SoFi Technologies, Inc. (SOFI) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us. I'm Mihir Bhatia, I'm the consumer finance and payments analyst here at Bank of America, and I'd like to welcome you all to our Annual Electronic Payment Symposium. We're excited to be joined for this session by Anthony Noto, the CEO of SoFi Technologies. Anthony, welcome to the conference, and thank you for joining us again this year.

It's my pleasure. Thank you for having me.

Great. Why don't we just get started. There's a lot of announcements out of SoFi this morning also. And 1 thing we were -- I was curious on, you're doing -- SoFi has a lot of areas to invest. We've been seeing -- as I said, we've seen a couple of announcements this morning, and one thing that we were wondering about is just as CEO, where are you spending most of your time? What are the priorities when it comes to investment dollars just among the wide array of places you could be spending them?

Yes. So I'd put it into 3 big buckets. One is building the company, and that's everything from our strategy, setting the priorities for the year, our objectives and key results, and against that backdrop, allocating our resources to our most important priorities, making sure that we're executing against those priorities and holding people accountable. So that's 1 big bucket. The second is making sure that we have the right people in the right positions and they have the resources to accomplish what they need to accomplish. And that involves everything from recruiting to providing leadership to different teams and giving them feedback along the way as well as helping them eliminate blockers. So we want to have the right people in the right jobs and ensure they have the right resources and we're helping get things out of their way. The third bucket is more of an external perspective, which is building relationships with investors, building relationships with partners and continuing to be a leader within the investment community as well as the financial technology industry. So 2 buckets are internally focused and on externally. People often ask how do we think about allocation of capital and priorities? And at the highest level, as CEO, it's really my responsibility to allocate resources, get access to resources and manage risk. And so that lens gets applied to all 3 buckets. And we look at each business on its own and make sure that, that business can become best of breed from a consumer value proposition standpoint, but also best of breed from an economic standpoint based on unit economics or account economics. If we can build the best-of-breed product that builds the best touch with people and at the best economics, then we're going to have much greater scale, much greater operating leverage, greater variable profit and that will allow us to reinvest at an even faster rate. And so we look at each one of the businesses on a stand-alone basis to allocate, to drive the best returns for that business and then think about how do we leverage the businesses together, so they're more valuable together.

Great. So maybe let's start diving into some of the segments a little bit. Maybe just starting with the Technisys acquisition. Firstly, congratulations on closing it so quickly. And maybe you can just give us a broad overview of what Technisys does? What are the capabilities that adds for SoFi? And what can you do now that it's part of SoFi when you combine it with Galileo that you maybe couldn't do before?

Sure. I think it's important to understand how we think about the long-term vision of the company and how Technisys plays into that because one piece of the broader vision. And so our mission is to help people achieve financial independence that can realize their ambitions. That's different for every person, but essentially means helping people get to the point that they have enough money to do what they want. In order to do that, we believe we have to be there for every one of the major financial decisions in their lives and all the days in between. And in essence, to do that, we have to be a one-stop shop across borrowing, saving, investing, protecting and spending. And we want our products in each one of those areas to be, as I mentioned, best-of-breed. How do we define best-of-breed? We measure with NPS scores, we try to differentiate on a daily basis through constant iteration across fast, selection, content and convenience. And we're looking to hone the products so that they are, in fact, far superior to any other product on those different variables and then also adding more value as they work better together. In order to get to that point of superiority by product, we believe we have to be vertically integrated. We believe we can innovate faster if we're vertically integrated. We could have lower cost if we're vertically integrated, and it's just that constant benefit being used over and over again. Our lending business was built from the ground up, from metal to glass, and we saw how fast we can innovate there. We have superior unit economics there. We have products other people don't even have. And those that other people do have, we are constantly focused on making our products better. In the category of Checking and Savings, in the category of credit cards and in the category of investing, we also want to be vertically integrated so that we can bring to bear the fastest innovation at the lowest cost and the best product, doing real-time decisioning and personalization. And the first step in vertical integrating our Checking and Savings account was to buy Galileo. Galileo is a payment processor into the debit and ACH networks. In addition to that, it provides software through APIs to allow partners to build their applications in a seamless way and really in a turnkey fashion. As our partners at Galileo begin to think about more products, they need more products and services. But guess what, the products and services, the people that partner with Galileo need are the same products and services that SoFi needs. And so as a company, we currently have 4 products that all run on 4 different core technologies. Checking and Savings runs on a core technology from a partner, it's called profile. Our Invest product runs on a different core with a different partner. And our credit card runs in a different core with a different partner. We knew over time for us to get to the next level of best-of-breed product, the next level of personalization and innovation, next level of real-time decisioning, we would need to have one unified core. And so we're in the marketplace looking for one unified core and debating whether to partner with somebody or build it ourselves. We found Technisys, and a couple of other companies like Technisys, and ultimately came to the conclusion that Technisys was the best partner for us to build one unified core across our borrower, saving and spending products. The more work we did with Technisys, and the more we started to understand the technology, we realized that it would serve SoFi well, but it also would serve all Galileo's partners incredibly well as they want to add more products. So at the end of the day, we are a consumer-direct company. We're trying to build the best financial products for our consumers. To do that, we need to be vertically integrated. We want to take the technology that we build or buy that helps us be vertically integrated, and then turn that into a business, which is what we've done with Galileo and now we'll do with Technisys. So it's first priority is to serve SoFi very well, but those technologies that do that. We want to make the industry have access to them so they could benefit from the same level of innovation and the same level of speed and low cost. What Technisys enables to do is multiproduct core. In addition to being able to provide many products in one core, it's extensible to products that don't even exist today. And in addition to that, it also has the ability to be multi-tenant. And most importantly, it allows third parties to integrate on top of it in a seamless way. So it gives our members great products, but it will also give our partners of Galileo incredible flexibility to go where they want to go. I would think about Technisys as LEGO blocks. And there's 2 ways LEGOs can be used. One is I have a bunch of LEGOs and I could be creative and build whatever I want, something that's never been built before. Another LEGO project could come with instructions, could come with how to build a ship or how to build a stadium or how to build a skyscraper. And Technisys uniquely allows companies to either opt into a product that's well constructed and already built, but also allows them to use LEGO blocks to build whatever they want. And so they just have to build that last mile, not everything to get to the curve, so to speak.

