Mogo Inc.
Q1 2021 Earnings Call Transcript

Published: 13 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Mogo Q1 2021 Earnings Conference Call. . I would now like to turn the call over to Craig Armitage, Investor Relations. Please go ahead.

[Craig Armitage:]

Thank you and thanks for joining us today, everyone. Just a couple of quick notes before we get started. First, today's call will contain forward-looking statements that are based on current assumptions, 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 these risks and uncertainties are included in our Q1 filings as well as periodic filings with regulators in Canada and the U.S., which you can find on SEDAR, EDGAR and on our website.

[David Feller:]

Thanks, Craig. Good afternoon and welcome to Mogo's First Quarter 2021 Results Conference Call. I'm joined today by Greg Feller, our President and CFO. It's been an active and highly productive start to 2021 for Mogo. We are building the most comprehensive digital wallet to address the needs of Canadian consumers. And the transactions we've completed in the first quarter, both strategic and financial, have really accelerated our growth plans and vision significantly. Today, we are in an even stronger position to take advantage of the accelerating adoption of digital wallets and digital finances. Although we've made a lot of progress, we're clearly still just getting started. What continues to drive us is the need for better solutions to what continues to be a big problem, the wealth gap. As we all know, the average person isn't on track to building wealth and instead continues to live a life dominated by financial stress. Although almost everyone of them has a bank account, they're clearly not getting the solution they need. At the simplest level, that's what we're here to solve. We're hyper focused on making Mogo the simplest, most engaging way to build wealth, which, for most people, means becoming a millionaire. If you were 20 years old today and just starting out in your financial journey, your goal would be to achieve at least $1 million in wealth in order to 1 day retire and reach financial freedom. Fact is, if you make $40,000 a year and save and invest $20,000 of your after-tax income, you could easily retire a multimillionaire. As much as we believe in gamification, we're also believe that money is a serious business, and our goal is to have a seriously smart products and an experience that really helps achieve their money goals. Years from now, the idea of having a bank account and trying to figure out what to do to achieve your goals will be a thing of the past. Financial literacy is being built into the products and the experience in a way that no in-person experience could deliver. Banking, as we know it, is going away and consumers will continue to move to the solutions that make it easy to manage their money and build wealth.

[Gregory Feller:]

Thanks, Dave. As Dave mentioned earlier, the first quarter was among the most active and strategically important period in Mogo's history, during which we made huge strides to expand our product capabilities, accelerate our road map and transform our balance sheet. In addition, we made a number of strategic acquisitions that give us increased scale and vertical integration that we believe uniquely positions Mogo as one of maybe two fintechs of scale in the massive and highly profitable Canadian market. This morning, we continue to execute on this strategy with the announcement that we're increasing our ownership in Canada's leading crypto platform, Coinsquare, to approximately 37% while retaining a very valuable warrant that allows us to increase our ownership to 48% at an attractive valuation. As Dave highlighted earlier, Coinsquare now has assets in its custody of approximately $900 million and a revenue run rate of over $95 million based on April's revenue. In addition, the company is generating over 50% EBITDA margin in recent months. Therefore, our effective 48% ownership of Coinsquare, post exercise of a warrant, we see as an extremely valuable asset that we believe can serve as a catalyst in 2021 as the market begins to better appreciate the true value of this platform and the opportunities our 2 companies have together.

[Operator:]

. Your first question comes from Doug Taylor with Canaccord Genuity.

[Douglas Taylor:]

I think, obviously, your Coinsquare transactions have been very well timed here. And I think one of the things that investors are looking for is just some information on what the range of outcomes or your intentions are with that asset from consolidation ultimately to potentially monetizing that through some other way. Can you just talk about how you're thinking about the different alternatives that are available to you going forward?

