GreenSky, Inc.
Q2 2021 Earnings Call Transcript

Published: 31 Jul 2021

[Operator:]

Good morning, and welcome to GreenSky’s Second Quarter 2021 Financial Call. As a reminder, this event is streaming live on the GreenSky Investor Relations website and a replay will be available on the same-site approximately two hours after the completion of the call. We will begin the opening remarks and introductions. At this time, I would like to turn the call over to Brinker Dailey, Head of Investor Relations. Mr. Dailey, you may begin.

[Brinker Dailey:]

Thank you, and good morning, everyone. Yesterday, GreenSky issued a press release announcing results for its second quarter ended June 30, 2021. You can access this press release on the Investor Relations section of GreenSky’s website. In addition, we have posted our second quarter 2021 earnings presentation, which we’ll refer to during today’s call.

[David Zalik:]

Thank you, Brinker. Good morning, everyone, and thank you for joining us today to review our second quarter 2021 results. GreenSky achieved record earnings and delivered on a number of key initiatives in the second quarter. The strength of the company’s performance reflects the long-standing commitment we have made to our merchants, consumers and funding partners, and this past quarter’s operating results could not have been achieved without the dedication and hard work of our GreenSky associates. Our strong start to the year has continued and was highlighted by strong profitability metrics and the achievement of several important accomplishments that I will elaborate upon. Throughout our remarks today, you’ll notice 2 consistent themes. First, GreenSky has made great progress, leveraging our strategic relationships and investments in merchants and sponsors that will materially grow transaction volume in the future. Second, our continued focus on the lifetime profitability of each loan originated on our platform is directly reflected in our record earnings this quarter. Turning to Slide 3. During the second quarter, GreenSky delivered record net income of $47 million, which represented a $33 million increase from the second quarter of 2020 and was a direct result of the improvement in our cost of funds and the scalability of our operations. Adjusted EBITDA of $61 million, also a company record, resulted in a 45% adjusted EBITDA margin for the quarter, accelerating our path towards sustaining long-term annual adjusted EBITDA margins exceeding 30%, consistent with what we outlined during Investor Day this past January.

[Andrew Kang:]

Thank you, David, and good morning. Moving to the second quarter financial update on Slide 6. As David mentioned, GreenSky reported record net income of $46.7 million and recorded adjusted EBITDA of $60.8 million, reflecting a 45% adjusted EBITDA margin for the quarter. These strong results highlight the accelerated path to achieving and outperforming the long-term goals we set at the beginning of this year.

[David Zalik:]

Thank you for joining us today. Operator, we are now ready for Q&A.

[Operator:]

Our first question comes from Christopher Donat of Piper Sandler.

[Christopher Donat:]

David, I wanted just to ask first on the solar. I realize it’s more of a future side of the business, but why the decision to move into the market now, what do you see in the opportunity? Or what’s sort of changed within GreenSky that caused the decision?

[David Zalik:]

So a couple of things, and we’re actually launching in small-scale in the third quarter. So we’ve been building out the capabilities and controls in the prior quarters. We have quite a bit of experience in solar. We see that there is a tremendous funding appetite for that type of product and leveraging our prior experiences, we’ve built out the controls and the processes that we think work, and we’ve certainly seen where we think we have advantages in the market between our technology, our protocols as well as the funding. And we think there can be a material growth factor for our business and something highly profitable and incremental. So certainly, doing it, absent all of those pieces didn’t make sense. It’s something that we’ve certainly been looking at for a while, and we’ve got the tools, and we’re ready to go.

[Christopher Donat:]

Okay. And then just thinking about your guidance on transaction volume and what’s going on in the marketplace with supply chain and labor issues. I’m just wondering if there’s -- well, it seems to me that certainty of financing for a contractor should be a positive thing that would work in GreenSky’s favor. But -- and I’m missing something or are the issues with supply chain and labor just overwhelming everything else? Or are you seeing something where contractors, they actually would prefer to deal with just straight cash from the customers who can pay cash to those customers .

[David Zalik:]

No. The finance rate, the percentage of jobs that are being financed is not going down if anything appears to be going up. But let me give you an explicit anecdote. If it used to take 6 weeks to get a window installed, it takes 12 weeks, it takes 18 weeks. We have roofing manufacturers that used to carry 12 products, and it takes a couple of weeks. Now they’ve constrained it to 3 products, 3 colors, and it can be 18 weeks. So when you have great sales, but you don’t get to recognize it until the job is complete, and it takes potentially 2 or 3x longer, that’s going to push transaction volume out. So what we’re seeing is, and we referenced this, we’re seeing record approvals, but the transaction volume is lagging because it takes much longer to get these jobs done. We’re not seeing less demand. What we’re seeing is when we interview our contractor customers that they’re overwhelmed with demand, and they’re greatly challenged by supply chain and labor. So what we are seeing is in the normal course, if a $10,000 sale is made in June, we would normally expect to see $10,000 in transaction volume in June and July. And instead, we’re seeing that get pushed out over 4, 5 or 6 months.

