SoFi (NASDAQ:SOFI) reports earnings on January 30 before the market opens. In this article I review the 7 Key Performance Indicators (KPIs) for SoFi that I track. I’ll then discuss a few of the other results, specifically forward-looking metrics that provide insight into their performance in the current macro environment, that I will be keeping an eye on during the upcoming earnings.
KPI 1 – Members
Last quarter during their earnings call, CEO Anthony Noto set the bar by saying that they are targeting 400k new members each quarter with a focus on member quality. That is a rather low bar to set as the last four quarters have all hit above that number. 4Q has historically been a very good quarter for member growth, most likely driven by the increased brand awareness from SoFi Stadium during the NFL season.
Last quarter was the very first time since 2019 that they experienced less than 10% QoQ member growth. Relative growth will slow over time, but I think the dual tailwinds of exposure from the stadium and their best-in-class APY on their Checking & Savings accounts (2.5% and 3.75%, respectively, as of the time of writing) should lead to membership growth exceeding 10% QoQ growth and that they’ll add over 500k members in the quarter.
KPI 2 – Products/Member
A core part of the bullish thesis for SoFi is that they are able to increase the lifetime value (LTV) of their members by getting those members to sign up for new products. The increase in lifetime value comes from boosting the revenue via each new product used. Additionally, the new products come with no new customer acquisition cost and make for a stickier relationship with their members as they become more embedded in the ecosystem.
Cross sell had a nice steady trajectory, but has flatlined in the last two quarters. I will be interested to see if the introduction of SoFi Plus in this quarter has helped with additional cross selling. SoFi Plus is the umbrella under which they grant additional benefits for members who direct deposit at least $1000/month into SoFi. It highlights perks in different products. Hopefully that leads to more members signing up for new products to take advantage of the perks. Last quarter products/member was only at 1.52. Anything below this number would be a disappointment, and I would hope that between SoFi Plus and the late addition of options trading to their brokerage product, SoFi Invest, that it will tick up to 1.55.
KPI 3 – Sales & Marketing spend per new member
This is essentially SoFi’s customer acquisition cost or CAC. This is a bit of an overestimate because they do not break down their S&M spend between their consumer business and their technology segment. However, the trend here is also not what I would like to see, as overall CAC seems to be slightly increasing. One would hope that as the business scales that they’d be able to take advantage of that to make their marketing dollars stretch further.
An alternative way to view this is that they are happy with their current CAC and that LTV of those members justifies the outlay in marketing dollars. Management has spoken several times about being satisfied with how much they are spending to acquire new members, which lends credence to this line of thought. While I do think that it’s probably that current LTV justifies current CAC, I would like to see efficiency gains here so that they can improve their margins, especially in the financial services segment which is currently losing money for the company. I have no particular expectation for this KPI, but it is something that I want to keep an eye on and I’ll also be looking for any commentary in the earnings call surrounding this issue.
KPI 4 – Deposits
As I’ve covered in prior articles, every $100 in new deposits that SoFi gains is worth about $1.25-$1.50 in yearly revenue until they are able to cover their entire loan book with deposits rather than warehouse lines of credit. That may not sound like a lot, but when you start talking about billions of dollars, it adds up quickly.
SoFi’s deposit growth has been very linear since an initial ramping period after receiving their bank charter. I expect this to continue or accelerate. Last quarter 50% of newly funded Checking & Savings accounts had set up direct deposit within 30 days, and 85% of new deposits are from direct deposit members. If the linear trend were to continue, Q4 would have ended with $7.3B in deposits. At 7.3B in deposits, the savings from funding their loans with these deposits compared to warehouse lines should be in the range of $7M. That should translate to an extra $7M in lending revenue this quarter compared to Q3 based on nothing other than deposit growth. Other digital banks that have already reported earnings such as Discover (DFS), and Ally (ALLY) have also seen an acceleration in their deposits. Both Discover and Ally are currently offering 3.3% APY in their savings account, which is lower than SoFi. LendingClub (LC) reports earnings on January 25, although their deposit growth is not expected to be as strong since they reported in their 3Q earnings call that a large depositor will be withdrawing their money in 4Q.
