Yahoo Finance SoFi Technologies, Inc. (NASDAQ:SOFI) Q1 2024 Earnings Call Transcript
SoFi Technologies, Inc. (NASDAQ:SOFI) Q1 2024 Earnings Call Transcript April 29, 2024
SoFi Technologies, Inc. beats earnings expectations. Reported EPS is $0.02, expectations were $0.01. SoFi Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Jordan and I will be your conference operator today. At this time, I'd like to welcome everyone to the SoFi Technologies Q1 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. [Operator Instructions] With that, you may begin your conference.
Maura Cyr: Thank you and good morning. Welcome to SoFi's first quarter of 2024 earnings conference call. Joining me today to talk about our results and recent events are Anthony Noto, CEO; and Christopher Lapointe, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our competitive 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 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.
Anthony Noto: Thank you, and good morning, everyone. Q1 was another exceptionally strong quarter for SoFi. We continue to successfully execute on our strategy of making SoFi the one-stop shop for digital financial services. We expected that 2024 would be an important year of transition. Heading into this year, we had a conservative outlook given interest rate volatility, industry liquidity, inflation and macroeconomic environment concerns. We planned for continued strong growth from our Financial Services and Technology Platform segments, up 50% year-over-year, offsetting our plan for lending to be 92% to 95% of 2023 revenue. And we set out to strengthen our balance sheet and capital ratios by continuing to grow our tangible book value.
I'm proud to report that our team delivered across each of these fronts and more in the first quarter of 2024. First, we responsibly grew revenue, while further diversifying our business. We grew adjusted net revenue in Q1 to $581 million, up 26% year-over-year. This marks the 12th consecutive quarter of greater than 25% growth. We grew adjusted EBITDA to $144 million, up 91% year-over-year. This represents a 25% margin compared to 16% a year ago. I'm pleased to report that our Financial Services and Technology Platform segments make up a growing portion of our revenue quarter-over-quarter, contributing 42% of adjusted net revenue in Q1. This is up from 40% last quarter and 33% a year ago, and we remain on track to finish 2024 with our revenue mix near 50:50.
Second, we posted GAAP net income of $88 million. This includes a $59 million one-time benefit from the recent exchange of convertible notes, which Chris will talk about more in a moment. After achieving our first quarter of GAAP profitability in Q4 2023, we committed to sustaining profitability for the full year of 2024 and we did so in Q1. We posted GAAP EPS of $0.02 per share, which excludes the benefit from the convertible note exchange. Third, we further reinforced our balance sheet for long term growth. We grew tangible book value for the seventh consecutive quarter to $4.1 billion, an increase of $608 million from the prior quarter. Equally as important, our tangible book value per share now stands at $3.92, up 16% sequentially. We grew consumer deposits by a record of $3 billion and saw continued strong buying demands for our loans, selling over $1.9 billion of loans in Q1.
SoFi bank reported net income of $100 million with a 21% margin and a return on tangible equity of 11.7%. Our total capital ratio for SoFi technologies is now 17.3%, a 200 basis point improvement from last quarter and well above our 10.5% regulatory minimum. Finally, our broad product offering, enabling people to borrow, save, spend, invest and protect their money, continues to attract more and more members to SoFi. In Q1, we grew our member base to 8.1 million, up 44% from the prior year, adding 622,000 new members in the quarter. Just as important, we continue to see members adopt more products and deepen their relationship with SoFi. We recorded 989,000 new product additions in the quarter, with 93% of those product ads coming in our Financial Services segment, a remarkable milestone considering it's been only five years since we launched our first non-lending products and two years since we launched SoFi Bank.
This increasingly diverse product relationship with our members is what maximizes the power of the financial services productivity loop and allows us to leverage our unique structural economic advantage. Despite external unpredictability in the year ahead, I remain as confident as ever in SoFi's future, our plans to sustain responsible growth and our ability to deliver meaningful value to our shareholders. Before handing it over to Chris to cover our financial highlights and share updated guidance, I wanted to give a quick peek under the hood on our segment-level results. Starting with Financial Services. We continue to drive acquisition and monetization and importantly, rapidly expanding margins. We achieved record net revenue of $151 million in Q1, up 86% year-over-year and 8% from the prior quarter, demonstrating the strong operating leverage in this segment we generated this 86% growth with only an 8% increase in directly attributable expenses year-over-year.
