Orion Digital - Q1 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, welcome to the Mogo Q1 2023 earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, 11 May 2023. I would now like to turn the conference over to Craig Armitage. Please go ahead.

Craig Armitage (Investor Relations)

Thank you. Good afternoon, everyone. Thanks for joining us. Just a few notes before we get started, that 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 our Q1 filings, as well as periodic filings with regulators in Canada and the U.S., which you'll find on SEDAR, EDGAR, and through the investor relations website. Second, today's discussion will include some adjusted financial measures and non-IFRS measures. You should consider these as a supplement to and not as a substitute for the IFRS measures. We included reconciliations both in our filings and the investor deck for those measures.

Lastly, the amounts today are discussed in Canadian dollars unless we indicate otherwise. I'll now turn it over to David Feller to get us started. Dave?

David Feller (CEO)

Thanks, Craig. Thank you. Good afternoon. Welcome to Mogo's Q1 2023 results call. I'm joined today by Greg Feller, our President and CFO. I can't emphasize enough how pleased I am with the progress our team made in Q1 as we continue to reengineer Mogo into a leaner and more profitable company. The level of engagement and focus that we're seeing from our team is truly amazing, and it's been reflected in our results. When the macro picture began to look worse in early 2022, we took quick and decisive action to accelerate our path to profitability with a stated goal of achieving Adjusted EBITDA positive in Q4 of 2023. As we discussed in March, we managed to achieve this goal in Q4 of 2022, one year earlier than planned.

It's hard to overstate the level of transformation we have made in the last 12 months, going from negative CAD 5.5 million Adjusted EBITDA to positive CAD 1 million in just 4 quarters. This progress gives us confidence in our ability to get to our targeted EBITDA run rate by the end of the year, which Greg will discuss in the outlook. We introduced our 3 key pillars last quarter. This continues to be our goal. The elimination of products like Card will allow us to put more focus on 3 areas that we believe there are significant growth opportunities in each of these areas, and perhaps more importantly, profitable growth. These are also segments where we believe there's a much higher barrier to entry and where we believe we can offer a more differentiated value proposition.

Lean and mean and getting to profitability as quickly as possible continues to be our number one priority across the organization. We are looking at every part of the business to identify areas where we can reduce costs and ensure we have the lowest possible costs. We are creating a more efficient operating platform that supports our strategy to be the low-cost provider in the marketplace. Again, key areas of focus include elevating the performance of the team, reducing vendor costs, eliminating unprofitable products, and improving profitability by focusing on operational excellence and efficiencies. Although in many of these ways these times are challenging, I couldn't be more impressed with the level of intensity and focus of our team that's driving our improved results. Although we still have a lot of work to do, the momentum is there.

Although our primary focus in the near term is on the efficiency and profitability initiatives, we also continue to advance MogoTrade and its disruptive value proposition in the Canadian market. When you enter a large market like DIY trading with a new product, the key is making sure that you truly have something that meaningfully differentiates you from the existing players, and that's what we're doing with Trade. Canadians continue to spend CAD billions a year in fees related to investing, and our goal is to eliminate this. Our value proposition is simple and compelling. MogoTrade is the simplest, lowest cost, and most sustainable way to invest in Canada. Now, what does that really mean? We are the first and only stock trading app in Canada that doesn't charge commission or FX fees, and the first and only where every investment you make also helps reduce your CO2.

When looking at the space, surveys show that the number 1 reason users switch is for lower fees. MogoTrade now has the lowest fees in Canada. Arguably, the most successful trading app in Canada is Wealthsimple in terms of the speed at which they have attracted millions of users with a lower cost and simpler experience than the existing incumbents. In fact, they also took the top spot for market share gain in 2022. MogoTrade is not only significantly cheaper, given our zero FX fee. We believe a much simpler, and we continue to get feedback from our users supporting this. All you need to do is check it out for yourself and compare it with any trading app in Canada in terms of cost and simplicity. Seeing is believing.

