Green Dot Corporation

Hello and welcome to the Green Dot Corp third quarter 2024 conference call. All participants will be in a listen-only mode. Should you need 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 touchtone 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 Willey, Senior Vice President, Finance and Corporate Development. Please go ahead.

Thank you and good afternoon, everyone. Today, we are discussing Green Dot's third 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 ir.greendot.com. As a reminder, Our comments may include forward-looking statements and expectations regarding future results and performance. Please refer to the cautionary language in the earnings release and in Green Dot's filings with the Securities and Exchange Commission, including our most recent Form 10-K and 10-Q, 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 will 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 third quarter earnings call. During the quarter, we delivered results in line with our expectations, and we have now largely moved past the headwinds associated with deconversions in the first half of 2023. As a result, we are seeing improved year-over-year performance with non-GAAP revenue up 16% and adjusted EBITDA up 19%, the strongest growth we have seen in these metrics in over two years. These results were driven by investments and continued improvement in our B2B segment, particularly BAS or embedded finance. We have also seen moderating rates of decline in actives on a year-over-year basis, and we posted sequential growth for the first time since the first quarter of 2021. This demonstrates we are making progress improving the financial and operational performance of Green Dot. As I have indicated on prior calls, our goal is not just to return Green Knot to a path of predictable performance and growth, but to also provide our partners and customers valuable solutions and deliver them in a highly secure, compliant, and scalable way. Over the long term, we believe this will solidify our competitive position while also ensuring that we are meeting the expectations of all of our stakeholders. Turning to the quarter, as I mentioned, our results were in line with our expectations, and we continued to focus on three key tenets of our story, investing in compliance, improving our cost structure, and building an engine of sustainable and steady opportunities. We made progress on all of these fronts during the quarter, and we continued investing in our compliance and regulatory infrastructure and saw year-over-year improvement in our adjusted EBITDA margins. We continue to see strong business pipelines and demand, which allows us to be very selective in considering only the highest quality opportunities that enable us to deliver on our high expectations related to risk management, compliance, and regulatory requirements and standards. You may have seen we recently announced the launch of Arc by Green Dot. Arc represents our embedded finance, or BaaS, capabilities that are powered by a secure, scalable, single-source platform. With this new brand, we have the opportunity to market and differentiate our end-to-end embedded banking and money movement tools that are designed for businesses of all sizes and do so in more meaningful, impactful ways. This launch represents a major milestone in our journey to establishing Green Dot as a leader and innovator in embedded finance, an industry we believe has significant long-term potential. We are excited about the feedback we are receiving from our partners and other industry leaders and influencers on this launch. And we look forward to developing the ARC brand further in 2025 and beyond. You will note we have modestly lowered our adjusted EBITDA guidance for 2024. While we tracked our expectations through the third quarter, as we moved through the third quarter and into October, it became clear that the difficult trends in our retail channel would persist longer than anticipated. Despite the anticipated shortfall, we remain committed to ensuring we are investing in the three key areas I just discussed with you. And separately, with some of our investments in conversions and tech debt eradication behind us, we are finally now investing in the modernization of the user experience for all of our consumer products, which will allow us to more vigorously compete in these product categories. Let me now hand it over to Jeff for his comments before I make some additional closing remarks and take your questions. Jeff?

