SoFi Technologies, Inc. (NASDAQ:SOFI) Credit Suisse 26th Annual Technology Conference November 30, 2022 4:20 PM ET
Chris Lapointe – CFO
Conference Call Participants
Moshe Orenbuch – Credit Suisse
Timothy Chiodo – Credit Suisse
So good afternoon, everyone. Thanks, and – welcome, and thanks for joining us here at Credit Suisse’ 26th Annual Technology Conference. I’m Moshe Orenbuch, joined by Tim Chiodo, and we’re very, very pleased to have with us SoFi this afternoon.
So with that, I’ll pass it over to Tim.
Sure. Thank you, Moshe. So thanks, everyone, for being here with us this afternoon.
Q – Timothy Chiodo
I’m going to start off with a few questions on the financial services or the Neobank segment. So the first one that we want to talk a little bit about is user activity. So you report the accounts and the members more on a cumulative basis rather than an active user basis, which it helps with the quarter-over-quarter growth at times, but it makes it somewhat more challenging to think about modeling ARPU, if you will. But maybe you could just provide some context into the underlying engagement of the user base that would help us and help investors with that overall user number.
Yes, sure. And thanks for having me, Tim and Moshe. I really appreciate it. So what I would say in terms of overall, we certainly have high engagement numbers through our financial services business as well as through our member products and relay products. But my view is that user activity on a day-to-day basis or daily activity is not the right metric to really look at, given the lifetime value of our members.
What we’ve learned is that we are here to create a one-stop shop and create lifetime value with our members. And if you look at the LTV cohorts of each of our members, we’ve learned that not – our members don’t generate value for us just on day one of becoming a member or in the first product that they take out, but also on the second, third and fourth product.
And if you look at those curves, we’ve seen an increasing amount of monetization of those members over time. So we think that the true way to value our business is by looking at our member base. And by looking at user activity at any single point in time is not really aligned with our overall jobs to be done of creating that one-stop shop and lifetime value with a member.
Okay. Thank you, Chris. Appreciate those points around the engagement. Somewhat related to that, which is a really important high-engaged type of customer within your user base is the direct deposit customer. So you talked about in Q3 earnings, we thought some pretty impressive stats around roughly $5 billion in total deposits. 85% of that coming from direct deposit members and 50% of that was newly funded accounts. So maybe you could just talk a little bit about direct deposit attach. How are you doing it? It seems like you’re having a lot of success with it. How are you driving that?
Yes. So we’ve had great success. As you mentioned, we reached over $5 billion of deposits with over 85% of those deposits coming from direct deposit members. So we’re really excited about that as it provides a low-cost source of funding for our business. In terms of what’s driving that growth, we’ve really focused on creating a product that caters to folks who do direct deposit with us.
And we’ve tried to embed direct deposit throughout our entire product ecosystem in everything that we do. And have created products that work better when they’re used together, especially when someone does direct deposit with us. The best example of that is through SoFi Plus, which we just rolled out and is basically an amalgamation of all of the member benefits that are available to our customers, but it also provides our members with 2x rewards as well as 3% cash back on their credit card if they use direct deposit. So that certainly helped drive some of the growth.
What has also driven the growth is our top-tier APY, both on checking and savings. Right now, we have a 2.5% APY on our checking business. I don’t know another bank out there who offers anything over 1% and the 3.25% that we just announced yesterday on savings is also in the top tier. So that’s a key and critical driver to continuing to drive growth there. And what I would say is we’re not even at the peak or the ceiling of what we can offer in terms of APY.
And the reason for that is because our alternative cost or sources of funding, whether that’s through warehouse or other means, is 200 to 300 basis points higher than what we’re offering our consumers and members, and we have significant room to grow.
Right, in terms of the alternative or the mix shift towards this, even if at a higher APY is still cheaper than the alternative. Also, Chris, I think you made some good points around the interwovenness, if you will, of direct deposit across the multiple products, whether it be lending products or to your point, the high APY on the savings or the checking account.
Let’s move on to CAC. And this is kind of related to this. So part of it just a general question in terms of the cost of acquiring customers in terms of other competitors, maybe bidding in certain similar channels for customers, if that’s changed at all over the last 12 months. But the follow-up and more detailed question is, are you shifting some of that money towards enhancing engagement of existing customers relative to just trying to bring new ones in?
