Q1 2022 SoFi Technologies Inc Earnings Call
Our number of total crossbar products in the quarter increased 22% year over year, demonstrating the continued success of our financial services productivity loop strategy.
Our strong momentum in member product in cross buy growth also reflects the success we have achieved in building the <unk> brand over the last year.
We committed to investing more in product and brand marketing once we reach the appropriate scale and unit economics last year.
That investment is already paying off well beyond our expectations and we're just getting started.
We took a giant step forward in achieving our goal of becoming a household brand name via our Sofia.
Stadium affiliation the success of our integrated multimedia campaigns and the reality of the influences we partnered with.
Our marketing team worked with 30 content creators across Tictoc, Instagram, Twitter and Youtube with a combined reach of more than $300 million throughout the NFL season, and the post season there are efforts.
Amplified the branding of Sofia, and certify stadium and together drove more than 270 million impressions.
Our unaided brand awareness, which had already increased more than 70% throughout 2021 more than doubled and Super Bowl weekend to an all time high.
We generated the highest so far related search volume of all time on game day with nearly 230000 and the most new visitors to our site since the mean stock craze in January 'twenty one.
And even without an AD. So phi had nearly five times more online searches than the top performing Super Bowl AD that aired.
Now I would like to discuss how our strategy to build the only vertically integrated one stop shop for digital financial services has resulted in a uniquely diversified business model and.
In lending we originated a record of more than $2 billion in personal loans in Q1 2022 up from $1 6 billion in the fourth quarter of 2021, and $1 3 billion in Q1 of 2021, our results reflect years of investing to maintain an attractive credit profile.
Phil and increasing our ability to capture more share of the trillion dollar market.
Our personal loan performance more than offset the continued lack of demand and student loan refinancing and the underperformance of home loans as we've transitioned and onboard new fulfillment partners.
We're also seeing the benefit of our ongoing investments to build and maintain a robust risk management framework in the current rising rate environment.
We are constantly iterating learning and Iterating, some more while using data that goes well beyond traditional industry specific underwriting data to drive the innovation and our credit underwriting models.
We're also increasingly leveraging machine learning tools to improve the member experience throughout the funnel from application to income verification to approval.
Cause of these disciplines are personal loan delinquencies and life of loan losses remain at record lows, even as we hit new origination records, while demand Dubai <unk> personal loans has remained robust.
The profile of our borrowers very attractive to loan buyers are personal loan borrowers weighted average income is $160000 within weighted average FICO score of 746.
Student loan borrowers weighted average income is $170000 with a weighted average FICO score of 775.
Let me say those numbers again, given how impressive they are our personal loan borrowers weighted average income is $160000 with a weighted average FICO score of 746, while our student loan borrowers weighted average incomes of $170000 and weighted average FICO score of 775, we are.
Also differentiated lending by the strength of our balance sheet and the diversification of our funding sources today, we have $5 5 billion of book equity on our balance sheet and about $7 billion and warehouse facilities, we can access to fund loans.
Not to mention the more than $1 5 billion currently and certified checking and savings deposits. We've raised so far at Sofia Bank, which are growing by $100 million weekly as.
As we scale the bank, we're gaining even more flexibility in lending.
We are already achieving savings by using our own deposits rather than warehouse facilities to fund loans. We've just started moving towards holding loans six months on average versus three which allows us to collect more net interest income.
This also creates a more rational pricing environment for our paper as we leverage our ability to hold loans for longer should pricing not to be acceptable.
And we can now introduce new loan types and pricing models that improve our competitive positioning.
In financial services, we've continued to achieve strong member and product group by Iterating on our products to ensure they are differentiated by four key factors and convenience and continuing to invest to make them work better when they are used together.
We finished the first quarter with $4 7 million in total.
So financial services products, a 111% annual increase and more than four times, our total lending products of $1 1 million.
The more scale and financial services products creates even more scale and cross buying and thus large marketing efficiencies just one year ago that ratio was two four to one and two years ago lending products actually outnumbered financial services products by a factor of one six to one.
Members have embraced the product launches in financial services introduced in the first quarter.
We launched margin lending and so if I invest which is one of the most common member requests. Another comment on request is extended hours trading which will launch in the coming weeks and options, which we are targeting introducing by year end.
We introduced no fee cryptic transactions for soap by money members that your direct deposit and we are assessing other possible crypto products to provide even more value to our members.
Last but certainly not least so far checking and savings provides an unmatched value proposition through an industry, leading API of up to one 5% a host of free features and a unique rewards program the.
This strategy is paying off as we've seen strong growth in direct deposit accounts and spending while deposits have accelerated further since we announced the <unk> increase of 25 basis points, a critical element of <unk> strategy, allowing us to innovate at a rapid pace, while providing diversified high return revenue streams and inefficient.
Cost structure.
Already a market leader among U S based neo banks Galileo continues to expand its client base to include <unk> and enterprise clients as adoption of modern cloud based digital payments and banking has opened up new verticals client types use cases and opportunities for example, we launched two new client.
