Orion Digital Corp. (ORIO) Q3 2023 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. And welcome to the Mogo Third Quarter 2023 Earnings Conference Call [Operator Instructions]. This call is being recorded on Thursday, November 9, 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 today. 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. Company undertakes no obligation to update these statements, except as required by law. Information about the risks and uncertainties are included in Mogo's Q3 filings as well as periodic filings with regulators in Canada and the United States, which you'll find on SEDAR, EDGAR and you can access through our Investor Relations Web site as well. Secondly, today's discussion will include several adjusted financial measures, 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, which you will see in the press release and the investor deck. And with that, I'll turn it over to Dave Feller to get us started. Go ahead, Dave.

Thanks, Craig. Thank you. Good afternoon. And welcome to our third quarter 2023 results call. I'm joined today by Greg Feller, our President and CFO. Our third quarter results showcase the continued progress we're making in building a highly efficient and more profitable operating platform at Mogo, one that will allow us to scale more profitably over time, while also driving long term organic growth across our products. As you can see, we're continuing to make solid progress. Q3 revenue was $16.2 million, up from $16 million in Q2 of 2023. This is our second quarter in a row of sequential quarterly revenue growth, another solid quarter with continued improvement in adjusted EBITDA from a loss of $2.8 million last year to positive $2.1 million this quarter. Q3 gross profit increased $11.4 million to 70% margin compared to $10.8 million and 63% margin in Q3 of last year. We continue to be on a path towards our EBITDA target of $7 million to $9 million. Our progress goes beyond efficiencies as we're also seeing growth in our business, which we'll touch on. We continue to focus on both our Canadian consumer fintech business and our B2B international payments business. Over the last 18 months, we've successfully simplified and narrowed our focus and you can consider two main business segments, Mogo, which includes wealth and lending and Carta, our payments business, this runs completely independently with its own team resources. Let me highlight some of the progress and plans for each beginning with Carta. We saw a strong year-over-year growth in payment volume, driven by growth from our existing customer base. Q3 payments volume increased over 30% to $2.4 billion. Similar to our wealth products, Carta offers payment processing at a fraction of the cost of big players. And given the massive market size, we believe there's a lot of runway for growth. We continue to make progress in terms of improving the efficiency of the platform and productivity of the team, including a migration to the Oracle cloud, which will enable us to scale more efficiently. We continue to be excited about the progress in long term growth opportunity in wealth. Our main focus is on building the ultimate wealth building platform that helps Canadian investors dramatically improve their performance, while also making a positive impact. The reality is that wealth management and the investing space in Canada is broken and it’s the primary reason why the vast majority are on track to retirement. This graph illustrates the problem we are focused on solving. A 30 year study showed that the average return of equity investors was only 4% versus the 10% average of the S&P. Now if you look at our target customer who has a 50 year investing time horizon, the difference translates into a staggering 16.5 times more money. This is also one of the key reasons why 75% of Canadians between the ages of 55 to 65, who have yet to retire have less than $100,000 saved. Why is the problem so big? The incumbents are focused on optimizing for their profits, not their customers. There is almost $2 trillion mutual funds that are charging an average 2%, that's $40 billion a year in fees for the privilege of underperforming. Simply put, it is a racket. So how do we fix this? One of the big inspirations to our approach is Warren Buffet, who is widely considered the greatest investor of all time. His recommended approach is for the average investor to rely on a passive S&P 500 index strategy. And only those that are truly prepared to do their homework and have the right temperament should consider actively picking their own stocks. The reality is this isn't the approach the vast majority take and is the reason why the vast majority dramatically underperformed the market. Buffet's partner, Charlie Munger, said it best. Knowing what you don't know is more useful than being brilliant. The advice Buffet has given many times is also brilliantly simple, consistently buy an S&P low cost index fund, keep buying it through thick and thin and especially through thin. We have made it simple for anyone to get a long term path to financial freedom by following this formula, while also making a positive impact. For only $4.99 a month, we automate it and fully manage this for our users. We choose the ETFs. This is actually more complicated than most realized, given how many ETFs are available, the difference in fees and importantly choosing between hedged and unhedged. What's more, we enable fractional investing, so users can easily set up $10, $20, $400 a week any amount they choose. We also automatically reinvest the dividends. This is another important element that the DIY investors often aren't aware of. About 30% of the 10% average return through [indiscernible] actually comes through dividend reinvesting. At any time, users can adjust their contribution easily do one-time deposits and set as many goals as they want all from the app. Again, this is a massive market and we are a very small player with a compelling value proposition that positions us for significant long-term growth. It is also important to note that in most of life, the more money you have the better things you can buy. But in investing, in personal finance, this is rarely true. For those who want to actively manage their investing, we have built MogoTrade. There are many things that set us apart from every other DIY trading app. But without question, the biggest one is we are primarily focused on helping our users improve their performance versus actively trying to get them to trade more. Not only do we educate our users and how hard it is to beat the market, if 95% of professionals can't do it what makes think you can. We in fact are actively encouraging people to not trade given the reality. And for those that are really prepared to do the homework, we are building an experience that helps some investors avoid the speculation that causes poor performance and really focuses on thoughtful long term investing. As an investor, you can have three kinds of advantages: informational, you know something that other investors don't; analytical, you do your homework better than others; and behavioral, you think and act more rational than others. Behavioral advantages are by far the most interesting as they are most enduring and impactful. As Buffet says, the most important quality for an investor is temperament, not intellect. On top of our focus on helping users invest wisely, we also offer zero commission, zero FX fee, and zero CO2, making MogoTrade the lowest cost and most sustainable way to invest in Canada. We're not only proud of the experience we've built to help people improve their performance, but doing it in a way that also has a meaningful positive impact really puts our solution on another level. This is also something that our internal surveys show that our users really appreciate and value. I thought it was important that we also showcase how this is impacting real people. Vince is a real person and like many Canadians in their 20s wasn't sure how to invest, but knew it was important. Although he is consistently saving, he wasn't sure whether or not that would put him on a path to financial freedom. After discovering Mogo and gaining confidence in the approach, he's now on a path to financial freedom and what he discovered was shocking. He had just kept doing. But had he just kept doing what he was doing, he would've ended up with a fraction of what was possible. One of the things we consistently see as well is when someone lacks confidence in the approach, it also impacts the level of commitment. So as you can see, Vince significantly has increased his contributions, but that's only part of it. Had he simply increased but kept in savings, he would've been on a path to $350,000 versus the $6 million. We've seen many of these examples where the impact is typically 10 times plus versus their existing strategy. Lastly, our results continue to be driven by the performance of our team and the high performance culture we've been building. This has also helped us increase our revenue per employee, metric that we believe captures efficiency improvements. We are relatively small team going up against literally the biggest companies in Canada with almost unlimited capital and resources. This along with our mission is what motivates our team to work hard to deliver products to really help Canadians dramatically improve their financial path. With that, I will turn it over to Greg.

