Hello Digit, Inc. (OPRT) Earnings Call Transcript & Summary

Greetings. Welcome to the Oportun Acquisition of Digit Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Nils Erdmann, Vice President of Investor Relations. Thank you. You may begin.

Thanks. I'd like to 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 them. A more detailed discussion of the risk factors that could cause these results to differ materially from our forward-looking statements are set forth in today's press release and in our filings with the Securities and Exchange Commission under the caption Risk Factors, including our most recent quarterly report on Form 10-Q for the quarter ended September 30, 2021, and our annual report on Form 10-K for the year ended December 31, 2020. During this call, we may reference our press release or a slide presentation, both of which are available on the Investor Relations section of our website at investor.oportun.com. 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. In addition, this call is being webcast, and an archived version will be available at investor.oportun.com after the call. Joining me today are Raul Vazquez, Chief Executive Officer; and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer. I'll now turn the call over to Raul.

Hello, everyone, and thank you for joining us. I am thrilled to share that we have entered into a definitive agreement to acquire Digit. This is a transformational deal that brings Oportun into the neobanking space and will expand our addressable market, accelerate and diversify revenue growth and position us for even more future success. Digit is a financial health and neobanking platform that offers personalized and automated savings, investing and banking tools. Its mobile apps enable members to integrate their existing bank accounts into the platform or they can make Digit their primary banking relationship through a bank partner. This acquisition unlocks significant value for both Oportun and Digit in 3 ways: first, we are acquiring a highly differentiated neobanking platform that provides a unique set of services; second, Oportun will significantly enhance Digit's current business; and third, the addition of savings, investing and banking products will make Oportun's existing business even stronger. I'll now dive into each of these in more detail. First, Digit is a great business. Its mission is to make financial health effortless for everyone by providing members a suite of AI-powered financial services. Digit launched the first truly personalized and automated savings app in 2015, and today has approximately $40 million in annual revenue run rate and is breakeven on an EBITDA basis. I'll take a minute to explain how Digit's platform works. Members set savings, investing or debt repayment goals through the Digit app, then the AI engine interprets their bank account cash flows, determines the optimal amount to apply towards their goals and automatically transfers the necessary funds over time to achieve those goals. One proof point of the success of their AI-driven approach is the 660 million transfers completed by their algorithms in the last 5-plus years. This represents a highly differentiated offering in the neobanking space because it enables customers to improve their financial health effortlessly. The results demonstrate the power of the platform we're acquiring, more than $7 billion in savings, $268 million in automated transfers to help prevent overdrafts and $30 million in investments, all done automatically. It is not surprising that an intelligent automated neobanking platform that generates those kinds of results is also loved by customers. Digit currently has 600,000 paying members, an NPS score of 70 and an app with a 4.7 star rating. Digit is led by Founder and CEO, Ethan Bloch, and we're excited to have him and more than 100 members of Digit's talented team join us at Oportun. Ethan will report directly to me and will oversee a newly created neobanking business unit within Oportun upon successful completion of the deal. Second, through this acquisition, Oportun will significantly enhance Digit's business. We will accelerate Digit's member growth by building a seamless integrated offering that presents Digit's savings, investing and banking products to the more than 1 million applicants we interact with every year. So even if a customer comes to us and we aren't able to approve them for a loan, we will still offer a suite of products that can establish a relationship with those customers. We will also accelerate Digit's growth by offering its neobanking products to Oportun's 2-plus million current and former borrowers whose financial lives we've enhanced through our credit products. One more thought on how Oportun will grow Digit's business. The addition of our strongly profitable lending economics to Digit's business creates 2 compelling dynamics: a meaningful increase in customer lifetime value from cross-selling loans and credit cards to neobanking customers and the ability to test product configurations at more attractive price points to acquire even more neobanking customers. Third, this acquisition makes Oportun's existing lending business even better. Our loan and credit card products are often a big step toward financial health and inclusion for our customers. To date, we've extended more than 4.5 million loans. Even so, because of our rigorous credit standards, we unfortunately are not able to serve thousands of applicants who come to us every day looking for help. Offering multiple products helps to start a relationship with every prospect. For example, we are already seeing great success in growing our customers with the addition of credit card and secured personal loan products. With this acquisition, our multiproduct business will get even better because Digit's complementary products will further increase conversion in our applicant funnel, lower the cost of acquiring a customer, increase share of wallet and customer lifetime value and provide new fee-based revenue streams, including subscription, transaction and interchange fees. In addition, Digit's products and apps will provide access to valuable data that will enhance our underwriting and AI capabilities and will create an opportunity to engage with customers on a daily basis. For context, our loans require engagement twice a month when payments are due, but Digit's savings, investing and banking products create daily reasons for customers to check how much is safe to spend, savings and investment balances and more. The higher levels of engagement and additional communication throughout the customer life cycle will create multiple opportunities to maintain and extend our profitable lending relationships with our customers. As a reminder, our NPS scores are approximately 80. So we have confidence that our customers will be open to having deeper, longer and mutually beneficial relationships with us. In summary, this is a transformational deal that brings together Oportun's profitable lending business with Digit's proven banking features to create a leading neobank. Our neobanking platform will have a base of 1.4 million members, a strong core offering of products and superior customer unit economics that generate durable competitive advantages and significant shareholder value over both the medium and long term. Now I'll turn the call over to Jonathan who will walk you through some additional details of the transaction. Jonathan?

