BM Technologies, Inc. (AMEX:BMTX) Q3 2023 Earnings Call Transcript

BM Technologies, Inc. (AMEX:BMTX) Q3 2023 Earnings Call Transcript November 20, 2023

Operator: Good afternoon, everyone, and welcome to the BM Technologies Third Quarter 2023 Earnings Call. Please note that this event is being recorded. [Operator Instructions] At this time, I’d like to turn the conference call over to Brian Prenoveau, Investor Relations for BM Technologies. Brian, please go ahead.

Brian Prenoveau: Thank you, operator, and good afternoon, everyone. Thank you for joining us for BM Technologies third 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 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, future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our Form 10-K and 10-Qs for a more detailed description of the risk factors that may affect our results.

Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time, I will turn the call over to Luvleen Sidhu, BM Technologies’ CEO. Luvleen?

Luvleen Sidhu: Thanks, Brian, and good afternoon, everyone. I am excited to be leading today’s call, along with Jim Dullinger, our CFO. Also present is Jamie Donahue, our President and Chief Technology Officer. We will be discussing our third quarter results and also providing updates on our business. As we have mentioned on our previous calls, this year, there is no denying, it was a tough year, not only for our company, but for the fintech industry as a whole. We navigated through unprecedented interest rate hikes that led to a sharp decline in our rate-sensitive deposit base. We also experienced delays in transferring our higher education portfolio to a Durbin-exempt sponsor bank, primarily driven by regulatory-related delays.

This substantially impacted our revenues given the high spend metrics of this portfolio. These are just two significant of several headwinds we faced over the past year. Despite these headwinds, we have sequentially improved our core EBITDA performance every quarter this year, driven by seasonally adjusted improved operating revenues and decreased core OpEx. Operating revenues for the quarter totaled $14.7 million, which is a 14% quarter-over-quarter improvement. Our core OpEx was at $15.5 million for the quarter, which is a 16% year-over-year improvement in core expenses driven by our profit enhancement plan initiatives. Our portfolio metrics also remained strong, with just under $1 billion in ending service deposits at September 30 and debit card spend of just under $2.2 billion in the nine months ended September 30.

Moving back to some more business commentary. Going through a tough year also provided its benefits. The silver lining in all of this is that hitting a difficult point allowed us to focus on foundation building steps. And for the first time in a long time, we were able to take a step back and relook at the business with a fresh perspective, thinking about how would we choose to rebuild the company from the ground up so we are best positioned for growth in a sustainable, strong future. Some of the foundation building steps we took this quarter include: number one, finalizing the move to First Carolina Bank for our higher education portfolio, which is a Durbin-exempt bank and will result in meaningful increases to revenue. We have sent out customer notifications regarding this move and expect the transfer will take place on or around December 1.

Second, we renewed our relationship with our core provider for another three years. We were able to do this at satisfactory terms and most importantly, solidifying this helps us focus on our business strategy and execution rather than a core conversion, which would likely take the full focus of our engineering teams for a whole year to successfully complete. Third, we have continued progress on our profit enhancement plan. With the current 15% lower core OpEx base compared to the prior year, and an expectation that we will realize over 60% of the targeted $15 million in core OpEx savings for the full year. Part of our cost savings efforts were offset by investments we made in positioning our company for growth. We do believe our full PEP savings will be realized within the first half of next year; and number four, we made significant progress in system upgrades such as the implementation of NetSuite and automation of rote and repetitive processes in different areas of our business such as banking operations, fraud and customer service to reduce costs and improve overall quality and business efficiency.

As it relates to our go-forward strategy, we are convinced we want to double down on improving and growing our student business. This is a very unique opportunity only available to BMTX. Second, we will continue to opportunistically look to expand our BaaS strategy, but not at the expense of losing focus on our student business. I will talk through our strategic thinking as it relates to these two strategies a bit more after Jim discusses our third quarter financials in greater detail. I will now hand it over to Jim.

