SoFi Technologies, Inc. (NASDAQ:SOFI) Q1 2023 Earnings Call Transcript

SoFi Technologies, Inc. (NASDAQ:SOFI) Q1 2023 Earnings Call Transcript May 1, 2023

SoFi Technologies, Inc. beats earnings expectations. Reported EPS is $-0.05, expectations were $-0.07.

Operator: Good morning, and thank you for attending today’s SoFi First Quarter 2023 Earnings Conference call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. At this time, I would now like to turn the conference over to our host, Maura Cyr SoFi Investor Relations. Maura, please proceed.

Maura Cyr: Thank you, and good morning. Welcome to SoFi’s first quarter 2023 earnings conference call. Joining me today to talk about our results and recent events are Anthony Noto, CEO; and Chris Lapointe, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our competitive advantages and strategy, macroeconomic conditions and outlook, future products and services and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements.

Factors that could cause these results to differ materially are described in today’s press release and our most recent Form 10-K as filed with the Securities and Exchange Commission, as well as our subsequent filings made with the SEC, including our upcoming Form 10-Q. 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. And now, I’d like to turn the call over to Anthony.

Anthony Noto: Thank you, Maura, and good morning, everyone. The first quarter at SoFi was an incredible beginning to what is already turning out to be yet another eventual year in the macro environment. Amid all the volatility, we delivered another quarter of record revenue and adjusted EBITDA with strong overall operating results, reinforcing the strength of our strategy and our ability to execute with excellence. A few key achievements from the first quarter include: our eighth consecutive quarter of record adjusted net revenue of $460 million, up 43% year-over-year with record revenue in lending and financial services, as well as continued strength in tech platform; Our third consecutive quarter of record adjusted EBITDA at nearly $76 million, representing a 48% incremental margin and a 16% margin overall; And incremental GAAP net income margin of 54%, resulting in a loss of just $34 million.

Deposits increased by $2.7 billion sequentially, marking another record quarter and now exceed $10 billion in total deposits. Importantly, more than 90% of our consumer deposits are from sticky direct deposit members and 97% of our deposits are insured. Our cash and cash equivalents on the balance sheet increased by $1.1 billion to $2.5 billion since year-end, reinforcing our strong liquidity position. Once again, we are achieving several financial inflection points. Adjusted EBITDA of $76 million is now greater than stock based compensation at $64 million, which actually declined. And this is another critical step towards GAAP net income profitability. We achieved positive variable profit in the Financial Services segment and remain on track for positive contribution profit by year end.

Additionally, lending net interest income revenue or NIM revenue of $201 million exceeded lending non-interest income of $136 million for the second consecutive quarter. And importantly, our NIM revenue is meaningfully greater than our Lending segment directly attributable expenses of $115 million. These trends increased the visibility and reinforce our goal of achieving positive GAAP net income in Q4 2023. Along those lines, we had another quarter of positive GAAP net income for SoFi Bank at $73 million, reflecting a 20% margin and a 23% return on average tangible equity on our way to expected 30% returns within the bank over the long term. Lastly, the quality of our bank operating and liquidity metrics remain robust and have improved since year end.

We saw new record levels of unaided brand awareness in the quarter and continued strong cross buy trends, which helped drive strong year-over-year growth in members and products with decreasing marketing spend intensity. The 433,000 new members in Q1, 2023 brings total members to nearly 5.7 million, up 46% year-over-year. We also added 660,000 new products in Q1 ending with nearly 8.6 million total products, also up 46% year-over-year. Of these new ads, Financial Services products totaled 7.1 million at quarter end and grew by 51% year-over-year, while lending products of 1.4 million were up 24% year-over-year. Sales and marketing expenses as a% of revenue declined nearly 100 basis points from last quarter and nearly 475 basis points from a year ago.

The strength of our results once again underscores how our full suite of differentiated products and services provides the foundation for a uniquely diversified business that is able to endure through market cycles, as well as exogenous factors. We talk often about our ability to act nimbly in a rapidly changing environment. There were several examples once again this last quarter, but I’d like to take a moment to highlight one that really exemplifies nimble execution to truly help our members at the most critical time. As the recent bank crisis developed, our team was able to bring our deposits FDIC insurance capabilities from offering $250,000 to $2 million within a week, providing comfort and safety to our members and enabling 97% of our deposits to now be insured versus 92% before the increase.

