BM Technologies, Inc.

Good morning, everyone, and welcome to the BM Technologies second quarter 2024 earnings 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 call over to Brian Preneveau, Investor Relations for BM Technologies. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining the BM Technologies second quarter 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 only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or 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. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release we issued yesterday afternoon. At this time, I will now turn the call over to Lavleen Sidhu, VM Technologies CEO. Lavleen?

Thanks, Brian, and good morning, everyone. Joining me on today's call is AJ Asija, our CFO, and Jamie Donahue, our President and Chief Technology Officer. Today, we are looking forward to sharing with you our financial results for the second quarter and first half of 2024, and also to discuss our strong progress in our technology transformation and growth initiatives. Before getting started, I want to provide you with some brief financial highlights. Operating revenues for the three and six months ended June 30th, 2024 totaled $12.5 million and $28.7 million respectively, compared to $12.6 million and $26 million for the three and six months ended June 30th, 2023, up 10% in the first half of 2024. Our Q2 2024 interchange and card revenue increased 57% year over year, validating our strategy of switching to a Durban-exempt bank. Our core EBITDA for the second quarter was a loss of approximately $880,000, a slight improvement compared to a core EBITDA loss of $906,000 in the second quarter last year. As you may recall, there is a considerable amount of seasonality in our higher education business, with the second quarter generally being the weakest quarter of the year. We look forward to the upcoming fall peak when students return back to school. Shortly, AJ will provide further details on our financial performance, but before that, I would like to provide some additional commentary for the second quarter. We made strong progress towards our strategy of digital transformation and setting the stage for growth in our higher education business going forward. We completed our technology platform transformation, a cutting-edge microservice architecture platform that unlocks their ability to bring additional products and services to market at an industry-leading pace. This significant investment enables us to offer our student customer base targeted products and services in a compliant manner. Our technology rollout was quickly followed by the launch of our first major product for our student customers in July. This was the launch of our cashback awards engine, which was the most important feature that our customers have been asking for. Over the last 12 months, we have already seen great engagement with this new feature with over $20,000 in cash back value put back in the pockets of our customers. Not only are our students benefiting, but we are also seeing early engagement metrics improve. With customers taking advantage of this feature, swiping on average one more time a month than a typical active account customer. This feature is the first of many that are expected to increase transaction and deposit volume and thereby revenues. With the next-gen technology, we are very excited in terms of what we can offer our students over the following quarters, increasing the value proposition for the VIBE account as well as our revenue potential. Also, in the second quarter, we experienced a strong response to our new identity verification or IDV product, which we launched in the first quarter. As a reminder, our IDB product is an innovative software as a service product that assists universities in mitigating fraud vulnerabilities during the student enrollment process. IDB leverages robust AI and machine learning tools, empowering universities to maintain their risk-level preferences with data-driven insights and significantly enhances their fraud detection capabilities. We believe adding this product to our technology stack will attract more college and university partners, create a new source of revenue for us, and reduce fraud for our university partners and for the company as well. Year-to-date, we have signed on 15 universities for this product and have a strong pipeline and anticipate solid sales through the remainder of the year. As part of our improved technology stack and service offering, IDV increases stickiness and lifetime value of our existing higher education relationships and opens the door for new university relationships as well. We continue to view the higher education business as a market with ample opportunity to deepen customer relationships, increase customer lifetime value, and unlock new revenue streams. This remains a unique opportunity only available to BMTX due to our distinctive customer acquisition model. and longstanding contractual relationships with colleges and universities across the country. We are very pleased with the foundational steps our team has taken to transform the outlook of this business and position us for greater profitability in the future as our growth initiatives ramp up. I will now hand it over to Ajay to review our financial performance in the second quarter in more detail and to provide more context.

