Q2 2020 Green Dot Corp Earnings Call
The concept 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 them.
Thank you Sean.
Welcome everyone to the Q2 earnings call for Green Dot.
I've had the pleasure responsibility of being CEO here or just a bit more than four months and we have been pretty busy.
In addition to deal with the occasional pandemic, we've been moving very quickly to realign the organization, bringing some great new leaders and focus on driving efficiencies and uncovering opportunities.
Even with some legacy issues in a few native surprises as one would expect.
I'm very pleased with all the early signs of progress we're making.
During the last earnings call.
We were still in the early stages of the Corona virus epidemic.
In the Green Dot really came through in dealing with such unprecedented challenges.
Enacted business continuity plants in Shanghai and across the US mandated work from home for all employees and implement as strict travel restrictions help protect the health of our employees and their families.
Our employees have been successful and maintaining our operations in a remote work environment.
And our offices in Shanghai, if sense reopened.
During all of this employee engagement and productivity have been high.
Like most other financial institutions, we did experience a disruption in staffing levels at our third party call centers across the globe during March and through the second quarter of 2020, resulting in longer than average weight periods for our customers and increased costs for the quarter.
I'm pleased to report that we and our partners has restored our staff into appropriate levels and are currently meeting or exceeding SLF Asia, stabbers or our call centers.
During this incredibly unfortunate pandemic.
We are proud that our products and services, we're using relied upon by millions of consumers and small businesses directly and through our partners to see much needed funds and support from various government entities and to do so safely limited to know contact.
This unprecedented crisis also clearly illustrates the strength of the diversified business, a green dot as well as a long term opportunities for widespread digital payments adoption.
Well, Jeff will provide you with a specific details related to our financial results I'd like to start by providing my perspective.
Overall, non-GAAP revenue increased 13% compared to the second quarter of the prior year.
This higher revenue an increase in active accounts are primarily due to new and existing customers using green dot products to electronically, we see coated related government stimulus payments.
Non-GAAP revenue also benefited from significant growth in our bass business.
Okay. It covert caused revenue pressure and other areas of our business, namely.
There are more significant vast partners and our paper program.
Our total operating expenses for the second quarter 2020 increased by 64.4 million compared to the second quarter in the prior year.
It is important to highlight the big component of section increase is related to growth of our bass business as well as increased revenue share one of our key retail partners.
He also suffered from co related operational expenses and transaction losses.
We expect decoded related operational expense and losses to be temporary.
Related expense lines will revert back to normal by the end of this year.
I'm very optimistic about the potential we have in thrilled about the leadership team put together over these past few months.
We are focused on five key initiatives here Green dot with the overall objective of delivering bottom line growth and strong free cash flow.
I will speak more about this after just provides more detail on our financial results.
Yes over to you.
Thanks, and good afternoon, everyone.
Overall, our consolidated results significantly exceeded our expectations. We're pleased that the scale of our platform and our market reach enable us to help consumers directly and indirectly through our partners.
Financial support to the government programs and whether the effects of code in 19 on their likelihood.
The continued uncertainty regarding the duration and the related impact of coded 19, our economy and any government response limits our ability to provide a thoughtful forecast at this time as such we won't be reinstating our guidance for the year. However, I will provide color on recent trends during the call.
As Dan mentioned, our Q2 2020, non-GAAP revenues grew 13% to 300 million and we delivered adjusted EBITDA of 45 million and non-GAAP EPS of 43 cents.
Experienced a few significant tailwind as well as headwinds in the quarter that I'll walk you through overall, we were pleased with the strength of our consolidated performance.
Our revenue results for the quarter were largely bolstered by significant growth into that business as well as new and existing customers utilizing our platform to receive stimulus funds and unemployment benefits.
As we discussed on our Q1 call we experienced a slowdown our business in March as the impact is covidien intensified customer acquisition spending levels were adversely affected and we experienced delays and certain initiatives and bass product launches.
During Q2, we saw strong recovery from the combination of stimulus funds and incremental unemployment benefits provided under the care Zac and the acceleration of many of the digital payment trends that existed pre coded.
This resulted in a higher demand in usage of our products and services as persisted into July.
During the second quarter, many of our Capesize experience accelerating growth specifically the number of direct deposit active accounts grew year over year by 35% and our gross dollar volume and purchase volume grew by 51% and 31% respectively.
The year over year revenue headwinds, we expected in our retail or direct to consumer channels were largely offset by strong growth in account acquisition and gross dollar volume.
Likewise, we experienced growth in our vast programs through a significant influx of gross dollar volume and daphne's recharge our partners. Despite one of our key best partners in the ride sharing business being significantly disrupted by the effects of coded 19.
It is important to note that the percentage interchange rate, we earn on purchase volume decline. Despite a shift in purchase volume to online spend this was due to the fact, the average ticket size per transaction increased by approximately 20%.
As we discussed on our prior call we experienced a year over year decline in net interest income due to lower yields on our cash investment balances as a result of rate cuts by the federal reserve earlier this year.
