Q2 2023 SoFi Technologies Inc Earnings Call
Good morning, everybody and thank you for joining today's second quarter.
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Good morning, and thank you for attending today's price for second quarter of 2023 earnings Conference call. All lines will be muted during the presentation portion of the code with an opportunity for questions and answers.
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At this time I would now like to turn the conference call host Melissa from Safeway Investor Relations. Laura. Please proceed.
Thank you and good morning, welcome to <unk> second quarter 2023 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 a.
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 advantage 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 most recent Form 10-K as filed with the Securities and Exchange Commission as well as our subsequent filings made with the SEC, including our upcoming Form 10-Q.
Any forward looking statements that we make on this call are based on assumptions as of today, 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 and good morning, everyone, the second quarter and so far it marked our ninth consecutive quarter of record revenue.
And fourth consecutive quarter of record adjusted EBITDA. These.
These results were bolstered by record revenue in both our technology platform business segment in our financial services business segment, which was fueled by record member additions coupled with strong monetization trends.
These results, which we achieved despite market volatility and industry disruption reflect the unique diversification of our businesses and the strong execution by our world class team.
I'm incredibly excited to discuss what we've accomplished I'm even more excited about what is in store for us over the next several quarters as the key underlying trends in each of our segments are indicating continued momentum across the business.
A few key financial achievements from the second quarter include record adjusted net revenue of $489 million up 37% year over year.
Record adjusted EBITDA of nearly $77 million, representing a 43% incremental margin and a 16% consolidated margin.
At the company level, we saw an incremental GAAP net income margin of 36%, which resulted in a loss of just $48 million.
And so far our bank, we had over $63 million of GAAP net income at a margin of 17%.
From a balance sheet perspective, our unique value proposition and so far it continues to fuel high quality deposits that increased by $2 $7 billion sequentially.
We ended the quarter with nearly $12 7 billion in deposits.
Importantly, more than 90% of our consumer deposits are from sticky direct deposit members and nearly 98% of our deposits are insured.
Our cash and cash equivalents, excluding restricted cash increased by $528 million since March $31 billion to $3 billion reinforcing our strong liquidity position.
We grew our tangible book value by $14 million, we remain well on track for GAAP profitability by Q4, and a few trends stand out in support of this anticipated achievement.
Lending net interest income of $232 million exceeded lending directly attributable expenses of $139 million.
Adjusted EBITDA of $77 million exceeded stock based compensation expense of $76 million for the second consecutive quarter.
And financial services contribution loss improved by $20 million versus Q1, 2023 to a loss of just $4 million well on its way to reaching positive contribution profit.
From a member and product perspective, I would highlight the following.
We added a record number of 584000, new members in Q2, 'twenty three bringing total members to $6 2 million up 44% year over year.
Our second highest quarter ever of new products in Q2 of 847000 brought total products to $9 4 million up 43% year over year.
Financial services products of $7 9 million at quarter end grew by 47% while lending products of over $1 5 million were up 25% year over year.
And lastly, strong growth due to the increasing word of mouth reality of Sofia products as well as our efforts to drive greater unaided brand awareness.
As an example, our recent change in the face of Finance campaign, which is challenging societies gender bias with respect to women and personal finances, resulting in over 72 million impressions in the first five weeks.
We have driven this growth with improving efficiency as our full suite of differentiated products and services has continued to resonate with both new and existing members.
Now I'd like to spend time touching on segment level results and trends.
Lending adjusted net revenue of $322 million grew 29% year over year.
The personal loans business maintained its strength in the quarter as we originated a record $3 7 billion.
Up 51% from the $2 5 billion in Q2 'twenty two.
Our underwriting model and our focus on high quality credit have resulted and dependable performance of these loans as our annualized net charge off rate was lower quarter over quarter at 294%.
Within student loans, we had another quarter of low origination levels, but for the first time in three years, we have clarity for the business as we look toward the latter half of this year.
Within home loans, we nearly tripled our originations sequentially aided by the increased capacity and capabilities are small acquisition at the beginning of the quarter increased.
Capacity and functionality allowed us to launch VA loans, helping deserving veterans finding homes with exclusive rates no origination fees, no down payments and dedicated loan officers.
Continuing to fully leverage the benefits of our bank license to drive great economics in both our lending and financial services businesses.
This has resulted in strong net interest income and sequential NIM expansion as lower cost deposits on our balance sheet have grown.
As of the end of Q2, 50% of our loans were funded by deposits and our $2 $7 billion of new deposits raised in the quarter was essential and funding are $4 4 billion.
Of total originations in the most cost effective way.
Our lending capacity remains robust with over $20 billion in total capacity to fund loans and meet our liquidity needs with $13 billion of deposits that have grown by over 2 billion a quarter.
$3 billion of equity capital and over $8 billion of warehouse capacity.
Lastly, the bank contributes to strong growth and so far the money members high quality deposits and increasing levels of spending.
This has led to high average account balances even as average spend has increased.
So find money members have increased nearly 47% year over year to $2 7 million accounts given the quality of these members with a median FICO score of 747 for a direct deposit portfolio, we see ample opportunity for cross border.
More than 50% of newly funded so if I'm gonna accounts are setting up direct deposit by day 30, and this has had a significant impact on spending.
Q2 annualized spend was over two seven times full year 2022 spend and Q2 spend per average funded account was up 13% quarter over quarter.
Within financial services more broadly net revenue more than tripled year over year to $98 million and grew 21% sequentially from Q1 'twenty three.
