SoFi Technologies, Inc. (NASDAQ:SOFI) Q3 2023 Earnings Call Transcript

SoFi Technologies, Inc. (NASDAQ:SOFI) Q3 2023 Earnings Call Transcript October 30, 2023

SoFi Technologies, Inc. misses on earnings expectations. Reported EPS is $-0.29 EPS, expectations were $-0.07.

Operator: Good morning, and thank you for attending SoFi’s Third 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’d now like to turn the conference over to our host, Maura Cyr from SoFi Investor Relations. Maura, please go ahead.

Maura Cyr: Thank you, and good morning. Welcome to SoFi’s third quarter 2023 earnings conference call. Joining me today to talk about our results and recent events are Anthony Noto, CEO; 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 advantage 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.

A financial advisor giving advice to a couple, illustrating the personal finance and insurance products the company offers.

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. 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, and good morning, everyone. Before my formal remarks, I want to take a moment to recognize the devastating tragedy that is currently taking place in Israel, Gaza, and the surrounding regions. It’s been incredibly difficult to witness the acts of terrorism and resulting war unfold over the past couple of weeks, and what is sure to be tough days to come. The murder of innocent people is unacceptable in any form, and it’s beyond belief that such actions are unfolding in the world today. With that, let’s turn to our third quarter results. The third quarter at SoFi marked our 10th consecutive quarter of record revenue and fifth consecutive quarter of record adjusted EBITDA. We delivered strong diversified growth with record revenue and improved margins across all three of our business segments.

Among our notable achievements in the quarter, I want to highlight two major milestones. First, 67% of our absolute growth in adjusted net revenue dollars was driven by the non-lending businesses, specifically, the Technology Platform and Financial Services segments; and second, our Financial Services segment achieved positive contribution profit for the first time, making all three reported segments profitable while bolstering our consolidated profitability even while we continue to invest aggressively for high levels of compounding for years to come. These overall results are a testament to our ability to outperform in difficult or rapidly changing environments, but also our ability to deliver on our goals and our overall mission while maintaining financial discipline and continuously setting new operational and financial records.

I’m excited to share more about this quarter’s notable achievements. A few key financial achievements from the third quarter include: adjusted net revenue of $531 million was 22% year-over-year. And importantly, all three segments recorded record revenue and we continue to diversify the revenue composition. Adjusted EBITDA of $98 million, represented a 48% incremental margin and a record 18% consolidated margin. Our Financial Services segment achieved positive contribution profit of $3.3 million at a 30% margin versus a $4 million loss last quarter and a $53 million loss in the year ago quarter. Our Technology Platform segment had a contribution margin of 36% versus 20% in Q2 and 23% in the year ago quarter. In our Lending segment, more than 77% of our adjusted net revenue was net interest income, which grew 90% year-over-year to $265 million, nearly 2x lending directly attributable expenses of $139 million.

That’s to say our net interest income is now nearly 2 times greater than our expenses. Segment contribution margin improved by nearly 300 basis points sequentially to 60%. At the company level, excluding one-time items, incremental GAAP net income margin of 48% resulted in a loss of just $19.5 million versus $48 million loss last quarter and a $74 million loss in the year ago quarter. Earnings per share loss, excluding the impact of goodwill impairment was $0.03 per share. SoFi Bank reported $84.8 million of GAAP net income at a 19.3% margin, representing 13% annualized turn on tangible equity. We remain well on track for GAAP profitability for the overall company by Q4 and the years that follow. From a balance sheet perspective, our unique value proposition in SoFi continues to fuel high-quality deposits that increased by a record of $2.9 billion sequentially, and we ended the quarter with nearly $15.7 billion in total deposits.