In the first quarter that offer innovative working capital models for <unk> and small to medium size businesses.
Technology platform enabled clients accounts increased 58% year over year in the first quarter to $110 million through new client acquisition and growth from existing clients a large installed customer base of galileo's clients also provide unique growth opportunities for existing capabilities like instant provisioning dynamic fraud.
Our Tianjin and two day early paycheck.
As well as financial and engagement products in our pipeline that can drive greater customer activity like instant funding and direct deposit switching or.
Our March acquisition of Technosis further differentiates our technology platform by allowing us to incorporate a next generation multi product korbel integration enables faster.
Patient and growth as well as greater.
Creating efficiencies.
<unk> also brings a complimentary footprint of established banks digital banks, and Fintech and Latin America, adding to the robust growth opportunity of <unk> existing presence in Mexico and Colombia.
Galileo and <unk> are already going to market together to offer new products and services to the Gallo clients looking to expand their lineup early reception among existing Galileo and <unk> clients in the U S and Latam has been very positive.
I'll finish here by saying that we have been in an all out spring over the last four years to build out our digital product suite to meet our members' needs for every major financial decision in their lives and all of the days in between.
The benefits of our strategy to build a uniquely diversified business combined with our national banking license not only positions <unk> to be the winner takes most in the sector transition of financial services. The digital but also provide greater durability through a market cycle I'm excited about where we are today and where we can go from here with that number.
Turn it over to Chris for a review of the financials for the quarter.
Thanks, Anthony overall, we had a great quarter with strong growth trends across the entire business, we exceeded our financial guidance, while achieving record revenue and our seventh consecutive quarter of positive EBITDA. Despite operating in a rapidly evolving macro environment.
Going to walk you through some key financial highlights for the quarter and then share some color on our outlook.
Outlook, unless otherwise stated I'll be referring to adjusted results for the first quarter of 2022 versus first quarter of 2021.
Our GAAP consolidated income statement and all reconciliation can be found in today's earnings release and 10-Q filings.
For the quarter, we delivered record adjusted net revenue of $322 million up 49% year over year and up 15% sequentially from the prior quarter's record of $280 million and $37 million above the high end of our guidance of $280 million to $285 million.
We also delivered $9 million of adjusted EBITDA, which came in $4 million above the high end of our guidance of zero to $5 million.
Looking at some of the annual trends, we generated $1 1 billion of adjusted net revenue over the last 12 months, a 49% increase from the same prior year period.
In addition, our Q1 annualized run rate was nearly $1 $3 billion of revenue.
We also generated $35 million of positive EBITDA over the last 12 months.
Now on to the segment level performance, where we saw strong growth and record revenue across all three segments.
And lending first quarter adjusted net revenue accelerated for the second quarter in a row and grew 45% year over year to $244 million.
Versus 30% in Q4, 'twenty, one and 21% in Q3 dollars 21.
Growth in lending was driven by 82% year over year growth in net interest income and 29% growth in noninterest income.
Growth in net interest income was driven by improvements in NIM, both year build and cost of capital and an increase in loan balances, which grew to $7 billion predominantly as a result of holding loans for a longer period of time very early benefit of having a bank as well as 30% growth in funded volume.
The largest contributor of funded volume growth was our personal loans business, which grew 151% or $1 $2 billion year over year to $2 billion on originations for the quarter, a new high for us and up 23% sequentially.
This origination number is more than double our quarterly pre pandemic average of $933 million in 2019, we were able to achieve this growth while maintaining our stringent credit standards.
And disciplined focus on quality, our personal loan delinquency rates and charge off rates have improved year over year.
In Q1, 90 day personal loan delinquencies as a percentage of loans on the balance sheet improved to 14 basis points in Q1, 'twenty two while our annualized personal loan charge off those 90 day delinquency and annualized charge off rates in our student loan refinancing business also remained extremely healthy at five basis points and 27 basis.
Points, respectively.
The increase in noninterest.
$133 million of contribution.
Fusion profit at a 54%.
Margin up from $88 million, a year ago and a 52%.
<unk> margin.
This improvement was driven by ops efficiencies and fixed cost leverage.
Shifting to our tech platform, where we delivered net revenue of $61 million in the quarter up 32% year over year versus the tough comparison, driven by stimulus benefits and a rapid evolution from cash to digital payments in the same prior year period.
Galileo contributed record revenue, while <unk> contributed a small amount following the close of the transaction in March overall revenue growth was driven by 58% year over year, Galileo account growth to $110 million in total.
We also signed 10, new clients two of which are in the <unk> space further diversifying our partner base.
Contribution profit of $18 million represented a 30% margin, which is in line with the 20% to 30% margin range, we have guided to in the near term given the opportunities for growth.
As discussed previously we remain committed to investing in the platform to ensure that our tech platform is well positioned to capitalize on the secular shift from physical to digital payments and rising overall demand for more Fintech services.
