Q4 2023 SoFi Technologies Inc Earnings Call
Good morning, My name is Stacey and I'll be your conference operator today.
Stacey: This time I would like to welcome everyone to the SIFI technologies, Q4, 2023, and full year 2023 earnings conference call.
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Speaker Change: Thank you.
Speaker Change: You may begin your conference.
Speaker Change: Thank you and good morning, welcome to <unk> fourth quarter and fiscal year 2023 earnings Conference call. Joining me today to talk about our results and recent events are Anthony Noto, CEO and Christopher I'll appoint CFO you can find the presentation accompanying our earnings release.
Speaker Change: On the Investor Relations section of our website.
Speaker Change: Our remarks today will include forward looking statements that are based on our current expectations and forecasts and involve risks and uncertainties.
Speaker Change: 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.
Speaker Change: Our actual results may differ materially from those contemplated by these forward looking statements.
Speaker Change: Factors that could cause these results to differ materially are described in today's press release and our subsequent filings made with the SEC, including our upcoming Form 10-K.
Speaker Change: Any forward looking statements that we make on this call are based on assumptions as of today, we undertake.
Speaker Change: 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.
Anthony Noto: Thank you and good morning, everyone 2023 was a remarkable year for so far we achieved multiple records and realized many of our aspirations. Despite seismic geopolitical and macroeconomic events. We demonstrated that we have built a business to thrive in a host of challenging environments reacting swiftly to change driving for our business.
Anthony Noto: Gordon standout financial performance, while continuing to serve our members needs.
Anthony Noto: Our 2023 results have reinforced my conviction in our long term potential and our ability to achieve our aspiration to become a top 10 financial institution I'd like to highlight some of our notable achievements for the year.
We reached GAAP net income profitability in the fourth quarter and are positioned to continue to drive positive GAAP net income in 2024.
We grew adjusted net revenue by 35% for the year to a record of $2 1 billion, while adjusted EBITDA of $432 million increased 200% versus 2022.
Anthony Noto: This represents a 54% incremental margin and a 21% consolidated EBITDA margin for the full year compared to our long term margin target of 30%, which we achieved in the fourth quarter of 2023.
Anthony Noto: Total members and products both grew over 40% with 2.3 million new members in 2023 for a total of $7 5 million members.
Anthony Noto: Added $3 2 million new products for a total of 11 million products at year end.
Anthony Noto: We continue to diversify our revenue with financial services and the tech platform contributing 40% of fourth quarter adjusted net revenue up from 34% in the year ago quarter.
Anthony Noto: Our financial services segment achieved positive contribution profit in the third quarter, which ramped further in the fourth quarter.
Anthony Noto: We completed a dramatic shift in tech platforms product offering and focus positioning us to capture the massive opportunity in the traditional banking sector. In addition to tech and consumer companies looking to provide financial services.
Anthony Noto: And lending 72% of adjusted net revenue was from net interest income compared to 48% in fiscal year 'twenty two.
Anthony Noto: Net interest income offers a more recurring and predictable cash revenue stream compared to noninterest income.
Anthony Noto: We generated $334 million intangible book value growth, which is now set to accelerate in 2024.
Anthony Noto: Total deposits grew by 11 $3 billion in 2023 to $18 $6 billion and over 90% of our consumer deposits are from direct deposit members.
Anthony Noto: So five bank reported net income of nearly $350 million, a 21% margin with a return on tangible equity of 15, 9% in its first full year of formation.
Anthony Noto: To put some of these achievements in the context of a longer term perspective I'll note. The following when comparing our business to fiscal year 2018, which is when I joined Sofia and we embarked on our new strategy. We've grown annual adjusted net revenue by more than eight acts.
Anthony Noto: Annual EBITDA by almost three <unk> were $660 million.
Anthony Noto: Members by more than 11 ex <unk>.
Anthony Noto: Total products by 16 X and consolidated net interest income by nearly five X and since adding several financial services products in 2019, we've grown annual financial services' revenue to more than $430 million.
Anthony Noto: Rental services products to $9 5 million in total.
Anthony Noto: In financial services products now comprise 85% of our total products.
Anthony Noto: The fourth quarter really capped an exceptional year.
Anthony Noto: Record adjusted net revenue of $594 million accelerated to 34% year over year growth.
Anthony Noto: While record adjusted EBITDA of $181 million.
Anthony Noto: 159% with a 30% consolidated EBITDA margin.
Anthony Noto: This EBITDA margin is up 14 percentage points year over year and is now equal to our long term target of 30%.
Anthony Noto: Financial services segment contribution profit grew to $25 million, an 18% margin versus $3.3 million last quarter and negative $44 million in the year ago quarter.
Anthony Noto: Our deposits grew by a record of nearly $3 billion in the quarter.
Anthony Noto: Tech platform segment revenue growth accelerated to 13% year over year on its way to 20% next year with a 32% contribution margin versus 20% in the year ago quarter.
Anthony Noto: In lending 76% of adjusted net revenue was net interest income up 43% year over year to $263 million.
Anthony Noto: We point this out because $263 million in cash revenue is two X greater and are directly attributable segment expenses of $120 million.
Anthony Noto: Contribution margin improved by over 500 basis points sequentially to 65%.
Anthony Noto: Company consolidated GAAP earnings per share was <unk> with.
Anthony Noto: With GAAP net income totaling $48 million versus a $40 million loss in the year ago quarter.
Anthony Noto: So five banks net income of $129 million represents a 27% margin an annualized return on equity of 16, 8%.
Anthony Noto: In terms of our balance sheet.
Anthony Noto: We grew tangible book value for the sixth consecutive quarter by a $204 million at the consolidated level, reaching $3 $5 billion in total.
Anthony Noto: Our total capital ratio improved to 15, 3% from 14, 5% last quarter.
Anthony Noto: Helped by organic tangible book growth over $1 billion in loan sales.
Anthony Noto: Capital optimization moves and an opportunistic convertible debt repurchase of $72 million.
Anthony Noto: From a member and product perspective in the fourth quarter. We added 585000, new members for a total of over $7 5 million members and 695000, new products for a total of over 11 million products.
