Orion Digital - Q2 2024

Transcript

Greg Feller (President and CFO)

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 Q1 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 the Mogo investor relations website as well. Secondly, today's session will include several adjusted financial measures, such as, or non-IFRS measures, excuse me. Please consider these as a supplement to, and not 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. With that, I'll turn it over to Dave Feller to get us started. Dave?

David Feller (CEO)

Thanks, Greg. Good afternoon, and welcome to Mogo's first quarter fiscal 2024 results 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 on the financial results and outlook. It was a solid start to 2024 for Mogo, both from a financial perspective and a product perspective. Q1 revenue was a quarterly record of CAD 17.9 million. We exceeded CAD 400 million in AUM, and we continued to generate positive Adjusted EBITDA while we invest in our products and marketing to achieve long-term growth in our business. Wealth, payments, and crypto form the key pillars of our business today. I'll walk through wealth, and Greg will talk about payments and crypto.

Our excitement around the long-term potential in wealth starts with the overall market size and the opportunity for innovation and disruption, given the dominance of the big banks. The Canadian wealth market is measured in the trillions and is expected to grow from over CAD 6 trillion today to over CAD 11 trillion by the end of 2032. Within this, there's an estimated CAD 2 trillion in high-fee mutual funds alone, along with annual contributions to RSP and TFSAs of around CAD 100 billion a year. The market today is dominated by the big banks that offer everything from self-directed trading to mutual funds to private wealth managers. Yet the reality is, most investors struggle to make adequate returns. In fact, studies show that the average investor dramatically underperforms the S&P 500, let alone anywhere close to the kinds of returns that great investors like Warren Buffett have produced.

As Buffett says, the reality is Wall Street makes more money by getting you to gamble than invest. What's more, they offer products like mutual funds that not only dramatically underperform, but charge very high fees, a killer combo. We firmly believe that the future of investing will be dominated by products and brands that actually deliver the best results, not by those that simply have distribution. The reason for this is simple: the impact of better performance is staggering. This graph showcases just how dramatic the difference can be. Compare the average return to the S&P 500 and then to a Buffett-level return. Right now, the majority of investors are dramatically underperforming the S&P 500 and literally leaving millions on the table.

At Mogo, we're obsessed with the performance of our members, and the reality is there's zero reason investors shouldn't be at least matching the S&P, and for some, they even have the opportunities to beat it. An important point to highlight here is the magnitude of the impact on investors' wealth building. The difference between 4% and 10% over a 50-year time horizon is more than 16x, and as you can see at the Buffett level return, the numbers are almost incomprehensible. It's important to note that our goal isn't to build the biggest wealth-building platform in Canada. It's to build the most effective, i.e., the one that really delivers the best returns for investors. Again, we believe the future of investing won't be about the features you have or the tools you have.

It'll be primarily, if not exclusively, based on the actual performance of the investors using it. That's our focus. We think that both a fully managed solution along with a self-directed solution will continue to be the way people choose to invest and build wealth. With that, we offer both a fully managed solution along with a self-directed investing app. We believe most investors will primarily rely on a managed solution, as most don't have the experience and desire to actively manage their investing. Not to mention, most would be way better off this way. Having said that, the excitement and potential will always attract investors to self-directed, and when done right, can be a very effective way at generating great returns and be a good complement to a managed solution. Given our focus is also on the next generation of investors, it's not all about the money.

We believe that the products that will win are the ones that not only help people achieve important life goals like financial freedom, but that do it in a way that can also have a meaningful, positive impact in the world. We believe we are the only investing platform in the world taking this unique approach to wealth building today. We've come a long way over the last few years with Moka, as we evolved it from what was primarily a short-term savings app to a best-in-class managed investing app. What really sets Moka apart is the actual performance and the impact that this has on wealth building for investors. In terms of performance, the strategy you employ has a big impact on your returns, i.e., stocks, bonds, et cetera.

