SOFIW - SoFi Technologies Inc. (SOFI) SoFi Shareholder Q+A Conference (Transcript)
2023-12-04 14:29:02 ET
SoFi Technologies, Inc. (SOFI)
Shareholder Q+A Conference
December 04, 2023 12:30 PM ET
Company Participants
Chris Lapointe - Chief Financial Officer
Anthony Noto - Chief Executive Officer
Presentation
Unidentified Company Representative
Thank you so much for joining. We'll get started in just a moment. We collected the questions via Technologies. Over the last few weeks, and we'll use this time to answer your top loaded questions focused on the overall business during our session today.
Our remarks may 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. 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. After today's event, we will have a full transcript and recording from today's event available on our Investor Relations site.
With that, let's get to your questions.
Question-and-Answer Session
Q - Unidentified Company Representative
First up, we have a question from Ricardo T. asks when will the Company be profitable?
Chris Lapointe
Rachel, I can take that one to start off, and then I'll turn it over to Anthony, and thanks, Ricardo, for the question. So what I would say is that we've made tremendous progress on delivering profits as well as driving growth in tangible book value. In Q3, we ended up delivering $98 million of adjusted EBITDA, our fifth consecutive quarter of record EBITDA.
We also grew tangible book value by $68 million in the quarter and $171 million over the last 12 months. This is critically important as every $100 million of incremental growth in tangible book value results in $800 million of organic lending capacity. As we've stated previously, we're still on track to achieve GAAP profitability this quarter and expect to maintain GAAP profitability going forward.
In addition, we're going to generate $300 million to $500 million of tangible book value in 2024.
Anthony Noto
I would add that tangible book value growth is very important. And while achieving GAAP positive net income is a driver of tangible book value growth. It's not the only driver that we've been focused on nor focused on going forward to drive tangible book value growth. There's a multitude of factors.
But our goal of achieving positive GAAP net income in the fourth quarter is one that we remain very confident in. And our plan is to be on an annual basis, positive GAAP net income going forward after that while the magnitude of positive GAAP net income will vary in any one quarter based on a number of factors. Our goal is to maintain positive GAAP net income in each year after 2023.
Next question?
Unidentified Company Representative
Yes Brandon R. asks. SoFi will be profitable in these next few years. Do you plan to deliver dividends to shareholders in the future?
Chris Lapointe
Thanks, Brandon. So, it's certainly something we'll consider as it becomes relevant to us.
Next question?
Unidentified Company Representative
Next up from Christopher H. When you acquired Technisys guided for $85 million to $100 million in savings between 2023 and 2025. Can you give an update on how that's progressing and when we can expect to see products like trucking and savings and credit card using Cyberbank Core?
Chris Lapointe
Chris. So I'll let Anthony comment on the product road map. But from a synergy perspective, we've made really good progress and are on track to hit the $85 million to $100 million in cost savings we guided to at the time of acquisition. As we've now fully integrated the business and have a robust go-to-market joint product offering strategy.
Anthony Noto
We continue to actively explore ways to leverage the technology platform at SoFi and also to leverage the technology platform resources to develop products and services more broadly for the industry. One product that SoFi is already using is called Konecta. It's a natural language tap box for customer service. It's helped reduce our costs overall and serving our members from a direct access standpoint and a health standpoint.
Specifically, it's reduced calls per contact and time to resolution and cost per contact. In addition to that, SoFi buy-now, pay-later product was the first product that was built on SoFi-Galileo from a processing standpoint as well as Technisys core.
And we have also rolled out from Technisys, a product called payment risk platform that allows the data and the algorithms at the tech platform, which experiences about 8 billion transactions a year to provide for better fraud protection on an authorization basis per transaction, and that's something that we'll continue to invest quite aggressively in.
In addition to that, we still have a large opportunity to have technology platform, take the lead in developing products and services that SoFi needs and the rest of the industry uses. That shows up in less cost from the EPD engineering part of the design standpoint at SoFi Money as well as some of our lending products.
In addition to that, because of the fact that we bought two companies that have vast engineering capabilities, we've been able to drive some synergies but bring them together, both on the tech side as well as the go-to-market side. And you see that manifest itself in higher margins at the tech platform business, which has been increasing quite meaningfully, and we'll continue to do so throughout the year.
The biggest opportunities for us will show up as more revenue and more profit in the tech platform and that will be the conversion from our core banking technology platform that we use today at SoFi to a Technisys platform, both in SoFi Checking and Savings as well as well as SoFi Credit Card.
