Green Dot Corporation (GDOT) Q2 2019 Earnings Report, Transcript and Summary

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 prepaid unit sales that has caused a material reduction in active prepaid accounts. In Q2 on a year-over-year basis, we were down by around 500,000 active prepaid accounts, primarily from the loss of nonreloading customers and cash reloading customers, offset by an increase of around 240,000 BaaS active accounts. The digital banking industry segment has become incredibly competitive this year. And over the past several months in particular with several so-called neo-banks, flush with new rounds of venture capital, spending a record amount of marketing dollars to convert customers to their largely free bank account offerings. While Green Dot has fared well historically against competition over many years, and we are still far and away the largest digital bank in this segment, we're taking these competitive pressures seriously. There's little doubt in our minds that the increased marketing spend from so many competitors in aggregate is taking its toll on our new customer acquisition. We have a track record of navigating through similar competitive environments and believe we are well-positioned with our innovative product roadmap and strong infrastructural competitive advantages to return to active account and associated revenue growth starting in 2020. But until then, we expect our prepaid product line to continue to show weakness in Q3 before performance starts to moderate in Q4 and then returns to active account growth in 2020. Adjusted EBITDA for the quarter was well ahead of our expectations delivering $75 million on a consolidated basis, representing a year-over-year growth rate of 18%, a growth rate that was achieved over and above a very strong comp from last year's Q2. The year-over-year EBITDA beat was broad-based with about half of the gain coming from flow through from higher revenue on several of our product lines and the other half coming from operational savings achieved through several of Green Dot's platform efficiency initiatives. The better than expected adjusted EBITDA result generated better-than-expected consolidated non-GAAP EPS for the quarter, up $0.90 representing a year-over-year growth rate of 22%. So now let's review our progress in achieving our Six-Step Plan for 2019. Step one is about launching 2 new innovative and exciting products. I think we are in excellent shape here. Our first product officially launched on July 30. It's called the Unlimited Cash Back Bank Account by Green Dot Bank. We are truly thrilled with the quality of the product, the execution of the launch and the tremendous number of positive articles and reviews we've received since launching. In fact, we have received nearly 1 billion media impressions from press coverage of Unlimited in just the first week since launch. Given that, I think it's fair to say that despite the tremendous number of competitors in the digital banking space today, unlimited by Green Dot has clearly captured the attention of a broad spectrum of the American public in a very short period of time. There are several items of note I would like to share about our Unlimited Cash Back Bank Account product. The first note is about the product itself. Unlimited is neither a prepaid card nor a debit card. It's a bank account that is designed to be the customer's primary bank account and in so being ultimately replace whatever current bank account that prospective customer currently uses. Market research shows that 80% of the American public under the age of 44 is willing to try a new bank account if they felt it was better than their current bank account. Among those respondents who rated Unlimited with a high intend to purchase core, more than half currently use a top 10 national bank and another 40% currently use either a credit union or a community bank. Less than 5% currently use an online only bank and less than 3% currently use a prepaid card. As such, we expect that our opportunity for Unlimited is large and mainstream. While very early days, I believe we are succeeding in finding a new customer base for Green Dot and in so doing we believe that Unlimited and other new products we are working on and intend to deploy before the end of the year have a real and promising opportunity to increase our TAM well beyond the prepaid market for our bank account products. While we have several BaaS partners with products that are intended to attract the mass banking market, Unlimited is the first product under their Green Dot brand name that seeks to attract a mainstream bank account customer. The second note is about technology. Unlimited is an app that houses a digital cash back checking account, a digital high-yield savings account, a way to send money to friends and family instantly and for free, a way to transfer money from the customer's old bank account into their new unlimited account, an on-demand digital deposits slip that enables a customer to deposit cash securely and at no charge at participating Green Dot retail locations, an easy to use mobile phone camera check deposit feature and much more. At any time the customer can touch the deposit tab in the app to send their employer a pre-populated e-mail requesting direct deposit enrollment thereby eliminating much of the hassle of enrolling in payroll