The overall Financial Services segment achieves $37 million in contribution profit at a 25% margin compared to a $24 million loss in the year-ago quarter. That margin is up 7 points from last quarter and a full 22 points from our first quarter of segment profitability achieved in the third quarter of 2023. This progress is notable given our significant investment across our Money, Credit Card and Invest products. SoFi Money delivered strong growth, high-quality deposits and engagement, and higher average account balances even as spending increased. We grew to 3.9 million SoFi Money accounts up 61% year-over-year with over 90% of our consumer deposits coming from direct deposit members. Our direct deposit members have a median FICO of 744 and over 50% of our newly funded SoFi Money accounts set up direct deposit by day 30, presenting ample opportunities for cross-buy into other SoFi products.
As these members make SoFi money their account of choice spending follows, with overall debit transaction volume exceeding $1.9 billion in the quarter, up 20% from the prior quarter and over 150% year-over-year. Looking at our Credit Card and Invest products, we previously shared that these are our heaviest areas of investment in the Financial Services segment, with current losses of nearly $100 million annually on a run-rate basis. However, through improved unit economics and scale, we expect that these products will eventually contribute profit similar to our progress with SoFi Money. Next, turning to our Technology Platform segment. Our consistent product development and successful shift in sales strategy has enabled us to diversify growth and pursue larger, more durable revenue opportunities.
In Q1, we exceeded $94 million in revenue, representing 21% year-over-year growth versus 13% last quarter, in line with our guidance for accelerating growth. Our Tech Platform segment contribution margin was 33% compared to 32% last quarter and 19% a year ago. Demand from traditional financial institutions and clients in non-financial categories remains strong, while lead times for winning RFPs and integrations and time to revenue are measured in multiple quarters and years, not months, we're seeing the transition to modern processing and modern cores playing out as envisioned. We also made significant strides in product development in Q1. We enhanced our partnership with the Bancorp to offer real-time payments, improving the money movement hub, enabling multiple new use cases for B2C and B2B clients.
We launched post-purchase Buy Now Pay Later for banks and fintechs to deliver flexible financing solutions for debit and credit purchases. Galileo and SoFi bank partnered to launch a small business financing card program with rapid finance and importantly, we continue to make progress with our growing pipeline of new partners in the quarter. And finally turning to Lending. As we shared last quarter, we've taken a more conservative approach toward originations, given our concerns around rate uncertainty and the broader macro climate. For Q1, adjusted net revenue of $325 million was flat year-over-year. Personal loan origination growth slowed to 11% year-over-year to $3.3 billion, in line with our more conservative approach. In fact, the balance of personal loans on our balance sheet declined 2% quarter-over-quarter.
Student loan originations grew 43% year-over-year to $752 million and home loan originations increased 274% year-over-year to $336 million, a record 82% of the segment's adjusted net revenue was derived from net interest income compared to 76% last quarter and 62% in the year-ago quarter. This is a direct benefit of our bank charter and our ability to hold loans longer when advantageous. The percent of adjusted lending revenue from net interest income has more than doubled since we launched the bank two years ago. Together, these efforts contributed to great results for SoFi in the first quarter of 2024. I am incredibly proud of our team's perseverance to serve our members and clients' financial needs in face of continued volatility and uncertainty around the world, while delivering good consistent growth, profitability and shareholder value creation.
With that, I'll hand it over to Chris.
Christopher Lapointe: Thanks, Anthony. The first quarter demonstrates strong evidence of how our increasingly diversified and differentiated business model drives SoFi's durability and long-term growth potential. I'm going to walk through key financial highlights and our financial outlook. Unless otherwise stated, I'll be referring to adjusted results for the first quarter of 2024 versus first quarter of 2023. 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 month. For the quarter, we delivered adjusted net revenue of $581 million with growth of 26% year-over-year. Adjusted EBITDA was $144 million at a 25% margin.
