Great. Good afternoon, everyone. Welcome to the virtual portion of the Needham Tech, Media, and Consumer Conference. My name's Kyle Peterson. I'm one of the fintech analysts here at Needham. Up next, we're going to be doing a fireside chat with Dave. We have Jason Wilk, CEO, and Dan Ury with IR. They're going to be joining us. Yeah, guys, welcome to the conference. Really appreciate you taking the time to speak with me today. Maybe if we could just start things off, for those that might be a little less familiar with the company, if you could just give a quick overview and primer about Dave, I think that would be really helpful for everyone here.
Yeah. Great to be here. At a high level, Dave is one of the world's largest neobanks, with 14 million customers, and we specialize in building innovative credit products for everyday Americans who are not well-served by traditional FICO or existing large banks. The company's been around since 2016. We've had tremendous growth over the past 10 years with a very low CAC, a very lean team, and tremendous execution.
Awesome. Yeah, no, that's helpful. Maybe we could move over and you could talk a little bit more about your customer base. What types of customer, whether it's age, FICO score, employment, any key characteristics or unifying themes. I think even interesting story about the name of the company and all of that, but I guess just any more insights as to who your core customer base is, what unifies them, and what's helped you build this base up into the business it is.
If you look at our core product set today, our main offering is a product called ExtraCash, which is a short-term liquidity product for customers to get access to much-needed capital between paychecks to afford things like gas or groceries. The company's name stands for Dave versus Goliath because we built the business to go up against traditional bank overdraft and overdraft fees that were being punitively charged on this customer that could least afford it. If you look at the industry, large banks have talked about their very high cost to serve being north of $300 per year just to maintain a basic checking account. For our customer base, it tends to be younger, in their twenties and thirties, who tend to have a lower credit score or just early on in their income journey.
They're not customers with a mortgage or prime credit card with these large banks. Therefore, the only way that the banks can make money off this customer segment is by charging high minimum balance fees and significant overdraft fees. Dave has flipped that model on its head for this everyday American consumer by being digital-first, no bank branches, and because of that, we have a significantly lower cost to serve, roughly $40 per user. We can actually have fantastic gross margins as a business and have costs that are upwards of 80%-90% cheaper than incumbent banks. That just leads to a long-term competitive advantage for us versus the incumbents.
In addition to our lean cost structure and digital-first approach, we specialize in, and we really were the pioneer of using customers' cash flow information to underwrite them for credit as opposed to using FICO, which tends to be a score associated with longer duration credit, installment loans, mortgages, auto loans. When it came to underwriting customers for very short-term credit, like we do with ExtraCash, which gives people up to $500 between paychecks, we felt that FICO was not a good proxy. We invented our own credit scoring system based on your cash flow data, and we've proven that works at scale. We've issued over 180 million credit originations since the company has incepted, and we've been able to steadily grow originations per user while quickly lowering loss rates from 10% at the beginning of the company now to nearly 1%.
Very differentiated in many aspects from our incumbent and scale neobank competition.
Awesome. Yeah, no, that's really great color. Maybe on the ExtraCash product in particular, that's seen really rapid adoption. I think it's really resonated with your customer base. I know there's some other players out there that have products that maybe look similar, at least at first blush. What do you think sets apart ExtraCash from maybe some of the guys that are doing a little more earned wage access? I know yours is structured differently, but what sets that apart? Why does it resonate with your customers, and why is that more attractive to them than maybe other shorter duration forms of credit?
I'd say we've got two primary sets of competitors. One is the incumbent banks. They offer traditional bank overdraft where you have to take your checking account negative to access much-needed credit. Those banks tend to charge $10-$36 per instance. Every time you swipe your card, could be for a cup of coffee, could be for a tank of gas. Every time you go negative on your account per swipe, they're charging you up to $34. Up to $100 per day. It's just significant cost. It's also not a very transparent experience. You don't know what you're approved for, you don't know when they're actually going to pull the money back out of your account. If you look at the way that Dave operates, it's structured as the same bank overdraft model that the incumbent banks use.
