MoneyLion Q1 2022 Earnings Review: are they pivoting away from consumer banking?
Last time MoneyLion ( ML ) caught my attention because it was one of the few SPACs that was delivering on the promised growth numbers (i.e. $155 million in promised revenue in 2021 vs. $165 in actual revenue). During their Q1 2022 earnings call they reiterated their revenue guidance of $325-335 million in 2022, which greatly exceeds the $285 million revenue promised in their SPAC presentation. To be fair, they are growing through acquisitions (they acquired a financial services affiliate network Even Financial, and a content agency MALKA); but hey, you don’t judge the winners!
This time, an interesting aspect for me is their “pivot” into the enterprise segment. Thus, the company is guiding for the Enterprise segment revenue to reach 50% of total revenues in just 6-9 months. Given the deterioration of profit margins in their consumer segment (because of the rising provisions for their core product, Instacash Advance), this is a very logical pivot.
However, I would argue that this pivot, if successful, could pave the way for several neobanks across the globe that didn’t manage to reach profitability in the consumer segment and cannot raise additional funds in the current environment. Let’s look at MoneyLion Q1 2022 results!
If you are new to MoneyLion, I recommend reading the profile of the company that I wrote earlier in the year: “MoneyLion: are investors missing out on this rapidly growing neobank?”
MoneyLion finished Q1 2022 with 3.9 million customers, which represents a 117% YoY growth. As I wrote in my previous review of the company, the total number of customers should be treated with caution, as MoneyLion defines this metric as a “cumulative number of customers that have opened at least one account, including banking, membership subscription, secured personal loan, cash advance, managed investment account, cryptocurrency account or an affiliate product.”
In addition, following the acquisition of Even Financial (an affiliate network for financial services), the total number of customers also includes “customers that have submitted for, received and clicked on at least one offer, including loans, credit cards, mortgages, savings and insurance products, from a Product Partner via our Even Financial marketplace.”
The company does not disclose the number of active customers, as well as the split of customers between MoneyLion banking services and the Even Financial affiliate network. Thus, only the increase in the total customers can be seen as a relevant metric (i.e. 2.1 million customers signed up for MoneyLion services or interacted with Even Financial network during the period from Q1 2021 to Q1 2022).
MoneyLion reported $408 million in originations during Q1 2022, representing 116% YoY growth. MoneyLion defines originations as “the dollar volume of the secured personal loans [ Credit Builder Plus ] originated and cash advances [ Instacash Advance ] funded within the stated period.”
Instacash Advance is a short-term lending product, and Credit Builder Plus is a “temporary” lending product (meaning the customers revert to a regular credit card once they have successfully built their credit score). As the result, despite $408 million in originations during the quarter, MoneyLion's “finance receivables” (you can think of “finance receivables” as the loan book) decreased from $140.3 million at the end of Q4 2021 to $138.6 million at the end of Q1 2022. The short-term nature of MoneyLion loan products does not lead to a build-up of a big interest-yielding loan book.
MoneyLion earns interest income on its Credit Builder Plus product only (Instacash Advance is a 0% APR product, and monetization comes through fees for expedited funds delivery and “tips”). Therefore, “originations” should be treated as the key driver of fee income (more on that below), while “loan receivables” is the key driver of the interest income (which is marginal).
However, Instacash Advance and (and to a lesser degree Credit Builder Plus) require capital and lead to credit losses, and therefore, both origination volumes and the receivables balance, are important cost drivers (interest expense and provisions for credit losses).
MoneyLion reported $69.7 in revenue for the quarter, which represents a 110% YoY growth. Following the acquisitions of Even Financial (affiliate network) and MALKA (content agency), the company started reporting revenue across two segments, “Consumer revenues” (MoneyLion core business) and “Enterprise service revenue” (mostly Even Financial and MALKA).
Consumer segment revenues grew 52% YoY and the growth in enterprise service came from acquisitions; thus, it is not reasonable to look at YoY growth. As you can see from the table above, “Net interest income” had a marginal contribution (5.2% of segment revenue); and most of the growth in “Service and subscription fees” came from the Instacash Advance product. From the company’s 10Q: “The increase in service and subscription fees were driven by increases in fee income related to instant transfer fees and tips from Instacash of $15.4 million driven by the growth of Instacash advances [ originations ].”
MoneyLion guided for the enterprise segment revenue to reach 50% of the total company’s revenue in 6 to 9 months. Assuming the company does not plan a decrease in consumer segment revenues, this implies that the enterprise segment revenue should more than double over the next 2-3 quarters. There is not sufficient information disclosure to validate this growth ambitions (i.e. growth of Even Financial and MALKA before acquisition), so for now we have to rely on the management’s guidance. However, it is clear that the company’s management is excited about the prospects of the Enterprise segment.
The company guided for $78-83 million in Adjusted revenue in Q2 2022 and $325-335 million in Adjusted revenue for the full year. The company adjusts GAAP revenue by amortization of loan origination costs and provisions for fee and membership receivables to derive Adjusted revenue. Adjusted revenue in Q1 2022 was $66.5 million (vs. $69.7 million in GAAP revenue).
The company reported $40.3 million in Gross profit for the quarter, which represents a 109% YoY growth. You can see the calculation provided in the company’s 10Q below. Surprisingly, the company does not include interest expense and provision for credit losses on finance receivables in this calculation. Deducting the interest expenses ($6.2 million) and provision for credit losses on finance receivables ($19.5 million) results in a Gross profit of $14.6 million for the quarter.
