Orion Digital Corp. (ORIO) Q2 2024 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Mogo Finance Technologies Second Quarter Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Craig Armitage, Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Thanks for joining us today. Just a few quick 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, and you can access via the Investor Relations website as well. And lastly, today’s session will include several adjusted financial measures or non-IFRS measures. Please consider these as a supplement to and not as a substitute for the IFRS measures. You’ll see that we’ve included reconciliations to those in the press release and in the investor deck. And with that, I’ll turn it over to Dave Feller. Dave?

Thanks, Craig. Thank you, and good afternoon. Welcome to our second quarter 2024 call. I’m joined today by Greg Feller, our President and CFO. I’ll cover some of the key operating highlights, and Greg will dig deeper into the financial results and outlook. It was a solid quarter, both from a financial perspective and a product perspective. A couple of highlights include: we generated positive cash flow from operations. We had year-over-year growth in all our business lines and revenue was up 10% year-over-year to $17.6 million. Carta’s payment volume was up 12% to $2.8 billion, and we’ve also made meaningful improvements in our wealth business. Today, we look at our business through the lens of three key pillars. Each one has its own unique opportunity for long-term growth. I’ll walk through the wealth and Greg will talk about payments crypto. Wealth industry today is estimated over $6 trillion, and that’s investable assets, which include brokerage accounts, retirement accounts, RSPs, TFSAs, trust, et cetera and is a growing market. About $2 trillion of that today is sitting in mutual funds, which highlights the opportunity given mutual funds have among the highest fees, many as high as 2%, while 98% of professionally managed funds underperformed the S&P 500. For example, Canada’s largest mutual fund, the RBC Select balanced portfolio has over $53 billion in assets and has a 10-year average return of 5.8% and a management fee of 1.67% versus a 15% 10-year return for the S&P 500. Now although you could argue that these two different kinds of portfolios, many who are in this are focused on long-term wealth creation and don’t fully understand the implications. One institution is earning close to $1 billion a year off of this one fund. To put these returns into perspective, let’s assume that you have a $10,000 investment over 50 years. In the balance fund at this rate of return, you’d get to $167,000 versus $1.8 million based on the 11% 50-year average of the S&P 500. That’s almost 11 times more money. If the 10-year average of 15% holds, that number would grow to over $10 million. Same amount of money invested, same time period, but radically different outcomes. Although there’s no lack of investing products in the market today, the reality is the existing solutions in the marketplace just don’t come close to solving the problem. Most Canadians aren’t coming close to achieving financial freedom. Perhaps no stack communicates this more than a recent retirement survey that showed 75% of Canadians who have yet to retire have saved less than $100,000 versus the estimated $1.7 million average that Canadian thinks they need to retire. And as we’ve just reviewed in the previous slide, it’s easy to see why so many never come close to it based on some of the products many of them get put into. We’ve developed a radically differentiated approach to solving the problem that includes a fully managed solution complemented by a self-directed one. As Warren Buffett says, being a great investor is more about temperament than intellect. And as James Clear, the author of Atomic Habits says, much of building good habits comes down to making it harder to do the things that lead to bad outcomes and make it easier to drive the behaviors lead to positive outcomes. Our products are designed based on behavioral science to make it simple and engaging for anyone to develop the right investing habits while minimizing the ones that tend to lead to underperformance. Most of our product improvements and road map are directly related to these behavioral improvements. Another disruptive element of our solution is our fee structure. We offer both a fully managed solution, along with the commission-free and zero FX fee self-directed investing app. Along with the guidance and education investors need, all for a simple low monthly fee of $15 a month. As a simple comparison, if you had $100,000 in an average mutual fund, your annual fee alone would be around $1,600 to $2,000 a year. And if you had $1 million with a wealth adviser, it would be around $10,000. And for the vast majority, this would all be for the privilege of underperforming and most importantly, being on track to a fraction of the wealth that’s possible. We’re still very early days in our journey in the wealth space and continue to make solid progress every quarter on improving our value proposition