Q4 2022 SoFi Technologies Inc Earnings Call
Good morning, and thank you for attending today's SIFI fourth quarter and full year 2022 on its conference call. All lines will be placed on mute during the presentation portion of the call with an opportunity for question and answer and at this time I would now like turn the conference safer.
You too.
Hi.
Laura CEA specifies investor relation.
Yeah.
Thank you and good morning, welcome to stop by fourth quarter and full year 2022 earnings Conference call. Joining me today to talk about our results and recent events are Anthony Noto, CEO and Crystal point CFO you can find the presentation accompanying our earnings release on the Investor Relations section of our website.
Our remarks today will include forward looking statements that are based on our current expectations and forecasts and involve risks and uncertainties.
These statements include but are not limited to our competitive advantages and strategy macroeconomic conditions and outlook future products and services and future business and financial performance. Our actual results may differ materially from those contemplated by these forward looking statements.
Factors that could cause these results to differ materially are described in today's press release and our upcoming Form 10-K as filed with the Securities and Exchange Commission.
Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events and now I'd like to turn the call over to Anthony.
Thank you more and good morning, everyone.
2022 was a remarkable year for so far we accomplished more than it was kind of hope for a resilient team drove great execution of our strategy is proving to provide the benefits of business diversification and durability to deliver exceptional growth and improving profitability.
Our adjusted net revenue grew 52% in 2020 due to over $1.5 billion and we delivered nearly five times. The adjusted EBITDA, We did in 2021.
We obtained a national bank license, which could not have come at a better time, allowing us to be incredibly flexible in a rapidly changing environment.
We're offering a compelling so find money product that is driving high quality direct deposit customers spending and deposit balances.
Deposits bolster and diversify our sources of funding, enabling us to offer our best rates on loans, while generating impressive returns and improving net interest income revenue.
In fact 2022 marks the first time, our lending net interest income revenue of $530 million by itself exceeded our total direct nature go lending cost of $443 million. We grew deposits seven times to seven 3 billion from 1 billion.
Over the course of the year really powering that cycle, we grow our member base by $1 8 million to $5 2 million members nearly nine times our size in 2018.
We acquired Technosis, adding a critical capability as we build our end to end technology stack and bring us one step closer to being the AWS of Fintech.
We navigated unparalleled market volatility macro headwinds high inflation, and increasing interest rates and to unexpected extensions of the steel alone moratorium by reacting nimbly and leveraging the diversification of our business to hit record revenue in each quarter of the year.
The fourth quarter was an incredible and two an exceptional year.
We delivered another quarter of record adjusted net revenue and adjusted EBITDA and strong overall operating results a.
A few key achievements from the quarter include our seventh consecutive quarter of record adjusted net revenue of $443 million up 58% year over year, which accelerated from 51% year over year growth in the third quarter and reflects record revenue in all three business segments.
Record adjusted EBITDA of $70 million was up 58% quarter over quarter that is nearly equal to the total adjusted EBITDA in the first three quarters of the year combined.
In Q4, we achieved a couple of important financial inflection points.
Adjusted EBITDA was $30 million is now largely equal to share based compensation expense of $71 million a critical step toward GAAP net income profitability.
Additionally, net interest income revenue or NIM revenue of $183 million exceeded lending noninterest net revenue of a $144 million for the first time.
Importantly, our NIM revenue is meaningfully greater than our directly attributable lending expense of $106 million.
In Q4, we had an incremental GAAP net income margin of 42%, resulting in a loss of just $40 million roughly half of the third quarter 2022 loss.
Another way of the $171 million of incremental GAAP revenue year over year $71 million or 42% drop through the GAAP net income line.
Given these accomplishments in our 2023 plan, we expect to achieve quarterly positive GAAP net income in Q4 2023.
Our strategy is continuing to play out with so if by money, which allowed us to surpass seven $3 billion and deposits of 46% quarter over quarter and savings of 190 basis points on cost of funds versus using other sources of debt to fund loans.
Another quarter of positive GAAP net income for the Sofa bank at over $30 million and added an 11% margin.
Finally, we grew our tangible book value for the overall company for the second consecutive quarter.
Q4 also saw our second highest quarter ever of member adds and our third highest quarter of product ads with strong momentum continue into Q1.
The 487000, new members in Q4, 2022 brings total members to $5 2 million up 51% year over year.
We also added nearly 700000 new products in Q4, ending with nearly $7 9 million total products up 53% year over year of these new ads political services products grew by 60% year over year to $6 6 million, while running products were up 24% to over $1 3 million.
The strength of our results once again underscores how our full suite of differentiated products and services provides a uniquely diversified business that has been not only able to endure but to thrive through market cycles now.
Now I'd like to touch on segment level results with a particular focus on the benefits of our diversified business drivers as well as the structural advantage over a bank charter.
In lending, we generated a record of $315 million of adjusted net revenue up 51% versus the prior year period.
Our personal loan performance more than offset the continued lack of demand and student loan refinancing and a less robust performance of home loans.
Student loan refi continues to be negatively impacted as federal borrowers again await clarity on the end of the moratorium of federal student loan payments.
Home loans faces macro headwinds from high rates, while we continue the process of transitioning to new fulfillment partners.
The personal loans business maintained its strength in Q4, we originated nearly $2 5 billion up 50% from $1 $6 billion in Q4, 2021.
This product continues to deliver even as we've raised our coupons to our borrowers as a result of rate increases and maintained our stringent underwriting criteria.
