Figure Technology Solutions, Inc. (FIGR) Earnings Call Transcript & Summary

Good afternoon. I'm James Yaro. I cover brokers, crypto investment banks here at Goldman Research. With us, we have Michael Tannenbaum, CEO of Figure Technology, a position he took over in 2024. He successfully led the company through its recent IPO. So congratulations on that. Figure offers robust growth and a unique innovative approach to fintech and blockchain technology. Prior to this role, Michael was COO at Brex and held senior positions at Brex and SoFi. Thank you so much for being here.

Thanks for having me. Excited to be here.

Great. Michael. So let's start on strategy here. So for investors who are new to the story, maybe lay out the simplest way to describe what Figure is building and why it matters?

Sure. We're building the future of capital markets on blockchain rails. We have a marketplace that offers origination of tokenized loans, sales and trading of those loans. And we started in the mortgage space. So we built a platform that enables our 250 partners which range from banks, credit unions, fintechs to originate assets in 5 days and for $1,000 versus industry average of $45,000 and $12,000. So it's a really disruptive approach to mortgage and to asset generation more broadly, and it's a capital market that comes hand-in-hand with an origination technology. And because of that, we're able to offer a really attractive margin, capital-light profile, which I think has been shown up in a lot of the excitement and enthusiasm for what we're doing. So glad to be here. Thank you.

Excellent. So this is your first conference since taking over as CEO of Figure now being a public company. What are the early lessons from the IPO process and I guess, in the few months since you went public?

Yes. So I joined the company April 24, and I was an early investor in the company and the Chairman of the company, Mike Cagney, the founder, and I worked together at SoFi, where I was the Chief Revenue Officer. So that's a bit of a background for folks that don't know that. And we went public in September. And since then, it's been very much focused on execution. And I think we've used the opportunity to really demonstrate clarity in our story. I think people will want to hear about this marketplace orientation that we offer, that capital light, they're looking at the growth and the margins. And I think we're talking to investors and spending time like we are here today to really listen to feedback and make sure that we're delivering that consistent story and also that consistent approach of starting where we are in a very small portion of the mortgage market today. We do about somewhere between -- somewhere around $1 billion on average of originations a month. And there's $2 trillion of mortgage outstanding annually and the broader consumer credit space is that much bigger. And so we see really that we're in very early days and our ambitions are much broader beyond just where we started beyond mortgage to expanding not only to all of private credit, but also even to equities, which I know we're going to talk a little bit about later.

Perfect. So let's dig a little bit into strategy before we go into the business a little bit deeper. So I guess you already mentioned it a little bit, but the broad aspirations for Figure and I guess maybe to make it a little bit more nuanced here or just sort of your top 2, 3 strategic priorities over the next 18 to 24 months?

So strategic priority one is continuing to expand in the mortgage space. I think we're very differentiated in that. We've taken a HELOC product and used it to go after that $35 trillion of home equity that's outstanding. And we do that in a variety of ways. Our HELOC product is now 20% of that is first lien, for example, meaning it's not on top of an existing mortgage. That HELOC product can be used to fund small businesses. It can be used for home improvement. It can be used to pay off existing mortgage debt or higher rate personal loan debt or credit card debt that's really high rates that are outstanding. And so it's a really flexible product and continuing to grow that into that $2 trillion, I'd say, is priority 1. Priority 2 is expanding product set within mortgage. We've started to do debt service covenant ratio loans, which are for investor properties. We've started to work in residential transition loans, which are also known as fix and flip. So continuing to look at what's working about our marketplace, the fact that we can offer lean perfection with something like DART, digital asset registry technology, value of that really showed up with Tricolor this quarter, which we could come back to. So that's kind of the second priority is diversification. And then the third is our blockchain pillar. So we have a stablecoin YLDS, which we use to settle and service the loans in our marketplace, and that's growing volume really nicely. You can check that out on the Provenance Explorer and Democratized Prime. That's our short-term overnight money marketplace, think about that like a commercial paper operating on blockchain rails, whereas Figure Connect is a term or permanent marketplace. This is a short term or overnight. And we're starting to see significant traction there. In fact, last week, we launched the ability for people in Solana to be able to lend into that Democratized Prime, but stay in the liquidity where they are on the Solana ecosystem, but then use a staked stablecoin to get into our marketplace. So I think we're seeing kind of core mortgage traction, but also lots of traction in asset diversification and in some of the newer blockchain products that we have.