Moving onto financial services, where adjusted net revenue of $24 million increased 264% year over year with new all time high revenues for sulfide money, which is now transitioning to sulfide checking and savings and continued strong contributions from sulfide credit card. So if I invest in lending as a service.
Improved monetization and exponential growth in financial services products drove our performance.
<unk> revenue per financial services product, Inc, increased 73% year over year and the number of products grew two two X year over year to $4 7 million in Q1 'twenty two.
All products were up approximately 100% year over year and sulfide credit card was up 500% year over year.
We hit $1 6 million products, and sulfide money $1 $8 million in Sofia invest and $1 $1 million in <unk>.
Contribution losses were $50 million for the quarter, which increased year over year predominantly as a result of now having a credit card business and needing to build our seasonal reserves, which is expected as we continue to grow in scale.
As of the end of Q1, the reserves are in line with industry peers.
Excluding these reserves contribution losses were $36 5 million.
We're up $1 million year over year.
The next thing I wanted to address is our balance sheet.
Overall, we are very well capitalized with ample cash and excess liquidity.
The recent opening of sulfide bank only reinforces the strength of our balance sheet and provides us with more flexibility and the ability to further lower our cost of capital in Q1, our balance sheet.
She grew by approximately $3 billion and that was driven by three factors.
<unk> cash cash equivalents and restricted cash increased by approximately $900 million.
Primarily as a result of an increase in pledge activity to capitalize the bank as well as increases in deposits at sulphide Bank, which totaled $1 2 billion at the end of the quarter.
Second loan balances grew approximately $1 2 billion as.
As a result of holding loans for a slightly longer period of time.
And third we had a $900 million increase in goodwill and intangibles related to our acquisition of <unk>.
We exited the quarter with $2 8 billion drawn on our warehouse facilities, which is approximately 40% of our overall $7 billion of capacity.
Our current book value is $5 5 billion and.
And our capital and leverage ratios are extremely strong both at the bank and at the bank holding company level.
Alright, I'll finish up with guidance.
The last 12 months, we have demonstrated the benefit of having a diversified set of revenue streams and a keen focus on continuing to underwrite high quality credit.
We expect those benefits to persist going forward, particularly in light of the existing macro backdrop.
For Q2, we expect another strong quarter of growth with $330 million to $340 million of adjusted net revenue up 39% to 43% year over year.
And expect $5 million to $15 million of adjusted EBITDA.
For the full year of 2022, we are raising guidance and now expect to deliver 1505 to 151 <unk> billion and adjusted net revenue exceeding our recently provided full year guidance of $1 7 billion.
And expect to deliver adjusted EBITDA of $100 million to $105 million.
Above our recently provided guidance of $100 million.
Overall, we couldn't be more proud of our Q1 results and continued progress having.
Having delivered nearly $1 $3 billion of annualized revenue and our seventh consecutive quarter of positive EBITDA. We continued to make great progress against our long term growth objectives in Q1, 'twenty, two and remain very well capitalized to continue pursuing our ultimate goal of making Sofia top financial institution.
With that let's begin the Q&A.
Thank you if you'd like to ask a question. Please press star followed by one of your telephone keypad. If for any reason you <unk> that question. Please press star followed by two again to ask a question press Star one.
Only one question and one follow up if you have any questions.
If you have any additional questions rejoining the queue, we will pause here briefly.
<unk> registered.
Our first question comes from Dan <unk> with Mizuho. Please proceed.
Hey, guys, saying, Hey, Chris Great quarter here.
Sure.
Hey, guys I have sort of like a maybe a longer term question.
I think we can.
Actually surprised to see the stock trade down today, so much and I think a lot of it had to do because he reported after upstart and I think theres a lot of confusion out there in the market from the from.
From the calls that we're getting from investors about the nuances of the different differences between the quality of self funding. Some of your competitors can you maybe talk to what.
What people are misunderstanding here and what they are missing when they're sort of putting you in that group.
<unk>.
Thanks, Dan I'll start and annual request to talk about the demographics and the credit profile of our loan growth I would say the biggest swing so.
So volume square and Paypal onto that that equation more recently.
Maybe to start with is we're building a one stop shop with a lifetime relationship with them.
Can be there for every one of the major.
In between and we're doing that through.
We have best of breed products.
Consumer standpoint, but also with best of breed of unit economics, and that will allow us to analyze.
Because as soon as you have.
<unk> diversified business with.
And our lending segment, we have four different items.
We're also in student loan refinancing or the in school loans and mortgages.
<unk> technology platform has two primary businesses.
Good morning.
Sure.
Well, Larry and some very high margin business.
Accelerating.
Innovation, given our low cost advantage and giving us a return on our own technologies.
And then our third segment the bundled services segment is highly diversified with some quite chunky unveiling.
So why invest even with Enzo by Investor not just incremental amongst them single stocks.
Final build out that portfolio.
One thing we are.
So new insurance lead generation business, we have the land trends are the biggest reasons why we've been able to navigate.
There have been multiple challenges.
