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Green Dot Corporation (GDOT)

Q2 2022 Earnings Call· Fri, Aug 5, 2022

$12.19

+0.29%

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Transcript

Operator

Operator

Good day and welcome to the Green Dot Second Quarter 2022 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Tim Willi, Senior Vice President and Investor Relations. Please, go ahead, sir.

Tim Willi

Analyst

Thank you and good afternoon, everyone. Today we are discussing Green Dot's second quarter 2022 financial and operating results. Following our remarks, we'll open the call for questions. Our most recent earnings release that accompanies this call and webcast can be found at ir.greendot.com. As a reminder, our comments may include forward-looking statements and 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 will make reference to our financial measures that do not conform with 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 reconciliation 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 property of the Green Dot Corporation and is subject to copyright protection. Now, I'd like to turn the call over to Dan.

Dan Henry

Analyst

Good afternoon, everyone, and thanks for joining us to discuss our second quarter results. Green Dot delivered a solid second quarter, with non-GAAP revenue down just slightly in the face of tough comparisons to last year. Adjusted EBITDA increasing 7%, driven by 140 basis points of margin expansion and non-GAAP EPS, up 9% to $0.74 per share. I'm proud of the results our team delivered, which George will cover in greater detail shortly. I would like to take this time to discuss several high-level themes I believe are important to our organization and deliver additional clarity for our investors, as we progress in our plan to transform Green Dot into a next-generation financial services platform. There are three topics I'd like to discuss before handing it over to George. They are; our operational performance, our business development initiatives and the macro environment. First, our financial and operational performance. As I mentioned earlier, we are pleased with our second quarter results. As the market intuitively focuses on metrics like revenue and EBITDA, there are other financial and operational levers that help drive the revenue and EBITDA using the headlines. As I have highlighted in prior calls, we have built out our management team while being very focused on creating a culture of operational efficiency, disciplined investment and holding our people and teams accountable and I believe we are seeing tangible progress on this front. While no single effort or metric may be clearly visible to investors in any given quarter, in aggregate, they do have an impact. As I look at our progress, in conjunction with our continued work to improve operations as a highly regulated financial institution, I grow increasingly confident we are making Green Dot a better company in the long term. On the revenue front, I would like…

George Gresham

Analyst

Thank you, Dan and good afternoon. Our second quarter non-GAAP earnings were stronger than expected due to the hard work of our team members in managing costs, improving operations and renegotiating agreements with vendors. I will comment further on our earnings outperformance and margin expansion in a moment. But first consolidated GAAP and non-GAAP revenue during the quarter as well as our active account totals continue to be impacted by the discontinuance of the government stimulus received by our customers in the prior year quarter and to a lesser degree the timing of tax season in 2022 versus 2021. In previous earnings calls, I mentioned that we believe about $4 billion in GDV was received directly by our account holders related to various government stimulus programs during the first quarter of 2021. While this GDV was received in the first quarter, it was late in that quarter and much of that GDV was monetized in the second quarter of 2021 via interchange revenue from spending activity, monthly account fees, ATM fees, et cetera and resulted in the activation of otherwise dormant accounts. Also our account holders received an additional $1 billion in Q2 and another $1 billion in Q3 of 2021 meaning Q2 and Q3 of 2021 reflected a disproportionate amount of the prior year stimulus benefits. We also had a tougher comparison in our tax business which was strong in the second quarter of 2021 due to an extension of the tax season, but reverted to a more normal cadence in 2022 with the first quarter of 2022 reflecting the majority of tax-related revenue. Despite this significant headwind, we were able to minimize the impact on a year-over-year basis with gains and average revenue per account and growth in our B2B segment driven by the growth of a large…

Dan Henry

Analyst

Thanks, George. In closing, I continue to remain confident that we are indeed making Green Dot a better company that will deliver value for our investors. Our technology transformation continues to move forward. We're making progress on a variety of internal initiatives to drive efficiency and our efforts to reenergize business development pipelines are showing progress. I look forward to the remainder of the year and sharing our plans for the next several years when we have our Investor Day on November 9 in New York City. We are committed to transforming Green Dot into a highly differentiated top-tier next-generation financial services platform that will create value for our customers, partners and shareholders. With that, I'll now turn it back over to the operator to take your questions.

Operator

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Ramsey El-Assal with Barclays. Please go ahead.

Ramsey El-Assal

Analyst

Hi, thanks so much for taking my question. I wanted to ask about the non-renewals. And you mentioned a discussion you're having with Uber. Is this kind of a coincidental series of events, or are you kind of methodically or systematically taking a bit of a tougher stance when it comes to renewing deals in general, part of a broader drive to kind of get the terms of these contracts in some type of order, or this just happens to be a pretty contentious season for this type of stuff?