This represented over 8 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 adjusted net revenue by 9 points relative to the year-ago quarter, while total non-interest operating expenses declined 16 points year-over-year. We delivered our second quarter of GAAP profitability, with GAAP net income reaching $88 million, a $122 million improvement year-over-year. Net income included the benefit of a $59 million net gain associated with the exchange of a portion of our 2026 convertible notes at a discount for equity during the quarter. We reported GAAP diluted EPS of $0.02, which was not impacted by the gain from the convertible note exchange.
Now onto the segment level performance. Starting with Financial Services, where net revenue of $151 million increased 86% year-over-year, with new all-time high revenue for SoFi Money and lending as a service, as well as continued contributions from SoFi Invest and Credit Card. Overall monetization continues to improve with annualized revenue per product of $59, up 31% year-over-year versus $45 in Q1 2023. This is driven by higher deposits and member spending levels in SoFi Money, greater AUM and monetizable features in SoFi Invest, and robust growth within SoFi Credit Card spend. Net interest income increased 106% year-over-year, primarily driven by $11.5 billion growth in deposits year-over-year. Our non-interest income increased 34% year-over-year, primarily driven by two factors: interchange, which grew 65% year-over-year based on over $7.5 million in annualized spend; and referrals from our lending as a service product, which grew 32% versus the prior year period.
Contribution profit reached $37 million at a 25% margin for the quarter even as we continue to invest to rapidly grow this segment. Despite our Invest and Credit Card businesses collectively losing nearly $100 million on an annualized basis, we still achieved strong margins. Lastly, we reached 10.1 million Financial Services products in the quarter, which is up 42% year-over-year with 919,000 new products in the quarter. We reached nearly 3.9 million products in SoFi Money, 2.2 million in SoFi Invest, and 3.6 million in Relay. Shifting to our Tech Platform where we delivered net revenue of $94 million in the quarter, up 21% year-over-year and down 3% sequentially. Annual revenue growth was driven by strong performance from new clients onboarded over the last nine months, large bank deals signed in Latin America and strong monetization of existing clients launching new products on our platform.
Galileo accounts grew 20% year-over-year to 151 million. The segment delivered a contribution profit of $31 million, representing a 33% margin. We continue to leverage investments made in the segment as we continue to position Tech Platform for higher rates of diversified durable growth going forward. We expect Tech Platform revenue to accelerate in 2024, with strong margins. Turning to Lending. First quarter adjusted net revenue remained flat year-over-year at $325 million, with $208 million of contribution profit at a 64% margin versus $210 million a year ago. These results were driven by a 33% year-over-year growth in our net interest income, while non-interest income was down by 53%. Growth in net interest income was driven by a 59% year-over-year increase in average interest earning assets and a 114 basis point year-over-year increase in average yields.
This resulted in an average net interest margin of 5.91% for the quarter, up 43 basis points year-over-year. I'd also highlight our $3 billion of deposit growth in the quarter compared to the $242 million of net loan growth on the balance sheet. This has allowed us to continue to reduce our reliance on outside warehouse funding, which is 226 basis points more expensive than our deposits. As a result, we reduced our warehouse utilization this quarter by $2.4 billion. The 226 basis points of cost savings between our deposits and our warehouse facilities continues to support our net interest margin and translates to nearly $500 million of annualized interest expense savings at our current deposit base. It also underscores the benefits of having the option of holding loans on balance sheet when advantageous and collecting net interest income.
We expect to maintain a healthy net interest margin above 5% for the foreseeable future and benefit from the continued mix towards deposit funding along with our ability to sustain healthy deposit versus lending betas. On the non-interest income side, Q1 originations grew 22% year-over-year to $4.4 billion and were driven by growth across our personal, student and home loan products. Personal loan originations growth slowed to 11% year-over-year and 2% sequentially to $3.3 billion, which was anticipated and in line with our more conservative approach given macro uncertainty. Our student loans business saw origination volume grow 43% year-over-year with a slight 5% decline sequentially to $752 million. Home loans grew by over 270% year-over-year and 9% sequentially to $336 million.