[Christopher Donat:]

Okay. And then, I guess, just last question for me. As you’re thinking about things being pushed out 4 or 5, 6 months, does that change how you feel about 2022? I think you’re already relatively optimistic of it because of EGIA and other relationships, but do you think you’ll see basically activity pushed out from ‘21 to ‘22.

[David Zalik:]

Yes. So look, all the leading indicators, including adjusting for these longer lead times, makes us very bullish in 2022. I think, Chris, that we’ve demonstrated that funding is highly diverse. And we’ve, I think, made it more profitable for our company. I think we’ve demonstrated that we can win and have continued to win some really, really big relationships, heads up against the competitive landscape. And as it relates to 2022, all the leading indicators are very encouraging. So we’ve got funding, we’ve got profit and profit margin, and we expect accelerating transaction volume. And just another anecdote, in here in the last couple of months, merchants are telling us they’re cutting back on their advertising just to have a chance to catch up to their backlog. So we -- the short answer is we’re very bullish on 2022.

[Operator:]

Our next question comes from John Davis of Raymond James.

[John Davis:]

I just want to follow up a little bit on Chris’ transaction question. David, how should we think about how the increased guide -- or sorry, decreased guide, how does that play out in 3Q versus 4Q? Obviously, it implies an acceleration in growth. As we get something similar from a growth perspective in 3Q, what we saw in 2Q and more of a hockey stick in 4Q? Or is it more even? Just anything to help us with how it plays out sequentially in the back half of this year?

[David Zalik:]

Yes. So what we don’t expect is the same kind of seasonal curve that we’ve had for the last decade. What we would expect is something that is more flat in terms of Q3 and Q4. But the fact remains, people generally don’t like to have home improvement performed after Thanksgiving, right? That tends to be a low time. What we don’t know exactly, and we can’t predict precisely is with the backlog, we don’t think people are going to say, well, we weren’t able to install in October, but now you’ve got the material, let’s go. So we think that it will be different than historical seasonality, and it does push more into Q4. We just don’t know how long it’s going to take the supply chain to catch up, right? Some industries seems they think by the end of the summer, they’re going to be a little bit more normal. Some are reporting that it’s into early next year. And so that would really elevate our Q4 volume.

[John Davis:]

Okay. So on reading those comments correctly, you would expect some modest acceleration in 3Q and then a little bit step-up in 4Q on a year-over-year growth basis relative to...

[David Zalik:]

That’s right.

[John Davis:]

Correct. And then maybe on the margin, I think guide implies 27% EBITDA margin. Obviously, it was pretty high popping 45% this quarter. You guys have kind of talked to a 30% margin longer term. So just want to understand a little bit of puts and takes. I know credit has been definitely a tailwind in the first half of the year. But just maybe, Andrew, if you can just go through the puts and takes on the margin in the back half of the year and if there’s been any change in kind of longer-term margins at all?

[Andrew Kang:]

Sure.

[David Zalik:]

Let me just comment that every year before we’re a public company, the margin EBITDA profile goes on a normal curve. If you look at certainly all the years that we’ve been public, fourth quarter and first quarter tend to be our weakest quarters. So it is -- our focus certainly is annual EBITDA margin, and we’re very excited that we’re demonstrating we can get there. Second and third quarter is always the highest EBITDA margin. So you tend to have your biggest quarters in the second and third quarter. And so it is only natural and historic for us that the margin tends to peak in second and third quarter and ebb in the first and fourth. Andrew, anything you want to add to that?

[Andrew Kang:]

No, David, that’s absolutely right. And just in commenting around the second quarter specifically, I think, as I mentioned in my prepared remarks, I think the areas where we saw the real improvement in cost of revenue was around both our operational costs as well as our overall cost of funds. And when I kind of unpack the cost of funds, we’re really seeing the benefit of our loan sales strategy. We talked to you guys about this late last year. And I know we had a lot of convincing to do. But what we said was when we diversify our funding model, we would be able to optimize the very important bank waterfall components we have, but also leverage loan sales to reduce FCR volatility and also, you’ve seen the impact of loan sales benefiting financial guarantee. So as well as, I should say, an improvement in the pricing of that leg of the funding model. So from the cost of revenue side, the cost of fund side, we’ve seen multiple dimensions of improvement this quarter. And I really think that that reflects kind of getting to a steady state, diversified model in Q1 and then now more solidly in Q2, where at the end of last year, you saw us kind of building expense to be able to execute now. We’re kind of at a steady run rate. So I think that’s a really important component of the impact to the second quarter. Also, the second quarter, similar to like what David mentioned, is the seasonal peak in portfolio performance. So we did see a strong benefit on our bank waterfalls through our incentive payments. And so collectively, I think the coming -- the loan sales strategy and the diversified funding model, just really hitting its stride, along with a really strong quarter from a credit perspective has translated into a very strong quarter.