Thank you, George, and good afternoon, everyone. Our third quarter non-GAAP revenue grew 16% year-over-year, and adjusted EBITDA increased 19%, primarily from continued growth in our B2B segment. As George mentioned, we've largely moved past the challenges from deconversion activities in 2023, and we are continuing to benefit from our processing conversion and reducing risk-related expenses while investing in regulatory and compliance initiatives. Most of these investments are now part of our ongoing spending, and although we will keep investing, we expect the growth rate of these investments to be more aligned with our revenue growth. Non-GAAP EPS of $0.13 decreased due to a higher-than-normal tax rate from one-time matters. Now I'll touch on the factors that influence the performance of our segments, and will refer you to both our press release and quarterly slide deck for segment results and key metrics. First is our consumer services segment, which is comprised of our retail and direct channels. Consumer segment revenue remains under pressure, due principally to the secular headwinds in the retail channel that continue to impact the number of active accounts on our platform. That said, the decline in active accounts year over year slowed in this channel with the launch of the PLF partnership. Revenue in the retail channel lacked a significant portion of the program deconversion in the first half of 2023. though there was still some modest impact in the quarter. Excluding this impact, I estimate that revenue in the retail channel declined in the low teens, and we've generally seen stability in lines practice and a bit of improvement in revenue practice. Notably, active accounts grew sequentially in the retail channel during a seasonally slow period, thanks to our strong start with the PLS partnership. Our continuous efforts to reposition our direct channel are making progress, and we believe we are now experiencing a period of sequential stability as we invest in feature functionality for the GoToBank platform and position this channel for growth. During the second quarter of 2023, we discontinued several legacy brands, resulting in year-over-year headwinds that are largely behind us now. The revenue in the direct channel is showing signs of stabilization after years of decline. The rate of decline this quarter was the slowest that it has been in over two years, Our focus remains on investing in the GoToBank platform's feature functionality and positioning this channel for growth. In the quarter, GoToBank continued to see revenue growth and improved segment profitability. GoToBank now comprises almost 75% of the direct channel revenue. Revenue per active account continued to grow at a solid rate in line with the direct channel as a whole. As I've mentioned in previous calls, when GoToBank accounts for 85% of the revenue in the direct channel, we intend to stop providing separate commentary on this product. Overall, segment profitability in the consumer segment remains under pressure from the revenue declines discussed, while benefiting from expense control, reduced risk expenses, and the positive impact of the processor conversion. Now I'll turn to the B2B segment, which is comprised of our BAS and rapid pay card channels. Revenue growth remains driven by a significant BAS partner, while we saw stability in the rest of the VAST portfolio. Key metrics such as purchase volume and active accounts have improved due to new partners and growth from existing partnerships. I'm optimistic that the momentum will persist, and we anticipate continued year-over-year growth from the entire VAST channel. A rapid pay card channel has modest revenue growth as pricing strategies continue to offset the pressure on active accounts. The staffing industry, one of our largest verticals, has faced headwinds for almost two years and has not yet seen a rebound. Nevertheless, year-to-date sales activity remains solid, and the team is implementing programs and strategies designed to boost employer and employee engagement, enhance activations, and improve retention. Fast and pay card segment profitability improved as we lapped deconversion headwinds, experienced revenue growth, and continued to focus on efficiency and driving scale. Additionally, there is a benefit in the quarter from one-time cost reductions. Absent this one-time cost reduction, I estimate the profit growth for this segment to be around 30% in the third quarter. Turning to our money movement segment, which is comprised of our tax processing business and our money processing business, which includes the Green Dot Network, also known as GDN. The tax business had some modest revenue growth in the seasonally slow third quarter, while money processing is down slightly. While our money processing business continues to face headwinds that stem from the decline in our own active account base, we believe those headwinds are abating to a degree as third-party transactions group double digits due to existing and new partners. Profitability in this segment remains solid. The tax business saw some margin declines due to timing, while money processing saw margin expansion as the team continues to focus on managing the expenses and returning to revenue growth. The corporate and other segment reflects the interest income we earn at our bank, net of the revenue share on interest we pay to past partners, as well as salaries, technology, and administrative costs, and some smaller intercompany adjustments. While revenue was relatively flat year over year, segment expenses increased due to higher costs related to regulatory and compliance investments, which were somewhat offset by ongoing expense reduction initiatives. Now let me turn to guidance. We are raising the low end of our non-GAAP revenue guidance to a range of $1.65 billion to $1.7 billion. I now expect full-year adjusted EBITDA to be in a range of $164 million to $166 million, and non-GAAP EPS to be between $1.33 to $1.36. Although the first three quarters of the year aligned with our expectations, as we moved through the third quarter and into October, it became apparent to us that the retail channel would underperform our forecast. While declines in revenue and active accounts in this channel have moderated, the performance is falling short of our expectations. As George mentioned in his comments, We are now investing in the platform to enhance features and modernize the user experience, aiming to improve account growth and our ability to drive higher revenue per active, which will benefit the retail channel. At a consolidated level, we anticipate a modest acceleration in revenue growth moving from the third quarter to the fourth quarter as we have more normalized comparisons, and we continue to benefit from the ramp of our new PLS programming. We believe adjusted EBITDA margins in the fourth quarter will be up 200 to 300 basis points from last year as we benefit from revenue growth and favorable expense comparisons relative to last year. Now I'll turn briefly to the segments. I expect revenue in the consumer segment to decline in the fourth quarter at a rate in the low single digits with full year declines in the high teens. The improvement in the rate of decline in the fourth quarter reflects the ongoing stability that we are seeing in the direct channel, as well as the positive impact from the ramp of PLS. For the fourth quarter, I would expect consumer segment margins to be up over 10 percentage points from last year, as we benefit from improved revenue metrics and should see notable improvement in our risk costs after working through higher-than-normal expenses associated with our internal platform conversion last year. For the full year, we expect to see margin expansion of 400 to 500 basis points. In the B2B segment, I expect revenue growth in the fourth quarter in the low 30% range as we move into more normalized comparisons after the initial benefit from launching Dayforce. I expect full year revenue to be in the mid 30% range. In the fourth quarter, margins in the B2B segment are expected to be up 100 basis points from last year, while full-year margins will be down roughly 100 basis points. I anticipate revenue in the money movement segment to be flat to down slightly, with full-year revenue growth in the low single digits. For the fourth quarter, margins in the segment should be down 100 to 200 basis points, while full-year margins are expected to be up approximately 200 basis points. In the corporate and other segments, revenue is expected to increase considerably as a result of an interest rate reduction and our efforts to optimize yields on our cash and investments. Expenses are anticipated to grow in the mid-teens, driven by increased spending on regulatory infrastructure. Additionally, expenses were lower last year due to reversing our bonus accrual in the fourth quarter. I expect our full-year tax rate to be approximately 24% and a fully diluted share count of approximately 54.9 million shares outstanding for the quarter and 54.2 million for the full year. Now, let me turn it back to George.

