Good afternoon, and welcome to the Green Dot Corporation Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Dara Dierks of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. On today's call, we'll discuss Green Dot's second quarter 2019 performance and thoughts about the remainder of the year. Following those remarks, we'll open the call for questions. For those of you who haven't yet accessed our earnings release that accompanies this call and webcast, it can be found at ir.greendot.com. As a reminder, our comments include forward-looking statements, among other things, our expectations regarding future results and performance. Please refer to the cautionary language in the earnings release and in Green Dot's filings with the Securities and Exchange Commission, including our most recent Form 10-K and 10-Q for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we'll make reference to our financial measures that do not conform to generally accepted accounting principles. For the sake of clarity, unless otherwise noted, all numbers we talk about today will be on a non-GAAP basis. Information may be calculated differently than similar non-GAAP data presented by other companies. Quantitative reconciliations of our non-GAAP financial information to the directly comparable GAAP financial information appears in today's press release. The content of this call is a property of the Green Dot Corporation and is subject to copyright protection. Now I'd like to turn the call over to Steve.

Thank you, Dara, and welcome, everyone, to the Green Dot Corporation Q2 2019 Earnings Call. Today, we will review the second quarter financial results, provide a status report on our Six-Step Plan, including details around our new unlimited cash back bank account product that officially launched 1 week ago and we will discuss the state of the Digital banking segment of our market. While Mark will share more context around our financial performance and guidance during his section of the call, I want to address upfront that we're lowering full year guidance. While disappointing and unfortunate, it is necessary as a result of an acceleration in declining unit sales in our legacy prepaid card product line combined with a later than expected launch of our new and limited product and a large BaaS program that together make it now unrealistic for us to achieve the growth we had attended in the second half. We believe the underlying reasons are contained to only our legacy prepaid business line and are likely to impact only this year's revenue growth trajectory as expected performance of our new products and our BaaS programs should help us return to healthy growth rates again next year. So now let's get into the numbers. Green Dot's products and platform model generated Q2 consolidated non-GAAP total operating revenues of $265 million, a 5% year-over-year increase. The largest drivers of the growth were our BaaS Platform product line and from growth in our processing and settlement segment. However, our Account Services segment underperformed our expectations in the quarter and the first half in general, due primarily to a decline in our legacy nondirect deposit active accounts, which we identified as a potential headwind on our last call. These declines continued and accelerated in Q2, resulting in lower than anticipated…

Thanks, Steve. Let's review the quarter and then discuss the remainder of the year. As a reminder, starting in Q1, we began using a new presentation for GAAP to include net interest income generated at Green Dot Bank from the investment of customer deposits. And introduced a new non-GAAP revenue measure to reduce GAAP revenue by commissions and certain processing related costs associated with certain BaaS partner programs where the partner and not Green Dot controls customer acquisition. Q2 non-GAAP operating revenue was $265 million, including $8 million of interest income and net of $13 million of commissions and processing related costs associated with certain BaaS partner programs. The Account Services segment delivered non-GAAP revenue of approximately $206 million, representing organic year-over-year growth of 2%. This growth was driven principally by an increase in direct deposit active accounts despite an overall decline in the number of active accounts in our Account Services segment. As a result, we experienced overall growth in gross dollar volume of 6% and purchase volume of 2% and corresponding growth in interchange revenue of 6%. These results came notwithstanding the material loss of around $500,000 prepaid active accounts due to lower unit sales of our prepared products, offset by 240,000 new active accounts generated from BaaS platform programs. Our Processing and Settlement Services segment generated approximately $66 million in non-GAAP revenue, representing year-over-year growth of 14%. This growth was attributable to higher transaction volumes across this segments product lines. Q2 adjusted EBITDA of $75 million represents year-over-year consolidated growth of 18% as we expanded adjusted EBITDA margins by more than 300 basis points, driven mostly by the success we are having through our ongoing investments in building and running a more efficient operating platform. Non-GAAP EPS came in at $0.90 per share, up 22% year-over-year primarily…

[Operator Instructions]. Our first person comes from Bob Napoli with William Blair.

I guess last quarter, Steve, you had a nice statement on Walmart right up front and no statement on Walmart this quarter. I was wondering if you could give an update on Walmart.

Yes. No change. I could have put it in frankly but I was focused on the other topic that I thought would be more of interest. But no, no change from last time the Walmart discussions continue on and the statement I made last time would still apply this time.

Then the account losses. Do you have -- have you been able to figure out pretty well where those accounts are going to? Is it broadly to a lot of different startups? Is it more Square, Cash App? Or where are those accounts?