This significant revenue growth is driven by three vectors.
The first is strong member growth across so Phi money invest.
Invest credit card and so if I protect.
The second is crushed by as the growing member base takes full advantage of our platform and the third is monetization revenue per financial services product has doubled year over year to $50 driven by higher deposits and remember spending levels and so five money greater AUM in Sofia invest and stability within suicide credit card spend.
We expect all three trends to continue their growth momentum.
Despite the continued investment in customer acquisition, we have significantly improved the profitability of the financial services segment.
Financial services Q2 contribution loss was just $4 $3 million, which is a $20 million improvement over the $24 million loss in Q1, 'twenty, three and a $44 million loss in Q4 2022.
We are seeing significant improvement in unit economics, driving greater operating leverage.
The improvement in variable profit per count as a result of higher monetization rates and lower customer acquisition costs due to marketing efficiency and cross by the improved unit economics and the scale of members is driving meaningfully greater variable profit dollars than our total acquisition costs. We expect the total financial services segment variable profit.
To exceed our segment fixed cost in Q4 at which point, we expect all three of our business segments to post positive contribution profit.
Our strong member and product growth reflects our culture of relentless iteration across our five key points of differentiation.
For instance in Q2, we raised the API and our savings deposits to four 3% and have since raised it again to four 4%, we launched so far travel and partnership with Expedia, which includes member discounts and 3% cashback rewards on bookings made with the sulfide credit card.
So if I travel represents our first effort to help our members spend better the next phase of <unk> mission to help our members achieve financial independence.
Selection is one of our key points of differentiation across our products earlier. This month, we were the sole retail distributor of the out of the IPO, which should be the beginning of a robust pipeline of ipos. After a long drought due to the <unk>.
<unk> capital markets IPO activity.
Despite our demand being many times oversubscribed, we were able to make an allocation to every single member who confirmed an indication of interest.
The differentiation and selection by offering Ipos remain street at IPO prices helps drive strong impressions and bring people onto the platform.
And oddity was no exception.
Marketing related to the deal drove a total of 8 million impressions, which not only bolsters the growth in new investment members and more AUM, but also increases brand awareness and member growth for the entire platform.
For our technology platform record full segment revenue of $87 $6 million saw growth of 13% quarter over quarter with a 20% margin at the segment level.
Importantly, we expect a year over year growth rate in technology platform revenue to accelerate by Q4 with increased contribution from new partners to the platform.
Along with greater product adoption among existing partners.
Platforms overall diversified growth strategy includes growth in new vertical segments, most notably <unk> partners, new products and new geographies as well as a focus on partnered with large existing customer bases.
With more durable revenue streams and growth prospects.
In Q2, Galileo signed five new clients and made significant strides against this strategy with 100% of new signed clients bring existing customer basis or portfolios, which drives much faster time to revenue generation compared to a startup company.
Along with the growing pipeline of joint opportunities selling combined Galileo antagonizes offerings into expanded customer base.
Technosis saw record revenue in this quarter and continue to make strides towards continued growth, bringing four clients live within the quarter we've.
We've also experienced great product uptake of new products, such as our payments risk platform product, which helps reduce transaction fraud by leveraging our unique data and algorithms as well as connect our natural language AI, driven chatbot, which provides faster resolution of customer contacts and reduce contacts per customer for our partners as well as so far.
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I'll finish here by saying, how proud I am of our team's relentless ability to not just persevere through the disruption and volatility of the financial services industry in the first half of the year, but to deliver record results driven by the very businesses that we're vulnerable to that volatility in our technology platform and financial services segments.
I cannot feel more blessed by our great teams ability to execute and importantly, our over 6 million members that have been so critical in making our vision of being a one stop shop for all of your financial needs become such an amazing reality.
With that let me turn it over to Chris for a review of the financials for the quarter and our outlook. Thanks Anthony.
<unk>, we had a great quarter with growth trends across the entire business, we achieved record revenue and adjusted EBITDA. Despite operating in a rapidly evolving macro backdrop amidst notable financial services industry headwinds.
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 2023 versus second quarter of 2022.
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 made available next week.
For the quarter topline growth remains strong as we delivered record adjusted net revenue of $489 million up 37% year over year, and 6% sequentially from the first quarter's record of $460 million and above our Q2 guidance of $470 million to $480 million.
Adjusted EBITDA was $77 million at a 16% margin also above the high end of our most recent guidance of $50 million to $60 million and ahead of the prior record quarter.
This represented 10 points of year over year margin improvement demonstrating significant operating leverage across all functional expense lines.
In fact sales and marketing declined as a percentage of revenue for the sixth consecutive quarter with.
With marketing intensity, approximately 300 basis points lower relative to Q2 2022.
Overall this resulted in a 43% incremental adjusted EBITDA margin year over year.
Our GAAP net losses were $48 million this quarter, which is a $48 million improvement year over year. We saw a notable year over year leverage in stock based compensation with SBC dropping to 15, 5% of adjusted net revenue versus 23% in the prior year period.
Incremental GAAP net income margin was 36% for the quarter, which represents further progress towards our expectation of GAAP net income profitability in Q4 of 2023.
Now on to the segment level performance, where we saw strong year over year growth across all three segments.
And lending second quarter, adjusted net revenue grew 29% year over year to $322 million.
Results were driven by a 103% year over year growth in our net interest income while noninterest income was down 30%.