Jim Dullinger: Thank you, Luvleen. During the third quarter of 2023, the company earned $14.7 million of operating revenue compared to $19.9 million in the prior year. Year-to-date 2023, the company earned $41.2 million of operating revenue as compared to $67.9 million in the prior year. Servicing fees for the third quarter of 2023 totaled $8.7 million as compared to $10.2 million in the prior year. Year-to-date 2023, servicing fees totaled $23 million as compared to $37.7 million in the prior year. As discussed in our calls earlier this year, servicing fee revenues were negatively impacted during the first quarter of 2023, but a fixed rate servicing agreements that were then in place. Beginning in the second quarter of 2023 and thereafter and under the amended deposit servicing agreements, servicing fee margins have improved by approximately 175 basis points at the current Fed funds rate due to the impact of the new variable rate agreements.

Interchange and card revenue totaled $2.7 million, for the third quarter of 2023 as compared to $5.3 million in the prior year. Year-to-date 2023, interchange and card revenue totaled $7.5 million as compared to $17.3 million in the prior year. Year-to-date 2023, interchange and card revenues were negatively impacted by the temporary loss of Durbin-exempt interchange fees. The transfer to FCB in December is expected to improve interchange rates for our higher education vertical by approximately 20 basis points on eligible spend. Had a Durbin-exempt bank partnership been in place during the second and third quarters of 2023, the interchange revenue for our higher education vertical would have been approximately 50% higher on a gross basis for these periods.

Average service deposits totaled $853 million for the third quarter of 2023, down from $922 million for the second quarter of 2023 and from $1.6 billion in the third quarter of 2022. Substantially all of this balance reduction occurred within our BaaS vertical due to the interest rate sensitivity of a large portion of these accounts. Average service deposits in our higher education vertical increased to $466 million in the third quarter, from $429 million in the second quarter of 2023. More significantly, ending service deposits in our higher education vertical increased to $636 million at September 30, 2023, from $408 million at June 30, 2023. Deposits per 90-day active accounts in our higher education vertical at September 30, 2023, averaged $1,864, representing an increase of 15% as compared to the second quarter.

Spending totaled $737 million for the third quarter of 2023, an increase from $658 million for the second quarter of 2023 and an increase from $683 million for the third quarter of 2022. Spending per 90-day active accounts for the third quarter of 2023 averaged $2,267 within our higher education vertical and $1,523 within our BaaS vertical both up significantly when compared to the second quarter of 2023 and the third quarter of 2022. Overall, we continue to see spend in our higher education vertical normalizing in 2023 to pre-COVID levels. Annualized debit card spend for highly active BaaS users, those with both direct deposits and a minimum of five customer-driven transactions per month was approximately $18,500 during the third quarter of 2023.

This very attractive cohort makes up approximately 21% of active accounts at September 30, 2023, as compared to 20% in the year-ago period. Account fees and university fees totaled $3.3 million for the third quarter of 2023 as compared to $3.5 million in the prior year. Year-to-date 2023, account fees in the university fees totaled $10.3 million as compared to $11.3 million in the prior year. During the third quarter of 2023, the company retained 99% of its higher education and institutional clients. And with our continued strategic focus, we anticipate growth in both the number of active accounts and account activity go forward. There were approximately 200,000 new account sign-ups in the third quarter of 2023 and over 400,000 new account sign-ups in the first nine months of 2023.

And at our higher education vertical, new checking account sign-ups in the third quarter improved 85% over the second quarter and 6% year-over-year. We processed over $3.6 billion of student financial aid refund disbursements during the third quarter of 2023 as compared to $3.4 billion during the third quarter of 2022. Core operating expenses totaled $15.5 million, for the third quarter of 2023, comparing favorably to the $18.4 million incurred for the third quarter of 2022 with a 16% year-over-year reduction. Year-to-date, 2023, core operating expenses totaled $44.8 million, comparing favorably to the $51.5 million in the prior year with a reduction of over 13% year-over-year. The company continues to actively execute upon its PEP with initiatives completed during the first nine months of 2023 that are expected to lead to the realization of over 60% of the targeted $15 million of cost savings for the full year 2023.

