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

Thank you, everybody. Welcome to our afternoon session of Global Exchange & FinTech Conference. Today, I have the pleasure of introducing Chris Lapointe from SoFi. He's been with SoFi now for...

4 years.

For 4 years, roughly 4 years, 2 years as a CFO in what has been an incredibly eventful time for the company, very busy, a lot going on. You went through a SPAC deal in May 2021, followed it up with the acquisition of Golden Pacific in February 2022 and then the acquisition of Technisys in -- earlier this year. So obviously, a lot going on. The world has been navigating a pandemic. You're dealing with the student loan moratorium, and fintechs and neobanks have been under a lot of pressure lately. And SoFi is swimming upstream and attempting to take share in that environment.

Can you help us understand why SoFi is different than a lot of those neobanks and fintechs that have been under significant pressure in the market today?

Yes, absolutely, and thanks so much for having me, Kevin. Really appreciate it. So what I thought I could do is I could at least hit on our mission, talk a little bit about our strategy and key differentiators, and then we can go in any direction that you like. So overall, our mission at SoFi is to help our members achieve financial independence in order to realize their ambitions. When I say financial independence, I don't mean that the member needs to be rich. They need to have enough money to do what they want, to have the career that they want, to have the lifestyle that they want, to have the family that they want. And what we've done at SoFi, in order to help our members achieve that independence, is we've created a comprehensive set of products and solutions that enable them to borrow better, save better, spend better, invest better and protect better. And we've done all of that by putting the member's interest first in every step along their financial journey and every day in between. And that's a really important competitive differentiator for us because we feel that our members have been left behind by legacy financial institutions who have focused on things and optimized for things that are outside the best interest of the members and what they want and need. So we've taken a different approach, and we've developed a one-stop shop of products and services where our members can get their money right, and we've done so in a digital format. In order to further our mission, we have deployed a strategy that we call the financial services productivity loop. And that has 3 main components. The first one is creating a comprehensive set of products that are, each and individually, best of breed. And we work really hard to ensure that they are best of breed by differentiating each and every one of them across 4 key dimensions: fast, selection, content and convenience. And in addition to that, we want each of those products to work better when they're used together. And the reason that, that's really important is because when a member takes out one of our financial services products, we need to build that trust and loyalty with them, such that when they need or want a second or third or fourth product, they think of and come to SoFi first. What happens at that point is the revenue per member increases dramatically. We don't have to pay a second customer acquisition cost. And it further helps our long-term goal of having the highest LTV in the industry. What that enables us to do is reinvest back into the business, back into the consumer in the form of better pricing, better products, better services. The second key element of our overall strategy is to have superior unit economics across each and every one of our products. And vertical integration is a key component of that. We've seen in our lending business where we're vertically integrated. We've built technologies and processes that enable us to iterate and innovate at a much faster clip and at a much lower cost, which provides us much more access to data and, again, allows us to provide a better service to our members. If we were able to have superior unit economics across each and every one of our products, again, we would be able to reinvest back into the consumer and into the business in the form of a better experience. And then the third component is investing in our fintech platform in pursuit of becoming the AWS of fintech. Back in May of 2020, we acquired the business, Galileo, because we fundamentally wanted to vertically integrate our Checking and Savings business in the same way that we did with our Lending business. And it has certainly enabled us to iterate at a much faster clip than lower cost. But that business is a really good business in and of itself, high growth and high margins. What's even better is that as we innovate and iterate at SoFi, we're iterating and innovating at Galileo, which is in turn helping all of the consumers in rising the tide for all boats and ships and driving better adoption in the overall industry. So that's our mission, our strategy and some of the competitive differentiators. The one last thing I would note there and what's really helped from a differentiation perspective relative to some of the companies and peer set that you talked about is that we have a very diversified business model where we have a whole host of products and services that perform better and/or differently in different macro environments. That has provided us with a ton of durability and enabled us to deliver strong results over the last several quarters. And then on top of that, our overall -- the quality of our member is extremely strong. Just 2 examples of that. Our personal loan -- our average personal loan borrower has an average weighted income of $140,000 and an average FICO of 746, and our average student loan refinancing member has an average weighted income of over $170,000 and an average FICO of 775.