through product improvements and how we market and communicate our value product. This last quarter alone, we released 21 new updates and hundreds of improvements. Mogo is designed to be the core part of your wealth building solution. Mogo is based on the proven long-term performance of the S&P 500. Again, 98% of professional fund managers underperformed this index. And the average investor generates less than 50% of those returns. Today, we have 18-year-olds who are on track to over $18 million by the age of 78 and over $62 million by age 90, with just a simple $50 week contribution. It’s hard to overstate how disruptive this is to the status quo. The old way would have been to have been sold into mutual funds from the bank and usually much later in life or perhaps download a commission-free trading app with the hopes of getting rich quick. Oh, and by the way, this is primarily done in the TFSA. So that $62 million would be equivalent to over $124 million in your RSP. What’s unique about our solution is we make it easy for anyone to get on a path to being a multimillionaire with a specific goal and date. How many people today are that are investing know the returns and have a plan where they know what they’re on track for, very few. One of the unique and engaging features we launched last quarter was our new leaderboard that showcases some of our top members and help celebrate and gamify getting rich. It’s also important to understand the impact of this on people today versus waiting decades to achieve their goal. Mental health is an important topic, especially for Gen-Z. And given financial stress is still the number one stressor across all demographics. Nothing helps improve but more than being confident around investing in financial freedom. Although it may take decades to achieve the goal, the benefits of being confidently on a path to financial freedom and to your self-esteem and confidence are immediate. Another unique element of our wealth building platform is Mogo, our self-directed investing app. One of Buffett’s favorites quotes is that Wall Street makes more money by getting people to gamble than to invest. The fact is most of these apps have been designed to get you to trade as that’s what drives our revenue, but the data is clear. The more you trade, the more you underperform. What’s more, they would like you to believe that it’s easy to trade. And because it’s now even commission free, it’s available to everyone. Well, the reality is the only thing that has happened is that they have made it easier than ever to gamble and speculate on stocks. Trading and gambling is easy, but serious investing that produces long-term good results is very hard. We believe Mogo is the only self-directed investing app that is designed to actually get investors to trade less and focus more on proven long-term value investing. One of our latest features is Buffett Mode and that now makes it easier than ever for someone to learn how to invest based off the principles of the greatest investor of all time. Buffett Mode is mostly focused on helping investors gain the knowledge, skills and discipline needed to be a better investor while moving away from behaviors like trading and gambling that lead to losses and underperformance. These include TikTok style educational videos from Buffett himself, explaining everything from circled confidence to how we calculate intrinsic value. It’s like having Warren Buffett as your investing copilot. Customer feedback is critical to us to helping us make sure that we’re focused on the right things, which is why 1 of our new features allow any user to simply shake the app and share their feedback on the product. What they like, what they don’t like, et cetera. This feedback goes directly into the slack channel but all of us, including my cell free constantly. Every day, we review all customer feedback and incorporate that in our plans accelerating this feedback loop has had a big impact on speeding up the rate at which we identify the right things to focus on. As part of our go-to-market strategy, we’ve also recently formed a key strategic partners with Postmedia to launch a new wealth section designed to help educate Canadians on the pitfalls of existing solutions in the marketplace and the impact that the right approach and strategy can have in terms of your ability to achieve financial freedom. We also formed a partnership with Tom Lee of Fundstrat who is a frequent CNBC contributor and is widely considered one of the most thoughtful strategists on Wall Street, to give our wealth members exclusive access to his investment research and further establish us a leading platform for serious investors. Again, we are clearly at the beginning of this journey to disrupt the wealth space in Canada and we’re pleased with the progress we’ve made this quarter. Like investing, we are taking a long-term compounding approach. It takes a while to gain the trust and credibility as a wealth brand. And these partnerships, along with the product improvements we made this quarter are important and meaningful steps towards this. With that, I’ll turn it over to Greg.