Thank you, Lavleen. During the second quarter of 2024, the company earned $12.5 million of operating revenue in line with revenue in the prior year quarter. Interchange and card revenue totaled $2.3 million for the second quarter of 2024 as compared to $1.5 million in the prior year. Interchange and card revenue were up 57% driven by the change in the partner bank with Durban exempt interchange rates. Servicing fee for the second quarter of 2024 totaled $6.9 million as compared to $7.7 million in the prior year. Servicing fees were down due to lower average service deposits in the BAS business. Average service deposits totaled $685 million for the second quarter of 2024, a decrease from $828 million for the first quarter of 2024 and 922 million in the second quarter of 2023. Compared to the second quarter of 2023, substantially all of the reduction in deposits occurred within our Bass Vertical where the average deposits of 261 million were down 47% compared to 494 million for the second quarter of 2023. due to the interest rate sensitivity of a large portion of these accounts. Average deposits in our higher education vertical were relatively flat at 425 million compared to 429 million in the second quarter of 2023. Deposits for 90-day active accounts in our higher education vertical at June 30th, 2024 averaged $1,665 up from $1,624 compared to the second quarter of 2023. Spend total $631 million for the second quarter of 2024, modestly down 4% from the second quarter of 2023. Spend per 90-day active accounts for the second quarter of 2024, averaged $1,853 within our higher education vertical compared to $1,855 in the second quarter of 2023. In terms of account signups, there were 60,000 new account signups in the second quarter and approximately 160,000 new account signups in the first six months of 2024. Account fees and university fees total $3.3 million for the second quarter of 2024, essentially in line with the $3.3 million in the second quarter of last year. During the second quarter of 2024, the company retained over 99% of its higher education and institutional clients. We processed over $1.9 billion of student financial aid refund disbursements during the second quarter of 2024, which compares favorably to the 1.8 billion process in the second quarter of 2023. Of the 1.9 billion, approximately 12% or 234 million was dispersed into bank mobile vibe checking accounts. With regards to our BAS business, this relationship expires in February, 2025. In the current regulatory and interest rate environment, this business is unprofitable for us. In the event of a wind-out, we expect our pro forma core EBITDA to increase at least $1 million per quarter on a run rate basis. Core operating expenses total $13.4 million for the second quarter of 2024, compared to $13.5 million incurred for the second quarter of 2023. Total expenses were $17.2 million compared to $17.7 million in the second quarter last year. Total operating expenses included $1.6 million of one-time costs related to the implementation of our NextGen platform through higher technology and professional services costs. Core net loss before interest, access, depreciation, and amortization totaled negative 2.6 million for the second quarter of 2024 compared to a core net loss of negative 4.1 million in the second quarter of last year. Core EBITDA was negative 881,000, a slight improvement over core EBITDA loss of negative 906,000 in the second quarter last year. Liquidity remained strong at June 30, 2024, with $12.5 million of cash, $0.4 million of working capital, and no debt. Note the second quarter is seasonally our weakest quarter, and we anticipate delivering positive core EBITDA for the full year 2024. And with that, I'd like to turn the call over to Jamie for his discussions on our technology investments and improvements. Jamie?

