OPRT - NASDAQ

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" Sidoti & Company, LLC

" Jefferies LLC, Research Division

" JPMorgan Chase & Co, Research Division

Greetings, and welcome to the Oportun Financial Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dorian Hair of Investor Relations. Thank you. You may begin.

Thanks, and hello, everyone. With me to discuss Oportun's third quarter 2025 results are Raul Vazquez, Chief Executive Officer; and Paul Appleton, our Treasurer, Head of Capital Markets and Interim Chief Financial 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, included projections, adjusted ROE attainment and expected originations growth, 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 ending September 30, 2025. 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 future 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 2025 financial supplement and the appendix section of the third quarter 2025 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 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. Our third quarter results were strong, marking our fourth consecutive quarter of GAAP profitability. We met or exceeded all of our guidance metrics, reflecting continued operational discipline and strong execution across the business. The 4 key headlines from the quarter are: continued GAAP profitability, improved credit performance, ongoing expense discipline and an enhanced capital structure. Let's start with profitability. We were GAAP profitable once again in Q3 with net income of $5.2 million, reflecting $35 million of year-over-year improvement. Our ROE was 5%, up 40 percentage points year-over-year. We achieved these results through continued disciplined expense management, improved credit performance and growth in originations. Based on our performance through the first 3 quarters, we remain confident that we'll deliver on our promise of full year 2025 GAAP profitability as we committed to at the start of the year. This includes our expectation to be GAAP profitable in the fourth quarter. Turning to credit performance. Our annualized net charge-off rate was 11.8%, a modest improvement from 11.9% in the prior year period. Our 30-plus day delinquency rate also improved year-over-year by 44 basis points to 4.7%. On the expense side, we reported $91 million in operating expenses, down 11% year-over-year. That represents our second lowest quarterly expense level since becoming a public company in 2019 and our lowest ever on an adjusted basis. Thanks to our planned reduction of second half 2025 marketing and other expenses, we now expect full year 2025 GAAP operating expenses of approximately $370 million, a $10 million improvement from our prior outlook and a $40 million improvement from 2024. Finally, we took meaningful steps during and after the quarter to further strengthen our capital structure. We executed ABS financings at weighted average yields below 6% in August and October and proactively repaid higher cost corporate debt. Additionally, we expanded our warehouse financing capacity in October by adding a new facility and modifying an existing one, extending average maturity and reducing our average cost of capital. Our debt-to-equity ratio was 7.1x at the end of Q3, down significantly from the 8.7x peak level in the prior year quarter, and we remain on track toward our target of 6x. With our Q3 highlights covered, I'll now review how we're executing against our 3 strategic priorities. improving credit outcomes, strengthening business economics and identifying high-quality originations. Starting with credit outcomes. On our last earnings call, we shared that the first half of the year saw a higher mix of new members than expected and that we were recalibrating originations more toward returning members. Our efforts were effective. 