[Gregory Feller:]

Sure, Doug. It's Greg. So yes, look, we view Coinsquare and our partnership with Coinsquare and the investment with Coinsquare as very strategic. We don't view this as a passive investment. Obviously, today's announcement that we're increasing that stake and investing more in the relationship is a clear sign of that. And then we have a warrant, which we believe is a very attractive price warrant that will get us to 48%, which, ultimately, we believe we will exercise at the appropriate time. We fundamentally believe as we believe, Coinsquare also believes that any next-gen digital platform, digital wallet in the fintech space really has to have a combination of both crypto and traditional fintech products. And we really see Mogo and Coinsquare as bringing the best in class of both sides in Canada. So we see very strong synergies between our 2 companies. With this investment, we're going to be moving to equity accounting our percentage ownership. For us to consolidate, we'd have to be north of 50%, which is something that we will look at in combination with the management team and Board of Coinsquare. So we're not focused on monetizing Coinsquare. We're focused on investing in that relationship and really leveraging both of our platforms to build value. We think, ultimately, the two platforms together, as I mentioned, with over 2 million members, the technology, the scale, the breadth of products we think is unique in the Canadian market, and we think there's a massive opportunity to build on that.

[Douglas Taylor:]

Yes. And so Coinsquare, I mean, certainly has a potential here to kind of become a dominant part of the story given your investment and the recent trends in crypto. And I guess you're asking investors to make a call a little bit more on the future of that asset in an investment in Mogo. And so I wonder if you could offer up I mean your views on Coinsquare's competitive positioning. It's been a leader in Canada, as you say, but what -- your view on the competitive market and the potential for other players to enter it or the barriers to entry so that Coinsquare could continue to enjoy the market share that it's had so far?

[Gregory Feller:]

Yes. So Coinsquare we think has been a leader for a long time in Canada. We believe they have a best-in-class, institutional-grade platform that we don't believe any other Canadian platform has that. They've got one of the broadest, if not the broadest, portfolio of offerings both on the retail and the institutional and high net worth side. We think that they are very well positioned on the regulatory front to get the appropriate regulatory approvals there to operate in Canada as an exchange. And they've got unique assets around the custodial side. So they are not a consumer app offering a couple of products, which, I would argue, most of the other players in Canada are. They are very much a broad cryptocurrency platform. So we think their position in Canada is unique. And we think there are significant barriers to entry both on the fintech space and the crypto space in Canada. Obviously, the Canadian regulators have been very clear that anybody offering the crypto space in Canada ultimately is going to have to be regulated. And we think that is going to be a barrier for a number of the international players. And there are other barriers as well in Canada for foreign players to come in here. So -- and we see the same barriers for players competing against Mogo in Canada. We think it would probably take a player 24 months to build and put in place all of the functionality, regulatory compliance, et cetera, provincially and federally across Canada that Mogo has. And I think that would be the same, if not more so, with Coinsquare in a lot of aspects. So we believe ultimately that this is a market where Canadian players like Mogo, like Wealthsimple are uniquely positioned. And there are barriers to entry where there's very -- there's really no other players of scale in the space as well and scale matters. So we think we're in a really good position. And that's obviously why we are very focused on investing. We believe there is a land grab opportunity. For the first time in Canada, fintech adoption is accelerating. It was well behind the U.S. and Europe and now it's accelerating. And we think we're in a unique position to take advantage of that. We're obviously well capitalized in our balance sheet. And we think between the assets and capabilities we have at Mogo now with Moka as well and the team there and then the partnership with Coinsquare, we feel really good about going -- things going forward.

[Douglas Taylor:]

One last question from me, not to lose sight of the performance of Mogo outside of Coinsquare. You talked about the growth in the Subscription & Services revenues, and you're still sticking to the 80% to 100% growth guide for kind of year-over-year in Q4. Can you help us just think about how or decompose that growth and your performance so far between crypto, which has obviously been very strong, the contributions from Carta, Moka going forward so that we might better understand the drivers going forward?

