GreenSky, Inc.

Q2 2021 Earnings Conference Call

7/29/2021

spk02: Good morning and welcome to GreenSky's second quarter 2021 financial school. As a reminder, this event is streaming live on the GreenSky Investor Relations website and a replay 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 Daly, Head of Investor Relations. Mr. Daly, you may begin.
spk01: Thank you and good morning, everyone. Yesterday, GreenSky issued a press release announcing results for its second quarter ended June 30th, 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. Today, you will hear prepared remarks from David Zalek, our chairman and chief executive officer, and Andrew Kang, our executive vice president and chief financial officer. We are also joined by Jerry Benjamin, our Vice Chairman and Chief Administrative Officer. Before we begin, let me remind you that the presentation and discussions will include forward-looking statements. These are statements that are based on current assumptions and are subject to risk and certainties and could cause actual results to different material than those projected. We disclaim any obligation to update any forward-looking statement except as required by law. Information about these risks and uncertainties is included in our press release issued yesterday, as well as in our filing with regulators. We will also be discussing non-GAAP financial measures on today's calls. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results, and we encourage you to consider all measures when analyzing GreenSky's performance. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials. The press release dated July 28, 2021, and on the investor relations page of our website. At this time, I will turn the call over to David.
spk05: 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 longstanding 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 two consistent themes. First, GreenSky has made great progress leveraging our strategic relationships and investments in merchants and sponsors that will maturely 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 three, 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. Green Sky's 30-plus day delinquency rate, a leading indicator of our portfolio performance, was 0.7% at the end of the quarter, an improvement of 29 basis points in the last six months from 0.99% at the end of last year. While our portfolio benefited from the macroeconomic environment and improved consumer liquidity, we could not have achieved these results without the contributions from our significant investments in people, process, and technology. Additionally, and as Andrew will expand upon shortly, The benefits from our stronger, more diverse funding model has allowed us to optimize our cost of funds, driving a 33% lower cost of revenue, which directly contributed to GreenSky's dramatic profitability this quarter. Transaction volume for the quarter increased to $1.5 billion, representing a 14% improvement from the same period of the previous year. While we are pleased with the growth year over year, we also recognize that second quarter transaction volumes continued to be impacted by a challenging supply chain and labor market, which both continue to be constrained, directly impacting a number of our sub-verticals in home improvement. More importantly, we're optimistic that recent key merchant and sponsor wins and the strong momentum we saw in the first quarter continued to demonstrate positive leading indicators, including the all-time quarterly record of approved credit lines in the second quarter. We expect that this trend will translate into third and fourth quarter transaction volume contributions that would elevate transaction volumes above our historical seasonality trends. Relating to the previously disclosed CFPB matter, we are proud of our record of consumer advocacy and have already implemented many of the protocols and business practices called for by the agreements. These enhanced protocols and practices have been very well received by our ecosystem and will only serve to enhance our best-in-class merchant and consumer experience. Andrew will provide further details on the financial implications relating to the resolution of the CFPB matter, which will not have any adverse impact upon our ongoing operations or our growth target. Moving on to slide five, GreenSky made significant enhancements to its technology offerings throughout the quarter, Specifically, we released version 6.5 of our mobile application, which migrates our point-of-sale platform to a new cloud environment. The updated mobile application using GPS technology provides qualifying consumers immediate access to credit in a highly secure environment. We believe that these enhancements further extend our competitive technology advantages and are examples of our commitment to innovation, security, speed, and feature functionality. We remain committed to innovation around our process and technology as our continuous improvement was a key factor in a number of large strategic sponsors and merchant wins this quarter. As we look to further build our momentum on transaction volume growth, I'd like to briefly outline some of the key recent merchant and sponsor wins across a diverse array of subverticals. Most notably, we finalized a very important contract with one of the nation's largest HVAC sponsors, EGIA. This five-year exclusive first look deal will shift valuable market share from competitors to green sky. This relationship is expected to generate an incremental $300 million in 2022 transaction volume and targets $1 billion in annual transaction volume over the course of the agreement. The company's best-in-class technology, tools, service, and commitment to continuous improvement provided EGIA with the best value proposition when compared to other market competitors. While this expanded sponsor relationship should provide meaningful incremental transaction volumes to GreenSky in the coming years, it was also a testament to our longstanding mutually beneficial relationship with EGIA and could not have been accomplished without the valuable contributions of many GreenSky team members. We also grew our industry-leading position in windows and doors, and we made significant strides in our other home improvement categories through the completion of new partnerships with leading national manufacturers in the kitchen and bath space. Lastly, we finalized an innovative alliance with Angie Inc., a leading digital marketplace for home services. These wins combined with our transitions from this quarter alone are expected to contribute in excess of $500 million in incremental transaction volume in 2022, with the opportunity for additional significant growth beyond that. Finally, I'm very pleased to announce that GreenSky is planning to expand our residential solar offering in the coming quarters. We're excited about the large addressable market and profit profile. Our second quarter results highlight our ability to execute on the strategic investments we've made in our merchant and sponsor relationships. Technology and process improvements have helped land many new key strategic wins and record-approved credit lines show strong consumer demand for GreenSky's platform. We're excited that recent trends and wins will fuel growth in the second half of 2021 and beyond. I will now turn it over to Andrew to discuss our quarter's financial highlights.
