Q2 2019 Earnings Call

Good afternoon.

Welcome to the Green Dot Corporation second quarter 2019 earnings Conference call.

Participants will be in listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the star key celebrates zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.

To withdraw your question. Please press Star then too.

Please note this event is being recorded.

I would now like to turn the conference over to Darryl Dirks Investor Relations. Please go ahead.

Following those remarks, well open the call for questions.

For those of you who haven't yet accessed your earnings release that accompanies this call webcast can be found at <unk> Dot Green Dot Dot com.

As a reminder, our comments include forward looking statements among other things our expectations regarding future results and performance. Please refer to the cautionary language in the earnings release and in Green Dot 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'll make reference to our financial measures that do not conform to 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 reconciliations of our non-GAAP financial information to the directly comparable GAAP financial information appears in today's press release. The content of this call is property of the Green Dot Corporation and subject to copyright protection now I'd like to turn the call over to Steve.

Thank you Dara and welcome everyone to the Green Dot Corporation Q2, 2019 earnings call Today, We'll review the second quarter financial results provide a status report on our six step plan, including details around a new unlimited Cashback Bank account product and officially launched one week ago and will discuss the state of the digital banking segment of our market.

Well Mark will share more context around our financial performance and guidance. During his section of the call I want to address up front that we are lowering full year guidance well disappointing unfortunate it as necessary as a result of an acceleration of declining unit sales in our legacy prepaid card product line combined with a lighter than expected launch of our new unlimited product and a large bass program that together and make it now unrealistic for us to achieve the growth. We had intended in the second half. We believe the underlying reasons are contained to only or legacy prepaid business line and are likely to impact only this year's revenue growth trajectory as expected performance of our new products and our best programs should help us return to healthy growth rates again next year. So now let's get into the numbers green dots products and platform model generated Q2 consolidated non-GAAP total operating revenues of $265 million, a 5% year over year increase.

The largest drivers of the growth were our best platform product line and from growth in our processing and settlement segment. However, our account services segment underperformed our expectations in the quarter and the first half in general due primarily to a decline in our legacy non direct deposit active accounts, which way identified as a potential headwind on our last call. These declines continued and accelerated in Q2, resulting in lower than anticipated prepaid unit sales that has caused a material reduction in active prepaid accounts in Q2 on a year over year basis, we were down by around 500000 active prepaid accounts, primarily from the loss of non reloading customers and cash reloading customers offset by an increase of around 240000 bass active accounts.

The digital banking industry segment has become incredibly competitive this year and over the past several months in particular with several so called Neal banks flush with new rounds of venture capital spending a record amount of marketing dollars to convert customers to their largely free bank account offerings.

Green Dot has fared well historically against competition over many years and we are still far and away the largest digital bank. In this segment were taking these competitive pressures seriously.

There's little doubt in our minds that the increased marketing spend from so many competitors in aggregate is taking its toll on our new customer acquisition.

We have a track record of navigating through similar competitive environment and believe we are well positioned with our innovative product roadmap and strong infrastructural competitive advantages to return to active account and associated revenue growth starting in 2020, but until then we expect our prepaid product line to continue to show weakness in Q3 before performance starts to moderate in Q4, and then returns to active account growth in 2020.

Adjusted EBITDA for the quarter was well ahead of our expectations delivering $75 million on a consolidated basis, representing a year over year growth rate of 18% a growth rate that was achieved over and above a very strong comp from last year's Q2, the year over year EBITDA beat was broad based with about half of the game coming from flow through from higher revenue on several of our product lines and the other half coming from operational savings achieved through several of green dots platform efficiency initiatives the better than expected adjusted EBITDA result generated better than expected consolidated non-GAAP EPS for the quarter of 90 cents, representing a year over year growth rate of 22%. So now let's review our progress in achieving our six step plan for 2019 step one is about launching two new innovative and exciting products. I think we are in excellent shape here. Our first product officially launched on July Thirtyth, it's called the unlimited Cashback Bank account by Green Dot Bank, we are truly thrilled with the quality of the product the execution of the launch and their tremendous number of positive articles and review.

As we receive since launching in fact, we have received nearly 1 billion media impressions from press coverage of unlimited in just the first weeks since launch.

Given that I think it's fair to say that despite the tremendous number of competitors in the digital banking space today unlimited by Green Dot has clearly captured the attention of a broad spectrum of the American public in a very short period of time. There are several items of note I would like to share about our unlimited Cashback bank account product.

The first note is about the product itself unlimited is neither a prepaid card nor a debit card. It's a bank account that is designed to be the customer's primary bank account and and so being ultimately replace whatever current bank account that prospective customer currently uses.

Market research shows that 80% of the American public under the age of 44 is willing to try a new bank account if they felt it was better than their current bank account among those respondents who rated unlimited with a high intent to purchase score more than half currently use a top 10 National bank and another 40% currently use either a credit union or community bank less than 5% currently use an online only bank and less than 3% currently use a prepaid card as such we expect that our opportunity for unlimited is large and mainstream while very early days I believe we are succeeding in finding a new customer base for green Dot and in so doing we believe that unlimited and other new products. We're working on are they tend to deploy before the end of the year have a real and promising opportunity to increase our Tam well beyond the prepaid market for our bank account products. While we have several bass partners with products that are intended to attract the mask, making market and limited is the first product under the Green Dot brand name that seeks to attract a mainstream bank account customer the second note.

It is about technology unlimited is an app that houses the digital cashback checking account a digital high yield savings account a way to send money to friends and family instantly in for free way to transfer money from the customers All bank account into their new unlimited account and on demand digital deposit slip that enables the customer to the positive cash securely and at no charge at participating green dot retail locations and easy to use mobile phone camera check deposit feature and much more at any time the customer can touch the deposit tab in the app to send their employer a pre populated email requesting direct deposit enrollment, thereby eliminating much of the hassle of enrolling in payroll direct deposit and questions can be quickly answered via 24, seven text chat product support available in the App and online at the touch of a button.