Every year when there's economic work.
Industry related or credit related and because we have that diversification and can reallocate our resources towards the best growth opportunities are.
And that's why we continue to deliver record revenues, despite the negative impact on the student loan moratorium.
<unk> Big thing I had mentioned and Chris will get into details as we're going after a high end customer mass affluent high net worth individuals on behalf of a great credit profile.
High income and they need the products and services that we've developed and most of the big banks have walked away from that price real products. They don't work for mortgages and brokerage where they don't have a personal financial management, where they don't have current buys and so that results from having a pretty diversified business, we think that the.
EBITDA profitable for us.
All seven quarters in Malawi, being GAAP profitable and we're generating positive cash flow EBITDA less capex was only on book value and we have substantial okay.
Sort of the biggest point is described how we're positioned.
Christine to details on our income.
Yes, Thanks Ed.
I would say is just echoing what Anthony said, our demographic and credit profile of our member base is extremely strong and we see that playing into our resolve the weighted average income of our student loan refinancing borrowers is a $170000 with an average FICO of 775.
Average income of our personal loan borrower is $160000 with an average FICO of 746 and that our overall credit profile.
But risk metrics are trending really well both on a year over year and sequential basis in terms of 90 day delinquencies are <unk> 90 day delinquencies are at 14 basis points.
Which is down year over year and sequentially and our student loan refinancing delinquencies remained really healthy at just five basis points and then from a charge off perspective.
Those remained really healthy as well and are trending in the right direction with our personal loans annualized charge offs at 1.0% to 4%.
And student loan at 27 basis points annualized.
I would add is we have the most unique funding strategy and distribution strategy that makes the low cost operator in lending.
We built the business end to end one for metals glass, but we've also rolled out diversified distribution of our loans.
We can sell whole loans, which is a great diversified market for us we've got a whole loans because we are a bank and we use deposits to fund them on a low cost and we can access the ABS market, if and when we think it's appropriate.
So we have a.
Great competitive advantage in low cost, but also an ability to get really strong premiums for the credit that Christa described unified distribution come from our capital markets.
Got it thank you.
Super helpful and can I ask one quick follow up here.
We're getting some questions today post that on the.
On the EBITDA for the second half I know I mean, we've done the work we know it has to do with.
From a longer duration than deposits, but maybe can you Chris can you quickly bridge for investors like us.
So the bridge from from where we are in the first and the second quarter to that $40 million ish ramp in the second half that would be helpful and thanks again.
Yeah, absolutely so we aren't providing specific segment level or product level detail, but do you at least help.
Folks think about that.
The bridge from from where we are in sort of 101 hundred $5 million Guide I would think about it in two buckets.
The bank is going to start contributing much more meaningfully in the back half of this year, but we're really proud to say that all new applications for our lending products are going through the bank.
As you know.
Deposit growth is going extremely well and as a result, we're going to start benefiting from a lower cost of capital and we're going to start seeing.
The benefits play out of being able to hold loans for a longer period of time at scale in the back half of the year and then the second thing the second bucket is related to approach and some of our higher margin businesses.
Specifically, our personal loans.
Oh.
So collectively.
Those are the main things that we bring to us.
From where we are today to the guide.
Got it. Thank you so much again, a great quarter.
Thank you David.
Thank you for your question.
Our next question comes from John Hecht with Jefferies. Please proceed.
Afternoon, guys, yet echo those congratulations on good numbers in a choppy environment.
So my first question is just I know, it's very early on but maybe can you give us kind of your perspective on early progress within the bank and kind of what Kpis, you're looking for and what we should look out lower over time.
Thank you John .
One of the key strategies of having the bank license is being able to offer a super differentiating checking and savings account.
We originally wanted to buy money, we're not a bank back in 2019, and we're sort of holdings for interest rate that we can get from street partners, but now as a bank. We can provide we can offer the interest rate that we think is most attractive and currently we are offering up to one 5% on checking if you do direct deposit with us.
And a host of other benefits as a member and other benefits in that account and charging fees. We do three round outs overdraft protection against pre certified financial planner or relationships. In addition to all the integration get another loans et cetera, we've seen tremendous uptake of that product since we launched it.
I will tell them in my prepared remarks.
<unk> challenging weightings from the Federal reserve.
You seem to give us the final approval was inquired when theyre available.
If they were going to do it given the political environment, we're in and so we're standing ready with marketing and collateral and plans and technology and operations ready to flip the switch, but once we did that it took a while to get things rolling in Q1, and we came out of Q1 and Q2 really seeing the benefits are driving positive uptake is up 60% and.
<unk> basis, and the number of direct deposit accounts, adding per week has doubled in Q2 versus Q1 and as Chris mentioned, we're up to over $1 5 billion of deposits and it's growing at about $100 million.
<unk> per week.
And the feedback from an NPS score basis is really strong so we couldn't be happier with that competitive advantage that we now have.
