Bm Technologies Inc

NYSE-MKT:BMTX

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, everyone, and welcome to the BM Technologies First Quarter and 2024 Earnings Call. Please note that this event is being recorded. [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, and thank you for joining us for BM Technologies First 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-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. At this time, I will 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. Together, we are excited to share with you our financials for the first quarter of 2024 and reiterate our strategy going forward with an emphasis on our technology transformation and growth initiatives. We are very pleased that the foundational steps our team took over the last 18 months have begun to show through the financial results. Revenue increased 21% compared to the first quarter last year, and we delivered $1.4 million of positive core EBITDA. This represents a $3.2 million improvement compared to the first quarter of last year. Similarly, first quarter net income of $748,000 was a $5.7 million increase compared to the first quarter of last year. Ajay will provide further details about the significant financial improvement. However, at a high level, the transfer of deposits to our new Durbin-exempt partner bank, coupled with variable rate deposit pricing in a stabilized interest rate environment, contributed to our increased revenue. Additionally, the Profit Enhancement Plan introduced last year is showing year-over-year benefit as we have meaningfully lowered our cost structure. These initiatives delivered improvements throughout the P&L as evidenced by higher revenue, expanding margins and solid profitability. The first quarter of 2024 represents the fifth consecutive quarter of sequentially improved core EBITDA performance. We're happy about the first quarter results and our progress, and we will continue to pursue the strategies we've discussed over the past year, doubling down on our Higher Education business and executing on our customer-for-life strategy. Jamie will provide further updates on our technology modernization efforts that are the precursor to delivering on this plan that positions our company for an exciting future of growth and innovation. The market opportunity remains ripe for growth. The statistics of our core customer market remain the same as what we've discussed in recent quarters with ample opportunity to deepen customer relationships, increase customer lifetime value and unlock new revenue streams. This is a unique opportunity only available to BM Tech due to our distinctive customer acquisition model and long-standing contractual relationships with colleges and universities across the country. The first quarter marks a return to profitability, but we are not done. We aim to continue enhancing our technology stack to improve the overall user experience with technology and capabilities that appeal to student banking customers and customers beyond their student years. We believe that by executing on our long-term growth strategy, we will be able to build upon a foundation of excellent financial results and continue to drive growth and profitability. I will now hand it over to Ajay to review our financial performance in the first quarter in more detail and to provide more context.

[Ajay Asija, executive]

Thank you, Luvleen. During the first quarter of 2024, the company earned $16.2 million of operating revenue, up 21% compared to $13.4 million in the prior year. Servicing fee for the first quarter of 2024 totaled $9.0 million as compared to $6.6 million in the prior year. Servicing fees were up 35% due to higher deposit yields under the new variable rate deposit processing service agreement. Interchange and card revenue totaled $3.4 million for the first quarter of 2024 as compared to $3.0 million in the prior year. Interchange and card revenue were up 15% driven primarily by the change in partner banks with Durbin-exempt interchange rates and higher overall spend. Average service deposits totaled $828 million for the first quarter of 2024, an increase from $805 million for the fourth quarter of 2023 but a decrease from $1.2 billion in the first quarter of 2023. All of this balance reduction occurred within our BaaS vertical due to the interest rate sensitivity of a large portion of these accounts. Average deposits in our Higher Education vertical were 2.5% higher than the first quarter of 2023. Deposits for 90-day active accounts in our Higher Education vertical at December 31, 2024, averaged $2,025, up from $1,947 compared to the first quarter of 2023. Spend totaled $809 million for the first quarter of 2024, up both from $714 million for the fourth quarter of '24 and $787 million in the first quarter of '23. Spend per 90-day active accounts for the first quarter of 2024 averaged $2,396 within our Higher Education vertical and $1,666 within our BaaS vertical. Annualized debit card spend for highly active BaaS users, those with both direct deposits and a minimum of 5 customer-driven transactions per month, was approximately $20,100 during the first quarter of 2024. This very attractive cohort makes up approximately 23% of our active accounts at March 31, 2024, as compared to 21% in the year ago period. There were approximately 100,000 new account sign-ups in the first quarter of 2024. Account fees and university fees totaled $3.7 million for the first quarter of 2024, up slightly from $3.6 million in the prior year. During the first quarter of 2024, the company retained 99% of its Higher Education and institutional clients. We processed over $4.3 billion of student financial aid refund disbursements during the first quarter of 2024. Of the $4.3 billion, approximately 12% or $523 million was disbursed into BankMobile Vibe checking accounts. Core operating expenses totaled $14.8 million for the first quarter of 2024, comparing favorably to the $15.3 million incurred in the first quarter of 2023, primarily from the implementation of our PEP plan. Total expenses decreased meaningfully to $15.5 million from $19.7 million in the first quarter last year. This reduction was primarily the result of lower expenses from the implementation of our PEP plan, lower depreciation and amortization costs from full amortization of a portion of the internally developed software and a onetime reduction in share-based compensation expense. Core net income before interest, taxes, depreciation and amortization totaled $108,000 for the first quarter of 2024, a substantial increase from the core net loss of $5.0 million in the first quarter of 2023. Core EBITDA was a positive $1.4 million compared to a core EBITDA loss of negative $1.9 million in the first quarter last year. Q1 2024 marked a turnaround in the company with the first positive core EBITDA since Q3 of 2022. Liquidity remained strong at March 31, 2024, with $14.6 million of cash, $4.8 million of working capital and no debt. Given the strong start to the year and continued impact of the 2023 PEP, we anticipate delivering positive core EBITDA 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 improvements. Jamie?

