SoFi Q2 2023 Earnings Review

Exploring the Results of this Banking Disruptor

The theme of the call was perseverance through financial service sector volatility. It was not “things were bad because of this.” It was “things were good despite this.”

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1. Demand

SoFi beat revenue estimates by 3.3% and beat its guidance by 2.9%. This was a record quarter for sequential member adds.

Demand Context:

• Lending revenue rose 29% Y/Y, tech revenue rose 4% Y/Y (8% Q/Q), financial service revenue rose 223% Y/Y

• 2nd highest quarter for new product adds and a record setting quarter for new members.

• Financial service products up 47% Y/Y and lending products up 25% Y/Y.

2. Margins

• Beat EBITDA estimates by 35.9% & beat guidance by 39.6%.

• Beat EPS estimates by a penny.

Fair Value Credit Markings:

SoFi added a table showing the variables and data guiding its markings to offer more clarity on that matter. As you can see, weighted coupon continues to rise Q/Q while defaults and pre-payments are steady. Discount rate rose for personal loans this quarter (I’m sure analysts will love seeing that) and fell a bit for student loans.

• Personal loan volume impressively rose 51% Y/Y to offset -1% Y/Y student loan volume growth and -27% Y/Y home loan volume growth.

• 103% Y/Y growth in net interest income was driven by higher loan balances and net interest margin expansion via higher weighted coupons, strong loss rates and a shift from warehouse funded credit to deposit funded credit (cheaper capital).

Credit Quality & Fair Value Markings:

Despite rapid volume growth, net charge off rate for personal loans FELL Q/Q to 2.94%. Its annual default and 90 day delinquency rates are steady. Furthermore, SoFi’s fair value markings (which offer a sense of expected gain on sale margin) fell for all 3 lending segments. Analysts will love that. For personal loans specifically, markings fell from 104.3 to 104.1 as discount rates rose with more rate hikes (offset by higher coupon & falling prepayment rate). Student loan markings went from 102.6 to 101.9 as well. Home loans are now marked at 89.2. A few added notes on just how safe and conservative these markings truly are:

• Actual observed loss rates are far better than markings assume. This is the benefit of a mean FICO over 740 & average annual income over $150,000 across its borrowers. It expects its credit performance to continue surpassing industry benchmarks partially thanks to this reality.

• SoFi’s forward looking expectations are overly pessimistic with 5% unemployment and 2.5% GDP contraction expected.

• It sold $100 million in student loans through whole loan markets at gain on sale margins ABOVE marking assumptions. This is despite those loans carrying a lower weighted average coupon than the rest of its student loan portfolio. Great news.

• It sold a small chunk of personal loans are gain on sale margins roughly similar to its markings.

The loan sales equated to just $340 million in total credit in a move to “keep channels open” per Chris Lapointe. It was symbolic. The company is still fixated on maximum return on equity (ROE) and will hold loans in this environment to accomplish it.

A combination of rising coupon, falling cost of capital and strong credit metrics is also leading to a spike in net interest margin (NIM). It rose from 5.23% to 5.74% Y/Y. This is expected to stay strong going forward.

More Margin Context

• 43% incremental EBITDA margin & 36% incremental GAAP net income margin for the quarter.

• SoFi Bank had a 17% GAAP net income margin.

• Q2-20 GAAP net income positive via a large tax benefit. Not related to operating profitability.

• Another quarter of leverage across sales & marketing, stock comp, general & administrative etc.

3. Guidance

For the full year 2023:

• Raised revenue guidance by 0.7% & beat estimates by 0.7%.

• Raised EBITDA guidance by 21.6% & beat estimates by 18.2%.

• Reiterated GAAP net income positive by Q4 and positive financial service contribution profit by Q4 as well. This is despite stock comp dollars expected to rise in the 2nd half vs. Q2 along with more depreciation and amortization expense. Meaning? The inflection is being driven by core operating profit.

The source of this annual beat is coming mainly from the Q2 outperformance. Guidance for the second half of the year was actually a bit light on revenue by less than 1% and well ahead on EBITDA. That’s less important considering the annual raise and that SoFi’s leadership loves to sandbag on quarterly expectations. Furthermore, leadership called assumptions in the guide conservative due to all of the macro uncertainty our economy faces.