In terms of our processing settlement services the number of cash transfers grew 11% year over year as customers of our reload network partners utilize our cash transfer services and is attributable to the accelerated digital payment trends, we're seeing an industry.
The number of tax refunds process was down 25% year over year as a result, the deferral the tax return deadline.
We do not expect the deferral materially impact the total number of tax refunds, we will process in 2020.
Deferral is the time better as some of the volume that we would typically see in Q2 or shift to the second half of 2020.
Let me turn my attention to our expenses and margins.
Our total non-GAAP operating expenses in Q2 grew by 64 million or 35% year over year.
Of this increased 38% related to volume increases in processing centers, which is in line with corresponding revenue increases in our basket.
Approximately 25% related to transactional losses from higher volumes of customer disputes and reserves for credit giving issued for previously denied disputes.
Tobin 19 created operational challenges that negatively impacted our ability to address this speaks volumes and as a result, the basis points of loss on purchase volume increased we believe the transactional losses will normalize in future quarters.
Approximately 22% related to volume increases in revenue and supply chain cost.
An increased revenue share rate associated with the renewable the Walmart Moneycard program.
And an 8% increase in marketing spend.
Our marketing spend in 2019, when coupled with concentrated in the back half of the year, whereas we're spreading the spend across 2020 and during the second quarter. We took advantage of the stronger environment for customer acquisition.
Approximately 6% of the increase related to incentive compensation for our employee net of cost reductions we made during the quarter.
We recorded a bonus accrual for non executives in light of our employees efforts to serve our customers and execute on our priority during the unprecedented times.
In Q2, two that 19, we head of our school.
The remaining 9% of the increase related to smaller items that group for a variety of reasons.
We continue to be disciplined with our spending.
And focus on reducing the overall complexity of operations with the goal providing operating leverage in the years to come.
Depreciation expense in Q2 increased 19% year over year increase capitalized development costs over the past several years to support our strategic initiatives.
We expect depreciation expense to increase in the short term and then begin to flatten out as we reduced the level overall spend on development by consolidating some of our products and.
Focusing on prioritizing our development based on strategic impact incremental operating margins.
Want to spend a few minutes on liquidity.
We generated operating cash flows in Q2 58 million in March we drew down the 400 million available to us under our revolving credit facility as a cautionary measure we have sense repay the entire balance drawn as of June 32020, as we feel comfortable about our cash forecast and the strength of our debt syndicate.
At June Thirtyth, our cash at the holding company was 143 million to 100 million revolvers available to us should we need to invest in strategic initiatives.
Now I'd like to focus on expectations for the remainder of the year.
While we're not in a position to reinstate guidance I will briefly share a few trends that we're observing in general theme.
Key metrics, such as account acquisition and gross dollar volume have continued a strong pace growing double digits in July however, the incremental federal unemployment benefits are set to expire in July and is unclear whether the government will extend this benefit or take additional action such as another round of stimulus funding will be.
Monitoring the level of gross dollar volume per account during August.
Determines there'll be a slowdown in the year over year growth of gross dollar volume.
While historically Q3 is typically a lower margin quarter than Q1 in Q2, principally because of the seasonality of tax refunds.
It is difficult to predict the overall impact on margin without an assumption related to an extension of government benefit and whether the soft opening in various markets is sustainable.
Indeed, there are many moving pieces that are out of our control.
We continue to have margin compression from known headwinds such as the revenue share increase with Walmart.
The loss of high margin interest income.
Additionally, on our Q1 call, we mentioned that we expected to reduce our planned SJ spend by 30 million.
The decision to reduce such spend was predicated on the uncertainty surrounding coded 19 with a strong momentum we saw on our key metric in Q2 and July we will call back a portion of those cost reductions in order to improve our operational capabilities around customer service.
In the future growth of the business and incentivize our nonexecutive employees for the great work they're doing.
As a rough framework.
Absent new stimulus funding for an extension of federal unemployment benefits. We believe Q3 2020 will look something like current consensus with an upside bias on revenue at approximately $240 million non-GAAP revenue.
Mid to high single digit margin.
With that I'll turn it back today.
Thank you Jess.
Okay.
Now.
Let's talk about some of the key things we accomplish in the second quarter.
In the past few weeks you may have seen a number of exciting announcements by some of our newest fast partner programs last week into it formally announce or Quickbooks cash bank account.
And industry, leading small business bank account.
As uniquely integrated into the Quickbooks ecosystem.
We're very proud to be working with into it to give small businesses faster access to funds, great account visibility and convenience as well as an industry leading interest yield.
Average also announced our new partnership to launch cabbage checking.
We are thrilled to be partnering and cabbage accompany that has done so march to help the small business community. During these particularly trying times facilitating nearly 6 billion in PPP loans this year.
The new product offers convenient and modern money management tools and high yield interest for their customers.
Through these new partnerships with into and Cabotage, we are positioning green dot to serve Americas 30 million plus small businesses.
We're also pleased to share than in last quarter, we launched our innovative new product, which well front.
Linking our issued debit cards and thank you functionality with their high yield cash account for their investors you see beautiful and seamless user experience integrated into the wells on App.
And we're very encouraged by the initial feedback on the product.
