Greetings and welcome to Oportun Financial’s Third Quarter 2024 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Dorian Hare, Investor Relations. Please go ahead, Dorian.

Thanks, and hello everyone. With me to discuss Oportun’s third quarter 2024 results are Raul Vazquez, Chief Executive Officer, and Jonathan Coblentz, Chief Financial Officer & 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 secured term loan 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 ending September 30, 2024. 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 record 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 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 third quarter 2024 financial supplement and the appendix section on the third quarter 2024 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 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 Raul.

Thanks Dorian, and good afternoon everyone. Thank you for joining us. Overall, I'm pleased with the progress demonstrated by our third quarter results. The four headlines from the quarter in my view were lower charge-offs, return to growth, continued cost reduction, and higher profitability. First, we had lower charge-offs. Our annualized net charge-off rate was 11.9%, which was 26 basis points better than the lower end of our guidance range. When measured in dollars, our quarterly net charge-offs declined year-over-year for the fourth consecutive quarter, in this instance by 6%. I'm also pleased with the progress we continue to make with our 30 plus day delinquencies, which were down 34 basis points year-over-year to 5.2%. That's the third consecutive quarter of year-over-year declines. Improvement in our credit performance is being driven in part by our implementation of our V12 credit model, which leverages the performance data of our portfolio over the last two years under higher inflation. We started using V12 to underwrite new borrower applications in January and recently implemented V12 to underwrite applications from returning borrowers, so we expect to see further improvements in credit performance in 2025. Second, we're ready to return to originations growth. After several consecutive quarters of origination levels that were lower than the prior year's levels, originations at $480 million during Q3 were virtually flat year-over-year. This is despite continuing to de-risk the business by decreasing average loan sizes, which were down 18% year-over-year from $3,975 to $3,244. Third, we continued progress on expense reduction actions. Our 3Q GAAP operating expenses were $102 million, down 17% year-over-year, and we are reiterating our expectation to reduce GAAP operating expenses to $97.5 million or less by the fourth quarter. And fourth, each of these factors led to higher profitability. We generated $31 million of adjusted…

Thanks Raul and good afternoon everyone. As Raul mentioned, we're pleased with the progress demonstrated by our third quarter results and we're looking to carry that positive momentum into the fourth quarter and 2025. As shown on Slide 7, Oportun delivered total revenue of $250 million and we were profitable on an adjusted basis for the third consecutive quarter with adjusted net income of $0.9 million for adjusted EPS of $0.02. While maintaining prudent credit discipline, originations of $480 million were down only 1% year-over-year. Sequentially originations were up 10%, aligning with the typical seasonal pattern for a ramp throughout the year. Total revenue of $250 million declined by 7% driven principally by a 7% decline in our average daily principal balance under our conservative credit posture. Our total net decrease in fair value of $132 million was primarily driven by current period charge-offs of $82 million and a $35 million non-cash mark on our ABS notes, due to their weighted average price increasing from 96% to 97.8% as benchmark interest rates declined and credit spreads tightened significantly. As a reminder, we elected last year to stop fair valuing our new debt financings and expect their fair value impact to be minimal by the end of 2025, as the prior financings near maturity. Interest expense of $56 million was up $9 million year-over-year, primarily driven by an increase in our cost-to-debt to 7.8% versus 6.3% in the year ago period, reflecting the higher rate environment. Net revenue was $63 million down 26% year-over-year primarily due to the total revenue decline, non cash marks on our ABS notes and a higher interest expense. Turning now to operating expenses and efficiency, we continue to see the benefits of our expense reduction initiatives. Our $102 million in total operating expenses in Q3 reflected…

Thanks, Jonathan. To close, I'd like to emphasize three key points. First, we're pleased with the progress demonstrated by our third quarter performance and our momentum thus far into the second half. We expect to generate second half adjusted EBITDA levels at our guidance midpoint that are almost 90% higher than the first half and to also be markedly more profitable on an adjusted net income basis. Second, with the completion of the credit card sale and refinancing of our corporate debt, we see no impediments to the full recovery of our business. And finally, our momentum is quite strong heading towards 2025 where we expect an improved credit performance, ongoing cost discipline and a return to originations growth will enable US to generate $1 to $1.25 in adjusted EPS and an adjusted ROE in the teens. To wrap up, I want to thank all of our team members in our retail locations, our contact centers and our corporate employees for their commitment and contributions. With that operator, let's open up the line for questions.

Certainly. We'll now be conducting a question and answer session. [Operator Instructions] Our first question today is coming from John Hecht from Jefferies. Your line is now live.