spk03: Thank you, David, and good morning. Moving to the second quarter financial update on slide six, 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. Let me dive a little deeper into the drivers of this exceptional performance and, importantly, how they reflect sustainable margins and profitability. Total revenue for the quarter was $137 million, up 3% year-over-year, while transaction fees increased to $102 million, driven by a 6.63% transaction fee rate and 14% growth in transaction volume year-over-year. APR ad origination, which is tightly correlated with transaction fee rate and closely associated to bill yield, was 13.5% in the second quarter, increased demand for higher APR loan products. The APR for our reduced rate loans increased to 6.9% from 6.7% at the end of last year. We are expecting a transaction fee rate of 6.5% in the second half of this year as MIPS continues to reflect recent trends. As I mentioned to you before in prior earnings calls, transaction fee rates are highly correlated with collateral APR at origination. While merchant and consumer demand may ebb and flow take rate, we are, as we have always been, focused on maximizing the lifetime profitability of our transaction volumes across all of our products, which takes into account both take rate as well as the collateral yield of the loans originated on our platform. For the quarter, servicing revenue grew 10% year-over-year to $31 million as the fair value change in our servicing asset increased approximately $5 million due to improved portfolio performance and expected lower cost of service. On slide 8, our 30-plus day delinquency rate dropped to 0.70%, representing a 29 basis point improvement since the end of last year. While the economic recovery and stronger consumer credit behavior has provided a benefit, Our current portfolio performance reflects the direct investments we have made to enhance our origination process with our merchants, drive more first looks, and without tightening credit policy. I would like to provide a final update on our COVID-19 disaster relief program for 2020. At its peak, the program accounted for approximately 4% of Green Sky's service portfolio. However, it now represents less than 10 basis points. While the program offered valuable assistance to many customers, it also came with uncertainty of how that portfolio could ultimately perform. Since then, we have provided consistent and improving updates on this deferral portfolio, and at the end of this quarter, the COVID-19 disaster assistance program remained at less than $10 million of our $9.4 billion servicing portfolio. We no longer view that the performance of this program will have a meaningful impact on our financial performance going forward. Turning to slide nine, GreenSky improved its cost of revenue by 33% year-over-year. The $65 million decrease compared to the second quarter of 2020 was a result of improvements in both operational costs and our overall cost of funds. Beginning with operational costs, our origination cost of our transaction volume improved by 11 basis points, and our cost of service as a percentage of the average servicing portfolio was flat year-over-year. Our overall cost of funds improved by $21 million, 44% when compared to the second quarter of 2020. Bank waterfall costs as a percentage of the average bank waterfall portfolio improved approximately 60 basis points when compared to the second quarter of 2020. These costs benefited from our loan sales activity during the quarter, which lowered our total FCR exposure by $17 million year over year. If you recall, when we launched our diversified funding model last year, we stated that loan sales would reduce the volatility on our profitability profile, and we are now seeing that reflected in our results. For additional context, bank waterfall costs accounted for approximately 83% of our servicing portfolio in the second quarter of this year, compared to 98% in the second quarter of 2020. Our loan sale costs which include mark-to-market on loan participations we hold on our balance sheet and also mark-to-market obligations on loans held for sale at a bank partner. For the quarter, our loan sale costs were $15 million and included realized premiums and discounts on loans marked or sold. The weighted average discount on the $547 million of sales this quarter was approximately 2%, which went across all of our product types, some of which were sold above par. This quarter's results reflect the improved pricing of our loan sales strategy that we believed would occur over time and that we've discussed on previous calls. We recognized an $8 million benefit to our cost of revenue related to our sales facilitation obligation expense. This was related to recent pricing improvements since the end of last quarter and also related to certain loans sold from our bank waterfall portfolio this quarter. which reversed the associated mark-to-market in our sales liability and was included in the realized net discounts for the quarter. On slide 10, the financial guarantee expense for the second quarter represented a $6 million benefit, which was driven by loan sales, loan mix, and an improved credit forecast. More specifically, the sale of loans in the quarter reduced GreenSky's escrow commitments in our bank waterfalls, which lowered the overall financial guarantee impact. we expect the financial guarantee expense will remain relatively flat for the remainder of the year. Operating expenses were $41 million, and when excluding non-recurring expenses, ops expense improved by 4% when compared to 2020. Included here, and which is also adjusted in EBITDA, was the $6.5 million impact from the resolution of the CFPB matter. At the end of the second quarter, the company was fully reserved for this matter, and we do not expect to incur any further expenses related to this. Turning to funding on slide 11, funding remains the strongest it has ever been, which continues to provide capacity to support growth. The second quarter was another excellent quarter in terms of our ability to commit to multiple sources and execute on