Green Dot Corporation (NYSE:GDOT) Q2 2023 Earnings Call Transcript

Green Dot Corporation (NYSE:GDOT) Q2 2023 Earnings Call Transcript August 3, 2023

Green Dot Corporation misses on earnings expectations. Reported EPS is $0.01102 EPS, expectations were $0.34.

Operator: Good day, and welcome to the Green Dot Corporation Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tim Willi, Senior Vice President of Finance. Please go ahead.

Tim Willi: Thank you, and good afternoon, everyone. Today, we are discussing Green Dot’s second quarter 2023 financial and operating results. Following our remarks, we’ll open the call for your questions. Our most recent earnings release, that accompany this call and webcast, 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 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. 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.

George Gresham: Good afternoon, everyone, and thank you for joining our second quarter 2023 earnings call. At Green Dot, our mission is to give consumers and businesses the power to bank seamlessly, affordably and with confidence. We recognize that access to the banking system should not be a privilege. Our core value is stewardship since we take care of something for others that is critically important to them, whether they are depositors or investors. To fulfill this mission and live up to our values, we are executing a strategy of integrating banking, technology and network platform, so that we may provide market-leading financial tools at low cost. Each of these platforms are already in place. We own the bank, we own the technology and we own one of, if not the largest cash money movement in payment networks in the U.S. with our Green Dot Network.

In addition, we own a diverse set of distribution channels where we distribute demand deposit accounts directly to consumers or through retail locations. We also support all sizes of businesses through our distribution of rapid! PayCard demand deposit accounts. We facilitate cash flow management through our tax products group for thousands of additional businesses, and we support some of the largest companies in the world with sophisticated embedded financial solutions tailored to their particular needs. To fully realize the potential of this strategy, we are highly focused on integrating these assets enhancing our technology and optimizing our product roadmap, so we can bring products to market in a more agile and timely way. So how are we doing on this journey?

Jess will cover our financial results in more detail. But for the second quarter, our non-GAAP revenue was up 2% compared to the same quarter in the prior year, while both non-GAAP and GAAP earnings metrics declined. This decline is attributable to a variety of factors, namely the deconversion of several partners, the ongoing evolution of our direct business as we let several legacy brands attrit or sunset, while we focus on the growth of GO2bank, the impact on partner interest sharing from higher interest rates and difficult year-on-year comparisons as we realized several one-time benefits in expenses last year. Despite these challenges and headwinds, as we move forward, we see evidence of stabilizing account trends, a growing pipeline and no shortage of opportunities for Green Dot as the market for embedded finance continues to evolve and grow.

Along these lines, I am pleased to confirm our newest BaaS embedded finance partner, which we have referenced in previous calls. Ceridian, a global leader in human capital management technology has selected Green Dot as a U.S. banking partner for Dayforce Wallet, Ceridian’s market-leading on-demand pay solution. We look forward to announcing a national launch and sharing more details of this program and partnership in the coming months. I am also very pleased to announce we have signed a meaningful new partner in our financial service center channel, which is part of our consumer segment. We are thrilled to launch a new partnership with the PLS family of financial service companies to offer a demand deposit account among other tools and features to their customers.

PLS is one of the nation’s largest community-based financial service providers, and we have a shared commitment to providing the services and tools that empower consumers, particularly those in the LMI community. Green Dot could not be more proud to be working with Ceridian and PLS, and I look forward to sharing more details on our partnerships in the coming quarters. Business development more broadly remains a key priority. And as we complete the technology conversion, this is one of the areas where we are redirecting our energies and focus. While 2023 is and remains the year of execution focused on internal initiatives, 2024 will be the year of execution focused on building enduring revenue streams. On last quarter’s call, our Chief Revenue Officer, Chris Ruppel, spoke about how we are instituting a more uniform regimented approach to how we go about identifying and pursuing opportunities, and we are making significant strides in proving this model and our pipeline, which is strong.

