Edited Transcript of GDOT earnings conference call or presentation 7-Nov-19 10:00pm GMT – Yahoo Finance

MONROVIA Nov 8, 2019 (Thomson StreetEvents) — Edited Transcript of Green Dot Corp earnings conference call or presentation Thursday, November 7, 2019 at 10:00:00pm GMT

* Mark L. Shifke

* Steven W. Streit

William Blair & Company L.L.C., Research Division – Partner and Co-Group Head of Financial Services & Technology

Greetings, welcome to the Green Dot Corp. Third Quarter 2019 Earnings Call. (Operator Instructions)

Please note, this conference is being recorded. I will now turn the conference over to Dara Dierks. You may begin.

Thank you, and good afternoon, everyone. On today’s call, we’ll discuss Green Dot’s third quarter 2019 performance and thoughts about the remainder of the year. Following those remarks, we’ll open the call for questions. For those of you who haven’t yet accessed our earnings release that accompanies this call and webcast, it can you found at ir.greendot.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 earnings release and in Green Dot’s filings with the Securities and Exchange Commission, including our most recent Form 10-K and 10-Q for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements.

During the call, we will 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 the 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 a property of the Green Dot Corp. and is subject to copyright protection.

Thank you, Dara, and welcome, everyone to the Green Dot Corp. Q3 2019 Earnings Call. We have a very full agenda today, starting with a review of our Q3 financial results. And as part of today’s presentation, our team has prepared a supplemental investor deck that Mark and I will reference throughout the call. You may want to take a moment now to access that deck, which is available on our website at greendot.com/ir.

Our focus on 3 key topics today: First, an update on our card program, sold through our retail and online channels, which I’ll refer to as our Consumer Business, including the details of our new 7-year contract renewal with Walmart for the MoneyCard program. And I’ll have a review of the performance of our newest app-based bank account product, called the Unlimited Cash Back Bank Account, which launched on July 30.

Next, we’ll have an update on our BaaS, or Banking-as-a-Service business line where we continue to see exceptional momentum with significant year-over-year growth, new large enterprise deals with Uber and Intuit and an exciting new FinTech joint venture with Walmart. And then, given that we now have certainty around the economics of the Walmart renewal and more informed assumptions around the other parts of our business, Mark will discuss our preliminary thoughts on 2020 guidance that you should consider when thinking about your models for next year.

So let’s start with a review of our Q3 results. Green Dot generated Q3 consolidated non-GAAP total operating revenues of $229 million, which is just a 1% year-over-year increase as a result of the anticipated decline in the number of consolidated active accounts. The year-over-year decline was around 250,000 accounts on a net basis, comprised of around 620,000 fewer active accounts from our Consumer Business, of which most were onetime use accounts, offset by an increase of 370,000 accounts year-over-year from our other card programs, principally driven by the building momentum of our Banking-as-a-Service platform, called BaaS. Our Processing and Settlement segment continued its stable growth trajectory, posting gains across all of its products and services.

For several years now, we’ve talked quite a bit about Green Dot’s unique products and platform business model. And on our call today, Mark and I want to highlight this model more granularly than we have in the past. We typically talk about Green Dot’s performance across 2 segments: Account Services; and Processing and Settlement Services. Those segments represent our product types like card programs and money movement services. But we then further consider our go-to-market strategies for those products and services, either bringing products to market through our own marketing efforts, such as our branded card program sold in retail and through our digital channels, effectively our product model, which we’ll call our Consumer Business on this call or we partner with enterprises that use our collection of unique platform assets to design and develop their own bespoke products and services, and then distribute them through their own channels of trade. This is what we’ve historically referred to as our platform model, which we’ll now refer to on this call is as our Platform Services Business.

The Platform Services Business consists of several leading product lines, including: Green Dot TPG Tax Processing, which is the #1 tax processor in America; Rapid Pay Corporate PayCards, one of the leading PayCard and wage disbursement companies in America; Green Dot Network Cash Processing, far and away, the #1 cash processing network in America, serving hundreds of partners; then we have Green Dot’s leading Banking-as-a-Service platform, of course, BaaS; and then Green Dot Bank, the unique and powerful integrated bank that is able to issue our products and provide various capital and deposit-taking services to all of our consolidated businesses and its many partners. While we’ve not historically highlighted our Platform Services Business, we believe it’s important to now to do so in order to help our investors understand the breadth, growth and, of course, profitability of our Platform Services Business, separate and apart from our large and profitable, even if we recently challenged, Consumer Business.

Now let’s update you on our Consumer Business. Please refer to the supplemental investor deck in the section entitled Unlimited By The Numbers. The app-based branchless banking market, in which Green Dot now competes, is vibrant and over the past year or so, has become very crowded with numerous competitors spending lots of money to market free banking apps. Our response has been to develop new products, starting with the Unlimited Cash Back Bank Account that focuses on value, not just price. Our strongly held belief is that our target customers will happily pay for real value. While still early days with only 13 week since the launch, our value strategy is showing solid results so far.

First, let’s start with the top of the funnel. In total, we’ve opened over 1.1 million new Unlimited accounts in just the first 13 weeks post-launch, of which over 0.5 million of those new customers have already made an initial deposit as of the end of October and became active depositing customers. This makes Unlimited the fastest-selling consumer account in our company’s history since the original nationwide launch of the Walmart MoneyCard back in 2007. I also want to point out that we’ve achieved these results while being disciplined in our marketing investment, gating the spend prudently to ensure that our average customer acquisition cost over time allows us to be profitable on the expected average lifetime revenue and margin of a newly opened account. In other words, our goal wasn’t to spend as much as possible to acquire new accounts as quickly as possible. Rather, the goal is to invest in a sustainable manner in order to generate steady and profitable growth. For the sake of clarity, I want to point out that Unlimited replaced our Green Dot classic prepaid card in the retail channel, and have replaced our Green Dot 5% Cash Back card on greendot.com.

So these new Unlimited accounts are not all incremental since we would’ve still opened a certain numbers of accounts from the sale of those predecessor products. But as we will highlight shortly, Unlimited is already having a very positive impact on our overall consumer business.

Turning to the next page. Let me help with these top-of-the-funnel statistics into perspective for you. Green Dot’s Consumer Business includes 6 consumer brands that we sell through retail stores and/or online. These primary brands are Green Dot, Walmart, GoBank, AccountNow, RushCard and Insight. We also have a few other specialty brands that are relatively small and either retired or only offered through limited channels. The 3 primary brands: Green Dot; Walmart; and GoBank, are sold in both retail stores and online.

Our total consolidated 90-day active account number includes accounts with the deposit, purchase, or ATM transaction in a given 90-day period. That means onetime use customers in our retail channel meet that definition and are counted as an active account in the period, in addition to customers who become regular monthly depositors. So the 90-day consolidated active account number is very sensitive to the number of new accounts sold at retail stores. Even though the majority of those accounts acquired through the retail channel or purchased for onetime immediate uses like paying a bill online are use cases where we make perhaps just $10 or so in lifetime revenue as compared to a customer acquired online or in the retail channel that passes our customer verification process and then makes recurring monthly deposits. Those accounts are called monthly depositing active. And the depending on the portfolio, a monthly depositing active could be worth as much as $200 or more over its lifetime. As such, the vast majority, around 90%, in fact, of Green Dot’s consumer account revenue comes from customers who are regular monthly depositors and use our accounts as their day-to-day bank account.