While these origination levels themselves are impressive the strength of our balance sheet and diversification of our funding sources provide new options to fund lending growth, while driving efficiency with cost savings.
These advantages are a direct result of so by bank.
Having more flexibility with our balance sheet allows us to capture more NIM and optimize returns a critical advantage in light of the macro uncertainty.
Additionally, by using our deposits as a funding source, we benefit from a lower cost of funding for loans in Q4, the difference in our deposit cost of funds and warehouse cost of funds was approximately 190 basis points, whereas the 125 basis points in Q3, and just 100 basis points in Q2, a powerful bench.
In a rising rate environment.
Lastly, the bank contributes to strong growth and so by money members high quality deposits and improved levels of spending and engagement.
This has led to higher average balances even as average spend has increased.
Of this $7.3 billion in deposits at quarter end, 88% were from direct deposit members roughly.
Roughly 50% of newly funded so find money accounts are setting up direct deposit by day 30 versus 20% in Q4 'twenty one.
And this has had a significant positive impact on spending.
Yeah.
Q4 annualized spend was three four times 2021 total spend in Q4 spend per average funded account was up 25% quarter over quarter.
So find money members have increased nearly 53% year over year to $2 2 million in total given the quality of these members with 745 million FICO score, we see ample opportunity for cross buy.
This is a great segue into financial services, more broadly where net revenue nearly tripled year over year to $64 million and grew 32% from $49 million sequentially in Q3.
Moreover, financial services annualized revenue is now approximately $260 million Contra.
Contribution loss of $44 million improved $9 million versus the third quarter, even as we invested $13 million more in marketing in the fourth quarter.
We saw this as a worthwhile the opportunity to attract more direct deposit members, even with this spend variable profit, including all marketing costs improved quarter over quarter and was nearly breakeven.
We still anticipate the rental services segment will be contribution profit positive in 2023, as we continue to scale and monetize the business.
We finished Q4 at $6 6 million financial services products up 60% year over year and $4 nine times total lending products of $1 3 million.
The increased scale and financial services helps drive cross buy and marketing efficiencies overtime.
The scale of financial services, not only drives cross buy and marketing efficiencies is also proving to be a large revenue contributor as we continue to drive monetization of these businesses in fact.
Annualized revenue per product is up nearly two <unk> from $21 in Q4 of last year to $40. In this quarter. This is due to the increasing attractiveness of these products growing brand awareness and network effects.
As we've committed we continue to iterate and invest aggressively in our product suite and that investment continues to pay dividends as members embrace our launches.
Since our last earnings call.
We introduced an increase in our checking and savings eight P y of up to 375% as of January 4th.
We launched Tso five plus a premium member service that bundles together are a wide variety of member benefits and provides incremental value on rewards.
So five plus is unlocked through enrolling indirect deposit.
We will continue to add more value and benefits. This premium member service to not only highlight the breadth of our products and services, but to also increase the total value of having your direct deposit with so far.
We expanded insurance coverage for our members to include cyber insurance or invest team launched options trading making good on our promise to our members to deliver this much anticipated service.
And we introduced a new way to spend with so fi with paying for their first product built on the combined Galileo and patches as platform.
This leads me to our technology platform segment, which remains a critical element of Sofia strategy.
In the fourth quarter.
<unk> segment revenue of $86 million grew 61% year over year with a 20% margin at the segment level were 24% if you exclude technosis.
So far it technology platform strategy includes growth in new verticals, new products and new geographies.
In Q4, Galileo signed 11, new clients and made big strides in this strategy with 36% of new deals and B to B.
27% of new deals outside the United States.
Importantly, all of these 11, new deals nine have existing customer bases, reflecting the continued demand for our innovative services from more mature organizations.
Technically this is also delivering strong growth in number of new clients signing an additional 16, new clients in Q4, including its first digital deal in Mexico.
I'll finish here by saying that we've been in an all out sprint over the last five 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, resulting in a uniquely diversified business combined with our National Bank license not only positioned so far to be the winner takes most in the secular transition or the financial services to digital but also to provide greater durability through a market cycle.
I'm excited about where we are today, even more excited about where we can go from here with that let me turn it over to Chris for a review of the financials for the quarter. Thanks, Anthony and good morning, everyone. We finished off a remarkable year, while navigating a rapidly evolving macro backdrop, even as our previously largest and most profitable business operated at 25% of Q4.
2019 pre COVID-19 volumes.
This proves once again that our diversified and differentiated business model drives sulfides durability and long term growth potential.
I'm going to walk you through some key financial highlights and then share some color on our outlook.
Unless otherwise stated I'll be referring to adjusted results for the fourth quarter and full year of 2022 versus fourth quarter and full year of 2021.
Our GAAP consolidated income statement and all reconciliations can be found in today's earnings release and the subsequent 10-K filing which will be made available in the coming weeks.
For the quarter topline growth accelerated and we delivered record adjusted net revenue of $443 million up 58% year over year, and 6% sequentially from the third quarter's record of $419 million and above the high end of the guidance provided during our last earnings call.
Adjusted EBITDA was $70 million at a 16% margin also above the high end of our most recent guidance.
We saw 14 points of year over year, and five points of sequential margin improvement demonstrating the strong operating leverage of the business as it scales.
Year over year margin improvement has been driven by significant operating leverage across our sales and marketing G&A and ops functional expense lines.
Overall this resulted in a 40% incremental adjusted EBITDA margin year over year.
