Earnings Call Transcript - GDOT Q1 2020

Operator, Operator

Good day and welcome to the Green Dot Corporation First Quarter 2020 Earnings Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Ms. Michelle Blaya. Please go ahead.

Michelle Blaya, IR Officer

Thank you, and good afternoon, everyone. On today’s call, we’ll discuss Green Dot’s first quarter 2020 performance. Following the remarks, we’ll open the call for questions. For those of you who haven’t accessed our earnings release that accompanies this call and webcast, it can be found at ir.greendot.com. As a reminder, our comments include forward-looking statements and our expectations regarding future results and performance. Please refer to the cautionary language in the earnings release and in Green Dot’s filings with the Securities and Exchange Commission, including our most recent Form 10-K and 10-Q for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we’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 reconciliation 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 the property of the Green Dot Corporation and is subject to copyright protection. Now, I’d like to turn the call over to Dan.

Daniel R. Henry, CEO

Thank you, Michelle, and welcome, everyone, to the Green Dot Corporation Q1 2020 earnings call. Today, we will discuss Q1 results and the impact of COVID-19 and share some of my early thoughts around the areas of focus for Green Dot going forward. Before we jump in, I would like to first thank the board of directors who provided me this opportunity and responsibility to take the lead here at Green Dot. A particular amount of gratitude and appreciation is owed to Bill Jacobs and Chris Brewster who provided day-to-day leadership on an interim basis prior to my arrival, and we are all very thankful for their continued leadership. The real shout-out, however, goes to the entire team at Green Dot. During the interim period, the company executed the busiest quarter of the year, tax season, without a hitch, delivering results well in excess of plan, but the true heroics of the team really began on February 3 when 300 of our developers in Shanghai found themselves having to shift quickly to a remote work environment amidst the height of COVID-19 in China. Then, on March 16, all call centers in the Philippines and India were closed due to COVID-19, which took our global call center staffing from 1,900 to 500 in just one day. Facing directly into the challenge, the customer service and IT infrastructure teams scrambled to bring online work-from-home capabilities for our call center representatives across the globe so that we could continue to serve customers during this critical time. And work-from-home directives hit here in the US a few weeks later and, again, the team adapted to complete remote working arrangements while continuing to serve our customers and partners. If that wasn’t enough, in April, our systems and people were tested once again when the first wave of relief funds from the CARES Act flooded customers’ accounts through direct deposit, creating almost equivalent to a full tax season of refund loads in a single day. Yes, these have been unprecedented times and they have tested all of us in ways no one could ever imagine. I’m proud of the team’s unwavering dedication to our customers and each other throughout these turbulent conditions, and I’m excited to be on board as one of the newest members of the Green Dot team. I’ll now hand the call off to Jess Unruh who will report on the company’s Q1 results and comment on guidance for the remainder of 2020, after which I will wrap up with some of my initial observations of the company and some current thoughts around our areas of focus and go-forward strategy. Jess, over to you.