No. We don't think we've competed, Bob, with Square and with Venmo for quite a long time. And those accounts, while cool accounts are generally used for -- like Apple Pay Cash, are generally used for the more casual money back and forth. We don't think there's a lot of direct deposit activity or a lot of payroll activity. So that sort of a known competitor that's been out there for several years. We think it's the neo-banks and frankly as we track competitive spend, it may well be that my commentary last call, although I don't know how you'd change it in retrospect but of our new product rollout and spending $60 million that we're putting aside for marketing caused others to increase their spend or at least move it up further in the year prior to the advance of the launch of our products to do sort of a land grab. Because you see the marketing expenses really skyrocket from several competitors. So clearly that attack was felt. These customers are not the stickiest and they go back and forth. So I don't think it's the end of the world and I think we have a pretty good line of sight into how this works because we've been through it so many times in different scenarios. But while I can't say with precision or at least not for publication which one provider it went to, we do know that there are several who greatly amped up spending in the neo-bank space and our belief is that where they went.

And the last question. Sorry, sure.

Just Bob, going to round out what Steve was saying. The other things that's implied by what he's saying is this really is a top of the funnel issue. This is about sales, not about attrition. So we saw a decline on the sales side but we didn't see existing customers all of a sudden leave. Yes. I mean the net result is still lower actives. But we expect that our marketing and the new product and all the stuff we're planning we'll regain that but it doesn't mean that it is in a horrific result. There's no question about that at least for the time being.

The Unlimited product and the $60 million of spend. I think your press release says that $60 million spend is going to be mostly in the third quarter. Maybe give some color on what you've seen so far in Unlimited? And then looks like a really attractive product for the consumer. How is it an attractive product for Green Dot?

Yes. So Unlimited so far. It's only been a week, right? So it'd be impudent for me to take a lot of detail from that and expand upon it. But Unlimited is doing very well so far. It's doing everything we thought, the ad campaign is doing well. I do want to correct you though on one point, it isn't $60 million of marketing, it was $60 million in total of which part we said was for marketing and part was advancing development of the BaaS platform. But I just want to make sure that's clear because otherwise the CPAs people will try to back into them and may not make sense. So the answer is Unlimited so far has been fabulous. And everything I could have hoped for in a launch. These are very complex products. You have the Apple alone has 7, 8, 10 different features from mobile check deposit to tracking all the rewards to how we know in a real live time authorization which is an Internet or app transaction versus which is a transaction at a retail store that's actually not trivial to do that at scale and in an audited environment as a bank. And I'm really proud of our team. We've had a flawless technology launch, a flawless marketing launch, nearly a billion media impressions last I checked, a few days ago. Incredibly positive consumer reviews and third-party press reviews as I'm sure you've seen. So we feel pretty good about Unlimited and the sales so far are very, very strong as well. What you don't know and I won't know for several more weeks is the funnel. So you have what's called a waterfall or funnel where you issue an account online and then you have to see how many people will…

The next question comes from Andrew Jeffrey with SunTrust.

Obviously disappointing to see the decel -- or the accelerator decline I should say in the core business but it sounds like you're launching products that are going head-on to address that. Mark, without asking you to guide to '20 because I know you're not going to do it. I just wonder how much confidence and conviction you have that the $60 million spend recognizing that it's split between marketing and technology is materially onetime and that you can really scale that investment next year? And I wonder as sort of a corollary do you have an idea, any thought whatsoever as to what you think of the sustainable revenue growth in this business is, given the changing competitive environment?

Look, it's a great question. And the answer is yes, we do have some thoughts on it. There are couple of things that are going on, Andrew. First, as we said, we're seeing a decline in the top of the funnel this year and we have sort of mapped out how we think that impacts us for the remainder of this year and it's really just in one place. The prepaid card sales at retail and online. If we think about our expectations around being able to hit our 1070 guide, which if we do should position us for growth -- a return to higher growth again as we go into 2020. We're going to need to issue about, I'd say, 100,000 incremental accounts per month and generate on average revenue of about $36 per account, and we have to do that in excess of our current run rate. And if we do so, that would get us to our guide for the full year and it would help us enter into 2020 at a year-over-year healthy growth trajectory.

