Earnings Reports (July 29th-August 2nd)
Taking a Look at Earnings Results for SoFi Technologies (SOFI), Lemonade (LMND), & STAG Industrial (STAG).
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1. SoFi Technologies (SOFI)
SoFi Techonolgies (SOFI) released their Q2 2024 earnings this week, and they performed quite well.
Key Highlights
Revenue Performance: SOFI beat revenue estimates by 5.3% and surpassed its guidance by 6.6%. The company reported a 36% three-year revenue compounded annual growth rate (CAGR), with recent quarterly growth of 39% and 48% two quarters ago.
Product Growth: Excluding its exit from the crypto business due to obtaining a bank charter, product growth rose 43% YoY. Notably, 40% of all new products were opened by existing SoFi members, highlighting the effectiveness of cross-selling. Net interest income increased by 42% Y/Y to $412.6 million.
EBITDA Performance: SOFI beat EBITDA estimates by 12.6% and surpassed its guidance by 14.9%, with EBITDA rising 80% YoY.
Net Income: The company exceeded GAAP net income guidance and estimates. They delivered a 20% GAAP net income margin and an annualized return on equity (ROE) of 11.2%.
EPS: They beat its GAAP EPS estimate of $0.00 by nearly $0.01.
Cash and Debt: SOFI holds $2.33B in cash and equivalents, with total debt amounting to $3.1B.
Deposits: The company reported $23B in total deposits. Consumer deposits grew by $2.2B QoQ, though overall deposit growth was below $2B due to the repayment of $800M in higher-cost brokered CDs. Currently, 80% of SOFI’s credit book is deposit-funded, with an optimal target range of 80%-90%.
Borrower Profiles: Personal loan borrowers have an average FICO score of 747 and annual earnings of $168,000, while student loan borrowers have an average FICO score of 768 and annual earnings of $146,000.
Credit Performance: Delinquencies showed signs of topping in March, with the net charge-off (NCO) rate staying below 4%. They reiterated its 7%-8% life-of-loan loss rate target.
Vintage Analysis: The 2020-2024 vintages have an average loss rate of 3%, indicating improving credit health. To breach the 8% target, the loss rate for the remaining principal would need to be 11%, a level the company has never encountered.
Future Outlook/Valuation
Annual Guidance: SOFI raised its annual revenue guidance by 1.4% and its EBITDA guidance by 2.5%. The company also increased its GAAP EPS guidance by a penny. Lending revenue is now expected to be at least 95% of 2023 levels, and financial services growth is projected at 80%+.
Quarterly Performance: Q3 revenue and EPS exceeded expectations, while EBITDA was in line. SOFI trades at 75x 2024 GAAP earnings, with EPS expected to compound at a 109% rate over the next two years.
Earnings Call Commentary
Revenue Sources: 45% of SOFI’s revenue now comes from non-lending sources, up from 38% YoY. Financial services grew by 80% YoY, driven by balance sheet optimization and product monetization.
Product Highlights: Invest product assets under management (AUM) rose 58% YoY, driven by inflows. Debit spend increased by 129% YoY, and SoFi Plus membership crossed 1M.
Credit Card and Loan Performance: Credit card delinquency and roll rates improved by 20% compared to 2023. SOFI sold $1.1B in personal loans at a gain on sale margin of 106.2%.
Growth Guidance: Despite slower revenue growth, account growth in the tech segment rose by 23% YoY. SOFI remains confident in the segment’s multi-year growth targets and expects higher rates of durable growth going forward.
My Take
SOFI’s latest results were pretty solid. Despite a turbulent macroeconomic environment, they have consistently demonstrated strong execution and financial performance. Rather than succumbing to the temptation of aggressive credit origination during periods of rate uncertainty, the company has exercised caution. This has positioned them to effectively utilize its excess balance sheet capacity as market conditions stabilize.
