Famous Dave's of America Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 5 speakers on the call.

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Dave's Financial Results for the Q3 Ended September 30, 2023. Joining us today are Dave's CEO, Mr. Jason Wilk and the company's CFO, Mr. Kyle Baumann. By now, everyone should have access to the Q3 2023 earnings press release, which was issued earlier today.

Operator

The release is available in the Investor Relations section of Dave's website at httpsinvestors. Dave.com. In addition, this call will be available for webcast replay on the company's website. Following management's remarks, we'll open the call for your questions. Certain comments made on this conference call and webcast are considered forward looking statements under the Private Securities Litigation Reform Act of 1995.

Operator

These forward looking statements are subject to certain known and unknown risks and uncertainties as well as the assumptions that could cause actual results could differ materially from those reflected in these forward looking statements. These forward looking statements are also subject to risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward looking statements, which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward looking statements. The company's presentation also includes certain non GAAP financial measures, including adjusted EBITDA as supplemental measures of performance of our business.

Operator

All non GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts and other important factors in the earnings press release and Form 8 ks furnished to the SEC. I would now like to turn the call over to Dave's CEO, Mr. Jason Wolf. Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. I'm pleased to share with you that we delivered another quarter of strong performance in Q3. We continue to execute well against our strategic and financial objectives, while making significant progress towards profitability and beating our expectations on key financial and operational Non GAAP variable margin and non GAAP variable profit expanded substantially and we continue to generate operating leverage on our fixed cost base as we scale the business. As a result, our adjusted EBITDA in the quarter improved over 90% year over year to a loss of 2,500,000 Based on these strong trends, we have raised our full year 2023 guidance across the board for non GAAP revenue, non GAAP variable margin and adjusted EBITDA. The midpoint of our guidance implies that we will turn adjusted EBITDA positive in this Q4, which is 1 to 3 quarters faster than expectation we set in mid-twenty 2.

Speaker 1

During our Q2 earnings call last year, we also set expectations around the levers we plan to employ to solidify our path to profitability. Since then, I'm incredibly proud of how we have rallied as a team and executed so strongly in order to deliver on our commitments despite the challenging market conditions. First, we committed to focusing on enhancing member lifetime value and expanding variable margins to improve the magnitude and durability of our variable profit based unit economics. 2nd, we committed to conversion focused marketing campaigns on channels with the highest proven returns, maximizing the efficiency of our investments. Finally, we committed to rationalizing expenses and driving operating leverage from our fixed cost structure as we grew the business.

Speaker 1

Our Q3 results demonstrate the substantial progress we've made against these objectives. First, we expanded our non GAAP variable margin by 1600 basis points based on initiatives that Kyle will get into in a moment. We also integrated the product experiences of our Extra Cash and Dave Card business, as we said, and as a result nearly doubled DaveCard spend volumes and achieved double digit growth in ARPU. 2nd, we reduced Quarterly marketing spend by 1 third and still managed to substantially grow member acquisition as we reduced our CAC by nearly 50%. Finally, we've driven substantial operating levers as our fixed cash expenses declined modestly, while our non GAAP variable profit more than doubled.

Speaker 1

The net result of this progress is that we reduced our adjusted EBITDA loss from $28,500,000 in the Q2 of 2022 to $2,500,000 in the last quarter, approaching breakeven. In addition to the progress we've made on our financials, we remain true to our values of being member centric We remain committed to progressing on our mission to build products that level the financial playing field. Moving forward, we are excited to continue driving profitability Out of our model that will enable us to grow and make impact for current and prospective members through ongoing growth and product development, ultimately allowing us to make further progress towards our mission. Now with that said, I'd like to dive a little bit deeper into the quarter and our progress against our strategic growth initiatives of acquiring new members efficiently, engaging them effectively and deepening our relationship with them via DaveCard engagement. Diving into our first strategic growth initiative, We once again drove meaningful member growth despite significantly reducing marketing spend relative to last year.

Speaker 1

As we've discussed in prior quarters, we strive to acquire customers by marketing Free banking services with the ability to instantly access short term credit with no interest and no credit check, a message that strongly resonates with our millennial and Gen Z audience. In the Q3, we added 821,000 new members while decreasing CAC by 30% on a year over year basis. On a sequential basis, we reduced marketing spend by 7% and still managed to grow member acquisition by 11% due to a 17% improvement in CAC. We attribute our CAC efficiency improvement to our continued platform improvements, channel optimization and enduring product market fit coupled with the more rational competitive dynamics in the market for advertising inventory. These cap efficiencies have persisted thus far in the Q4, which bodes well for marketing performance.

