Q3 2022 Mogo Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Q3 2022 earnings Conference call.
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Slowing the presentation, we will conduct a question and answer session.
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This call is being recorded on Thursday November 10 2022.
Now I'd like to turn the conference over to Craig Armitage Investor.
Investor Relations. Please go ahead.
Thank you and good afternoon, everyone. Thanks for joining US just a few quick notes before we get started first.
First I'd note that today's call will contain forward looking statements that are based on current assumptions and subject to risks and uncertainties that could cause actual results to differ materially from those projected.
We undertake no obligation to update these statements except as required by law.
Information about the risks and uncertainties are included in our Q3 filings as well as periodic filings with regulators in Canada, and the U S, which youll find on SEDAR, Edgar and through our Investor Relations website.
Second note today's discussion will include adjusted financial measures and non <unk> measures.
You should consider these as a supplement to and not as a substitute for.
Measures and you can find reconciliations both in the filings and in the Investor deck and lastly, the announced today are discussed.
The amount that we discuss today excuse me are in Canadian dollars, unless we indicate otherwise.
I'll now turn the call over to Dave seller to get Us started thanks.
Thanks, Greg.
Good afternoon, and welcome to our third quarter 2022 results call I'm joined today by Greg <unk>, our president and CFO .
In our 20 year corporate history, we've seen a lot of challenging macroeconomic operating environments. In Q3, clearly was another one of those periods, especially for tech and Fintech companies.
In the face of this our revenue was up 12% year over year, which underscores the resilience of our business of course, we have placed an even greater focus in recent quarters on improving bottom line performance versus top line growth.
This showed through in the Q3 results with Opex down, 25% compared to Q1 2022 and.
And EBITDA loss decreasing by 32% from the previous quarter to $2 8 million.
Now this is a good start however, given the current environment, we need to do a lot more which is why we announced today that we are taking very aggressive steps to reduce our expenses as well as simplify and narrow our focus for better execution. While at the same time, ensuring we are positioned for long term growth.
We are already moving forward with several meaningful changes, including shutting down moka, France, which needed a lot more scale to get to profitability.
And also eliminating our current crypto offering.
We're also closely evaluating all of our products and we'll be looking to narrow our focus to only those products in areas, where we see the greatest opportunities for profitable growth.
Our goal is to simplify to one app, one brand and one platform the <unk>.
Centerpiece will be our new trade, where we plan on bringing other products beginning with moka into the App.
This will not only help reduce costs and drive efficiencies, but there's also a natural synergy between these two products given that approximately 67% of DIY investors today also own mutual funds.
And Mocha excuse me is designed to be a far more cost effective way for Canadian surpassed glean best or is the high cost mutual funds.
So again this is more than just a restructuring this is a new path forward for our product offering and will help us speed up our execution and we believe put us on an accelerated path to long term profitable growth.
In terms of update on trade.
We continue to gather feedback and iterate on the product. Although we initially had removed our wait list. We then decided to put it back up as we had enough users on it to get the data and feedback we needed in terms of changes and improvements we need to make.
As I mentioned in last quarter's update our goals to have trade ready to begin driving growth beginning in Q1.
Given the features we are completing and enhancements, we are making including things like price notifications.
We are feeling like we have a solid product and value proposition to go into the market.
The heavy lifting and development has been done and we're in the final stages before the product is ready for prime time.
With that I will pass it over to Greg.
Thanks, Dave.
I'll provide a few comments on Q3, and then I'll turn to restructuring initiatives that we outlined this morning in our release Q.
Q3 results were solid despite the reduced marketing spend and the continued macro environment headwinds highlighting the resiliency of our model even in a volatile environment. Our member count grew 17% revenue increased 12%, including a 10% increase in services revenue.
Payment volume at our card payments Division grew to $1 9 billion in the quarter.
Gross profit was $10 8 million benefits.
Benefits of previously announced cost cutting initiatives resulted in a substantial improvement in our adjusted Opex adjusted EBITDA and net loss lastly, we ended the quarter in a solid financial position with combined cash digital assets and investments totaling $106 million, which included approximately $35 million of cash.
Our total member base grew 17% over last year from $1 8 million in Q in Q3 last year to $2 1 million members. Despite our decision to proactively reduce marketing spend we expect the new member growth will be affected in the near term from the restructuring initiatives, including the wind down of Moka, France in the current quarter. Nevertheless, we will continue to work hard.
That bring value to this size will never base as we dial up marketing efforts for mobile trade in 2023 build out the wealth side, you should act as catalysts to recharge member growth.