Yes. So what I would say is we’re focused on both, both in terms of new user and member acquisition, but also engagement and having people convert with other products or whether that’s direct deposit taking out a second, third, fourth product.
So our overall strategy and mix shift in terms of allocation of marketing dollars hasn’t changed. We’ve made a tremendous amount of progress in terms of marketing efficiencies over the course of the last few years. And that’s primarily driven by significant growth in brand awareness, growth in our overall cross buy rates and growth in our financial services products.
When we think about what goes into how we acquire a member or how much we’re willing to spend on a member, it’s not just looking at the expense and putting it in the product P&L and seeing what the unit economics are, we’re looking at the lifetime value of that member and what can be achieved over the course of that member’s lifestyle – lifetime.
And what we’ve learned is, over the course of the last several quarters, we’ve seen meaningful growth in the LTV of our financial services members, particularly in our SoFi Checking and Savings business where we focused on direct deposit and bringing those customers on board.
What that’s allowed us to do is provide us with more flexibility in terms of CAC dollars – spending more in CAC to drive overall membership in financial services, and that has had downstream impacts on our lending business. If you look at our overall CAC and lending from people as a result of all the cross-buy we’re seeing, that’s down 8% to 9% both year-over-year and sequentially, and that’s a result of this focus on brand awareness and financial services.
Well said, Chris, thank you so much on the CAC and also the sort of implied LTV to CAC commentary there. I think investors appreciate that. Before we move on to the Lending segment, and I’ll turn to my colleague, Moshe. We want to just ask one more, clarify when you put something out the other night related to this, but I just think given it’s so topical, let’s just hit this for the investor community in this form. Maybe just talk about some of the recent regulatory attention to crypto and some of the headlines there. And maybe the, I would call it, small exposure that your business has there?
Yes. What I would say on that front is that we take our regulatory and compliance obligations extremely seriously, both at the bank level but also at the bank-holding level and particularly as it relates to digital assets. What I would say is that we believe we’re in full compliance of the mandate of our bank and all applicable laws. And to your point, the overall exposure that we have to cryptocurrencies is insignificant. If you look at our 10-Q filing, the amount of revenue that we generated in our brokerage business was $3.85 million. So less than 1%, and crypto is only a subset of that $3.85 million.
In addition to that, we have about $130 million of our members’ crypto assets on our balance sheet that are held at other custodians. But we’re doing that to facilitate their trading and there’s no exposure to us. So overall, very minor exposure from a crypto perspective, but we are working extremely closely with regulators and have a very constructive dialogue as it relates to all of these matters. And then the last thing I would say is we don’t have any exposure to FTX or – and we don’t partner with them.
Perfect. It is worth taking a minute to clarify that for people that might be listening in on the webcast, it’s de minimis, less than – well less than 1% of revenue, no lingering exposures and really – which is the reason why you put the filing out the other night.
All right. Last one for me on the neobanking segment. When we think about an example of a neobank that has a full product suite, SoFi is a great one, right? Maybe one of the most full product suites out there of any neobank in the U.S. But there’s still probably some more products that you could add over time. Could you just talk about maybe what you don’t have?
Yes. I think we have a lot of the table stake items in the financial services space that we like to have. We recently rolled out margins earlier this year. We’ll come out with options on the invest side. And then there are a number of other features and services that we’ll be able to offer through financial – through our financial services ecosystem.
One of the things that comes up often with our customers and others on a – almost on a day-to-day basis is SMB banking and lending and whether we’re going to get into that. It’s certainly something that we will explore. It’s not something that we’re going to do right now. But everything that we’re doing right now with the consumer and everything that we’re doing on the technology front, we want to be able to do not only with consumers, but also with businesses who also have similar types of needs.
So over time, you’ll see us making investments in that space. There’s a huge opportunity on the consumer front right now. So it’s not something we’re focused on. And we are also a brand-new bank and need to continue to prove to the regulators that we’re living up to what we put in our application and in our existing businesses. But over time, we expect to be able to enter into that space as well.