So the number of monthly depositing actives is an interesting view of the data because it serves both as a leading indicator of portfolio health, and of its directional momentum. In other words, are you losing depositing actives month-over-month or are you gaining. The 90-day active number while still relevant, is more of a lagging indicator.

Please turn to the next page in the deck. On this chart, you can see that the number of 90-day actives across all 6 portfolios in our Consumer Business declined year-over-year by around 586,000 accounts in aggregate by July 30, the date we launched Unlimited. Then by the end of October, the rate of decline had slowed materially, losing just 50,000 more accounts during the 13 weeks that followed. In other words, the launch of Unlimited by itself was able to dramatically slow the acceleration of 90-day active losses amongst all 6 branded consumer portfolios in just 13 weeks after launch. As you’ll recall, our high-level commentary on the Q2 call was that we expected the decline in 90-day consolidated active accounts to widen in Q3, moderate in Q4, and then bottom and begin growing off its low in Q1 2020. And maybe that we don’t bottom now until, perhaps, Q1 of next year and then start climbing back to narrow the year-over-year gap. So perhaps, a quarter or 2 later than we first expected, primarily because we have not yet launched the new MoneyCard and the new Gen Z app, which we expect to help additionally drive active customer accounts once they launch in the first half of next year.

But the trend in 90-day actives in our Consumer Business is very encouraging. The picture is even better when you look at monthly depositing actives for the Consumer Business. And this leading indicator, across all 6 portfolios, the number of monthly depositing actives declined by around 200,000 accounts from the start of the year through July 30, the date we launched Unlimited. Then from August 1 through the end of October, the rate of decline slowed dramatically and moderated, losing just around 30,000 more accounts. In other words, Unlimited by itself was able to dramatically slow the losses of monthly depositing actives amongst all 6 branded consumer portfolios in just the 13 weeks after lunch.

Now let’s turn to the next page to review the Green Dot brand all by itself. While the impact of the Unlimited product on our entire Consumer Business, inclusive of all 6 brands, is certainly impressive, seeing Unlimited’s impact on the Green Dot brand is truly inspiring. On this next chart, you can see that the number of 90-day active accounts for just the Green Dot brand declined year-over-year by around 160,000 accounts by July 30, the date we launched Unlimited. Then by the end of October, we slowed the pace of year-over-year losses to around 47,000 accounts. In other words, the launch of Unlimited has already narrowed the year-over-year losses for the Green Dot brand in 90-day actives. The picture is even better when you look at the data from monthly depositing actives for just the Green Dot brand.

From the start of the year through July 30, the date we launched Unlimited, the Green Dot brand lost 35,000 depositing actives. Then from August 1 through the end of October, the number of monthly depositing actives bottomed and climbed back, past the losses to actually grow by 20,000 accounts over and above where we started the year. In other words, Unlimited was able to stop the losses of monthly depositing actives on the Green Dot brand and get back to growth both relative to the start of the year and on a year-over-year basis.

Finally, let’s look at the direct deposit accounts for the Green Dot brand. From the start of 2019 through July 30, when we launched Unlimited, the number of direct deposit accounts were essentially flat, up just 3,000 accounts during that entire 7-month period. But then, starting with the launch of Unlimited through the end of October, we gained around 40,000 new direct deposit accounts. In other words, in just the 13 weeks since launch of Unlimited, we’ve gone from essentially a flat number of net direct deposit accounts to growing by 40,000 accounts in just those 3 months. This puts Unlimited on a trajectory to become the highest-penetrated consumer account direct deposit portfolio in our company’s entire history.

It’s difficult to compare Unlimited’s performance with the account numbers released by some of our privately held competitors. Our belief which has been echoed by at least one third-party research firm is that when the privately held neo-banks released account data to the press, they’re often quoting the number of accounts that were opened on their platform, regardless of whether those accounts have ever received a deposit. We also believe some privately held competitors double count new customers because a single new account may also come with an integrated savings account that may or may not be used by the customer. In Green Dot’s case, when we speak about a certain number of active accounts, we’re referring to a net number of active accounts comprised of new depositors in the period, plus existing customers who continue to make transactions in the period, minus customers that attrited in the period.

Lastly, while most of our new accounts come with a free FDIC insured savings account along with the transaction with debit card account, we only count that customer once.

On the next page in the deck, we have shared some account-level KPIs you may find helpful. All statistics are comparisons between the new Unlimited product and the Green Dot products that replaced. First, note the average gross dollar volume or total deposits per Unlimited account is up by 25%. Direct deposit enrollment is up by 30%. And retention per account is up, so far, by 30% as well. The higher engagement in usage has exceeded our initial expectations while also validating our strategy to prioritize our marketing budget to attract quality over quantity.

On the unit-economic basis, using the first 13 weeks of the cohort, Unlimited is so far turning out to be a great value to both the customer and to Green Dot with net lifetime revenue and margin dollars per account expected to be within 10% or so of the products it replaced. Although, we believe there are some tweaks we can make over the coming quarters that may close at 10% delta and bring revenue contribution margins more in line with the products Unlimited replaced.

While we’re pleased with these early results, the ultimate success of Unlimited would be judged based on the actual purchase volume behavior and actual retention rates relative to our model as the portfolio continues to grow and season.

Next, let’s review Green Dot’s digital engagement, which we believe is a harbinger of future product usage and retention. As a point of reference, we used a third-party data service, called SimilarWeb, for these independent statistics in order to compare our company’s performance with that of our competitors.

This first page shows the number of app downloads for Green Dot apps as compared with all the leading U.S. neo-bank apps. Some important takeaways on this Slide: One, our older products do not require an app in order to use the account. And in fact, most of our legacy active customers do not use any app. Nonetheless, our sheer size has always helped to make Green Dot a digital leader amongst our peers; two, our strategic decision to make certain important product features and services only available in the app has helped to propel our digital engagement beyond our peers for several years now; and three, since launch of Unlimited on July 30 through the end of Q3, Green Dot had grown to be tied or a little ahead of the leading U.S. neo-bank app and even beating it by around 30,000 app downloads in September, the last month of data available.

On this point, it’s important to call out that the bank account products offered by many of our competitors are typically free. And in aggregate, we believe they spend well in excess of $100 million in marketing to achieve this level of app download performance. By comparison, Green Dot products are not free, and we believe our marketing investments, even in Q3 when we launched Unlimited, have historically been just a fraction of our competitors.

Now let’s go to the next page, which shows digital user engagement and in particular, time spent with the app. We’ve taken a great care in the strategic design of the Unlimited app, and we believe it is a segment leader. Our app is lightning fast, super easy to navigate, contains a myriad of cool features and functions that integrate seamlessly with the account and a constant interactive messaging between the app and the user’s mobile phone is designed to make the product sticky and relevant.

