Dave Inc. (DAVE) Earnings Call Transcript & Summary

All right. We'll go ahead and get started here. Thank you very much to all of you for joining us this afternoon. I'm very excited to have senior management from Dave. Before we get started with Dave, I'm James Faucette, Senior Research Analyst for Morgan Stanley covering the fintech space. We have Jason Wilk, CEO, thanks for joining us. And Kyle Beilman, CFO. Thanks for being here, guys. Before we get started with my line of questioning, just be sure for any important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So Jason, I'm going to put you on the spot while not to throw anybody under the bus, but earlier today, as people -- somebody was reviewing my schedule, they said to me, Dave, what's Dave? And I said, I think you'll be a great customer for Dave. As soon as Jason explains to us what Dave is.

Yes, good question. So we are a leading neobank with a best-in-class overdraft solution for our consumers. I started the company back in 2017 with the pain point that most people are using overdraft as an expensive form of short-term credit. And so we looked at the landscape. We saw a bunch of neobanks that have been in market struggling to acquire users because they lacked this key value prop of offering overdraft to customers. And so our product today is a fee-free checking account with no minimum balance fees. And we have an overdraft solution that customers can get access to instant credit the same day they join to buy things like gas and groceries without paying the expensive overdraft fees that they're used to at a traditional bank. We've used the strategy to acquire over 6 million customers at this point. It's been a tremendous business and in a little over 5 years we've taken the company from a small office to a public company.

And so within that, what are kind of the key accomplishments or developments that -- for people that don't know Dave should be aware of like size, reach, who you're kind of targeting, et cetera?

Yes. So again, it's about 6 million customers today. And our total population of the TAM is around 160 million people. That's comprised of those that are financially vulnerable, which is about 35 million people who are typically overdrafting about 10 to 20 times per year at a legacy bank and they're paying about $400 a year in fees for a traditional legacy FI. There's about another 135 million people who are overdrafting a handful of times per year, but need help with things like building credit. They need help with things like saving money, investing advice and that's more of the middle class America. And we think that we are an everyday brand to go after all of these types of customers. I'd have to mention sort of the foundation of the name. I mean Dave sort of stands for Dave versus Goliath. But it's also supposed to be a friendly everyday approachable name that people feel comfortable with that's not going to get gouged by fees.

That's where when people forget my name, they just call me Dave literally, like I have no idea why. So I can understand what you're saying. So that being said, and so I think that's fairly easy to understand, at least for me, conceptually. But what do you think is the biggest or at least has been the biggest misunderstanding of the market and particularly the stock market of Dave's business over recent months?

Yes. I think it's been interesting to see our stock be affected by this inflationary environment because I think what people need to understand is that for the last couple of years, we've had a pretty large headwind for the business just given we were competing with the government for our core value prop of giving people money for everyday essentials like gas and groceries. With the trillions of dollars of stimulus coming in, people were less in need of a service like Dave. And so we impressively grew the business about 30% last year with that headwind. Now that we're seeing cost go up significantly with inflation and seeing the stimulus behind us, this is now an excellent time for customers to come to Dave. And you can look at things like Google Trends, we're seeing record numbers again back to 2019 levels of people searching for things like cash advance, overdraft, credit building and the like. So I think the market is misunderstanding that piece. The second one is around the potential with rising interest rates, if that's going to affect our credit model at all as well. And we feel more confident than ever that we have no issues with anything related to loss rates. People again use us for gas and groceries. We're the last lifeline that someone wants to cut off. And the short duration of the payback that people use us for, given we are an overdraft solution, a lot of people use our product for just a couple of days. And the average duration that our customers borrow from us on for the overdraft is only 8 days. So even in an environment where we have challenges with collection, we can easily pare back the model or tweak it. So the next pay cycle, we can alter it to get back towards profitability. But those seem to be the 2 biggest misunderstandings right now. But we are more excited than ever about the future of the business.

So let's talk about the ExtraCash offering. And obviously, a big focus for the value prop that you're communicating to your customers and potential customers. But what keeps incumbent banks from competing with Dave on that front? And why do you think you haven't seen them move to emulate that more aggressively?