Speaker 1

Our second key strategic growth initiative is to engage members by delighting them with instant access of up to $500 of extra cash using our proven AI driven underwriting models. Our monthly transacting member base remained roughly flat sequentially to 1,900,000. To unpack this a bit more, our DaveCard and Extra Cash monthly actives grew healthily sequentially. However, as we mentioned last quarter, we began to transition our $1 per month to a new billing system, which has created a near term headwind to overall MTMs as we include $1 subscribers in this metric. We expect to complete this migration in the Q4 and we're excited about the flexibility that this new system will provide us to potentially pursue further subscription opportunities.

Speaker 1

Turning to our extra cash business, we once again drove a significant increase in extra cash origination volume, which was up 23% year over year and 7% sequentially to $932,000,000 This growth is largely driven by increases in extra cash transaction members. This performance highlights the strong demand for extra cash both from new and existing members as our origination volume metric approaches nearly $1,000,000,000 per quarter. Despite the increase in origination volume, our net receivables balance remains low at only $97,000,000 once again highlighting how the short duration of extra cash allows us to serve a vast number of everyday Americans without the need for a sizable capital intensive balance sheet nor significant credit risk exposure at any one point in time. Furthermore, our 28 day delinquency rate improved 165 basis points compared to the Q3 of 2022 and 41 basis points sequentially despite challenging macroeconomic conditions and step change growth in origination volume. This 3rd quarter figure represents The lowest ever 28 day delinquency rate in our company's history despite the previous low occurring in the Q1, what typically exhibits the seasonally strongest credit performance given the additional liquidity provided to members from tax refunds.

Speaker 1

Our strong credit performance is attributable to the ongoing investments we're making in our proprietary AI enabled Risk Management and Payment System. Over the past few quarters, we've launched 2 new underwriting models focused on different member segments of our portfolio. The combined effect has been incredibly positive as we're sustainably driving higher levels of conversion, retention and net monetization. Moving to our 3rd strategic growth initiative, we are constantly working to create a deeper payments relationship with our members by accelerating adoption of our Dave debit card through the synergies that exist with Extra Cash. We aspire for our members to utilize our full suite of banking services complemented by our market leading short term liquidity feature of extra cash.

Speaker 1

Our DaveCard metrics continue to display progress with improved cross attach rates from extra cash into our DaveCard business, which is demonstrated by the 73% year over year increase and 12% sequential increase in Dave Car spending volume in the 3rd quarter. Our average transaction per monthly transacting member increased 39% year over year and 13% since the Q2 to 6.4% for another record quarter. We plan to continue executing on our strategy and driving further adoption of Dave Banking heading into 2024. Pulling together our solid progress within both ExtraCash and the Daycard monetization, we recorded a 9% increase in ARPU during the quarter on a year over year basis and an 8% increase sequentially, which highlights our ability to effectively monetize our core monthly transacting member base. As we look to the Q4 and into 2024, we expect to see incremental improvements in extra cash ARPU resulting from the new percent based Express fee pricing structure which we introduced to new entity members over the last few months.

Speaker 1

This new structure is exhibiting favorable early signs for extra cash monetization and create even greater synergies with the DaveCard, which should support monetization on that side of our business as well. All said, we continue to deliver significant value for our members and deepen relationships with them as we seek to become the primary banking destination for everyday Americans. We have successfully executed against our roadmap and our execution in 2023 has positioned us to accelerate our path to profitability as we are now on the verge of turning adjusted EBITDA positive in Q4, while continuing to generate double digit growth. We look forward to delivering on our goals for both day members as well as our shareholders as we solidify our position as a superior banking experience for everyday Americans. With that, I will turn the call over to Kyle to take you through our financial results.

Speaker 1

Kyle?

Speaker 2

Thank you, Jason, and good afternoon, everyone. We're pleased to record our Q3 results as we exceeded expectations across our key operational and financial metrics. We grew our non GAAP variable profit by over 50%, demonstrated the sustainability of our non GAAP variable margin improvements and made significant progress on our path to profitability, approaching breakeven on a non GAAP adjusted EBITDA basis. The KPIs underlying the key tenants of our strategy are also very positive. Versus Q3 of last year, CAC is down 30%, Originations are up 23%, exceeding $930,000,000 Our 28 day delinquency rate is at its lowest point in company history And cross attached into DaveCard is strong with total DaveCard spend exceeding $340,000,000 up 73% year over year.

