Oportun Financial Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 8 speakers on the call.

Operator

Hello, and welcome to the Oportun Financial Third Quarter 2023 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to Turn the call over to Dorian Hair, Investor Relations. Please go ahead.

Speaker 1

Thanks, and hello, everyone. With me to discuss Oportun's Q3 2023 results are Raul Vasquez, Chief Executive Officer and Jonathan Kobins, 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.

Speaker 1

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 Q3 2023 financial supplement and the appendix section of the Q3 2023 earnings presentation, all of which are available on at the Investor Relations section of our website at investor.

Speaker 1

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

Speaker 2

Thanks, Dorian, and good afternoon, everyone. Thank you for joining us. Today, I'll discuss our Q3 financial performance and update you on Oportun's 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 $268,000,000 This top line performance demonstrates the resilience of our business.

Speaker 2

We reached our quarterly GAAP operating expense target of $125,000,000 ahead of schedule. At $123,000,000 in Q3, GAAP operating expenses were our lowest in 2 years and a 10% reduction sequentially. Additionally, we achieved another post IPO record for Adjusted operating efficiency of 40.8 percent attributable to our prudent cost management. We're also working to ensure that Oportun is well funded to grow in a responsible and sustainable fashion. We recently executed new personal loan financing agreements totaling up to $267,000,000 with 2 of our primary funding partners.

Speaker 2

That brings our total executed funding agreements since June to $967,000,000 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 $16,000,000 our adjusted EBITDA fell well short of the $35,000,000 to $40,000,000 range we provided.

Speaker 2

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 1st quarterly vintage originated under our tighter criteria. As you can see on Slide 9, after 12 months of performance, we are now seeing cumulative net charge offs for that vintage of 6.1% were approximately 60 basis points higher than the comparable 2019 vintage.

Speaker 2

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 Back 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 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 percent 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 and adjusted net loss of $18,000,000 for the quarter for an adjusted loss per share of $0.46 per share.

Speaker 2

Let me now shift to the actions we are taking to offset our increase in losses and enhance profitability. Today, we are announcing $80,000,000 in further annualized operating expense reductions that will get us down to $105,000,000 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 Oportun. 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.

Speaker 2

Oportun holistically addresses 2 of the most fundamental challenges to financial health and resilience: Access to responsible and affordable credit and adequate savings. Accordingly, we've been allocating our spending to the 2 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 So to enhance our focus in this challenging economic environment, we're taking the following actions.

Speaker 2

1st, 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. 2nd, we are reviewing strategic options for our credit card portfolio and we'll update the market when we have included 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 Oportun.

Speaker 2

Annualized net interest for secured personal loans are currently over 300 basis points lower and 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 Q3 financial performance

Speaker 3

and our updated 2023 guidance. Thanks, Raul, and good afternoon, everyone. As Raul mentioned, we made progress on a number of fronts in the 3rd quarter, Yet we have more to do to consistently drive strong results. I remain highly confident that our continued credit tightening actions, further cost initiatives and streamlining of our product offerings will enable us to enhance profitability in 2024 and beyond. As shown on Slide 6, Oportun delivered record total revenue of $268,000,000 although the impact of net change in fair value drove an adjusted loss of $18,000,000 We continue to be focused on quality rather than quantity with originations of $483,000,000 which were down 24% year over year.

Speaker 3

Sequentially, we were virtually flat from the 2nd quarter as we further tightened our credit Total revenue of $268,000,000 representing year over year growth of 7% outperformed our guidance range due to slightly higher portfolio yield resulting from our pricing increases. Our 32.5 percent portfolio yield increased by 30 basis points from Q2 to Q3. We remain on track for our 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. Net revenue was $85,000,000 down 42% year over year due to an unfavorable net change in fair value and higher interest expense compared to 2022.

Speaker 3

Current period charge offs of $88,000,000 were the primary driver of our total net decrease in fair value of $136,000,000 As Raul mentioned, we have seen an increase in our 30 plus day delinquencies as well as some softening in late stage roll rates. As a result, the fair value price of our loans decreased to 100.4% as of September 30 and resulted in a $9,000,000 mark to market decrease. This was driven by our increasing our remaining cumulative net charge off assumption by 58 basis points to 11.9%. Also contributing negatively towards our earnings was a $15,000,000 mark to market increase in our asset backed notes, resulting from a 22 basis point increase in weighted average price to 94.3% and continued regular amortization of several of our ABLs. Interest expense of $47,000,000 was up $20,000,000 year over year, primarily driven by increased debt outstanding and the increase in our cost of debt to 6.8% versus 3.9% in the year ago period.