Our GAAP net losses were $40 million this quarter, a $71 million improvement year over year and $34 million improvement sequentially.
Incremental GAAP net income margin was 42% year over year and notable step in our path to GAAP profitability.
In addition to our adjusted EBITDA margin expansion, we saw meaningful leverage against stock based compensation as a percentage of revenue at 16% in Q4, 2022 down from 27, 5% in the same prior year period, putting us well on our path to longer term goal of singles digit stock based compensation margins as previously communicated.
Indicated.
For the full year, we delivered $1.54 billion of adjusted net revenue up 53% year over year from $1.01 billion in 2021.
As a reminder, we revised our annual guidance in April of 2022, following the extension of the moratorium on federal student loan payments.
Our updated guidance for the year included $1.47 billion in adjusted net revenue and $100 million and adjusted EBITDA.
This guidance contemplated an ultimate extension in the moratorium until year end, which implied a Q4 ramp and student loan refinancing activity ahead of the anticipated resumption of federal payments.
From an adjusted EBITDA perspective, we delivered $143 million in profit nearly five times that of 2021 and $63 million above the guidance. We presented following the moratorium extension I just discussed.
2022 delivered a 9% adjusted EBITDA margin 630 basis points of improvement from 2021.
Even with the recent subsequent extension of the moratorium through June of 2023, which impeded the expected Q4, 2022 ramp and student loan refi demand, we still exceeded that revenue guidance by $80 million and adjusted EBITDA by $43 million.
We achieved these results by implementing new strategies and through nimble asset allocation, which speaks to our ability to leverage the diversity of our revenue streams.
Now on to the segment level performance, where we saw strong growth across all three segments.
In lending fourth quarter, adjusted net revenue grew 51% year over year to $315 million.
Results were driven by 138% year over year growth in our net interest income while noninterest income was relatively flat.
Growth in net interest income was driven by a 109% year over year increase in average interest, earning assets and a 317 basis point year over year increase in average yields slightly offset by 162 basis point increase in the cost of interest bearing liabilities.
This resulted in an average net interest margin of 594% for the quarter up 141 basis points year over year.
Noninterest income was relatively flat year over year as increased personal loan originations at higher weighted average coupons were largely offset by lower student loan and home loan originations.
Personal loan originations grew 50% year over year to $2 $5 billion, while student loan originations were down 73% and home loan originations were down 84% year over year as a result of macro headwinds and a continued transition of home loan fulfillment partners.
Overall, we achieved strong topline growth, while maintaining our stringent credit standards and disciplined focus on quality.
Our personal loan borrowers weighted average income is $165000 with a weighted average FICO score of 747.
Our student loan borrowers weighted average income is $170000 with a weighted average FICO of 773.
This focus on quality has led to continued strong credit performance.
Fact, our on balance sheet delinquency rates and charge off rates remain healthy and are still below pre COVID-19 levels.
Our on balance sheet 90 day personal loan delinquency rate was 34 basis points in Q4 22, while our annualized personal loan charge off rate was 2.47%.
Our on balance sheet 90 days student loan delinquency rate was 13 basis points in Q4 2022, while our annualized student loan charge off rate was 0.37%.
As we have expressed in the past it is reasonable to expect credit metrics to revert over time to more normalized pre pandemic levels, but we continue to expect very healthy performance relative to broader industry benchmarks.
The lending business delivered $209 million of contribution profit at a 66% margin up from $105 million, a year ago, and a 51% margin.
This improvement was driven by a mix shift to higher margin personal loans revenue, along with marketing and ops efficiencies as well as fixed cost leverage across the entire segment.
For the full year lending adjusted net revenue grew 45% to $1, one $1 billion and the segment delivered $664 million of contribution profit at a 60% margin.
Shifting to our tech platform, where we delivered net revenue of $86 million in the quarter up 61% year over year, we're up 13% excluding technosis.
Overall annual revenue growth was driven by 31% year over year, Galileo account growth to 131 million in total as well as sequential growth in transactions per active account.
We also signed 11, new clients four of which are in the <unk> space and three of which are in Mexico further diversifying our partner base.
During the quarter one of our clients migrated the majority of their processing volumes to a pure processor, which resulted in a $6 million to $7 million revenue headwind in period.
Segment contribution profit of $17 million represented a 20% margin and 24% if you were to exclude technosis.
For the full year. The Tech platform segment grew revenue, 62% to $315 million and delivered $76 million of contribution profit at a 24% margin.
Excluding technosis revenue growth was 24% year over year and contribution margin was 30%.
Moving onto financial services, where net revenue of $65 million increased 195% year over year with new all time high revenue for so find money and continued strong contributions from so by credit card, so find us and lending as a service.
Overall monetization continues to improve with annualized revenue per product increasing to $40 nearly two times the $21 in the same prior year quarter and up 25% sequentially from $34.
We reached $6 6 million financial services products up 60% year over year by adding 635000, new products in the quarter we.
We now have $2 2 million products, and so by money $2 2 million and so fine dust and $1 9 million and relax.
Contribution losses were $44 million for the quarter, which improved sequentially as a result of the growth in revenue as well as fixed cost leverage by 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 year over year reduction in higher margin digital assets revenue.
For the full year the segment delivered $168 million of revenue, which is nearly three times the $58 million, we delivered in 2021, and our contribution losses were $199 million.
Notably that's a 21% improvement in contribution loss per average product during 2022 versus 2021.
Switching to our balance sheet, where we remain very well capitalized with ample cash excess liquidity and strong regulatory capital and leverage ratios.