Well, we've seen a lot of lip service from the big banks who are trying to offer a more friendly overdraft solution. Ultimately, the customer base that is paying a lot of the fees is typically a customer that has been shunned away from the banking system and they're being charged these significant fees. We don't think that the banks have been rushing to offer a solution like Dave because their cost structure is so much higher than ours that they actually need to charge these overdraft fees to make sense of banking a large majority of Americans in this country. If you look at a typical large bank, they have 10,000 bank branches, they have 250,000 employees. You can't really make that work on nonurban interchange and a model where you have to service that customer with bank tellers and the like. Dave's technology model where we only have 300 employees, which can service this 6 million customer base and using data science to underwrite people, gives us a significant cost advantage that we can offer the solution at this rate. We don't think banks can compete with a free overdraft solution that looks and feels like Dave at all. There's also, to add on to that, there's a lot of technical advantage we have in the way that we design this product. So a typical bank overdraft, you have to spend all your money before you can access overdraft. But Dave, we built a unique model where we give our customers a free checking account. And we give them a secondary account called ExtraCash. And that account, they can choose to save for a rainy day or overdraft whenever they need it and send that money to their spend account to use their Dave card right away or they can send the money out to their external account whenever they want as well. So it's not even a cost advantage, it's a technology advantage we have as well.

Got it, got it. So you mentioned that maybe stimulus in some ways was a bit of a competitor, at least for your customers as that was being distributed in '20 and '21. What are the other kind of cyclical tailwinds or headwinds that you've observed with the usage of ExtraCash over the past few years? And I guess one question that we -- that occurs to us or we've heard from other investors is, is this a product that's correlated with delinquencies or unemployment or something else?

Yes. And the answer is we can service unemployment customers. We can service a recessionary economy. Ultimately, if someone loses their job, that could be net negative for most traditional lenders. But for someone like Dave, we can actually use that recurring unemployment income to be underwritten to help customers get access to overdraft. So the only environment where Dave has challenges is in that stimulus environment, a return to normalcy, an inflationary environment, a recessionary environment are all net tailwinds for the business. And I think we seem to do a better job of educating investors that, that is the reality for us. As far as the different tailwinds that we've had behind us, we're just using a lot more of our data to improve the product. We're testing out Dave 500 right now. So we'll have $500 of overdraft, which is the best-in-class offer of any banking product in the country. And then this month, we also launched ExtraCash credit-builder. So we're going to be the only overdraft solution that can actually help you build your credit. We think that's going to be a meaningful tool for things like retention and engagement and ultimately helps us improve financial health of our members to offer more credit products for our users over time.

Got it. Now let's, once again, kind of building on other products, what's the tipping product? And how does that business work? And within the -- let's just start there. And can you give a description of what that is and how that works?

Yes. So we monetize the ExtraCash product in -- with 2 optional fees. So you can actually use our product entirely for free by getting approved for ExtraCash. And effectively, when you get to our dispersed on screen of where you want that money send, you can send it to an external account instantly for a fee. You can send it externally to a bank account for over ACH rails for free. You can send it to your Dave debit card for a discount to spend it now instantly. In addition to that, we have a tip-based model. So a customer can choose to give us a pay what you think is fair type fee for the use of our service. And compared to a $34 overdraft fee that's typical at a bank up to $100 a day, we often find the majority of our customers like to tip Dave something. That was a model we brought to market back in 2017. This was such a new product in market we weren't sure what to charge for it. And so we decided to go with a tip-based model to do some price discovery. It turned out people love that model. We figured it was defensible from the big banks is who the hell wants to tip their bank. And now fast-forward to today, we've got a very defensible revenue stream for us in the tips.

And then on the fees that you are charging for immediate access, particularly if you're pushing it to another account, et cetera, has there been any meaningful regulatory attention on that at all? Or kind of what's the current temperature, I guess, of policymakers around some of those fees?

The unique way we built the ExtraCash product is it's an account that's offered through our bank sponsor. So it's a bank-originated model, which we feel very comfortable about. We've had many meetings of regulators in the past, one including the CFPB back in 2020. And we've given up tons of data. And we ended up being one of the few companies to ever get a no action letter from the agency because what they found through all of our data is our product is so helpful in nature to customers compared to the legacy overdraft system that these small instant transfer fees that we charge for consumers and tips are all completely voluntary. And the instant transfer fees are pretty analogous to a cash app or Venmo in the transfer fee for accessing your own funds. So with all that in mind, it's -- we feel very confident about the position we have for the business.

So we've begun this conversation talking a lot about like the attention-grabbing value proposition that Dave brings to the market and how that's different than what the incumbent banks are doing, et cetera. But talk us through like the bigger picture, longer-term vision for Dave banking. How do you see this business in the long run? What products and services do you want to be able to deliver? And how do you think you're going to stack up against the incumbent banks and legacy providers?

Yes. So for us, the long-term path is around customer graduation. We're really excited about that opportunity to help members improve financial health and help them level up to different products that they otherwise would not have access to. The mission of our business is to build products that level the financial playing field. And so it's really to deliver products for everyday Americans that those are financially healthy, are getting access to. That's sort of the grand mission for the business. And ultimately what we can -- what we're sort of seeing there and what we're actually putting into action is things like getting people more of what they need. Dave 500 is really key for people to go buy bigger amounts that they need to go fulfill more everyday financial emergencies. Credit-builder is going to be there to help people get from that 580 to the 620. And then Dave should be there ready and willing and ready to approve the person right away when they're in line and ready for a better and bigger credit product. We think that we can offer the whole sort of spectrum of services to our members. We'll have sort of a crypto product later in the year via our FTX partnership. FTX now has investing and trading as well. So not out of the question, we could be getting into that at some point. But we do want to really focus in on like the core value prop for the customer around banking and credit as our main value props for the user.

