Good afternoon, and welcome to the Green Dot Second Quarter 2024 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tim Willi, Senior Vice President, Finance. Please go ahead.

Thank you and good afternoon everyone. Today we are discussing Green Dot's second quarter 2024 financial and operating results. Following our remarks, we'll open the call for your questions. Our most recent earnings release that accompanies this call and webcast can be found at ir.greendot.com. As a reminder, our comments may include forward-looking statements and expectations regarding future results and performance. Please refer to the cautionary language in the earnings release and in Green Dot's filings with the Securities and Exchange Commission, including our most recent Form 10-K and 10-Q for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we will refer to our financial measures that do not conform with generally accepted accounting principles. For the sake of clarity, unless otherwise noted, all numbers we talk about today will be on a non-GAAP basis. Information may be calculated differently than similar non-GAAP data presented by other companies. Quantitative reconciliation of our non-GAAP financial information to the directly comparable GAAP financial information appears in today's press release. The content of this call is property of the Green Dot Corporation and is subject to copyright protection. Now, I'd like to turn the call over to George.

Good afternoon, and thank you for joining our second quarter earnings call. It was a solid quarter that was generally in line with our expectations, and we continue to make progress on many fronts, including the finalization of our consent order, which you would have all seen by now. Consistent with our prior disclosures, much of the order relates to matters arising and resolved several years ago. I am pleased that we have come to an agreement with our regulators related to these issues and, as you would expect, we have been diligently working to address the requirements contained within the order. Ensuring we are good stewards of our customers' funds is our top priority, and one we take very seriously. Security, risk management, and regulatory compliance are the most important aspects of our job, and critical to our mission of being responsible stewards of our customers' money and our shareholders' capital. This experience will costly, will make us a better company for all of our stakeholders, and I continue to believe the investments not only ensure the safety of our customers' money, but will also prove to be a competitive advantage. I look forward to these standards being applied uniformly and transparently across the embedded finance and payments and landscapes. During the second quarter, we delivered results that were in line with our internal expectations, as we navigated remaining headwinds associated with the conversions in the first half of 2023, and elevated spending on compliance and regulatory initiatives. We kept our heads down, stayed focused on our goals, and saw continued progress on a variety of fronts. In addition to the regulatory work we have been doing, we are making steady progress and pragmatically moving forward on our plan to continually improve Green Dot's performance and return to growth. Our most urgent priorities have been and remain, first, compliance. Ensuring we are good stewards of our customers' funds, as demonstrated by building exceptional risk management capabilities, implementing state-of-the-art compliance focus technologies, and driving a culture that puts stewardship, compliance, and partner and customer needs first. Second, revenue. Building sustainable and predictable business pipelines and onboarding capabilities, to replenish partners and revenue streams lost in prior years so both Green Dot Corporation and Green Dot Bank, can remain financially healthy for years to come. And third, margins. Being good stewards of our investor funds by managing costs, improving margins, and bringing our product to market at low marginal cost. Let me now hand it over to Jeff for his comments, before I make some additional comments regarding these priorities. Jess?

Thank you, George, and good afternoon, everyone. Non-GAAP revenue grew 11% year-over-year, primarily from continued growth in our B2B segment, and modest growth in our Money Movement segment. Adjusted EBITDA of $34 million, the non-GAAP EPS of $0.25, both decreased from last year, due to specular headwinds in retail, portfolio of sunsetting in our direct channel, and partner program deconversions in early 2023. At the same time, we've incurred incremental expenses associated with our ongoing investment in regulatory and compliance initiatives, while benefiting from a reduction in processing expenses from last year's processor conversion. Our GAAP results for the quarter, reflected incremental $24 million reserve for the final consent order on top of the $20 million reserve, established in the previous year. Now I'll touch on the factors that influence the performance of our segments, and will refer you to our press release and quarterly slide deck, for our segment results and key metrics. First is our Consumer Services segment, which is comprised of our retail and direct channels. Consumer segment revenue remains under pressure, due principally to the secular headwinds in the retail channel that continue, to impact a number of active accounts on our platform. Year-over-year growth has also been impacted by a program deconversion in the first half of 2023. Excluding this program, segment revenue decline was in the low 20% and we've generally seen stability in volumes per active, and a bit of improvement in revenue per active. Looking forward, as we lap the deconverted program, and our new program with PLS begins to ramp, we anticipate a more moderate revenue decline, towards the latter half of the year. Our direct channel repositioning is progressing well. We phased out multiple legacy brands in Q2, 2023, which resulted in year-over-year headwinds. Nevertheless, the direct channel revenue is…