70% of Q3 originations went to returning members, up from 64% in the first half. Although our third quarter 30-plus day delinquency rate of 4.7% came down by 44 basis points year-over-year, it was at the higher end of our internal expectations. Observing this trend, we took additional credit tightening actions during the quarter, which are ongoing. This included leveraging a new early default model to enhance predictiveness in using our bank transaction model to lower loan amounts and enact hard declines where needed. While these actions help protect portfolio quality, they led to slightly lower originations in Q3, and we expect continued impact in Q4 origination levels. Accordingly, we now expect full year 2025 originations growth in the high single-digits percentage range, slightly down from our prior expectation for growth of approximately 10%. Turning to business economics. We continue to make strong progress on efficiency and operating leverage. Our risk-adjusted net interest margin ratio improved 231 basis points year-over-year to 16.4% -- as a reminder, that metric includes portfolio yield, net charge-offs, cost of capital and loan-related fair value impacts. Our adjusted OpEx ratio improved 133 basis points year-over-year to 12.6% of our own portfolio. That's a new record for cost efficiency and within 8 basis points of our 12.5% target. Together, these improvements drove strong operating leverage, lifting ROE by 40 percentage points year-over-year and sharply increasing adjusted EPS from $0.02 to $0.39. Finally, on identifying high-quality originations, even as we maintain a conservative credit posture, we grew originations by focusing on members with higher free cash flow and on channels that deliver the strongest results. Q3 originations were $512 million, up 7% year-over-year, marking our fourth consecutive quarter of growth under a disciplined credit approach. Our referral program continues to perform well, driving 25% growth in referral-based originations to $31 million in the quarter. And expanding our secured personal loans portfolio remains a key pillar of our responsible growth strategy. SPL originations increased 22% year-over-year, and our secured portfolio grew 48% year-over-year to $209 million, now 8% of our own portfolio, up from 5% a year ago. Through the first three quarters of this year, secured personal loan losses have run over 500 basis points lower compared to unsecured personal loans. Altogether, these actions reflect our commitment to balancing growth, credit quality and efficiency, an approach that's driving consistent improvement in Oportun's profitability and overall momentum. With that, I'd like to now preview our updated 2025 outlook. We continue to closely monitor key indicators such as inflation, unemployment, fuel prices and evolving government policies alongside our internal performance metrics. Our members have remained remarkably resilient despite ongoing macro uncertainty and our third quarter results reflect that resilience. With that being the case, our 30-plus day delinquency rate did come in at the high end of our internal expectations, as I mentioned earlier. While we tighten credit accordingly, we do anticipate these trends to result in a slight increase at the midpoint of our full year 2025 annualized net charge-off rate by 20 basis points to 12.1%, reflecting approximately $5 million in higher anticipated losses. This includes a 12.45% annualized net charge-off rate expectation at the midpoint of our guidance for the fourth quarter. We expect this elevated loss rate to be temporary, impacting early 2026 before easing by next year's second quarter as recent tightening actions take hold. Finally, we've raised our full year adjusted EPS guidance to a range of $1.30 to $1.40 per share, up 4% at the midpoint, reflecting strong year-over-year growth of 81% to 94% -- this increase is driven by continued expense discipline and a lower cost of capital, which together strengthen our profitability outlook for 2025. Oportun itself has become far more resilient with sustained GAAP profitability, improved operating efficiency and a clear path toward our 20% to 28% target ROEs. Looking ahead to 2026, we plan to stay focused on our 3 strategic priorities, which gives us confidence that we'll continue to grow adjusted EPS next year. With that, I will turn it over to Paul for additional details on our financial and credit performance as well as our guidance.