Jess Unruh, CFO

Thanks, Dan. Good afternoon, everyone. Before I get started, I’d like to say thank you to our employees. Despite the many challenges during this unprecedented time, they have been steadfast in their support of our company, coworkers, customers, and partners. I’m going to cover our financial results for Q1 and then spend most of my time discussing recent trends in light of the impact of COVID-19. Our Q1 2020 non-GAAP revenues grew 6% to $347 million, and we delivered adjusted EBITDA of $92 million and non-GAAP EPS of $1.13. These results exceeded the guidance we shared on our Q4 earnings call despite headwinds in late March from COVID-19. As a refresher, we expected our Q1 non-GAAP revenue to be approximately 30% to 31% of our full-year guidance or roughly $330 million, and we expected adjusted EBITDA to be around 48% of our full-year guidance of roughly $86 million. The year-over-year revenue growth in the quarter was driven by both of our segments. Non-GAAP revenues in our Processing and Settlement segment increased 14%, driven by strong performance in both tax processing and money processing services. The number of tax refunds processed grew 3%. We also expanded the adoption of our taxpayer advance programs and introduced new tax processing services in 2020 that had exceeded our expectations. Revenues from our money processing services increased as a result of 10% growth in the number of cash transfers, principally from third-party reload partners. Non-GAAP revenues in our Account Services segment grew 2% as a result of an increase in BaaS program management service fee revenues earned from platform partners and continued growth in the number of direct deposit active accounts from our BaaS and PayCard programs. This growth was partially offset by a decline in the number of active accounts in our Consumer programs, with active accounts for the segment down 5% year-over-year, consistent with our expectations. Offsetting some of the weakness in lower-margin active accounts was 4% growth in direct deposit accounts, which helped drive a 10% increase in gross dollar volume. An additional factor in the quarter was the year-over-year decline in net interest income due to lower yields on our cash balances as a result of rate decreases by the Federal Reserve earlier this year. As expected, we experienced year-over-year margin compression in the quarter largely due to an increased revenue share rate associated with the renewal of the MoneyCard program and our marketing efforts to promote our Unlimited product, both within our Consumer business as well as a decline in interest income, which carries a very high margin. We generated strong operating cash flows in Q1 of $104 million. Additionally, we drew the maximum amount of our revolving credit facility as a precautionary measure in light of uncertainties around the current economic environment. At the end of the first quarter, after considering our investment in TailFin and our $100 million draw on our revolver, we had $218 million in unencumbered cash. We believe maintaining a strong liquidity position is prudent in light of meaningful uncertainties and to ensure we have ample flexibility to pursue strategic priorities. Now I’d like to discuss the impact of COVID-19 and our thoughts on guidance for the year. First and foremost, we believe that the long-term strategy to grow our business will remain intact despite the impact of COVID-19. However, in the near term, it is very difficult for us to forecast our revenues because the COVID-19 situation is rapidly evolving and both the duration and severity of the economic impact are unknown. Therefore, we are withdrawing our 2020 guidance for non-GAAP revenue, adjusted EBITDA, and non-GAAP EPS. While we are not in a position to provide detailed guidance, I’d like to briefly share a few trends we’ve observed across our business segments and channels. I’ll start with our Account Services segment, which incorporates our account programs in our Consumer business and our two platform programs, BaaS and PayCard. In our Consumer business, our retail channel has been impacted by reduced foot traffic at our retail partners, although most of our largest retail partners are providing essential services, consumer activity noticeably slowed with the shelter-in-place mandate. Our online channel, however, has remained strong. Our BaaS programs had been resilient, but some partners have headwinds in their business, such as those in transportation and ride-sharing. Our PayCard programs are facing headwinds associated with unemployment. Overall, the year-over-year trends in our key metrics and revenues in January and February were strong and then we saw a marked slowdown in late March and early April as the impact of COVID intensified. As April progressed, we saw a surge in GDV from stimulus funds deposited onto our account programs. During April, we deposited nearly $2 billion in stimulus funds from the IRS, and that has benefited purchase volume and interchange revenues in April. GDV is a leading indicator of our revenue for all of our account programs and we’ve experienced mix trends over the past two months that make it difficult to confidently forecast our revenue in the coming quarters. We’re monitoring our direct deposit active base to better understand sources of GDV and churn. With respect to the former, we’ve seen an increased proportion of ACH deposits coming from government benefits as customers file for unemployment. The enhanced unemployment benefits afforded under the CARES Act have helped offset erosion in payroll deposits. In our Processing and Settlement segment, our tax processing services have been largely unaffected as most Americans eligible for a refund received their funds in January or February. In March and April, we’ve seen a migration in volumes away from tax preparers to do-it-yourself programs online, but overall volumes of tax refunds processed are expected to be in line with our previous forecast. The deferral deadline to submit tax returns to July has a little impact on our tax processing services since that deferral generally benefits those that pay taxes as opposed to those eligible for a refund. With respect to our money processing services, the trend is consistent with our account programs. We saw a slowdown in reload activity in late March and early April, and those trends have moderated as April progressed. In summary, we’ve experienced healthy double-digit year-over-year growth in January and February and mid-single-digit decline in March. Our April revenue will be flat year-over-year due to the benefit of the stimulus funds. As we look out over the remainder of Q2, we anticipate trends to revert back to the pre-stimulus levels that we saw in March and early April, with interest income on deposits also expected to be materially lower throughout the year as the rate on overnight funds is near zero. All in, we expect Q2 non-GAAP revenue to be down somewhere in the neighborhood of 10% year-over-year. Let me turn my attention to operating expenses. The majority of our costs, such as revenue share and processing expenses, are variable. If revenue declines, so will these expenses. However, we are anticipating a few headwinds that will create margin compression throughout the year. First, we had significant disruption in our third-party offshore call centers as a result of COVID. We’ve made significant progress with our partners to restore these staffing levels. In the short term, we’ve moved some staffing onshore, which will be more expensive for us. Additionally, our strategic initiatives to transform our call center operations have been delayed as a result. To be clear, this initiative is very important to us as it will provide margin improvements in future years. We will continue to focus on these initiatives throughout the year. However, some of the benefits we expected to realize in 2020 will be delayed. Second, we earn tiered volume incentives from the payment networks. Our purchase volume in 2020 will be negatively impacted by COVID and, as such, we’ll likely earn fewer incentives. Green Dot maintains solid liquidity and cash flow. As I noted earlier, we have taken steps to strengthen our liquidity position in light of the uncertainty, including drawing $100 million on our revolving credit facility. We’ve also instituted an enterprise-wide headcount freeze, delayed or reduced non-critical projects, and implemented strict travel restrictions. We’re being disciplined with our spending while preserving investments in strategic initiatives. We’re evaluating additional actions to reduce expenses further if needed. Thus far, we’ve reduced our planned SG&A spend by $30 million. With that, I’ll turn it back to Dan.

