Welcome to Oportun Financial Corporation’s First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the speakers’ 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 Oportun’s first quarter 2023 results are Raul Vazquez, Chief Executive Officer; and Jonathan Coblentz, 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 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 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 March 31st, 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 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 non-GAAP to GAAP financial measures is included in our earnings press release, our first quarter 2023 financial supplement and the appendix section of the first quarter 2023 earnings presentation, all of which are available at the Investor Relations section of our website at investor.oportun.com. In addition, this call is being webcast, and an archive version will be available after the call, along with a script of our prepared remarks. With that, I will now turn the call over to Raul.

Thanks, Dorian, and good afternoon, everyone. Thanks for joining us. Today, I’ll discuss our first quarter financial performance, share how we’re managing through this dynamic macroeconomic environment by minimizing costs and maximizing efficiency, and I will provide an update on our strategic initiatives. Let me begin with our Q1 performance. We generated total revenue of $260 million, exceeding our guidance range and up 21% year-over-year, reflecting higher than anticipated average daily principal balance and higher non-interest income from our Savings product. Our first quarter annualized net charge-off rate of 12.1% also outperformed our guidance range of 12.5% plus or minus 15 basis points. As a reminder, starting last July, we began to significantly tighten our underwriting standards to address the impact of inflation on our members. We’re pleased that the first payment defaults and delinquencies on our post-July vintages continue to perform near or better than 2019 pre-pandemic levels. Finally, by driving higher revenue and exercising disciplined expense management, we produced a narrower adjusted EBITDA loss of $24 million compared to the $49 million to $44 million loss guidance range that we provided. We are focusing on adjusted EBITDA in 2023 because it demonstrates the cash flow generation capability of the business and it is not impacted by swings in fair value. Jonathan will cover Q1 adjusted net income and the impact of non-cash fair value mark-to-market changes. Overall, we made good progress this quarter. There is still work to be done, and the entire team is focused on driving more value for our shareholders. Let me shift now to how we are managing the business in this uncertain macroeconomic environment. The headline is that we are taking a conservative stance and are focused on the things that we can control, while carefully monitoring the economic environment. I’ll go into…

Thanks, and good afternoon everyone. As Raul mentioned, Oportun delivered solid performance in the first quarter versus our expectations. I am optimistic that Oportun will emerge as a more sustainably profitable business, given our front book’s strong performance, our more efficient cost structure, and shrinking back book. In the first quarter, we generated $260 million of total revenue, up 21% year-over-year, as shown on slide eight, and $88 million of adjusted net loss, or $2.60 of adjusted net loss per share. Higher net charge-offs, non-cash fair value mark-to-market declines and higher interest expense drove the earnings decline, partially offset by revenue growth and lower operating expenses. Our aggregate originations were $408 million, down 49% year-over-year, reflecting our ongoing credit tightening actions and our focus on high-quality originations. Net revenue was $5 million, down 98% year-over-year primarily due to non-cash charges including a net change in fair value decline of $216 million. This included the non-cash impact of declining fair value mark-to-market adjustments on our ABS notes and our loans of $86 million, and net charge-offs of $92 million. Higher interest expense also contributed to the net revenue decline, which was partially offset by the higher total revenue. The fair value price of our loans decreased to 100.3% as of March 31st, and resulted in a $37 million mark-to-market decrease. The reduction in fair value of our loans was driven by an increase in our assumption for remaining cumulative charge-offs, due to higher charge-offs on our back book, partially offset by a lower discount rate due to lower interest rates and tighter credit spreads for our ABS notes. The $49 million mark-to-market increase in our asset-backed notes, which contributed negatively towards our earnings, resulted from a 158 basis point increase in weighted average price to 94.1%. Interest expense of $39 million…

Thanks, Jonathan. As we’ve communicated while we perform solidly and made progress in the first quarter, we remain highly cognizant of the uncertain macro environment and the related credit implications. The leadership team and I have made the necessary adjustments to create a more efficient and more profitable business. With the significant expense reductions we spoke about today. Oportun has enhanced its cash flow in comparison to our prior forecast, which we expect will carry over into 2024 and beyond. With that, operator, let’s open up the line for questions.

Thank you and ladies and gentlemen at this time we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from John Hecht with Jefferies. Please state your question.

Afternoon, guys. Thanks very much. I think you gave enough information with respect to the, the kind of net saves over the course of the year, but maybe can you just give us, some detail about the cadence of the cost saved just so we, get it in our models as accurately as possible.