Thanks, Dave. Good afternoon, to everyone. The third quarter was our second quarter in a row of sequential top line growth and fourth quarter in a row of positive and increasing adjusted EBTIDA, clearly, demonstrating the strength and resiliency of our model. While we placed significant focus on driving increased efficiencies and profitability over the past 18 months, which included a decision to exit unprofitable products, we've also continued to invest in our wealth and payments platform as we view these as the two strong drivers of growth going forward. And while our reported revenue declined year-over-year due to difficult comparisons to ‘22, we have now clearly seen a return to revenue growth with Q3 revenue up sequentially to $16.2 million, our second quarter in a row of sequential top line growth. Importantly, this growth is happening with less than a million a quarter of marketing spend today. As we move into 2024 and launch our marketing initiatives for our wealth platform, we believe that this along with the strong growth we are seeing in our payments and lending business will set us up for delivering on accelerating revenue growth in 2024. Our strong focus on efficiencies resulted in total OpEx decreasing by 34% from $18.5 million in Q3 of last year to $12.2 million this quarter. In dollar terms, that's a decrease of $6.2 million in quarterly expenses, well ahead of our original targets. And although we expect some additional cost savings going forward, we plan to invest some of those savings into increased marketing development spend to drive the accelerating revenue growth we're targeting for ‘24. Importantly, any investment spend we do make will be guided by the rule of 40 and therefore require expectation of increased top line growth from that spend. These cost reductions translated into another strong quarter of adjusted EBITDA expansion. Adjusted EBITDA grew for the sixth quarter in a row, increasing nearly $5 million over the same period last year to $2.1 million in Q3. Importantly, we've also seen a corresponding significant increase in cash flow from operations, which went from negative $1.5 million in Q3 to positive $2.6 million this quarter before discretionary investment and loan book. These improvements also resulted in a reduction of our adjusted net loss in every quarter since the start of 2022, and that continued in Q3 with adjusted net loss of $2.6 million versus $2.9 million in Q2 and $8.4 million in the comparable period in ‘22. These results keep us solidly on track to deliver further adjusted EBITDA expansion in the fourth quarter and reach our full year 2023 targets. In addition to the improved operating profitability, we continue to have a solid financial position. We ended the quarter with cash and total investments of roughly $44 million. This included combined cash and restricted cash of $19.3 million, our investment portfolio with a book value of $12.7 million. And as we discussed last quarter, our assets now also include 87 million shares in TSX listed WonderFi Technologies, which was valued at approximately $12 million at quarter end. We continue to believe that WonderFi is well positioned in the crypto market in Canada as the only fully regulated crypto exchange, a growing crypto payments business and a strong balance sheet. As of July, the company had $35 million of cash and $18 million in other investments and over $700 million in assets under custody on their platform. Importantly, with less than 25 million Mogo shares outstanding today, our shareholders have leveraged to about 3.5 shares of WonderFi per Mogo share giving them meaningful exposure to this exciting asset class in crypto. Turning to our outlook. With our Q3 results, we reiterated our objectives for the full year 2023. Specifically, we are focused on achieving full year adjusted EBITDA $7 million to $9 million, and exiting 2023 with an annual adjusted EBITDA run rate of $10 million to $14 million based on a Q4 adjusted EBITDA target of $2.5 million to $3.5 million. Our year-to-date results position us well to achieve these objectives, and as we look out to next year to deliver an attractive combination of both top line growth and positive adjusted EBITDA margins towards our rule of 40 target in the second half of 2024. With that, we will now open the call to questions operator.

