SoFi Technologies, Inc. (NASDAQ:SOFI) Q4 2022 Earnings Call Transcript

SoFi Technologies, Inc. (NASDAQ:SOFI) Q4 2022 Earnings Call Transcript January 30, 2023

Operator: Good morning, and thank you for attending today’s SoFi Fourth Quarter and Full Year 2022 Earnings Conference Call. All lines will be placed on mute during the presentation portion of the call with an opportunity to question and answers at the end. At this time, I would now like to turn the conference over to our host, Maura Cyr, SoFi’s Investor Relations.

Maura Cyr: Thank you, and good morning. Welcome to Sofie’s fourth quarter and full year 2022 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 upcoming Form 10-K as filed with the Securities and Exchange Commission. 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. 2022 was a remarkable year for SoFi. We accomplished more than any of us could have hoped for. Our resilient team drove great execution of our strategy that has proven to provide the benefits of business diversification and durability to deliver exceptional growth and improving profitability. Our adjusted net revenue grew 52% in 2022 to over $1.5 billion, and we delivered nearly 5 times the adjusted EBITDA we did in 2021. We obtained a national bank license, which could not have come at a better time, allowing us to be incredibly flexible in a rapidly changing environment. We’re offering a compelling SoFi Money product that is driving high-quality direct deposit customers spending and deposit balances.

The deposits bolster and diversify our surge of funding enabling us to offer our best rates on loans, while generating impressive returns and improving net interest income revenue. In fact, 2022 marks the first time our lending net interest income revenue of $530 million by itself exceeded our total directly attributable lending cost of $443 million. we grew our deposits 7 times to $7.3 billion from $1 billion over the course of the year, really powering that cycle. We grew our member base by 1.8 million to 5.2 million members, nearly 9 times our size in 2018. We’ve acquired Technisys, adding a critical capability as we build our end-to-end technology stack and bringing us one step closer to being the AWS of fintech. We navigated unparalleled market volatility, macro headwinds, high inflation and increasing interest rates and two unexpected extensions of the student loan moratorium by reacting nimbly and leveraging the diversification of our business to hit record revenue in each quarter of the year.

The fourth quarter was an incredible end to an exceptional year. We delivered another quarter of record adjusted net revenue and adjusted EBITDA and strong overall operating results. A few key achievements from the quarter include our seventh consecutive quarter of record adjusted net revenue of $443 million, up 58% year-over-year, which accelerated from 51% year-over-year growth in the third quarter and reflects record revenue in all three business segments. Record adjusted EBITDA of $70 million was up 58% quarter-over-quarter, that is nearly equal to the total adjusted EBITDA in the first three quarters of the year combined. In Q4, we achieved a couple of important financial inflection points. Adjusted EBITDA was $70 million is now largely equal to share-based compensation expense of $71 million, a critical step toward GAAP net income profitability.

Additionally, net interest income revenue, or NIM revenue of $183 million exceeded lending noninterest net revenue of $144 million for the first time. And importantly, our NIM revenue is meaningfully greater than our directly attributable lending expense of $106 million. In Q4, we had an incremental GAAP net income margin of 42%, resulting in a loss of just $40 million, roughly half of the third quarter 2022 loss. Said another way, of the $171 million of incremental GAAP revenue year-over-year, $71 million or 42% dropped to the GAAP net income line. Given these accomplishments, in our 2023 plan, we expect to achieve quarterly positive GAAP net income in Q4 2023. Our strategy is to continue to play out with SoFi Money, which allowed us to surpass $7.3 billion in deposits, up 46% quarter-over-quarter, and savings of 190 basis points on cost of funds versus using other sources of debt to fund loans.

Another quarter of positive GAAP net income for the SoFi Bank at over $30 million and at an 11% margin. Finally, we grew our tangible book value for the overall company for the second consecutive quarter. Q4 also saw our second highest quarter ever of member adds and our third highest quarter of product adds with strong momentum continuing into Q1. The 487,000 new members in Q4 2022 brings total members to 5.2 million, up 51% year-over-year. We also added nearly 700,000 new products in Q4, ending with nearly 7.9 million total products, up 53% year-over-year. Of these new adds, financial services products grew by 60% year-over-year to $6.6 million, while lending products were up 24% to over $1.3 million. The strength of our results, once again, underscores how our full suite of differentiated products and services provides a uniquely diversified business that has been not only able to endure, but to thrive through market cycles.