While we’re still in very early days, the user engagement metric is encouraging because it could be an indicator of future retention and purchase behavior, which are 2 most important factors in generating lifetime revenue and margin. We expect the new Walmart MoneyCard app and the new Gen Z App to be released in the first half of next year, will be even better still. We think the app-based branchless banking market is an exciting space in which to compete, and we believe there is lots of room for lots of winners. A rising tide does, in fact, float all boats, and we truly wish success for all. But the fact is that the #1 neo-bank in America in terms of the number of active accounts, the number of app downloads, digital user engagement, revenue and profit isn’t a neo-bank at all. In fact, it’s a bank, called Green Dot.

In summary, we believe Green Dot’s Consumer Business has shown extreme resiliency in light of all direct competition, spending so heavily on the marketing of free banking apps. Additionally, we think Green Dot’s Consumer Business is well positioned to remain ahead of the pack as it has been for its entire 20-year run because we have several deep competitive modes that we think would be nearly impossible to replicate. Consider the following: First, Green Dot has massive scale, and we believe with the lowest-cost provider in the FinTech industry, we’re highly efficient, vertically integrated FinTech platform with more than 50 million end-users consuming our products and services every year. Great scale brings great efficiency. According to CB Insights, the largest neo-bank in the world is new bank in Brazil, with an estimated 5 million total customers and likely a fewer number of customers that are active. The #1 so-called challenger bank in the U.S. or neo-bank, aside from Green Dot, is believed to have perhaps 1 million or so active customers, based on piecing together data from different third-party research reports. Assuming that analysis is accurate, then Green Dot is the #1 app-based branchless bank in the world and the largest in the U.S. by more than a 5x lead, even without considering many of the BaaS-related accounts, which only increase the scale efficiencies Green Dot realizes.

Next, Green Dot has broad distribution across multiple channels. While we certainly spend marketing dollars on digital acquisition, just like our competitors, unlike our competitors, we’re able to supplement that digital acquisition spend with very low-cost large-scale brick-and-mortar distribution of approximately 100,000 major retailers through thousands of seasonal tax-preparation offices and the large digital tax-preparation services through our platform B2B channels, including corporate PayCard partnerships and BaaS partnerships where a large and growing list of America’s largest consumer brands and technology companies distribute our products directly to their customers through their own channels of trade.

Our broadly diversified distribution enables us to bring down our average cost of acquisition. For example, over the last 4 years, we believe that neo-bank market collectively spent several hundred million dollars to acquire a total of just 3 million to 4 million active, no-fee accounts in aggregate while generating, we estimate, hundreds of millions of dollars in losses in the process. Whereas during that same period, Green Dot’s Consumer Business acquired around 20 million active paying customers at a single-digit blended new acquisition cost and generated hundreds of millions of dollars in revenue in the process. We believe that no competitor can match our overall customer acquisition cost or even come close.

Next, Green Dot isn’t the neo-bank. We’re a federally regulated bank and have access to our own free FDIC insured deposits that can be used to generate interest revenue, stronger customer relationships or both.

And lastly, Green Dot is a diverse enterprise with many different products and services offered through several different channels. To provide some context around that diversity, in 2020, we expect that around half of our non-GAAP consolidated revenue will come from our Platform Services Business. To help contextualize the value of our competitive mode, at the height of the free prepaid movement from 2012 to around 2014, we believe Green Dot had perhaps a dozen free competitors, some quite large like Chase and American Express, collectively spending hundreds of million of dollars in marketing and incentives to pull away Green Dot customers. Ultimately, all of those free prepaid programs, every single one of them, transitioned their models, sold or shuttered. To be clear, we never take our leadership for granted. Just as we did in the past to successfully navigate various competitive challenges, we are upping our game to offer the consumer more value for the money, better customer service, better and more elegant technology, and we’re investing in much better and more effective social media and digital marketing strategies.

Our new Unlimited Cash Back Bank Account is a good example of this. And as sales and usage trends indicate, there would appear to be a many customers out there who’re happily willing to pay for real value. We recognize that we have more work to do to get our Consumer Business back in the growth trajectory and that Green Dot’s ongoing leadership in the free neo-bank era is not guaranteed. In fact, our lower year-over-year exit rate of consolidated consumer active accounts is one of the several significant 2020 headwinds, Mark will talk about later. But what is certain is that Green Dot will use its 20 years of deep knowledge of its customer base and its unmatchable infrastructural advantages, our competitive moat, if you will, to prudently compete with all comers, and we expect to do so profitably.

Lastly, on the topic of Unlimited. We’re pleased to let you know that Green Dot now has a new trademark branding position and a new spokesperson. Our new branding position is Green Dot Bank, the extreme value bank. And one of the ways we intend to get the word out is through a new TV and social media partnership with Ellen DeGeneres. The Ellen’s Show is seen daily across America, is the #1 show on Daytime TV, reaching 17 million weekly viewers. Plus, Ellen is one of the biggest personalities in the world on social media with more than 200 million followers across the various leading social media platforms. Green Dot Bank and the Unlimited Cash Back Bank Account will be integrated into the Ellen Show on TV and through her social media content in a variety of ways with the goal of millions of Americans learning about the extreme value of Green Dot Bank’s new Unlimited Cash Back Bank Account, and then hopefully, going online to open an account for themselves.

Now let’s talk about the Walmart MoneyCard. As disclosed last week, Green Dot and Walmart have entered into a new 7-year agreement for Green Dot to continue to issue and manage the Walmart MoneyCard program. The key operating and business terms are similar to our previous MoneyCard agreement, but the base rev-share economics have increased by several basis points. For 2020, we estimate that the year-over-year headwind to Green Dot’s consolidated margins will be around 150 basis points, which is similar or little better than the impact to consolidated margins at the last renewal in 2015. We’re always proud to serve Walmart and our millions of mutual customers, and we are thrilled and truly honored to be partnering with the world’s largest retailer on this program for many years to come.

Now let’s talk about Green Dot BaaS, our leading Banking-as-a-Service platform. Over the past few earnings calls, we’ve shared our optimism about the healthy and growing pipeline and suggested we could close at least 1 large-scale BaaS partnership that we would announce in the future.

I’m proud to say, we delivered 3 very significant new deals that we believe further solidify Green Dot’s standing as the unmatched #1 BaaS Platform in FinTech. Plus, our sales pipeline for new Baas partnerships remains robust, and we are engaged in negotiations with several large brand-name technology companies for partnerships that we hope to announce the coming months.

Here’s a review of our recently announced wins. First, Uber announced during their keynote speech at the Money20/20 conference that it was launching a new initiative, called Uber Money. Most importantly, as it relates to our investors, Uber also announced that the entire core of the driver payments and rewards debit card program will be built atop the Green Dot BaaS Platform. The relationship is a significant expansion beyond the current program and that the Uber debit program will be integrated into the driver’s app as the preferred way all drivers receive their wages. In the current program, wage is defaulted at the driver’s own existing bank account, and then they could respond to an ad for the Uber debit card within the driver’s app and then sign up if they wanted to change the way they receive their wages. But now that the account is offered as part of the main enrollment flow, we expect to onboard more accounts on a run-rate basis than we currently onboard.