Sure, John. It’s Jonathan. We said in our remarks that for the fourth quarter, we expected that our GAAP operating expense would be around, excuse me, about $125 million. So again, $125 million, so from a modeling perspective, I think it’d be very reasonable to assume that it, it kind of stepped down from the current level, over the next couple quarters.

John, this is Raul. The other way to think about this from a modeling perspective is that we start to see the impact of the cost reduction about three months after, we take the action. So the February action means that the expenses will really start to -- I’m sorry, the savings of the February action. We start to see this month and really in June and the savings from the action that we took today, we’ll start to see in August. So that -- that’s the other way to think about it in terms of say monthly expense savings and what quarter you’d start to see the savings in.

Okay, that’s very helpful. And then you guys have -- a lot of different channels you can lean on for growth. You’ve got the bank partnerships, some retail partners, your own store base, your own kind of organic digital channel where like how do you think about the mix of that over the next few quarters, given that you’re kind of, fine tuning your business? Is there any of those channels you’re relying more on or less on given call at the backdrop?

Well, I think we’d say right now that the three channels that we’re relying the most on are certainly, our bank partnership channel. That continues to be a channel that we’re pleased with. We’re also pleased with our retail channel because that generates quite a bit of traffic without necessarily having to spend outbound marketing in this environment. And then finally online continues to be a good channel for us. The reduction that we have taken in sales and marketing and we did share that sales and marketing is down about 45% year-over-year. The bulk of that cut is in digital. So although online continues to be a strong channel for us, we have seen reduced applications and loans there as we cut the marketing there, John.

Okay. And then you guys have talked about obviously tightening and the benefits that we should see in that over the coming quarters and months. Maybe how do you measure the incremental credit quality? Like maybe specifically what terms or underwriting factors may be changed and how does -- how do we see that or how do you characterize that in the front book?

Yes, so, the things that we’re really focused on in originations today are really number one, focusing on repeat borrowers, those who’ve had success with our loans in the past, and then number two, across both repeat and new borrowers, really focusing on those who have higher free cash flow. Although inflation is coming down, the decline is very slow, right. Inflation continues to be persistent. So we think the best thing to do right now is continue to focus on those applicants, who have high free cash flow. In terms of what we look at to measure success, it’s really some of the content that we put in the earnings deck. And that’s really number one. When we look at our originations over the last nine months, you can see in the first payment defaults, that’s page nine of our earnings deck, that they continue to be below 2019. That’s the green line on that chart. And you can see in that chart, the green line continues to be below 2019. So that gives us confidence. And then on page 10 of the deck, we also shared what the 30 plus day delinquency rates look like from September to January. And all of those continue to be better at or near 2019 levels. So that’s the other thing that really gives us confidence, John, when we think about the front book, right, those loans that we’ve made since the tightening. And then finally, though, you didn’t ask, when we look at the overall picture, we look at a declining back book, and we chose in this quarter to show it to you as just dollars to really try to emphasize the point of how much that back book is shrinking. So you can see that it was $1.6 billion at the end of Q1. It will decline by $400 million this quarter and then another $500 million in the remainder of the year. So as that continues to decline, the front book becomes a bigger and bigger proportion of our book overall and we’ll start to see a better delinquency and losses picture emerge.

Great. Thanks for all that detail. Thank you.

Thank you, John.

Our next question comes from Rick Shane with JPMorgan. Please state your question.

Thanks guys. Really two questions. One is that when we looked at the repayment rate for the first quarter, it seems a little bit lower than we would have necessarily expected given seasonality and given some of the tightening in terms of credit. Is that just noise or is there something going on there that we should be aware of?

Hey Rick, it’s Jonathan. I think that’s consistent with what we’ve been saying about tax returns, tax refunds being lower for our customers. So with less cash flow, you would see seasonally lower payment rates.

And Rick, this is Raula. As you know, you’ve heard us say this over the years, that tax refund tends to be one of the largest checks that our members get all year. And a data point that I read last week indicates that tax refunds ended up being 28% lower year-over-year. So as you can imagine, if that’s one of the biggest checks our members get and it’s almost 30% lower, that would impact their -- the ability to repay at a rate that we’ve seen historically in Q1.

Got it. And obviously that rolls into the Q2 credit outlook, which makes sense.

That’s right.

The other thing obviously that stands out is when you look at the vintage curves clearly under performance of the 2021 vintage, but what stands out to me is that normally by about this time you start to see the curve flatten out and it continues to really have a upward sloping trajectory. When -- what should we be looking for to see that start to inflect?

