Greetings! Welcome to the Oportun Third Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Nils Erdmann, VP of investor Relations. You may begin.

Thanks. And welcome to Oportun's third quarter 2019 earnings call. Joining me today to discuss our results are Raul Vazquez, Chief Executive Officer; and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer. Before we get started, let me remind you that some of the remarks made today will include forward-looking statements. Actual results may differ materially from these contemplated or implied by these forward-looking statements. A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in today's earnings press release. 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. Also, on today's call we may present both GAAP and non-GAAP financial measures which we believe will provide useful information. Our reconciliation of GAAP and non-GAAP measures is included in our earnings press release, our third quarter 2019 financial supplement as well as the appendix section of the third quarter 2019 earnings presentation all of which are available on the Investor Relations website at investor.oportun.com. In addition, this call is being webcast, and an archived version will be available after the call on the Investor Relations portion of our website. With that, I will now turn the call over to Raul.

Thank you, Nils. And good afternoon. We appreciate you're taking the time to join us in your interest in Oportun. During today's call, I will provide an overview of Oportun followed by some third quarter highlights. I'll then layout our strategic drivers and key objectives for the remainder of the year and beyond. Jonathan will then present our strong third quarter financial results along with our fourth quarter and full-year guidance and then we'll open the line for questions. As this is our first earnings call as a public company and some of you may be new to Oportun, I'll begin by highlighting some of the key elements of Oportun's business specifically our mission, our growth opportunity, and our competitive advantages. At our core, Oportun is a high-growth company driven by our mission to provide inclusive affordable financial services and empower our customers to build a better future. We have a substantial market opportunity that we estimate to be 100 million people in the U.S. or either mis-scored by the credit bureaus or our credit invisible. To serve this large market, we apply our mission driven approach which starts with a deep understanding of our customers augmented by sophisticated data driven risk analytics and bolstered by purpose built technology including a full centralized and automated risk engine and deaccessioning platform. By combining these elements, we built a rapidly growing consistently profitable company with a strong credit culture. Since our founding in 2005, we've originated over 3.4 million loans and dispersed over $7.8 billion. Since 2016, we've grown annual revenue at a pace of over 30% per year whilst still producing a low and stable net lifetime low loss rate. Importantly, we've been profitable on a pre-tax basis for the last four consecutive years. Our customers are hardworking responsible individuals with…

Thanks, Raul. Before I start taking you through the details, I want to remind you that we began electing the fair value option to account for loans receivable held for investment originated an asset-backed notes issued on or after January 1st, 2018. Loans receivable on asset-backed notes issued prior to January 1st, 2018, continue to be accounted for our amortized cost. In order to better illustrate the trends in our business, we've created a view of the financials as if we had always elected the fair value option. We refer to this as our fair value pro forma view. Unless I state otherwise, all of the metrics that I will now share with you will be on a fair value pro forma basis for the purposes of comparison to prior year periods. Now, I'll run through the key drivers of our results for the third quarter. Total revenue was $153.6 million up 22% over the prior year quarter. Our managed principle balance at end of period grew 25% over the prior year quarter to reach $2 billion driven by growth in originations and average loan size. Aggregate loan originations for the quarter of $543.5 million grew 19% due to the expansion of our omni-channel network and our marketing efforts as well as increases in the term and loan amounts for returning customers. The evolution of our credit models has allowed to safely increase our average loan sizes over time and we've continued to reward returning customers with access to larger loan amounts with longer terms. Because we reward our returning customers with lower rates as well, we expected our portfolio yield to decrease slightly which it did from 34.4% in the third quarter a year ago to 33.8% for the most recent quarter. Our interest income for the third quarter…

Thank you, Jonathan. I'm proud of the management team and employees at Oportun who have a strong mix of financial services in technology industry experience. Together, we have built a high growth profitable business and we have the depth and breadth of expertise required to execute the growth strategies that will continue to serve our customers and create value for our investors. We're proud of our achievements in the number of people we've served but we believe the best is yet to come and that we have wonderful opportunities for future sustainable long-term growth. Thank you all for your time. And with that, I welcome your questions and comments. Operator?