Growth in net interest income was driven by a 117% year over year increase in average interest, earning assets and a 289 basis point year over year increase in average yields resulting in a net interest margin of 574% for the quarter, which is a 50 basis point expansion year over year.
<unk> of 26 basis point expansion versus Q1 2023.
I'd also highlight our $2 $7 billion of deposit growth in the quarter compared to the $2 4 billion of net loan growth on the balance sheet period over period.
With 216 basis points of cost savings between our deposits on our warehouse facilities. This has resulted in a meaningful benefit to our net interest margin.
As underscored the advantage of holding loans on the balance sheet and collecting that interest income.
Looking forward, we expect to maintain a very healthy net interest margin as a result of two things.
First the mix of funding will continue to move towards deposits and second we expect to continue to pass on benchmark rate increases for new loan originations through our weighted average coupon on.
The noninterest income side Q2 originations grew 37% year over year to $4 4 billion.
And were driven by record volumes in our personal loans business, which grew 51% year over year to $3 7 billion.
However, student loan originations were down 1% year over year and home loans by 27% year over year as macro factors continue to provide headwinds to these businesses.
In the second quarter, we sold portions of our personal loan student loan and home loan portfolios.
In terms of execution levels on these sales and the personal loans business, we executed a sale at 104, 1%, excluding hedges and 104, 5% including hedges.
For student loans, we executed at 101, 5%, excluding hedges and north of 104%, including hedges.
For home loans, we executed at 101, 2%, excluding hedges and north of 102%, including hedges.
This quarter, we maintained our stringent credit standards and disciplined focus on quality, which has led to a continued strong credit performance.
Our personal loan borrowers weighted average income is $164000 with a weighted average FICO score of 745.
Our student loan borrowers weighted average income is $163000 with a weighted average FICO of 768.
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 40 basis points in Q2 2023, while our annualized personal loan charge off rate was down sequentially to $2, 94%.
Our on balance sheet 90 days student loan delinquency rate was 13 basis points in Q2 2023, while our annualized student loan charge off rate was 42 basis points.
We continue to expect very healthy performance relative to broader industry levels.
The lending business delivered $183 million of contribution profit at a 57% margin up from $142 million a year ago also a 57% margin.
Shifting to our tech platform, where we delivered record net revenue of $88 million in the quarter up 4% year over year and 13% sequentially.
Overall annual revenue growth was driven primarily by Galileo account growth to $129 million in total.
We also signed nine new clients across the platform.
The segment delivered a contribution profit of $17 million, representing a 20% margin, which is up quarter over quarter.
Notably as we expect to see an acceleration in year over year technology platform segment revenue growth by Q4, we also anticipate continued margin expansion.
Moving onto financial services, where net revenue of $98 million increased 223% year over year with new all time high revenue for sulfide money and continued strong contributions from <unk> by credit card, so find us and lending as a service.
Overall monetization continues to improve with annualized revenue per product, reaching $50 more than double the same prior year period and up over 9% sequentially.
We reached $7 9 million financial services products in the quarter, which is up 47% year over year, and we continued to see strong quarterly product ads with 759000, new products in this segment versus the prior quarter at 584000, new ads.
We hit nearly $2 7 million products, and so fund money $2 $3 million and still find us and $2 6 million in real life.
Contribution losses were $4 million for the quarter, which improved by over $49 million year over year, and nearly $20 million sequentially as we start to see operating leverage in this segment.
We continue to expect positive contribution in this segment by Q4 of 2023.
Switching to our balance sheet, where we remain very well capitalized with ample cash and excess liquidity.
Having sulfide bank further reinforces our strong balance sheet and provides us with more flexibility and access to a lower cost of capital relative to alternative sources of funding.
In Q2 assets grew by $3 $1 billion as a result of a $528 million increase in cash and cash equivalents, highlighting our strong liquidity position and access to cash as well as adding loans to the balance sheet given the impressive growth we continue to see in the personal loans originations.
On the liability side of the balance sheet, we saw significant growth in deposits as they grew to nearly $13 billion up $2 $7 billion sequentially versus $2 $7 billion in the prior quarter and $2 3 billion in Q4 of 2022.
Because of this we exited the quarter with $4 billion drawn on our $8 $5 billion of warehouse facilities in.
In addition in the second quarter, we extended our corporate revolver for another five years and upsized it to $645 million.
This further highlights our strong liquidity position, particularly in the current market environment.
In terms of our regulatory capital ratios, our total capital ratio of 16% as of the end of the quarter remains comfortably above the regulatory minimum.
Let me finish up with guidance.
Throughout the last 12 months, we have demonstrated the benefit of having a diversified high growth set of revenue streams multiple cost efficient sources of capital.
Keen focus on underwriting high quality credit and a high degree of operating leverage as we scale the business.
We expect those benefits to persist going forward, even in light of the existing macro backdrop.
In the second half of the year, we expect to deliver 1.0 to five to 1.085 billion.
Of adjusted net revenue and $180 million to $190 million of adjusted EBITDA with a more significant portion of the revenue and the EBITDA expected to be generated in Q4.
As we move towards expected GAAP net income profitability in the fourth quarter, we expect stock based compensation and depreciation and amortization expenses to be slightly higher than reported Q2 levels in both the third quarter and fourth quarter of the year.
This guidance implies full year 2023 revenues of one 974 to 2.034 billion.
Above our prior guidance of one $955 billion to $2.02 billion.
Our second half guidance implies full year 2023, adjusted EBITDA of $333 million to $343 million.
Our prior guidance of $268 million to $288 million.