direct deposit. And questions can be quickly answered via 24/7 text chat product support available in the app and online at the touch of a button. The app also offers a host of mobile alerts to keep the customer connected to their account and feeling instantly gratified by seeing their cash back balance grow with every online or in app transaction. The third note is about design. Unlimited is a cool bank account. For example, the website is unique, content rich and the result of considerable consumer testing and artistic review. Information is transparent and reflective of Green Dot's culture. In fact, all the how-to videos are real Green Dot employees talking about the product they created. The Unlimited app is highly functional, intuitive and fast. And the lifecycle messages, social media and TV spots are designed for the mainstream millennial in mind. When the customer get their personalized Visa debit card at their home, the card looks modern and unique and can be easily provisioned for Apple Pay, Google Pay or Samsung Pay. Even the image that comes up on the mobile phone when you make an in-app or mobile payment looks sleek and modern. Design matters and we believe our customers will take notice leading to a more intimate relationship between the customer and the bank account over time. The fourth and perhaps most important note is about value. For the customer that uses Unlimited as a primary bank account the 3% cash back in online and in-app purchases and the 3% annual interest rate on savings represents extreme value. Plus Unlimited offers easy to find free ATMs, free cash deposit at popular retailers using our app and the account has no overdraft or penalty fees of any kind. In fact, the only fees that a typical customer might pay are the ATM fees at our out of network machines and a $7.95 monthly fee that can be waived when the customer spends $1,000 per month or more, an easy hurdle for most people. We believe Unlimited is the best value in banking. Notice that I didn't say it's the cheapest bank account. There are many free bank accounts as you know out there. But we believe we have succeeded in designing a product that is both the category-leading value for consumers and a financially sustainable product for Green Dot. While it is far too early to predict any type of specific outcome, I can let you know that assuming acquisition rates stay at least similar to what they have been in week 1, we believe we will meet or exceed our goal of opening 1 million new Unlimited accounts prior to the end of the year. Unlimited is the first of what is intended to be several new product launches this year as part of our strategic innovation roadmap, including a new Gen Z mobile bank account product that we expect will find a completely different market than Unlimited. It is our goal and expectation that in aggregate, these new products, Unlimited plus the others scheduled to be introduced before the end of the year will provide the unit acquisition lift needed to drive expanding active account numbers and associated expanding revenue in our Account Services segment in 2020. Step two is about increasing purchase volume and attracting a more committed customer base. We've been achieving this step very well since launching our first slate of rewards debit cards in 2016 and that trend continues this quarter, although, the loss of units sales is a headwind on aggregate growth. For example, spend volume was up 2% year-over-year on a materially lower number of active accounts. Of course, to grow overall revenue in the Account Services segment, we need both quality and quantity as we had been achieving up until recently. With the successful launch of Unlimited and the other new products scheduled to be introduced this year, we believe we will return to active account growth in 2020. Step 3 is about building and releasing BaaS 3.0 and 4.0. This is a work-in-progress and continues on schedule. Remember that every new product launch whether the launch of a new Green Dot or GoBank branded program or the launch of a BaaS partner program enriches the BaaS platform's capability set because we first develop a given new function or capability on the BaaS platform for all of us to use including our own product designers who are customers of our own platform. For example, with Unlimited in the market barely for a week, we have already received several calls from current and prospective BaaS partners asking if they can incorporate this feature or that feature into their products. Innovation breeds innovation and the more robust their products, the more robust their platform. And the more robust our partner programs can become. The way we improve and evolve the platform's capabilities with each new product release is a compelling part of the BaaS value proposition and one of the reasons I think business partners, including several of America's largest retail, consumer, technology and financial services companies choose to partner with Green Dot BaaS. On that topic, I'm pleased to let you know that we are seeing strong and material incremental demand and opportunity for our BaaS or Banking-as-a-Service platform business line. In 2019, BaaS is on track to achieve a year-over-year GDP growth of over 60% and revenue growth of over 70%. Of course, we're having offsetting challenges in our legacy prepaid business causing the lower