Now I’d like to spend time touching on segment level results, as well as the structural advantage of our product strategy and having a bank charter. In lending, we generated a record $325 million of adjusted net revenue, up 33% versus the prior year period. Our personal loan performance more than offset the continued headwinds in demand for student loan refinancing and the less robust performance of home loans. Student loan refi continues to be impacted as federal borrowers still await clarity on the end of the moratorium on federal student loan payments. Home Loans faces macro headwinds from rising rates, while we continue the process of integrating Wyndham Capital Mortgage, which we acquired at the beginning of Q2 2023. The Personal Loans business maintained its strength in Q1, hitting record originations of nearly $3 billion, up 46% from $2 billion in Q1 2022.

This product continues to deliver even as we maintain our stringent credit standards and pass on rate increases to our borrowers. While these origination levels themselves are impressive, the strength of our balance sheet and diversification of our funding sources provide new options to fund origination growth, while driving efficiencies with cost savings. These advantages are a direct result of SoFi Bank. Having more balance sheet flexibility allows us to capture more net interest income and optimize returns, which provides more stable earnings in any macro environment. But it’s especially important in times of excess volatility. As of the end of Q1 2023, 44% of our loans were funded by deposits and our $2.7 billion of new deposits raised in the quarter helped fund our $3.6 billion of total originations in the most cost effective way.

Photo by Towfiqu barbhuiya on Unsplash

Our lending capacity remains robust with over $20 billion in total capacity to fund loans and meet our liquidity needs with $10 billion of deposits which have grown by $2 billion a quarter, $3 billion of equity capital and $8.6 billion of warehouse capacity. Lastly, the bank contributes to strong growth in SoFi Money members, high quality deposits and great levels of engagement. This has led to a higher average account balances even as average spend has increased. More than 50% of newly funded SoFi Money accounts are setting up direct deposit by day 30, and this has had a significant impact on spending. Q1 annualized spend was 2 times 2022 spend and Q1 spend per average funded account was up 15% quarter-over-quarter. SoFi Money members have increased over 48% year-over-year to 2.4 million accounts.

Given the quality of these members, with a median FICO score of 749 for our direct deposit portfolio, we see ample opportunity for cross buy. This is a great segue into financial services more broadly where net revenue more than tripled year-over-year to $81 million and grew 25% from $65 million in Q4 2022. Contribution loss of $24 million improved $19 million versus the previous quarter and we achieved variable profitability for the first time in the segment, even as we maintained elevated marketing expenses in the first quarter. We’ve continued to achieve strong member and product growth by iterating on products to ensure they are differentiated on four key factors. Fast, selection, content convenience and continue to invest to make them work better when used together.

So far in Q2, we continue to iterate on these products. Last week, we raised our savings rate again to 4.2% and just this morning we announced SoFi Travel in partnership with Expedia, which will include member discounts and 3% cash back rewards on bookings made with the SoFi credit card. SoFi Travel is a digital destination that represents our first non-financial product effort to help our members spend better in the next phase in SoFi’s mission to help our members achieve financial independence. We finished Q1 with 7.1 million financial services products, up 51% year-over-year and 5 times total lending products of 1.4 million. The increased scale in financial services helps drive cross-buy and marketing efficiencies. Financial Services sales and marketing spend as a percentage of net revenue was 51% versus 60% in Q1 of last year.

We continue to scale our top of the funnel products given the attractive monetization opportunities by capitalizing on our improved brand awareness and network effects. We saw this increased efficiency even with the fact that these products have a 12 month to 18 month payback period. For Technology Platform, full segment revenue of nearly $78 million saw growth of 28% year-over-year with a 19% margin at the segment level or 28% if you exclude Technisys. Galileo’s overall diversified growth strategy includes growth in new verticals, new products and new geographies. With a focus on larger customers that have large installed basins. In Q1, Galileo signed five new clients and made big strides in the strategy with 80% of newly signed clients having existing customers or portfolios, along with a growing pipeline of (ph) opportunities selling Galileo and Technisys offerings to an expanded customer base.

Technisys recently signed one new client in Mexico and has entered into a proof-of-concept stage with a large U.S. legacy financial institution. With that, let me turn it over to Chris for a review of the financials for the quarter.

Chris Lapointe: Thanks, Anthony. We started the year with a great quarter, which saw strong growth trends across the entire business. We achieved record revenue and adjusted EBITDA despite operating in a rapidly evolving macro backdrop. I’m going to walk you through some key financial highlights for the quarter, and then share some color on our financial outlook. Unless otherwise stated, I’ll be referring to adjusted results for the first quarter of 2023 versus first quarter of 2022. Our GAAP consolidated income statement and all reconciliations can be found in today’s earnings release and the subsequent 10-Q filing, which will be made available next week. For the quarter, top line growth remains strong as we delivered record adjusted net revenue of $460 million, up 43% year-over-year and 4% sequential from the fourth quarter’s record of $443 million and above our Q1 guidance of $430 million to $440 million.