Extremely exciting. So Figure, as you just talked about, focus on innovation across a variety of products. What do you think allows you at Figure to drive such rapid technology development with strong margins? Obviously, strong cost discipline.

So this has been coming up in this conference, and I think it's important to talk about one of the things that we've been really good about from my standpoint is we don't just focus on tokenization for tokenization's sake. We focus on liquidity, right? Just because you tokenize something does not create liquidity in that. And we have lots of liquidity. We've done $20 billion of what we do in mortgage, and there's been about $70 billion of transaction activity in that mortgage product. And so there's a lot of transaction and a lot of liquidity. And so we really are focused on how do we make that core product useful in so many different applications, like small businessm for example, or like debt payoff. And in doing so, we're keeping those same technology rails that we have, that same product, but using it in a different way. Another example is like a home improvement customer that might use our product. They don't know anything about mortgage or Fannie Mae. They're competing with, say, like a personal loan they might otherwise use. And so there are so many different use cases for us, and we're standardizing that use case across these 250 partners, adding liquidity and that lowers costs and means we get a lot of ROI on our tech investment. But at the same time, to your point, we do have a very innovative culture. I think one of the things that -- I remember when we IPO-ed, the NASDAQ person there was like, well, you guys are like still taking calls during your IPO and stuff. And I think that there is a lot of drive. We understand the market opportunity that's ahead. It's massive. We think all the capital markets will ultimately migrate to these rails, and it's a big opportunity, and we're very focused at the IPO just being a catalyst for us to move that much more aggressively and faster into this market.

So I want to touch on tokenization because that, as you've noted, is top of mind at this conference. But I'd like to start first maybe on HELOCs, the core product, and you talked about partners already. So you added 78 originating partners in the third quarter, which is more than the entirety of last year and the year before in each of those years and more than twice as much in the first half. So what drove the stronger origination? Is it a broader recognition of the product, something else? And I guess, how should we sort of think about that originating partner growth trajectory?

So we have a flywheel, right? Every marginal dollar that comes into our marketplace helps lower costs and increase liquidity for all participants. So you should expect some acceleration as we continue to grow and expand. I think in Q3, in particular, some of that growth is because of the SMB use case that we unlocked. And very specifically, what we did, and this, I think, does a really nice job of highlighting the way that we're differentiated and how we compete with someone like Fannie Mae, we decided that we wanted to offer our product to business customers as well. We opened the technology to support a business bank account underwriting. For most people in the lending space, business bank account would mean self-employed, and that's typically going to be a much slower and more complicated to underwrite. We took a different approach. And importantly, when we do that, we have all of our capital market behind us ready to buy that loan because we're an integrated technology and capital market. We're like a Fannie Mae plus an LOS plus the securitization engine altogether. And what that means is we can shift and make changes to the product to support these use cases. And so when we opened it up to SMBs, for example, we were able to add a bunch of people who are kind of waiting to offer this product as an alternative to SBA or as an alternative to a traditional SMB term loan, again, going back to anybody who has that $35 trillion of home equity, even if they're funding a small business, they're probably better off using their home equity because you're borrowing over 30 years with a lower rate, which is going to give you the lowest possible payment. So that is just a massive opportunity. And I think you saw a little bit of that unlock in the SMB specifically in Q3.

What sort of originating partners attracted to using the Figure platform? You've seen from what we can tell, fairly broad nonbank adoption. But what about banks? And then within that bank comment, maybe you could just break down between smaller versus larger banks?

