Orion Digital Corp. (ORIO) Q2 2023 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Mogo Q2 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 10, 2023. I would now like to turn the conference over to Craig Armitage. Please go ahead.

Thank you, Joanna, and good afternoon, everyone. Thanks for joining us. Just a few notes before we get started. Today's call will contain forward-looking statements that are based on current assumptions and subject to risks and uncertainties that could cause actual results to differ materially from those projected. The company undertakes no obligation to update these statements, except as required by law. Information about the risks and uncertainties are included in Mogo's Q2 filings as well as periodic filings with regulators in Canada and the United States, which you'll find on SEDAR, EDGAR and through the Investor Relations website. Secondly, today's discussion will include some adjusted financial measures such as non-IFRS measures. Please consider these as a supplement to and not as a substitute for the IFRS measures, and we've included reconciliations to those both in the filings and the investor deck. I'll now turn it over to Dave Feller to get started. Dave?

Thanks, Craig. Thank you, and good afternoon. Welcome to our second quarter 2023 results call. I'm joined today by Greg Feller, our President and CFO. Over the past year, we focused our team and resources on accelerating the path to profitability, narrowing our product focus and building a more efficient operating platform, one that will allow us to scale Mogo profitably over time, while also driving long-term organic growth in our three core pillars. As you can see, we're continuing to make solid progress. We continue to significantly improve adjusted EBITDA, which went from negative $4.1 million last year to positive $1.8 million this quarter. Cash flow from operations before investment in loan book improved from negative $2.5 million last year and roughly breakeven last quarter to positive $2.1 million this quarter. Although revenue was down slightly from last year due primarily to the elimination of unprofitable products, gross profit increased from $11.3 million to $11.9 million. Our progress goes beyond efficiencies as we are also seeing growth in our three key business segments, which we will touch on. As part of this, we increased our full year adjusted EBITDA guidance to range of $7 million to $9 million. Although much of our focus has been on narrowing our focus and simplifying the business, along with driving efficiencies in every area, we have also been spending time investing in growth initiatives in all three pillars of our business. As we move forward, we expect more and more of time and resources will be towards driving profitable growth. Importantly, today, we are already seeing organic growth. Lending, although, down year-over-year, is up sequentially. Wealth assets have grown about 14% year-over-year, and payment volume is up 50%. Beginning with wealth. Wealth includes Moka, MogoTrade and Mogo Asset Management which is an emerging B2B growth opportunity for our wealth business. Total assets in wealth are up 14% year-over-year, and this segment now contributes about 1/3 of our subscription and services revenue. Perhaps most importantly, the growth we are seeing is all organic as we are essentially spending nothing on marketing these products. Obviously, this is a massive market measured in the trillions, and we have three meaningful ways to grow within it. Although from a product perspective, we've been focused on the development of Trade, Moka continues to be an important business and a big opportunity going forward. In terms of revenue, Moka is the biggest driver within wealth. Our goal is to build the best and most effective passive wealth solutions in Canada. That means making it easy for anyone to get on track to becoming a millionaire and helping everyone build wealth more effectively than what they are currently doing. I think, the best way to understand our primary value proposition is comparing investing through Moka versus the average mutual fund, which is still the dominant way most Canadians invest with almost $2 trillion today in mutual funds. Given the average fee for a mutual fund is around 2%, assuming the same return for both portfolios over a 50-year period, you would end up with about double the amount of money with Moka. Our value proposition is simple. Moka is designed primarily as long-term wealth solution based on an S&P 500 strategy. Now the reality is the average mutual fund historically dramatically underperforms the S&P 500. In fact, research shows that 95% of financial professionals can't beat this benchmark over time. With Moka, users can also set up short term savings goals, and our current short-term yield is 5.3%, significantly higher than rates found in any high interest rate savings account. Again, this is all for $4.99 a month. And at any time, users can adjust their contributions, pause them, do one-time deposits and set up as many goals as they want all from the app. This is a massive market and we are a very small player with a very compelling value proposition that positions us for significant long-term growth. Mogo Asset Management. This is a business that we have talked about in the past, and it's become a meaningful part of wealth. This is a B2B model, where we offer an independent platform for portfolio managers to grow their business. We provide the regulatory, technological and operational infrastructure needed for an advisor to build their business. And as an exempt market dealer, we also offer the ability for foreign investment managers to distribute their alternative funds in Canada. This business continues to grow just by word-of-mouth, and is now at a scale that's driving meaningful revenue and profit contribution. We are excited about the long-term growth prospects here. In terms of product development, MogoTrade has been our primary focus for the last 12 months and we continue to make progress in our path to product market fit. Like Moka, our goal is to build the most effective self-directed trading platform in Canada, one that actually helps people become a more successful investor. MogoTrade is built for serious investors that know how hard it is to beat the market and are looking for every edge they can get. With zero commission, zero FX fee, and zero CO2, MogoTrade is the simplest, lowest cost and most sustainable way to invest in Canada. In terms of our competitive moat, we have built a very low platform that enables us to offer this unique value proposition. While still early days, we continue to see strong signs of product market fit, including strong core retentions, solid Net Promoter Scores and a continued growth in assets on the platform. Within wealth, MogoTrade is the fastest growing product. Payments. Carta is our payments business that runs completely independently of Mogo, with its own team and resources. Carta continues to grow payments volume up over 50% to $2.5 billion. This is the second quarter in a row with year-over-year growth of 50%. Similar to our wealth products, Carta offers payment processing at a fraction of the cost of big players. And in today's world with a focus on efficiency and profitability, we think this positions Carta well. In terms of the long-term growth opportunity, payments is a massive market and we are very small players, so there is lots of runway for Carta. We have a long history in digital lending with over 20 years, and this continues to be an important part of our business. Our moat includes 20 years of data and experience through multiple market cycles and deep organizational knowhow across all the required capabilities. Many fintechs are looking to get into lending in some way which speaks to the attractiveness of the business and the market opportunity. As I mentioned earlier, although down year-over-year, originations have been growing, which drove a slight growth sequentially and we expect the growth to continue. While we also like the size of the opportunity for lending as a standalone product, we are also pleased with how synergistic it has become with wealth. Think about a traditional banking model where customers come in for savings, checking, credit cards and then attached to things like mutual funds. We see a similar opportunity here. What's more is the same habit that enables someone to pay-off their loan, can be transferred to saving and investing i.e. going from being in debt to building wealth. Now our results are really attributable directly to the performance of the team, which continues to impress. The team has really embraced our high performance culture and is helping to improve productivity across the board. Total team members have gone from a high of 391 down to about 211, and Mogo itself has gone from about 320 to only 150, a metric that I think highlights our progress as revenue per employee, which has gone from about 135,000 in Q1 of 2021 to about 303,000 this quarter, all while also improving our growth prospects within our three pillars. As we make further progress on our goals and see the results, the team continues to get more engaged. We believe we're just getting started. With that, I will turn the call over to Greg.