This represents a 40% to 44% incremental adjusted EBITDA margin for the full year.
Overall, we couldnt be more proud of our Q2 results and continued progress having delivered $489 million of adjusted net revenue and $77 million of adjusted EBITDA. We continued to make great progress against our long term growth objectives and remain very well capitalized to continue pursuing our ultimate goal of making <unk> a top financial institution.
With that let's begin the Q&A.
Your lines to Q&A, if you'd like to ask a question. Please press star followed by one on your color. Thank you Pat to join the question queue.
Analysts will each be allowed to ask one question if you'd like to ask the second question Keith Thank you.
I'm going to ask a question. Please ensure that your devices.
Cool.
Our first question comes from John Hecht from Jefferies.
John Your line is now open. Please go ahead.
Okay. Thank you. Thanks, guys. Good morning, and congratulations on a great quarter, Chris you gave us a few details about some sales of different categories of loans, maybe give us a little bit more on the execution. The details on the execution of those sales.
Hey, Jonathan.
So in aggregate, we ended up doing about $340 million of whole loan sales in the quarter. Our whole loan sale was a $50 million sale at an execution level of 104, 1% excluding hedge gains in period and it was one out of four 5% including hedge gains.
End of Q2, the PL book was marked at 104, 1%.
Our student loan sale was $100 million sale execution level of 101, 5%, excluding hedges and about 104% including hedges.
At the end of Q2 with the student loan book was marked at about 101, 9%, but what I would say is the important thing to note here is that that $100 million sale.
In school loans with significantly lower weighted average lives than the overall portfolio. So they have lower value. However, these specific loans were sold at a higher execution than where they were marked the.
The remaining $190 million of sales of our home loan debt execution of 101, 3%, excluding hedges and north of 102%, including hedges and as of the end of Q2. The home loan book was marked at 89, 2%.
As discussed in the past, we remain very well capitalized we raised $3 6 billion in 2021, we have access to over $8 $5 billion of warehouse lines only 4 billion of which is currently drawn in our bank deposit base of nearly $13 billion is really growing quite nicely.
Given this flexibility will always maximize the returns on the loans that we originated as well as the overall firm ROE and thats going to take different forms given any given the market environment that we're operating in at the time. This quarter. We ended up doing a few small sales to keep channels open, but we remain very focused on maximizing returns which means holding these loans.
For a longer period of time.
Okay. That's great. Thank you for those details second and maybe for Anthony.
Still a lot of momentum in new customer adds maybe talk about the channels is there any mix shift in where you're finding these customers and how you are finding the customers and any change in characteristics of the new customers.
Yes. Thank you John for the last five and a half years, our number one objective and marketing has been to build our unaided brand awareness unaided brand awareness is measured when you ask 100 people when you need a financial services product or do you think of and when we joined the company in 2018.
Two out of 100 would say so far we've.
We've had our unaided brand awareness reached high single digits, it bounces around a little bit, but it's pretty herculean effort to grow from 2% to high single digits on the top.
And our country top five banks for the country are anywhere between 20 and 30% as we drive that unaided brand awareness. We're building trust will be covering household brand named parallel to that we're doing digital marketing. We're doing other forms of traditional marketing to try to optimize our customer acquisition cost and scale our customer growth.
Member growth as well as our product growth and I think this quarter is the first quarter that I can say I feel really confident that flywheel is really working and what I mean by that is we're seeing efficiencies in our customer acquisition costs and those efficiencies are really more correlated with the unaided brand awareness has been increased in addition to the fact that our marketing and <unk>.
Product teams or iterating everyday through technology and content information and analytics to drive those efficiencies what are the reasons that we're going to be able to achieve contribution profitability in the financial services segment, which are still spending a vast amount of money on acquisition doesn't payback for October 24 months is because we're really now the unit economics in the customer acquisition.
Cost.
We're starting to fill a benefits of morality, we're starting to feel the benefits of efficiency byproduct and then of course the cross buying at the same time that our monetization is improving so I wouldn't point to one specific channel or one specific effort is the holistic approach that we've taken over the last five and a half years that is really starting to pay off in the quarter and as we look into Q3 as well.
As a reminder, unless we will each be allowed one question if you'd like to ask the second question. Please return the question Keith.
Our next question comes from Dan Taylor.
Dan Your line is now open. Please go ahead.
Oh.
Great results.
Amazing I do have one question only which is I noticed that the non interest income in lending declined.
This quarter can you give us some color on why that.
Thank you.
Hey, Dan.
So.
Noninterest income declined sequentially and that was a function of fair market value write downs, which was due to increases in interest rates.
We also had an increase in absolute dollar amount of NPL write offs now while our dollar charge offs were up sequentially as I mentioned in my prepared remarks, our annualized charge off rate in the quarter for our personal loans business was 294%, which was down from what it was in Q1 as we've discussed in this current market environment, We do expect.
Net interest income to contribute more meaningfully to the lending segment revenue, that's because we're seeing a much better return by holding loans for a longer period of time in generating that net interest income versus selling or towards generating near term monetization opportunities now.
Now specifically speaking about the fair market value write downs the marks on our loans across all products ended up decreasing period over period and the personal loans business, specifically that fair market value decreased from 104, 3% to 104, 1%. So it was down 20 basis points. This was a function of the <unk>.
I don't rate, increasing by 60 basis points to six 1% and that was a function of the two year treasury swap rate, increasing by about 69 basis points and spreads tightening by 10 basis points as a result of the secondary trade observations.