Importantly, more than 90% of our consumer deposits are from sticky direct deposit customers, and 98% of our deposits are insured. Our cash and cash equivalents, excluding restricted cash, remained healthy at $2.8 billion, reinforcing our strong liquidity position. We grew tangible book value for the third consecutive quarter by a record of $68 million at the consolidated level. On a trailing 12-month basis, we generated $171 million in tangible book value growth. From a member and product perspective, we added 717,000 new members in Q3 ’23, bringing total members to nearly 7 million, up 47% year-over-year and acceleration in growth. Our highest quarter ever of new products in Q3 of $1 million brought total products to $10.4 million at quarter end growing by 45% year-over-year, also an acceleration with record product additions in both lending and financial services.

Even with this rapid growth in members, overall products per member remains at 1.5x, reinforcing the appeal of our robust product suite and multiproduct adoption by existing members. Financial Services products of 8.9 million at quarter end grew by 50% year-over-year, while Lending products of over 1.6 million were up 24% year-over-year. I am incredibly proud of these accomplishments and the progress achieved on our march to making SoFi a household brand name. Unaided brand awareness continues to grow as a result of successfully executing viral marketing campaigns bolstered by key events at SoFi Stadium, improving customer satisfaction, driving word-of-mouth and the result of us truly helping people get their money right. Now I’d like to spend some time touching on the segment level results and trends.

Lending adjusted net revenue of $342 million grew 15% year-over-year. The personal loans business maintained its strength in the quarter with record originations up 38% from Q3 ’22. Student loans, as expected, saw some increasing demand ahead of the resumption of student loan payments marking our highest origination quarter since Q1 of 2022. Within home loans, total originations were up 46% sequentially and 64% year-over-year despite a continued challenging rate environment for both purchase and refi. We continue to fully leverage the benefits of our bank license to drive greater economics in both our Lending and Financial Services businesses. This has resulted in strong net interest income and sequential net interest margin expansion as lower cost deposits on our balance sheet have grown.

As of the end of Q3, over 65% of our loans were funded by deposits, and our $2.9 billion of new deposits raised in the quarter were essential in funding our $5.2 billion of total originations and $2.8 billion in net loan growth in the most cost effectively. Our lending capacity remains robust with over $27 billion in total capacity to fund loans and meet liquidity needs, which includes our $15.7 billion of deposits, $3 billion of equity capital and over $8.4 billion of warehouse capacity. Lastly, the bank contributes to strong growth in SoFi Money products, high-quality deposits and great levels of engagement. This has led to higher average account balances even as average spend has increased. SoFi Money products have increased nearly 53% year-over-year to 3.1 million accounts.

Given the quality of these members with a median FICO of 743 for our direct deposit portfolio, we see ample opportunity for cross buy. More than 50% of newly funded SoFi Money accounts are setting up direct deposit by day 30. And this account primacy, as expected, has had a significant impact on spending, which exceeded $1 billion in quarterly debit transactions volume, up 3.2x year-over-year and represents more than $5 billion of annualized debit transaction volume. Within Financial Services more broadly, net revenue grew 142% year-over-year and 21% sequentially to $118 million, driven by continued strong monetization within the segment, which Chris will cover in more detail later. What is most impressive in the Financial Services segment is that we reached $3.3 million in contribution profit despite still spending significantly across money, credit card and invest.

Moreover, the credit card and invest businesses are still in heavy investment mode, generating significant losses at a run rate of well over $100 million annually, as they scale acquisition in order to achieve variable profitability, they will eventually see positive contribution profit similar to how we delivered with SoFi Money. Selection is one of our key points of differentiation across our products. During Q3, we enabled our investment members to participate in three initial public offerings, including the ODDITY IPO, the Instacart IPO and the ARM IPO, providing retail investors access to IPOs at IPO prices, which was once unthinkable is just another way we are working to help level the playing field for our members. This differentiation helps bring more people onto the platform while increasing brand awareness and member growth.