[Operator Instructions] The first question is from Sanjay Sakhrani of KBW. Please go ahead.

Thanks and good results. I guess first question on the origination volume. Obviously that was strong and it exceeded even our expectations. So, when we think about what's driving that, maybe Raul you could sort of break it down how much is coming from just strong demand versus some of the expansion opportunities. You're talking about both in terms of profile asset classes and then geographies as well?

Hi Sanjay, I'm happy to do it. So, you're absolutely right, we're really pleased with the overall demand that we're seeing from the customer and we think it's a couple of things. 1) As you pointed out we've done a nice job broadening our customer base. So, we've indicated that our strategy has to continue to add the population that prefers being serviced in Spanish. And adding the very large population that prefers to be serviced in English. So, that percentage got up to 55% of new applicants this quarter. So, we think part of the demand is just the very purposeful diversification of our customer base and we're starting to see the dividends of that. 2) The second thing is our investments in the omni-channel strategy and that is both what we're seeing as we've added new locations in particular in Florida and New Jersey which you heard us call out, we're really happy with what we're seeing there. Florida is the fastest growing state that we've seen in our history. And the customer continues to respond very well to our investments in mobile. So, we're also really pleased with the work that's being done in mobile. Then and finally, the marketing team that we have right now is the strongest marketing team that we've ever had. So, we continue to see really robust performance from our direct manual efforts but I recently did a deep dive with the group that's doing our digital marketing and that performance is fantastic and we continue to invest in that year-over-year. So, we think that all of those elements are contributing to that strong originations growth.

Okay, great. And then, I guess I've a follow-up kind of two part for Jonathan.

Sure.

Perhaps you can, is there of a chart or something that puts the 10 million GAAP net income to then minus 639 GAAP EPS per share. I just wanted to make sure I understood how we go from positive to negative. And then secondly, in terms of the share count we should use on a go-forward basis, maybe you could just give us some color as to what we should use on a go-forward basis. Thanks.

Sure. So first of all, we don’t have a chart and though you'll see it in the Q that we anticipate filing shortly. But I can take you through the map very quickly. Basically we had a beneficial conversion feature associated with one of our series of convertible preferred stock as I described. And we were required pursuing to GAAP to value that feature. And then allocate our positive GAAP net income to that first. And then so that basically zeroed out the year. And then the quarter, basically all of the income, you had a negative number there because it had to balance the year. So, that’s what's getting allocated to common in the quarter which is why you see a large number. The second thing is, while we IPO'ed close to the end of the quarter, you calculate EPS based on average share count and EPS is really only for common shares. And so, we had preferred shares outstanding up until the point in the IPO. So, our common share count was much smaller for the quarter. So, you basically had that $37 million impact being allocated across in a very small average share count which is why you got the $6.37 loss. Let me pause there before I address the share count question and just ask if that was helpful.

No, that is helpful, thank you.

Okay. And then on a go-forward basis as you saw in the guidance, we did provide guidance not just for adjusted net income but also for deluded adjusted EPS. And so, if you do the math there, you'd come out with around 28.8 million shares roughly.

Okay, great. Thank you.

The next question is from Rick Shane of JPMorgan. Please go ahead. Rick Shane, your line is open.

Hey sorry about that, guys. Thank you for taking my question. First, a sort of a nuance question related to the fourth quarter. When we think about origination volume and gain on sale, is there anything in the mix particular to the fourth quarter with seasonality and how they spend that we should think about that might drive the gain on sale down again?

That's a great question. We're not we're expecting trends in gain on sale to be consistent in the fourth quarter with what we saw in the third quarter, Rick.

Okay, great. So, no mix shift in terms of the types of loans that you're selling?

