Green Dot - Earnings Call - Q1 2020

Transcript

Operator (participant)

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'd like to turn the conference over to Ms. Michelle Blaya. Please go ahead.

Michelle Blaya (Head of Investor Relations)

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 irgreendot.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 property of Green Dot Corporation and is subject to copyright protection. Now, I'd like to turn the call over to Dan.

Dan 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 for providing 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. 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 planned.

The true heroics of the team really began on February 3rd, 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. On March 16th, 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. Work-from-home directives hit here in the U.S. a few weeks later, and again, the team adapted to complete remote working arrangements while continuing to serve our customers and partners.

If that was not 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 the equivalent of 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 have imagined. I am proud of the team's unwavering dedication to our customers and each other throughout these turbulent conditions, and I am 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)

Thank you. 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%, 31% of our full-year guidance, or roughly $330 million, and we expected adjusted EBITDA to be around 48% of our full-year guidance, or 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 have 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 with 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 have 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 have 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've 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 mixed 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 in 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 receive 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 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 this initiative throughout the year. However, some of the benefits we expected to realize in 2020 will be delayed. Second, we earned tiered volume incentives from the payment networks.

Our purchase volume in 2020 will be negatively impacted by COVID, and as such, we will likely earn fewer incentives. Green Dot maintained 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 a revolving credit facility. We've also instituted an enterprise-wide headcount freeze, delayed or reduced non-critical projects, and implemented strict travel restrictions. We are 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.

Dan 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. 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 26th, as of now, has to be virtual. 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 have 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 hinder 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 year-on-year Netspend, I have 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.

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 comes down to two fundamental things: people and focus. In addition to spending urgent energy on expense reduction, I've 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've 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 a 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. To do anything in the payment space—I'm sorry, fintech space—you have to have access to the nation's banking system. If every payment/fintech company needs a bank, why would we, as one of the only fintechs that owns a bank, consider selling it? No. The answer is no. 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 competitive 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 under-leveraged 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. Item number four, in terms of our consumer business, we will be spending significant time this year preparing ourselves for 2021.

The intention is to get focused on delivering a consumer banking product that will create lasting value for the mass market consumer in this country. We will 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 because 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. 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 deposit network, tech platform, and bank gave us the ability to deliver valuable turnkey solutions that these companies were searching for. 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've never thought possible. Now, 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 is Daniel Eckert. He was announced recently. The recognized fintech, digital retail, and payments pioneer, Daniel most recently served as Walmart's leader for services and digital acceleration at Walmart US. I first met Daniel nearly a decade ago after he arrived at Walmart to lead his 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 (participant)

Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one if you'd like to ask a question. We'll take our first question here from Ramsey El-Assal with Barclays. Please go ahead.

Ramsey El-Assal (Director and Equity Research Analyst of Payments, Processors and IT Services)

Hi, Dan. Thanks so much for doing this call and welcome back to the game, as it were. I wanted to ask you about, I guess, 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 for 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 sort of 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? I have one follow-up.

Dan Henry (CEO)

Yes, Ramsey. It's both.

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

Ramsey El-Assal (Director and Equity Research Analyst of Payments, Processors and IT Services)

A little bit in both ways. Okay.

My follow-up question is a little bit broader, and it is building on something that you said at the end of your prepared remarks about challenger banks. I was 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 will come out of this in a better competitive position, or it will just be something that is somewhat similar with you guys having to, again, work harder and smarter to gain, quote-unquote, "lost ground"?

Dan Henry (CEO)

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 deposit have a little bit of a benefit.

I believe that everyone is going to have some challenges here because we have 20 million Americans currently unemployed, and I believe that the lower-income consumer in this country is probably disproportionately impacted. The nice thing is with Green Dot is 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. The other nice thing is we've got 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. I think collectively we're all solving a big need in the country. 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.