It's also important to note that we're building this in a way that enables us to be a low-cost leader. Without the constraints of a higher price model, along with modern architecture and automation, we are hyper-focused on building a platform that enables us to offer this disruptive value proposition profitably. We are now on a weekly release cycle for this product. Every week we are releasing improvements to the experience. With each new release, we continue to see improved metrics. Once we complete some of our key initiatives, we will be able to spend even more time on improving and growing this product. Our goal remains to achieve strong product market fit this year and set the stage for a more meaningful revenue impact next year. Obviously, there's a lot of discussion around AI. There's no doubt it will have a big impact on our business.

There are two key areas where this will be happening. The first is internally and how we leverage it to drive operational efficiencies and productivity improvements. We've been using AI in our lending and underwriting for a while, and now we're looking at every other part of the business. Customer service is gonna be a big one, and AI will enable us to cost-effectively scale customer support for Trade, and we're also leveraging it in marketing and engineering as well. The efficiency gains we have made to date are without any real impact from AI, and we expect AI will continue to drive our costs down for years to come. The other big area of impact with AI will be in the wealth space itself, and in fact, we believe will help drive more users to a platform like MogoTrade.

AI will make it easier for the average investor to make better decisions without the need of high-priced financial advisors. The one thing that will always be constant is needing the lowest cost way to execute the trade itself. We are building MogoTrade for a world with AI, and we think it will be a powerful combination that will help accelerate the move away from traditional wealth solutions. Building a brand new platform with a business model designed for a world with AI is a big advantage to compare to the existing players. With that, I will turn the call over to Greg.

Greg Feller (President and CFO)

Thanks, Dave. Good afternoon. As Dave explained, in addition to implementing our efficiency initiatives across the company, we've been investing in two core growth areas of wealth and payments. As part of our strategic review last year, we identified our payments business, which driven by our wholly owned subsidiary, Carta Worldwide, as having a number of attributes we believe make it an attractive growth opportunity for the company, including addressing a massive two and a half trillion dollar TAM, significant barriers to entry, strong history of achievements by Carta, especially in the European payments market, and a number of large global customers that represent significant long-term growth opportunity. As a result, we made the decision to increase our investment in this business, which this year includes a significant investment in migrating a platform to the Oracle Cloud.

We expect this migration to be complete in Europe by year-end, which along with other investments we are making, should help position the business for long-term growth and margin expansion. Turning to our financial results for the quarter. Despite a challenging macro environment, we've acted decisively to adjust the balance of growth, investments, and profitability over the last four quarters. Our results clearly demonstrate the progress. Specifically, total OpEx for the quarter decreased by 45% year-over-year. In CAD terms, that was CAD 11 million quarterly decrease. In our disclosures for Q4, we set the expectation we would see a 25%-35% over the next several quarters relative to Q3. We're already near the middle of this range.

As discussed, our efficiency initiatives include a strategic decision to exit a few of our subscale and unprofitable products, which are having a short-term impact to revenue, as we saw in the current quarter, with revenue down about CAD 1.2 million from Q4. These initiatives also resulted in a material improvement to gross margins, which expanded by 600 basis points sequentially from Q4. Our cost savings, along with improved gross margin, resulted in a rapid improvement in Adjusted EBITDA to CAD 1 million in the quarter. Our adjusted net loss decreased every quarter in 2022 and continued that decrease in Q1 to a net loss of CAD 3.9 million versus CAD 4.3 million in Q4 and CAD 10.8 million same time last year.

The results give us confidence to continue to deliver expansion of the Adjusted EBITDA and reach our target of CAD 10 million-CAD 14 million by year-end. We ended the quarter in a solid financial position with cash and total investments of CAD 60.4 million. We believe that we'll see a number of monetization opportunities for some of our investment portfolio over the next 12-24 months. In April, Coinsquare announced a business combination with TSX-listed WonderFi and CoinSmart. The company combined will become one of the largest registered crypto asset trading companies in the world and will provide Canadians a wide range of products and services, including both retail and institutional investors.