Working with all these partners not only grows and diversifies our business, but all of our partners make us a green dot better.
I would like to thank quickbooks, cabbage, well front and all of our partners for their trust and giving us the opportunity to work with them.
Last quarter on my first earnings call for Green Dot I laid out five key initiatives in areas of focus number one.
Keith to bank grow it integrated and leverage is capabilities.
Number two it much more efficient.
Resulting in bottom line growth and free cash flow growth.
Number three our core businesses tax processing money processing and pay card.
Growth and stability.
Number four consumer business, both direct and retail renewed growth.
Number five vast partnership business.
Here, we want to be an innovator not in order taker.
Declaring these five areas of focus is easy.
Executing on such as much tougher.
The requires hardware driven and maintained by a lot of dedicated people pretty simple right.
Just get clear on what you're going to focus on then make sure you have the right people they get the job not.
Simple, but not easy.
The most important thing we accomplished in the second quarter was a complete rebuild of the leadership team here Green Dot.
Through internal promotions and external hires we feel that one of the strongest teams I've ever had the pleasure working with.
We started with annual record to use run financial services at Walmart to come in as our Chief product officer, and help us deliver innovative solutions to our Bash partners.
We added Philip Loma, our new Chief risk officer with experience from great companies, such as pay Pal Netspend any amount.
We then brought in gray corals, former CEO of HR Block Bank focus on our first initiative.
Growing and better integrating green Dot bank.
We then added branded Thompson as executive Vice President of retail tax pay card and money processing to help us focus on delivering renewed growth into our consumer retail business.
I've worked with branded before at both year on that Netspend and he is always delivered above and beyond.
We also made many internal changes and promotions and legal ITD project management compliant operations marketing and others. So much so.
That is a leadership organization stands today, the only senior executive leaders still in place as and when I arrived as my head of HR, Jason Bible Harman enjoy you see tired.
On a tremendous job over these last few months assisting me rebuilding this leadership team.
A lot of credit goes to him and his team in assisting me and delivering this much needed change so quickly.
Now keeping that momentum in line.
This last piece of the people side of equation is very exciting.
Last week at Green that we declared a work from anywhere approach for the remainder of 2020.
We have found that with our current work from home environment, we are maintaining a high level of productivity.
As we embraced as new normal we are developing guidelines and practices keep our sense teamwork strong while reinforcing a performance driven mine check.
For the past 25 years of building companies.
I've said that people are not our most important asset the right people are.
From a recruiting standpoint work from anywhere has dramatically increased the quantity in caliber of applicants we are receiving for open positions.
As I just described over.
Over the past three months, we've built a tremendous leadership team here at Green Dot now.
Add to that our ability to hire talent from all over North America without requiring relocation.
I got to tell you I am ecstatic about the powerful team we are going to put on the field.
Every company on the planet Big and small is made up of people in every company deals with the same challenges via Pandemics economic pressures for climate competitive challenges and at the end of the day.
The degree of long term success always comes down to the people in that organization.
They are attitude their commitment the capabilities their performance.
I'm thrilled to be working with and supporting this tremendous team we have put together and I can't wait to see the talent, we can add to our ranks as we continue to recruit with the work from anywhere approach.
Finding energy and focus of our team with a valuable assets, a green dot and.
And we have an opportunity to create some tremendous value.
I want to thank all the great employees agreeing that the board of directors and the investors who is an opportunity I look forward to what we can accomplish together.
With that I'll hand, it off to the operator for questions. Thank you.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the Keith.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Bob Napoli of William Blair. Please go ahead.
Good afternoon.
Dan and Jess.
Andy come on board and all the sudden.
Revenue growth goes to 20%, it's a pretty pretty nice acceleration you put in in a few weeks Joe into pandemic two to help out I guess.
Hazard to guess.
Yes.
So I have to buy I guess, you're there.
Five key points of growth in graduate made to really be both team and what is the.
What are you most excited about it when there's a lot going on I mean partnerships with wealth front expansion with into it and cabbage.
New it the what.
From what you see what are you most excited about in the growth front, where do you see the biggest opportunity.
To enhance growth and profitability over the next.
Couple of years.
Hey, Bob Thanks, I can take no credit for this revenue growth that Thomas.
Yes, thanks Nonetheless.
Yes.
Okay.
If you if you're talking like significant growth over the next two or three years.
Yeah, you're right I kind of look at things like short term medium term and long term and I think you're done. This in the short term just kind of getting some of the fundamentals back and order on our what I call. The tried and true businesses, we have here of tax and pay card and in retail and even to the green Dot reload network.
So I think I'm very excited about.
With brand in here that new leadership, and the things that he's seen and able to kind of quickly turn styles is real helpful.
And medium term, what we're going to be doing and terms or just kind of.
Driving growth through traditional retail that we have as well as I mentioned on last call kind of.
Reclaiming the banner if you will have a have a direct to consumer digital offering.
Predominately to low to moderate income consumers in this country thats.
Thats going to give us.
Most of the growth next year and.
That's a long term grower for US right there just new in of itself and then.
Hi, guys in stack on top of that.