Ramsey El-Assal (Director and Equity Research Analyst of Payments, Processors and IT Services)

Okay. Great. Congratulations on the role, and thanks for taking my question.

Dan Henry (CEO)

Thank you very much, Ramsey.

Operator (participant)

We will take our next question here from Andrew Jeffrey with SunTrust. Please go ahead.

Andrew Jeffrey (Managing Director)

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

Dan Henry (CEO)

Hey, Andrew. Nice to hear your voice.

Andrew Jeffrey (Managing Director)

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 at 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 that's here as to whether maybe even directionally you think sales and marketing was elevated? Is that something you can bring down? How should we be thinking about Green Dot's competitive response? COVID-19 outstanding.

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 intend to spend a significant amount of time and energy this calendar year to prepare ourselves for 2021. Green Dot, I believe, has a bit of a history of kind of, "Hey, every year or so, here's a new product, and let's market and promote that new product." My philosophy is at Green Dot, you know what? We're a bank. We own a bank. We really should stop calling 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.

Our go forward strategy and philosophy is going to be leverage our actual bank charter to be able to issue real DDA accounts and provide customers a long-term solution for their financial and payment services needs. What you can expect is we will 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. 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 we are just going to build and build more customers on the base that we have.

Andrew Jeffrey (Managing Director)

Okay. I look forward to seeing how all that evolves in practice and the numbers. I guess with regard to new products, Unlimited in particular, which was launched to 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. I know it's early days for you and you're still 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 and probably making some modifications to that. It is a—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 that they stay happy, but we'll probably make some modifications to that on a go-forward basis to be able to continue to maintain strong acquisition that should improve the economics of it.

Andrew Jeffrey (Managing Director)

Great. Appreciate it.

Dan Henry (CEO)

Absolutely. Thanks, Andrew.

Jess Unruh (CFO)

Thanks, Andrew.

Operator (participant)

We will take our next question here from Bob Napoli with William Blair. Please go ahead.

Bob Napoli (Senior Director)

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 are under-leveraged, and I think the BaaS business, the tax business. What is your, I guess, top priority? What are your top priorities from a business and product perspective? If the BaaS business was, I think, growing at a high rate, they have 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 could not be more thrilled with that.

Bob Napoli (Senior Director)

Nice guy.

Dan Henry (CEO)

When you think about the—yeah. I mean, he's a great guy. The vantage point that he's had over the last 10 years at Walmart, if you think about being able to bring somebody in to basically one of Daniel's main responsibilities is going to be the BaaS business, partner business. To be able to have Daniel sitting in the room with our partners at Apple and Uber and Intuit and others, Walmart, and to be able to talk about what's possible and what sort of solutions we can bring these partners by leveraging the assets we have of a bank and a platform, retail distribution, what have you. Yeah, we will continue to be driving deeper in that business. Our philosophy on BaaS is to, I term my users, kind of sweep the stairs from the top.

We will be focusing on our current large partners and other large partners in the space and the industry to work with. Daniel and team will be focused on driving that, and then we will, maybe, as I mentioned in the call, focus on kind of a reboot, if you will, of our consumer business. That is to really create banking products that will offer lasting value for the mass market consumer in the country and just put our shoulder behind that and just—you may find these calls boring because we are just going to just stay focused and year after year just continue to promote and grow that customer base.

Bob Napoli (Senior Director)

Thanks. A follow-up question. I mean, Green Dot does have a strong balance sheet. Any thoughts of 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, or how else would you intend to utilize the balance sheet?

Dan Henry (CEO)

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

Bob Napoli (Senior Director)

Great. Thank you. Appreciate it.

Dan Henry (CEO)

Thank you. Bye.

Operator (participant)

We'll take our next question from Andrew Schmidt with Citi. Please go ahead.

Andrew Schmidt (Equity Research Analyst of FinTech, Software and Payments)

Hey, Dan. Yes. Thanks for taking my question. And welcome, Dan. Glad to have you.

