Q2 2022 SoFi Technologies Inc Earnings Call
He is the shift around us and so far it's been a new normal for us for the last four years, so to US it's business as usual, we've built our products and services to provide durable high levels of growth with a specific economic profile and that is what we're delivering.
Now I'll run through the highlights of the financial results for the quarter.
Total adjusted net revenue grew 50% year over year to a record $356 million up 11% from the prior record set in Q1 2022.
Strength in all three of our diverse business segments contributed to these results.
Lending adjusted net revenue grew 46% year over year to $251 million led by continued outperformance in our personal loans business, which saw a record origination levels of nearly $2 5 billion.
As well as strong sales execution.
<unk> services net revenue grew 78% year over year to $30 million up nearly 30% from $24 million in Q1, with our largest contributors being record so far checking and savings revenue along with continued strength in Sofia credit card, so far invest and learning as a service.
Technology platform net revenue grew 85% year over year to nearly $84 million with record Galileo revenues in our first full quarter of contribution from Technosis Importantly, Galileo revenue growth accelerated to 39% year over year.
Adjusted EBITDA of just over $20 million increased 81% year over year and 134% sequentially.
Members in products, each saw accelerating quarter over quarter growth and our second highest quarter ever of new ads and we continue to see strong cross by trends.
The 450000, new members in Q2 'twenty two represented our second highest quarter of new ads, bringing total members to $4 3 million up 69% year over year.
Our industry, leading API was a strong driver of high quality, so find money member growth and increasing direct deposit conversions give us confidence that our growing member base is both durable and active on the platform.
We also added 702000 new products in Q2.
This represents our second highest quarter of new product ads, ending with nearly $6 6 million total products up 79% year over year.
These new ads financial services products of $5 4 million at quarter end doubled year over year, while lending products have more than $1 $2 million were up 22%.
The significant scale of our top of the funnel products is driving greater and more efficient member growth and cross by total cross bar products in the quarter increased 24% year over year, demonstrating continued success of our financial services productivity loop strategy.
Now I'd like to spend some time touching on the segment level results.
These highlight the benefits of our uniquely diversified model the robust growth across all three business segments increased efficiency driving improved profitability and our strong balance sheet with multiple funding sources all of this with strong and stable credit metrics first as lending, where we originated a record of nearly $2 five.
$5 billion of personal loans in Q2 of 22% from $2 billion last quarter and nearly double $1 3 billion in Q2 2021.
This product continues to deliver even while we maintain our strict credit standards and attract borrowers with high incomes and FICO scores.
Our personal loan performance more than offset the continued lack of demand and student loan financing, which is down to 25% of.
Volume prior to the moratorium on federal student loan payments and the performance of home loans, which face macro headwinds from rising rates, while we continue the process of transitioning to new fulfillment partners.
We're also differentiated in lending by the strength of our balance sheet.
And the diversification of our funding sources two points, which are bolstered by having Sofia bank.
The bank charter could not have come at a better time and the economic benefits are already starting to positively impact our operating and financial results first the ability to offer an industry, leading API and value prop has led to strong growth in Sofia money members high quality deposits and great levels of engagement.
<unk> members have increased nearly 92% year over year to $1 8 million accounts and growth in balances has accelerated significantly we exited the quarter with $2 7 billion in deposits and spend trends have improved significantly.
To put this in perspective, it took three years to accumulate our first $1 billion of deposits and just three months to grow another $1 6 billion.
In addition, approximately 80% of our deposits are from direct deposit members, demonstrating the quality and stickiness of these deposits.
As a result of this growth in high quality deposits, we've been able to benefit from a lower cost of funding for loans, while being able to pass on higher rates in our loans in.
In Q2 alone the difference in our deposit cost of funding and warehouse cost of funding was approximately 100 basis points and that Delta will continue to grow in a rising rate environment and.
And third deposit funding increases flexibility to capture more NIM and optimize returns a critical advantage in light of notable macro uncertainty we don't have to access sales channels in the face of suboptimal conditions, such as those we have witnessed more broadly in the asset backed security market over the last few quarters.
The power and the financial benefit of the bank is demonstrated clearly by our $25 million of positive GAAP net income in Q2 at a 13% margin.
We also have $5 $5 billion of book equity on our balance sheet and approximately $7 billion and warehouse facilities that we can access to fund loans over half of which is committed capital.
Now on to financial services, where we've continued to achieve strong member and product growth by Iterating on our products to ensure they are differentiated by four key factors fast.
Selection content convenience.
Continuing to invest to make them work better when used together we.
We finished Q2 with $5 4 million financial services products, that's up 100% year over year and four five X total lending products of $1 2 million.
The increased scale and financial services products creates even more scale and cross buying and company wide marketing efficiencies total sales and marketing spend as a percentage of adjusted net revenue declined for the second consecutive quarter, even as we scale our top of funnel products, which often do not contribute standalone to revenue for <unk>.
Year to 18 months.