Daniel R. Henry, CEO

Thank you, Jess. As you heard, the team delivered a solid Q1. This is something I can take no credit for. However, I am very grateful for it. The first quarter has always been the company’s strongest quarter in terms of revenue and profitability. With no one knowing the extent of the negative and lasting impacts of COVID-19, we are very fortunate to have banked this quarter before the world changed. Due to work-from-home requirements, my arrival to Green Dot on March 26 has to be virtual but, nonetheless, we are making very good progress. Driven by the urgency created by the pandemic, the leadership team and I began working aggressively to eliminate unnecessary expenses. So far, we’ve reduced planned SG&A expense by close to $30 million for the remainder of the year. These reductions in expenses will not impact our ability to serve our partners and customers, nor will these expense reductions temper our future growth. Consequently, when we all emerge from this current economic situation, Green Dot will be a leaner, more efficient operation. My decision to join Green Dot comes from my desire to build a lasting and transformative company that delivers inventive financial service offerings that improve the financial lives of our customers. With Euronet and Netspend, I’ve had some great practice, and I’m really looking forward to putting some of that experience to work here at Green Dot. This company has a tremendous collection of assets—a bank, a proven, modern, and scalable tech platform, millions of customers, and over 100,000 points of retail distribution with its own cash deposit network. And if that’s not enough, partnerships with some of the largest and most powerful consumer companies on the planet—Apple, Intuit, Uber, Walmart, and others. I believe that, at the end of the day, successful ventures and their relative level of success come down to two fundamental things: people and focus. So, in addition to spending urgent energy on expense reduction, I spent a lot of time getting to know the senior leadership team at Green Dot. I’ve been learning about the assets we have and the areas where we need work. I have been reviewing everyone’s level of commitment and skills and gaining their input on what we should do to improve and grow. These conversations, together with discussions with members of the board and select individuals in my professional network, have started to shape go-forward strategy and view for the company. At a very high level, I can share the following. First, are we going to sell the bank? In a word, no. Do anything in the fintech space, you have to have access to the nation’s banking system. So, if every payment/fintech company needs a bank, why would we, as one of the only fintechs that owns a bank, consider selling? So, no. The answer is no. And no matter how many different ways you ask me the question, the answer will be no, we are not selling the bank. It is a strategic asset, a compelling differentiator, and a source of immense potential value. Next, we are going to get much more efficient. Operationally, we lack clarity inside the organization in terms of which divisions are most profitable and efficient and which ones are just the new cool thing to talk about. We are not taking full advantage of our scale in terms of automation, vendor management, and internal staff efficiencies. In addition to growing the top line, we will become much, much more focused on bottom line growth, free cash flow, and margin expansion. Point three: We have three very powerful, but currently underleveraged businesses inside Green Dot—tax processing, money processing, and PayCard. These are tried and true businesses that produce solid results, but they can be so much more if properly supported. We will no longer take these businesses for granted, but we will put energy and resources behind them to ensure their continued growth and market leadership. And number four, in terms of our Consumer business, we will be spending significant time this year preparing ourselves for 2021. The intention is to be focused on delivering a consumer banking product that will create lasting value for the mass market consumer in this country, and we’ll take full advantage of our bank charter, retail distribution, and direct-to-consumer capabilities. I believe the reason we are seeing such an abundance of so-called challenger banks pop up is that both Netspend and Green Dot squandered their advantages in this space over the past five years. We will be working hard in the coming years to regain that lost ground. And finally, our BaaS platform, or what I refer to internally as our partner business. Green Dot has done a tremendous job in securing multi-year agreements with some of the best consumer-facing companies on the planet—Apple, Intuit, Uber, Walmart, to name a few. Our unique combination of payments experience, retail cash supply to network, tech platform, and bank gives us the ability to deliver valuable turnkey solutions that these companies were searching for. But what gets me really excited, however, is the thought of what we can bring to these partners. Once we start to flex our creativity and assets, I think we will be able to bring these partners and others integrated payment and financial service solutions they’d never thought possible. And this brings me to the people side of the formula. Great vision without great people is irrelevant. Today, inside Green Dot, we have some great people, but I intend to add a few more in the near term to continue to progress toward building a truly world-class organization. These talent additions will help solidify our vision and accelerate our growth and prominence in the payments and fintech world. First of these new additions was Daniel Eckert, who was announced recently. A recognized fintech, digital retail, and payments pioneer, Daniel most recently served as Walmart’s leader for Services & Digital Acceleration at Walmart US. I first met Daniel nearly a decade ago after he arrived at Walmart to lead its Financial Services division. We struck a good relationship that has lasted to this day. We share what could perhaps be described as an embarrassing interest and appreciation for the complexity of the payments ecosystem, and we now share a mutual enthusiasm for what we can create with the assets here at Green Dot. Daniel will be working alongside me in the role of Chief Product, Strategy, and Development Officer. His experience, capabilities, and vision are hard to match, and I’m thrilled to be able to partner with him on this adventure. In closing, I want to once again thank everyone at Green Dot and also you, our shareholders, for this opportunity. With that, I’ll turn this over to the operator and open up for questions. Thank you.

