Oportun Financial Corporation

fourth quarter 2023 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 Dorian Hare, Senior Vice President of Investor Relations. Mr. Hare, you may begin.

Thanks, and hello, everyone. With me to discuss Opportunity's fourth 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 of operations and financial position, planned products and services, business strategy, expense savings measures, statements regarding our senior secure term loan and plans and objectives of management for our future operations. Actual results may differ materially from those contemplated or implied by those forward-looking statements, and we caution you not to place undue reliance on these forward-looking statements. A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in our earnings press release and in our filings with the Securities and Exchange Commission under the caption, risk factors, including our upcoming Form 10-K for the year ended December 31, 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 for our core business and which will provide useful information to investors regarding our financial condition and results of operations. A full list of definitions can be found in our earnings materials available at the Investor Relations section on our website. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. A reconciliation of all non-GAAP to GAAP financial measures is included in our earnings press release, our fourth quarter 2023 financial supplement, and the appendix section of the fourth quarter 2023 earnings presentation, all of which are available at the investor relations section of our website at investor.opportune.com. In addition, along with a copy of our prepared remarks. With that, I will now turn the call over to Rahul.

Thanks, Dorian, and good afternoon, everyone. Thank you for joining us. Today, I'll discuss our fourth quarter performance and update you on our progress in key areas of the business. Let me begin with four highlights of our Q4 performance. First, we generated revenue of $263 million to close full year 2023 with a record $1.1 billion up 11%. Second, our Q4 annualized net charge-off rate was 12.3%, 50 basis points better than last year. In addition, for the first time since 2022, our quarterly net charge-offs measured in dollars were lower than the prior year. Third, our GAAP operating expenses were $129 million, down 15% year-over-year. We met our stated GAAP OPEX goal for the quarter of $125 million when $7 million of non-recurring severance relating to cost actions announced on our Q3 earnings call are backed out. Finally, adjusted EBITDA was $6 million and represented a $40 million year-over-year increase. Overall, our team executed well in the quarter and Jonathan will provide more details on our Q4 performance shortly. Turning the page to 2024, I'm pleased that we're seeing early signs of a business recovery taking shape, driven by the strategic decisions and operational changes we made in 2023. I'll now share the three areas of improvement that I find most promising. I'll start with credit and the four positive dynamics we are seeing related to our credit performance. As you can see on slide six of our earnings presentation, loss rates are approximately 400 basis points lower for our front book of loans in comparison to our back book loans. As a reminder, the back book of loans are loans originated prior to the first material tightening in July of 2022. The front book of loans represents originations since then. You can also see on slide seven that the back book shrank to 21% of our own principal balance at the end of the fourth quarter, but disproportionately accounted for 53% of our gross charge-offs. The good news is that the impact of the back book will continue to diminish throughout 2024 as we currently forecast our back book to shrink to 3% of our own principal balance at the end of this year. Second, our 1 to 29 days delinquencies are below 2023 levels. This bodes well for future 30-plus day delinquency performance and, more importantly, charge-offs in the second half of the year. The last time the early stage buckets were running below the prior year was three years ago when 2021 was below 2020. Third, secured personal loans finished 2023 with annualized net charge-off levels that were approximately 350 basis points better than our unsecured personal loan products. We plan on growing our secured personal loan portfolio this year as part of our strategic priority to identify sources of high-quality origination. Finally, just over a year ago, we launched our integrated Opportune mobile app by leveraging the Digit Savings App platform. We now know that borrowing members who use our app have exhibited approximately 45% lower 30-plus day delinquencies three months post-disbursement than those who have not yet signed up to use the app. We plan to increase the visibility, promotion, and adoption of our mobile app in 2024. Improving credit outcomes is a key priority, so we will continue our conservative underwriting stance and focus on enhancements to underwriting models, servicing efforts, and our mobile app. The second promising area is expense management. As I mentioned earlier, we met our Q4 OPEX goal and As you can see on slide eight of our earnings presentation, we are significantly more efficient today than we were when we became a public company four years ago. Adjusted OpEx as a percentage of average managed principal balance was appreciably down to 12.5% in Q4 2023 versus 18.1% in Q4 2019. Fortifying our core business and unit economics are our priorities for 2024 and I will share additional decisions we've made in these areas in a few minutes. The third and final promising area of improvement that I want to highlight is funding. Our most recent $200 million securitization, which closed in February, was 10 times oversubscribed. At an 8.4% weighted average interest rate, its cost is 160 basis points less than the securitization we executed in October 2023. In my view, this signifies the confidence investors have in the credit quality of our originations, as well as the improvement and strength of our business model. Again, I'm encouraged by all these signs of improvement, but there's still work ahead to fully realize our business recovery. To that end, we're announcing that we will continue to reduce our operating expenses this year by an additional $30 million on an annualized basis, bringing our total annualized cost reductions since Q2 22, when we first started our expense management efforts to a substantial $240 million. The 2024 full-year guidance that Jonathan will share with you incorporates these actions with lower OPEX levels generating significantly enhanced profitability. Finally, in order to execute our plans for 2024 and beyond, we recently completed two amendments, one to our residual facility and the other to our senior secured term loan. The amendment to our residual facility provides us with a three-month principal payment holiday and extends the term to January 2025. We will make principal payments on the senior secured term loan in the amount equal to the payments that would have been made on the residual facility. The senior secured term loan amendment reduces the minimum asset coverage ratio, which is the ratio of our unrestricted cash and equity in some of our financing facilities to the outstanding debt. We needed to lower the escalating levels of this covenant for 2024, which were set before 2023's higher than expected losses and lower originations caused by credit tightening. Given the scheduled increases in the asset coverage ratio covenant levels for the remainder of 2024 and into 2025, we are currently evaluating refinancing options. In summary, after a very challenging 2023, I am confident that we are on the right path to achieving a stronger position for the company, driven by the strategic decisions and operational changes we've announced today and have made over the last 12 months. With that, I will turn it over to Jonathan for additional details on our fourth quarter 2023 financial performance, as well as our first quarter and full year 2024 guidance.