We were delighted to see such high quality demand in these offerings and growth in our member base. For our Technology Platform, full segment revenue of $89.9 million saw a slight acceleration in growth of 6% year-over-year. Importantly, as noted previously, we expect the year-over-year growth rate in Technology Platform revenue to continue to accelerate into Q4 with increased contribution from new partners to the platform along with greater product adoption among the existing partners. Tech Platform’s overall diversified growth strategy includes growth in new vertical segments such as B2B and traditional financial institutions, new products and geographies and a focus on partners with large existing customer bases with more durable revenue streams and growth prospects.

In Q3, Tech Platform made significant strides against this strategy with the majority of new signed clients bringing existing customer bases and portfolios, which drives much faster time to revenue generation compared to a startup, along with a growing pipeline of joint opportunities selling combined Galileo and Technisys offerings into an expanded customer base. The demand from traditional financial institutions and new categories is the most robust that we’ve seen. While the lead times for winning RFPs and ensuing integrations are long, measured in many quarters, not months, their transition to modern processing and modern cores is playing out in real time the way we envisioned it would. On the product side, we continue to build and ship a diverse range of products for multiple sectors.

We launched a corporate credit solution, which is designed to modernize expense management for both financial and non-financial corporations by introducing a central account with a single credit limit. In addition, we’ve expanded our Buy Now Pay Later offering to allow lenders to offer it as a form of working capital loans for the small business clients, a great example of the joint Galileo and Technisys capabilities. And third, Galileo powered experienced launch of an innovative debit card program that allows users to improve their credit scores. From a geographic perspective, we received MasterCard certification to provide our payment cards and processing services and five new LatAm countries. Additionally, we have continue to see great product update and new stand-alone products such as our payments risk platform product, which has recently been launched to the entire financial services ecosystem not just existing Galileo clients, as well as Konecta, our natural language AI-driven intelligent digital assistant, which provides faster resolution of customer contacts and reduced contacts per customer for our partners as well as SoFi. I’ll finish here by saying how proud I am of the teams relentless ability to not just persevere through the disruption and volatility of the financial services industry in the first three quarters of the year, but to deliver record results.

I could not feel more blessed by our great team’s ability to execute and importantly, our more than 7 million members that have been so critical in making our vision of being a one-stop shop for all your financial needs become such an amazing reality. With that, let me turn it over to Chris for a review of the financials for the quarter and our outlook.

Christopher Lapointe: Thanks, Anthony. Overall, we had a great quarter with strong growth trends across the entire business. We achieved record revenue and adjusted EBITDA despite operating in a rapidly evolving macro backdrop with notable financial services industry headwinds. 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 third quarter of 2023 versus third 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 remained strong as we delivered record adjusted net revenue of $531 million, up 27% year-over-year and 9% sequentially from the second quarter’s record of $489 million.

Adjusted EBITDA was $98 million, an 18% margin, also ahead of the prior record quarter at $77 million. This represented over 7 points year-over-year and nearly 3 points of sequential margin improvement demonstrating significant operating leverage across all functional expense lines. In fact, sales and marketing declined as a percentage of adjusted net revenue for the fourth consecutive quarter with marketing intensity 349 basis points lower relative to Q3 ’22. Overall, this resulted in a 48% incremental adjusted EBITDA margin year-over-year. If you look at marketing expense per new member, this quarter saw a 17% decline versus last quarter and a 32% decline versus the year ago quarter. This is a function of increased monetization of our member base and investments made in all of our operating segments as well as continued improvement in marketing efficiency and success of our financial services productivity loop.

Our GAAP net losses were $267 million this quarter. Excluding the one-time impairment expense of $247 million, net losses would have been $19.5 million, which is a $55 million improvement year-over-year. We saw notable year-over-year leverage in stock-based compensation with SBC dropping to 12% of adjusted net revenue versus 19% in the prior year period. Our incremental GAAP net income margin would have been 48% for the quarter, excluding the one-time goodwill impairment expense. This is a non-cash charge that has no impact on tangible book value, which grew by $68 million to $3.3 billion. We remain committed to achieving GAAP net income profitability in Q4 2023. In terms of GAAP EPS, our reported loss of $0.29, when adjusted to exclude the one-time impairment expense would equate to a loss of $0.03.