But what most people don't realize is it's the behavioral element, even in passive and managed investing, that really drives the big impact. The natural tendency for investors is to want to sell when the market is down and buy when it is up. But as we all know, trying to time the market is a losing game and ultimately leads to poor returns. So even if you pick the right strategy, like the S&P 500, you won't achieve good returns unless you address the behavioral issues. Ultimately, the combination of the right strategy and right behavioral edge produces radically better outcomes. We see this every day with our customers, whether they switch from self-directed investing, mutual funds, or even wealth managers, getting them on track to 5x, 10x, even more in terms of the wealth is not uncommon…

While others have gamified trading, we are focused on gamifying serious wealth building to drive the right behaviors that maximize the outcome. Every day, we see our users engage in features that motivate them to not only continue their investing, but to increase their contributions as they see how much money they can get on track for. Although you might think this would be common, the fact is, most investors today have no idea what the returns are, have no idea what they are on track to, or even what they would like to achieve in the long run. We make it easy for them to not only invest, but to see exactly what they're on track to by when, and this helps drive the right behaviors to maximize the outcome. Some of the new features we are working on, including a leaderboard that gamifies the wealth-building experience.

At Moka today, we have users who are actually on track to over CAD 70 million, and just to get into the top 100 on our leaderboard requires being on track to about CAD 4 million. As we continue to improve the experience and our value proposition, we see opportunities to increase our monthly subscription fee and still deliver great value while improving our economics, which is why we're going to be offering a new CAD 15-a-month tier. Mogo is our self-directed investing app, and in Q1, we launched our biggest feature yet, Buffett Mode. Like Moka, the key to successful investing comes down to the right behavior and temperament. As Warren Buffett says, successful investing is more about temperament than intellect.

While every other trading app are primarily designed to drive trading, as that's what they, drives revenue, we believe Mogo is the only self-directed investing app that is designed to actually get investors to trade less and focus more on long-term value investing. The reality is, most self-directed investors dramatically underperform the S&P 500, and most have no idea. We've designed an experience that is based on the investing principles of Warren Buffett. Warren started with $114 and turned it into a fortune over $100 billion. The fact is, there will be investors who today are in their twenties and will become billionaires by investing based on the principle of value investing and its greatest practitioner, Warren Buffett. With a simple monthly subscription fee, we are solely focused on helping our users become more successful investors, not on getting them to trade.

This positioning and business model sets us apart from all the other self-directed trading apps in Canada. One of our unique features is how we help investors minimize gambling and speculating, which is one of the primary reasons for underperformance. Another big advantage we have over the existing incumbents is our smaller, hyper-focused team. We believe that small teams build better products, but that also gives us a cost advantage in terms of the ability to be profitable on a fraction of the users of the bigger companies. We're still in the early days with both of these products, and we continue to work on increasing our product velocity in terms of improvements to the experience that help our members improve their performance. This is what guides our roadmap. Does this help the user improve their performance as an investor?

Again, you would think this would be common, but I can assure you it's not. As Warren Buffett reminds us, with investing, you can't be active every day, but you can learn every day. This is also a core focus with our experience as we develop more and more learning features that drive more engagement and better outcomes. We believe that our investment in our products will continue to be the primary driver of growth, while also continuing to increase our marketing activities to drive increased awareness and what we see as a more premium positioning in the marketplace. With that, I'll turn it over to Greg. Greg?

Greg Feller (President and CFO)

Thanks, Dave, and good afternoon. Let me first discuss our two other pillars, beginning with Carta, our payments business. Carta had another solid quarter in Q1, and it was reflected by an 18% year-over-year increase in volume to CAD 2.6 billion, putting this business on an annual run rate north of CAD 10 billion. We continue to be very excited about Carta and its long-term growth prospects. Another major pillar in Mogo is our crypto-related investments, which collectively today represent just under 50% of our market cap. Largest of these is our 87 million shares in TSX-listed WonderFi, the only fully regulated crypto exchange in Canada. Recently, WonderFi announced the nomination of three new directors to the board as a cooperation agreement with Kaos Capital.

We view the agreement as a shareholder-friendly step that will enable WonderFi to begin to fully realize the growth potential of its position as the only fully regulated crypto exchange in Canada. We'd also like to congratulate the WonderFi team on the recent Q1 results, which included 60% increase in assets under custody to CAD 1.6 billion, record trading volumes of CAD 1.1 billion, and ending the quarter in a strong financial position with cash and digital assets of CAD 54 million. Turning to Mogo's financials, it was a solid first quarter to the start of 2024, generated record quarterly revenue while continuing to deliver positive Adjusted EBITDA. Q1 revenue was a quarterly record, CAD 17.9 million, up 13% over the prior year, and showed accelerating growth for the second consecutive quarter. We achieved this without significant marketing spend to date.