Speaker 2

Now to dive a little deeper into our results. Total GAAP revenue in Q3 was $65,800,000 up 16% from Q3 of last year. Revenue growth is primarily driven by increases in ARPU from our monthly transacting member base. The ARPU expansion has largely been driven by higher extra cash and DaveCard engagement amongst our total MTMs. From a product development standpoint, we're extremely focused on our user journey of delivering a best in class short term credit solution to drive member engagement and DaveCard adoption, which is driving the growth of extra cash and DaveCard actives and increasing ARPU and member lifetime value.

Speaker 2

Non GAAP variable profit in Q3 increased 51% to $37,300,000 representing a 55% margin relative to our non GAAP revenue, up approximately 1300 basis points versus Q3 of last year. The increase in variable margin has been driven by structural improvements across our business. First, credit performance continues to improve as a result of ongoing development and optimization of our AI enabled underwriting engine and supporting infrastructure, resulting in higher spreads and lower credit losses. Additionally, we have driven efficiencies in how we utilize the payment networks to move money and reduced costs resulting from contract negotiations with several key vendors. Our ability to sustain these non GAAP variable margin levels has enabled another increase our margin guidance for the year, which we'll be sharing more detail on later in the call.

Speaker 2

And moving to 3rd quarter operating expenses, Our provision for credit losses decreased 13% to $16,000,000 compared to $18,400,000 in Q3 of last year. As a percentage of extra cash originations, the provision declined to 1.7% in the 3rd quarter compared to 2.4% in the year ago period. The decrease in loss provision is attributable to the ongoing improvements we've made to our risk architecture as I referenced a moment ago. These gains are also evident in our 28 day delinquency performance, which tracks the delinquency rates of a given quarter's originations. Compared to the Q3 of last year, our 28 day delinquency rate improved by 165 basis points to 2.42 percent, while we grew originations by 23 percent to $932,000,000 Processing and servicing costs during the quarter decreased by 26 Percent to $7,100,000 compared to $9,500,000 in the year ago period.

Speaker 2

On a percentage basis relative to origination volume, Processing and servicing costs improved nearly 50 basis points to 0.8% compared to 1.3% in the year ago period. These gains are sustainable driven by technology investments we've made in our payments infrastructure and improved contractual terms with vendors as I also referenced a moment ago. Advertising and marketing expenses decreased 42 percent to $13,900,000 during the 3rd quarter compared to $24,100,000 in the year ago period. This 42% reduction in marketing spend led to an 18% reduction in member acquisitions Since we were also able to reduce our tax by 30% over that period. This combined with the long tail marketing investments made during the 2nd quarter enabled us to efficiently deploy our marketing dollars and significantly reduce spend during the Q3, while continuing to meaningfully grow our variable profit.

Speaker 2

Compensation expense decreased 5 percent to $23,100,000 in the 3rd quarter compared to $24,300,000 in the year period despite increasing non GAAP revenue by 15% over the same period. As a percentage of non GAAP revenue, Compensation expense declined from 41% in Q3 of 2022 to 34% in Q3 of 2023. We continue to believe that we can execute on our plan without needing to make material additions to our overall headcount given the scalability of our Technology platform and overall operating model. GAAP net loss for the Q3 improved to $12,100,000 compared to a net loss of $47,500,000 in Q3 of 2022, representing a 75% improvement. Adjusted EBITDA loss for the 3rd quarter was $2,500,000 compared to a loss of $27,500,000 during the year ago period, representing a 91% improvement.

Speaker 2

The improvement in adjusted EBITDA was due primarily to the combination of our revenue growth and variable margin expansion, coupled with tight cost controls and lower marketing spend. As Jason mentioned, this puts us well on track to meet our goal of Turning adjusted EBITDA profitable as early as the Q4 of this year, it would be 1 to 3 quarters faster than the expectation we set during mid-twenty 22. We're really proud of the work that our team has done to get us to this point and look forward to continue to build on our momentum in Q4 and throughout next year. Now turning to the balance sheet. As of September 30, 2023, we had approximately $171,000,000 of cash and cash equivalents, marketable securities, short term investments and restricted cash compared to $178,000,000 as of June 30, 2023.

