Dave Inc.

Greetings and welcome to Dave's third quarter 2022 earnings call. As a reminder, this conference is being recorded. This afternoon, Dave issued a press release announcing results for the third quarter and in November 10th, 2022, which can be found at investors.dave.com. We would like to remind you that during this conference call, management will be making forward-looking statements, including statements regarding expectations related to financial guidance, outlook for the sector, and and company and the expected investment and growth initiatives. Please note these forward-looking statements are based on current expectations and assumptions which are subject to risks and uncertainties. These statements reflect the company's views only as of today and should not be relied upon as representative of views as of any subsequent date and Dave undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion of the material risks and other important factors that could affect our financial results, please refer to the company's filings with the SEC, including its Form 10-K filed with the SEC on March 25, 2022, and subsequently filed quarterly reports on Form 10-Q. In addition, during today's call, the company will discuss non-GAAP financial measures, which they believe are useful as a supplement measures of Dave's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You will find additional disclosure regarding the non-GAAP financial measures discussed on today's call in Dave's press release issued this afternoon and its filings with the SEC, each of which is posted on Dave's website. The webcast and transcript of this call will be available on the investor relations section of the company website. It is now my pleasure to introduce your host, Mr. Jason Wilk, CEO and chairman of the board. Thank you, Mr. Wilk. You may begin.