Thanks, Dave, and good afternoon. Let me quickly discuss the two other pillars of our business, beginning with the payments business, Carta. Carta had another solid quarter as reflected by a 12% year-over-year increase in payments volume to $2.8 billion, putting them on an annual run rate of more than $10 billion. We continue to be very excited about this business and the long-term prospects working with exciting global customers like Plexi [ph] in France and Alba [ph] in U.K. Another major pillar of our business is our crypto-related investments, which collectively today represents close to 50% of our market cap, although importantly represents 0% of our revenue as Mogo today doesn’t have any operating businesses in crypto. The largest of these investments is our 87 million shares in Canadian Crypto Exchange WonderFi, which is listed on the TSX. You may have seen WonderFi reported results – Q2 results yesterday, highlighted by a $337 increase in client assets under custody to about $1.4 billion, and they’re in a strong financial position with cash and digital assets of $47 million and no debt. Turning to Mogo’s financials, it was another quarter of year-over-year growth of our business while delivering on a key cash flow milestone. After making some tough decisions in 2022 to accelerate our path to profitability, which resulted in a reduction of our quarterly OpEx by 50%, we’ve delivered our second consecutive quarter of year-over-year growth in Q2 of $17.6 million, up 10% year-over-year. The discipline on costs has continued even while returning to growth mode with OpEx flat year-over-year. Sequentially, marketing spend was actually down in Q2 as we are still being more focused on product improvements for wealth that Dave touched on, rather than increasing marketing, which we believe is the right balance to really build the best-in-class product and generate more viral component. We expect marketing was slowly ramp as we head into 2025, while remaining focused on growing EBITDA and manage your cash flow. Q2 adjusted EBITDA came in at $1.4 million, down modestly from the same period last year, but importantly, up 40% sequentially from Q1. We have also seen a substantial increase in cash flow from operations before discretionary investment in loan book. This metric was positive for the seventh consecutive quarter and rose to $3.8 million in Q2 versus $2.1 million in the prior year period, which enabled us to reach an important milestone of positive cash flow from operations which came in at a positive $0.5 million in the quarter versus negative $1.8 million in Q2 of last year. Dave talked about the continued improvements we are making to our wealth product, Mogo and Moka including the significant value-enhancing updates for app. These changes will not only help our users invest and build wealth more intelligently, but they will also create a significant opportunity for Mogo to increase ARPU. Today, our ARPU across our consumer base products is $25, while ARPU just for our wealth products is $180, which represents a huge opportunity for us to continue to increase the monetization rate of our member base of over CAD 2 million. We ended the quarter in a solid financial position with cash and total investments of roughly $41 million. This included combined cash and restricted cash of $11.3 million, investment portfolio of $11.6 million and marketable securities of $18.6 million. Importantly, as I mentioned earlier, we had a milestone quarter with positive overall cash flow from operations. But even more broadly, if you exclude share buybacks and debt repayment, we generated positive overall cash flow after investing in financing activities in the quarter as well. We also continue to expect monetization opportunities from our investment portfolio over the next 12 months. Turning to our outlook for fiscal year 2024. We continue to expect subscription services revenue to grow in the mid-teens for the full year, and we are also introducing adjusted EBITDA guidance for the full year of $5 million to $6 million. Lastly, I think it’s also worth highlighting that given our credit facility is on a floating rate basis, we will also see meaningful savings from any future rate reductions, which the market is currently predicting. With that, we will now open the call to questions.

Thank you. [Operator Instructions] First question is from Adhir Kadve from Eight Capital. Please go ahead.

Hey guys. Good afternoon and thanks for taking my questions here. One of the things that kind of caught my eye and I thought was important in the quarter was that you guys were cash flow positive on a consolidated company level. Can you give us a sense of how you’re kind of thinking about your cash moving forward through the back half of the year?