The App also offers a host of mobile alerts and keep the customer connected to their account and feeling instantly gratified by seen their cashback palins grow with every online or in App transaction. The third notice about design a limited as cool Bank account. For example, the website is unique content rich and the result of considerable consumer testing and artistic review information is transparent and reflective of Green Dot is culture.

In fact, all the how to videos are real green dot employees talking about the product they created.

The unlimited App is highly functional intuitive and fast and the lifecycle messages social media and TV spots are designed for the mainstream millennial in mind.

When the customer gets a personalized visa debit card at their home the Karlix modern and unique and can be easily provision for Apple pay Google pay or Samsung pay even the image. It comes up on the mobile phone when you make an app or in store mobile payment looks sleek and modern.

Design matters, and we believe our customers will take notice, leaving to a more intimate relationship between the customer and the bank account overtime, the fourth and perhaps most important note is about value for the customer that uses unlimited as their primary bank account, the 3% cash back an online and in App purchases and the 3% annual interest rate on savings represents extreme value plus unlimited offers easy to find free ATM free cash deposit of popular retailers using our app and it kind of has no overdraft or penalties of any kind in fact, the only fees at a typical customer might pay are the ATM fees outdoor out of network machines, and a 795 monthly fee that can be way from the customer spends $1000 per month or more an easy hurdle for most people. We believe unlimited is the best value in banking notice I didn't say, it's the cheapest bank account there are many free bank accounts as you know out there, but we believe we have succeeded in designing a product that is both a category leading value for consumers.

And financially sustainable product for Green Dot well, thus far too early to predict any type of specific outcome I can let you know that assuming acquisition rates stay at least similar to what they have been in week. One we believe we will meet or exceed our goal of opening 1 million new unlimited accounts prior to the end of the year limited is the first of what is intended to be several new product launches. This year as part of our strategic innovation roadmap, including a new Gen Z Mobile bank account product that we expect will find a completely different market than unlimited. It is our goal and expectation that in aggregate. These new products unlimited plus the other is scheduled to be introduced before the end of the year well provide the unit acquisition lift needed to drive expanding active account numbers and associated expanding revenue in our account services segment in 2020 step two is about increasing purchase volume and attracting a more committed customer base. We've been achieving this step very well since launching our first slate of rewards debit cards in 2016 and that trend continues this quarter, although the loss of unit sales as a headwind on aggregate growth.

For example spend volume was up 2% year over year on a materially lower number of active accounts of course to grow overall revenue in the account services segment, we need both quality and quantity as we had been achieving up until recently with the successful launch of unlimited and the other new products scheduled to be introduced this year. We believe we will return to active account growth in 2020 step three is about building and releasing bass 3.0 and 4.0. This is a work in progress and continues on schedule remember that every new product launch whether the launch of a new green dot or Gobank branded program or the launch of a best partner program enriches the bass platforms capability set because we first develop a given new function or capability on the best platform for all of us to use including our own product designers, who are customers of our own platform. For example, with a limited in the market barely for a week. We have already received several calls from current and prospective best partners asking that they can incorporate this feature that feature into their products.

Innovation breeds innovation and the more robust our products the more robust our platform and a more robust our partner programs can become the way, we improve and evolve the platform's capabilities with each new product release is a compelling part of the bass value proposition and one of the reasons I think business partners, including several of America's largest retail consumer technology and financial services companies choose to partner with Green Dot bank on that topic I'm pleased to let you know that we are seeing strong and material incremental demand and opportunity for our bass or banking as a service platform business line and 2019 that is on track to achieve a year over year GDP growth of over 60% and revenue growth of over 70% of course, we're having offsetting challenges in our legacy prepaid business, causing the lower consolidated growth rates.

Nevertheless, bass is performing quite well and we expect to do experienced continued growth in 2020 with several new potentially large scale expansions underway with current large bass partners and a fairly long list of new partnerships and programs in the queue to be developed and launched over the next several months for competitive reasons, we can't share details on new programs until they launch, but one program I can mention is Monzo moms, who is a leading UK Neal bank provider that is coming to the U.S. and they will be using our platform to facilitate cash deposits tomato accounts through our nationwide retailer based cash processing network. As you may know green dots platform powers deposit taking for many leading Neal banks and we welcome Monzo.

Lastly, I'm pleased to announce a green dot as joint visa to support their Fintech fast track initiative here in the U.S. Requalified Fintech companies partnered with certain leading venture capital firms can now be referred to green dot to have their programs developed issued and managed elsewhere across our various revenue divisions I'm pleased to welcome a whopping 253, New partners, who have chosen green dot rapid pay for their corporate pay card solution. This incredible list includes names like six flags Entertainment Corp. Sally Beauty Holdings Lands' end incorporated and Gamestop Corporation, we welcome them all to our Paycard Division step four is the greatly broadened the size and scale of our bass platform's ability to serve a greater number of partners through the development and late 2020 deployment of our bank operating system called banking OAS or boss little be capital O.S. development continues on track with boss as you recall, we reserve part of that $60 million investment for the purpose of accelerating bass platform development and that is.

On track step five is to continue to improve and scale, our operating infrastructure, which holds an evergreen spot on our annual six step plan. We continue to make material progress here you can see evidence of our success in our Q2 adjusted EBITDA and non-GAAP EPS results were non-GAAP total operating revenue grew by only 5%, but non-GAAP EPS grew by 22%.