Thank you, AJ. Good morning, and thank you for your time today. I'm happy to update you on our progress on the technology transformation that we've been discussing over the last few quarters. We have launched our new platform architecture as a foundation for our web and mobile interface for our BankMobile Vibe customers this quarter. I'd like to remind you that our technology transformation was driven by our vision to modernize our platform architecture and offer innovative new products and services to our customers. with exciting new features to enhance the overall user experience. This transformation also allows us to stay ahead of the changing bad landscape by being able to deliver full service banking functionality via APIs and or embed our technology and other ecosystems seamlessly. Our investment in our platform has also unlocked our capability to integrate best of breed partners into our products and services rapidly. I would like to discuss exciting new details on two new features that we have brought to market and are in production this quarter. The first offering I want to discuss is our exciting new cashback rewards engine through our partnership with CARD, as Lavleen shared. This new feature was launched in July and allows customers to earn cashback on everyday debit purchases effortlessly. Helping them save their hard-earned money and build a solid financial foundation for the future, customers benefit from a comprehensive reward solution that contains brands they know and love, help them discover new brands, maximizes our savings through discounts and rebates on everyday spending. This rapid market launch is a working example of our investment in our platform, listening to the needs of our customers, and introducing products through revenue-generating partnerships. Adding Cards Innovative Rewards as a Service API into the Bank Mobile Vibe checking account underscores our dedication to innovation while leveraging our upgraded technology platform. The second product we have launched is our Identity Verification Service, or IDV. The IDB solution plays a key role in the university enrollment process, providing enriched identity information to inform university-driven business rules for decisioning on student enrollment applications. The solution involves managing data we already receive in our disbursement distribution flow with the higher education clients that have subscribed to this SaaS service. We've created a unique delivery point through either a file-based batch processing or a custom API integration. Either of these methods ensure rapid deployment, frictionless integration, and secure control over the information shared. This is another example of BMTX leveraging the investment in our platform architecture that is the foundation for these and all new offerings we will launch in the coming quarters. We are excited to bring these new features to life at pace while increasing our partnership value to our higher education and bank mobile buy customers. I have two higher education clients with 13 others in implementation in Q2 and have a strong pipeline we're executing on in the current quarter. Before I turn the call back over to Lavleen, I want to continue to update you on our progress we've made on the AI and machine learning firms. We are committed to being a data-driven firm that weaves in AI and machine learning where appropriate to enhance our operations and efficiency. We continue to deploy robotic process automation, or RPA, modules in our back office to increase efficiency while reducing error rates. Our custom-developed RPAs also lower overall expenses in fraud, compliance, and our operational needs. On the AI front, we have made significant progress and investment in our own proprietary large language model that leverages our private, secure data set that will anticipate our customers' needs and address potential issues. We are internally piloting this new technology now and hope to release it to our customers over the next few quarters. Before I wrap up, I want to take a moment and thank all of our dedicated and talented associates that bring this amazing technology to life. Thank you. I look forward to continued innovation and an exciting future for BMTX. And with that, I turn the call back over to Lavleen for some closing remarks. Lavleen?

Thank you, Jamie. Our priority in the second quarter was the technology and product enhancements we made, as we believe these investments set the foundation for future growth. The trends and momentum in our core business remain strong, and we are optimistic about our future. As mentioned earlier, our BAS partnership is approaching expiration in February 2025. In the current regulatory and interest rate environment, this business is unprofitable for us. In the event of a wind down, BMTX would be significantly more profitable. While we believe we have a superior and valuable product offering for the best programs, we believe the current macro environment makes it challenging to maintain profitability of these programs. The higher ed business remains profitable and our primary focus for tackling growth. Given the unique nature of this asset and the investments we have been making, We have also been receiving inbound interest for our business at values substantially higher than today's stock price. And our board has encouraged us to explore all strategic options that enhance shareholder value. In 2024, we have been particularly focused on three key tactics to position us for growth now that we have our technology in place. Our first tactic is to drive growth and usage in our student accounts by launching value-enhancing products and features for our customers. Now that we have launched our cashback rewards program, the next product we anticipate launching before the end of the year is an offering providing financial, insurance, and wellness benefits to our customers. This was also one of the top requested products in our customer surveys, and we look forward to sharing more as we get closer to a rollout date. Our second growth tactic is to continue to offer value-added products and services to our colleges and universities. This year, we will continue to accomplish this through the sale of our new IDB product. We are excited that the pipeline for this product remains strong. And lastly, we are investing in an omnichannel marketing approach, leveraging new marketing automation and AI-based marketing strategies to better engage with both our university and student customers in a more personalized fashion. We believe these efforts will also lead to improved engagement. We have created a unique marketplace with universities on one side and student customers on the other. Over time, our goal is to keep offering new products and services to each side of our marketplace to provide our customers with the best value and also increase our revenue potential. Our go-forward roadmap will be based on listening to and understanding our customers' wants and needs and then delivering. Thank you for joining us on our call today. We will now open the line for questions.