consolidated growth rates. Nevertheless, BaaS is performing quite well and we expected to experience a continued growth in 2020 with several new potentially large-scale expansions underway with current large BaaS partners and a fairly long list of new partnerships and programs in the queue to be developed and launched over the next several months. For competitive reasons, we can't share details on new programs until they launch but one program I can mention is Monzo. Monzo is a leading U.K. neo-bank provider that is coming to the U.S. and they'll be using our platform to facilitate cash deposits to Monzo accounts though our nationwide retailer base cash processing network. As you may know, Green Dot's Platform powers deposit taking for many leading neo-bank's and we welcome Monzo. Lastly, I am pleased to announce that Green Dot has joined Visa to support their FinTech fast track initiative here in the U.S. where qualified FinTech companies partnered with certain leading venture capital firms can now be referred to Green Dot to have their programs developed, issued and managed. Elsewhere across our various revenue divisions, I'm pleased to welcome a whopping 253 new partners who have chosen Green Dot RapidPay for their corporate PayCard solution. This incredible list includes names like Six Flags Entertainment Corp, Sally Beauty Holdings, Lands' End Incorporated and GameStop Corporation. We welcome them all to our PayCard division. Step four is to greatly broaden the size and scale of our BaaS Platform's ability to serve a greater number of partners to the development and late 2020 deployment of our bank operating system called Banking OS or bOs. Development continues on track with bOs as you recall we reserved part of that $60 million investment for the purpose of accelerating BaaS platform development and that is on track. Step five is to continue to improve and scale our operating infrastructure which holds an Evergreen spot on our annual Six-Step Plan. We continue to make material progress here. You can see evidence of our success in our Q2 adjusted EBITDA and non-GAAP's EPS results where non-GAAP total operating revenue grew by only 5%, but non-GAAP EPS grew by 22%. You can also see an example of that efficiency with our new chat text product support feature that rolled out only last week as part of Unlimited. And yet even after a week, it's already handling thousands of customer chat sessions that would have otherwise required a phone call to an agent to handle that service to the customer at a higher cost. Lastly, step six is about the smart and accretive allocation of capital to enhance shareholder value over time. During our second quarter, we announced that we entered into a definitive agreement with Bank of America Merrill Lynch to purchase a total of $100 million of our Class A common stock under an accelerated stock repurchase transaction. Under the agreement, we received an initial delivery of approximately 1.7 million shares. The final number of shares to be repurchased and the aggregate cost per share to Green Dot will be based on our volume weighted average stock price during the term of the transaction, which is expected to be completed this year. Before I hand the call over to Mark, I'd like to speak about what we see as the state of the digital banking space where Green Dot largely competes. This space includes traditional national banks and community bank that enable their accounts to be opened online, branch-less online only that have been around for many years and then the so-called neo-banks that themselves are not banks but are typically venture-backed technology focused or marketing focused companies that assemble the components of a bank offering through a bin-sponsorship program with a third-party bank, a processing partnership with a transaction processor and then typically a homegrown or outsourced program management function that pulls all the parts together. The neo-bank concept has its earliest roots dating back to 2011 and 2012 with an app called Bank Simple, which at the time, captured the hearts and minds of the Silicon Valley Millennial crowd. And you had Green Dot's own innovative mobile bank account product called GoBank, which launched to great fanfare and went after a more mainstream mobile banking crowd. Since then, aside from what became known as Simple, which sold years back to BBVA and GoBank, which remains a popular Green Dot owned mobile banking app, not much had happened in the neo-bank space until the past year or so. When FinTech investors took note of the success of certain so-called challenger banks in Europe and then took notice of the domestic demand from large established FinTech players for Green Dot's own Banking-as-a-Service business line. We believe the combination of the European challenger bank successes and the broad-based and impressive ramp in the U.S. of Green Dot's Banking-as-a-Service platform with clients like Apple, Intuit, Uber and many more set the stage for the BC investment thesis tipping point, resulting in nearly $6 billion in venture investments made in North American FinTech startup firms in just this past Q2 alone. With the majority of those investments being in the digital banking and lending space, including multi-hundred million dollars investments in neo-banks that compete directly with Green Dot. We believe the thesis for