Right. So we've got a very diversified group of partners, 250. Those range from fintechs, nonbanks, like you said, solar and then will include depositories, both traditional banks as well as credit unions, and we serve all of those. I think we are less penetrated. There's about 5,000 banks and 5,000 credit unions, and we're in really early innings there. I think the sweet spot for us has been the, call it, regionals that are looking to where can we add value to someone like a bank. Banks typically are not going to have the most efficient processes. They're not going to staff up rapidly or staff down rapidly, and so we can be a great outsource partner for them. And I think it's important to note that the cost advantage we have in origination, that $1,000 versus that $12,000 industry average is going to be even more manifest inside a bank. One, because of the staffing challenges they have. But two, banks are unique and that they have to serve -- they don't have to do anything, but they're typically oriented to -- especially credit unions and banks to orient it to serve their existing customers. So if someone with, say, $100,000 mortgage that says, I want to do a $100,000 mortgage, a bank is going to lose a lot of money on that, but still want to do it and be accommodating, whereas a fintech or an independent mortgage bank might say, see you, right? And so because they have to do that, that's our wedge in and to say, we can make that production profitable for you because on a $100,000 mortgage to pay $12,000 cost to originate is extremely prohibitive to use our process and do it in $1,000 is much more attractive. And so that lower balance mortgage process is our wedge into a lot of these depositories, whether they be bank or credit union, in particular, because they're so focused on serving their customers.

So maybe just one more on that. So the big banks have the CCAR stress test, and that's capitalizing for a 2008 type scenario. And one product that didn't perform particularly well in 2008 was HELOCs, right? And so the CCAR stress test punishes these big banks quite heavily in terms of capital. So they want to be there for their clients. It's an expensive product to offer. So there's even a capital concern on top of it. So how does the dialogue work? And what will be the value proposition to one of the largest banks out there?

Well, I think HELOC, and this speaks to the greenfield nature of what Figure does. In general, HELOC prior to Figure was kind of an unloved asset class. And I think if you go back to SoFi, right, student loan was also an unloved asset class prior to SoFi's entry in that, and there's some commonality there. So I think what you are citing is actually a further reason why the market wants to adopt something like Figure because we are bringing liquidity into a product that people used to see as an accommodation product, one they didn't want to do. And I think very importantly, this product, this HELOC chassis is not only used for first lien -- excuse me, for second lien. In fact, 20% of what we do is first lien, and that is very different than when people think about kind of the HELOC you're talking about that is a product that people don't want to offer. We're saying, listen, a HELOC is just what we started with has the liquidity, is where we've invested a lot of technology and money into. So let us continue to grow that and use it for so many different types of lending. All HELOC means is that you have the ability to redraw, which is actually generally favorable to the borrower. Most people like that option.

Excellent. So this is financials conference, so we need to talk about rate sensitivity. So this is some argue the golden age of HELOCs, in that there's record home equity outstanding, but people can't necessarily tap that without having to refinance at much higher rates. So maybe just at a high level, could you walk us through the impacts to your business if long rates were to fall, let's say, 100 to 150 basis points?

Yes. So absolutely acknowledge that this has been a great time to be in the home equity space. You've had a combination of rapid growth in home prices, so lots of equity. You have people locked into lower rates. You have people not moving and therefore, doing home improvement. So there's a lot of good in that environment. I think Figure has been successful in a variety of rate environments. And if you look at our growth, it's been rapid, whether rates were falling, rising or flat. In general, as rates flow down, say, the 100, 150 basis points that you're mentioning, that tends to increase borrowing. And so in an environment like that, I actually expect volume to go up because at the margin, you're looking at your payment and your payment is going down. We have floating rate HELOC, we have fixed rate. So we've got a variety of products on behalf of our partners to capture those different movements in the yield curve. I think even more importantly, though, when you look at like if there was to ever be a very booming mortgage market like we saw in 2021, which would probably require a more -- a lower -- even lower rate environment than you're talking about because there's so many people locked in at 2%, 3%. But in that event, I actually think Figure would be the absolute choice for all of the $100,000, $200,000, $300,000 mortgages because there'll be so much demand in the system. People are going to have to figure out why I need to focus on the $500,000, $600,000, $700,000, $800,000 loans, where I can make money. I've got no ability to staff up and process all that. So I think you'll actually -- just like what you saw for Internet companies in -- with the onset of COVID and people rapidly had to get online in every aspect of their business, I think if there were to be an event like that, people will be flocking to Figure because they're going to need that capacity, those low cost, that automated seamless way to process all this volume. There'll be no other way to do it.

