Bm Technologies Inc

NYSE-MKT:BMTX

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, everyone, and welcome to the BM Technologies Fourth Quarter and Full Year 2023 Earnings Conference Call. Please note that this event is being recorded. [Operator Instructions]

At this time, I'd like to turn the conference over to Brian Prenoveau, Investor Relations for BM Technologies. Please go ahead.

[Brian Prenoveau]

Thank you, operator, and good afternoon, everyone. Thank you for joining us for BM Technologies Fourth Quarter and Full Year 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 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]

Thank you, Brian, and good afternoon, everyone. Joining today's call is Jim Dullinger, our CFO; and Jamie Donahue, our President and Chief Technology Officer. We will be discussing our fourth quarter and full year results and also providing updates on our business.

I will provide a high-level overview of our strategy to double down on our higher education business and execute on our customer-for-life strategy, and Jamie will provide an update 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.

Since we last spoke, we completed the transfer of deposits to our new partner bank, First Carolina Bank in December 2023. We're thrilled that this has been completed and it will have a meaningful impact on our operations in 2024 and beyond. Beginning in December 2023, we are now able to receive this enhanced revenue stream. Importantly, this is revenue that drops to the bottom line as profit. Separately, throughout 2023, we implemented initiatives as part of our profit enhancement plan, or PEP, that reduced core operating expenses by approximately $9.5 million for the year.

We expect to realize further benefits and to get the full year benefits of the PEP in 2024. We sequentially improved our core EBITDA performance every quarter throughout 2023. Between additional interchange revenue, our growth initiatives and continued cost reduction efforts, we are optimistic that we will return to positive core EBITDA in 2024. However, what we are most excited about is our technology modernization efforts that we have been investing in over the last 24 months, which are finally coming to fruition. In a moment, Jamie will walk us through some of the technology investments and how this better positions our company for the future. But I want to briefly touch on the reasons for this necessary investment. The fact is that in the world of fintech, we are an older fintech that -- and with that comes the benefit of stability and scale but also with legacy technology on the higher education side of our business. This legacy technology has been holding us back and capitalizing on the competitive advantage we have in this market.

For example, we estimate that less than 1 in 5 of our higher education disbursement services customers convert their refunds to active BankMobile Vibe checking accounts. And although hundreds of thousands of new accounts are opened each year, we are also seeing about the same number of accounts become inactive. That means we have significant untapped potential to deepen customer relationships, increase CLV and unlock new revenue streams for an existing customer base.

As we shared on our last call, we have committed to doubling down on our student business and moving into growth mode. This is a unique opportunity only available to BMTX due to our unique customer acquisition model and long-standing contractual relationships with colleges and universities across the country. By upgrading our technology, we are going back to our roots of when we first started the business in 2015. Our roots of innovation, co-creating a product based off of the needs of our customers using data analytics and enhanced marketing tools to understand and engage with our customers and most importantly, leveraging exponentially growing technologies like AI to deliver best-in-class experiences to them.

I will now hand it over to Jim to briefly discuss our 2023 financials.

[James Dullinger, executive]

Thank you, Luvleen. During the fourth quarter of 2023, the company earned $14.9 million of operating revenue as compared to $15.7 million in the prior year. For the full year 2023, the company earned $55.3 million of operating revenue as compared to $83.6 million in the prior year. Servicing fees totaled $8.5 million for the fourth quarter of 2023 as compared to $6.9 million in the prior year. For the full year 2023, servicing fees totaled $31.5 million as compared to $44.6 million in the prior year. As discussed in our previous calls, servicing fee revenues were negatively impacted during the first quarter of 2023, by the fixed rate servicing agreements that were then in place, beginning in the second quarter of 2023 and under the amended deposit servicing agreements and current effective federal funds rates, servicing fee margins have improved by approximately 165 basis points.

Interchange and card revenue totaled $2.7 million for the fourth quarter of 2023 as compared to $5 million in the prior year. For the full year 2023, interchange and card revenue totaled $9.5 million as compared to $22.3 million in the prior year. 2023 interchange and card revenues were negatively impacted by the loss of Durbin-exempt interchange fees. The transfer of our higher education service deposit accounts to First Carolina Bank in December 2023, improved interchange rates for our higher education vertical by approximately 20 basis points on eligible spend.

How did Durbin-exempt bank partnership been in place during the full year of 2023? The interchange revenue for the higher education vertical would have been approximately $4 million higher based on $2.2 billion of related spend. Average service deposits totaled $805 million for the fourth quarter of 2023 down from $853 million for the third quarter of 2023 and from $1.4 billion for the fourth quarter of 2022. Substantially all of this balance reduction occurred within our BaaS vertical due to the interest rate sensitivity of a large portion of these accounts. Average service deposits in our higher education vertical increased to $479 million in the fourth quarter of 2023 from $466 million in the third quarter of 2023 and remain relatively flat with the $483 million in the fourth quarter of 2022.