Now on to the segment level performance, where we saw a strong year-over-year growth across all three segments. In Lending, third quarter adjusted net revenue grew 15% year-over-year to $342 million. Results were driven by a 90% year-over-year growth in our net interest income, while non-interest income was down 51%. Growth in net interest income was driven by 113% year-over-year increase in average interest-earning assets and a 244 basis point year-over-year increase in average yields, resulting in an average net interest margin of 5.99% for the quarter, which is a 13 basis point expansion year-over-year and importantly, a 25 basis point expansion versus Q2 2023. I’d also highlight our $2.9 billion of deposit growth in the quarter compared to the $2.8 billion of net loan growth on the balance sheet period-over-period.

With 219 basis points of cost savings between our deposits and our warehouse facilities, this has resulted in a meaningful benefit to our net interest margin and has underscored the advantage of holding loans on the balance sheet and collecting net interest income. We expect to maintain very healthy net interest margin as a result of two things: first, the mix of funding will continue to move toward deposit funding, which is currently north of 60%, and second, we will continue to pass on benchmark rate increases for new loan originations. On the non-interest income side, Q3 originations grew 48% year-over-year to $5.2 billion, and were driven by strong performance from all three products, even as we continued our unrelenting focus of underwriting against our stringent credit standards.

We saw record volumes in our personal loans business which grew 38% year-over-year and 4% sequentially to $3.9 billion. Our student loans business saw origination volume double year-over-year and grew notably on a sequential basis to $919 million ahead of the resumption of payments. Home loans grew by 64% year-over-year and 46% sequentially. And this growth despite continued headwinds from the current rate environment, stems from the early benefits of the integration of Wyndham Capital, which has allowed us to add deep fulfillment expertise into our tech stack and better fill member demand. In the third quarter, we sold portions of our personal loan and home loans portfolio. In terms of in-period sales execution levels, we sold personal loans at an execution level of 105.1% and will be sold home loans at a weighted average execution level of 100.2%.

In addition, last week, we executed a $100 million sale of personal loans at a 105.1% execution to the same partner who purchased personal loans in Q3 and we agreed to terms with that same partner for a $2 billion forward flow agreement at similar execution levels. We are also in the market, including in discussions with funds and accounts managed by BlackRock with respect to a $375 million securitization at favorable execution levels, and that is expected to close mid-November. Our personal loan borrowers’ weighted average income is $167,000 with a weighted average FICO score of 744. Our student loan borrowers weighted average income is $180,000 with a weighted average FICO of 781. 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 48 basis points in Q3 ’23, while our annualized personal loan charge-off rate was 3.44%. Our on-balance sheet 90-day student loan delinquency rate was 14 basis points in Q3 ’23, while our annualized student loan charge-off rate was 38 basis points. We continue to expect very healthy performance relative to broader industry levels. The Lending business delivered $204 million of contribution profit at a 60% margin, up from $181 million a year ago, which represented a 61% margin. Shifting to our Tech Platform, where we delivered record net revenue of $90 million in the quarter, up 6% year-over-year and 3% sequentially. Annual revenue growth was driven primarily by Galileo account growth to $137 million in total.

The segment delivered a contribution profit of $32 million, representing a 36% margin, up significantly quarter-over-quarter as we leverage investments made to integrate Galileo and Technisys and to position the segment for higher rates of diversified durable growth going forward. We expect the Technology Platform segment revenue to see an acceleration in Q4 with ongoing strong margins as we leverage prior investments. Moving on to Financial Services, where net revenue of $118 million increased to 142% year-over-year with new all-time high revenue for SoFi Money and Invest and continued strong contributions from SoFi Credit Card and Lending as a Service. Overall monetization continues to improve, with annualized revenue per product of $53, up 61% year-over-year versus $33 in Q3 ’22, and up nearly 8% sequentially, driven by higher deposits and member spending levels in SoFi Money, greater AUM and monetizable features in SoFi Invest and stability within SoFi Credit Card spend.