Anthony Noto: Now I'd like to spend some time touching on quarterly segment level results lend.
Anthony Noto: Lending adjusted net revenue of $347 million grew 10% year over year against the difficult comparison of 51% year over year growth in the year ago quarter.
Anthony Noto: Personal loan originations grew 31% year over year to $3 $2 billion.
Anthony Noto: Student loan originations grew 95% year over year to $790 million and home loan originations increased to 193% year over year to $309 million.
Anthony Noto: Within our financial services net revenue grew 115% year over year, and 18% sequentially to $139 million driven by continued strong monetization within the segment.
Anthony Noto: We achieved $25 million in contribution profit despite our significant investment across the money credit card and invest.
Anthony Noto: As we noted last quarter.
Anthony Noto: Card and invest businesses are still in heavy investment mode with losses of over $100 million annually on a run rate basis.
Anthony Noto: Through unit economic optimization and greater scale. These businesses will eventually see positive contribution profit similar to how we deliver with Tso five money.
Anthony Noto: We continue to see strong growth in Sofia money products, and importantly high quality deposits and great levels of engagement.
Anthony Noto: This has led to higher average account balances even as average spend has increased so.
Anthony Noto: So if I money products have increased 54% year over year, whereby nearly $1 2 million to $3 4 million accounts as important is the quality of these members with the median FICO of 744 or a direct deposit portfolio and hence we see ample opportunity for cross buy.
Anthony Noto: In terms of engagement.
Anthony Noto: Over 50% of our newly funded so prime money accounts are setting up direct deposit by day 30.
Anthony Noto: This account primacy drive spending which exceeded $1 $5 billion in the fourth quarter debit transactions of volume. This is up nearly three <unk> year over year and represents more than $6 billion of annualized debit transaction volume.
Anthony Noto: Our invest products, excluding crypto from all periods grew 20% year over year to a total of $2 1 million with AUM, increasing 54% year over year.
Anthony Noto: We've continued to launch exciting new products that meet our members needs and financial services to further accelerate new member growth and cross by.
Anthony Noto: Just today for instance, we announced the launch of alternative investments in mutual funds with the launch of Alts Sofia is granting yet another opportunity for everyday investors to access investment opportunities traditionally reserved for institutional investors and the ultra wealthy.
Anthony Noto: For our tech platform revenue of $97 million accelerated to 13% growth year over year up from 6% in Q3.
Anthony Noto: We continue to make significant strides in our strategy of leveraging our unique product suite to pursue diversified growth and larger more durable revenue opportunities.
We started to see evidence of this strategy in the fourth quarter.
Anthony Noto: As growth was driven not just by continuing strong organic growth of existing partners and new product adoption by them, but also by notable contributions from increasingly diversified clients, which have launched within the last six months.
Anthony Noto: As mentioned last quarter demand from traditional financial institutions and nonfinancial categories remains strong.
Anthony Noto: While lead times for winning Rfps and ensuing integrations are measured in many quarters not months the transition to modern processing and modern Coors is playing out in real time the way we envisioned it.
Anthony Noto: On the product side, we continue to build and ship a diverse range of products for multiple sectors, most notably we launched and expense management solution in partnership with Mastercard that provides clients in the BW sector with insights into corporate card spend.
Anthony Noto: We launched same day, ECH, which allows account holders faster access to funds and helps mitigate risk tied to transactional delays.
Anthony Noto: And we launched a risk data Mart and data pipeline for our payments risk platform, which is seeing rapid adoption from existing clients.
Anthony Noto: With that let me turn it over to Chris will review of the financials for the quarter and our 2024 outlook I'll.
Anthony Noto: I will return to review our multiyear outlook after Chris shares his thoughts.
Chris: Thanks, Anthony the Q4 and full year 2023 results really proved once again that our diversified and differentiated business model drives sulfides durability and long term growth potential.
Chris: I'm going to walk through key financial highlights and our financial outlook.
Chris: Otherwise stated, we'll be referring to adjusted results for the fourth quarter and full year of 2023 versus fourth quarter and full year of 2022.
Chris: Our GAAP consolidated income statement and all reconciliation can be found in today's earnings release and the subsequent 10-K filing which will be made available next month.
Chris: For the quarter, we delivered record adjusted net revenue of $594 million with growth accelerating to 34% year over year and 12% sequentially from the third quarter's record of $531 million.
Chris: Adjusted EBITDA was $181 million at a 30% margin, which is our long term target margin up over 80% from the prior record quarter of $98 million.
Chris: This represented over 14 percentage points of year over year margin improvement and 12 percentage points of sequential margin improvement demonstrating significant operating leverage across all functional expense lines.
Chris: In fact sales and marketing declined as a percentage of adjusted net revenue for the fifth consecutive quarter.
Chris: Total operating expenses declined roughly 17 points as a percentage of adjusted net revenue year over year.
Chris: Overall this resulted in a 74% incremental adjusted EBITDA margin year over year.
Chris: We achieved GAAP profitability this quarter for the first time with GAAP net income, reaching $48 million and $88 million improvement year over year, and an incremental margin of 55%.
Chris: We saw continued year over year leverage in stock based compensation dropping to 12% of adjusted net revenue versus 16% in the prior year period on our path to our longer term goal of single digit stock based compensation margins.
Chris: For the full year, we delivered $2 1 billion of adjusted net revenue up 35% year over year from 1.5 billion in 2022.
Chris: Adjusted EBITDA rose, 201% year over year to $432 million at a 21% adjusted EBITDA margin.
Chris: Our full year net loss was $54 million.10 per share excluding the goodwill impairment charge taken in Q3.
We exceeded the high end of our most recent revenue and EBITDA guidance by $9 million and $36 million, respectively by leveraging our unique suite of products and services nimble asset and resource allocation as well as our relentless focus on unit economics and risk management.
Chris: Now on to the segment level performance.
Chris: And lending fourth quarter adjusted net revenue grew 10% year over year to $347 million with $226 million of contribution profit at a 65% margin up from $209 million a year ago.
