Orion Digital - Q4 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to the Mogo Q4 2023 financial results 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 Wednesday, March 20th, 2024. I would now like to turn the conference over to Mr. Craig Armitage. Thank you. Please go ahead.

Craig Armitage (Primary Investor Relations Contact)

Thank you, operator, and good afternoon, everyone. Thanks for joining us today. Just a few notes before we get started. Today's call will contain forward-looking statements that are based on current assumptions and subject to risks and uncertainties that could cause actual results to differ materially from those projected. 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 Q4 and year-end 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 the investor relations website as well. Second point is today's discussion will include several adjusted financial measures, i.e., non-IFRS measures. Please consider these as a supplement to and not as a substitute for the IFRS measures.

You'll see we've included reconciliations to those measures in the press release and the investor deck. And with that, I'll turn it over to Dave Feller to get us started. Please go ahead, Dave.

David Feller (Founder and CEO)

Thanks, Craig. Thank you. Good afternoon and welcome to Mogo's fourth quarter and fiscal 2023 results conference call. I'm joined today by Greg Feller, our president and CFO. Our focus in 2023 was to build a more profitable and efficient company while at the same time setting us up for long-term sustainable growth by increasing product velocity and driving improvements across our products. We are pleased that we have made excellent progress on both fronts. As you can see, our financial results really highlight the progress we've made. Q4 revenue was CAD 17.2 million, up more than CAD 1 million or 6% sequentially. Another solid quarter with continued improvement in Adjusted EBITDA, up 1,000% from last year to positive CAD 2.7 million this quarter.

This brought us to CAD 7.7 million in adjusted EBITDA for the year, towards the top of our guidance range, and most significantly, a CAD 19.9 million improvement compared to the adjusted EBITDA loss of CAD 12.2 million in 2022. Our business today is made up of three key pillars: wealth, payments, and crypto. We're excited by the long-term opportunity in each of these. I'll walk through wealth, and Greg will talk about payments and crypto. It's helpful to start with the market opportunity in wealth. The Canadian wealth market is measured in the trillions and 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 mutual funds alone, along with annual contributions to RSP and TFSAs of over CAD 100 billion per year.

There are many players in the market today, and options for consumers include self-directed investing, wealth advisors, mutual funds, robo-advisors, and traditional brokers, while the majority of these assets are still with the big banks. With so many products and solutions available to Canadians today, the natural question is, what is the opportunity for a new player like Mogo? The reality is that although there are many solutions in the market, the vast majority of Canadians are nowhere close to being on a path to retirement and financial freedom. Perhaps no stat sums this up as well as the 75% of Canadians between the ages of 55-65 who have yet to retire and have less than CAD 100,000 saved versus the CAD 1.7 million average Canadians believe they need to retire.

This is also why, of all the areas to improve in someone's life, 92% agree that improving their finances would have the biggest impact on their happiness. Wealth building and investing is broken, and the status quo is an urgent need of disruption. Unlike what we see in the market today, we believe that the future of investing will be dominated not by the incumbents, but by products and solutions that have the biggest impact on improving Canadians' wealth, although this might seem obvious and common sense that it's not the reality today. How do we intend to disrupt this market? Over the last few years, we've been heads down building what we believe is the most effective wealth building platform in Canada. There are many things that differentiate our wealth products, but the biggest differentiation comes from our focus on leveraging behavioral science.

As Warren Buffett has said, being a successful investor is way more about having the right temperament than it is about intelligence. Similar to achieving other important life goals like getting in shape, the knowledge of what to do is a very small part of what drives success. It's having the discipline to do the things that need to be done consistently that get you the results, and most importantly, avoiding the bad things that take you off track. The same applies in investing, and we've incorporated this into our products. This simple graph highlights the kind of improvement that can be made in someone's wealth building journey compared to the average investor return. A consistent S&P strategy would result in over 16 times more money over a 50-year time horizon.

Unlike other self-directed trading apps that are focused on getting you to trade, given that's how they make money, the more you trade, the more they make, the less you keep. Mogo is our self-directed investing app and is unlike any other trading platform in Canada. For one, our focus is solely on helping you improve your return, not trade excessively or speculate. The app now includes Buffett Mode based on legendary investor value investor Warren Buffett, widely regarded as the most successful investor of all time. Buffett Mode is designed to help anyone invest based on the principles of value investing. One of the key features of the app is how it's designed to help investors reduce trading and speculating, which has been proven to be one of the biggest drivers of underperformance, and instead to focus on thoughtful long-term value investing.