If you would like to ask a question over the phone, please press star followed by the number one on your telephone keypad. To withdraw any questions, press star one again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Bill Desolum or Mike Grundahl from Northland Securities. Please go ahead. Your line is open.

Yeah. Hey, guys. This is Mike. With the potential for the bass wind down, is there like an advance notice period? Do you have to let that customer know like six months in advance, 90 days in advance? How does that work?

Jamie, you want to take that?

Sure. Hey, Mike, good morning. Yeah, there's there's with any program wind down, there's parameters that that's that's all we can say at this point. We just wanted to share with you, you know, the our view on that side of our business. So there are parameters that that's about all I can get into on the call.

Got it. Got it. OK. And then it's nice to see that, you know, next gen platform is in and the rewards program was launched. Kind of two questions related to that. Is there any more light you can shed on, you know, finance, insurance, and wellness benefits? You know, what type of features that'll be specifically? And then secondly, the $1.6 million you incurred in 2Q, do you expect to incur any more next-gen, I'll call them implementation costs in 3Q or 4Q?

Let me take the second one, and Jamie can answer the first part of the question. So the one-time cost of 1.6 were truly just 4Q2, and we do not anticipate them to reoccur in 3Q or 4Q. Jamie, you want to take the first part of the question?

Sure. And that was, Mike, just to remind you, that was what is the wellness Yeah, we'll have finance, insurance, and wellness. I'm just kind of wondering what kind of benefits or services those are for the students. Yeah, we will put a press release out ahead of that launch, just as we did with CARD. It details the outline, but it's what you can imagine. It's to expand on the marketplace Levine has been talking about over the last few quarters, to add those, you know, detailed financial wellness and Other products will be in there. I don't want to go too far afield on that partnership is actively being worked, but we're really, really excited about what features we'll bring to our users. Okay. Okay. Thank you.

I'll jump back in the queue.

As a reminder, to ask a question, please press star followed by one. Our next question comes from Bill Desolum from Titan Capital. Please go ahead. Your line is open.

Great. Thank you. A group of questions. First of all, the ID verification, will that be sold to universities that you do not currently work with on the disbursements side, and so it could be a door opener, or is it solely for universities that you are working with currently?

Hi, Bill. Jamie here. Good morning. Good to talk to you again. Yeah, that's our plan. In fact, we have a number of universities that are not disbursements clients today that are in implementation. So we think it's a unique market niche that will open the doors for us for other business lines.

And is there any advantage to a non-disbursement customer or a university that takes on the ID verification product, but then the question is, is there an advantage to them choosing then to work with you on the disbursement side? Or are those different enough, admissions versus finance, that it's only the relationship as opposed to some integration benefit?

Yeah, great question. We know our existing disbursements clients love the integration. the symmetry we give them with because the data like i mentioned in my my earnings call here you know we get that file already from the university so there's no extra lift we do see a symbiotic relationship when customers use the idv scoring data along with our disbursements um there is a lift in their departments and really you know that market we're we're in a market dominant position right from the university perspective right so this is another way to get get our foot in the door, and introduce them to the power of BMTX. And as you're aware, those contracts are cyclical. Some universities are part of a larger ecosystem with some big ERP that might do parts of this. It really gives us a chance to have a seat at the table with these universities that we don't do that business with, and we're super excited about it.

OK, given that there are synergies, As you think about your two- to three-year roadmap, do you have additional products that you are imagining or that are in the works that will be added to the university quiver?

Absolutely, yes. That's what I could say. It's our roadmap, and inside of that 36-month horizon you suggested, we think that Because of our relationship and because of our platform architecture that we built, we can bring other value-added products and services to our university clients for sure.

Great. That's helpful. And then the universities that, and I realize it's a small number, but the universities that are using the ID verification today, are they doing it for all student applications or a small portion of those applications that they deem to be higher risk?