I'd like to touch on that later, but just to follow up on what you talked about on your CAC -- driving your CAC lower, you drive new members, you've been growing persistently. I mean, your growth has been through the roof over the last several years and really accelerate, especially within the personal loan business. You recently bought the bank. You have a new deposit base. You also issued new guidance recently at first quarter earnings where you implied that your EBITDA is going to ramp quite a bit throughout this year, in fact, probably significantly after the second quarter. Could you help explain why you see that profitability really start to expand in the back half of this year?

Yes, 2 main things are driving that. First is we do expect to see continued growth in our high-margin personal loans business, which has been doing extremely well in a rising rate environment as people are looking to refi other variable-rate debt into fixed-rate loans. So that business continues to do extremely well. We expect it to continue to do really well, and it has high margins. Similarly, on our Galileo business, which has high margins, 30% right now, we expect to see continued and sustained growth throughout the rest of the year. The second main component and one of the larger drivers is the fact that we now have access to the bank and the lower cost of capital. So in the back half of the year, you're going to start seeing a much more meaningful impact from the lower cost of capital of using our now high-quality deposits that we've been able to raise through SoFi Bank as well as an extended hold period. So prior to having the bank, we would originate a loan, hold it on our balance sheet for 3 months and then sell. Now that we have a bank, we have the flexibility to originate the loan, hold it on our balance sheet for up to 5 to 6 months and then sell. And we're seeing incremental gains on net interest income, which will be a large driver of that ramp in the back half of the year, but we're also not seeing any degradation in our gain on sale margins.

So how much interest expense are you saving versus your warehouse lines by utilizing the deposit base?

Yes. So prior to having the bank, we had access to about $7 billion of warehouse capacity, and we would pay anywhere between 150 to 400 basis points, depending on the facility. And each of those facilities is variable in nature, such that as Fed funds increases, so does the cost of that capital. And then on the deposit side, we're offering an APY of about 1.25% for people who take out direct deposits. So the cost-of-capital savings that you're seeing between our deposits and the warehouse facilities today is north of 150 basis points.

Okay. And then you mentioned that the whole periods are longer as well, right? So you're retaining more NII. Are you seeing it -- would that impact your gain on sale that you're currently occurring? Or potentially -- could you explain how that plays a part?

Yes, we haven't seen a whole lot of degradation in the overall gain on sale margins. We've just started holding loans for a longer period of time. And the demand that we've had for our paper, both on the personal loans and student loan refinancing side, has been extremely strong and robust. So we're not seeing any degradation.

Okay. And then -- so you also gave updated guidance when the student loan moratorium was extended in August. You took it out of 2022. I think by our estimates, it's worth roughly $100 million of EBITDA per year. Could you see that as an additional tailwind as we go into 2023? Do you expect the moratorium to expire sometime in 2023? Or what's your expectations there?

Yes. So what's -- as you mentioned, what's baked into our overall 2022 guidance is that the moratorium does not expire, and it extends throughout the rest of the year. But we don't have any expectations for when it's actually going to expire. It's pretty -- it's an evolving situation with new news and hypothesis every single day. So I don't want to comment on where we think that will go. But it will certainly -- when and if it does expire, it will certainly be a tailwind to the business. What I would say and what's consistent with what we talked about during the earnings call is that we think we're going to be driving towards a 30% incremental EBITDA margin in 2023 and beyond because we think that, that's the right level of investment that will enable us to drive top line growth for decades to come.

Yes. So a ramp in the back half of this year and then potentially, if things were to develop on the student loan side into 2023.

Right.

Okay. And then you often hear that higher interest rates are diminishing the potential impact there. Can you talk about how higher rates are impacting your potential margins? And obviously, it's a topical item right now.

Yes, absolutely. So what I would say in terms of the overall student loan market is there's about $1.7 trillion of debt outstanding today with hundreds of billions of dollars debt outstanding that's priced at a level that's far north of where we're able to price our student loan refinancings right now, and that's primarily a result of 2 things. We have a cost structural advantage as a result of being vertically integrated and being able to offer better pricing relative to some of our monoline peers. And then second, by now having SoFi Bank, we're able to further strengthen that structural advantage that we have.