We reached 8.9 million Financial Services products in the quarter, which is up 50% year-over-year, and we saw record product adds with 957,000 new products in the segment. We hit nearly 3.1 million products in SoFi Money, 2.5 million in SoFi Invest and 3 million in Relay. For the first-time, this segment reached positive contribution profit at $3.3 million for the quarter and we continue to expect positive contribution in the segment in Q4 ’23 and beyond. This is while we continue to invest aggressively against ample opportunities to rapidly grow this operating segment with attractive returns. Switching to our balance sheet, where we remain very well capitalized with ample cash and liquidity. Now more than ever, SoFi Bank 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 Q3, assets grew by $2.4 billion as a result of strong growth in both student and personal loans. On the liability side of the balance sheet, we continued strong growth in deposits, reaching $15.7 billion, up $2.9 billion sequentially versus $2.7 billion in the prior quarter and $2.7 billion in Q1. Important to note that deposit growth outpaced loan growth for the third consecutive quarter, resulting in more efficient funding costs and a lower reliance on warehouse lines as we ramp the portion of loans that are funded by deposits versus other sources of capital. Because of this, we exited the quarter with $4 billion drawn on our $8.4 billion of warehouse facilities. This further highlights our strong liquidity position, particularly in this market.

In terms of our regulatory capital ratios, our total capital ratio of 14.5% as of the end of the quarter remains comfortably above the regulatory minimum of 10.5%. Throughout the last 12 months, we have demonstrated the benefit of having a diversified high growth set of revenue streams, multiple cost-efficient sources of capital, a keen focus on underwriting high-quality credit and a high degree of operating leverage as we scale the business. We expect those benefits to persist going forward even in light of the existing macro backdrop. For the full year of 2023, we now expect to deliver revenue of $2.045 billion to $2.065 billion, above our prior guidance of $1.974 billion to $2.034 billion and full year 2023 EBITDA of $386 million to $396 million above our prior guidance of $333 million to $343 million.

For the full year, this represents 33% to 34% adjusted net revenue growth, 19% adjusted EBITDA margin and a 48% incremental adjusted EBITDA margin, meaning we expect to drop 48% of all incremental revenue to the bottom line, despite growing at more than 30%. In terms of depreciation and amortization, and stock-based compensation expense, we expect mid to high-single digit percentage increases in the fourth quarter relative to the third quarter results. With that, let’s begin the Q&A.

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Q&A Session

Operator: Thank you. We will now open the line for Q&A. [Operator Instructions] Our first question today comes from Andrew Jeffrey of Truist. Your line is open. Please go ahead.

Andrew Jeffrey: Hi. Good morning. Thanks for taking the questions. [Technical Difficulty]

Anthony Noto: Sorry, Andrw. Go ahead.

Andrew Jeffrey: Okay. Great. Thanks. Appreciate it. I wanted to ask about the decision to sell some personal loans sort of how you arrive at the decision as to which loans you sell and you got great execution in the quarter. Could you compare that to the marks or the assumptions for those loans that you continue to hold on the balance sheet?

Christopher Lapointe: Yeah. Sure. Thanks for the question. So what I would say here is that we’ve really built a nice high quality balance sheet that’s generating net interest income that’s nearly 2 times the costs are directly attributable to expenses to that — to that segment. Now despite cutting credit and driving up quality of our loans, we are still and will continue to see a lot more opportunity to originate more high quality loans. So selling at these attractive prices at the 105.1% that I mentioned, plus having the opportunity to originate more is optimal at this point. In terms of how the execution compares to where the loans are marked on the book, we sold that 105.1%, and the book is marked at 104.0% which is down 10 basis points quarter-over-quarter despite the weighted average coupon on the overall portfolio increasing.

