Hey, thanks everyone for joining us. I'm Devin Ryan, head of financial technology research here at Citizens JMP, and looking forward to this conversation. I'm not sure if people have looked at the stock chart yet here, but last time I checked, Dave's stock's up 50% today. We're going to figure out what's going on here and get to the bottom of it. Pleased to be joined again by the management team, Jason Wilk to my right, who's a CEO, and Kyle Beilman, who is a CFO. Jason, Kyle, thanks for joining us again. Good to see you.
Yeah, great to see you. Thanks for having us.
I think maybe just before we get into it, Jason, if you could just start with a little bit of an overview of what Dave does and the founding story of the company, just to lay the groundwork for the audience here.
Yeah. We are a digital-first neobank. Launched the company in 2017. We offer free checking and savings accounts to our customers, helping them save on overdraft fees and minimum balance fees found at incumbent banks that are charging members as much as $400 a year to operate a basic checking and savings account. We specialize in a cash advance offering called ExtraCash, which our members can access up to $500 of paycheck-to-paycheck liquidity at no interest to pay for things like gas or groceries. Another way they can save on expensive overdraft fees is by using this product. In the fourth quarter, we had over $1 billion of originations on that product. It's incredibly popular with younger members. We think our platform is incredibly defensible against the big banks, given our low-cost structure, digital-first nature, and next-generation AI underwriting and customer support.
Great. So you guys reported earnings today. So I guess we'll start there. And I'm assuming that has something to do with the stock appreciation. So ended 2023 with some fantastic results. You guys got to GAAP profitability, had a solid quarter on all metrics, and provided a pretty good outlook for 2024 as well. So why don't you guys just maybe start there, some of the highlights from the quarter, and just what you guys were talking about with earnings this morning?
Yeah. Look, for quite a long time, we've talked about our path to profitability. We've mentioned that our platform, we've made a lot of investments, and we needed to get to 2.1 million monthly transacting members for us to effectively break even on that platform that we invested so heavily in. We reached that threshold in the fourth quarter. We exceeded on profitability because we excelled on our margins. Our marketing efficiency was improved. Our delinquencies on the ExtraCash product were at record lows. That led to the beat on the profitability, getting us to $10 million of Adjusted EBITDA versus the break-even we thought we were getting to.
Yeah. And just to add on to that, we grew revenue Q4 over Q4 by about 23%, with about $72 million in Q4 revenue. A big focus of ours has been increasing our variable margins. We've been able to increase margins by about 2,000 basis points over the past 12 months, really driven by just the underwriting improvements of our CashAI, which we call our underwriting engine that supports ExtraCash. Our delinquency rates are down about 140 basis points year-over-year, while we've grown originations by about 30%. If you look at that in the context of what's going on in the broader consumer credit landscape, I think that just demonstrates how differentiated our capabilities are from a risk management standpoint. There's been a number of other things that we've been doing to try and increase margins.
That's really been a big part of the profitability story and driving just more efficiency out of our unit economics.
Yeah. Yeah. It's an incredible story to go from going public. I don't think at the time of coming public, the expectation was that your business model was necessarily going to be as profitable as quickly as it was. I think the market mood changed. But you guys adapted very quickly and then made a lot of decisions that have gotten you to this point. So I guess, what does being a profitable firm mean? Building off of this, we'll talk a little bit about the outlook for the company, but getting to profitability, what does that mean for the company? What does that give you the ability to do as you think about growth going forward?
Well, we're hoping that getting past this profitability milestone just builds a lot of credibility in the management team. We've talked a lot about our plans to get here. We think moving forward, it just gives us the credibility to build new features that we successfully were able to get ourselves to profitability through this challenging time period.
But yeah, I think just to add to that, we think that the future is very bright for our business. And we've really only scratched the surface from a product development standpoint of what we want to build. And so just getting the company to profitability just allows us to reinvest in the innovation that we really think is going to be the future for consumer banking moving forward. So just excited about the ability to reinvest back into the business more than what we have been, I think, recently.
Yeah. I think the next thing I would say is that it just proves the great operating leverage we have with the business. Now that we've passed this 2.1 million monthly transacting member, every incremental user we can acquire from here on out is just incremental to the bottom line. And so I think that, plus the enhancements we have through our AI underwriting and our AI chat support, ChatGPT sorry, DaveGPT, we have a lot of scale.
Yeah. So customer acquisition costs, I think, actually have continued to come down. So you guys are acquiring customers at very low cost. Talk a little bit about that. Why has there been an improvement in CAC? And where do you see that trending from here?