Dan Henry

Analyst

Hey, Ramsey, it's Dan. Appreciate the question. It's more of the latter. I mean we hate to lose any partners and any revenue, any contribution of course. But as we think about our long-term plan and vision and what we really want to be the best in the world at I believe that for the long-term, we are striving to be probably more uniform in what we do. And long term we'll probably be quite okay without these partners.

Ramsey El-Assal

Analyst

Okay. And then on the pipeline side of BaaS is there a – maybe give us a little color on the contract pipeline in terms of the optionality that you might have to refill some – fill in some of these losses or offset some of these losses over time.

Dan Henry

Analyst

Yes. I can say that with a lot of confidence that we're in great discussions with a number of partners. And our approach has been more focused in terms of looking for partners that really share with us a vision and a desire to really service lower moderate income consumers and small business, really is proving to be a solid strategy. And I expect that you'll be hearing more about some perspective and live new partners or soon-to-be live new partners before the end of the year.

Ramsey El-Assal

Analyst

Got it. Thanks so much.

Operator

Operator

The next question will come from Andrew Schmidt with Citi.

Andrew Schmidt

Analyst

Hey, Dan, George, Tim, thanks for taking my questions. I think just to start off, it does seem like the environment is becoming more rational and that can help things like CAC as you alluded to. Just to be clear, are you seeing more CAC efficiency today, or is that something to come in the back half? Because it does seem like that could be a pretty significant benefit both to the cost structure and then also obviously to user growth. Any color there would be helpful. Thanks.

George Gresham

Analyst

Hey, Andrew, this is George. The answer – you might recall I think a similar question was asked in our last earnings call, a few months ago. And at that time we didn't have any evidence that our competitors in direct-to-consumer had changed their behavior but that's changed. So most recently it's clear to us that certain competitors are pulling back, decreasing capital allocation to direct-to-consumer, which of course lowers the cost for us and hence some of the changes that I communicated earlier in the call. So yes, we see that market is improving. And therefore, we're going to accelerate marketing investment into that improving market in the back half of the year.

Andrew Schmidt

Analyst

Got it. Very helpful. And then if I could dig in a little bit on the comments about FY 2023. And I understand that your comment is meant to be more directional in nature but we'll hear more about this at the Analyst Day, I'm sure. But is there any sort of magnitude you can give us in terms of EBITDA growth that you're planning relative to this year? Just anything to give us a little bit of insight into 2023 because there are a lot of moving parts and it is early. I understand that the environment is shifting but any other details just to help get clarity on the out year would be helpful. Thanks.

George Gresham

Analyst

Sure. I mean I'll disappoint you in the sense that we can't give any kind of specifics. I mean as far as like the trends we might think about in the next year first, I'd say, with respect to the timing of any impacts from partner changes either onboarding or off-loading are notoriously difficult to predict here sitting six months from the beginning of the year or five months from the beginning of the year. So that's a challenge. But we do expect new partners to come on board. We expect to have further operational savings. We expect to have contributions from product features that we'll be adding to our existing customer base, different than but similar to an overdraft feature for example. So there's a mix of things. But I just want to emphasize again, we have a lot of work to do to go through our planning and budgeting and so we should be able to go through that quite thoroughly in November.

Andrew Schmidt

Analyst

Got it. Thank you very much. I’ll sit back in the queue. Thanks a lot, guys.

George Gresham

Analyst

Thank you, Andrew.

Operator

Operator

Your next question will come from Andrew Jeffrey with Truist Securities. Please go ahead.

Andrew Jeffrey

Analyst

Hey guys, appreciate you taking the question. Dan and George, I heard you both mention the requirements and the rigors of running a regulated financial institution. And I just wonder, if you're kind of messaging -- sort of the comments about perhaps more anti-fraud and KYC spend that you might need to make. Is this sort of an ongoing evaluation process? Have you learned something new about sort of fraud on the platform? I'm just wondering, what the incremental commentary is referring to and if this is kind of a moving target for you.

George Gresham

Analyst

Well, I'd say Andrew, that these issues are always important to every institution as we manage a business like this. It's important to partners. It's important to us. Obviously, regulators are always active in this area. So, it's an area that we need to be attentive to, focused on and we intend to be exactly that as we move through the year. So that's the main point we want to make on this topic.

Andrew Jeffrey

Analyst

Okay. You weren't making any comments about next year as far as perhaps heightened spend in that area. I just wanted to clarify that.

George Gresham

Analyst

Pointing out one of the many uncertainties that impact a company like ours.