You can also see an example of that efficiency, where their new chat PTX product support feature that rolled that only last week as part of unlimited and yet even after a week, it's already handling thousands of customer chat sessions that would've otherwise required a phone call to an agent to handle that service to the customer at a higher cost lastly step six is about the smart and accretive allocation of capital to enhance shareholder value overtime. During our second quarter, we announced that we entered into a definitive agreement with bank of America Merrill Lynch to purchase a total of $100 million of our class a common stock under an accelerated stock repurchase transaction under the agreement. We received an initial delivery of approximately 1.7 million shares the final number of shares to be repurchased and the aggregate cost per share to green dot will be based on our volume weighted average stock price during the term of the transaction, which is expected to be completed this year before handing the call over to Mark I would like to speak about what we see as the state of the digital banking space, where green dot largely competes this space.

Includes traditional national banks and community banks that enable their accounts to be opened online branchless online only banks that have been around for many years and then the so called Neal banks that themselves are not banks, but are typically venture backed technology focused our marketing focused companies that assembled the components of a bank offering through a bin sponsorship program with a third party bank a processing partnership with the transaction processor and then typically a home grown or outsource program management function that pulls all the parts together the meal Bank concept has its earliest roots dating back to 2011 and 2012 with an app called bank simple, which at the time captured the hearts and minds of the Silicon Valley millennial crowd and he had green dots own innovative mobile bank account product called Gobank, which launched to great fanfare and went after a more mainstream mobile banking crowd.

Since then aside from what became known as simple, which sold years back to BBB and Gobank, which remains a popular green dot on mobile banking App now much had happened in the Neal bank space until the past year or so when Fintech investors took note of the success of certain so called Challenger banks in Europe , and then took notice of the domestic demand for large established fintech players for green dot to own banking as a service business line. We believe the combination of the European Challenger Bank successes and the broad based and impressive ramp in the U.S., a green dots banking as a service platform with clients like Apple Intuit Hoover and many more set the stage for the VC investment thesis Tippingpoint, resulting in nearly $6 billion and venture investments made in North American Fintech startup firms in just this past Q2 alone with the majority of those investments being in the digital banking and lending space, including multi hundred million dollar investments and Neil banks that compete directly with Green Dot we believe the thesis for the Sun Prairie.

He then the level of investment is that millennials and Gen. Z of course have an intimate relationship with their mobile phones and that these generations hold the belief that big banks and big companies more broadly are somehow bad or unethical as such we believe there is a strong conviction amongst the tech VC community that the opportunity exists to disrupt the traditional banking industry by creating modern digital banking brands that appeal to millennials and Gen. Z's so that they can gain scale and ultimately offer the full service offerings of JP Morgan Chase or another traditional bank.

To realize that goal we believe the startups most first built significant scale in the base underlying account relationship from which all good things spring and that is becoming the consumers primary bank account.

To accomplish that many of the meal banks offer free mobile banking experience with varying features supported by tremendous marketing campaigns intended to fund a land grab while such a model is always going to be cash flow negative. We believe the theory is that at the startup can get to scale building infrastructure to take advantage of scale economics, and then break even on a unit economic basis. They can then start to make money with lending and other add ons of course, we have seen this before in the prepaid industry, where in 2011 to 2014 American Express Chase and many others launched no fee products backed by tremendous marketing campaigns to encourage acquisition with the promise are free to encourage trial and retention. They were in fact successful an opening millions of new accounts, but the customer behavior did not justify the SCPA or the attrition rates largely equaled to the acquisition rates, meaning that the unit economics were never able to scale. One by one the BC is tired of losing hundreds of millions of dollars in round after round of investment with no clear are likely path to profitability.

Those companies were either sold or shuttered.

Today, just five years later not one of those products exists as they were.

We do think today is fundamentally different because the smartphone infrastructure is far more mature than it was back then and the age of the digital native is now prime for choosing the banking relationship as such we do believe they're going to be Neil boehm players or able to achieve booked a large customer base and a sufficiently scaled infrastructure to breakeven or make a profit to interchange in product add ons. However, we believe that most new entrants will not make it as their venture investors tire of chasing that elusive scale and profit all round. After round of investment runs drive. This is when we expect to see the inevitable consolidation plays followed by the closure of those startups, who could not scale and could not sell already we witnessed the demise of fin by chase and were seeing several of the free Neal Bank model is attempting to transition to fee models, where they are now seeking to add fees to formally free services of course. This doesn't mean that having competitors spend hundreds of millions of dollars in aggregate marketing free bank accounts doesn't take its pound of flesh from Green Dot. It did in 2012 and it is doing it now.

Now in 2019, but we believe we are positioned to successfully navigate this period, well and ultimately benefit from the tremendous amount of total marketing investments being made by many digital banking players in aggregate a rising tide floats all boats and all of the collective marketing dollars being spent to convince consumers that a digital bank is a good thing will help green dots efforts as well as weve demonstrated in the prepaid wars when literally dozens of companies. We're entering the prepaid race like the kardashians and Susie Orman and many retailers at launch their own programs and then the free prepaid years, when large companies like Chase and American Express spent collectively hundreds of millions of dollars on marketing free products, we expect green dot to again be a winner when the dust settles. We believe the reasons for our success in those competitive battles then are the same reasons why we feel confident in our prospects today, let me explain number one there is nothing Neil about green Dot, where the issuing bank, where the product designers that create the products that consumers enjoy and come to rely upon where the large and highly.

Capable technology force that builds what the designers design, where the 100000 retail a strong cash deposit network, where the highly scaled program manager that profitably provides services to 50 million customers across all our product lines and we are the distribution engine that supports digital and brick and mortar distribution of our own products across the internet the app stores and a practically every strip shopping center coast to coast, plus Alaska, Hawaii, and Puerto Rico number two we believe we are one of the lowest cost providers of digital banking services in America early in the life of Green Dot we learn from our longstanding business partners at Wal Mart that controlling costs isn't just about expanding margins rather be in the low cost provider builds a competitive moat around your business, which others can easily cross.