Speaker 3

Turning now to operating expenses and efficiency. We We are continuing to see the benefits of our previously announced cost structure optimization initiatives. Our $123,000,000 in total operating expenses during Q3 was the lowest quarterly figure we've reported since the same quarter in 2021. And in comparison, our Q3 total revenue was 69% higher. As Raul described, we are enacting further cost reduction measures aimed at lowering our GAAP operating expenses to a quarterly run rate of $105,000,000 by the Q4 of 2024, resulting in $80,000,000 in annualized savings.

Speaker 3

We expect the headcount reductions announced today to result in a one time charge in the 4th quarter of approximately $7,000,000 Excluding this charge, we still expect operating expenses to be at or below $125,000,000 in the Q4 of 2023. I'd like to highlight for you on Slide expenses to average managed principal balance was 15% as of 3Q 'twenty three, 539 basis points is better than the quarter in which we went public 4 years ago. Our adjusted OpEx ratio, which excludes stock based compensation expense and certain non recurring charges was even lower at 13.4% for 3Q 'twenty three as we reduced adjusted operating expenses by 19%, while we grew total revenue by 7%. In the 3rd quarter, our sales and marketing expenses were just under $19,000,000 down 2% sequentially and down 13% year over year as part of our expense discipline and continued credit tightening. For the quarter, we recorded adjusted net loss of $18,000,000 compared to an $8,000,000 net profit in the prior year quarter and an adjusted net loss per share of $0.46 versus prior year net earnings per share of $0.25 Adjusted EBITDA was $16,000,000 in the quarter, a sequential improvement of $11,000,000 compared to last quarter's $4,000,000 On a year over year basis, it reflected a $22,000,000 increase compared to the negative $6,000,000 in adjusted EBITDA we reported in the prior year quarter.

Speaker 3

Nevertheless, our adjusted EBITDA fell short of our $35,000,000 to $40,000,000 guidance. As Raul mentioned, this was principally due to fair value adjustment of our adjusted EBITDA calculation and interest expense. Now on Slide 8, let me discuss Q3 credit performance. Our annualized net charge off rate of 11.8% was within our guidance range. This compared to 9.8% in the prior year period and 12.5% in the 2nd quarter.

Speaker 3

We were pleased that our risk adjusted yield, which deduct charge offs from portfolio yield increased by 107 basis points sequentially to 20.8%. Due to our 30 plus day delinquency rate increasing by 25 basis points sequentially to 5.5% and higher late stage roll rates, We do anticipate our 4th quarter annualized net charge off rate to increase by 50 basis points in the midpoint of our guidance, which I'll detail for you shortly as compared to our Q3 charge off rate. Although inflation has generally abated, prices have not come down on an absolute basis and gas prices were about 10% higher on average during the Q3 from the Q1 trough, causing further economic stress on our member base. In prior earnings calls, we've discussed the fact that the credit performance of our portfolio has 2 distinct drivers. First, the post July 2022 origination vintages made over the last 15 months after our significant credit tightening, which we refer to as our front book and second, the originations made prior, which we refer to as our back book.

Speaker 3

The back book continues to represent the bulk of our delinquencies and charge offs, but also continues to shrink. The back book declined by $400,000,000 in the Q3 to $900,000,000 and is anticipated to further decline to $600,000,000 as of year end. While it continues to be true that our elevated losses are being driven by back book vintages, as Raul explained earlier, We saw some deterioration in the vintages from the Q3 of 2022. Slide 9 shows the loss rate for recent loan vintages compared to their respective To be clear, this Q3 2022 front book vintage is still performing much better than the back book. We believe the reason recent vintages are performing in line with 2019 performance is that we took further actions in December 2022 that are benefiting 2023 vintages.

Speaker 3

As we discussed with you last quarter, we've continued to improve the credit quality of our originations. The percentage of underwritten loans with Vantage scores of 6.60 or greater was 33% for 2Q 2022 prior to our significant credit tightening and increased to 49% during 3Q 'twenty three. Higher Vantage scores recent originations also help Why we continue to see 2019 level performance from the 2023 vintages. Regarding our capital and liquidity, Net cash flow from operations in the 3rd quarter set a new record of $107,000,000 up 58% year over year, which supported net debt repayment of $24,000,000 along with loan originations. We've repaid debt on During each quarter this year for a total reduction of $99,000,000 This debt repayment also includes $7,000,000 of principal amortization on our residual facility, which bears interest at SOFR plus 11%.