As we bring people into the top of the funnel it increased non cross buying we have and as you know in the personal loan product, we double our variable profit prolonged and somewhat comps buys require invest into that money is really one of the products of things, starting with Boston realized and our costs.
Our initial cost very very attractive and we're actually leaning in even more because the LTV is proving out to be even higher than we thought based on early indications. So really happy with the bank product starting Tonight and tomorrow.
And the bank and the bank and go through the process.
The plans that we have specifically like the checking savings account and funding our new loans in the bank, but there.
Our other opportunities are now coming to one such as having a sponsored van business that we can partner with Galileo.
They are <unk> partners that they're adding and theres a lot of them in the beauty channel, while we can be a sponsor bank <unk>.
And so that's a new revenue stream that will work with regulators to launch and with our partners there. So.
A number of other things that will come down the pipeline as a regional bank that werent contemplated until we actually got the license.
That's very helpful. I appreciate all that detail a follow up question yes.
Yes, maybe just.
Because it's been a volatile market I think credit spreads are.
Drifting around it obviously interest rates are moving upward.
Talk about the components of the gain on sale.
And.
Is there any kind of different trends you're observing.
Different asset types.
And kind of the outlook for that.
Yes, I can take that one Jon.
So what I would say is that there are a few important things to note when thinking about the overall trends in gain on sale margins, especially on a quarter to quarter basis.
And there are a number of factors that play into that most predominantly rates spreads and then obviously the price that we're charging analysts like yourself.
In addition to those factors, it's really important to incorporate the impact of hedge gains and losses, which are critical particularly in.
The environment that we're in right now so in.
Q1, our gain on sale margins, excluding hedge gains were four 2% and they were north of four 5%. Once you include hedges associated with loan sold in period, our student loan refinancing business high gain on sale margins was one 5% excluding the hedge.
And north of 4%, one shrink what advantages and that our home loans business was negative 60 basis points, excluding the hedge and north of 2%.
Once you include the hedges so they've been relatively consistent.
Hedged basis over the course of the last several quarters.
And we expect them to.
To be able to maintain that they ask the only other thing I would say as it relates to our lending business that we obviously seek to maximize profit dollars in our lending business and stay within a 40% to 50% contribution margin range.
We obviously have a number of levers to do that despite the rapidly rising rate environment that we've been going through over the course of the last quarter was plus we were still able to deliver a 133 billion contribution dollars at a 54% margin across our entire portfolio, even as rates went up 80 to 170 basis points across the curve.
One of the other thing Thats, just adjunct to the benefit of those that may be more.
Or is that close.
What does that cause the company back in 2019, when we joined in 2018 with Michel and I.
We're looking at 4% to five rate increases throughout 2018 and 19.
And we rapidly developed a strategy of being able to test six different six by six Chris simultaneously in the marketplace and at that time. The company really only had the ability to test two prices. We spent the better part of 2018 and Thats just testing all these different prices and building that capability, but also understanding the unit economics by <unk>.
Marketing channel and reflecting that over time, so the level of sophistication, we have the marketing pricing front. It is really built over the last four years. So as rates are going up even though our funding costs are going down we've already being prudent about making sure we have the right price for the right credit.
Constantly testing and also leveraging different channels that we know have certain types of bank loan losses in quality or performance. In addition to that we have early warning framework that our risk team has talked about we actually executed at the beginning of 2020 being endemic to make sure that we're in a position to be able to pull back as economic conditions.
To provide leading indicators that aircraft. So we're playing on both ends of the spectrum offensive with pricing in channels and then if the market turns over in some way.
That's not what was predicted what we can also take back the other way.
Wonderful guys, thanks very much.
You're welcome.
Thank you for your question.
Our next question comes from Dominic Gabriel with Oppenheimer. Please proceed.
Thanks, so much for taking my questions.
Great results.
If you just think about your investment initiatives now how many of that how may of those changed since the end of the year 'twenty one versus today since the market seems to be signaling.
Changing consumer environment have you changed any of your kind of investor.
Investment dollar targets for your various business mix.
I just have a follow up thanks, so much.
The answer is yes, and it's been like that every quarter since we launched the business. We do an annual planning process that starts to fall.
Our SaaS sales the priorities for the company for the following year, we did back in September and October without six priorities. The team then does the bottoms up financial plans against those priorities and when we started the year.
Around mid February we start was called a mortgage revised forecast which will be.
Vision over time based on everything we've learned and so all the marketing conditions don't change from December January February and the performance of our business get factored into that revised forecast going through that same process every quarter. That's what allows us to assess where are things going well where things more challenging than we thought how do we reallocate our resources.
Against that involves is priority <unk> results so and.
And we do a weekly.
Latest call processes wildfire meeting all the Nitty gritty details across all of our promotional products and our financial performance. So that would go into that revised forecast, we're not starting from scratch. We built on the back of seven or eight weeks of actual results in the quarter and what were seeing any foreign tourism and competitive environment et cetera. So it's.
<unk> been processing when you have a diverse set of industries that we have an issue one of the advantages stuck in one silo.