From a financial perspective, the company will have transacted over CAD 17 billion since 2017 and have over CAD 600 million assets under custody with a registered user base in excess of 1.65 million users. The company will also have a well-capitalized balance sheet with no debt. Post-transaction, Mogo is expected to be the largest shareholder with approximately 14% ownership. Not only are we bullish on the outlook of the company, but we believe it will offer more visibility and clarity and transparency for Mogo shareholders, as we will own about 85 million shares in the new company, which will trade on the Toronto Stock Exchange. The transaction is expected to close, subject to regulatory and shareholder approval early Q3 this year.

Upon closing, we expect that we would no longer be required to consolidate a proportional share of the company's losses in our results. Turning to outlook, we will continue to focus on expansion of our Adjusted EBITDA and improving our cash flow. Specifically for 2023, we're focused on achieving full year Adjusted EBITDA of CAD 6 million-CAD 8 million and exiting 2023 with an annual Adjusted EBITDA run rate of CAD 10 million-CAD 14 million based on Q4 2023 Adjusted EBITDA target of CAD 2.5 million-CAD 3.5 million. As David said, we're extremely proud of the entire Mogo team and their hard work that has allowed us to achieve these results, along with the continued improvements we expect for the rest of the year.

We believe it is a major milestone and highly differentiating for a fintech of this scale to generate positive Adjusted EBITDA while continuing to make investments in long-term growth areas such as our investments in wealth and payments. We believe this will position us well for the future and for accelerating revenue growth in 2024 and beyond. Going forward, we will continue to balance margins and growth, which will be guided by using the Rule of 40 principle. Specifically, our goal is to manage between growth, revenue growth, and EBITDA margins as we strive for achieving a target combined of the two of 40. With that, we will now open the call to questions. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the 1 on your touch-tone phone. You will hear a 3-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Adhir Kadve with Eight Capital. Please go ahead.

Adhir Kadve (Principal and Technology Equity Research Analyst)

Thanks, guys. Let me just say congrats on the margin performance. Really strong performance there. I just wanted to ask on trade, MogoTrade and payments, moving forward. Seemingly, you guys mentioned that these are growth investments, but they're also scaling, which implies, like, they're potentially dragging down your margins, but you still have strong margin performance. As these programs scale and as these assets scale, how should we be thinking about the margins for them moving forward, versus the revenue growth as well? Thanks.

Greg Feller (President and CFO)

Adhir, I think, as it relates to, I think the two businesses that we've highlighted that we're still investing in, obviously the payments business, and the digital wealth business. I think, what I would say on the payment side is, it's, I think scaling of that will be on a relative basis, depending on the growth, could be accretive from a growth margin and allow expansion of the growth margin. I think our target for that business is really to exit the year in a break-even, around a break-even level from an EBITDA perspective, so that we see the benefits of operating leverage as we move into 2024 and beyond.

That's what I would say on the payment side. On the MogoTrade side, I think that, I think it will be relatively stable from a growth margin perspective. You know, from an EBITDA perspective, it really depends on the level of investment that we decide to make in that, in that business. Obviously, marketing being one area, which we plan to invest in. I would say that we are planning, even in our guidance, that we can expand marketing dollars, in Q4 of this year. The ultimate margin profile from an EBITDA perspective will depend on that balance.

Again, on a consolidated basis, we will continue to, you know, adhere to the principle of the Rule of 40 and managing both that level of investment, the impact on EBITDA margin, and what we believe the outcoming growth rate is. I think we will sort of try to stay from a consolidated basis within that range.

Adhir Kadve (Principal and Technology Equity Research Analyst)

Excellent. Then just you kind of touched on my next question towards the end there, just on trade. Can you give us a sense of what you're kind of seeing as it's invitation only and from the early adopters of the app? Kind of what are you thinking about in terms of a broader launch? What still needs to be done for the asset to kind of really be out there on a broader basis?

