BM Technologies - Q2 2024

Executive Summary

• Q2 2024 was seasonally weak but operationally constructive: operating revenue was $12.5M (down sequentially from $16.2M in Q1, roughly flat YoY), GAAP diluted EPS was $(0.41), and Core EBITDA was $(0.9)M; one-time NextGen costs of $1.6M weighed on results.
• Interchange and card revenue rose 57% YoY to $2.3M, validating the Durbin-exempt bank switch; servicing fees fell on lower average serviced deposits (primarily BaaS).
• Management maintained an outlook for positive Core EBITDA in FY 2024 and highlighted a potential BaaS wind-down that could lift pro forma Core EBITDA by ≥$1M per quarter on a run-rate basis.
• Strategic/product catalysts: NextGen platform completed, rewards engine launched (30% adoption among actives; +1.4 transactions/month cohort uplift), and 15 IDV SaaS clients signed YTD to address university enrollment fraud.

What Went Well and What Went Wrong

What Went Well

• Durbin-exempt economics drove a 57% YoY increase in interchange and card revenue to $2.3M, supporting the strategy shift to a new partner bank.
• Technology transformation completed; cash-back rewards launched in July with early traction: 30% adoption among active users, +1.4 transactions per month in the cohort, and ~$20K rebates paid to students in the first month.
• IDV SaaS product gaining momentum (15 universities YTD), designed to reduce enrollment fraud and deepen higher education relationships; can be sold beyond existing disbursement clients.

What Went Wrong

• Servicing fees declined YoY (to $6.9M vs $7.7M) amid lower average serviced deposits (total $685M vs $922M YoY), mostly due to BaaS deposit runoff and rate sensitivity; total spend fell 4% YoY.
• Seasonally weak quarter plus $1.6M one-time NextGen implementation costs pressured profitability (GAAP EPS $(0.41); Core EBITDA $(0.9)M; Core EBITDA margin −7%), reversing Q1’s positive Core EBITDA.
• BaaS remains unprofitable in the current regulatory and interest-rate environment; management signaled an expiration in Feb 2025 and potential wind-down considerations.

Transcript

Operator (participant)

Good morning, everyone, and welcome to the BM Technologies Q2 2024 Earnings Call. Please note that this event is being recorded. Following management's prepared remarks, we will hold a question and answer session. For those joining us on the webcast, you can submit your questions online where the management team can see them. At this time, I'd like to turn the conference call over to Brian Prenoveau, Investor Relations for BM Technologies. Please go ahead.

Brian Prenoveau (External Investor Relation)

Thank you, operator, and good morning, everyone. Thank you for joining the BM Technologies Q2 Earnings Call. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our Form 10-K and 10-Qs, for a more detailed description of the risk factors that may affect our results.

Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release we issued yesterday afternoon. At this time, I will now turn the call over to Luvleen Sidhu, BM Technologies CEO. Luvleen?

Luvleen Sidhu (CEO)

Thanks, Brian, and good morning, everyone. Joining me on today's call is Ajay Asija, our CFO, and Jamie Donahue, our President and Chief Technology Officer. Today, we are looking forward to sharing with you our financial results for the Q2 and H1 of 2024, and also to discuss our strong progress in our technology transformation and growth initiatives. Before getting started, I want to provide you with some brief financial highlights. Operating revenues for the three and six months ended June 30th, 2024, totaled $12.5 million and $28.7 million respectively, compared to $12.6 million and $26 million for the three and six months ended June 30th, 2023, up 10% in the H1 of 2024.

Our Q2 2024 interchange and card revenue increased 57% year-over-year, validating our strategy of switching to a Durbin-exempt bank. Our core EBITDA for the Q2 was a loss of approximately $880,000, a slight improvement compared to a core EBITDA loss of $906,000 in the Q2 last year. As you may recall, there is a considerable amount of seasonality in our Higher Education business, with the Q2 generally being the weakest quarter of the year. We look forward to the upcoming fall peak when students return back to school. Shortly, Ajay will provide further details on our financial performance, but before that, I would like to provide some additional commentary for the Q2.

