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

Okay. Thank you, everyone, for joining us. We give Richard Repetto a little break here for about 30 minutes before he goes back on. But today, I'm honored to introduce Anthony Noto, CEO of SoFi, one of the fastest-growing digital financial services companies out there today. Anthony has had a lustrous career, CFO of the NFL; Global Head of TMT Investment Bank at Goldman Sachs; and COO of Twitter before this. And then he joined SoFi in 2018. So quite a name -- quite a few names there.

So what brought you to SoFi? What really attracted you to really come and run this company at the time?

The first thing that attracted me is, I was a sell-side research analyst from '99 through 2007. And I got to have a front row seat to the emergence commercialization of the Internet 1.0 and saw what Amazon have done in the retail sector and Expedia and Priceline in travel and Netflix in film and on and on. And I really asked myself the question, why hadn't we seen a similar type of disruption and value creation in the consumer financial services space. So I thought it was a unique opportunity to be able to bring technology to bear in that industry. But up until that point really hadn't seen that type of disruption. And then secondarily, I thought there's a real opportunity to help a segment of the population that was left behind. People that had worked incredibly hard to be successful academically, worked incredibly hard to be successful professionally. They're making $100,000 plus a year, and they're struggling to live the American dream. And so our mission at SoFi is to help people achieve financial independence to realize their ambition, which means they get to the point that they have enough money to have the home they want, the size of the family they want, the career they want, live where they want, retire when they want. And it's really hard in the United States today that make that amount of money and do all those things. And one piece of the puzzle that's missing is a relationship bank, a bank that could be there for all the major financial decision in your life and all the days in between. You need to be there where you're making the -- we need to be there for our members when they're making the decision on paying for college. So they don't overpay for college and take out too much debt. And then in their 20s, so they budget so they can invest in their 20s and get the benefit of decades of compounding returns on those investments. And when they start to think about a family and how big that family is and what they can afford and size house they could have and those are all big economic decisions. They're all big emotional decisions. And we're building a relationship company that can help people get to that point that they realize their ambitions. And we have to be in all of these products to get there. We can't just choose the products that we make money on and that we have a high ROE on. We have to choose the products that they need so that we're there for all those major decisions. So that's why, for us, we want to help people get their money right. And that means we have to help them borrow better, save better, spend better, invest better and protect better. And those are the activities we're helping them do. And I'm proud to say, 5.5 years in, we're the only place you can do all those things on a digital mobile app and do it largely for free.

Yes. It's obviously generated quite a bit of growth as well along with it. That growth was over 40% in the first quarter. Do you think that's something that you can sustain for a longer period of time? And what are some of the reasons behind that, that you see, just given what you've built already in SoFi?