When you have the best vertically integrated assets from top to bottom the ability to design build and deploy your new products yourself and you have the highest scale lowest cost infrastructure underpinning those efforts that means you can afford to give the customer more charge less and still achieve your margin goals. Some years have been better than others, but green dot nearly 20 years of growth success and sustainability and the field as competitive as financial services hasn't happened by accident number three.

Lastly, green dot as both the ferocious competitor on our product side and a great partner on our platform side.

On a product side and limited as our mainstream product that is designed to compete with leading Neal banks and others.

Practically overnight unlimited is being recognized by many third party experts and reviewers as the best of the digital breed and our new products still to come our intended to push the envelope even farther in a different direction, then unlimited with the goal of attracting a younger and different type of target customer on the bass platform business line, we aren't a competitor at all in fact, it's our goal to be an enabler and a great partner.

Theres practically nothing we won't do for bass business partners to ensure their success, we make all our product innovations, including everything you see on a limited available on a platform for any partner to use and incorporate into their own products and we are known to be a great partner because we are known to be incredibly flexible doing everything we can to power. The b spoke dreams of our best partners. The reason, we behave this way as both moral and strategic moral because their business partners need us and rely on our services whether from the bank or the cash deposit network or some other area of our company as a key ingredient to their success and this helps us strategically since ensuring growth from both sides of our products and platform business model is how we intend to grow revenue and expand margins overtime as I noted at the beginning of this call. We openly recognize the damage the free Neal Bank segment has done to our legacy product line at this point in time, we do believe that the challenges. We're currently experiencing our short to intermediate term in nature and that our strategic roadmap, starting with unlimited will put us back on a healthy growth.

Factory and 2020, we believe that Green dot is well positioned to successfully navigate this latest competitive battle as it has done in the past and that if we were able to successfully execute our strategic plans, we have a clear opportunity to emerge as the largest and most profitable player in the digital banking space and with that I'll hand, the call over to Green dots Chief Financial Officer, Mark Schipke for his commentary Mark.

Thanks, Steve Let's review the quarter and then discuss the remainder of the year as a reminder, starting in Q1, we began using a new presentation for gap to include net interest income generated at Green Dot bank from the investment of customer deposits and introduced a new non-GAAP revenue measure to reduce GAAP revenue by commissions and certain processing related costs associated with certain best partner programs with a partner and not green Dot controls customer acquisition Q2, non-GAAP operating revenue was $265 million, including $8 million of interest income and net or $13 million of commissions and processing related costs associated with certain past partner programs.

The account services segment delivered non-GAAP revenue of approximately $206 million, representing organic year over year growth of 2%. This growth was driven principally by an increase in direct deposit active accounts. Despite an overall decline in the number of active accounts and our account services segment.

As a result, we experienced overall growth in gross dollar volume of 6% and purchase volume of 2% and corresponding growth in interchange revenue of 6%.

These results came notwithstanding the material loss of around 500000 prepaid active accounts.

Due to lower unit sales of our prepaid products offset by 240000, new active accounts generated from bass platform programs, our processing and settlement services segment generated approximately $66 million in non-GAAP revenue representing year over year growth of 14%. This growth is attributable to higher transaction volumes across the segments product lines Q2, adjusted EBITDA of $75 million represents year over year consolidated growth of 18% as we expanded adjusted EBITDA margins by more than 300 basis points driven mostly by the success, we are having through our ongoing investments in building and running a more efficient operating platform non-GAAP EPS came in at 90 cents per share up 22%.

Our six month of 2019, we ended Q2 was $71 million of unencumbered cash in our balance sheet and no debt.

In addition, as previously mentioned, we utilized $100 million to acquire our stock under an accelerated stock repurchase transaction, which is expected to be completed this year, turning now to the remainder of the year as Steve discussed a few minutes ago on a year over year basis, we experienced an accelerated loss of unit sales and our prepaid product lines, resulting in lower active accounts from both non reloading customers and cash reloading customers. This trend began in Q1 as we pointed out in our prepared remarks at that time and accelerated in Q2, we expect much of this trend to continue into Q3 before starting to moderate in Q4 as a result of anticipated adoption of our new products. This year.

While we believe the launch of our new branded products in certain bass programs that are expected to ramp will lead us back to active account and revenue growth in 2020, there are not enough months left in the year to offset the anticipated loss of revenue and 2019 from the accelerating decline in our prepaid accounts. We therefore are readjusting our expectations for the remainder of this year.

As such we are changing our estimate for full year non-GAAP operating revenue from a range of $1.114 billion to $1.134 billion to a range of $1.06 billion to $1.8 billion.

And we are lowering our full year adjusted EBITDA outlook from a range of $255 million to $261 million to a range of $240 million to $244 million. We now expect our full year non-GAAP EPS to be in a range of $2.71 to $2.77 per share from the current range of $2.82 to $2.91 per share, reflecting the combination of lower adjusted EBITDA during 2019 marginally offset by the benefit of the share repurchase plan.

Now, let's talk about our expectations for Q3, which include the material incremental marketing and technology investments as discussed on our last call. We are estimating Q3 to deliver approximately 225 million to $230 million and non-GAAP operating revenue adjusted EBITDA to be in the range of 12 million to $14 million and non-GAAP EPS of approximately two cents per share and with that I would like to ask the operator to open the phone for questions.

Operator.

We will now begin to question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then too.

Our first question comes from Bob Napoli with William Blair. Please go ahead.

Thank you.

I guess last quarter, Steve you had a nice statement, Don Walmart right up front and no statement on Walmart. This quarters wondering if you could give an update on on Walmart.