So with that being the kind of the main value props, as you just put it, how should we think about ARPU or revenue potential trajectory over time? And I've got to imagine and one of the things that we talked about with a lot of the companies that we cover is that you basically have like 40% of the U.S. population today that doesn't have a full suite of banking and financial services, right? And a lot of that just has to do with age, it's millennials and Gen Zs, but the beauty is they will over the next 20 years and they're going to be -- most of them are going to be incrementally better customers over time. So how should we think about that revenue potential over time? And is ARPU the right metric? Or what are the things to track there?

Yes. I think it's ARPU and lifetime value. So I think it's a great time to be with Dave because we're so early on in our monetization lifecycle of our customer base. I mean today, we monetize off of interchange off of our banking product. We monetize off of optional fees on our ExtraCash business. And then we have a dollar per month subscription fee, which is tied to financial insights, which our credit-builder will be rolled up into. And so when I think about future monetization, there's a lot more opportunities for us to add more things into our subscription product to increase pricing there in more of a premium model. Additionally, I think there's a lot of opportunity within additional credit expansion as well. And whether we do that through a partner model or whether we actually take on some balance sheet risk there, the ARPU expansion opportunity there is huge. The fact that we're already offering overdraft credit to the lion's share of our members, when we're ready to offer that customer a more traditional product, and we can pre-approve them for it because we have their data and we have all their KYC already, the attach rate to that is going to be huge just like the attach rate was huge when we launched banking to our consumers with 50% of our people that were opting into our banking service early on. We'll get those same kinds of attach rates for the rest of the products we develop. And that means huge ARPU expansion opportunities, which will equate to more retention and obviously massive LTV acceleration.

So on those incremental products, I mean, look, it's easy for us to imagine what those could be. But what are the products and services that Dave Banking is focused on for kind of the next cycle or the next 12 to 18, 24, 36 months. And where should we be focused on in terms of what you want to bring to market next?

So it really is a big focus on ExtraCash, the credit-building component, credit monitoring and then the graduation of that next credit product. I think that's where our people should be focused on right now. I think it is worth noting, though, that this company was profitable as most recent as 2018 and 2019. We front-loaded a lot of head count expansion to go build our banking business and other components. And so the need to believe for us to get back to profitability, even with just our core offering of today, we have great unit economics. And so the need to believe is pretty low for us to get back to profitability just doing what we're doing. I think that's something that investors really need to pay attention to. And anything we do in and above ARPU expansion with new credit products will just accelerate that path to profitability and more.

Got it. I've been monopolizing questions. But if anybody does have a question, please feel free to raise your hand. We'll get you a mic. On that last point of profitability, given the current capital environment, how are you thinking about balancing between investments for growth versus profitability? And what do you -- what are your current expectations around medium-term cash flow and some of these other things that people are more focused on maybe than they were 9 months ago?

So look, I think for us, the important thing again is that we already have proven we can be a profitable business in the past. And we front-loaded quite a bit of hiring to get to 300 people, which is still an incredibly lean team when it comes to comparing us to other fintech companies in the space that have had to do layoffs. And so when I think about our ability to get back to profitability, it's just taking a very disciplined approach to growth on the customer side. And we're going to continue to invest in growth right now as we're seeing record low numbers for us to acquire customers with a lot of people pulling back from marketing spend. And we fortunately completed our transaction to go public in January, raised another $100 million from FTX. So we've got a $300 million balance sheet right now. One of the most dry powder companies in the country right now with a business with great unit economics. So we're going to just continue to invest in growth. And if anything, the areas we're going to continue to just be mindful is additional head count growth. Leaning into 2022 already, we had a diligent approach to hiring head count as it was. We have 300 people. But our plan for the entire year was only to hire 55 people before this marketing turn down. So we don't really need to do anything from a correction perspective to keep ourselves with that clear line of sight towards profitability. And our CFO Kyle here has been very mindful of us keeping that profitability view in their sight.

So on -- so if that's from a hiring perspective, what about like retention? And one of the key things that people worry about, particularly for younger companies in this kind of equity market or stock market downturn is retention. And how you may have to shift the compensation packages for people historically in downturns, we've -- employees have expressed increased preference for cash over stock, et cetera. So what's your current thinking around not just hiring, but maybe more importantly retention and what the compensation packages, et cetera, will need to look like to do that?