improving our cost of funds. we increased two bank partner commitments by a combined $640 million in the quarter. In April, and as previously disclosed, one of our bank partners increased its commitment by $500 million, increasing their total revolving commitment to $2 billion and extending the agreement into the fourth quarter of 2023. A second bank partner increased its commitment by $140 million to an aggregate revolving commitment of $900 million. Also during the quarter, we expanded our forward flow agreement with a leading life insurance company by an incremental $500 million to a total $1.5 billion commitment. Lastly, we completed approximately $547 million in asset sales across all loan originations with some of the strongest pricing we have seen over the last year. Our bank partner waterfall commitments were approximately $10.3 billion in total at the end of Approximately $2.6 billion of commitments were unused at the quarter end, and we expect an additional $2.3 billion in revolving capacity to become available in the next 12 months as consumers pay down their loans, providing ample funding for planned future transaction volume. I'd like to take a moment to highlight the progress we have made since launching our diversified funding initiative over a year ago. In total, we completed approximately $1.9 billion in sales and have seen pricing improve every step of the way. We completed a $1.5 billion forward flow agreement and bank partner commitments have increased to $10.3 billion. While we continue to find additional opportunities for enhancement, I am very pleased with the progress we have made over the last year to increase capacity across multiple fronts and foundational in improving Green Sky's strong bottom line profitability. When we announced the strategy, we strongly believed that we could grow funding capacity and also optimize our cost of borrowings, which I believe we have been very successful in accomplishing. Our corporate liquidity has also continued to improve as we reshape our profitability and return to strong positive cash flows. At the end of the second quarter, the company had over $200 million in unrestricted cash, approximately 38% increase since the end of last year. highlighting our ability to generate free cash in tandem with growing profitability. We anticipate similar steady cash growth in the future as we continue to demonstrate sustainable profitability. On slide 12, we have updated our full-year transaction volume guidance to $6.0 billion to $6.2 billion. The slight 4% change from our previous estimate reflects the headwinds David noted in the home improvement supply chain and labor markets. We are also updating our revenue guidance to $520 million to $540 million, which reflect our updated volume guidance and recent transaction fee trends. We are increasing net income to $100 million to $110 million and adjusted EBITDA to $160 to $175 million and updating our adjusted EBITDA margin guidance to 30% to 35% for the full year. Our updated guidance highlights the significance in how we have enhanced our overall costs to deliver ongoing and sustainable profitability alongside continued strong growth in future periods. Thank you for your time and interest in Green Sky. I will now turn the call back to David.
spk05: Thank you for joining us today. Operator, we are now ready for Q&A.
spk02: Thank you, David. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you're unmuted locally. Our first question comes from Christopher Donat of Piper Sandler. Christopher, your line is now open.
spk05: Great. Thanks for taking my questions, David. 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 sort of changed within GreenSky that caused the decision? 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 to 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. Okay. And then just think 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 Green Sky's favor.
spk07: But am I 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?
spk05: No, no, no.
spk07: Those customers get a top IQ.
spk05: No, the – The finance rate, the percentage of jobs that are being financed, is not going down. If anything, it appears to be going up. But let me give you an explicit anecdote. If it used to take six weeks to get a window installed, it takes 12 weeks. It takes 18 weeks. We have roofing manufacturers that used to carry 12 products per and it'd take a couple of weeks. Now they've constrained it to three products, three 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 two or three times longer, that's going to push transaction volume out. So what we're seeing is, and we reference 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 four or five or six months. Okay. Yeah. And then I guess this last question for me, as you're thinking about things being pushed out four or five, six months, does that change how you feel about 2022? I think you're already relatively optimistic of it because of EGIA and other relationships.
spk07: But do you think you'll see basically activity pushed out from 21 to 22?
spk05: Yeah, so look, all the leading indicators, including adjusting for these longer lead times, makes us very bullish on 2022. I think, Chris, that we've 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 living 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, 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 the short answer is we're very bullish on 2022. Got it. Okay. Thanks very much, David. And thanks, Chris.
spk02: Our next question comes from John Davis of Raymond James. John, your line is now open.
spk07: Hey, good morning, guys. Just want to follow up a little bit on Chris's transaction question. David, how should we think about how the increase guide or, sorry, decrease 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 to 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 the shares?
spk05: Yeah, 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, you know, you weren't able to install it 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, it 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 volumes.