This year's opening of sulfide bank further reinforces our strength and provides more flexibility and access to a lower cost of capital relative to alternative sources of funding.
In Q4 assets grew by $3 $2 billion as a result of the strong growth we continue to see in personal loan originations.
On the liability side, we saw tremendous growth in deposits to $7 $3 billion up $2 3 billion quarter over quarter.
Because of this we exited the quarter with $3 $1 billion drawn on our $8 $4 billion of warehouse facilities, which represents 36% of our total available capacity.
Our current book value was $5 $5 billion and our tangible book value has grown for two consecutive quarters with more than a $50 million increase sequentially in Q4.
Let me finish up with guidance.
Before going through the specific numbers I want to hit on some of the larger macro assumptions that underpin our financial guide.
From an interest rate perspective, we are assuming an outlook consistent with the consensus forward curve with a peak fed funds rate, reaching approximately 5% in Q2 2023 with two rate cuts in the back half of the year to get us to a four 5% exit rate in 2023.
We are assuming a two 5% contraction in GDP and a normalization of unemployment to around 5%.
And from a credit perspective, we are expecting a continuation of elevated credit spreads across capital markets and a continued normalization of consumer credit.
For Q1, we expect to deliver adjusted net revenue of $430 million to $440 million and adjusted EBITDA of $40 to $45 million.
For the full year of 2023, we expect to deliver adjusted net revenue of $1.925 billion to $2.0 billion.
Representing 25% to 30% growth in adjusted EBITDA of $260 million to $280 million.
Our outlook represents 30% incremental EBITDA margins for full year 2023 versus full year of 2022, and we expect to reach quarterly GAAP net income profitability by Q4 2023 with GAAP net income incremental margins for the full year of 20%.
Finally quickly.
Quickly hitting on a few key points for each segment.
In our lending segment, we expect the department of educations moratorium on federal student loan payments to extend through June 30th 2023 at which point there are 60 days before repayments actually begin.
Accordingly, our outlook assumes that we will be operating in our current run rate levels until September .
After September we do believe there will be a recovery to a higher levels of student loan refinancing revenue than the current trend, but we do not expect to return to pre COVID-19 levels in 2023.
In our personal loans business, we expect to see modest growth as we balance taking advantage of ample headroom in this business given our current market share and differentiated product with a thoughtful and prudent approach to ensuring our credit remains very high quality.
We remain committed to underwriting to an industry, leading life of loan loss profile.
In our Tech platform segment, one area of focus for US in 2023 is on quality of new clients, including size durability and time to market over quantity, which means bigger wins that leverage the combined go to market value proposition of the tech platform, while still investing in focused new product areas to draw.
<unk> diversification.
While we expect low double digit organic revenue growth in 2023, do this focus and a variety of other factors our longer term strategy is already starting to pay off with greater diversification in our pipeline and significant margin expansion expected in 2023.
After a three year investment period, and the tech platform, including moving to the cloud a two and a half X increase in head count the acquisition of technicians and launching new product capabilities, we will increasingly focus on leveraging the value of our investments through the synergies between the two product lines technosis in Galileo as well as through joint <unk>.
<unk> offerings, all to drive meaningful contribution profit growth relative to revenue growth.
In starting to operate as one unified technology platform, we have recognized opportunities to reduce our costs, including a small reduction in head count.
In financial services, we expect continued strong growth in revenue driven by growth in products as well as increased monetization per product as we scale deposits spend in AUM.
Importantly, we will front load investments in the year to take advantage of attractive opportunities to continue to scale, our high quality deposit base.
In summary, we could not be more proud of the results. So far delivered in 2022 weeks.
We exceeded $1 $5 billion in annual revenue and grew adjusted EBITDA, nearly five times to more than $140 million.
We continue to be extremely well capitalized and are excited about the opportunities in front of us.
We look forward to another strong year in 2023 and with that let's open it up to questions.
Thank Keith.
This will be allowed to.
One question each.
Please wait until the question Keith for a second question as a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question he might crestar tape pacing, you'll you'll ever meet exactly what else getting your question. So our first question comes from that line of Michael Inc of Goldman Sachs.
Your line is now open. Please go ahead.
Hey, good morning, Thank you very much for the question.
I appreciate all the color around 2023 I was just wondering if you could go into a little bit more detail around the origination assumptions.
Gave some detail around student loan and personal lines could you do that for homes as well. Thank you very much.
Yes, sure. So I can I can hit that one Nancy can chime in so in terms of our overall outlook on originations.
Going back to what I said in my prepared remarks, we are assuming modest growth in our personal loans business. We do see there being an ample headroom for continued growth given where our market share is today. Currently we are at about a 6% market share in our credit box that's up from about four 5% a year ago, So significant headroom.
But we are going to take a prudent approach to this.
<unk> continued to monitor monitor credit.
And make changes as necessary.
Student loan refinancing, we're assuming that originations are at the current run rate levels at least through the end of August 2023.
And we do expect a bit of an uptick once the moratorium.
And in June followed by a 60 day extension and then and home loan originations, we expect to continue at the current pace.
We are at right now with.
A potential uptick in the back half of the year as we resolved all of our fulfillment issues.
Our next question comes from the line of Dominick Gabriele.
Open Hindman. Please go ahead.
Hey, guys great results.
So I just wanted to talk about the.
Deposit growth I mean, it's really been Anthony it's been really.
Astounding.