However, as we've seen in the last quarter, we are increasing our marketing initiatives for our wealth platform. Over the past two years, we've been highly focused on accelerating profitability despite an increase in growth-related spend in Q1. Total OpEx is down almost 50% from the beginning of 2022. This quarter, we generated 13% year-over-year revenue growth while holding OpEx relatively flat. Although we continue to operate with efficiency mindset, our focus again, is on increasing revenue growth and will be guided by the Rule of 40, and therefore we require expectation of increased growth to offset any decrease in margins. Q1 Adjusted EBITDA remained positive at CAD 1 million, similar to the same period last year. Importantly, we've seen continued positive cash flow from operations before discretionary investment in loan book. This metric was positive for the sixth consecutive quarter, reaching CAD 1.8 million in Q1 2024.

Lastly, adjusted net loss for the quarter was CAD 4 million, roughly flat with the prior period of CAD 3.9 million. Dave talked about the relaunch of our two wealth products, Mogo and Moka, and the significant value-enhancing elements to these products. These changes will help our users invest and build wealth more intelligently. They also create a significant opportunity for Mogo to increase our ARPU while maintaining a compelling value proposition for our users... With the new pricing tiers of CAD 15 a month for each of Moka and Mogo, we have a significant subscription-driven opportunity of up to CAD 360 per year per user for those members that subscribe to both products. This represents a huge opportunity to expand our subscription revenue over time.

With these new monetization opportunities from wealth, we believe that it's a significant potential to leverage our existing 2.1 million member base to drive increased monetization and therefore overall ARPU above our current consumer ARPU of approximately CAD 27 a year. Given the limited penetration of these products today within our member base, our primary focus will be increased monetization of this member base over growth of the member base itself. Lastly, we ended the quarter in a solid financial position with cash and total investments of roughly CAD 53 million. This included combined cash and restricted cash of CAD 13.8 million, marketable securities of CAD 28 million, and investment portfolio of CAD 11.6 million. We expect to see monetization opportunities from these investments over the next 12 months. Uniquely, Mogo investors continue to have a meaningful leverage to the crypto sector through these investments.

In summary, we are very excited about our new wealth products and the continued growth of our payments business, and remain focused on driving increased subscription services revenue growth to the mid-teens for the full year. We will also continue to focus on increasing our combined subscription services revenue growth and Adjusted EBITDA margin towards our target Rule of 40. At 19% for Q1 versus 14.5% last quarter and -5% in the year earlier period, we believe we are well on our way. With that, we will now open the call to questions. Our operator?

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. One moment, please, for your first question. Your first question comes from the line of Scott Buck with H.C. Wainwright. Please go ahead.

Scott Buck (Managing Director and Equity Research Analyst)

Hi, good afternoon, guys. Thanks for taking my questions. I'm curious if you guys have received any early feedback on the Moka and Mogo app relaunches, and then what's an appropriate timeline for investors to see some, you know, I guess, meaningful, growth or progress on that front?

David Feller (CEO)

So it's Dave. Maybe I'll just talk about the first piece here. Yeah, I mean, you know, obviously, we continue to stay close to our users and our customers, constantly seeking feedback. We also recently did a new what we call Net Promoter Score survey, which, you know, generally judges the likelihood that people would be promoters versus detractors. You know, generally, a score above zero is considered good, and the higher you get, the better it is. Our most recent Net Promoter Score was north of 40, which was a dramatic improvement from the previous one, before we did basically the rebranding and the new features for Moka. So, you know, very pleased with what we saw in the Net Promoter Score.

And then we continue to be pleased with just generally the behaviors that we're seeing with users signing up, especially those that are setting up these long-term wealth goals. And as I mentioned in my commentary, you know, one of the behaviors that we're really looking for is, you know, how do people actually interact with the app? How often are they coming back to it? And instead of this just being a passive investing strategy, some, for example, look at something like this as a managed solution like Moka as being something like a set it and forget it, whereas our approach is very different. We're actually looking for engagement from our users because the engagement is actually what drives, we think, that long-term success versus it's in the background, and they don't know what's going on.