The company expects to achieve its full PEP target with continuation into the first half of 2024 as certain of its cost reduction efforts have been partially offset by investments in its technology, operational processes and data initiatives. Core loss before interest, taxes, depreciation and amortization, totaled negative $0.8 million for the third quarter of 2023 comparing favorably to the negative $0.9 million for the second quarter of 2023 and unfavorably to the $1.5 million core EBITDA for the third quarter of 2022. Significantly, Q3 2023 represents the third sequential quarter of improvement in the company’s core EBITDA results with expected continuation for the fourth quarter of 2023 and reflecting the continuing progress being made on our path to profitability.

Liquidity remained strong at September 30, 2023, with $8.8 million of cash, $7.4 million of working capital and no debt. In addition, the company anticipates monetizing approximately $2 million of additional tax receivables by end of 2023. Importantly, our September 30 cash balance would have been $3.5 million higher, but for the timing of a servicing fee prepayment received in October instead of at quarter end, this is generally the case. For the fourth quarter of 2023, the company expects close to breakeven core EBITDA and positive operating cash flow. With that update, I’d like to turn the call back to Luvleen for some final comments. Luvleen?

Luvleen Sidhu: Thank you, Jim. I would like to provide some color on how we are thinking about the business going forward. With the upcoming move to First Carolina Bank and our core decision finalized, we are in a better position to focus on growth. Our primary focus going forward will be to double down on our student business. We are already market leaders in this segment, touching about one in every three college students eligible to receive a refund. However, we believe there is still tremendous untapped growth potential in this segment. For example, of the $11 billion to $12 billion in financial aid refunds we disburse each year through our existing university relationships, less than $2 billion of this flows into BankMobile checking accounts.

Similarly, only about 10% to 12% of students receiving a refund choose the BankMobile checking account as a vehicle in which they want to receive their refund. Furthermore, we currently lose an active accounts almost as many accounts that we open each year. So there is tremendous opportunity to improve retention of our account holder. Not only is there a tremendous market opportunity for us to capture, but we — but what we love about the student market is that it is totally aligned with our mission of why we came into being. We built this company on the premise that we wanted to build a digital bank utilizing best-in-class technology to financially empower millions of Americans by providing them with a more affordable, transparent and consumer-friendly banking experience.

What better way to execute on that mission than by focusing on millions of students in the U.S. and helping them build strong financial lives by partnering with us. There are a few steps to make this reality. First, we have to have the right team, starting with the Chief Growth Officer, who has the marketing product, data insights and business development experience to provide the leadership in executing the strategy. He or she will then help shape the strategy and enhance our current team to execute. We are in the final stages of this hire and hope to have a new addition to our team in this role by the top of the year. Second, we need to unify our technology base so we have our most modern API-based technology stack in place for our student business.

This way, we can much more quickly roll out new products and features that we deem important to attract and retain our student customers and build out our product roadmap. This technology unification and upgrade is expected to roll out in Q1 2024. Lastly, we will need to experiment with new tactics and strategies, which will allow us to better quantify the opportunity in the higher education segment over the next 18 to 36 months. And we look forward to sharing more as we build the team and finalize on our strategy. As for our BaaS strategy, we remain intrigued. BaaS provides revenue diversification with the opportunity to earn higher margin SaaS revenue. That being said, we must face the reality that this model is currently facing a lot of pressure.

Many BaaS players have struggled with profitability due to a number of factors, including increasing regulatory pressures, risk of disintermediation by BaaS banks and other macro effects, just to name a few. That being said, we still believe there is an opportunity for a few key players to succeed in Bath as the market opportunity remains large. We will continue to opportunistically look for BaaS deals, partnerships, and potentially M&A opportunities that help us remain active and competitive in this space, but not at the expense of losing focus on our core student business. In summary, I want to reiterate that we are very optimistic and excited about our future. We are building our company to last and are not just focused on quarter-to-quarter results.

