SoFi Q2 Earnings Review Part 1: The Results

SoFi beat all analyst expectations across the board and their own guidance on their Q2 earnings, as is tradition. As with any quarter, there were some positives and some negatives. Also, listening to that earnings call was an absolute blast. I called for management to bring their A-Game to the call. I have no idea if they read that or not, but they absolutely brought it. CFO Chris Lapointe and especially CEO Anthony Noto crushed that earnings call like an Army middle linebacker blitzing a Navy quarterback with an empty backfield. They preempted almost every single bear argument, they got out in front of the narrative, and they threw down some absolute zingers.

My earnings preview was split into predictions followed by a discussion about the way I thought the story would play out. My thoughts on earnings are too long for a single article, so I’m going to split this review in two. This one is going to talk about the actual results. I’ll do that by comparing those results to my predictions and provide some charts along the way to illustrate the points better. Part two is going to address the narrative of the company and how Noto and Lapointe just left the bears stranded and dying on the top of Fair Value hill (yes, that’s definitely hyperbole, but it gives me a chance to use this awesome image from the king of AI-generated SoFi content Kenmegan4, so I’m rolling with it).

Members

SoFi came in with 643k new members this quarter. My prediction of 640k was almost spot on. New members are what keeps everything ticking for SoFi, and it looks like this quarter SoFi established a baseline of 600k+ new members per quarter as the norm going forward. This graph is a classic example of exponential growth.

Total members now sits at 8,774k. That means if they can add just 613k members in each of Q3 and Q4, they will close out the year with 10M members. That’s a huge milestone and pretty clear evidence that they are capturing a lot of market share. I can’t imagine this isn’t a goal internally and I think they get there.

Originations

Personal Loans

Ok, I was way wrong on personal loan originations. Based on what SoFi had done in Q4 and Q1, I thought we’d see originations flat to down QoQ. Instead they had a massive surge of +28% QoQ. That is the second largest quarterly growth number ever for personal loans and by far the largest in absolute terms. They were able to grow originations by over $900M. Just look at the graph, that is SO many originations. LendingClub reported after hours on the same day as SoFi, and while they saw some growth here, SoFi just blew it out of the water. Upstart hasn’t reported their Q2 numbers yet. The overall trend here is pretty clear. SoFi is gobbling up the members and in turn gobbling up the origination market share

Longtime readers know that I thought SoFi had been playing it a little too safe in Q4 and Q1. The really interesting thing to notice here is on the call they said they were still being conservative in spite of this massive origination number. What that indicates to me is that there is serious demand returning for short-duration, high-yielding assets like personal loans. SoFi is originating them now and will have a lot of willing buyers for their paper with attractive yields and attractive credit profiles.

A couple more really important data points here. First, they sold $1.1B in personal whole loans at a blended execution of 106.2%! That’s more whole loans than we’ve seen in years. This is also the third quarter in a row where the gain-on-sale margin (GOSM) has increased. Additionally, almost $1B of the originations were senior secured loans. These have lower yield, but are also extremely low risk because they are passing the risk off to third parties. Every quarter that they sell a significant amount of loans at ever-increasing GOSM is proof that demand for their loans is extremely strong, that the fair value marks are justified by market data, and that liquidity is returning to capital markets. Those are all excellent developments for the business.

Yes, 1Q23 is missing. That is because they did not sell any loans in that quarter.

A few more quick data points to illustrate that they are continuing to be conservative in spite of the fact that they had such a large increase in originations. First, weighted average income and FICO in Q2 for personal loans were $168k and 747, respectively. This compares favorably to Q1, where those numbers were $169k and 746. They added almost a billion dollars in originations without compromising one bit on borrower quality. Furthermore, they are still very much on the low end of their historical average for originations/member. Before they started to throttle originations in Q4 of 2023, they averaged $538 in PL originations per member, so they probably still have around 15% upside from here just to get back to their normal origination levels.

The boost in originations, coupled with the fact that they did not have to lower their credit standards is a testament to the strong demand in the current environment from borrowers. It’s also an indication that their member growth is constantly refreshing the pool of borrowers they have. I’ve said it before and I’ll say it again. Member growth is the lifeblood of the company and is the real driver of their long-term growth.

Student Loans

Student loans was another metric where I got very close. I predicted $720k and they had $737k. This number should rise in Q3 as that’s the biggest quarter for in-school loans to be originated as students go back to school. Also, federal loan rates rose a lot in the past year and right now they are on par or possibly higher than a loan you can get from SoFi, which should drive even more in-school business to SoFi. As long as rate cuts materialize, that will be a tailwind to this business from that point on as well. I expect that this is the bottom for student loan originations.

Deposits

I thought that this would be the best quarter for deposits ever and I predicted $3.05B in new deposits. I was way off because net deposits were only $1.4B. At first glance, that looks like a huge miss and looks concerning. However, it turns out I was actually right when I said that this would be the best quarter ever for deposit growth. Here is the graph of quarterly deposit growth.

I hear you saying, “Chris, you’re an idiot and you can’t read a graph. That is obviously their worst deposit growth quarter ever.”