Our personal loan borrowers' weighted average income is $169,000 with a weighted average FICO score of 746. Our student loan borrowers' weighted average income is $146,000, with a weighted average FICO of 768. In the first quarter, we sold portions of our personal loan, student loan, and home loan portfolios totaling over $1.9 billion that comprises approximately $1.26 billion in personal loan principal, $300 million in student loan principal, and nearly $350 million in home loan principal. In terms of personal loan sales, we closed $500 million of loans in whole loan form and $700 million in ABS at a blended execution of 105.7%. These had similar structures to other recent personal loan sales with cash proceeds at par or at a small premium to par, and the majority of the premium consisted of contractual servicing fees that are capitalized.
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 if we held the loans. As a result of the personal loan sales in the quarter, the quantity of personal loans on our balance sheet declined sequentially despite growth in originations. Additionally, we sold $62.5 million of late-stage delinquent personal loans principal in the quarter. Typically, we do not sell delinquent loans until they are charged off, but we were able to generate positive value generated from both recovery and servicing value relative to letting the loans charge off and sell after the fact. As discussed during Q4 results, roughly 15% of our losses came from credit tiers that we ceased originating several quarters earlier, which represented 3% of unpaid principal balance.
We were therefore able to reduce exposure to those credit tiers as the loans run-off and become a much smaller portion of overall unpaid principal balance. In addition, we continue to make adjustments to our credit underwriting model in line with the internal and external indicators underlying our risk scorecard. Moving to our student loan sales, we closed $294 million of loans in whole loan form and execution of 104.9%. This sale had no accompanying loss share provision nor senior secured financing option. Finally, our $344 million of home loan sales were sold at a blended execution of 100.9%. Also in the quarter, we executed $399 million of senior secured financing, which will show up on our detailed balance sheet as senior secured loans held for investment at amortized costs.
These loans have a fixed term structure and are secured against the underlying assets, therefore equivalent to the investment grade bonds if we were to do a securitization for the same pool of collateral. 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. Turning to credit performance, our on-balance sheet 90-day student loan delinquency rate was 13 basis points while our annualized student loan charge-off rate was 60 basis points. Our Q1 on-balance sheet 90-day personal loan delinquency rate was 72 basis points. Our annualized personal loan charge-off rate decreased to 3.45% from 4.02% in Q4 including the impact of asset sales, new originations and the delinquency sale in the quarter.
We anticipate ongoing normalization in credit performance toward pre-pandemic levels of 7% to 8% life of loan losses. Now turning to our fair value marks and key assumptions. Our personal loans are marked at 104.2% as of quarter end, down from 104.9% at the end of Q4 and well below the 105.7% blended execution achieved on the $1.2 billion in personal loan sales. The lower personal loan mark was primarily a function of the discount rate increasing by approximately 30 basis points to 5.8%. This was driven by the underlying benchmark rate increasing by approximately 50 basis points and spreads tightening by 20 basis points, in line with industry trends. Importantly, the benchmark rate change and the spread change are empirical as they are actual market-observed inputs, not assumptions.
In addition, the mark was negatively impacted by the annual default rate increasing by 9 basis points to 4.85% and the annual prepayment speeds increasing by 150 basis points to 24.7%, which has an immaterial impact on the overall change in the mark. When a borrower pre-pays, we are still capturing the principal and the impact to the value of the asset is only based on the premium above par at a given point in time, which is very small relative to the principal outstanding. The weighted average coupon of the personal loan portfolio remained unchanged at 13.8%. For our student loan portfolio, the fair value mark remained unchanged at 103.8% at quarter end. In terms of the inputs, our weighted average coupon remained flat at 5.6%, annual losses remained flat at 60 basis points, prepayments increased by 8 basis points to 10.5% and the discount rate remained unchanged at 4.3%.