Operator, Operator

Thank you. We’ll take our first question here from Ramsey El-Assal with Barclays.

Ramsey El-Assal, Analyst

Hi Dan. Thanks very much for doing this call and welcome back to the game that we were – I wanted to ask you about just one kind of tactical question and another one a little higher level. Are you getting a boost from accounts on file from the stimulus? In other words, are you capturing that volume? Are there any newly acquired customers who are signing up with Green Dot in order to capture the volume who might end up being a Green Dot customer ongoing? Or is it more just you had customers that already had their accounts linked to the IRS and the money just flowed automatically? Can we think of this as an acquisition tool or is it really more just kind of a one-off benefit for the existing customers? And I have one follow-up.

Dan Henry, CEO

Yes, Ramsey. It’s both. We had our customers we’ve had for a long time with direct deposit and also through our tax business. We got a big surge of GDV with the stimulus from the CARES Act. But I also believe that we’re seeing a nice little pop, if you will, in terms of card ordering and activation, and I believe that’s for customers who were needing stimulus, but also it’s for customers who were kind of in need of a formal electronic payment or the way the world is changing now in terms of having to order so many goods and services online. Really, a lot of cash-based consumers don’t have that option of cash anymore. I think we are benefiting a little bit in both ways.

Ramsey El-Assal, Analyst

A little bit in both ways? Okay. And then my follow-up question is a little bit broader, and it’s sort of building on something you said at the end of your prepared remarks about challenger banks and I’m just wondering if you could kind of give us your updated thoughts on how COVID could impact the competitive landscape in your industry. Are these challenger banks also receiving kind of a one-time maybe lifeline as it were from stimulus type payments? Obviously, many of them were pre-profit. Do you think you’ll come out of this in a better competitive position or it will just be something that’s somewhat similar with you guys having to again work harder and smarter to gain "lost ground?"

Dan Henry, CEO

Well, I think COVID is requiring pretty much every business in the country to work harder and smarter. I believe that the neobanks that have customers who were on direct deposits have a little bit of a benefit, but I believe that everyone is going to have some challenges here because when we’ve got 20 million Americans currently unemployed and I believe that the lower-income consumers in this country are probably disproportionately impacted. And I think that Green Dot has—we’ve got a nice diversified business, we’re in a much better position, I think, than just kind of a monoline neobank to weather this storm. And the other nice thing is we get positive free cash flows, strong revenues and cash in the bank, we don’t need to go out and raise our series C, D, E, and F, as many others have to. So, I think collectively we’re all solving a big need in the country. So, I hope that everybody makes it through this, but I do think the challenger banks are going to have a bit of a challenge in the coming 12 months.

Operator, Operator

And we’ll take our next question here from Andrew Jeffrey with SunTrust. Please go ahead.

Andrew Jeffrey, Analyst

Hi. Good afternoon. Appreciate taking the question. Dan, welcome. Look forward to working with you again.

Dan Henry, CEO

Yeah, Andrew, nice to hear your voice.

Andrew Jeffrey, Analyst

Yeah. Likewise. I’d like to maybe build on Ramsey’s question a little bit with regard to challenger banks. One of the points of consternation, I guess, is the way I’ll say it, among investors I think in the last 12 or 18 months that Green Dot has been, the level of sales and marketing spend aimed at maintaining the competitive position and maybe combating some of these newer entrants. Do you have a view or can you give us some insight this year as to whether maybe even directionally do you think sales and marketing has elevated, is that something you can bring down? How should we be thinking about Green Dot’s competitive response, COVID-19 notwithstanding?

Dan Henry, CEO

I think that what you’re going to see is kind of a philosophical change in the approach in terms of consumer marketing. As I referenced in the call, we tend to spend significant amounts of time and energy this calendar year to prepare ourselves for 2021. And Green Dot, I believe, has a bit of a history of kind of, hey, every year or so, here is a new product and let’s market and promote that new product. And my philosophy is, at Green Dot, you know what, we’re a bank—we own a bank. So, we really should stop calling these marketing companies challenger banks and neobanks because none of them are banks. They are all just marketing companies, marketing products, and pieces that they put together from other third-party service providers. So, our go-forward strategy and philosophy is going to be leveraging our actual bank charter to be able to issue real DDA accounts and provide customers with a long-term solution for their financial and payment services needs. So, what you can expect is we’ll continue to spend meaningful dollars on sales and marketing, but we’re going to get off the treadmill and start climbing a flight of stairs. And what I mean by that is we will be creating a product that a customer is going to want to take and keep for years and that’s going to build and build more customers on the base that we have.

