BM Technologies, Inc.

Good afternoon, everyone, and welcome to the BM Technologies fourth quarter and full year 2023 earnings conference call. Please note that this event is being recorded. Following management's prepared remarks, we will hold a question and answer session. For those joining us on the webcast, you can submit your questions online where the management team can see them. At this time, I'd like to turn the conference over to Brian Prinevo, Investor Relations for BM Technologies. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us for BM Technologies' fourth quarter and full-year earnings call. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties, that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward-looking statements speak as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information and future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our Form 10-K and 10-Qs, for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the investor relations section of our website. At this time, I will turn the call over to Lavleen Sidhu, VM Technologies CEO. Lavleen?

Thank you, Brian, and good afternoon, everyone. Joining today's call is Jim Dellinger, our CFO, and Jamie Donahue, our President and Chief Technology Officer. We will be discussing our fourth quarter and full year results and also providing updates on our business. I will provide a high-level overview of our strategy to double down on our higher education business and execute on our customer for life strategy. And Jamie will provide an update on our technology modernization efforts that are the precursor to delivering on this plan that positions our company for an exciting future of growth and innovation. Since we last spoke, we completed the transfer of deposits to our new partner bank, First Carolina Bank. in December 2023. We're thrilled that this has been completed and it will have a meaningful impact on our operations in 2024 and beyond. Beginning in December 2023, we are now able to receive this enhanced revenue stream. Importantly, this is revenue that drops to the bottom line as profit. Separately, throughout 2023, we implemented initiatives as part of our Profit Enhancement Plan, or PEP. that reduced core operating expenses by approximately $9.5 million for the year. We expect to realize further benefits and to get the full year benefits of the PEP in 2024. We sequentially improved our core EBITDA performance every quarter throughout 2023. Between additional interchange revenue, our growth initiatives, and continued cost reduction efforts, we are optimistic that we'll return to positive core EBITDA in 2024. However, what we are most excited about is our technology modernization efforts that we have been investing in over the last 24 months, which are finally coming to fruition. In a moment, Jamie will walk us through some of the technology investments and how this better positions our company for the future. But I want to briefly touch on the reasons for this necessary investment. The fact is that in the world of FinTechs, we are an older FinTech that, and with that comes the benefit of stability and scale, but also with legacy technology on the higher education side of our business. This legacy technology has been holding us back and capitalizing on the competitive advantage we have in this market. For example, we estimate that less than one in five of our higher education disbursement services customers convert their refunds to active Bank Mobile Vibe check-in accounts. And although hundreds of thousands of new accounts are open each year, we are also seeing about the same number of accounts become inactive. That means we have significant untapped potential to deepen customer relationships, increase CLV, and unlock new revenue streams for an existing customer base. As we shared on our last call, We have committed to doubling down on our student business and moving into growth mode. This is a unique opportunity only available to BMTX due to our unique customer acquisition model and longstanding contractual relationships with colleges and universities across the country. By upgrading our technology, we are going back to our roots of when we first started the business in 2015. Our roots of innovation, co-creating a product based off of the needs of our customers, using data analytics and enhanced marketing tools to understand and engage with our customers, and most importantly, leveraging exponentially growing technologies like AI to deliver best-in-class experiences to them. I will now hand it over to Jim to briefly discuss our 2023 financials. Thank you, Louise.