Much deposit growth you have gotten over the last year and I'm just curious about how you think about you know.
And the environment, where you may need less deposits.
And how you would go about perhaps trimming that growth rate in that environment or like let's say originations are down is that right or is it.
Something else any color you can provide on that outlook will be excellent. Thank you so much.
Thank you Dominic we're really pleased and proud of what we've been able to achieve on the deposit side getting to seven over $7 billion of deposits starting at less than 1 billion at the beginning of the year.
That trend really reflects the strategy that we've employed behind the bank to offer a very high interest rate on checking of over 2% and a high interest rate on savings at 375% no fees and complete functionality in your phone to be able to pay bills to build to send money to your friends.
To be able to look at all of your transactions to build a really function all of your money movement rate right from our App. The combination of that plus the focus we've had on driving high quality direct deposits has driven that deposit number of what I'd say is we're nowhere close to the point in our total deposits that we would have trouble deploying.
Hum the Illumina Hunter our growth is really driven by how much resources that we have to go after it once people become aware of our product the adoption is pretty strong behind that and so the deposits that we have today could be deployed on the way we have the last several quarters, one to fund our own loans truly be opportunistic opportunities really.
Two are the ones that are in the marketplace.
There are several businesses, we're not in today that would leverage deposits, including small and medium business loans.
And being in that entire sector without would require deposits as well it would get leverage obviously growing deposits from small medium business also so if we get to the point that our deposits are significantly higher than they are today, we can deployment and many many other ways to drive a great return for the company.
Our next question comes from the line of Kevin Barker of Piper Sandler. Your line is <unk>. Please go ahead.
Good morning, Thanks for taking my questions.
Balance sheet has grown tremendously over the last year, partly due to the deposit growth could you talk about.
There are differences between held for investment versus a held for sale strategy on you know in particular, we've seen several companies start to come back to the Mark the securitization market.
In the first quarter with spreads tightening relative to late 'twenty two numbers I'm just trying to see how you balance driving net interest income versus potentially some fee or gain on sale income and how you think about that for the rest of the year. Thank you.
Yes. Thank you for the question.
We noted in the press release or prepared remarks that we had a couple of key inflection points in the year. One of the biggest inflection point is that our name our lending net interest margin revenue is now greater than our noninterest revenue and Thats, a pretty big milestone. It reflects a lot of initiatives over the last five years, one of which was going to bank licenses.
Being able to use deposits to fund our loans and not have to recycle that cash through quick sales et cetera. So we have the luxury of being able to look in the marketplace look at our balance sheet and make the best decisions for long term returns.
And as we've done that we've been able to hold loans longer and generate that revenue stream that is more recurring from net interest margin you should expect the NIM to continue to grow.
Both in absolute dollars and as a percentage of total <unk>.
Revenue in the lending sector. The second big accomplishment was that for the full year.
We're able to sorry in the fourth quarter, we're able to get the NIM revenue greater than they are directly attributable fixed cost of the lending business, meaning the non interest income lending revenue was it needed to get to profitability at the contribution basis in Q4, which is another big big milestone, but you should expect that to continue to grow it as a rep.
Midstream, that's more visible and more consistent than a gain on sale noninterest income, but we have the luxury of making the best choices basically marketplace I'll, let Chris talk about the specifics in terms of securitizations versus whole loan sales versus holding yeah and in terms of the ABS market.
Seeing the exact same trends that you highlighted in your question back in November we actually did a $600 million term securitization deal at an attractive cost relative to where we expect warehouse.
Cost of funding to be in 2023, and things have continued to improve in the overall market you know in the first month of this year. So we expect to be able to access that market here in Q1 and for the rest of the year.
Yeah.
Our next question comes from the line of Marci on book of Credit Suisse. Your line is not like please go ahead.
So maybe a maybe it's a follow up to that.
Can you talk about what you were what you actually sold during the quarter in personal and students.
And when did you actually buy any portfolio portfolios during the period as well.
Yeah.
Yes, I can hit on that so in terms of sales for the quarter, but we ended up relying predominantly on deposit funding warehouse funding in that term securitization, we did about $200 million worth of whole loan sales and a $600 million term securitization, so about $800 million in it.
Total in terms of loan purchases like.
Like I said during the last quarter, having the bank with a large and growing deposit base provides us with much more flexibility and a new source of funding our loans, which allows us to grow the balance sheet and a whole loans for a longer period of time. There are a few ways that we can bring loans onto the balance sheet. We can go out and pay us upfront marketing cost and originate them or.
Or we can purchase the loans. So similar to Q3, we had the opportunity to buy some seasoned loans.
Time, they were from a student.
Student loan refinancing space and these were all loans that we originally underwrote overall size was about half of what we did in Q3 and given the credit quality loss profile and return characteristics.
We jumped on the opportunity as we knew the borrower at best and it will set us up for really strong net interest income in the coming quarters, given our overall cost of funding.
And then we also had a few hundred million dollars in normal course cleanup calls.
Some of our consolidated securitization.
For several years.
Our next question comes from the line of Eugene Simmons, sorry, you're not out of Thomas Your line is <unk>. Please go ahead.
Sorry was that Eugene ammonia from market, making.
Hi, guys how are you.
Quick question from me back to the outlook for 2023, you're very helpful. A lot we'll have the Colette kress, but I was wondering on the swing factors lets say the factors that would allow you to go to the high end of your range guide what would be the top two or three things that you guys are looking for that.
They were adults here in 2020.