Sure. We remain very confident in our outlook and our guidance that we gave after Q1. As you mentioned, our Q1 results were our eighth consecutive quarter of record revenue, up about 40 plus -- 43%. It was our third consecutive quarter of positive EBITDA. 48% of the incremental revenue year-over-year dropped to the bottom line, driving EBITDA margins to 16%. We're generating a significant amount of return to the bank. It's GAAP profitable, about $74 million of GAAP profitability with a 20% ROE. And we're able to really grow deposits in a high-quality way, up $2.7 billion. So a lot of great things came out of the quarter that reinforced our outlook for the year and our view that we'll be GAAP profitable by the fourth quarter. So incredibly confident in that in the direction that we're going with some tailwinds behind us now that we really look forward to going into 2024. As it relates to our longer-term growth, we're comfortable that we believe we can compound growth at about 25% to 35% over the next several years. There's a number of different reasons for that, and I'll try to break them down. Our lending business grew in the low 30% in the quarter, and we're growing that rate, quite frankly, with one hand tied behind our back. Our personal loan business is gaining market share. It's a great product. It's a product that's really differentiated in the marketplace. We have really high credit profile there. The average FICO score is around 750. The loan size is around $30,000 and it's delivering a great yield for us, especially now that we're funding with deposits. Our home loan business has been one that we've really been in transition. I couldn't be happier to announce that we've integrated Wyndham Capital, the technology stack, and we now own end-to-end capabilities. We're seeing great improvement in our NPS scores. I just got a note from Chad Borton, who runs our lending business that our post NPS score since we've integrated the acquisition is up to 80%, which is remarkable. So we're ready to step on the gas in home loans for the first time in a couple of years. The rate market is not where we need it to be right now to see that acceleration, but we'll have a great tailwind from the home loan business. And then student loans, it's been a long 3 years. It's been a winner for 3 years to have your largest and most profitable business at 25% of its capability. And so we'll see a great tailwind from that, not to mention the ability to go to SMB lending and other products. So the lending business, really high-growth, super high profitability, we expect that for the next several years. Our technology platform business, we think we're at the very beginning of a huge secular transition in 3 ways. We'll continue to see more B2B partners. We have a number of B2B partners now. We've been able to sign up someone with a fleet arrangement. We also have a partnership with Toast and a few other B2B businesses that are starting to scale very nicely. We also have, for the first time, very deep and long-duration conversations with big financial institutions. And the combination of both Galileo and Technisys, having a modern core, a multiproduct core, that's low code to no code in the cloud, plus a modern issuing platform is incredibly valuable. In addition to that, we've rolled out Konecta, which is a chatbot. It's a natural language AI chatbot that's getting great reception, significantly improves time to resolution, lowers cost and lowers contacts per member. We also rolled out a product called PRP, which is payment risk platform. It's leveraging the 5 billion transactions that happen on our platform annually, to help make quick authorization decisions and prevent fraud. And so we have a number of great partners in the pipeline. We have a number of great products that will add on top of the strong financial progress we've made there already. We've talked about that business accelerating in the back half of the year, and it's also going to see great margin expansion, which will contribute to the growth. Then the last segment is probably the least appreciated segment and the least talked about, and that's financial services. And that's a significantly big contributor to overall growth. In Q1, about 52% of our growth came from lending and the remaining 48% came from nonlending. The Financial Services segment being the fastest component of that. That's SoFi Money, which is checking and savings; SoFi Credit Card; SoFi Invest, which consists of the brokerage with single stocks, cryptocurrency, robo accounts and ETFs; and then our insurance product; and then Relay; and last but not least, a product that is an alternative brand Lantern that helps with price comparison within financial services products. That business did about $81 million, up from about $20 million a year earlier with significant improvement in profitability. That business is going to continue to compound quite significantly. And there's a number of product launches in each one of those businesses that has yet to come. Within checking and savings, you could see us being in the SMB business, you could see us entering into consortial business. There's other products that we'll add to brokerage. And in credit card, we have 1 product, we'd love to have a portfolio of 4 products. So lots of opportunity in growing all of those businesses and having to talk about geographic expansion.

So I'd like to go back on the Financial Services and Tech segment, some of the key things you mentioned there. But before we go there, I really want to touch on something that's core to SoFi student lending business, that was the root to SoFi go back to student lending. We had a big announcement from the debt ceiling deal where the payments are going to be turned back on with the deal that was announced in August 30, I believe the date is. So could you just give us an idea of like how that impacts your business, and how big could the student lending refi market be for SoFi in particular?

Yes. We think the need to help members with student loans and their student loan burden is greater than it's ever been. We've been supportive of forgiveness. We're supportive of the moratorium for the first 2 years. And then in the last year, we thought it was a little exorbitant. So the reality is, we had a great outcome, I think, for the country, bipartisan agreement to extend the debt limit and to make sure that we had fiscal responsibility at Department of Education, and I applaud our representatives for that decision. In front of us, we think there's about a $200 billion addressable market for the credit box that we serve that would be in the money. And that's a sizable opportunity. We think there will be 2 underlying value props for people. Some people will choose to refinance at a lower rate and some people will choose to refinance at a longer term. Our average loan size historically has been $70,000. If you assume a 6% interest rate on that $70,000 from a financing perspective, in a 10-year term, the monthly payment would be $775. We believe people will be able to refinance that at a lower rate. There's about $200 billion that are in that high 6s, high 7% range that was issued going all the way back to 2009 time period. And so there will be people that can refinance at a lower rate. But assume for a second, they don't refinance at a lower rate, they just extend the term from 10 years to 20, which people will do, and we're seeing a high propensity that already happening before the federal student loan moratory amending. So if someone goes from a 10-year term on $70,000 and 6% rate to 20 years, the lower that monthly payment to $500, they'll have an excess $275 that they could choose to spend on other things or pay down other debts. Most importantly, they can prepay. They could still pay at that rate with no penalty. And when rates go down, which everyone is predicting they will, they could refinance as many times as they want without friction. We charge no fees on student loan refinancing. There's no closing costs, and our typical time to fund is about 7 days. So we do think there will be a fair number of people that extend the term to get that lower monthly payment, and they could choose to still pay the same total amount. So I think we have a very unique value proposition, both in lowering the cost for those with high rates and lowering the monthly payment for those that may choose to extend the term. They could even extend the term and take a higher rate. So that same example I gave, if they went from 6% rate at 10 years to a 7% rate at 20 years, their payment would be $540. Still lower than that $775. So we think there's a lot of pent-up demand for the last 3 years. There's also a lot more awareness that you can refinance student loans. Many people don't realize that you can do that privately with SoFi, not just have to deal with the burden that you have with the federal government. In addition to that, there's a lot fewer competitors.