This is due to the increasing monetization and attractiveness of these products are increased brand awareness and network effects.
Our investment in our products is paying off as members embrace the product launches in financial services introduced in the first quarter.
<unk> checking and savings provides an unmatched value prop through an industry, leading API of up to one 8% as of Monday July 25th a host of free features.
And a unique rewards program the.
This strategy is driving strong growth in direct deposit accounts, which in turn is driving strong growth in spend which grew 29% quarter over quarter.
Within Sofia invest we launched extended hours trading and so our first full quarter of margin investing we remain on track to launch options by year end as well as introduced new proprietary Etfs to the platform.
We've increasingly utilize our <unk> platform to acquire educate advise our members under holistic financial picture and their next best move we added the auto tracker product to the existing real estate property tracker and credit score monitoring to add even more insights to members' financial help and support them as they NAV.
The economic landscape.
This platform has become a notable source of cross buying further bolstering the financial services productivity loop strategy.
Transitioning to our technology platform, a critical element of our strategy.
Not only is this segment a strong revenue and cash flow driver, but it's two businesses Galileo and Technosis also contribute to maintenance of the sofa strategy.
Faster innovation at lower cost.
The return diversified revenue streams.
In the second quarter full segment revenue growth of 85% year over year included the first full quarter of contribution from <unk>.
On an organic basis <unk> revenue grew 39% year over year at Galileo enabled accounts grew 48% year over year.
And this is with a 26% margin or 333% if you exclude technosis.
Among <unk> evolving products Galileo has added new <unk> capabilities as well as a secured credit card offering.
I'd like to focus on the <unk> segment for a moment as it is enormous and we're already making great strides.
30% of the Gallo client pipeline is now comprised of BTB deals up dramatically from 10% to 15% at this time last year as we quickly leverage these new capabilities to penetrate more opportunities.
And considering the market opportunity in this segment, we estimate the <unk> opportunity at $29 million.
With 50% of payments still via paper check.
Just like in consumer banking, we have the capability and the opportunity to convert these to digital payments and virtual cards.
This is a prime example of how we have driven technological innovation that Gallo to address more market segments and further diversify sources of growth.
Texas continues to achieve milestones with its first core banking deal in Mexico, and the launch of a new banking client in Brazil in the second quarter.
In addition to new products and an increasingly diverse client lists Texas isn't Galileo have yet another major source of growth cross selling among their complementary client basis product sets and geographic footprints bring Texas just to the U S through Galileo and Galileo to Latam through Technosis suffice to say the teams are running after these <unk>.
<unk> and we cannot be more excited.
I'll finish here by saying that we've been in an all out sprint 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 Bank license not only positions so far to be the winner takes most in this sector transition of a financial services digital but also provide greater durability through a market cycle I'm excited about where we are today and even more excited about where we can go.
From here with.
With that let me 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 eighth consecutive quarter of positive EBITDA. Despite operating in a rapidly evolving macro backdrop I'm going to walk you through some key financial highlights for the quarter and then share some.
Color on our financial outlook, unless otherwise stated I'll be referring to adjusted results for the second quarter of 2022 versus second quarter of 2021.
Our GAAP consolidated income statement and all reconciliations can be found in today's earnings release and the subsequent 10-Q filing which will be available next week.
For the quarter growth accelerated and we delivered record adjusted net revenue of $356 million up 50% year over year and 11% sequentially from the prior quarter's record of $322 million.
Q2 revenue was $16 million above the high end of our guidance of $330 million to $340 million.
Adjusted EBITDA margins also doubled quarter over quarter, as we delivered $20 million at a 6% margin coming in $5 million above the high end of our guidance of $5 million to $15 million.
Now on to the segment level performance, where we saw strong growth and record revenue across all three segments.
And lending second quarter, adjusted net revenue accelerated and grew 46% year over year to $251 million.
Year over year growth in lending was driven by a doubling of our net interest income and 18% growth in noninterest income.
Growth in net interest income was driven by an increase in asset yields as well as average loan balances while growth in noninterest income was a result of an increase in originations and hedge gains.
Q2 originations grew 9% year over year to $3 2 billion.
And were driven by record volumes in our personal loans business, which grew 91% year over year to $2 5 billion.
However, both student loan and home loan originations were down by more than 50% year over year as we continue to face headwinds from the moratorium on federal student loan payments and rising rates as well as fulfillment issues continue to impact our home loans business.
We achieved this top line growth, while maintaining our stringent credit standards and disciplined focus on quality.
Personal loans borrowers weighted average income is $160000 with a weighted average FICO score of 748.
Our student loan borrowers weighted average income is $170000 with a weighted average FICO of 773.
This focus on quality has led to strong credit performance.
Our on balance sheet delinquency rates and charge off rates remain extremely healthy and are still approximately 50% below pre COVID-19 levels.
Our on balance sheet 90 day personal loan delinquency rate was 21 basis points in the quarter, while our annualized personal loan charge off rate was one 5%.