Either you Jim Thank you for the question.
You know Theres, a Chris laid out in our prepared remarks, some of the underlying assumptions, both macro and micro on the macro side GDP growth that's not as as dollar as we have in our forecast or implications of a stronger economy than what we have and we have we think a.
Relatively conservative number for GDP.
Decline of about 2.5% unemployment, we had a 5% that's a factor if it comes in.
Worse than that that could be a negative a tailwind would be.
In the fours and then on interest rates, we have been picking up 5% and then coming back down to about four 5%.
If rates came back even more than four 5% and so then the 4% range I think we could get an optimal part of the curve as it relates to passing on coupons profitability per loan as well as the NIM that we can make for relative to our deposits would be a pretty pretty good outcome separate from that for the technology platform sector.
We have a really robust pipeline is more diverse but more importantly, there are many members clients in our pipeline that have large existing consumer base or user basis.
And to the extent that those become law.
Launched in 2023 before the second half of the year, we get benefit from upside in those large partners coming on board from the tech sector as it relates to the financial services sector.
I really believe we have a lot of upside in the invest category.
Quickly on launching new products to make sure that we have some cable stakes products, but also some more innovative differentiation selection.
And I think that if we're able to launch those two are receptive member base in your user base. It could be a tailwind second thing there could be a tailwind to invest as if the IPO market opens back up we can underwrite ipos were the sole retail distribution channel for the review and IPO, we participate in the new Bank IPO our members want.
Access to Ipos and IPO prices.
We're uniquely providing main street with access to IPO prices that those ipos and IPO prices.
The calendar opens back up we have a pipeline there as well, which helps both with adoption of the product by new users because they want that unique selection, but it also drives incremental assets under management, which.
Allows us to drive to drive more revenue and monetize more.
So those are some of the underlying trends that could give us a tailwind when we pass over to Chris.
Yeah. The only other thing I would add to that Anthony is back to one of the comments that I made a few minutes ago around credit spreads so implied in our guidance and what I mentioned is that we're expecting to see continued elevated credit spreads throughout the year, obviously things are looking pretty good and in January and spreads have tightened in the ABS market.
It seems to be showing some signs of life. So if that continues throughout the year there could be additional upside in the lending business as well.
Our next question comes from the line of Mahesh <unk>.
Hi, good morning, and thank you for taking my questions.
I just wanted to ask about the.
<unk> technology platform segment, it sounds like a little bit of maybe not change, but refinement in this strategy. As you go after you know you're focusing on quality of clients and bigger.
Existing basis, what are some of the implications of that strategy and I was also curious in terms of just new product introductions of cross sell to existing.
Clients in that segment like as we think about growth from here how much of it is going to come from you know cross.
Cross sell cross buy if you will in that segment versus some winning some of these new large parts those thank you.
Yeah. Thank you for the question and I think you've characterized it appropriate and that is a refinement of the strategy.
But now that we're operating on one unified platform with both Technosis in Galileo we can leverage the combined go to market and that does drive some synergy cost savings, which is why Chris mentioned small head count reduction, but there are also cost savings and different areas like marketing when you have that unify unified approach.
Especially in the United States. In addition to that we've made really significant investments in a tech platform over the last three years, we've increased head count by two and a half as we move to the cloud while maintaining them on prem capabilities. The on Prem will now go away. This year. We've also done a great job of adding new partners.
We've been adding 20 plus partners a year.
As we look at the macroeconomic environment and where we sit we think the right strategy for the years to focus on durable companies with large installed bases or well capitalized companies that we know can make the transition and that we will get a great return to leverage or leverage our platform capabilities.
And so thats how were approaching the year with for.
For the first time, we're going to have meaningful margin expansion and tech platform to start to leverage that investment we've made but we're still investing we're still growing and let me give you. An example of some of the areas that we've invested in that we expect to bear fruit this year and we'll keep investing in our first and foremost we wanted to diversify our products just out of a debit or interchange hgh type of product.
Expanded in the BBB category, we have a number of new <unk> partners that are generating revenue today somewhere doing small and medium business lending some are simply using them for payments.
For accounts receivable and accounts payable, but there's a good pipeline of other partners that have large fleets as well as new economy companies etcetera. In addition to building out the B to B channel. We've also tried to add more products for consumer facing our clients and so one of the products that we have that's been adopted is secure.
Another product that we've launched more recently is a fraud protection as you think about fraud and you think about the scale of some of the partners of Galileo. They may not have the scale to invest in fraud. The way that we can and they may not have the data that we have to actually drive those models and so we've rolled out one piece of a fraud.
<unk> platform that we want to make available to all of our partners. If we can help them eliminate Friday, not only saves losses, but actually makes their service more reliable reduces the overhead they haven't call centers and it also allows them to hit better SLA and servicing their customers. When they do have issues that have to be solved. So it's a classic major footprint.
Your foot type of product.
In addition to that we're focused on things that will help them drive engagement. So we've launched a direct deposit switching product and Youll see us continue to do more there to drive more engagement things like instant funding or another vehicle that makes the movement of money faster and better for our partners.
And then last we just launched our first product on both Galileo and technicians, so far which is paying for that product is now available for any of our partners and if you think about the partners at Galileo many of them are not playing in the same segment that we are we're in a very high end customer with high FICO scores and high income most of this scale and Gallo as partners.
He is actually at the Unbanked or Underbanked, a paying for product is much better for them and been a secured card or unsecured loan or credit card and that product can be launching a turnkey fashion with a much higher interchange was up 3% compared to what they're generating at 1% and debit it does bring with it some risk and so we'll have to wait.
