GreenSky, Inc.
Q1 2021 Earnings Call Transcript

Published: 5 May 2021

[Operator:]

Good morning and welcome to GreenSky's First Quarter 2021 Financial Results Conference Call. As a reminder, this event is being streamed 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 with opening remarks and introductions. At this time, I would like to turn the conference over to Brinker Dailey of Investor Relations. Mr. Dailey, you may begin.

[Brinker Dailey:]

Thank you and good morning, everybody. Thank you all for joining us. Yesterday, GreenSky issued a press release announcing results for its first quarter 2021 ended March 31, 2021. You can access this press release on the Investor Relations section of the GreenSky website.

[David Zalik:]

Thank you, Brinker. Good morning, everyone and thank you for joining us. It's good to be with you today to review our first quarter 2021 results. The first quarter was another solid quarter for GreenSky in a very strong start to the year. We have built on the momentum generated at the end of last year and are witnessing outstanding application volume growth across our markets that we believe will further propel our business in 2021. GreenSky posted a company record first quarter adjusted EBITDA of $35 million with a higher adjusted EBITDA margin of 28%. Our outstanding year-over-year profitability was in the face of still ongoing merchant supply chain difficulties related to the continued impacts of the pandemic. First quarter pro forma net income adjusting for non-recurring fees exceeded 2020 first quarter results by $24 million. A driver of the company's strong performance was the outstanding performance of our service portfolio. For the quarter, the 30 plus day delinquency rate, which is a leading indicator of credit performance was 0.76% marking a strong improvement compared to the previous quarter and to the first quarter of 2020. The strong credit performance has positive implications on our cost of revenue and other areas that impact our profitability, which Andrew will discuss in more detail shortly.

[Andrew Kang:]

Thank you, David, and good morning. Turning to Slide 8 of the presentation. So far 2021 has continued to demonstrate a consistent progress and executing against our diversified funding strategy, which is today benefiting from both more efficient loan sales and also from enhanced relationships with our existing bank funding partners. We believe this quarter has demonstrated disciplined execution on both fronts. In March, we announced the completion of $1 billion forward flow sale agreement with a leading life insurance company who was new to GreenSky’s ecosystem. In April, we further expanded that agreement by increasing its commitment by an additional $500 million for a total of $1.5 billion. Subsequent to quarter-end, a bank partner that has been part of GreenSky’s platform for multiple years increased its commitment by an additional $500 million increasing their total revolving bank waterfall commitment to $2 billion. That bank partner also extended its agreement for an additional two years into the fourth quarter of 2023.

[Operator:]

Absolutely. Your first question comes from the line of John Davis of Raymond James.

[John Davis:]

Hey, good morning guys. Hey, David, just want to start out with transaction volume. Obviously, just talking about some key wins and a lot of the moments on especially I guess sequentially February to March. Any thoughts on April, that won't give you confidence that you can hit that midpoint or higher of your guide that was on change on transaction volume, despite that at least of 1Q that were a little bit weaker than we had expected, just curious on some of that shut down, maybe we just have the seasonality wrong? But I'm just curious, kind of what gives you confidence given I think, slightly weaker trends in 1Q?

[David Zalik:]

Yes. So thank you John. Transaction volume in April, as we indicated had accelerating growth, all of the leading indicators for us are through the roof. And so the first thing we look at are the number of applications that we received daily, weekly, for example in April already in May. And then it's – which of those customers were approved. And then that translates into a transaction volume typically over the next 60 to 90 days. So when we look at this February over last February, this March over last March isn't as relevant. So we look at this March over March of 2019, and then we look at growth from February to March and growth from March to April, and we see what the leading indicators are, and we see how that tracks very nicely to our full year forecast, which is broken up by month, which does take into account seasonality. Keep in mind. I think that shortly Q1 is about 20% of the year, and I think some people just took our annual transaction volume and divided by four or something – to dividing by four, and obviously that's pretty way off. So all the leading indicators should know that we are at or better than where we expected for Q1 and certainly for Q2.

[John Davis:]

It's clear, you kind of ended up where you expected for 1Q overall.

[David Zalik:]

Yes, typically we beat budget.