Adjusted EBITDA was $76 million at a 16% margin, also above the high end of our most recent guidance of $40 million to $45 million and ahead of the prior quarter record. This represented 14 points of year-over-year margin improvement, demonstrating the strong operating leverage of the business as it scales. Year-over-year margin improvement has been driven by significant operating leverage across our sales and marketing, G&A and ops functional expense lines. Overall, this resulted in a 48% incremental adjusted EBITDA margin year-over-year. Our GAAP net losses were $34 million this quarter, which is a $76 million improvement year-over-year and a $6 million improvement sequentially. Our incremental GAAP net income margin was 54% for the quarter.

In addition to our adjusted EBITDA margin expansion, we saw meaningful leverage against stock based compensation as a percentage of net revenue at 14% in Q1 2023, down from 16% in the fourth quarter and 24% in the prior year quarter. This represents further progress toward our expectation of GAAP net income profitability in Q4 2023. Now, on to the segment level performance where we saw strong year-over-year growth across all three segments. In Lending, first quarter adjusted net revenue grew 33% year-over-year to $325 million. Results were driven by 113% year-over-year growth in our net interest income, while non-interest income was down 17%. Growth in net interest income was driven by a 99% year-over-year increase in average interest earning assets and a 318 basis point year-over-year increase in average yields, resulting in an average net interest margin of 5.5% for the quarter.

This represents roughly 110 basis points of year-over-year NIM expansion. Q1 originations grew 7% year-over-year to $3.6 billion and were driven by record volumes in our personal loans business, which grew 46% year-over-year to nearly $3 billion. However, student loan originations were down 47% year-over-year and home loans by 71% year-over-year, as the extension of the federal student loan moratorium and macro factors continue to provide headwinds to these businesses. We achieved this top line growth while maintaining our stringent credit standards and disciplined focus on quality. Our personal loan borrower’s weighted average income is $164,000 with a weighted average FICO score of 747. Our student loan barrower’s weighted average income is $173,000 with a weighted average FICO of 769.

This continued focus on quality has led to strong credit performance. Our on balance sheet delinquency rates and charge off rates remain healthy and are still below pre-COVID levels. Our on balance sheet 90 day personal loan delinquency rate was 38 basis points in Q1 2023, while our annualized personal loan charge off rate was 2.97%. Considering the weighted average life of the personal loans on our balance sheet, our portfolio life of loan losses are forecasted to be 4.5%, which is below our risk tolerance. Our on balance sheet 90 day student loan delinquency rate was 12 basis points in Q1 2023, while our annualized student loan charge off rate was 0.34%. As we’ve expressed in the past, it is reasonable to expect credit metrics to revert over time to more normalized pre pandemic levels, but continue to expect very healthy performance relative to broader industry levels.

The Lending business delivered $210 million of contribution profit at a 65% margin, up from $133 million a year ago and a 54% margin. This improvement was driven by a mix shift to higher margin personal loans revenue, as well as sales and marketing and ops efficiencies and fixed cost leverage across the entire segment. Shifting to tech platform, where we delivered net revenue of $78 million in the quarter, up 28% year-over-year, while Galileo revenue was up 3% year-over-year. Overall, annual revenue growth was driven primarily by Galileo account growth to $126 million in total. We also signed five new clients in Galileo and on in Technisys, and we finished the task of moving every client to the cloud with 100% of transactions now migrated. Sequentially, revenue and contribution profit declined in the segment due to seasonality in transaction volumes, along with timing implications from shifting focus to larger potential partners with larger existing businesses, B2B customers and a more durable customer base which has longer sales cycles.

The segment delivered a contribution profit of $15 million, representing a 19% margin and 28% if you were to exclude Technisys. Moving on to financial services, where net revenue of $81 million increased 244% year-over-year with new all-time high revenue for SoFi Money and continued strong contributions from SoFi Credit Card, SoFi Invest and lending-as-a-service. Overall, monetization continues to improve with annualized revenue per product increasing for the fourth consecutive quarter to $45, 2 times the $20 in the prior year and up 15% sequentially from $40. We reached 7.1 million financial services products in the quarter, which is up 51% year-over-year and we continue to see strong product ads with 584,000 new products in the segment. We hit 2.4 million products in SoFi Money, 2.2 million in SoFi Invest, and 2.2 million in Relay.