Look, ultimately, we think that we're just scratching the surface on the total TAM. We're at 2 million customers. We think there's 180 million customers in the total addressable market. And we're just seeing a very favorable, receptive market in a high-interest rate environment where people are getting shut off for access to mainstream credit. People are looking for ways to save money. So a free banking solution is a great opportunity. And then the Extra Cash product is an amazing place for people to get access to low-cost credit that they can use to go buy everyday essentials and not worry about being turned down from a credit card or a personal loan type service.
That's great. So I want to double-click a little bit into the credit performance. So you guys reported an improvement in credit metrics today. It seems like some of the metrics we're following in the industry more broadly are going the other direction. So talk a little bit about why there's that differentiation and then what you're seeing more broadly in credit.
It comes down to the construct of our ExtraCash product. The use case of ExtraCash, a member will see an ad for Dave. They can come in and apply for credit with us, get approved for up to $500 within 5 minutes of download. We use transaction data to underwrite the consumer. CashAI, which is our engine that we built to analyze risk, is looking solely at transaction-based data to make an underwriting decision on the member. We're looking at income type. We're looking at where you work. We're looking at how often you get paid. And we're able to make an assessment on how much credit we can give you until your next paycheck date. On average, we are extending credit for 8-10 days. It's a very short duration.
Because we have this real-time look into someone's financial insights, we have a very high confidence in our ability to not only extend the right amount of credit but also gives us a lot of confidence in the repayment as well. So the combination of short duration, high visibility into the transactions of our members is what leads to the low loss rates. We also get tons of data. So when somebody connects a bank account to get underwritten based on their transactions, we're seeing at any given point 3-12 months of somebody's checking account transaction history. Times that by we've issued 91 million cash advances to date through ExtraCash. Each of those is using that transaction data, which could be upwards of 6-12 months. So multiply that by 91. It's billions and billions of data points we're using to build this model.
And so it's not surprising to me that we've been able to increase originations, get to north of $1 billion, and see loss rates go down because the system keeps getting better and better.
Yeah. Yeah. So you guys participated in artificial intelligence today. We did. And I think kind of hits the nail on the head in terms of just the technology underlying the model. So talk a little bit about artificial intelligence. And then you referenced the DaveGPT that you guys launched last year. So how does that play in thematically with how you guys are leveraging data, but then also artificial intelligence technology to really differentiate the platform?
Look, I believe that AI can be a great enhancer to our great operating leverage story. I think being a digital-first neobank, it's all about operating leverage versus you versus the incumbent banks that have 5,000 bank branches. They're spending billions of dollars on employees. We, through AI, can have 300 employees that can service 10 million total members, 2 million transacting users. And AI is a great enhancer for us to get a lot more customer scale without the need to add a lot to our operations. We're doing all this underwriting through this AI, which means that not a single human is looking at any particular credit application. So there's infinite scale there. And then we recently launched DaveGPT, which is our customer support chatbot using OpenAI in the background. And that's now responding to close to 90% of customer inquiries.
That saves us on the need to increase our support costs as we onboard new users. So when I think about, we have 2 million monthly transacting members. We're now profitable. We can profitably add customers at scale without the need to add to our operations. That's just a foregone conclusion that we can continue to add operating leverage and see more earnings potential for the business, not even including new products we can build.
Yeah. Just to add to that, this is not something that we started a year or two ago when AI became more in vogue. I mean, roughly 15% of our FTE headcount is within the data organization. And so we've been building around this for the past 6 or 7 years as really the foundation of our company and how we think about the scalability of our technology. So yeah, it's not new to us.
Yeah. So I want to talk a little bit about the outlook for 2024. So maybe hit on some of the high-level points, kind of themes that you guys are framing for what you're looking to achieve in 2024. And then we can get into some of the drivers that are going to get you there. But I guess what have you guys been talking about in terms of the outlook and what you guys want to accomplish after, I think, overachieving thus far from 2023?
Yeah. You want to talk, Guy?
Sure. I mean, do you start strategically? And I'll take the numbers.
Yeah. Look, strategically, we think that there's a lot of opportunity for us in just getting more engaged with our customer base to drive more ARPU through direct deposit. We acquire customers very efficiently by giving them access to this short-term credit when they come through the door. And we want to migrate as many of those customers as possible into our checking account relationship and ultimately winning direct deposit. If we can get somebody's direct deposit, we, on average, get them to spend about $1,000 per month on their Dave Card. That turns into about $15-$20 of incremental ARPU that all flows to the bottom line as well. And we're very early on, I would say, in that sort of transition from just credit-only to credit plus direct deposit users. And we're going to be leaning a lot more in that strategy this year.