As it relates to our long discussed technology transformation, I am pleased to share we are now nearly complete with this process, having executed seven conversion events from our legacy processor to our new platform with the final activities expected to be completed this month. The finalization of this effort puts us in a position to operate as a more efficient, nimble, and scalable company going forward. This has been a two plus year journey driven by our legacy processors exit from the business has been a challenging road for many of our team members in a consuming focus for management. While we will have post-conversion cleanup work remaining, bringing this phase of work to completion allows us to redirect our focus and energy to other priorities and opportunities, including additional enhancements to our technology and product offerings, and of course, growth.

In addition to being stewards of consumer deposits, a responsibility we take extremely seriously. We are also stewards of shareholder capital, which is why we continue to focus on making expense management and margin expansion a part of our corporate DNA. We are making significant strides in evolving our culture to having a dedicated focus on managing costs and allocating capital with a considerate and thoughtful approach. While the current period is carrying excess cost due to the technology conversion, we expect those costs to abate as we move into 2024. We will of course continue to make investments in our regulatory responsibilities and obligations in order to better serve customers. In summary, we are making important strides on our journey, but we are only in the middle innings with plenty to do.

I want to thank all of our team members, our partners, and our investors for coming along with us as we execute this strategy. Now, let me hand it over to Jess.

Jess Unruh: Thanks, George, and good afternoon, everyone. Overall, our consolidated results came in line with our expectations and as George said is a solid quarter of progress towards our goals. I’ll walk you through our key financial highlights and then I’ll provide color on our updated guidance for the year. Our GAAP and non-GAAP revenue for the quarter grew 1% and 2% respectively year-over-year, while adjusted EBITDA was down year-over-year for the reasons George discussed. I’ll provide color on each of our segments. First in our Consumer segment. As you know, our Consumer segment is comprised of both our retail and direct-to-consumer distribution channels. Overall, this segment is impacted by changing consumer patterns within retail, the non-renewal of a retail program, and our dedicated focus on our GO2bank brand and our direct-to-consumer channel at the expense of legacy brands that are now in runoff.

While our retail channels impacted by secular changes and the non-renewable program, we are taking steps to reposition this business. Specifically, we are actively working with our retail partners on strategies that encompass a wide range of embedded account and payment experiences that are designed to help our retail partners continue to build enduring and loyal customer relationships through digital financial experiences, not just products on shelves. We also signed a new partner in POS [ph] and we are focused on making our cost structure in retail more efficient. In our direct-to-consumer business, we continue to fully commit our marketing spend to support our GO2bank brand, and as a result, we deliberately put legacy brands such as Rush, AccountNow and others into runoff.

As mentioned on our first quarter call, we sunset some brands in the second quarter as we continue to move through our platform conversions. We had success in converting a portion of those accounts to GO2bank. As expected, many did not convert an attrition of these legacy brands accelerated. As a result of the attrition of legacy brands over the last two years and its own rapid growth GO2bank has become a larger part of that channel and its growth rate will have a more pronounced impact as we move forward. In the second quarter, GO2bank continued to have strong year-over-year growth in direct deposit accounts up approximately 40%, which resulted in strong growth and revenue per account. With that context in place, let me provide some color on the performance of the segment during the quarter.

Segment revenue was down 14% driven by the year-over-year decline in active accounts. Revenue in our retail channel was down in the upper-teens year-over-year. Though I would note, that excluding the impact of the non-renewal revenue declines in the retail channel were in the low-teens. The direct channel saw mid-single digit declines in revenue consistent with the first quarter. I believe it’s worth pointing out that the decline in direct deposit accounts continues to moderate with its slowest rate of decline in over a year and the smallest sequential decline that we have seen in over two years. This is fueled in part by some moderating decline retail, but also in the direct channel as GO2bank builds momentum. Direct deposit accounts represent approximately a core of our total accounts in segment, and these accounts are more highly engaged with higher volumes and revenues than non-direct deposit accounts.

Revenue per account continues to improve as we drive deeper engagement rates, particularly with GO2bank helping to offset the attrition in legacy portfolios. As I’ve said many times, this is an evolution, but we are encouraged by what we are seeing from GO2bank and the impact it’s having on the direct channel and the increased likelihood that it can help drive continued moderation in the rate of decline for the consumer segment overall and believe that we’re moving closer to an inflection point. Segment profit was down year-over-year by 27% due to the decline in revenue and as we discussed last year, we negotiated numerous one-time benefits in our expected structure in the first half of 2022, and in particular the second quarter of 2022 causing margin compression and making the year-over-year a pretty tough comparison.