spk07: Okay, so if I'm 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 3Q. That's right. Correct. And then maybe on the margin, I think guide implies 27% EBITDA margin. Obviously, it was a pretty high-popping 45% this quarter. you know 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 has been uh definitely a tailwind in the first half of the year but just andrew if you can just go through the puts and takes in the margin of the back half of the year and if there's been any change in kind of longer term margins at all sure let me let me just um let me let me just uh comment that um every year
spk05: before we were 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 our focus certainly is annual EBITDA margins, and we're very excited that 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?
spk03: No, David, that's absolutely right. And, you know, just in commenting around the second quarter specifically, I think, you know, 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 unpacked the cost of funds, we're really seeing the benefit of our loan sale 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 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 it's 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, you know, the impact to the second quarter. Also, the second quarter, similar to what David mentioned, is a 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 loan sale 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.
spk07: Okay, so 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.
spk03: Well, I'd say I agree with you that we're getting there quicker, but I'd say that there's opportunity to keep going. Okay.
spk07: And then last one for me, I guess it's kind of a two-parter. David, the solar kind of headwinds on the business a couple years ago were 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 health care and where we are there.
spk05: So, solar certainly should be at least a billion-dollar business for GreenSky in terms of annual transaction volume. We'll see if that takes us one year or two 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, And I think that over time, it'll be even more transparent. What you're noticing as more and more of our originations are originated onto, 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 percent contribution margin. And so, if we originate a billion dollars, it would be really simple. You'd take transaction volume, discount that funding partner, would earn, and we'd clear five. 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 a 12% transaction fee, but negative cash flow in the subsequent years. It would just be a great net economic at time of origination. Is that helpful? Yeah, that's exactly what I was looking for. And then just elected health care. And elected health care 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 health care is ramping and now so is
spk06: John, I would just add on the health care piece, 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 sheer 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. Thanks, Jerry.
spk02: Thank you. As a reminder, it's star followed by 1 on your telephone keypad to submit a question. Our next question comes from Giuliano Bologna of CompassPoint. Giuliano, your line is now open.
spk00: Thank you. I guess 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 driving that number. that are probably not necessarily recurring. They're kind of a little bit of a reversal of what happened last year and even earlier this year. The investor day guide was kind of 30% or exceeding 30% scale from the EBITDA margin perspective. What I'm curious about from somewhat of a trajectory perspective is that obviously you're getting a benefit this year, which is putting you right into that 30% to 35% range. 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 that is protected?
spk05: Yeah, we don't see it going down to go back up other than the natural seasonality. So, you know, we painted, I think, a very clear picture in our first investor day in January on a five-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.
spk00: That's great.
spk03: Giuliano, I would just add to David's comment. I'd say, you know, just 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 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, you know, I feel like we're at a spot now where, you know, we have gotten to the point, you know, given the guidance we've provided, we feel that to be, you know, 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.
spk00: Thank you. The only question from there is really, now that you're running in a much better margin profile, you've obviously increased liquidity since the end of last year. I'd kind of be curious about what you think the best use of cash is at this point, because if you're running opt-ons marginally, you should probably 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 do you think about the use of that cash? from a deployment perspective?
spk03: Sure. I'd say that first.
spk07: Go ahead, David.
spk05: 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.
spk00: That sounds very good. The only thing that I'd be interested in, if you're seeing any of this, from a market perspective, or if you suspect that this might be happening, is that there isn't some discussion about a greater use of unsecured 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 curious to see the interplay between potential compensation on that side, and have you seen any impact to that recently?
spk05: 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 personal loan website. So it's highly subsidized by the merchant and It is instant. It's paperless. It's even more transparent for 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.
spk00: That's great. I really appreciate the time, and I will jump back in again.
spk05: Thank you.
spk02: Our next question comes from Aaron of Citi. Aaron, your line is now open.
spk04: Thanks. Just on the cost of revenue, at the investor day, you laid out an example of the, and maybe it's just because it's life of loan, but it kind of shows the bank waterfall in the loan sale as being similar cost of revenue, and you're running below, which was around 3.1%, 3.2%, and you're running below that thus far, or at least in your guidance for me and your 2021, has that expectation of cost of revenue changed overall? I'm just trying to understand the differences between the two.
spk03: Andrew, go ahead. Yes. Aaron, 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. Okay.
spk04: I mean, is that more of a current environment issue or is that something that's structural that you expect would be, you know, through the next several years?
spk03: It's definitely structural because, you know, prior, you know, you've got 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. Thank you.
spk02: Ladies and gentlemen, as a final reminder, please press star followed by 1 on your telephone keypad to submit a question. At this time, we currently have no further questions. So I'll hand back over to David Zalek for closing.
spk05: 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 one-time 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.
spk02: Thank you. Thank you all for joining today's call. You may now disconnect your lines and have a lovely day.
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