First of all, how dare you say that? It’s insulting. Second of all, let me explain. Deposits are broken into three types: demand, savings, and time. Demand deposits are deposits in a checking account. Savings deposits are deposits in a savings account. Time deposits are certificates of deposit (CDs). Most people think about “deposits” as the first two, but SoFi has been offering CDs since they became a bank. CDs also pay out a higher rate than either demand or savings deposits. Here is a graph of the average rate for each type of deposit since they got the bank charter.

After some initial fluctuations due to the rapid rate hikes in 2022, you’ll notice that SoFi has to pay somewhere between 0.5%-0.8% higher interest on time deposits than savings deposits. Time deposits are the most expensive type. Now here is the deposit growth graph again, only broken down by demand and savings deposit growth compared to time deposit growth. Bars that go into the negative means that type of deposit decreased.

“Oh man, Chris isn’t an idiot.”

Thank you, I appreciate you taking back your prior insult. You’ll also notice that these numbers don’t exactly match the ones in the graph above. That is because these are averages throughout the entire quarter and the ones above are from the balance sheet, so they are a snapshot on the last day of the quarter. The story is the same either way though.

Demand and savings deposits, the amount that people are putting into the SoFi platform, reached an all-time high in the quarter. The average amount of demand and savings deposits increased by $2.9B from Q1 to Q2. Time deposits, which are the CDs that they offer through brokerages like Vanguard, decreased by an average of $726M. SoFi chose to let a bunch of CDs hit their maturity and chose not to offer new ones to replace them. They were replacing more expensive capital (CDs) with less expensive capital (checking and savings deposits). I just spent more time talking about deposits than I ever thought I would in my entire life.

Revenue

Lending

We covered most of this in the personal loan origination section above. SoFi went way harder on lending than I expected. That resulted in way more revenue than I projected. I predicted $310M in lending ANR. They delivered $339M. In my defense, SoFi lied to us in the Q1 earnings call when they said the following:

You can see for the past two years that the second quarter is seasonally flattish for lending, which coupled with our more conservative approach toward originations this year should drive a sequential decline in lending revenue, which largely offsets tailwinds in the two other segments.

I think this also shows that there really was a change in their thinking due to the change in the consensus view around rate cuts that materialized in Q2. I like that they did this and I think it is the right decision given the macro and all the reasons I listed above.

Tech Platform

This was absolutely the lowlight of the quarter. I am disappointed by the results from the Tech Platform. I understand that sales cycles are longer with larger clients. I am also aware that revenue from signed contracts might not show up for a while even after the deal is closed.

That does not change the fact that the Q2 results were poor and the downgrade in the full year Tech Platform revenue guidance was disheartening. Despite the fact that they reiterated the long-term growth rate, this is still the first public guidance that I can remember that they’ve issued and missed. It’s also in the least transparent part of the business so it is almost impossible to understand what went wrong here, which is really frustrating as an investor.

2023 looked like it was a return to growth in Galileo after three consecutive quarters of growth from Q2 to Q4. However, Q4 is still the high water mark as both Q1 and Q2 in 2024 are slightly down from there. I have been listening to the Galileo podcasts, which have shed a ton of light on what they are building and I finally feel like I understand this product offering. It sounds like it has the capability to really be a game changer for SoFi. However, the execution at Galileo has not matched the excellent execution everywhere else in the business. The Tech Platform is in the penalty box for me after this quarter.

The chance to redeem themselves must be swift and convincing. The new guidance is mid-to-high teens growth in 2024 compared to 2023. 15% growth this year means $215M of revenue in Q3 and Q4 combined. That means they need two straight quarters of meaningful growth. Derek White and team need to prove that their offering is what they say it is by putting up numbers to justify it. I need to see two strong quarters of real growth here to close out the year followed by continued execution next year. I will not be fully convinced until I see four straight quarters with 15%+ YoY growth.

I also don’t like that we got the same lines from management about sales cycles and deferred revenue when they talked about the Tech Platform. It’s one thing if we could see the underlying numbers and factors so we can understand what is going on. We can’t. Repeating the same lines is fine if the segment is performing and hitting guidance. When the segment is not performing, I do not think it’s ok to shrug it off so casually. Radical accountability and greater transparency are required when things go wrong. I am disappointed that we did not get either.

I predicted $103M in Galileo revenue and SoFi only put up $95M. If they had gotten anywhere near my prediction, which is where they should have been based on their guidance, this would have been a flawless quarter. It’s too bad they were unable to pull that off, but they’ll get another chance starting in Q3 now to make amends.

Financial Services

Speaking of making amends, Q1 was a bit of a letdown in Financial Services growth. They more than made up for it this quarter. This was their highest growth quarter in financial services and they did it with 70.5% incremental contribution margin. That means for each dollar of revenue growth in Q2, 70 cents went straight to contribution profit. Two years ago, financial Services contribution margin was -177%. That means for every dollar of revenue it brought in, they had $2.77 of expenses. One year ago, contribution margin was -4.4%, so they spent $1.04 to get $1 of revenue. Contribution margin is now 31.4%, so for every $1 in revenue there are only $0.69 in expenses. That’s incredible operating leverage and highlights that Financial Services has high fixed costs but low variable costs and there is room for further margin expansion.