Dan Henry (CEO)

Thanks, Andrew. Nice to be here.

Andrew Schmidt (Equity Research Analyst of FinTech, Software and Payments)

This theme that I asked over the past few questions, but I just want to hone in on it. You mentioned that Green Dot and Netspend headquartered some of the opportunity over the last several years and seeded some of the advantage to these challenger banks, as they're called. Could you just talk a little bit more about your strategy to kind of reinvigorate consumer business and kind of to take that opportunity back, whether it involves faster product cycle times? You talked 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—and I remember that I'm kind of having flashbacks to years ago—what's most important is remember this is not a zero-sum game. 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. 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. I think that's first and foremost. I think that everybody seems to treat this industry like it's a football game. Somebody's going to win and somebody's going to lose. That's really not, in my opinion, not the case.

I think actually the more of us that are out there promoting an alternative to a traditional bank account, the better because we all collectively build awareness and acceptance of such products. The strategy really, it's nothing groundbreaking other than we're going to leverage the fact that we are a bank and we're going to have real DDA accounts out there for the consumer. We're going to get tight and clean on our product, tight and clean on our messaging, and just go after it day in and day out, build 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, moving the card, using the card, and get great service whenever they have a problem.

To 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 and sponsorships. You build it by having a good, solid product and delivering great service day in and day out for years and years.

Andrew Schmidt (Equity Research Analyst of FinTech, Software and Payments)

Okay. That's helpful context. Thank you. My follow-up question is want to ask about potential behavioral changes post-COVID. Obviously, there's a 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. Talk about how that might affect the business in terms of just behavioral changes, thinking about just the accelerated shift from 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. 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. 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 trapped in cash. Those consumers were doing just fine with cash.

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 casher and cash 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. We were curious, like, is there fraud happening here? What we found out was the local cable company, which was usually always open to accept payments for your monthly cable bill, was closed. 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.

When I hear little soundbites like that, I realize that, hey, a lot of the consumers that were hanging on to cash for the last two months really did not have an option and got pushed into the electronic payments world. I think that will definitely benefit us at Green Dot as well as many other players in the space.

Andrew Schmidt (Equity Research Analyst of FinTech, Software and Payments)

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

Dan Henry (CEO)

Likewise. Thanks for the question.

Operator (participant)

We will take our next question from George Sutton with Craig-Hallum. Please go ahead.

George Sutton (Senior Research Analyst)

Thank you, Dan. Welcome. I think I'm a good example. I took $200 out before this crisis started. I think I still have the same $200. Nobody would have taken my cash.

Jess Unruh (CFO)

George, I'm the same way. I hit the ATMs and loaded up on cash, and I was just good for nothing.

George Sutton (Senior Research Analyst)

Exactly. You are absolutely committed to the bank. I hear that. You mentioned you're planning to get better data about the different segments and the different offerings. I'm curious how much of a look at the sacred cows this is. 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 my seat before me, I think, was brilliant and had really great instincts. I worked well for him for a long time. I don't think I'm that smart. I like data. I like numbers. I like to test things. I like expanding margins and bottom-line growth. We will 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. When I say capital, it's not just dollars, but it's also time and energy and people.

George Sutton (Senior Research Analyst)

I understand. One other thing. I think it was Jess in his prepared comments mentioned we 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)

Yeah. I think it's just a generic message. Making sure we have enough dry powder that gives us the most optionality as we look. It'll give Dan some time to dig through the weeds and go through his strategic review process and understand what is the best use of our capital. That provides us with some dry powder down the road if we need it for strategic initiatives.

George Sutton (Senior Research Analyst)

Understood. Thank you very much.

Dan Henry (CEO)

Thank you, George.

Operator (participant)

We will take our next question from Reggie Smith with JPMorgan. Please go ahead.