We made strong progress towards our strategy of digital transformation and setting the stage for growth in our Higher Education business going forward. We completed our technology platform transformation, a cutting-edge Microservice architecture platform that unlocks our ability to bring additional products and services to market at an industry-leading pace. This significant investment enables us to offer our student customer base targeted products and services in a compliant manner. Our technology rollout was quickly followed by the launch of our first major product for our student customers in July. This was the launch of our cashback rewards engine, which was the most important feature that our customers have been asking for. Over the last 12 months, we have already seen great engagement with this new feature, with over $20,000 in cashback value put back in the pockets of our customers.

Not only are our students benefiting, but we are also seeing early engagement metrics improve. With customers taking advantage of this feature, swiping on average one more time a month than a typical active account customer. This feature is the first of many that are expected to increase transaction and deposit volume, and thereby revenues. With the next-gen technology, we are very excited in terms of what we can offer our students over the following quarters, increasing the value proposition for the Vibe account as well as our revenue potential. Also, in the Q2, we experienced a strong response to our new identity verification or IDV product, which we launched in the Q1. As a reminder, our IDV product is an innovative software as a service product that assists universities in mitigating fraud vulnerabilities during the student enrollment process.

IDV leverages robust AI and machine learning tools, empowering universities to maintain their risk level preferences with data-driven insights, and significantly enhances their fraud detection capabilities. We believe adding this product to our technology stack will attract more college and university partners, create a new source of revenue for us, and reduce fraud for our university partners and for the company as well. Year to date, we have signed on 15 universities for this product and have a strong pipeline and anticipate solid sales through the remainder of the year. As part of our improved technology stack and service offering, IDV increases stickiness and lifetime value of our existing higher education relationships and opens the door for new university relationships as well. We continue to view the Higher Education business as a market with ample opportunity to deepen customer relationships, increase customer lifetime value, and unlock new revenue streams.

This remains a unique opportunity only available to BMTX due to our distinctive customer acquisition model and long-standing contractual relationships with colleges and universities across the country. We are very pleased with the foundational steps our team has taken to transform the outlook of this business and position us for greater profitability in the future as our growth initiatives ramp up. I will now hand it over to Ajay to review our financial performance in the Q2 in more detail and to provide more context.

Ajay Asija (CFO)

Thank you, Luvleen. During the Q2 of 2024, the company earned $12.5 million of operating revenue, in line with revenue in the prior year quarter. Interchange and card revenue totaled $2.3 million for the Q2 of 2024, as compared to $1.5 million in the prior year. Interchange and card revenue were up 57%, driven by the change in the partner bank with Durbin-exempt interchange rates. Servicing fee for the Q2 of 2024 totaled $6.9 million, as compared to $7.7 million in the prior year. Servicing fees were down due to lower average service deposits in the BaaS business.

Average service deposits totaled $685 million for the Q2 of 2024, a decrease from $828 million for the Q1 of 2024, and $922 million in the Q2 of 2023. Compared to the Q2 of 2023, substantially all of the reduction in deposits occurred within our BaaS vertical, where the average deposits of $261 million were down 47% compared to $494 million for the Q2 of 2023 due to the interest rate sensitivity of a large portion of these accounts. Average deposits in our Higher Education vertical were relatively flat at $425 million, compared to $429 million in the Q2 of 2023.

Deposits per ninety-day active accounts in our Higher Education vertical at June 30th, 2024, averaged $1,665, up from $1,624 compared to the Q2 of 2023. Spend totaled $631 million for the Q2 of 2024, modestly down 4% from the Q2 of 2023. Spend per ninety-day active accounts for the Q2 of 2024 averaged $1,853 within our Higher Education vertical, compared to $1,855 in the Q2 of 2023. In terms of account sign-ups, there were 60,000 new account sign-ups in the Q2 and approximately 160,000 new account sign-ups in the first six months of 2024.