Excellent. We agree the SMB digital banking opportunity is an important one. But to your point, though, for now focused on U.S., but it’s something that’s more of a potential call option down the road?
Okay. Great. With that, I think we can shift to the Lending segment, and I want to pass to my colleague, Moshe Orenbuch.
Great. Thanks, Tim. So Chris, the personal loan segment has been in the area that’s been consistently the highest – recently the highest level of originations and has been taking market share within its industry. Just talk a little bit about what has given you the ability to gain that market share and take price in that segment.
Yes. So what I would say on the personal loans front, we’ve had really good success. Our overall market share in our credit profile, the number we’re trying to attract was about – was north of 6% this past quarter, and that’s up from 4.5% just a year ago. And what’s even better is that we’ve been able to grow originations and outpace the market while maintaining really strong credit trends. What I would say is what’s driving some of these things, it comes down to the fundamentals, product, pricing, placement and promotion, the 4 Ps.
On the product front, we truly believe that we have a differentiated product that goes anywhere from how quickly someone can get a loan. Right now, someone can apply and get funded within two days, which is a really tough hurdle and bar to meet. That’s down from eight days just a few years ago. So we’ve made significant progress there. We offer sizable loans.
Our average balance right now is – origination balance is about $30,000. We offer flexibility in terms of terms and structure. And then we also provide additional benefits to our members who are willing to set up auto pay or do direct deposit, which further reinforces that Better Together concept that I was talking about earlier.
So certainly, from a product perspective, that’s helping drive it. On the pricing point, we’ve come a long way since 2018 when we first joined – we only had the ability to price 50% of our personal loans at one price and 50% at another price. We’re now able to price across dozens of sells across multiple grids and be able to dynamically move pricing on a day-to-day, week-to-week basis.
So that certainly also helped in attracting the right type of member and continuing to grow that origination base. And then finally, the last thing I would say is we’re continuing to hone our overall credit models, which has been a huge investment area for us over the course of the last several years.
And it continues to improve with all of the proprietary data that we’re getting from our members. We seek to underwrite to free cash flow versus FICO score and the more data that we have about someone’s income and spend behavior, the better we’re able to serve them. So I think those three factors combined is what’s really helping drive that growth.
Turning to the student loan area that was the basically the business on which SoFi was originally founded and was your largest origination category up until the issue with respect to the student loan moratorium, now that’s been extended. So how do you think about that product in the next several quarters? And given where interest rates are now, how do you think about that product even once that moratorium is over?
Yes. So what I would say is rewinding back to 2019 when the business was fully operational, we were originating $2.4 billion per quarter, so almost $9.5 billion on an annual basis. Obviously, the rate environment was a bit different at the time, but Fed funds was still north of 1.5%. The last several quarters, we’ve been operating in the $400 million-ish origination volume level, so less than 25% of where we were. What we were anticipating is that there was going to be definitive expiry of the CARES Act in January of 2023.
And what we had contemplated in our guide was that we would see an acceleration in demand in the back part of the quarter, similar to what we saw last year at this time. And that revenue that would be generated from an uptick in demand, which came at a higher incremental margin than the contribution margins that we’re operating at right now.
So what I would say is it’s certainly going to have a near-term impact on the business. We did expect several weeks of outsized demand. But what I would say is there’s still a third left in the quarter and we’re in a very, very fluid market environment.
And we’ll do everything we can to make up lost ground just like we have. Looking forward to 2023, right now, what’s contemplated is that this could go until end of June, at which point, there’s another 60 days before repayments actually even start. So it would have an impact. But again, given the diversification of our business model and our ability to allocate capital effectively and execute, we feel like we’ll have another strong year of growth as well as profit improvement in the same way that we’ve done in the last 2.5 years.
Thanks for that. The home loan business, it’s been difficult, both at an industry level and for SoFi. Could you just talk a little bit about, number one, you remain committed to that business. What is it that you kind of need to do to get to the point where you want to be? And how that could evolve over the course of the next year or so?
Yes. One of the reasons that we’re in the home loans business in general is because taking out a home loan or purchasing a home is one of the most important financial decisions someone will make in their financial lives. So we need to be there for our members in those situations and every day and between. So we will figure out how to operate in this business while delivering great value to our members and also to shareholders. What I would say is we are squarely in a purchase market relative to where we were a few years ago, where we were in a refinancing market.