Thanks, Raul, and good afternoon, everyone. Turning to Slide 5. We delivered a strong third quarter, coming in $2 million or 6% above the top end of our adjusted EBITDA guidance, driven by lower operating expense and lower interest expense. In addition, we met guidance for total revenue and net charge-offs and delivered another quarter of strong GAAP and adjusted EPS performance. Turning now to Slide 6. We continued our momentum with our fourth consecutive quarter of GAAP profitability, generating $5.2 million in net income and diluted EPS of $0.11 per share. This marks our seventh straight quarter of adjusted profitability with adjusted net income of $19 million and adjusted EPS of $0.39 per share. While maintaining credit discipline, originations of $512 million were up 7% year-over-year, slightly below our prior expectations due to the credit tightening actions Raul mentioned a moment ago. Total revenue of $239 million declined by $11 million or 5% year-over-year. This decline was primarily due to the absence of $9 million of credit card revenue in the prior year quarter. As a reminder, we completed the sale of our credit card portfolio in November of last year, a transaction that has been accretive to our bottom line. Net decrease in fair value was $77 million this quarter, primarily due to $80 million in net charge-offs, which declined 3% from the prior year quarter. In addition, sustained lower ABS funding costs drove a favorable $7 million mark-to-market adjustment on our portfolio. Third quarter interest expense was $57 million, up $1 million year-over-year as sub -3% pandemic era ABS issuances continue to pay down. However, cost of debt was lower sequentially, decreasing from 8.6% in the second quarter to 8.1% in the third quarter, closely aligning with our 8% unit economics target. This improvement reflects the positive impact of recent lower cost ABS issuance, the refinancing of higher cost ABS debt as well as the repayment of corporate debt, which I'll cover more in detail shortly. Net revenue was $105 million, up 68% year-over-year, driven by improved fair value marks and lower net charge-offs more than offsetting lower total revenue. Operating expenses were $91 million, down 11% from the prior year, reflecting our ongoing cost discipline. Year-to-date, we've reduced operating expenses by $43 million. As Raul mentioned, with additional cost-saving measures identified, we now expect full year 2025 operating expenses to be approximately $370 million, including approximately $92 million in the fourth quarter for a 10% full year reduction from 2024. Adjusted EBITDA, which excludes the impact of fair value mark-to-market adjustments on our loan portfolio and notes was $41 million in the third quarter. This reflected a year-over-year increase of $10 million, driven by cost reductions and credit performance improvement. Adjusted net income was $19 million, up $8 million year-over-year, driven by our reduced operating expenses along with improved credit performance. Adjusted EPS increased sharply year-over-year from $0.02 per share to $0.39 per share, while our adjusted ROE improved 19 percentage points to 20%, which I will discuss further when I review our unit economics progress. GAAP income before taxes of $14 million increased $54 million year-over-year. This was our highest level of pretax income since the first quarter of 2022. I'll note that while our GAAP net income of $5 million increased sharply by $35 million, it was approximately half of what it would have been due to a $5 million unfavorable revision to tax expense from an annual R&D tax credit study. The revision primarily drove our effective tax rate up to 64% compared with 24% in the prior year period. Despite the higher rate, diluted EPS of $0.11 per share also impacted by the tax revision still increased by $0.86 per share year-over-year. Next, I'd like to provide some additional color on our credit performance in Q3. Our front book of loans originated since July 2022 continues to perform quite well, while our back book of pre-July 2022 loans continues to roll off. As you can see on Slide 7, our more recent credit vintages have generally outperformed their predecessors. And as a result, the losses on our front book 12 months after disbursement are now running approximately 700 basis points or more lower than our back book. Furthermore, you can see our annualized net charge-off rate for the quarter by front book versus back book on Slide 8. In Q3, the front book had an annualized net charge-off rate of 11.7%, near the 9% to 11% net charge-off range that we target in our unit economics model. The back book continues to decline, representing just 2% of the loan portfolio at quarter end, but accounting for 7% of gross charge-offs. We still expect the back book to further diminish to just 1% of our portfolio by the end of 2025. Finally, as you can see on Slide 9, our net charge-off rate was 11.8% in the third quarter, which was 7 basis points better than last year's rate. Our Q3 net charge-off dollars declined by 3% year-over-year. While we reduced our 30-plus day delinquency rate year-over-year for the seventh consecutive quarter, it was at the higher end of our internal expectations, as Raul talked about. Turning now to capital and liquidity. As shown