One concerning aspect that hasn't been heavily emphasized is SOFI’s share count and dilution. The company now has over 1 billion shares outstanding, which is worrisome for long-term investors like myself. Despite delivering solid results over the past year, SOFI's investors haven't seen significant capital appreciation. I believe this lack of growth is partly due to share dilution, along with manipulation from the market. As a result, the stock now requires substantial liquidity to achieve significant price movements. Although I believe this liquidity will eventually materialize with continued strong execution, management's actions are currently making it more challenging. But, I do believe in Noto navigating this float in the future as the company matures.
That said, as long as SOFI continues to deliver strong results, I am committed to maintaining my investment. I’m pretty comfortable with my position sizing at the moment. The company's ability to compound revenue, expand margins, maintain credit health, and gain product traction outweighs the minor setback in their tech platform segment. This quarter's performance has met my expectations.
2. Lemonade (LMND)
Lemonade (LMND) announced their Q2 2024 earnings results this week.
Key Highlights
Profits & Margins:
Lemonade beat its EBITDA estimates and guidance of -$48M by $5M, or 10.4%.
The company also exceeded GAAP EPS estimates of -$0.86 by $0.05.
Balance Sheet:
Cash and equivalents stood at $931M, up from $927M QoQ.
LMND has no debt.
The diluted share count increased by 1.7% YoY.
Guidance & Valuation:
LMND reiterated its annual revenue, IFP, and GEP guidance, slightly missing estimates but beating EBITDA estimates.
The company plans to spend approximately $105M on growth this year.
Q3 results suggest a Q4 guidance beat, given the annual reiterations.
With a $491M enterprise value, LMND trades at about 3x 2024 gross profit, a stark contrast to the over 50x sales multiple during the 2021 bubble. This 3x gross profit multiple may represent an overcorrection compared to an average S&P firm, which typically has a 7x-8x gross profit multiple.
Operational Highlights
Net Cash Flow:
LMND expects to be net cash flow positive going forward, except for Q4 2023, where its $931M cash pile may decrease by 1%-2% before consistently growing. This due to the synthetic agent program financing 80% of its growth spend. While this does not reflect free cash flow (FCF), achieving a positive net cash flow is a step towards future FCF and EBITDA inflections. LMND's “customer cortex” allows it to maintain flat operating expenses YoY, aside from intentional growth spending. This actually allows them to leverage for future growth.
The company’s proactive strategy minimizes catastrophic event (CAT) exposure, notably in home insurance, where it faces challenges in securing premium hike approvals. As this cortex has refined itself over the years, it has become increasingly accurate in assessing these areas for profitability. By focusing on renters and pet insurance, and targeting favorable states and Europe, LMND is optimizing its underwriting approach. The decision to not renew certain CAT-exposed home policies is expected to reduce premiums by $20 to $25M this year but will ultimately improve profitability.
Lemonade’s Loss Ratios & Leverage:
The company’s trailing 12-month and quarterly loss ratios have improved, even amidst challenging CAT conditions (one of the most difficult, historically). Its strategic shift away from CAT-exposed home insurance, primarily through non-renewal of policies with older underwriting models, has supported this progress. This move is expected to contribute a positive profit tailwind by removing policies with a negative lifetime value.
Gross Loss Ratio (GLR) excluding CAT impacts was 62%, down from 73% YoY.
Despite CAT impacts, GLR improved YoY.
Underwriting and operating expense efficiencies have led to better financial leverage, with premiums growing at 35% while OpEx increased at 11% over two years.
The company continues to harness AI and tech-based efficiencies, automating 30% of customer communications with Gen AI tools.
Car Insurance Expansion:
LMND is preparing to accelerate its car insurance growth, focusing on states with favorable regulatory environments and cross-selling opportunities with existing renters. Improvements in regulatory conditions and LMND’s underwriting models set the stage for growth in this segment. The company anticipates accelerated growth, highlighting improved service, underwriting precision, and consumer cost as competitive advantages.