This was partially offset by the portfolio weighted average coupon increasing by 40 basis points to 13, 6% and the conditional prepayment rate assumption decreasing by 10 basis points to 19%.
Annual default rate and our assumptions in the March remained at four 6%, which was the same as Q1.
The one thing that's important to note here is the actual realized Q2 annual default rate was 294% down from the prior quarter that means what we we're actually observing in terms of losses in the quarter or 166 basis points per year or 250 basis points over the life of the loan below what is embedded in our current.
Mark of 104, 1%.
And the student loan business the fair market value marks decreased from 102, 6% to 101, 9%. So it was down 70 basis points sequentially. This was a function of a few things first the discount rate ended up increasing by 30 basis points to four 4% that was a function of the benchmark rate increasing by 50.
Basis points and spreads tightened by about 20 basis points.
Second the ctr embedded into market increased by 10 basis points to 50 basis point, and then third the CPR embedded in the March increased by 20 basis points to 10, 6% collectively these were partially offset by the portfolio weighted average coupon increasing by 10 basis points to 5%.
One thing to note here is that the actual realized Q2 annual default rate was 40 basis points.
That means what we're actually observing in terms of losses are 10 basis points per year or 50 basis points over the life of loan below what is embedded in the current mark of one on one 9%.
Thank you. Our next question comes from Mike <unk>, Mike. Your line is now open. Please proceed with your question.
Sure.
Hey, Anthony Chris Good morning, Thanks for taking my question.
I wanted to.
Switch gears, a little and ask a question about the balance sheet.
I was just wondering when do you think about the <unk> guide and in the full year Guide, Chris I mean can you maybe give us a little bit of a sense of.
What type of balance sheet growth.
Do you expect I mean, there's the capital ratios are still fairly healthy today, but continue to move down is it fair to think that with the elongated whole period on some loans there'll be some more amortization and then the balance sheet rate of growth should slow from here, even with strong origination is expected to continue or or how are you guys thinking about that.
Yes, sure what I would say in terms of overall growth from an asset perspective.
I would expect similar growth to what we've seen over the course of the last few quarters, but we are seeing an uptick obviously in the ameren to nation down as a result of pay downs.
And then on the liability side, we are expecting continued healthy growth from deposits, we will be able to grow this quarter over $2 billion, but we're expecting to grow over $2 billion again.
So net net you can see similar growth in the balance sheet relative to what you saw this past quarter in terms of capital ratios as you mentioned those remain extremely healthy in the mid teens across the board.
We have sufficient capital to deploy.
Operator next question.
Thank you. Our next question comes from Kevin Barker from Piper Sandler Kevin. Your line is now open. Please proceed.
Good morning, Thank you.
Like to follow up on the NIM, obviously really strong this quarter as you continue to grow, particularly with the personal loans.
Becoming a real driver of that and the yields that you've been seeing there now as we look into.
At the end of the year, we expect student loan Refis to pick up would you expect a little bit of pressure on the net interest margin as you transition more towards student lending versus personal lending or do you feel like the growth maybe could accelerate on the asset side, just given a pickup in refis.
Student loans, coupled with momentum on the personal line side.
Sure what I would say in terms of Q3, we do expect margins to remain very healthy.
But we are taking a conservative view and thats why its embedded in our overall guidance in the back half of the year given the potential increases in cost of funds in various pricing strategies as well as the mix shift in our loan originations to student loan refinancings, particularly in Q4 as you know.
There's a lag between how we price our loans relative to when the fed moves rates.
Given that we price to the forward curve, which impacts our cost of funds once the fed increases, but we do anticipate being able to maintain very healthy margins as you saw they were up.
Sequentially to $5, 74% this quarter.
Thank you Chris.
Thank you. Our next question comes from Andrew Jeffrey from Cherished Andrew Your line is now open. Please go ahead.
Thanks. Good morning, appreciate you taking the questions.
The deposit growth is super impressive and remained strong and obviously you have a real source of differentiation I Wonder Chris handler, Anthony if you could comment just on a couple of aspects of that one sort of the sustainability or in fact potential for acceleration I think especially given the.
<unk> of the banking industry and the introduction of fed now and just to how how do you view that very high or market high <unk> sustainability thereof, as you see more competition from similarly high.
High yielding accounts out there from other providers.
Yes, we're super excited about the progress that we've made over the last year and a half as having the ability to set our own API and so by money and then the benefit from those high quality deposits and lower cost of funds on the lending side, which is really causing the whole P&L to work well together.
Clear competitive advantage.
It relates to deposits, 90% of our deposits are consumer deposits are from direct deposit customers, which is a heck of an achievement given that we're adding two plus billion dollars a quarter.
Wanted to make sure that we are a primary relationship with our members given our strategy of building a relationship with them on their first product and building that trust and reliability.
Second product that comes to <unk>. So we're going to continue to be very.
Purposeful and focused on high quality deposits and high quality group. We're comfortable that we can continue to add $2 billion is a positive quarter on the back of member acquisition. So five money. We're also confident that we can continue to compete with anyone on API, that's a rational company and what I mean by that is we are very unique in that when we bring in to.
<unk> at that four 4% <unk> that you get without fees.
Those deposits and funding businesses that haven't even a higher yield against them in our origination platform. Many of the people that compete in the <unk> top tier that we compete and do not have that same origination platform and can't generate the same type of yield off of the deposits that weekend.