Chris: These results were driven by 43% year over year growth in our net interest income while noninterest income was down by 36% primarily driven by increased losses in prepayments.
Chris: Growth in net interest income was driven by an 82% year over year increase in average interest, earning assets and a 122 basis point year over year increase in average yields.
Chris: This resulted in an average net interest margin of 6.0% to 2% for the quarter up three basis points sequentially and eight basis points year over year I'd also highlight our $2 $9 billion of deposit growth in the quarter compared to the $1 $6 billion of net loan growth on the balance sheet.
The 218 basis points of cost savings between our deposits in our warehouse facilities has resulted in a meaningful benefit to our net interest margin.
It also underscores the benefits of having the option of holding loans on balance sheet, when advantageous and collecting net interest income.
Chris: We expect to maintain a healthy net interest margin and benefit from the continued mix toward deposit funding along with our demonstrated high loan WAC betas.
On the noninterest income side Q4 originations grew 45% year over year to $4 $3 billion and were driven by growth across all three products.
Chris: Even as we continued tightening in underwriting against our stringent credit standards.
Chris: We saw typical seasonality and intentionally planned for lower originations in our personal loans business with originations of $3 2 billion up 31% year over year and down 17% sequentially.
Chris: Our student loans business, our origination volume nearly double year over year and declined 14% sequentially to $790 million.
Chris: Home loans grew by 193% year over year and declined 13% sequentially to $309 million.
Chris: Our personal loan borrowers weighted average income is $171000 with a weighted average FICO score of 744 are.
Chris: Our student loan borrowers weighted average income is $154000 with a weighted average FICO of 781.
Chris: Our Q4 on balance sheet delinquency rates and charge off rates continue as anticipated to normalize back towards pre COVID-19 levels.
Chris: Our on balance sheet 90 day personal loan delinquency rate was 56 basis points, while our annualized personal loan charge off rate was 4.0%.
Chris: Our on balance sheet 90 days student loan delinquency rate was 13 basis points, while our annualized student loan charge off rate was 59 basis points.
We continue to expect healthy performance relative to broader industry levels.
In the fourth quarter, we sold portions of our personal loan and home loan portfolios totaling $1 $2 billion approximately $875 million in personal loans principal and $350 million in home loan principal.
Chris: In terms of the personal loan sales, we closed a previously disclosed $375 million securitization with Blackrock, where we sold both bonds and the reserve and an execution level of 105, 1% and closed an additional $500 million of loans in whole loan form to multiple parties at a blended execution of 105.
Chris: 6%.
Chris: These had similar structures to other recent personal loan sales with cash proceeds at par or at a premium to par and the majority of the premium comprised of the contractual servicing fees that are capitalized.
Chris: These deals included a small loss share provision that is above our base assumption of losses and immaterial relative to the exposure we would otherwise have had if we held balloons.
Chris: In the quarter, we executed $450 million of senior secured financing, which will show up on our detailed balance sheet and senior secured loans held for investment at amortized costs.
Chris: These loans have a VIX term structure and a secured against the underlying assets. Therefore equivalent to investment grade bonds. If you were to do a securitization for the same pool of collateral.
Chris: In addition, these loans are priced at market rates, which not only helps to diversify our balance sheet. But also provides an additional return above our cost of funding and a yield similar to the net interest margin of our loans, which are unsecured now turning to our fair value marks and key assumptions.
Chris: Our personal loans are marked at 104, 9% as of the year end up from 104.0% at the end of Q3.
This was a function of the discount rate decreasing by 103 basis points, which was driven by the underlying benchmark rate declining by 90 basis points and spreads tightening by 13 basis points.
Chris: Notably the benchmark rate change in the spread change our empirical is there actual market observed inputs not assumptions.
Chris: Partially offsetting the decrease in discount rate was an increase in the annual default rate assumption from four 6% to four 8% as well as an increase in the annual prepayment speed assumptions from 'twenty to 'twenty, 3%, which has an immaterial impact on the overall change in the Mark.
Chris: When a borrower prepays, we're still capturing the principal and the impact of the value of the assets is only based on the premium above par at a given point in time, which is very small relative to the principal outstanding.
Chris: We expect default rates to continue to normalize to pre COVID-19 life of loan loss levels of approximately 7% to 8%.
Chris: For our student loan portfolio, the fair value Mark at year end increased to 103, 8% versus 101, 5% at the end of Q3.
Chris: This was a function of the portfolio whack, increasing by 24 basis points in the discount rate decreasing by 57 basis points driven by the underlying benchmark rate declining by 86 basis points and spreads widening by 29 basis points.
Chris: Partially offsetting the decrease in discount rate was an increase in the annual default rate assumption from 0.5% to 0.6%.
Chris: Importantly, the fair value benefits, resulting from interest rate decreases as well as personal loan spread tightening was offset nearly one for one by hedge losses and spread widening in our SLR business.
Chris: So there was no net revenue benefit in the quarter due to discount rate input changes.
Chris: For the full year lending adjusted net revenue grew 21% to $1 $3 billion in this segment.
Chris: <unk> delivered $823 million of contribution profit at a 62% margin.
Moving onto financial services, where net revenue of $139 million increased 115% year over year with new all time high revenue for sulfide money credit card and lending as a service as well as continued contributions from self I invest.
Chris: Overall monetization continues to improve with annualized revenue per product of $59 up nearly 50% year over year versus $40 in Q4, 2022 and up 10% sequentially.
Chris: This is driven by higher deposits and members spending levels and sulfide money greater AUM and monetize volt features and so if I invest in robust growth within so by credit card spend.
Chris: We reached $9 5 million financial services products in the quarter, which was up 45% year over year with 626000, new products in the quarter.
Chris: We reached nearly $3 4 million products and sulfide money $2 4 million and still find us and $3 $3 million in Chile.
Chris: Contribution profit reached $25 million for the quarter, even as we continue to invest aggressively against the ample opportunities to rapidly grow this operating segment with attractive returns.