Over our history, including most recently Covid, we've shown the ability to quickly realign our cost structure to adjust balance of top line growth versus profitability based on challenging macroeconomic backdrop lead management growth investments more conservatively for several quarters now as discussed on our last earnings call. We started to reduce expenses and increased focus on profitability with the golar.
Reaching a positive adjusted EBITDA by Q4 'twenty three during.
During Q3 reduced marketing and product development investments lowered head count and subsequent to quarter end began to wind down mogul crypto as Dave mentioned.
These decisions as quickly had a positive impact on profit and cash flow measures adjusted Opex decreased by 24% adjusted EBITDA loss improved substantially to $2 8 million or 32% decrease compared to <unk>.
Loss of $4 one in Q2.
Net cash flow from operations before investment in receivables improved 47%.
Negative $1 2 million compared to negative $2 3 million in Q3, 2021, and negative $7 $2 million in Q1 of this year, our net loss for Q3, which improved materially from the previous quarter includes unrealized losses totaling approximately $10 million, primarily driven by a bogo share of losses in affiliates and revaluation of bogus.
Investment portfolio, which reflect recent broader equity in crypto market declines.
In today's earnings results, we announced that we were implementing a restructuring that we will see further reductions in our opex, which I'll comment on a little later.
We ended the quarter in a solid financial position and the restructuring we announced today is intended to protect us and ensure we're in a position to move the business forward over a long period without requirements capital. We ended the quarter with $35 3 million of cash investment portfolio of $13 8 million digital assets of <unk> 7 million.
Which which we monetize subsequent to quarter end and our investment in <unk>, which had a book value of $56 million at the end of the quarter.
Clearly, it's been a very challenging period for answering crypto related with the recent MTX news, adding to the volatility we've seen in the sector over the last several quarters with our recent decision to exit our mobile crypto product and and.
Our primary crypto exposure today now is through our 35, 4% ownership in Canadian Crypto exchange coin square.
Although the current crypto volatility in specific company related issues with companies like MTX have been painful for a lot of people in this sector. We believe this is only going to accelerate what we've always believed that the future of crypto at least in North America will be within our regulated environment with regulated crypto exchanges.
Which is exactly why we believe claims square the first and at this point the only regulated crypto only exchange in Canada and for that matter in North America is very well positioned for the future of this industry.
Among other important factors that means that clients now the comfort and security knowing coins grid subject to the highest level of dealer compliance and oversight under the existing regulatory system in Canada.
Turning to Carta Carta, our payments business Carta showed healthy sequential growth in transaction volume to $1 9 billion from $1 7 billion in Q2, they continue to grow with our existing customers while building a pipeline of future business. We also recently brought in a new managing director based in Europe .
There were several key our key customers are and he's going to help us execute on our payment strategy going forward.
<unk> remains a valuable asset with a positive outlook.
In a massive sector and we continue to believe there is significant opportunity for this business.
Even just with the current customers alone less less new customers as we consider our overall growth priorities and investments. We will continue to think through the best long term path to this business strategically to maximize value.
In light of the macroeconomic conditions, we are acting decisively to adjust the balance between growth investment and profitability based on the inputs and key indicators. We see today. Our view is these economic challenges will persist and lifeless likely worsen in 2023, which has informed our decision to take these additional steps beginning this quarter, we are implementing a broad.
The restructuring plan that we expect will result in a further 25% to 35% reduction in operating expenses over the next several quarters. In addition to head count reductions, we are evaluating other efficiency and product rationalization opportunities, which may include eliminating unprofitable or subscale products. In addition, we are taking a cross cost.
This approach to our loan business and I expect our loan book to actually decline over the next couple of quarters as we continue to manage this business with a defensive posture.
While we work to achieve these savings and efficiencies, we will continue investing prudently and initiatives that we believe will drive topline expansion over the long term with a focus on our digital wealth solutions like Bogo trade.
Once implemented we expect these initiatives to have a 10% to 15% reduction on our quarterly revenue, but we expect this impact to be more than offset by our opex reductions and therefore further accelerate our path to positive adjusted EBITDA and profitability in terms of 2022 based on the restructuring.
We now expect total revenues of $68 million to $69 million. This year down modestly from previous guidance of 69 to 72.
In summary, these are difficult decisions in a challenging market.
However, we believe they will better position <unk> to manage through this period with our existing capital, while also making us more and more efficient company that continues to focus on long term growth opportunities through our broad product portfolio, including exposure to innovative digital wealth solutions.