Yes. I mean you guys have been one of the most prolific in marketing the SoFi Stadium. I mean, do you anticipate something where you could really push to grow that refi demand, particularly in the third quarter and fourth quarter as student loan is going to be a big issue for a lot of your customers?

Our outlook for the year contemplated the plan that was announced as part of the debt ceiling bill. So that's in line with our expectations. In terms of the need to market and the returns, we make a very good profit margin on student loans the day that we fund those. So the marketing self-funds, the loan itself will get a variable profit day 1. That includes the marketing costs and the operating costs and our assumption on life of loan losses and our funding costs. So it will be self-funded.

Okay. And then obviously, student loans are going to have a credit impact as well as these payments are to impact. Your loss rates on personal loans have been relatively low compared to your expectations. I mean do you anticipate that there will be an increase in defaults on other products just because of the student loans? Or do you feel like that's handled with the underwriting you've already put in place?

It shouldn't have an impact on our personal loan performance because when we underwrite a personal loan, we're forecasting the applicants' and that future members' ability to pay based on their cash flow, and we're asking them for a bunch of data that allows us to determine what their cash flow is. In addition to that, we do a credit pole. So we see all their liabilities. And if they had an existing student loan, even if they weren't paying it, it would have shown up in the liability side, and that would have been assumed as a necessary payment within that cash flow. So it should have no impact. The student loan was part of that overall decision criteria in the personal as well as all the other debt at that moment of financing. So it should have no direct impact, everything else being equal.

Okay. One of the more controversial topics that we've seen out there is holding loans on balance sheet versus selling them. Obviously, the markets have been very volatile, something that you've been able to handle because your deposit base is now over $10 billion. Could you just touch on just quickly why it makes sense to hold versus sell? And just help us understand why you made that decision, just particularly over the last couple of quarters?

Sure. The first and most important thing to mention is that we actually have the optionality to hold versus sell and having a bank license has afforded us that in addition to the fact that we have a lot of funding capabilities. So before we were a bank lender, we had to use warehouse lines on our own equity capital. And we have about $3.5 billion of our own equity capital to fund loans, about $2.4 billion of cash on the balance sheet at the end of Q1. So that's one source of funding. We also have $8 billion of warehouse lines. And as of the end of Q1, we used $3 billion of that, so an incremental $5 billion. And then as you mentioned, we've been really fortunate in the last year to be able to drive substantial deposit growth and really high-quality deposits. So we added $2.7 billion of deposits in Q1. We said we expected to continue to add about $2 billion per quarter. So we ended the quarter about $10 billion. It's important to note, 90% of those deposits are from direct deposit customers, people that are using us as their primary relationship. And 97% is insured. So we have a substantial amount of funding capability that actually allows us to hold loans longer to maximize ROE. If we didn't have that capability, we would have to sell more frequently. But the way we look at it is we want to look at the balance sheet and understand our funding capacity, our liquidity and the risk we're willing to take. And then it comes down to what's the best way to maximize ROE? Right now, we believe we can get better than a 6% return on assets on our personal loans, and they're marked at about a 4% return on assets. So we're keeping them because we can get a better return and that will maximize ROE. And we have the flexibility to keep them given the funding that we have, the liquidity we have. And the one thing I'd also add to the equation is we have about an 18% leverage ratio at the bank holding company. That's total equity to total assets, and that can come down to about 10.5%. So we have a lot of flexibility. So it's a combination of those 3 things and being able to maximize the ROE in that decision. And that's what will drive our decision. An actual holding period is what will drive it. It will come down to those factors, our funding capacity, our liquidity, our capital ratios and what return we'll get from holding versus selling.

Yes. So that 18% to 10.5% really gives you that buffer to continue to have that flexibility going on?

That's correct.

Yes. Just in the interest of time, I want to move on to maybe to touch on some of the Financial Services segment and some of some of the comments that you made earlier, particularly around the growth and tremendous growth and the path to profitability, particularly in that segment. What is really the underlying driver of that growth? And do you feel like that's sustainable just given the momentum that you've had over the last couple of quarters in particular?