We approve you for a transparent amount of money you can use between paychecks. You don't need to take your checking account at Dave negative. We provide a separate overdraft account for you to access the credit. Those two things lead to a far better experience. In addition, we only charge $5 for every $100 that you borrow, compared to, again, the $34 per instance. Massively differentiated from the incumbent bank offerings. That's still the primary place we're acquiring customers from. For customers to get approved for ExtraCash, you have to connect your primary account so we can see exactly where we are taking market share from. It tends to be the large banks where people are migrating over because they're looking for a lower cost, much more accessible credit.
Moving gears towards our scaled neobank competitors like a Chime or a Cash App, we are also very differentiated there in the sense that we don't require customers to be a direct deposit member of our platform to get approved for credit. We really specialize and again pioneer in leveraging the transactions at your external bank account, which we gather through a company called Plaid, of which we then underwrite your account for your willingness to be approved for credit. That model is just much more efficient from a customer acquisition perspective. Our CAC is sub $20 compared to theirs, which can be into the hundreds because ultimately our view is that people's willingness to switch their bank to get access to credit is a far smaller TAM than those willing to just connect a bank account, which is a very easy proposition for members to connect an account.
We think the TAM is much wider, which we think the low CAC really proves out that thesis.
Awesome. Yeah, no, that.
The only area I'd add to that is a way that we differentiate both from the big banks as well as the scale neobank competitors is in terms of credit access. Right. The example that Jason gave of on a typical bank overdraft where the fee is $35, the typical transaction size in a customer's bank account is $50. Potentially they're paying $35 for an overdraft for a $50 transaction. Right. Where you contrast that with ExtraCash, where our average revenue per ExtraCash was $13.50 for an average transaction size of $212. That same dynamic applies to the scale neobanks, where we think we're best in class from a magnitude of credit access standpoint. We can see through the connected bank account data what the typical transaction size is within our neobank fintech peers, and we think we're best in class in that dimension as well.
That's really what resonates best with this base, is they're looking for the fintech partner who supplies them with the most money is really from a top of wallet share perspective, what's the priority for these customers.
Awesome. Yeah, no, that makes a lot of sense and is super helpful. Staying on ExtraCash and maybe switching over to the funding side of things, I guess I know you guys are in the process and have announced that you're kind of transitioning a lot of these receivables to an off-balance sheet structure with Coastal Community Bank. I guess could you walk us through maybe how have you guys historically funded these? What does the transition look like now, and what are the puts and takes in terms of whether it's unit economics, balance sheet intensity, capacity, just any additional color as to how that transition will evolve and what it could do for you guys I think will be really helpful.
Okay. Can I take that one, Jason?
Yeah, Dan, go for it.
Historically, the way that ExtraCash was funded was that it's, as Jason mentioned, originated by our bank sponsor, so in this case, Coastal originates the overdraft receivable. We buy that receivable from Coastal within one business day, and then we've kept that on our balance sheet and funded it with a combination of equity and debt. We have an asset-backed credit facility with Victory Park Capital that's had $75 million drawn on it for about three and a half years now. We've been largely just funding the ExtraCash receivables balance with cash in our balance sheet because we're generating so much free cash flow as a business. It's publicly disclosed, I think, SOFR plus 500 basis points on the credit facility.
That is being replaced by this new funding structure with Coastal that you intimated, Kyle, whereby Coastal will continue to originate the overdraft receivable as opposed to buying it within one business day. We have to buy it within 60 calendar days. Again, 90-ish% of the receivables pay back on their respective due date, and the average term or duration is about 11 or 12 days. It really substantially reduces the funding obligation because Coastal is going to originate, hold the vast majority of receivables, they'll be paid back, and all that capital recycling will take place on Coastal's balance sheet.