[Gregory Feller:]

Yes. So I would say that the Q1 growth in Moka is not in Q1, so it's not part of it. Carta clearly is a big contributor to it just given that we're -- we've included the results for a portion of the quarter, I think just over half the quarter from Carta. And then -- but by far, the fastest actually growing revenue product streams were MogoSpend and crypto. I would say that at the growth rates that we're seeing, we think they're well on their way to being in a position to be more than 10% of our Subscription & Services revenue at some point in the near future. So they're getting to a scale that they're actually going to be meaningful drivers of absolute growth as well because, as you know, they've both been coming from a small base. So we feel very good about that. Moka, our focus on Moka is going to be -- and Dave I think touched on this a little bit, but our focus on Moka is going to be really bringing their kind of best-in-class investing on automated savings into the Mogo account and really getting it out to our broader member base. And that, we believe, will give us a lot more opportunities to monetize that member base outside of the subscription model. And then also the Moka team is very focused already on helping develop our free stock trading solution. So there's no way we could do all of this that we're doing without that acquisition and the team that we've got there. So I think that's why we feel good about our ability to kind of deliver on the targets that we've put out there.

[Operator:]

Your next question comes from Scott Buck with H.C. Wainwright.

[Scott Buck:]

Greg, I'm curious, in terms of the overall operating results, what is your crypto exposure? I mean is it less than 10%, less than 5% of total revs right now?

[Gregory Feller:]

Yes. I would say it's in -- yes, it's definitely in kind of single-digit percentage range. So as we've said in the past, we -- given it's a high-growth product for us, we've got a lot of leverage on the upside to crypto. But given the fact that it's really, at this stage, not a material portion of our revenue, we've got limited downside on the downside in our financials from crypto.

[Scott Buck:]

Okay. That's perfect. And second, in terms of closing of the Moka transaction, I'm curious as you guys start to work through integration, if you recognized any new or identified any new opportunities, cross-selling or otherwise as you start to work through that?

[Gregory Feller:]

Well, I would say the biggest opportunity is the free stock trading. I mean there's no way we'd be in a position to -- I feel comfortable on talking about launching that for year-end. And if you look at the success Wealthsimple has had with that solution as really the only free stock trading solution in Canada, it has been significant. We do believe that, that is a product that has one of the biggest opportunities to move the needle in terms of high member growth at a low cost. And we think it's a core part of any broader digital wallet solution that obviously we're building. So yes, I would say that is the biggest area of focus, and we -- there are definitely other opportunities that we're seeing. We are ultimately building a vertically integrated financial fintech platform, and Carta really brings that vertical integration on the payment side, Moka really brings it on the investing side. And there's other components of that they bring to the table, including regulatory compliance as well. And it's a complex industry, and it has got regulations across provincial and federally. And so yes, I mean it -- we see a lot of opportunities to leverage their capabilities and their team as we continue to build out the broader solution here.

[Scott Buck:]

I appreciate that. And last one from me. I'm curious if you could provide a little bit of color on how you think about ROI on some of the investment spend you're doing, whether it's on the marketing side or the tech side.

[Gregory Feller:]

Yes. Great question. I mean our -- that's basically how we assess all of our spend. And particularly, on the marketing and development side, we believe we're in a world now where product development is marketing. And in fact, it's the most effective marketing. We believe the most successful fintechs out there are succeeding because of great products, not because of heavy marketing dollar spend. Marketing is a complement to it, but it doesn't replace a great user experience. So we very much look at -- on the marketing side, we look at a CAC to LTV ratios. We look at -- and we adjust how fast we want payback depending on what level of investment we're prepared to make and what level of investment we're making on the product side. And then on the product side itself from an ROI perspective, it's the same thing. You could have a free product, but it's a free product which has some cost. But if that free product is driving a lot more users at a lower cost that are engaging and monetizing other products, that could be the best marketing dollars you spend and drive a very effective ROI. So that's absolutely how we kind of manage our spend and investment both on the product development and the marketing side.

[Operator:]

Your next question comes from Suthan Sukumar with Eight Capital.

[Suthan Sukumar:]

First question, I guess, is related to the last question on the -- really on the momentum you're seeing with the new member growth quarter-over-quarter for the past few quarters. I think you mentioned earlier that crypto, MogoCrypto, was somewhat of a gateway for some of the user acquisition this quarter. Curious, when looking ahead, what do you see as some of the biggest drivers for the user acquisition going forward? Is it really going to be driven by launch of new products? Or do you guys have plans to continue kind of playing around with the brand messaging side of things?