[James Donahue, executive]

Thank you, Ajay, and good morning. As we shared last quarter, BMTX is well on its way to executing on our technology transformation. We are happy to announce that we have launched our new mobile and web experiences for our BankMobile Vibe customers this quarter with exciting new features to enhance the overall user experience. Our technology transformation was driven by our vision to modernize our platform architecture and offer innovative products and services to our customers. We are executing on that vision and delivering exciting new features for our clients. Our main focus over the next few quarters will be to add a rewards engine to allow our students to take advantage of their everyday spending and encourage primary banking behavior. We are also looking to enhance our direct deposit flow and external account linking for easy funding. All these changes will make the BankMobile Vibe account a feature-rich, lifelong checking and savings account that will grow with our student population. Our technology platform will also enable us to integrate with partners more easily so we can truly add value to our customers from a product and partnership standpoint over time. I'm also excited to announce that we have successfully launched our first new product and service to our university clients to diversify beyond our original refund disbursement product. The product is called identity verification service, or IDV. It is a SaaS revenue product that assists universities with one of their biggest pain points, which is enrollment fraud. The product we have launched mitigates fraud vulnerabilities during the student enrollment process. We've signed 9 clients to date and have a strong pipeline of over 50 schools we are working on over the next several quarters. We are excited that this offering increases stickiness and lifetime value of our existing higher education relationships and opens doors to sell new -- to new clients. In a few minutes, I will turn the call back over to Luvleen, but before I do, I want to update you on our progress executing on the automation and machine learning front within BMTX. We are happy to share that since we met with last, we've deployed 3 more robotic processing automation (sic) [ robotic process automation ] agents, RPA modules, bringing our production total to 10 within our back office that have increased efficiency, reduced our rates and lower overall expenses. As an example, just one of these automated intelligent agents has handled over 83,000 cases since its launch in January. We estimate some 5,000 hours were saved in this application of AI and ML alone. We are executing on expanding these functions working across the larger organization in the coming quarters. In addition to this, we are leveraging our new AI innovation lab on a few fronts. The first is leveraging our proprietary large language model that employs our data set to direct marketing to our existing and prospective clients in deeply meaningful ways. And frankly, that was just not available on our legacy platform. We've also built an API to automate and predict fraudulent activity across the portfolio. This new API is in production and actively being tuned and trained. We are also developing an impressive assistant that will help answer and support -- answer support questions, provide detail on account activity and we believe add immense value to our BankMobile Vibe customers. Thank you for your time this morning. I will close with this thought: we are extremely proud of the hard work and dedication of our talented team that makes this amazing technology come to life. I look forward to keeping the positive momentum going. And with that, I turn the call back over to Luvleen for some closing thoughts.