Really the potential on the vast partnership initiative.
We are very uniquely position.
That we own the bank, how we've got 20 years of experience of.
Digitally opening up accounts for consumers, providing the customer service, having the platform to run the transactions.
And then having 100000 locations, where where consumers are no matter, how digital world gets for quite a while you're still going and have the need for physical locations to load cash and Thats combination is unique to anybody in the country and so and I think that the.
Our existing partners and conversations we're having with other potential partners.
Yes tells me that Weve.
We execute well.
We've got we've got lots of growth for years to come.
The Green Dot.
Great and just one follow up question.
A number of unedited commercials, I guess on what I would consider to be probably expensive time slots.
With us on CNBC I think some Sunday morning shows that is that if the unlimited product I think you were going to simplify the products are you simplifying the unlimited product and then that is going to be like the key marketed.
Retail product for the company.
Yes, we're not disclosing our star.
Tell strategy on that right now, but weve.
As you can the another product is now a two into not at three and three so it's a bit to it's a better product works economically and still.
Having really good uptake.
As for the quarter commercials.
Rep remnant TV is.
Surprisingly affordable you so.
We are.
So we did the way to run the TV you buy blocks in your necessary pick and choose which shows you get on so I don't think you our target market, Bob but I'm glad you unless you get a chance to the commercials yes.
Thanks, Dan appreciate it.
Great. Thank you.
Our next question comes from Ramsey El Assal of Barclays. Please go ahead.
Hi, guys. This is standing on for Randy Thanks for taking the questions.
Just that's helpful that you provided the framework for Q3 am hoping maybe you can talk more broadly about how you think about the stickiness of the customers that may have been acquired the government stimulus.
And maybe how you're attempting to keep some of those longer those customers longer term and.
Maybe if that sort of lead us to how we can think through Q3 as well just high level thoughts on sort of the stickiness with our customers.
Sure sure. So certainly we don't want to squander the opportunity to add around customer acquisition. So were.
Lots of efforts internally trying to lifecycle market to folks to retain them as long as possible.
I would say in terms of sticking it.
One observation would be our balance sheet as of the ending Q2 deposit balances are up roughly $1 billion year over year. So what we're seeing with customers as we see an influx of customers were seeing influx of GDV and in those balances are little more sticky 70 people are being prudent about their spending habits.
At some point in the future that that.
The balance will come off in the form of purchase volume et cetera, which will earn interchange.
Sticking us in the fact that people are holding onto balances longer.
Yes, I Wouldnt say, there's a material trend in in uptick or trended churn for example, so.
I think you're going to see probably a bigger active set in in Q2 and you will in Q3, but I think you'll still see year over year growth.
Which is something we haven't seen in total active basin, but.
That's great yeah.
And as maybe a follow up.
I think I'd ask about the cost levers here.
I know again just to get some helpful breakout in the Mr contribution of the expense growth, but maybe forget as well you can speak more broadly about how you think about the cost levers that are available to you you spoke about the work Mediware initiative, maybe can that weve to longer term cost savings on the real estate consolidation or.
Now that you've had more time in the seats. If you have uncovered any new cost savings initiatives, obviously love to hear about that.
Yes. Thanks.
Great just good I'll, just get a quickly say in with the work from home or work from anywhere certainly that's providing additional opportunities not only from the recruiting side of the house, but also from a cost perspective as you can imagine where we're taking a hard look at all of our properties and leases and trying to come up with the best possible model. So I think there could be leveraged there in the future.
Look I think we talked about in Q2, we had a heightened amounts of called transaction losses are dispute volume.
It was that such a level that.
Higher than anything we've seen in prior years I.
I don't expect that level of dispute to continue and so that should help out with margins on a go forward basis.
And then look we have some continued headwind in Q3 in Q4 related to the Rev share for Walmart and the high Mark lots of high margin interest income.
But as you can imagine we're still sort of uncovering cost opportunities we're looking at.
Okay fluid vendor negotiations in hopes of providing operating leverage in the future.
I think the big thing that I'll call out in that again touched on this is a fair amount of complexity in the system built up over the years and there is planned internally to streamline some of that and that will help out operating leverage as well definitely want to add any color.
Now I think you covered adjust.
I appreciate it thanks.
Our next question comes from Andrew Jeffrey of Suntrust. Please go ahead.
Hi, Good afternoon I appreciate you taking the call.
A question.
Dan I Wonder if you could spend a couple of minutes talking about Walmart relationship.
Inclusive or exclusive.
Tail fan and.
What you'd expect from the retail business, which I think is predominantly Walmart is there a change in the go to market strategy and how you plan.
To monetize and keep that still be of growth driver for green Dot.
Okay.
Yes, Andrew.
Yes, I want to your.
You are they in the world a retail.
Especially when you talk to retailers they kind of a goodwill. This are there theres walmarts and then there's everybody else in this of course is bricks and mortar retail.
And so I think David.
Yeah.
With Green Dot, we have a very neutral retail business outside of Walmart.
Now we have.
Green Dot and that when I say has had a Walmart that includes green cards that are better sold through Walmart stores as well as.