So we have an advantage as it relates to being both an originator of loans and obviously a bank with with the deposits that are insured up to $2 million. In addition to that we also have the benefit of those money members coming in and buying another product that has great variable profitability and even better when we don't pay for that customer acquisition cost. So for example.
Certainly these aren't the exact numbers, let's say, we make about $700 and variable profit on alone and the customer acquisition cost for that loan is also $700, which is taken out of it variable profit if someone cross buys into that loan product for money, we acquired the money customer at less than $50 less than $25 often they cross line.
The profitability of that loan goes from $700 to <unk> hundred dollars. So there is great leverage there.
Haven't even begun to leverage that type of benefit in terms of thinking about the <unk>. We're really excited about when rates start to decline and other banks cant maintain the level of <unk> that we can of how competitive we can be versus them. So we're going to maintain high quality deposit acquisition, we leveraged our competitive advantages stay at the top tier of the API.
Just make sure we focus on quality over quantity.
Thank you. Our next question comes from Mihir Bhatia from Bank of America. Your line is now open. Please go ahead.
Hi, Good morning, and thank you for taking my question.
I wanted to maybe go back to the discussion about the financial services productivity new.
I was just wondering if you could just talk a little bit more about that.
When you look at slide seven.
I think really show, where you expect that ratio of financial service products blending products stabilize around.
Obviously, our products for member seems to have stabilized right now around this $1 five market.
Very aggressive given the growth in members, but just wondering about the other ratios and.
Relatedly. If you could also just talk about the major cross by channels that you currently have and how you see that evolving thank you.
While we are growing our member base that this quarter was 44% with a record number of member adds while we're growing the member base so quickly.
Denominator.
It's unlikely that the one five products per member that Youre using for total products and total numbers is going to go up in fact, I think it's a herculean effort that it's actually stayed stable at one 5% typically if youre member base. The denominator is growing that fast it would put pressure on the on the corrosion of one five and then over time as the member base slowed the product.
Both would accelerate and that number would start to go up.
We're at $1 five today, the numerator is growing very fast the denominator is growing very fast I'd say I'd expect it to stay in about that range I wouldn't expect it to start to move up until the member growth really slowed quite meaningfully because there is a lag between when a member comes on to the platform and when they take out a second product.
And so it's.
Really significant that we're maintaining that one five over time my hope would be that they have 345 products with us hopefully that every product they have with us we want that firepower relationship to be with them for all of their needs.
And so we're going to continue to not just build trust with them, but AD product selection. So we can be there for all of their major decisions that they make and all of the days in between.
As it relates to the cross buy channels, we provide that slide in the investor deck that kind of gives you a sense for the products with the highest scale and the most data are there products that are the best at driving cross buy so if we have a primary relationship with the Sofia money member and we have their direct deposit we see what those are paying with the loans that are paying.
We see if they have excess cash that should be invested in vehicles outside of just yielding savings account. We see if they are not able to generate discretionary spending that should be invested if theyre not invested in their twenty's, it's really hard for them to get to the point that they're fragile independents to catch up later on and so that primary relationship gives us really good.
Data about their mortgage about student loans.
<unk>. So we can help them get their money right. They're related product is something we don't talk about that frequently because it doesn't directly drive revenue, but it's also a big contributor to cross buy and a huge contributor on the data side.
I have all my accounts off of my credit cards savings accounts checking accounts across my entire family connected and I can see real time Interrelate every transaction that's happening with any of my money anywhere.
Nothing.
Now it gives me great insight on how to budget, but it also gives me a good insight and where they're areas of efficiency that I can drive a favourable budgetary decisions behind not dimension. We also get mortgages through <unk>. We also get sued along is through relate and then of course credit cards and the refinancing of our personal loans.
Thank you. Our next question comes from James You May need from talent. James Your line is now open. Please go ahead.
Thank you good morning, guys. Congrats on the strong results I wanted to ask about student loans, obviously would come in close to the end of the moratoriums. So would be great to hear your latest perspective on the level of demand. We can expect for Refis in Q4.
As you kind of staring at your specific demographic that you're targeting something maybe more affluent.
Our customized and the level of interest rates that we are at today.
So where do we start off by sort of giving one number and also our point of view on student loan refinancing.
Happy for the American people and that our administration has made a decision on the outlook for student loans. So families can plan. Accordingly, it is going to be a huge burden for many of them the more they know.
The better they can plan for the future. We're here to help them in any way that we can.
Over 40 million Americans that still have federal student loans, I think about that number 40 million Americans, we havent, even refinanced a million student loans in our history and certifies entire history, we've not refinanced more than $1 million student loan federal student loans, including private student loans and so the opportunity in front of us starts with 40.
And then you can break it down from there based on demographics based on interest rates based on term to kind of understand the addressable market, Chris will walk you through sort of our assumptions.
The biggest point people really need to remember is that market is very large and people have various different budgetary constraints. Some may refinance at a lower rate and therefore based on the interest rate and semi refinance just to lower their monthly payment because there's no penalty for prepaying, there's no penalty for refinancing.
At times, you have no closing costs no origination fees no fees tied to it so if someone needs to create a little bit of cushion in their budget by going from a $500 payment a month or $250. They can do that with no consequences because as rates do come down. They can then refinance again if rates don't come down, but they wanted to pay it off from the same term.
They can prepay each month more than they're supposed to so it'll be interesting to see what happens over the next six months and I'm sure there'll be a battleground for many you're talking about what the outlook is but over the next 10 years I think it's an exciting opportunity and we're glad to be back in the business, yes, So specifically related to our <unk> guidance. Our outlook currently assumes that we're going to be operating at our core.