Thanks, Dave. We are very pleased again with our performance this quarter where we achieved further meaningful EBITDA expansion driven by continued success in reducing our cost base through performance initiatives. Specifically total OpEx decreased by 38% compared to Q2 of last year. In dollar terms, that's a decrease of $8.1 million, exceeding our original targets of 25% to 35% reduction. I want to thank the entire team for their work to help us achieve these results, and as Dave mentioned, we appreciate how everyone has really embraced our high performance culture, which continues to drive improving results. As previously discussed, our efficiency initiatives included a strategic decision to exit subscale and unprofitable products, which is having short-term impact to our revenue growth as we saw in the current quarter. However, and from a sequential basis, we were actually up slightly. Importantly, these initiatives also resulted in material improvement to gross profit and gross margin year-over-year of about 900 basis points. Our savings, along with improved margins, resulted in rapid improvement in adjusted EBITDA year-over-year to $1.8 million in Q2. This compares to a loss of $4.1 million EBITDA in the second quarter of '22, and perhaps more impressively was up 80% from Q1. Importantly, these efficiency initiatives also resulted in increased cash flow from operations before investments in loan portfolio from negative $2.5 million in the year ago quarter to positive $2.1 million this quarter and up from just over breakeven in the first quarter of this year. In addition, our adjusted net loss decreased every quarter in '22, and that trend continued this year with Q2 adjusted loss of $2.9 million versus $3.9 million in the first quarter and $9.5 million at the same time last year. The results give us increased confidence in our ability to deliver further adjusted EBITDA expansion this year and reach our 2023 targets. With today's results, we actually increased our full year adjusted EBITDA guidance, which I'll review in a moment. In addition to improved operating profitability, we continue to have a solid financial position. Ended the quarter with cash and total investments of $52 million, which included combined cash and restricted cash of $22 million, investment portfolio of $13.5 million, plus a $16.7 million stake in Coinsquare, which post quarter end was converted into 87 million shares in TSX listed WonderFi Technologies. We believe the new WonderFi is well positioned in the crypto market in Canada as the only fully regulated crypto exchange through Coinsquare, a growing crypto payments business and a strong balance sheet. Turning to our outlook, we continue to focus on growing our adjusted EBITDA and improving our cash flow, while at the same time making prudent investments in future growth. Specifically for 2023, we're focused on achieving full year adjusted EBITDA of $7 million to $9 million up from our previous guidance of $6 million to $8 million exiting 2023 with an annual adjusted EBITDA run rate of $10 million to $14 million, which is based on a Q4 '23 adjusted EBITDA target of $2.5 million to $3.5 million. We believe this will position us well for both margin expansion and accelerating revenue growth in 2024 and beyond, and puts us on a path to achieving our rule of 40 target of combined adjusted EBITDA margin and revenue growth rate of 40%. We also believe it's highly differentiating for a public fintech at this scale to generate positive adjusted EBITDA while continuing to make investments in our three core pillars. Lastly, as you probably notice in our release today, we have decided to move forward on a 3:1 share consolidation, which will address the NASDAQ share price requirement, and will also result in us having less than 25 million basic shares outstanding. The consolidation is expected to go in effect from a trading perspective on Monday, August the 12th. With that, we'll now open up the call to questions.