And that also ultimately drives people to increase what their contributions are to actually get on a even a better path to financial freedom. So we've got a lot of people that start out initially, you know, set up where they're on a path to, let's say, just over $1 million. We have one example where somebody started initially contributing around $25 a week, put them on a path just over $1 million, and has now consistently increased that contribution because of the experience itself, including things like our wealth calculator, where every time you actually engage with it, it shows you how much more money you'd be on track for. You know, and this, this user has gone from being on track to $1 million to now being on track to, to $10 million.

So again, it kind of just showcases the importance of that, that engagement. And so just, another kind of, you know, really good sign that we're seeing, which is also, by the way, why we've also, you know, as we continue to improve the value proposition, we're also looking at, not only increasing the base price, but also adding different tiers. And that obviously, you know, something that I just spoke about as well, and, and that obviously reflects our ongoing confidence in, in the value proposition based on the feedback of, of the users.

Scott Buck (Managing Director and Equity Research Analyst)

Great, Dave. I appreciate that. Greg, I think you had some comments in the earnings release regarding potential monetization of some of the assets in the investment portfolio. Any additional color there you can share with us?

Greg Feller (President and CFO)

So yeah, what I would say is, look, a big chunk of the total portfolio are in what we call marketable securities, so obviously, publicly traded shares. And we also have a number of meaningful private investments that we believe we will see some opportunities over the next 12 months. So I think a combination of some of the public equities we hold, as well as the private, we, you know, gives us confidence that, we'll be able to see some monetizations out of that portfolio here over the next 12 months.

Scott Buck (Managing Director and Equity Research Analyst)

Okay, perfect. Appreciate that. And then last one, I just want to ask you about provisioning real quick. It looks like there was a meaningful tick up from the fourth quarter. Just curious if that, you know, reflects something you're seeing in consumer credit or more just a function of, I don't know, the portfolio, the loan book size and accounting?

Greg Feller (President and CFO)

Yeah. So our credit performance continues to be within the range that we're looking for from the loan book, so no flags there. You know, from an accounting perspective, the loan loss provision is driven by a number of factors, including just the overall origination amount. The overall origination amount in Q1 of this quarter versus Q1 of last quarter was up about 5x. So that by itself would account for, you know, probably the lion's share of the increase. And then there's some other factors in the IFRS provision that we have to take into account, including unemployment rates and things like that, that impact it.

But I would expect that provision on an absolute level actually comes down over the next couple of quarters. So there's some seasonality there as well, but nothing that we're concerned about.

Scott Buck (Managing Director and Equity Research Analyst)

Perfect. I appreciate the time, guys. Thank you very much.

Greg Feller (President and CFO)

Thanks, Scott.

Operator (participant)

Once again, if you would like to ask a question, simply press star, followed by the number one on your telephone keypad. Your next question comes from the line of Adhir Kadve from Eight Capital. Please go ahead.

Adhir Kadve (Equity Research Analyst)

Hey, guys. Thanks, thanks for taking my questions. I just wanted to ask, first, so it's good to see the subscription line kind of return to growth this quarter. Can you give us a sense of which of the two products, whether it was wealth or, sorry, whether it was Moka or whether it was MogoTrade, that really kind of contributed to that growth, or was it something else?

David Feller (CEO)

Well, it's Dave. So I'd say at this stage, Moka is still the bigger product, given its kind of longer history. So I'd say at this stage, you know, we're kind of further along with Moka. But, you know, we're also seeing, you know, some meaningful growth, even on the Mogo side, AUM, you know, AUM on the platform, up well over 100%, but also on a much smaller scale. You know, we also effectively have done very little to no marketing on the Mogo product, where we've actually done, you know, some on Moka, but I think we're now at a place where we kind of feel both products are, you know, increasingly ready for prime time.

I think kind of going forward, we expect to have, you know, more of a balance between both of those products in terms of what's driving growth.