Thanks, and hello, everyone. This acquisition is a major leap forward for our long-term strategy. The addition of Digit combines the characteristics of our profitable and high-growth lending business with the revenue and product diversity of Digit's savings, banking and investing services. The new platform creates opportunities to significantly accelerate our growth and enhances our earnings power over time. Oportun will acquire Digit for approximately $212.9 million, comprised of $114.4 million in cash and $98.5 million in stock. Oportun has obtained a commitment to finance the cash portion of the consideration through an amortizing loan secured by the residual cash flows from our asset-backed notes. So we don't see any financing risk on this transaction and expect to close either towards the end of this year or early next year. Digit's annual recurring revenue is approximately $40 million, and it has been operating at breakeven on an EBITDA basis. We expect the business will be immediately additive to our 2022 revenue. As you can see from the slide presentation on our website, Digit will enable us to offer a much broader suite of financial services to lower our CAC through the offering of multiple products and to diversify our revenue by adding subscription, transaction and interchange fees. We believe that incremental revenue from our broader product offering will immediately improve our financial performance in 2022, while cross-selling in a higher conversion rate will have a compounding effect on our top line in subsequent years. Finally, we believe this acquisition is a very compelling use of capital and is strategically a significant evolutionary step for our business. Once the transaction is completed, we'll provide more specific details on our financial projections for our combined business. We couldn't be more excited about Digit and the opportunity it presents to grow our profitability and further our mission. Raul, I'll turn the call back over to you.

Thanks, Jonathan. This acquisition greatly enhances our value proposition by giving us the broadest AI-driven, mobile-first product offering, making us a leader among neobanking and digital banking peers. It unlocks the ability to reimagine banking products and creates a category-defining experience for the millions of customers we will serve in the coming years. We expect this transaction will accelerate our customer and revenue growth, and it gets us to market 3 to 5 years earlier than if we were to build these products on our own. I'd like to thank both Oportun's and Digit's shareholders, employees and partners for their ongoing commitment. We look forward to building our business together with you. Operator, please open the line for questions now.

[Operator Instructions] Our first question comes from the line of Steven Kwok with KBW.

First one, I guess, I had was if you could just break out Digit's revenue composition between subscription transaction and interchange fee.

Yes, Steven, it's almost all subscription. That's the vast majority of it.

Got it. And do we know how fast the growth rate has been within the revenue base?

Yes. Steven, this is Raul. One of the things that we think is so exciting about this transaction that you may have seen in the materials is the ability to be able to accelerate the great business that we're acquiring. One of the things that the Digit team did that we really respect and we think was a good decision was at the beginning of the pandemic, they really realized that there was a greater set of needs that they wanted to focus on, and they focused all of their development efforts, they focused their capital on building the next evolution of their neobanking platform, which is a big reason for why we're moving forward with this acquisition. I've been using the product. I think it's fantastic. So now that they're going ahead and having more and more people use this new evolution, what they call Digit Direct, we're really going to lean in with them and drive the growth that we think is that unlocked potential that is so exciting for us.

Got it. And congrats on the deal. And just one last follow-up was if you could just compare and contrast Oportun and Digit's customer base, and you've also talked about lowering the cost of customer acquisition. If you could just like provide a little more details on that, that would be great.

Absolutely. This was an area we spent a lot of time on in the last few months as we were getting to know the Digit business better. Certainly, as we went through due diligence, and we did a lot of analysis, there's just fantastic overlap in terms of both customer needs, but also some of the specifics, I think, that you're asking about. So from an age perspective, they skew a little younger, but we think it's very consistent with the 80% of new applicants that are using mobile in our own business. So we feel great about that. Income percentages are very comparable. Age, again, looks pretty good. There were some slight differences. They skew a little younger, but again, we feel the mobile part of our business looks like that. So when we looked at this, we thought that there was both a tremendous amount of overlap in commonality in terms of needs, income, choice of channel. And then there were some slight differences that present opportunities for both businesses to expand their customer base now that we're combined.

Thank you.

Sure. Thank you, Steven. Well, with that, we want to thank everyone for joining us on today's call. This is an exciting day for our business, and we look forward to speaking with you again soon. Thank you so much.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.