During the fourth quarter of 2023, the company earned $14.9 million of operating revenue as compared to $15.7 million in the prior year. For the full year 2023, the company earned $55.3 million of operating revenue as compared to $83.6 million in the prior year. Servicing fees totaled $8.5 million for the fourth quarter of 2023 as compared to $6.9 million in the prior year. For the full year 2023, servicing fees totaled $31.5 million as compared to $44.6 million in the prior year. As discussed in our previous calls, servicing fee revenues were negatively impacted during the first quarter of 2023 by the fixed rate servicing agreements that were then in place. Beginning in the second quarter of 2023 and under the amended deposit servicing agreements and current effective federal funds rates, servicing fee margins have improved by approximately 165 basis points. Interchange and card revenue totaled $2.7 million for the fourth quarter of 2023 as compared to $5 million in the prior year. For the full year 2023, interchange and card revenue totaled $9.5 million as compared to $22.3 million in the prior year. 2023 interchange and card revenues were negatively impacted by the loss of Durbin exempt interchange fees. The transfer of our higher education service deposit accounts to First Carolina Bank in December 2023 improved interchange rates for our higher education vertical by approximately 20 basis points on eligible spend. Had a Durbin exempt bank partnership been in place during the full year of 2023, the interchange revenue for the higher education vertical would have been approximately $4 million higher based on $2.2 billion of related spend. Average service deposits totaled $805 million for the fourth quarter of 2023, down from $853 million for the third quarter of 2023, and from $1.4 billion for the fourth quarter of 2022. Substantially, all of this balance reduction occurred within our BAS vertical due to the interest rate sensitivity of a large portion of these accounts. Average service deposits in our higher education vertical increased to $479 million in the fourth quarter of 2023 from $466 million in the third quarter of 2023 and remain relatively flat with the $483 million in the fourth quarter of 2022. Deposits per 90-day active account in our higher education vertical totaled $1,710 and $1,785 during the fourth quarter and for the full year of 2023. totaled $714 million for the fourth quarter of 2023, an increase of over 5% from $679 million for the fourth quarter of 2022. Spend for 90-day active accounts in our higher education vertical averaged $1,947 and $8,341 during the fourth quarter and for full year 2023. Overall, we continue to see spending in our higher education vertical normalizing to pre-COVID levels. Annualized debit card spend for highly active BASA users, those with both direct deposits and a minimum of five customer-driven transactions per month, was approximately $19,100 during the fourth quarter of 2023. This very attractive cohort makes up approximately 22% of active accounts at December 31st, 2023, as compared to 20% in the year-ago period. Account fees and university fees totaled $3.5 million for the fourth quarter of 2023 as compared to $3.4 million for the fourth quarter of 2022. For the full year of 2023, account fees and university fees totaled $13.8 million as compared to $14.7 million in the prior year. There were approximately 100,000 new account sign-ups during the fourth quarter of 2023 and over 500,000 new account signups during full year 2023. With our continued strategic focus, we anticipate growth in both the number of active accounts and account activity in 2024. During the fourth quarter of 2023, the company processed over $2 billion of student financial aid refund disbursements as compared to $1.9 billion during the fourth quarter of 2022. During full year 2023, the company retained 99% of its higher education institutional customers and dispersed $11.4 billion in refunds to students. The company signed 10 new colleges and universities in 2023, providing 112,000 additional students access to bank mobile disbursements and the bank mobile Vibe checking account. This compares favorably to the 60,000 additional students added in 2022 under 11 signed agreements. Core operating expenses totaled 15.6 million for the fourth quarter of 2023, comparing favorably to the 17.6 million incurred for the fourth quarter of 2022 with an 11% year-over-year reduction. For the full year of 2023, core operating expenses totaled 59.6 million comparing favorably to the $69.1 million in the prior year with a 14% year-over-year reduction. The company continues to actively execute upon its profit enhancement plan with initiatives completed during 2023 that reduce core operating expenses by $9.5 million with further and full-year cost savings expected to be realized in 2024. Core loss before interest, taxes, depreciation, and amortization totaled negative 0.8 million for the fourth quarter of 2023, comparing favorably to the negative 1.9 million for the fourth quarter of 2022. Significantly, Q4 2023 represents the fourth sequential quarter of improvement in this key measure. The company expects a return to positive core even in 2024 based upon improved margins from Durbin-exempt interchange fees and other growth initiatives, and stricter cost controls implemented as part of the company's profit enhancement plan. Liquidity remained strong at December 31, 2023, with $14.3 million of cash, $5.7 million of working capital, and zero debt. With that update, I'd like to turn the call over to Jamie Donahue to discuss the significant investments we have made in upgrading our technology and how they are expected to improve our overall products and service offerings and support our growth in 2024 and beyond.

Jamie? Thank you, Jim, and good afternoon, everyone. I'm happy to update you on the progress of BM Tech's technology transformation that we announced a few quarters ago. We are pleased to be launching new mobile and web experiences for our Bank Mobile Vibe customers this month with exciting new features to enhance the overall user experience. Our technology transformation was driven by our vision to modernize our platform architecture and offer innovative products and services to our customers. This shift enables BMTX to deliver our high-quality banking experience in three distinct ways. One, full application deployment, like our BankMobile Vive and T-Mobile Money offerings today. Second, being able to deliver full-service banking functionality via our own custom APIs. And third, embed our technology and other ecosystems all seamlessly, all of which allows us to stay ahead of the changing BAS environment. Our investment in our platform has also unlocked our capability to integrate best-of-breed partners into our products and services rapidly. In the coming quarters, we will discuss these new features and partnerships in more detail. BMTX is committed to being the data-driven platform of the future for the financial services vertical. Before I turn the call back over to Lavleen, I want to share some of the developments we have on the AI and machine learning front within BMTX. We have employed active RPA modules within our back office that have increased efficiency, reduced error rates, and lower overall expenses in fraud, compliance, and our operations teams. We are eager to expand these functions across a larger organization in the coming quarters. The most impactful technology that we've unlocked on our platform transformation is our ability to leverage AI. We're happy to announce we have built a proprietary large language model that leverages our data set to anticipate our customers' needs and alleviate potential issues. We are looking forward to piloting this to our customers over the next few quarters. We also have created an innovation lab in partnership with a marketing-centric AI firm to complement our technical and marketing teams to rapidly bring to market AI-driven features that will empower and grow our user base. Thank you for your time this afternoon. The future is bright for BMTX, and with that, I turn the call back over to Lavalene for some closing thoughts.