Yes. I think to expand upon that this is why we believe it's contained and sort of help you size it. And this will lead into the growth. We expect to be back to growth in Q4. And what the assumption is to believe you grow and we think we can do better than this. But this is what you have to believe to grow in Q4 internally. And that is that with Unlimited, we issue net 100,000 incremental accounts per month and the revenue that Mark said $36, that doesn't mean the revenue we'll get. That means the revenue we need to get in order to make the plan. And that's fairly low. So the reason is you have cards that are issued month after month. For example, a card that's issued on an account that's issued in July or August because we did it at the end of July has 5 months to have revenue delivered over 5 months. An account that we issue in December has no time to deliver revenue. So the average of that half-life is 2 to 2.5 months. And over that 2 to 2.5 months, we expected about $36 per account. So that's what we need to believe to get to our plan and we think that's achievable and conservative. But we will find out when we see it. So if you see those numbers, that means we're growing already again in Q4 and that we enter 2020 already growing year-over-year. And that's why we believe this is somewhat contained. If we did not have the new product rollout, and not even the new product, just the marketing in general. Then we would be down further, right, because you'd have the continued decline, at some point it'd plateau out but you'd have the…

All right. And I appreciate that. And then one more if I may. Just with regard to the 5 new BaaS customers you announced on 1Q call as well as Apple and the Apple card, I guess, launches we soft-launched today. I mean how much of that is in your back half guide? And does it as those programs ramp, should they be additive to growth at least next year? Just trying to dimensionalize that a little bit?

Yes. No, you bet. I don't want to go into too much with how we formulated the guidance. But obviously we're always going to try to -- when you're guiding down we want to make it as -- we want to leave ourselves room for margin of error for sure, although, we certainly didn't do that this year. We thought we did. And so the answer is, Mark, help me with the question. I forget the question.

The answer is there is an immaterial amount of the new BaaS partners in the back half of the year. Is what we expect the growth to be next year.

Yes. That's right. So we didn't -- as part of the conservatism or the caution, we're not assuming those ramp. Because you never know on the new programs how they'll ramp. So the answer is there's not any BaaS except for what's in there for run rate and then any new programs or growth or any that kind of thing is not baked in there, yes.

The next reason comes from Ramsey El-Assal with Barclays.

Given guidance is really predicated at this point on successful uptake of Unlimited, can you talk more about your distribution strategy and your kind of marketing plans or marketing calendar to the degree that you're able to kind of help give us a little more flavor of how you expect to kind of aggressively roll the product out? Are you cross selling into an existing customer base? Is cannibalization a risk? Just anything around the mechanics of getting this out in the marketplace, I think, would be helpful?

Right. So we're fully distributed today. We're, obviously, online at greendot.com, and we are also selling it at rushcard.com because this is a better product and a better fit for the audience. So we'll have that at RushCard and at greendot.com. And then we also have it in stores. So look, while we may be sad about the declining unit sales, we still sell more accounts than anybody by multitudes. And we don't want to do anything to risk that. So the same product in retail is the same product. It's a Green Dot classic prepaid card. The worse thing you can do in retail sales is have somebody walk into a store shelf and suddenly everything changes and the package doesn't look the same or it's unnerving and it brings a lot of risk and we don't like risk in that regard. So the products in the store are the same products you've always been able to get, but when you go to register the card it immediately upgrades you to the Unlimited product and we are doing that because it's a better product for the customer. We think it means that we'll have more first time reloading activity and longer retention and more revenue for those customers. And so we'll see how that goes. Again, that's only been 1 week, 1.5 weeks, but so far so good. So we're in retail. We're online and that some of our other website properties as well. So we're fully distributed today and then the marketing has only rolled out beginning July 30 and we'll continue for some time to come.

Okay. A follow-up for me. The business model obviously is really shifting quite a bit, much more on to BaaS side away from the monoline prepaid business that you were in some years ago. Is there any way to accelerate the shift via M&A? Is there any way to deploy capital maybe at scale in order to move more aggressively into the BaaS sort of realm?

Well, I'm not sure. You always have companies out there but right now there's an unnatural, we think valuation on the private companies that are in this space. As a public company we report obviously and it's known. But on the private company, the valuations are just so much higher that there's not really anything you can buy I don't think. And the companies that are in the private space and have revenues in growth rates fractional to ours and not the infrastructure we have. The values are just tremendous we think. And so there's nothing really to buy there in our view. But we're always looking for things that we can maybe buy and we have good capital. And if there's anything attractive that we think can help we would do that. But we honestly believe that the product line, especially, BaaS is doing very well. We have all we can eat, rolling out a lot of accounts. We have a lot of business and a lot of traction picking up there. It's a very compelling offering and I think most will tell you that it is absolutely far and away the best offering from both technology and the integrated stack of any company doing that kind of our Banking-as-a-Service model. So we like where that is and then we just got to right-size the product side of our business which for the last 3 years has been unparalleled growth with our products that we rolled out in 2016. And we think the new products, the first one is Unlimited but we have others rolling out this year. Other really good one rolling out this year. We think all those together will put us back for another multiyear growth trajectory but we're not there in Q2 and Q3. That's for sure.