Account fees and university fees totaled $3.3 million for the Q2 of 2024, essentially in line with the $3.3 million in the Q2 of last year. During the Q2 of 2024, the company retained over 99% of its higher education and institutional clients. We processed over $1.9 billion of student financial aid refund disbursements during the Q2 of 2024, which compares favorably to the $1.8 billion processed in the Q2 of 2023. Of the $1.9 billion, approximately 12%, or $234 million, was dispersed into BankMobile Vibe checking accounts. With regards to our BaaS business, this relationship expires in February 2025. In the current regulatory and interest rate environment, this business is unprofitable for us.

In the event of a wind-down, we expect our pro forma Core EBITDA to increase at least $1 million per quarter on a run rate basis. Core operating expenses totaled $13.4 million for the Q2 of 2024, compared to $13.5 million incurred for the Q2 of 2023. Total expenses were $17.2 million, compared to $17.7 million in the Q2 last year. Total operating expenses included $1.6 million of one-time costs related to the implementation of our next-gen platform through higher technology and professional services costs. Core net loss before interest, taxes, depreciation, and amortization totaled -$2.6 million for the Q2 of 2024, compared to a core net loss of -$4.1 million in the Q2 of last year.

Core EBITDA was -$881,000, a slight improvement over a core EBITDA loss of -$906,000 in the Q2 last year. Liquidity remains strong at June 30th, 2024, with $12.5 million of cash, $0.4 million of working capital, and no debt. Note, the Q2 is seasonally our weakest quarter, and we anticipate delivering positive core EBITDA for the full year 2024. With that, I'd like to turn the call over to Jamie for his discussions on our technology investments and improvement. Jamie?

Jamie Donahue (President and CTO)

Thank you, Ajay. Good morning, and thank you for your time today. I'm happy to update you on our progress on the technology transformation that we've been discussing over the last few quarters. We have launched our new platform architecture as a foundation for our web and mobile interface for our BankMobile Vibe customers this quarter. I'd like to remind you that our technology transformation was driven by our vision to modernize our platform architecture and offer innovative new products and services to our customers, with exciting new features to enhance the overall user experience. This transformation also allows us to stay ahead of the changing fintech landscape by being able to deliver full service banking functionality via APIs, and/or embed our technology in other ecosystems seamlessly. Our investment in our platform has also unlocked our capability to integrate best-of-breed partners into our products and services rapidly.

I would like to discuss exciting new details on two new features that we have brought to market and are in production this quarter. The first offering I want to discuss is our exciting new cashback rewards engine through our partnership with Kard, as Luvleen shared. This new feature was launched in July and allows customers to earn cashback on everyday debit purchases effortlessly, helping them save their hard-earned money and build a solid financial foundation for the future. Customers benefit from a comprehensive reward solution that contains brands they know and love, help them discover new brands, maximizes their savings through discounts and rebates on everyday spending. This rapid market launch is a working example of our investment in our platform, listening to the needs of our customers, and introducing products through revenue-generating partnerships.

Adding Kard's innovative rewards as a service API into the BankMobile Vibe checking account underscores our dedication to innovation while leveraging our upgraded technology platform. The second product we have launched is our identity verification service, or IDV. The IDV solution plays a key role in the university enrollment process, providing enriched identity information to inform university-driven business rules for decisioning on student enrollment applications. The solution involves managing data we already receive in our disbursement, disbursement distribution flow with the higher education clients that have subscribed to this SaaS service. We've created a unique delivery point through either a file-based batch processing or a custom API integration. Either of these methods ensure rapid deployment, frictionless integration, and secure control over the information shared.

This is another example of BMTX leveraging the investment in our platform architecture that is the foundation for these and all new offerings we will launch in the coming quarters. We are excited to bring these, these new features to life at pace while increasing our partnership value to our Higher Education and BankMobile Vibe customers. We've gone live with two higher education clients, with 13 others in implementation in Q2, and have a strong pipeline we're executing on in the current quarter. Before I turn the call back over to Luvleen, I want to continue to update you on our progress we've made on the AI and machine learning fronts. We are committed to being a data-driven firm that weaves in AI and machine learning where appropriate to enhance our operations and efficiency.