Really interesting. So that actually, I think, maybe brings me to my next question, which is first lien HELOCs. So what are first lien HELOCs? And I guess within that question, maybe you could talk a little bit about what's greenfield versus what you think could have been otherwise an unsecured consumer loan versus first mortgages or maybe something else?

Yes. So I think most of HELOC today is greenfield. You have that $35 trillion, again, very attractive rates, long terms, ability to pay off lots of debt, almost your home, if you have home equity then is likely to be the most efficient cost -- excuse me, the most efficient form of financing. But then when you get into what a first lien HELOC is and what we introduced over the summer is the ability to pay off an existing mortgage with our HELOC. And so in the event you had a higher rate loan, maybe you were worse credit and your credit migrated up or you didn't put very much down and you've paid off, whatever the reason, if the prevailing rate today and in a falling rate environment this will be increasingly the case, if the prevailing rate today is lower than the existing you have, you can use our HELOC to pay off any existing lien, including a secured lien, whether that be a mortgage or a HELOC. And I think what we've done with that product is we've said to our 250 partners, especially the ones that are in the mortgage space, whether they be banks or mortgage companies, don't go Fannie Mae, right, go through our process, our capital market, our approach because we're offering that $1,000 cost to originate that 5-day process and we're competing with the alternative, which is a much longer sales cycle and much more expensive capital market. Again, if you use our capital market, there's 80% reduction in third-party review because we put the information on a blockchain, for example. And so there's a lot of speed and efficiency that we gain. You're getting investor transparency and payouts within 5 days versus waiting 45 days for that Fannie Mae process. So it's a much simpler and more transparent and more liquid process. And we're competing -- disruption tends to start at the bottom, right? And we're competing in these smaller balance mortgages, but there's lots of them. And when I joined in April 2024, average balance was $65,000 for Figure. It's now about $100,000. And so we're continuing to eat into that Fannie Mae business, especially in the first lien where we see even higher balances because we're offering a lower cost and more quick process to our partners, and we're just in the beginning. There's that $2 trillion annual of origination.

Got it. Okay. So maybe on the other loan products, you talked about one of them briefly, but I think the other 2 are DSCR loans and then crypto-backed loans. So maybe just talk about the value proposition and growth prospects for those 2?

Yes. I think this highlights the flywheel that we have from the investor standpoint. People are buying products from us on Figure Connect, which is essentially an auction system that allows us to deliver loans to the best buyer on behalf of our seller partners, the originators and people are looking for more, right? So when we -- if you think about DSCR, which was one of the larger non-QM products out there in terms of market size, we can -- it's a business that is not standardized. There's no good loan origination system for the DSCR space. No one's built that product. So we can take the same approach, which is an integrated capital market and origination system to our same partners or partners that are aware of us and say, you can do more business with us. And then on the investor side, people like the reporting, they like the transparency. They like the blockchain approach to standardizing no humans in the loop, understanding the data, verified on chain. And so what that's doing is it's driving that lower cost into that same or into an adjacent market like DSCR. On the crypto-backed loan side, you've seen a huge explosion in crypto ownership in -- across the world, and it's very natural that some people are going to want liquidity against that, especially because so much of that ownership is driven by people who believe in an increasing price opportunity and who, therefore, don't want to pay taxes on current gains. And so if you think that there's going to be someone who's going to offer -- win the embedded crypto-backed loan space, right, partner with other people who want to offer a crypto-backed loan to their customer bases, I think Figure absolutely has the right to win that business based on what we've done in mortgage and based on what we've done in blockchain, we are clearly the person to partner with if you are, say, some fintech that wants to offer that service, a wealth manager that wants to offer that service or one of our existing customers that says, "Hey, by the way, do you own crypto? Do you want to borrow against that? There's a lot of people that do.

Third-party originated loans seems like an opportunity to add to the platform over time. I can think of asset classes like auto. Help us think about whether and when you'll begin to offer those and which asset classes you see as most attractive?