Yes. Thank you, Adhir. And just to put a finer point on it. We were cash flow positive on a consolidated basis, excluding debt repayment and share buyback. So – but importantly, the point is – the reason this was set a milestone quarter for us is cash flow – it really starts with the cash flow from operations level, which was the first quarter since 2020 when we were not really investing in the loan book, where we actually reported positive overall cash flow from operations. And that means that we generated enough cash from our operations to actually internally self-fund any investment made in the loan book. And then if you sort of look at the other cash flow components, excluding discretionary share buybacks and debt repayment we actually generated overall cash. So I think the reason this is so important is we’ve shown that we’ve got the business to a level in terms of revenue and OpEx that we can really self-sustain the business at least at a flat loan book, while continuing to invest in growing our wealth and our payments business, which continues to grow. And we have been the ability to either turn that investment dial up or down, depending on how we want to manage our cash, which will also depend on future monetization. But that really puts us in the control position as it relates to our cash and our capital use.

Excellent. And then just maybe some – on some of those levers when it comes to the wealth business and maybe the payments business. Individually, how are you guys thinking about what you want to do with the wealth business moving forward? I know you said marketing will likely increase through the back half of the year. But just maybe give us some color on how to think about the wealth and the payments business individually through the back half of the year?

So I’ll talk about the payments, then Dave can talk about the Wealth business. On the payments business we expect to see continued growth in the payments business, which we’ve seen consistent growth in the payments business, quite frankly, over the last – more than over the last year. So we continue to expect continued growth in the payments business from a top line perspective. As we have mentioned previously, we are making pretty meaningful investments in the payments business, including a significant migration to the cloud. And so during that migration period, we have increased costs, and we expect by some point in Q1 for that project to be over and that will result in what we believe will be meaningful savings for us there and really get that business to a cash flow positive basis. So we’ve got some temporary investments we’re making on the infrastructure side that we think are the right long-term investments for that business. Again, we were still quite small in the relative scheme of things in the overall multitrillion dollar payment industry. We’ve got some very good customers that we have visibility on growing with them. And we think we’ve got a unique value proposition as a low-cost vendor in the space that has the ability, quite frankly, to undercut a lot of bigger players and known players out there in the market that we think will have a challenging time matching our pricing because it will impact all the rest of the pricing. So we think that’s a pretty big stand-alone opportunity separate from the wealth business, and that’s – we’re going to continue to invest and go after that opportunity. So anyway, on the wealth side, I’ll let Dave talk about our strategy there.

Sure. Yes. On the wealth side, as I mentioned in my commentary, it really is a balance between focusing on product improvements. And obviously, we live in a world today where it’s pretty clear that, in many cases, better products win, especially in a world driven by social media, referrals, word of mouth. So we’re very hyper focused on continuing to prioritize the improvement to the product and actually make that one of the key growth drivers. As we mentioned, we did 21 releases in the last quarter that included hundreds of improvements. Again, every time we do this, we are focusing on measuring it based on things like the Net Promoter Score. We believe there’s a strong correlation between a higher NPS score and stronger word of mouth, which obviously then translates into a certain percentage of your new customers coming from word of mouth. Our goal is to get to a place where well over 50% of our new customers are effectively coming from word to mouth driven by a very good product experience and value proposition. And then complemented by marketing. Obviously, some of the ones that we mentioned in terms of the new partnerships this quarter, the Postmedia one we’re really excited about. That’s literally just getting going. We’re about to have some of our first articles go live there. They’ve got a base of over 17 million monthly active users on that platform. And their goal is to start kind of distributing this new wealth section, which again is sponsored by Mogo and Moka, that includes a bunch of both sponsored content but as well as directed editorial, and they are very much aligned on kind of the message that we’re trying to go out in the marketplace in terms of educating Canadians on the realities of the wealth building space in Canada, some of the pitfalls and obviously, that ultimately directly aligns to our product offering. The point I made in my commentary, which I think is a really important point is you’ve got – really got to look at this stuff long term and everything is, again, just like investing, compounding, building trust and credibility as a trusted incredible wealth building brand obviously takes time, part of the reason we did this strategic partnership with Tom Lee obviously comes down to that. Tom Lee, again, is a very well respected U.S. strategist, one of the more respected commentators that are included regularly on CNBC. And so bringing him to our member base, while it’s going to be doing several in-person events as well posted by Tom Lee in the Canadian market. And obviously, again, all of this helps to improve our positioning and establish us as kind of a trusted incredible well building brand in the Canadian space. So we think all of that combined will continue to drive growth in the wealth business throughout the next – the rest of the half of the year leading into 2025.