Adhir Kadve (Equity Research Analyst)

Okay, got it. And then, what does that marketing kind of entail? I mean, you guys have 2.1 million users already on the platform. How do you kind of get them to reactivate? What kind of strategies will you use around that?

David Feller (CEO)

Yeah, I mean, obviously, there's a bunch, but obviously, email campaigns continue to be, you know, an effective strategy, for sure, you know. And we're, you know, constantly, you know, testing different strategies there. But generally, email campaigns that, you know, aren't just meant to, you know, sell people on the product, but actually kind of deliver value. We know that, you know, from our member base, that, you know, one of the top goals they have continues to be around, you know, basically financial education, specifically even on learning how to invest and building wealth.

So, you know, that's also kind of a really kind of big core focus from a product and marketing perspective, increasingly, is just, you know, really kind of solid educational content versus, you know, you know, quite frankly, more of a hard sell. But yeah, email continues to be a key driver and something we'll continue to leverage and leverage more than we have in the past. But also, we have our Postmedia partnership still, so that also continues to be something that we're, you know, confident in, especially given, you know, Financial Post and its positioning in the marketplace and generally, you know, leveraging it to, you know, establish a certain level of credibility, especially for, you know, a relatively new entrant in the wealth space in Canada.

So, although, our target customer isn't necessarily, you know, subscribing to the Financial Post, Financial Post, you know, and just generally, that, that section, news item in through social media, a lot of this stuff, still is, is effective with that, that target demo. Really, our kind of main target is, you know, Gen Z and millennials. So I'd say generally between, you know, 25 and 40 is kind of our, our main target, target demo. We're also developing relationships with influencers, so we expect to see a lot more influencer type marketing out there, including product reviews of both Mogo and Moka as well, and just generally a lot more kind of social media presence.

We've, you know, hired up on the marketing team, brought on some more kind of social media and creative people to create more and more content. So that's also an area that we're investing in versus just, you know, paid marketing.

Adhir Kadve (Equity Research Analyst)

Okay, got it. And then, maybe two more questions. One, in terms of the fee tier. So if I heard that correctly, it'll be CAD 15 a month for Moka, CAD 15 a month for Mogo, so all in CAD 30 a month for CAD 360 ARPU per user. But how about the-

David Feller (CEO)

Yeah, if customers take both products. Yeah.

Adhir Kadve (Equity Research Analyst)

... If they take both, yeah. So what about a cross-sell between the two products, between Moka and Mogo? Obviously, there's a very high level of cross-sell ability between the two. Will you kind of also leverage that as well, or has that started actually?

David Feller (CEO)

Yeah, I would say that really hasn't started. Right now we're, you know, primarily focused on each product kind of developing its own marketing and narrative in that. But obviously, at a point, no question about it, and, you know, we have tested it in a very small way. But you know, generally our view is that, and in fact, kind of the stats show, for example, you know, 60, a high percentage of self-directed investors obviously also invest in things like mutual funds, as well as have other kind of managed solutions. So, you know, well, well north of 50%. So that there's already a strong kind of data point on the general attachment rate. You know, most people are not exclusively self-directed.

And then generally, we think especially, you know, over time, if you take a look at somebody in their, in their twenties, even if they start, for example, on something like Moka, you know, where they're saying, "Hey, I really don't have the confidence in, in investing, I, and I don't really have the time to do it," they start with something like that. But over time, in a 50-year journey, you know, a lot of them start saying: Hey, listen, I actually have some interest in some self-directed as well. So, you know, we see that over time, a natural, you know, addition is you add kind of that other product in there. I mean, our kind of target in the long run is to have, you know, at least a kind of 50%, you know, attachment rate. Right?

That's what we're looking at.

Adhir Kadve (Equity Research Analyst)

Awesome. Exciting times ahead, guys. I'll pass along.

David Feller (CEO)

Yeah, thanks.

Operator (participant)

Thank you. There are no further questions at this time. I'd like to turn it back to Dave Feller for closing remarks.

David Feller (CEO)

Okay. Well, thanks for joining us for the call. Thanks for the questions. Also, just wanted to say a special thank you to all the Mogo team members that make all this possible, and look forward to updating everybody post our Q2 results. Thanks again.

Operator (participant)

Thank you, presenters, and ladies and gentlemen, this concludes today's conference-