Got it. Maybe just staying with the Galileo in this segment for a second. This morning, you announced, talked about the expansion into Colombia. I guess that brings me to a question. We talked about -- a little bit about this on the earnings call, too. But what are the most exciting growth vectors for the Galileo business in 2022? Is it going to be new products sold into the existing base? Or is it going to be more of just selling Galileo to new clients here in the short term?

Yes. SoFi Technology services, which consists of Galileo and now Technisys, have many different growth vehicles, and I'll try to isolate each one of those for you. Galileo itself, the first driver of growth is the growth of the consumer accounts or business accounts for existing customers. So SoFi -- sorry, Galileo has continued to see really strong growth in accounts enabled. Our most recent disclosure was 100 million accounts enabled through Galileo's technology partners. And so that is the first big driver of growth in a dimension not to lose sight of. And that growth rate is probably disclosed. A second driver of growth is actually providing those partners with more products and services. So think of it as a distributed network of 100 million accounts, and they have all have one product. And all of those accounts could have more than one product. It could be a secured debit card. It could be buy now, pay later. But the provider to that account also could have more products such as dynamic fraud capabilities or dispute capabilities or reward capabilities. And so the first driver of growth is the growth in those accounts. The second driver of growth is more products for the consumer but also more products to serve the consumer. And so those are 3 growth opportunities just in the existing installed base. Parallel to that, Galileo is still signing up new partners. As an example, in 2021, Galileo signed up 44 new partners that will onboard throughout 2022 and contribute in 2023 economics. Of course, the partners that Galileo signed up in 2020 contributed a little bit in 2021, but will more meaningfully contribute in 2022 and that's additional growth on top of the installed base. In addition to that, Galileo can expand geographically. We're currently in Mexico with 4 of the largest fintech companies. And as you mentioned, Galileo is now going to Colombia on its own organically, but Galileo through the acquisition of Technisys, will now also operate in a number of other Latin American countries that Technisys already operates and be able to expand much faster into those environments given the partnerships that Technisys already has and cross-selling Galileo's product to them in addition to Technisys and Galileo going to market together in those geographies to include the United States.

Great. Maybe just following up on that, just one quick one. As you add new partners, are these partners like with H&R Block and Spruce where it's a de novo, new program? Or is there a lot of competitive takeaways? The reason I ask that is one of the debates, I guess, that we've been hearing increasingly is with the existing neobanks, what -- are they going to stay with Galileo as SoFi -- as it gets integrated more into SoFi? Are they going to look to diversify their partners beyond Galileo? And so just trying to understand how difficult is it to move away from one provider to a different provider and what the competitive situation is.