Deposits per 90-day active accounts in our higher education vertical totaled $1,710 and $1,785 during the fourth quarter and for the full year of 2023. Spend totaled $714 million for the fourth quarter of 2023, an increase of over 5% from $679 million for the fourth quarter of 2022. Spend per 90-day active accounts in our higher education vertical averaged $1,947 and $8,341 during the fourth quarter and for full year 2023.

Overall, we continue to see spend in our higher education vertical normalizing to pre-COVID levels.

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 $19,100 during the fourth quarter of 2023. This very attractive cohort makes up approximately 22% of active accounts at December 31, 2023, as compared to 20% in the year-ago period.

Account fees and university fees totaled $3.5 million for the fourth quarter of 2023 as compared to $3.4 million for the fourth quarter of 2022. For the full year 2023, account fees and university fees totaled $13.8 million as compared to $14.7 million in the prior year.

There were approximately 100,000 new account sign-ups during the fourth quarter of 2023 and over 500,000 new account sign-ups during full year 2023. With our continued strategic focus, we anticipate growth in both the number of active accounts and account activity in 2024.

During the fourth quarter of 2023, the company processed over $2 billion of student financial aid refund disbursements as compared to $1.9 billion during the fourth quarter of 2022. During full year 2023, the company retained 99% of its higher education institutional customers and disbursed $11.4 billion in refunds to students.

The company signed 10 new colleges and universities in 2023, providing 112,000 additional students access to BankMobile disbursements and the BankMobile Vibe checking account. This compares favorably to the 60,000 additional students added in 2022 under our 11 signed agreements.

Core operating expenses totaled $15.6 million for the fourth quarter of 2023 comparing favorably to the $17.6 million incurred for the fourth quarter of 2022, with an 11% year-over-year reduction. For the full year 2023, core operating expenses totaled $59.6 million, comparing favorably to the $69.1 million in the prior year with a 14% year-over-year reduction. The company continues to actively execute upon its profit enhancement plan with initiatives completed during 2023 that reduced core operating expenses by $9.5 million, with further and full year cost savings expected to be realized in 2024.

Core loss before interest, taxes, depreciation and amortization totaled negative $0.8 million for the fourth quarter of 2023 comparing favorably to the negative $1.9 million for the fourth quarter of 2022. Significantly, Q4 2023 represents the fourth sequential quarter of improvement in this key measure.

The company expects a return to positive core EBITDA in 2024 based upon improved margins from Durbin-exempt interchange fees and other growth initiatives and stricter cost controls implemented as part of the company's profit enhancement plan. Liquidity remained strong at December 31, 2023, with $14.3 million of cash, $5.7 million of working capital and zero debt. With that update, I'd like to turn the call over to Jamie Donahue to discuss the significant investments we have made in upgrading our technology and how they are expected to improve our overall products and service offerings and support our growth in 2024 and beyond. Jamie?

[James Donahue, executive]

Thank you, Jim, and good afternoon, everyone. I'm happy to update you on the progress of BM Tech's technology transformation that we announced a few quarters ago. We are pleased to be launching new mobile and web experiences for our BankMobile Vibe customers this month 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. This shift enables BMTX to deliver our high-quality banking experience in 3 distinct ways: one, full application deployment like our BankMobile Vibe and T-Mobile MONEY offerings today; second, being able to deliver full-service banking folks in via our own custom APIs; and third, embed our technology in other ecosystems all seamlessly, all of which allows us to stay ahead of the changing BaaS environment.

Our investment in our platform has also unlocked our capability to integrate best-of-breed partners into our products and services rapidly. In the coming quarters, we will discuss these new features and partnerships in more detail. BMTX is committed to being the data-driven platform of the future for the financial services vertical.

Before I turn the call back over to Luvleen, I want to share some of the developments we have on the AI and machine learning front within BMTX. We have employed active RPA modules within our back office that have increased efficiency, reduced error rates and lower overall expenses in fraud, compliance and our operations teams.

We are eager to expand these functions across the larger organization in the coming quarters. The most impactful technology that we've unlocked on our platform transformation is our ability to leverage AI. We are happy to announce we have built a proprietary large language model that leverages our data set to anticipate our customers' needs and alleviate potential issues. We are looking forward to piling this to our customers over the next few quarters.

We also have created an innovation lab in partnership with a marketing-centric AI firm to complement our technical and marketing teams to rapidly bring to market AI-driven features that will empower and grow our user base.