Speaker 2

As of quarter end, our net receivables balance was $97,000,000 an increase of roughly $8,000,000 sequentially. The amount drawn on our credit facility remained at $75,000,000 as of the end of Q3 as we continue to rely on our balance sheet cash in the 3rd quarter to fund extra cash originations versus our credit facility given the cost of capital difference between our facility and our corporate cash. That said, a few weeks ago, we announced that we had amended our credit facility to increase our capacity by $50,000,000 to $150,000,000 an increase in the advance rate by approximately 800 basis points, and we were able to reduce our cost of funds by approximately 200 basis points And additionally extend the maturity date by an additional 2 years such that we now have over 3 years remaining on the term of the facility. As highlighted in our earnings release today, the fact that our lending partner was willing to extend more capital at more favorable terms despite the notably tighter Conditions in the broader capital markets speaks volumes to the strength of our business, unit economics and overall outlook. Now turning to our guidance.

Speaker 2

Given our significant revenue improvements throughout the year, we now expect full year 2023 non GAAP revenue to range between $257,000,000 $261,000,000 representing growth of 22% to 24% compared to last year. 2nd, given our sustained levels of variable margin this year and improvements that we've made to our variable cost structure, We are raising our full year 2023 non GAAP variable margin guidance to range from 53% to 54%, which is up 1200 to 1300 basis points relative to 2022. Finally, we are also raising guidance and now expect Full year of 2023 adjusted EBITDA to be a loss between negative $22,000,000 to negative $17,000,000 reflecting a 75% to 80% improvement from 2022 and implying a range of negative $2,000,000 to positive $3,000,000 in the 4th quarter. The significant improvements across our key financial metrics throughout the year have not only allowed us to raise our guidance, but have left us well positioned to achieve our goal of achieving profitability in the coming months. I'll now pass it over to Jason to conclude our call.

Speaker 1

I'd like to thank everyone for joining today's call and for the entire Dave team's commitment to our strategy, which is related to our outperformance. Operator, we can now open the call for questions.

Operator

Certainly. Please standby while we compile the Q and A roster. One moment for our first question. And our first question will be coming from Gary Prestopino from Barrington Research. Your line is open.

Speaker 3

Hey, Dave. Hi, Kyle. How are you?

Speaker 4

Doing well. Thanks, Gary. Appreciate you jumping on.

Speaker 3

Look, couple of things here. Can you maybe can we dwell there's a number of things I want to dwell into, if you don't mind, but can we dwell into What is really driving the improvement in CAC? I mean, you've cited a couple of Thanks, Eric. But I'd like you to elaborate a little bit of that because that's really great improvement on the customer acquisition costs.

Speaker 1

I think there's a few things happening here, Gary. 1, we think that the timely message to help people get Access to up to $500 in 5 minutes or less is really driving a chord with consumers right now given The inflationary period driving up costs for consumers. Additionally, I think there has been a lot of channel optimization we've done to really do a lot of Mixed media testing to make sure we are spending the right amount on the right channels. We've also really doubled down the channels that are the most efficient for us, scaling back in some other channels that had otherwise proven to not be as efficient at scale. And lastly, we think overall given on the macro side, given the pullback of the crypto industry, there is quite a bit of dollars that have been pulled out of the ecosystem, which is favorable for us just seeing a decrease in CPMs across the board.

Speaker 1

All that said, I think we have a nice Tailwind behind us to continue to have efficient CAC for the foreseeable future.

Speaker 3

Okay. What as you went through this process, what are some of your more efficient channels that you're using for acquiring Customers, if you can elaborate on that and make that public.

Speaker 1

I don't know that we disclosed the channels. It's a lot of the more notable names that you've heard of before and the way that we build creative and optimize those channels I think is what is really unique today less so the channel mix.

Speaker 3

Okay. And then on the extra cash, you said you put some new, I guess, Models, added 2 new underwriting models or algorithms or whatever. Could you maybe elaborate what you're Finding as you've developed a better history with this product that you've been able to positively Change some of those algorithms or underwriting factors?

Speaker 4

Sure. Gary, I can happy to take this. This is Kyle. Thanks again for the question. So one of the unique things about our business is just the velocity of our portfolio.