Interestingly, the acquisition of Even Financial and MALKA did not impact the gross profit margin of the company significantly. As you can see from the chart below, the company maintained a gross profit margin of around 60% through the last 6 quarters. My two takeaways from this are a) Even Financial and MALKA operated with gross profit margins of around 60%, and b) not including interest expense and provisions for credit losses in the gross profit margin calculation of MoneyLion's core business makes it look like a high gross margin business (while in reality, it isn’t).
In summary, treat the reported Gross profit calculation with caution. Interest expenses and provisions for credit losses are direct costs for providing the company’s services; and thus, shall be included in the calculation of Gross profit (even if GAAP allows not doing it).
The company guided for an Adjusted Gross profit margin of 60-65% in both Q2 2022 and for the full year 2022. The company calculates the Adjusted Gross profit margin by dividing GAAP gross profit by Adjusted revenue (described above).
MoneyLion reported $100.3 million in Operating expenses, which represents a 195% increase compared to Q1 2022. The growth in expenses was to a large extent driven by consolidating the costs of Even Financial and MALKA; thus, comparing individual expense positions is complicated. However, one thing is clear: acquisitions brought in more costs than revenues.
I will argue again, that the interest expense is part of “operations”, and thus, should be included in the operating expenses. Making such an adjustment would imply total operating expenses of $106.4 million and an Operating loss of 36.7 million for the quarter (compared to the Operating loss of $2.2 million in Q1 2021).
As I argue above, comparing Q1 2022 with Q1 2021 for most of the expense positions is meaningless given the consolidation of Even Financial and MALKA expenses. However, one thing is comparable: provisions for credit losses for finance receivables. These are the provisions that MoneyLion has to make when they originate Instacash advances or Credit Builder Plus loans. As the chart below illustrates, provisions have been around 5% over the last four quarters, which indicates that the write-off rate is not deteriorating.
Nevertheless, given higher origination volumes, the absolute dollar value of provisions for finance receivables increased from $4.9 million in Q1 2021 to $19.5 million in Q1 2022. At the same time, revenue from the Consumer segment increased from $32.13 million in Q1 2021 to $48.96 million in Q1 2022. Thus, the growth in originations is essentially eating into the Gross profit of the company (4.9 / 32.1 = 15.3% vs. 19.5 / 49.0 = 39.8%).
Moreover, the interest expense increased from $1.47 million in Q1 2021 to $6.2 million in Q1 2022, which makes the Consumer segment even less profitable (1.47 / 19.5 = 7.5% vs. 6.2 / 49.0 = 12.6%).
As the remainder, Instacash is the key source of revenue for the company’s Consumer segment. Thus, if the origination volumes continue growing, the gross profit will continue to deteriorate…to the extreme point, where MoneyLion might consider abandoning the product and the whole consumer segment. However, I believe they are aware of the problem and should be considering product repricing or scaling down the volumes.
Net Income (Loss) and Adjusted EBITDA
The company reported a Net Loss of $6 million and a negative Adjusted EBITDA of $24.8 million for the quarter. The Operating loss of $36.7 million (per my calculation) was offset by the tax benefit of $28.4 million and a gain in fair value of the warrant liability of $3.9 million.
As can be seen from the table below, Q1 2021 result was heavily impacted by the changes in the fair value of warrant liability and convertible notes. Excluding these two items would result in a Net Loss of $2.2 million in Q1 2021 and $9.9 million in Q1 2022 (this adjustment would not impact Adjusted EBITDA results).
The company guided for a negative Adjusted EBITDA of $20-15 million in Q2 2022, and a negative Adjusted EBITDA of $50-45 million for the full years, as well as reiterated its ambition to exit 2022 with breakeven Adjusted EBITDA.
As the chart from the quarterly presentation suggests that the path to the “breakeven Adjusted EBITDA” includes quite aggressive cuts in expenses relative to revenue (i.e. from 138% of Adjusted Revenue in Q1 2022 to 118-126% in Q2 2022). Unless the company plans to scale down its originations (to lower provisions) or lay people off (to lower compensation and benefits expenses), this improvement most likely is expected to come from revenue growth. So far, MoneyLion management has been able to deliver on its promises (MoneyLion is one of the few de-SPACed companies that did not lower their forecasts following listing), and this is another test.
Things to Watch in 2022
Revenue growth. Given the management’s guidance on the share of the Enterprise services revenue (50% in 6-9 months), I would expect rapid growth in this segment’s revenue. Moreover, my understanding is that “breakeven Adjusted EBITDA” will be delivered through revenue growth (in the Enterprise segment) and not through cost cuts.
Originations and Provisions for credit losses. As I illustrated in the text above, higher origination volumes lead to higher provisions for credit losses and interest expenses and destroy the gross profit margin of the Consumer segment. I believe the management should be considering either repricing the service or scaling it back.
A further build-up of Enterprise services. I believe the acquisition of Even Financial and MALKA was the first step in the company’s transition (pivot?) into the enterprise segment. For instance, during Q2 2022, MoneyLion partnered with AEON in Malaysia to provide financial services in the region. However, MoneyLion will act only as a technology provider in this partnership. I guess we can expect more of such partnerships in the future.
In summary, MoneyLion remains an interesting company to follow in my opinion. Seeing the growth of their core business slow down, they acquired Even Financial and now look at even more adventurous growth opportunities (like the partnership with AEON). I guess I wouldn’t be surprised if they eventually become a pure “Banking-As-A-Service” player (especially, if the provisions keep eating into consumer business margins), which would be a super interesting pivot to follow. Can’t wait for their next quarterly report!
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Source of the data used above: Investor Relations
Disclosure & Disclaimer: despite rocky performance in 2021 and early 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.