Thank you, Jess. Before taking your questions, I would like to spend some time discussing the actions we are taking to address, the three priorities I mentioned at the outset of this call. First, on the compliance front, we have been very busy in making substantial investments in our infrastructure. We have built our plan, and are allocating these investment dollars after taking into consideration, the conversations we have had with our regulatory stakeholders, and aligning that feedback with our own internally identified initiatives. Our spending on regulatory and compliance infrastructure in 2024, is anticipated to be $15 million to $20 million higher than that in 2022, which is the material and deliberate investment in this area of our company, and has been made in the face of partner attrition and a smaller reported active account base. The areas we are investing in include improved systems to help us better onboard, and verify newly acquired accounts, enhanced BSA, AML monitoring and reporting systems, enhanced fraud management systems, and the addition of internal audit, compliance, and risk management personnel. Beyond the dollars invested, we have been highly focused on changing the culture to one that prioritizes risk management. There are many benefits to these investments and actions. First and most important, they enhance the safeguarding of our customers' deposits and financial transactions, which is an obvious imperative for remaining a strong financial institution. Second, they enhance our end-to-end customer experience, resulting in an improved customer retention, a key lever for improving our profitability. Also, these investments allow us to more efficiently comply with our regulatory obligations, allowing us to grow at scale with effective and enhanced risk management. The next priority, revenue generation, is critical to sustaining and strengthening our company and our bank. As you know, coming out of COVID,…

[Operator Instructions] Our first question is from Ramsey El-Assal with Barclays. Please go ahead.

Hi. Thanks so much for taking my question this evening. My question is on the B2B segment revenues, which came in ahead of our model. Could you disaggregate how much of the segment's gross was driven by the largest BaaS partner that you mentioned, versus from the remainder of the segment? I'm just trying to get an idea about the sort of balance of growth in the segment?

Hi, Ramsey, it's Jess. So the predominant growth came from that key BaaS partner, but we took note in the prepared remarks, to call out that even if you put that key BaaS partner aside, we had growth from the existing partnerships, and some of the newer partnerships that we launched last year, including Dayforce. So although we don't break those out, certainly the key BaaS partner was the primary driver, but nonetheless, the other programs also grew.

Got it. And a quick follow-up, and apologies if you covered this already. I missed some of the prepared remarks, unfortunately. Could you - what about the next sort of 12 to 18 months? Are there any other large renewals that are sort of pending? Are you feeling now sort of like things are relatively stable just in terms of, contract discussions?

Hi, Ramsey, thanks. This George. I would say over the course of the last year, if you would have asked that question a year ago, we probably would have given you a very different answer, but here, as we sit today, as it relates to our key BaaS partners, this year in '24, we've renewed and extended the vast majority of our current BaaS revenue. And in our prepared remarks, I also mentioned that we've signed. I pointed out a couple of reasonably important new BaaS partners that are under contract, and were currently onboarding and will be launched in early-ish 2025. And let me also say that the partners that Jess was referring, to beyond the largest of our BaaS partners have generally been performing very well, have been growing year-over-year, and have relatively healthy trends. And last, before I stop rattling on, we don't contain within our BaaS group the PLS opportunity, although I mentioned that that partner, which is contained within our retail, which is in our consumer business, launched earlier this summer in July, and has just been performing very, very well. So we're super excited about that. So I probably over-answered your question, but let me pause and see if you have any follow-up.

No, that's perfect. I appreciate the thoroughness of it. Thanks so much.

Thank you.

The next question is from Tim Switzer with KBW. Please go ahead.

Hi, good afternoon. Thank you for taking my question.

Hi, Tim.

My first question is on the growth outlook here. You guys mentioned, probably for the company, accelerating growth as they move through the back half of the year. It seems like we're kind of implying year-over-year growth 20% or higher, by the end of the year should we assume a continued acceleration above that level in 2025. Given all the momentum you have in BaaS and some of the other areas?

Jess, why don't you take the first kind of the guidance part of that question, and then I'll chime in at the tail.

Yes, I think your implied growth rates in the back half of the year are - in the zip code of, mid-teens to upper-teens area. So accelerating growth throughout the year.

Yes, so underlying, yes, Tim, if you don't mind, I'll just expand a bit. Underlying that, of course, are the initiatives started now two years ago, even prior to my having this role with respect to retirement of some brands, migrating some brands off the portfolio, the sunsetting of some partnerships, et cetera. For the most part, those activities we will have rolled through, by the back half of this year. And in the back half of last year, we had some very elevated costs associated with dispute-related losses, our migration off of the processing platform onto ACI, et cetera. Obviously, we don't expect to replicate those costs. Then as we think, obviously, we're not in a position to give 2025 guidance, but we do believe, the last question, that our current partnerships. We've had a lot of success in renewing and extending those contracts, even in the midst of the pending overhang of the consent order. So we're very pleased with that. That makes us feel good about future years. I'd also point out that I think, if you look at our free cash flow year-to-date, it's about comparable to prior year, even though the core underlying business has shrunk a bit. But nevertheless, we're generating really high free cash flow yields. Now, we also make a $35 million contribution to TailFin have for the last five years. The last contribution was made in this year in '24. Now, that's treated as an investment for all the right reasons, but we will not be making a similar contribution next year. So irrespective of business activities, et cetera, which we feel pretty optimistic about. Our cash flow will be at least $35 million better, irrespective of trends in the underlying business. So I'll stop again. Maybe I've over-answered your question, but I got to take my opportunity where I can.

Yes, no, that was great. Thank you. And then my other questions on the expense side of things, you guys mentioned, the spending on regulatory infrastructure should peak or has already peaked. Should we expect that now staying flat as you continue to just continue investing on top of that, or there are not true or maybe lower expenses, or if you could redeploy that elsewhere. And then where else would you guys like to be investing right now?

