further annualized operating expense reductions that will get us down to $105 million in quarterly run rate expenses by the end of 2024. These operating expense reductions will be affected by an approximately 18% reduction in our corporate staff, as well as other non-compensation expense savings. I recognize how difficult this is for those employees affected, and I want to thank them for all their contributions to OPPORTUNE. Before handing off to Jonathan, I also want to spend a few minutes reiterating our strategic priorities and how we are adapting them to the current environment. OPPORTUNE holistically addresses two of the most fundamental challenges to financial health and resilience, access to responsible and affordable credit and adequate savings. Accordingly, we have been allocating our spending to the two most proven and profitable parts of the business, unsecured personal loans and our savings product. Our primary focus remains the largest component of our business, our unsecured personal loan product. We will continue to grow at prudent levels and enhance this product's profitability. Our savings product continues to be profitable on a cash flow basis and was the primary driver of our 39% year-over-year growth in non-interest income this quarter. So, to enhance our focus in this challenging economic environment, we're taking the following actions. First, we're increasing our focus as a management team and reducing expenses by sunsetting our embedded finance partnership with Sezzle and discontinuing our investing in retirement products. The elimination of these products and initiatives will contribute to the operating expense reduction I mentioned earlier and will simplify our business. Second, we are reviewing strategic options for our credit card portfolio and will update the market when we have concluded that process. Finally, I'm pleased to announce that we're significantly expanding our secured personal loan product to approximately 40 states through our partnership with PathWord. Our secured personal loan product is highly synergistic with our unsecured personal loan product. Responsibly expanding secured lending, collateralized by members' autos, will allow us to better serve those who need larger loans while reducing credit exposure for opportune. Annualized net charge-offs for secured personal loans are currently over 300 basis points lower than for unsecured personal loans on a year-to-date basis. We expect to complete the expansion of our secured personal loans footprint by the end of 2025. With that, I will turn it over to Jonathan for additional details on our third quarter financial performance and our updated 2023 guidance.