Speaker 3

So we're beginning to reduce the balance of our expensive corporate debt. As of September 30, total cash was $200,000,000 of which $82,000,000 was unrestricted and $18,000,000 was restricted. Turning now to funding. As Raul mentioned, we recently entered into 2 new personal loan financing agreements totaling $267,000,000 In addition to the June August transactions we discussed on our last earnings call totaling $700,000,000 The recent $197,000,000 private Financing with Castle Lake, its affiliates and other investors will fund existing and newly originated loans for a 2 year revolving period at a fixed rate of interest and marks our 2nd funding transaction of the year with Castle Lake. The new debt financing will be accounted for on an amortized cost basis.

Speaker 3

The $70,000,000 whole loan flow sale agreement with longtime partner Ellington will fund loans to new members. These whole loan sales will be accounted for as off balance sheet with servicing fee income being recorded on our income statement. This will be a reinitiation of our Access Loan Program to support borrowers that we currently aren't lending to. When we offered the Access Loan Program in the past, It was successful in increasing the number of returning members that opportune could serve and we expect to start seeing this benefit again in the latter half of twenty twenty four. Turning now to our guidance as shown on Slide 12, our outlook for the Q4 is Total revenue of $260,000,000 to $265,000,000 annualized net charge off rate of 12.3 percent plus or minus 15 basis points, adjusted EBITDA of $5,000,000 to $10,000,000 I'll note that this 4th quarter adjusted EBITDA guidance range is well below that implied by our prior guidance.

Speaker 3

This reduction of our adjusted EBITDA outlook is due to the same issues that drove our miss for the 3rd quarter. Our 4th quarter adjusted EBITDA expectations are also by higher charge offs due to the trends we've been speaking with you about today and higher than previously forecast interest expense. We expect 4th quarter interest expense to be in the $51,000,000 to $53,000,000 vicinity. Our guidance for the full year is total revenue of $1,054,000,000 to $1,059,000,000 annualized net charge off rate of 12.2 percent Plus or minus 10 basis points, adjusted EBITDA of $500,000 to $5,500,000 I want to be frank by acknowledging that this is not how we anticipated or wanted to close 2023. Nevertheless, my conviction remains Fortified by the decisive actions we announced today that are increasingly tight underwriting posture that are we are on track to markedly improve our Raul, back over to you.

Speaker 2

Thanks, Jonathan. Before my final remarks, I want to inform you that as disclosed in our filing today, Carl Pasquarela has decided to retire from his Position on Oportun's Board of Directors to pursue other opportunities. With Carl's departure, the Board has selected Neil Williams to assume the role of Lead Independent Director. On behalf of the rest of the Board and the company, I would like to sincerely thank Carl for almost 14 years of service as a Director and for his significant contributions to Oportun. I look forward to working closely with Neil in his new capacity as a Lead Independent Director.

Speaker 2

In closing, I want to first emphasize the progress that we have made to position Oportun for profitable, sustainable growth. We remain highly focused on Our capital partners have demonstrated their confidence in the underlying strength of our business model with the 967 We've executed since June. In summary, I am highly confident that the initiatives we spoke about today will result in the emergence of a leaner, more profitable opportune. We look forward to updating you on the progress of this evolution when we report on our 4th quarter results and provide our 2024 guidance early next year. With that, operator, let's open up the line for questions.

Operator

Thank you. We'll now be conducting a question and answer session. One moment please while we poll for questions. Our first question is coming from Rick Shane from JPMorgan. Your line is now live.

Speaker 4

Thanks, guys. A couple of questions. If we can take a look at Slide 9 from this quarter and compare it to Slide 11 from last quarter. I think it's pretty instructive of what's gone on. And I know that everybody is going to be scrambling to try to match this up, but the 2019 vintage seasoned between 9 12 months, up 130 basis points.

Speaker 4

The 2022 vintage seasoned up 2 20 basis points in that 3 month period. It seems fairly dramatic that The 2022 vintage was outperforming the 2019 vintage, 3 months ago and now it's underperforming it by 60 basis points. Can you really help us understand what's going on there?

Speaker 2

Sure. So Rick, this is Raul. I think as we mentioned during The script comments, we are seeing borrowers that are just feeling stress in the current macro Environment, right? Although inflation is slowing down, prices continue to be elevated. More and more surveys indicate that consumers are concerned about Just kind of their own financial situation, and I think we're starting to see that now in that Q3 vintage.