Andrew Jeffrey, Analyst

Okay. I look forward to seeing how all that evolves in practice in the numbers. And then, I guess, with regard to new products, Unlimited in particular which was launched quite a bit of fanfare, we get a lot of questions about sort of the economics of that product. The rewards are pretty generous and I think that falls under the category of what you can control. And I know it’s early days for you and you’re so virtual, but can you give some thoughts on the profitability of that product and if that’s one of the things perhaps that we’re going to see you address in the near term?

Dan Henry, CEO

Yeah. We will be addressing that product here in the near term by making some modifications to that. And we’ll be doing that very thoughtfully because we do have some customers that have embraced that product, and we’re going to make sure they stay happy, but we’ll probably make some modifications to that on a go-forward basis to be able to continue and maintain strong acquisition to improve the economics of it.

Operator, Operator

And we’ll take our next question here from Bob Napoli with William Blair. Please go ahead.

Bob Napoli, Analyst

Good afternoon. Dan, welcome back, and good luck to you guys. I guess, just you talked about a number of key initiatives or things that were underleveraged and I think the BaaS business, the tax business, what are your, like, I guess, the top priority? What are your top priorities from the business and product perspective? And the BaaS business was I think growing at a high rate; they had Uber as a client. Has that business slowed down a lot?

Dan Henry, CEO

Yeah. I think in terms of kind of top priorities, the arrival of Daniel Eckert, I couldn’t be more thrilled with that.

Bob Napoli, Analyst

I'm very pleased with the arrival of Daniel Eckert.

Dan Henry, CEO

Yeah. He’s a great guy, and his experience over the last 10 years at Walmart will be invaluable. One of Daniel’s main responsibilities will be the BaaS business and our partnerships. Having him in the room with our partners at Apple, Uber, Intuit, and others will allow us to discuss possibilities and solutions we can offer by utilizing our banking assets, platform, and retail distribution. We will continue to focus on deepening our engagement in that area. Our strategy for BaaS is to prioritize our existing large partners and potential large partners in the industry. Daniel and his team will drive that initiative. Additionally, as I mentioned in the call, we are looking to reboot our Consumer business to develop banking products that provide lasting value for the mass market consumer in the country. We are committed to this focus, and you may find these calls repetitive as we persistently promote and grow our customer base year after year.

Bob Napoli, Analyst

Thanks. And a follow-up question. Just, I mean, Green Dot does have a strong balance sheet. Any thoughts on how you might want to utilize that? Is there something from an M&A perspective that you would—that's a tuck-in that supports your new strategy or your adjusted strategy? I mean, because it’s—well, how else would you intend to utilize the balance sheet?

Dan Henry, CEO

I haven’t identified any acquisition targets yet. I much, much prefer organic growth over acquired growth. I find organic growth is a lot easier to integrate, much higher return on your assets and equity that way. But in terms of the strength of the balance sheet, I don’t intend to continue to grow the business and keep that dry powder. I have no immediate thoughts right now of—certainly not of any share repurchases in this current environment. I just want to stay strong, stay liquid, and get through 2020.

Operator, Operator

And we’ll take our next question from Andrew Schmidt with Citi. Please go ahead.

Andrew Schmidt, Analyst

Hey, Dan and Jess, thanks for taking my question. And welcome, Dan, glad to have you.

Dan Henry, CEO

Thank you, Andrew. Nice to be here.

Andrew Schmidt, Analyst

So, this theme was asked a little bit over the course of the past few questions, but I just want to hone in on it. You mentioned that Green Dot and Netspend had squandered from the opportunity over the last several years and ceded some of the advantage to the challenger banks. Could you just talk a little bit more about your strategy to kind of reinvigorate the Consumer business and kind of to take that opportunity back, whether it involves faster product cycle times. You talk about creating more value for the mass market consumer. Maybe a few more details that underlie that would be helpful.