Importantly, SoFi expects to add more than $2 billion in deposits this quarter.

“We’re excited about next several quarters. Trends in all segments point to great momentum for the business.” -- CEO Anthony Noto

4. Balance Sheet

• $3B in cash & equivalents ($20 billion in total liquidity). Using less than 50% of its current warehouse capacity.

• $6.4B in debt.

• Capital ratios (total cap ratio = 16%) are all well above minimums.

• Stock compensation = 16% of revenue vs. 31.3% Y/Y.

• Holds $18.2B in loans for sale vs. $15.9B Q/Q & $13.6B Y/Y.

• Deposits rose about 26% Q/Q to reach $12.7 billion. Nearly 94% of the deposits are direct deposits with 98% of then insured (vs. 97% Q/Q).

  • The quality of these deposits remains sky high with a mean FICO of 747 vs. 749 Q/Q.

• Tangible book value rose slightly by $14 million Q/Q.

5. Call & Release Highlights

Student & Home Loans:

The team still expects a material volume ramp for student loans into Q4. Its guidance assumes volumes are flat Q/Q in Q3 and start to build in Q4. It does not expect origination volume to get back to 2019 levels this year.

“The next 6 months for student loan analysis will be a battleground, but we’re very excited that it’s coming back.” -- CEO Anthony Noto

The Wyndham Capital integration led to the 3x Q/Q spike in home lending volume.

Bank Charter Working;

50% of SoFi’s new originations were funded by its deposits this quarter vs. 44% Q/Q. It continues to shift from warehouse credit funding to deposit-based funding. When taking that with its weighted coupon rising faster than benchmark yields, its loss/default rates still well below 2019 levels and its falling pre-payment rates, net interest income is exploding higher. Specifically, it rose by 100% Y/Y. Notably, SoFi is still pocketing 216 bps of added profit spread by funding with its deposits vs. warehouse facilities (thank you charter). This benefit has grown steadily in previous quarters despite SoFi raising its APY.

This tidbit leads us to another interesting point. SoFi pays a 4.4% savings APY because of its ability to direct those dollars to higher yielding investments. Most competition trying to match its APY does not have this luxury. So? SoFi’s lending business should mean its APY is lowered more slowly than it is for others as rates start to fall. The edge should deepen as rates are cut.

Finally, SoFi’s financial services products (mainly SoFi Money) are helping to juice this deposit growth as well. 50% of Money users set up direct deposit within 30 days in yet another example of its products being better together. Direct depositors engage more with the platform and contribute more revenue. Specifically, average spend for the cohort rose 13% Y/Y as an example of why deposits matter beyond cheaper cost of capital.

Financial Services:

• Revenue per product doubled Y/Y to $50. This rapid growth is expected to continue.

• Access to the Oddity IPO was many times oversubscribed.

• Money products up 47% Y/Y. Invest products up 18% Y/Y to 2.3M. Relay products up 90% Y/Y to 2.6M.

• Interchange revenue up 188% Y/Y as debit explodes.

Technology Platform:

Next quarter growth will again be lackluster while it’s expected to meaningfully accelerate in Q4. The transition to larger accounts has led to declining business from dozens of smaller firms. This has meant slower account growth near term. As larger accounts ramp with SoFi, it should mean a faster revenue ramp and better focus. Galileo signed 5 new clients. All of them have existing user bases. Technisys added 4 new clients.

Growth:

The team discussed what a GAAP net income inflection will mean aside from happier investors. The inflection to profitability will give it the right (“permission”) to invest more aggressively into growth. So? Positive profits could coincide with accelerating revenue growth. Strong combo.

6. Take

Dear fellow SoFi investors,

It is time for a well-deserved victory lap. Demand is rocking, margins are soaring, members are spiking, credit metrics are dynamite and the tech segment’s acceleration is coming. Anthony Noto is a leader who I would run through a brick wall for. There is nothing to pick at in this report. Only a smile to put on our faces as I know I rightfully defended a baby being thrown out with the bathwater. Congrats to us.

“No company has greater aspirations than we do. Nobody is further along than we are. And it is my job to make sure we execute every second of every hour of every day.” -- SoFi CEO Anthony Noto