Chris: Full year segment revenue of $437 million is two six times the $168 million, we delivered in 2022, and we broke even on a contribution basis for the full year.
Chris: Shifting to our tech platform, where we delivered record net revenue of $97 million in the quarter up 13% year over year and 8% sequentially.
Chris: Annual revenue growth was driven by continued monetization of existing clients along with new deals signed in new client segments.
Chris: Galileo accounts grew 11% year over year to $145 million.
Chris: The segment delivered a contribution profit of $31 million, representing a 32% margin.
Chris: We continue to leverage investments made to integrate Galileo and Technosis and position the segment for higher rates of diversified durable growth going forward.
Chris: We expect tech platform revenue to continue accelerating in 2024 with strong margins.
Chris: For the full year. The Tech platform segment grew revenue, 12% to $352 million and delivered $95 million of contribution profit at a 27% margin.
Chris: Switching to our balance sheet, where we remain very well capitalized with ample cash and liquidity.
Chris: In Q4 assets grew by $2 1 billion as a result of $1 $6 billion growth in loans and approximately $400 million of growth in cash cash equivalents and investment securities.
Chris: On the liability side deposits grew by $2 9 billion sequentially to $18 6 billion.
Chris: Importantly deposit growth outpaced net loan growth for the fourth consecutive quarter.
Chris: As a result, we were able to reduce warehouse facilities utilized by over $700 million.
Chris: Resulting in more efficient funding costs as we continue to ramp the portion of loans that are funded by deposits.
Chris: We exited the quarter with $3 $2 billion drawn on our $9 billion of warehouse facilities.
Chris: We grew tangible book value for the sixth consecutive quarter by a record $204 million to nearly $3 5 billion.
Chris: In the fourth quarter, we opportunistically executed the buyback of a small portion of our outstanding convertible bonds, which was additive to our GAAP net income by $14 $6 million accretive to GAAP EPS and additive to our total risk based capital ratio by more than 30 basis points.
Chris: Additionally, we entered into a credit default swap arrangement for $2 $5 billion of refinance student loans.
Chris: These loans were reclassified as held for investment versus held for sale based on the fact that we intend to hold these loans until maturity given the more attractive returns relative to pricing trends, we see in the market today.
Chris: We do not expect to see that price dynamic changing.
The reclassification is consistent with fair value accounting practices and has no overall impact on our revenue and profitability.
Chris: The credit default swap however, does improve capital ratios.
Chris: Is it significantly lowered the risk weighting for these assets and increased our total risk based capital ratios by greater than 1% in the quarter.
Chris: In terms of our regulatory capital ratios, our total capital ratio of 15, 3% at year end improved from 14, 5% last quarter and remains comfortably above the regulatory minimum of 10, 5%.
Let me finish up with our outlook.
Chris: Before going through specific numbers I want to review some of the larger macro assumptions that underpin our financial guide.
Chris: We assume a contraction in GDP in 2024.
The increase in unemployment to higher than 5% and broadly a continuation of uncertain capital markets activity and continued normalization of consumer credit.
Chris: From an interest rate perspective, we are assuming for rate cuts in response to a contracting economy higher unemployment and deterioration in normalization in credit performance with fed funds rate, reaching approximately four 5% by Q4 2024.
Speaker Change: Before I summarize 2024 annual guidance I want to give some high level thoughts by segment.
Speaker Change: 2024 will be a transitional year for <unk> as a tech platform and financial services segments, together will drive our growth and increase from 38% of total adjusted net revenue in 2023 to approximately 50% for all of 2024.
Speaker Change: Specifically, we expect our tech platform and financial services segments, when taken together to grow 50% or more with the financial services segment growing approximately 75% year over year and tech platform growing approximately 20% year over year.
Speaker Change: We are taking a conservative and pragmatic approach toward our lending segment revenue expecting to largely maintain it given our concerns about the 'twenty 'twenty four macro environment as it relates to uncertainty on rates the economy and industry liquidity.
Speaker Change: Therefore, we will manage the lending segment revenue to be 92% to 95% of 2023 lending revenue.
Speaker Change: This very conservative view of lending reflects our choice to limit lending growth below both the much higher level of demand. We have had and expect to continue to see in 2024 and the capacity that we have.
Speaker Change: Fortunately for us the scale and profitability, we have achieved in our tech platform and financial services segments allows us to intentionally limit growth of our lending businesses in periods of uncertainty, while still maintaining an attractive overall growth rate significant profit cash generation and book value growth.
Speaker Change: Even with our conservative view of the lending business, we expect 50% growth in revenue of Tech platform and financial services combined and to add at least $2 3 million new members in 2024, which represents 30% growth.
Speaker Change: Within lending our personal loan originations could be relatively flat or down versus 2023, while student loan originations could grow just modestly and home loans growth could be correlated with rate decreases.
Speaker Change: In terms of capital and liquidity, our total risk based capital ratio improved to 15, 3% up from 14, 5% in Q3, demonstrating our ability to effectively manage our balance sheet and capital ratios through growth in GAAP net income opportunistic capital efficiency transaction and loan sales.
Speaker Change: In terms of our lending capacity, we have the ability to originate $18 billion to $20 billion in loans in 2024, while keeping capital ratios well north of regulatory minimums and that's based on growth in tangible book value amortization of existing loans and previously announced loan sales.
Speaker Change: To be specific we expect to generate $300 million to $500 million of tangible book value in 2024, which translates to approximately $2 $4 billion to $4 billion of incremental capacity.
Speaker Change: Second loans are amortizing or paying down an annual rate of $8 4 billion.
Speaker Change: Third we have our previously announced $2 billion forward flow agreement. In addition to a number of on the run loan sale transactions, we expect to execute similar to the sales achieved in Q4.
Speaker Change: And lastly, we have headroom in our capital ratio.
Speaker Change: Having said that we intend to originate less than the $18 billion to $20 billion in capacity and this is based on the factors I outlined previously.
Speaker Change: With that let me turn to specific guidance.
Speaker Change: For 2024, even with our conservative view of the lending business at 92% to 95% of 2023 revenue, we expect 50% growth in revenue of Tech platform and financial services combined and to add at least $2 3 million, new members, which represents 30% year over year growth.
