Chime Financial, Inc. (CHYM) Earnings Call Transcript & Summary

So the context behind Chime Enterprise, we acquired a company middle of last year called Salt Labs. Salt Labs is founded by the founding team of a company called DailyPay, which really pioneered earned wage access, or EWA, in the employer space. With that acquisition, we established Chime Enterprise. Chime Enterprise's goal is to offer Chime's suite of products as sort of a holistic employee financial wellness suite to employees via employers. And what's exciting about this for Chime is we think this opens up a new strategic low CAC and kind of evergreen new customer acquisition channel for us. And we're very excited about, yes, some of the recent progress and updates. So last week, we announced a new partnership with Workday. Chime is a wellness partner. And what that essentially means is we are integrated into the Workday Benefits platform. And so what this does for us is this gives us exposure to Workday's something like 6,000 customers, and there are 30 million end consumers in the U.S. to offer Chime products to. And it basically creates a very quick way for Workday customers to switch on Chime Workplace, our suite of services directly integrated into their existing HR system. So we're really excited about this sort of a channel partnership within the enterprise space. We also recently announced, and by recently, I think I mean yesterday and today, 2 of our newest employer partners, companies called Etech and Ubiquity. These are leaders in the BPO and customer experience space. And we've been really pleased with the progress there. These are on the smaller end of employers. We've been really pleased with the progress there both in terms of the adoption of Chime among the user base as well as interestingly, reengaging previously active Chime members who are sort of being reintroduced to Chime now via this channel. So it is very early days. These are relatively small customers, but we're really excited about this progress. And I think one of the things that we've been trying to be clear on is, look, this is an enterprise sales cycle. This is going to take time to build. I think we've been pretty clear that we should not be building this into our financial models for 2025, but we remain very excited about this in the medium term. And I think that's because we feel like we have a couple of key advantages in building out this business. Number one, we are going to market with a holistic suite of products as opposed to sort of a monoline, stand-alone EWA service. Number two, we're pricing this for free. So with Chime Enterprise, Chime Workplace, we are offering -- think about it as a kind of souped-up version of our direct-to-consumer MyPay product, where instead of access to $500, we're giving access to up to $1,000 of earned wages truly for free. That is very different than the other players in the market that are charging, I think, oftentimes pretty exorbitant fees for this type of product. And then the third is our brand. We're talking to employers that already have sometimes high single-digit percentage of their workforces already banking with Chime. So again, still early days on Chime Enterprise, but we are really excited about this as a channel.

Yes. No, that was a great update. And if I may ask 2 follow-ups on this just because I think it's a really interesting topic. So 2 things you mentioned. Like, when I think about channel partnerships or distribution partnerships across the fintech ecosystem, you oftentimes worry about owning the direct customer relationship, but you mentioned this sort of anecdote that you've been able to go out and reengage Chime users that may have lapsed. So I would love to hear how you think about owning, maintaining, redeveloping or reengaging that customer relationship via the Chime Enterprise channel. And then the second question on MyPay being offered for free, we talked about the dynamics in loss rates coming down in the core direct-to-consumer MyPay loan book. But from my understanding and sort of theoretically on the enterprise side, you're going to have access to the payroll information from the employers. Those loss rates are going to be a lot lower and the benefits to you are pretty clear, but I would love to hear more color on that.

Yes, you got it exactly right. This is a fundamentally different risk profile compared to our direct-to-consumer version of MyPay, where we are underwriting based off of direct deposit history, what we know about a customer base. In the enterprise channel, we're directly integrated into the payroll system. We have time and attendance data. The loss rate profile of that is far different, far lower than what we see in the direct-to-consumer. That's why we can offer this truly for free and monetize this via the core spend relationship that we have with our members. On your first question, part of the bet here is that we're going to market again with the Chime brand. We're not building a white label type of business here. This is a bet that we can go acquire members at the point of employment and hopefully serve them not just through that job, and look, there's a lot of turnover in this population and these types of employers, but the next job and the next one and the next one, turning this into a long-term customer relationship. That's the hypothesis. We got to go prove that, but we think we're well on our way and pretty excited about that.

That's great. And like you said, we've had 2 announcements over the last 2 days. So I'm looking forward to getting the Bloomberg notification for the next batch that is coming up here. Next few set of questions, maybe a little higher level, taking a step back. So I guess when we just think about the growth profile of the company, can you talk about the levers you have to pull to drive growth, maybe what some of the building blocks for your overall growth algorithm are to help investors understand what the trajectory is from here for Chime.