Thank you for your time this afternoon. The future is bright for BMTX. And with that, I turn the call back over to Luvleen for some closing thoughts.

[Luvleen Sidhu, executive]

Thank you, Jamie. These are definitely exciting times for sure. We are already market leaders in the higher education vertical touching about 1 in every 3 college students eligible to receive a refund. However, we believe there is still tremendous untapped growth potential in this segment. With the significant investment we have now made in our technology platform, we can unlock value we never could before. I am extremely excited about our future possibilities. We can now get back to our roots of innovation, cutting-edge technology and a customer-obsessed approach that will enable us to add value and grow with our 20-something year old customers over their lifetime. With one of the lowest customer acquisition costs in the industry and with a customer-for-life strategy, we are now positioned to execute on the unparalleled opportunities in front of us in the quarters ahead in years to come. We are optimistic about the near term and are building our company to last and are not just focused on quarter-to-quarter results. We believe 2024 will be the first year of a return to profitability and set us on a path towards long-term shareholder value creation.

Before signing off, I do want to take a moment to introduce to you, Ajay Asija, who we are excited to have joining us as CFO starting next week. Ajay?

[Ajay Asija, executive]

Thanks, Luvleen. As a background, I've spent the last 25 years in financial services and fintech in investment banking, have known the company well since its inception and see BM Technologies as the future of banking. When the opportunity was presented to me, honestly, it was the easiest career decision I've ever made. I'm super excited to be in this role starting next week and look forward to working with you all and meeting you at some point in the near future.

[Luvleen Sidhu, executive]

Thank you, Ajay. We are definitely lucky to have you. I also want to thank Jim for his time at BMTX and we wish you all the best.

Thank you again for joining us on our call today. Most importantly, we appreciate the dedication and skills of our amazing team and the huge amount of work and passion that has gone into bringing us to this point. Thank you all so much for all that you do. We will now open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Mike Grondahl from Northland Securities.

[Mike Grondahl, analyst]

My first question, just as it relates to 2024 and the guidance you gave for growth in revenues and positive adjusted EBITDA, how should we think about interest rate sensitivity? If the Fed cuts rates is that positive later this year? Just help us understand that interest rate sensitivity a little bit.

[Ajay Asija, executive]

It's Ajay Asija. Let me take that question. So in our -- in our forecast for core EBITDA profitability in 2024, we have modeled in 3 interest rate reductions in 2024. And just to give you some context, for every 25 basis points reduction in the Fed funds rate, our revenue goes down by approximately $2 million and vice versa.

[Mike Grondahl, analyst]

Got it. And, Ajay, did you say revenue for every 25 bps of a cut, revenue would go down by $2 million?

[Ajay Asija, executive]

Yes. So we are positively influenced by the Fed funds rate.

[Luvleen Sidhu, executive]

Increasing.

[Mike Grondahl, analyst]

Yes.

[Luvleen Sidhu, executive]

So when Ajay was talking about was versa, the cut would obviously have a negative impact. But on the upside, as rates increase, that's a positive impact on our company.

[Mike Grondahl, analyst]

Got it. Got it. Great. Secondly, Luvleen, you talked about for 2 quarters now, kind of doubling down on higher ed and you've got the tech stack aligned for that. What would you say are the 2 biggest benefits that college students would see accessing the Vibe product? Like is it features? Is it user experience? Like what are 2 things that they would see differently?

[James Donahue, executive]

Mike, this is Jamie Donahue. I'll take that one. Yes, so absolutely user experience, first and foremost, as Luvleen said, being first in market you do stack up some tech debt, which we cleared. The second would be, we're really excited about the future features we're going to bring to drive engagement. We believe that that's been a significant blocker and the new technology platform is the unlock to that. So we're really, really excited.

The 2 big things are existing user experience is going to be greatly enhanced and then rapidly deploying features that make sense to grow our user base.

[Mike Grondahl, analyst]

And I don't know, can you share a new feature to just -- and timing on that?

[James Donahue, executive]

Yes, we're thinking about rewards. Think of -- if you look at our industry, look at the natural progression of where these financial services accounts go. Our rewards engine is one. I can share with you.

[Mike Grondahl, analyst]

Got it. Got it. And then last question. How should we think about deposit levels going through '24, especially new business -- anything to kind of help us with there?

[James Donahue, executive]

I think we can't comment specifically on the deposits. That being said, as you saw in the press release, we are focused on the student side of the business, and we expect that part of the business to grow.

[Operator]

Your next question comes from the line of Greg Pendy from Chardan.