Speaker Change: We anticipate adjusted EBITDA margins of approximately 20% in the first quarter ramping to our long term target margin of 30% by year end, which equates to a range for 2020 for EBITDA of $580 million to $590 million.
Speaker Change: For the full year 2024, we expect expenses under the EBITDA line to be roughly equivalent in aggregate in dollar terms compared to 2023, excluding the 2023 reported goodwill impairment expense.
Speaker Change: That equates to full year GAAP net income in the range of $95 million to $105 million and GAAP EPS in the range of seven to eight.
Speaker Change: We expect growth in tangible book value of $300 million to $500 million for the year and to end the year with a total capital ratio north of 14%.
Speaker Change: For Q1, 2024, we expect to deliver adjusted net revenue of $550 million to $560 million adjusted EBITDA of $110 million to $120 million and GAAP net income in the range of $10 million to $20 million.
Speaker Change: Now, let me turn it back to Anthony for thoughts on our medium term outlook.
Anthony Noto: Given the number of milestones we have achieved since we transitioned the strategy of the company when I joined six years ago as well as the fact that 2024 will be a transitional year. We started to be helpful to provide a longer term perspective beyond 2024 for.
Anthony Noto: For the 2023 through 2026 time period, we see 20% to 25% compound annual revenue growth, assuming no meaningful change in the macro environment and no significant new business launches or acquisitions, such as small to medium business checking and savings were small and medium business lending.
Anthony Noto: The broader asset management business and.
Anthony Noto: <unk>, a broader credit card portfolio, new technology verticals for the technology platform business or new geographies.
Anthony Noto: The $20 to 25% compounded annual revenue growth from 2023 through 2026 assumes a compounded annual growth rate of 50% for financial services revenue.
Anthony Noto: Mid twenty's percent protect platform revenue at mid teens for the lending segment revenue.
Anthony Noto: Simply put this growth only reflects the benefits of the investments we've made in our existing businesses paired with continuing to build brand awareness trust and adoption by new members and driving cross buy from existing members there.
Anthony Noto: The earnings power associated with this growth is notable and could drive between 55, and <unk> 80 per share and GAAP EPS in 2026.
Anthony Noto: Moreover, we see 20% to 25% EPS growth beyond 2026, reflecting both the continued growth of the core businesses. We just described plus the added benefit from new business lines launched in the 2024 through 2026 time period that begin to scale and impact beyond 2026.
Anthony Noto: Make no mistake, the long term opportunity for so far remains unchanged and we continue to believe we are just getting started there.
Anthony Noto: There are endless opportunities for investment and growth and we remain focused on the right types of durable growth for the stage of our company and within the environment in which we operate.
Anthony Noto: In summary, we cannot be more proud of the results of so far in 2023, we're even more encouraged by the prospects ahead of US we have demonstrated the benefit of having a member centric approach and being a one stop shop to help our members get their money right.
<unk> and having a diversified high growth set of revenue streams multiple cost efficient sources of capital a keen focus on underwriting high quality credit and a high degree of operating leverage as we scale the business to be the winner that takes most and the digital financial services sector with that let's begin the Q&A.
Speaker Change: Thank you.
Speaker Change: I would like to ask a question. Please press star followed by one on your telephone keypad.
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John Hecht: Our first question today is from John hedged.
John Hecht: Jeffrey John. Please go ahead your line is open.
John Hecht: Yes. Good morning, guys. Thanks, very much for all the details about the intermediate term goal.
John Hecht: Thank you taking my question.
John Hecht: You guys are taking a fairly.
John Hecht: Fairly conservative look at the economy, and I think thats dictating or guiding.
Andrew Jeffrey: How you want to balance the growth between the lending segment in the non lending segments. This year Anthony I was just wondering.
If things kind of pan out a little better than expected with that would that change the trajectory and then how do we think about kind of lending segment versus non lending segments as we get into next year.
Andrew Jeffrey: I think if the economic backdrop is vastly different than it will change the trajectory both up and down I would think about that both ways could be worse it could be better.
Andrew Jeffrey: As I think about the different businesses, some things that could give us tailwind if we do see great declines our whole loan business really would benefit from refinancing in the mortgage business that would benefit from greater purchases right now rates are quite high and stifle the growth in that market, but that would be a benefit we really love to home loan business for a couple.
Andrew Jeffrey: Reasons number one it's probably the largest the most emotional financial decisions people are making their lives and if we're going to be there for our relationship with our members we have to be there for that decision.
So as one of the most risky if someone over pays for a house or it takes on too much debt and their mortgage because eliminate the ability to have discretionary income to invest in if you do that in your twenty's at various it's really hard to catch up later, so it's a really critical product for us delivering on our mission.
Andrew Jeffrey: Also great economic product and we largely to agency mortgages, which means we use our capital just to underwrite it but then we can sell it to the government agency windows, which benefits balance sheet quite meaningfully. So thats one business that will be capital light generally with your agency mortgages that would benefit from lower rates.
Andrew Jeffrey: The second business that would benefit from that as those rates come down you will see more people looking to get yield and other products like invest.
Andrew Jeffrey: And offset to rates coming down some may believe that our Sofia <unk> part may not grow as fast what I'd say is from an interest rate standpoint, we are committed to providing a top tier <unk>. In addition to no fees and all the functionality that we provide with two day early paycheck.
Andrew Jeffrey: <unk> earn reward points and two person to person payments and bill pay and all the other benefits of that product, but because we are an originator and we do generate yield against those deposits as you know six 1%. This quarter, we're going to be able to maintain a competitive advantage and werent right, we give us money.
Andrew Jeffrey: Tony.
Tony: I would say if the rate cuts are in fact six times instead of what we're forecasting at four I do worry about the economy I don't see a world in which we have fixed rate cuts and we have a strong economic backdrop the market quickly switched from.