Okay. Great. I'm going to, again, take an opportunity to expand on your question. It's good. It's something I want to talk about. We and the companies you follow and our other analysts follow obviously, are operating in a regulatory environment of, I think, some intensity. We - Green Dot, are not in the business of regulatory arbitrage. We're in the business of building a vertically integrated solution set, for consumers and B2B partners. And so, the vast majority, if not all, of the regulatory activities that have to happen within the value chain that I'm discussing, happen within our four walls. And that's good because we can control those. We can manage those activities. And we have invested, as I mentioned, considerably in improving our capabilities. Now, again, caveating that we're not giving '25 guidance, we have both invested significantly in the buildup of our operating compliance platforms. So, we've added people in the compliance department, internal audit, BSA, AML, et cetera, et cetera. And those will be ongoing costs. But we've also invested in activities this year that, look backwards in some way, in the contemplation of the consent order, et cetera. We've been doing a lot of work that probably, and I expect not to repeat. So I don't want to breakout those two elements of our regulatory costs. But simply put, I would expect some of those costs not to repeat. The last part of your question, which is an excellent question, is what would we want to invest in? What we are investing in this year, is we have some portion of technology debt we're continuing to eradicate. That's very important. As Jess mentioned, we have seen persistent declines in our retail distribution business unit greater than our expectation. That product has not received material…

That was great. Appreciate all the color. Thank you, guys.

Sure, you bet, Tim. Thanks for the questions.

The next question is from George Sutton with Craig-Hallum. Please go ahead.

Hi, guys. James on George, thanks for taking my questions. First question is probably for Jess, but it sounds like the return to growth in the Consumer segment is getting pushed out a bit. I guess what's changed there, relative to your prior expectation?

Yes, I would say principally in the retail business, George alluded to it. We have continued pressure from digital offerings, competition, executive trends, et cetera, but also note that we enhanced our risk management processes. And in doing so, that pushes out some higher risk, lower value accounts. So that does have an impact on our active account trends, and has some impact on segment profits. I think that's slowing some of our expectations so that retail, the declines are not necessarily moderating as quickly as we would have liked.

And then on the banking and the service side, congrats on growing the pipeline there and adding a couple of new partners. I guess what do, you think is driving the growth in the pipeline. And then any anecdotes you can share on the couple of new partners you added, whether was a Green Dot what do you think sort of led to those wins?

Sure. Well, a couple things led to the growth of the pipeline. One is, when I became the CEO, I asked Chris Ruppel to become the Chief Revenue Officer, and the purpose of that was to consolidate and standardize our go-to-market efforts where they had been disparate before. And that team has done a very nice job - in focusing on the right types of opportunities to address, getting them under contrast, getting them in the pipeline, and doing it under a relatively challenged environment. So that's job one. And they've done a great job. And I want to express my gratitude to them for that. Also, there's been a lot of disruption in the broader fintech industry, of course, disruption with sponsor banks and fintech providers. You know all these stories. And that creates a churn within the market. And I think we're well-positioned to capitalize on the best of that churn. The best opportunities within that churn, I think we're well-positioned to be a safe landing for some of those companies, since we have now for two years been devoted to significant enhancements in our compliance and regulatory oversight. And this is very important to all prospects now. So that's an important factor. And third, the overarching secular trend, which companies are waking up. They have important customer relationships. Some of them might be financial in nature. And they want to provide a more financial solution, so that they can have longer-term, more meaningful, more depthful relationships. So I think those three factors have all been working in our favor, and leading to some of our success so far.

And then lastly, from me, on the renewal of the large thing to the service partner, any changes in the relationship or new economics of that renewal that you can share? And also, I'd be curious to know if this is something that went up as a competitive process? Thanks.

Sure. I don't have a response for the latter part of your question, but I did allude to in the outset of my, I guess, toward the end of my prepared remarks that the agreement is for a longer term than it has been in the past, which allows us substantial amount of runway to provide other solutions and problem-solving initiatives to this partner. They're important, and that's great. And the economics, which I think we've talked about in the past, have been relatively static. So by that, we mean the revenue growth, or lack thereof, does generally not impact the margin, the dollar margin of that account. And the account has been adjusted in order to allow some opportunity for us to have growth in that relationship as revenue grows. I wouldn't call it linear, but it's better than it was before, and we're quite pleased with that relationship.

That was good. Congrats on the progress.

Thanks, James. Appreciate it.

This concludes our question-and-answer session. I would like to turn the conference back over to George Gresham for any closing remarks.

Thank you, operator. As I do from time-to-time in closing, I would say the company's gone through a journey over the last couple of years, been some downs for sure. We've had some challenges that we've weathered, and I want to take an opportunity to express my deep gratitude to our team members, around the world who are contributing so much to Green Dot. We have a great team of people, and really appreciate all their hard work and effort, and of course, appreciate our investors and those of you interested in our story. So, we're going to keep swinging. We've got a great future ahead of us, and really looking forward to getting there. Thank you all for your interest in the company. Bye-bye.

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