Reggie Smith (VP of Equity Research)

Good evening, gentlemen. Thanks for taking my question. I guess the first one is kind of high level. Dan, I was curious how you thought about, I guess, stepping back into the industry. It seems as though you've kind of shifted from kind of retail customer acquisition, and now things are being activated digitally. You've got, as you said, the challenger banks, and you've got your Squares and your Bimbos of the world. Kind of how do you think about, I guess, competing in that space? I know historically, Green Dot and Netspend had a strong hold on the check cashing and the retail space. But how do you play with some of these guys that may have larger install bases than yourself or different features to get people to even take out a card? It's almost like an add-on type feature. What are your thoughts there?

Dan Henry (CEO)

To me, kind of where things are moving is one of the reasons I was excited about taking this opportunity at Green Dot is when you look at the collective assets of Green Dot. It's funny. If you dissect the word fintech, fin is financial, tech is technology. Everybody's got technology, but nobody's really got the financials. Everybody borrows the bank. If you take that definition literally, we might be one of the only fintechs out there, except for maybe Square now because I think they've bought a bank. There are bigger players that are kind of wading into this space and providing financial services, which for me is thrilling because many of those partners or many of those companies are our partners: Apple, Uber, Walmart, Intuit.

I believe that we can really, as I mentioned in the call, partner with them and bring them some really unique solutions. When you add to that the fact that we have been directly acquiring consumers for 20 years, and we have 100,000 physical retail points of not just distribution of cards, but for the acceptance of cash and for the acceptance of payment, we've got this infrastructure of physical points as well as infrastructure of a bank and bank charter that has the license to take these deposits and also extend credit to consumers and to players in our industry and in the industry of our partners. It gets pretty exciting. Can I tell you what are the top five things on our product roadmap today? No. Because we're really in the infancy of putting together our plans and our strategy.

I believe that with our balance sheet, with our bank, with our retail network, with our technology platform, and with our partners, we are very, very well positioned to be a significant player in the payment space in the years ahead.

Reggie Smith (VP of Equity Research)

Got it. If I could sneak one more in, the question I often asked Steve in the past is just kind of thinking about BaaS. I know you've only been in the suite for a month and a half or so. Just curious, 5 years, 10 years from now, is the company more of a platform for other fintechs and less about direct issuing, or how do you think about the mix longer term? Where is your strength? Where are your strengths and values in this entire, I guess, kind of ecosystem?

Dan Henry (CEO)

We got a left arm. We got a right arm. We have good, strong strength in the direct-to-consumer acquisition through our direct marketing channel and our retail distribution. We have great strength in our platform and great partners on that platform. Do not get me using sports analogies because I will make a fool out of myself. We can talk about left hook or right hook, whatever you want, however you want to put it. I think that if we think about, as I think about, we have a convergence here of consumers that they want to interact with their favorite companies and brands and products. If we can provide seamless ways for those consumers to interact, i.e., purchase goods and services, we think that consumers and companies will benefit from that.

Reggie Smith (VP of Equity Research)

Understood. Interesting. Okay. Thank you for taking my questions, and good luck.

Dan Henry (CEO)

Hey, thank you. Appreciate it.

Operator (participant)

We will take our next question here from Steven Kwok with KBW. Please go ahead.

Steven Kwok (Director)

Hi. Thanks for taking my questions. I hope everyone's 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 benefits. If you could help break apart what you're seeing or what your assumptions are on both the BAS side and then on the consumer side as well. How should we think about that for the second quarter? Thanks.

Jess Unruh (CFO)

Sure. Hey, Steven. It's Jess. I think, obviously, in the prepared remarks, we talked about the benefit from stimulus funds, especially with respect to our trends in late April and early May. We continue to see those trends improving. 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. We think because of the lack of visibility in the short term, I think it's prudent for us to provide a guide of 10% down.

Steven Kwok (Director)

Got it. Just on the expense side, if let's say this environment, type of environment continues, how much additional expenses are there for you guys to take out? Could you just elaborate on what level of expense deductions would you be willing to do?