Like mobile well to help Canadians invest in built well with.
With that operator, we will now open the call to questions.
Thank you ladies and gentlemen, we will now begin the question and answer session.
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The first question comes from.
Here <unk> of eight capital. Please go ahead.
Great. Thanks. Good afternoon, guys. My first question will be on mobile trade you guys kind of gathered feedback that you removed the way close and kind of brought it back.
Maybe just can you give us a sense of what you did learn during that period, and how youre kind of applying that moving forward to the to the broader launch.
Yes, hi, its Steve.
One of the challenges with launching a product like mobile trade is you obviously, we're launching a product.
In an existing marketplace with a bunch of existing solutions. So.
As much as on product you try to focus on kind of what's that MVP minimal viable product.
It is also a balancing act between that and understanding what are those right features that you need and the experience Eaton need to.
To really give yourself a chance to have.
Two essentially win market share against the existing incumbents, you know and those include companies like well simple and quest trade in and the big banks. So you know.
That's a key part of our of what we were kind of looking for in terms of feedback.
And at the same time, just continuing to refine the performance of the App too obviously.
Our liability and performance and an app like this especially in the markets that youre seeing today are critical. So these are things that you know, we're trying to be kind of really thoughtful and careful before we release it to the broader public and therefore, having enough.
Shall users we get that feedback.
And ideally not actually bring on more users before you've made those adjustments just because you know that these other users there, they're probably going to kind of have the same perspective, right you kind of have to a certain degree.
That initial one time chance to convince somebody Hey. This is this is an app that I now want to use so.
That really has been the focus and and that includes things like other other ways to load money on it you know in terms of more options to load money on it.
We've mentioned this before too in terms of certain limit order capabilities not everybody does limit orders stop orders those types of things. So those kinds of features and understanding.
Each of those are important as well as identifying features that help to differentiate our value proposition meaningfully from the other players in the market.
Price notification being one of them so.
That's really what we've been focused on.
Okay got it and then just to kind of confirm.
You don't expect that restructuring will kind of.
Impact Bogo trade at all.
No I mean, we are restructuring the way were doing it is.
We're making sure we still have resources and ability to continue to focus on growth initiatives like trade, we just arent going to have.
Multiple we're not to be able to do multiple things at one time, so trades still being kind of our priority as I just mentioned the heavy lifting has been done we're really kind of finalizing it.
And we've got the resources to continue to obviously finalize it and iterate on it you know the challenge for MOGO going forward is going to be deciding between new features new products things like that obviously as I just outlined our priority right. Now is you know once we complete trade and have it out there we're really focusing on everything.
And kind of drive that efficiency. So instead of maybe in the past we met a prioritize for example, launching crypto before we would prioritize bringing moka into the App now, we're prioritizing things like bringing them, okay into the App, which we know there's a synergy there but also there's an efficiency. So you know.
That really is more the kind of trade offs, we're going to make as we adjust our our resources.
Okay Gotcha, and then maybe just just on moca kind of bring it into the App and that the one the one app plus solution. You guys described you guys kind of have a timeline on when that would happen or when you would kind of get started.
Just any color on that would be great.
I mean.
The most I would say is our is our goal is obviously to focus on that in next year, but no specific timeline.
Okay got you.
And then maybe just broadly on the crypto space, we've been kind of hearing a lot about <unk> and sandbags and treat and everything thats going on and I kind of I completely agree with you with the regulation path forward, but how does the how is the team at coin square kind of thinking through that and can you give us a sense of how.
That's going to play out maybe potentially in Canada.
Sure it's Greg.
So so.
As I made the comments I made in the opening remarks.
Think this just accelerates what what we've always believed in what claims square has always believed which is why they have been pursuing the regulatory path ahead of us.
Really all the other players.
Is that ultimately this industry.
Is going to be regulated needs to be regulated.
And customers have need to have comfort.
That their assets are protected.
And that has potentially been a disadvantage for coins square up until this point as its really been operating in the context of of being regulated even prior to regulation.
But as the world moves to more of a regulated crypto environment, especially in North America.
We think that it's going to quickly shift to an advantage.
And protect against things like leveraging our customers' assets.
As a regulated entity today coin squares doesn't provide margin to customers.
It doesn't do any any doesn't lend out crypto.
And none of their custodians.
Are allowed to lend out crypto as well so really theirs.
In our regulated regulated environment in Canada is that leverage that is being.