Dan Henry, CEO

Yeah. I’ll share what I can. I mean, I think that what’s most important—remember, I’m trying to have flashbacks two years ago. What’s most important is remember like this is not a zero-sum game. So, if you think about the unbanked, underbanked, low to moderate income consumer in the country, it’s huge. I mean, it could be 50% of the population. So, there’s plenty of room out there for a very successful Green Dot, a very successful Netspend, a very successful three or four other neobanks. So I think that’s first and foremost. I think everybody seems to treat this industry like it’s a football game, somebody is going to win and somebody is going to lose. And that’s really not my thing in that case. I think actually the more of us are out there promoting an alternative to a traditional bank account, the better, because we all collectively build awareness and acceptance of such products. So, the strategy really it’s nothing groundbreaking other than—and we’re going to leverage the fact that we’re a bank and we’re going to have real DDA accounts out there for the consumer. I’m referring to tight and clean on our products, tight and clean on our messaging and just go after it day in and day out till that customer base really put time and attention on our customer service side of things to make sure that our customers have as little friction as possible getting the card, loading the cards, using the card, and get great service whenever they have a problem. And for me, that’s how you build a business and that’s how you build a brand. You don’t build it by spending hundreds of millions of dollars on marketing, sponsorships. You build it by having good solid products and giving great service day in and day out for years and years.

Andrew Schmidt, Analyst

Okay. That’s helpful context. Thank you. My follow-up question is, I want to ask about potential behavioral changes post-COVID. Obviously, some pretty substantial reduction in foot traffic to stores, some of that will come back, but it seems like some of that is just structurally not going to come back, delivery, curbside pickup, things like that. Can you talk about how that might affect your business in terms of just behavioral changes thinking about just the accelerated shift in the physical to digital and then just more broadly strategy regarding just distribution? Thanks.

Dan Henry, CEO

Sure. Two great questions there. I think it’s hard and difficult for anybody to predict what’s the post-COVID world going to look like, but I think that everybody can agree that in so many aspects, video conferencing, just delivery of products, and grocery pickup, I mean, we’ve seen kind of two years’ worth of digital transformation in two months. And the challenge that I have—one of the challenges I believe in terms of the growth of the prepaid segment, if you will, or an alternative bank account is for consumers that I always thought were tracked in cash. Those consumers were doing just fine with cash, and I believe that COVID is really forcing a lot of consumers to have to search out a digital solution because even if they could go to a check cash or encash a check, the ability to use cash when—we have one example of a cable, we saw a spike in card sales somewhere in the country and just we were curious: Is there fraud happening here? And what we found out was the local cable company, which was usually always open to accept payments for your monthly cable bill, was closed and they had a sign on the door directing customers to go across the street to one of our retailers and get a Green Dot card and load that card and pay their cable bill electronically. So when I hear little sound bites like that, I realize that, hey, a lot of the consumers that were hanging on to cash for the last two months really didn’t have an option and got pushed into the electronic payments world. And I think that will definitely benefit us at Green Dot as well as many other players in the space.

Andrew Schmidt, Analyst

Okay. Thank you very much, Dan. Look forward to working with you.

Dan Henry, CEO

Likewise. Thanks for your question.

Operator, Operator

And we’ll take our next question from George Sutton with Craig-Hallum. Please go ahead.

George Sutton, Analyst

Thank you. Dan, welcome, and I think I'm a good example. I took $200 out before this crisis started. I believe I still have that same $200 in cash.

Dan Henry, CEO

Good for nothing.

George Sutton, Analyst

Exactly. So, you are absolutely committed to the bank, I hear that. But you mentioned you’re planning to get better data about the different segments and the different offerings, and I’m curious how much of a look at the sacred cows such as—are you planning to make some changes with this information or are these more refinements?

Dan Henry, CEO

I would say it’s the latter. It’s more refinements. The guy that was in the seat before me I think was brilliant and had really great instincts, and that worked well for him for a long time. I don’t think I’m that smart, and so I like data, I like numbers, I like to testing things, and I like expanding margins and bottom line growth. And so, we’ll look at the data and Jess and his team will run the numbers, we’ll see what’s the highest and best use of our capital. And when I say capital, it’s not just dollars, but it’s also time and energy and people.

George Sutton, Analyst

I understand. One other thing, I think it was Jess in his prepared comments mentioned you drew down some of our facility and part of that usage may be for strategic activities. Is there something upcoming that isn’t clear or was that just a generic message?

Jess Unruh, CFO

I believe it's just a general statement. We want to ensure we have enough resources to give us flexibility as we allow Dan some time to analyze the strategic review and determine the best way to utilize our capital. This will also provide us with resources in the future if needed for strategic initiatives.

Operator, Operator

And we’ll take our next question from Reggie Smith of JPMorgan. Please go ahead.

Reggie Smith, Analyst

Good evening, everyone. Thank you for taking my questions. My first question is broad in scope. Dan, have you considered re-entering the industry? It seems like there has been a significant shift with retail customer acquisition moving to digital activation. With companies like [indiscernible] and others, how do you view competition in that space? Historically, Green Dot and Netspend have dominated the check-cashing retail market. How do you plan to compete with companies that may have larger user bases or different features that could attract customers to their cards? It feels like it might be more of an add-on feature for us. What are your thoughts on this?

