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SoFi Q2 2021 Earnings Review
Digesting this disruptor's quarterly results.
“My passion for SoFi grows every day. We are committed to running faster, reaching higher and achieving more.” — CEO Anthony Noto
SoFi’s internal guidance called for $215-$220 million in adjusted net revenue. Analysts expected $231 million. The company posted $237.2 million in adjusted net revenue topping the highpoint of internal guidance by 7.8% and analyst forecasts by 2.7%.
This quarter represents the 8th straight period of accelerating membership growth. Similarly, total product growth has accelerated for 7 straight quarters. Brisk expansion is one thing, but rising sequential growth rates point to strong momentum going forward.
The company’s most mature product — student loans — saw 11% year over year growth despite the moratorium and pandemic headwinds cutting industry volume for this segment by 50%.
SoFi’s financial services segment saw 602% year over year growth to reach $17 million and roughly doubled sequentially. This newer part of the organization still does not feature a positive contribution profit margin but that is quickly moving in the right direction. Every financial services product grew triple digits year over year.
The company continues to intentionally go slowly with monetizing its financial services segment to fuel early growth. It will launch new revenue streams here (options and margin accounts) in the future. With very little incremental cost to launch new products, this will directly boost profit margins.
Galileo — SoFi’s application programming interface (API) developer — saw revenue rise 138% year over year to reach $45.3 million. This was despite a delay in revenue recognition from a key client and fading stimulus check benefits.
“We are expecting to see stronger sequential growth for Galileo into the third quarter.” — CFO Chris Lapointe
SoFi’s internal guide called for $(8)-$2 million in Adjusted EBITDA. It posted $11.2 million thus beating the high point of its outlook by $9.2 million.
$144 million of the company’s $163 million net loss came from non-recurring charges related to going public and a change in the fair value of warrant liabilities. Without these charges, net income margin would have been (8.8)%.
c. Guidance Updates
SoFi is reiterating its 2021 revenue and EBITDA guidance despite a $40 million annual revenue hit from the CARES Act moratorium extension on federal student loan payments. This hit should not repeat in 2022 as it’s set to expire at the beginning of next year. It also does not include the $12 million in revenue from its APEX acquisition which was originally included in its 2021 guidance.
Third Quarter 2021 Guidance is as follows:
$245-$255 million in adjusted net revenue
Analysts were expecting $260 million. This was lowered primarily due to the CARES Act extension.
$(7)-$3 million in adjusted EBITDA
d. Operational Highlights
Product upgrade highlights so far in 2021:
Rate match guarantee on student loans
Snooze feature to lock in current rates on new student loans
Home loan rates calculator tool
Two-day early paycheck feature within SoFi Money as well as overdraft protection
Weekly dividend ETF as well as crypto and fractional shares on SoFi Invest
SoFi’s Credit Card rewards program saw a meaningful ramp in accounts, balances and spend following its debut this year. SoFi Relay — the company’s free credit score monitoring — is also leading to “a surge in new membership.”
“There is much more innovation in the pipeline, stay tuned.” — Noto
SoFi introduced a loan/money bundle that gives users lower rates on personal loans that are paid off via direct deposits. This is its “products are better together” in action.
50% of personal loans were fully automated in the quarter vs. 30% year over year.
The company has reduced time to loan funding by 50% so far this year.
e. Notes on Galileo
The company expects run rate contribution margin from Galileo of 30% but it is lower for now as SoFi invests in its future growth. SoFi has been heavily investing in the Galileo segment to finish moving its operations to the cloud & to roughly double its head count to position the entity for growth.
Galileo has signed 22 new partners since the beginning of the year. 12 out of 22 of these new client wins came in the second quarter. With Galileo collecting revenue per transaction this is quite the positive development. For context, Galileo added 41 total clients in 2020.
No major partners have left the Galileo platform.
f. Conference Call Highlights
1. Anthony Noto
SoFi’s user lifetime value (LTV) continues to rise with consumer acquisition cost (CAC) continuing to fall thanks to cross-selling new products. We were not given a specific LTV/CAC metric.
“Product NPS is improving.” — Noto
SoFi has now sold 3x more financial services products than lending products. These two metrics were roughly equal 12 months ago. This drove a 70% increase in cross-selling activity year over year.
Galileo crossed 100B in annualized payment volume in July.
“We couldn’t be more encouraged with our acquisition of Galileo. We’ve made significant investments to build out its cloud environment over the last 15 months. It’s now built and will lead to significant cost savings via integrating with SoFi Money and Credit Card. We have a very robust Galileo product pipeline.” — Noto
Noto compared the importance of the Galileo purchase to eBay buying PayPal and Google buying YouTube — quite ambitious. He further added that any major m&a activity for the company will likely involve small, international entities.
“Our superior LTV generated by our users thanks to cross-selling is higher than our competitors. This allows us to more aggressively reinvest in lowering rates and improving services. Nobody else has built a one-stop shop.” — Noto
Noto told investors that he is committed to delivering long term profit margins in the 30% range.
SoFi re-engineered its lending process and risk quantification leading to:
A 30% approval rate spike
A 60% funnel conversion spike
0 negative impact on its credit quality
Noto was asked about SoFi potentially debuting a buy now pay later (BNPL) product in the future. Noto called the opportunity “exciting” and referenced the possibility on launching a BNPL product in Latin American markets in the future.
SoFi plans to expand Galileo’s product offerings well beyond ACH and debit.
Noto continues to expect the bank charter process to be wrapped up in the coming quarters. This will boost net interest margin across the board for the company. There was no specific date given to investors on the call.
2. Chris Lapointe
Adjusted EBITDA margin on incremental revenue was roughly 30% in the period pointing to strong margin momentum going forward.
g. My Take
The CARES ACT student loan moratorium extension hurt the company this quarter. It was likely gearing up for a large raise to guidance until this news surfaced. Still, growth rates in its key operational metrics continue to accelerate and its EBITDA margin turned positive. In my view, SoFi admirably endured temporary headwinds and can now look to even further accelerate growth going forward.
I’d be a buyer on any significant share price weakness. I have no interest in doing anything but adding to my position at this time.
Thank you for reading! For my broad overview of SoFi’s business click here.