Our on balance sheet 90 days student loan delinquency rate was four basis points in the quarter, while our annualized student loan charge off rate was just 28 basis points.
The lending business delivered $142 million of contribution profit at a 57% margin up from $89 million, a year ago, and a 52% margin.
This improvement was driven by a mix shift to higher margin personal loans revenue as well as ops efficiencies and fixed cost leverage across the entire segment.
Shifting to our tech platform, where we delivered net revenue of $84 million in the quarter up 85% year over year, including our first full quarter impact from Technosis.
You were to exclude Technosis organic growth was 39% year over year, a meaningful increase from the 19% year over year growth achieved in the first quarter of the year.
This acceleration was the result of sequential growth in transactions per active account and to a lesser extent by having a relatively easy comparison quarter. As Q1 2020 to annual growth was dampened as a result of stimulus benefits in Q1 2021.
Overall annual revenue growth was driven by 48% year over year, Galileo account growth to $117 million in total.
We also signed 12, new clients eight of which are in the <unk> space further diversifying our partner base.
The segment delivered a contribution profit of $22 million.
Representing a 26% margin and 33% if you were to exclude technosis.
Moving onto financial services, where net revenue of $30 million increased 78% year over year with new all time high revenue for so find money and continued strong contributions from sulfide credit card. So if I invest in lending as a service.
We were able to achieve this growth despite having a tough comparison quarter. As a reminder, Q2 2021 financial services revenue included $4 4 million of episodic revenues from advisory and IPO underwriting services.
Excluding that $4 4 million in Q2, 'twenty, one on our year over year growth would have been 140%.
We reached $5 4 million financial services products in the quarter, which is up 100% year over year and at 639000, new products. It was our second highest quarter ever of new product ads in the segment.
We hit $1 8 million products and so find money.
$2 million in Sofia, invest and $1 $3 million in <unk>.
Contribution losses were $54 million for the quarter, which increased year over year predominantly as a result of building our seasonal reserves for the sulfide credit card business, which is expected as we continue to grow in scale.
In addition, we saw a year over year reduction in higher margin digital assets revenue as well as episodic IPO in advisory revenue.
Switching to our balance sheet, where we remain 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 achieve a lower cost of capital relative to alternative sources of funding.
In Q2 assets grew by approximately $400 million quarter over quarter as a result of adding them approximately $1 billion of loans to the balance sheet given the strong growth we continue to see in personal loan originations.
Offsetting the growth in loans, we had a $700 million decrease in cash as a result of funding the bank in Q1.
The equity used to capitalize the bank was part of cash and cash equivalents. Shortly after funding the bank at the end of Q1.
It has since been deployed and is generating a strong return by funding originations in the bank.
On the liability side of the balance sheet due to our strong deposit growth, we exited the quarter with only $1 6 billion drawn on our warehouse facilities about 20% of our overall $7 billion worth of capacity down from $2 7 billion in the first quarter of the year.
Overall, we remain very well capitalized with ample cash and excess liquidity.
Finishing up with guidance throughout 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, even in light of the existing macro backdrop.
Our outlook also assumes the federal student loan payment moratorium.
We will last until January 2023, which would result in a late Q4 2022 benefit based on the trend experienced in 2021.
In the second half of the year, we expect to deliver $830 to $835 million of adjusted net revenue and $75 million to $80 million of adjusted EBITDA with a more significant portion of the revenue and EBITDA getting generated in Q4.
This guidance implies full year 2022 revenues of 1508 to $1 five $1 3 billion above our prior guidance of 1505 to $1 510 billion.
Our second half guidance implies full year 2022, EBITDA of $104 million to $109 million above our prior guidance of 100 to 105.
Overall, we couldn't be more proud of our Q2 results and continued progress having delivered over $1 4 billion of annualized revenue and our eighth consecutive quarter of positive EBITDA. We continue to make great progress against our long term growth objectives in the quarter and we remain very well capitalized to continue pursuing our ultimate <unk>.
<unk> of making Sofia top financial institution.
With that let's begin the Q&A.
Okay.
Thank you I'd like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you had like term is that question. Please press star followed by two again to ask a question press Star one.
I ask that you limit your questions to one question and one follow up as a reminder, if you are using a speaker phone. Please remember that pick up your handset before asking your question.
My first question is from the line of Kevin Barker with Piper Sandler You May proceed.
Great. Thank you for taking my questions. Congrats on a great quarter could you talk.
Talk about why you feel comfortable.
Continuing to push to grow the personal loan space, even though we have an uncertain economic outlook I.
I understand a lot of those personal loans are very high credit quality.
Very high FICO scores and higher incomes relative to what we see out there in the market but.
There's obviously a lot of uncertainty out there and just love to hear your view on that on those loans and why they're they continue to be attractive.
Attractive growth.
<unk> profile.
Thank you for the question Anthony.
In volatile markets like we're in today with discontinuity in interest rates.
Other issues around the macroeconomic environment.