Afternoon guys. Thanks very much for taking my questions. I think I have two for Jonathan and one for you, Raul. The two for Jonathan are, Jonathan, you mentioned the fair value marks on the ABS should be wrapped up by the end of next year. Do you have a sense of what's left to mark on that based on the current mark versus the fair -- versus I guess par?

Yes. And we actually have a slide for that, John. Thank you for the question. If you take a look at slide -- hold on. If you take -- it's at the back of the earnings deck and it's -- I'm just flipping there right now, sorry. It's Slide 34. If you look at Slide 34, in the middle, we have asset backed notes at fair value and it says cumulative fair value mark-to-market adjustment, and for the notes that is $30.8 million, so $31 million, right. So we're not making any more. We're not electing fair value for any new debt. So this existing fair value debt is just going to pay down. It will be mostly paid off by the end of next year and between then and now, I would expect to take most if not all of that mark.

And then second question for you. You mentioned a priority of delevering the business. How do you got -- what do you guys look at in terms of leverage ratios or primary leverage ratios, I guess, and what would kind of the longer term target be for that?

Sure. So if you take a look at Slide 16 of our deck, it's where we have the unit economics model that we've been trying to -- that we're focused on and – yeah -- thank you, Raul. And there it indicates that our target leverage ratio which we're currently above is 6 to 1 and so the -- I mentioned in my remarks on the call, John, that this new facility, one of the things we really like about it is we can repay $60 million of the principal balance with without paying a prepaid penalty, so that would take the debt from $235 million to $175 million. We've talked about the fact that this year, every month we've paid down 5.7 million of corporate debt principal and our cash flow position is only going to be stronger -- cash generation is only going to be stronger next year given the increased profitability that we're projecting. So if we pay down that debt to $175 million over time, we expect that we'll get to our target 6 to 1 leverage ratio and we're comfortable with that as a target for us.

Okay, and then Raul, question for you. You guys are leaning back into growth, which is nice. And you know, over time you guys have built up channels. You got the Meta, you got DolEx and then you have Barri, maybe talk about -- and then you've got your own branches, you've got your own online presence. Maybe can you talk about where the kind of focus for the source of growth will come, given all those opportunities?

Thanks for the question, John. So we feel that we've got all the things that we need to get back to target growth rates of 10% to 15% for the portfolio. To your point, our own kind of multichannel business, our physical stores, our contact centers, our digital channels, we know those are going to serve us well. And to answer your question, we think that really there is an opportunity to continue to lean into our own physical channels. One of the things that we'd like to do is to really put down some physical locations in some of the states where we don't have locations today. The bulk of our locations today are in California and Texas, but we're able to lend in over 40 states, so one of the things that we're looking at next year is putting down some physical locations in states like Georgia, Pennsylvania, Ohio. Think of all of the large populated states that were just a focus in the election -- in this last election, we think there's an opportunity for us with physical locations to drive awareness, consideration and growth of our portfolio. On top of that, the lending as a service opportunity like you said, DolEx, Barri and now Western Union, we think that's also a great opportunity and something we're going to lean into next year.

Okay, great. Thanks guys.

Thank you John.

Thank you. [Operator Instructions] Our next question is coming from Gowshi Sri from Singular Research. Your line is now live.

Thanks. Can you guys hear me?

Yes, we can.

Congratulations on the quarter.

Thank you.

In terms of customer acquisition, I mean you just mentioned physical location -- invested the CapEx into physical location. I know it has been trending down to $118. So can you provide more insight into the drivers, into the significant reduction in customer acquisition costs? Is it primarily a decline due to returning customers or is this a shift in marketing channel mix and what is it going to -- and how is it going to trend, looking into 2025?

We think it's the product of a couple of things. First of all, we've reduced sales and marketing expenses. As we were looking at reducing OpEx throughout the business, one of the things that we also looked at was just sales and marketing expenses which are down 8% year-over-year. You combine that then with the fact that V12 in particular for new applicants has given us an opportunity to really lean into growth, overall growth in loans was 22% for the quarter. So when you combine the lower OpEx, the higher growth in loans, that's what really drives that CAC to the record low of $118. As we do return to growth, we want to invest more in marketing. So I'm not necessarily asking the team to continue to have us at these low levels. What we're really looking for is a return on that investment, right. This is much more of an investment than an expense. So as we mentioned during our comments, as we are now comfortable returning to growth, we'd really like to spend more. Along with the seasonal patterns of our business, we spend more in Q4 on marketing and really drive portfolio growth as opposed to driving CAC lower.

Okay, thank you. And my follow up is on your EPS forecast for 2025. It's between $1 and $1.25. Given your all your unit economics model and now your forecast for origination growth, what is primarily driving between the lower bound and the upper bound of that estimate?