I talked about how we think we're a platform. And I think one of the benefits of being a platform, oftentimes, you have multiple ways to win. And we think that's very true for Chime across active members, across continuing to grow ARPAM, or average revenue per active member, and number three, our transaction profit margin as we continue to scale. So I'll tick through kind of each of those real quick. On actives, we have 8.7 million active members monthly transacting actives today, just scratching the surface again of the nearly 200 million, making up to $100,000 U.S. adults in this country. We are already the #1 destination, again, among anybody in the U.S. for primary account or direct deposit switchers in the U.S. We are making it easier for new members coming to Chime to get a taste of Chime. We've talked about this a little bit in the past as our day 1 strategy. We've opened up key value props from the direct deposit paywall, if you will, like credit builder, making it easier to engage and get the value prop from that, earlier in our members' journey. We've made it easier to fund your account with Apple Pay or a debit card. That's helped accelerate some of our growth. We're going to continue to launch new value props. And of course, we're very excited about Chime Enterprise. So a lot of levers to continue to grow active members. ARPAM is the second. And we've had, I think, some good success on this recently as well. In Q2, ARPAM grew 12% year-over-year. A lot of that driven by the continued breakout success of MyPay. We think there's a lot more to do on this dimension as well, even just within our current or existing product set. So if you take a look at our most engaged members, we define those as ones that have adopted 6 or more of our products. This is a double-digit percentage of our active member base. Their ARPAM is double our average of closer to $250. And you see our cohorts trend up over time as well. And there's a few different levers underneath that, that are going to help us continue to grow ARPAM. One is share of wallet. So we're already capturing a big portion, but there's more to go. And I think one of the reflections we've had as a business is we actually haven't done the best job helping our members understand that as they bring more of their financial life to Chime, they get more from us. And so that's why we're doing things like Chime+, which is our free membership tier. We get much more from Chime when you bring a direct deposit to us. The second one is take rate. And specifically, what I would point out on take rate is the opportunity to help more of our members get more out of our credit building service, specifically our credit builder card, which earns interchange rates that are far higher than debit. And then third, of course, when we launch new products, we open up new revenue streams. So multiple levers across ARPAM as well. And then the last one is transaction margin. I think we are going to continue to see opportunities in transaction margin across, again, a few dimensions. One, as we complete the final stages of our Chime core migration, which we have slated for the back half of this year, we stand to benefit from additional gross margin expansion in the business. We're going to continue to hone our loss rates. We talked about that as it relates to MyPay. And we also benefit from economies of scale. This is a payments business at the end of the day, and the payments businesses are all about scale. One thing that I would say about transaction margin as it relates to how we manage and run the business, you should expect our transaction margin to fluctuate over time. A great example of this is MyPay, where we deliberately brought transaction margin down with the initial launch of this product. It's a lower-margin product, but now it's getting better over time. Our philosophy and decision framework is all around how do we maximize transaction profit dollars over the long term. We think that's the most strategic way to grow. I think you're seeing that play out right now with MyPay, now with us returning to an incremental adjusted EBITDA margin of mid-40s or higher by the end of this year. So that's how we manage the business, and we'll continue to invest some margin for the sake of long-term growth going forward as well.

Yes, it makes a ton of sense. And you just mentioned EBITDA margins. And if I think about the 3 topics I discussed most with investors, it's net user adds TAM, which we've talked about; it's loss rates at MyPay, which we've talked about; and then it's adjusted EBITDA margins, both near term and long term. So fiscal '24, you were breakeven adjusted EBITDA margins. We get up to 4% in 2Q '25. You've also talked about your long-term target to getting to 35% adjusted EBITDA margin. So maybe you could talk about the confidence of your ability to achieve that longer-term target. Maybe anything you can say on time lines, levers to pull, operational leverage, et cetera?

Yes. If you boil down the core economics of our business, think about how our business operates, this is essentially a recurring payments portfolio that monetizes at close to 70% transaction margin, that retains north of 100% year-over-year on a net dollar basis. And we're scaling that over a largely fixed OpEx base that's really concentrated in discretionary investments in growth, new member acquisition, product development. There is a lot of operating leverage in a model like that. I think our numbers kind of speak for themselves on that front. If you took a look at OpEx as a percentage of revenue, that's improved 19 points over the last 2 years. You've seen leverage across every OpEx category. That's flowed through to our adjusted EBITDA margin. That improved 18 points over the last 2 years in Q2. And we expect that the margin improvement that we posted this year to accelerate as we move into the back half of the year. We called that out in our guidance for Q3 and the full year. And I think one other way to look at this is on an incremental basis, as I mentioned. If you take a look at our business on an incremental adjusted EBITDA margin basis, you would have seen that in 2024, our incremental was 46%. We then temporarily brought that down with the initial launch of MyPay. And now as loss rates are improving, our guide is calling for returning to the mid-40s or higher incremental adjusted EBITDA margin by Q4. I don't think a four-handle is a crazy place to see Chime execute against over the years ahead. And that's why we think we've got a really strong line of sight to a 35% or higher long-term margin in the business.