Thank you, operator. Good afternoon, and thank you for joining us for our third quarter earnings call. For today's call, I'll begin by providing some highlights on the quarter, and then we'll recap recent progress on our strategies. After that, I will turn it to Kyle, who will discuss our third quarter results in more detail, as well as our outlook. On to Q3 highlights. Dave's value prop of no hidden fee banking with up to $500 of interest-free extra cash continued to resonate with millions of hardworking Americans, leading to another record quarter. During the quarter, we reported non-GAAP total operating revenue of approximately $58.6 million, representing an increase of approximately 41% year-over-year, driven primarily by growth in monthly transacting members based on stronger customer acquisition and retention, as well as impressive growth of our Dave card interchange revenue. During the quarter, we added a record of more than 800,000 net new members, while reducing tax by 18% versus the second quarter. We continue to demonstrate significant scale with approximately 8 million total members as of quarter end. In terms of engagement, we saw a record 1.8 million monthly average transacting members in the quarter, up 18% sequentially and 26% year-over-year. Our transacting members completed a record of 4.6 average transactions per month in Q3, representing 105% growth versus 3Q20, which is just prior to our launching of the Dade Card product in late 2020 and an indication of how we've been able to deepen engagement with this added offering within our ecosystem. This trend accelerated through the third quarter of 2022 with transactions per active reaching 4.9 in September, driving transaction-based revenue growth of approximately 43% versus Q2. Dave Card is a key component of our strategy that is starting to materialize after many product synergy enhancements. We were also able to make improvements to our unit economics as some of our margin enhancing initiatives came online. leading to a nearly 280 basis point increase in non-GAAP variable margin. Our extra cash portfolio is also performing well. We grew originations by approximately 110% year-over-year, while our 28-day delinquency rate improved 13 basis points from the third quarter of 2021 and improved over 80 basis points from the third quarter of 2020. Importantly, we were able to demonstrate strong growth while also reducing our EBITDA burns. particularly as we progressed throughout the quarter with burn significantly down as we entered Q4. Now to dive a little deeper into the quarter and our progress against our strategy to be the superior banking product for everyday Americans. Our first area of focus is to acquire customers efficiently at scale by marketing top of mind liquidity pain points for hardworking Americans. As mentioned above, we had a record quarter in terms of new member growth and total members. Our key value prop was helping folks get extra money from Dave before their everyday expenses continues to resonate strongly. We were able to grow member acquisition by approximately 82% on a year-over-year basis while keeping CAC flat. CAC is now close to pre-COVID levels, having further improved to under $20 in the last half of Q3 and declining further thus far in Q4 due to favorable competitive dynamics on our primary channels, which is driving lower CPMs. CAC improvements have also been unlocked through a combination of investments we've made in marketing new product and feature enhancements, improvements in our infrastructure to support strategic optimization, as well as an increased focus on channel expansion, all of which provides us with a more durable and diversified marketing mix. In addition to progress we've made on CAC, our newest cohorts are some of the strongest we've seen in our history as our product enhancements are driving additional ARPU and retention, leading to improved return profiles from an LTBA to CAC perspective. Lastly, one important thing to point out is that the customers we acquired historically and currently acquire are younger. The large majority are under the age of 34, which gives us excitement about the lifetime value potential. The second part of our strategy is to engage customers by delighting them with same-day access to a credit using our AI-driven underwriting. Extra cash, our flagship feature, allows customers to access up to $500 of overdraft funds the same day they join Dave with no interest charges. We can do this because our AI and data driven underwriting can make an instant decision based on income and spending data from a linked bank account. This user journey is far different than that of a traditional bank, which requires weeks or months of direct deposit wait time and charges of overdraft fees of the $34 per use. Dave was the first to market with this disruptive solution back in 2017. Customers love the extra cash feature and use it frequently. on average only needed to borrow funds for eight days and accessing it approximately two times per month. We had approximately $757 million of extra cash origination volume throughout the quarter in approximate 110% growth rate over the same period last year. The net extra cash receivables portfolio totaled approximately $87.6 million as of quarter end, which highlights the high velocity and capital efficient nature of the product. By way of comparison, our net extra cash receivables portfolio totaled approximately $44.9 million as of the end of 3Q21, representing approximately 95% growth on a year-over-year basis. Importantly, through underwriting improvements and pricing adjustments, ARPU has increased by 11% on a year-over-year basis, something we had committed to on our last earnings call. 28-day delinquency is improved by 13 basis points on a year-over-year basis as we continue to demonstrate our risk management capabilities and ability to manage unit economics of extra cash. It is worth pointing out that sequentially, 28-day delinquency performance was up by 40 basis points. This was in line with expectations due to the higher proportion of new members in the portfolio given the growth in member acquisition in the third quarter. New members tend to have higher DQ rates than longer-tenured members. Longer tenured cohorts are performing in line with historical trends and our expectations. Further, I want to provide some context regarding the seasonal dynamics of our delinquency rates. If you look back over the past several years of performance data, you'll observe a similar trend. We see better performance in the early part of the year, supported by tax refunds. Delinquencies tick up in Q2 and Q3 and tend to fall again in Q4. This year is following a similar pattern though with better performance than corresponding periods in prior years. The final part of our strategy is we want to create a deeper payments relationship with our members by driving adoption of the DaveCard. DaveCard is our debit card that customers can use to facilitate their everyday spending and deposit needs. Our updated strategy to jumpstart this product has been to offer DaveCard holders cheaper and instant access to extra cash, which has already provided to be an efficient way to drive first-time card usage a leading indicator to a longer-term direct deposit relationship. For historical context, we rolled the Dave card out as an optional upgrade at the end of 2020, which produced modest results. However, as of this recent Q3 strategy shift showing signs of success, every new customer now receives a Dave card as we double down on the synergy between the two product lines to accelerate our desire to have a thriving interchange business. Additionally, Dave card is deepening engagement with members as average transactions per monthly transacting member in Q3 has grown to 4.6x, with September alone coming in at 4.9x. Direct deposit members transact on data card approximately 40 times per month, so keeping an eye on our ability to increase transactions per monthly transacting active member is a good one to track our progress on the strategy. Not only is this an important strategic metric for us, but increasing card engagement and growing transactions per MTM is a way to unlock the significant interchange opportunity we have. I did want to address why day will continue to thrive even against a challenging macro backdrop, including a recession or high unemployment. The short duration of extra cash provides a unique advantage in allowing us to make updates to our underwriting models significantly faster than traditional credit products with longer durations. We're able to adjust pricing and underwriting on a continuous basis and observe the impact on our portfolio within days and weeks of origination. This contrasts with longer tenured credit products on which it can take years to meaningfully adjust the pricing and underwriting in the underlying portfolio to reflect consumer credit market conditions. Extra cash also limits overall risk per customer, given our average principal exposure per member advances roughly $150. Moreover, our underwriting engine is unique in that the AI is primarily using bank account transaction data to make credit decisions. The data we receive allows us to detect changes in income patterns, which FICO-based underwriting struggles to achieve given the heavily lagged nature of a FICO score. The nearly real-time credit signals we receive position us favorably in the event of rising unemployment. On the repayment front, our settlement flows allow us to apply all income sources in linked accounts, including unemployment and government benefits to repay the extra cash receivables. And finally, unlike typical consumer lenders, Our goal is to ultimately build a long-term financial relationship with our customers. Extra cash serves as a highly efficient and profitable way to establish those relationships early on. Before I recap, I want to touch on the proxy we filed yesterday, which includes our plans for a refreshed employee equity plan. We have an outstanding team here at Dave, and employee retention and engagement is important to our continued trajectory of growth and profitability. We felt that this was the right proactive step to take for our business as we lean in on our existing team to drive operating leverage without the need for meaningful investments in net new headcount. So in summary, we have a market-leading CAC bolstered by profitable unit economics with credible growth prospects. Our differentiated AI data-driven credit underwriting has rapid payback duration and minimal capital requirements. Extra cash to Dave Carr's flywheel effect is unlocking significant additional revenue potential within our massive growing camp. And positive outlooks show our continued progress towards reaching adjusted EBITDA profitability in 2024 while operating a resilient and well-capitalized business. Now, I'd like to pass it over to Kyle, our CFO.