I'm not going to give you the specifics.
It's multifaceted, but obviously the personal loan business is much better and we saw that opportunity and we leaned into it student loan business to that may have impacted by the president's unexpected extends the moratorium we pulled back significantly the marketing there and reallocated back we're starting to reallocate more aggressively the thing about checking savings and we're seeing that flow through.
Loans and higher LTV justifying more investment there so.
Constant changes in process.
Great and then just for my follow up if we just think about the moratorium versus the floating idea, perhaps even $10000.
Debt relief within student lending, how does that impact the business versus the Lora story.
I really do appreciate the earlier remarks on the high income.
Customers I would assume those folks maybe it took a larger loans on.
Average than just the average.
Laurel.
Person within student.
There. So any color you can provide on how that might affect your business and how youre thinking about that dynamic between the bar chart in the 10000 per person.
For forgiveness. Thanks, so much.
Yes, absolutely and I'll try to take a broader.
Prospective on this educate those that may not be aware so on prior to the pandemic our student loan refinancing business has an average loan size of about $70000 average loans being refinanced with $71000 and we are doing over $2 billion.
Early refinancings from since then we've operated at 50% or below other than the fourth quarter. When people thought that more term was going to end in January we saw a big surge in late November and December so certainly.
The demographics, Chris mentioned have generally been the same.
But what people should understand is any months already refinanced with us would not be eligible for a federal student loan forgiveness, because they now have private loans.
Student loan forgiveness, that's been talked about has ranged from $10000 for everybody.
The $10000 for those that were in economically below a certain income class to $50000 for everybody was a pregnant.
Having campaigned behind was $10000 a forgiveness for those that had any aid hidden quantify what's been talked about more recently the president has said I'm not interested in $50000 of forgive us per person.
Appointed.
Risers are pointing more towards $10 an hour to forgiveness below a certain economic level. There's a lot of it based on economic level I've heard everything from some $85000 of income to $125000 of income.
The best thing for so by first of all of our shareholders here on business.
He announces the best thing is and the moratorium and we just move on but thats been lately, what's more likely is somewhat more forgiveness. If there is some level of forgiveness $10000 and below I think it would be great for our business, though you may say that applies to everybody even of advise everybody. There's a cohort of people who have been waiting.
And waiting and waiting for student loan forgiveness, and they have not refinance and thats in our demographic as well once they are actually is forgiveness theres nothing to wait for a more you now know what the plan is still to refinance $60000, but the number of people that will be refinancing will be magnitude is better than it was in the past because there's really no reason to wait here.
The longer, especially with rates going up from there.
They're not going to be a second waiver for gains.
This area, where there has turned out largely forgive us for people to $125000. A corridor is really hadn't been advantageous to us given the demographics that we set it at a weighted average income of $170000.
And so that's the way I would think about it in terms of our financial guidance, we've assumed that the moratorium will extend all the way through 2022, so our guidance that Chris mentioned a $1 five.
<unk> 5 billion to $1 5 billion is an assumption that there is still a low business does not recover and in fact, it continues to be relatively low.
Alright.
Okay.
Thank you for your question.
He comes from Mike <unk> with Goldman Sachs. Please proceed.
Hey, good afternoon, I just wanted to ask about the origination outlook for home loan specific, particularly I know you called out some filament partner issues.
Can you just talk a little bit about.
Whether you see that easing in the back half and could help.
And then could you.
The backdrop of competition and the softening refinance environment, how does how does that affect how you think about a hormone originations.
Yes, we do have a.
An opportunity assistant we improve the value proposition to our members at home loans and.
Execution on the operational side.
The execution of operational side is what's holding us back.
We have moved from existing partner to one entirely new partner in doing that moves things haven't proceeded as fast as we have white, which was great.
Highlights of how the diversification of our business allows us to overcome something thats under performed.
Two things have happened in the whole of this one we moved to that new partner was growing pains of execution being better at the same time. The team has had the additional challenge of the.
The mix of home loans, moving from refinancing more towards purchase purchases of different operational process as you can imagine.
It's really critical in those scenarios that you hit closing dates et cetera, and so were areas.
Wrangling aside are trying to provide the best level of service, we can and so we really haven't stepped on the gas pedal as it relates to driving on top of the funnel demand.
And we underperformed in the quarter.
Confident the team has the right plan and work its way out of drop of course.
Year.
It's a product of our members well still 60% of the homeowners, we hear from Rick or more from existing members.
One of the most important financial decisions will make us one of the probably the biggest emotional decision ability and we need to be there for them and give them a great product and a great service.
There's still a huge opportunity for us given how few loans, we've done for our members and the magnitude of the user base.
Duncan mentioned stealing share from the first product.
Great. Thank you very much for the thoughts Anthony.
Thank you.
Thank you for your question.
Our next question comes from Mihir Bhatia.
From Bank of America.
Well.
Hi, Thank you for taking my questions. Maybe just to start can you just talk about your macro expectations for the rest of steel.