Speaker 2

The reason why we think Q4 and Q1 could look different is Q3 only benefited from the July 2022 tightening. The Q4 vintage included not just that tightening, but a significant in December of 2022, including returning customers. And then Q1, that whole vintage, right, has the benefits of that December tightening. So we continue to really be focused on servicing collections and underwriting, but we recognize that this is a different environment than that 2019 pre pandemic environment in which there was an inflation, volatile fuel prices, obviously, no geopolitical issues. So we're pleased with where Q4 and 2023 are, but we continue to watch them closely and continue to focus on tightening to make sure that we get the outcomes that we want.

Speaker 5

Got it.

Speaker 4

Okay. Thank you. 2nd question comparing those slides. The way I read this, it actually looks like the Q4 Vintage, for example, the 22s, 3 months ago, we're showing a 3.5% loss rate. It's now 3.1%.

Speaker 4

Why is the Q4 Vintage showing down when you compare the slides versus last quarter? I just don't understand that.

Speaker 2

Yes. It's a good question, Rick. So On that page in the prior deck, we were looking at net charge off rates and 30 day delinquency rates. We decided in this presentation to only show net charge off rates because we would also get questions about how this particular slide compared to static Pool information and to include the delinquency rates didn't make it a good comparison to the static pool information. So that's why you see it is kind of net charge off rates in this deck and that's what it will be going forward.

Speaker 4

Got it. I see and I see the language difference. I appreciate that. Okay. Last question and this is a bigger question.

Speaker 4

But one of the challenges that you face is that fair value accounting at this point is really exacerbating the volatility in quarterly earnings and people's And I realize that there are some pretty significant optical challenges associated with establishing CECL reserves for loans that have lives as short as yours do. But the trade off is that it will create a much more linear story around earnings And probably a little bit more predictability. Is it worth reassessing that at this point? And what are the accounting requirements to change from fair value to reserve accounting at this point?

Speaker 3

Sure. Rick, thank you for your comment. And we do recognize the volatility that the fair value has created in this environment. To answer the second question first, it's an election that any company can make. So, we could choose to make that election in the future.

Speaker 3

However, we still believe that Fair value accounting for our loans continues to highlight their value. You may recall From our prior earnings call that we indicated that we were going to stop accounting for new financings as fair value and we would account for them as amortized costs. So for example, the Castle Lake Securitization that we just closed, that's going to be on an amortized cost basis. So the bonds that we previously had fair value, we Can't switch them back, but that will run off. And so I do think by removing the liability side of the equation, over time, we will simplify things.

Operator

Thank you. Our next question is coming from John Hecht from Jefferies. Your line is now live.

Speaker 6

How are you guys? Thanks very much. First one just on the and Raul, I think you kind of expressed this, but I just want to make sure the cost saves, they're kind of across The Board, are they more focused on kind of pushing out maybe some of the new initiatives or how do we think about Kind of the layering of cost saves across the business.

Speaker 2

They're pretty much across the board. They touched every department in the organization. So it's a combination of both compensation savings through headcount reduction and then non comp savings And certainly narrowing our focus by eliminating the embedded Nance partnership, eliminating the investing in retirement product, those contribute To the savings as well, John.

Speaker 6

Okay. Then and I know you guys have talked about pushing some price increases out to enhance the risk adjusted margin. Do you still have more room there? Is it out of the 40 states that you're moving into, is there just a subset of those that you have more room? Maybe Can you give us a sense for where yields might go?

Speaker 2

Yes, I think we have a bit more room. We did share that our 32.5 Percent portfolio yield was up 30 basis points quarter over quarter. So we think we've done a good job, John, throughout the year increasing Pricing and at the end of the year, we've shared that we'll end up with our year end portfolio Yield being 200 basis points higher than it was at the end of 2022. So we think we've taken a lot of the improvement already. From here on out, it's going to Smaller improvement.

Speaker 6

Okay. And then, should any so I think the share count jumped this quarter. Was that tied to some of the, I guess, the warrants for the prior debt deal? Anything we should think about with the share count in the next couple of quarters?

Speaker 3

No, I think the share count should be relatively stable going forward.

Speaker 6

And then the last one is the flow arrangement, not the Castlight deal, but the other one. I think you mentioned you're going to be getting servicing income in this net. Do you expect to make any gain? Will you be taking a gain on those asset sales as well?