Next, Uber has expanded the loyalty component of the Uber debit card program to allow more drivers to get more rewards, which in turn is expected to generate longer retention and more usage of our accounts.

And lastly, Uber is using more parts of our BaaS Platform than ever before by now integrating our retail cash processing network into the riders’ app. In this new use case for the BaaS Platform, Uber riders can now fund their Uber cash account using Green Dot’s increasingly popular e-cash mobile bar code system. This new BaaS integration will allow for riders who don’t have plastic, meaning a debit card or credit card, to now pay for their Uber ride with cash. Uber has been a great and growing partner for Green Dot since the very beginning of our BaaS Platform business line, and we’re thrilled to be able to announce it’s expanded at much deeper level of integrated partnership with Uber.

Next, I’m pleased to announce that Green Dot has expanded its partnership with Intuit and agreed to a multiyear contract extension. As you may recall, Intuit currently uses Green Dot TPG as it’s back-end process for tax refund processing on TurboTax. And Green Dot issues and manages the Intuit turbo card for tax refund disbursements. Now in this new expanded partnership, Intuit intends to integrate our BaaS Platform into their enterprise-wide technology platform in order to facilitate a broader array of opportunities. Intuit is an amazing company and a longtime Green Dot partner, and we are very pleased to expand and deepen our relationship.

Last, but absolutely not least, I’m very proud and excited to announce a significant new partnership between Green Dot and Walmart, and we have deepened our partnership with the creation of a new joint venture, called TailFin Labs, LLC. The name comes from a hybrid of the words retail and FinTech. TailFin is newly created Walmart-Green Dot joint venture. It’s designed to serve as an accelerator to bring innovative, creative and compelling financial solutions to Walmart customers through all channels of commerce worldwide. Walmart controls the JV with 80% of the equity and Green Dot with 20%. Green Dot will contribute capital into the JV on an annual basis for the first 5 years, from which the JV can pay for R&D and build out whatever products or services are created. Green Dot’s value is expected to be as the product development and operating partner, helping the jointly ideate new big ideas and then accelerate those big ideas to market through our BaaS Platform and Green Dot’s unique and proven ability to develop and operate bespoke FinTech solutions. Walmart is not only an innovative partner with a leading technology capability of their own, but it’s also a world-class distribution platform partner and will provide its highly trusted brand name and massive customer base across its omnichannel platform where the products that JV develops can be distributed and commercialized. The way Green Dot intends to make money from the JV is by earning a rev-share on products and services we may jointly develop and then bring to market. We believe that the intersection of retailing and financial technology is a potential gold rush of potential innovation that is still in its earlier stages of discovery. And that bringing together an omnichannel retailing giant like Walmart and an enterprise-grade FinTech innovator like Green Dot can create a fertile soil for such innovation to germinate, develop and blossom.

Over the past 13 years, Green Dot and Walmart have created many new products and services that have become consumer staples in the financial services space, and we are thrilled to now take that history of successful and profitable innovation to a new and much deeper level of engagement and collaboration with the founding of TailFin Labs, LLC.

Lastly, on this topic, to create further alignment on all the new exciting things we seek to accomplish together over the many years to come, Green Dot will grant Walmart 975,000 shares of our common stock, effective January 1, 2020, and the stock will vest equally over 36 months.

See, here’s the thing about Green Dot’s BaaS Platform. It’s not just a set of standard banking account APIs or predefined developer sandbox, although we certainly have all that too. Rather, Green Dot’s BaaS is an entire ecosystem of best-in-class, essential integrated technologies and capabilities designed for large enterprise partners to build what they want, how they want it, without limits. We believe that the other BaaS providers simply provide the basic tech platform at the hub of the account in order to enable the basic functions of a bank account. That’s where those platforms largely begin and end. We believe this requires the partner to stitch together other relationships to enable their programs. For example, the partner will need to find a bank issuer that’s small enough to be Durbin-exempt, but large enough to have sufficient sources of capital to enable deposit growth. Then they’ll need to negotiate and contract with an outsourced call center or build an in-house customer care solution, negotiate with the free ATM networks and do the IT work to integrate them, spend millions on fraud tools, CIP controls and hiring the experts to run and manage the hundreds of program details and on and on and on.

The point is that we believe, by the time the program is built and up and running, customers of competing BaaS Platforms find themselves spending a fortune to provide a fairly basic bank account app that looks like just about every other fairly basic bank account app and often losing millions of dollars in OpEx as they go. Want to take cash deposits, provide cash back rewards, offer sweep accounts to generate higher interest rate savings account, how about putting a customer’s photo from their mobile phone on their debit card, small business merchant accounts that can pay the merchant faster, how about a customer settlement process to facilitate one thing or another, not on their platforms, you won’t. Then you have the scale issue. We believe that any one of Green Dot’s large enterprise BaaS programs generates more transactions per second demand than all the programs and all the other competing BaaS Platforms combined. High scale brings high risk and large companies can’t afford for their technology and banking partner to be learning on the job. Together, these are just some of the reasons why we believe Green Dot BaaS is #1 in a league of 1.

2019 has been a good year with respect to making significant progress in achieving Green Dot’s long-term strategy of expanding our TAM with more modern and mainstream app-based consumer products for new generation of customers. And we have certainly made tremendous progress in the expansion of our platform business with BaaS in particular. But it’s been a disappointing year with regard to execution against our financial guidance as the Consumer Business struggled to regain its footing before we launched Unlimited.

We understand the valuation penalties associated with slower consolidated growth, and the challenging optics created by negative growth in our Consumer Business that masks the outstanding growth in our Platform Service Business. Nevertheless, we don’t believe our Platform Services Business is being properly valued, based on its significant growth and increasing revenue contributions relative to our total enterprise value. For example, Green Dot’s entire consolidated enterprise trades at less than 4x its 2019 Platform Services non-GAAP revenue compared to smaller peers that trade at as much as 11x revenue. As we have outlined over the last 2 calls, we have a focused strategy to return to Consumer Business growth and believe the early successes of Unlimited in such a short timeframe is a great first step. But regardless of our challenges in the Consumer Business, the stark differences in evaluation between our consolidated business, inclusive of Green Dot’s industry-leading BaaS Platform as compared with the private and publicly traded comps, much smaller competitors, has become hard to ignore. As such, ensuring we highlight the strength of our BaaS Platform and other platform businesses will be a focus for us going forward in addition to highlighting the attractive and leading asset we have in our improving Consumer Business. You, our loyal investors, should expect to hear a continued disclosure about these 2 businesses going forward, as we continue our active focus on enhancing shareholder value by making the right strategic decisions for our customers, our partners, our regulators, our employees and our investors.

And with that, we’ll go over to Mark Shifke for his report.


Mark L. Shifke, Green Dot Corporation – CFO [4]


Thanks, Steve. As a reminder, starting in Q1, we began using a new presentation for GAAP 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 BaaS partner programs with a partner and not Green Dot controls customer acquisition.

Q3 consolidated non-GAAP operating revenue grew 1% year-over-year to $229 million, including $7 million of interest income and net of $11 million of commissions and processing-related costs associated with certain BaaS partner programs.