on Slide 11, we've taken significant recent steps to enhance our debt capital structure by reducing debt outstanding and lowering our cost of capital while bolstering our liquidity. We deleveraged during Q3 by reducing our debt-to-equity ratio from 7.3x to 7.1x quarter-over-quarter, supported by GAAP profitability and $99 million in operating cash flow, of which $31 million was used to pay down debt. Our leverage is down markedly from the 8.7x peak level a year ago. Much of our focus on reducing debt outstanding has been on repaying higher cost corporate debt, which carries a 15% interest rate. We proactively repaid $20 million of corporate loan principal during the third quarter and another $17.5 million following the quarter end. We've now repaid a total of $50 million since the facility's inception in October 2024, reducing the original $235 million balance to $185 million, resulting in an annualized run rate reduction in interest expense of $7.5 million. Since the end of the second quarter, we have continued to demonstrate our ability to consistently access the capital markets at favorable terms. In August, we issued $538 million in ABS notes at a 5.29% weighted average yield, which was our lowest cost ABS issuance since October 2021. Following the quarter end, we completed another ABS issuing $441 million in notes at a 5.77% weighted average yield. Both transactions achieved a sub -6% funding cost, a AAA rating on their senior notes and freed up warehouse capacity for future originations. Also, following the quarter, we increased our total committed warehouse capacity from $954 million to $1.14 billion, increased the weighted average remaining term of our combined warehouse facilities from 17 months to 25 months and reduced the aggregate weighted average margin across our warehouse facilities by 43 basis points. We did so by closing a new $247 million 3-year revolving term committed warehouse facility and improving the terms of existing facilities. Following the end of the quarter, we purchased $115 million of the Opportune service loan portfolio held by our bank sponsorship partner, Pathward. We expect some profitability benefit from the acquisition, driven by the lower funding cost of owning the portfolio in comparison to the prior agreement with Pathward. Finally, as of September 30, total cash was $224 million, of which $105 million was unrestricted and $119 million was restricted. Turning now to our guidance, as shown on Slide 12, our outlook for the fourth quarter is total revenue of $241 million to $246 million, annualized net charge-off rate of 12.45%, plus or minus 15 basis points and adjusted EBITDA of $31 million to $37 -- our Q4 total revenue guidance reflects a $7 million year-over-year decline at the midpoint, largely due to the absence of the prior year period $4 million in credit card revenue. Our Q4 adjusted EBITDA guidance of $34 million at the midpoint also reflects a $7 million year-over-year decline, driven by lower total revenue and higher net charge-offs, partially offset by lower interest expense. Our Q4 annualized net charge-off midpoint guidance at 12.45% reflects 3Q's 30-plus delinquency rate being at the higher end of our expectations. We tightened our credit standards during Q3 and expect this uptick in our net charge-off rate to be temporary. Our revised full year 2025 guidance includes total revenue of $950 million to $955 million, annualized net charge-off rate of 12.1%, plus or minus 10 basis points, adjusted EBITDA of $137 million to $143 million and adjusted EPS of $1.30 to $1.40. I'll note that our recent credit tightening actions imply a high single-digit year-over-year decline in originations for the fourth quarter. For context, 4Q '24 originations of $522 million were our highest level since 2022. We've maintained the midpoint of our full year revenue guidance at $952.5 million while narrowing the range by $10 million. We've also maintained the midpoint of our adjusted EBITDA guidance at $140 million, reflecting 34% year-over-year growth while narrowing that range by $4 million. We've increased our adjusted EPS midpoint by $0.05 per share or 4%, supported by lower operating expenses and reduced cost of capital. Together, these actions more than offset the impact of slightly higher charge-offs and reinforce the continued strength of our profitability trajectory. Before I turn it back to Raul, let me conclude with a brief summary of our unit economics progress. While our long-term targets are GAAP targets, I'll use adjusted metrics because they remove nonrecurring items and provide a better sense of our future run rate. It's clear on Slide 14 that we continue to make significant progress in Q3. Adjusted ROE was 20%, which was a 19 percentage point year-over-year improvement, driven principally by cost reductions and improved credit performance. Our North Star continues to be delivering GAAP ROE of 20% to 28% annually, driven by reduced annualized net charge-offs to 9% to 11%, lowering operating expenses to 12.5% of our own portfolio and attaining annual growth of 10% to 15% in our own loan portfolio. We also intend to return to our 6:1 debt-to-equity leverage ratio by reducing our debt outstanding and continuing to grow GAAP profitability. With that, Raul, back over to you.