Tony: Late October going from higher for longer fixed rate cuts in a matter of 90 days that tells you how bifurcated that the market is and how concerning things can switch. So quickly. So we wanted to be conservative in our outlook as it relates to risk we have the benefit of being able to be conservative in our outlook because of what we've done in growing that.
Tony: Services segment, and the technology platform segment and now that the financial services segment is pro forma contribution profit basis, we can grow even faster and it doesn't drive our losses up we're still insignificant investment mode. There because of the acquisition cost on invest and on credit card and also fund money, but overall its profitable and we can grow it.
Tony: <unk> faster and benefit from that high margin revenue the margins increasing in favor of the tech platform, we invested meaningfully over the last three years in the Tech platform. We're now on margin expansion mode and revenue acceleration mode. So.
Tony: Having all three businesses a direct result of our broad based strategy of giving consumers what they need to get their money right, but it also results in more durable and diverse revenue streams in the situation, where the economy is weaker than expected losses will go up we are seeing trends across the industry. The all bank data is very telling and charge off rates.
Tony: Delinquencies as well as reserves for losses that indicate that normalization is happening across the spectrum and we wanted to be prudent make sure we factored that into our risk profile.
Next question Keith.
Tony: Our next question today is from Andrew Jeffrey Suntrust. Andrew. Please go ahead. Your line is open.
Andrew Jeffrey: Hi, Good morning, I appreciate you taking the question.
Andrew Jeffrey: Anthony I Wonder if you could talk a little bit about the company's anticipated balance between growth I'm thinking specifically in the financial product segment and profitability you've achieved at least this quarter your long term margin targets.
Andrew Jeffrey: And extensively you continue to generate really good LTV to CAC. So are there any factors that limit growth in terms of the financial products segment or could we actually see that accelerate as the business becomes a little more balanced away from lending.
Speaker Change: Thank you for your question.
Speaker Change: The contribution margin in that business.
Speaker Change: Breakeven for the full year and improved meaningfully in the fourth quarter.
Speaker Change: I would say the <unk>.
Speaker Change: Major limit on our growth in the financial services segment is how much we want to spend on building awareness and marketing we have a really good customer acquisition cost profiles in the businesses.
Speaker Change: So if I money, it's got the best payback period, but we're doing really well and invest investors Shouldnt go to sleep on our invest business as we mentioned in the call. The AUM increased more than 50%, we launched alternative asset classes. Today, we continue to give consumers access to products that are typically only available for the wealthy and we're bringing them to main street, we did that.
Speaker Change: With Ipos and now with alternate investments today, which will continue to build out also.
Speaker Change: And then the credit card business, we really hunker down there and pulled back to make sure. We have the credit profile of our market segmentation right and most importantly, like we did a money make sure we have the unit economics, right and I feel like we've made great progress there. So within that segment. It really comes down to how much we want to spend and driving marketing their products have payback periods are anywhere from <unk>.
Speaker Change: 12 months to 36 months. So ultimately we wanted to manage the overall business to a 30% incremental EBITDA margin and so we will invest up to that point and thats how to think about the limited growth, but in terms of the opportunity if we wanted to.
Speaker Change: Spend more and not hold ourselves to that balance between growth and a 30% incremental EBITDA margin would you grow the faster the market the product market fit is so great and just a question of how much you want to dial it up or down.
Speaker Change: Thank you.
Speaker Change: Our next question is from.
Speaker Change: Betsy Smith from Jpmorgan. Please go ahead your line is open.
Reginald Lawrence Smith: Hey, good morning, Thanks for taking my question.
Reginald Lawrence Smith: Chris I think you said that personal loan charge offs were 4% I believe for the whole year I was wondering.
Reginald Lawrence Smith: I'm wondering if you could tell us what that was for the fourth quarter.
Reginald Lawrence Smith: I guess, my math will totally be off.
Reginald Lawrence Smith: <unk> also like fleet, one through the first three quarters of the year.
Reginald Lawrence Smith: Would imply like a 6% loss rates and the <unk>.
Speaker Change: Fourth quarter, I don't know if I'm wrong more like.
Speaker Change: Any color there would be helpful.
Speaker Change: Yes.
Speaker Change: Hey, Rajeev in terms of the fourth quarter and what you heard in my prepared remarks was accurate for the fourth quarter. So our NCO rate for the personal loans business was 4.0% that was up from 344% in Q3 of 2023 as Anthony alluded to we do expect to continue normal.
Speaker Change: <unk> towards pre COVID-19 levels and life of loan losses in the 7% to 8% range.
Speaker Change: Next question. Thank you.
Speaker Change: Our next question is from Dan Dan That's from Matthew Hi, Don. Please go ahead. Your line is open.
Thank you hey, guys excellent quarter nice work.
Dan: Anthony maybe question for you and provided nice outlook on profitability into 2026 can you maybe give us your comfort level on the earnings long term earnings power of the business.
Speaker Change: Thank you.
Anthony Noto: Yes, I think theres two important indicators for the long term earnings power of the business, which is what we've done to date and then what's the sort of incremental way to think about profitability. So 30% EBITDA margin in the fourth quarter is a huge milestone for us I cannot tell you. The number of people that I mentioned, our long term margin at 30%.
Anthony Noto: To that word naysayers, there so I'm really proud of the scale that we've achieved over $2 billion of revenue are particularly proud of what we've done from a profitability standpoint have 35% revenue growth, which accelerated with a 30% actual EBITDA margin and GAAP profitability shows you the earnings potential of this business.
Anthony Noto: The margin could be much higher than 30%.
Anthony Noto: We're sticking to that is our long term margin today.
Anthony Noto: Think about 2000.
Anthony Noto: 26 in that time period.
Anthony Noto: Our margin profile in the thirties, as what would help us get there and we're making it achievable. If you think about our businesses individually and collectively as a series of unit economic businesses, where were architected the revenue per account.
Anthony Noto: Variable cost per account through variable profit margin.
Anthony Noto: <unk> exceeds the customer acquisition cost by a meaningful margin and then pays back after 12 months to 24 months as you scale that variable profit per account youre going into a fixed cost base. Once you get that above the fixed cost base. The incremental unit economics, just drops to the bottom line and our unit economics are greater than 30%, which means our long term margin.