Yes, absolutely so in terms of the overall macro expectations. We are assuming that rates will continue to increase what we.
Baked into our forward guidance that we would have.
Seven additional rate hikes between now and the end of the year.
Got it and then anything.
The rest of it.
Any other color you can provide beyond just the rate just what are you assuming for I guess unemployment and consumer health both kinds of things anything at all you can do either.
Yes.
Assuming that the voice dairy environment space silver toward us today.
We are not assuming a recession.
Our early warning.
With frameworks that will allow us to get in front of some type of deterioration in the economy. That's of the magnitude that would have an impact a way for loan losses.
We've been doing this for four years of low through the cycles before.
Thanks.
So it will be vigilant in our front book right now.
Indicators are.
Showing relatively strong demand and a relatively stable economic environment and as Chris mentioned that.
The performance of.
Credit has been quite positive.
Great. Thank you that's helpful and that's quite consistent with what we've heard from others too. So I think that's the I think for one other question I guess just to follow up in terms of I think John asked about Kpis within the bank and I apologize if I missed this but did you give the direct deposit penetration rate maybe with your members in just the amount of cross sell Youll see.
<unk> bank deposit holders any other loan thank you.
We have not given the specific numbers in a specific kpis.
That's something we'll evaluate over time.
Only thing I said was that the weekly ads have doubled since the repayments in Q2 versus Q1.
Our calls we are seeing a good ramp increase based on the pressure today and focus in the area by adding critical homeless of value to the equation.
The checking and savings conversion and the highest showed a 1.25%, but really taken to the next level as I mentioned, it's more it's up to seven times in Q2 versus Q1.
And we share increasing conversion of accounts funded to drive.
Direct deposit of 60%.
Thank you Rudy.
Okay.
Thank you.
Good execution again for the quarter. Thank you.
Thank you.
Thank you for your question.
Our next question comes from Tim Chiodo with Credit Suisse. Please proceed.
Yeah.
Great. Thanks, a lot for taking the question I wanted to dig into the financial services segment for the non interest income.
Strong growth year over year, absolutely, but when we looked at it on a quarter over quarter basis, maybe there's just some seasonality there maybe you could just help us in the modeling of how we should think about the.
Noninterest income for that segment in Q2, Q3, and really for the rest of the year.
Sure.
Yes that one Tim.
So what I would say is we saw very good momentum at year over year as you alluded to.
Over the quarter, we saw.
Sequential growth in products for both 15%.
Money and credit card combined delivered $10 million of revenue in the quarter that was up.
$2 million or 22% sequentially and that was primarily.
Driven by.
Interchange as well and some of them.
Our lantern a guy have invested a combined or learning as a service delivered $8 million on the quarter that was up $2 million sequentially or 30%.
And then our investment in <unk>.
Levered 5 million sub revenue, what I would say in terms of the forward outlook again, we don't provide it at the product level, but we do expect to see continued strong momentum and growth and product talent across all of the products as well as improvement in monetization if you will.
Look at our annualized revenue per product in the financial services and that's.
That was up 73% year over year. So we've made really good improvement over the last several quarters and continuing to monetize those products and numbers and we expect that to continue going forward and the way that that's going to increase through.
Continuing to drive that.
Any way to try and spend we're seeing really good trends in that.
Right now, especially opening the bank and then obviously alon.
Launching new products and feature a spike like options.
That we expect to do by the end of this year.
One thing to remember and I think people know this but just in case.
For a full quarter in Q2, which will benefit that segment versus only one month in Q1.
Excellent great. Thanks, a lot Chris really Chris I appreciate that the other one was just a quick follow up just you made a comment that kind of caught my attention in the prepared remarks around strong new accounts at Galileo for sure. But then also you mentioned in terms of new customers. A couple that are in the <unk> area. If you could just put some additional context around that that would be.
I appreciate it.
So our product at Galileo platform lend itself, not just to consumer driven businesses.
<unk> has been a leader in the in the BDC space in Neo banks.
Since its inception since we bought it we said increasingly.
Demand in the enterprise space the number two.
Partner within Galileo, which has been number two for years that actually enterprise customer.
Consumer customers, so it how does that flexibility.
So we've signed a number of enterprise partners, some of which that it's for accounts payable accounts receivable payments and working capital. In addition to other types of businesses that or indicate the economy.
We're not naming specific names.
Once those in conjunction with our partner that we posted our earnings call, but that's increasingly a big channel for us when we have our product pipeline to better serve the enterprise and SMB space Holistically are based on the demand we're seeing.
Excellent. Thank you Anthony I appreciate you guys taking those questions.
Yes.
Our next question comes from Jeff Adelson with Morgan Stanley . Please proceed.
Hi, Good evening, Anthony and Chris.
Okay just wanted to.
Understand the trajectory of personal loan growth here in your assumptions and really nice quarter for that line what kind of growth maybe are you assuming in your guidance for the rest of the year and then just as you kind of look under the Hood. There are you seeing more demand from your customers for that product or I mean, if I understood Anthonys comments correctly earlier.