We continue to deploy robotic process automation, or RPA modules, in our back office to increase efficiency while reducing error rates. Our custom-developed RPAs also lower overall expenses in fraud, compliance, and our operational teams. On the AI front, we have made significant progress and investment in our own proprietary large language model that leverages our private, secure data set that will anticipate our customers' needs and address potential issues. We are internally piloting this new technology now and hope to release it to our customers over the next few quarters. Before I wrap up, I want to take a moment and thank all of our dedicated and talented associates that bring this amazing technology to life. Thank you. I look forward to continued innovation and an exciting future for BMTX.

With that, I turn the call back over to Luvleen for some closing remarks. Luvleen?

Luvleen Sidhu (CEO)

Thank you, Jamie. Our priority in the Q2 was the technology and product enhancements we made, as we believe these investments set the foundation for future growth. The trends and momentum in our core business remain strong, and we are optimistic about our future. As mentioned earlier, our best partnership is approaching expiration in February 2025. In the current regulatory and interest rate environment, this business is unprofitable for us. In the event of a wind down, BMTX would be significantly more profitable. While we believe we have a superior and valuable product offering for the BAS programs, we believe the current macro environment makes it challenging to maintain profitability of these programs. The Higher Ed business remains profitable and our primary focus for tackling growth.

Given the unique nature of this asset and the investments we have been making, we have also been receiving inbound interest for our business at values substantially higher than today's stock price, and our board has encouraged us to explore all strategic options that enhance shareholder value. In 2024, we have been particularly focused on three key tactics to position us for growth now that we have our technology in place... Our first tactic is to drive growth and usage in our student accounts by launching value-enhancing products and features for our customers. Now that we have launched our cashback rewards program, the next product we anticipate launching before the end of the year is an offering providing financial, insurance, and wellness benefits to our customers.

This was also one of the top requested products in our customer surveys, and we look forward to sharing more as we get closer to a rollout date. Our second growth tactic is to continue to offer value-additive products and services to our colleges and universities. This year, we will continue to accomplish this through the sale of our new IDV product. We are excited that the pipeline for this product remains strong. Lastly, we are investing in an omni-channel marketing approach, leveraging new marketing automation and AI-based marketing strategies to better engage with both our university and student customers in a more personalized fashion. We believe these efforts will also lead to improved engagement. We have created a unique marketplace with universities on one side and student customers on the other.

Over time, our goal is to keep offering new products and services to each side of our marketplace to provide our customers with the best value, and also increase our revenue potential. Our go-forward roadmap will be based on listening to and understanding our customers' wants and needs, and then delivering. Thank you for joining us on our call today. We will now open the line for questions.

Operator (participant)

If you would like to ask a question over the phone, please press star followed by the number one on your telephone keypad. To withdraw any questions, press star one again. We'll pause for just a moment to compile a Q&A roster. Our first question comes from Bill Dezellem or Mike Grondahl from Northland Securities. Please go ahead. Your line is open.

Mike Grondahl (Head of Equities and Director of Research Senior Research Analyst)

Yeah. Hey, guys, this is Mike. With the potential for the BAS wind down, is there, like, an advanced notice period? Do you have to, have to let that customer know, like, 6 months in advance, 90 days in advance? How does that work?

Ajay Asija (CFO)

Jamie, you want to take that?

Jamie Donahue (President and CTO)

Sure. Hey, Mike. Good morning. Yeah, there's with any program wind down, there's parameters. That's all we can say at this point. We just wanted to share with you, you know, our view on that side of our business. So there are parameters, but that's about all I can get into on the call.

Mike Grondahl (Head of Equities and Director of Research Senior Research Analyst)

Got it. Got it, okay. And then, it's nice to see that, you know, next gen platform is in and the rewards program was launched. Kinda two questions related to that. Is there any more light you can shed on, you know, finance, insurance, and wellness benefits? You know, what type of features that'll be specifically? And then secondly, the $1.6 million you incurred in 2Q, do you expect to incur any more, next gen, I'll call them implementation costs in 3Q or 4Q?

Ajay Asija (CFO)

Let me take the second one, and Jamie can answer the first part of the question. So the one-time cost of $1.6 were truly just for Q2, and we do not anticipate them to reoccur in 3Q or 4Q. Jamie, you want to take the first part of the question?