The second piece of the growth strategy is around our subscriptions. We think that we have a $1 per month subscription for access to some light premium features, such as our budgeting and financial insights tools. We'll be looking at testing new price points for that throughout the year. That's not in our current model today. We think that our dollar price point, which has been in place since 2017, is quite underpriced compared to the market. We're excited about testing some new price points and branding around that. I'd say lastly, we're just excited about the core business. The ExtraCash product has a ton of room to run. We're seeing loss rates go down, originations going up.
I think there's room to run on not only acquiring new users into that efficiently but just the ARPU growth that comes from deeper engagement and more frequency of use of that product.
Great. Yeah. And then in terms of the guide, we guided to $325 million of top line at the high end of the range and $305 million at the bottom end. The midpoint represents about 23% growth year-over-year. I think for a number of reasons, we think it's a relatively conservative outlook based on everything that we've seen in the business. But how that sort of translates into EBITDA is $25 million on the bottom end and $35 million at the higher end. But I think for all the reasons that we've talked about, feeling very good about the outlook and our ability to deliver on those commitments.
Yeah. I just want to stay on the banking side a bit and the direct deposit. So it's a competitive market. A lot of firms say they'd love to kind of have the direct deposit. How are you guys planning to lean in? You're having some success. But talk about the strategy of what's working. And then how do you penetrate that market more? Because to the point, if you can win more of that, that is incredibly high return on success, if you will.
Yeah. Look, I'd say this year is going to be a lot more of the same of acquiring customers through our credit-first marketing, which is you're going to see an ad for Dave on Instagram or TikTok or streaming TV about this app can get you up to $500 in five minutes or less. That drives our incredibly low CAC, gets people in the door to start transacting with us. And then we'll be leaning in more on giving customers additional credit benefits if they convert to direct deposit. Currently, you get no additional benefits if you're direct deposit. We're only winning customers into DD based on saving the money on overdraft and minimum balance fees that they're incurring at their existing bank. But now we think we can offer sort of incentives based on increased credit access if they make the switch. And that, I think, we're pretty bullish.
We can make some improvements there.
Yeah. As you think about the evolution of the product offering, are there other types of credit extension that make sense in leveraging the models that you guys have built and kind of the differentiation of the AI strategy that you guys have put in place? Can you do that in other parts of the credit spectrum? Are you comfortable doing that?
Yeah. Look, I think it's a big part of the strategy for us is how do you graduate customers over time into a deeper relationship? And starting off with ExtraCash, great way to build early trust with the member. Getting them into direct deposit from there is another thing to do. But then from there, we'd love to use our CashAI underwriting to get customers into future credit products, knowing that we have more data than everybody on credit transaction and underwriting. And that same technology should be able to be used to offer different credit products from credit cards to personal loans. Anything's on the table for us to leverage this great tech platform that we built. And if we can just cross-attach users into those, it's all incremental ARPU lift on what is a fairly fixed cost basis.
Yeah. Can you talk about the Dave Card and the success you're having and kind of the evolution of how that product has grown but then also kind of where it might go from here over the next year, if you will?
Yeah. So we didn't launch the business with the Dave Card. We solely launched with our ExtraCash offering back in 2017. We fully launched the Dave Card experience throughout 2021 and 2022 and sort of had that as a standalone service, really marketing the ability to get customers out of the predatory overdraft and minimum balance fees that their bank is charging them. That won us a certain amount of fan favor and conversion from the existing user base. But it was really the last year where we started to lean in on giving people discounts on accessing their cash advance or ExtraCash if they put the cash advance on the Dave Card. And that's led to 50% of our new users choosing to take us up on that offer. And that's driving meaningful trial of the card and is a nice funnel into direct deposit.
But we're now excited to start leaning in on more credit for those members. So more credit plus discount on access, we think, is going to be a winning formula to increase card spend more so than the, I think, $1.5 billion we were at this year.
Yeah. Yeah. I think a lot of the challenges that neobanks face or other banks, for that matter, is just a cold start problem with their service and how do customers really get immediate value out of opening up a checking account. And by virtue of that, you end up with these very high CACs because there's so much leakage in your funnel before you get people to transact. And so we've tried to combat that cold start issue by just seeding account activity with ExtraCash and just see a lot of synergies between those two products to drive trial, build some familiarity and trust with the product before we're asking for a direct deposit. And so this year, as Jason mentioned, is really focused on that third leg of the customer journey.
After we've built the trial, some of that initial trust now, how can we add more value by how can we deliver more value once customers make that final commitment to us? And so we're really excited about that opportunity.
Yeah. So you guys have a lot on your plate over the next year organically. Is there anything on the M&A front that might be of interest? Or how are you guys thinking about, particularly now that you're kind of profitability and strongly adjusted to be profitable for 2024, the types of things you would think about doing or would want to do there, if anything?