Thank you, Jess. Before taking your questions, I would like to spend a few moments on our vision for Green Dot and our decision to invest strategically in embedded finance and the launch of ARK. As you know, Green Dot is a pioneer in digital payments and was among the first to introduce prepaid cards and other tools and features that give LMI consumers more seamless, secure, and value-driven ways to manage and move their money. Since being founded almost 25 years ago, Green Dot has evolved dramatically, and we now build and offer a wide spectrum of financial technologies and services that create value, retain and reward customers, and accelerate growth for businesses of all sizes. We do this through our portfolio of brands, including Green Dot Bank, GoToBank, Rapid, our tax products group, the Green Dot Network, and now our embedded finance brand, ARK. which will enable us to more effectively market and grow our secure banking and money movement capabilities that benefit consumers and businesses of all sizes. ARK already powers some of the world's most trusted brands and thousands of other businesses at all stages of growth with seamless, secure, and useful financial tools and experiences. And ARK is different from many other basket-embedded finance providers, first, ARC is integrated with Green Dot Bank, providing partners with leading FDIC insured banking products and tools, plus regulatory and compliance expertise, oversight, and peace of mind. Second, ARC features flexible, modular technology, cloud-based and scalable by design to meet a wide range of business needs and goals and to adapt as our partners grow. And third, comprehensive program management. ARK's end-to-end banking services are powered by enterprise-grade APIs and offer our partners access to comprehensive customer support, fraud protection, access to the largest retail deposit and ATM network in the U.S., and much more. The addition of ARK to our portfolio of brands is an important milestone for us as we continue investing in differentiating and marketing our embedded finance platform and capabilities, empowering more companies with seamless banking and payments that fuel value, loyalty, and growth. I think most would agree embedded finance is transforming banking as we know it, boosting value and convenience for consumers and driving engagement and revenue for businesses. And we believe in the not-too-distant future we'll see payments and banking embedded everywhere, across all industries and all brands. Again, it is our belief that we are only scratching the surface of this industry, and we are very excited to be part of its growth as we bring modern banking to more consumers and businesses in compliant, secure, and scalable ways. I believe giving our banking as a service business unit a unique brand that has substantive, differentiated meaning in the marketplace is important for that business. Of course, we continue to manage other world-class brands, including Santa Barbara Tax Products Group, Rapid Pay Card, the Green Dot Network, the Green Dot Suite of Products, Walmart Money Card, and GoToBank, and we welcome ARK by Green Dot to that proud family. In summary, it was a solid quarter in which we returned to positive growth, and we expect to see positive growth in the fourth quarter as well. I would like to thank the entire team for all their hard work as we continue to make demonstrable progress improving the performance of Green Dot. I will now be happy to take your questions. 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 speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster.

Once again, to ask a question, please press star, then one. Thank you.

There are no questions at this time. I'll now turn the call back over to George Gresham for any closing remarks.

Well, thank you, operator. Either we were so thorough in our overview or there's a lot of competition out there for attention in the market tonight. But regardless of that, I want to take just an opportunity in closing to, of course, thank all of our associates and colleagues at Green Dot who've worked so hard on platform consolidations, eradication of tech debt, improvement of our regulatory environment, and all of those efforts, those and others that I haven't mentioned. And of course, Since we have many of the premier companies in the United States as partners, certainly want to thank them and our customers for all of their support for Green Dot. So thank you all. Appreciate talking to you in the future and look forward to it. Take care. Thank you, operator. Bye-bye.

Thank you. And that does conclude our conference for today. Thank you for participating. You may now disconnect.