[David Feller:]

So it's Dave. Yes. I mean I think there's a lot of different products and value props that we think Mogo offers today that definitely are appealing to the market. But I'd say, given the momentum we're also seeing on the card and also given the momentum and the link between active card users and our other products, I think we're increasingly positive around focusing a lot more of our marketing and user experience actually around the card. So we've obviously been working on that for a while. And increasingly, we're essentially designing the experience where more and more, by default, a user gets a card. So I think the card will become increasingly an important focus from a marketing perspective as well as just from a value prop. Similar to free stock trading, we think we have a very compelling value proposition in the card. There's no other card in the marketplace today in Canada that not only offers 1% Bitcoin cash back, but also automatically offsets your carbon footprint and all for no annual fees. I mean the market in Canada is massive. Debit cards in Canada, just over $250 billion a year spend in debit cards and the vast majority of them, 0 rewards. In fact, most of them come with $15 a month fees for the banks. And then the credit card space, you're talking over $500 billion a year spent on credit cards. And increasingly, what we're seeing is more and more people are looking for better control. That is the problem with credit cards, people, it's easy to get yourself into debt. So we think this secular shift away from even wanting to use credit cards will continue. You're starting to see obviously a lot of momentum globally in this space. And I think as people start to increasingly see the link between controlling their spending and the ability to actually build wealth and starting to realize that actually one of the main reasons I can't build wealth is because I've been using a credit card, I'm in debt, I have no money available left at the end of the month, they're going to start to more and more see the benefits of shifting away from that. But the problem with debit cards in the past is they've also lacked some of the rewards. So the best of both worlds is getting credit card level-type rewards with the control of using your own money. And then just as I mentioned in my comments, we're looking at launching MogoWealth at the end of this year, and that is also going to be linked to the card where we're effectively going to set it up where there's automated roundups so that when you're actually using the card by default, you're automatically investing at the same time. And then obviously, users can adjust that. But you can just see increasingly, there's that automatic link between our products. So when you're using the card today, at the end of each month, your Bitcoin rewards get deposited in Bitcoin, in your Bitcoin account, that obviously helps to drive engagement there. And then in the case of wealth, you're going to have, for those that are choosing to keep that on, automated monthly money going directly into your wealth account as well. And our goal and focus there is going to really be getting them to go beyond just the roundups and actually heading towards that target, right? So that the card essentially becomes the gateway for a lot of these other products that we're offering. And that's the -- I would say, you're going to start to see that more. In terms of the stock trading, that's clearly going to be -- free stock trading clearly going to be a customer acquisition opportunity for us as well. But that's not going to be launching until the next -- at end of this year. So that will really start to have an impact next year.

[Suthan Sukumar:]

Great. That's helpful. Could you guys share an update on where things are at with your peer-to-peer payment strategy both in terms of timing, but also in terms of how you're thinking about bringing that product to market within the app and integration with the digital wallet? And what sort of business model do you anticipate with peer-to-peer payments?

[David Feller:]

Sure. So it's interesting. I mean we've been looking at the P2P market space for a while. Obviously, you see in the U.S., Venmo, Cash App, the 2 dominant players; in Canada, again, we know it's primarily Interac EMT, although Wealthsimple is having some success with their new effectively peer-to-peer solution. But increasingly, we actually believe this is going to become more likely to be an important part of the card experience. So when you actually look at most use cases for P2P, it usually comes out of somebody's spending money. So if you're buying lunch or something and somebody is going to pay you back, which would be a common thing to happen where somebody's got to pay somebody back, really, that money has got -- it's like, I would have used my own money to pay for it, but you paid for it, so I got to pay you back. I don't actually want to have a separate account with separate money. That really just comes out of my spending budget. So really, we see that increasingly as just a core functionality of the card itself. So you're using the card, you're controlling your spending. Let's say, you're on $1,000 a month budget, you're using the card in terms of your remaining spending. Sometimes you have to pay people back. You want that money to come out of that essentially that just like a transaction, no different than if you paid for it yourself, comes out of that. So we see it increasingly being a core function of the card. And also, we believe that in the long run, that's where most P2P will happen. Whichever card becomes a dominant card in someone's wallet, right, that will increasingly -- assuming they have a P2P solution, be increasingly where someone decides to essentially do their person-to-person transfer. So our goal is to still launch a P2P functionality before the end of this year. But again, we really see it as kind of a feature predominantly for the card, even though you're still going to have the ability to sign up and be able to do P2P without the card, but in terms of that daily average use and that high use, really a card feature. Now it isn't going to be a revenue driver. It is really just a product feature that drives more adoption in the usage of the product. Even in our own surveys, that is clearly one of the things that people were looking for, "Hey, I wish I had the ability to do some P2P with this card because sometimes I have money in there. I got to -- I have to be able to pay somebody back with that money." But again, we really just see it as primarily going to be a card feature. Obviously, a low friction and hurdle point for somebody to sign up for Mogo as well and then -- but not a revenue driver.