[Luvleen Sidhu, executive]

Thank you, Jamie. As you can tell, there is a lot of excitement amongst our leadership team about the trajectory of our business and the opportunities that lie ahead. Our technology is an enabler that opens up new revenue streams and positions us to offer our customers products and partnerships we never could before. This year, we are particularly focused on 3 key tactics to drive growth now that we have our technology in place. First, a new product launch for our student Vibe checking account. This will be our cash-back rewards engine launching in Q2. Second, a new product launch for our university clients. This is our IDV product, which we have 9 signed clients to date. Third, provide personalized omnichannel marketing to increase funnel conversion and engagement. With the advantages of AI, we are better positioned for micro personalization. We believe that these 3 focused efforts will help us attract new customers, increase engagement with existing customers and improve our revenues. 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. We are optimistic about our future and what we are building. The first quarter of 2024 was a great step in our future direction. I want to thank you for joining us on our call today, and we will now open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Greg Pendy with Chardan.

[Gregory Pendy, analyst]

Just a couple of questions. I'm not sure if you put much value into it, but the Fed survey earlier this week noted that expectations for college education are supposed to increase 9% or a 2.5% increase. That's a big uptick for next year. What would be the -- if this starts to gain momentum or people start to raise expectations for a big bump next year, what are the puts and takes we should be thinking about for next year to your business?

[James Donahue, executive]

Yes. Greg, nice to hear from you. This is Jamie. So what we think is we have a market-dominant position in the disbursements business. So anything that happens in that space boosts that side, and then the output of that is more clients signing up for the Vibe accounts. So that's how we see it. So it's every -- it's what we work on hard every day. The team is laser-focused on how to convert those what we call prospects or people through the funnel into BankMobile Vibe customers.

[Gregory Pendy, analyst]

Okay. Great. And then it looks like you maintained your outlook for core positive EBITDA for the year. I know rates have fluctuated, and we just heard from you a few days ago. But is there any color you'd want to provide on -- you put up positive core EBITDA in this quarter. Any kind of thing that has changed notably in that thought process?

[Ajay Asija, executive]

Yes. It's Ajay Asija. Let me take that question. So consistent with what we told you a month ago or so, we expect continued growth in the Higher Education business and the several growth initiatives that Luvleen and Jamie have talked about. So we're optimistic about the future, but we're not providing a guidance at this time.

[Gregory Pendy, analyst]

Okay. Fair enough. And then just -- can you just go into one final question, just your provision for operating losses down from 4Q and then the year-over-year change? Anything you're seeing there?

[Ajay Asija, executive]

Yes. So the provision for operating losses were up from first quarter of last year. It was primarily related to third-party fraud related to unauthorized card transactions. But as you can see, it was down from Q4 as well.

[Gregory Pendy, analyst]

Okay. Very helpful. And that's -- you're working on that, I take it, with the initiatives you announced?

[Ajay Asija, executive]

Yes.

[Operator]

Next question comes from the line of Mike Grondahl with Northland Securities.

[Mike Grondahl, analyst]

I know you're putting a little bit less emphasis on the BaaS new business. But what is kind of your outlook for deposits there in the next couple of quarters?

[Ajay Asija, executive]

So we -- as you saw last year, the deposits were down meaningfully in the BaaS business. The business has mostly stabilized. It is a little bit of a runoff -- there's still a little bit of a runoff in the deposits, but for the most part, it's stabilized.

[Mike Grondahl, analyst]

Got it. Got it. Good. And could you kind of describe the revenue model for the IDV business? It sounds like you have 9 clients signed. I don't know, maybe the average revenue per school, just so we can get a feel for that business and its revenue model?

[Luvleen Sidhu, executive]

Yes, Michael. At this time, we aren't providing guidance on that. But at a high level, what we want to say is that we're very excited about the product. We have seen that the pipeline is actually multiples of refund disbursement, and the reason why is because the pain point that we have identified is so urgent for our schools. And the beauty of their revenue model at a high level is it's a mix of recurring annual subscription fees but also like a SaaS model, where there's a variable per student cost as students go through the enrollment verification process. And so it's a diversified new revenue stream for us, and we're really excited to share more as we launch more of these schools and continue to build upon the pipeline.

[Mike Grondahl, analyst]

Got it. And any guess what the mix between sort of the recurring subscription and the transactional per student cost will be?

[James Donahue, executive]

Yes. Mike, Jamie here. Yes, so the subscription is -- as a SaaS offering, right, would be a subscription to get into the dance. And then as students come through the enrollment side is where we see the per usage. There's -- it's an interesting play and a value proposition that helps us identify fraud at the top of our funnel, right? Because without this gate, the universities might enroll some suspect folks. I mean, I think you're aware, it's public that there was about $5 billion of CARES Act fraud, right, that really hit the space hard. This was an answer to that. So the revenue is on the subscription side. Just think SaaS model when you're looking for the revenue. And as Luvleen outlined, we felt pretty strongly that we wanted some signed contracts to build you guys models in the coming quarters to share with you what that looks like.