Andrew Jeffrey

Analyst

Okay. And then on the BaaS front, do you see sort of a changing competitive environment at all? There have been some high-profile players that have gotten apparently more aggressive in the space. It's obviously a space that's gotten a lot of press and visibility. I just wonder, if you can talk about sales cycle and maybe the types of customers you think you're going to win and sort of how competitive just overall the market is recognizing that you're gaining discipline on the contract terms.

Dan Henry

Analyst

Yes. I'd love to comment on that because, what we're seeing is -- I think, it's a combining of a lot of factors out there. So, you see that a lot of players that thought they wanted to get into financial services and looking for BaaS partners and those providers of those services, I think they're finding that, it's harder than people thought to grow a customer base with such offerings. So, I think as you're having fewer I think organizations interested in launching services or opportunities on a BaaS platform. Some of the BaaS platforms out there are then now having their partners are not living up to expectations of their growth. So that's impacting those providers. Some of those providers are being impacted by the explosion of the venture bubble. And so it is creating a lot of concern questions and churn out there I believe. And for us -- and Andrew, you've heard me say this since I got here is that, I don't want to be out there opening up our charter for every Joe fintech that wants to do something in payments. We really want to be focused on partners that can be of scale and partners that are focused on solving the problems that we're focused on solving, which is really serving consumers and small businesses that aren't very well served by traditional financial institutions for various reasons. So we feel very good these days when we go competing and chasing after partners that we know fit our criteria because we're just because the partners that we're looking for are ones that are really looking for a partner that can be with them long term. So, that's another thing we're able to sell strong with.

Andrew Jeffrey

Analyst

Thank you.

Operator

Operator

The next question will come from George Sutton with Craig Hallum. Please go ahead.

George Sutton

Analyst

Thank you. Just a clarification on the three partners not renewing. You referred to last quarter as pulling back pretty significantly I think as a result of an M&A change. Is that included in those three, or would that be separate?

George Gresham

Analyst

That's separate. That's a long glide path down client that's independent of our conversation today.

George Sutton

Analyst

Got you. Okay. And then were any of these three -- because I know fixed fee contracts have been a challenge for you. I'm curious if any of these three were under a fixed fee contract.

George Gresham

Analyst

No.

George Sutton

Analyst

Got you. Okay. Well we're thrilled to have Dan out marketing. We're thrilled to have George then structuring the deal. So, I'm curious of the business development work as you see it today relative to the size of the deals that are moving away. Can you just give us some perspective on A versus B?

Dan Henry

Analyst

George, I'd just say that, we're obviously focused on -- you know this from the -- you know George and I. I mean we're focused on that bottom line what we said in this call that we -- with these losses we are expecting to see the bottom line grow '23 over '22. And so, we expect to be able to do that through continued organic growth as well as some of these new wins. So...

George Sutton

Analyst

Got you. Thank you.

Operator

Operator

The next question will come from Bob Napoli with William Blair. Please go ahead.

Bob Napoli

Analyst

Thank you. Good afternoon. So I guess the -- what is working the best in BaaS? And what products are selling? What are you most excited about with your BaaS business?

Dan Henry

Analyst

Hey Bob, it's Dan. What I'm most excited about with the BaaS business. I'll tell you what I'm most excited about the Bass business, it's just the clarity that we're gaining. And I was just on a call earlier today with the team and just talking through some of the recent opportunities that we're planning on bringing on board and how they fit our new criteria of partners that have real good growth potential and are aligned with us in terms of truly serving the consumer. And that's just really important to us. And so I'll just kind of say it and -- not say anymore but if we've got partners or if there's a prospective partner out there who is looking for a way to nickel and dime somebody or take advantage we're not interested. And so I'm really excited about the cadre of partners that we have and the few we have in our sights to bring on board.

Bob Napoli

Analyst

How is GO2bank? Can you give any metrics on GO2bank? And how is it performing relative to your expectations? And I think that's key to growing your account base again. Is that GO2bank? So any color on size of GO2bank, how it's performing versus your expectations, the profit model LTV to CAC. I guess, some of those -- the competitors probably have pulled back a fair amount?

George Gresham

Analyst

Yeah. Bob this is George. We can't give you a ton of metrics, but I would tell you that GO2bank remains our key point of focus with respect to direct-to-consumer distribution. So we distribute GO2bank via that channel, which sits in the consumer segment of course and to a lesser extent through the retail channel. GO2bank is doing very well. We believe it's a good product in the market. We think that it's got a lot of durability. The average life per account is very strong. The average revenue per account is very strong. All of those metrics line up for us. However, I would when we make comments about marketing spend as we did in our prepared remarks today, we're essentially talking about GO2bank because it sits within the direct-to-consumer marketing channel. And so if we pull marketing because of what we perceive as unattractive acquisition costs within that channel that will have a short-term impact negative impact on GO2bank, and as we accelerate marketing and as we will in the second half of the year that will have a positive benefit. So we're super happy with the product. It's performing as we want it to and we're going to continue to invest in it and we'll accelerate that investment through the balance of the year.