Speaker 3

Yes, great question, John. We expect that On a gain basis, it will be breakeven for us. So we just economically wouldn't expect to have a gain, but we will have a servicing fee income. But the real win in this relationship is the access loan borrowers who are successful with the loan, They will become candidates for returning loans in starting in the latter half of twenty twenty four. You may recall we've had this program in the past and it worked out really well for us.

Speaker 3

So we're looking forward to restarting it with Ellington.

Speaker 6

Yes. So almost like a more of a customer acquisition type opportunity?

Speaker 3

Absolutely. No, that's right. We'll be able to serve more new customers without taking credit risk exposure and get the benefit of the customer lifecycle.

Operator

Our next question is coming from Lance Jesserone from BTIG. Your line is now live.

Speaker 7

Hey, guys. Thanks for taking my question today. In terms of the interest Vince, obviously that contributed a little bit to the miss. But assuming we're in a bit of a higher for longer scenario and rates are relatively Stable. How are you thinking about the cadence of your interest expense over time?

Speaker 7

I know without giving guidance into 2024, but Looking at where rates are versus where you expect your funding mix to be over 202425, how should we kind of think about that cadence going forward?

Speaker 3

That's a great question, Lance. So what I can point you to is interest expense for The Q3 was $47,000,000 and I said in my remarks that we expected interest expense for the 4th quarter to be $51,000,000 to $53,000,000 So that gives you a quarter over quarter type cadence. We would That that there's going to be some continued upward pressure into 2024 just because the existing financings that we have that are at a lower cost of interest are going to start either going into amortization or coming up for renewal over the course of the year next year.

Speaker 2

And Lance, certainly, that view is part of what drove our thinking on The cost reductions in taking $80,000,000 of expense out of the business on an annualized basis as we go into 2024 is just this Certainly, this view of higher for longer with longer apparently getting longer and longer over time.

Speaker 7

Got it. I appreciate that. And then in terms of the fair value, I know we talked a little bit about what drove it this quarter. Obviously, it gets really lumpy and a lot of it you kind of attributed to lingering inflation plus gas prices. But if you could give us Any color just on what you're seeing from your customer base?

Speaker 7

I know obviously they're always kind of in this state of a permanent recession, but We're in a new scenario where basically everything costs a little more. Anything that you can give us in terms of color on how you see the Broader market evolving over the next year or 2 that kind of gives us a little insight into how we should think about modeling the fair value marks, especially as we're a little distance from that side of the borrower group?

Speaker 2

Sure. So, certainly reluctant to try to give you a view over the next year or 2, but I can Certainly give you a sense of what we're hearing from our members when we speak to them from a collections perspective. So the top reason that people give for why they're having trouble making their payments is just some sort of an income delay, Right. So their employer is having trouble giving them the income that they've earned in that particular time. So that's the number one reason.

Speaker 2

Number 2 is someone has lost their job or they're unemployed for a period of time. We've stated in the past that our borrowers, Right. When they lose their job, they quickly try to pivot to find another job, but that's certainly the number 2 reason why people are unable to make their payments. Number 3 is something that's medical related, so some sort of a disability or an illness. And then the last one, I'll just focus on the top 4, It's again kind of work related.

Speaker 2

So they've had a pay cut or they've had reduced work hours. So again, we're just seeing this kind of softening environment is impacting them. And sorry, the last one is relevant also in terms of the comments we provided, other bills and expenses, right? Just, Again, struggling with just the expenses in other areas. So it tends to be something related to work, something related to other expenses, whether that is an illness Or something that is non medical related, Lance.

Speaker 7

Got it. Thanks so much.

Speaker 2

Sure.

Operator

Thank you. Our next question is coming from Sanjay Sakhrani from KBW. Your line is now live.

Speaker 5

Thanks. Maybe you could just talk about the expense reductions. Could you just talk about what it does to sort of the muscles on revenue growth and maybe even on collections as you're cutting costs? I'm Trying to think through the implications that might have to the fundamentals.

Speaker 3

Sure. So,

Speaker 2

Inside, there was very, very little done that would touch servicing and collections. In this environment, we thought it was critical to your point, Sanjay, to continue to have the muscle mass that we built up in those areas. On originations, we've been cutting the marketing budget. You to say that throughout the year. So there were cuts to the marketing team because we do expect approval rates to continue to be Lower than they have been historically.

Speaker 2

And as a consequence, we're not going to be spending as much in outbound marketing. So therefore, we felt we could cut some of the marketing team. So there really were, I would say, deep muscle cuts relative to what we need in originations or in servicing.