So I think because we believe that the future of the capital markets is going to be on Figure's rails, ultimately, we will not be able to expand asset classes as rapidly as -- we will not be able to have every single person adopt our loan origination software for whom assets we'd like on our marketplace, right? So the assets can scale faster than the people who will adopt our software. And we see that opportunity. And as a result, we're going to offer the ability to use our marketplace but not necessarily have to use our origination technology. And the places where that's going to work best are the places where we can perfect the lean because if you go back to Tricolor and what happened there, it's really important that when you're a lender in order to make all this marketplace work, you know that you have that lean perfection and there was not fraud and there is -- that loan has not been double pledged and blockchain is a great place and way to do that. But in order to do that, if you didn't actually manufacture the loan, it's much easier to know about that if you can control the lean. So that's natural for real estate. It's natural for auto. It's natural for parts of the SMB world where you can take a lean on things like IP, intellectual property, equipment, et cetera, inventory. And so that's where -- those are the places where you have the yields that are attractive plus the lean perfection where I think Figure can be an early mover in bringing asset classes that didn't necessarily use our origination software, but where we can still perfect the lean, standardize the capital markets and bring them into things like Figure Connect and Democratized Prime.

You mentioned the Tricolor situation. You definitely have a different approach to collateral management. We've talked about this, you and I, but...

I can't talk about it enough.

There you go. I'll give you the opportunity. So you have a different approach. And so how -- what are the lessons learned from the situation? And do you think that's driving more client interest in Figure?

I do. I think that we have had a few things happen in Q3 that really drove some milestones in terms of bringing investor attention to Figure. Obviously, our IPO, the Tricolor and first brand situation, which exposed the fact that in this world of warehouse lending, and I would consider our Democratized Prime platform, a competitor to warehouse lending, in these warehouse lending worlds, you do not know, and I've been on the other side of this, right? I've been at multiple fintechs that have gone off the ground. And it's all managed by spreadsheets, right? And so it's natural that some loans could be double pledged. And whether it's willful misconduct or just inadvertent error, I think if you're on the other side of that as a lender, it's really severe and as we saw with Tricolor in particular. And so as a result, people are seeing the value of the digital padlock that Figure offers to confirm that there's been only -- there is only one owner of the loan. And when the loan moves throughout the capital market, that the blockchain is tracking the ownership of that loan automatically. Another thing that we saw was the shutdown of the government and what that did, especially to small business market with the SBA. I think that was another big eye opener. And I think in general, you've seen lots of volatility around Fannie Mae itself. And there's been a lot of management changes there. There's been I think, talks of different types of loan products, et cetera. And so what that does, I think, for people that are participating in our marketplace is say, where do I -- what's going to be the platform of liquidity, standardization, homogeneity and ultimately, prosperity in the future. And I think more and more people are seeing the value of what Figure does based on some of these exogenous factors that have shed light on kind of the value proposition of using a blockchain-based approach to the capital market.

You recently announced a tokenized secondary offering for Figure stock. Can you walk us through what you announced, the problem that it's solving and how should we think about tokenized equities within Figure's broader strategy?

So we launched a -- it's a nondilutive secondary offering, and it is -- think of it as a second share class of Figure stock that will trade natively on blockchain with decentralized custody. There's no DCCC. It's not an NMS security. So it's going to trade on -- Figure has its own transfer agent. And I think one of the things people may not realize about Figure is that Figure has actually built a competitor to Shareworks or Carta called Figure Equity Solutions, and we were actually running our own equity cap table on this product until we went public. And I think that was because this has always been part of the story. There's always been a goal to tokenize equities in addition to tokenized debt. We named the product Democratized Prime because it competes with prime brokerage. And ultimately, the value proposition of a tokenized equity, the way that we're approaching it is that you can control the stock loan on the equity as an equity owner. And so when there is an interest in borrowing that equity, the majority of the economics are now going to accrue to the owner of the equity, which is very different than the status quo of prime brokerage. And so one way I kind of think about what we're doing for asset ownership, whether it be equity or debt is we're doing for asset ownership kind of what the Internet did for content creation, right? We are bringing that control and that democratization to those people because of this blockchain-based capital market that we've built. And the other thing that you can do is then also offer cross-collateralization. So if you think about a traditional prime broker environment, you're not going to get cross-collateralization into other -- certainly other asset classes and maybe not even other securities of the same asset class. Whereas when you have lean perfection, right, when you're not saying, oh, I wonder who actually owns this equity, for example, people that are tokenizing private equity stock, like do you actually know that you have a right to those cash flows, whereas here, we're saying because it's self-custody, because it's this technology, you actually know who has the ownership of that, which gives you the confidence as a lender to offer cross-collateralization in a marketplace like Democratized Prime.