The next question comes from Steven Kwok with KBW.

I guess the first one I had around the slowdown in active accounts. You mentioned there was non-reloading customers and cash reloading customers. Just wondering like on the direct deposit side what were the trends there? Did you see any slowdown there as well?

So we're up in direct deposit again but at the same time that will be down. As you sort of follow these trends, again our business is -- like a lot of sales businesses are funnels, right? You have the top of the funnel and then people have to engage and then like any subscription model that you've covered over the years. When you're lacking at the top of the funnel, all good things flow from the funnel. So whether it's ultimately direct deposit this one or that one, if you don't correct the funnel you'll ultimately have losses everywhere, right? So that's why the funnel is important to us. The fact that our customers have been so loyal and it's held through is a fabulous thing. And look, we're down net if you take out the offset of BaaS we down barely 200,000 accounts year-over-year in the quarter. And that's in the face of hundreds of millions of dollars of marketing and people literally going to prepaid message boards and Green Dot message boards and saying, "Hey, we can give you to this for free and we will do this and we'll do that." So it's a very, very hard kind for marketing to overcome. So I think the fact that we're down only what we are down after so many months of that kind of combative markings is pretty impressive. It doesn't mean it's great for the income statement and we'll still be up this year as you know from our guide 4%, 5% whatever 1070 is on the guide. So the company's not shrinking. It's growing but it clearly hurts your growth rate for the moment. So that's the kind of marketing we have been facing.

Got it, and just like as an industry, can you help size what the industry is growing at and what the trends are that you're seeing?

When you say the industry, you mean prepaid?

Prepaid and digital both.

Well, if you take -- gosh, there's so many private companies. If you listen to [indiscernible] earnings call, their net spend division looked exactly like our division, very similar in terms of active cards. They were down in active cards. So they were a little worse there. In terms of the overall storyline, it's similar. And I think the reason is, is that you have the neo-banks going after the prepaid customers with the free offering. And that's a land grab and that's what we live through a little bit of déjà vu. I remember this conference call except we didn't have all the diversity that we have now back then, but I remember this call having the same kinds of questions about Bluebird and American Express Serve and about Chase Liquid and about the Western Union product. This really frankly more than I can remember. And there was the same kind of concept and that is you have all this money pitching a free offer and it does cause customers to shift. But it's not permanent and people go back and forth and over time the economics of a free customer are pretty punishing unless you have a really low cost infrastructure. I think Green Dot's one of the few companies that could actually support that. And the vast majority of our customers are free today because you have fee waivers for direct deposits. So if you think about the customer base of Green Dot today, both in terms of the BaaS side of the house and the prepaid side of the house, the product side, the vast majority are free. So we can support those economics with margins that do quite well but to be a startup with a small infrastructure and you have to rent -- when you think about it all the parts of your business. It's pretty punishing economic model that can't be sustained forever. And so the key is for us is to be ultra-competitive, to fight hard which we always do. It's how have been here for 20 years. And to make sure that we are always a fierce competitor in the market. And I want to be clear about something, we're going to be a fierce competitor in the market.

Got it. And final question is just around the share buyback. Any appetite for additional share buyback?

Well, we still have -- I was asking Jess just before the call the percentage that BAML has conducted so far. And it is supposed to go through the end of the year and given where the stock is in the aftermarket, I hope they've saved most of their buying power till after this call. But we're certainly executing the $100 million buyback that's in process right now and if we can do more we will. I think it's a good opportunity to do that and I'm sure we will talk about that along with other uses of capital in the upcoming Board meeting. Certainly would be a good opportunity for it.

The next person comes from Andrew Schmidt with Citi.

First question on visibility for the remainder of the year. I appreciate the comments on the notion that you've set the bar prudently here, but what gives you the confidence that we won't see another unexpected step down like we saw this quarter? Just talk a little bit about your visibility as it pertains to the remainder of the year, particularly as it relates to active card growth?

I can take that. We think it's pretty good. But having said that I would have told you that in previous times so you're watching your trends carefully. And we certainly didn't expect an incremental $100 million of competition of marketing against us. But these things happen. We think the visibility is good because we can track the retail numbers. We know that with the launch which is where most of the losses are. When you track the launch of Unlimited and the marketing campaign that goes along with it and what we know is still to come, we already see upticks in sales there. So we think we feel pretty good about where we're going with it and that we've sliced enough to hit our number appropriately. So I think we have good visibility. The reason you hearing me hesitate is that it's a big world and we have a lot of divisions. So if you're asking the question what's our visibility on our prepaid unit sales. I think pretty good. I think the FP&A team has a good rhythm to it. And I think we've gotten it well outside of the unusual campaign after the Q2 call. -- Q1 call. So we think it's a good visibility and I feel pretty good about the guidance knowing that I suppose anything could happen. But Mark, what are your thoughts about it?