Financial Services is the only reason that SoFi grew 22% year over year. Lending and Tech Platform both saw single digit growth. For a segment that was a money-losing afterthought in 2022, that’s extremely impressive. Financial Services has done a yeoman’s work for the business as a whole. Without FS, SoFi would be a busted growth story. With FS, they are still growing over 20% YoY in a transitional year for the business.

Here are three more points that need more attention in the discussion about Financial Services. First, it is by far the easiest segment to predict. Second, there is no way to argue about the accounting. This is all cash revenue and there aren’t a bunch of fair values to squabble over. Third, this is all capital-light revenue with low risk. This is exactly the type of revenue the market says it wants, but it appears they are completely discounting it now that they got it.

What makes it so easy to forecast? You take the average revenue per user, which slowly rises over time, and multiply it by total members, which is not particularly difficult to predict. Here is average FS revenue per member.

What has driven the increase over time? Deposits are a part of the story here, but not all of it. For example, between Q1 and Q2, deposits per member actually decreased slightly from $2,657 to $2,621 even as FS revenue per member increased from $18.51 to 20.07. FS is driven by the productivity loop, and there is no better illustration of the that loop working than the graph I just posted. And while the decrease in Technology Platform guidance was disheartening, it was very exciting to see that they increased the Financial Services guidance from 75% growth to “more than 80%” growth.

Financial Services is where they engage users and its driven by innovation. There aren’t very many ways to innovate in Lending apart from making it fast, frictionless, and intuitive. Meanwhile, many of the initiatives in FS do show innovation, from the alternative assets that are driving AUM growth in brokerage, to the Pay in 4 buy-now-pay-later offering, to the new credit cards that will be rolling out, to offers and referrals driven by insights gained from Relay. The bulk of future innovation will be here as SoFi starts to make it easier for members to know what they must do, can do, and should do each day in their financial lives.

I’ve also not seen this covered anywhere else, so I’ll mention it here. SoFi has the potential to also supplement FS revenue through investment banking. They’ve already participated in several high-profile IPOs. In some, like Rivian and ARM, they just offered IPO pricing on shares. On others, like Instacart, SoFi participated as an underwriter. Noto talked in the earnings call about the innovation they are already bringing to the table in the earnings call when he said, “We are now finalizing a turnkey way for companies going public to extend participation in their IPOs at scale to their customers, employees and partners.” That should be a further tailwind that will help them into more underwriting deals as the IPO market appears to be getting its legs again.

How much can FS really scale? The potential is massive. Noto highlighted this in the call:

I often say businesses like credit card and brokerage by themselves, someday could be bigger than SoFi is in total today. There are companies that are very big that are just in the credit card business and just in the brokerage business. And today, those are small for us, and we're investing aggressively.

I’d add there are Financial Services verticals that don’t even exist in house, or are very small right now that you could add to this list like SMB banking, investment banking, asset management, and insurance. Noto has said he wants to drive 20%+ CAGR for decades, not three years or five years, but for decades. For that to happen, the company has to always have new S-curves for growth coming online. The next big S-curves where they are “investing aggressively” are credit cards and brokerage, and that revenue is going to show up in Financial Services.

Total ANR

I predicted $585M in ANR. SoFi delivered $597M. That is a $37M beat on their revenue guidance, which is actually the second highest beat they’ve ever had. It was also a $31M beat on analyst estimates. This is also a brand new all-time high for revenue in a quarter that many believed would be weak and where revenue would decrease quarter over quarter. It really was an excellent quarter overall.

EBITDA and Net Income

This article is already too long, so I’ll finish up quickly. I predicted $135M in adjusted EBITDA and $25M in GAAP net income. They posted $138M and $17M, respectively, which was pretty close to my estimates. A big part of the reason that their margins were slightly lower this quarter than last quarter is the extra sales and marketing spend associated with getting $4.2B in personal loan originations. However, that marketing spend will continue to pay dividends for the next 18-36 months, so a slight hit to this quarter’s margins are well worth it for the long-term results.

Conclusion

This was almost a perfect quarter. Tech Platform was the only disappointment. Lending is coming back, which is a really bullish sign that SoFi is seeing significant demand for their loans. If rate cuts do come in September as the market is pricing in, expect to see further acceleration in lending, which will be a huge tailwind for the business overall. Financial Services posted its best ever quarter of growth, they are releasing new credit cards, adding a subscription service to SoFi Plus, and are continuing to innovate in the brokerage space.

SoFi continues to show its resiliency and its agility in navigating an ever-shifting macroenvironment. They showed again how their diversified business model allows them to pivot to wherever the opportunities lie. When one segment disappoints and has a guidance drop for the year, the other two more than made up for it by outperforming and both had raised guidance for the year.

Subscriber update

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Disclosures: I have long positions in LC and SOFI.

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