[Operator Instructions] First question comes from Adhir Kadve at Eight Capital.

Congratulations on these results. I just wanted to ask on the OpEx reductions. Are you largely done with what you wanted to do at this point in time? Or how much more is there really to still go with the OpEx reductions to really increase the adjusted EBITDA?

Yes, so Adhir, I'll take that, and Dave can add on any comments that he wants. I would say we are still looking; we continue to look at efficiency opportunities. So I would say most importantly, really the lens that we're looking at any OpEx reductions are not through a, hey, just cut costs, but through this high performance culture on how do we improve efficiency in all parts of our business. And we continue to believe there are opportunities to do that. But I would say the lion's share of those OpEx reductions are definitely behind us from our perspective as we sit here today. And we obviously are continuing to make investments in the business. So importantly, we really are looking to balance our OpEx level with an adequate level of growth investments that we do believe can drive longer term growth rates. And our goal as I -- as we talked about is to really be in a position by the second half of 2024, where we're starting to achieve that rule of 40 target, which obviously means we have a combined revenue growth and EBITDA margin in the 40% range. And I think that's what we're looking to make sure we're able to deliver on. And that requires obviously an adequate level of investments as well.

Excellent. And just as we think about that rule of 40 target, would that be more weighted towards more EBITDA, or would it be weighted more towards revenue growth or would it kind of be 50/50? Because there's obviously lots of levers in the business that you can pull, but there's also great growth opportunity as well with Trade and Moka, and all the things that you mentioned in your prepared remarks. So how would you think of that rule of 40 as we -- if we're thinking, call it, as we're sitting here next year?