Jamie Donahue (President and CTO)

Sure. And that was, Mike, you just reminded, that was what is the wellness? Yeah, we'll have a follow-up.

Mike Grondahl (Head of Equities and Director of Research Senior Research Analyst)

Finance, insurance, and wellness. I'm just kinda wondering-

Luvleen Sidhu (CEO)

Yeah

Mike Grondahl (Head of Equities and Director of Research Senior Research Analyst)

.what kind of benefits or services those are for the students?

Luvleen Sidhu (CEO)

Yeah, we will put a press release out ahead of that launch, just as we did with Kard, that details the outline, but it's what you can imagine. It's to expand on the marketplace Luvleen has been talking about over the last few quarters, to add those, you know, detailed financial wellness and other products will be in there. I don't wanna go too far afield on that. Partnership is actively being worked, but we're really excited about what features we'll bring to our users.

Mike Grondahl (Head of Equities and Director of Research Senior Research Analyst)

Okay. Okay, thank you. I'll jump back in the queue.

Operator (participant)

As a reminder to ask a question, please press star followed by one. Our next question comes from Bill Dezellem from Tieton Capital. Please go ahead. Your line is open.

Bill Dezellem (President and CIO)

Great. Thank you. A group of questions. First of all, the ID verification, will that be sold to universities that you do not currently work with on the disbursements side, and so it could be a door opener, or is it solely solely for universities that you are working with currently?

Jamie Donahue (President and CTO)

Hey, Bill, Jamie here. Good morning. Good, good to talk to you again. Yeah, that's our plan. In fact, we have a number of universities that are not disbursements clients today that are in implementation. So, we think it's unique market niche that will open the doors for us for other business lines.

Bill Dezellem (President and CIO)

Is there any advantage to a non-disbursement customer or a university that takes on the Identity Verification product? But then, the question is: Is there an advantage to them choosing then to work with you on the disbursement side, or are those different enough, admissions versus finance, that it's only the relationship as opposed to some integration benefit?

Jamie Donahue (President and CTO)

Yeah, great question. We know our existing disbursements clients love the integration and the symmetry we give them with because the data, like as I mentioned in my earnings call here, you know, we get that file already from the university, so there's no extra lift. We do see a symbiotic relationship when customers use the IDV scoring data along with our disbursements, there is a lift in their departments. And really, you know, that market, we're in a market dominant position, right, from the university perspective, right? So this is another way to get our foot in the door and introduce them to the power of BMTX. And as you're aware, you know, those contracts are cyclical.

Some universities are part of a larger ecosystem with some big ERP that might do parts of this. It really gives us a chance to have a seat at the table with these universities that we don't do that business with, and we're super excited about it.

Bill Dezellem (President and CIO)

Oh, okay. Given that there are synergies, as you think about your 2-3-year roadmap, do you have additional products that you are imagining or that are in the works that will be added to the university quiver?

Jamie Donahue (President and CTO)

Absolutely. Yes. That's what I can say. It's our roadmap, and inside of that 36-month horizon you suggested, we think that, because of our relationship and because of our platform architecture that we built, we can bring other value-added products and services to our university clients, for sure.

Bill Dezellem (President and CIO)

Great, that's helpful. And then the universities that, and I realize it's a small number, but the universities that are using the ID verification today, are they doing it for all student applications or, a small portion of those, applications that they deem to be higher risk?

Jamie Donahue (President and CTO)

Yeah, so that's the uniqueness of this scoring idea from an enrollment process. You know, some large universities have had a similar technology that they've developed in-house, but by and large, our mid-sized community colleges and technical universities just don't have that capability. What we're seeing is they are doing a sample of their what we call SECs or applicants in the testing phase. But we have had experience where customers have taken their whole enrollment population, which could be, you know, as high as 4-to-1 for active seats. We're seeing closer to 1.5 applications to seats, but we've also had customers that have done a look back of existing. So all the prior enrolled just to score them so they could make some internal decisions.

So it's the gamut right now. I think as they get more comfortable with the technology and what value it provides, we see the look back and the all model as the way forward.