And maybe just one last one, more of a clarification. Can you just – I may have missed it in the opening remarks, just the ARPU that you’re seeing on the wealth products? I think you said $25 currently and can grow to about $300. Just a clarification on those two metrics.

So no, our current ARPU is actually our average ARPU of Mogo members across all our products is $25. But – with the current pricing of our wealth product, it’s effectively an average user would bring in $180 of ARPU. So that’s the opportunity to increase that overall monetization rate.

Excellent. That’s what I was looking for. Thanks a lot guys. Appreciate the time and I’ll pass the line.

Next question comes from Scott Buck of H.C. Wainwright Philippines. Go ahead.

Hey, good afternoon guys. Thanks for taking my questions. First, I just wanted to ask about the state of consumer credit. And then secondly, given the investments you’re making in wealth and payments – how should we be thinking about the lending business longer term?

Can you hear me?

Yes, I hear.

Okay. So yes, on the lending side, what you’ve seen is we’re – right now, we’ve got a relatively flat loan book here, quarter-over-quarter. So we’re not – we have not been aggressive in the lending space. Obviously, there’s a massive market in Canada which we believe we have an opportunity to take advantage of if we wanted to, but we’re more focused on balancing any investment there with prioritizing wealth and payments over lending. We do believe, though, in the long-term value of our lending business. We’ve been in it for 20 years. We’ve done over 1 million loans in Canada and have a very large proprietary database which we think gives us a very unique advantage. Lending is actually one of the hardest areas to get into because it takes years to build up that data and that capability. So it’s probably an under-monetized asset right now that Mogo has, but again, we are prioritizing payments and wealth over that today. But I think as we as we ramp those businesses up and those businesses generate more capital and give us the flexibility to grow the loan book. We’ll consider that. We’ve been pretty disciplined as it regards to the loan book. And so we actually saw an improvement in net charge-off rates this quarter over last quarter. So I think overall, we feel comfortable about that market. Obviously, we are expecting – the market is expecting rates to start coming down, which I think is going to help the average consumer, which is positive. So yes, I think that’s kind of our perspective on that. I don’t know if I – if that – was there another question there? Scott?

No, no, that’s helpful. That’s really helpful. Second, I want to follow up on the Tom Lee and Fundstrat announcement. Someone who query has a lot of reach down here in the states between CNBC and whatnot. I’m curious, did you guys issue equity? Or what are the economics of this partnership?

No, no equity, just effectively a marketing partnership. And so it’s a – we’re effectively paying them fee over the next 12 months, no equity, and that will all show up in our marketing expense.

Okay. Perfect. That’s great. And then last one, it was touched on in the prepared remarks the impact that declining interest rates could have on what you’re paying in interest expense on the credit facility. Could you put some kind of dollar figures around that so we have a sense of what that could mean on an annual basis in terms of savings?

Yes. I mean, look, right now, every 1% would mean $0.5 million of cash savings to us. So we’ve absorbed the increase in the higher rates because of our facilities on a floating rate basis. So we’ve absorbed that over the last several years. And so obviously, lower those rates coming down, give us the opportunity to get some of that back and see some of that fall to the bottom line. But it could be quite meaningful depending on how low rates go.

Sure. No, that’s very helpful. I appreciate the time guys. Thank you.

Thanks.

[Operator Instructions] There seems to be no further questions at this time. I’d now like to turn the call back over to Dave Feller, Founder and CEO. Please go ahead.

Well, thanks again for joining us on our Q2 update. Just also wanted to end by saying a big thank you to the entire Mogo and Carta team. The team has been working hard for the last year, but definitely in the last quarter. And I think we’re starting to see a lot of the positive impacts come through in terms of just the business performance and especially where we are in some of the product priorities like wealth and payments. So again, big thank you to the team there, and we look forward to updating you after our next quarter. Thank you.

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