Yes. First, my philosophy on maintaining our partnerships. It's our responsibility to deliver more value for Galileo's partners that they can develop on their own or they could get from somebody else. And we build a product and the financials and economics in the same way for them as we build SoFi products for SoFi consumers. We want to create the most value for each one of Galileo's partners compared to what they could do on their own or they can do it with someone else. Let's talk about doing it on their own. We know the cost of building what Galileo built. We've evaluated that cost, and we chose to partner with Galileo. And instead of actually building it ourselves, we ended up buying Galileo because we knew how hard it would be to build, how long it would take and the absolute resources sync it would take away from us building the end products for our consumer. And so a big reason why we bought Galileo was we thought it was going to be incredibly hard to replicate. It would be a huge distraction. It would take our eye off the ball, and it could also be synergistic to us in a number of different ways. We were the only one-stop shop in FinTech. Other people have talked about it, and other people have said they're going to launch it, but I've been here for 4.5 years, and no one else has done it. They haven't even come close in the time that we've done it. We had just student loan refinancing and personal loans in February of 2018 when I joined, and we obviously now have the one-stop shop product for over 1.5 years since then. So we can invest at a higher rate than anyone else. And if I was another company that was looking to build a consumer-direct business in financial services, and I had the option to build in this infrastructure myself or partnering with the equivalent of the Amazon that has more capital than I have, that has more resources that I have, and they've already built these 2 big components, why would I waste my time to build that? That's not where the differentiation exists, that person, so far, is going to make that the best infrastructure can be because they need it themselves and they understand they'll lose their customers if i.e., Galileo's partners, if it's not the best-of-breed technology at the lowest cost. So we're dedicated to making sure we build more value for our partners that they can build on their own or with someone else. Let's talk about the others. There's a fragmented universe of people that do what Galileo do and very few that do what Galileo and Technisys does together. In fact, no one does what Technisys and Galileo does together. It's the only complete end-to-end out-of-the-box banking solutions, from building the front-end application, integrating to the APIs on the functionality, building the core technology and processing of whatever product it is in the cloud and then payment processing in the cloud. So we think we've leapfrogged the front of anyone else that we've ever lost a deal to. Our current customers have been our current customers since we bought the company. One customer of Galileo had announced well before we bought it that it would be moving off Galileo. I think they regret moving off Galileo, frankly, and they have less innovation and less functionality and even more so now that we own Technisys. So we've been able to meet the needs of all of our partners and maintain them in addition to growing by 44 new partners. And the key for us is making sure that we build that value from them and now with Technisys and Galileo together, we think it's an unmatched service. We think it will operate at the lowest cost for our partners that will be really hard for others to match because we have so many different economic pieces, and we'll innovate faster than anyone else and also enable services that are very personalized and in real time in nature.

Great. That's really helpful. Maybe switching gears to the bank charter. Obviously, you received it earlier this year. Just give us an update on how that integration is going? Where are you in terms of starting to get loans issued through the bank and in terms of just generating deposits?

Yes. The team has done a great job since we got the final approval. We had to basically close down SoFi Money and stand up SoFi Invest. We had to transition over all of the accounts from SoFi Money to -- sorry, we had to stand out SoFi Money and stand up SoFi Checking and Savings. And that includes having to transition people off of SoFi Money to SoFi Checking and Savings. It's a different technology. It's a different reporting process. It's a different marketing from a brand perspective and also value prop perspective. So we worked really hard throughout the fall to be able to get approval in early December, so we would hit 2022 running on all cylinders. There's a variety of different factors that impact what's going on in Washington. If you've been paying attention, you'll see that the Fed Chairman needed to be renominated. He then had to go through confirmation hearings. In addition to that, there were a number of other board members that were being nominated for new positions and some new Federal Reserve Board members that were nominated, one withdrew. So there's a lot of moving parts throughout November, December and January. I couldn't be more thankful that we received approval in January, but the fact of the matter is we lost that entire month from being able to market the new product. We then needed to go through a transition, and it really wasn't until end of February, beginning of March that were able to go generally available for the checking, savings account. The team has done a phenomenal job in building that product and bring it to market and I'm really pleased with the progress the team has made as well as a differentiated product that we have with consumers. And it's a really important top-of-the-funnel driver for us. It gives us the central nervous system. When people do direct deposit, that's what we're trying to drive. And as we said in the last call, we're seeing nice pickup there. Once we have the direct deposit, the economics of that product were great, it's a viable stand-alone checking, savings account product, but it also drives a lot of opportunity for cross-selling and leverage what we call the financial services productivity loop. And we've seen really great progress there throughout the year, driving lower customer acquisition costs and really rapid growth in members and products per member in light of a more challenging backdrop for others on the cost side. So it's a -- the bank charter is important for that checking savings account, but it also is an important part of our strategy to include funding our loans at lower cost. And the team has been moving the technology of our loan origination from our prior licenses with states into the bank and originating in the bank and, as Chris mentioned, we're on track to deliver that on the time that he laid out on the Q4 conference call in terms of loans being originated from the bank itself, and the funding costs there are much lower in addition to the fact that we have one regulatory regime, not 50 different states.