The timing of those things have taken slightly longer than we would have anticipated just given the macroeconomic backdrops and the vast demand that we've had for RFPs at the tech platform business. So our outlook remains the same and our enthusiasm for both the synergies, but between the two businesses is unchanged in addition to the robust growth outlook for the tech platform being the strong as we've seen.
Unidentified Company Representative
Great. Next question comes from Christian P. Why should shareholders be confident in holding long term?
Anthony Noto
I'd like to take a step back and kind of frame this for everyone, especially if people are not that familiar with SoFi. But at the highest level, we believe we're the best positioned to be the winner take most. When we went through the IPO process, we laid out an investor presentation that talked about organization our vision and our strategy and why we thought it would deliver a sustainable competitive advantage to allow us to be the winner that takes most.
Two years later, I couldn't be more confident in that vision and strategy and mission and our execution sense then. For those that are not familiar, our mission is to help people achieve financial independence and realize their ambitions. We're trying to help people that have worked hard academically.
They've worked hard professionally, and they're just not getting to where they want to in their life. They don't have the home they want. They don't have the size family they want. They may not have the crew that they want. They may not be on track for retirement or for educational capabilities to their or -- to their family members.
And so we want to help them in every major financial decision they make in their lives and all their days in between, because it's necessary for us to do that, so they actually get to the point that they have enough money to realize that dream. So we want to help them borrow better, say better, spend better, invest better and protect better.
And if we can do all of those things in a unique way for them in a personalized way, then they can get their money right and realize their versions. That means we have to be a one-stop shop. We can't just be in one product category and avoid product categories that are hard. Home loans is a great example. It's one of the largest economic decisions some will make in their life, and it's probably the largest emotional financial position on making their lives.
It's a business that's hard to make money in, in downturns like we've seen with high interest rates in that market today. And it's very easy to make money when rates are very low, and you can't exit and enter these businesses when you want. You have to be there and build a relationship with your members. And so that's been our approach.
To date, we're the only company that I'm aware of digital that's offering products across those five verbs that I laid out, and we've executed successfully. The second important point about the Company is our competitive advantage. We draw a competitive advantage from the fact that we are a one-stop shop and when we drive success in one product and drive trust and reliability in that product, that member takes a second or a third product from us.
And when they do that, it adds up to the highest lifetime value. And that highest lifetime value on a per member basis allows us to get better rates as it relates to things like SoFi Money, lower interest rates on things like loans and more products and services like our free certified financial planner and all the content that we produce.
And all the other ways that we add value like giving people for rewards for just using our app or setting up things that make them better in their facial like recurring investments. We're leveraging our budgeting our products and services in relay so they can invest more of their disposable income, help them get there faster through compounding.
And that one-stop shop does provide us with that higher lifetime value. But importantly, we want each of our products to be best of breed from a consumer value proposition standpoint, and to do that, we want to continually iterate over and over on being faster and having the best selection of product category and giving great content and great convenience and then, of course, making our products better when they're used together.
Not only do we want to have the best to beat product from a consumer standpoint, we also want to have best-of-breed unit economics. And the combination of those things allows us to operate at lower cost and higher LTV, which is the sustainable competitive advantage. Add to that, the scale that we've achieved in members on track to over $2 billion of revenue this year, on track to achieve profitability already driving tangible book value growth.
And what's in front of us is really up to us to capture, from here. it's about becoming a household brand name that is known by everyone when they think about who to using the financial services industry. And that, in total, allow us to be the winner that takes most in the financial services sector as it relates to technology delivery services.
Next question.
Unidentified Company Representative
Great. Next up, where do you see the Company in 2025?
Anthony Noto
It's -- it would be hard for us to give you an outlook for 2025 today, but I'll give you some sense from where we're headed directionally. And we've talked about these things in the past. We do believe that over time, you'll see our business be third borrowing, a third technology platform revenue, and a third financial services revenue.
In 2024, based on our outlook right now and things change all the time by time we give guidance, come February, when we report results, it's likely that in 2024, 50% of our revenue will come from borrowing and 50% of our revenue will come from the technology platform and financial services combined. We've talked in the past about getting to an EBITDA margin long term of 30%.
We remain very confident that that's achievable. We've consistently had greater than 30% incremental margins throughout 2023, and that provides a good leading indicator on the margin outlook. Long term, we want our net income margin to be 20% and we're trying to build the business to have a return on equity of 30%, and that's including the technology platform business.
In terms of member growth, we've barely scratched the surface with our more than 7 million members. By 2025, our hope is that we're adding close to $1 million, if not more than $1 million per quarter in new members versus what we've averaged in the $400,000 range throughout 2023.
