SoFi Q2 2022 Earnings Review: SoFi needs the student loan moratorium to end

SoFi ( SOFI 0.00%↑) reported another strong quarter last week. Before the pandemic triggered the student loan payment moratorium, the company was pretty much a monoline lender offering student loans. However, over the last two and a half years, despite the moratorium headwinds, SoFi managed to scale their personal loans and financial services businesses, as well as made strategic acquisitions of Galileo and Technisys. The company now has a diversified income stream, but I argue below that in the short-term, they really need the student loan payment moratorium to end to continue growing. Let’s review their Q2 2022 results to understand why.

If you are new to SoFi, I suggest reading my previous reviews:
👉🏻 SoFi Q4 2021 Earnings: firing on all cylinders
👉🏻 SoFi Q1 2022 Earnings: let's put that bank charter to work!

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Customers

SoFi finished Q2 2022 with 4.32 million “members”, which represents a 67% growth compared to Q2 2021 and a 12% growth sequentially. The growth in the reported “products” metric suggests that the member growth came from SoFi Relay (+228K products, 20% QoQ) and SoFi Money (+212K products, 13% QoQ), SoFi Invest (+154K products, 8.5% QoQ), as well as SoFi’s lending products (+63K products, 5.5% QoQ) and SoFi Credit Card (+23K products, 19.5% QoQ). Just don’t try to sum up the number of products, as a single member can use multiple products.

In its B2B segment, SoFi’s Galileo reported 116.6 million powered accounts, which represents a 48% growth compared to Q2 2021 and a 6% growth sequentially. Galileo charges its clients transaction fees (transactions initiated from the Galileo-powered accounts); hence, the number of powered accounts is a highly relevant metric. However, Technisys operates a “traditional” SaaS pricing model and till now, SoFi has not introduced a meaningful metric that would help investors understand the performance of this business. I would continue arguing that SoFi should improve on reporting the performance of its B2B arm.

Overall, I like both the rate at which SoFi members grow, and the diversity of products that drive this growth (Money, Relay, Invest, Credit Card, etc.). SoFi is not a “monoline lender” anymore and starts looking like a full-scope consumer bank.

Loan Originations

SoFi originated $3.2 billion in loans in Q2 2022, which represents an 8.7% growth compared to Q2 2021, and a 3.5% decline sequentially. As can be seen from the chart below the driver behind the origination volumes were personal loans, which grew 91% compared to Q2 2022. The student loan moratorium continues to negatively impact the origination of student loans, with the origination volume down 53% compared to Q2 2021 and down 84% compared to the peak in Q4 2019 (the moratorium was introduced in March 2020).

Looking at the origination volumes, I would argue that SoFi desperately needs the student loan moratorium to end to continue growing its lending business. At the moment, SoFi has close to a $10 billion origination run rate in personal loans, and given that they operate in the prime segment (average FICO score of 748), I believe they might struggle with further growth in this product (especially if the economic situation worsens).

At the moment, the moratorium is expected to expire on August 31, 2022; however, it is believed that the president will extend the moratorium term. I will use Anthony Noto’s, SoFi CEO, words to explain what happens once the moratorium ends: “we'd expect the demand for that product [student loans] to really go through the roof and be back to normalized levels that we saw in 2019.”

Loan Portfolio and Deposits

SoFi finished Q2 2022 with over $2.7 billion in customer deposits, a 134% increase from Q1 2022. As the company’s management boasts on the earnings calls, the company is adding over $100 million in deposits each week. What is notable is that the company is collecting the majority of its deposits from its members. This is a stark difference from LendingClub, which has to advertise high-yielding deposits to secure funding for its origination.

The company finished Q2 2022 with $8.2 billion in loans on its balance sheet, an increase of 14% from Q1 2022. As can be seen from the table below, the growth in the loan balance came primarily from personal loans. The company’s management refrained from guiding on the pace of retaining loans on its balance sheet. However, they commented that the deposit base gives the company a 100bps (1%) advantage in funding costs compared to other sources of funding.

Let’s see how the situation progresses, but I am very positive about SoFi building up its own loan book. As I wrote in my reviews of LendingClub and Upstart, I am skeptical of asset-light lending businesses, as those rely on continuous growth in originations, and the lending business is cyclical.

Revenue

SoFi generated $362.5 million in revenue (Net Interest Income + Non-interest Income) during Q2 2022, which represents a 57% growth compared to Q2 2021, and 10% sequentially. As can be seen from the revenue breakdown below, the share of Net Interest Income in the total revenue grew from 24% in Q2 2021 to 34% in Q2 2022. The banking charter and the growing deposit base allow SoFi to keep the loans on its book (permanently, or for a longer period), so we should see further growth in the interest income revenue share.

It should be noted that the consolidation of Technisys contributed approximately $21 million to the company’s revenue in the quarter; thus, the “organic” total net revenue growth was around 48% YoY. Galileo’s revenue grew 39% YoY, so even excluding Technisys, SoFi’s technology segment provided a decent contribution to growth in the quarter. SoFi acquired Galileo in early 2020, at the peak of its student lending business, and earlier this year doubled down in technology direction by acquiring Technisys. Thus, while the student loan payment moratorium was hindering SoFi's lending business, the company managed to build an additional business line with a run rate of $330 million in annual revenue.