What that's going to mean for our financial statements is from a balance sheet perspective, about 75%-80% of our gross receivables balance, which is about $317 million at the end of the first quarter, will actually move to or be funded and remain on Coastal's balance sheet, and then call it 20%-25% of the gross receivables balance, call it $65 million using the latest numbers, will stay on our balance sheet. It's just going to dramatically reduce the funding obligation and really just increase the free cash flow generation characteristics of our business by not needing to effectively fund that investment in the portfolio.
If you're just playing that forward, that's $250 million, call it, of just using an 80% figure of percentage of the balance sheet that's going to go off balance sheet would mean $250 million of cash comes onto our balance sheet. We'll use that cash to pay down the $75 million drawn on our credit facility. Be left with $175 million of cash with which the plan is to continue to be very opportunistic as it relates to share buybacks. Also important to note that that $250 million represents almost a turn of EBITDA, right. We're going to screen that much cheaper from an enterprise value to EBITDA basis, and I think it's $17 or so per share in net cash that we'll be generating.
In terms of the P&L impact, obviously, in conjunction with paying down our credit facility, we'll remove cash interest expense from our income statement. We'll pay Coastal what's called a balance sheet usage fee. It'll be a certain spread over Fed funds that's considerably cheaper than what we pay Victory Park Capital. That will flow into the financial network and transaction cost line, which is a variable cost within our P&L. It will burden gross profit and gross margin, but we will add that cost back for EBITDA purposes because it's effectively and constructively just a financing cost, the same way that we're using the funds from the funding facility to pay down Victory Park Capital's credit facility.
Important to note that the gross margin guidance that we put forth in the latest earnings release was that we expect to continue to expand from the 72% gross margin we generated in the first quarter towards the mid-70s range throughout the year. That reflects the impact of the balance sheet usage fee that will flow onto our P&L over the coming months. We expect to begin funding on this new Coastal funding arrangement next month and should have it complete by the end of the third quarter.
Okay. Awesome. Super detailed and comprehensive color there, so really appreciate that. I guess I just want to maybe pick your brain a little bit. Has there been any discussions about capacity? Obviously, you guys are growing a lot, is this an area where you guys were growing a lot but unable to self-fund a lot between the credit facility and just equity and such on the balance sheet? Obviously there's constraints to everything, does this unlock and keep you guys growing and/or maybe launching new products? I know Dave Flex is one you guys have talked about more, I guess what are some of the other things that this could potentially unlock for you guys?
I think there's a tremendous amount of capacity with Coastal. There's seemingly no limit there for us to keep scaling the facility with them. Importantly, our new products like Flex will be leveraging, we believe, the same infrastructure there. Not taking origination volume risk there and just going to free up a lot of cash for us on the balance sheet that's not going to be encumbered by needing to use our own cash and/or taking on debt with Victory Park.
Okay.
Not to mention if you look at the free cash flow conversion of our business and the EBITDA guidance we have, we're generating a substantial amount of free cash flow this year and for years to come, which just continues to supply capital needed to invest in the business. I wouldn't say, Brent, my view is with or without the Coastal facility, we haven't been capital constrained in our ability to grow the business and to continue to build out the product roadmap.
Okay. Awesome.
It goes without saying, this business has very little risk on private credit exposure, just given it's a highly attractive portfolio. The duration is so short, about 10 days on average, and the average size per unit is also very small. In a worst-case scenario, we could continue to balance sheet this ourselves, and it's a highly accretive transaction for us to take on. It's very attractive for anyone to want to take this portfolio, and that's why Coastal was so excited to take it on.
Yeah, no, makes total sense here. I guess maybe going back to Dave Flex, we touched on it very briefly, but that seems like that's something you guys are pretty excited about. Could you give a little bit of an overview, really effectively what it is, why it resonates with your core customer base, and where you think the opportunity set lies, and when that can start to be a needle mover on the P&L?