I think deposits accelerate past the linear trend and am hoping to see $7.7B or more.
KPI 5 – Galileo Accounts
This is where the macro weakness really kicks in. A lot of Galileo’s partner neobanks are being hit hard by the worsening macro environment. Some of them have gone out of business and many others are seeing significant decreases in growth. This has manifested in deceleration of Galileo account growth.
I do not expect to see more than 130M accounts and think that 127 is probably feasible. Hopefully there will be other good news in the technology segment, but I do not expect it to come from account growth.
KPI 6 – Personal Loan Lending Originations
This will be the quarter where SoFi surpasses LendingClub (LC) in personal loan originations, having reeled in Upstart (UPST) in 3Q22. LendingClub recently announced that they were laying off 14% of their workforce and did a pre-release of their 4Q earnings where they stated that total originations were $2.5B. The bulk of these are personal loans, although they do have some auto refinance and commercial loans as well. This is a 30% QoQ decrease in total originations that probably came mostly from a combination of weakness in their marketplace originations and tightening credit standards for the loans they are holding until maturity. They also had an extra injection of cash from a tax credit that they leaned on in 3Q22 to increase loans funded by LendingClub. Regression back to business as usual after that one-time injection of liquidity is also a reason for the relatively smaller origination number in 4Q.
I believe SoFi will continue to increase originations without compromising their lending standards and will be above $3B in personal loan originations for the first time. Demand for this product remains very strong, and SoFi’s liquidity is high enough to absorb the demand for the foreseeable future. I do not expect them to overreach for significant growth because of the continued uncertainty about the economy in 2023.
KPI 7 – Tangible Book Value
Increasing tangible book value means that the loans that SoFi’s loan book are not losing value over time and that they are cash flow positive. The details of how to properly analyze SoFi’s cash flow can be found in one of my previous articles, but Free Cash Flow is a bad metric for banks that tells the wrong story. SoFi’s actual cash flow was +$18M in 3Q22, I plan on detailing that calculation again in an upcoming article.
JP Morgan analyst Reginald Smith just started coverage on SoFi at a neutral rating. One of the risks he highlights is that SoFi could be “caught in a vortex of a once-in-a-generation Fed tightening cycle.” That Fed tightening cycle could lead to write-downs on their loan book. This would happen because demand from capital markets dries up as fiscal policy tightens. Lower demand from capital markets decreases how much SoFi can charge when they sell their loans. That decreases the fair value of their assets. The easiest way for investors to track this is in the book value, as that will reflect changes in the value of their loans.
SoFi’s tangible book value crept up in 3Q22 on the strength of their positive cash flow, and I will be looking for this trend to continue.
Other Important Metrics
SoFi is extending their holding periods from 3-4 months to 6-7 months, and so I fully expect their loan book to continue to grow. However, the biggest risk I see with their current model jives with the risk highlighted above by the JPM analyst, although I have a slightly different risk to highlight than he did. Decreasing demand from capital markets is bad for more than just the fair value of their loan book. SoFi only has so much capital that they can leverage to expand the amount of loans they can hold on in their books. Selling loans at a profit has been their bread and butter for well over a decade and they have an excellent track record of maintaining a gain on sale margin (GOSM) of 4-5% on their student loan and personal loan portfolios. GOSM has slowly been decreasing and additional deterioration in demand would hit there first. I’ll be keeping an eye on both the volume of loans sold and the profits they can squeeze from those loans.
Other people have voiced concerns that SoFi might miss estimates this quarter because their guidance included a small boost in student loan originations in 4Q. The idea was that the moratorium was set to expire at the end of December. A similar bump in originations in student loans occurred in 4Q21 when the moratorium was scheduled to be lifted on January 31, 2022 (see below). That moratorium was extended when student loan forgiveness was postponed until the Supreme Court hears the case regarding its constitutionality. That extension came after SoFi gave 4Q guidance and some are concerned that the loss of those originations will negatively affect this quarter’s earnings.