Yes. I'm really proud of the Financial Services segment. These are businesses that were born sort of since 2018. There are companies out there that exist in each category. So SoFi Invest. The only place that you can buy single stocks, fractional shares, which we pioneered, we created ETFs, we created robo accounts, we offer cryptocurrency, and we're in the IPO market as well. We've done IPOs like the Rivian IPO. So that competes with single companies out there in just -- in the brokerage or investment space. SoFi Money to checking savings account, SoFi Credit Card, SoFi Protect, et cetera. SoFi Money has really been the tip of the sword. Getting the bank license allows us to offer an incredibly compelling 4.2% interest if you do your direct deposit with us on savings. There's no restrictions on spending. You can spend as often as you want with that money, as frequently as you want. You can pay from your phone to your friend. You can pay from your phone with ACH, you could pay a bill electronically, it won't even send a physical check to you. So it gives you complete functionality, no fees and super high interest, and that's driving great direct deposit adoption. And those members, we then have great information on, we see their spending, we see the bills they're paying, and we can help them get their money right with the rest of our products. SoFi Invest is a product that has a lot of cross buy, about 40% of its adoption is from existing members and a product that we have -- we believe, has great promise and a lot more that we could add to it. And the credit card business is one that typically is the highest ROE business for a financial services company, and it will be for SoFi as well, and we've slowly moved into that business to get up the education curve on the right channels to acquire customers in, the right credits to underwrite, and we're really ready to step on the gas in that business because the overall Financial Services segment has actually gotten to the point of scale where it's covering all these acquisition costs. If you look at the product growth in the Financial Services segment, it's over 50%. Every one of those new products comes at a negative deficit of acquisition cost. But we've actually reached the point where the business is generating enough revenue and variable profit, it's covering all that acquisition costs. And so that will help us get to GAAP profitability at the end of the year. But it will also allow us to step harder on the gas than these other businesses that have that negative acquisition cost that takes 12 to 18 months to pay off.

It creates a feedback loop, where you can keep reinvesting and growing. That's great. And then you said on the Q1 earnings call, the growth in deposits, in particular, has been really strong. You had over $10 billion as of the first quarter. Has that strength continued through here through the second quarter and you anticipate that through the rest of the year as well?

The strength is continuing. We continue to believe we can add $2 billion a quarter in high-quality deposits the way we have in the past. And the market, it's very differentiated product, and there is increasing competition in the market. I only bring that up because we're executing in the way that we have since we got the bank in a very nimble way to stay in front of the competition, and I think the team is doing a great job beating everyone else. It's also a way of me saying, when rates start to go down, you're going to really see our differentiation, because we can use deposits to fund our loans as opposed to using those deposits to buy someone else's assets, we have a unique competitive advantage. The competitive advantage that we can look at the combination of our loans and our direct deposits and the rate that we give to maximize ROE but also put a lot more into the APY and maybe take a little bit less profit on our loans to be able to do that. So as rates go down, which they are forecasted to do in the back half of this year or next year and it will happen inevitably, I'm not going to predict what happens, you will see us keep a higher rate when other people are lowering their rates because we could afford to do so and our differentiation will actually increase, not decrease. And I couldn't be more excited until that day comes.

So you should start to see the spreads and the reinvestment start to really...

The distance between us and everyone else is only going to increase.

In the interest of time, I want to pivot over to the tech segment, some of the things you mentioned earlier, we bring people back, you bought Galileo back in April 2020. And you also brought in Technisys a little over a year ago. You've integrated those over a brief integration period. Can you just give us an update on where the business stands right now. And particularly, after you lost a sizable customer in the fourth quarter. You're anticipating quite a bit of growth in the back half of the year. Can you just give us an update there and why that growth is going to continue? And do you see that momentum in the '24?