Yes. Maybe sort of a related topic, you mentioned it in one of your prior answers, is ChimeCore, which I think is a really interesting initiative. You were previously using a third-party provider. You've built out your own proprietary payment processing engine. So maybe you could just give a very brief overview of the work you've done there. You've migrated part of the portfolio. So what remains and then what the benefits of the P&L are going to be from there?

Yes. This has been a pretty massive and multiyear effort. to build our own transaction processing engine and core ledger. This is really the guts of any sort of payments business. And we're really excited now to be in the final stages of our ChimeCore migration. Just to give a quick lay of the land there. Last year, we migrated our credit portfolio over to the ChimeCore system. This year is all about migrating our debit and savings portfolio over to ChimeCore. We've already transferred all new accounts coming on to Chime, on a ChimeCore. The last stage is to convert essentially the back book of debit and savings accounts to ChimeCore, which we have scheduled for the back half of this year. We're excited about this on a number of dimensions. Number one, for sure, this is some additional cost savings opportunity for Chime. We're already benefiting from some of this already. But as we complete the final stages, we do anticipate another uptick to our gross margin as we head into 2026. But I think maybe more strategically and really the biggest reason why we embarked on this multiyear expensive journey is this is going to allow us to innovate way more and way faster. When you own your technology stack end-to-end, you don't have to go get into the queue of a third-party system. You can design things the way you want, you can iterate much, much faster. So I think the biggest payoff long term is that really this is setting the stage for future, even faster product innovation for Chime.

Yes. No, I think it's a very exciting initiative. So I always want to hear more color on it. I think we have at least one question in the audience, so I will turn it over here.

Scott Barishaw from Deutsche Bank. You talked about all these great things that you're doing to increase new adds, which is exciting. Can you talk a little bit about some of the things you're doing to prevent people from leaving, right? I mean that's one of the things that I think may concern people that you grow out of Chime and you want to move on to another financial institution. But I think on the roadshow, you were talking about some other things down the road like some investing products and sort of those types of things that are going to not let people leave.

Yes. A few things on this. One, just to address your question head-on, we've gotten this question a few times, do Chime customers "graduate" from Chime to another bank maybe that has more capabilities. The reality is we don't see a lot of that. That is not a large phenomenon in our business at all. That being said, we know we need to continue to grow with our member base, that some of their financial needs are going to evolve over time. Certainly, there's going to be a portion of our member base that is going to be able to utilize a more traditional unsecured credit card. We got to play a role in that. Certainly, our member base needs to solve problems around long-term savings and investing. We feel like we got a right to play in that as well. And the list sort of goes on. So our product road map is pretty much fully booked for the next decade, I would say. We've got a lot to do. But this is also a case where I think one of the realities that we've had to explain is, for members, our members, again, everyday folks, there's a lot more job switching than maybe we all are maybe more accustomed to. For example, in Chime Enterprise employers, they turn over their workforce basically twice a year. And so there's quite a bit of people resurrecting, coming back to Chime. Maybe they lost their job, maybe they're switching jobs, but then the next time they engage with us is when they get a new direct deposit with their new employer. When we ask our members, who do churn, where did you go, that's always the #1 answer. And we do see a lot of folks coming back to Chime.

Thanks for that, Scott. We are right at time. I am going to sneak one more in. This is the Deutsche Bank Tech Conference. Every other company that's been here has taken the opportunity to talk about AI. So I would be remiss not to ask Matt about what is going on with AI at Chime, how you're using it today and what's next on the horizon.

Yes. Look, I think maybe you've heard this from other companies, but we did issue a pretty clear call to arms to Chimers to think about how they could adopt AI really across the business. And we are seeing this change the way that we work in all areas of our business: engineering, marketing, risk, compliance and certainly, customer support. And I think that last category is where we're probably seeing the biggest business benefits so far. So now our AI-powered customer support tools automate 72% of customer interactions. That's sort of thousands of human agents. We launched a gen AI voice bot in Q2. It doubled member satisfaction scores. Our members prefer to talk to a robot. That did not used to be the case, not so long ago. And what's cool about this is we're obviously getting efficiency, but we're also improving the quality, which is pretty cool. I don't think that the world of an AI-powered financial coach or adviser in your pocket is actually that far away from us now. There's a lot of hype around this kind of thing. But I think at Chime, we've got as good of a shot as anybody bringing that to the real world and making that a reality for 2 reasons. Number one, the multiplier on AI is data. We have tremendous data on our members. And number two, you have to be able to harness that. Because we built our infrastructure layer, our data is centralized, we can harness our data and leverage it for AI in ways that I think is far superior, particularly relative to traditional institutions that kind of rely on the patchwork. So we're very excited about AI, but I think it is still early days on that front.

Yes, absolutely. Well, it's a great note to end on, Matt. We touched on a lot of topics. Thank you so much for your time. It was great to have you here. So everyone give it up for Matt. Thank you very much.

Thank you.