In the B2B segment, which consists of our BaaS and PayCard channels, aggregate revenue growth of 26% largely remains driven by our BaaS channel where revenue was up approximately 30%. The growth of one of our larger BaaS customers continues to power the top line while we faced headwinds on revenue and actives from the roll off of two BaaS partners. In the PayCard channel, our revenue and active account growth has moderated due to macro shifts in the temporary staffing industry one of our primary verticals where inflation and recession tiers have impacted hiring decisions. We experienced active declines in this vertical in late 2022 through May of this year, and we saw a rebound in June. Revenue was also impacted by a shift in the mix of purchase volume that is weighing on interchange rates and changes in consumer ATM behavior.

That said, strong sales activity and leading indicators in the core PayCard product as well as continued growth in our EWA offering give us confidence that momentum in this channel should reaccelerate in the coming quarters. Profit in the B2B segment was down 23% as expected, driven largely by the impact of client deconversions in the BaaS business and the dynamics I just discussed in the PayCard channel. We had margin compression from one-time expense structure benefits last year similar to our consumer segment and pressure on margins in the PayCard business due to the lower interchange rate. While we face what we believe to be temporary pressure on revenue growth, we continue to invest in the PayCard business as sales momentum has been strong, while also incurring expenses to support the launch of our newest fast partner.

Shifting to our Money Movement segment, revenue was down 8% year-over-year from a decline in cash transfer volume and timing of tax refund volume. The Green Dot Network business continues to see year-over-year revenue declines moderate from the mid-teens in 2022 to a mid-single-digit decline in the second quarter of 2023. Revenue declines remain driven principally from the impact of the decline in active accounts in our other segments. While continued growth from third party transactions up year-over-year in the mid-teens helped offset some of the overall decline. Third-party programs now comprise over 60% of our total cash transfer volume. Our tax refund volume was down year-over-year because of timing shifts versus last year. On a year-to-date basis, revenue in our tax processing channel was up low single digits year-over-year.

Profitability remains strong with flattish profits and some modest margin expansion in both tax and Green Dot Network. Our final segment Corporate and Other reflects the interest income we earn in our bank, net of the revenue share on interest we pay to best partners as well as salaries and administrative costs and some smaller intercompany adjustments. Interest income net of partner sharing was down year-over-year as expected due to a higher rate environment. As a reminder, the rapidly rising rate environment of 2022 created an imbalance between the blended yields we earn on our cash and investments and the rate we pay our vast partners and effectively creates a headwind for revenue in the segment. Salaries and other general and administrative expenses were up just slightly from last year as our cost cutting efforts helped to offset the incremental costs associated with our technology conversions.

Now turning to guidance. We are reaffirming our revenue range of $1.376 billion to $1.462 billion and expect to be above the midpoint of this range. We are narrowing our adjusted EBITDA range to $182 million to $188 million while keeping our midpoint at $185 million. Likewise, we are narrowing our non-GAAP EPS range to $1.80 to a $1.90. We are encouraged by our results and trends in Q2 and the progress we’re making towards our goals. Turning to the back half of the year, let me provide you with a bit more color to round out your models. At a high level, revenue should generally be evenly split between the third quarter and the fourth quarter with about 40% of adjusted EBITDA and non-GAAP EPS in the third quarter and the balance in the fourth quarter.

This would imply a bit more margin impression in the third quarter from the second quarter levels before rebounding a bit in the fourth quarter. Now we provide a bit more color on the full year financial outlook for each of the segments. In the Consumer segment, we expect revenue and segment profits to decline year-over-year in the mid-teens. Margins for the full year should approximate the full year margins that we saw in 2022 with sequential improvements in each of Q3 and Q4. In the B2B segment, we look for revenue growth for the year to be approximately 20% with flattish segment profits. While full year margins should be down roughly 300 basis points from 2022, we should see sequential improvement in both the third and fourth quarters. In the Money Movement segment, we expect revenue and profit to be essentially flat with last year.