No change.

Could it put it in frankly, but I was focused on the other topic that I thought would be more.

Of interest, but no no change from last time or the Walmart discussions continue on in the statement I made last time would still apply this time.

Then the account.

Losses.

Do you have have you been able to figure out.

Pretty well, where those accounts are going to is it broadly to a lot of different startups is it more square cash out for we know where those accounts. So we don't think we've competed Bob Bob with square and with Venmo for quite a long time and those accounts. While cool accounts are generally used for cat and I like Apple pay cash for general use for the more casual money back and forth. We don't think there's a lot of direct deposit activity or a lot of payroll activity. So that's sort of a known competitor that's been out there for several years.

We think it's the Neal banks and.

And frankly, as we track competitive spend.

It may well be that my commentary last call, although I don't know how you change it in retrospect.

But of our new product rollout and spending $60 million that were putting aside from marketing.

Caused others too.

Increase their spend or at least they're moving up further in the year.

Prior to the advance of the launch of our products to do sort of a land grab because you see the marketing expenses really skyrocket from several.

Competitors.

So so clearly that attack was felt.

These customers are not the stickiest and they go back and forth. So I don't think it's the end of the world and I think we have a pretty good line of sight into how this works because we've been through it so many times in different scenarios.

But.

But while I can't say with precision or at least not for publication, which one provider it went to.

We do know that there are several who greatly amped up spending in the <unk> and the neo being space and our belief is that that's where they went.

And last question, sorry, sure, there's probably not going to round out what Steve was saying the the other thing that's implied by what he's saying is this really is a top of the funnel issue. This is about sales not about attrition and so we saw.

A decline on the sales side, but we didn't see.

We didn't see existing customers all the suddenly.

Yes, I mean, the net result is still lower active but.

We expect that our marketing in the new product not the stuff that we're planning on we'll we'll regain that but it doesn't mean that it is in a terrific result in no question about that at least for the time being.

The unlimited product and the $60 million of spend I mean, it the I think at your press release says that 60 million spend is going to be mostly in the third quarter.

Maybe.

Give some color on what you've seen so far in unlimited and then it looks like a really attractive product for the consumer how is it an attractive product for green dot that yes. So limited so far it's only been a week right. So I mean it'd be yes.

In prudent for me to take a lot of detailed from that.

And expand upon it.

But unlimited is doing very well so far it's doing everything we thought the AD campaign is doing well I do want to correct you, though on one point it isn't 60 million of marketing or 60 million in total of which part we said was for marketing in part was advancing development of the vast platform.

But I just want to make sure thats clear because otherwise the CP. So people will try to back into into may not make sense.

And Im really proud of our team we've had a flawless technology launch a flawless marketing launch.

Nearly 1 billion media impressions last I checked a few days ago and incredibly positive consumer reviews, and third party press reviews as Im sure Youve seen so we feel pretty good about unlimited and the sales so far very very strong as well.

What do you don't know and I wont know for several more weeks.

Is the the funnel. So you have what's called the waterfall or funnel, where you issue an account online.

And then you have to see how many people will have what's called in our case removed the CRB, which is at a inside languages. The sticker that everybody gets on a card that says before using call. The bank to make sure. We know you've got the card safely.

So.

So the website retails different how many people are coming to your website to order the account and are completing CRP, which is your customer identification program.

We tend to be very very conservative on C. IP.

And and that means were probably.

Rejecting 40 plus percent of applicants, we don't love doing that but we've learned the hard way over many years that if you're not air tight on the CRP process, you just get a lot of garbage in the funnel.

And you get bots and you get all kinds of.

Fraud rings, and that kind of stuff and we just don't have any patients for it.

And so the customers were getting through the funnel are real people and and that means you will get higher response, and lower fraud, which we've been lucky to achieve over several years as we've done that so then they get through the funnel they get the card where they passed the IP to get the car to their house remove it and then funded and we won't know for sure.

In total I'm going to say 90 days to see how that works. The early indications, but it's been a week are very very strong and and beyond our expectations, but.

We have a road in front of US right. So all we can do as compared to what we used to get with the green dot, 5% card or what we used to get before 5% with the Green Dot classic prepaid card.

And the numbers look very strong we do see fairly good evidence that this is a different customer base.

You could just tell by the questions you get in chat.

You can monitor the chat conversations the questions you're getting.

The fact that people go immediately to move funds off another bank account through bank to bank transfer.

Whereas prepaid people will reload with cash for example, so I think we are succeeding and fundamentally finding a different customer base that is looking to this account as a replacement for their main Street Bank account and we've never had that green dot. So we expect that given the volume that we are doing which we feel really good about we think that the conversion in that funnel that I. Just described will be as good or better than forecast, but we just won't know until we know so I'd say the account is doing well for us and we'll have to know more when we have the next call and whenever that is and 90 days from now.

The other question you had about how is the card doing for us economically the economics should be similar to our other card products for years, we've had the green dot 5% cash back product.

Which is higher and thats on all spend not just.

Internet. So we've had that card for three years 2016.

So we're three years, you've had the green dot 5% card. Many hundreds of thousands of accounts had been issued over those years and that is a very high value proposition as well and it's on everything so.

We think we understand how these cards work.

And and how the behavior works.

But we always need to track it and this is a different customer base, but we hope people enjoy it and we hope that they get a lot of value in utility out of it and we think that the way we have the pricing set and the way we have the fee waiver set will make a living and the customer will get a great value out of it and at the portfolio economics will be favorable to us and similar to what we've had historically, but for disclosure as you know I tend to be a little conservative on these things only time will tell and I don't want to get over my skis.

Thank you.

You bet.

The next question comes from Andrew Jeffrey with Suntrust. Please go ahead.

