Green Dot Corporation

Hello and welcome to the Green Dot Corp First Quarter 2024 conference call. All participants will be in a listen only mode. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Tim Willie, Senior Vice President, Finance. Please go ahead.

Thank you, and good afternoon, everyone. Today we are discussing Green Dot's first quarter 2024 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 webcasts can be found at .green.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 of the Securities and Exchange Commission, including our most recent form 10-K and 10-Q for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we will 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.

Good afternoon, and thank you for joining our first quarter earnings call. I'd like to start by making some brief comments on our progress during the quarter before turning it over to Jess for a more detailed financial discussion. I will then make some closing comments, and we will open it up to your questions. First, there are no material developments to report since our fourth quarter earnings release regarding the proposed consent order received from the Federal Reserve Board. As we have previously disclosed, the matters addressed in the proposed consent order relate to activities and practices that commenced prior to the company's CEO transition in 2020. As I have mentioned many times, as an organization, risk management and compliance remain a top priority, and we continue making significant investments in our control functions to ensure that our business activities are performed in a safe and sound manner, and in compliance with all applicable laws and regulations. We strive to be recognized as an industry leader in risk management and compliance, which in time, I believe, will be a competitive advantage. Turning to the quarter, we are off to a solid start for the year. While our results reflect ongoing headwinds from client deconversions a year ago, they were generally in line with our expectations for the quarter, and we continue to expect improved momentum in the second half of the year. I continue to see progress on key initiatives we've mentioned on previous calls that are critical to ensuring we maximize the value of our assets and differentiators. I would like to briefly touch on a couple of these initiatives before handing it over to Jess to discuss our results in more detail. First, we are focused on driving efficiency and higher returns on capital. The team continues building processes and infrastructure that will enable us to be a well-managed, efficient, and growth-focused organization. These efforts may be somewhat overshadowed by the expenses associated with our investments in regulatory and compliance improvements, but we are making progress in building a company that can utilize its scale to drive operating leverage, further efficiencies, and elevated return.

Second,

we are focused on accelerating revenue growth and positioning the company for more steady and predictable revenue and earnings streams in the coming years. We expect improved momentum on this front as we move through 2024, and we are focused on ensuring our business grows on a sustainable basis at scale in 2025 and beyond. Our business development pipelines are solid and very encouraging. We signed over 300 new clients in our pay card division and four new partners in the Green Dot Network, and we just launched PLS, a new financial services center customer in our retail division.

We continue

to see a growing number of opportunities in various stages of discussion across all of our channels, which is quite exciting. The discussions we are having in terms of potential partners and the business models that are being discussed continues to drive my belief that we are still in the early stages of the embedded finance evolution. In conjunction with the activity and opportunity we are seeing, we are making investments across a variety of areas, namely, the infrastructure to more efficiently launch new partners, expanding our capabilities and product offerings and money movement, and driving enhancements to our core product suite that will drive deeper engagement and monetization. Given our assets and capabilities, the possibilities are limitless. It's a very exciting time to be part of the embedded finance landscape. Now, I will turn it over to Jess to walk you through the financials. Jess.

Thank you, George, and good afternoon, everyone. Non-GAAP revenue grew 9% year over year, primarily from continued growth in our B2B segment. Adjusted EBITDA of $59 million and non-GAAP EPS of 59 cents were both down year over year, largely from a combination of secular headwinds in retail, sunsetting of portfolios and deconverting partner programs last year, as well as incurring incremental expenses associated with our ongoing investment in regulatory compliance initiatives, while benefiting from a reduction in processing expenses as a result of our processor conversion last year. Regarding our GAAP results, I want to point out two items. First, we incurred one-time charges of $12 million in the quarter due to ending our partnership agreement for our core banking system. This is different from the card management system that we implemented in 2023. We decided that developing a new core banking system was no longer of the mutual beneficial interest for us and the vendor that had been selected for this initiative. Second, as it relates to the proposed consent order that we disclosed earlier this year, the $20 million estimated liability that we incurred in 2023 remain unchanged until we receive additional information. Before I discuss our segments, I want to mention that our quarterly investor presentation now contains an appendix with incremental data on the channels that comprise our three reportable segments, including three years of quarterly revenue and metrics for each to help you with your modeling. We'll keep reporting on our three segments that you are familiar with, and I believe it's important to continue to provide transparency and insight about our business to help the market better understand our various -to-market channels and outlooks. Turning to the segment results, I will focus on providing insight and details about how they performed and what factors influenced the quarter results, rather than reciting the actual numbers since we have increased the amount of information we provide about our channels and segments in the quarterly investor presentation.