Yeah, this new product reminds me of the early days of our company. We're really leveraging our strengths and underwriting and being a digital-first product to disrupt someone else's significant fee stream. In this case, it is the fee stream associated with subprime credit cards, which are charging over $100 billion a year in compound interest fees, over $20 billion a year in late fees. We think that our advantages in underwriting our digital-first approach and that our different approach to how the product is going to be constructed is just going to be a far better experience. It's going to save customers a lot of money, but also be a major ARPU enhancer for our business, but also hopefully a new customer acquisition tool which we can continue to scale acquisition efficiently over many more years to come.
This product is structured as a credit card where there is no concept of minimum payment and compounding your interest over time. You basically pay off your statement over four subsequent paychecks, and so it's about a 45-day duration in aggregate, but we are taking chunks of the credit over the subsequent weeks. It's much better than subprime credit cards for the consumer. No late fees, no compound interest, and we believe it's much better than BNPL, given there's no fragmentation and there's no friction because we don't require you to go through a merchant checkout online to acquire the credit. This is going to be an on-demand access device. You can go buy whatever you want online or offline, and customers pay a modest monthly fee and a small transaction fee to access it.
What we're excited about there is that we know our customers' willingness to pay for credit is there, and they would rather pay a small fee in order to not be restricted to go only shop online to access BNPL. Many of our customers are either not approved for subprime credit cards or they're being grossly overcharged. Therefore, we think that we sit in a really interesting spot to be a big player in credit cards.
Okay. Yeah, no, that's super helpful. I guess would this be maybe a little more analogous, I know, tends to be a little smaller, but I think some of the BNPL guys do have some card business that they're trying to get more outside of being kind of just a button on a merchant website. Is that something that maybe it's a little more analogous to, a lot more consumer-friendly than subprime credit cards for sure, but maybe a little more mass appeal than some of the more niche BNPL product offerings with their cards.
Yeah. I would agree. Man, I think this new category, I'd call it sort of direct-to-consumer BNPL-
Yep
is, we think, going to be a huge opportunity, a huge industry in the next 10 years as customers realize that traditional credit cards are not in their best interest. They make money when you are delinquent. They're optimizing for bad behavior. This product, everybody wins. Investors win because it's a short duration product with not significant amount of principal at risk at any given time. It's great for consumers because it is cheaper, it's more transparent, and you're not being laden with significant interest fees and late fees.
Awesome. Yeah, no, that makes a lot of sense. Maybe we could shift to the rest of the product roadmap and what that looks like, whether that's in the coming years. I think you guys have done a really nice job here with the core and everything, but I guess, what do you envision as other adjacencies, other areas that you think are really either poorly served or are areas that you think would really resonate with your core customer base? I guess, what are other areas of opportunity or interest that you see at least wanting to explore in the next couple of years?
We see ourselves expanding into more short-term credit adjacencies where we believe there's significant fee streams available to disrupt. We're not talking about what those necessarily are today, but we find that there's still a lot of opportunity to leverage a digital-first platform using cash flow data to disrupt credit products that, we believe that cash flow data is a meaningful differentiator. That's not going to be, in our view, the next five years, a long-duration installment loan. It's going to be products that are, call it, six months and below, where we feel like there's not great customer access or there's significant fees being charged. The product roadmap is really surrounding that, and we believe that the more we do for customers over time within short-term credit, the better chance we have of winning our customers' primary banking relationship over time.
Okay, awesome. Yeah, no, that is really helpful. Maybe if we could pivot over to the topic of banking licenses in fintech. I think that has been something that's really been a theme throughout, I don't know, probably the last 8-12 months or something, where we've had a lot of fintechs, both public and private, announce plans to go after and try to get a bank license, whether that's through a de novo process, either a full OCC charter or ILC, or there's been some acquisition kind of related strategies as well, I guess. Is that something that has been on your radar? Would you think about doing this? I guess, maybe if not, how do you view the value of having the sponsor bank relationship and everything, and why do you think it makes sense to potentially not go down that path?
