Bm Technologies Inc

AMEX:BMTX

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone, and welcome to the BM Technologies Second Quarter 2024 Earnings Call. Please note that this event is being recorded. Following management's prepared remarks, we will hold a question-and-answer session.

[Operator Instructions] 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]

Thank you, operator, and good morning, everyone. Thank you for joining the BM Technologies Second Quarter 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-Q, 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, executive]

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 second quarter and first half 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 3 and 6 months ended June 30, 2024 totaled $12.5 million and $28.7 million, respectively compared to $12.6 million and $26 million for the 3 and 6 months ended June 30, 2023, up 10% in the first half 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 second quarter was a loss of approximately $880,000, a slight improvement compared to a core EBITDA loss of $906,000 in the second quarter last year. As you may recall, there is a considerable amount of seasonality in our higher education business, with the second quarter 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 second quarter.

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 and cutting-edge micro service 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 Cash Back 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 cash-back value put back in the pockets of our customers. Not only are 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 volumes 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 second quarter, we experienced a strong response to our New Identity Verification or IDV product, which we launched in the first quarter. 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 to 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 increase its 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 second quarter in more detail and to provide more context.

[Ajay Asija, executive]

During the second quarter 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 second quarter 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 second quarter 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 second quarter of 2024, a decrease from $828 million for the first quarter of 2024 and $922 million in the second quarter of 2023.

Compared with the second quarter 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 second quarter 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 second quarter of 2023. Deposits for 90-day active accounts in our higher education vertical at June 30, 2024 averaged $1,665, up from $1,624 compared to the second quarter of 2023.

Spend totaled $631 million for the second quarter of 2024, modestly down 4% from the second quarter of 2023. Spend per 90-day active accounts for the second quarter of 2024 averaged 1,853 within our higher education vertical compared to $1,855 in the second quarter of 2023.

In terms of account sign-ups, there were 60,000 new account sign-ups in the second quarter and approximately 160,000 new account sign-ups in the first 6 months of 2024. Account fees and university fees totaled $3.3 million for the second quarter of 2024, essentially in line with the $3.3 million in the second quarter of last year. During the second quarter of 2024, the company retained over 99% of its higher education and institutional clients.

We processed over $1.9 billion of student financial refund disbursements during the second quarter of 2024, which compares favorably to the $1.8 billion processed in the second quarter 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 second quarter of 2024, compared to $13.5 million incurred for the second quarter of 2023. Total expenses were $17.2 million compared to $17.7 million in the second quarter last year. Total operating expenses included $1.6 million of onetime 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 negative $2.6 million for the second quarter of 2024, compared to a core net loss of negative $4.1 million in the second quarter of last year.

Core EBITDA was negative $881,000, a slight improvement over a core EBITDA loss of negative $906,000 in the second quarter last year. Liquidity remained strong at June 30, 2024 with $12.5 million of cash, $0.4 million of working capital and no debt. Note, the second quarter is seasonally our weakest quarter, and we anticipate delivering positive core EBITDA and for the full year 2024.

And with that, I'd like to turn the call over to Jamie for his discussions on our technology investments and improvement. Jamie?

[James Donahue, executive]

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 that is 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 [ BaaS ] landscape by being able to deliver full-service banking functionality via APIs and/or embed 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 Cash Back Rewards Engine through our partnership with Kard, as Luvleen shared. This new feature was launched in July and allows customers to earn cash back on everyday debit purchases effortlessly, helping them save their hard-earned money and build a solid financial foundation for the futures -- 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 received in our [ disbursement ] distribution flow with the higher education clients that have subscribed to the SaaS service.

We have created a unique delivery point through either a file-based batch processing or a custom API integration. Either of these methods ensure rapid employment, 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 new features to life at pace while increasing our partnership value to our higher education and BankMobile Vibe customers. We have gone live with 2 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 [ leads ] in AI and machine learning where appropriate, to enhance our operational -- 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 phenology 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 to bring this amazing technology to life. Thank you. I look forward to continued innovation and an exciting future for BMTX.

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

[Luvleen Sidhu, executive]

Thank you, Jamie. Our priority in the second quarter 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 remains strong, and we are optimistic about our future.

As mentioned earlier, our BaaS 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 BaaS 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 3 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 cash-back 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-added 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.

And 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 road map 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]

[Operator Instructions] Our first question comes from Bill Dezellem -- Mike Grondahl from Northland Securities.