First is our

consumer services segment, which is comprised of our retail and direct channels. The -over-year revenue decline in the segment was largely driven by the retail channel, where macroeconomic trends continue to impact account acquisition and therefore active accounts and associated metrics like purchase volume continue to come under pressure. -over-year revenue decline was higher than previous quarters, principally because of a program B conversion in 2023. That program was still largely in full force during the first and second quarters last year. Excluding that impact, the rate of decline for retail and the consumer segment as a whole was consistent with the fourth quarter of 2023. We continue to work with our retail partners to improve the productivity of the physical store locations while also pursuing a variety of digital initiatives with our retail partners as they increasingly turn to digital and omni-channel delivery of financial services. As well, we are now live with our initial rollout with our newest partner, TLS, and we would expect to see that launch provide positive support for metrics in the retail division as we work through the balance of 2024. We are nearing the end of a multi-year journey to transform our direct channel into a single brand focused on GoToBank. As I've shared before, we made a conscious decision in 2021 to de-emphasize legacy brands while putting all marketing and capital investment into developing the GoToBank program. This process is largely complete, culminating with the sunset of several legacy brands at the end of the second quarter of 2023. As a result, the aggregate top line results for this channel continue to be challenged on a -over-year basis, though I am encouraged that on a sequential basis, revenue appears to be stabilizing with a bit of growth after the second quarter sunset. For the quarter, GoToBank saw growth in the mid-teens against a tough comparison, and we continue to see steady growth on a sequential basis. I would note that GoToBank is now over 70% of the direct channel revenue, and we expect this share to increase over time. At some point in the future, when GoToBank revenue represents more than 85% of channel revenue, we will likely stop reporting on GoToBank separately. For now, I'll continue to provide some general insights into its performance to help you understand the ongoing shift in the direct channel. The decline in profitability in the consumer segment reflects the pressure on revenue in both channels that I just discussed. Adjusting to the deconversion of retail program, I estimate that profits were down in the low double digits while margins were effectively stable, which points to our ability to manage expenses and allocate our resources as this division evolves. Turning now to our B2B segment, which is comprised of our Bass and Rapid Paycard channels. Revenue growth in this segment remains largely driven by a significant Bass partner, while we faced headwinds on revenue and active accounts from the roll off of two Bass partners in the first half of 2023. With the launch of new partners and growth of existing partners, I believe that we have seen revenue in this channel bottom out in the second quarter last year with solid sequential growth in revenues, just as we have seen with active accounts and purchase volume in this channel. This progress, along with solid business development pipelines, gives us confidence in our outlook for this channel to continue to see solid year of year growth in the coming quarters. Our Rapid Paycard channel had revenue growth in the second consecutive quarter, as we benefited from a variety of pricing strategies that we introduced in the second half of 2023. Active accounts continue to remain under pressure due to headwinds in the temporary staffing industry, which is one of our largest industry verticals. And while we have little control over the macro backdrop, we continue to experience solid sales momentum and make further investment in our early wage access capabilities. The decline in profitability and margin compression in the B2B segment continues to be driven by the impact of client deconversions in the Bass business and the impact of fixed profit structures with certain Bass partners, while profitability in the Rapid Paycard channel improved with a better revenue performance. Now turning to the money movement segment, which is comprised of our Green Dot Network business and our tax business, which we refer to as TBG. Revenue growth was driven primarily by TBG, which had a strong start to the tax season. The Green Dot Network business continued to face headwinds associated with a decline in transactions from our own issued accounts, as active accounts continued to decline. We anticipate those trends to moderate with our launch of PLS and retail channel, and lapping the sun setting of legacy portfolios in our direct channel. We have a strong pipeline of new network participants and expect third party volumes to begin to reaccelerate as we launch partners in the coming quarters. Profitability in the segment remains solid with stable margins in TBG, while the Green Dot Network business managed to improve despite some revenue headwinds. Last is our corporate and other segment, which reflects the interest income we earn at our bank, net of the revenue share on interest we pay to fast partners, as well as salaries, technology, and administrative costs, and some smaller inter-company adjustments. Revenue was down from last year, reflecting the lingering impact of the rising rate environment, offset by the seasonally strong deposit inflows into the bank. Expenses were up modestly as ongoing expense reduction initiatives were offset by the elevated costs associated with regulatory and compliance investments, which we have discussed on prior calls. Now let me turn to our guidance. We had a solid start to the year. We are reiterating our guidance for 2024 of non-GAAP revenue in the range of 1.55 billion to 1.6 billion, adjusted EBITDA of 170 million to 180 million, and non-GAAP EPS of $1.45 to $1.59. Our outlook for the segments and the cadence of earnings is largely unchanged. We expect the consumer segment to face low double-digit revenue declines from a combination of secular headwinds in retail, lapping of a retail program deconversion, and the sunset of portfolios in the direct channel, with a second quarter decline similar to the first quarter. However, we expect to see better momentum with the launch of PLS in retail, a growing contribution from GoToBank in the direct channel, and lapping the aforementioned headwinds. And it's possible that the segment could see flat revenue growth for second half of the year with the possibility of some growth in the fourth quarter. In line with my comments on the revenue outlook, we also expect margins, active accounts, and other metrics to exhibit a similar pattern with a full year of processing cost reduction from the completion of our processor conversion in 2023. We now project revenue growth in the B2B segment to be in the mid 30% range with steady growth across the year. Growth will come from new bass partners launched in 2023 and existing partners in the bass channel, as well as recovery in the rapid pay card business. We anticipate margins to decline 150 to 200 basis points with second quarter margins improving over the first quarter, but I still expect the second and third quarter margins to be down year over year. I anticipate revenue growth in the mid to high single digit for the money movement segment. The first half of the year will likely have lower revenue growth with an increase in tax and a modest decline in the Green Dot network. In the second half of the year, I expect modest acceleration in revenue growth driven by the Green Dot network from the launch of PLS in our retail channel and new partner launches over the course of the year. Margins are expected to expand 500 to 600 basis points for the year due to growth of the tax business and the acceleration of Green Dot network. In the corporate and other segment, revenue should be in the mid to upper single digits, reflecting our efforts to optimize our yields on our cash and investments, while also incorporating some modest rate cuts, which will benefit us. Expenses should be up in the mid teens related to our spending on regulatory infrastructure that I discussed earlier. To give you an idea, our projected investment in regulatory infrastructure in 2024 will be $17 million more than in 2022. Some of this investment will not be ongoing. Additionally, we anticipate a substantial jump in expense in the fourth quarter as we compare to Q4 of 2023, where we reduce some bonus accruals as we came up short of our original operating plan. I expect our tax rate to be .5% with fully diluted share count of 54 million shares outstanding. Now, let me turn it back to George.