Right. You mentioned Washington. Obviously, there's been a lot of noise around student loans. So let's just hit it head on. What are your expectations as to what's going to happen? One thing that we've been hearing is extension. One of the reasons arguing for an extension is that servicers might not even be ready to start processing payments here, when it expires in May, so they might need one. What are you hearing? What's the latest on that beyond the 2023?

The industry, the servicers are ready for starting repayment. And they have been ready since the fall. The last -- the extension prior to the one in December that -- September was supposed to be the end of student loan payments and the moratorium against those student loan payments, and President Biden administration extended the September date to the January 31 date to ensure that the servicers were prepared. We talk to the servicers all the time. They are 100% prepared to resume the payments of federal student loans on May 1. So that's not an issue at all. The economy is not an issue at all. It's very clear the administration is focused on potentially extending this for one reason and one reason only, midterm elections. It's 100% political. We have record inflation. We have strong economic growth, all the other aid programs tied to the pandemic that were instituted back in March of 2020 have ended. This is the last element that's left and the progressives are putting a tremendous amount of pressure on the President and the administration to stand by their campaign promises of giving forgiveness on student loans. And because they're not ready to do that or they haven't come to the right structure to do it, they're going to kick the can down the road and consider other ways to keep the progressive officer back. One way is to extend their federal student loan payment moratorium. There's been a lot of noise out of Washington last month. The President's Chief of Staff said that 2.5 weeks ago that next week, the President would either extend the moratorium or announce restructuring, neither of which has happened. So far is going to be fine either way. We had record revenue in Q3. We had record revenue again in Q4. We did $1 billion of revenue in 2021 with our largest first business running at 50% capacity, and we had full year EBITDA of $30 million. So we're prepared for it either way. The good thing is we have a diversified business. That business has allowed us to hit those record numbers despite this student loan moratorium going on 2 years now. So we're prepared for it either way. We gave guidance to the Street on what would happen per quarter after it was extended. So hopefully, investors understand the economic impact as well. We're not going to slow down. The other businesses we have are driving great growth and contributing significantly, and we feel really comfortable that we benefit from a diversified business, some businesses do well in a low rate environment, some do well in a high rate environment, and we can continue to drive really strong top line growth and improve profitability without student loans if that unfolds.

Great. You mentioned the consumer is relatively strong. We've heard some, I should say, more comments about people worried about consumers, particularly at the low end, given gas prices and inflation. So maybe just talk to us a little bit about what you're seeing. Are you seeing any signs of weaknesses between different segments, between FICO scores, whether it's through your personal loan business, whether it -- and I know you do mostly high end, but through your partnership with Pagaya, you probably do get to see some of what's going on even at the lower end of the consumer spectrum there?

Yes, demand for fixed rate term loans has been strong. We talked about our unsecured personal loan business benefiting from a higher rate environment. As consumers look to refinance at a variable rate, high revolving debt into fixed rate term loan debt. And that business has benefited, if you saw our Q4 results, you could see the growth versus Q3. Our focus on high credit quality hasn't changed. SoFi underwrite 680 FICO scores and above, we actually underwrite to cash flow models, but we share with you what the FICO scores are that we have inherently target. We've had really great performance of our loans, both refinance student loans as well as personal loans throughout the uncertainty of the last 2 years since the pandemic started. And we continue to focus on that really high credit. Our FICO -- actual average FICO scores are in the mid- to high 70s across both products. We only approve about 30% of the applicants for unsecured personal loans. The other 70% we send to partners and monetize them through lead generation revenue through Lantern or through our partnership with Pagaya. What I'd say is demand for borrowing has remained high, just as we talked about in Q4, and our selection and quality has also remained high and our delinquencies and performance have been consistent and we probably -- that information is publicly available through the different products that we securitize and as well as sell on whole loan form.

Sure. Just you mentioned securitized there. We've seen some companies pull or maybe delay a securitization in the last few weeks. Are you -- from what we've heard from our fixed income folks, demand for SoFi, particularly on the student loan side, product continues to be extremely high among the fixed income rates? But...

