Mogo Inc. (NASDAQ:MOGO) Q1 2023 Earnings Call Transcript May 11, 2023

Mogo Inc. beats earnings expectations. Reported EPS is $-0.05, expectations were $-0.09.

Operator: Good afternoon, ladies and gentlemen, and welcome to the Mogo Q1 2023 Earnings Conference Call. [Operator Instructions]. This call is being recorded on Thursday, May 11, 2023. I would now like to turn the conference over to Craig Armitage. Please go ahead.

Craig Armitage: Thank you, and good afternoon, everyone. Thanks for joining us. Just a few notes before we get started that today’s call will contain forward-looking statements that are based on current assumptions and subject to risks and uncertainties that could cause actual results to differ materially from those projected. The company undertakes no obligation to update these statements, except as required by law. Information about the risks and uncertainties are included in our Q1 filings as well as periodic filings with regulators in Canada and the U.S., which you’ll find on SEDAR, EDGAR and through the Investor Relations website. Second, today’s discussion will include some adjusted financial measures and non-IFRS measures.

You should consider these as a supplement to and not as a substitute for the IFRS measures, and we included reconciliations both in our filings and the investor deck for those measures. Lastly, the amounts today are discussed in Canadian dollars, unless we indicate otherwise. I’ll now turn it over to Dave Feller to get us started. Dave?

David Feller: Thanks, Craig. Thank you. Good afternoon, and welcome to Mogo’s First Quarter 2023 Results Call. I’m joined today by Greg Feller, our President and CFO. I can’t emphasize enough how pleased I’m with the progress our team made in Q1 as we continue to reengineer Mogo into a leaner and more profitable company. The level of engagement and focus that we’re seeing from our team is truly amazing, and it’s been reflected in our results. When the macro picture began to look worse in early 2022, we took quick and decisive action to accelerate our path to profitability with a stated goal of achieving adjusted EBITDA positive in Q4 of 2023. As we discussed in March, we managed to achieve this goal in Q4 of 2022 one year earlier than planned.

It’s hard to overstate the level of transformation we have made in the last 12 months, going from negative $5.5 million adjusted EBITDA to positive $1 million in just 4 quarters. This progress gives us confidence in our ability to get to our targeted EBITDA run rate by the end of the year, which Greg will discuss in the outlook. We introduced our 3 key pillars last quarter, and this continues to be our goal. The elimination of products like will allow us to put more focus on 3 areas that we believe there are significant growth opportunities in each of these areas and perhaps more importantly profitable growth. These are also segments where we believe there’s a much higher barrier to entry and where we believe we can offer more differentiated value proposition.

Lean and mean and getting to profitability as quickly as possible continues to be our #1 priority across the organization. We are looking at every part of the business to identify areas where we can reduce costs and ensure we have the lowest possible cost. We are creating a more efficient operating platform that supports our strategy to be the low-cost provider in the marketplace. Again, key areas of focus include elevating the performance of the team, reducing vendor costs, eliminating unprofitable products and improving profitability by focusing on operational excellence and efficiencies. Although in many of these ways these times are challenging. I couldn’t be more impressed with the level of intensity and focus of our team that is driving our improved results.

Although we still have a lot of work to do, the momentum is there. Although our primary focus in the near term is on the efficiency and profitability initiatives, we also continue to advance MogoTrade and its disruptive value proposition in the Canadian market. When you enter a large market like DIY trading with a new product, the key is making sure that you truly have something that meaningfully differentiates you from the existing players, and that’s what we’re doing with Trade. Canadians continue to spend billions a year in fees related to investing, and our goal is to eliminate this. Our value proposition is simple and compelling. MogoTrade is the simplest, lowest cost and most sustainable way to invest in Canada. Now what does that really mean?

We are the first and only stock trading app in Canada that doesn’t charge commission or FX fees and the first and only where every investment you make also helps reduce your CO2. When looking at the space, surveys show that the #1 reason users switch is for lower fees and MogoTrade now has the lowest fees in Canada. Arguably the most successful trading app in Canada is Wealthsimple in terms of the speed at which they have attracted millions of users with a lower cost and simpler experience than the existing incumbents. In fact, they also took the top spot for market share gain in 2022. MogoTrade is not only significantly cheaper given our 0 FX fee but we believe are much simpler, and we continue to get feedback from our users supporting this.

All you need to do is check it out for yourself and compare it with any trading app in Canada in terms of cost and simplicity, seeing is believing. It’s also important to note that we’re building this in a way that enables us to be a low-cost leader. Without the constraints of a higher-priced model, along with modern architecture and automation, we are hyper focused on building a platform that enables us to offer this disruptive value proposition profitably. We are now on a weekly release cycle for this product. And every week, we are releasing improvements to the experience. And with each new release, we continue to see improved metrics. Once we complete some of our key initiatives, we will be able to spend even more time on improving and growing this product.

Our goal remains to achieve a strong product market fit this year and set the stage for a more meaningful revenue impact next year. Obviously, there’s a lot of discussion around AI and there’s no doubt it will have a big impact on our business. There are 2 key areas where this will be happening. The first is internally on how we leverage it to drive operational efficiencies and productivity improvements. We have been using AI in our lending and underwriting for a while, and now we’re looking at every other part of the business. Customer service is going to be a big one, and AI will enable us to cost effectively scale customer support for Trade. And we’re also leveraging it in marketing and engineering as well. The efficiency gains we have made to date are without any real impact from AI, and we expect AI will continue to drive our costs down for years to come.