We're looking for ways to lower their cost of debt, we're looking for ways to better say, even better spend and so the demand in this environment is going to be quite strong. It's very prudent that we focus on our core target and make sure we stick to our disciplined credit profile, we underwrite to free cash flow that we're using our credit models predict we're underwriting to.
FICO score or anything else.
We're in an environment, where some of the best credit profile individuals are out there looking to refinance their debt from higher variable cost debt into fixed rate debt and also fixed maturities. So they can lower their cost of borrowing and also manage their budgets are and thats, creating a lot of demand and our team's doing a great job of providing.
Range of products to meet their demand.
We're sticking to our credit profile that we've had.
Four years, that's proven out quite well, we manage to our loan loss of about 8% and as long as we're able to do that we continue to underwrite.
And with those change and we have leading indicators that we're tracking in a profile that our risk team manages that gives us early warning signals and as those change we changed how much we're willing to underwrite ill give you. An example, if you go back to March of 2020, we saw dislocation in some of the commercial paper markets and the repo markets.
Worried about the liquidity in the marketplace and we've pulled back meaningfully on how much we're willing to lend and we did that based on our front.
Your overall profile of the macroeconomic indicators that would in turn back on the amount we were lending until those turned green again, so it's something we've done in the past something thats proven to be quite prudent and.
We feel like we have the right team and right history in place and I'll, let Chris talk about the actual performance of the loans or we're saying, yes. So as I mentioned in my prepared remarks, the overall demographic and credit profile of our personal loans remains extremely strong.
Like I had mentioned the weighted average income of our borrowers are 160000 with an average FICO score of 700.
And we're seeing really good trends in terms of overall delinquencies are our personal loans business 90.
90 day delinquencies were at 21 basis points in the quarter.
That's roughly in line with where we were a year ago, which was at 18 basis points and then in terms of overall charge off rates, our personal loans business was at one 5% annualized.
Again, which is roughly in line with where we were a year ago at one 2% and both of those metrics are well below where we were.
Prior to Covid.
Yeah.
Okay, Great and then obviously you had fairly strong fee income and growth.
And spread income in the lending segment I'm, assuming the personal lines or.
A large contributor to that.
Are you seeing any headwinds from changes in the securitization market or maybe changes in hedging costs given the volatility we see in the market today or is there any do you anticipate any additional headwinds from some of the volatility we see out there in the market today.
So overall we've seen.
Really good momentum and continued demand from our whole loan buyers overall overall demand for our loans in the quarter were extremely strong which is obviously a testament to the quality of our paper and the credit profile of all of our borrowers. If you look at the quarter and Youll see this in the Q next week personal loan the whole loan sales were up both year over year.
Sequentially, where we ended up selling over $1 $1 billion to whole loan buyers, which was a record quarter for up for us and thats up 46% year over year and 15%.
Essentially so overall really good demand on the whole loan side.
We arent seeing any deterioration there in terms of.
The impact of rates on our overall margins, we've been able to successfully navigate and prudently raise our weighted average coupon throughout the course of the last few quarters to keep pace with rising rates and Youll see in our Q next.
Next week that the average income that we earned on our personal loan portfolio.
Kris about 60 basis points quarter over quarter and that's in line with what we saw in terms of rising benchmark rates.
Okay, great. Thanks for taking my questions, Chris Thank you Anthony.
Okay. Thank you.
Thank you.
The next question is from the line of Dan <unk> with Mizuho. Please proceed.
Okay.
Hi, Thanks, Great results.
Congrats.
So.
My first question is can you give us like.
Sort of some recent consumer trends, maybe something on the members and on demographics like how have things changed in terms of your demographics. So some may be noticed that the cycle went up so I would love to get an update on that thank you.
Yes.
<unk> touched on the trends for lending outside of the trends for lending I'll hit on technology platform and then also our financial services products, We're really happy with the performance of the financial services segment were starting to see great monetization there as I mentioned in our prepared remarks, there couldnt be a better time to have become a bank and allows us for the first.
Tying to give a very attractive interest rate on checking tour members at one 8% API.
We're able to give them a better interest rate, while lowering our cost that one 8% combined with other sources of funding lowers our cost of lending between our warehouse facilities and our cost of deposits by 100 basis points, so actually given them, one 8% versus before and they've got 30, or 40 or 50 basis points and we're actually saving.
100 basis points on top of it that's driven great demand for our checking savings account and great direct deposit activity in the direct deposit activity then leads to higher spending so as we mentioned in the call. We saw a meaningful increase sequentially in the spending and also year over year.
I would say our spending is really about taking market share because we're taking them from March banks and their direct deposit customers. If we do look at the members that we've had for this period of time, they're spending is still strong but again, we're up in credit and up in income. So we may not be representative of the broader United States in the economic activity in the.
They may be feeling our customers ramping quite well in this environment.
As it relates to investing Youll see that we were able to grow both checking and savings are so by money by close to 90% and invest at 90% as well and we saw net inflows there which is quite remarkable in this market environment, you would expect that the opposite so our differentiation invest is coming through and we've done surveys of our members to understand why we.