[Mike Grondahl, analyst]

This is Mike. With the potential for the BaaS wind-down, is there like an advance notice period? Do you have to let that customer know like 6 months in advance, 90 days in advance? How does that work?

[Ajay Asija, executive]

Jamie, do you want to take that?

[James Donahue, executive]

Sure. Yes, 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 the -- our view on that side of our business. So there are parameters, that's about all I can get into on the call.

[Mike Grondahl, analyst]

Got it, got it. Okay. And then it's nice to see that next-gen platform is in and the rewards program was launched. Kind of two questions related to that. Is there any more light you can shed on finance, insurance and wellness benefits? What type of features that will 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 it, implementation costs in 3Q or 4Q?

[Ajay Asija, executive]

Let me take the second one, and Jamie can answer the first part of the question. So the onetime costs of $1.6 million 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?

[James Donahue, executive]

Sure. And that was -- Mike, just to remind you, that was what is the wellness. Yes, we'll have...

[Mike Grondahl, analyst]

Finance, insurance and wellness. I'm just kind of wondering, what kind of benefits or services those are for the student?

[James Donahue, executive]

Yes. 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 detailed financial wellness, and other products will be in there. I don't want to go too far a field on -- that partnership is actively being worked, but we're really, really excited about what features it will bring to our users.

[Mike Grondahl, analyst]

I'll jump back in the queue.

[Operator]

[Operator Instructions] Our next question comes from Bill Dezellem from Tieton Capital.

[William Dezellem, analyst]

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 disbursement side, and so it could be a door opener? Or is it solely for universities that you are working with currently?

[James Donahue, executive]

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

[William Dezellem, analyst]

And is there any advantage to a nondisbursement customer or a university that takes on the ID 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?

[James Donahue, executive]

Yes, great question. We know our existing disbursement clients love the integration and the symmetry we give them with -- because the data -- as I mentioned in my earnings call here, 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, 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, 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.

[William Dezellem, analyst]

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

[James Donahue, executive]

Absolutely, yes. That's what I could say. It's our road map 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.

[William Dezellem, analyst]

Great, that's helpful. And then the universities -- 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?

[James Donahue, executive]

Yes. So that's the uniqueness of this scoring idea from an enrollment process. Some large universities have had a similar technology that they've developed in-house. But by and large, our midsized community colleges, technical universities just don't have that capability.

What we're seeing is they are doing samples -- a sample of their, what we call, [ SoCs ] or applicants in the testing phase. But we have had an experience where customers have taken their whole enrollment population, which could be as high as 4:1 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.

[William Dezellem, analyst]

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 -- what level of fraud they're willing to tolerate essentially.

[James Donahue, executive]

Yes, 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.

[William Dezellem, analyst]

Okay. 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 are these the example -- the pilot example that you gave in the opening remarks, is that primarily going to be used for increasing retention, just been higher value and increasing the retention? Or is it a revenue generator in addition to retention increaser?

[James Donahue, executive]

Yes, 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 accounts specific to them, help them with financial wellness.

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 cost in the call center and increase engagement with our customers. So we expect to look from the OpEx side, not necessarily from a revenue side at this point.

[William Dezellem, analyst]

Great. 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?

[James Donahue, executive]

Yes. Yes. 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. And we launched it July 7, so my statistics are from July 7 to August 6, I think, is my latest data. I'm looking at my notes correctly.

And of that 30%, we -- 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 -- this has been a long -- in fact, when we surveyed our customers, this was the #1 thing that they were looking to us for. And the unlock was our technology investment in next-gen. So really, really happy, really excited about the penetration and how it's going to help our customers.

[William Dezellem, analyst]

Yes. And how does that 1.4 additional transactions a month compared to what you would -- per month, in the month, how does that compare to what you would have hoped for?

[James Donahue, executive]

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

[William Dezellem, analyst]

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?

[James Donahue, executive]

Yes. We really worked hard at 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 3 screens in total for you to click in 3 screens for you to sign up. And most of those screens are you choosing which vendors you want to do business with, which -- where do you want to get your rewards.

So because it's API-based architecture, Kard also is an API platform-based architecture, and now BankMobile Vibes 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.

[Operator]

[Operator Instructions] We have no further questions in queue. I'll turn the call back over to Luvleen Sidhu for closing remarks.

[Luvleen Sidhu, executive]

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

[Operator]

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