Jess Unruh (CFO)

I would say from a fixed cost base, let's say our marketing dollars are something we can focus on. Of course, just like everyone else, we have payroll to evaluate and understand whether we need to make any actions there. For the time being, yeah, we feel pretty good.

Steven Kwok (Director)

Great. Thanks for taking my question.

Dan Henry (CEO)

Great. Thank you, Steven.

Operator (participant)

We will take our next question from Joseph Vafi with Canaccord. Please go ahead.

Joseph Vafi (Managing Director of Equity Research)

Hi. Good afternoon. Thanks for taking my questions. Dan, welcome on board to Green Dot. I just wanted to ask one of the.

Hi, how are you?

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 try to tell you, we're not selling the bank. Ask as many times as you want. We're not going to sell the bank.

Joseph Vafi (Managing Director of Equity Research)

Oh, no. I'm not going to sell the bank. I know you're not going to sell it.

Dan Henry (CEO)

Oh, okay. Go ahead.

Joseph Vafi (Managing Director of Equity Research)

Yeah. No, no. I just wanted to ask on looking at the different businesses, if you've got a feel for where you think the ROIs are higher at this point or where you sense they may be higher, especially if you look at the BaaS business kind of versus kind of as one big bucket versus the consumer as another big bucket. Then I will have a quick follow-up.

Dan Henry (CEO)

Yeah. I think kind of where we are right now, I'm still early in my review of the company. I think it's obvious to anybody who follows the company, our tax processing business, TPG, has good numbers. You can see that in the first quarter every year. I think that both, if you look at just a general sort of the consumer business and the BAS business, both of those businesses are excellent businesses with some very, very exciting growth potential. It's just a matter of us focusing on the right partners and the right products in those respective spaces and just continuing to invest thoughtfully and methodically over the years.

Joseph Vafi (Managing Director of Equity Research)

Okay. Fair enough. Just kind of circling back to some of the consumer products, we're kind of hearing more noise from some of the P2P guys on full bank account functionality on their P2P platforms. Their customer act model is a little different than kind of 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 do 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. Thanks for your questions. I appreciate that question a lot. You think about the, if you call it, usual traditional. Traditional is kind of traditional Green Dot or kind of neobanks that are out there where it's like, "We want to be your bank account in a somewhat traditional fashion." That's the consumer side of Green Dot. As I mentioned, we're going to focus, reboot, and get busy on that.

If you think about the BaaS side of the house, with the partners that we have and other partners that we're talking to, we intend to be a piece of the plans and strategies of those partners around their method of kind of embracing their end users and facilitating their kind of interaction with those end users and the method those end users use to buy goods and services or to communicate with one another or to support each other or provide funds to one another. We may see a couple of three, five million accounts someday on our consumer platform. Through our partners, in terms of pieces of the payment ecosystem we provide, we may see tens of millions of accounts there, but much smaller revenue per, if you will. Still all profitable, nicely recurring with good margin.

Joseph Vafi (Managing Director of Equity Research)

Great. Makes a lot of sense. Thanks, Dan.

Dan Henry (CEO)

You're welcome. Thank you.

Operator (participant)

We will take our next question from George Mihalos with Cowen. Please go ahead.

George Mihalos (Managing Director of FinTech Equity Research)

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

Dan Henry (CEO)

Thanks, George. Good meeting you.

George Mihalos (Managing Director of FinTech Equity Research)

I wanted to circle back to a question that I think Reggie had asked that maybe you can elaborate on a little bit. 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 cost. 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)

George, thanks for that question. Just to be clear, I've said this many times. I haven't sounded like a public platform. I didn't sell Netspend. Netspend was bought. Netspend was and TSYS is great. Great people there. It was a wonderful transaction for everyone. Don't get me wrong. I think it's evidenced by the growth of Netspend post-acquisition. The environment and the potential growth of that business was there and I think continues to be there. From the standpoint of the environment, different today than it was then, I really don't see it as much different. If you think back then, we had American Express and Chase Bank and lots of other competition out there. I don't see that as much unlike this current wave of challenger banks and neobanks.