We're seeing positive flows from them and 50% of it from people that are trying to catch up in life. It didnt invest when they were younger they are trying to get more money to work now so you get the benefit of compounding and the other 50% are people, we're going to see it as an opportunity to buy in at lower valuations. So exactly the trend you'd want to see and for those that aren't.
Familiar with Brian Vest product, while we are a one stop shop overall for financial services products were also one stop shop.
Because we have single stocks without commissions fractional shares, which we pioneered we have our own Robo advisory portfolios and then in addition to that we have proprietary Etfs and crypto currencies that can be purchased on our platform. So we're seeing really strong demand there and it seems also doing a great job or at least for insurance products.
Which is really a lead generation product you see all of those revenue streams coming through in the financial services segment as it relates to the technology platform. We're seeing strong growth in number of counts and activity per account and thats a broader swath of consumers than just those that are on Sofia. So our acceleration of revenue growth there was quite.
<unk> in the quarter and something that we're happy to see.
Great job guys I appreciate it.
Thank you. Thank you.
Our next question is from the line of Dominic Gabriel with Oppenheimer. Please proceed.
Hey, great. Thanks, so much.
I was just curious could you talk about your flex your expense flexibility to continue to drive adjusted EBITDA margin in dollars.
Even in perhaps a slower macro environment.
Both within the segments and in non segment expense and then I just have a follow up thanks so much.
Yes, one of the things I want to make sure everyone has a historical perspective on this in March of 2020 of that part of the United States decided that those with federal student loans didn't have to make payments. We've now been in that environment for two and a half years that was one of our largest and most profitable business at that time.
We've gone on to drive $1 billion.
Revenue in 2021, and our first full year EBITDA profitability and we're doing a record revenue quarters in 2022 with improving profitability as well as we've talked about so we've been in.
A mode of optimization on the cost side of the equation for two and a half years. This is not a new thing for us and so we try to manage the business. So that will drive both growth and durable improving profitability through the cycle, which is what you've seen so far we have a lot of flexibility we're investing in a really high rate. If you look at our lending business it's operating in.
At really strong profitability is not as profitable as it would otherwise be with the student loan business, but still quite profitable.
Our technology segment revenue as Chris mentioned has very high margin and that's with us absorbing technosis, which is really a breakeven business at this point given the magnitude of the investments that we're making there we're making a really sizable investment in customer acquisition costs in our financial services segment, which has a lot of upside to profitability and some huge milestones in front of us.
I'll, let Chris talk through the path there, yes. So in terms of the overall path to profitability within financial services, you will see in our 10-Q disclosure next week that we breakout directly attributable expenses for each of the segments as Anthony mentioned, both lending and tech platform are sufficiently.
Profitable and then a financial services side. If you were to look at our variable profit excluding marketing spend you would see that we've been profitable over the course of the last several quarters.
And we expect to be able to cover that marketing spend by the end of this year and be variable profit positive at that point, it's all about scaling that segment.
Sufficiently in order to cover our fixed costs, which we expect to be able to do by the end of next year. So the end of 2023, so overall really good progress.
Been made and we're well on our path.
Yeah.
Absolutely I think that the adjusted EBITDA margin, probably surprised people to the upside this quarter, it's great to see and if you if you.
Just think about you have been building a diverse set of revenue streams focused on interest rate cycle appropriate in your business.
Personal loans were up quite nicely now.
Has the demand change for your products, even in the financial segment I noticed perhaps.
As the <unk> up a little bit more.
How would you how would you expect a shift in your demand for your products.
As rates keep rising potentially thanks, so much.
In the personal loan segment the demand will continue to increase as people that have variable rate debt and also that that may not be longer term need to refinance people that have short term and variable rate debt they need to extend the length of the debt and get into a fixed rate payments that they can consolidate down to them and get the debt paid off.
On the investing side clearly a market share gainer there to see the growth that we are in our invest members and net flows is likely unique in the sector and I think the disruption that's happening more broadly for the fintech those focused brokerage or invest accounts is going to be a benefit so far given our stability of the fact that we have deposit funding.
With a bank that were EBITDA positive consistently for two years and we have a lot of capital on the balance sheet, we could be a really safe home for a lot of people that are worried about their capital getting trapped in some way from dislocations in private companies and public companies in the brokerage space.
As it relates to student loans.
Our guidance and our outlook still assume the moratorium will end until 2023 dividend sooner. We expect the demand for that product to really go through the roof and we'd be back to normalized levels that we saw in 2019 in Q1 of 2020, which as Chris mentioned was over $2 billion of origination and that would be.
Huge tailwind that allows us to step on the gas even more because it's a really profitable business and high incremental profit margins.
Technology service side for Galileo and Technosis, we're in an environment, where companies really need to drive greater efficiency in their businesses and drive down costs, which means they need to upgrade their technology platforms and we are a perfect.
Company to partner with them, whether it's on the core banking technology or payment processing and <unk>.