So I have about 50 other questions on tokenized equity, but we only have 5 minutes. So let's talk about Democratized Prime and then YLDS as well. Could you explain how those 2 products work together and what the combination unlocks for both borrowers and investors?

Democratized Prime and YLDS?

Yes.

So the way they work -- so YLDS is Figure stablecoin, YLDS. It's -- as a reminder, it's a little different than the GENIUS Act stablecoins and that it's an SEC registered security. So it is actually able to pay YLDS. And one other thing I like to highlight about it that is a reason why a lot of banks are interested in it is that the proceeds that are invested in -- that are put into YLDS can be put both into treasuries and into tokenized deposits. So if a bank wanted to offer YLDS to its customers, it could keep those liabilities on its balance sheet. And if you think about the regional banks that we've been talking about, if you're looking at who to partner with, I think Figure is a natural choice given what we've been doing on the asset side. And so YLDS is today, it's the oil of our capital market. It's what we're settling the loans in. And for example, if you buy YLDS through some of our -- sorry, if you buy loans or sell loans through a warehouse line through some of our partners, that transaction will be settled in YLDS and the ownership of the assets will come exactly atomically at the same time that the money is sent out. And only a stablecoin, which is programmable money can offer something like that. So again, going back to Tricolor, you can start to understand why you could prevent something like double pledging by confirming that money only leaves the system at the same time asset ownership is conveyed. So that's kind of one. And then two, YLDS is also what we're using to bridge liquidity in places like Solana or Sui or Ondo, where you've seen us make partnership announcements. So for people that are in other platforms, not necessarily on Figure or Provenance, which is our L1, and they're looking for YLDS, I think we're best in the world at tokenized loans and YLDS. If they want to get that into their -- where they are -- say they're in stablecoin on a Solana ecosystem, we can use YLDS to bridge, they can stake their liquidity and then come into something like Figure, lend in Democratized Prime and the borrowers, which would be our partners that have these assets can then take advantage of that liquidity and YLDS just sort of the rail from Democratized Prime to other ecosystems because Figure recognizes that there's lots of L1s out there, right? There's Tempo, there's Ethretrium, there's Solana, and there's lots of stablecoins out there. And so we want to focus on what we're best in the world at and then earn some additional economics as we own those rails between things.

Okay. Great. So you had robust adjusted EBITDA margins in the third quarter, 55% EBITDA margin. So how do you balance margins versus growth? And I guess the EBITDA profile that you expect going forward? Margin profile?

Yes. Margin is an output. So we don't target a specific margin when we run the business. It's an output of the fact that we are moving our business model to this capital-light marketplace Figure Connect, which started only in June 2024, as I mentioned, is already about 50% of the volume that we do. The incentives are such that partners of Figure are inclined to do more business with Figure Connect because they make more money. We've actually sacrificed some top line revenue in favor of a higher quality, more capital-light, higher EBITDA margin revenue stream. And we've done that because we want to push that marketplace forward and push what we're doing, encourage partners to do more with us and ultimately build a sustainable marketplace that is, by its output metric, a high-margin business.

Okay. Great. So as we wrap up, maybe just lay out what, the 1 or 2 things you want investors to take away about Figures opportunity over the next few years?

I think that when I left my last company, Brex in 2024 in the winter, and I was thinking a lot about what to do. And I just kept coming back to how big of a market opportunity there is. Every single asset class within debt, within equity benefits from a more standardized and tokenized approach. And I think that it was just such a big opportunity that I thought this is massive, and this is the future capital market. And I look at that whole market landscape and how malleable and basically how extensible the HELOC chassis that we started with into that broad marketplace, and I see just a huge amount of opportunity. So really exciting time for Figure, and I'm so grateful for you continuing to spend time and all of you in the audience learning about us. So thank you.

Great place to end. Thank you so much, Michael.

Thank you.