We have also a very unique and disruptive pricing model that aligns with our customers' best interests: a simple CAD 8-a-month subscription fee. With this, our customers get access to commission-free and zero FX fee investing. So for most self-directed investors, this fee structure will actually save them money. But most importantly, we aren't trying to get them to trade like every other platform. Instead, we are obsessed with their performance. For our target demo on a 50-year time horizon, a simple 1% improvement in their annual performance can mean the difference in millions. As I stated earlier, we believe the future of investing will be dominated by products and brands that actually deliver the biggest impact to Canadians' wealth.

We recently announced the launch of Moka.ai, the next generation of our wealth building app, with significant updates and enhancements designed to help the next generation of Canadians get on a real path to becoming millionaires and achieve financial freedom. Like Moka, behavioral science is at the heart of our experience, along with a proven long-term investing strategy. With Moka, we are seeing people go from being on a path to virtually, virtually nothing to literally millions. Some were investing in mutual funds. Some were simply, putting money into savings accounts, but most had no idea what the right approach or how much money they would need to invest to achieve financial freedom. A combination of the right behavior and the right investing strategy creates a quantum improvement versus incremental. We have members that have increased what they're on track to by over 50x simply by using Moka.

With the relaunch of the new products, we've also introduced new branding that we believe really helps elevate our products in a way that is specifically designed to resonate with our target demographics of Gen Z and millennials. This sets the stage for a ramp-up in our marketing efforts beginning in Q2. Given our target demographics, social media will be a key focus, including a very robust influencer-led campaign, and will be supported by other marketing activities, including our marketing to our large member base and through a Postmedia partnership. AI continues to dominate the tech headlines, and given the success we've already seen internally, we also continue to be excited by its transformational potential across every area of the business. There's no question that AI has already had a meaningful impact on our business, as it has been a large driver of our cost efficiencies.

Mogo today is a team of only 150 versus 320 at our peak, yet with a team of less than 50%, we wouldn't have been able to achieve the level of progress we made without the use of AI. Clearly, we're at the very early stages of what we can do and continue to expect to with AI in every single area of the business, from engineering to customer service to marketing, data and analytics, and product development. Today, we're leveraging AI in customer service through our AR chatbot. Marketing continues to be an area where AI is increasingly impactful, whether it's campaign creatives or copy. Product development leverages AI, and we design our products with the expectation that AI will continue to become a big driver of the experience.

There's no question that AI will have a transformative effect on the future of wealth building, and we aim to be at the forefront of it. With that, I'll turn the call over to Greg. Greg?

Gregory Feller (President and CFO)

Thanks, Dave, and good afternoon. Let me first discuss two of the other pillars, beginning with our payments business, Carta Worldwide. Carta had a strong year in 2023, as reflected in a 30% increase in our payments volume to CAD 9.9 billion. Carta's growth in 2023 was driven by continued expansion of its core European payments business, and we continue to be excited about this business and its long-term growth prospects in the massive $2.5 trillion global payments market. Importantly, we have a number of large existing customers, which we believe we continue to expand our business with, give us high confidence to make the investments we expect will pay dividends in the future. These investments include substantial enhancements to Carta's platform, including the previously announced migration to the Oracle Cloud.

As we discussed last quarter, another major pillar is our crypto-related investments, which collectively today represent about 40% of our market cap. The largest of these is roughly 87 million shares in TSX-listed WonderFi. WonderFi owns and operates one of the leading digital asset businesses in Canada through their crypto trading platforms, Bitbuy and Coinsquare, which is also the only fully regulated crypto exchange in Canada. The company also has a crypto payments platform called SmartPay. Importantly, we believe WonderFi is an undervalued asset that has significant potential in this growing sector. Turning to our financials, the fourth quarter was a very strong quarter to close out the year. Over the past 24 months, we have placed significant focus on driving increased efficiencies and profitability, including exiting a few subscale products.

We've continued to prudently invest in development of wealth and payments as we view these two segments as strong drivers of growth going forward. We have now clearly seen a return to revenue growth, with Q4 revenue up 6% sequentially to CAD 17.2 million, third quarter in a row of sequential growth. Importantly, it also marked a return to year-over-year growth, which was significant given the 2022 comparison quarter had been difficult given our exit of certain products. Also, this growth is happening with less than CAD 1 million of marketing spend today per quarter. As we move into 2024 and launch our marketing initiatives for our wealth platform, we believe that this, along with strong growth we are seeing in our payments and lending business, set us up for delivering on accelerating subscription services revenue growth in 2024.