Thank you, Jamie. These are definitely exciting times for sure. We are already market leaders in the higher education vertical, touching about one in every three college students eligible to receive a refund. However, we believe there is still tremendous untapped growth potential in this segment. With the significant investment we have now made in our technology platform, we can unlock value we never could before. I am extremely excited about our future possibilities We can now get back to our roots of innovation, cutting-edge technology, and a customer-obsessed approach that will enable us to add value and grow with our 20-something-year-old customers over their lifetime. With one of the lowest customer acquisition costs in the industry and with a customer-for-life strategy, we are now positioned to execute on the unparalleled opportunities in front of us in the quarters ahead and years to come. We are optimistic about the near term and are building our company to last. and are not just focused on quarter-to-quarter results. We believe 2024 will be the first year of a return to profitability and set us on a path towards long-term shareholder value creation. Before signing off, I do want to take a moment to introduce to you Ajay Asija, who we are excited to have joining us as CFO starting next week. Ajay?

Ajay Asija Thanks, Lavleen. As a background, I've spent the last 25 years in financial services and FinTech in investment banking, have known the company well since its inception, and see BM Technologies as the future of banking. When the opportunity was presented to me, honestly, it was the easiest career decision I've ever made. I'm super excited to be in this role starting next week and look forward to working with you all and meeting you at some point in the near future.

Thank you, AJ. We are definitely lucky to have you. I also want to thank Jim for his time at BMTX and we wish you all the best. Thank you again for joining us on our call today. Most importantly, we appreciate the dedication and skills of our amazing team and the huge amount of work and passion that has gone into bringing us to this point. Thank you all so much for all that you do. We will now open the line for questions.

thank you if you would like to ask a question please press star 1 on your telephone keypad if you would like to ask a question over the web you can submit your questions online where the management can see them your first question comes from the line of mike grundell from northland securities please go ahead hey thank you um hey my my first question just as it relates to 2024 and the guidance you gave for

growth in revenues and positive adjusted EBITDA. How should we think about interest rate sensitivity? You know, if the Fed cuts rate, is that positive later this year? Just help us understand that interest rates and sensitivity a little bit.

Hi, it's AJC. Let me take that question. So in our in our forecast for core EBITDA profitability in 2024, we have modeled in three interest rate reductions in 2024. And just to give you some context, for every 25 basis points reduction in the Fed funds rate, our revenue goes down by approximately $2 million and vice versa.

Got it. And AJ, did you say revenue, for every 25 BIPs of a cut, Revenue would go down by 2 million.

Yes. So, we are positively influenced by the Fed funds rate. Increasing.

Yep. So, when AJ was talking about vice versa, the cut would obviously have a negative impact, but on the upside, as rates increase, that's a positive impact on our company.

Got it. Got it. Great. Secondly, you know, Loveline, you talked about for two quarters now kind of doubling down on higher ed and you've got the tech stack to line for that. What would you say are the two biggest benefits that college students would see you know, accessing the Vibe product? Like, is it features? Is it user experience? Like, what are two things that they would see differently?

Hey, Mike, this is Jamie Donahoe. I'll take that one. Yeah, so absolutely user experience, first and foremost. As Lavleen said, you know, being first in the market, you know, you do stack up some tech debt, which we cleared. The second would be we're really excited about the future features we're going to bring. To drive engagement, we believe that that's been a significant blocker, and the new technology platform is the unlock to that. So we're really, really excited. The two big things are existing user experience is going to be greatly enhanced, and then rapidly deploying features that make sense to grow our user base.

And I don't know, can you share a new feature or two, just in timing on that?

Yeah, we're thinking about rewards. If you look at our industry, look at the natural progression of where these financial services accounts go. A rewards engine is one I can share with you.

Got it, got it. And then last question, how should we think about deposit levels going through 24, especially new business? Anything to kind of help us with there?