And so touching on the bank, you mentioned -- so it's driving lower funding costs, which is driving EBITDA growth. Could you just give us an update on how -- your progress on growing the deposit base? I believe you mentioned, what, roughly a little over $1 billion in deposits as of the first quarter, and it was growing at roughly $100 million per week. Could you give us any updates on where you are with the deposit side?

Yes, we've seen a tremendous uptick in our overall deposit base, and we're really happy with the progress that we've been making there. So as when we announced earnings a month ago, we had said that we were at about $1.5 billion of deposits and growing at around $100 million per week. This week, we're at about $2.2 billion of deposits right now at SoFi Bank, and we're still growing at that healthy clip of north of $100 million a week. So overall, really good progress. That's a really key element of our overall longer-term strategy. And we're also really happy with the progress that we've made on the direct deposit side. We've seen a significant uptick in terms of overall conversion. Our conversion rates for our direct deposit members have increased by 60% Q1 versus Q4. The overall average balance per direct deposit member has increased about 25% sequentially. And then we're seeing really good engagement trends where spend per money member or Checking and Savings member has increased as well sequentially. So overall...

Tremendous amount of growth on the deposit side. What do you -- what's the main driver you're seeing there? Obviously, your rates -- APY is a little bit higher than most of the peers, but your incremental -- it's worth it to you because your incremental costs are lower. Can you just explain why you're generating such a tremendous amount of growth on the deposit side?

Yes. I think it's a function of having an industry-leading APY with no restrictions. A lot of peers out there have high APYs, but they have balanced restrictions. You can put $5,000 to get this APY. But after $5,000, that drops to X, Y or Z. Our APY is 1.25% for all of our direct deposit members, and there is no limitation on the amount that they can deposit. So I think that's a key competitive differentiator. I think in addition to that is going back to the intro where I talked about having a diversified set of products and solutions that is very much unlike some of the monoline players out there.

Yes. So you're driving -- you have lower CAC on the deposit side to drive higher LTVs on the other products that you're selling, right?

Exactly.

Yes. Now you have more loans on your balance sheet versus loan sales to drive some of this revenue, right? So you're seeing -- you're still able to retain that gain on sale margin. Why are you able to still maintain those types of margins even though you're holding the loan for a longer period of time?

Yes. I think this comes back to the quality of our borrower that I mentioned at the beginning of the conversation. Like I said, the weighted average income of a personal loan borrowers is $140,000 with a very high FICO of 746. In addition to that, we're seeing really good credit statistics. We publicly report our 90-day delinquencies. In Q1, those were at all-time low levels and had improved sequentially and year-over-year. And similar story on our annualized charge-off rates, which were at 1.04%, and that was an improvement year-over-year. So what we're seeing is really good trends in terms of loss rates and delinquencies, which is helping drive overall demand for the purchases -- purchasers of our paper.

So a lot of others in the other installment lenders or student lenders or even credit cards are starting to see a little bit of degradation specifically around the sub price side. You're -- obviously, you have lending to higher FICO scores. Is there any other -- are you seeing anything else in the market that may be indicating that we're starting to see softness in the consumer or anything of the sort? Or is it still fairly benign? I mean you're showing year-over-year declines in your delinquency rates and default rates.

Yes. We haven't seen it in our consumer base. And I think that's a function of the quality and the overall profile of our borrower. So we haven't seen any degradation up into this point, but we obviously closely monitor that, along with a number of other macroeconomic factors that we're reviewing every single day and week to ensure that we're continuing to lend to the best borrowers.

Okay. One question we get a lot from investors is -- maybe you've heard this a lot is, when are you going to be GAAP profitable, right? And I think a lot of people have just been hearing that a lot. Could you just help us understand the buildup from EBITDA growth to GAAP profitability sometime in the future and how we get there?