I do not think that SoFi will miss due to lower than expected student loan originations because most lending revenue does not take place in the quarter of originations. There is a lag between originating the loan and the time when SoFi starts earning interest on that loan, so this should have minimal impact on this quarter’s results.
Leverage ratio is a function origination volume and loan sales, but this is the measure of how much SoFi can continue to grow their loan book. Currently they have a CET1 and Tier 1 leverage ratio of 16.4% in SoFi bank and 24.2% for SoFi Technologies as a whole. SoFi’s structure as a company is slightly complicated since they actually have two businesses under their umbrella that hold loans. Those businesses are SoFi Bank and SoFi Lending Corp. Basically, SoFi Bank holds loans that are collateralized by deposits, while SoFi Lending Corp holds loans that are funded by warehouse facilities.
The Bank also had about $50M in retained earnings that will be added its capital reserves from 3Q (this will also be covered in depth in a separate article, the same one where I’ll talk about cash flow). For now, SoFi has excess liquidity in SoFi Technologies and could easily recapitalize the bank to bring the bank’s ratios higher if needed. This is especially true if deposits continue to grow at the pace highlighted above. Another $2.5B in deposits this quarter as I predicted above would push the SoFi Bank ratios to around 12% if they were to lend against that entire amount. 12% is probably too close to their required minimums for comfort. Again, my take is that they have a lot of liquidity to move into the bank as required and still could take on at least another $6-$7B in assets before they truly start to push up against the minimums across the entire business. That gives them about two quarters even assuming no loan sales at all before this really starts to become an issue, but it is something I want to be cognizant of and monitor.
Personal loan delinquencies are increasing across all lenders and SoFi is no different. I’ve said it before and I’m sure I’ll repeat it again, but SoFi is not immune to the macro conditions. The fact that their average personal loan borrower has a FICO of 746 and average salary of $160,000 should insulate them to an extent. How much it shelters them is the question that I would like to answer. Delinquencies as a percentage of total loan balance is increasing in both their student loans and personal loans and I expect that trend to continue. Unfortunately SoFi was not a public company before the pandemic so it is difficult to compare current performance with previous performance since that data is not available. I will be keeping track of this data and doing what I can to compare it to other lenders to see how SoFi stacks up moving forward.
Galileo and Technisys Updates
I mentioned above that I expected Galileo accounts to have a weak quarter. However, that doesn’t mean that the technology segment will necessarily be weak overall. Management has been talking about the possibility of signing a big financial institution. At both the recent Citi Fintech conference and the Credit Suisse conference, CEO Anthony Noto and CFO Chris Lapointe used very similar language regarding their discussions with large financial institutions. Noto said:
There are incumbents that have relationships with older technologies, and it’s not a question of whether our technology is better or a lower cost solution. It’s a question of when they’re willing to make the change from an older technology that’s siloed. So, we’re in discussions with large banks that we’ve never been in discussions with before, because we have a complete end solution. I think we’re in the pole position to win those big financial institutions, big bank deals, but it really is going to come down to when they decide to make the transition.
Chris Lapointe echoed two weeks later:
And it’s our view that it’s not a question of whether our technology is superior or we’re able to deliver this technology or service at the lowest cost, it’s more of a question of when it happens, not if. So we feel like we’re extremely well positioned to win some of these mandates with larger financial institutions who are operating with legacy providers in a very siloed way, but it’s much more of a question of when, not if.
While I do not expect to hear anything specific on the earnings call regarding these contracts, there are sure to be analyst questions and I’ll be looking forward to seeing how management addresses them. They have also been pivoting away from focusing on neobanks to other B2B sectors like their current client Toast, a payment platform for restaurants. Hopefully, there will be updates in the B2B space to report as well.
SoFi’s fourth quarter earnings will give significant insight into how they are handling the current macro conditions. There are several bellwether indicators that I will be keeping a very close eye on that I have highlighted here in the article. So far their execution in spite of difficult headwinds has been exemplary and I expect that trend to continue. However, if chinks in the armor begin to appear, these are places and metrics I will be looking at to identify them. SoFi remains one of my highest conviction investments for the long term and I look forward to seeing another set of data that will indicate if they can maintain resiliency moving forward.