Dan Henry, CEO

I was excited about the opportunity at Green Dot because when you look at its collective assets, it becomes clear that while everyone in fintech has technology, few possess the financial aspect. Most rely on banks for that. If we take that definition literally, we might be among the only fintechs that operates like a bank. There are larger players in the market offering financial services, which generates substantial revenue, and many of these companies are our partners, such as Apple, Uber, Walmart, and Intuit. I believe we can collaborate with them to provide unique solutions. Moreover, we've been acquiring consumers directly for 20 years and have 100,000 physical retail locations that not only distribute cards but also accept cash and payments. This gives us a robust physical infrastructure alongside the banking infrastructure that allows us to take deposits and extend credit to consumers and our industry partners, which is quite exciting. While I can't disclose the top five items on our product roadmap just yet, as we are still in the early stages of forming our plans and strategy, I am confident that our strong balance sheet, banking capabilities, retail network, technology platform, and partnerships position us well to become a significant player in the payments space in the coming years.

Reggie Smith, Analyst

Okay. And if I could sneak one more, and it’s a question I often asked Steve in the past. So, just kind of thinking about that, and I know you’ve only been in the seat for a month-and-a-half or so. But just curious, 5, 10 years from now, is the company more of a platform for other fintechs and less about direct issuing or do you think—how do you think about the mix longer term and where are your strengths and values in this entire, I guess, kind of ecosystem?

Dan Henry, CEO

We have strong capabilities in both direct-to-consumer acquisition through our direct marketing channel and in our retail distribution. Our platform is robust, and we have excellent partners supporting it. While I might stray into sports analogies, the essence is that we see a convergence of consumers who want to engage with their favorite companies, brands, and products. If we can create seamless ways for these consumers to make purchases, we believe it will benefit both consumers and companies.

Operator, Operator

And we’ll now take our next question here from Steven Kwok with KBW. Please go ahead.

Steven Kwok, Analyst

Hi. Thanks for taking my questions, and I hope everyone is doing well. Dan, welcome aboard. My first question is just around the 10% down revenue guidance. I was just wondering how much of that is baking in the stimulus benefit, if you could help break apart what are you seeing or what’s your assumptions on both the BaaS side and then on the consumer side as well, like how should we think about that in the second quarter? Thanks.

Jess Unruh, CFO

Sure. Hey, Steven, it’s Jess. I think obviously in the prepared remarks we’ve talked about the benefit from stimulus funds, especially with respect to our trends in late April and early May, and we continue to see those trends improving. So, it will be hard to know exactly what’s going to happen in the back half of May and certainly even harder to know what’s going to happen in June. So, we think because of the lack of visibility in the short term, I think it’s prudent for us to provide a guide that 10% down.

Steven Kwok, Analyst

Got it. And then just on the expense side. If let’s say this type of environment continues, like how much additional expenses are there for you guys to take out? Could you please elaborate on like what level of expense reduction would you be willing to do?

Jess Unruh, CFO

I would say from a fixed cost basis, our marketing dollars or something we can focus on and then, of course, because like everyone else we have payroll to evaluate and understand whether we’d make any action there. But for the time being, yeah, we feel pretty good.

Operator, Operator

And we’ll take our next question from Joseph Vafi with Canaccord. Please go ahead.

Joe Vafi, Analyst

Hi gentlemen. Good afternoon. Thanks for taking my questions. And Dan, welcome onboard to Green Dot.

Dan Henry, CEO

Thank you, Joe.

Joe Vafi, Analyst

I just wanted to ask one of the previous questions just a different way if you kind of—I know, Dan, you...

Dan Henry, CEO

No. I tried to tell you we’re not selling the bank. Ask as many times as you want, we’re not going to sell the bank.

Joe Vafi, Analyst

Okay. Fair enough. And then just circling back to some of the consumer products and kind of hearing more noise from some of the P2P guys on full bank account functionality on their P2P platforms, and their customer acquisition model is a little different than a traditional player. I don’t want you to give away any of your secret sauce at this point. But how should we think about that or how would you help us think about their customer acquisition, which has kind of sometimes spread pretty virally versus the traditional model? Thanks a lot.

Dan Henry, CEO

Absolutely, and thank you for the question. I really appreciate it. This makes me reflect on what's typically considered traditional. Traditional refers to the classic Green Dot model or the neobanks that aim to provide a banking experience in a conventional sense. This relates to the consumer side of Green Dot, where we plan to focus, rebuild, and get actively involved. On the BaaS side, with our existing partners and potential new ones, we aim to play a role in their strategies for engaging their end users. This includes enhancing how those users interact with one another, whether for purchasing goods and services or providing support. We might see a couple of million accounts on our consumer platform eventually. However, through our partners, we could see a larger number of accounts within the payment ecosystem we contribute to, though the revenue from these may be smaller, they will still be profitable, recurring, and maintain a good margin.

