Student loan business ‘declined meaningfully,’ SoFi CEO says

SoFi CEO Anthony Noto joins Yahoo Finance Live to discuss fourth-quarter earnings, 2023 guidance, student loan trajectory, growing economic stress, and the outlook for borrowers.

Video Transcript

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RACHELLE AKUFFO: SoFi is getting a boost today after reporting record adjusted net revenue for the fourth quarter and giving upbeat guidance for the year to come. Now, this comes as President Biden gears up to back his student debt relief program in court as the backlash continues.

SoFi CEO Anthony Noto joins us now, alongside Yahoo Finance's own Brian Sozzi. Good to have you both here. So I first want to start, obviously, it's been a bumper time ever since that announcement from President Biden. How much of that do you attribute to what you've seen in the last quarter?

ANTHONY NOTO: Well, what President Biden has announced, and President Trump before him, is two things. One, a moratorium on federal student loan borrowers from having to pay their loans. And then subsequent to that, the president announced a forgiveness plan.

So since March 2020, our student loan refinancing business has declined meaningfully. It's running at about 25% of what it was prior to March 2020. But that's sort of old news. We've delivered seven consecutive record revenue quarters in a row, this fourth quarter being a very strong end to four record quarters in 2022 for an exceptional year. And we're growing 58% year-over-year.

So we reported $443 million of revenue, up 58%. That's actually faster than the growth rate in Q3. And our profitability improved meaningfully at 55% sequentially to $7 million of positive EBITDA, bringing the full year to $143 million of positive EBITDA.

So really hard to find a company doing what we're able to do, and it's really driven by the diversification of our business across being a one-stop shop for your financial needs all on a mobile phone. And we're looking to do roughly $1.9 to $2 billion of revenue, up 25% to 30% in 2023, in addition to achieving GAAP profitability by the end of the year in the fourth quarter.

BRIAN SOZZI: Anthony, once there is resolution on the student debt front, how do you expect the trajectory of your student loan business to fare?

ANTHONY NOTO: If it comes at the end of the period that he's articulated, which means by June and then there's a 60-day period for the servicers to start the payment send out process, we don't believe we'll see a pickup until that time period, so August, September. And we actually don't believe it will go straight back to where levels were prior to 2020. Just given where interest rates are, it's likely to be a slower build. But that's all factored into our 2023 outlook, which is still quite robust.

BRIAN SOZZI: For those not familiar with the SoFi model, Anthony, take us through the performance in the quarter for personal loans, very large uptick there. Is that a sign of growing economic stress?

ANTHONY NOTO: No, not really. Our market share in unsecured personal loans is quite small at about 6%. So we're stealing market share. We go after what's called a prime customer, high income and high credit. So if you think about a FICO score, our average FICO scores are in the 750s for our loans.

And we manage to a life of loan loss of less than 8%. And it's been meaningfully below that. In fact, we haven't seen delinquencies even get back to where they were in 2019. I think we're just one of the few companies that understands how to write unsecured credit. And so we're gaining meaningful market share.

Having the bank license also helps us meaningfully. Our deposits are now up to $7.5 billion versus about a billion at the beginning of the year. And we save about 190 basis points using those deposits, which allows us to give our members really competitive interest rates on their loans. So it's a great product that we can serve well with our deposits, but also helps us drive revenue for our money and checking account product, which allows us to give our consumers high interest at 3.75% on savings and 2.5% on checking without restrictions and full functionality on your phone.

RACHELLE AKUFFO: And that growth in-- that you saw in high-quality deposits really stood out. Any plans to sort of reallocate some of that capital into diversifying into other parts of your business?

ANTHONY NOTO: Yeah, the deposits, we can only really use those to buy loans or originate loans. But we do have ample amount of cash on our own. On our balance sheet, we ended the quarter with about $1.4 billion of pure cash and cash equivalents, another $400 million of investment in treasuries and other securities, and then another $400 million in restricted cash. So really a strong cash position and liquidity position, which allows us to invest.