Current run rate origination levels in the student loan refinancing business until September after September we do believe there will be a recovery to 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.
Thank you. Our next question comes from Mike Lang from Goldman Sachs. Michael Your line is now open. Please go ahead.
Hey, good morning. Thank you very much for the question I was just wondering if you could provide a little bit more color on your expectation.
A bigger portion of the revenue and EBITDA is going to be.
More <unk> weighted what are some of the key assumptions around that is that just.
The student loan assumptions you just laid out and then just as a quick follow up.
I was wondering if you could just.
Let us know if the oddity IPO has any impact.
Financial services revenue and profits if I recall I think when you guys did.
The retail distribution Caribbean and new bank, there is a little bit of an uplift there, but any thoughts there would be helpful. Thank you.
Sure.
As I mentioned in my prepared remarks from a phasing perspective, we expect more robust revenue and EBITDA generation in Q4 versus Q3.
Arent, providing detailed segment level guidance, but one thing I will say is that we expect relatively flattish Q3 revenue and our tech platform ahead of an acceleration in growth in Q4 and additional strength in the latter part of the year from our student loan refinancing business in terms of profit trends, we're going to be frontloading marketing investments with <unk>.
<unk> EBITDA is expected to be marginally above where consensus is today for Q3 at $58 million.
And we expect to see more of a ramp in Q4, EBITDA and achieved GAAP profitability in Q4.
The IPO.
The IPO that we do get fees and these ipos are not that material.
The IPO is a very big differentiator for our members that have invest accounts that are members that open invest accounts and that we were the only place that you can buy that and retail at IPO prices and.
And we really benefit from having that unique selection and acquisition and also AUM, which then leads to revenue. So there is some direct revenue from underwriting or its being a selling agent, but the bigger benefit is the growth in members and growth in our AUM.
Thank you. Our next question comes from Britta Schmidt from JP Morgan. Your line is now open. Please proceed.
Hey, good morning, and congrats on the quarter two quick questions and of course there Anthony.
<unk> talked about.
From a top 10 bank and I was curious how you define the margin questions.
Question for Chris Real quick.
I appreciate the disclosure on the loan sales I was curious on those personal loans as he definitely.
Related to the price back to you Mark I was curious what the APR was similar.
Similar to the broader portfolio of $13 six or is it higher or lower thank you.
Sure on top tenants top 10 financial institution, and it's measured by market cap.
And on the second the portfolio that we ended up stowing selling at a higher weighted average coupon, but a shorter duration. So net net resulted in an execution level similar to where the book is mark today.
Thank you. Our next question comes from Dominick Gabriele from Oppenheimer. Your line is now only 10. Please go ahead.
Hey, thanks, so much and good results.
I was just curious about the incremental EBITDA margin.
I think the revenue is similar to what we were expecting for the year.
But the EBIT margin is significantly better and above the 70 30 split that you guys usually talk about about reinvestment and then when you couple that with.
The stock based comp and depreciation perhaps staying elevated it means that there is some real expense synergies coming through in the underlying business.
And I was wondering what your feel is on investments.
Moving forward and at the 70 30 rule has changed and where in the expense lines G&A technology and product development any of those buckets, you could talk about where youre seeing the most leverage to really raise this incremental EBITDA margin guidance. Thanks.
Sure Let me let me kickoff.
First thing I'd say is.
Our long term view is 70 30, so as you think about 2024 definitely or in your mind around 30% incremental EBITDA margin.
The World has been very uncertain this year and that's probably one of the biggest under statements I can make.
The World has been uncertain, we've held back some investment going into quarters to see where our revenue comes out. So that we are certain we can always deliver on EBITDA and non-GAAP net income and EPS as.
As the quarter unfolds, we see opportunities to release some of that cushion and to spend at an acquisition. Its still happens our business is doing very well. We obviously saw the first time in our history that 50% of our revenue growth year over year was actually driven by non lending businesses.
You look at the change in the financial services segment and the change in the technology segment year over year in dollars there was equal to the change in.
non-GAAP lending revenue.
They were equal for the first time.
As that growth rate continues we got a lot of operating leverage in those two segments and it allows us to drive more to the bottom line or high incremental margin business is in fact Fas.
<unk> services segment lost $24 million in Q1, and was only $4 million this quarter and that's down from $44 million in Q4. So.
So we're seeing great unit economics, and we're seeing great operating leverage covering our fixed costs in those two businesses and thats contributing to more profitability. We have a goal this year being GAAP profitable. Our number one goal is to make sure we're driving toward financial outcomes as it relates to the business, we want to serve our members well to do that.
But based on where we've seen incremental margins throughout the year and based on the investment opportunities. We have in front of us and the efficiency of those opportunities we're going to drive more profitability in the back half of the year than we otherwise anticipated Chris can talk to the one items that we're seeing there, but I'd say, it's both better unit economics, and the fact that we're finally exceeding our fixed costs and then.
I want to revisit one question someone said about accelerating the growth we're going to focus on quality over quantity, but I will tell you. Once we achieved GAAP profitability and we cover acquisition cost we will have much more of a license to more aggressively spend and acquisition.
That 30% level.
Yes, so dominic in terms of where we're seeing the real leverage is really across all functional expense line.
As I noted in my prepared remarks sales and marketing as a percentage of revenue was down 300 basis points year over year, our technology and product development expenses as a percentage of revenue were down 200 basis points operations down 300 basis points in G&A down about 800 basis points. So we're really we're really doing a nice job of being able to achieve leverage.