Honestly into that market with our partners, but it's another example of the innovation that we drove in that we now think we can get a return on our revenue guidance.
Last thing I'll touch on is connector, it's not something we've talked about on the call before but we think it's a diamond in the rough so to speak it's an AI driven customer service model that uses both voice and text and that product is one that so far has now adopted and that's after so if I did a complete RFP of all the different choices and determined.
It would be the best choice for our company and we'll continue to invest in that product is available to our partners as well.
And the last thing I'd say about our strategy and technology platform is that the opportunity to expand geographic geographically is bigger than you could imagine we have to really paced our level of investment and while we're not expanding geographically would say, there's a lot of penetration within the Latam market, which is our area of focus, especially with the technician.
More than 12 markets, helping cross sell galileo's products.
Yeah.
Our next question comes from the line of Dan <unk> of Miss Your name. Your line is alright. Thank please go ahead.
Yes.
Hey, guys great results. Thanks for squeezing me in.
Can you maybe give us some.
Quarterly trends on sort of particularly the three metrics.
Student loans personal loans and mortgages, just kind of how things are trending through.
At the end of January .
Yes, so thanks, Tim for the question. So we aren't providing specific views on how things are trending right now, but what I would say is on the student loan Friday through January and as mentioned in our guide.
We expect it to be at the existing run rate levels that we saw in Q3, and Q4 and personal loans.
Things are things are progressing as one would expect theres a lot of headroom in that business, but we're being mindful with respect to credit.
And then in the home loan side, we have made some really good progress over the course of the last two to three months in terms of some of those fulfillment issues that we've talked about previously.
And and things are trending in the right direction.
Anything you'd add there.
The other thing I'd add Dan is I didn't say it in my prepared remarks that we're seeing the strong trend in member and product growth continue into Q1.
Throughout the year are constantly iterating on marketing channels on marketing messages on on.
Lifecycle marketing and leveraging the most efficient channels and I feel like in the fourth quarter.
It was a culmination of a lot of work over the last few years and we saw the benefit of that and as we started the new year.
Continue to see that so we feel really great about not just the growth rate and members as well as products, but the quality of those members.
And product adoption in addition to the cost of cost of acquisition.
Yeah.
Our next question comes from the line of Ashwin <unk> of Citigroup. Your line is finally upon please go ahead.
Thank you congratulations on the.
On the results.
Questions on the process of transfer to new fulfillment partners.
And you just mentioned that the last 13 months had been the case, but what should investors expect in terms of timeline financial impact.
Yeah.
This has come up and what's the main factors that seem to be.
I guess affecting a more timely transition.
And just to give you a little bit of history here, we had a partner that was helping US drive great success on the back end fulfillment side of the equation, we do the.
We do the marketing to drive the demand at the top of the funnel, we do the underwriting for the loans and after that loan is locked we partner with them, we partner with a film and partner to get through all of the all the steps after that that partner. Unfortunately got acquired them. We were then required to make a technology platform switch with the new acquired company.
Which was costly and time consuming.
Tell me the economics of that.
That entity was seeing became quite orders is worth as rates increased and we realize that the economic relationship that we had was changing we needed. Another partner we started pursuing other partners quite frankly, well before the acquisition happened just needing diversification and so we've we fast track the second partner that we needed to.
Transition to that transition didn't happen as quickly as we would hope I will tell you in the last two months, we've seen more progress there than we have in the last 18 months and I'm encouraged by the progress. The team has made both in terms of.
The technology integration the process flow the ability to hit you know time to funding metrics and serve our members better we're nowhere near perfect, but we're starting to move into the right direction for the first time in a while in terms of the economic impact on the overall business Christmas pretty clear in saying that it drove.
Throughout the year I would think about it is more second half of the year than the first half of the year, but the team is executing in a way that I think positions us really strongly to start stepping on the gas a little bit more as it relates to demand we've had our foot off the gas quite frankly, because we don't want to generate demand that we can fulfill and a high quality way and we're starting to get to the point.
I think we'll be there by the second half of the year will get step on the gas and they start to see a much bigger market share gain there we have such a small market share even with higher interest rates I think there's a huge opportunity for us to drive.
Drive revenue.
Revenue, there as well as that revenue being profitable.
In addition to that we do at some point similar to the rest of our businesses want to own it end to end.
We own lending from metals and glass, so to speak and it gives us such advantages on iterating on testing on pricing on credit on user flow.
Fraud on risk and we see the same thing now and so five money owning Galileo and having the benefit of technicians as well and so at some point in home volumes, we will own. The backend also we would always partner it's great to have two sources of capacity, especially given our aspirations and how big we think this could be.
It is a huge financial transaction for our members. It has emotional transaction and we need to be able to scale it and meet the needs of all of our members and that's what we're focused on long term.
Our next question comes from the line of John Hecht of Jefferies. Your line is now open. Please go ahead.
Yes.
Hey, guys.
Congratulations on the quarter.
Anthony you talked about.
Estimates better yet.
Yes.
Yes.
Maybe just a little bit.
Yes.
Right.
Great.
Customers and members.
Okay.
And as a marketing person that.
We will see.
Activities.
Thank you.
Yeah.
Okay.
Okay.
Hey, John It was really hard to hear your question I don't want to guess what your question was maybe you could.
Ill back in with a better connection.
Something about B to B and then it was pretty muted after that.