The other big area in the impact with AI will be in the wealth space itself and in fact, we believe will help drive more users to a platform like MogoTrade. AI will make it easier for the average investor to make better decisions without the need of high-priced financial advisers. But the one thing that will always be constant is needing the lowest cost way to execute the trade itself. We are building MogoTrade for a world with AI, and we think it will be a powerful combination that will help accelerate the move away from traditional wealth solutions. Building a brand-new platform with a business model designed for a world with AI is a big advantage compared to the existing players. With that, I will turn the call over to Greg.

Gregory Feller: Thanks, Dave, and good afternoon. As Dave explained, in addition to implementing our efficiency initiatives across the company, we’ve been investing in 2 core growth areas of wealth and payments. As part of our strategic review last year, we identified our payments business, which is driven by our wholly owned subsidiary, Carta Worldwide, as having a number of attributes we believe making it an attractive growth opportunity for the company, including addressing a massive $2.5 trillion TAM, significant barriers to entry, strong history of achievements by Carta especially in the European payments market and a number of large global customers that represent significant long-term growth opportunity. As a result, we made the decision to increase our investment in this business, which this year includes a significant investment in migrating a platform to the Oracle Cloud.

We expect this migration to be complete in Europe by year-end, which, along with other investments we are making should help position the business for long-term growth and margin expansion. Turning to our financial results for the quarter. Despite a challenging environment, macro environment, we’ve acted decisively to adjust the balance of growth, investments and profitability over the last 4 quarters, and our results clearly demonstrate the progress. Specifically, total OpEx for the quarter decreased by 45% year-over-year in dollar terms [indiscernible] $11 million quarterly decrease. In our disclosures for Q4, we set the expectation we would see a 25% to 35% [indiscernible] over the next several quarters relative to Q3, and we’re already near the middle of this range.

As discussed, our efficiency initiatives include a strategic decision to exit a few of our subscale and unprofitable products, which were having a short-term impact to revenue as we saw in the current quarter with revenue down about $1.2 million from Q4. However, these initiatives also resulted in a material improvement to gross margins, which expanded by 600 basis points sequentially from Q4. Our cost savings, along with improved gross margin resulted in a rapid improvement in adjusted EBITDA to $1 million in the quarter. In addition, our adjusted net loss decreased every quarter in ’22 and continued that decrease in Q1 to a net loss of $3.9 million versus $4.3 million in Q4 and $10.8 million same time last year. The results give us confidence to continue to deliver expansion of the adjusted EBITDA and reach our target of $10 million to $14 million by year-end.

We ended the quarter in a solid financial position with cash and total investments of $60.4 million. And we believe that we’ll see a number of monetization opportunities for some of our investment portfolio over the next 12 to 24 months. In April, Coinsquare announced a business combination with TSX-listed WonderFi and CoinSmart. The company combined will become one of the largest registered crypto asset trading companies in the world and will provide Canadians a wide range of products and services, including both retail and institutional investors. From a financial perspective, the company will have transacted over $17 billion since 2017 and have over $600 million assets under custody with a registered user base in excess of 1.65 million users.

The company will also have a well-capitalized balance sheet with no debt. Post transaction, Mogo is expected to be the largest shareholder with approximately 14% ownership. Not only are we bullish on the outlook of the company, but we believe it will offer more visibility and clarity and transparency for Mogo shareholders as we will own about 85 million shares in the new company, which will trade on the Toronto Stock Exchange. Transaction is expected to close subject to regulatory and shareholder approval early Q3 this year. Upon closing, we expect that we would no longer be required to consolidate a proportional share of the company’s losses in our results. Turning to our outlook. We will continue to focus on expansion of our adjusted EBITDA and improving our cash flow.

Specifically, for 2023, we are focused on achieving full year adjusted EBITDA of $6 million to $8 million and exiting 2023 with an annual adjusted EBITDA run rate of $10 million to $14 million based on Q4 ’23 adjusted EBITDA target of $2.5 million to $3.5 million. As Dave said, we’re extremely proud of the entire Mogo team and the hard work that has allowed us to achieve these results, along with the continued improvements we expect for the rest of the year. We believe it is a major milestone and highly differentiating for a fintech at this scale to generate positive adjusted EBITDA while continuing to make investments in long-term growth areas such as our investments in wealth and payments. We believe this will position us well for the future and for accelerating revenue growth in 2024 and beyond.

Going forward, we will continue to balance margins and growth, which will be guided by using the Rule of 40 principle. Specifically, our goal is to manage between revenue growth and EBITDA margins as we strive for achieving a target combined of the 2 of 40. With that, we will now open the call to questions. Operator?

Q&A Session

Operator: [Operator Instructions]. Your first question comes from Adhir Kadve with Eight Capital.

Operator: [Operator Instructions]. Your next question comes from Scott Buck with H.C. Wainwright.

Operator: There are no further questions at this time. Please proceed.

David Feller: Thanks for joining us for our Q1 call. I appreciate the questions and look forward to updating you post Q2. Thanks again.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.