Our other 95000 retail locations so.
There's there's growth with both in retail and total with with Walmart Moneycard in partnership with Walmart.
Together with retail in general.
Branded tops are very much a couple of hands on this call.
He ran retail for Netspend smoothies, very knowledgeable hits around running.
Fresh eyes, and and knows the assets at Green Dot has and we're in.
Really interesting conversations with not just Walmart, but with other retail partners about what can we do for them and payments beyond just the plastic card.
And so again, if you think about.
Leveraging his skills and capacity of green out with the bank in with the platform in our expertise.
We.
We're excited revenue with discussions railing Walmart of where we can move with payments I guess I'd just just beyond the plastic card and there has been changes at the leadership at Walmart.
And so were.
Very encouraged with.
The new president of Walmart us as well as the product team that he's building there and some of the early discussions that we're having.
So again stay tune in that regard.
And then.
I would have.
Thank you can help out and elaborate and maybe talk about the vast businesses it evolves.
Inferring from the press release, and maybe some of your comments that.
There may have been a shift in mix in batch.
In terms of those customers generate interchange versus those general program to either.
I just wonder if you can elaborate on that and talk about which is more scalable and if theres a strategy going forward as to.
Construction contracts.
Mix.
Yes, yes. Good question, yes, there's there's quite a few flavors within basked in terms of the contractual agreements some look very standard like.
Similar to a Walmart relationship where we are in cardholder fees and then as a Rev share in the Bakken.
Whereas the other.
Side of the spectrum is really going to be us as a platform behind the scenes powering it but really the the past partners. The one sort of front facing with the consumer and earning the cardholder fees and interchange et cetera. So there's quite a few different models underneath the hood.
And certainly what we're seeing is in particular that platform business is really expanding and growing you're seeing that some of the results here as fast fee increase.
As I think look I think it's fair to say now with the new leadership team in place that will take a hard look at what we want to do from a contract structure perspective, and how we want that to evolve over time.
It is one business more one type of revenue more scalable intrinsically that another.
I would say they are different so one is.
One where we're earning fees from the vast partner I would say that more I would say traditional subscription based they control the acquisition funnel were behind the scenes, earning a fee.
Yeah for transactions versus the other model, where it looks similar to what we do on our retail consumer side or direct to consumer side, where we're trying to incentivize cardholders, what we don't we don't necessarily control customer acquisition.
Which is yes.
A bit of a challenge when do you think about how to bottle and price those programs. So.
I think I think our thoughts on bass will continue to evolve and will share some more.
As the quarter gone.
Okay. Appreciate thank you.
Our next question comes from George Sutton of Craig Hallum. Please go ahead.
Thank you.
On Quickbooks first congratulations.
I would scare you apply explain what we came up with those the Tam for that opportunity I wondered if you could address that opportunity from your peers effective.
I'm not going to take a shot at quantifying the potential size of it.
By now we are.
Yes.
You alluded to 30 million small businesses in partnership with Intuit Quickbooks on is very exciting for us.
And.
Hi, good.
To be able to serve the notice a low income individual consumer and build our expertise around that and then thinking on how we can leverage a lot of those tools and learnings to serves small business.
Especially if we're able to.
Leverage leverage the.
The power of our bank.
Together with partners like into a cookbooks and even cabbage.
Yes, I think theres theres, some real growth potential for us there.
I wondered if you could bifurcate the impact that you were seeing from the stimulus money going to consumers versus the government benefits through the employment unemployment upside and I asked that in the sense that as we look forward to whatever the next stimulus is going to be.
We will benefit more.
No.
It's.
I would if I kind of look at all is like one large stimulus. If you think about the increase amount yet of unemployment benefits combined with any sort of onetime benefits edge.
It's all to me a very welcome and noble effort of folks in DC to key.
Keep a lot of employees in this country any in a good stayed as we get through this.
Hopefully once and lifetime event so.
It's.
George is if thats. The question that I was kind of out there I think across all companies in terms of.
Give code that Didnt happen, what would what would the world look like and vice versa. So.
Where.
There is another version of the carriers I understand those that comes out later this month will of course that will be better for us and if it didn't come out at all.
But.
I think by like most everybody I would have preferred the coburn never happened.
Understand would probably not all these sitting at home right now.
Yes.
Does that help.
Sure. Thanks George.
Our next question comes from Andrew Smith of Citi. Please go ahead.
Hey, Dan Aegis, Thanks for taking my questions.
Yes, the account growth in the quarter as what do you think it broke that down between Boston consumer.
You had some comments in your prepared remarks and then.
As a follow up to that whether there's a difference in retention that you see.
On the consumer platform versus fast platforms, I know that probably hereon boss, but just just at a high level that would be helpful.
Yes, we haven't broken out consumer versus fast.
I will say that.
If you were to go back to our our commentary beginning of year, what we thought about expectations. Those again before cobot happened that we expect the consumer business, which is retail and direct consumer channels to be down on revenue double digits, while the platform business, which is made up of Paycard and.
Fast and money processing and tax stocks and would be up high high double digits.