In the Corporate and Other segment, we have an earnings headwind from higher interest revenue share. In our Q4 2022 call, we provided an estimated headwind for 2023 in a range of $15 million to $20 million. This range has increased several million dollars in light of recent rate hikes. All the while, expenses should begin to reflect our progress in cutting costs as we move through the platform conversions. For the full year, I expect our non-GAAP effective tax rate to be 23.5% and the diluted weighted average share count to be approximately 52 million shares. With that, I’ll turn it back to George.

George Gresham: Thank you, Jess. As I look back on the first half of the year, we have accomplished quite a bit. We’re in the final stretch of completing the technology platform conversions and are on track to realize our goal of $35 million in cost savings and become a more nimble streamlined company. Just as important, this enables us to reallocate resources to focus on other areas and opportunities for the company. Our newest BaaS partner Ceridian has been onboarded and we are excited to have POS is a new customer and our FSC channel while also signing over 300 new customers in our PayCard and EWA business and six additional partners to the Green Dot Network. Lastly, we took moves to further reduce our cost structure while increasing our investment in sound regulatory compliance, and we continue to be very focused on driving a culture of efficiency and smart investment throughout the organization.

That said, there’s still plenty of work to do, but I am pleased with where we are on our transformation and I am very grateful for the hard work and dedication of the Green Dot team as we work to deliver on our goals for 2023 and beyond, while also being good stewards of the trust and capital that our customers and investors have given us. Thank you for your interest in Green Dot and now let’s open the line for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question today comes from Ramsey El-Assal from Barclays. Please go ahead.

Shray Gurtata: Hi, this is Shray on for Ramsey. Thanks for taking my questions. My first questions on the B2B segment, so it came in well ahead of expectations. Could you provide some insight on how much the beat was driven by the roll offs of the BaaS contract non-renewal versus the growth in the remaining BaaS and PayCard business?

George Gresham: I’ll take that one. So the beat in BaaS, I think we made a reference in the prepared remarks so that BaaS continues to power the top line results. In particular, one of our BaaS partners in principle is driving a lot of that growth and then that’s helping offset some of the loss revenue from the roll off of the BaaS partners. Make sure I’m answering your question.

Shray Gurtata: Yes, absolutely. That’s helpful. And then just as a follow-up, when and what – when and at what pace do the associated revenues with the Ceridian signing ramp up throughout the year or is that more of a 2024 impact? And if so, how should we think about the ramp and the corresponding P&L impact for next year? Thanks.

George Gresham: Yes, I think the impact of Ceridian in 2023 will be relatively small. These programs take a while to ramp up. So we just launched the Ceridian program. So it’ll have obviously a more material impact in 2024, and then POS will launch in 2024 and ramp throughout the year. And in both – in the case of both programs, there’s an existing base that we’ll attempt to convert and then ramp new acquisition as well. So like any of our programs, I think it’ll take time for those to materialize and become more meaningful for the P&L.

Shray Gurtata: Got it. Appreciate it.

Operator: Thank you. Your next question comes from Michael Perito from KBW. Please go ahead.

Michael Perito: Hey guys, good afternoon. Thanks for taking my questions.

George Gresham: Hey, Michael.

Michael Perito: I wanted to start on the some of the segment commentary that Jess provided at the end there. I think I – if I heard you correctly, the B2B segment revenue year-on-year growth [indiscernible] 20%. I just want to make sure, I heard that correctly and just kind of that suggests a little bit of a year-on-year growth slowdown in the back half of the year as relative to where you were in the first half. Is that correct?

Jess Unruh: I just say 20% year-over-year for the full year in 2023. With respect to second half versus first half, I have to go back and look and see what – I think partly you’re going to have some of these vast partners that we’re rolling off. I think in our first quarter call we did mention that we had some impact from those programs in the first quarter and certainly that had exceeded our expectations in the first quarter, and then in the second quarter, those programs are essentially completely gone.

Michael Perito: Got it. Okay. And have you guys, just in terms of active accounts and deposits, have you guys quantified like what’s left with the programs that are going to be gone in the next few months here in terms of when looking at the end of period kind of Q2 numbers?

Jess Unruh: If my memory serves here, I believe in the BaaS channel, all those active are gone.