Anthony Noto: It could be greater than 30%, but we're going to stick with that right now for our long term margin.
Anthony Noto: It's quite surprisingly achieved it so really while we're still growing so that should be a great indication of what the future could break, but we're not going to push it higher than that because we want to make sure. We hold ourselves accountable to some constraints on what we invest in while balancing growth versus profitability and marching towards higher Roe and greater tangible book value growth.
Speaker Change: Next question please.
Speaker Change: Our next question is.
Speaker Change: Jeff Adelson from Morgan Stanley. Please go ahead your line is open.
Jeff Adelson: Hey, Thanks, guys I appreciate you taking my questions.
Jeff Adelson: Just wanted to dig in on follow up on <unk> question, a little bit of data on the credit on the personal loan book I know you did modestly increase the life of loss expectation there to four 8% this quarter.
Speaker Change: Yes, when we look at some of the ABS data.
Speaker Change: Does it look like.
Speaker Change: Data continues to get worse.
Speaker Change: And we have other lenders out there in the consumer world that have flagged that.
Speaker Change: Losses should also get worse. This year. So I'm wondering if you could help us frame, where you have your expectations for 2020 for credit on the loss side going there.
Speaker Change: Is there a world where you see that overshooting, the kind of four 8% life of loan expectation this year or do you think that.
Speaker Change: If you could kind of hold there and then.
Follow up I'm wondering should also provide the dollar benefit that you got this quarter or revenues this quarter from the from the new secured financing you announced thanks.
Speaker Change: Sure so on the actual.
Speaker Change: <unk>.
Speaker Change: Losses, I, just want to be clear when I when I mentioned, the 4.0% NCO rate that was an annual loss rate.
Speaker Change: Where we expect it to normalize too.
Speaker Change: 7% to 8% life of loan, which translates closer to a.
Speaker Change: 485 ish percent annualized loss rate.
Speaker Change: Which we expect to occur in the first half of 2020 for the reason that we get confident that we're going to peak out at those levels is that if you look at our <unk> for Q4 of 2023 about 15% of those net charge offs are related to credits that we have removed from the system and that.
<unk> is about 3% of the overall <unk> on the balance sheet, that's expected to get down to less than 1% by the end of.
Speaker Change: By the end of the year in terms of your second question around the benefit from revenue from secured financing that we announced we did about $450 million in the quarter as I alluded to in my prepared remarks, the actual revenue generation associated with that in period was immaterial given time of.
Speaker Change: Of sales.
Speaker Change: And the only other thing I'd add is that our backdrop for credit and credit performance and normalization is tied to our economic outlook, obviously in a more challenging economic outlook those assumptions would likely not hold to be true and we obviously manage the business differently I would say the one thing that's been true over the last six years that I've been here is whatever we.
Speaker Change: Thought would happen with the economy isn't actually what's happened with the economy, and we have to be nimble and smart and read all the macroeconomic data points in our own business performance has to adjust accordingly, so I don't want anyone to think that the outlook that we have is in all economic backdrop is not as for the very specific one that we outlined.
Speaker Change: Yeah.
Speaker Change: Next question please.
Speaker Change: Thank you. Our next question is from Michael <unk> from Goldman Sachs. Michael. Please go ahead.
Speaker Change: Yes.
Michael: Hey, good morning. Thank you very much for the question I appreciate all that revenue guidance by segment for 2024 I was just wondering if you could talk a little bit about the contribution profit outlook key things to consider.
Michael: For each segment.
Michael: Any specifics around 2024 by segment would be helpful. Thank you.
Michael: Yes.
Michael: Think about the lending business is meaningfully profitable very high contribution profit margins there.
Michael: For those who've been following us for a long time, you'll remember the comments that we've made about ensuring that our loans have a 40%, 50% variable profit margin per loan.
Michael: Those loans will be durable through the cycle and we remain focused on achieving that.
Michael: The second thing I'd say is on the technology platform the margins contracted there quite meaningfully prior to this year as we invested in moving to the cloud from on Prem and we invested in new architecture, and new products and services and we're now seeing the benefit of those investments coming in higher revenue and more operating leverage and you saw a nice contribution profit margins.
Michael: Spansion, there, which you can continue to see with more revenue.
Michael: The business that once you exceed your fixed cost incremental profitability is quite meaningful and then the financial services segment is a lot harder to talk homeland Jesely because theres. So many different businesses there.
Michael: Chris said on the call that we're losing over $100 million a year on from a contribution profit standpoint across the different businesses. We're investing despite the fact that we achieved $25 million in the quarter contribution profit, we're still losing meaningfully in businesses like credit card and Sofia invest because of the acquisition cost there but.
Michael: Also because of the fixed costs are not covered by the variable profit yet.
So that business has a lot of upside and contribution profit we have to think about it by business and where those businesses are in their development cycle and so invest in credit card or very early in their investment cycle and therefore, losing a lot of money. So find money is now variable profit positive and carrying the weight of the profitability of their overall business.
Michael: Also have some ancillary businesses in there that are high margin that are small dollars that contribute nicely, but they're not they're not the biggest contributor to that area.
Speaker Change: Next question. Thank you.
Speaker Change: Our next question is from Vincent <unk> Stephens Vincent. Please go ahead. Your line is open.
Vincent Albert Caintic: Hey, good morning, Thank you for taking my questions I appreciate all the details.
Vincent Albert Caintic: Going back to the breakout expectations I want to focus on.
Vincent Albert Caintic: Sort of your expectations for how that affects loan sales.
Vincent Albert Caintic: The pipeline looks like for those how should we expect.
Vincent Albert Caintic: Acceleration of loan sales in 2024.
Vincent Albert Caintic: <unk> continued to go down.
Vincent Albert Caintic: On the fair value Mark.
Vincent Albert Caintic: Does the current fair value marks actually reflect the floor rate cuts already or should we expect that.
Discount rates it decline and therefore increase the great Valley markets as time goes on thank you.