Yes that kick in there with the consumer business would be down in actives, and then start moderate while the bassam and take our business continue to accelerate Albacete cobalt has disrupted some of those trends I would say that at a high level.
Maybe less activity has helped to mute some of those headwinds we thought we would see on the consumer business.
And secondarily I would say vast continues to grow at a healthy clip and I would say that.
Simulates was.
Continued to be.
Helpful not only for the consumer business the for the vast business. We have few programs that were.
Dedicated to sort of the tax space and they benefited greatly from stimulus funding.
And then we've had some other programs that.
Continue to grow healthily, Paycard, obviously was impacted from unemployment issues across the us and so that slowed down quite a bit that I would say without giving you specific numbers I would say the year over year trends in active on consumer business were way better than we thought there would be and bass continues to grow.
Certainly offsetting any headwinds we had on pay card.
Got it that's helpful and then maybe higher level question on pricing.
Obviously, there's a variation of pricing out there for other products in the marketplace, but.
Many other digital banking products still offer.
Account fees and things like that.
Just wondering if you know whether an existing or new products you see that the mix of pricing change in going forward, whether maybe you know relying more on interchange versus account fees or other value added services other types of products can maybe.
Okay can maybe account for more revenues versus versus companies just curious just.
Thoughts on potential evolution and product pricing.
Yes interrupt you appreciate the question and then.
I'm going to try to like you be the open with you, but I also don't want to be tip. My hat in terms of what what will be you going out with at some point.
Your.
Customers in my opinion, your don't always value free and so.
From our experience.
Many many years of being in this space.
If you want to drive.
[music].
Numbers that show you got a lot of accounts or a lot of cards issued.
You can lead retreat in you can have a lot of a lot of clinical customers and accounts with very little to very limited engagement.
So.
My belief philosophically is that.
No there's.
BMW is worth more than a bicycle.
So.
The consumer really wants a product that serves their money needs in their financial needs and is not just a simple.
Transaction tool or mad money tool than they are more than happy to pay a monthly fee of $5 or $9 for that product and even in the Neal Bank space. That's out there you see a lot of very.
Companies, I think you're making great traction where they have a monthly subscription model, where they may charge, one fiber $9 made they call it a subscription.
But it's still a sort of costs a consumer pays for forget integrate service in that great product.
So.
Im rambling, a little bit, but really I think the message is that.
I don't I want to being a business, where I am only competing on price.
And.
As far as I can tell you.
It's out where.
We're really one of the few digital bank second really glad that were truly our bank and that of marketing company.
Right I think.
I think people are willing to pay for value and we're going to offer real tremendous value for our customers.
Okay makes sense, Dan Thank you very much.
You're welcome Thank you Andrew.
Our next question comes from Mac, Ken of Needham. Please go ahead.
Hey, good evening effects like how Peterson on for Mike. Thanks for taking the question.
Just wanted to see if you get an update on.
And then we've established a more leadership within the Green Dot Bank talked about.
Taking advantage of that to whether its.
Loss from additional products.
So just overdraft protection just want to see if everything update on some of the traction you guys are getting with that.
Yes.
In terms of rolling out a number of consumer friendly overdraft solution that requires a technical build on our side.
In terms of inserts.
So that's a long pole and intense there.
As Green Dot bank as a bank.
We we feel that we have you have the ability to rollout that product and Greg corals.
Two I've I mentioned on the call.
He's been.
If you still relatively new I think about a month into the job he's had numerous meetings with with our regulators and with our team at the bank and.
I'm feeling very.
Very optimistic about the value and discipline, the Greg can bring to Green Dot bank.
Great.
It's helpful. Thanks.
And then just one quick follow up on the competitive environment, particularly with some of these neo bank. So you guys seeing any.
Shake out or disruption, obviously your account trends or look have looked really strong. This quarter just wanted to try to tease out work stimulus and what might be some of these smaller start shipping these transformative pressure.
With the from the market volatility caused like over.
Yes, I can't really comment on what other neo bank startups or are feeling.
Yes, again, a couple pitches from bankers about here.
Some some startups and within tech space are in need of some capital.
I know it seems to me like the capital markets is still working really well and.
I don't I don't I don't think coated.
It's brought positive or negative to the space and I think it's across the board as its almost neutral.
Alright sounds good thanks to the car thanks nice quarter.
Thanks Count.
Our next question comes from Ashish Sabadra of Deutsche Bank. Please go ahead.
Hi, Thanks for taking my question Congrats on the solid results I was just wondering if it's possible to quantify the benefit of the stimulus on unemployment in the quarter are maybe another way to think about it would be just to the indicate that framework for the fourth quarter, which implies like 60 million dollar sequential decline.
Like what.
How much of status seasonality versus a loss that benefit that you are not miss an accounting for right now and young.
Great. Thanks.
Okay.
Well take a stab at that.
I think I want to talk about stimulus funding GDB associated with it during the quarter that was.
Roughly $2 billion.
So that's.
2 billion of the $5 billion year over year increase.
Unemployment benefit.
