Earnings Labs

Green Dot Corporation (GDOT)

Q4 2023 Earnings Call· Tue, Feb 27, 2024

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Transcript

Operator

Operator

Good day, and welcome to the Green Dot Corp Fourth Quarter 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Mr. Tim Willi, Senior Vice President, Finance. Please go ahead, sir.

Tim Willi

Analyst

Thank you, and good afternoon, everyone. Today, we are discussing Green Dot's fourth quarter 2023 financial and operating results. Following our remarks, we'll open the call for your 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. Or additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we will refer 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 George.

George Gresham

Analyst

Good afternoon, and thank you for joining our call. I will make some brief comments regarding the proposed consent order we disclosed in our earnings release and my thoughts on 2023 before handing it over to Jess, who will walk through our fourth quarter results and provide our guidance for 2024. I will then spend some time discussing our business and strategy. We have a lot to cover, so let's get started. You will have noted we are in receipt for proposed consent order from our primary federal regulator, the Federal Reserve. This proposed order relates to matters arising as long ago as 2017 under management in place at that time. And we are very pleased to soon bring these matters to conclusion. I will make some additional comments on this topic in a few minutes. 2023 was a challenging year, but not without its accomplishments. We completed our processor conversion and are beginning to realize the anticipated savings and after spending years preparing for and executing this conversion, the team is now focused on other growth centric initiatives. We successfully onboarded several new partners in our BaaS channel, including Ceridian, now Dayforce, and announced the signing of PLS, which is a significant win in the financial service center vertical within our retail channel. PLS will launch in the first half of 2024. Our business development efforts are gaining momentum and pipelines continue to grow. We have made significant progress integrating disparate processes and procedures, launching new technologies across fraud, disputes and project management, and generally improving business and regulatory controls. Finally, the processor conversion and other savings initiatives resulted in cost reductions efficiencies across the company. It was a busy year and we made a lot of progress. Jess will detail our forward guidance in a few moments, but we believe we are on the cusp of returning to account growth in the back half of 2024. For the most part, we will have lapped lost partner revenue and impacts of sunsetting various brands by midyear. We will launch new partners and see growth from GO2bank and other product features, and we will see meaningful benefits from other cost management efforts. All of this combined gives us good reason to be optimistic as we exit 2024 and head into 2025. With that, I'll turn it over to Jess to discuss our results. Jess?

Jess Unruh

Analyst

Thanks, George, and good afternoon, everyone. I'll walk you through our key financial highlights, and then I'll provide color on our guidance for 2024. Our GAAP and non-GAAP revenue for the fourth quarter and full year grew year-over-year by 7% and 4%, respectively, while adjusted EBITDA and non-GAAP EPS were down year-over-year for the quarter and the full year. In addition to the decline in adjusted EBITDA, our GAAP operating income for the quarter full year was further impacted by the $20 million reserve we recorded related to our proposed consent order. George will provide more color on that topic in a moment. As it relates to our non-GAAP results for the quarter, we continue to address transitory challenges that arose during the third quarter related to our processor conversion and transaction losses associated with customer disputes. We also incurred incremental expenses in connection with our ongoing investments in our anti money-laundering program, including improvements to our compliance controls, policies and procedures. As mentioned in previous earnings calls and SEC filings, we expect to continue to invest in these programs to remediate the matters addressed in the proposed consent order, ensure we have market leading compliance programs and to mitigate and reduce our fraud losses over the long-term. Over time, we believe that this will be a competitive advantage. Despite these near-term headwinds, we were able to meet our revised guidance, and I believe that we are poised to see fundamental performance improve, which I'll discuss later in my comments about our outlook for 2024. With that high level context to our quarterly results, I'll provide color on each of our segments. First is our Consumer segment. Segment revenue in the quarter was down 21% year-over-year and down 20% for the full year, both driven by declines in our retail…

George Gresham

Analyst

Thank you, Jess. We'd now like to spend some time discussing the proposed consent order, the individual characteristics of our distribution channels and describe how they each tie into our strategy and my corporate goals and priorities for 2024. As I noted at the outset, we have been in ongoing discussions with the Federal Reserve regarding a proposed consent order. The proposed order relates principally to various aspects of compliance risk management, including consumer compliance, as well as compliance with anti-money laundering regulations. The matters addressed in the proposed order relate to activities and practices that commenced prior to our CEO transition in 2020 and they back to 2017. We do not currently expect any incremental restrictions to be placed on our business or operations. However, until the order is finalized, I am not able to comment on its specific elements. I will say this, we take regulatory compliance very seriously, and we have invested considerably in people in time, and process improvement and product improvement and in money to improve our capabilities in this regard. We are not the same management team or the same company that we were in 2017. We have changed our culture throughout the organization to ensure our policies, programs, services, and people make regulatory compliance our top priority, our North Star. We are not now nor will we ever be done as we have adopted an approach of continuous improvement, and we are now making and will continue to make those improvements. Our core value is stewardship. We hold customer deposits as stewards and must take care of those deposits. We provide a unique service to the American economy given the wide range of clients we serve. We provide access to FDIC insured bank accounts to millions of Americans who are otherwise blocked from…

Operator

Operator

[Operator Instructions] And the first question will come from Tim Switzer with KBW.

Tim Switzer

Analyst

I appreciate all the color you guys provided. I think you guys have been pretty qualitative about how the revenue impact and earnings should improve over the course of 2024, particularly, as we start lapping over last year and you get benefits from new BaaS partners. But can you maybe help quantify for us either revenue or EBITDA or something as we get towards the end of 2024 and enter '25? Like, what are we looking at here on either, like, a year-over-year basis, growth rate, or anything like that? Can you guys help us out?