Thanks, Paul. To close, I'd like to emphasize 3 key points. First, we're pleased with our third quarter results, achieving GAAP profitability for the fourth consecutive quarter, a GAAP ROE of 5% and adjusted ROE of 20%, both significantly improved from a year ago. Second, we made important progress in strengthening our capital structure, lowering leverage and reducing our cost of capital, improvements that position us well for the years ahead. And third, we're raising our full year adjusted EPS guidance expectations again to a range of $1.30 to $1.40, reflecting strong year-over-year growth of 81% to 94%. We expect to grow our adjusted EPS further in 2026. Our disciplined execution across credit, efficiency and quality growth has delivered consistent progress over the past 2 years. Oportun is now a more resilient business even amidst ongoing macro uncertainty, supported by our dedicated team and loyal members. We look forward to speaking with you early next year to share our Q4 results and provide our full set of 2026 expectations. With that, operator, let's open up the line for questions.

[Operator Instructions] Our first question comes from the line of Rick Shane with JPMorgan.

Look, the delinquency trends and charge-off trends are apparent and the credit tightening is having the impact as intended. I am curious, you guys have a lot more insight into the behavior of your consumers, whether it's frequency of payment, size of payment, loans that they're taking. Can you share some insights that you're seeing behaviorally beyond just sort of delinquencies and net charge-offs to help us understand what is going on at the consumer level for pluses and minuses?

Yes, Rick, thanks for the question. As you can imagine, people's financial lives are quite complex. I've enjoyed the conversations we've had over the years about things that can go well. For example, there have been years where wage growth has been positive and then certainly the things that are challenging. I think right now, I'll start with kind of what we're doing to try to generate this improvement that we've seen in our trends, right? One of the things that you've heard us talk about over the last few quarters is really focusing on average loan size. So for example, in Q3, average loan size for our owned portfolio, on the unsecured personal loans, we took average loan size down 5% year-over-year. Even for the secured personal loan portfolio, where we're very pleased with performance. You heard in our comments state that losses year-to-date for secured are 500 basis points better than for unsecured. We're still taking loan sizes down there as well. So loan size was down for the secured personal loans 7% year-over-year, right? So we think that right now in this economy, it's important to try to decrease loan size and really focus on making payments affordable. And that's because though we think that the consumer today continues to be very resilient, there are certainly pressure points, right? The latest inflation rate at 3% year-over-year was the highest year-over-year increase since January. As you know, we recently found out that for the first time in over a decade, wage growth for the lowest quartile, right, is now below wage growth for the highest quartile of earners in the country. And fuel prices here in California are higher than they were -- modestly higher than they were a month ago, but they are higher than a year ago, right? So right now, we think there's still resilience in the consumer, but there are these points of pressure. There's also the potential impact of the government shutdown, if that continues. So right now, we continue to be focused on having a conservative credit box, decreasing average loan size and really trying to keep our loans as affordable as possible.

Got it. That makes a lot of sense and I think it's pretty consistent with our world view as well.

Our next question comes from the line of Brendan McCarthy with Sidoti.

I just wanted to circle back to the consumer behavior point. I know in Q2 this past quarter, repayments were elevated. Just curious as to how repayments trended in the third quarter.

We're still seeing similar trends of slight repayment rates. Again, we think that really has to do with the fact that we've made our loans smaller, so they're just easier to pay off, Brendan. It's not an area of concern for us right now. And in fact, as you know, right, we're always happy to have loans paid off.

Great. That makes sense. And pivoting to OpEx, I think it's solid to see another -- the expectation for $10 million in OpEx to come out for the rest of the year. Just curious as to what line items you're taking OpEx out of the business.

Yes, there have been several. I'm really pleased with the focus throughout the organization on staying lean and reducing OpEx. So for example, we saw sales and marketing go down about $1 million in the quarter relative to last year. Personnel expenses were down $2 million year-over-year. G&A was also down about $2 million year-over-year. The tech team continues to find efficiencies, continues to find ways to use technology and innovation to lower OpEx. So really across the board, nice efforts throughout the organization.