this unprecedented level of investment is that millennials and Gen Zs, of course, have an intimate relationship with their mobile phones and of these generations hold the belief that big banks and big companies more broadly are somehow bad or unethical. As such, we believe there is a strong conviction amongst the tech-VC community that the opportunity exists to disrupt the traditional banking industry by creating modern digital banking brands that appeal to millennials and Gen Zs so that they can gain scale, and ultimately, offer the full service offerings of a JPMorgan Chase or another traditional bank. To realize that goal, we believe that startups must first build significant scale on the base underlying account relationship from which all good things spring and that is becoming the consumer's primary bank account. To accomplish that many of the neo-banks offer free mobile banking experience with varying features supported by tremendous marketing campaigns intended to fund a land grab. While such a model is always going to be cash flow negative, we believe the theory is that if the startup can get to scale, build an infrastructure to take advantage of scale economics and then break even on a unit economic basis, they can then start to make money with lending and other add-ons. Of course, we have seen this before in the prepared industry where in 2011 through 2014 American Express, Chase and many others launched no fee products backed by tremendous marketing campaigns to encourage acquisition with the promise of free to encourage trial and retention. They were in fact successful in opening millions of new accounts, but the customer behavior did not justify the CPA or the attrition rates largely equaled to the acquisition rates. Meaning that the unit economics were never able to scale. One by one the VC's tired of losing hundreds of millions of dollars in round after round of investments with no clear or likely path to profitability and those companies were either sold or shuttered. Today, just five years later, not one of those products exists as they were. We do think today is fundamentally different because the smartphone infrastructure is far more mature than it was back then and the age of the digital native is now prime for choosing the banking relationship. As such, we do believe there are going to be neo-bank players more able to achieve both a large customer base and a sufficiently skilled infrastructure to break even or make a profit through interchange and product add-ons. However, we believe that most new entrants will not make it as their venture investors tire of chasing that elusive scale and profit while round after round of investments runs dry. This is when we expect to see the inevitable consolidation plays followed by the closure of those startups who could not scale, who could not sell. Already, we've witnessed the demise of Finn by Chase and we are seeing several of the free neo-bank models attempting to transition to fee models where there are now seeking to add fees to formally free services. Of course, this doesn't mean that having competitors spend hundreds of millions of dollars in aggregate marketing free bank accounts doesn't take its pound of flesh from Green Dot. It did in 2012 and it is doing it now in 2019. But we believe we are positioned to successfully navigate this period well. And ultimately, benefit from the tremendous amount of total marketing investments being made by many digital banking players in aggregate. A rising tide floats all boats and all of the collective marketing dollars being spent to convince consumers that a digital bank is a good thing will help Green Dot's efforts as well. As we demonstrated in the prepared wars, when literally dozens of companies were entering the prepaid race like the Kardashians and Susie Orman and many retailers have launched their own programs and then the free prepaid years when large companies like Chase and American Express spent collectively hundreds of millions of dollars on marketing free products. We expect Green Dot to again be a winner when the dust settles. We believe the reasons for our success in those competitive battles then are the same reasons why we feel confident in our prospects today. Let me explain. Number one, there is nothing neo about Green Dot. We are the issuing bank, we're the product designers that create the products that consumers enjoy and come to rely upon, we are the large and highly capable technology force that builds what the designers design. We are the hundred thousand retailer strong cash flow deposit network. We are the highly scaled program manager that profitably provides services to 50 million customers across all our product lines and we are the distribution engine that supports digital and brick-and-mortar distribution of our own products across the Internet, the app stores and in practically every strip shopping center Coast to Coast plus Alaska, Hawaii and Puerto Rico. Number two, we believe we are one of the lowest-cost providers of digital banking services in America. Early in the life of Green Dot, we learned from a long-standing business partners at Walmart that controlling cost isn't just about expanding margins, rather being the low-cost provider builds a competitive moat around your business which others can't easily cross. When you have the best vertically integrated