Our goal is to get back to $20 million plus in EBITDA over the next 24 to 36 months through a combination of revenue growth, cost discipline and refocus of strategy thereby hopefully significantly increasing the value of our company for our shareholders. Thank you for joining us on our call today. We do appreciate your support, and most importantly, we appreciate the dedication and skills of our amazing team. Thank you so much for all that you do. We will now open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Greg Pendy from Chardan. Please go ahead.

Greg Pendy: Hi, guys. Thanks for taking my questions.

Luvleen Sidhu: Hi, Greg.

Greg Pendy: Hi. So I guess, what things kind of increased visibility now that you have the rate contracts in Durbin-exempt, I guess, visibility on that front. Any update on a buyback. I think you authorized one a while back. Just kind of what are the thoughts? Is that still authorized right now, and is that something that could come into play in 2024?

Jim Dullinger: Yes, Greg, this is Jim. Good to speak to you again. So, buyback is definitely one of the strategic alternatives that, we are actively considering. To your point, it’s definitely on the table for 2024. As we discussed in our prior call is, with the continuing change in the macro-economic environment, we’ve leaned towards conservatism with our cash, but obviously, our principal focus is, the highest return to our shareholders. So, it’s definitely something that, we are evaluating as a potential strategic passing for 2024.

Greg Pendy: Okay, great. And then just one more, just on the operating expenses, can you just go into a little bit of color on the technology communications spending? I think you already mentioned some of it. There were some puts and takes in the quarter, just trying to figure out. It seemed to have bumped up sequentially?

Jim Dullinger: Yes, there is some variability there. So that line item evolves, as you might expect. So it’s our tech spend, our processing charges, our communication charges. As the number of transactions increases, so Q3 is one of our peak quarters for seasonality, with the return to school. That variable component is reflected in that technology, and core processing line item as well.

Greg Pendy: Got it. Got it. Okay. That’s all I have. Thanks.

Jim Dullinger: Thank you, Greg

Operator: Your next question comes from the line of Mike Grondahl from Northland Securities. Please go ahead.

Mike Grondahl: Hi. Good afternoon. How are you guys thinking kind of the next couple of quarters on deposits on the higher ed side and the BaaS side, How should we think about deposit growth, or continued kind of runoff?

Luvleen Sidhu: Yes. I think, Mike, for us, we’re focused on – it’s clear in this macro environment, number one, is chasing deposits that are rate sensitive doesn’t make sense for us. So, we haven’t been focused on deposit growth as it relates, to the interest rate sensitive side of our portfolio. And that’s why we’ve really doubled down as we’re seeing in 2024, to be a focus on reinvesting and reinvigorating our student business, and really that strong untapped market that exists there, even without selling another school just in our current ecosystem. We’re not at a point where we’re quantifying that. I think what we wanted to also make sure that, the market understands is that, it’s a stepped approach. And the first step in that, is hiring the right leadership honing in on our strategy; and two, our technology unification.

So, I talked about our most modern technology platform, and making sure that that’s in place, so that we could more quickly roll out products and services. That would better attract, engage and retain that customer base, which we then downstream to greater deposits and greater spend in that portfolio. That’s expected to roll out by the end of Q1. So really, in the latter half of next year is, when we’re going to start seeing the impacts of some of the initiatives that we’re putting forth in the end of this year and the earlier half of next year.

Mike Grondahl: Got it. And Jim, just for you. I think what you’re seeing is, the reason core operating expenses were up 3Q from 2Q is, just a seasonality with the higher education business and the processing cost that, goes along with that. Is that the right way, to think about it?

Jim Dullinger: Yes, Mike, I think it’s definitely the right way, is the principal driver for the increase quarter-over-quarter, is those variable costs, and they are directly in line with the increased activity, and the increase we’ll see coming through our top line revenue as well.

Mike Grondahl: Got it. I’m just looking at my notes here quick. Any color you can give us on the terms? It sounds like your core processing provider, you extended that three years. Was that similar terms? Was that something you would plan to do all along? Or when did you kind of decide you were going to extend that?