[John Davis:]

Okay. So it’s fair to say kind of no change to the mid- to long-term margin profile of the business. You’re just getting there quicker than you thought you were going to initially?

[Andrew Kang:]

I’d say I agree with you that we’re getting there quicker, but I’d say that there’s opportunity to keep going.

[John Davis:]

Okay. And then last one for me. I guess it’s kind of a 2 quarter. David, the solar kind of headwinds on the business a couple of years ago, we’re pretty well documented given the higher take rate. So just curious, do they still carry the -- I believe it was kind of in the 13% range take rate. So we could expect some upward pressure. How big do you think the solar could get as a percentage of the business? And then lastly, just kind of any update on elective healthcare and where we are there.

[David Zalik:]

Got it. So solar certainly should be at least $1 billion business for GreenSky in terms of annual transaction volume. We’ll see if that takes us 1 year or 2 years to get to that kind of run rate. But we’re very excited about it. And one thing to think about is -- and this will create a lot less complexity is -- and I think that over time, it will be even more transparent. What you’re noticing as more and more of our originations are originated on to, for example, insurance company balance sheet, there is no waterfall. There is no FCR. There is a great deal more simplicity and transparency as it relates to the financials. And we would have a similar structure. We would not expect our solar originations to be on a complex bank waterfall. We would expect to clear 5% contribution margin. And so if we originate $1 billion, it would be really simple. You take transaction volume, discount that out of funding partner, would earn and we can clear 5, and that would be recognized at time of origination, plus we’d get servicing fee, and then there would be no ongoing volatility. So we think that keeps it very, very clean. And so there wouldn’t be the noise of the 12% transaction fee, but negative cash flow in the subsequent years, it would just be a great net economic at the time of origination. Is that helpful?

[John Davis:]

Yes. That’s exactly what I’m looking for. And then just elective healthcare?

[David Zalik:]

And elective healthcare continues to ramp up, and we’re very excited about that. And we expect that to continue to ramp and start becoming a meaningful part of our business. So we’ve got, I think, a lot of opportunities in front of us, not only in our home improvement core business, but now healthcare is ramping and now solar. John, I’ll just add on the healthcare. Please recall that we had gotten to about 10% of enterprise-wide originations in the fourth quarter of 2019, and we’re hoping to grow that to the mid-teens. It’s difficult to do when you’re growing your home improvement business, $800 million to $1 billion a year. We’re not going to get to 10% this year. I hope by the fourth quarter next year, we’re in that sort of range. The gentleman leading that healthcare business for us is having great success with some large enterprise accounts. And the demand for share procedures is keen. So the market is there for us, and it’s just a matter of execution. But we do have some denominator effect to catch up, but we’d like to see this be a multibillion-dollar contributor and the market certainly is there for it.

[Operator:]

Our next question comes from Giuliano Bologna of Compass Point.

[Giuliano Bologna:]

I guess kind of jumping into a slightly different topic. The revised guidance implies EBITDA in the 30% to 35% range for ‘21. And there are obviously some tailwinds that are kind of driving that number that are probably not necessarily recurring. They’re kind of a little bit of reversal of what happened last year and even earlier this year. The Investor Day guide was kind of 30% or exceeding 30% of scale from an EBITDA margin perspective. What I’m curious about from similar trajectory perspective is that, obviously, you’re getting a benefit this year, which is pretty you right -- into that 30% to 35% range. Would you see -- would you think it would come down a little bit before you got back up? Or do you think it’s possible going into next year that you could be right at kind of your optimized EBITDA margin cadence perspective?

[David Zalik:]

Yes. We don’t see it’s going down to go back up other than the natural seasonality. So we painted, I think, a very clear picture in our first Investor Day in January on a 5-year plan to get us to $300 million in profit, $10 billion in volume, 30% plus margin. And what we think we’re demonstrating here just a few quarters later, is that we’re way ahead, and there’s obviously upside. And we think we can continue that momentum because of the investments that we’re making and the wins that we’ve had that will start impacting us at the end of this year and early next year. So we’re very excited, and we think we’ve got great results and great momentum.

[Giuliano Bologna:]

That’s great.