[John Davis:]

Okay. That's helpful. And then Andrew, maybe just help us a little bit. I know there is a lot of moving pieces in the EBITDA margin that obviously came in much better, it looks like it was all FCR related, but maybe just try and keep a high level, the puts and takes of why 28 in the first quarter, I think the midpoint of guidance on a 1,000 basis points below at 18. Like what are the big call outs, why it will decline, again, obviously above your prior guidance? And then maybe help us a little bit with the sequential or kind of quarterly cadence of the expected margins, I know that can…

[Andrew Kang:]

Sure. So I think one of the largest drivers of the change in the revenue – I’m sorry in the revised guidance is around the cost of revenue. So trying to break that down, I think simply put there, we've seen as we have transitioned into a diversified funding model and as it's something that we actually, I believe tried to highlight when we first announced the strategy, we expected there to be some lower volatility around FCR expense, we're seeing that come through. If you look quarter-over-quarter, I'm sorry – year-over-year, in the first quarter you'll see that there was a significant decrease in the FCR expense that coupled with more improving loan sales costs is really helping to support a more efficient cost of funds, which is contributing to the profitability. That's probably the largest component to some extent would obviously benefiting as you'd expect from improved credit performance, as it required – as it relates to our incentive payments. The delinquency trends that continue to be near record lows, and as a result, we continue to see some of the similar trends we saw in 2020 related to higher expected payments. Although, I would attribute more of the cost of revenue improvement related to FCR expense. And then probably the last piece is just, as I mentioned earlier, the loan sale costs continue to improve, we've now put a lot of components of that model in place. And I'd say that, when we discussed this in Q3, we talked about our ability to improve upon that execution, I think with the stability of the markets and strong institutional investor demand, we've been able to accelerate that probably even faster than I would've expected. So pound for pound, I think, the efficiency of our overall funding costs have been significantly improved, that coupled with operating expenses, both in servicing collections, as well as in SG&A, all being flat to better are also contributing to a solid fee versus our initial expectations.

[John Davis:]

Okay. And then any comments sorry…

[Andrew Kang:]

No, go ahead. I think you were going to ask about…

[John Davis:]

Yes. Sequentially like, how should we think about the margin all else equal kind of from 1Q into the – obviously you're implying it's going to be down, but is it down a lot in 2Q and it gets better 3Q, 4Q, just help us a little bit with the – how you guys are thinking about this from our cadence – quarterly cadence perspective?

[Andrew Kang:]

So I think Q2 will be – will continue to see a lot of what I just described and we'd expect there to be some strong performance, I think, as David alluded to, we expect volumes to pick up as well, seeing some of the leading indicators of the first quarter. I think where we – what I try to be a little bit more transparent was in the second half of the year, when I provided my walkthrough on guidance. We do – I think the biggest kind of toggle there is the fact that we do have and believe that there is still some uncertainty on how our consumers will perform that have been impacted by COVID impact. Overall, what I call the depth of that impact is definitely much smaller today, if you recall at the peak in 2020, our deferred portfolio was about 4%, it's now 20 basis points. So the impact of – the sheer impact of that is much, much smaller, however, we still have about $20 million of loans that are in deferral and we have about $40 million of loans that have had some level of deferral in the past. So with – I think what we're trying to model is that there still remains some uncertainty in the second half of the year related to how those loans could perform. However, we are cautiously optimistic because sitting here today, we're not seeing those trends yet, but I would say, our sentiment is not that different from many others, we hear that, we're still cautiously optimistic, but modeling first a little bit more uncertainty.

[John Davis:]

Okay. I appreciate that. Thanks.

[Operator:]

Your next question comes from Juliano with Compass Point.

[Unidentified Analyst:]

Good morning and thanks for taking my questions. I guess, from a starting point it'd be interesting to get a little bit of sense of what the different moving parts are within the FCR change in kind of guidance on a go-forward basis and what the – what are not the primary drivers are? And what I mean by that is, at what portion of that is more credit or at a portion of that portfolio size, because you may have more loan sales. So the kind of the portfolio subject to the FCR might be contracting. And there is a portion of that even just beyond that loan performance, just from a better delinquency performance.

[Andrew Kang:]

Sure. So in our prepared remarks, I think what we tried to make transparent was that in Q1 about 85% of our loans from a cost of funds perspective is allocated to bank waterfall costs. And 15% of our service portfolio is based on loan sales. If you compare that to 2020 Q1 of 2020, a 100% of that would have been on bank waterfall. So effectively 15% of the servicing portfolio is now funded through loan sales. As we talked about when you sell a loan we don't incur any of the FCR expense. So if you look on Page 11, you can see that the FCR expense on the right side in Q1 was about $77.6 million, and in Q1 of 2020, it was about $97 million. So there is a – you can see that there is dramatic decrease, and that would be attributed to us primarily being able to diversify our funding model and the benefit that we had expected to achieve on our bank waterfall costs. Right below that, you can see that incentive payments to a lesser degree improved, so if you look at Q1 of 2020, incentive payments were $44 million and in Q1 2020, incentive payments for $42 million, so there is still a benefit there and that's primarily where you would see the better credit performance of the portfolio come through. So pound for pound, we're getting more from an FCR expense benefit, but we are also seeing the benefit from credit as well.