Now I’d like to touch on segment level results, with a particular focus on the benefits of our diversified business drivers as well as the structural advantage of our bank charter. In lending, we generated a record of $315 million of adjusted net revenue, up 51% versus the prior year period. Our personal loan performance more than offset the continued lack of demand in student loan refinancing and the less robust performance of home loans. Student loan refi continues to be negatively impacted as federal borrowers again await clarity on the end of the moratorium of federal student loan payments. Home loans faces macro headwinds from high rates, while we continue the process of transitioning to new fulfillment partners. The personal loans business maintained its strength in Q4.

We originated nearly $2.5 billion, up 50% from $1.6 billion in Q4 2021. This product continues to deliver even as we’ve raised our coupons to our borrowers as a result of rate increases and maintained our stringent underwriting criteria. While these origination levels themselves are impressive, the strength of our balance sheet and diversification of our funding sources provide new options to fund lending growth while driving efficiency with cost savings. These advantages are a direct result of SoFi Bank. Having more flexibility with our balance sheet allows us to capture more NIM and optimize returns, a critical advantage in light of the macro uncertainty. Additionally, by using our deposits as a funding source, we benefit from a lower cost of funding for loans.

In Q4, the difference in our deposit cost of funds and warehouse cost of funds was approximately 190 basis points, where it was 125 basis points in Q3, and just 100 basis points in Q2, a powerful benefit in a rising rate environment. Lastly, the bank contributes to strong growth in SoFi Money members, high-quality deposits and improved levels of spending and engagement. This has led to higher average balances even as average spend has increased. Of the $7.3 billion in deposits at quarter end, 88% were from direct deposit members. Roughly 50% of newly funded SoFi Money accounts are setting up direct deposit by day 30 versus 20% in Q4 ’21, and this has had a significant positive impact on spending. Q4 annualized spend was 3.4 times 2021 total spend, and Q4 spend per average funded account was up 25% quarter-over-quarter.

SoFi Money members have increased nearly 53% year-over-year to 2.2 million in total. Given the quality of these members with 745 million FICO score, we see ample opportunity for cross-buy. This is a great segue into financial services more broadly, where net revenue nearly tripled year-over-year to $64 million and grew 32% from $49 million sequentially in Q3. Moreover, Financial Services annualized revenue is now approximately $260 million. Contribution loss of $44 million improved $9 million versus the third quarter, even as we invested $13 million more in marketing in the fourth quarter. We saw this as a worthwhile opportunity to attract more direct deposit members. Even with this spend, variable profit, including all marketing costs, improved quarter-over-quarter and was nearly breakeven.

We still anticipate the Financial Services segment will be contribution profit positive in 2023 as we continue to scale and monetize the business. We finished Q4 at 6.6 million Financial Services products, up 60% year-over-year, and 4.9 times total lending products of $1.3 million. The increased scale of Financial Services helps drive cross buy and marketing efficiencies over time. The scale of Financial Services not only drives cross buy and marketing efficiencies, it also is proving to be a large revenue contributor as we continue to drive monetization of these businesses. In fact, annualized revenue per product is up nearly 2x from $21 in Q4 of last year to $40 in this quarter. This is due to the increasing attractiveness of these products, growing brand awareness and network effects.

As we’ve committed, we continue to iterate and invest aggressively in our product suite, and that investment continues to pay dividends as members embrace our launches. Since our last earnings call, we introduced an increase in our checking and savings APY of up to 3.75% as of January 4. We launched SoFi Plus, a premium member service, that bundles together are a wide variety of member benefits and provides incremental value and rewards. SoFi Plus is unlocked through enrolling in direct deposit. We will continue to add more value and benefits to this premium member service to not only highlight the breadth of our products and services, but to also increase the total value of having your direct deposit with SoFi. We expanded insurance coverage for our members to include cyber insurance, our invest team launched options trading, making good on our promise to our members to deliver this much anticipated service, and we introduced a new way to spend with SoFi with paying for there first product built on the combined Galileo and Technisys platform.

This leads me to our Technology Platform segment which remains a critical element of SoFi’s strategy. In the fourth quarter, full segment revenue of $86 million grew 61% year-over-year with a 20% margin at the segment level or 24% if you exclude Technisys. The SoFi Technology platform strategy includes growth in new verticals, new products and new geographies. In Q4, Galileo signed 11 new clients and made big strides in the strategy, with 36% of new deals in B2B and 27% of new deals outside the United States. Importantly, of these 11 new deals, nine have existing customer bases, reflecting the continued demand for our innovative services from more mature organizations. Technisys is also delivering strong growth in number of new clients signing an additional 16 new clients in Q4, including its first digital deal in Mexico.