Thank you, Jess. Before taking your questions, let me just provide some additional comments on our priorities and vision for 2024 and beyond. As Jess indicated, we are off to a solid start and more importantly, we see a path to accelerating growth as we move through the second half of the year. The first quarter is our toughest quarter for year over year growth. Comparisons from this point on become more forgiving as we move past the number of lingering headwinds. More important is our operating momentum is beginning to improve as we launch new partners, existing partners gain traction and see growth, and we continue driving efficiencies. While the headwinds from 2023 make it a bit harder to see the momentum in our results in the first half, as we laugh those headwinds, our momentum will reveal itself more clearly in the second half of the year. Additionally, I believe our pipeline activity and investments in product and partner infrastructure provide us with a clear opportunity to build on that momentum in 2025 and beyond. We continue to build a culture of financial discipline with an eye on driving scale and maximizing our returns on capital. This is driven in part by improving the processes by which we allocate capital and measure the return on those decisions. It also includes ensuring our company has strong leadership to guide and drive those processes. As I mentioned on our year end call, we recently appointed new executives to head up product development and human resources. And most recently, we welcomed Renata Kane as our new general manager of banking as a service. Renata is a long time payments veteran with substantial experience in payments and risk management, and I look forward to the contributions that she'll make to the team and to our growth as a leading embedded services provider. Last, as I discussed in some detail in our year end call, I believe we have a tremendous set of assets that are quite valuable, whether they are viewed individually or more importantly, as one integrated platform. We have been increasingly transparent about these businesses, their operations and our outlook to help the market better understand their operations and unique ability to create value. But I won't review the strategy in the same level of detail as our year end call. I do think it's important to ensure the market understands our vision and opportunity. Simply put, the market for embedded finance is vast, growing and going through some big changes. Markets that are large and growing create opportunities and change also creates opportunity. As I have said many times, we have all of the pieces to be one of the only fully integrated providers in the embedded finance market. We are building a platform that will not only drive our direct to consumer effort, but just as important, will empower our partners to drive retention, value and growth for their businesses. Whether it be a retailer, a technology company, a tax network or an employer, we are well positioned to power their proprietary financial services strategies. Enterprises that are looking to employ embedded finance as part of their own business strategy are having to rethink how and who they work with in this evolving market. And I believe we bring a differentiated and compelling value proposition to the marketplace. While there always will be much work to be done, we are making notable progress and I want to thank the team for their work and commitment.