Yes. I think, high level, 50/50 growth rate EBITDA margin is probably the right way to think about it. But I do think, that our aspirations are to have higher growth than that. And if that requires a little less EBITDA margin to enable that, and we think it's long-term profitable growth, and I think that's an adjustment we'll make, but I think the base level is something close to 50/50 with sort of adjustments around the margin, depending on the opportunities and where we see that growth potential.

Okay. Excellent. And then, I wanted to ask about the product market fit in MogoTrade. What really still needs to happen to really achieve that product market fit? And is there -- are we still thinking -- or when are you guys still thinking about like a broader launch to the market?

Sure. So it's Dave. I think maybe the right way to think about MogoTrade is really taking a step back and just thinking about wealth itself. And in particular, kind of, our objective is to build the best wealth building platform in Canada, which is based on a strategy of having a best-in-class passive along with a best-in-class active investing solution. But it's also based on the belief that, for the vast majority of people, they should rely primarily on a passive solution. So as much as we're building this DIY active trading solution, our fundamental belief is -- and again, whether if you think about what our objective is, our objective isn't to create the biggest trading platform. It's to create the most successful wealth building platform, and it's a combination of the two. So as an example, I mean, given the stats that I, in fact, shared in my remarks, 95% of professional money managers can't beat the S&P 500 over time. So what does that mean for the average DIY investor, right? So we are really trying to educate. This isn't about trying to get as many people into Trade. It's actually trying to get people into the right solution. And for most of those people, actually Moka is the right solution. So -- and what we are seeing now is even as we market Trade for some people, Moka may be the better solution. So if we bring a 1,000 people into Mogo, we actually don't care which one they choose, we just want them get is the best solution, right? And by the way, obviously, the Moka business itself is reoccurring revenue subscription-based. So it's got some attractive natures from that, but we believe that having both of these platforms actually makes overall attractiveness there. And there is always going to be synergy. A lot of people who still invest passively also have some level of active investing as well. So there is going to be some synergy there. From a product market fit perspective, we talked about that only because it really is about understanding that when you are early days in a product, that's the reality of where you are. We actually believe today that based on the current product and the current user experience and features, that there is no big missing element to MogoTrade today, right? It really is about just continuing to see the feedback, making small tweaks to it, and continuing to improve how we market and communicate that value proposition. So the reality is today, there is not a lot of development that we feel we need to make to the platform. But maybe perhaps a lot of small tweaks is the best way to answer that.

Yes, and Adhir, I guess what I would just add is, again, our goal here and the way we are really investing and looking at the wealth businesses is to grow the wealth business. We are not looking at it from the perspective grow any one product. We want to grow the overall wealth business. And we believe the right way to do that, just like we believe the right way to grow the overall Mogo is having synergistic products and having a compelling value proposition to bring members into Mogo. And those members may or may not choose to use all our products. But what we care most about is they are using some of our products and we are building and growing that. And so we are less focused on any one individual product by itself and really sort of growing that overall pie. And I think what we have really seen continue to highlight this quarter and I guess what we are articulating this quarter, which I don't think we have articulated before is the synergies that we're seeing of wealth across our broader member base and how that's playing to our broader member base, our members that weren't in wealth before. And that value proposition, quite frankly, driven more by Moka today. I mean, we're not really in this sort of hot retail stock trading environment that we were a few years ago, and I'm sure that will come and go. But from an overall perspective of the long term, that recurring revenue, recurring investment theme to our users and our members, that's the story that’s I think really, really playing well. And we're seeing what we believe is really good monetization metrics in that that's starting to happen there.

And then last question, I'll pass the line here. Just the WonderFi shares. Obviously a significantly more liquid investment now for you guys, so it just kind of gives you a lot of optionality. What are the plans for those shares? Are they largely -- do you just see a lot of opportunity with what WonderFi is doing? Just kind of thinking through what you'd like to do with those shares?