In addition to that, you'll continue to see us go deeper and broader in the product categories we are today. There's so much left for us to add in those categories without having to enter any new businesses or new areas outside of our current offerings.
With that, I'll take your next question.
Unidentified Company Representative
Great. And that question came from Deron W. This next one comes from Ousmane N. asks what is SoFi doing to expand? Is there a plan to buy companies in the sector or to expand internationally?
Anthony Noto
We have really lit scaled our way to where we sit in 2023, which is an unprecedented point relative to any other company in the financial technology sector or final services overall. And so,, our focus is really about continuing to make our products more scalable to continue to make them safe to continue to drive brand awareness and to continue to build out the selection within those products.
We obviously are students of listening to our members and we listen through all channels, including social media. And I know that there's a high demand for Level 1 options. We also know there's a huge opportunity to offer retail investors, Main Street investors, alternative asset classes like private equity funds and hedge funds and credit funds and real estate investment funds.
Things that only high net wealth individuals are able to get access to like we've delivered IPOs and fractional shares to Main Street investors before anyone else. And so we have a huge opportunity within each one of the verbs that I mentioned to continue to expand. And then in addition to that, when you think about those verbs about borrowing and saving and spending and investing, protecting, we use those verbs because those are jobs we're getting harder to do.
And so there's an opportunity to help us -- allow people to buy better. Today, we're offering with our partner, Expedia online travel purchases and helping people their travel products, whether it's airline ticket or a hotel or rental car or an overall package. We're trying to offer that product at a better way to buy. You could see us do that in more categories, things like entertainment tickets, things like shopping generally.
And so in each one of those verbs will continue to build out, so no need for us to go out and buy anything big or small. We've got all the products that we believe we need to be successful. We're executing against them, and we'll continue to iterate on those five things that I mentioned. Faster, more selection, better content, great convenience and working better together.
Unidentified Company Representative
Great. Next up comes from Brian T. What will set SoFi apart from all the other fintech companies going forward to ensure your investors are in the right company?
Anthony Noto
I kind of hit on these points earlier, but I will say at a high level, go back to 1999, 2000, 2001 and then through 2005 time period. Where we are now reminds me of where we were in the consumer direct-to-consumer Internet space back in around 2001, 2002 time period. There were dozens and dozens of companies in each vertical segment of the Internet.
And after 2001, after the tech bubble burst in the res recession, there was consolidation. There was a number of companies that went out of business. But by 2003, 2004, 2005, you saw one or two companies start to emerge in each vertical category, one or two companies in online travel, one or two companies in online media are on video or in search or in just general e-commerce buying.
And I believe that over the next three years, you'll see that same thing evolve. I think we're at the point now where the leaders are emerging, but they'll start to reach escape velocity over the next two years. One big caveat is that hire for longer is a real risk to the economy. It's a real risk to any sector and one that we're cautious on and one that we're making sure that we can navigate around.
The economy has stayed relatively robust. Unemployment has stayed lower than people have anticipated. Inflation has come down. Rates have clearly been high. In an environment where higher for longer persists, my scenario may take longer to unfold, but I do believe over the next two or three years, you'll see the winners that are sitting on top of each vertical category today move further and further away from their other fintech competitors and further and further away from the incumbents.
Unidentified Company Representative
Next up from David H. Where do you see fintech in the next five years? And how will SoFi contribute to the developing technology?
Anthony Noto
Yes. Part of that question I just answered, but let me focus on the technology piece of it for a second. If you go back to that time period for the direct-to-consumer Internet space, much of the services that provided weren't built specifically for the online experience. People were basically adopting off-line capabilities onto online like shipping as an example.
And then you saw the second order effect start to take place where technologies were being built specifically for e-commerce, specifically for desktop buying and selling and media consumption. And that evolved to mobile and then to social.
We are just starting to see the technologies emerge within the Fintech sector that are needed for digital transactions that are needed for digital experiences. If you think about fraud, many of the large banks in our country are using a technique to stop fraud on digital by simply not allowing people to open up accounts.
So, there's a lot of account takeover and a lot of impersonators and fraudsters that use synthetic accounts to open accounts and then steal money. While traditional incumbent banks, they prevent them from happening right now letting you open an account. Well, SoFi is only a technology company. We don't have physical locations.
You can only open an account through our app or our website, and we've developed technologies to ensure we prevent fraud on activity from account takeover and also new account fraud. We also do that on transactions. We are on the tipping point -- or tip of the spear as it relates to the investments being made here and really partner with a number of companies.