Yes, absolutely. So we certainly have a plan to get to GAAP profitability. It's a multi-stage approach. I'll walk through each of the stages just to give you a sense for how we're thinking about it and the progress that we've made up until this point. So the first stage was -- first step to the process was to become EBITDA profitable for a full year. We ended up doing that in 2021, which was a material improvement from the $220 million of losses that we had in 2018 and $150 million of losses that we had in 2019. So we've made really good progress from an adjusted EBITDA perspective. To give you some of the building blocks to that, our lending business is highly profitable. We're delivering over 50% margins every single quarter. We also have a tech platform business that is profitable and generating 30% margins. Our Financial Services segment had contribution losses about $50 million in the quarter. But what I would say is if you go into the details and into our filings and dissect some of the cost elements, and if you were to look at variable profits, excluding marketing spend in that segment, we've actually been profitable for the last 3 quarters. And we expect to be profitable on a variable profit basis, including marketing, by the end of this year, so the end of 2022. The reason that, that's really important because, at that point, it's more of a scale game, and you have to acquire more members that are delivering positive variable profit in order to cover your fixed cost. And we expect to be able to cover those fixed costs by the end of 2023 and become contribution-profit positive exiting that year. So we're making really good traction there. And then the remaining pieces from EBITDA down to GAAP net income, as you have unallocated or nondirect expenses, that's corporate overhead. We expect to see real operating leverage in that line item over the course of the next several years as we've invested quite heavily in the prior years, leading up to becoming a bank and building out a lot of our processes. We also have stock-based compensation of about $77 million in Q1. 1/3 of that expense was attributable to performance share units, which were granted as part of our IPOE process. And those are -- that expense is actually going to go away in Q1 of 2024. So if you were to exclude that expense, the overall stock-based compensation relative to revenue is in the 15.5% range, and we expect to get that down to single digits over the course of the next few years. So those are the main building blocks. We certainly see a path to profitability, but it's a multi-stage process.

So pretty consistent profitability within the Lending segment, potential for operating leverage within the Technology segment?

Yes.

What EBITDA margins are you targeting longer term there?

So right now, we are operating at a 20% to 30% margin in the near to medium term. We expect that business could be a 40% margin long term.

Okay. And then breakeven or close to it, by the end of '23 within the Financial Services segment as you generate scale?

Exactly. That's right.

At operating leverage. Okay. So why should we think about EBITDA and cash flows right now as a better metric versus GAAP earnings?

Yes, one of our main objectives is to create value for our shareholders and the company, and we view the best indicator of growing value and overall equity value -- book value is free cash flow. And that's what we're focused on delivering right now. If you were to actually look at an adjusted free cash flow of our business, you can't really see it in our filings because we're a financial services company. But if you strip out some of that noise between cash from operations and cash from financing, we're actually cash flow positive.

Yes. There's a lot going on there. A lot of momentum that's going on in quite a tough market. So when you step back and you take this in consideration and you're growing, you have all these different products that you've had. You've gone through a series of M&A. You've become a bank. Where do you see SoFi 3 years, 5 years down the road? What does it look like? Is there other products that we're not seeing? Is there something else there? What do you envision so far looking like 3 to 5 years from now?

Yes, we're really excited about the position that we're in right now. What I would say, longer term, we have aspirations to be a top 10 financial institution. And we have the recipe and the tool set to get there, and we want to be a very well-known brand. So call it, 3 to 5 years from now, we expect the overall revenue profile of the business to be about 1/3, Lending; 1/3, Tech Platform; and 1/3, Financial Services, with margin profiles, as you just described, of about 50-plus percent in the Lending business, 30% to 40% in the Technology Platform business and then mid-20% to 30% in the Financial Services segment. What I would say is we've never been in a better position than we are today to navigate what appears to be a tough macroeconomic cycle. We ended up raising over $3.5 billion of capital last year to shore up our balance sheet. We now have access to low-cost deposits and funding. We have all of the table-stake products necessary to enable our members to get their money right. And it's all coming down to execution for us over the next several quarters and years to realize our overall ambitions.

Okay. Well, Chris, we appreciate your time and wish you the most success. And thank you for joining us here at the Piper Sandler conference.

Awesome. Thank you so much.

Thank you. Appreciate it.