Let me now open

it up to your question. Operator.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Your first question comes from Tim Switzer from KBW. Please go ahead.

Hey, good afternoon. Thank you for taking my questions. Hey Tim. I

had a follow up on your comment about the regulatory expenses. You mentioned you're spending about $17 million more this year compared to last year. Not all of that will be in the run rate permanently. Could you maybe provide a little bit of color or like a breakdown on where your regulatory expenses are, what they're going towards over the course of this year and then maybe which of those are temporary investments or some that'll be more like spending over the long term?

Sure Tim. Thanks for that question. First, the metric that you're referring to is a two year comparison. So take note of that. In the nature of those investments are focused in what we would think of as traditional oversight and compliance activities. So internal audit, the compliance department, BSA, AML capabilities both on the technology side, people side, et cetera. So they fall in those traditional categories. We've been focused on heightened investment in the first half of this year and we think some of those activities that are more transitional will be in place and therefore you would see a kind of first half, second half and maybe this year, next year decline because of those transitional investments we're making. I'm not gonna quantify that for you. I would just say that it's an important, not a minor element of the $17 million data point that you made reference to. And then I would just take the opportunity of course to note as the entire FinTech slash sponsor bank industry goes through heightened oversight from various regulators, it couldn't be more important at this time for us to make sure that we develop the capabilities to be leaders in this activity. I can certainly see a time in two or three years down the road where a key differentiator in the marketplace needs to be strong, steady, stable regulatory capabilities at the bank level in the FinTech space and we intend to be a leader with respect to that capability. So hopefully I answered your question but please if I didn't, feel free to ask a follow up.

No, that was really helpful, thank you. And the other question I had is your guide on the B2B segment talked about kind of generally consistent -over-year growth for the full segment but the BAS segment I believe, it seems like it grew a lot more than people were expecting this quarter and I don't know if that's driven by growth of current partners or you maybe had some people come online a little bit quicker but could you maybe talk about your growth expectations in the BAS segment and the trajectory maybe of when some of your partners will be launching over the course of the year?

Thanks Tim, this

is Jess. Yeah, the forecast for the year has come up a little bit relative to the call we had back in February. That is principally being powered by one of our largest BAS partners. You would have seen this consistent trend over the past couple of years but that's not the sole reason. We also have a program that we launched last year, Ceridian, which is ramping over the course of the back half of 23 and through 24 and we have other existing partners that are also growing but by and large the outsized performance is being driven principally by that single partner.