assets from top to bottom, the ability to design, build and deploy your new products yourself, and you have the highest scale, lowest cost infrastructure underpinning those efforts that means you can afford to give the customer more, charge less and still achieve your margin goals. Some years have been better than others but Green Dot's nearly 20 years of growth, success and sustainability in a field as competitive as financial services hasn't happened by accident. Number three, lastly, Green Dot is both a ferocious competitor on our product side and a great partner on our platform side. On our product side, Unlimited is our mainstream product that is designed to compete with leading neo-banks and others. Practically overnight, Unlimited is being recognized by many third-party experts and reviewers as the best of the digital breed. And our new products still to come are intended to push the envelope even farther and in different directions than Unlimited, with the goal of attracting a younger and different type of target customer. On the BaaS platform business line, we aren't a competitor at all. In fact, it's our goal to be an enabler and a great partner. There's practically nothing we won't do for our BaaS business partners to ensure their success. We make all our product innovations including everything you see on Unlimited available on our platform for any partner to use and incorporate it into their own products. And we are known to be a great partner because we are known to be incredibly flexible doing everything we can to power the bespoke dreams of our BaaS partner. The reason we behave this way is both moral and strategic. Moral because our business partners need us and rely on our services whether from the bank or the cash deposit network or some other area of our company as a key ingredient to their success. And this helps us strategically since insuring growth on both sides of our products and platform business model, is how we intend to grow revenue and expand margins over time. As I noted at the beginning of this call, while we openly recognize the damage the free neo-bank segment has done to our legacy product line at this point in time, we do believe that the challenges we are currently experiencing are short to intermediate term in nature and that our strategic roadmap, starting with Unlimited will put us back on a healthy growth trajectory in 2020. We believe that Green Dot is well-positioned to successfully navigate this latest competitive battle as it is has done in the past and that if we're able to successfully execute our strategy plans, we have a clear opportunity to emerge as the largest and most profitable player in the digital banking space. And with that, I'll hand the call over to Green Dot's Chief Financial Officer, Mark Shifke for his commentary. Mark?

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 from a combination of the outperformance of adjusted EBITDA and a lower tax rate of 150 basis points, partially offset by $2.8 million of higher D&A. Green Dot also generated $167 million of cash flow from operations through the first 6 months of 2019. We ended Q2 with $71 million of unencumbered cash in our balance sheet and no debt. In addition, as previously mentioned, we utilized $100 million to acquire our stock under an accelerated stock repurchase transaction, which is expected to be completed this year. Turning now to the remainder of the year. As Steve discussed a few minutes ago, on a year-over-year basis, we experienced an accelerated loss of unit sales in our prepaid product lines, resulting in lower active accounts from both reloading customers and cash reloading customers. This trend began in Q1 as we pointed out in our prepared remarks at that time and accelerated in Q2. We expect much of this trend to continue into Q3 before starting to moderate in Q4 as a result of anticipated adoption of our new products this year. While we believe the launch of our new branded products and certain BaaS programs that are expected to ramp will lead us back to active account and revenue growth in 2020, there are not enough months left in the year to offset the anticipated loss of revenue in 2019 from the accelerating decline in our prepaid accounts. We, therefore, are readjusting our expectations for the remainder of this year. As such, we are changing our estimate for full year non-GAAP operating revenue from a range of $1.114 billion to $1.134 billion to a range of $1.06 billion to $1.08 billion. And we are lowering our full year adjusted EBITDA outlook from a range of $255 million to $261 million to a range of $240 million to $244 million. We now expect our full year non-GAAP EPS to be in the range of $2.71 to $2.77 per share from the current range of $2.82 to $2.91 per share, reflecting the combination of lower adjusted EBITDA during 2019, marginally offset by the benefit of that share repurchase planned. Now let's talk about our expectations for Q3, which include the material incremental marketing and technology investments as discussed on our last call. We are estimating Q3 to deliver approximately $225 million to $230 million in non-GAAP operating revenue. Adjusted EBITDA to be in the range of $12 million to $14 million. And non-GAAP EPS of approximately $0.02 per share. And with that, I would like to ask the operator to open the phone for questions. Operator?