Is this better sorry, guys is this better.
Yeah perfect. Thank you.
I'm sorry can you hear me now.
Yes, we can hear you.
Okay, I apologize because my headphones are bad.
Question was just you had been you mentioned b to B activity you guys clearly still have very positive momentum with new members and new customers I'm wondering.
Given your channels of customer acquisition the cost of customer acquisition is there anything changed from a characteristic perspective.
And how do you look at opportunities from that regard in 2023.
Yes, so the SMB opportunity I think is really a opportunity that is aligned with the type of member that we're acquiring in our core target. We don't have plans in 2023 to enter that market.
We do believe it's an opportunity for us over the longer term to serve that market well you follow us on social media, it's a constant.
Constant requests that we get from people to launch small and medium business checking and savings small medium business lending.
When the pandemic first started back in 2020 March time period, we were inundated with tons of small and medium businesses coming onto sulfide and trying to apply for PPP loans.
We clearly don't have small medium or lending now that we have a banking license that is an area that we can go into but we didn't at that point in time, we stood up a website that allowed us to take the traffic that came to Sofia and leverage land turn to send that traffic to a marketplace of small medium business lenders and it was very people were.
Very happy with it.
Dan.
As a result of that let us to realize that many of our members are operating small medium businesses and that we could serve them on the commercial side as well.
But as I mentioned, it's not something that we do in 2023.
I would never say that would stay the same we review it every quarter if the student loan market came back sooner than expected and some of the other things went our way in the economy and so forth. It may be something that we could focus on the second half of the year, but right now it's not on the funding list, but it's a huge opportunity for us.
When I mentioned that earlier was.
We've been asked the question earlier about deposits and what happens if they grow too big and that would be a great problem to have if they grow in excess of what we're willing to originate on the personal loan side and SLR side in home loans and credit cards, we would offer more lending products to make sure we're capturing bad great resources.
Deposits to deploy against high returning assets.
Yeah.
Our last question today comes from the line of Michael Perito of I Suppose your largest front I attend please go ahead.
Hey, good morning. Thanks for taking my question you. Obviously you guys have hit on a lot already this morning, I thought maybe I'd just ask Chris just can you maybe give us some a reminder, or some context around how you guys were thinking of of capital of the bank in your twenties twenty-three projections, obviously very healthy still today, but I imagine.
In the guide is there's a bit of balance sheet growth baked in as you guys start in 2022, and just curious where you kind of have the capital ratios levering too and how that compares to kind of where you want to run the bank normalized going forward.
Yes.
Mike for the question, so I'm not going to be providing guidance on the balance sheet size within the bank, but I'll at least provide a little bit of insight in how we're thinking about it so right now what we'd capitalize the bank with about $1 billion billion dollars of capital you'll see that in the bank call report that comes out later today. We're currently operating at about a 15% leverage ratio which is still.
And significantly above our regulatory limits. So we do expect to see additional additional balance sheet growth as we continue to scale our lending business, we expect modest growth in our personal lines business and that's relatively muted in the student loan refinancing.
Some growth in our home loans, the only other thing I would add in terms of being able to grow the bank balance sheet is that we are sufficiently capitalized at the parent as well, where you know coming off of a year in 2021 of raising over $3 $5 billion of capital and we've only deployed $1 billion of that to the bank. So we have.
Sufficient excess liquidity that we could capitalize the bank and grow it further if if if we wanted to.
The only thing I would add onto that is something we were talking about is the team yesterday it doesn't get a lot of attention, but when you look at the asset side of our balance sheet and look at the trend and you look at our cash and cash equivalents. We finished the year at one $4 billion of cash and cash accrual is what's not in that number is $424 million of restricted cash.
And then there is some investment securities, which is a combination of treasuries and government securities as well as.
Loans that were reserves of about $400 million the trend in that line has been continuing to increase which is speaks not only to the liquidity that we have but the equity that we have that we can deploy either against funding loans were funding that from the bank.
And it's one of the important measures that we will continue to give you a.
Somewhat of a level of confidence in being able to fund the bank to grow more if we need to put more active either.
Great. Thank you for dialing in today I wanted to end with.
A couple of comments.
February marks my five year anniversary, so five and just very humbling, what we've achieved during such an unprecedented time period growing from less than $500 million in revenue to $1 5 billion at the end of 2020 to 600000 members to $5 2 million members and negative adjusted EBITDA to $140 million of each.
EBITDA, plus raising $3 6 billion in capital, becoming a public company and receiving a federal bank license.
<unk> done all of that through two interest rate cycles, a recession to the potential for another a global pandemic and flushing inflation on a 40 year high and in an incredibly competitive environment with significant access to near zero cost of capital is a remarkable five year run none of us know happens without the full phase of our board and our shareholders.
The persistent and unrelenting resolve our people and a team that had done nothing short of extraordinary Medicare Prognosticate about what lies ahead for the economy interest rates, but in my view the political background. The regulatory background remain very uncertain and lucid charges factors are out of our control, but as it relates to what.
Lies ahead I will simply say my strongest belief that soon probably continues to be the best positioned company to be the winner that takes the most and the digital financial services sector of the future, reaching a outcome is what we control and what we remain steadfastly focused on to achieve with that thank you for calling in and listening to our fourth quarter results as well as our 2002.
<unk> full year results, we'll talk to you next quarter. Thank you.
Goodbye now.
Ladies and gentlemen that concludes today's call.
Great. That's you may now disconnect your lines.
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