Mogo Finance Technology, Inc. (NASDAQ:MOGO) reported another quarter of growth for Q3 2019, beating expectations despite controlled marketing spend and its slow transition to partnership lending. Strongest was lending revenues as customers moved to higher interest loans and the member base expanded. Going forward, as the company moves to placing loans with its partners, we expect subscription and services revenues to accelerate as the company will generate more revenues from origination fees and recurring platform fees as well as from its soon-to-be-launched premium subscription product, MogoGold. Investors should look to 2020 when the company begins to provide prime loans, which comprise an even bigger part of the Canadian loan market.
Q3 2019 Earnings Results
Mogo reported revenues for the third quarter of 2019 of $16.6 million versus $15.4 million a year ago (up 8%,) and $16.4 million in Q2 2019. Revenues from subscriptions and services were $7.8 million, flat with last year, and revenues from loans were $8.8 million versus $9.7 million a year ago. Removing the discontinued short-term lending business and revenues from discontinued cryptocurrency mining from last year’s numbers, core revenues grew 13%. The subscription and services part of the business declined 1%, but eliminating mining revenues of $439,000 from last year’s revenues would have made that a gain of 5.3%.
Gross margin increased dollar wise by 5% to $10.1 million, versus $9.6 million a year ago. Gross margin percentage decreased to 60.8% versus 62.0% a year ago and 63.3% in Q2 2019.
Operating expenses increased to $11.2 million in Q3 2019 or 1.8%.
The operating loss was $1.1 million versus a loss of $1.4 million a year ago. The operating loss margin is now -6.6% compared to -9.2% last year. The non-GAAP net losses, taking out one-time charges and stock based compensation, were $5.8 million versus $5.4 million last year.
GAAP EPS was a loss $0.22, compared with last year’s loss of $0.31. On a non-GAAP basis the number was a loss of $0.21 per share versus a loss of $0.23 per share. Average shares outstanding grew from 23.0 million in Q3 2018 to 27.3 million in Q3 2019, an increase of 19%.
Cash flow from operations (before working capital changes) for Q3 2019 was $1.8 million versus $1.5 million a year ago, and free cash flow was a negative $275,000 versus a negative $1.7 million a year ago. After funding the loan portfolio, the cash flow (before working capital changes) was a negative $6.0 million versus a negative $12.2 million in last year’s quarter. Adjusted EBITDA, was $1.1 million for Q3 2019 compared to $1.0 million a year ago (excluding loan financing.) The company plans to remain EBITDA positive throughout 2019 and hopes to start to contribute to funding the portfolio through operating cash flow.
MOGO Continues Testing Loans with New Lending Partner goeasy
Mogo has partnered with goeasy to accelerate its loan growth and move future loans off its balance sheet in order to grow more quickly while reducing debt. Its partnership with goeasy Ltd. (TSX:GSY) provides Canadians with personal loans up to $15,000 with terms of up to 5 years, on a mobile device using the Mogo app. The arrangement is currently in pilot, but Mogo is entitled to full loan origination fees for all the customers it provides goeasy. It is expected that the deal will be finalized, possibly expanded, and rolled out to all Mogo customers in Q1 2020. Consumers will be able to use the Mogo app to get a no-obligation loan pre-approval, customize their loan, and complete the loan agreement in minutes. Goeasy will fund loans that meet its credit criteria, while Mogo will still fund other loans. The customer will not be aware who is giving the loan until it is finalized and both companies will provide loans based on their own lending criteria. The process has seamless integration into the Mogo app. goeasy's operating division, easyfinancial, is a leading provider of unsecured and secured non-prime consumer loans in Canada. It has been in business 29 years, has more than 400 lending locations, has originated more than $3.6 billion in loans and has a $1 billion consumer loan portfolio. While Mogo’s loans typically average $3,000, we expect that those provided by goeasy may average a higher amount. Goeasy provides sub-prime loans and Mogo is still pursuing a lending partner that will provide its customers prime loans and/or other financial products. We are expecting MOGO to announce a prime partner in Q1 2020.
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