Greg Feller (President and CFO)

Yeah, I think, a couple of ways to look at this. First and foremost, I think, again, it's important to remember that, you know, our primary focus continues to be on operational efficiency and cost-cutting. Also including, you know, things like, you know, eliminating certain products, winding down. A lot of the team and the resources and attention are still going to those items, which means obviously less time and attention for growth items like trade. That's just an important point. Obviously, that's having an impact in terms of the speed at which we kinda get trade going. Having said that, we still have resources on it. It's still our number two OKR in the organization. You know, as I mentioned, we are on now a weekly release cycle.

We used to be on a biweekly, and now we're on a weekly release cycle. We're actually beginning to kind of pick up the pace at which we're releasing and making improvements. In terms of just, you know, feedback and that, we also are being kind of very careful in terms of our strategy before we quote, you know, really launch. Part of this is a strategy of, you know, win before launch and really making sure that we have all of those signs of product market fit. That's what we kind of have stated repeatedly that our primary focus in this year is to achieve product market fit with MogoTrade. That really means making sure that when we bring on users, we're seeing really good retention metrics, engagement metrics, both qualitative and quantitative.

We're doing a lot of surveys, a lot of user interviews. You know, one of the things I highlighted is we continue to get really good feedback in terms of the simplicity of the app, as well as the fact that people appreciate the lower fees. You know, as an example, one of the pieces of feedback we had was that many users were not aware that we were charging zero FX fee. We actually have a new experience feature that's gonna be released next week in which anytime somebody goes through the experience, it's very clear, a lot clearer that there's zero FX fee. Once they found out about it, obviously, they appreciated the value proposition.

You know, these are just all the things that we're trying to do to really make sure that we get the product to where it is and to where it needs to be before we start putting any sort of material marketing dollars behind it. Again, I think given where we are in terms of, you know, we're in May, we're in a really good position. I think we're gonna be well-positioned where, you know, we can start to get more aggressive in terms of, especially as we move away from some of these efficiency items, you know, beginning in Q4 and hopefully in Q1. I don't know if you've personally have tried the app, but you know, right now you shouldn't even be on the wait list for long.

You should be able to get it very quickly if you've, if you've signed up. What's really important for people to understand too is this is not an app that is meant to appeal to every single DIY investor out there, right? We saw that, you know, with even companies like Wealthsimple, as I mentioned, right? They came out with a much simpler user experience, with obviously the first to offer zero commission. Many existing users of some of the existing platforms said nobody's gonna use this platform. It doesn't have a whole bunch of features and things that other people want. The reality is no DIY trading platform grew as quickly as Wealthsimple. In fact, they actually, you know, gained the most market share last year.

That really is a key part of our focus and strategy is essentially, you know, we believe that kinda is more the modern direction. We have the advantage of kind of building this now knowing everything we know. We don't generally believe in the first mover advantage. We think a lot of obviously successful companies out there came after the first mover. We really are focused on making sure that we can go out there with a very meaningful differentiation against all the players, including a Wealthsimple, and continue to get that user feedback to make sure that we're hitting the mark.

Adhir Kadve (Principal and Technology Equity Research Analyst)

Excellent. Finally, just on the, on the WonderFi and Coinsquare merger, obviously you guys will be a big shareholder in that. Do you see one, what are your longer term plans for the asset? Two, is there any kind of strategic benefit to Mogo, maybe some from some cross-selling between your user base, their user base? Just kinda thinking longer term, how you're thinking about that asset.

Greg Feller (President and CFO)

Yeah, I think, will be some strategic opportunities, I think, between the two companies. It's not our primary focus right now, but we continue to believe in the value, and the relevancy of the digital asset class as being another asset class, investors in particular next generation want access to. Having that relationship with the only fully regulated crypto exchange in Canada, we believe is gonna be an advantage for us. I would say that, you know, our long-term plans will ultimately be to really maximize value for our shareholders. We're in no rush there. I think we're very kinda optimistic on the prospects of that business once they close their transaction.

We think the company's gonna be very well capitalized, very well positioned to really be, you know, the de facto leader in the Canadian market. I think it's gonna be an attractive story for investors from the public market perspective as effectively the only publicly listed, fully regulated crypto exchange in North America. As I mentioned in my comments, we effectively will with 85 million shares and only of ownership of WonderFi and only 75 million shares of Mogo outstanding, effectively, there will be one WonderFi share underlying each share of Mogo. Seeing the value of that share will give our shareholders a lot more visibility and clarity in the components of the value of Mogo today.