[Andrew Kang:]

Giuliano, I would just add to David’s comment, I’d say just making sure you understand that the results we’re seeing today aren’t necessarily because of any sort of release. I think it’s more that something -- a release that could then come back. This is really, as I described before, an acceleration to a stable cost of revenue P&L. And as David mentioned, there will be seasonality over the course of the year. But really, I feel like we’re at a spot now where we have gotten to the point, given the guidance we’ve provided, we feel that to be pretty much a good starting point and every dollar of incremental volume we can generate in the coming year is going to improve upon that. Hopefully, that helps.

[Giuliano Bologna:]

That’s very helpful. I guess the only question from there is really now that you’re running at a much better margin profile. Obviously, increased liquidity since the end of last year. I kind of be curious about what you think the best use of the cash at this point? Because if you’re running top line margin, you should have a -- be adding to your cash position, if it makes sense to use that cash to fund more kind of balance sheet facilitated loans or how you think about the use of that cash from a deployment perspective?

[Andrew Kang:]

Sure. I’d say -- go ahead, David.

[David Zalik:]

So we are generating a lot of cash. Thank you for recognizing that. And we don’t see any need to balance sheet. There’s incredible diversity. What we’re seeing is really fantastic participation and demand from insurance companies. And it just can’t get more efficient than that from our perspective. So in conjunction with our bank partners, we think we have a tremendous amount of runway in terms of efficient growth. And as we continue to accumulate cash, we’ll be looking seriously at all options, but we certainly haven’t made any conclusions at this time.

[Giuliano Bologna:]

That sounds very good. The only thing that I’d be mention just -- if you’re seeing any of this from a market perspective or suspect this to, I mean, there’s been some discussion about a greater use of unsure personal loans, not necessarily the types of loans that you’re offering that are more specific to projects that are being used for home improvement type projects or even cash out refis on the mortgage side that could be used for expansion or renovation projects. I’m kind of curious you see can you interplay the potential competition on that side? And have they seen any impact of that recently?

[David Zalik:]

No, not at all. And here’s why. What you’re referring to generally is a product for credit seekers and the data clearly supports that. But remember, the advantage that our platform has is there is a subsidy paid by our home improvement contractors that allows the consumer to get a much better deal than what they could get at any bank directly or a personal loan website. So it’s highly subsidized by the merchant, and it is instant, it’s paperless. It’s even more transparent to the consumer. So we’re certainly not seeing -- and as you know, personal loans have been around and very popular and have an important place, but we don’t see it intersecting with commerce. We see it as more loan consolidation than anything.

[Operator:]

Our next question comes from Arren Cyganovich of Citi. Arren?

[Arren Cyganovich:]

Just on the cost of revenue. At the Investor Day, you laid out the kind of example of the -- maybe just because it’s life of loan, but just kind of shows the bank waterfall and loan sale as being similar cost of revenue and you’re running, which is around 3.1%, 3.2%, and you’re running below that thus far and at least in your guidance for the remainder of 2021, has that expectation of faster revenue changed overall? And I’m just trying to understand the differences between the two.

[Andrew Kang:]

I think, Arren.

[David Zalik:]

Andrew, go ahead.

[Andrew Kang:]

Yes. Arren, I think to answer your question, I think the short answer is yes. If we were to update that view today, you would see advantages relative to what we presented then. Pricing has improved, availability has improved, capacity has increased. So I think the component in that view that reflected the cost of our loan sales strategy would be improved from that January perspective. And that’s something we’re looking to put together and might be able to share with you in the next call.

[Arren Cyganovich:]

Okay. I mean is that more of a current environment issue, or is that something that’s structural that you expect will be through the next several years?

[Andrew Kang:]

It’s definitely structural because prior -- you had to recall in January, we had done some discrete loan sales. We now have a $1.5 billion forward flow agreement in place. That creates structure. We also, by the way, are still doing discrete loan sales as well. And in addition to that, we’re getting more and more demand requests from our bank capacity partners. And we’re having discussions on other additional funding sources. So I think those are all the structural pieces that really, again, thinking about where we started in January to where we are today, much faster than what I initially had expected is having accelerated to a pretty steady state within a couple of quarters.

[Operator:]

At this time, we currently have no further questions. I’ll hand back over to David Zalik for closing.

[David Zalik:]

Thank you, everybody, for joining us. I’d like to add one additional comment. We’ve just gotten some messages. I want to be very clear that there have been no reserves released. There’s no onetime reserve or reversals. There’s no loans on our books that have caused that. So the increase in profitability and profitability rate has been driven by improved cost of funds and efficiencies in the company. So I just wanted to underscore that. Thank you, everybody, for joining us. Look forward to our third quarter call. Thank you.

[Operator:]

Thank you all for joining today’s call. You may now disconnect your lines, and have a lovely day.