[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 what's called, in our case remove the CRV which is inside language fee. Sticker that everybody gets on a card that says before using call the bank to make sure we know you got the card safely. So you send the card out. You get the CRV removal, you have funding either by ACH bank transfer, cash or whatever the case may be and then people start using it. Those first 3 steps in the funnel are the most vital which is how many people are coming to your website in the case of the website, retail is different. How many people are coming to your website to order the account and are completing CIP which is your customer identification program. We tend to be very, very conservative on CIP. And that means we're probably rejecting 40%-plus of applicants. We don't love doing that, but we've learned the hard way over many years that if you're not airtight on the CIP process, you just get a lot of garbage in the funnel and you get bots and you get all kinds of fraud rings and that kind of stuff and we just don't have any patience for it. And so the customers are getting through the funnel are real people. And that means you will get higher response and lower fraud, which we've been lucky to achieve over several years as we have done that. So then they get through the funnel. They get the card. In other words, they pass the IP. They get the card to their house, remove it and then fund it. And we won't know for in total I'm going to say 90 days to see how that works. The early indications but it's been a week are very, very strong. And beyond our expectations. But we have our road in front of us, right. So all we can do is compare it to what we use to get with their Green Dot 5% card, what we used to get before 5% with the Green Dot classic prepaid card and the numbers look very strong. We do see fairly good evidence that this is a different customer base. You can just tell by the questions you get in chat. You can monitor the chat conversations. The questions you're getting, the fact that people go immediately to move funds off another bank account through bank-to-bank transfer whereas prepaid people reload with cash, for example. So I think we're succeeding and fundamentally finding a different customer base that is looking to this account as a replacement for their main street bank account. And we've never had that at Green Dot. So we expect that given the volume that we're doing, which we feel very good about, we think that the conversion in that funnel that I just described will be as good or better than forecast but we just won't know until we know. So I say the account is doing well for us and we ought to know more when we have the next call when that is in 90 days from now. The other question you had about how is the card doing for us economically? The economics should be similar to our other card products. For years, we had the Green Dot 5% cashback product, which is higher and that's on all spend, not just Internet. So we've had that card for 3 years, 2016. So for 3 years you've had the Green Dot 5% card, many hundreds of thousands of accounts have been issued over those years. And that is a very high value proposition as well and it's on everything. So we think we understand how these cards work. And how the behavior works. But we always need to track it and this is a different customer base, but we hope people enjoy it and we hope that they get a lot of value and utility out of it and we think that the way we have the pricing set and the way we have the fee waiver set, we will make a living and the customer will get a great value out of it. And the portfolio economics will be favorable to us and similar to what we've had historically. But for disclosure as you know, I tend to be a little bit conservative on these things. Only time will tell and I don't want to get over my skis.

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 continued decline in new unit sales which ultimately turns into a decline in actives. So launching the new product which are planned sometime back in retrospect I wish we would have done it 8 months sooner. But we've got a lot of launches and we did a lot of cool things during that time too. So hindsight is 2020. But that's where it is. So that's what we have to believe and then we think there's sustainable growth is what it is. Double digits is always our goal and this year we clearly didn't make it and there's a ton of competition. And probably some of my public commentary on these calls doesn't help because all the competitors hear it and map out their response. But we think we'll end up, Andrew, the winner at this or a winner at this as we always have because our infrastructure and our distribution and our scale and our ability to issue accounts at a fraction of what they are, what they cost others and the ability to have both sides of the product where we have our product model where it's on own product that we issue and then we have BaaS, which is the rest of the industry. So we think we're in a really good place and that strategically we're on base but we had oh my gosh, we think well in excess of $100 million spent only in the last 3.5 to 4 months, accelerated spend that wasn't there prior. We always had spend again us targeting our prepared base and the accounts that you receive out of that prepaid base are not -- they move back and forth, these are not multiyear customers. But it actually takes a pretty big chunk out of your numbers. So that's the issue we're facing today and we expect to be back on the growth trail in Q4 and then into 2020 in a more normalized state.

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.