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

Greg, it seems like you guys are obviously poised for return to revenue growth in 2024. How does that kind of fit in or could you give a little more specifics about how that fits in with your rule of 40 and what that means for adjusted EBITDA just in terms of what levers are going where?

So yes, I think, as you know, we've been focused on adjusted EBITDA, positive adjusted EBITDA, in 2023, which we've now clearly achieved and have achieved that every single quarter. Also importantly, from a revenue growth perspective, although, we are not showing year-over-year revenue growth right now due to the comparison period in ‘22 when we had other products, we are importantly showing sequential growth. So we really believe that revenue trough in Q1 of this year and we're growing from that level, but we do expect to return to year-over-year growth in early 2024. And as you mentioned, we're targeting the rule of 40. So what does that mean? It means that we are looking to get to a revenue growth, combined revenue growth and adjusted EBITDA margin that total at least 40 at some point in 2024. And I would say that our bias is to obviously remain adjusted EBITDA positive. But our biases do have our revenue growth higher than our adjusted EBITDA margin at this point in time, just given the fact that we believe we have such a massive TAM. And so I think as we look at those two levers, we are going to be leaning more heavily on the growth side of it. But importantly, our plan is to remain adjusted EBITDA margin positive. So we have no intentions to go back negative there just to drive growth, that will be sort of a key guide post for us as staying adjusted EBITDA margin positive. But I think in the near-term given the TAM that we have got ahead of us, we are going to be more focused on getting there more weighted towards the growth side of the equation in that rule of 40 calculation.

And then second one for me, I think this was the sixth consecutive quarter of sequential decline in tech spend. Does that reflecting confidence in where you guys are in the product pipeline or is that more reflective of just trying to get to adjusted EBITDA positive?

So here is what I would say there. We have, as Dave talked about, been focused on efficiencies. And the reality is we believe with the high efficiency culture we have been building internally at Mogo, we are seeing very meaningful improvements in productivity from the team. And we believe we are operating at a higher level of productivity from all areas, including technology with a smaller team than we were before. Now as we move into 2024, and as we look at really sort of accelerating the top line, I think, the two big growth lever investments will be both marketing and technology. So as I mentioned, we do believe that we have some additional cost saving opportunities, but we actually expect to be investing those more in the growth related investment areas and the big ones there will be technology and marketing.

And then last one for me. We have been bombarded down here in the states with negative news flow in terms of where credit card balances are and then increases in auto delinquencies. Can you just give us an update on the state of the consumer credit in your business?