In a purchase market, one of the things that allows people to succeed is you have to have phenomenal back-end operations, and you need to be able to fund a loan in 30 days or less, no if, ands or buts. And that’s a big shift from where we were in the refinancing business where you could fund within 90 days. So right now, we’re partnering with folks on the back end from an operations perspective, and they’re not living up to what we need them to do in terms of the overall customer experience. So we’re looking for ways to own the entire end-to-end process in the same way that we do with our student loan business and personal loans.
We’ve made really good progress over the course of the last several months in improving the experience and the operations and are really optimistic about the forward outlook. But there’s a long ways to go before this business becomes a meaningful contributor to the overall P&L. But we’re excited about where we’re at, and we’re going to continue to rebuild.
We talked a little bit about the ability to continue to take price on the personal loan business. And certainly, that’s enabled you to continue your hedging at a comparable cost, yet it still is a source of confusion concern to investors. As we’ve been through a continued volatile interest rate environment, how have you been able to maintain that program? And the effective yield or gain on sale that you’ve been able to.
Yes, the two reasons that we’ve been able to maintain the gain on sale margins that we’ve had over the course of the last several quarters is, one, our hedging program and then second, being able to pass price through or keep pace with the forward benchmark rates in our weighted average coupon. So on the hedging front, what we’re trying to do from the most simplistic way is, as soon as we originate a loan that is susceptible to rate volatility, we’re trying to lock in the execution that we would achieve at the time of originating that loan.
As soon as we sell the loan or it’s in a structure where rates do not impact it, we would lift the hedge, and that’s purely what we’re doing. So in a rising rate environment, you’ll see hedge gains that offset fair market value true downs. In a lower rate environment, you’ll see hedge losses and upside in fair market value.
So it’s purely a hedge to lock in the execution. What’s also helped is that we’ve been successful in raising our weighted average coupon at a fairly healthy clip relative to where the forward benchmark rates are. Over the last two quarters, we’ve raised our balance sheet weighted average coupon by 60 basis points. So that’s not just new originations, but that’s the entire balance sheet. So new originations is increasing even more and much more aligned with Fed funds.
Got you. Last thing, we’ve gotten a lot of questions about the $1 billion of loans you repurchased. Can you just talk a little bit about, obviously, having the bank gives you the ability to do that and actually add to profits, but can you talk about the appetite from your partners? And how to think about that $1 billion in the context of that?
Yes. So as you mentioned, having the bank provides us with much more flexibility. Right now, we’re going out and generating deposits and we need to earn a return on those deposits to be able to cover the cost. So there’s a few ways you can do that. You can go out and originate loans and pay a marketing expense and start generating NIM and taking on much more from a credit or a loss profile perspective.
Another way is going out and purchasing loans. In this specific instance, we had the opportunity to repurchase over $1 billion of loans that we originally underwrote and that we currently service, which we viewed as a great asset. These are members that we know that we underwrote, we understand the loss profile and they were seasoned loans, which means that the overall loss profile of those loans was much less than what they would be on a new origination.
So this came down to purely returns and generating the highest returns for our cash and that’s what we’ve done – that’s what we did. And this is something that we will continue to do given the opportunity set. We’re looking to maximize ROE across the board over the long term, and that can mean originating new loans, but it could also be purchasing and holding them on the balance sheet.
Great. Was that back to you, Tim.
We’re going to shift the conversation a little bit to Galileo or the financial technology platform. And then hopefully, we’re going to have some time at the end for a quick discussion on profitability. So Chris, I want to touch on two things that you and I have talked about in the past, but I think they’re important to discuss here in this forum as well, but Galileo customer concentration, it comes up a lot. So that most recent number, I believe, was just north of 60%, just shy of two-third or so, right, 64%. And it’s these five larger customers there. Maybe you could just talk about since that disclosure is a little bit dated at this point. Has that number come down? And the follow-up is just around the contract length with those customers and confidence behind retaining them.