As Dave mentioned, one of the focus areas in 2023 was driving operational efficiencies, and we've seen excellent results. Total OpEx decreased by 25% in Q4. In dollar terms, that was a CAD 4 million decrease of CAD 4 million in quarterly OpEx. For the full year, OpEx was down 37%. We believe that revenue per employee is an important efficiency metric. As you can see, since the beginning of our efficiency initiatives, we've increased our revenue per employee by 82%. Although we will continue to operate with efficiency mindset in place, we also plan to invest some of the savings into increased marketing development spend to drive accelerating revenue growth in 2024. Importantly, any investment spend we do make will be guided by the Rule of 40 and therefore require expectation of increased growth from that spend, with a particular focus on focus on accelerating subscription and services growth.

Cost reductions translated into another strong quarter of adjusted EBITDA, which grew for the seventh quarter in a row, increasing to CAD 2.7 million, up from CAD 200,000 for the same period last year. Full-year progress is significant. Adjusted EBITDA was CAD 7.7 million, a CAD 19.9 million improvement compared to an adjusted EBITDA loss of CAD 12.2 million in 2022. Importantly, we've also seen a corresponding significant increase in cash flow from operations before discretionary investment and loan book, which went from negative CAD 10 million in 2022 to positive CAD 9.5 million in 2023, with CAD 4.7 million of this generated in Q4 alone. These improvements also resulted in a consistent reduction of our adjusted net loss since the start of 2022, and that continued in Q4 with adjusted net loss of CAD 2.6 million versus CAD 5.4 million in the year earlier period. In Q4, led by gains in investments, we also reported positive net income of CAD 8.5 million.

In addition to the improved profitability, we remain on solid financial position. We ended the year with cash and total investments of CAD 55 million, up from CAD 44 million at Q3 end. This included combined cash and restricted cash of CAD 17.9 million, other investments totaling CAD 10 million, and crypto-related investments totaling CAD 27.7 million, which means that with less than 25 million Mogo shares outstanding today, our shareholders have significant per-share leverage to this growing sector. Turning to our outlook, having clearly demonstrated our ability to significantly reduce OpEx in 2024, we expect to shift the balance toward return to accelerating revenue growth while at the same time continuing to generate positive Adjusted EBITDA. We will increase investments in marketing and development to drive acceleration in subscription services revenue growth from its wealth from our wealth and payments business, which, as discussed, are areas we see significant expansion opportunity.

For 2024, we expect accelerating subscription services revenue growth during the year, with an overall subscription services growth rate in 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 toward our target Rule 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 one on your telephone keypad. And should you wish to cancel your request, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star and one to answer your question. Your first question comes from the line of Adhir Kadve from Eight Capital. Please go ahead.

Kiran Sritharan (Associate Analyst)

Hey, afternoon, guys. This is Kieran on for Adher. Just wanted to start off by touching on the forward guidance itself. It's good to see the uplift in subscription revenue growth. Just curious where that confidence is coming from and what are some of the triggers to get to that double digits.

Gregory Feller (President and CFO)

Yeah, thanks for that. It's Greg. So, I think we feel very good about continued growth in our payments business, which for the most part is being driven by expansion with existing customers. So we feel really good about that continuing on in 2024. And then, as you've heard from Dave, we've made really massive investments in our wealth platform. We're getting very strong early feedback from our users. We're seeing a high NPS score. And that, along with some of the recent growth we've seen in Q4, and ramping up our marketing spend to get that story out there. I mean, we've really been spending less than CAD 1 million a quarter in marketing. So, you know, any growth that we have seen in the business has been on very limited marketing. We feel that puts us in a good, good position to just really deliver on that.

Kiran Sritharan (Associate Analyst)

Appreciate that. And on Carta, you know, it's a very positive day on the payments business. Could you maybe touch on what 2024's gonna look like? Is it gonna be more net new users, or is it gonna be activating the current user base? And I'll leave it there. Thank you.

Gregory Feller (President and CFO)

Yeah, no, on Carta, as I say, it's really gonna be about expansion with existing customers. We've got a few big customers, including Pluxee, which has recently spun off from Sodexo in France, that we've been winning a lot of business with. They are a global player, massive player in the market. And we've been winning a lot of their business. And so that really sort of gives us a different lens on, versus, say, going out there and trying to win new business. You know, so I think we expect more of the same in 2024, so launching in new countries and expanding existing programs in existing countries, with some of our biggest customers.

Kiran Sritharan (Associate Analyst)

Thanks. pass around.

Operator (participant)

Thank you. And your next question comes from the line of Scott Buck from H.C. Wainwright. Please go ahead.