The magnitude of investment that will take place in preventing fraud, both transactional fraud and account opening fraud is going to grow by magnitude because it's the one product that if you get right, it saves you money instantly. And so the ROE on it is very high. The large technology companies haven't really invested in this at all. It's really us the incumbents that are doing it and startups.
So, I think the one area that will change the most dramatically is fraud and fraud capabilities. And once that happens, it will allow for the movement of money to be even faster. I was reading this weekend someone was annoyed with the fact that when they pay their credit card bill on SoFi, they don't get the balance available balance increased instantly.
They have to wait a couple of days. That's a function of fraud and risk capabilities that need to be improved or the history and that person improving. I pay my credit card bill every day. My balance gets improved every day. And that as I do that more and more, we can use our algorithms to make that money available faster and to allow financial services to move faster.
If you don't have the right fraud capabilities, the right risk capabilities, you can't do that. So, the investment in front is going to be quite large, and will make the movement of money, the availability of money even faster but for the digitally enabled companies, not the incumbents that haven't invested in that area.
Unidentified Company Representative
Great. Next up, Justin W. asks, what is the biggest challenge that you foresee SoFi facing in the coming quarter? What is your strategy as an executive team to overcome the said challenge?
Anthony Noto
Well, I wouldn't focus on any one quarter. I would focus more over the next 12 months. And I'd say, there's a couple of different areas to focus on. One is the macroeconomic environment. And we've talked about higher for longer being one of the risks and scenarios that we have to be cautious about, not necessarily because of our business. Our business has shown an ability to do well in high rate environments and do well in lower rate environments.
That was a part of the initial reason for being a one-stop shop. The initial reason for being one-stop shop was more tied to our mission and what I talked about earlier in order to help people get their money right. But in a world in which we start to see incumbents having liquidity issues, large banks. It could be a tougher environment more holistically for the economy and for financial services. And so, we want to make sure that we have the right protections in place if that scenario unfolds.
That's not a scare that we're definitively calling for. It's just one that I think is more prominent now than it has been before. Given the rapid rate increases we've had over the last two years and the fact that inflation has come down but isn't entirely solved yet. The second thing is I'll go back to the risks. If you think about fraud loan activity and tough economies, the amount of motivated people to steal money to interact with the frontal service industry to benefit only increases.
And then as it relates to other companies that we partner with, we are focused on counterparty risk and making sure that we have multiple suppliers in the areas that may not be able to survive through any economic downturn. And then, of course, we're focused on our balance sheet and making sure we have proper liquidity, proper capital, and that we continue to maintain a very strict credit standards. So, we maintain our industry-leading life of loan losses on our -- on the loans that we're underwriting assets on our balance sheet.
Unidentified Company Representative
Great. In that vein Torey L. asks, how is SoFi to survive the possible upcoming recession?
Chris Lapointe
Yes. I can take this one, Rachel, and thanks, Torey. And it kind of hits on some of the points that Anthony was making, but I'll reiterate. So our business has shown the ability to perform in different rate and macro environments. And we are nimble enough that we can allocate capital to whichever businesses are doing well and profit in whatever macro environment we are in.
We've demonstrated an ability to do that consistently over the course of the last several years. Not only that, we're a secular growth story, which means we are taking share in virtually every business in which we operate and add a strong economic profile as we leverage our structural cost advantages. So that's a big difference for us.
In terms of some of the specific areas of optimism that we see, first, we're on track to reach GAAP profitability in this quarter, which helps greatly with tangible book value generation, and it provides us with much more flexibility in investing for growth. Second, in Q3, we ended up reaching contribution profit positive in financial services, which is going to continue to improve in the coming quarters. Third, we are nearing a growth inflection point in our tech platform segment and demand for our combined product suite from large attractive players is the highest that we've ever seen.
And then fourth, our cross buy rates remain really strong even as we grow our member base. And at higher scale, the benefits of our financial services productivity loop are becoming much more significant. And given all of that, as Anthony mentioned, it's important to think through the scenario where rates end up staying higher for a longer period of time, and there remains volatility in the marketplace. In that scenario, I think we need to be realistic about what that means for the industry.
Demand for our products are going to remain really robust and opportunities for us to capture that demand will also be very strong. But we can't just think about SoFi in that environment. As it's going to put pressure on other financial companies that unlike SoFi are not benefiting from growing deposits and that face notable interest rate risk as they either don't hedge or can't pass through higher rates in the same way that we've been able to do over the course of the last 1.5 years.