Yes. So in terms of the overall concentration, that was a number dated back to our 2021 10-K. We will update it for this upcoming K if there is meaningful exposure. But what I would say is the overall concentration has come down, and that’s a function of bringing on new customers onto the platform. We’ve been really successful in continuing to gain share on the consumer front but also more recently in the B2B space. So overall concentration has come down and will continue to come down as we onboard new customers.
Perfect. In the interest of time, I want to move to another one that I think is pretty exciting, which is TAM expansion for Galileo. So clearly, when you look at the logos of digital banks, neobanks that are working with Galileo, it’s most of them, right? It’s a lot of logos. But beyond that, I believe that you’ve recently signed some new types of customers. And maybe you could just elaborate around that, what I’m getting at is platforms, right? Platforms and marketplaces, which are another means of accessing TAMs of card issuance.
Yes. So what I would say on the Galileo front, we couldn’t be more pleased with where we are from a technology, scalability, robustness and ability to innovate in that business. We truly believe that our technology and ability to innovate is second to none, and we’re doing really well relative to competition, particularly legacy processors, but also some of the folks who tell themselves as modern digital processors.
So right now, we’re starting to steal – continue to steal share in the consumer space. We’re starting to steal real share in the B2B space, and we expect to be able to continue to do so over the course of the next several quarters and years.
And one of the things that’s certainly helping is the acquisition of Technisys, where we now have a complete end-to-end solution all the way down to the core. Right now, we’re in discussions with large financial institutions and other consumer businesses and platforms that we never were in before, and that’s a function of having this complete end-to-end solution.
And it’s our view that – it’s not a question of whether our technology is superior or we’re able to deliver this technology or service at the lowest cost, it’s more of a question of when it happens, not if. So we feel like we’re extremely well positioned to win some of these mandates with larger financial institutions who are operating with legacy providers in a very siloed way, but it’s much more of a question of when, not if.
In addition to that, we’re also talking to a lot of the consumer platform players who are partnering with multiple technology providers that are very fragmented. And the technology that we’ve built both at Galileo and Technisys as well as all the products that we’ve built at SoFi create a really unique opportunity for a complete package for these businesses. So overall, we feel great about the progress that we’ve made. We think we’re set up for success, and we’re on all the right conversations right now.
Okay. In the interest of time, I think we need to move to profitability. Thank you, Chris. But on the platform piece, I just want to clarify for the audience. When you talk about some of those platforms, one, you have signed some to be clear? And when you talk about a platform, you mean, for example, maybe a retail or restaurant point-of-sale type system that has access to underlying large number of merchants.
Got it. We’ll wrap it up to talk a little bit about profitability. Can you just talk a little bit about the time frame for the stock-based comp? How long does it last? And when can we see it fall off? And how that relates to SoFi kind of getting to be GAAP profitable.
Yes. Absolutely. So let me start at a higher level. Right now, we have – we operate in three segments. Lending business, we’re operating at margins on a consistent basis. Our tech platform business, right now, we’re operating at a 30% margin – contribution margin. We expect that business longer term to operate north of 40%. Our Financial Services segment, we are losing money today.
But if you look at our variable profit ex marketing, we’ve been profitable over the course of the last several quarters, and we expect to be able to cover that marketing cost and exit 2022 variable profit positive. The reason that that’s important is because at that point, it’s about scaling those members that have positive variable profit in order to cover our fixed costs, which we expect to be able to do by the end of 2023.
So by the end of 2023, we expect to have three segments that are contribution positive, . Below that line, you have the stock-based compensation, which is about $75 million to $80 million per quarter. A one-third of that is related to performance share units, which were issued as part of the IPO. And those performance share unit expenses will roll off in Q1 of 2024. And the residual portion of that is about 12% of revenue today, and we expect to get that down to single digits over the course of the next several years.
And then finally, the other line items are fixed overhead, which we’ll get real leverage from over the course of the next several quarters, and depreciation and amortization, which is predominantly amortization of intangibles of our tech platform acquisitions. So overall, we’re making really good progress. It’s a multistage process, but we’re making great strides in that area.
Great. And unfortunately, with that, we are out of time. We have many more questions we’d love to ask. And Chris, I wanted to thank you for joining us, and thank everybody who participated in this year’s conference.
Great. Thank you, guys.
Thank you, Chris.