Across the entire system, and we expect that to persist going forward.
Thank you. Our next question comes from Timothy <unk> from Credit Suisse.
Your line is now open. Please go ahead.
Great. Thank you I wanted to talk a little bit about some of the new client wins that you announced for Galileo if you could just add some context around to the extent you can on sizing or if these are the sort of the majority of the programs coming over to you you mentioned that they have existing accounts I'm, assuming that they're relatively established.
Grabs and also if you could touch on where they were before they were with more of a one of your more modern competitors or one of the more traditional competitors.
Thank you for the question on Tech platform ruined proud of the team that transition that we decided to make in 2022 and where we've gotten to in 2023. It wasn't an easy decision to walk away from a lot of these easy startup types of deals that we can announce on the call and dozens of quantities and then they would triple win with <unk>.
One thousands of dollars, but a lot of distraction from our team and a lot of.
Focus of resources given their young nature.
We understood long term that our technology is incredibly unique in the technology stack that we have with Golden rule type product core that's monitoring in the cloud with processing. That's in the cloud. In addition to some other great products that sit on top of a platform vendor payment risk platform and connected to that.
That we could go to market and fight with the with all of the competitive set against the biggest deals in the United States and in Latam, We're really encouraged by the number of requests for proposals that were seeing from margin institutions. These things take time. These are large institutions are sensors, they're under pressure from regulators to upgrade their technology and they also want to.
Modernize their technology, so that it can be more innovative and they can be more reactive in real time to different regulatory pressures as well as any disruption of the industry like we saw in the first half of this year. So there is definitely sort of a tidal wave of need for new technologies, and we have that technology. So I'm really excited that we made that transition that we have.
That suite of products, we're not going to win every deal I'm confident we'll win our fair share and it'll take time in terms of the actual results I would say, we're seeing very small contributions from the new partners that we've added it definitely was a benefit to the quarter and helped us on the upside and we're still we're seeing still a strong steady growth from our existing partners that are doing quite well.
<unk>.
Obviously, anniversarying using a partner a year ago, which we made the tough decision on who is the right long term decision versus the easier near term decision, but we're now anniversarying that and as Chris mentioned, we expect a tech revenue it would be flattish in Q3, and then accelerate year over year in Q4, as we get more contribution from those new partners that are either already on order that will be onboard.
And I'm really excited about 2024, when the investments that we made this year and on boarding new partners starting to kick in even more so I think it will be a <unk>.
<unk> studied nonstop and revenue overtime with the acceleration on a year over year basis come in the fourth quarter nothing to announce the big bank side of advances decision side.
Conversations with every Titan. Thank you can think of large banks regional banks community banks.
Companies that are not banks, but have large consumer bases that they would like to offer financial services products to that we can do that with.
Our next question comes from Robert <unk> from Autonomous Your line is now open. Please proceed.
Good morning, guys I wanted to follow up on where the current bookings March down sequentially a bit for all the reasons you discussed Chris do you think that that will continue to drift lower in subsequent quarters and if so do you think that.
Noninterest income lending can can stay at the $100 million level you hit in the second quarter.
Yeah.
And let me let me start on that question one thing I wanted to make sure people are paying attention to is what our weighted average coupon as well.
We're very fortunate in that we feel are sophisticated ability to test different price points against different credit.
Backdrops, and we've been really successful in passing on higher rates and our loans as benchmark rates have gone now obviously there are a number of factors beyond weighted average coupon, including spread in the benchmark rates and prepayments and defaults on our cost of funds and I'll, let Chris talk through that but.
People really should pay attention to what are we doing that weighted average coupon and how is that providing us some leverage uniquely in the marketplace versus competitors as we still gained a significant amount of volume I'll, let Chris talk to you components, Yes, I already went through the details of where the marks are and how they changed quarter over quarter in terms of how we're thinking of.
What we expect going into Q3 in the back half of the year, it's going to be dependent on what happens in the market, it's going to depend on what happens with rates that's going to depend on what happens with charge offs prepayments et cetera, we mark to market. The book every single month.
And we've taken into consideration all of the inputs that I outlined and what drove the changes quarter over quarter. So it.
It is highly market dependent.
And what I would say is in this type of environment, given where rates are and the returns that we're generating on our loans by holding them. We would expect net interest income to be a much larger portion of the overall revenue pie for the lending segment, but that could change depending on market environment.
And hopefully it's clear by our reported numbers how the yields we're getting on the loans is greater than the price that would be willing to pay should be honest when the financials at this point.
Thank you all now kind of F 'twenty.
For any closing remarks.
Thank you.
People often ask me how.
So if I get to such an unprecedented point and being a digital one stop shop for financial services.
And as soon as I get to the point that so many companies over the last five years have endeavored to reach while others now saved through aspiration today <unk> got so many other strive to do.
Answer to what contributes to our success is simple it is our team.
Our people the people so far that wake up every day focused on achieving our mission and building our culture. So that we can change the lives of millions of people and someday hundreds of millions of people. Yes that has hundreds of millions of people make no mistake about it no company no leader no team has greater ambition our aspirations in <unk>.
<unk> New company is further along that journey than <unk> and it's on me to ensure we win every second of every minute of every hour of every day. Thank you for your time today and I look forward to addressing you again next quarter.
Goodbye.
That concludes today's conference call everybody. Thank you very much. Thank you you may now disconnect your lines have a lovely.
[music].
Okay.