Certainly something over looking at in Q3 is whether it sounds like Congress is making some progress here around the unemployment benefits. If they are successful in doing so then clearly our Q3 framework.
We'll improve on revenue basis, now, there's always a sequential step down in both revenue and.
Margins when you go from Q2 to Q3, because theres a fair amount of.
In an all time.
Fair amount of tax refund volume that still come through in Q2 now you've added on stimulus funding.
You've added on generic additional $600 per week from the federal.
Government on unemployment benefits and then as we head into Q3 right that the stimulus funding gone potentially be.
Federal and part of that if it will be gone, but all that could change the in the matter we care. So I'm not sure if I'm asking your question but.
That's probably the best I can do free.
No thats very helpful tanks, and maybe just Don a quick question on capital allocation priorities.
The company has.
Good amount of cash.
How do you think about capital allocation priorities going forward. Thanks.
We have.
You're a handful of initiatives here at the company what we're focused on one is stabilizing our our TPG platform stores investing some capital there.
The other is.
You are building building, our where we're calling it the challenge to challenger banks color Green Dot.
2.03, 0.04 0.0, what are you choose.
And.
Whereas spend spend a good amount of time and energy on really improving.
Our customer experience.
Anywhere from from Ivy, Our two card services to sign up for the products.
Across the board.
Yes, most all of that effort and work is being done by existing employees in the company. So.
From a capital allocation standpoint, as we as we are generating free cash flow.
You might my intention is to is the bank that free cash flow and not not try to find ways to spend and I really think that you have.
Just really NR doorstep.
Tremendous opportunities.
At all we need to do is execute on those opportunities with our existing resources on hand to really.
Piece for some meaningful growth for the company.
It's actually quite a nice position to be.
That's helpful. Thanks, Alan again, congrats on the southern.
Okay. Thank you very much needs.
Our next question comes from Steven Kwok of KBW. Please go ahead.
Hi, Thanks for taking my questions. Just the first one I have is just around the operating margin I know you've guided to the mid to high single digits for the third quarter, but that was just wondering like once all of the third party activities like normalized like what's the appropriate normalized margins that we should be looking at and I guess.
As a follow up to assess allow like what's the incremental margins on your business.
Thats stimulus does happen and unemployment does happen in the third quarter, how should we think about incremental margins on that piece of Robbie. Thanks.
As a lots on factor if I can answer your question.
I would say.
Maybe just a focus on the stimulus funding so absent and we don't expect to have the same issues, we had operational challenges with the speed volume in Q3 so.
Yes, the margin on the flow through the state any stimulus funds that would come through and any additional federal unemployment benefits and certainly get higher margins than what we experienced in Q2. There's also some I would say some I call. It some headwinds and Tailwinds in Q3, you've got the headwinds of web share on on Walmart interest income.
And tailwinds from the shift in.
Some of the tax volumes in Q2 Q3.
Got some marketing timing et cetera.
So I would say a fair amount of puts and takes Sir normalized margin I look we're going to lap.
The the Rev share on on on Walmart in 2020, 2021 excuse me.
And we'll go off that base.
I would say Dan had lot of the initiatives, we have underway, obviously about increasing free cash flow that means more profitable products and services.
One example of making sure Rightsizing economics is the unlimited changing for three and three to two into clearly the.
That was the focus there was the increase in economics for us and making them more profitable product. So I would say look it's hard to say right now any for him to tell you what the normalized margins will be.
But clearly the focus internally is about profitability and free cash flow.
So our goal clearly the to drive margins up Dan If you have anything else you want to comment on.
Yes, I just think it's down.
We're going to be working on this over next several quarters make the job easier for you guys, but.
We have a different margin in our bass business than we do on our Walmart business, which is a different margin than we have in our direct to consumer business, which is a different margin, we haven't our green dot com retail business and so dependent on.
Which one of those is growing faster.
You know kind of has an impact on our margins so.
I think that.
And.
Forward to provide you with some guidance make your job easier, but it is I.
I guess when measured on what we're in we're not dodging. The question here. It's just hard to just kind of simplified to pay your sustain or margin we get on every dollar revenue.
Got it understood. What was just wondering is is there a.
Target of margin expansion going forward on a yearly basis.
How should we think about the pace of improvement.
All right.
Yeah, I, there's not a target in terms of it's just not that.
Okay.
I guess this is one of the things that don't teacher business School you. Just can't said ahead of us to the target margin increase of X.
But.
What I can say.
It's the target is that.
No.
Every year, our cash flow, our free cash flow grows and our margin expands over the prior year.
That's that's what I'm used to doing that so I'm used to operating.
You know I've said.
I said 100 times is that the beautiful thing about a payments business.
Is.
Once you get to a level of fixed costs, where you can you.
Serve the customers at a at scale.
Just keep your fixed cost fixed.
Keep your fixed costs fixed your margins will expand.
So back to your question about capital allocation.
No I'm not sure, but I seem to I suspect that there was a time before I showed up that hey, whenever there was profit or free cash flow everybody came our way suspended.
That is a mindset that I am in just in fabric about changing around green dot.
We're going to keep our fixed cost fixed.