I think what is different is back in the day of Netspend, I think Netspend secured PayPal back in those days. Conversations with Apple were just beginning. Now you're seeing the likes of Uber that have come in. Walmart is moving beyond just a card product and more payment solutions as a partnership with us and TailFin. I think what is different, I think what is absolutely still the same, right? The low to moderate-income consumer market and population is still huge. Nobody has rightfully, properly claimed a position to be the financial services company to serve the low to moderate-income consumer in this country. No one has said, "This is it." Many have started, and then they decide to try to move up the channel and go to the higher-income customers.

I think that the opportunity to serve this very large customer base is still there and still ripe for the taking. What has changed is the technology to such where everybody's got a very powerful computer soon with 5G speeds in their pocket. What you're going to be able to do with that together with partners like Apple, Uber, Intuit, and Walmart is savvy players that own a bank, have great technology, have tremendous payments experience, are going to be able to create some very powerful solutions for the consumer and reach those consumers through these great partners.

George Mihalos (Managing Director of FinTech Equity Research)

Okay. Thanks. Appreciate that, color. Maybe just a quick follow-up for yourself, Jess. A lot of discussion around optimization 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. Point to Joe, who wants to take that one? As I said in my call, I'm going to focus on free cash flow, bottom line growth, and margin expansion. Where it goes with the blended margin, that's really hard for me to say in terms of where should the margin be on the consumer side of business. I may have some experience on that. Where's the margin going to be on the BaaS side of the business? Based on how fast we make those revenues and such, I'd be a fool to guess at this point.

Jess Unruh (CFO)

I think it's fair to give Dan some time to understand which products are most profitable and give him a chance to uncover rocks and whatnot. I think that's going to take some time. I think we'll have better clarity down the road here.

Operator (participant)

All right. We will take our last question here from John Heck with Jefferies. Please go ahead.

John Heck (Research Analyst)

Thanks, guys, very much. I really appreciate all the color and kind of the goals and strategies going forward here and how you're trying to develop them. Thank you. A little bit more just, I guess, technical questions here. Within your interchange revenues, how much of that's physical versus e-commerce? What have you seen, say, the last few weeks? Obviously, it's more e-commerce 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. We see, obviously, PIN, which you would traditionally see in-store, migrate to signature and even more so to online and in-app. That, in theory, should give us a greater interchange return. I would say that there are some headwinds to interchange in that.

The interchange rates you get at the highest tiers are all related to travel and things like that. Obviously, those categories of MCCs are shrinking while other sort of card-not-present categories are increasing. Overall, it's a benefit to interchange rates, but there are some implied headwinds within it.

John Heck (Research Analyst)

Okay. Thanks for that. Within BaaS, I wonder, can you talk about, I mean, we used to talk about pipeline and everything, but can you talk about how you see the BaaS opportunity set over the next several quarters?

Dan Henry (CEO)

The pipeline is very strong. I think that where we are, to be completely transparent, is we're actually in a position to be selective in terms of the partners that we go with. We're going to be spending time through marketing and chasing after partners, but probably be a little bit more selective in terms of the partners we work with. It's more of a, I suppose, focus more on a quality as opposed to a quantity in terms of partners that we're pursuing.

John Heck (Research Analyst)

Okay. Appreciate that very much. Thanks, guys.

Dan Henry (CEO)

You're welcome. Thank you.

John Heck (Research Analyst)

Thank you.

Operator (participant)

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

Dan Henry (CEO)

Thank you, operator. Hey, Jess, thank you very much for doing our first virtual Zoom earnings call. It is kind of unique. Thanks to everybody for dialing in and listening. Talk to you here in about three months again.

Jess Unruh (CFO)

Thank you.

Operator (participant)

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