From a segment perspective, the Account Services segment delivered non-GAAP revenue of approximately $184 million, representing a year-over-year decline of 5%. This decline was the result of the expected year-over-year decrease in quarterly active accounts from our Consumer Business, partially offset by an increase in active accounts from our Platform Services Business. Despite the fewer number of consumer active accounts, we increased consolidated direct deposit accounts year-over-year by 4%, which in turn contributed to year-over-year growth of 8% in GDV and 2% in purchase volume and corresponding growth in interchange revenue of 4%. Our Processing and Settlement Services segment had a great quarter and generated approximately $52 million in non-GAAP revenue, representing year-over-year growth of roughly 29%. This continued growth is attributable to higher transaction volumes across this segment’s product lines.

Q3 consolidated adjusted EBITDA of $25 million outperformed our expectations by around $10 million due to savings from lower-than-expected SG&A cost, higher-than-expected operating efficiencies and lower-than-budgeted marketing spend. In Q4, we expect our adjusted EBITDA performance to offset the Q3 over performance, ending the year at the lower end of our full year adjusted EBITDA guidance range. The reasons for the expected lower margins in Q4 are that we do not expect to enjoy the same level of savings in Q4 that we enjoyed in Q3. And we expect the margin flow-through from revenue in Q4 to be somewhat lower as Platform Services revenue, while still profitable, does not fully make up for the lost margins on the lower consumer account revenue.

Non-GAAP EPS for the quarter came in at $0.20 per share. Green Dot generated $205 million of cash flow from operations through the first 9 months of 2019 and ended Q3 with $79 million of unencumbered cash on our balance sheet and no debt.

Let’s now turn to the slide entitled, trends in Green Dot’s Consumer Business and Platform Services Business. This slide is intended to help show the trajectories of our Consumer Business and our Platform Services Business as we think about exit rate heading into 2020. You can see that our Consumer Business delivered a non-GAAP revenue CAGR of 15% from 2016 to 2018, but in 2019, will have declined year-over-year by 8% to around $626 million. Based on the 2019 exit run rate, we expect the Consumer Business to enter 2020 at a materially lower non-GAAP revenue run rate that it had at the exit of 2018. However, during that same period, our Platform Services Business thrived, led by our Banking-as-a-Service platform with a non-GAAP revenue CAGR of 28% from 2016 to 2018 and in 2019, will have grown year-over-year by another 26% to around $435 million. Based on the 2019 exit rate, we expect the Platform Services Business to enter 2020 at a materially higher non-GAAP revenue run rate that it had heading into 2019. So as Steve discussed, the headwinds in 2019 and heading into 2020, are primarily related to our consumer accounts business. This is what the new Green Dot Unlimited product, combined with a forthcoming new Walmart MoneyCard and the new Gen Z App, both scheduled to be launched in the first half of next year, are intended to help remediate over the course of 2020.

As it relates to our expected full year consolidated 2019 results, we expect to finish the year with non-GAAP operating revenue at roughly $1.060 billion, adjusted EBITDA around $240 million and non-GAAP EPS around $2.73 per share.

Now let’s turn to the discussion of next year. Given that we now have certainty around the economics of the Walmart renewal and more informed assumptions around exit run rates for our Consumer Business and our Platform Services Business, inclusive of the BaaS Platform and our bank, we want to provide our preliminary high-level thoughts on 2020. I want to note that we have not completed our comprehensive budgeting process for next year, and we won’t be providing formal 2020 guidance until the February call. However, we do want to share our thoughts on next year that you should consider when thinking about your models. As Steve shared, we are very pleased with the early results from the Unlimited product launch, and believe we are starting to see losses moderate in our consolidated active account trends and are seeing clear growth in our Green Dot brand active account trends.

Nevertheless, we are expecting to exit this year with several hundred thousand fewer 90-day active accounts in our Consumer Business that we had at the exit of 2018. So while we expect to narrow the GAAP in actives in our Consumer Business over the course of 2020, the 2019 exit rate will create a material year-over-year headwind at the start of the year. We additionally expect to exit 2019 with a lower interest income run rate on the investing of consumer deposits at the bank as a result of several short-term interest rate cuts this year and the possibility that more cuts could take place next year.

On the positive side, we expect that our Platform Services Business, led by the continued expansion of our BaaS Platform, will exit 2019 with a materially higher non-GAAP revenue run rate than this business had at the exit of 2018. In fact, we expect that the higher exit rate on platform services will make up for the lower exit rate on our Consumer Business and interest income combined. So we expect top line exit rate headwinds and tailwinds to largely offset each other. On the bottom line, the margin flow-through that we expect to lose from the lower exit rate on the Consumer Business is largely expected to be offset by the margin flow-through we expect to gain from the higher exit rate on the Platform Services Business, combined with savings we expect to realize from platform operating efficiencies over the course of 2020.

Then there are 4 unique year-over-year bottom line headwinds that, together, we expect will cause a material decrease in the amount of year-over-year adjusted EBITDA we expect to generate. First, we expect 100% of the lower interest income to impact margins. Then there is the Walmart renewal, which as Steve mentioned, is expected to generate approximately 150 basis points of consolidated year-over-year margin compression.

Next, we expect to see higher year-over-year SG&A expenses, primarily in the areas of technology operations, risk management, compliance, customer care and facilities associated with supporting the launch and ongoing operations for all the new enterprise BaaS deals we announced last week, plus several more in the pipeline that we expect to announce in 2020. While we don’t ordinarily need to materially increase SG&A in order to onboard and run BaaS programs, these new BaaS programs are not ordinary because of the size of the partners and the nature of the programs they intend to create and launch. In aggregate, these new partnerships have the opportunity to become very large as they launch and then scale and mature over time, generating incremental infrastructure, operating team and platform capacity demands.

Finally, we want to reserve some amount of incremental year-over-year marketing dollars to invest in Unlimited, plus the 2 new products we intend to launch in the first half of next year.

We are very pleased with the efficiency of the marketing investments we’ve made so far in 2019, and we want the flexibility to do more next year, should we continue to see the opportunity to acquire high-quality customers and what we believe to be industry-leading and profitable customer acquisition costs. So while the lower exit rate on consumer actives is expected to be largely offset by the higher exit rate on platform services and savings from platform operating efficiencies, the other items, interest income, the Walmart renewal, incremental SG&A and a modest amount of incremental year-over-year marketing dollars are expected, together, to create a net $60 million to $65 million adjusted EBITDA headwind into 2020, most of which we would expect to lap in 2021. Taken all together, this commentary implies that we do not currently expect to guide much more than flat on the top line and perhaps, $65 million lower year-over-year on adjusted EBITDA will provide 2020 guidance during our February earnings call.

If we are more successful in narrowing the year-over-year delta in the number of active accounts in our Consumer Business over the course of 2020, and if we find that our Baas Platform and other product lines within our platform services business grow beyond the 2019 exit rate, then we would expect 2020 to build over the 4 quarters and lead to a much improved 2020 exit rate heading into 2021 while the headwinds to adjusted EBITDA would be expected to largely lap in 2021 as well.