We quite frankly, don't believe we're getting any value for that asset today because it's opaque, it's not transparent, and we think that will help unlock some value for our shareholders as well.

Adhir Kadve (Principal and Technology Equity Research Analyst)

Excellent, guys. Congrats on the quarter. Congrats on the operational efficiency. I'll pass the line.

Greg Feller (President and CFO)

Thanks.

Operator (participant)

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Scott Buck with HC Wainwright. Please go ahead.

Scott Buck (Managing Director)

Hi, good afternoon, guys. Thanks for taking my questions. You've done a really nice job bringing costs in. I'm curious, Greg, how much of these reductions represent a permanent change in the cost structure versus, you know, more temporary?

Greg Feller (President and CFO)

I would say that none of these are temporary reductions in the sense that we haven't made temporary changes that we expect or have any clear plans for them to come back. Obviously there are variable expenses like marketing that we've reduced that will be variable, and we will see periods where we increase those investments. I think we've as Dave really talked to in his comments, this was not just a cost-cutting exercise. This was a really a strategic review, refocusing of the business and reengineering of the business to be leaner and meaner, to be in a position to be the low-cost operator in the industry.

As I said in my comments, I don't think there are a lot of examples of Fintechs of our scale, showing the kind of EBITDA margin that we're showing and that we expect to show over the next couple of quarters. That's while making real investments in our payments business and our wealth business. Being a low-cost operator, we believe is a massive advantage, especially in these volatile times where capital is scarce. Effectively, we believe we have a sustainable business that we can manage and grow and invest without needing to go to the capital markets, just by managing with the capital that we have. We think that's a huge advantage.

As far as investments going forward and ramping those expenses up, again, we will manage that within the Rule of 40 discipline of basically saying, if we're going to dial up expenses which are going to, in the short term, lower EBITDA margin, we better expect an offsetting increase in growth rate to be able to do that. We, at this stage, plan to remain EBITDA positive rather than this being some temporary dial that we've just turned.

Scott Buck (Managing Director)

Great. I appreciate that additional color. Second, I wanted to ask about the consumer lending business. Just curious what you're doing in on underwriting there, whether you've kind of tightened your underwriting standards given the environment and maybe just, you know, as a whole, what you're seeing in terms of consumer credit.

Greg Feller (President and CFO)

Yeah, I think, look, as we've said in the past, we've taken a very cautious and disciplined approach, conservative approach to our, to our lending business. It's a business that we've been doing for 20 years. We believe we're one of the most experienced digital lenders in Canada, and have experience through, you know, all kind of cycles. The cycle we're seeing right now is not one that's new to us. We think that gives us a big advantage. As you've seen on our balance sheet, our actual loan book has decreased in the last couple of quarters. You know. Well, actually, in fact, it's actually decreased in the last 3 quarters.

That tells you know, the approach that we've been taking. Meanwhile, our credit performance continues to be strong. We really haven't seen any deterioration there. We've been, you know, very pleased with it, and in fact, gives us, you know, more confidence to, you know, adjust that and at least have a stable loan book as we move further into 2023.

Scott Buck (Managing Director)

Great. That's helpful. Last one for me. It looks like share count may have come in a little bit this quarter versus end of year. Do you guys buy back some shares?

Greg Feller (President and CFO)

We didn't buy back any shares. We bought back shares in Q4. There may have been some small changes, but I don't think there was anything meaningful from last quarter.

Scott Buck (Managing Director)

Great. appreciate the additional color, guys. Thank you very much.

Greg Feller (President and CFO)

Thanks.

Operator (participant)

There are no further questions at this time. Please proceed.

Greg Feller (President and CFO)

Thanks for joining us for our Q1 call. Appreciate the questions and look forward to updating you post Q2. Thanks again.

Operator (participant)

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