Yeah, when we look at the adjusted EPS of $1 to $1.25, we're confident we can deliver that. So there are a couple of things that we think are going to help us deliver that. Number one, this return to growth, that will help us drive the portfolio higher, it will start to really help with revenue. We are really proud of our Q through – sorry, Q3 performance, in particular, the improvement in profitability. When you think about the fact that revenue was down $18 million and we still improved profitability. So when we think about next year, driving originations growth, again, driving growth in the portfolio will help us reverse that trend in revenue, so that's number one. Number two, losses; we expect losses to continue to come down. We shared that we expect losses to be in the 11% to 12% range, so that's certainly going to help us. And then finally we're going to continue to be very disciplined in OpEx. So when we look at an exit rate of $97.5 million and we continue to be disciplined in that area, we think that's really what's going to give us the opportunity to deliver that adjusted EPS in that range.

Awesome. Thank you again for taking my questions. I'll take the rest offline.

And thank you so much.

Thank you. [Operator Instructions] Our next question is coming from Vincent Caintic from BTIG. Your line is now live.

Hi, good afternoon. Thanks for taking my questions. So actually follow up questions kind of related to the growth aspect of it. So it's nice to be able to see that we're now at the inflection point for year-over-year growth rates. I was wondering, you mentioned in the prepared remarks that you are seeing macro improvements to the economy and so if you could maybe talk about the drivers of that growth rate, specifically if you could talk about your underwriting posture and any changes to that? And I'll ask my related question now, as you're growing, what sort of, I guess, risk adjusted margins and loss rates should we be expecting with the growth you're achieving? Thank you.

So I'll take the beginning of those. I'll have Jonathan talk about the risk adjusted margins. In terms of our return to growth throughout the year, we've been talking about the fact that there were a few things we were going to be looking for. Number one, we'd want to look at our own metrics and when we look at where credit is trending, we look at the performance that we've been able to drive in delinquencies. We shared that 30 plus delinquencies were down 34 basis points year-over-year. That gives us confidence that our underwriting adjustments are working. V12, we shared in our comments that we started using V12 for underwriting the new applicants. We started that at the beginning of the year and we've been very, very pleased with the improvement in V12 versus V11. We're now using that for the returning population, which is historically where we've had 75% to 80% of our portfolio has been in the hands of returning borrowers. So to be able to apply this much improved risk model V12 relative to V11 to the returning portfolio, that's one of the things that gives us confidence in being able to return back to growth. So our internal metrics are one of the things we were going to look at. Number two, we wanted to continue to see inflation come down and I think now there's broad recognition that the Fed has done a fantastic job trying to get that back to their target rate. So to see inflation start to come down, we know gives more breathing room in the budgets of our borrowers. And then finally we were going to look for other macro indicators that the economy would be constructive. So when we look at the unemployment rate and in particular how strong the job market is for blue collar workers and we look at fuel prices, fuel prices continue to be low, we know that's one of the things that also makes a big difference in our borrowers’ ability to make our payments and to be able to just make their paycheck stretch in all of the ways that they need, those are the things that really give us confidence returning to originations growth, our internal metrics and then what we see in the macro. I'll pass it over to Jonathan now.

Thanks, Raul. So Vincent, if you want to take a look at Slide 17, which is our unit economics model, you asked about risk adjusted margin and loss rates, so we gave guidance for 2025 that we expect our annualized net charge-off rate to be between 11% and 12%. And then on the unit economics slide, right, as you've seen for several quarters now, we've had very resilient total revenue at around 36%. We've had stable cost of funds at 8% and that takes us to a net interest margin before charge-offs of 28%. So if we take that 28% and we're 11% to 12% charge-offs for next year that would imply 16% to 17% risk adjusted NIM.

Okay, great, that's very helpful. Thank you for all that detail. And so it sounds like so you have significant model improvements and you're now reflecting that there's some macro improvements here, but you're not really changing, I guess, your underwriting posture in terms of loosening up a lot. It's actually so it's your model improvements and the macro improvement and you're still otherwise remaining tight. So there's sounds like there's opportunities basically and you're still being very conservative, if I'm understanding that correctly.

That's absolutely right. We would not characterize this growth as being driven by opening up from a portfolio perspective. What we've seen is the decisions that we made over the last few quarters in terms of reducing OpEx, in terms of having a tight credit box, all of that is creating a trajectory for the business where by now adding a bit of growth with the current credit box, by adding a bit of growth, what we're able to do is to drive improved profitability. So when we look at 2025, as we've shared now with the preliminary view into 2025, we expect that those lower losses, that ongoing low level of OpEx, combined with a bit of growth really delivers that improved profitability next year relative to our really good performance this year.

Great. That's super helpful. Thanks very much.

Thank you.

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

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