[Mike Grondahl, analyst]

Got it. And I guess just one last question. Is -- would a university that signed up, do they put all of their enrollees through the process? Or do they just kind of select the enrollees they want to be ID-verified? Is it kind of an all...

[James Donahue, executive]

Yes. It's a great question. And that's, from our side, the beauty in this, right? The applicants far outpace the seats available, right, across the spectrum. So the plan is we take that enrollment file from the university and push all of the applicants through as a screening mechanism. And then the university -- they all have different rules, right, state rules, different private rules. So they make their decisions based on our scoring that we provide them. But yes, it's everyone.

[Mike Grondahl, analyst]

Got it. And then last question, just for the higher ed business. Are you seeing any changes in the competitive environment there? If you could talk about that.

[James Donahue, executive]

No. I think we're -- no, to answer you directly. The players that are out there are still out there. We think we have a -- as we've said and we believe, we have a unique value proposition that takes a burden off of our universities, provides valuable service and gives the fastest -- nearly the fastest access to money to our students. So we think on both sides, as Luvleen described, we're providing a service to the higher education universities themselves and real value to our BankMobile Vibe customers.

[Operator]

Your next question comes from the line of Bill Dezellem with Tieton Capital.

[William Dezellem, analyst]

Let's start with the interchange and card revenues, which were down in the fourth quarter, but then switched to not only being up but up 15% in the first quarter. What changed?

[Ajay Asija, executive]

Let me take that question, Bill. It's Ajay Asija over here. So the interchange and card revenue were up primarily because of the new BPSA with First Carolina Bank that allows us to earn the interchange revenues on a Durbin-exempt basis. Plus the spend was a little bit higher as well. So those 2 are the big reasons.

[William Dezellem, analyst]

And speaking of the spend, the spend was up -- is this correct if the spend was up versus the fourth quarter? I'm thinking $809 million versus $714 million. And if so, why was that the case? Because I guess, in my mind, the holiday spend would have driven a seasonality where Q4 would have been higher.

[James Donahue, executive]

Yes. So Bill, Jamie. So we think of that as a sign of our work that we did the year prior: our direct marketing, some of our campaigns, some of the features we added before -- ahead of our technology refresh, which we implemented in April. So we believe that some of the marketing and our campaigns and some of the services we added on the legacy tech are drivers to that. And plus, we've seen -- the other thing, I think, that contributes to that number being higher is the runoff has stabilized and flattened out, especially in that higher ed business. So those 2 factors, we think, are positive signs.

[Luvleen Sidhu, executive]

Additionally, though, I would just add to that, there's seasonality in our business, and so there's a winter peak. So students enrolled January, February. That tends to be a high-volume refund disbursement time. And similarly, in that Q3, beginning of Q4, it's kind of that -- August through October is another bump from a seasonality standpoint in our business.

[William Dezellem, analyst]

Right. Okay. And then the rewards engine that you were going to be implementing, what's going to be required to put that into place?

[James Donahue, executive]

Yes. So yes, it's a tech lift and a partnership agreement, which we have in place. And so it's as you've seen with some of the other credit cards, but this is with a debit card, right? So we're going to incentivize -- the users can enroll in this program and pick where they want rewards to be generated from. So it's -- we're really, really excited. And our surveys tell us that it's the #1 feature request of that cohort. So we're really excited to see the impact that, that will have to drive primary banking experience.

[William Dezellem, analyst]

And so, Jamie, when you say they get to pick, does this mean they can choose the retailers that they want rewards at? So Safeway, I could care less about, but Kroger I'm excited about, and so we'll make that selection? Or what is -- what are you referring to there?

[James Donahue, executive]

Yes, Bill, right on. You hit the nail right on the head. There are retailers that have signed up for our consortium that are part of our offering, and the individual users get to steer where they get those rewards.

[William Dezellem, analyst]

Got it. Okay. And then the last questioner asked about the identity verification revenue split between subscription and the per student fees. Which of those 2 do you anticipate to be larger, subscription or the per student as you push them through the funnel?