We're at the point now, though, where we can drop about $0.30 of every incremental revenue dollar year-over-year to the EBITDA line, and that's what's going to allow us to drive to GAAP profitability by the end of the year. One of the huge inflection points we hit in the quarter is that our EBITDA is now equal to stock-based compensation, which is the first step you need to be able to show a path to GAAP profitability, and we're at that point now.

The second key inflection point is that our lending net interest revenue is now greater than our directly attributable costs in lending, which means we're not dependent on other forms of revenue streams from lending to cover our costs within lending. So a lot of things come together, a really strong end to an exceptional year, and those are just some of the highlights.

RACHELLE AKUFFO: And I mean, looking ahead down the road, we know that the education department earlier this month said that it wants to transform the current income-driven repayment program on some of these federally-backed student loans. Any inkling of perhaps what that might be and what that might mean for your business if there is an overhaul of the system?

ANTHONY NOTO: Yeah, there's already an income-driven repayment plan that exists, and there's a new one that's been announced by the Department of Education that is much more favorable for people to do. We think these types of programs are really critical to helping people that have taken on too much student loan debt or, in some cases, were misled and they don't have the ability to pay it back. And so we have to create programs for targeted groups of people.

The programs that we don't support are widespread programs that give to the rich or give to the wealthy or give to the people that are fully capable of paying back their student loans. And unfortunately, the administration and the Department of Education hasn't taken that approach, and they're wasting taxpayers' dollars. We should absolutely fund those people that need the help. We should forgive those people that need the help. But those that are capable of being paid-- those that are capable of paying need to be put back into payment, and they-- and they shouldn't have their loans forgiven either.

And I think that's the real rub. There's currently a debt ceiling issue that's coming. If they just eliminated the moratorium on student loan payments, they'd recoup $50-- $5-- sorry-- $5 billion of tax revenue on a monthly basis, which could help fund some of that debt with better servicing. And so it's right now a political quagmire. And unfortunately, we don't have leaders in Washington that are thinking about the taxpayer every day and using these blanketed programs to subsidize people that don't need it.

BRIAN SOZZI: Anthony, well, on the topic of Washington, we got a key Federal Reserve meeting this week, likely get another interest rate hike from the Fed, likely a couple more on the way. How does that impact your outlook for originations in your home business and other parts of the business this year?

ANTHONY NOTO: Yeah, so right now, we're benefiting from three strong businesses. So we have the lending business, which you discuss, which is about 60% of our revenue that's doing quite well. Two is our tech platform business, which we enable 130 million accounts in banking-like accounts or B2B payments, and that tech platform business is doing quite well at around $80 million. And then we have our financial services business, which includes checking and savings, brokerage, cryptocurrency, robo accounts as well as credit card and insurance, and that finished the quarter at about $60 million, a little bit above that.

All three of those businesses had record revenue quarters, which contributed to our seventh consecutive revenue quarter overall for the company. So we feel like we're in a really good position to be able to operate in the environment. We do expect the Fed to continue to increase rates to a peak of about 5%, and then following the forward curve to see two rate cuts after that. And our outlook for 2023 that's calling for $1.9 to $2 billion of revenue approximately, which is 25% to 30% growth, factors that in as well as GDP decline of 2 and 1/2% and unemployment of about 5%.

BRIAN SOZZI: Unrelated to any of this, Anthony, I know you're a big football guy. Who wins it all? Who wins the Super Bowl?

ANTHONY NOTO: You know, I'm not going to make a prediction yet. Yesterday's outcome for our hometown 49ers was quite unfortunate. Obviously, the Eagles have a great team and I think are going to give the Kansas City Chiefs a really tough time. And maybe as we get closer, we can get back on and can give you a point of view.

But I'm still licking the wounds, so to speak, of seeing our hometown team the 49ers just have some unfortunate turn of events with Brock being hurt and then the backup quarterback Johnson being hurt and really not even being able to compete in a way that you would want to on such a big game.

RACHELLE AKUFFO: Indeed. I mean, here in the Washington area, no love for the Philadelphia Eagles. But you know, well, I'll keep my predictions for now. A big thank you for joining us. SoFi CEO Anthony Noto and our very own Brian Sozzi. Thank you both.