Not, yes not materially. We continue to sell 15% of our core originations on a random basis at a fixed price and then the access loans we sell all of them. So, that can cause the mix shift to change. But from a trend perspective, right now we're not seeing anything that would expect would lead us to believe that the gain on sale on a percentage basis should change overall.

Great, okay thank you. And then, sort of more high level, you talked about the strength in New Jersey, you talked about the strength in Florida. And we're seeing that in terms of the year-over-year volume gains. I'm curious if you attribute that to new stores or penetration of the existing stores. So, I'm kind of curious what to build up the potential demand just as we move into the fourth quarter and into 2020?

Hi Rick, it's Raul. That's a great question. We would say it's both. So, I think as you know what is that happening is we put new stores on the ground. It takes a few months for them to start to make those around the store where they're present. But once someone comes in and they become a new customer of ours, we're able to evaluate their performance and if they perform well, then they start to repeat cycle when loans get larger, our cost to acquire is lower, losses get lower. So, what's happening in Florida and New Jersey is we continue to add locations. For example in New Jersey, we added our sixth and or seventh location in the last few weeks. But to you point, some of the first locations in New Jersey that have been there about a year, they're in the repeat cycle now. So, they're driving faster growth because of those larger loans. Florida has been open over a year and a half now and that state is definitely in a situation now where they're starting to get into the repeat cycle and we're starting to see faster growth. So, it's a little bit of both and what you're going to see it continue to do is continue to place locations in those states where we feel that we still have a lot of opportunity to grow.

Got it, okay thank you. And then, and I realize that given the seasonality of originations, there is not a simple answer to this question. But realistically what is the timeframe to breakeven for a new store from sort of opening to breakeven. And the reason I ask that is that I think so much of the story is about leveraging, basically marginal profitability of each of the branches starting to impact the overall overhead, leveraging that overhead.

Yes. So Rick, we don’t specifically disclose what that matric is for the stores but the matric that we have disclosed that I think might be helpful is that on the payback period for a newly originated loan is about four months. And that means that after the loan's been outstanding for four months, we basically recouped our origination cost and that includes store as well as marketing costs in that calculation. So, hopefully that gives you a sense that stores can very rapidly get to profitability and scale.

And Rick, this is Raul. Yes, I think one of the things we disclosed in the past is one of the things that makes us feel good about long-term growth prospects is the balance is in the stores are building faster than they have historically. Because we're getting better and better at creating that wall of sound if you will with from a marketing perspective of combining our digital with our direct mail with the retail location. So, customers are becoming aware of our presence and finding us either via mobile or online or our location. So, that gives us a lot of bullishness as we think about our ability to continue to improve the bottom-line in future years.

Okay great, thank you. Certainly I'm old enough to get the wall of sound reference.

[Operator Instructions] The next question is from John Hecht of Jefferies. Please go ahead.

Afternoon guys and congratulations on the success part. You got a successful first quarter. First question, it's a little redundant from what Sanjay and Rick were asking. But just thinking about you guys have a fairly balanced growth opportunity here and you've got recurring customers, geographic expansions, new branches. How do we think about maybe the next year to with respect to the cohort growth of your install base versus some of the new opportunities? And then, can you give us a sense for maybe branch expansion particularly in Illinois and Florida where you mentioned the states are going very well in terms of growth.

Yes so John, thank you, it's Raul. What I would say that you can expect from us is that kind of balanced methodical approach to grow. So, one of the things that we talk about here internally and we've been doing this for some time is to ensure that we're meeting our short term commitments while building for long-term success. So, this year we're on track to put down about 35 or so incremental locations that’s consistent with what we've done in prior years. We're still finalizing our 2020 plan but we would expect to be in that ballpark again. So, we're going to continue to put those new locations down so that that way we can build that cycle that I was describing earlier. And at the same time we'll start to see the dividends of our high NPS scores when we see customers come back and get access to those larger loans. I disclosed in the script also that we're incredibly happy with the progress that we're making in NPS and mobile and that has gone from 76 to 83 in the last year. So, we see more and more customers that want to actually interact with us that way and we're taking better-and-better care of them. So, we think that's going to help to continue to drive future growth. And then certainly the progress we're making in new products, we expect to see growth in that and it's ability to contribute to the topline in 2020. So, you'll continue to see balance growth and you'll continue to see the investments that we're having in this year add new factors of growth rates in both auto and credit cards in future years.