Thank you. As Jason mentioned, our total non-GAAP operating revenue was $58.6 million during the third quarter, representing 41% growth compared to the same period last year. Total operating revenue on a GAAP basis during the third quarter also grew 41% versus Q2 of 2021. This growth was driven by increases in our monthly transacting member base, as well as ARPU expansion given continued improvements in extra cash monetization and growth in Dave card engagement. For the third quarter, non-GAAP variable profit was $24.7 million, representing a 42% margin relative to our non-GAAP total operating revenue. From a margin perspective, this represents an increase of about 280 basis points relative to the second quarter. The increase was primarily attributable to the margin-driving initiatives we began realizing in the third quarter, including improvements to key vendor costs increased emphasis on fraud controls related to the Dave card, and ongoing improvements to extra cash risk management and our credit policy, which will better position us to react to potential headwinds in the macro environment. Supporting our variable margin efforts, we remain laser focused on extra cash portfolio performance and have had consistent and strong results, with an average 28-day delinquency rate of 4.07% in Q3 2021. a 13 basis point decrease versus Q3 2021's average. As we've previously noted, we expect incremental variable margin expansion to be driven by vendor contract and pricing renegotiations with our banking product partners, by a reduction in processing costs related to how we utilize the payment networks to move money, and finally, by our next generation extra cash underwriting model, which is currently being tested and has been exhibiting encouraging preliminary results. Now moving to operating expenses. The provision for unrecoverable advances totaled $18.4 million for the quarter compared to $10.8 million in Q3 of 2021. The 70% increase was primarily attributable to increases in extra cash origination volume, which increased 110% versus Q3 of 2021. We had $757 million of extra cash originations in the quarter, up $357 up from $360 million in Q3 of last year. The increased expense year was driven by volume growth, as credit performance remained consistent and in line with expectations. It's worth noting that we had a sizable fraud event in the quarter that created headwinds to the provision. We've remediated the root cause and believe that this was a one-off event, providing additional upside to the provision, expense, and variable margin moving forward. Processing and servicing fees totaled $9.5 million during the third quarter, compared to $6.2 million in Q3 of 21. This increase was primarily attributable to increases in extra cash originations, which, again, is healthy given the attractive unit economics in that business. On a percentage basis, processing and servicing fees improved from approximately 1.8% of origination volume in the third quarter of 21 to 1.3% in Q3 of this year. Our marketing and acquisition spend totaled $24.1 million in the third quarter, compared to $12.9 million in Q3 of last year, as we expanded investments in our summer marketing campaigns. We're very happy with the performance of our summer marketing initiatives. On a sequential basis, marketing expenses increased by approximately 16%, while new member CAC reduced by 18%, demonstrating the scalability and incrementality of our marketing engine. In terms of compensation, we spent $24.3 million during the third quarter, compared to $15.4 million in Q3 of 21. The increase was primarily attributable to increased salaries and stock-based compensation expenses as we invested in headcount to support our ongoing growth initiatives. Sequentially, there was a 38% reduction in compensation expense, driven largely by lower stock-based compensation expense in the quarter. After adjusting for that impact, Compensation expense in the third quarter was roughly flat compared to the second quarter of 2022 levels. Going forward, we will continue to exercise tight cost discipline by only hiring for critical positions and reevaluating the need for back bills as they arise to further support our efforts around profitability. Adjusted EBITDA for the quarter was a loss of $27.5 million compared to a loss of $28.5 million during the second quarter of this year. The sequential top line growth and variable margin expansion we achieved were offset in part by higher marketing expenses in the quarter. Adjusted EBITDA losses improved substantially on a month-to-month basis within Q3 based on growing revenue, the front loading of our marketing expense in the quarter, and the ongoing benefits of our variable margin initiatives. For added context on margins, several of the initiatives underlying our variable margin improvements are ongoing and yielding positive results, which we expect to increasingly realize in Q4 and into early next year. GAAP net loss for the quarter was $47.5 million compared to $27.1 million in the second quarter of this year. Additionally, it's important to note that the third quarter net loss figure includes approximately $9 million in one-time charges related to legal settlements, as well as one-time transactional expenses. And the second quarter net loss figure benefited from approximately $29 million of other non-operating income-related extinguishment of liabilities, as well as the changes in fair value of earn-out and warrant liabilities. Now turning to the balance sheet. As of September 30th, we had approximately $225 million of cash and cash equivalents, restricted cash, and short-term investments. Additionally, we had $18 million of undrawn capacity under our warehouse credit line as of quarter end, an ample runway to scale that facility as we continue to grow our extra cash business. The remaining term on that facility is over two years. In an aggregate, we believe we are well capitalized to deliver solid growth, execute on our strategy, and achieve profitability without the need to raise any additional capital. Now turning to our outlook. We continue to expect non-GAAP total operating revenues to be between 200 and 215 million for the year. In terms of margins, we continue to expect our non-GAAP variable margin to be in the range of 40% to 44%. As noted above, we continue to expect our margin driving initiatives to yield results into Q4 with additional upside in 2023. We also expect adjusted EBITDA to significantly improve from third quarter levels as a result of continued margin improvement, greater operating leverage, and lower marketing spend based largely on continued CAC efficiencies. For the quarter, we expect to spend between $11 million and $13 million on marketing and acquisition spend, a 46% to 54% reduction relative to the prior quarter. Overall, we're excited about the trajectory of the business and our product roadmap, And our strong capitalization positions us well for prudent growth and a clear path to profitability. And with that, I'll pass it over to the operator for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time we will pause momentarily to assemble our roster. And our first question will come from Devin Ryan with JMP Securities. Please go ahead.