So as you know, we have been operating in the credit environment in Canada for now 20 years and we have gone through all cycles, including global financial crisis and managed to keep that business profitable throughout those cycles. Our customer base, in the sub-prime space, as we say, is more used to operating in an environment, I would say, a more pressured environment that quite frankly, is now covering more of the economy. But the reality is our customer base operates in that kind of area most of the time. And because of that, we generally don't see as meaningful of an increase in delinquencies in periods of stress that, quite frankly, the prime lender see. So that's point number one. And in fact, actually on our major credit metrics that we follow and track, whether it's charge off rate, whether it's total delinquencies, we have seen continued improvement over the last couple of quarters and over the last several quarters, including since 2022. So we feel really good about where we are in terms of managing the risk of that book. We've been pretty conservative on it and we also think we have a customer base that manages well through these cycles. One other data point I would just give you is that the big concern increasingly is just refinancing on mortgages and the impact that has on consumers that their mortgage payment increases significantly. But the reality is -- for us is a less than 25% of our customer base actually have mortgages majority of them actually rent. And so in a lot of ways they're -- a lot of them are insulated from what we kind of see as the biggest impact for a lot of consumers out there. So that would just be another data point.

And just if I could squeeze one quick one in. I'm curious where you guys are on your current repurchase authorization, and should we expect to see you guys continue to buyback shares at these levels?

Yes, we have significant capacity in our share buyback authorization, both on NASDAQ and the TSX. I think, what you have seen is that over the past several quarters, we have been a buyer of our stock in almost every quarter in the last four quarters. So obviously, we continue to believe that there's significant value there and the markets aren't reflecting that value appropriately. So we think that's an opportunity and a good use of our excess capital on our balance sheet. So yes, I think it's fair to say that that trend will probably continue at these levels.

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

I just wanted to talk about maybe the three pillars of growth that you guys have been talking about, and that return to growth into next year. Where do you really see or what do you really see driving that in terms of the three, the cards -- the payments business, the wealth business and the lending business, where do you really see that the growth coming from?

I mean, really, it's going to be a combination of all three of those. I think over the long run, we believe that you're going to see wealth and payments growing at a faster rate than the credit side of the business. But we think the credit side of the business will be a contributor to growth and not a drag on growth, which quite frankly has been on in the past, but clearly the big upside that we see is going to be from the wealth and the payment side. And so I think ultimately that's where you're going to see it more heavily weighted, but we believe that there's a great opportunity in all three of these segments. And so that's why we're feeling pretty confident about our ability to drive accelerating growth as we go into 2024 and beyond.

And then maybe just on the marketing, you guys have historically, always had a very strong user base, 2 million users for as long as I can remember. When you think about investing in marketing, how will you balance that investing in trying to acquire new users or will you kind of just push the new products to your current user base? Just kind of give us -- how to think about that balance as we head into 2024 and the growth aspect?

I mean, obviously, at the end of the day, we're going to continue to focus on leveraging our member base. Obviously, our member base at the end of the day it's all about efficiency. So obviously, acquiring, converting an existing member into any of our products is always going to be kind of priority number one. On the external marketing, we've always been very kind of disciplined and focused as relates to efficiency there as well. I mean, we track very closely our cost of customer acquisition, the customer payback, how quickly do we get that acquisition cost paid back and ultimately, tie that into the lifetime value of the customer. And then we continue to kind of optimize that based on what we're seeing. Part of that also comes to there's different customers out there, different segments. Same thing in lending, all customers aren't equal. Same thing on the wealth side, right? We're really focusing on growing assets. So obviously, you'll have different customer segments that are obviously worth more than other segments as well. And so as we continue to go out there with our paid marketing develop kind of those profiles, figure out what those LTVs are and what the appropriate CAC is, in the long run, it really becomes kind of a balanced blend of the two, right? So I think that's the way we look at it.

And maybe just one last one for me, just in terms of the broader optimization cost efficiency that you're looking at. Of course, we've seen the strong EBITDA performance over the last six quarters. But is that largely behind you? I guess, are you guys all done with that? Or -- and if you're not, what else needs to kind of be done on those broader initiatives?

So as I mentioned in my comments, we actually do still have some additional initiatives that we are working on, including our migration to the cloud. But what we're expecting to do is to take a lot of those savings and invest it in growth. So we are going to be less focused on just driving absolute OpEx down and more focused on driving a combination of EBITDA, positive EBITDA and accelerating top line revenue is how we're going to balance it going forward. So again, we do have additional initiatives but we do expect to use that freed up capital to invest in growth initiatives.

Thank you. We have no further questions. I will turn the call back over for closing comments.

Okay. Well, thanks again for joining us on our Q3 call. We look forward to updating you post Q4. Thanks again.

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