I’ll finish here by saying that we’ve been in an all-out sprint over the last five years to build out our digital product suite to meet our members’ needs for every major financial decision in their lives and all the days in between. The benefits of our strategy resulting in a uniquely diversified business, combined with a national bank license, not only positions SoFi to be the winner that takes most in the secular transition of the financial services to digital, but also to provide greater durability through a market cycle. I’m excited about where we are today and even more excited about where we can go from here. With that, let me turn it over to Chris for a review of the financials for the quarter.

Chris Lapointe: Thanks, Anthony, and good morning, everyone. We finished off a remarkable year while navigating a rapidly evolving macro backdrop even as our previously largest and most profitable business operated at 25% of Q4 2019 pre-COVID volumes. This proves once again that our diversified and differentiated business model drives SoFi’s durability and long-term growth potential. I’m going to walk you through some key financial highlights and then share some color on our outlook. Unless otherwise stated, I’ll be referring to adjusted results for the fourth quarter and full year of 2022 versus fourth quarter and full year of 2021. Our GAAP consolidated income statement and all reconciliations can be found in today’s earnings release and the subsequent 10-K filing, which will be made available in the coming weeks.

For the quarter, top line growth accelerated, and we delivered record adjusted net revenue of $443 million, up 58% year-over-year and 6% sequentially from the third quarter’s record of $419 million and above the high end of the guidance provided during our last earnings call. Adjusted EBITDA was $70 million at a 16% margin, also above the high end of our most recent guidance. We saw 14 points of year-over-year and five points of sequential 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 40% incremental adjusted EBITDA margin year-over-year.

Our GAAP net losses were $40 million this quarter, a $71 million improvement year-over-year and $34 million improvement sequentially. Incremental GAAP net income margin was 42% year-over-year, a notable step in our path to GAAP profitability. In addition to our adjusted EBITDA margin expansion, we saw meaningful leverage against stock-based compensation as a percentage of revenue at 16% in Q4 2022, down from 27.5% in the same prior year period, putting us well on our path to longer-term goal of single-digit stock-based compensation margins as previously communicated. For the full year, we delivered $1.54 billion of adjusted net revenue, up 53% year-over-year from $1.01 billion in 2021. As a reminder, we revised our annual guidance in April of 2022 following the extension of the moratorium on federal student loan payments.

Our updated guidance for the year included $1.47 billion in adjusted net revenue and $100 million in adjusted EBITDA. This guidance contemplated an ultimate extension in the moratorium until year-end, which implied a Q4 ramp in student loan refinancing activity ahead of the anticipated resumption of federal payments. From an adjusted EBITDA perspective, we delivered $143 million in profit, nearly 5 times that of 2021, and $63 million above the guidance we presented following the moratorium extension I just discussed. 2022 delivered a 9% adjusted EBITDA margin, 630 basis points of improvement from 2021. Even with the recent subsequent extension of the moratorium through June of 2023, which impeded the expected Q4 2022 ramp in student loan refi demand, we still exceeded that revenue guidance by $80 million and adjusted EBITDA by $43 million.

We achieved these results by implementing new strategies and through nimble asset allocation, which speaks to our ability to leverage the diversity of our revenue streams. Now on to the segment level performance, where we saw strong growth across all three segments. In lending, fourth quarter adjusted net revenue grew 51% year-over-year to $315 million. Results were driven by 138% year-over-year growth in our net interest income, while noninterest income was relatively flat. Growth in net interest income was driven by a 109% year-over-year increase in average interest-earning assets and a 317-basis point year-over-year increase in average yield, slightly offset by 162 basis point increase in the cost of interest-bearing liabilities. This resulted in average net interest margin of 5.94% for the quarter, up 141 basis points year-over-year.

Noninterest income was relatively flat year-over-year as increased personal loan originations at higher weighted average coupons were largely offset by lower student loan and home loan originations. Personal loan originations grew 50% year-over-year to $2.5 billion, while student loan originations were down 73% and home loan originations were down 84% year-over-year as a result of macro headwinds and a continued transition of home loan fulfillment partners. Overall, we achieved strong top line growth, while maintaining our stringent credit standards and disciplined focus on quality. Our personal loan borrowers weighted average income is $165,000, with a weighted average FICO score of 747. Our student loan borrowers weighted average income is $170,000, with a weighted average FICO of 773.

This focus on quality has led to continued strong credit performance. In fact, 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 34 basis points in Q4 ’22, while our annualized personal loan charge-off rate was 2.47%. Our on-balance sheet 90-day student loan delinquency rate was 13 basis points in Q4 2022, while our annualized student loan charge-off rate was 0.37%. As we have expressed in the past, it is reasonable to expect credit metrics to revert over time to more normalized pre-pandemic levels, but we continue to expect very healthy performance relative to broader industry benchmarks. The lending business delivered $209 million of contribution profit at a 66% margin, up from $105 million a year ago and a 51% margin.