[James Donahue, executive]

So this is Jamie again, Bill. The way we see it is university size, it matters here, right? We have some specialized schools that are on the smaller side. So that's going to be a mix. We priced it, we believe, that's fair for all sizes. But on the larger -- our larger universities, obviously, the funnel's larger for them. So the per unit cost might outpace the subscription by substantial numbers in that scenario. But again, we service a high percentage of all higher education universities, trade schools and colleges, universities. So we think it's a mix.

[William Dezellem, analyst]

So in some cases, the subscription could be the larger, more than half of the revenue that this school would pay you. But in other situations, it could be where the per student applicant or the per applicant fee, that ends up being the larger piece then?

[James Donahue, executive]

That's spot on. That's spot on.

[William Dezellem, analyst]

Okay. That is helpful. And do you have time for me to take a couple more questions or shall I step back in the queue?

[Luvleen Sidhu, executive]

Go ahead. Go ahead, Bill.

[William Dezellem, analyst]

Yes. Okay. So 2 additional questions. First of all, the technology communications and processing expense declined down to $4.7 million from $6.8 million in the fourth quarter. So a couple of million-dollar decline sequentially. What led to that?

[Luvleen Sidhu, executive]

Ajay, you're on mute.

[James Donahue, executive]

Ajay, you're on mute.

[Ajay Asija, executive]

I'm sorry. I apologize. Bill, it's Ajay Asija. Let me take that question. So the expenses were down because we had an internally developed piece of software that had $1.9 million in quarterly amortization, and we amortized it down to 0 last quarter. So that's the largest part of the change in that expense category.

[William Dezellem, analyst]

Great. You referenced that in your opening remarks, and I just didn't appreciate the magnitude. And then there was a reference in the opening remarks about micro personalization. Would you talk about that plan and the, I guess, number one, the time line; and number two, the -- really what you're wanting to accomplish through that plan?

[Luvleen Sidhu, executive]

Yes. Bill, it's a phased approach for us. And we were starting with finding the right marketing automation partner at the top of the year, which we're excited about the partner that we picked. It's industry-leading Braze is a platform that we're using there, coupled with really data mining our customers at a level that we haven't before, which has been accelerated by the new technology platform that Jamie and team have created that allows us to understand our customer base better. So you have the marketing automation tools plus the data that allows you to segment the portfolio on a new level that we haven't before. And then third is leveraging marketing automation tools as well as AI that allows us to be able to not just do historical A/B testing and marketing for certain segments but can become much more granular and focus students at a very individual level in our messaging, which wasn't possible before. So that's at a high level, Bill. I think more tangible, as we kind of execute, we might be able to give some more examples. But that's how we've prepared for this, and that's the sort of technology that now exists that allows us to message and engage at those types of individual levels.

[William Dezellem, analyst]

And Luvleen, what are you ultimately from an endgame perspective wanting to accomplish with those efforts?

[Luvleen Sidhu, executive]

Yes. The end goal would be that when you are able to segment at that type of level of personalization, the hypothesis is that the conversion and the engagement improves because you're meeting the customer at a level that they feel understood. There's empathy in the messaging, there's understanding about what's individual, unique and important to them. So that's the hypothesis.

[William Dezellem, analyst]

Great. And then lastly, do students have the ability to transfer money from one student to another through student A's Vibe account to student B's Vibe account?

[James Donahue, executive]

Yes, Bill. We're really happy to announce that's one of the feature enhancements in our new platform is peer-to-peer payment. It's a homegrown -- we've written the software for ourselves. It's an in-house solution. It not only does let funds move between Vibe accounts but also encourages enrollment for those that aren't Vibe accounts. So you could send it to somebody that isn't a Vibe money from cash from one account to another and then have them enroll and then accept the money. So we're really excited about that as a feature that's going to encourage primary banking.

[William Dezellem, analyst]

Great. And congratulations for implementing that.

[James Donahue, executive]

Thank you, Bill.

[Luvleen Sidhu, executive]

Thank you, Bill.

[Operator]

I will now turn the call back over to Brian Prenoveau to take any questions submitted on the webcast. Please go ahead.

[Brian Prenoveau]

Thank you. At this time, I don't see any web-submitted questions. So I will turn the call back over to Luvleen for some concluding remarks.

[Luvleen Sidhu, executive]

Great. Thank you, everyone, for joining us this quarter, and we look forward to touching base soon. Have a good one. Thank you.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.