Operator, Operator

And we’ll take our next question from George Mihalos with Cowen. Please go ahead.

George Mihalos, Analyst

Hey, Dan, welcome back, and I look forward to working with you again.

Dan Henry, CEO

Thanks, George. Good to hear your voice.

George Mihalos, Analyst

Wanted to circle back to a question that I think Reggie had asked or maybe you can elaborate on a little bit. But when you look at the market now compared to when you were running Netspend, I think when you sold Netspend to TSYS, there were a lot of motivations for doing so beyond costs; there were additional channels you were able to kind of tap into from a growth perspective. Is the current environment different at all than the one where you sort of sold Netspend into TSYS? Meaning, is the idea of being part of sort of a multi-product, multi-channel sort of institution not as attractive as maybe what was the case seven years ago?

Dan Henry, CEO

Thank you for your question. Just to clarify, I’ve addressed this topic many times before. I did not sell Netspend; instead, it was acquired. The transaction was beneficial for everyone involved, and the growth of Netspend after the acquisition supports that. The business environment and potential for growth still exist today. If we reflect on the past, we faced competition from American Express, Chase Bank, and others, which is similar to the current competition from challenger banks and neobanks. One difference, however, is that during the time of Netspend, PayPal was securing its presence and discussions with Apple were just beginning. Now, companies like Uber and Walmart are evolving their offerings beyond just card products into varied payment solutions, and they are partnering with us and TailFin. While some aspects remain unchanged, the market serving low to moderate-income consumers is still significant and largely untapped by any specific financial services company. Many have attempted to cater to this demographic but often shifted focus to higher-income customers. The opportunity to serve this large customer base persists. Meanwhile, technology has advanced, and everyone now carries powerful devices with fast connectivity, enabling us to develop impactful solutions alongside partners like Apple, Uber, Intuit, and Walmart, who have the capabilities and experience in payments to enhance the consumer experience.

George Mihalos, Analyst

Okay. Thanks. I appreciate that color. And then maybe just a quick follow-up for yourself or Jess. A lot of discussion around customization and a focus on the bottom line and improving margins. I’m just curious if you’re willing to sort of put out there sort of an aspirational margin target if we look several years down the road past COVID and the like, what do you think the proper margin profile is for this type of business? Thanks, guys.

Dan Henry, CEO

Sorry. Jess and I are on Zoom trying to decide who should respond. As I mentioned in my call, our focus will be on free cash flow, bottom line growth, and margin expansion. It’s difficult for me to predict where the blended margin will land, particularly regarding margins in the consumer segment. I might have some insights there. As for the margins on the BaaS side, it really depends on how quickly we can book revenues and various other factors at this time.

Jess Unruh, CFO

I think it’s reasonable to give Dan some time to determine which products are the most profitable and allow him the opportunity to identify important aspects, which will take time. I believe we will gain better clarity in the future.

Operator, Operator

All right. And we’ll take our last question here from John Hecht with Jefferies. Please go ahead.

John Hecht, Analyst

Thanks guys very much. Really appreciate all the color and kind of the goals and strategies going forward here and how you’re kind of developing, so thank you. So, a little bit more just technical questions here. Within the interchange revenues, how much of that’s physical versus eCommerce or what have you seen for the last few weeks? Obviously, it’s more eCommerce now, but anything striking with respect to those trends?

Jess Unruh, CFO

I mean, yeah, clearly, we’ve seen, as you’d expect, an uptick in card not present transactions. So, you see obviously PIN, which you would traditionally see in-store, migrate to signature and even more so to online and in-app, and so that in theory should give us greater interchange return. Now, I would say that there are some headwinds to interchange, in that with the interchange rates you get at the highest tiers are all related to travel and things like that. So, obviously, those categories of MCCs are shrinking while others sort of card not present categories are increasing. So, overall, it’s a benefit to interchange rates, but there are some implied headwinds within it.

John Hecht, Analyst

Okay. Thanks for that. And then within BaaS, I wondered can you talk about— I mean, do you talk about pipeline and anything that you can talk about how you see the BaaS opportunity set over the next several quarters?

Dan Henry, CEO

The pipeline is strong, and to be fully transparent, we find ourselves in a position to be selective about our partners. We will invest time in marketing and seeking out partners, but we will likely focus more on quality rather than quantity in our partner selections.

Operator, Operator

And at this time, I’d like to turn the call back to Mr. Dan Henry for any additional or closing remarks.

Daniel R. Henry, CEO

Thank you, operator. Hey Jess, thank you very much for doing our first virtual Zoom earnings call, it’s kind of unique. And thanks everybody for dialing in and listening, and talk to you here in about three months again.

Operator, Operator

And this concludes today’s call. Thank you for your participation. You may now disconnect.