But in an effort to make sure we don’t get ahead of ourselves and that we don’t unintentionally repeat the forecasting challenges we experienced this year, we aren’t likely to guide 2020 much beyond what we can see at the time in the Q4 call in February.

And with that, I would like to ask the operator to open the phone for questions. Operator?


Questions and Answers


Operator [1]


(Operator Instructions)

Our first question is from Bob Napoli with William Blair.


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [2]


Bob, wait a second. Before you begin the questions, I want to introduce to our investors and analysts on the call today, Jess Unruh. Many of you know Jess. He’s been with our company for quite some time as Co-Operational Chief Financial Officer and Chief Accounting Officer. And as our company continues to expand and we do more things, Jess is going to be increasingly supporting Mark and I, both at investor conferences and here in the company in all aspects of getting our finances done on a day-to-day basis. So I might just introduce himself, say a few words, and then we’ll go into your question, Bob.


Jess Unruh, Green Dot Corporation – CAO [3]


Thanks, Steve. I’m excited to be here. Some of you have met me at conferences, in our investor calls. For those who don’t, my name is Jess Unruh. I’ve been at Green Dot for a little over 10 years. Prior to Green Dot, I was at Ernst & Young for many years. At Green Dot, I’ve been the Chief Accounting Officer for the past 5 years and Operational CFO for the past 3 years. And I oversee accounting, financial reporting, tax, data, procurement and our shared service operations. So thank you for the opportunity.


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [4]


Very good. Okay. Bob, with that, nice to hear your voice. Let’s go ahead and take your question.


Robert Paul Napoli, William Blair & Company L.L.C., Research Division – Partner and Co-Group Head of Financial Services & Technology [5]


Okay. A lot going on here, that’s for sure. Just on the Platform Services Business, the growth rate — how sustainable is the growth rate of that business? And can you break out any — well, we have an idea what the tax piece is, but what is the BaaS? Which pieces are growing faster? What — so what kind of growth rate do you expect for platform services? And how big is that BaaS business? And I would think that would be the fastest-growing piece over the business?


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [6]


Yes. I think that’s right. A lot of our Platform Services Businesses have been around for a long time, our money processing network, TPG, which is a tax processor and PayCard, RapidPay card. So a lot of those have been around for a while and BaaS is without question, among those pieces, the fastest-growing. And the CAGR, we expect to continue, but we don’t want to guide anything specific until we have all the facts and figures ready for guidance call in February. But I think the CAGR is indicative of what it’s doing. And you know, Bob, that we announced last week fairly significant number of expansions and new partnerships and the pipeline looks robust. And so those new partnerships, you build them, you deploy them and then they grow and season over time just like now we’re benefiting from the ones that we’ve launched over the past years as they’ve grown and seasoned. So the BaaS Platform has a lot of growth, we think, to it, and every time we get more information on it, we share it. And as we promised in the calls, we’re going to continue to highlight the platform services portion of the company with more granularity and in particular, on the guidance call so that you and others can have a better appreciation for how to size it, and how to view it in relative comparison to our accounts business.


Robert Paul Napoli, William Blair & Company L.L.C., Research Division – Partner and Co-Group Head of Financial Services & Technology [7]


Then I guess the Consumer Business, the Unlimited product and the other products. I mean the — what effect — you said that it’s equal to or 90% of the profitability of the prior products. And when do you — by the time you enter/exit 2020, would you expect that business to have year-over-year growth?


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [8]


So yes, what we said Unlimited — and for those of you who — I know it’s hard when you have a lot of calls that you’re going to at the same time. But we put a deck together, Samir and our FP&A team put this together. It’s actually quite good. It’s called Supplemental Earnings Call Deck, their creative title. And — but in there, it has a section called Unlimited by the Numbers, and it actually gives with granularity and actual charts more than really most companies would do, but we really wanted to — investors to have a sense of it what our decline was and then the launch of Unlimited and what that portfolio has done. And what’s so impressive about it, frankly, even from us, we design the products. You don’t always know how these things will work. It pictures our 6 main consumer portfolios that have been declining, in particular, since the more aggressive marketing of our free competitors and that is the question affected us, and we’ve talked about that. So you have all these 6 portfolios like a boulder coming downhill, and you’ve seen that decline, especially starting and accelerating in Q2 of this year. So you have this big boulder coming down, then Unlimited comes in and steps in front of the boulder and has actually been able to slow it dramatically, and a lot of leading edge — all of our leading-edge metrics have stopped the boulder and now pushing it back up the hill despite the fact that you still have losses in the other 5 portfolios. It’s just a very impressive result for such a young product and the quality of the customers, as we showed in the deck, is pretty strong. So if you haven’t yet downloaded that, we really urge you to do that, we think it tells you a lot of information in a very transparent and fact-based way. So what we’re forecasting is that Unlimited on its own will help the entire consolidated Consumer Business, bottom some time in Q1 or so — Q1 or Q2, given there we’re about a quarter later than we thought we would be, but pretty close and then in — pushing that boulder up. So the boulder is already going up but we need to go past where we used to come down. So in other words, I don’t want to say is we’re narrowing the gap and then the boulder will need to go past that gap and then grow in the absolute. We’ve already grown in the absolute on direct deposit accounts by a lot, and we’ve already grown in the absolute on 30-day reloading actives for the Green Dot brand. But we’ve only flattened out in consolidated actives although that’s incredibly impressive for 13 weeks, given what our rate of decline was. So it’s a very, very positive story. And we’ll have more granular information on it when we guide in 2020 in the February call because by then, we will have another 3 months data and we’ll see what where we’re going with it. We’ll have more visibility to the other lunches as they come. But without question, it’s about as positive a story as we could have ever have hope to have. And we’re really quite pleased with it. But it’s 13 weeks, you know.


Operator [9]


Our next question is from Andrew Jeffrey with SunTrust Robinson Humphrey.


Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division – Director [10]


Clearly, the 2020 guide is below what we’re looking for but the metrics are encouraging and there are couple of things. One, I guess, it seems to be worth calling out, Steve, and maybe you can elaborate a little bit that — I mean, correct me if I’m wrong in this characterization. But it seems like 90% of your Consumer Business revenue is despite the overall business declining are really sticky, right, around direct deposit or monthly depositors.


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [11]


It’s been incredibly resilient, shockingly so. Yes, very, very, very resilient.


Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division – Director [12]


So — I mean I guess for those who are worried that the legacy business, sort of broadly defined by nondirect deposit, goes away, that should be a — which is a draconian assumption. That should be a pretty powerful bulwark against that, right?