M&A is certainly interesting for us. We're continuing to scour the landscape for interesting opportunities. I still think that people have a little bit unreal expectations still back from their 2021 valuation days. So we're being patient as people start to burn through more cash. But we're looking at things that are adjacent to our credit and banking solutions, things that could fit nicely within our subscription bundling that we are working on but nothing that's been meaningful yet. Having the better market cap as of today also gives us a little more leverage there versus being a $60 million company. So yeah, we're still excited about it.
Yeah. That's great.
Yeah. But I think just generally speaking, we think that there's going to be consolidation within the industry. There's a lot of subscale players out there. And I think for people to get access to the public markets or even just realize the benefits of scale that you need to, I think, have sufficient unit economics, there just has to be consolidation. So we expect that to probably play out over the next 18-24 months.
Yeah. Great. I want to talk just for a minute about the balance sheet. You guys have done a lot of work there as well over the past year. I think you guys renegotiated your credit facility late last year. Then you announced the repurchase of the FTX note at a very substantial discount, which is great to see. Maybe just talk about those actions and then what that means in terms of positioning for the balance sheet. I think that speaks to kind of the flexibility that you guys will have.
Yeah. So we have a longstanding relationship with Victory Park. We partnered with them to take the company public via their SPAC vehicle. But they've been our lender for the past five or so years. We did renegotiate our credit facility with them back in September, I believe, upsized the facility by about $50 million. And now have a $150 million warehouse line with them. So just a lot of room to continue to grow the ExtraCash business with that source of available funding, lowered our cost of funds with that renegotiation too. And if you think about that in the context of the interest rate environment that we're in, I think just speaks to their assessment of the unit economics and the viability of our business. But yeah, the FTX thing was also another important transaction that we recently executed.
So back in early 2022, we struck a partnership with FTX with the idea of bringing crypto into the Dave ecosystem. We ultimately never launched that. And as we all know, things unraveled with FTX later that year. But as a part of that partnership, we had a $100 million convertible note that they invested into Dave. We were able to work with the bankruptcy estate over the last handful of months. And we were able to buy back that investment for $71 million, just a significant discount to the $105 million of the carrying value of the note at that point. So, a very creative transaction for the business. And I think, just importantly, an opportunity for us to signal just the favorable outlook that we have about the business and our go-forward liquidity profile in order to be comfortable parting ways with that much cash.
Very creative transaction. Again, I think super important from a messaging standpoint about the trajectory that we feel like the business is on.
Yeah. So in the last minute or two here to close out, stocks up 50% today. It's already had a huge move leading into today. So kudos on the recovery. But I suspect that you guys still feel like there's a long ways to go. And so talk a little bit about, for people in the room that are looking at the stock, how you guys are thinking about the opportunity and the investment and why you guys are as excited as you are. And kudos on the execution to getting to where we are today.
Yeah. Look, I still think long way to go from here. But happy to see at least some positive momentum in the stock. But look, I think the reason why I'm bullish on the business is it comes back to that story of the operating leverage. We are profitable at 2.1 million monthly transacting members. We have a very efficient marketing funnel, which is continuing to add a lot of members per quarter at a very efficient cost. We feel very good about the ability to add additional ARPU from our members, both from new subscription opportunities, deeper engagement with our ExtraCash product, and also with the focus on converting more members into direct deposit. And that all is going to add towards incremental profitability from here on out and give us sufficient capital to further invest in the business. But we love our story.
We love the customers that we are serving, our need of these solutions. And so that's going to be a tailwind for us for many years to come. And yeah, we're excited.
Terrific.
Quick question. Can we ask quickly?
Sure. Yeah.
Yeah. So I think can you talk a little bit about, if you look forward a couple of years out, where the leverage will come from with the business, right? How should we think about variable margins, which you improved to 57%, I believe, last quarter? And CAC obviously down. So that's helping the marketing side. But how should we think about the headcount cost? What are the big cost structure of the business? And where's the leverage going to come from?
Yeah. So I made the point earlier about gross margins or variable margins. It was actually 61% in Q4. So I think that we have really healthy margins. We're also talking about increasing our subscription offering as part of our mix, which we think is net positive to the margin profile and the incremental growth there, just given that as very high margin flows directly to the bottom line. But I think, as we've talked about, we feel really confident that the investments that we've made in our technology platform give a ton of scalability from here, which is incremental customer growth and the monetization associated with that flowing directly to the bottom line as well.
So just a lot of inherent operating leverage in the business where we just don't think we need to make substantial or material additions to our headcount to allow us to continue to grow from here. So yeah, we just think that the growth from this point is just very accretive to margins overall.
Terrific. OK. Well, I think that's a great place to end it. But Jason, Kyle, thank you for joining us on this big day. And best wishes for a great 2024.
Thanks, Devin. Appreciate it.
Thanks, everybody.