Speaker 4

So I think as you can appreciate, We turned the book over several times per month just given the very short duration of extra cash. And so With that, we're just able to originate a substantial amount of transactions. I believe we have originated extra cash over 90,000,000 times to date. And so with that opportunity, we have tons of data points on performance and the ability to just continue to optimize and risk Split within the portfolio to find efficiencies and basically risk profile customers more effectively. We've also made substantial amount of investments just in our underlying payments infrastructure that supports extra cash, which I I think it's also another key part of our secret sauce and has allowed us to cut back on delinquencies.

Speaker 4

But overall, it's just been A dedicated focus from the team just to continue to optimize the portfolio and we're able to, like I said, be in a unique position to do that just given The velocity and the number of at bats that we have based on the number of transactions we're originating.

Speaker 3

Are you finding in this kind of environment, Carl, that Kyle, I'm sorry, that you're getting a lot more inquiries into extra cash In terms of short term needs?

Speaker 4

I think generally speaking, demand is pretty favorable right now. Consider it more normalized coming out of a high stimulus, high with a lot of extra back stopping that was coming in through A lot of the COVID relief and just looking a lot more similar to what things look like pre COVID, which I think is a more favorable overall environment for us to begin. But I wouldn't say we're in any sort of abnormal demand period based on anything that we've seen. It's just Strong and consistent overall demand and we've continued to add value to the product over time too that's driving higher degrees of retention as well. So, yes, overall positive and productive macro, but I wouldn't say abnormally favorable.

Speaker 2

Okay.

Speaker 3

And then I'm just going through my notes here. You mentioned something about a new fee schedule as well as I think it was you're moving away from the dollar per month subscription. Did I get that right? Could you just talk a little bit about that?

Speaker 4

Yes, sure. So 1st and foremost, on the fee structure. So historically, we had a tiered dollar based fee structure As you sort of went with respect to the extra cash express fees. So as limits went up, the express fees went up, but not Linearly, they were it was just a feature that was arbitrary as you went up the limit spectrum. Starting Earlier in the Q3, we on boarded all new customers into a percent based pricing model.

Speaker 4

So allowing us to Scale our fee structures up with origination size. We've also paired that with a bigger discount for folks to send their extra cash funds to Our DaveCard to further drive that trial and engagement with the Dave spend account. But overall, we think this change is helpful from a monetization perspective, but also just helps to better align us with the customer to ensure that we're Delivering the maximum value for extra cash and our unit economics to support that. So it's been a positive change And we expect it to be additive in the 4th quarter as we rolled that out to all of our existing customers in the beginning part of the quarter.

Speaker 3

So you're getting rid of the tiered structure and you're just going to an overall flat percentage?

Speaker 4

Correct.

Speaker 3

Okay. And then what was the other thing there with the dollar per month membership fee? Did you say you were stopping Matt or did I miss

Speaker 4

So we're taking a close look in our subscription business overall, but the changes that we've made is We've built a new billing system and payments architecture underlying the subscriptions product that we started to roll out last quarter. This presented a bit of headwinds just in terms of migrating users over into that new billing structure that's Like I said, put some headwinds around the number of MTMs, but what that does allow us to do is gives us a lot more flexibility in the future to roll out prospective subscription offerings At a later date. So we're excited about that opportunity, but taking a close look at more of the specifics for 2024 around what that could look like.

Speaker 3

Okay. And then just lastly, and I'll let somebody else jump in. I mean, you guys have done a great job of getting the cost structure down and driving efficiencies and Growing the revenues through extra cash and the Dave card. I mean, at this point, do you feel pretty confident that You really evolved the company on to a step change basis where as you can Continue to grow revenues in this environment that your year over year losses The EBITDA will diminish and you could maybe attain a run rate of profitability for a full year?

Speaker 1

Certainly EBITDA profits, I mean,

Speaker 3

I didn't mean overall GAAP profits.

Speaker 4

Yes. Well, I guess to To answer the first part of the question, we feel like the improvements that we've made, 1st and foremost, on the variable cost structure are sustainable and we've completely rerated the And unit economics based on the changes that we've made there. So feeling very good about the trajectory of Just the optimization and monetization part of artistic unit economics. I think overall, we still feel very confident in the overall Growth opportunity and prospects to continue to grow the top line and feel like that our team is of sufficient size now for us to execute on our plan without making material additions to our overall fixed cost base in order to deliver that growth plan. So I think what that all leads us to is a very favorable outlook with respect to profitability moving forward.

Speaker 3

Okay. Thank you.

Operator

Okay. And I'm showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Famous Dave's of America Q3 2023
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