Hi, guys good afternoon.

Hey, Andrew.

You know, obviously disappointing to see the T cell or the.

The accelerated decline I should say in the core business, but it sounds like here.

Launching products that that are going to head on to address that so.

You know mark without asking you to guide to 20 of US I mean, I know you're not going to do it I just wonder how much confidence and conviction you have.

Yes that $60 million spent recognizing that it's split between marketing and technology.

Materially.

One time and that you can really scale that investment next year.

And I wonder as sort of a corollary do you have an idea any thought whatsoever as to what you think the sustainable revenue growth in this business is given the changing competitive environment.

Look it's a great question and the answer is yes, we do have some thoughts on it.

There were a couple of things that are going on Andrew first.

As we said, we're seeing a decline in the top of the funnel this year and we have.

Sort of mapped out how we think that impacts us for the remainder of this year and it's it's really just in one place.

The the.

Prepaid card sales at retail and online if we think about our expectations around.

Being able to hit.

Our Tenseventy Guy.

And which if we do should position us for growth.

A return to higher growth again as we go into 2020, we're going to need to issue about let's say a 100000 incremental accounts per month.

And generate on average revenue of about $36 per account and we have to do that in excess of our current run rate and if we do so that would get us to our guide for the for the full year revenue would help us enter into 2020 at a year over year healthy growth trajectory I think I think to expand upon that.

And this is why we believe it's contained and sort of help you size it and this will lead into the growth.

We expect to be back to growth in Q4, and and what the assumption is to believe you grow and we think we could do better than this this is what do you have to believe to grow in Q4 internally and that is that with unlimited we issue not a 100000 incremental accounts per month.

And the revenue that Marc said $36. It Doesnt mean, thats revenue, we'll get that means with the revenue we need to get in order to make the plan and that's fairly low. So the reason is you have cards that are issued month. After month for example, a card that's issued on an account that is issued in.

July or August because we did at the end of July has five months to to have revenue delivered over five months of an account that we issue in December has no time to deliver revenue. So the average of that half life is two to two and a half months and over that two to two and a half months, we expected about $36 per account. So thats, what we need to believe to get to our plan and we think that's achievable.

And conservative, but we'll find out when we see it and so if you see those those numbers that means were growing already again in Q4 and that we entered 2020 already growing year over year and Thats. Why we believe this is somewhat contained if we did not have the new product rollout and not even the new product just to marketing in general.

Then we would be down further right because you have to continue to decline at some point that plateau out, but you'd have the continuing decline in new unit sales, which ultimately turns into a decline in active so launching a new product.

Which you plant sometimes back in retrospect I wish we would have done it eight months sooner but.

We had a lot of launches and we did a lot of cool things during that time too. So hindsight is 2020.

But thats, where it is so thats, what we have to believe and then we think the sustainable growth is what it is double digits as always our goal and this year, we clearly didn't make it and there is a ton of competition.

And.

Probably some of my public commentary has we have these calls doesn't help.

As all the competitors here to map out their response.

But we think we'll end up Andrew the winter at this or a winner out this as we always have because.

Our infrastructure and our distribution and our scale and our ability to issue accounts at a fraction of what they are what they cost others and the ability to have both sides of the.

Product, where we have our product model, where it's our own products that we issue and then we have bass.

Which is the rest of the industry. So we think we're in a really good place and that strategically Ron base, but we had Oh my gosh, we think well in excess of $100 million spent only in the last.

Three and a half to four months.

Accelerated spend that wasn't there prior we always had spend against us.

Targeting our prepaid base and the accounts that you receive out of our prepaid base or not.

The most move back and forth season on multi year customers, but it actually takes a pretty big chunk out of your your numbers. So that's the issue we're facing today and we expect to be back on the growth trailing Q4, and then into 2020 in a more normalized state.

Okay, all right I appreciate that and then one more if I may just with regard to the five new bass customers you announced on the one Q call as well as.

Apple and the Apple cardiac launches, we soft launched today.

I mean, how much of that is in your back half guidance and does it.

As those programs ramp should they be additive to growth at least next year, just trying to Oh, he allies that a little you bet.

I don't want to go into too much with how we formulated the guidance, but obviously, we're always going to try to.

And when you're guiding down we want to make it as.

We want to leave ourselves room for margin of error for sure. Although we certainly didn't do that this year.

We thought we did and so.

The answer is a remarkably the question forget the question. The answer is we're very immaterial amount to the value of the news bass partners in the back half of the year, but that's not in the back half growth to be next year, Yes. That's right. So we didnt have as part of the conservatism, where the caution we're not assuming those ramp because you never know on the new programs, how they'll ramp.

So the answer is not any bass, except for its in there for run rate and then any new programs or growth or any of that kind of thing is not baked in there yes.

Okay.

I appreciate it. Thank you. Thank you mark for helping to get back on track.

The next question comes from Ramsey El Assal with Barclays. Please go ahead.

Hi, guys. Thanks for taking my question.

Given guidance is really predicated this point on successful uptake of unlimited.

Can you talk more about your distribution strategy and you're kind of marketing plans are marketing calendar to the degree that you're you're able to.

To kind of help give.

Give us a little more flavor of how you expect to kind of aggressively roll. The product out are you cross selling into an existing customer base is cannibalization or risk just anything around the mechanics of getting this out in the marketplace I think would be would be helpful. Right. So we're fully distributed today.

We're obviously online at Green Dot Dot Com and we're also selling it at rush card dotcom, because this is a better product and a better fit for the audience. So we'll have that in rush card and a green dot dot com.

And then we also have it in stores, so look well we may be.

Sad and about the declining unit sales, we still sell more accounts than anybody by multitude and we don't want to do anything to risk that so the same product in retail is the same product to the green Dot classic prepaid card.