Jess Unruh

Analyst

Let me take a stab at commenting on each of this is buried in a very long script, so I understand some of it may be hard to find. On the consumer business, we talk about first half revenue declines as we're lapping some program deconversions, et cetera. And then in the back half of the year, things are improving as we launch PLS and we have continued growth from GO2bank. So I would expect in the back half of the year to have sort of mid-single-digit growth rates in the consumer business, that's revenue. In B2B, we talk about mid-20% growth sort of throughout the course of the year. And then in money movements, I think we commented that in the first half of the year, we would have roughly single-digit revenue growth, and we would have higher more pronounced growth rates in the back half of the year as, the Green Dot Network builds on its business development pipeline, launch of PLS, et cetera. So you end 2024 with a, call it, mid-teens growth rate in the Money Movement business. Let me stop there and see if I'm answering your question.

Tim Switzer

Analyst

The other question I have on the expense side. It sounds like you guys, you finish the core conversion so that expense is now out of your run rate. It sounds like you should be able to finish your, AML/BSA investments by mid-2024. Where do you guys want to put your investment dollars after that? Where will you be focusing your investments?

George Gresham

Analyst

Just a few clarifications on some of the points you just observed. First, it is correct that the conversion was completed by the end of August. There were lingering expenses that trailed in through the fourth quarter. I think those are mostly behind us at this point. So that on a go forward basis, is that in the system. I will point out that although we have heightened BSA/AML investments in the first half of the year relative to the second half of the year. Our overall investment in compliance related activities, BSA/AML, internal audit compliance department, et cetera is up fairly significantly on a year-over-year basis. So it will dip a bit in the back half of the year to a more normal run rate in the back half of the year. So I wanted to clarify that. But more importantly on a prospective basis, our investments. So there's a couple categories of investments we'd like to make and are making this year in my discussion, I went through kind of those categories. So, in certain, so in our vast business, for example, we are building out API libraries or sandbox, etcetera, in order to make our product more competitive in the marketplace. Now that needs to be done, that will be done this year. We are building a number of tools and capabilities to accelerate the onboarding of opportunities that we win because it's, frankly, unacceptably long at this point. So we're making those investments, and we're building out our product features and capabilities in order to provide more services for more use cases in our distribution channels. So in general, those are the nature, that's the nature of our investments that we're making, on a prospective basis.

Operator

Operator

[Operator Instructions] Our next question will come from George Sutton with Craig-Hallum.

James Rush

Analyst

Hey, guys. James on for George. Thanks for taking my questions. It's been about three years since GO2bank launched. Can you maybe talk about how the GO2bank product has kind of evolved, how various customer cohorts have performed, and any key milestones you're hoping to achieve kind of going forward over the next couple of years?

George Gresham

Analyst

Yes. Thanks, James. Yes. As you have a chance to go back to that long script, I think you'll see some, quantification of the size of GO2bank. But what's particularly important GO2bank is and remains our flagship consumer product. That's not going to change. To your point, it was launched three years ago. It is due for a user experience update. So to Tim's last question, I neglected and should have added that, part of our investment structure in '24 and '25 is significant UX experience up updates for both, GO2bank, Walmart MoneyCard, and the any other Green Dot product. So those investments are being made. And, as we move through that, we'll be adding and enhancing features to GO2bank, in order to, make further inroads into our target market, which is depending on how you count it, 70 million, 80 million, 100 million individual consumers that are digital first in the United States. So the growth rate's been very good. The profitability of GO2bank's been very good. We've had a lot of success. We've been, a bit, burdened by, retiring brands as we focus on GO2bank. So we're almost through that life cycle. So, GO2bank is doing very well and we expect it to continue that trend into the future.

James Rush

Analyst

And it sounds like, I mean, you guys are making some more internal investments, but just sort of given where the stock is, some of the commentary about a potential fundamental improvement in the back half of the year, improving free cash flow generation, could you just sort of comment on how you're thinking about capital allocation and sort of other potential strategic opportunities you might be considering?

George Gresham

Analyst

Sure. Commenting on a on a stock that's trading at something like 2x, is kind of beyond my ability to rationalize, frankly. The point of this kind of extended discussion of our assets and our strategy was hopefully to remind our constituents of being amazing and incredible value that underlines the consolidated entity. We've got some spectacular businesses that are generating a lot of cash flow. There's a lot of opportunity to weave these businesses together to create just an amazing offering in the market for embedded and consumer finance products. And that's the journey we're on. As it relates to, capital, in the near-term, so the next few quarters, I wouldn't expect, don't expect as of today any dramatic announcements with respect to capital allocation if the underlying your question is, for example, a share repurchase or something like that. We don't, we're quite cautious with the use of our capital at this point as we move through this period. As we get into the year, and we're going to start seeing growth again, I think that will afford us a bit more latitude with respect to some capital choices. So absent big capital moves, we're going to continue to deploy our capital, in incremental ways to make each of our business units stronger and better and more competitive. And so that's our approach, until you hear otherwise.

Operator

Operator

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

George Gresham

Analyst

Well, thank you, operator. I just want to thank all of you who have chosen to join us today and are along for this journey. I know it's been some challenges, but the company is making great strides. We've got the right team in place. Very excited about the future, and appreciate you taking the journey with us and look forward to talking to you in the near future. Take care. Bye-bye.

Operator

Operator

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