Okay. And then, second questions more like idiosyncratic question about rates and their effect. Rates set down more recently and there is some forecasting of further reduction of rates next year. How do we think about that I mean there is a certainly an uplift on the fair value, the loan portfolio tied to that and some offset in the debt. How do we think about that and how it effects your earnings going forward?

Sure. This is Jonathan, John. A great question. So first of all, we provided guidance for the fourth quarter and the full-year for adjusted net income which includes the impact of the fair value mark. And so, that guidance certainly takes into consideration our basically our forecast based on the forward curve for rates. And in fact, if you noted on the press release and the earnings talk we actually mentioned the forward rates that we use specifically. What's happened since the end of the quarter as you know is that on the very short end because our loans are about three quarters year duration that those rates had actually come down, which will benefit us. And then, on two years and longer which is where our asset-backed notes are, those rates have actually gone up slightly which also will benefit us. But we factored those elements into the guidance that we've provided for the quarter.

Okay, thanks. Sorry?

And then John, just have one quick thought on that and then circle back. I forgot to mention one piece. There is obviously the elements of kind of interest rates and then there is just the elements of the underlying performance of the loan. So, one of the things hopefully that you picked up in Jonathans comments is just the improved performance year-over-year in terms of the performance of the loans and that's really one of the things that drove our performance. So, just wanted to make sure that's not loss because certainly interest rates are a part of it. But a lot of the other things in terms of the high quality asset that we create are captured in that change in fair value. I forgot to answer one specific part of your prior question; I apologize. John, you asked about Florida and New Jersey. And so, specifically yes, we think there is still a lot of opportunity there. In terms of the number of locations that you would see us put down next year, it would be just proportionately in Florida and New Jersey because we've still only been there less than two years in Florida and about a year in New Jersey. So, your hypothesis is correct, that is an area that would get a higher investment from us relative to the other states.

Okay. And then, I appreciate all that color, it's very helpful. The final question is very high level. There's been some changes in terms of legislative landscape and then you have the elections in front of us and I'm wondering just how does that impact the competitive environment and does that afford you guys any opportunities going forward?

Yes. So that, that's a great question. We would say first of all when we look at a lot of the legislative activity, we think it's a really good thing for consumers and as you know we're a very much a mission-driven company that seeks to create positive outcomes for people that we deal with. So, we're absolutely supporters of the legislative activity that is meant to try to figure out how to keep people from borrowing at triple digit rates. So, that would be the first thing. In terms of just trying to think about how that legislative -- how those legislative efforts can impact us or our election. We built a business that does really well regardless of what's happening from a legislative perspective or who is in the White House. So, our business grew at a very high rate. When there was a democrat in the White House, our business continues to grow at a high rate with the republican in the White House. So, we think that our efforts that have our average APR be at 36% but that sorts I think that allow us to focus primarily on the business as opposed to having to be too concerned about what's happening from a legislative or electoral perspective. So, we're certainly keeping a close eye on those things but it's not anything that's keeping us up at night.

Alright guys great, thank you very much.

Thank you, John.

[Operator Instructions] There are no further questions at this time. I will now turn the call over to Raul Vazquez for closing remarks.

Well, on behalf of the opportunity, I want to thank you again for joining us on today's call. And we certainly look forward to speaking with you again soon. Thank you, everyone.

This concludes today's conference. And you may disconnect your lines at this time. Thank you, for your participation.