$SoFi Technologies Inc.(SOFI)$ mission: “ to help our members achieve financial independence in order to realize their ambitions. More simply stated, to have enough money to do what they want.”
In January 2022, SOFI received regulatory approval to become a bank holding company and to acquire Golden Pacific, and its wholly-owned subsidiary, Golden Pacific Bank.
Generally SOFI has three segments in its business.
1 - Lending Segment - under this segment, there are 3 products:
- Student Loans. Primarily operate in the student loan refinance space, and later expanded into “in school” lending,
- Personal Loans. Primarily originate personal loans for debt consolidation purposes and home improvement projects.
- Home Loans. Historically offered agency and non-agency loans for members purchasing a home or refinancing an existing mortgage.
2 - Technology Platform Segment
The Technology Platform segment consists of Galileo, which is a provider of technology platform services to financial
and non-financial institutions. Galileo provides vertical integration benefits with SoFi Money and deposit accounts held at SoFi Bank. SOFI earns revenue on Galileo’s platform Technology Platform Fees and Program Management Fees.
3 - Financial Services Segment - there are multiple products under this segment, including cash management
and investment services.
SoFi Money is a digital, mobile cash management account.
SoFi Invest is a digital brokerage service that provides a streamlined mobile investing experience through which SOFI offers multiple ways to invest and give members access to active investing, robo-advisory and digital assets services.
Other includes:
SoFi Credit Card
SoFi Relay which is a personal finance management product that allows members to track all of their financial accounts in one place and utilize credit score monitoring services.
SoFi Protect, which partners with insurance providers across auto, life, homeowners, property and casual, and renters
products and estate planning to help the members protect their assets.
Also there is a financial services marketplace platform branded Lantern Credit to help applicants that do not qualify for SoFi products with alternative products from other providers, as well as providing a product comparison experience.
And, Equity capital markets and advisory services
Some risks with SOFI
SOFI has multiple products and therefore, is competing at multiple levels with a variety of competitors.
Operating as a bank holding company, SOFI is subject to significant additional regulation.
Lending segment brings in about 75% of total revenue for the year ended 2021, so we cannot ignore the credit risks and interest rate risk.
Strength
A key element of underwriting process is the ability to facilitate risk-based interest rates that are appropriate for each loan. Using SoFi’s proprietary risk models, SOFI can project quarterly loan performance, including expected losses and prepayments. The outcome of this process helps to determine a more data driven, risk-adjusted interest rate that SOFI can offer to members.
Operating as a bank holding company can enhance SOFI overall profitability by lowering the cost to fund loans (by utilizing members deposits held at SoFi Bank to fund loans).
SOFI has launched the member home feed that has been an important and additional driver of new product adoption. It deem as an important part of the strategy and ability to use data as a competitive advantage.
Key metrics
The key financial measures that are used, along with the key business metrics, by management to evaluate the business and measure performance is Contribution profit (loss), which is the primary measure of segment-level profit and loss reviewed by management and is defined as total net revenue for each reportable segment less expenses directly attributable to the corresponding reportable segment.
From the three segments, the Financial Services was at contribution loss, which is due to the increase in:
- sales and marketing (increased by $150.3mil or 54% compared to year ended 2020). Advertising expenditures has cost an increase of $44.2 mil, and the second major increase of $38.5 mil is related to increasing utilization of lead generation channels during 2021.
- general and administrative (increased by $261.2mil or 110% compared to year ended 2020). This was largely caused by an increase in employee compensation and benefits of $120.7mil and an increase in the fair value of the warrant liabilities of $86.8 mil.
The table below presents the key business metrics that SOFI management uses to evaluate the business, measure performance. All metrics were increased significantly.
Management Guidance
For Q1 2022, SOFI management expects to generate $280 to $285 million of adjusted net revenue, up 30% to 32% year-over-year. For the full year 2022, management expects to grow adjusted net revenue 55% year-over-year, to $1.57 billion, and deliver adjusted EBITDA of $180mil.
My thought on SOFI: With current net loss of $483mil and adjusted EBITDA of $30mil, SOFI path to profitability is still a long journey. However, I think SOFI will be able to reduce the sales and marketing cost and employee compensation as a ratio of revenue very soon if the 50% revenue growth is sustained.
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