Everything that is in between we truly have an end to end solution for them and Devin ECH and soon to be on the credit side as well as a whole host of other products that the team is working on and we'll have a single point solutions that we also have a technosis that are quite.
Hey, just from a functionality standpoint, and a cost standpoint. So we're really excited about the amount of demand we're seeing there and I mentioned, it's not just in the consumer area, but also the <unk> area and a lot of the enterprise payment technology doesn't exist today for people to do digital payments. They are largely still doing paper payments that we can enable a lower cost.
There as well.
So we're excited about that.
On the insurance side, its been relatively steady, but we're gaining market share there as a lead generator.
And then I was wondering of the service I think the more disruptive the credit markets are the more people will look to lower their cost and lending if theyre not a bank to be able to meet the higher life of loan losses and charge offs they may be experiencing.
Great. Thanks, so much.
Thank you our.
Our next question is from the line of Moshe <unk> with Credit Suisse. Please proceed.
Great. Thanks, and congratulations on all of the success milestones of the bank related related to that and probably a better question this quarter than when I asked that last quarter. You mentioned, the 80% of your deposit flows coming from direct deposit customers could you talk a little bit about what.
Got.
The increase in direct deposit customers could do for your various businesses, including spending it's so funny money and the persistence and other products.
Yes, one of the things that we've seen going back to our overall strategy of using our different products to build a relationship with members and from that relationship build trust and reliability. So when they want to use a second product they choose us and we get great financial and operating leverage in addition to more data to better serve them and help them get there.
Anyway, what we have seen the sulfide money product that checking savings account product as we've raised the E&P why the quality of the customer their FICO score their credit profile has also increased.
That sets us up really well for future opportunities to serve them on the lending side.
I would say the members that we're acquiring through so by money they need less borrowing than the members. We've had in the past, but they have higher they have higher credit profiles, which is going to bode well for the future cross buying of our business. They also have more money to invest which would help our invest business. In addition to other areas that we see as opportunities with them.
The aggregation of more money members with higher credit profiles in more direct deposits is really positive once we have the direct deposit we know what types of bills. They have we know if they are sitting on cash that they're not investing we know if they're overextended with credit card payments or student loan payments or mortgage. So it's it's a treasure trove of information.
That helps us serve them much better does that second thing I'd say is that as we've added those direct deposit customers. We've seen really strong spending trends and we have a 1% interchange on a debit card today, and so that business benefits as well as the benefit of the data.
But then a fiduciary follow up I'm sorry go ahead.
I was going to say on activation rate side of the equation industry benchmarks for percent of funded accounts that are converting to direct deposit.
Gotcha. Thank you.
Just as a follow up you had noted that you added a number of new <unk> customers in a very large Tam could you talk about what that what that process is how long does it take and how large that could be.
As a revenue stream for your tech platform.
Over the next year or two.
Yes, I'd say the sales cycle differ.
Differs by the stage of company.
<unk> does matter, but stage of company matters more so earlier stage companies the sales cycle much shorter.
More mature companies the sales cycle is much larger the benefit of existing companies were installed bases or existing payment.
Needs is that you don't have to build their business over time is there already seems to be transition from physical payments to digital and you grow quite rapidly off of an old platform to a new platform. So in many ways getting more existing partners as opposed to early stage companies could help accelerate growth there.
On the financial services side, non <unk> side, we're in conversation with large banks in the United States and outside the United States that previously were not in conversations with before we owned Technosis. So the combination of <unk> and Galileo is a pretty powerful combination that gives payment processing and core and then solution.
Which is a great opportunity for an existing large financial institutions to move to a modern stack and benefit from all the innovation that we're driving in addition to lower costs on the <unk> side. It's just an area that we hadn't invested in meaningfully in the past we have many <unk> customers, where there is a product set that they need.
To capture more of the opportunity that comes to us and Thats. The big difference between where we are today and then in the past the demand was there. We just didn't have the product set build out which the team has invested in this year. So we're excited about that as well.
Thanks very much.
Thank you.
Next question is from the line of John Hecht with Jefferies. Please proceed.
Hey, guys.
We reiterate the congratulations and thanks for taking my questions.
First one on any touched some of this but you used to kind of onboard new customers that I think predominantly through student loans obviously.
That calculus has changed so maybe talk about what are the what are the new kind of what's the mix shift in terms of Onboarding and cross selling and revenue ramp given the changing atmosphere.
Yes, so overall, but we've seen a pretty pretty significant shift over the course of the last few years in terms of the number of lending products are financial services products.
Right now the number of financial services products as a ratio of lending products is four and a half to one.
And we're seeing a lot of top of funnel low customer acquisition cost members coming through the funnel through financial services as Anthony mentioned in his prepared remarks, we saw a 24% increase in overall cross buy rates, which is predominantly coming from those financial services products, which is helping us get.
Efficient much more efficient on overall marketing spend and you'll see in the results that we were more efficient in terms of both the cost to acquire a new member as well as marketing spend.