Hi, this is actually Michael Falco standing in for Devin. Thanks for taking my question. Maybe just one on expenses, you know, not to get too far ahead into 2023, but given the environment and, you know, on one hand, the strong growth you're seeing, but on the other hand, the obvious desire to move toward adjustity, but I'll break even. Are there any early frameworks for kind of how to think about the expense run rate or growth in the next year and whether that be based on product development or expanding the infrastructure of the firm, just kind of how we should be thinking about that going into the year ahead?

Hey, this is Kyle. I can take this one.

I think the, you know, the sort of feedback that we provide at this point is that from a fixed cost structure perspective, we're really comfortable and confident that we can continue to, you know, innovate and drive product development with the team that we have. And so we don't expect any significant increases from, you know, that base moving forward at this point. And we're going to continue to really focus and be disciplined on any new headcount, as I mentioned in my remarks, any new headcount from here, and just really focusing on the existing team that we have in place to support growth. From a marketing perspective, I touched on that as well in my remarks, but ramping things down here in the fourth quarter, and I think we'll really be able to demonstrate the benefits of our operating leverage, continued growth, and top line, our margin enhancements, and just overall lower levels of investment, which will really manifest itself in a significant step change function in EBITDA losses in Q4. And we feel like we're on a really positive trajectory to deliver on our timeline of adjusted EBITDA break-even by 2024.

Thanks. That's very helpful. And then maybe just one follow-up. You know, it seems like the current environment continues to benefit, the macro environment continues to benefit some of the products, you know, such as extra cash and demand there. You know, that said, we're starting to see, you know, a little bit of a come down from peak inflation, and we'll kind of see where that trends. But if inflation begins to normalize, you know, how do you see these volumes progressing? You know, and is there a level of inflation where maybe demand diminishes?

So we're very confident that this product performs very well and has a significant need in pretty much every environment except for a heavy stimulus environment. That's where we saw demand go down in 2020 and 2021 as the government stepped in to cover a lot of short-term liquidity needs for our members. We have seen some macro tailwind with everyday essential products getting more expensive, but ultimately what we're seeing now is stimulus is mostly burned off We're just seeing things really return more towards 2019 levels as seen from our CAC and just seeing our growth overall. And so I don't see any slowdown. There's always going to be a need for customers to access small amounts of money between paychecks to cover things like gas, groceries, and food.

Great. Really appreciate it. I'll hop back in the queue. Thank you.

Thanks for the question.

Again, if you have a question, please press star then one. As there are no more questions, this concludes our question and answer session. I would like to turn the conference back to Jason Wilk for any closing remarks. Thank you very much for the time. We remain super excited about this business, and we look forward to future progress with everyone. Thanks a lot.

The conference is now concluded.

Thank you for attending today's presentation. You may now disconnect.