Yeah, so that's the uniqueness of this scoring idea from an enrollment process. You know, some large universities have a similar technology that they've developed in-house, but by and large, our mid-sized community colleges and technical universities just don't have that capability. What we're seeing is they are doing samples, a sample of their what we call SSEs or applicants in the testing phase, but we have had experience where customers have taken their whole enrollment population, which could be as high as four to one for active seats. We're seeing closer to 1.5 applications to seats, but we've also had customers that have done a look back of existing. So all the prior enrolled just to score them so they could make some internal decisions. So it's the gamut right now. I think as they get more comfortable with the technology and what value it provides, we see... we see the look back and the all model as the way forward.

Okay, let me make sure I just heard what you said, Jamie, is that you think what a university should do is use the data to evaluate the last recent tranches of students, have that data or knowledge, I'm now thinking machine learning, they then can take that and apply that to 100 of their applications and uh and identify what level of what level of fraud they're willing to tolerate essentially yeah the scoring and then and then each university will have their own business logic on that scoring and how they want to handle it but yes that that was correct that was a correct recap okay thank you i i appreciate that and uh then Talking about the new AI technologies that you are piloting right now, do you anticipate that those will be revenue generating or these, the example, the pilot example that you gave on the opening remarks, is that primarily going to be used for increasing retention, just being higher value and increasing the retention? Or is it a revenue generator in addition to retention increaser?

Yeah, great question. Well, initially, I think where we see that technology landing is it's servicing our customers better. It's giving them a real-time tool to answer questions about their account specific to them, help them with financial wellness. We think of it in terms of not so much revenue generating or charging folks for it initially. But we do see it as an OpEx reduction to minimize calls to the call center and increase engagement with our customers. So we expect to lift on the OpEx side, not necessarily from a revenue side at this point.

Great, thank you. And then one additional question, please. The rewards engine, have you seen behavioral changes in the first month from the students that are using this? Besides, I guess you noted the one additional transaction per month. Do you have any other data beyond that that's insightful?

Yeah. Yeah. So really, really, really proud of this. So we track active customers. And of our active customers that we rolled this out, 30% have signed up for the service. So that's a pretty good penetration rate. And we launched it July 7th. So my statistics are from July 7th to August 6th, I think is my latest data. I'm looking at my notes correctly. And of that 30%, there's been an increase of 1.4 more transactions for that cohort. So, and then lovely you mentioned $20,000 have been put back in our students' pockets in the form of rebates and rewards. So we, you know, this has been a long, in fact, when we surveyed our customers, this was the number one thing that they were looking at. to us for. And the unlock was our technology investment next gen. So really, really happy, really excited about the penetration and how it's going to help our customers.

And how does that 1.4 additional transactions a month compare to what you would have per month in the month? How does that compare to what you would have hoped for?

It's actually a little above plan, frankly, from what we see right now. It's early days and early trends, but we wanted to share with you that we're really impressed with the performance. The adoption is really what we're – if they don't adopt it, if the users don't subscribe to it, then we have no chance at those transactions. So we're really excited to be able to share some more metrics with you in the coming quarters.

Okay, Jamie, I will actually follow up on that adoption. What does it take for someone to adopt rewards or sign up, I guess? What's the friction to make that happen?

Yeah, we really worked hard at making that frictionless. I think in total, because you're already a vetted, valid BankMobile Vibe customer, and because we're using an API integration, I think it's three screens in total to click and three screens for you to sign up. And most of those screens are you choosing which vendors you want to do business with, where do you want to get your rewards? So because it's API-based architecture, Card also is an API platform-based architecture, and now Bank Mobile Vibes sits on platform-based architecture. It makes it, I don't want to say everything has a bit of friction, right? You have to choose it. But after that, it's really simple.

Great. Thank you for taking all the questions. No problem.

As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. We have no further questions in queue. I'll turn the call back over to Levleen Sidhu for closing remarks.

Thank you, everyone, for joining us today, and we look forward to meeting with you next quarter. Have a good one. Bye-bye. Thanks. This concludes today's conference call.

Thank you for your participation. You may now disconnect.