Well, I think that’s the part of the book that, that we’re actively managing, Rick. That’s if you think about 2021, that was the vintage that really, really felt the impact of high inflation that felt the impact of just all the elements that we’ve been talking about higher rents, higher gas prices, that’s the curve that we would’ve seen really start to flatten out in a normal tax season. So yes, we’ll have more information to provide next quarter because that’s really where our collections and analytics teams are focused is just figuring out how do we get in touch with those members? How do we figure out the best way to help them so that that way they can get back to the normal payment behavior that we would expect to see?

Got it. And when we think about these things normally, what we would be looking for is some sort of slowing of the year-over-year change and rate of delinquencies. Is there anything that when you look at that vintage from, because again, we can see the charge-offs, but we can’t see the delinquency trends on a vintage basis. Are there indications there that start to give you comfort that over the next three months or six months that curve will start to flatten out other than -- just anything other than burnout?

Yes. Well, we’ve always felt that our members have a high willingness to pay. The challenge anytime they become delinquent is a challenge say and the ability to pay. So the couple of things they give me confidence, Rick, when I think about this, number one is, you know, because you watched this very carefully and we all got information just a few days ago on this, the employment market continues to be exceptionally strong. Number two, though, I did mention earlier, inflation is coming down slowly. It’s just -- it ends up being quite sticky. The good news is it is coming down, right. So we think that a combination of a strong employment market with inflation starting to abate a bit, and then the actions that we can take on our side, whether it’s a temporary reduction in payments, other things just to help someone really improve their cash flow over the span of say, 30 days. Those are the sorts of things that we’ve seen help us in the past when someone is dealing with a temporary problem in making their payments. So that’s really what gives us confidence is. Things are improving a bit economically while the job market stays very strong.

Got it. Okay. Very helpful. Thank you.

Thank you, Rick.

Thank you. [Operator Instructions] Our next question comes from Sanjay Sakhrani with KBW. Please state your questions.

Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. The first one I had was just around the front book loss rates that you expect. If I were just to do the math of the first half versus your full year guidance, it implies a back half of the year, about 10.5% at the midpoint. Just curious as to how we should think about what part of that is from the front book versus the back book and from a longer term perspective, what is a more normalized charge off rate you expect to get to?

Yes, Steven, great question. So, I think our long-term goal ultimately is to get back to our 7% to 9% charge-off range. We’ve been pretty consistent about articulating that. In terms of the second half of the year I agree at a high level with your math in that our guidance comparing the full year to 1Q actuals and 2Q guide suggests lower levels of losses in the second half of the year. I won’t state a specific number about that, but you can do the math and kind of back into it. And then you know, the back book is still contributing, but it’s going to contribute less. Right? As Raul mentioned a moment ago, and you can see this on slide 10 of our deck, we’ve shown the expected dollar decline of the back book. It’s about $1.6 billion at March 31st, and by the end of the year it’s going to have declined by $900 million to about $700 million outstanding. So, we expect less and less contribution.

Got it. And then just I’m curious as to within the full year charge-off guidance, what type of assumptions are you using on the macro side? Has anything changed relative to the prior guidance on that?

No, I think from a macro perspective, we haven’t changed our assumptions in terms of just continuing to see a strong employment market for our members. I think as we’ve talked about in the past there are layoffs certainly that are taking place throughout the industry, but our sense is that for our member, right, you’re typical kind of blue collar worker the employment market continues to be quite strong. So, we haven’t changed our assumption regarding a robust employment market for our member.

Got it. And the final question I have is just around the raised EBITDA by about $15 million, $20 million. How much of that was attributed to this quarter, perhaps outperforming versus, I guess, back the remainder of the year being better? Thanks.

I think it incorporates all of that, right? We expect over $40 million of the expense saves that we announced -- the incremental expense saves to hit in 2023. And that’s potentially offset by potentially higher charge-offs and potentially higher interest expense. We always look at a range of assumptions in setting guidance and consider multiple different scenarios and coming up with a total guide.

But Steven, I think underlying that is a really high degree of confidence that we have, that our business is improving its profitability every single quarter, starting in this quarter, as you could tell, with the guidance for adjusted EBITDA being positive. And then to your point, there are significant improvements expected in Q3 and Q4, which again, right, are indicated by the full year guidance were adjusted EBITDA and the fact that we did raise that guidance.

That’s right. If you looked at what our guidance implies, it suggests over $80 million of adjusted EBITDA on the second half.

Got it. Great. Thanks for taking my questions.

Thank you, Steven.

Thanks.

Thank you. There are no further questions at this time. I’ll hand the floor back to Raul Vazquez for closing remarks.

I want to thank everyone once again for joining us on today’s call, and we look forward to speaking with you again soon.

Thank you. And that concludes today’s conference. All parties may disconnect. Have a great day.