Contribution losses were $24 million for the quarter, which improved by over 50% year-over-year and 44% sequentially as we start to see operating leverage in the segment. Importantly, we achieved positive variable profit in the Financial Services segment for the first time, which reinforces our expectation of positive contribution profits by the end of 2023. Switching to our balance sheet where we remain very well capitalized with ample cash and excess liquidity. Last year’s opening of SoFi Bank further reinforces our strong balance sheet and provides us with more flexibility and access to a lower cost of capital relative to alternative sources of funding. In Q1, assets grew by $3.4 billion as a result of a $1.1 billion increase in cash and cash equivalents, highlighting our strong liquidity position and access to cash, as well as adding loans to the balance sheet, given strong growth we continue to see in personal loan originations.

On the liability side of the balance sheet, we saw tremendous growth in deposits as they grew to over $10 billion, up $2.7 billion sequentially versus $2.3 billion in each of the prior two quarters. Because of this, we exited the quarter with just $3.6 billion drawn on our $8.6 billion of warehouse facilities. In addition, last week we extended our corporate revolver for another five years and upsides it to $645 million. This further highlights our strong liquidity position, particularly in this market. Our available for sale securities portfolio remains quite modest at $175 million market value with $6 million in cumulative unrealized losses versus $195 million at year end 2022. This portfolio consists primarily of short duration government backed securities.

Let me finish up with guidance. Throughout the last 12 months, we have demonstrated the benefit of having a diversified set of revenue streams, multiple cost efficient sources of capital, and a keen focus on underwriting high quality credit. We expect those benefits to persist going forward, even in light of existing macro backdrop. For Q2, we expect to deliver adjusted net revenue of $470 million to $480 million and adjusted EBITDA of $50 million to $60 million. For the full year of 2023, we are raising guidance and now expect to deliver adjusted net revenue of $1.955 billion to $2.02 billion, up from our prior guidance of $1.925 billion to $2 billion and we now expect full year 2023 adjusted EBITDA to be $268 million to $288 million, up from our prior guidance of $260 million to $280 million.

This represents a 30% incremental EBITDA margin for the full year. Overall, we couldn’t be more proud of our Q1 results and continued progress. Having delivered over $460 million of adjusted net revenue and $76 million of adjusted EBITDA, we continued to make great progress against our long term growth objectives in the quarter and remain very well capitalized to continue pursuing our ultimate goal of making SoFi a top financial institution. With that, let’s begin the Q&A.

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Q&A Session

Operator: We will now open the lines for Q&A. Our first question comes from the line of Mihir Bhatia with Bank of America. Your line is now open.

Mihir Bhatia: Good morning.

Anthony Noto: Good morning.

Mihir Bhatia: Thank you for taking my question. Maybe to start, Chris, if you could just provide the loan sales and gain on sale margins this quarter, with and without hedging if possible, please? And just talk also about the larger strategy. Is there any change as you’ve grown deposits to hold loans for longer or is it still very much a buy and distribute model? Thank you.

Chris Lapointe: Yes. No problem. So I’ll hit on each of the products starting with our home loans business. So in home loans, we ended up selling $78 million of principal at a 104.7% execution level, inclusive of hedges, it was about 100 basis points less than that. In our personal loans business, we did not do any whole loan sales in period, our last one was in Q4 at 104.4% execution. But we did execute a $440 million consumer loan ABS transaction with spreads that outperformed our expectations and we’re able to price at 90 basis points over (ph). The deal was 8 times oversubscribed with over 28 orders, which allowed us to tighten spreads meaningfully by 80 basis points relative to the deal that we did back in Q4 that had comparable collateral.

The market obviously continues to search for shorter duration securities backed by higher credit collateral. And then in student loan refinancing, we did not do any whole loan sales in period. Our last one was in Q3 at a 104.4% execution. What I would say in terms of your second question, Mihir, as we’ve discussed in the past, we are extremely well capitalized at this point having raised $3.6 billion in 2021. We have access to $8.6 billion in warehouse lines, $3.5 billion of which is drawn currently. And our bank deposit base of $10 billion is growing really quickly with the vast majority of our deposits, more than 90% of them coming from direct deposit members. In addition to that, we’ve been able to successfully access the ABS markets each of the last two quarters, which have brought attractive fixed financing options for all of our loans.

Given this flexibility, we’re always going to maximize returns on the loans that we originate as well as the overall firm ROE. And that’s going to take different forms given the environment that we’re operating in at any given point in time. This quarter similar to last quarter, we had the flexibility to hold loans for a longer period of time, particularly given the growth that we saw in deposits of $2.7 billion, which resulted in really strong net interest income. But that could certainly change in future quarters, but we have a lot of options and flexibility to that.

Operator: Thank you. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open.