Yes, so look, early days, post transaction there. So, the team there is working on integrating the three businesses. And we think that WonderFi now has a very unique trading platform for crypto in Canada. And again, the only fully regulated exchange in Canada, a growing payments business. So we think there's a lot of upside there. And we're early days, so we're in no hurry to monetize the position there. But obviously, as you say, given that they're public, it gives us a lot of optionality. I think we feel good at Mogo about our existing position. Again, really important metric that we hit this quarter, cash flow positive from operations before investment in loan book. The reason that metric is so important is the investment in loan book, as you know, is a dial we can control. If we turn that dial off, that actually turns into positive cash flow from the loan book. But if we're growing the loan book, obviously, that is a use of cash, but we're building asset on our balance sheet. But importantly, we're now at a point where effectively we are self-funding a lot of the growth of our own loan book. And that was a really important milestone that we hit this quarter.

[Operator Instructions] Next question comes from Scott Buck from H.C. Wainwright.

First one, if the Moka revenue is reoccurring versus transactional, that would seemingly make it more valuable. Are there M&A opportunities there where you could potentially scale the wealth business meaningfully?

Yes, it's great, Scott. I mean, there definitely are opportunities there. I mean, I think stepping back and thinking about M&A for Mogo. As you know, we have been active in the past. We haven’t been active more recently, but we do think we have a very unique asset and platform in Canada. And key differentiators are 2 million-plus members makes us one of the biggest in Canada, and a strong underlying profitable model with scale. I think there still remains a number of fintechs in Canada that are subscale, that haven't reached profitability, and it's going to be challenging in these markets to be able to do that. So I think that gives us a lot of options as we think about M&A, and that could be in the wealth area for sure. So that's something that we'll keep an eye out here as we move forward.

That's helpful, Greg. I appreciate that. And then turning to the lending business. There's a lot of talk here in the states about credit card balances reaching all-time highs. It sounds like the demand is there for your own lending. I'm curious what the credit environment looks like in terms of quality and maybe where we go from here?

Yes. So look, I think a couple of things I would say on that. First of all, Mogo has been in lending for 20 years. And I think we have navigated through all markets, including the global financial crisis and economic times that are a lot more challenging than the times we're seeing right now. The reality is, is we haven't really seen any significant deterioration in the economy in Canada. I think a lot of people are predicting a soft landing here. But we're also -- we're taking a cautious approach. We have a very small loan book relative to the size of the TAM here. There were -- this is a multibillion-dollar opportunity from a loan perspective here. And we're sitting here today in the $55 million range. So we're very small. And it's just one component of our overall revenue piece. I think our goal there is that it's not a drag on growth and that it contributes, but we really kind of see more a primary driver. The other thing just to remind you, our average loan size, very small is just over $1,000, average payment size very low. And I think that's why we've been able to navigate through more difficult times in a very positive way. So we're seeing good performance in the loan market today. And relative to our scale, we think there's huge opportunity, and it's just going to be 1 of the three components that we're going to be executing on.

That's helpful. And then last one on payments. I'm curious where you guys see the incremental opportunities. Obviously, 50% volume increase year-over-year is pretty impressive. Kind of curious where we go from here?

So the business is predominantly a European-focused business, and we have some good customers there that we are growing with. And we believe we have an opportunity just with our existing customer base to meaningfully grow the business from the level it's at right now. And I would say that that's our primary focus today. So we -- as Dave mentioned in his remarks, we've really been positioning the business to be the low-cost leader in the market, and to be able to produce -- support our customers at high volume at the most cost-effective price. And we think that's a very differentiated strategy. And so I do think in the longer term, there will be opportunities for us to go in and compete with other players that, quite frankly, we don't think can match our pricing. So we're trying to build every part of our business on a model that allows us to be a low-cost winner. So we can have the lowest pricing in the industry and still make money. That's what we did with MogoTrade, and that's what we're going to be doing on our payments business as well. So we think that gives us a lot of flexibility and opportunity ahead of us.

There are no further questions. I will turn the call back over for closing comments.

Okay. Thanks again for joining us on our Q2 call. We look forward to updating you post Q3. Thanks, again.

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.