Yes. I couldn't be more excited about our positioning in the tech platform sector for a couple of reasons. One, it feels like 1999 where all the big financial institutions have to change their technology. And I saw that happen with retailers. I saw that happen with media companies. We saw that happen with travel companies. And it really hasn't happened in the Financial Services segment because there hasn't been competition. There hasn't been a chaos that caused the big banks to have to change -- but the reality is their technologies, their core technologies are built on mainframes with old archaic languages like COBOL. So they can't manage their assets and liabilities in real time. We just saw the downfall of that happen. I know where my deposits are by the second. I can open up my laptop, look at Datadog, where deposits are in that moment, see where they're coming from, where they're going to, and manage my assets and liabilities in real time. There's a real need for big banks to do that. But it's also a need because there are end of life for these technologies. They can't continue to innovate. They can't acquire customers digitally the way that we can. And so those technologies are needed now more than ever. The combination of Galileo and Technisys puts us at the center of those conversations. If we didn't have Technisys, we wouldn't have a multiproduct core that's low code. That's modern and the next generation of technologies. We don't even see the old-generation technologies competing with us. It's really awesome to others that have their new modern cores. So it puts us in a great conversation with big institutions. It's also helping us open up doors to new product areas like risk and fraud that we historically haven't been in with those 2 businesses, and that's also allowing us to leverage the data of the more than 125 million accounts that we have at Galileo to do things like payment risk management platform, which we could offer to anyone regardless they use Galileo or Technisys. Same thing with Konecta. It's benefiting from all the data that we have and helping drive artificial intelligence in the way that top [indiscernible] questions. And again, a product that we use independent of Galileo and Technisys. So I think we're at the precipice of a really strong tailwind for years to come. From our business in particular, we will see it accelerate in the back half of the year, and as we mentioned by the fourth quarter to 15% to 20% growth and then continuing from there faster.

You mentioned you're in proof-of-concept stage as well with a large financial institution. It seems like a pretty big step in tech segment's evolution and some of the things that you've built. How long do you expect this proof of concept to play out? When do you anticipate that we're going to actually start to see some of the fruits...

Yes. And that was more to be illustrative about how long the sales cycle is. Large financial institutions, they talk to the different technology providers and platforms. They do RFPs, they do and go down to a list of a couple, then they pick one and they actually do real integration to do proof of concept. And so we're at -- we're close to the bottom of the that. And in that particular case, I'd say it's another 6 to 12 months away before there's some new announcement. We're making great progress. But there are up to a dozen other conversations at various stages with large financial institutions as well. Some of them are in core, some of them are in processing. Some of them are on some of these other solutions like Konecta, PRP and Pay in 4.

There's dozen financial institutions. Do you anticipate other financial institutions to also start to be realizing end-of-life technology that you mentioned?

I'd see the financial institutions following a couple of different buckets. There's definitely a cohort that's end of use -- technology. There's a bucket that says we want to stand up with an entirely new stack and acquire new customers in that stack. We can't acquire digitally. If you download the top 10 banks apps in the country and try to sign up for an account on that digital app. Many of them don't allow you to actually sign up on the app because they don't have the fraud safety controls that they need, so they force you to call or go into a branch to do so. They really need to be able to provide acquisition digitally on the phone. We can help them do that. But with our core and with our processing and our banking in the box APIs. So there's a cohort of people that want to stand up with an entirely new stack for SMB for new customers and just deal with their new customers on that platform. And then there's a similar group that fundamentally needs to have better control with managing systems and assets and liabilities. And they're being forced to look at new technologies because they weren't able to answer the Fed's call and tell them where the deposits were by the minute, and some of them not even till the end of the month.

Fascinating story. You've been telling it quite a bit this quarter. Can you give us -- just to wrap up here what is something new -- something you want to highlight to The Street that may be underappreciated just given the whole story you told us here?

Yes. I think the biggest thing I'd say is when we were going public back in 2021, we talked about the fact that many people talked about being a one-stop shop, but only SoFi has done it. Well, not only have we launched all those products on a digital platform, they've all scaled to the point now where we're going to have overall GAAP profitability, and we continue to run the business and fund the business from its organic growth. Will we look at different opportunistic financings to lower our cost of capital and small tuck-in acquisitions? Yes, but the reality is, it's all built. We're past the technology build. We're past the learning curve that you need to be able to become a bank on risk and controls and fraud. We're past the point of hiring the entire team and going through that maturation and building a board. And now for the first time, we'll be able to operate all of our businesses with no hands tied behind our back, and I'm really looking forward to that. We've built out 7 different opportunities, 7 different businesses in 1 company, and they've all scaled to the point where they can fund themselves. And ultimately, we can drive accelerating growth because of that profitability in all 7 businesses. So not only did we build them but we're at a point now where they can all thrive and it's really unbridled growth from here, really subject to how much we want to invest versus drops to the bottom line, and we have the flexibility to do both.

That's great. Well, thank you for taking the time here to speak with us and a really fascinating story. We look forward to seeing everything SoFi can do over the next couple of years.

Thanks, Kevin.

Thank you, Anthony.