As mentioned previously, we sold $294 million of student loan collateral in the quarter. Had we not sold those assets, the student loan discount rate would have increased by a similar magnitude as our personal loans business. Switching to our balance sheet where we remain very well capitalized with ample cash and liquidity. Assets grew by $1.2 billion largely as a result of $242 million growth in loans and approximately $803 million growth in cash, cash equivalents and investment securities. On the liability side, deposits grew by $3 billion sequentially to nearly $22 billion. As mentioned earlier, we reduced our reliance on warehouse facilities through our robust deposit growth and exited the quarter with approximately $800 million of warehouse debt drawn.
In Q1, we opportunistically executed two transactions in order to optimize our financing structure and bolster our capital capacity. First, we issued $862.5 million in convertible notes due in 2029 at a 1.25% coupon. The debt proceeds are being used to replace higher-cost financing, including the redemption of the $320 million of outstanding Series 1 preferred stock that carries an annual dividend of 12.5%, which was set to increase to over 15% in late May. In total, this new convertible issuance should reduce our financing expense by $40 million to $60 million per year, including cost saving opportunities with the remaining proceeds. Second, we agreed to an exchange of $600 million principal of our convertible notes due in 2026 for shares of SoFi common stock.
This was a notable discount compared to what we would have had to pay in two years. This transaction generated a gain of $59 million for us in the quarter, while notably reducing our 2026 maturities and bolstering our funding capacity. When viewed in total, these transactions are accretive to book value and net income and have minimal impact on a fully diluted EPS basis. In terms of our regulatory capital ratios, our total capital ratio of 17.3% improved by 200 basis points from 15.3% last quarter, due in large part to these transactions, and remains comfortably above the regulatory minimum of 10.5%. While we don't intend to utilize the excess capital capacity in the year given our view of the macro uncertainty, these transactions put us in an even stronger position for years to come.
Lastly, we grew book value to $6.1 billion and tangible book value to $4.1 billion. We recorded tangible book value per share at $3.92, up 16% quarter-over-quarter. Now moving on to our updated 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, our continued 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. 2024 remains a transitional year for SoFi, as the 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.
For the full year 2024, we now expect to deliver adjusted net revenue of $2.39 billion to $2.43 billion which is $25 million higher than our implied prior guidance range of $2.365 billion to $2.405 billion. This guidance assumes lending revenue will be 92% to 95% of 2023 levels, which is unchanged from prior guidance and Tech Platform will grow approximately 20% year-over-year, which is also unchanged. We expect the Financial Services segment revenue to grow more than 75% year-over-year. We now expect adjusted EBITDA of $590 million to $600 million above our prior guidance of $580 million to $590 million, and that incorporates increased investment into more product innovation, new businesses, services and member benefits. This represents 15% to 17% adjusted net revenue growth and a 25% adjusted EBITDA margin.
We now expect full-year GAAP net income of $165 million to $175 million above prior guidance of $95 million to $105 million, which includes a $59 million gain associated with the convertible note exchange. We expect fully diluted GAAP EPS of $0.08 to $0.09 per share above prior guidance of $0.07 to $0.08 per share. We now expect growth in tangible book value of approximately $800 million to $1 billion for the year versus our previous guidance of $300 million to $500 million given the benefits of the recent convertible debt exchange along with the effects of new convertible issuance. We now expect to end the year with a total capital ratio north of 16% due to those transactions versus our previous guidance of 14%. We continue to expect to add at least 2.3 million new members in 2024, which represents 30% growth.
For Q2, we expect to deliver adjusted net revenue of $555 million to $565 million, adjusted EBITDA of $115 million to $125 million and net income of $5 million to $10 million. In terms of phasing, you can see for the past two years that the second quarter is seasonally flattish for lending, which, coupled with our more conservative approach toward originations this year, should drive a sequential decline in lending revenue, which largely offsets tailwinds in the two other segments. In terms of operating expenses, you can expect low single-digit sequential growth as we continue to invest in future growth. Overall, we couldn't be more proud of our Q1 results and continued progress. Having delivered over $581 million of adjusted net revenue and $144 million of adjusted EBITDA, we continued to make great progress against our long-term objectives in the quarter and remain very well capitalized to achieve our vision of making SoFi the one-stop shop for digital financial services.
With that, let's begin the Q&A.
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