On the final note, I want to mention the revenue growth from SoFi’s “Financial services” segment. While it still has a margin contribution to the overall business (8% of the total revenue in Q2 2022), its revenue grew 78% compared to Q2 2022 and 29% sequentially. Usage of SoFi Invest, SoFi Relay, and SoFi Credit card keeps growing, and I believe it is critical for SoFi’s ambition to become a true consumer bank that can support its customers at different phases of their lives (not only when they need a loan). Student and personal lending are fixed-term relationships, and SoFi needs non-lending products to keep the relationship with its customers once the loans are repaid.

The company’s management guided for $830-835 million in Net adjusted revenue in H2 2022, and $1,508-1,513 million in Net adjusted revenue for the full year 2022. Adjusted revenue is the net revenue excluding the impact of the change in the value of the servicing rights and residuals rights in securitization. Adjusted net revenue stood at $356.1 million in Q2 2022, and $321.7 million in Q1 2022 (so $677.8 million in H1 2022).

As I wrote above, I am skeptical about SoFi’s ability to scale the personal loans business further (but, as an investor, I will be happy to be proven wrong), so I believe the management is expecting to grow the revenue by a) keeping more loans for longer on their balance sheet in Q3 and Q4 2022, and b) growing student loan originations in Q4 2022, as the student loan moratorium is not expected to be prolonged past 2022. So far, SoFi’s team has consistently delivered on their guidance, let’s see if they manage to keep it that way.

Operating Expenses

SoFi reported $458.2 million in non-interest expenses for the quarter, which represents a 15.5% increase compared to Q2 2022. Naturally, as the revenue grew faster than the expenses, the Loss before income tax improved to $95.7 million. As you will see later in the text, operating expenses included non-cash items, such as stock-based compensation and amortization.

Looking at the non-interest expenses as a percentage of revenue, we can see continuous improvement with each quarter. In Q3 2021 the company booked a sizeable gain on its warrants, hence the “dive” on the chart below. SoFi’s management hinted at their ambition of reaching GAAP profitability in 2023, and if LendingClub's experience with getting a banking charter is of any guidance, then I think it is doable.

Net Income and Adjusted EBITDA

SoFi reported a Net Loss of $95.8 million for the quarter, an improvement from a Net Loss of $165.3 million in Q2 2021, and an improvement from a Net Loss of $110.4 in Q1 2022. It should be noted, that Q2 2021 performance was impacted by the changes in the fair value of warrants ($71 million) and transaction expenses related to the company’s IPO ($21 million). Excluding these two items (that the company didn’t have in Q2 2022), the Net Loss actually increased YoY.

The company reported another quarter with a positive Adjusted EBITDA. Adjusted EBITDA was the quarter was $20.3 million, an improvement from $11.2 million in Q2 2021. As you can see from the adjustment breakdown above, the key adjustments are stock-based compensation ($80 million), as well as depreciation and amortization of acquired assets ($38 million).

The company’s management guided for $75-80 million in Adjusted EBITDA in H2 2022 and $104-109 million in Adjusted EBITDA for the full year 2022. Achieving this result would mean an improvement in Adjusted EBITDA margin (Adjusted EBITDA over revenue) from 4.3% in H1 2022 to 9-10% in H2 2022.

Things to Watch in 2022

• Loan origination volumes. As I wrote above, I am a bit skeptical about SoFi’s ability to continue scaling personal loan volumes, but if they achieve it I will be more than happy. Last year, student lending volumes started picking up in the anticipation of the end of the moratorium. There is little hope that the moratorium will be lifted at the end of August, but last year’s experience suggests that the moratorium ending by the end of the year, might have an impact already in Q3 and Q4 this year.

• Non-lending revenue. It is really fascinating that the student loan moratorium stimulated SoFi to diversify its business beyond student lending. Beyond personal loan business, SoFi made strategic acquisitions of Galileo and Technisys, as well as built up a revenue stream from the non-lending business (SoFi Invest, SoFi Relay). Short-term, of course, the company’s financial performance will be driven by the loan origination volumes, but technology and financial services should become meaningful contributors over the medium term.

• The path towards profitability. The banking charter and the growing deposit base should trigger the growth in interest income, as the company can retain loans on its balance sheet. Eventually, this should lead to profitability and this is really interesting to observe how aggressive the company’s management will be in reaching this point. So far Anthony Noto and his team executed with surgical precision, so I just cannot wait when they guide for GAAP profitability (I’d bet on Q2 2023).

In summary, that was another strong quarter from SoFi, hats off to the company’s management! Cannot wait for the moment when the student loan moratorium is finally lifted and SoFi starts running at its full capacity!

Source of the data used above: Investor Relations

Disclosure & Disclaimer: despite rocky performance in 2021 and the first half of 2022, I have open positions in most of the companies covered in this newsletter (including SoFi), 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.