It sounds like you're.
Putting more marketing dollars out that area.
And.
Could you also kind of help us understand how your ability to pass through of interest rates is going there it looks like from the queue.
You were able to increase the rate there are about 40 bps Q on Q and <unk> got the two year rate going up 160 bps, roughly so just trying to understand all those little drivers there.
Yes.
Personal loans.
Talk about the outlook in terms of.
Driving demand note a couple of macro things good things that we're doing on the Mercury side.
Interest rates go higher we saw this in 18 and 19.
We see people refinancing at a variable rate debt quite credit card debt and other highway variable debt into fixed rate term loan debt and so our product is really conducive to doing that and we capture that demand. Additionally, as rates go higher.
You go back and look at our advertising in 2018, and 19 Youll see we have a use case advertising behind home improvement.
Interest rates go higher and individuals look to remodel their homes instead of buying new homes when that product also benefits.
One of the things that we can do now that we werent able to do in 2018 and 19 as we can market the product to our existing customers.
And when we were going public we have provided a presentation that showed you the percent of our loans that were cross bar is averaging a 20% to 30% range.
So as the business has grown has stayed in that range and that's a really efficient way for us to market to our customers.
So we will be leveraging that through this environment as well in terms of the trajectory of it.
The outer quarters out Chris talked about yes. So in terms of the trajectory we are providing forward guidance on originations, but as you as you know we saw really good growth out of 151% Euro share and we ended up exiting the quarter with about five 5% market share. When you look at the overall Tam or our credit credit bonds.
And that's in comparison to about 4% in Q1 of 2021. So we do expect to be able to continue gaining share over the course of 2022.
If rates continue to increase we do expect the market.
To expand.
They are just mentioned on the marketing side, we can afford to be a little bit more aggressive on the marketing front.
And open the aperture a little bit because of our decline monetization strategy.
This is a product where we're proving 30% of the applicants previously the other 70% was sort of off until we launched land turn and now we are learning as a service that we have at our own our own application processes. So we can be a little bit more aggressive on marketing and drive a return against that because our declines can be monetize in those two ways.
And then the one last thing to address your final question about testing rate increases through whack.
Especially in the PL business, we've made really good progress on thoughtfully increasing pricing.
And demand has remained extremely robust as you saw in the quarter.
Overall in the balance sheet and through our originations in the quarter.
We were successfully able to raise both NPL and that for us.
Really good progress there and it's showing up in our results.
And then if I could just kind of a follow up on the student loan side.
Assuming that the student loan moratorium does go away.
At year end or even before then.
Is it reasonable way of thinking about your guidance here going forward, maybe that the original 2023.
Im sorry, the original 2022 number for EBITDA of around $2 59 is potentially the right way to think about 2023.
Yes, we're not providing specific guidance around 2023, but at this point we shared.
The quarterly impact on the SLR business.
And the result of the impact from the extension, but it is probably went up by about 2023.
The one thing I will say is.
As the shareholders comes back or if it doesn't as we exit 2022, we'll go back towards 30% incremental EBITDA margin philosophy, and the reason why I'm emphasizing that is.
And there's a lot of different ways to think about shareholder value creation. We believe return on invested capital is the most highly correlated metrics with.
Shareholder value creation thing gets better than row, we'll look at bolt on for us to get to the return of capital that we think we can achieve our mix of businesses.
The 30 plus range, we have to have a 30% EBITDA margin and low capital utilization there has to be I'd say on the capex side of the equation, which generates great flow through from EBITDA to free cash flow was within build our book value.
So as we guided touring to with or without stood at Lowe's will be back to a 30% incremental EBITDA margin that we have the benefit of the student loan business that will just be more incremental revenue of more than quality.
730% rate.
Yes.
Got it thank you.
That is the end of our Q&A session now I'll turn the call over to <unk> CEO , Anthony Noto for closing remarks.
Thank you all and thank you February for joining us this afternoon or evening wherever you are before we wrap up I wanted to share some final thoughts.
We are no stranger to adversity as many of the halfway point of 2022. There is no shortage of challenges ahead, but there has been no shortage of challenges every year. Since we joined back in February of 2018, and with each set of unique challenges embracing vacating each time.
I cannot predict the future, but I can assure you that we have the best strategy and the most diversified set of businesses that are delivering superior consistent financial performance generating.
Generally in both high growth and revenue and strong profit as measured by EBITDA. We also have significant financial resources with more than $5 billion in capital and a battle tested team. Most importantly, I can assure you that we will work tirelessly to be preparing as best we can wherever we face ahead, such as we have over the last four years.
I Love our team I Love, our strategy high level company, and I Love, where I work I wake up every day trying even better later than the day before reminding myself that those who dare wait until we've talked desktop next time. Thank you for your interest in <unk> and thank you for your support.
Goodbye.
That concludes.
<unk> Q1, 2022 earnings conference call. Thank you for your participation you may now disconnect your lines.
[noise].