Bill Dezellem (President and CIO)

Okay, let me make sure I just heard what you said, Jamie, is that you think what a university should do is use the data to evaluate the last recent tranches of students, have that data or knowledge, I'm now thinking machine learning, they then can take that and apply that to 100% of their applications, and identify what level of fraud they're willing to tolerate, essentially.

Jamie Donahue (President and CTO)

Yeah, the scoring. And then each university will have their own business logic on that scoring and how they want to handle it. But yes, that was correct. That was a correct recap.

Bill Dezellem (President and CIO)

Oh, okay. Thank you. I appreciate that. And then talking about the new AI technologies that you are piloting right now, do you anticipate that those will be revenue generating or these, the example, the pilot example that you gave in the opening remarks, is that primarily going to be used for increasing retention, just being higher value and increasing the retention, or is it a revenue generator in addition to retention increaser?

Jamie Donahue (President and CTO)

Yeah, great, great question. Well, initially, I think where we see that technology landing is it's servicing our customers better. It's giving them a real-time tool to answer questions about their account specific to them, help them with financial wellness. You know, we think of it in terms of not so much revenue generating or charging folks for it initially, but we do see it as an OpEx reduction to minimize calls to the call center and increase engagement with our customers. So we expect a lift on the OpEx side, not necessarily from a revenue side at this point.

Bill Dezellem (President and CIO)

Great, thank you. And then one additional question, please. The rewards engine, have you seen behavioral changes in the first month from the students that are using this. Besides,I guess you noted the one additional transaction per month. Do you have any other data beyond that that's insightful?

Jamie Donahue (President and CTO)

Yeah. Yeah. So really, really, really proud of this. So we track active customers, and of our active customers that we rolled this out, 30% have signed up for the service. So that's a pretty good penetration rate on And it's only—we launched it July 7th. So my statistics are from July 7th to August 6th, I think is my latest data. I'm looking at my notes correctly. And of that 30%, there's been an increase of 1.4 more transactions for that cohort. So, and then Luvleen mentioned $20,000 have been put back in our students' pockets in the form of rebates and rewards.

So we, you know, this has been a long, in fact, when we surveyed our customers, this was the number one thing they were looking to us for. And the unlock was our technology investment next gen. So really, really happy, really excited about the penetration and how it's going to help our customers.

Bill Dezellem (President and CIO)

How does that 1.4 additional transactions a month compare to what you would have hoped for?

Jamie Donahue (President and CTO)

It's actually a little bit above plan, and frankly, you know, from what we see right now. We hope, you know, it's early days and early trends, but we wanted to share with you that we're really impressed with the performance. The adoption is really what we're... You know, if they don't adopt it, if the users don't subscribe to it, then we have no chance at those transactions. So, we're really excited to be able to share some more metrics with you in the coming quarters.

Bill Dezellem (President and CIO)

Okay, Jamie, I will actually follow up on that adoption. What does it take for someone to adopt rewards or sign up, I guess? What's the friction to make that happen?

Jamie Donahue (President and CTO)

Yeah, we really worked hard at that, making that frictionless. I think in total, because you're already a vetted, valid BankMobile Vibe customer, and because we're using an API integration, I think it's three screens in total for you to click and three screens for you to sign up. And most of those screens are you choosing which, you know, which vendors you want to do business with, where you want to get your rewards. So, you know, because it's API-based architecture, Kard also is an API platform-based architecture, and now BankMobile Vibe sits on platform-based architecture. It makes it, I don't want to say everything has a bit of friction, right? You have to choose it, but after that, it's really simple.

Bill Dezellem (President and CIO)

Great. Thank you for taking all the questions.

Jamie Donahue (President and CTO)

No problem.

Operator (participant)

As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. We have no further questions in queue. I'll turn the call back over to Luvleen Sidhu for closing remarks.

Luvleen Sidhu (CEO)

Thank you, everyone, for joining us today, and we look forward to meeting with you next quarter. Have a good one. Bye-bye.

Jamie Donahue (President and CTO)

Thanks.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.