The worst thing you can do in retail sales is have somebody walk into a store shelf and suddenly everything changes in the package doesn't look the same we're it's unnerving and it brings a lot of risk and we don't like risk in that regard so.

The products in the store the same products, you've always been able to get.

But when you go to register the card immediately upgrades due to the unlimited product and we're doing that because its a better product for the customer. We think it means that we'll have more first time reloading activity and log retention and more revenue for those customers.

And so we'll see how that goes again, it's only been a week week and a half.

But so far so good so we're in retail were online and and that some of our other website properties as well. So we're fully distributed today and then the marketing has only rolled out beginning July thirtyth and will continue for some time to come.

Okay.

Follow up for me.

Yeah. The business model, obviously is really shifting quite a bit much more into the bass side away from the kind of monitor line prepaid business that you were in some years ago is there any way to accelerate the shift.

Via M&A is there any way to deploy capital.

Maybe at scale in order to move more aggressively into the bass sort of round.

Well I'm not sure I mean, there you always have a companies out there but right.

Is that are in the private space and have revenues and growth rates fractional to ours.

And not the infrastructure we have.

The values are just tremendous we think.

And so there's nothing really to buy there in our view, but we're always looking for things that we could maybe by and we have good capital and.

And if there is anything in the attractive that we think can help we would do that.

But we honestly believe that.

The product line, especially bass is doing very well we have all we can eat we're rolling out a lot of accounts, we have a lot of business and a lot of traction picking up there. It's a very compelling offering and I think most will tell you that it is absolutely far and away the best offering from both technology and the integrated stack of any company doing that kind of a of a banking as a service model. So we like where that is and then we just got to rightsize. The the product side of our business, which for the last three years has been unparalleled growth with our products that we rolled out in 2016, and we think the new products. The first one is unlimited, but we have other is rolling out this year.

Other really good ones rolling out this year, we think all of those together will put us back for another multiyear growth trajectory.

But were not there in Q2 and Q3 Thats for sure.

Great Thats helpful. Thanks, Yes.

The next question comes from Steven Kwok with KBW. Please go ahead.

Great. Thanks for taking my questions I guess, the first question I had just around the the slowdown inactive accounts you mentioned it was non reloading customers and cash flow and customers.

Just wondering like on the direct deposit side, what we're trying to stay or did you see any slow down there as well.

So we're up in direct deposit again, but at the same time.

That will be down in other words as you as you sort of fall. These trends again, our business is what like a lot of sales businesses, our funnels right at the top of the funnel and then people have to engage and then like like any subscription model that youve covered over the years.

When you're when you're lacking at the top of the funnel.

All good things flow from the funnel so whether it's ultimately direct deposit this without one if you don't correct. The funnel you will ultimately have losses everywhere right. So thats why the funnel so important to us. The fact that our customers have been so loyal and have held through is a fabulous thing and look we're down net if you take out the the offset of bass were down barely 200000 accounts year over year in the quarter.

And that's in the face of hundreds of millions of dollars of marketing and people literally going to prepaid message boards in green Dot message boards, and saying Hey, we can give you to this for free and we'll do this and we'll do that so it's a very very hard kind of marketing to overcome.

So I think the fact that were down only what were down after so many months of that kind of combative marketing I think is pretty impressive.

Doesn't mean, it's great for the income statement.

And we'll still be up this year as you know from our guide to a four or 5% whatever 10 70 is on a guide so the company is not shrinking its growing but it clearly hurts your growth rate.

For the moment and.

And so thats the kind of marketing we've been facing.

Got it and then just like as an industry can you help size like what the industry is growing at and what the trends are that you're seeing.

When you say the industry mean prepaid are pretty the yeah, yeah, prepaying and digital both well if you take.

Gosh in with so many private companies, if you listen to Tces earnings call.

They are Netspend division look exactly like our division are very similar.

In terms of active cards, and we were down in active cards. So they were a little worse there, but in terms of the overall story line it's similar.

And I think the reason is is that you have the Neal banks.

Going after the prepaid customers with a free offering.

And Thats, a land grab and Thats, what we lived through a little bit of Deja Vu I remember this conference call.

Except we didnt have all the diversity that we have now back then.

But I remember this call having the same kinds of questions about Bluebird and American Express serve.

And about chase liquid and about the Western Union product and there is really frankly more than that.

Remember and it was the same kind of concept and that is you have all this money pitching a free offer and it does cause customers to shift.

But it's not permanent and people go back and forth and over time, the economics of a free customer pretty punishing unless you have a really low cost infrastructure I think green Dot is one of the few companies that can issue could actually support that and the vast majority of our customers are free today, because the fee waivers for direct deposit. So if you think about the customer base of Green Dot today, both in terms of the bass side of the house and the prepaid side of the house the product side. The vast majority are free.

So we can support those economics with margins that do quite well, but to be a startup with the small infrastructure and you have to rent in fact, we think about it all the parts of your business is a very punishing economic model that can be sustained forever.

And so the key is for us to be ultra competitive.

To fight hard, which we always do it's how we have been here 20 years and to make sure that we're always a fierce competitor in the market.

And I want to be clear about something we're going to be.

Fierce competitor in the market.

Got it and final question is just around the share buyback any appetite for additional share buybacks.

Well, we still have I was just asking just before the call of the percentage that BAML has conducted so far.

And it's supposed to go through the end of the year and given where the stock is in the aftermarket and hope they save most of their buying power to laugh. After this call.

So.

But we are certainly executing $100 $100 million buyback thats in process right now and if we can do more we will I think it's a good opportunity to do that and I'm sure. We'll talk about that along with other uses of capital and the upcoming board meeting.

So certainly would be a good opportunity for it.

Great. Thanks for taking my questions.