Anthony Noto: Operator, next question? Operator, can we take the next question.

Operator: Our next question comes from John Hecht of Jefferies. John, your line is open.

John Hecht: Good morning, guys. Congratulations on the good quarter. I’m just wondering, you’ve got a resumption of growth in student lending demand, you’re still growing the other products too. I’m kind of — I’m wondering how do we think about kind of the mix at the bank and the NIM at the bank over the next few quarters as the — particularly the student lending reversed to normal demand sequences?

Anthony Noto: Yes, it’s definitely going to play in our favor. The way, I think about it is, we have a pretty good hand on how we allocate capital. And we’re going to allocate the capital based on what’s going to give us the best balanced returns. As Chris mentioned, we’ve grown the balance sheet really well over the last two years since having the bank is generating an impressive amount of net interest income. It’s more than covering our cost there. In the quarter, you saw that we drove 67% of our growth in absolute dollars from non-lending from the Tech Platform and from Financial Services. I think you should expect that type of trend to continue in that — it’s balanced or skewed more towards non-lending. As we think about our balance sheet and we think about the student loan business in particular, what I’d say is, we saw exactly the trend that we expected in student loans in the quarter, which was a slight bump relative to where we’ve been in the past.

We don’t expect to see a step function change in student loan originations for a couple of reasons. One, I think student loan borrowers, federal student (ph) borrowers are refinancing for the two reasons we mentioned. One is savings specifically in cost relative to their current rate and getting a lower rate, and then others that are looking to lower their monthly payment, some of which are doing that at actually a higher rate than they are today. And so we think that will be a slow steady climb as people hit each month of having to pay their bill. The second factors are decisions. We’re going to be very prudent in how we allocate capital to maximize returns. And now that we have four effective loan platforms to allocate that capital to – it’ll really be driven by the opportunity each before being home loans, in school loans, in school student loans, student loan refinancing and then personal loans.

The other thing I would just mention is that we did see an acceleration growth in the Technology Platform. The pipeline there is pretty visible and it’s the most robust that I’ve seen. It will take quarters to answer RFPs not months and to integrate partners. But we made the transition of that business over a year ago, and we’ll start to anniversary, the tougher comps in Q4, and we’ll see an acceleration in that business as well. So really strong prospects and Tech Platform, great trends in Financial services. So think about SLR and PL being additive to growth, not the driver of growth as we go into ’24.

Christopher Lapointe: And then the only other thing I would add, John, in terms of the actual NIM margin specifically, what we are expecting those to remain very healthy throughout the remainder of the year, but we are taking a bit of a conservative approach, and that’s what’s currently embedded in our guidance. Reason for that is obviously as a result of increases in cost of funds and various pricing strategies as well as a mix shift into student loan refinancing.

Operator: Thank you. Our next question today comes from Dan Dolev of Mizuho. Your line is open.

Dan Dolev: Hey, guys. Terrific results. Really, really strong. I just have one question. We’re at the end of October now. Can you maybe talk about overall trends, consumer health, everything you’re seeing into the fourth quarter? There’s obviously a lot of debate out there in terms of the overall health of the consumer. I’m sure you’re seeing a lot of it. So I would appreciate some comments on that in your business. Thank you.

Anthony Noto: Sure. First, I’d like to caveat on my comments with the fact that we are relatively unique and that we’re a secular grower, not a cyclical grower at this point. Yes, there are cycles in some of our businesses with the vast majority of our growth is us taking market share from existing incumbents as opposed to an indication of the economy or the economic cycle. So secular growth to driving force. That said, we continue to see really strong demand for our products and really strong consumer trends. In SoFi Money, we’re seeing balances increase on a per account basis, not just new accounts adding to our deposits. We’re also seeing increased spending on a per account basis, not just because we’re adding new accounts.