Those are really two -- those are two really important points for us as it allows us to manage our assets and liabilities in real time and do it at a micro level down to a loan level. In that environment, we would want to be a lot more conservative and actually see something like personal loans not grow very much at all, and student loans grow marginally next year. And so, as we think about the higher for longer scenario, when we think about being very balanced, not because of the opportunity in front of us, but because of the turmoil that may happen around us.
Unidentified Company Representative
Great. And next up, George L. asks, what AI strategies or products are you implementing or developing at SoFi?
Anthony Noto
Two have already mentioned Konecta being one in our payment risk platform being to -- it's interesting, as I read social media, we do our earnings calls. I read research reports. I listened to people on the different business networks, CNBC, Bloomberg, et cetera. Almost 99 -- almost 100% of the conversation about fintechs evolves around financial metrics things like interest rates and deposits and balances and loss rates.
And that's critically important because ultimately, that's what drives cash flow, and that will ultimately drive valuation and where stock prices go. The thing that's not talked about the thing that I think AI can have the most profound impact on outside of fronted risk is the experience in digital.
We don't have a building that you walk into, someone agree you and say hello. Someone that gets you a coffee, someone that makes you feel warm and welcome. Some of that makes you feel confident that you can trust the person behind the desk we have to deliver that through a technology platform and to deliver that through our app, from our phone conversations, from our e-mail messages. We have to deliver that 100% in a digital experience.
And I think artificial intelligence will help us do what we're focused on every day. We want to answer three questions every day. What must you do in your financial life, what should you do and what can you do? We have the products and services that give us the data when you use those products with us to answer those three questions. It requires us using technology to personalize those messages to you.
So every day, we can answer those three questions for you. In our app, you'll see there's a member home feed. No one ever asked about the member home feed. The member home feed is a way for us to deliver those three questions to you consistently every day. If you think about Facebook, you go to your Facebook home feed, if you use that product to see what's happening with your friends.
If you're a younger generation, maybe using Snapchat. If you want to see what's happening in the world, you go to Twitter to see what's happening in the world. If you want to see what's happening in your business world and you're a business network, you go to Linked in and see their home feed. When you want to see what's happening in your financial life, our goal is to build a product and service thing.
When you go to your SoFi home feed, we can answer those three questions for you. And we have the data to do it. We have the products to do it, and we have the technology capabilities to do it. Artificial intelligence is a key element that will allow us to accelerate our ability to do so. We're using machine learning there today to personalize it for you. Sometimes, you may have, for whatever reason, a higher balance on your credit card.
You may go to your member home feed and see a card that says, Anthony, your credit card is 80% utilized. You're paying 24.99% interest on that outstanding balance. Would you consider refinancing at a lower interest rate, 14% and to determine out over two years, you have a path to bring it down and improve your credit score, which may allow you to then actually refinance at a lower rate. You may have a mortgage that's due next year, and interest rates are going up, we may prompt you to refinance sooner.
While the rate you're refinancing at today is higher than your existing rate, that rate that you get next year is going to be higher than today, when you want to know that ahead of time, so you don't miss that opportunity to refinance at a lower rate. You may be sitting on $20,000 of cash across all your different accounts. That's not compounding, that's not getting a higher interest rate. We can make a suggestion that you will call with a certified financial planner.
You can set that call up by simply hitting the button, picking a date and time and your phone ring at that point in time. And you'll hear a live person helping you how to allocate that excess cash that should be compounding over decades as opposed to getting no yield on a daily basis. So, I think there's a huge opportunity for us to continue to evolve our digital interface in a way that's personalized, that's solution-based and helps you get your money right because we're answering those three questions on a daily basis.
Unidentified Company Representative
Great. And we're just about at time. Anthony, any closing remarks you'd like to share with the group?
Anthony Noto
Before we close, I do want to take one moment to emphasize how much we appreciate the engagement and informed perspectives you all show in regard to SoFi and the future of our business as retail shareholders. We know many of you probably have full-time jobs, families or other commitments, but taking time to learn and engage with SoFi and any other companies you invest in is the best way to make informed decisions and get your money right.
To the Twitter universe, I read all your tweets you may work harder every day. You make me proud that you care so much about our company that we're putting so much time into. I also want to underscore how proud I am of our team's relentless ability to go beyond persevering through the disruption and volatility of the financial services industry this year by delivering record results so consistently.
As we enter the last month of 2023, I could not feel more blessed by our great team's ability to execute to support our more than 7 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.
Thank you for joining us today. We look forward to more opportunities for conversations like these.
Unidentified Company Representative
Thank you to everyone. The recording will be available on our IR site later today. Have a good one.
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SoFi Technologies, Inc. (SOFI) SoFi Shareholder Q+A Conference (Transcript)