Understood there. And last question here from me on the net charge-off rate. I know you're looking for a temporary increase. I think you mentioned into the first quarter of 2026, but you're expecting it to kind of come back down perhaps in the second quarter of 2026. What's ultimately backing that expectation there?

Yes, that's a great question. So we talked about some of the tightening that we did in the quarter. And I would point to 2 things that really give us confidence when we think about the shape of the curve. Number one, when we think about the tightening we did in the quarter, the first payment default rates that we saw in Q3, right, those right now look quite good, and they make us feel that the tightening that we did was effective. Second thing was, as we shared during the call, in the first half of the year, we had about 64% of originations going to our returning members. That meant that we had that higher percent of originations in the first half going to new members. We were able to focus more on returning members. So we saw 70% of Q3 originations going to returning members, right? So that makes us feel like the originations are at a better balance. And then finally, to add one more, when we look at the early delinquency trends right now in the business, those also indicate that the impact that we're seeing right now should be in Q4 and Q1, and then we should start to see it come back down in Q2 through Q4 of 2026.

Our next question comes from the line of John Hecht with Jefferies.

Apologize if this -- there's some redundancy. I've been bouncing back and forth between different calls. I'm talking about the -- I'm interested in the characteristics of the secured personal loan customers. Maybe discuss the resell or maybe graduation of this from a different product versus where you're identifying these opportunities in new channels and how that mix looks going into 2026.

Yes. So secured is certainly one of the areas where we've been quite pleased with the growth that we've seen, John. So the secured portfolio now is $209 million. It's up 48% year-over-year. and it represents 8% of our portfolio, and that was 5% last year. One of the things that the team has been able to do is, number one, really focus on how do we present the product during the application flow, how do we make it just a much more efficient experience so that, that way we can increase conversion. So the product teams, the engineering teams and the risk teams have done really good work there. The marketing team also for the first time this year, started to focus on campaigns that were specific to trying to attract people that would be interested in secured personal loans. Historically, it's been just kind of a side-by-side offer with unsecured. So we were focused on getting unsecured customers and then presenting the opportunity for a larger loan if they owned their car. But now we have dedicated marketing campaigns that really are focused on trying to acquire someone that does own their car -- and those are the types of campaigns that we're really focused on in 2026 as we think about secured personal lending as one of the pillars of growth that we really want to lean into next year and in coming years.

Second question is just the -- you've talked about the delinquencies in the quarter. I'm wondering if you're seeing any changes in roll rates. Is there anything, whether it's at the product level or income cohorts that you're seeing roll rates change in any direction that gives us a perspective on what we should expect going into 2026?

Well, I mean, throughout the year, there are certainly puts and takes in terms of roll rates among different parts of the portfolio, John. But when we think about a very modest increase in this case of just 20 basis points at the midyear for full year guidance, -- it's the sort of thing that we think we've absolutely made adjustments for in the business by looking for reductions in OpEx, right, looking for reductions in marketing spend. So nothing that's really concerning to me at this time.

Okay. And then you guys have done a good job in delevering the balance sheet. I think it was closer to 9. It's now almost back to 7. I know I think your goal is 6. Maybe can -- based on the trajectory of the business and your outlook, when do you hit 6? And when you hit 6, I'm sure you're going to be focused on maintaining a good balance sheet. I guess what -- does that increase any optionality for you at that point in time?

Yes, John, thanks for the question. Yes, we're really pleased with the trajectory in leverage coming down, as you pointed out, from a high of 8.7x third quarter last year to now 7.1x. And even quarter-over-quarter, right, we saw the decrease from 7.3x to 7.1x. And so we expect that trajectory to continue. We haven't guided anyone yet to a number time line as it were for the 6x. But clearly, we're on a good path towards that. So that's kind of the outlook.

And we have reached the end of the question-and-answer session. I would like to turn the floor back to CEO, Raul Vazquez for closing remarks.

We want to thank everyone once again for joining today's call. We appreciate your continued interest in Oportun, and we look forward to speaking to you again at the beginning of next year. Thank you.