Bob Napoli

Analyst

Thanks. And last question just on the tech upgrade. You guys are -- I mean, it's a very important project I think for Green Dot. How is it going? Where are the risks? I mean, if this -- what is I guess the backup plan or if it takes longer just any color on the tech upgrade would be helpful?

George Gresham

Analyst

Yeah. Truer words couldn't be said when you said it's very important. It is very important to us. It's central to our activities right now. And I didn't include it in our remarks today. But to remind you there's really kind of four parts to this initiative. There's a processing migration. We have risk management tools we're implementing. We're rewriting some code on the front end of the business and we're migrating to cloud. So it's got a lot of complexity to it. The part that we've talked most about the platform migration and we've made some quantified statements about that is relative to our last call largely on schedule. And consistent with what I would have said in the past I'd tell you there's a lot of moving parts between here and there that have shifted but we have successfully done environment testing on part of that work. We're in the environment testing on the latter part of that work, so a lot of moving parts. Super excited about it. We're entering in a very important phase over the next nine months with respect to that platform migration and we're excited to keep you updated on it.

Bob Napoli

Analyst

Sorry, I have to ask this one. I forgot. The NetSpend is being sold. Did you bid on it? Why didn't -- I mean, it seems -- I mean, obviously, Green Dot strategically looks like the best buyer, but it went to private equity.

Dan Henry

Analyst

Hey, Bob. Yes. We did not bid on it and we did not participate on it. It wasn't an attractive asset to us.

Bob Napoli

Analyst

Great. Thank you.

Dan Henry

Analyst

Thanks, Bob.

Operator

Operator

The next question will come from Mike Grondahl with Northland Securities. Please, go ahead.

Mike Grondahl

Analyst

Yes. Thanks, guys. Hey, George, could you just repeat what you said about 2023 adjusted EBITDA and EPS? I just want to make sure I got what you said.

George Gresham

Analyst

Yes. I said, based on what we know today, have a lot of work still to do. We expect to be able to grow EBITDA on a year-over-year basis relative to the midpoint of the guidance for 2022 that we just gave and we would expect EPS to grow at a faster rate as our share count decreases via our share repurchase program.

Mike Grondahl

Analyst

Got it, got it. And then, I think, it was on the last call or two calls ago, I think, you thought or hoped that active accounts would grow by year-end year-over-year. Any update there?

George Gresham

Analyst

Yes, that's correct. We did say that. And as you would note in our comments around guidance one of the elements of context we gave was, with respect to the decreased marketing in the first half of the year that impacts that statement. So as -- if you look specifically at the consumer segment, now, I'd say, it'd be more accurate to expect that we expect our average accounts by the end of the year, by Q4 to be largely comparable with our Q2 exit. And with respect to the partner segment we would expect those accounts to decline.

Mike Grondahl

Analyst

Got it. And then maybe lastly, because the three contracts that are not renewing were not fixed fees, can we assume that those three were above the BaaS margin of 15.9%, so they're going to be margin dilutive?

George Gresham

Analyst

I don't think we can go into that level of detail on those particular accounts or those individual accounts, with respect to their relative dilutive or accretive characteristics to the margins, Mike. But I would say, to add a little bit of color to the situation, obviously, these accounts would have been some -- had some level of maturity to them in a sense that they would have been signed in a different era, relatively speaking, and have terms that are kind of reflective of that. And so, as these renewals come up and those terms we find to be difficult, obviously, we have to make difficult decisions around them. And that's what we've done. And -- but I want to put an emphasis on some of Dan's comments he made with respect to the changing market dynamics. We do think there remain market participants who have received extraordinarily inexpensive capital. That environment is changing for them. And we think it may be that some of these partners had serious financial issues themselves that they need to resolve and certain providers may be willing to provide services to these sorts of accounts for losses and we're simply not in a position to be prepared to do that.

Mike Grondahl

Analyst

Good, good. Okay. Hey, best of luck in the back half.

George Gresham

Analyst

Thanks a lot, Mike.

Dan Henry

Analyst

Thanks, Mike.

Operator

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Dan Henry for any closing remarks. Please, go ahead, sir.

Dan Henry

Analyst

Thank you, operator, and thank you everybody for listening. We're very, very pleased with our results for the second quarter and we're really very excited about our potential going forward. So appreciate all your support. And with this, we will hang up and get back to work. Thank you all.

Operator

Operator

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