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [13]


It is. I mean that’s sort of a — look — we want to be transparent and there’s nothing worse than clobbering analysts or investors with a surprise. We just hate it, and we’ve done, without meaning to. Obviously, we have a lot of people in the finance team and in our product team work really hard, but we’ve done a pretty poor job of financial guidance, not intentionally, but it’s been so hard to sort of understand the month-over-month and quarter-over-quarter declines when you’re looking at the 90-day group of cards, many of which are one and done, some of which past CIP, customer identification, but then don’t reload. Then we have all these portfolios and millions of customers trying to figure out, okay, who’s going to a trite and when? And how much dollars those guys worth? Who is going to sign on and when? And how many dollars are those guys worth? And we’ve just — and then of course, we don’t know what our competitors’ plans are. So in big marketing campaigns rollout, we see it. And so we’ve really missed this falling — what you want to call it, the falling knife what everyone would call it starting primarily in Q2 in March, you can really see it on the charts we supplied. And just continue to accelerate, I say, wow, luckily, we had Unlimited that was rolling out, and we’re working on it and thank goodness we did. And it’s really good product. So we knew the product would do well because of all the research and testing but you never know until you know. And thankfully, it’s done very, very well. So I think, people should be encouraged by that without question. It’s — again I’ve designed a lot of products and all the ones pretty much the Green Dot sells, and this would be the best one that we’ve had well, since the Walmart MoneyCard in ’07. And if you take some time to flip through the deck and look at the direct deposit metrics and the rest, there is no way you can come away not being impressed with the results. But at the same time, you have this exit rate issue. So one of the things we wanted to highlight in our — and it isn’t guidance, you want to be thoughtful about that. It’s commentary to your model, let’s call it, because it isn’t truly guidance. But is that we have — we don’t have 10 issues in the company. We have one, the same one we’ve been talking about now for a year, and that is that, it’s the decline of our legacy Consumer Business portfolios, all of them, pretty much in the one and done — the single-use customers, we call them segment, and the cash reloading segment. The direct deposit segment has been pretty strong. And if we hadn’t done something, even that would’ve ultimately decayed, and you can kind of see that in the consolidated chart. But even when everything else was going down quickly, we’re still going up in direct deposit, and now, of course, resuming up in direct deposit. So I think you comment that about that resiliency is absolutely fact based and the fact that a lot of folks who were at this Money20/20 conference last week, it’s a great conference for us for those of you who are able to attend and witness some of it. It was a wonderful opportunity for us to meet a lot of people. And I think people are really amazed with just the quality of products and all the things that we’re rolling out and all that. But it’s not obvious to the naked eye until we put it all together for investors of what those model inputs are. So the only issue we have on the business is that the consumer accounts is being offset by the growth in the platform. So that takes care of that. And then of course, if the Consumer Business continues to come back, then that will be popping along with the platform business. But right now, platform is overcoming the losses in consumer. On the bottom line, you have these 4 other inputs that are not about company performance at all. And in fact, they’re pretty good things in the absolute. They just are what they are. So I wanted to make sure that investors know about them. In talking to analysts last week at the conference, I could tell, people are aware of them, but not putting the pieces together. When you see what Street consensus is for next year, you can just kind of tell the people I’m thinking about it. That’s we wanted to point out is that, hey, look, you know the Fed would be lowering interest rates. You know we make money on interest rates. Let’s remind you how that impacts us. Everyone knows, we renewed the Walmart agreement for a very long time, 7 years of stability at a 150 basis points consolidated margin hit, and that’s been a very good thing. The market reacted well to it, and it’s a very good deal for us. But it’s still 150 bps, right? So we wanted to call out these things that aren’t about company performance, and they’re in the public domain, but when you see what the overall consensus estimates were for next year, you can tell that people hadn’t yet put them together, if you will, in the models. And that’s why I wanted to make sure you guys did so that we didn’t have a disconnect when we guided for next year.

And then in terms of the stock price, there were several good analyst reports, including yours, Andrew, and others have talked about the stock price. And does it price for Armageddon or price for runoff and just then the other things. It’s hard to know what people always think, but I think the information today is a good counterbalance to that concern. And the stock price isn’t — when we get this, isn’t really reflection of any kind of mathematical — we don’t think any kind of mathematical formula to the actual EPS metrics or something else. It’s a reaction to the fact that we’ve missed guidance for a couple of quarters, and that we’ve had trouble sizing our Consumer Business and the melt off of it, and we get that. That causes a valuation penalty. So we’re trying to do by giving these model inputs today and say, look, the platform business is — I don’t think anyone questions, is real rocket ship for us and a very exciting part of our business. So I think that’s understood by most.

On the Consumer Business, now with the charts that we’ve provided with Unlimited, knowing that we still have other new products to come out. But Unlimited by itself, be kind of hard to ignore the trends on that. They’re pretty clear and obvious. And so I don’t know how investors will take, if you will, the reminder of the model inputs before we give guidance for next quarter. But hopefully, it’s a way to provide some certainty and to provide some — or a belief of certainty and to get our arms around the model that we struggled to get our arms around. So hopefully, people take it that way and understand the help we’re trying to be and making sure that we are not out of sync with the market in February.


Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division – Director [14]


Yes. Well, I’m among those in this model next year. I appreciate that. Getting on front of it. Maybe I can ask, and then I’ll jump back in the queue. For this perspective, if we’re looking at something that’s in the neighborhood of $180 million EBITDA next yhear, considering the headwinds, but also considering the growth in these new products and recognizing that the Walmart is a onetime hit and then you go on and you start to ramp. Is that kind of a base case for what you would view as being the durable ongoing Green Dot business around the other side of this consumer decline? And for the most part, new products are kicking in and that’s kind of the high-value EBITDA is one way of thinking about that the Green Dot is generating?


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [15]


I think so. I mean if you look at — I mean the onetime hits are what they are and the interest rates, I don’t — I think you all know that I’m on the Board of Federal Reserve or District 12, but clearly, I don’t have any information or knowledge that the general public wouldn’t have about interest rates and those kind of things. But if you just look at what the interest rates are, you can make up your own decision of what you think they will be a year from now, the exit rate. But to your point, the Walmart renewal is a one-shot deal for 7 years. It’s a very long-term stability and a lot of time for us to overgrow that with efficiencies and bigger sales and whatnot.

You have the SG&A, which is — for any platform that’s growing. You have to invest in that. We’ve done that for years while at the same time, saving money in other areas like customer care and automation for various things, and we’ve done a good job with that every year, I think, and benefited from that again as you know this Q3. And that’s one of the reasons why we had the EBITDA performance we did. So a lot of these, to your point, are onetime, they reset. And then as you have a consumer account division building backup. We need to build up to about 600,000 accounts in total to get back to where we were at our all-time peak in 2018, okay? And so we’ve already come back quite a bit, as you can see from the charts. We have to keep going. We’ll know more in February if we’ll do that in Q3 or Q4 and not even in the year. I don’t know. I don’t want to presell it because I don’t want to be wrong. But that’s why I wanted to give everyone the charts so you can sort of make up your own mind and everyone can do their own analysis because they’re pretty spectacular, and frankly, better than what we would have guessed or predicted at this point. So I think you’re right. I think we have a real chance for the platform to continue to grow. I think that’s a fairly strong belief and one that’s a fair belief to have. And then you can see the Consumer Business coming back strongly, and when that comes back, it comes back. So I think we’re in a pretty good place as we approach the exit rate of 2020 into 2021, but you never know, and I’m sure we’ll have competitive reaction to our success. Our competitors hear this call. When I talked about our marketing plans back in Q1, that’s what generated, we think a lot of our competitors altering their marketing plans and come back and clobber us beginning in April. So I need to maybe a little best less transparent on these calls, but transparency or not, consumers are going to do what they’re going to do. And when they see a great product, and they see it well marketed like we’re doing with the Ellen’s Show and the great job that Ellen DeGeneres is doing. What a wonderful person and what a great career she has established. And we’re so proud to have her as a spokesperson. And as we do those kinds of things, we’re hopefully rebound and be back in good shape for 2021. Once again, we’ll be at the top of the mountain like we were up at the free prepaid wars back several years ago. But we don’t want to get ahead of ourselves, so we’re giving you everything we know and when we guide in February, we’re not going to guide an ounce beyond what we can see as an exit rate at that time, right? So we’re going to be thoughtful and prudent about it and go from there.