Is being regulated in particular and it's that leverage that actually has caused the problems that we're seeing in our nonregulated environment. So.
My own personal view is that the.
<unk> this is going to accelerate the path for and I would say requirement for our companies to be regulated.
But also the bar is going to be high.
And I think it's going to be a challenge for a number of players that aren't regulated right now to meet all the requirements capital requirements et cetera.
In the current market, which I think.
<unk> point square, a big advantage so despite the volatility in the sector.
We feel that we've got.
A great investment in and the only regulated crypto only exchange in Canada.
Because we think that that's actually where the industry is clearly going to going to be going now.
Okay, Great and then maybe one last question and I'll pass the line.
You mentioned that the restructuring will have some impact on user growth moving forward, but how about the current base of users to $2 1 million users that you have right now do you anticipate any kind of accelerated churn or anything like that with that base or do you think that youll kind of.
The restructuring is aimed at products that maybe don't have large bases of customers using it just any color around that would be helpful.
Yeah, Yeah I.
I would say.
This point, we don't expect there is going to be an impact.
A minor impact in the current quarter, which I think will more impact.
The absolute net net increase is in the quarter.
In Q4.
But we don't at this stage foresee any any material impact to our member base with what we're contemplating.
Excellent Thanks, guys I'll pass along.
Thank you once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
The next question comes from Scott Buck of each C. Wainright. Please go ahead.
Hi, good afternoon guys.
Hey, Scott during 'twenty.
During 2020, you guys were able to pull some levers and generate some pretty meaningful EBITDA margins basically overnight.
This time seems a bit more nuanced.
I Wonder if you could give us maybe a little bit more color on the differences between what you did then in 2020 and what you're looking at doing now over the next.
Four or five quarters.
Right. So look I think it's a good comment as you know we generated about $5 million of EBITDA on $10 million a quarter revenue.
And we have substantially higher revenue here today.
And we haven't we haven't given explicit guidance on EBITDA.
But I think the difference is back then we really just didn't have.
Uh huh.
Any strength on our balance sheet.
To support any growth investment so.
So we had to make a very different decision that we're making today.
And I think the decision that we're making today is one that considers.
The capital we have today in particular the cash we obviously believe we've got a number of assets that.
That ultimately we can monetize over time that can provide additional capital, but we're focused today on having a.
A strategy that allows us to operate with the current cash that we have.
And we think that the plan that we're implementing today allows us to do that.
Obviously, we were targeting Q4 EBITDA positive in 2023 before this so we expect that that is going to be accelerated and moved up without.
Giving a specific timeline on that but.
Our focus is to get to positive EBITDA, but again, managing that with making appropriate level of investments in what we believe are still important products big opportunities like MOGO trade.
Great. That's very helpful and my second question on the loan book I'm curious what you guys have seen so far in terms of any deterioration in credit quality and have you already been proactive in adjusting underwriting standards as you prepare for a more difficult environment there.
Yes. So the answer is yes, and we made comments on as far as being proactive we made comments on the last quarter that we were being conservative in this environment, we continue to be conservative and we're indicating that we're going to.
To take that sort of conservative defensive posture as it relates to lending.
And part of that guidance of 10% to 15%.
Impact to revenue is a combination of of that more conservative.
Posture on the lending side alongside of some of the initiatives restructuring initiatives like exiting crypto Moka Moca.
France et cetera.
But I would say that we've tightened up our.
Our underwriting and in fact have seen.
Pretty solid credit performance over the last couple of months with what we've been seeing here in Q3.
So all.
All of the things that we're doing.
So actively we think are.
Our resulting in positive results here.
And clearly we're making these ahead of an environment that all.
Ultimately, we think could become more challenging and we want to make sure. We're ahead of it.
Which means that we run the risk of actually I'm, not giving out what would be good loans right now, but that's a risk we're willing to take so I think we feel.
Good about where we are in the lending side.
You know Scott.
This is not our first downturn.
I think we may be one of the only public fintech out there its been operating has a 20 year operating history.
And especially 20 years in lending.
In the Canadian market. So I think that gives us a lot of comfort and.
In our ability to manage through these periods and that's why we're being proactive.
Great well I appreciate the time guys. Thank you very much.
Thanks.
Thank you.
Again, ladies and gentlemen, if you do have a question. Please press star one at this time.
There are no further questions at this time I would like to turn the call back to Dave seller for closing remarks.
Thank you.
Thank you for joining today's call.
We look forward to updating you post Q4 and year end results. Thanks Kim.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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