The next question comes from Andrew Schmidt with Citi. Please go ahead.

Hey, Steve and Mark Thanks for taking my question.

First question on visibility for the remainder of the year appreciate the comments on the notion that you've set the bar prudently here, but what gives you the confidence that we we we won't see another unexpected step down like we saw this quarter.

Just just talk little doubt your visibility as it pertains to the remainder of the year, particularly as it relates to active card growth.

I can take that we think it's pretty good.

But having said that I would have told you that in previous times to always watching your trends carefully.

And we certainly didn't expect an incremental $100 million of competition of marketing against us.

These things happen.

We think the visibility is good because we can track the retail numbers, we know that with the launch which is where most of the losses are.

When do you get when you track the launch of unlimited and the marketing campaign that goes along with it and what we know is still to come we already see upticks in sales. There. So we think we feel pretty good about where we're going with it.

And that we've sliced enough to hit our number.

Appropriately. So I think we have good visibility. The reason you're hearing me hesitate is that it's a big world and we have a lot of divisions to be asking the question. What's your visibility on our prepaid unit sales I think pretty good and I think the DNA team has a good rhythm to it and I think we've gotten that well outside of the unusual.

Campaign. After the Q2 call of Q1 call. So we think it's good visibility and I feel pretty good about the guidance.

Knowing that I suppose anything could happen, but mark what are your thoughts about it I'd say pretty much the same thing were.

In terms of how we're looking at the rest of the year, we're not assuming that retail sales are going to get any better. We recognize that there has been a decline beyond expectation and we continue to factor in that continuing trend in terms of sales of the new products.

We're taking.

I think.

Very refined view not an aggressive view on what it takes for us to turn things around and so.

We feel pretty good about a return to growth in Q4 based on what we're seeing today and also assuming you know maybe some something goes bump in the night.

I think also I want to remind me about a diversified business model, which we've worked really hard on in the past several years and we've done I think a super job with.

Look we've been routed here in a temporary way we believe in Q into Q3 with.

This kind of marketing activity going directly after the heart of our of our customers and yet we still grew 5%.

In the quarter. So it just gives you a sense that and this is the most when the most important messages for me to relay.

I know as an investor myself in other companies and in the VC World that it's very easy to take that steering wheel and you either all the way laughter, you're all the way right and the truth is that neither as ever the case nothing's ever as good or bad as it seems on a time and our and our general sense is that we are well diversified company and this is a problem specifically in our prepaid card acquisition group.

We have 32 products in the company. This is our legacy division. So it's our biggest division. So I think we have very good plans to fight back and I think we have very good plans to launch products, which we are in the works long before we had this issue come up in the past.

Three four months and we think it's a great product and its one of several so I think we feel good about the future recognizing that this is a painful.

Look at the alarm that until this this call is.

Horrific from Arkansas, just so so obviously you never want to give this kind of news to investors, we value the relationship and the and we hate when we don't hit a plan.

But we also want to be transparent that is not the end of the world and that is one division out of many that were well diversified company and even in the middle of the worst route we've had.

You're still growing 5% and I think we are going to be in great shape for the end of year.

Understood. Thank you for that and then.

Question on customer acquisition cost obviously some of the competitors you mentioned have.

You know if ramped up.

They're they're they're marketing efforts, if you mentioned that the pretty heightened customer acquisition cost.

It seems like that trend is going to abate anytime soon which would imply sort of at least maintaining the level of marketing spend from a copper customer acquisition perspective into 2020, so any comments in terms of just.

The level of marketing spend or customer acquisition cost required.

Going forward relative to the past on what that might imply for profitability right well.

In Green dots case were profitable with this money that we're spending on marketing on a unit basis.

So we feel good about.

We feel good about that so I don't think thats really the issue whether or not the other private companies and the other bdcs will continue to pour money as they have forever or for another two to three years I don't know.

Everybody has their limits, we know that already there are some.

Companies that are trying to charge fees and re track on that because it's very very hard to make money at free, especially when you have 15 free competitors online so remember to the customer it isn't green dot versus.

One company or two companies it's about.

The bank, you're using versus 23 banks are 15 free bank's online and all of that marketing that happens against each other and again for example, if you're talking to Green Dot we're thinking our competitors are the free online banks, but if you were talking to one of the private Neil banks. They tell me. They are competitors are the other Neal banks right. So everybody is kind of marketing against everybody.

My experience over many years of running this company and being involved as an investor and other companies is that a fear that VC that gets real old real fast once you get past the point of Enough's enough and I don't know, how thats going to play out.

At Green Dot, though we're not going to do anything we can't we won't that jeopardizes, our long term economic sustainability, it's not worth it and we have such a diverse business line everything else you'd look to other places, but the marketing spend that we are doing now is accretive to the product. We certainly expected to we'll see more as we learn more about the funnel and how people behave but if it's anything like our current products are 5% product. The amount we're spending on mountain proposition has in any wacky no no more dramatic than what we spent historically so.

We think we're in good shape, there and as it relates to what the private companies will do or not do it's hard for me to tell my own belief is that you'll have one or two new banks that will make it into mature companies and will scale and you'll have others, who won't and whatever happens with the Neal banks Green Dot as the father of that industry and the one that continues to evolve we will be there right alongside that's my general feeling on it.

Thank you very much guys.

Thank you Andrew you bet.

Due to time constraints. This concludes our question and answer session.

I would like to turn the conference back over to Steve strength for any closing remarks.

That was a fast hour.

Thank you for the questions for those who.

Asked I think we got to most of them are all of them and we'll see you at a conference soon and we appreciate your time have a good day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[noise].

[noise].

[noise].

Why why.

[noise].

[noise].

What.

Right.

[noise].

[noise].

[noise].

Yeah.