We saw this happen in the pandemic as well. March of 2020, we weren't entirely certain what would happen on the demand side of buying our loans either through securitizations or through whole loan sales. And I'm not sure people understand how broad-based the diversification of our distribution is. First and foremost, we're a bank. So we have the great luxury of funding off of our deposits and holding loans if we want to hold those loans. And philosophically, we want to maximize our return on each loan. So we have 3 ways to do that. One is we fund our loans through our low-cost deposits, and we hold them. and our deposits are growing very nicely, and we have ample funding through deposits. We have $7 billion of warehouse facility, about half of that is committed. And there's more demand every day for others who want to give us warehouse facility because of the quality of our loans and the security behind it. And in addition to that, we sell our loans through whole loan sales our asset-backed securities. The fact of the matter is our ABS sales have gone down meaningfully over the last 4 years and is now a minority of what we do, and we take advantage of that market if the pricing is right. Our preference is to sell in whole loans. We get great executions, really high, and it services regional banks and asset managers really well. They have very large deposit bases. They don't actually lend and they need to get a return on the deposit basis, and we serve a great vehicle for them. So we're pretty diversified broadly from whole loan sales, asset-backed securities as well as being able to hold on as in our balance sheet when we fund via either deposits or through warehouse facilities. The demand for our loans is only increasing, it's not decreasing and we benefit from being able to play each one of those sources of demand against the other.

Great. Maybe just turning quickly to home loans. I think you've talked in the past about getting to 1% market share over the next 2, 3 years. Talk to us a little bit about the growth strategy to achieve that. Clearly, we're going to have a much more purchase-oriented market.

Yes. I mean we have a very low market share. Our focus has been on fixing the back-end capabilities so that we can really deliver on our value equation of fast selection, content convenience. Historically, we've primarily just underwritten agency mortgages that are conforming not jumbo. We also haven't been in the purchase market. So we've -- we closed that business down when I arrived in 2018. We're losing about $15,000 per loan. We've relaunched it and re-architected it in late 2019, and have been growing the business very nicely, and it's a good contributor to our revenue and our profitability. Over 60% of our home loans are from existing members. So the first growth strategy is meeting the needs of our members. And what does that require? Well, it requires us having broad selection. And so we're expanding the selection to jumbo, we're expanding the selection into purchase loans. We obviously have to deliver on fast. We want to be the fastest place to approve a loan, fastest place to close a loan and fund that loan. And so we've been putting a lot of energy into that before we step on the gas pedal on the top of the funnel. We've largely driven most of our demand organically and from existing members as we build out the back-end capabilities of all those different products. We think the opportunity in front of us is enormous, even with a rising rate environment, just given the quantity of home loans, either purchased or refinancing that are 3.7 million members already delivered. So we're really excited about the opportunity to broaden that selection. And as we broaden that selection, we'll be able to start to market much more aggressively than we have up until this point. But it's 100% market share gain for us.

Great. We only have a couple of minutes left, but I did want to hit this last one really quickly. The stock has seen some weakness recently. It's not surprising in the context of the larger market concerns around student loan extensions for whatever reasons, they actually are doing them. So a slight negative at least for this year. You personally, however, have been buying shares almost every day, it feels like I see a new Form 4 from you. So it's quite refreshing, a little different to see management actually doing that and certainly a vote of confidence in the stock. Take a minute to tell investors 2 or 3 things that you think are probably underappreciated about SoFi and the stock.

Yes. What I'd say is my personal decisions -- my personal decisions to buy SoFi stock are really driven by one thing. And that's a long-term orientation on the company. I want to help this company become one of the top 10 financial institutions in the United States and one of the most admired brands in the world and a top 15 technology company. And so if investors see me buying stock, it's because I believe in that long-term opportunity and vision of getting there. I think we have a position in the marketplace that's unmatched by anyone else and will be incredibly hard for anyone else, including big legacy banks to match. It took a lot for us to build it. It takes a lot of competencies. It takes a certain type of leadership and mentality. And I think it's really hard for others to replicate, especially in an environment that's increasingly going to be challenging from an investing standpoint. And my desire to invest is really focused on the long term and the flexibility I have with my capital to make those investments. But no one should look into those decisions that I'm making as the current performance of the company or anything else. We obviously have a duty to disclose material nonpublic information broadly and my purchase of stocks are not tied to that. It's tied to the long-term orientation I have and the flexibility I have, with the liquidity I have.

Great. Thank you so much. I think we're pretty much out of time with that. But thank you again for joining us. Really appreciate it.

My pleasure and thank you for having us, and we appreciate the interest and support. Thank you.

All right. Thank you.