Spend as a percentage of revenue quarter over quarter and year over year.
Okay. That's helpful. Thanks, and then moving on to the technology platform you got a lot going on there between geographical expansion and I think some vertical integration.
And then <unk> I think to how do we think about the composition of revenues and then the source of revenue. So I mean is it all the take rate type of thing or are there. Other alternative sources of revenue as you guys expand and diversify that.
Yes, so for right now within the Tech platform, our Galileo business makes money through transactions. So every time someone swipes a car card or there's an API call. We collect pennies on the dollar in terms of <unk>, that's more of a recurring revenue stream SaaS type model.
We expect to continue to grow into that business and diversify the overall revenue streams and just one clarification galileo's business.
Have a fixed rate on those transactions on the API calls, it's not a percentage of interchange as a percentage of the transaction size of basket size gets smaller it doesn't change what we get paid we get paid by by transaction or by API call.
Great. Thanks, very much guys.
Thank you.
Our next question is from the line of Jeff Adelson with Morgan Stanley . Please proceed.
Great. Thanks, Good evening, Anthony and Chris.
Hey, John .
You had a pretty good you had a pretty good quarter.
B you beat by revenues on.
15 to 25 million and $5 to $50 million on the EBITDA relative to the OTT guys. I'm just kind of curious it looks like you only took up the full year 'twenty two guide by roughly $3 million to $4 million.
Just wondering if theres something going on in the back half of the year that we should be.
<unk> be looking for maybe or are you building maybe in a degree of conservatism in your outlook here.
That's what I would say is in terms of the overall age to guide our goal is always to provide the research and investor community with our best outlook on the business at any given point in time, given where we are in the year, we remain very comfortable with the trajectory of our business and our guidance, particularly in light of the uncertainty related to the macro environment that we're in.
Variance right now so overall still very optimistic and the forward outlook.
At this point.
Got it. Thanks, that's helpful. And then just maybe switching and the gain on sale.
Since we're not getting in the queue until next week I think you said.
Could you maybe break out how much of a hedge gain you saw this quarter I think last quarter, you had about $160 million.
Just wondering how much of the $140 million. This quarter came from that and that is a part of that do you think you could also.
Breakout the hedge versus unhedged gain on sale margins youre seeing by product this quarter.
Absolutely. So in terms of overall hedge gains for the quarter, we ended up generating $75 million in the quarter.
In terms of the actual gain on sale margins I'll give you both unhedged and with hedge gains for personal loans. It was three 4%, excluding the hedge and four 5%, including hedge gains our student loan business was 99, 8%, excluding the hedge and north of 4%, including the hedge.
And then our home loans business with.
Execution of about 95%, but north of one 5% when including the hedge what I would say in terms of overall sustainability and durability of these margins we've been able to sustain these gain on sale margins inclusive of hedge gains in those 104% level for our personal loans and SLR business at 101 to one.
102 at home loans, and that's primarily a result of the hedging strategy that we have but also a function of being able to keep pace with rate increases and pass those through to our weighted average coupon like I said earlier youll see in the Q that.
The average interest earned on our overall portfolio increased 60 basis points quarter over quarter and Thats in line with the increase that we observed with comparable benchmark rates now that's not a perfect indication of how much we increased our weighted average coupon on in period originations.
But it does give you a sense for our success in being able to raise flat, while continuing to drive growth to originations.
Got it and then you've done a pretty good job, so far risen deposits with a new bank and growing your loans accordingly.
Just wondering as we think about this kind of doubling of.
Your your whole period and pretty good strength in the personal loan originations.
Is it unreasonable to assume that.
With a doubling of the loan whole period that at a minimum you could probably double your loan balances by early next year with one year under your belt.
You were at six or $7 billion. When you got the bank I mean is it unreasonable assumed accurate at 12 or 14 billion overtime or by next year.
Yes, I don't think.
I don't think we're going to provide guidance on the actual bank balance sheet or the amount that we're going to grow loans, but what I would say is over the course of Q2, we ended up.
Growing overall deposits by over $100 billion per week and the second thing I would say is we have sufficient equity capital both at the bank and the bank holding company to fulfill our overall origination plant.
We want to we do want to maximize the value of the bank and enforces us to depend on the environment and all the rest of our businesses our objective would be to grow at a healthy clip.
Okay, great. Thanks for taking my questions.
Thank you our.
Next question is from the line of Eugene <unk> with Moffett Nathanson. Please proceed.
Okay, well. Thank you very much got it. Thank you for taking my question I wanted to come back to personal loans for a minute.
Obviously, a very very strong growth trajectory here talked a bunch about the strong demand overall given interest rate environment, but can you talk a little bit about your success in gaining market share in this market. It's a very competitive market out there a lot of providers a lot of innovative providers, what's the edge and how do you how do you maintain that market.
Sure sure gain momentum going forward.
Yes, we have a very small market share in personal loans, we are gaining share.