[Gregory Pendy, analyst]

I think in 3Q, you called out that you're going to -- we're expecting to get the $2 million in receivables. I'm assuming that came through with your cash ending at $14 million. If not, let me know. But then my second and on that point, how are you thinking about cash? Is there any other notable puts and takes you see coming up with a high cash position, how would you think about a buyback at these levels?

[James Dullinger, executive]

Yes. Good question. Just to confirm, we did monetize the tax receivable. So that was received, and that is part of our $14.3 million of ending and available cash at $12.31 million. From a standpoint of directionality is I would expect the available cash balance to correlate closely with our movement in core EBITDA. And as stated is we expect to move towards positive core EBITDA in 2024. Buybacks is always a question, right? And I'll give you the same answer that we gave before is we constantly evaluate that as well as other strategic options and evaluate the potential for maximizing total shareholder return, and it's something we will continue to look at as we build up our cash balances throughout 2024.

[Gregory Pendy, analyst]

Okay. And then maybe just on that point, I mean, you mentioned the tech spending. How should we be thinking about CapEx then going forward? Just is there anything notable? Will it be a little bit lower than 2023 now? Or just any thoughts there?

[James Dullinger, executive]

Yes. I think it will be at a similar level, right? We're -- there's obviously a significant investment to get where we are. But we're obviously looking to continue to invest in technology and maintain and improve and build upon the tech stack. So I would expect that the go-forward level of CapEx spend, which is principally internally developed software, will continue at the same rate as 2023.

[Operator]

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

[William Dezellem, analyst]

A couple of questions. First of all, speaking of internally developed software, there was an impairment this quarter of $620,000. Would you please discuss that?

[James Dullinger, executive]

Good question that relates to the original technology that was developed based upon the inception of our BaaS partnership with T-Mobile. It was actually coming at the very tail end of its life, so that impairment charge represents the remaining month of its net book value. And based upon the company's losses for 2023 overall, as we made the determination to impair that last month and write the carrying value again of that original vintage internally developed software down to zero.

[William Dezellem, analyst]

Okay. Jim, I had actually speculated that it may have something to do with moving to the new technology. But in fact, if I heard you correctly, it's more a function of the low stock price and essentially adjusting book value down to be closer to the stock price. Is that really -- that accounting phenomenon. Is that really correct? More correct?

[James Dullinger, executive]

I think it's fair. The impairment was driven largely by the company's results for 2023 and less of a functionality issue with the software. That said, obviously, as Jamie articulated is we are moving to our Next-Gen platform in the first half of 2024. So that will present significant new features and functionality across our platform.

[William Dezellem, analyst]

Great. And then when did or will the student side of the business go live on the common platform and when did or will the BaaS side of the business go live on the new platform?

[James Dullinger, executive]

Yes, Bill, we're anticipating the BankMobile Vibe to go this month and then a short follow-on, maybe second quarter for the T-Mobile offering to follow suit.

[William Dezellem, analyst]

And you did reference new features on the student side of the business. Will this also create new features on the BaaS side of the business that you think will be instrumental or meaningful in moving the needle for those customers?

[James Dullinger, executive]

Yes. Great question. So that was the foundational element. One of the foundational elements of us moving and investing in that transformation was we believe that the feature set needed to be not unique to vertical or cohort, but be available across platform. And what's really, really interesting about where we'll be by the end of the second quarter is any feature for BankMobile Vibe or T-Mobile or any other BaaS offering we might come across will be available across our entire portfolio. So really, really excited about the unlock there.

[William Dezellem, analyst]

And Jamie, you think some of those you think some of those features that are relevant to the students will also be relevant to T-Mobile customers or future BaaS customers?

[James Donahue, executive]

Absolutely, we do. We think -- we could study -- yes, we studied user [indiscernible]. They're very similar.

[Gregory Pendy, analyst]

Excellent. And then one additional question. What led to the POS spend increasing in Q4 relative to Q4 of '22?

[James Dullinger, executive]

Yes. I think the easy answer, Bill, is inflationary measures, right, year-over-year. But I think we're also starting to see above and beyond the effect of inflation is the features and functionality that both Luvleen and Jamie spoke to. [indiscernible] it's at the very infancy at that stage, and we expect to continue to see advancement in development in 2024. But I think it's the combination of both factors.

[Operator]

We currently have no more phone questions. I will now turn it over to Brian for web questions.

[Brian Prenoveau]

Thank you, operator. At this time, I do not see any questions submitted online. So Luvleen, I will turn the call back over to you.

[Luvleen Sidhu, executive]

Great. Thank you, Brian. Thank you, everyone, for joining today, and we look forward to meeting you soon for Q1. Thank you.

[Operator]

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