LMND also aims to compete on cost, leveraging its operating efficiency and lack of a traditional agent network to offer competitive pricing. Despite lower pricing potentially impacting margins, it expects reduced marketing intensity due to broader differentiation.
Other Developments:
An investor day on November 19th is expected to include updates on IFP growth targets and the unveiling of the next-generation tech platform, L2, which will enhance cost savings and reimagine insurance operations in the AI era (I will be there!).
Additionally, just over $100M in LMND premiums are awaiting regulatory approval for premium hikes.
My Take
LMND delivered another solid quarter, although the stock sold off again due to reaffirmed guidance. Despite operating at a net loss, the company continues to reduce this deficit QoQ and YoY. It is projected to achieve adjusted EBITDA profitability by 2026. When analyzing LMND, it is crucial to focus on the business's fundamental trends rather than overcomplicating the analysis of an unprofitable company in growth mode.
In recent years, LMND's customer cortex has struggled with inconsistent underwriting and targeting profitable geographical areas. This inconsistency stems from its relatively new AI data stack, which requires continual refinement as it processes more data over time. However, the company's cortex has become much more efficient and accurate, as evidenced by growing revenues, an expanding customer base, improved gross loss ratios, and stable operating expenses.
Taking a big-picture view, this trend suggests that LMND may not only become profitable but also evolve into a cash flow machine. I'm comfortable with my current position, but if the stock price dips into the low teens again, I might consider adding more shares.
3. STAG Industrial (STAG)
STAG Industrial (STAG) reported strong second-quarter earnings this week, reflecting its operational strength and strategic execution. Despite a slight drop in occupancy rates, the company showed revenue and earnings per share (EPS) growth YoY.
Key Financial Highlights
Earnings Per Share (EPS): STAG reported EPS of $0.33, a 13.8% increase from $0.29 in Q2 2023.
Total Revenue: Revenue rose to $189.8M, up 10.5% from $171.6M in Q2 2023.
Core Funds From Operations (FFO) Per Share: Core FFO per share increased by 8.9%, reaching $0.61.
Cash Net Operating Income (NOI): Cash NOI improved to $148.4M, a 10.3% increase from the previous year.
Occupancy and Tenant Diversification:
STAG reported an occupancy rate of 97.1%, a slight decrease from 98.2% as of December 31, 2023. The operating portfolio's occupancy rate stood at 97.5%, compared to 98.4% previously. No single tenant accounted for more than 2.9% of total annualized base rental revenue, and no industry represented more than 11% of the total annualized base rental revenue. These metrics highlight the company's success in maintaining a diversified and stable tenant base.Rental Growth Metrics:
STAG achieved significant increases in its rental growth metrics. The cash rent change for new and renewal leases increased by 36.8%, while the straight-line rent change rose by 51.8% for the quarter. These metrics demonstrate the company's ability to capitalize on favorable market conditions to enhance rental income.Acquisition and Portfolio Management:
The company completed acquisitions of 10 buildings totaling 2.2 million square feet for $225.6M. In contrast, it sold 7 buildings totaling 1.1 million square feet, generating $78.2M. The net capitalization rate for acquisitions was a cash rate of 6.7% and a straight-line rate of 7%.Financial Stability:
STAG maintained a strong balance sheet with a net debt to annualized run rate adjusted EBITDA ratio of 5.0x. As of June 30, 2024, the company's liquidity was $902.9M. The REIT's umbrella partnership structure provides flexibility for acquiring properties on a tax-deferred basis.
Future Outlook & My Take
While STAG Industrial did not provide direct forward financial guidance in its earnings release, the management reaffirmed its commitment to maintaining current guidance amidst potential market volatility. This outlook reflects confidence in the portfolio's health and resilience.
Investors should monitor STAG's ability to sustain high occupancy rates and strong rental growth, as well as its strategic acquisition activities. Market volatility, particularly interest rate fluctuations, could impact future acquisition strategies and overall performance. STAG will remain one of the top REITs in my portfolio, I’ll be accumulating when the opportunity presents.