Speaker 5

Thanks. And maybe just a follow-up on all these credit related questions. I'm just trying to think through What gives you the confidence that you've made the proper adjustments on the underwriting scorecards Continue to grow. I understand you're not growing on a net basis, but just you're still originating. I'm just curious sort of I Understand the vintages are definitely performing, but like what kind of adjustments have been made and what makes this backdrop so much difficult than prior cycles?

Speaker 5

I'm just trying to think

Speaker 2

Yes. I mean, I would say just having read the comments of some of the other businesses in our sector, Right. There seems to be an indication of stress across borrowers across all of the companies whose transcripts I read. I think it is a very challenging environment because we have had these higher prices for longer. We've had the volatility in fuel.

Speaker 2

The job market is starting to soften a little bit. So I think those are things that we're all dealing with from an industry perspective. In terms of what we look at Sanjay to Try to ascertain the right level of originations. It's exactly what you said. We look at the vintages.

Speaker 2

So we look at 1st payment defaults. We look at what Do the roll rates look like, what are early delinquency trends look like in each of the vintages, and that's how we go ahead and continue to make adjustments. To be clear, we've been tightening throughout 2023 and to be more specific because I know you're asking for specificity. It's not just looking at approval rates, it's looking at what is the average loan size, what is the average term, what is the distribution in terms of who we're lending to. We shared in comments that Vantage scores over 660 now are 49% of our originations.

Speaker 2

In Q2 of 2022, that was 1 third. So we are looking for higher cash flows, higher credit scores And we're reducing our exposure from an average loan size and average term with some of the segments of our borrowers, Sanjay.

Speaker 5

Okay. Thank you very much. Thank you.

Operator

Thank you. Next question is a follow-up from Rick Shane from JPMorgan. Your line is now live.

Speaker 4

Thanks for taking my follow-up this afternoon. Sure.

Speaker 3

Just one

Speaker 4

thing, You guys have talked about some of the things that you're seeing in the labor markets. I'm curious, when you delve into it, if you're seeing anything either On a geographic basis or on an industry basis that's noteworthy, are you seeing weakness in particular regions or particular job sectors?

Speaker 2

We're not seeing differences today in terms of the regions that we would call Kind of dramatic or noteworthy. From an industry perspective, I know there have been some areas Where we have been tightening a little bit relative to other industries, Rick. So we have seen some differences from an industry perspective.

Speaker 4

Do you want to be to steal Sanjay's word, could we get a little more specificity on that? Or do you want Do you want to maintain the discretion on that?

Speaker 2

Yes. Let me just follow-up on the most recent numbers that we have on that, Rick. So just give me we weren't prepared to share that at this moment. So just give me a few minutes and we'll try to make sure that we provide an update on that.

Speaker 4

Terrific. Thanks. It didn't strike me as a question you would normally not. It struck me as a question you would normally answer. I was about to phrase that question like a quadruple negative.

Speaker 4

So I was just a little surprised. So thank you. Happy to wait and hear the answer after you take

Operator

We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.

Speaker 2

I want to say thank you once again for joining us on today's call, and we look forward to speaking with you again in the next quarter. Thank you very much.

Operator

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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Key Takeaways

  • Oportun delivered record Q3 revenue of $268 million (up 7% YoY) while cutting GAAP operating expenses to $123 million (10% sequential reduction) and achieving a post-IPO record adjusted operating efficiency of 40.8%.
  • Credit costs rose as the Q3-2022 loan vintage showed some deterioration, driving an annualized net charge-off rate of 11.8% (within prior guidance) and prompting full-year 2023 charge-off guidance to be increased to 12.2% ±10 bps.
  • Adjusted EBITDA of $16 million missed the prior $35–$40 million range due primarily to fair value adjustments on loans and higher interest expense, resulting in an adjusted net loss of $18 million (–$0.46 per share).
  • Management announced $80 million of further annualized expense cuts—aiming for a $105 million quarterly run rate by end-2024—via an 18% corporate headcount reduction and the sunsetting of lower-return products (e.g., Sezzle partnership, retirement investing).
  • Since June, Oportun has executed $967 million in new personal-loan funding agreements, underscoring investor confidence, and plans to expand its secured auto-collateralized loan product to 40 states while maintaining focus on its core unsecured loans and cash-flow-positive savings offering.
A.I. generated. May contain errors.
Earnings Conference Call
Oportun Financial Q3 2023
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