If we do that and then we pay attention to variable cost whether we've got a contribution margin from a deal that's 3% or 30%.
We keep our fixed cost fix our overall margins will grow.
Yes.
But.
I can't I cannot going I'm, not going to never to predict by how much but.
Growth is what we're going after.
Got it thanks addressed on.
Thank you.
Our next question comes from George Mihalos of Cowen. Please go ahead.
Hey, good afternoon, guys. Thank for taking my stuff.
Hey, George wanted to ask if we if we looked up hey, Dan if we if we look at.
Direct deposit as a as a.
Percentage of your accounts outstanding first half of the year, it's north of 50%, it's up meaningfully from from the first half of last year is is that above 50% sustainable and where do you think it can go as you kind of look out over the next couple of quarters.
Yes, so well start with that and then you can add color I would say look in the quarter certainly the direct deposit base was bolstered by unemployment benefits and to some degree stimulus funding.
But I think they'll look our goal internally is to be hyper focused on direct deposit direct deposit customers because they are by and large at the longest lifetime revenue than lifetime contribution for us. So.
I think I think maybe Q2 was a bit and anomalous.
But I would suspect that the direct deposit penetration in the overall activities will continue to grow, especially as we get into next year. If we have additional products that were.
Designed for long term usage with additional functionality for the consumer.
Yeah, George and I guess I look at.
Sure I, but when it comes a direct deposit accounts I'm going to be your focus more just on.
The actual net number of those accounts as opposed to percentage of total.
The reason being is as we move into.
More and more bass partnerships and.
[music].
The then there's there's going to be here.
The number of accounts could could grow pretty substantially if we just becoming embedded accounts in as one of our partners apps. So I'd say thats ravages kind of caution from the standpoint of a percentage of total is not to me as important as the actual net number of direct deposit accounts and that number I fully expect.
Correct.
We will be seeing that growing.
Year on year for us for many many years.
That's that's the that's very helpful. Then Im just just one more if I could go if I could sneak one im just going back to the the competitive question, maybe asking that a bit of a different way.
You sort of had been yield banks that have been competing against you with teams. We've got some I guess, the digital wallet operators down but also making.
More aggressive push if you will around direct deposit layering more functionality.
On a four core core payments functionality curious, how you're thinking about double competitively in the market and yes, maybe not so much how you decided against us up so little bit model, but how much of it sounds will that be on.
Maybe some of the more tradition.
This is.
Yes, So George you could I love the dead. The question I think I get the gist of it.
If I if I look back I think I've been.
Kind of in this space.
Yeah, sorry, Netspend 12, plus years ago, and even then what what I saw was are you some of our biggest.
Adam is to growth.
Yes.
In grain consumer habit in terms of utilizing cash.
Lack of awareness in terms of the product and what it could do and also maybe kind of lack of.
Credibility.
If you will and so.
What.
What we found back then when you folks like American Express and Chase jumped into this space was they spent hundreds of millions of dollars educating the market on the value of prepaid cards.
Again today, when I see what Jay I'm very encouraged by is really the number of players jumping into.
The space either directly or.
But around the room competing with us is that they see them as much as competitors because a total available market is so large I see them as helping us.
Communicate the message.
There are.
Very viable.
And.
Useful and competitive.
Alternatives out there to traditional bricks and mortar banks and financial institutions and.
I think we've all seen just over the last three months of.
What we call that has done to drive.
Digital adoption by a lot of consumers, who had originally had been making purchases in cash and so I really am.
Yes, I'd to actually I had mixed emotions when I when I read your same things you do about other other companies kind of jumping into the stays on one hand.
No.
I believe and competition I'd, rather not have it out to be honest, but that competition.
They take some of their funding they spend marketing dollars, they build awareness and consumers mindset of other ways.
Do you payments on your banking and that benefits all of us as.
Rising tide lifts all boats and I go back to what I've said for years and years. If you look at the size and total available market.
It's not a zero sum game theres plenty of room for.
A number of companies and space to be very very successful.
I guess they cut George off.
Our next question comes from Bob Napoli of William Blair. Please go ahead.
So thanks for the follow up just a quick one.
The revenue per account active accounts has gone up the last two quarters by like 14%.
Every or even at has the active accounts went out and ending the first quarter, even before that much affection until that I just wonder if you could gives any color on why.
Revenue per account is up.
Such as it is.
Yes, Bob I would say I wouldn't give a ton of credence to.
Revenue per active and the reason they say that is because we have certain programs in our bass.
Channel, where we don't report active.
But if you look at the pace of the PNM for example, and you're taking card revenues and other fees and interchange or are you looking at the account services segment revenues and your dividing that into active base. There's there's both some bass programs as well as like gift card revenues. For example that don't have a corresponding active so I wouldn't give a lot of credence Hogan.
Revenue practice.
Okay, great. Thanks appreciate it.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to Dan Henry for any closing remarks.
Thank you operator.
Well, thank everybody for the Collyn.
And just wanted to thank.
All the new Tech team members agreeing that and all those that are still hairball, my showing up and.
Everybody now more acceptable or going to be able to do.
Thanks, everyone.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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