[Unidentified Analyst:]

That sounds very good. Then kind of on a go-forward basis, there obviously seems to be – it looks like the fiscal 2021 is a bit front end loaded from an EBITDA perspective and what you’re seemed to be assuming is a similar trend, a similar kind of – similar impacts that you were assuming before, but just a little bit less on the front end of the year and more in the back half of the year. What I'm kind of curious about is, how that cadence might run, because at least from most companies – most companies out there credit seems to be extremely strong going into the second quarter. So I'm kind of curious how that set up flows through for the second quarter if credit remains in a similar ballpark to the first quarter, during the second quarter, and then how we should think about that cadence for the year?

[David Zalik:]

Sure. I think we would echo that similar sentiment, we feel that into the second quarter, we feel credit will remain similar as Q1. What we are – what we – we don't know, and what we're being cautiously optimistic about is, what happens in the second half of the year. If you recall previously when we initially gave guidance for 2021, we had indicated that we had expected higher credit losses due to the pandemic kind of through – kind of the going through the course of 2021, we obviously haven't seen that in Q1, we're not seeing that in Q2. So I think it's still in our minds a little yet to be determined on when we will still see it. And again, the magnitude of that overall impact is much, much lower, but I think we want to see Q2 performance before we're able to kind of continue that positive trend forward. So to answer your question Q2 very similar to Q1 to extent some lower – some uncertainty on how credit will perform in the second half of the year, that all being said, that should – the total full year guidance should give you an idea on how the impact will be in Q3 and Q4.

[Unidentified Analyst:]

That's great. Thank you. I'll jump back in the queue.

[David Zalik:]

Thank you.

[Operator:]

Your next question comes from the line of Michael Young with Truist.

[Michael Young:]

Hey, thanks for taking the question. Wanted to just kind of take the updated 2021 guidance and put it I guess into the broader context of the 10/9/30 strategic plan. It seems like this is more, hey, we thought it was going to be more of a transition year with more pandemic impact in 2021 before kind of reverting to the norm. And maybe that's just going to be a lesser impact. Is that kind of the message, or do you think this meaningfully impacts kind of that 10/9/30 plan over the next couple of years?

[David Zalik:]

Well, we think it certainly demonstrates that it's highly achievable and certainly sitting here in May, we’re further along than we expected to be going down that path. I think it's important to point out this is only in one part, the credit story. Certainly going into Q1, we knew what delinquencies were. So credit was not the big surprise for Q1. There is upside around credit by the thing that I think is that we haven't really talked about is we're getting more efficient funding, more diverse funding, and certainly transaction volumes are trending exactly are better than we expected. So Michael, I appreciate you asking because the way we think about it is we're just getting that much closer, faster right now than we'd previously talked about to the 10 by 9 by 30. And I think that's a good step forward. And of course, yes, there is upside for this year. Andrew, you had something to add?

[Andrew Kang:]

I would just say, short answer, yes. I think this puts us on track squarely on 10 by 9 by 30. We did talk about 2021 being a transitional year. And I think we pointed to higher loan sale costs. I think we demonstrated an improvement there in Q1, all things being equal. I think – if that continues, I think would clearly on path to meet our goals. And then in terms of credit, we assume that there was going to be a larger potential impact that's come down considerably since we announced that in Investor Day in January. But as I mentioned a moment ago, there's still a lot of uncertainty. So short answer is, we think our results this quarter and thus far this year are certainly putting us to achieve that five-year plan.

[Michael Young:]

Thanks. And one other question, just wanted to ask on the funding partners, just kind of how those conversations are going. On the one hand, I would think things would be more desirous of funded assets at this point in the low rate environment, on the other hand, maybe some of the institutional side, we've seen a big jump up in the 10-year treasury rates, et cetera. So maybe as demand weaken there, just any color you can add on just kind of how those conversations are going, that would be helpful.

[David Zalik:]

We're feeling like we're living in the land of abundance, our super regional national banks certainly appreciate super prime short duration loans. So there's certainly more demand. However, as we stated before, it's really important to us to have diversification. We've seen excellent execution which also by the way, conveniently is a much simpler accounting from bank buyers and non-bank buyers. And so for us, this is about number one, optimizing diversification and long-term economics where we're taking a long-term view. And that's certainly how we're treating our partners and vice versa, but we're seeing great demand. And we're driving this toward diversification for the long-term.

[Michael Young:]

Okay, perfect. Thanks. I'll step back.

[David Zalik:]

Thank you.

[Operator:]

Your next question comes from the line of Chris Donat with Piper Sandler.