Speaker Change: Yeah sure in terms of the overall demand for our loans. The demand remains extremely robust you saw that we did over $1 billion in sales in Q4, 875 of which came from unsecured personal loan sales with a $375 million securitization.
Vincent Albert Caintic: <unk>.
Vincent Albert Caintic: Sales in whole loan format.
We do expect demand to remain robust we're seeing that already in Q1 as a reminder, we do have a four $2 billion forward flow arrangement in 2024 with a party that has bought loans from us over the course of the last few quarters that will stay intact throughout the year and then we do expect.
Vincent Albert Caintic: Robust demand on other on the run low on transactions that we've done akin to what we did in Q4, so overall really good demand.
Vincent Albert Caintic: Strong execution levels as demonstrated in my prepared remarks.
Vincent Albert Caintic: In terms of the fair market value marks do these include the four rate cuts already are.
Vincent Albert Caintic: Our marks are reflective of a point in time, so as of the end of Q4.
Vincent Albert Caintic: The marks reflect what the underlying benchmark rate as of December 31.
Vincent Albert Caintic: So.
Vincent Albert Caintic: The four rate cuts going forward going forward.
Vincent Albert Caintic: The other thing I'd say is as we think about our durability of our loans, we have continued to reduce our credit box.
Late December we have reduced our underwriting by eliminating what we call tier six and seven which is the higher end of our FICO band.
Vincent Albert Caintic: Those that know the company, we underwrite 680, FICO and higher than our average is much higher than 680 in the mid sevens as we talked about earlier.
Vincent Albert Caintic: But as we progressed through the year, we have reduced our credit box and we continue to do so and in December making a relatively big change at $6 seven so that our loans are durable through the cycle, whether we hold them on balance sheet or we sell them and then the only other thing I would add just to follow on to my point around the March included four rate cuts as you all know.
Vincent Albert Caintic: But we hedge interest rate exposure on our loans, so when interest rate drops the value of the loan increases, but thats offset by hedge losses.
Vincent Albert Caintic: Similar to what happened in Q4, we saw a meaningful interest rate.
Vincent Albert Caintic: Reductions, but.
Vincent Albert Caintic: But we also had meaningful hedge losses that offset that.
Vincent Albert Caintic: Yes.
Vincent Albert Caintic: Thank you next question. Our last question, we have time for today is from Dominick Gabriele from Oppenheimer. Dominic. Please go ahead. Your line is open.
Dominick Gabriele: Hey, guys. Thanks, so much for the question and the color across the call.
Dominick Gabriele: <unk>.
Dominick Gabriele: Maybe Anthony you can talk to us.
Dominick Gabriele: Or Chris through the assumptions that lead to your mid 20% revenue growth within the tech platform that'd be really helpful.
Dominick Gabriele: May be incurring as possible.
Dominick Gabriele: Breaking it down by the new client wins pipeline for deals customer adds anything you can provide I feel like this.
Dominick Gabriele: Targets likely going to be significant importance moving forward.
Speaker Change: Thanks, so much.
Chris: Yeah, we're not going to get into that level of detail we're in market in conversations with <unk>.
Chris: Potential partners across the spectrum of the diversified customer base, we have.
Chris: Ongoing dialog with everything from government related deals for child support and benefits from the federal government all the way to new consumer financial services offerings from large established nonfinancial services brands, all the way to big large traditional banks in our country.
Chris: The drivers of the business are quite simple, we havent underlying payment processing platform that each should think about generating revenue based on two factors one getting paid.
Chris: Based on the transactions that occur in that platform the volume of those transactions and the price for this transaction. In addition to the API Apis that we provide.
Chris: Within the technology processing platform, we provide epi for account opening for Bill pay for two day early paycheck for person to person payments.
Chris: For payment risk platform fraud capabilities, and so different partners used different Apis and the more they use the more we get paid but it also drives the more transactions. In addition to that we have other products like connector, which is a natural language.
Chris: That uses machine learning, we also have a product called payment risk platform, where we're helping people decide instantaneously on the risk of the transaction and whether or not it should be authorized or not and we get paid for each one of those those authorizations. In addition to that we have patents as banking core which is a much larger.
Chris: <unk> decision for any institution used to thinking of of course, an operating system or <unk> capability.
Chris: For one big reason, we have a lot of products and so far those products all have different operating systems, we want them to run on one platform one operating system and we want that system to the extent, we want to new products that don't even exist today.
Chris: In the financial services industry, many banks many financial companies have many quarters in fact, they probably have more quarters in products because many of them were aggregated roll ups of other banks that had different quarters for checking and savings not to mentioned that different quarters for private credit card versus checking and savings or even for loans and so technically.
Chris: <unk> enables our company to have one platform running different quarters for different products and it's extensible into different areas. One example of that is <unk> buy now pay later, we launched buy now pay later with Galileo and Technosis and so far it was the first product on all three technologies and we did it in a very short period of time and it's a great product.
Chris: That is easier for the consumer use and can be authorized REIT in the application itself and so that is another driver of the overall revenue streams. We also do services for digital solutions, we do build front ends for apps.
Chris: Isn't to other types of digital services as it relates to that.
Chris: Product development. So there is no one answer to your question other than more partners more accounts and more products per account, which drives the revenue from those factors that I just laid out.
Chris: Ends our prepared remarks and questions.
Chris: I wanted to finalize our comments today by.
Sharing with you some final thoughts.
Speaker Change: 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 industry throughout the year, but to deliver record results.
Speaker Change: We feel more glass by more than seven 5 million members that have been so critical in making our vision of being a one stop shop for all your financial needs become such an amazing reality.
Speaker Change: The benefits of our strategy, resulting in a uniquely diversified business that is unmatched by any digital only provider and our scale capabilities and competitive advantages not only positioned so far to be the winner in that takes most in this sector transition of financial services. The digital but also provide greater durability through a market cycle.
Speaker Change: Excited about where we are today.
Speaker Change: Even more excited about where we can go from here. Thank you for dialing into our call and we look forward to talking to you next quarter.
Speaker Change: Goodbye.
Speaker Change: Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Yeah.