[Suthan Sukumar:]

Got it. And last question from me guys is on M&A. You guys have obviously been quite active with strategic acquisitions and investments over the past little while. Do you guys try to remain opportunistic on M&A going forward? Or do you have what you need in kind of the big building blocks and kind of just we're going to shift focus now to just straight execution in the business?

[Gregory Feller:]

Yes. So yes, I would say, look, we feel really good about where we are right now and the building blocks that we've got, and we've got a lot of work ahead of us on executing on the stock trading and continue to expand our partnership with Coinsquare. So we've got no shortage of opportunities with what we've got. So I think our focus right now is on growing our business, executing on our product development road map and continuing to expand our relationship and our partnership with Coinsquare. If there was an M&A opportunity that we thought made sense that accelerated our product road map or brought other pieces to the table that we thought was going to be valuable, then obviously, we'd look at it. But it's -- I think we feel pretty good about where we are at this point in time right now.

[Operator:]

. Your next question comes from Bill Zhang with Raymond James.

[Bill Zhang:]

So prepandemic, you were doing 17,000, 20,000 member additions a month. And obviously, this quarter was a lot higher. Is it safe to say that we can expect this to be sustainable for the balance of this year? Or do you think there is room to grow that base even more?

[Gregory Feller:]

Yes. It's Greg. I -- look, I think we continue to believe that there is an opportunity for us to increase that and continue that trend of adding more net members in 2021 than we've historically been doing. So -- and we think that, that opportunity actually will accelerate further in 2022 when we've got products like free stock trading out there, and we will have a very unique and compelling value proposition that we don't think anybody else in Canada will have. So we're still -- despite our scale, there's still a massive opportunity. And so yes, I think there's definitely an opportunity for us to continue to grow net member additions as well.

[Bill Zhang:]

Great. And on the investment portfolio side, I know you had mentioned monetization in 2021. How should we think about that cadence here?

[Gregory Feller:]

Sorry, you kind of -- how should we think about the cadence, did you say?

[Bill Zhang:]

Yes. Exactly.

[Gregory Feller:]

So look, I think these things are always hard to predict. Vena, we had an opportunity because they did a bigger rate and we sold into that rate. We -- there's -- obviously, a lot of real money went in there that's expecting multiple valuations go higher, but we're -- that's not a long-term strategic investment. So we monetized it. And so we do believe there is a reasonable probability that we'll have other monetization opportunities out of that portfolio this year. And -- but it's always hard to call it exactly when. But again, a number of those investments, we don't see as strategic. So when there is an opportunity to monetize those and we think -- to be honest, the majority of those investments we believe have value above book value, which we obviously saw a significant increase in -- over our book value in Vena. And we think we've got that opportunity in some of our other investments as well. So we want to capitalize on that when that opportunity presents itself.

[Operator:]

And I'll now turn the call back over to presenters for closing remarks.

[David Feller:]

Thank you. Well, clearly, it's been an exciting time for Mogo. We've already accomplished a lot so far in 2021 and have multiple important catalysts I think coming up in the next few quarters in terms of new product launches and enhancements. All of this is really geared towards continue to build out what we -- our plan to really kind of have the most powerful engaging finance app in Canada. Thanks again for joining us today and for your interest in Mogo. And we look forward to talking to you again with our Q2 results. Thanks.

[Operator:]

This concludes today's conference call. You may now disconnect.