Well, I'd say pretty much the same thing. In terms of how we're looking at the rest of the year, we're not assuming that retail sales are going to get any better. We recognize that there's been a decline beyond expectation and we continue to factor in that continuing trend. In terms of sales of the new products. We're taking, I think, a very refined view not an aggressive view on what it takes for us to turn things around. And so we feel pretty good about a return to growth in Q4 based on what we're seeing today and also assuming maybe something goes bump in the night.

I think also I want to remind you about a diversified model which we've worked really hard on in the past several years and we've done I think a super job with it. Look we've been routed here in a temporary way we believe in Q2, Q3 with this kind of marketing activity going directly after the heart of our customers. And yet we still grew 5% in the quarter. So just give you a sense that and this is the most -- one of the most important message for me to relay. I know as an investor myself and other companies and in the DC world that it is very easy to take that steering wheel. And if you're either all the way left or all the way right. And the truth is that neither is ever the case. Nothing's ever as good or bad as it seems of the time. And our general sense is that we are well-diversified company. And this is a problem specifically in our prepaid card acquisition group. We have 32 products in the company. This is our legacy division, so it's our biggest division. But I think we have very good plans to fight back and I think we have very good plans to launch products which were in the works long before we have this issue come up in the past 3, 4 months and we think it's a great product and it's one of several. So I think we feel good about the future, recognizing that this is a painful -- look I'd be a liar if I didn't tell you this. This call is horrific for Mark and I. So obviously you never want to give this kind of news to investors. We value the relationship and we hate when we don't hit a plan. But we also want to be transparent that it is not the end of the world and that it's one division out of many, that we're a well-diversified company and even in the middle of the worst route we've had, you're still growing 5% and I think we're going to be in great shape for the end of the year.

Understood. And then a question on customer acquisition cost. Obviously some of the competitors you mentioned have ramped up their marketing efforts as you mentioned at a pretty heightened customer acquisition cost. It seems like that trend isn't going to abate any time soon in which it implies sort of at least maintaining the level of marketing spend from a customer acquisition perspective into 2020. Is there any comments in terms of just the level of marketing spend or customer acquisition cost required going forward relative to the past and what that might imply for profitability?

Right. Well in Green Dot's case, we are profitable with this money that we're spending on marketing on a unit basis. So we feel good about that. So I don't think that's really the issue. Whether or not the other private companies and the other VCs will continue to pour money as they have forever o for another 2 to 3 years, I don't know. Everybody has their limits. We know that already there's some companies that are trying to charge fees and retrack on that because it's very, very hard to make money at free. Especially, when you have 15 free competitors online. So remember to the customer it isn't Green Dot versus one company or two companies. It's about the bank you're using versus 23 banks or 15 free banks online. And all of that marketing that happens against each other, and for example, if you're talking to Green Dot, we're thinking our competitors are the free online banks. But if you were talking to one of the private neo-banks, they tell me there competitors are the other new-banks, right. So everybody is kind of marketing against everybody. And my experience over many years of running this company and being involved as an investor in other companies is that if you're that VC, that gets real old real fast once you get past the point of enough is enough. And I don't know how that's going to play out. At Green Dot though, we're not going to do anything. We can't, we won't that jeopardizes our long-term economic sustainability. It's not worth it. We have such a diverse business line, and everything else till you look to other places, but the marketing spend that we're doing now is accretive to the product. We certainly expect it to, we'll see more as we learn more about the funnel how people behave. But if it's anything like our current products or our 5% product, the amount we're spending on now for acquisition isn't wacky. It's no more dramatic than what we spend historically. So we think we are in good shape there. And as it relates to what the private companies will do or not do, it's hard for me to tell. My own belief is that you will have one or two neo-banks that will make it into a mature company and will scale. And you'll have others who won't. And whatever happens with the Neo banks, Green Dot as the father of that industry and one that continues to evolve will be there right alongside. That's my general feeling on it.

Due to time constraints, this concludes our question-and-answer session. I would like to turn the conference back over to Steve Streit for any closing remarks.

That was a fast hour. Thank you for the questions for those who asked. I think we got to most of them or all of them. And we will see you at a conference soon and we appreciate your time. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.