I got you, that makes sense. Thanks for taking my questions. Thank you Tim.

Thank you, your next question comes from George Sutton from Craig Hallam, please go ahead.

Hey guys, James on for George, thanks for taking my questions. Can you talk a bit more about the decision to walk away from the Core Banking Platform?

Thanks James, it's George. Yeah, well let me tell you what I can tell you. When I joined a couple years ago, there's two categories of technology investment that had been initiated. One had to do with what we call a card management system. That vendor is ACI, that technology was used in our processor conversion that we undertook last year. Distinct from that, we had a relationship with another vendor, Temenos, which was focused on a core banking system and think about core banking systems as kind of traditional account bank type features, interest rate calculations, credit, small business, EDA accounts, sorts of things. Now that investment, we have a tremendous amount of legacy investment in those capabilities in our technology stacks as they are currently. So that investment wasn't a cost saving focus in the context of our current capabilities, it was more of a longer term play. And frankly, as we changed focus from the card management system to the core banking system, it became obvious to us that there might be a better way to approach solutioning those sorts of activities. And so we ended up working through that with our vendor and that's where we ended up.

Gotcha. Because as I recall, I think one of the advantages of the new core banking system is the idea that you could build products once used many times across various BAS partners along with your own product. So does that sort of change going forward?

No, no, that has not changed. So again, I'm gonna make distinctions beyond the card management processing environment that I just made reference to. So on top of that capability, which is, we call it bank processing. So route a transaction over a network, get an authorization, send the authorization back, et cetera, right, basic transaction processing stuff. Think of that as what we did last year. Then on top of that, our product features are organized in a set of what we'd call internally stacks. So we have a contemporary BAS stack, we have a legacy stack and we have other technologies associated with some of our businesses. And so the activity that we've been undertaking of which the processor conversion was important to is eliminating older legacy stacks, which the stacks have product features within them. And that activity, that investment is unchanged. We continue to do that and will continue to do that. In fact, some of our most significant investments this year are focused on that effort. So the question, when we think about our product roadmap longer term and we think about small business offerings or credit offerings, et cetera, credit might be the better example. When we are poised to launch consumer credit, across our platform, down the road, not in any current period, but down the road, the question will be, should we then implement a core banking system that already has those account features built on a third party basis or do we enhance our then consolidated stack? So the consolidation and simplification that you're asking about is underway and unimpacted by this decision. How we launch future products and features, that is impacted by this decision. However, we have plenty of runway ahead of us to make that decision in a timely coordinated way. So the simplification work, I wanna be very clear, is not impacted at all by this choice.

Makes sense. Last one for me, so as I interpreted it, correct me if I'm wrong, but it sounds like you're raising the outlook for B2B growth, bringing consumers down a bit. So given the margin differential between those two segments, what gives you the confidence in sort of maintaining the full year, even that guy from the year?

Yeah, you're correct in consumer coming down a bit, B2B coming up, I think in money movement, slightly moved up as well. And then of course, as we always do, we're managing expenses through the business. So within corporate and other, I think our forecast on costs have come down for a variety of efforts by the management team. So still feel confident in achieving the 170 to 180 EBITDA guidance.

Thanks guys. Thanks James.

Thank you. Once again, to ask a question, please press star one. Your next question comes from Chris Kennedy from William Blair, please go ahead.

Yeah, good afternoon. Thanks for taking the question. Can you just talk broadly about some of the changes in the embedded finance market that have taken place over the last 18 months or so, and talk about how green dots can position to take advantage of that?