Operator [16]


Our next question is from Ramsey El-Assal with Barclays Investment Bank.


Damian Justus Wille, Barclays Bank PLC, Research Division – Research Analyst [17]


It’s Damian on for Ramsey. So I just wanted to drill down into your confidence on — in sort of the bottoming out of the decline in Q1. I know you quoted MoneyCard launching and the Gen Z App launch at the beginning of next year, but maybe you can talk us through sort of your confidence in the slowdown and then the decline in Q4, the bottoming out in Q1 and then what kind of growth you think you can kind of get to?


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [18]


Well, I don’t want to give too many forward-looking belief — statements on where we can get to. And Damian, I know you didn’t — it was unintentional, but I want to make sure I didn’t say beginning of next year for the launches of new the products, except first half because I don’t — again, we want to be — we want to make sure we hit everything we say. But yes, the new products, we have high hopes for us as well. If you look at the rate, here is what I’ll do if I were building the model because I’m not going to give you an answer, but I’ll sort of try to do some breadcrumbs for you is if you look at the month-over-month on the charts we gave, growth, right? I mean how many weeks are there? We told you how many weeks and so forth. You can plot on a graph in a model, how many active accounts we lost per week or per month, take your pick, starting with beginning of the year of 2019, down to the peak at the launch of Unlimited, and then how many we’ve gained. And then you can sort of take that exact model and just add to it because these are net actives. In other words, each month’s number of actives is by definition the net of who has attrited and who is new and who is active in that month, right? So it’s a net number. And you can figure that now what you don’t know is will we fall off our pace, will we increase our pace and that you don’t know and that we’ll have to figure out. But I can give you sort of a good sense of run rate as you go through the end of 2020, and that’s what I’ll probably do if I were building a model and didn’t have inside information. And frankly, that’s kind of how we build our models because you just don’t know. I don’t know what the competitive reactions going to be, right? You don’t know these things. But, at lease, I give you a sense of how to look at it, and then you can make your own conclusions and decisions.


Damian Justus Wille, Barclays Bank PLC, Research Division – Research Analyst [19]


All right. Well, we’ll be doing our modeling on our side. But maybe another question then on margins. So you announced the sort of $60 million to $65 million incremental headwind for next year. I’m thinking about then this year you had the $60 million of spend on — it is the onetime marketing spend. So is that 2020 hit in addition to the lower — the $60 million lower EBITDA in 2019? Or is it in lieu of it? And then maybe just longer term, as you think about your business, do you think that the level of investment, I mean, your business — it required to sort of hit the same level of growth has changed as a result of all of this? Or do you think it’s relatively the same?


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [20]


This is going to sound really dumb. I’m not sure I understand the question. Are you saying the investment we need to make in 2020 more than the investment we made this year to achieve the same level of growth on Unlimited? Is that kind of what you’re saying or asking?


Damian Justus Wille, Barclays Bank PLC, Research Division – Research Analyst [21]


Well, there is 2 parts to it. So the first half is, there is — it’s going to be $60 million to $65 million as a negative EBITDA hit in 2020. Is that in addition to the negative $60 million that you took this year off the marketing spend? Or is that…


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [22]


Well, it’s a net number. What we’re saying is that if we did $240 million, which is what we said our guidance was for this year to finish the year at, and you took $65 million off that and be at $175 million or something like that. And that would be our exit rate, that would be our exit run rate heading into next year, not because of company performance, per se, those were offset. The platform and the Consumer Business offset each other largely. It’s because of, as we mentioned, the onetime hit from the Walmart renewal, which laps the interest rates, which is anyone’s guess. It’s increase in SG&A, which you don’t do every year, but the size of the programs we announced are pretty big programs. I mean these are — any one of these are sizable, let alone, all of them together and plus you have TailFin, which could be quite — whatever we come up — I mean that could be quite significant, we don’t know. So we’re not going to do that every year, right, nor have we done that every year. So a lot of those will rest and go into 2021. So that number that we’re indicating that could be our guidance at $175 million includes everything. That’s where we’re saying the net number is. So it is $175 million minus another $60 million for marketing, if that’s what you’re asking. Our marketing expense on a year-over-year basis isn’t probably much different, it’s pretty flat to what we spent in 2019 in total for the full year versus what we’re planning to spend next year. But I want a little bit of room because we’ve done so well with the way we’ve gated our marketing with Unlimited. In fact, you may have heard Mark’s commentary that we actually spent less in Q3 than what we budgeted because we’re achieving our goals. The trick is — look, we’re not a startup. We’ve been here for a while. And the trick to marketing, if you can do it, and you’re lucky, and you do the right things, and you have a good product, it’s not to spend your money as fast as you can to see you can have a headline number, oh, we’ve acquired this many accounts, whatever it is. The trick is to acquire enough accounts slowly, but surely over time. So you’re growing but in a way that’s profitable on a cost of acquisition versus unit-economic basis. And that’s what we do. So it’s about gating that, and if we can continue to do that successfully, we want to make sure we have a little more room next year because we’re launching those other products. So that’s why we made that but that $65 million in total headwind, that net headwind, is the full number inclusive of whatever else you think might be in the.

So team, here is what we’re going to do. Mark is signaling me that we’re at the top of the hour, and my eyes aren’t good enough to see what’s on the screen in front of me. So I don’t know how many…


Mark L. Shifke, Green Dot Corporation – CFO [23]


We’re finished, and we’re going to have another call, yes.


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [24]


Yes. For those of you who don’t know, because we don’t want to blackbox any one on any information, we want to make sure you get what you want to ask, is after each earnings call, we do a group call with a lot of analysts and others who join. And if you’re not an analyst on that, I believe you certainly can be, right? Can anyone be on that? Or how do we do that?


Mark L. Shifke, Green Dot Corporation – CFO [25]


I think we’re done.


Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [26]


Okay. Well, get a hold of Don Duffy who runs ICR. He’s our Investor Relations, and we’ll get beyond that, and then we’ll have the follow-up calls. We really appreciate you being here today and glad you got to ask your questions and others 1 or 2 that won’t get to. But we thank you all for joining us today. We’ll see you at the Citi Conference next in New York in a few days, right?


Mark L. Shifke, Green Dot Corporation – CFO [27]




Steven W. Streit, Green Dot Corporation – Founder, President, CEO & Director [28]


Okay. See you then. Thank you. Bye-bye.


Operator [29]


This concludes today’s conference. You may disconnect your lines at this time. And thank you for your participation.


Leave a Reply