Scott Buck (Managing Director, Senior Technology Analyst)

Hi, good afternoon, guys. Thanks for taking my questions. First, I was hoping maybe you could provide a little bit more color on where some of the incremental marketing dollars are gonna be going.

Gregory Feller (President and CFO)

Sure, Dave, you wanna touch on that?

David Feller (Founder and CEO)

Sure. Yeah, as I mentioned, in my call there, we've put a lot of work into both of our wealth products, Moka and Mogo. So again, Moka is the fully managed solution. So when we talk about our wealth platform, it includes both a fully managed solution as well as a self-directed solution, Mogo being the self-directed solution. We've had, you know, really strong product velocity on both of those products. We've also made a lot of changes even to the branding and how we're kinda marketing and bringing those to life. And as Greg just touched on, we also have had very kinda positive response from our Net Promoter scores, and we're starting to see some just really good feedback from users. So we're gonna be kicking up, you know, some significant marketing efforts, starting in Q2, so April.

Again, as I mentioned, it'll be primarily led by strong kinda influencer focus, just given our target demo of Gen Z and millennials. So, you know, marketing expenses directly related to bringing on influencers, both bigger influencers and micro-influencers, and then complementing that with campaigns to our member base as well as through our Postmedia partnership. So we'll be expecting to ramp that up all through Q2. So that really is gonna be where the main focus is from a marketing perspective, both on Mogo and Moka.

Scott Buck (Managing Director, Senior Technology Analyst)

Great. I appreciate that. And then I was curious, you know, how you guys are feeling about share repurchases today. I know you had bought back some shares in 2023, and it looks like it was at an average price maybe at or even a little above where we are today. Just kinda curious your thought process now on share repurchases and kinda capital allocation in general.

Gregory Feller (President and CFO)

Yeah, Scott. So we obviously continue to have a share repurchase authorization in place. We have not been able to repurchase any shares for quite a while here, given our blackouts with reporting year-end. But otherwise, you know, we bought back in almost every other quarter in 2023. So, you know, given where our share price is today, I think it's reasonable to assume that that will be a part of our capital allocation here, going forward as well.

Scott Buck (Managing Director, Senior Technology Analyst)

Great. And then last one for me. I'm curious to get your thoughts on WonderFi share price. I mean, I think the stock is down kinda 13% year-to-date versus, you know, at least the perception that there's been a real rebound in crypto and, you know, a broadening of interest there.

Gregory Feller (President and CFO)

Yeah. Look, obviously, we're large shareholders, the largest shareholder. And so we do obviously watch that stock carefully as well. As I mentioned in my remarks, our view is there's some valuable assets there at WonderFi. And we don't think that it's getting proper recognition in the market. So, you know, our basis, just so you know, in WonderFi is over CAD 1 a share, effectively. And so, you know, we are obviously thinking a lot about that, but agreed. You know, our view is that at this stage right now, we don't think the share price reflects the value there for sure.

Scott Buck (Managing Director, Senior Technology Analyst)

Great. I appreciate the added color, guys. And congrats on the quarter's results.

Gregory Feller (President and CFO)

Thanks, Scott.

Operator (participant)

Thank you. Once again, should you have a question, please press star, then the number 1 on your telephone keypad. Your next question comes from the line of Andy Nguyen from Raymond James. Please go ahead.

Andy Nguyen (Equity Research Associate)

Thank you for taking my questions. Could you give us some more color on the decision to invest in Bitcoin and Bitcoin ETF this quarter? Thank you.

Gregory Feller (President and CFO)

Yeah, look, we've been long-time believers in Bitcoin as a store of value. And, you know, we kinda subscribe to Michael Saylor's view of the depreciation of the dollar. And so we think, actually, as part of our overall portfolio, having some of our, let's call it, excess cash, sitting in Bitcoin, whether it's Bitcoin directly or a Bitcoin ETF, we think makes sense for us. Obviously, we ultimately believe that Bitcoin, crypto more broadly, is gonna be part of any next-gen financial platform. And that's obviously what we're building in Canada. So we think it's consistent with our focus and our view of the market.

Andy Nguyen (Equity Research Associate)

Thank you

Operator (participant)

Thank you. There are no further questions at this time. Mr. Dave Feller, please proceed.

David Feller (Founder and CEO)

Oh, thanks, Operator. Well, thank you for joining our call today. We look forward to updating you post our Q1 results. Thanks again.

Operator (participant)

Thank you. That concludes our conference today. Thank you for participating. You may all disconnect.