This improvement was driven by a mix shift to higher-margin personal loans revenue, along with marketing and ops efficiencies as well as fixed cost leverage across the entire segment. For the full year, lending adjusted net revenue grew 45% to $1.11 billion, and the segment delivered $664 million of contribution profit at a 60% margin. Shifting to our tech platform, where we delivered net revenue of $86 million in the quarter, up 61% year-over-year, or up 13% excluding Technisys. Overall, annual revenue growth was driven by 31% year-over-year Galileo account growth to $131 million in total as well as sequential growth in transactions per active account. We also signed 11 new clients, four of which are in the B2B space and three of which are in Mexico, further diversifying our partner base.

During the quarter, one of our clients migrated the majority of their processing volumes to a pure processor, which resulted in a $6 million to $7 million revenue headwind in period. Segment contribution profit of $17 million represented a 20% margin and 24%, if you were to exclude Technisys. For the full year, the Tech Platform segment grew revenue 62% to $315 million, and delivered $76 million of contribution profit at a 24% margin. Excluding Technisys, revenue growth was 24% year-over-year and contribution margin was 30%. Moving on to Financial Services, where net revenue of $65 million increased 195% 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 to $40, nearly 2 times the $21 in the same prior year quarter and up 25% sequentially from $34. We reached 6.6 million Financial Services products, up 60% year-over-year by adding 635,000 new products in the quarter. We now have 2.2 million products in SoFi Money, 2.2 million in SoFi Invest and 1.9 million in Relay. Contribution losses were $44 million for the quarter, which improved sequentially as a result of the growth in revenue as well as fixed cost leverage, but increased year-over-year, predominantly as a result of building our CECL reserves for the SoFi credit card business, which is expected as we continue to grow in scale. In addition, we saw a year-over-year reduction in higher-margin digital assets revenue.

For the full year, the segment delivered $168 million of revenue, which is nearly 3 times the $58 million we delivered in 2021, and our contribution losses were $199 million. Notably, that’s a 21% improvement in contribution loss per average product during 2022 versus 2021. Switching to our balance sheet, where we remain very well capitalized with ample cash, excess liquidity and strong regulatory capital and leverage ratios. This year’s opening of SoFi Bank further reinforces our strength and provides more flexibility and access to a lower cost of capital relative to alternative sources of funding. In Q4, assets grew by $3.2 billion as a result of the strong growth we continue to see in personal loan originations. On the liability side, we saw tremendous growth in deposits to $7.3 billion, up $2.3 billion quarter-over-quarter.

Because of this, we exited the quarter with $3.1 billion drawn on our $8.4 billion of warehouse facilities, which represents 36% of our total available capacity. Our current book value is $5.5 billion, and our tangible book value has grown for two consecutive quarters, with more than a $50 million increase sequentially in Q4. Let me finish up with guidance. Before going through the specific numbers, I want to hit on some of the larger macro assumptions that underpin our financial guidance. From an interest rate perspective, we are assuming an outlook consistent with the consensus forward curve, with a peak Fed funds rate reaching approximately 5% in Q2 2023, with two rate cuts in the back half of the year to get us to a 4.5% exit rate in 2023.

We are assuming a 2.5% contraction in GDP and a normalization of unemployment to around 5%. And from a credit perspective, we are expecting a continuation of elevated credit spreads across capital markets and a continued normalization of consumer credit. For Q1, we expect to deliver adjusted net revenue of $430 million to $440 million and adjusted EBITDA of $40 million to $45 million. For the full year of 2023, we expect to deliver adjusted net revenue of $1.925 billion to $2.0 billion, representing 25% to 30% growth and adjusted EBITDA of $260 million to $280 million. Our outlook represents 30% incremental EBITDA margins for full year 2023 versus full year of 2022, and we expect to reach quarterly GAAP net income profitability by Q4 2023, with GAAP net income incremental margins for the full year of 20%.

Finally, quickly hitting on a few key points for each segment. In our lending segment, we expect the Department of Education’s moratorium on federal student loan payments to extend through June 30, 2023, at which point there are 60 days before repayments actually begin. Accordingly, our outlook assumes that we will be operating in our current run rate levels until September. After September, we do believe there will be a recovery to a higher levels of student loan refinancing revenue than the current trend, but we do not expect to return to pre-COVID levels in 2023. In our personal loans business, we expect to see modest growth as we balance taking advantage of ample headroom in this business given our current market share and differentiated product with a thoughtful and prudent approach to ensuring our credit remains very high quality.