Sure Chris, thanks for that question. Well,

there's been an array of changes, they're not gonna stop. This is, although companies have been talking about embedded finance for quite a long time now. It nevertheless has been a relatively immature industry in the sense that there's a lot of idiosyncratic relationships and business models and contracts in the marketplace. So that I think is still the case. So layer into that, I would say, a regulatory light type environment. And what I mean by that is the regulation that happens primarily focused on banks, and oftentimes that regulation does not see through the bank, through the FinTech, as not in the past. So that one is the embedded finance market starting to mature in a sense. Not mature, got plenty of ways to go, but the practices, the pricing, the structures, the needs are maturing in the sense buyers are becoming somewhat more knowledgeable about the industry. And the product offerings for embedded finance are becoming more tailored and designed to these specific needs, as opposed to taking some legacy account structure and trying to fit it into an embedded finance need, as opposed to custom or tailored built scalable business models. So that's happened, and then the regulatory change that's underway right now is, at least as far as our view is concerned, I think it's well supported by market information, is the regulators are quite intent on looking through the bank to the FinTech, to the non-bank FinTech. Since many, many of the activities that you traditionally think of being managed by a bank, BSA, AML, are oftentimes managed at the FinTech, not at the bank. And so that is an early stage change in the market, which we think will have significant impacts on the FinTech bank relationships and markets. So if you kind of put these two kind of developing more product-focused evolutionary aspects, a new entrance in the market focused on embedded finance, along with an emerging, I think too early to tell, how it plays out, regulatory change, and how we're positioned in that. Our regulatory circumstances have long been kind of holistic in the sense that there is no looking through a green dot. You're looking at the bank, you're looking at the entire lifecycle of a FinTech-type delivery model, embedded finance model. So we think we've long been exposed to that regulatory oversight, which will be new to some of the competitors who are well-situated. We have work to do. We need to ensure, as I said earlier, that we're the leader in regulatory oversight and compliance so that we can win business on that differentiator. And then also, since we have an integrated vertical solution, we offer product processing, issuing, operational support, broad risk management. We have a bank, and we have the green dot network, which is an absolutely critical asset to serve a non-branch financial institution. One of the very few of those assets in the market. We're extremely well-positioned to offer an integrated solution for a complex buying decision to third parties, and we're already at scale. We have more scale to come, so we should be able to do that at a market-leading low cost. So I took an opportunity in your question to rephrase our strategy, but hopefully, I've addressed your question, but please ask a follow-up if I didn't.

No, that's very clear, appreciate that. And then just separately, acquisitions have always been part of Green Dot's strategy historically. What's your thoughts on M&A today? Thank you.

Sure, in the short term, I would say extremely cautious about M&A, I'd put it that way. I think our appetite, given the priorities we're currently managing to introduce additional complexity into our organization in the short term, our appetite for that is low. So, and obviously, I'm sure it's obvious, I hope it's obvious that we would consider our equity value to be out of market. We're trading at a significant discount, which doesn't put us in an advantaged place, in my view, to be aggressive on those fronts. So what we need to do is continue to execute on our platform consolidations. I touched on earlier, bring new product to market, focus on embedded finance, small business, and our own consumer offerings, and make sure that we're exceptional with respect to regulatory compliance. And then down the road a bit, when we've stabilized those priorities, it'll be time, I think, to consider acquisition. And so when that time comes, the areas that we are focused on longer term, I mentioned one earlier, consumer credit, we'll have a build versus buy decision to make around that. And we're very, very focused on small business type services and activities, and those are kind of the areas of investment around products and services that we would expect to be making, whether that's internally build those activities or acquire them in the market.

Great, thanks for taking the questions. Thank you. Thank

you. There are no further questions at this time. I would like to turn the conference back over to Mr. Gresham for any closing remarks.

Well, thank you, operator, and I want to thank our investors and analysts and the people interested in the Green Dot story. We are here trying to provide access to financial services, to all Americans that are excluded from that set of activities. We've been at that mission for 20 plus years. We're gonna continue on that mission. And before I close, I wanna take a particular moment to express my gratitude to my colleagues, friends, and coworkers at Green Dot. They're extraordinarily dedicated and focused on that mission. They're great stewards for our investors and our customers. And they're doing a great job in getting us to where we need to be. So thank you very much to everyone and talk to you next time. Bye bye.

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