[Chris Donat:]

Hi, good morning, everyone. David, you made a comment in your prepared remarks about, I think there were three merchant, you had a number of merchant wins, but I think three of them came from competitors. For the ones you won from competitors. Can you give us any sense of why you won? Like what about GreenSky enabled you to take the business?

[David Zalik:]

So in one case, it was a better integration tools. In another case, it was a better user experience. And in a third case, it was a combination of frustration with legacy partner on missing promises and just our reputation with their peers. And so this isn't new for us. It's how we've grown the business for years. And we just wanted to kind of call it out. Obviously, we had hundreds of wins in the quarter, but these were large and directly coming from a proposed competitor.

[Chris Donat:]

Understood. And then just thinking about the transaction volume guidance for the full year, there's no change there, but it seems like that the trends are working in your favor, not just some wins, but also healthcare is the lack of change reflect like the onboarding can take time or it takes time to ramp up a new merchant or conservatism in like, how do you do about the healthcare ramp over the year? I'm just trying to understand, it seems like the world looks a little better now than it did a couple months ago, and that that might lead to better transact, or you'd be more selective with your loans were noting that your FICO scores, that origination are about 10 points higher than they were a year ago.

[David Zalik:]

So Chris, great question. It's everything you've just described. Certainly having lots of wins taking market share growing the market, does take time to ramp. That's part of it. We're also sitting here in unchartered territory and we're not going to pretend to know exactly what happens over the next eight months. So there is a conservative bias and we have a lot of conviction that we can meet or beat. And we're in the meet and beat game. So that's what we're focused on.

[Andrew Kang:]

I'd also highlight that David mentioned this a moment ago, but our Q1 results, we're ahead of what our internal budget was on track with what we gave for the range of guidance. So I think for us, Q1 certainly was a good data point. We'd like to have Q2 in the back and then reassess, but I think all trends are showing as David described.

[Chris Donat:]

Okay. And then just the last one for me on the FICO scores because they are higher than they were before pandemic, is that reflect something of your funding partners in there, what they're interested in, in this environment? Or and is there an opportunity for you to widen your credit box going forward? Or do you think with the unchartered waters that we're in that you're going to be cautious around that?

[David Zalik:]

I can say it's certainly not driven by us or our funding partners. It's driven by market demand. And I think you could imagine a hard to – first of all, we're talking about five or six points, but over the last couple of years, hard to take exception to 774 versus 781. I don't think any funding source would see that as any kind of material degradation or improvement for that matter. It's purely demand. We think there is even more demand coming. And it's certainly a very, very exciting time but it's not driven by us. We think there's lots of good 680s and 700s out there. We just need them to have some stability in their lives and want to do more home improvement.

[Chris Donat:]

Got it. Thank you very much.

[David Zalik:]

Thank you, Chris.

[Operator:]

Your next question comes from the line of Rob Wildhack of Autonomous Research.

[Rob Wildhack:]

Good morning, guys.

[David Zalik:]

Good morning.

[Andrew Kang:]

Good morning, Rob.

[Rob Wildhack:]

Just a quick one on the financial guarantee expense. Andrew, I think you said, the expectation was flat sequentially. Does that mean that you're expecting it to be a negative expense for the rest of the year?

[Andrew Kang:]

No. It means that it should just kind of not be an expense or a benefit, it should be pretty flat yearly for the range.

[Rob Wildhack:]

Okay. And then David, you talked about comparing March 2021 volumes, March 2019 volume, and I'm just wondering if you'd be willing to share how much volume up in April 2021 versus April 2019?

[David Zalik:]

I'm going to defer to Andrew on that. But what I can say is a very healthy and gives us a lot of confidence that will meet or exceed our expectation for 2021.

[Andrew Kang:]

Yes, I would say that March was the first month we saw real solid year-over-year growth. Coupled with the fact that we talked about the credit line in application approval rates recently kind of all-time highs, I think that does have a leading indicator in April as well as the remainder of the second quarter showing favorably. I think the best way to think about it is if you look at the seasonality, you'll see that the second quarter of the year is about 25-ish – it's 25% of the – 26%, sorry, it’s 26% of total volume. So you should see an expected increase from Q1 to Q2 relative to that seasonality.

[Rob Wildhack:]

Okay. Thank you.

[Operator:]

At this time, there are no further questions. I would like to turn the call back to management for any additional or closing remarks.

[David Zalik:]

Thank you for your questions. And thank you again for joining us today. Please stay healthy and safe, and we look forward to speaking with you when we discuss our second quarter 2021 results.

[Operator:]

Thank you for participating in today's conference call. You may now disconnect your lines at this time.