We think about the differentiators for all of our products in four dimensions, five really but for unique ones fast selection content convenience and then the fifth one is having our products work better together you get a lower interest rate. If you also do direct deposit as an example, so fast we want to be the fastest place to apply for a loan.
Fastest places it approved for a loan and the fastest way to get funding for a long and on personal loans, we try to get it down to two days it used to be eight or nine days why is that the case people don't they don't want to wait for a decision. They want to know they have a solution to wherever their problem is and so we want to do that very quickly and we work everyday to do so and I think we're as competitive as anyone.
I'd be shocked if anyone was faster than us. There's also rescission period that we have to consider but we can get it down to two or three days and we do that quite quite often.
As I think about selection selection is not just the term and the type of rate. It's also other elements of that loan one of which is pricing and because we are a bank and our cost of funding is meaningfully lower now we can be much more aggressive on pricing.
And we're pretty I would say surgical as it relates to the ratio between the credit profile and the pricing profile. We developed back in 2018 six different grades of about 36 cells that are constantly use to figure out where there is an opportunity in pricing relative to credit so thats a sophisticated process.
That's done each week and it's been built on four years of data the.
The second element of that is marketing and understanding which channels provide the best borrowers and it's not just the best bar in terms of their demand, but it's about their variable profit and so we're trying to optimize for 40% to 50% of variable profit margin on a per loan basis, and we wanted to maximize dollars. There, we know which channels performed the best and unit economic basis.
And so our marketing can be a lot more efficient.
Generally hard to find people that are good credit profiles, but they're not always necessarily looking for money and youre trying to find a great solution for them.
So those are those are a couple of elements that we use on a singular basis of the price of the differentiation we have.
Also increasingly are doing things like I mentioned to make our products work better when you use them together, so giving you an advantage. If you are also a direct deposit customer and the rate that we offer you we've done historically auto payments as a discount to the rate, but direct deposit is now another lever that we can use from a differentiation standpoint that others cannot use.
We don't have and you'll see us continue to do better together the types of things to get there.
Got it got it. Thank you that's very helpful. And then a quick follow up just on the macro environment. You mentioned that you mentioned that youre looking at at a broad range of about kind of early warning indicators, obviously, you're looking at a lot of data across your 4 million user base.
Are you seeing any indications of any deterioration in kind of in the macro environment and maybe you can speak a little bit in a little bit more detailed what macro macro scenario are you are you assuming for your second half guide.
Yes, because we were focused on a specific <unk>.
Segment of the population in a specific credit profile of the population.
We're going to look at different metrics than that necessarily tie to GDP growth or inflation et cetera, I don't want to get into all the details on the different metrics.
<unk> you to the risk team utilizes that framework they provide us with early warning levels, we use red green and yellow they change quite frequently we'll look at them every month there have been some months in the past that were more rather than months that we currently have.
So there is there is not going to be something you can look at and say this means X y or Z for so our team is looking at that broad range of indicators and using that to.
Great each one of the metrics and ultimately when we get to a certain level of things being.
<unk> language.
Which is what we did back in March of 2020, and then once we learn we learned last we don't turn it back on until they turn back to yellow yellow or green. So it's something we monitor all the time.
If you look at the second quarter April was more negative than may or June .
May and June we're more positive in April so, it's an ever changing environment I don't want to give you any indication of what it is going to be tomorrow or what it was yesterday our guidance reflects what it's been and where we think it is going to be.
And then the only other thing I'd point out.
The actual performance of our loans, which could just talked about.
Got it got it well. Thank you very much guys really appreciate it.
Thank you.
That concludes today's Q&A session I will now hand, the call over to Anthony Noto for closing remarks.
Thank you and thank you for everyone for your thoughts today and spending time in our call.
I wanted to end with a couple of points.
I'm incredibly humbled by the privilege to lead <unk> and work with so many passionate people that have built our company day by day and inch by inch growing time and time again each challenge we faced all in service of changing the lives of so many people I would have never predicted that we could deliver superior growth with record revenue.
Quarter after quarter in 2021, and now again in 2022 or student loan refinancing business operates at 25% to 50% of normalized levels for the last two and a half years and we still delivered eight quarters of positive EBITDA. We went public we raised over $3 5 billion.
And we obtained a very hard to accomplish goals and becoming a national bank, but that is exactly what we've done here today and last quarter and the quarter before that our members need our help like never before and our ability to help them is unmatched by any company that I am aware of the responsibility that comes with that.
Our position is great, but the personal and professional satisfaction, what we deliver is even greater.
And on the impact we have on our members.
While no one day has a dramatic impact relative to others. The cumulative impact of the last 1620 days is dramatically, which is why we have to remain focused like never before and ensuring that we continue to move with urgency with purpose with a winning mindset and a founder's mentality to make progress every minute of EB.
Every hour of every day, so the aggregate impact remains unmatched until next quarter. We thank you for your interest in so fine. Thank you very much.
That concludes today's conference call. Thank you for your participation you may now disconnect your lines.
Okay.
Yeah.