Well, I think the reasons to not go down that path are just to keep the team really focused on product development and leaving the compliance and regulatory burden on the bank partner. I think for a business like Dave, where we have the scaled compliance programs, have a tremendous track record, we're very profitable, we would be a very attractive company should we want to pursue the bank charter. I think every fintech is taking a look at it, and it'd be impossible to ignore the fact that many people are getting granted licenses and quite quickly. We've not committed one way or the other which direction we're going to go. Certainly an interesting area right now and the regulators seem very open for business.
Yeah. No, that makes total sense. Yeah, definitely is something we get a lot of questions on with everybody. It seems like almost, I don't know, every other month I'm getting some sort of alert that someone else is going down that path. Yeah. No, super interesting. Anyways, wanted to shift over to capital return. I think you guys have really made that a big part of the Dave story. I know Dan talked earlier that this Coastal transaction could unlock some additional liquidity. The business generates a lot of cash. Yeah, I saw you guys did that. I think you guys did a convert that had really good execution that you used to buy back even more. I guess, how have you guys viewed this?
How have share repurchases become a big part of the story, and how do you view that evolving over the coming years?
We want to continue to buy back stock where we think there's dislocation. The company, we think, is tremendously undervalued, even at today's prices. It's just still a disconnect to where we think the business should be trading at, given our asset-light approach, tremendous profitability, very quick growth. We're just not seeing it yet. When that's happening, we're going to continue to use our balance sheet to buy back stock. We believe we had a very bullish transaction last quarter where we issued the convertible note to accelerate the buyback ahead of unlocking this additional capital with Coastal. That just has been a very well-received transaction, not only from the huge capital returns we've had as a result of that, but we're also going to be building our analyst research up with other significant firms as well.
That was a great deal for us all around. I think we're going to use our profitability to our advantage when we think there's opportunity to buy more of our company. We love our business. We want to own more of it.
Yeah. It's one of the reasons we introduced the adjusted EPS guidance a couple of months ago in conjunction with our 2026 guidance, was that we want to continue to grow our top line at very healthy levels. Right? The midpoint of the latest guidance is 29% top-line growth, continue to grow EBITDA even faster than revenue, given the operating leverage embedded in the business, and then grow adjusted EPS even faster than EBITDA by virtue of using the denominator of the EPS calculation, i.e. the share count, as an additional lever to drive growth. I think we screen very cheap on an EBITDA basis. I think we're trading less than 10 times 2026 EBITDA, and we screen even cheaper on an adjusted EPS basis, which we continue to chip away at that with share buybacks, and that's the plan for the coming quarters.
Awesome. Yeah. No, that makes a lot of sense. I know we still have a little bit of time left, but we've covered a pretty vast amount of information here. I guess I'll turn it over to you guys. Jason or Dan, are there any other things either that you feel are misunderstood outside of obviously the share price, which I think you guys are making good strides to address. Any other things that you think are misunderstood about the company, or closing thoughts or remarks that you want to make sure everyone in the audience understands?
Well, I think there's really three key takeaways from our vantage point from the call. One, first and foremost, credit performance was a Q1 record low for us, despite our loss provision being up, which is not a good metric for our company to be judged on, because that really is dependent on the day of the week the quarter ends. Investors really should be honed in on our 28 days past due metric, given the short duration nature of our product, and that's down to 1.69%. Just a tremendous work from the team to hit that record low metric. We think even more better things to come on our credit book as we have more seasoning and have our forthcoming v6.0 model, which will be integrating many more features into our underwriting.
The second is just we have committed to this medium-term growth algorithm where we think we can sustain mid-teens user growth and low double-digit ARPU growth for many years to come. If we can achieve that, of which we did beat that significantly in the first quarter, that's going to just generate really solid top line and gross profit growth over time. Then we talked about the Flex Card, just an exciting new development for our product roadmap. We thought it was a knockout quarter. Still think that compared to our realistic comps, a lot of room to run on valuation here still.
Yeah. No, definitely. Fair enough. Well, appreciate you guys taking the time, and I think we'll leave it there. Thank you again for joining us.
All right. Thanks so much, Kyle.
Thanks a lot, Kyle. Appreciate it.