I think we can't comment specifically on the deposit. You know, that being said, as you know, as you saw in the press release, we are focused on the student side of the business, and we expect that part of the business to grow. Fair enough. Okay. Thank you. Thanks, Mike.

Thank you, Mike.

Thanks, Mike.

Thank you.

Your next question comes from the line of Greg Pendy from Chardon. Please go ahead.

Hey, guys. Thanks for taking my question. I think in 3Q you called out that you're going to – we're expecting to get the $2 million in receivables. I'm assuming that came through with your cash ending at $14 million. If not, let me know. But then my second and on that point, how are you thinking about cash? Is there any other notable puts and takes you see coming up with a high cash position? How would you think about a buyback at these levels? Thanks.

Yeah, good question. Just to confirm, we did monetize the tax receivable. So that was received, and that is part of our $14.3 million of ending and available cash at 1231. From a standpoint of directionality, I would expect the available cash balance to correlate closely with our movement in core EBITDA. And as stated, we expect to move towards positive core EBITDA in 2024. Buybacks is always a question, right? And I'll give you the same answer that we gave before is we constantly evaluate that as well as other strategic options and evaluate the potential for maximizing total shareholder return. And it's something we will continue to look at as we build up our cash balances throughout 2024. Okay.

And then maybe just on that point, I mean, You mentioned the tech spending. How should we be thinking about CapEx then going forward? Is there anything notable? Will it be a little bit lower than 2023 now, or just any thoughts there?

Yeah, I think it'll be at a similar level, right, where there's obviously a significant investment to get where we are. But we're obviously looking to continue to invest in technology and maintain and improve and build upon the tech stack. So I would expect that the go-forward levels of CapEx spend, which is principally internally developed software, will continue at the same rate as 2023. Okay. Great.

Thanks a lot.

My pleasure. Your next question comes from the line of Bill Denzelum from Titan Capital Management. Please go ahead.

Thank you very much. A couple of questions. First of all, speaking of internally developed software, there was an impairment this quarter of $620,000. Would you please discuss that?

Yeah, good question. That relates to the original technology that was developed based upon the exception of our BAS partnership with T-Mobile. It was actually coming at the very tail end of its life. So that impairment charge represents the remaining month of its net book value. And based upon the company's losses for 2023 overall, is we made the determination to impair that last month.

and write the carrying value again of that original vintage internally developed software down to zero okay jim i had actually speculated that it may have something to do with moving to the new technology but in fact if i heard you correctly it's it's more a function of the low stock price and um and essentially adjusting book value down to be closer to the stock price. Is that really that accounting phenomenon? Is that really more correct?

I think it's fair. The impairment was driven largely by the company's results for 2023 and less of a functionality issue with the software. That said, obviously, as Jamie articulated, is we are moving to our next-gen platform. and the first half of 2024, so that will present significant new features and functionality across our platform.

Great, thank you. And then when did or will the student side of the business go live on the common platform, and when did or will the BAS side of the business go live on the new platform?

Yeah, Bill, we're anticipating the Bank Mobile Vibe to go this month, and then a short follow-on, maybe second quarter, for the T-Mobile offering to follow suit.

And you did reference new features on the student side of the business. Will this also create new features on the BAS side of the business that you think will be instrumental or meaningful in moving the needle for those customers?

Yeah, great question. So that was the foundational element. One of the foundational elements of us moving and investing in that transformation was we believed that the feature set needed to be not unique to vertical or cohort, but be available across platforms. And what's really, really interesting about where we'll be by the end of second quarter is any feature for BankMobile, Vibe, or T-Mobile or any other VAS offering offering we might come across will be available across our entire portfolio. So really, really excited about the unlock there.

And Jamie, you think some of those, excuse me, you think some of those features that are relevant to the students will also be relevant to T-Mobile customers or future BAS customers?

Absolutely, we do. Okay, great, thank you. We could study, yeah, we could study the user heuristics. They're very similar.

Excellent. Thank you. And then one additional question. What led to the POS spend increasing in Q4 relative to Q4 of 22?

Yeah, I think the easy answer, Bill, is inflationary measures, right, year over year. But I think we're also starting to see above and beyond the effect of inflation is the features and functionality that both Lovleen and Jamie spoke to. Granted, it's at the very... infancy at that stage and we expect to continue to see advancement and development in 2024. But I think it's the combination of both factors.

Great. Thank you both. Thank you both.

We currently have no more phone questions. I will now turn it over to Brian for web questions.

Thank you, Operator. At this time, I do not see any questions submitted online. So, Lavleen, I will turn the call back over to you.

Great. Thank you, Brian. Thank you, everyone, for joining today, and we look forward to meeting you soon for Q1. Thank you.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.