We remain committed to underwriting to an industry-leading life of loan loss profile. In our Tech Platform segment, one year of focus for us in 2023 is on quality of new clients, including size, durability and time to market over quantity, which means bigger wins that leverage the combined go-to-market value proposition of the Tech Platform, while still investing in focused new product areas to drive diversification. While we expect low double-digit organic revenue growth in 2023 due to this focus, and a variety of other factors, our longer-term strategy is already starting to pay off with greater diversification in our pipeline and significant margin expansion expected in 2023. After a three-year investment period in the Tech Platform, including moving to the cloud, a 2.5x increase in head count, the acquisition of Technisys and launching new product capabilities, we will increasingly focus on leveraging the value of our investments through the synergies between the two product lines, Technisys and Galileo, as well as through joint product offerings, all to drive meaningful contribution profit growth relative to revenue growth.

In starting to operate as one unified technology platform, we have recognized opportunities to reduce our costs, including a small reduction in head count. In Financial Services, we expect continued strong growth in revenue, driven by growth in products as well as increased monetization per product as we scale deposits, spend and AUM. We Importantly, we will front-load investments in the year to take advantage of attractive opportunities to continue to scale our high-quality deposit base. In summary, we could not be more-proud of the results SoFi delivered in 2022. We exceeded $1.5 billion in annual revenue and grew adjusted EBITDA nearly 5 times to more than $140 million. We continue to be extremely well capitalized and are excited about the opportunities in front of us.

We look forward to another strong year in 2023. And with that, let’s open it up to questions.

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Q&A Session

Operator: Our first question comes from the line of Michael Ng of Goldman Sachs. Your line is open. Please go ahead.

Michael Ng: Hi, good morning and thank you very much for the question. I appreciate all the color around 2023. I was just wondering if you could go into a little bit more detail around the origination assumptions. You gave some good deal around student loan and personal loans, could you do that for homes as well? Thank you very much.

Chris Lapointe: Yes, sure. So, I can hit that one, and Anthony can chime in. So, in terms of our overall outlook on originations, going back to what I said in my prepared remarks, we are assuming modest growth in our personal loans business. We do see there being ample headroom for continued growth given where our market share is today. Currently, we’re at about a 6% market share in our credit box. That’s up from about 4.5% a year ago. So significant headroom ahead of us, but we are going to take a prudent approach to this and continue to monitor credit and make changes as necessary. In student loan refinancing, we’re assuming that originations are at the current run rate levels at least through the end of August of 2023, and we do expect a bit of an uptick once the moratorium ends in June followed by a 60-day extension.

And then in-home loan originations, we expect to continue at the current pace that we’re at right now with a potential uptick in the back half of the year as we resolve all of our fulfillment issues.

Operator: Our next question comes from the line of Dominick Gabriele of Oppenheimer. Please go ahead.

Dominick Gabriele: Great results. So I just wanted to talk about the deposit growth. I mean it’s really been — Anthony, it’s been really astounding how much deposit growth you’ve gotten over the last year. And I’m just curious about how you think about an environment where you may need less deposits? And how you would go about, perhaps, trimming that growth rate in that environment, let’s say, originations are down. Is it rate, or is it something else? Any color you can provide on that outlook would be excellent. Thank you so much.

Anthony Noto : Yes. And thank you, Dominic. We’re really pleased and proud of what we’ve been able to achieve on the deposit side getting to 7 — over $7 billion of deposits, starting at less than $1 billion at the beginning of the year. And that trend really reflects the strategy that we’ve employed behind the bank to offer a very high interest rate on checking of over 2% and a high interest rate on savings at 3.75%, no fees and complete functionality on your phone to be able to pay bills, to be able to send money to your friends to be able to look at all of your transactions, to be able to really function all of your money movement right from our app. The combination of that plus the focus we’ve had on driving high-quality direct deposits has driven that deposit number.

What I’d say is, we’re nowhere close to the point in our total deposits that we would have trouble deploying them. The alumina on our growth is really driven by how much resources that we have to go after it. Once people will become aware of our product, the adoption is pretty strong behind that. And so the deposits that we have today could be deployed on the way we have the last several quarters; one, to fund our own loans; two, to be opportunistic opportunities related to our loans that are in the marketplace. There are several businesses we’re not in today that would leverage deposits, including small and medium business loans and being in that entire sector would require deposits as well. And we can leverage obviously growing deposits from small and medium businesses also.

So if we get to the point that our deposits are significantly higher than they are today, we can deploy them in many, many other ways to drive a great return for the company.

Operator: Our next question comes from the line of Kevin Barker of Piper Sandler. Your line is now open, please go ahead.