Fortunately for us, we haven't raised a lot of capital at major valuations. So if you look at the history of the business, we've only raised $60 million of equity capital prior to taking the company public. I don't know of many businesses that have used that little amount of capital to get to a public offering. And we only raised a Series A and Series B to get there. The Series B -- between the Series A and the Series B is probably when the lines here are -- well, the lines of our employees we hired is from the Series B and beyond. So no one even at these depressed prices right now, which I think is temporary, most people are still in a pretty decent position versus a lot of companies that have raised at these massive price evaluations, which are probably in a world of heard of people that are significantly underwater on their options. So for us, we're not doing any make holes right now. It's like let's just work on this together and let's keep performing on the business because performance is what's going to get us out of this. And then we can reassess next comp cycle in the beginning of 2023 to see those any areas where we need to grow certain high performers or not. But we're feeling good about performance. We're feeling good about retention. And ultimately, because we're such a mission-driven company, most people join the business at Dave because they really care about the customer segment. They really care about making a difference for everyday American consumers. And Kyle and I have laughed about it before, we wish we were a more equity-driven at the business. But now that's actually helping us quite a bit that the mission-driven piece is really a tailwind for retention.

Right, right, right. So we've got a question here. Is that the mic? Here in the front.

Look, just a question on brand. Obviously, super important just given customer acquisition, trust, disruption versus incumbent banks. Can you just talk about the efforts historically in building the Dave brand? And then, any initiatives going forward in terms of maximizing that and really expansion to other products as well?

Yes. Brand is something we've cared a lot about from the very beginning. We spent a big chunk of our first seed check to buy the dave.com domain name. It was a really strong brand. We wanted something that felt very challenger in nature with the Dave versus Goliath type brand that we built around the business. We're continuously using the Dave bear logo and making sure that that's evident through all of our advertising. And we're going to be exploring a lot more new channels as well as introducing sort of more of a -- like a physical mascot, we'll be showing a be more of advertising to extend our leads in brand recognition. Of the top 50 leading fintech apps in the app store, and we're the only one with sort of a recognizable figure. And we think that's something we can lean into that just leads that brand recognition in an industry where there's a lot of copycats and commoditization.

So when you think about brand and competitors kind of going after and sometimes I feel like people that we talk to, they feel like it's a winner-take-all market. I'm like 40% of the population, like you said, it's like 130 million, 140 million people in the U.S., you don't need to have like the winner, right? Like it's -- there's going to be a lot of opportunity there. But on the flip side is there are a lot of big names that are kind of chasing the space, right? Like you start with, clearly, you mentioned Cash App and Block is kind of going after that with a slightly different value proposition. Ultimately, we think some of the credit providers like BNPL providers will become and start to offer their own banking type offerings, et cetera. So how do you feel about the landscape? Where do you think there are advantages for Dave beyond the brand? Right now you mentioned the recognition. But beyond brand, where do you feel like you have advantages? And where do you think that there's work to be done for Dave?

So I think we're taking the approach of that anti kind of super app. I mean we don't think that people want to bank as a service where it's just only 1 of 10 things that you do. I have not seen that strategy work for anyone at meaningful scale. And so for us, we really don't lean into being the best banking experience that's attached to the best credit experience. And we have not seen that be deployed very well yet with anyone in the market. So to the extent we can continue down that path, we think there's a lot of benefits to that strategy. And one of -- there's only a handful of people that are really laser-focused on being that banking product for the everyday American consumers and having that be their primary objective. And we haven't seen any of the kind of unit economics that we have around the banking businesses given the credit component that we've attached to it.

Got it. And then I know you've kind of touched on this initially. But what about the -- a higher interest rate environment like -- and how does that impact the puts and takes for Dave? And I guess maybe said differently, what are Dave's sensitivities to interest rates? Like where do you get benefit versus challenges, et cetera?

So the benefit is we'll get some spread on the savings accounts that we have for our customers for the money sitting in the checking accounts. Our customers don't have a ton of discretionary savings. So I wouldn't say that's a major area of revenue we're going to see be tick up. But I'd say as far as where we're defensible is on the ExtraCash business. We have a credit facility of $100 million to service the entire population of 6 million customers. The amount of turnover that the facility sees each month because the average duration is so short on ExtraCash means that we can service this entire base with a tiny facility. I think Kyle can confirm and I think in Q1, to service the entire population, I think we used like $40 million of this credit facility. So that's pretty unheard of from an exposure perspective of how many people that can use this great product, which has great economics and not have to tap into it. If anything, we could just use our equity capital and pay no interest rate as the revolver that we use with Victory Park has an interest rate that revolve or floats with inflation.

We're not really super sensitive to cost of capital just given that it doesn't take a meaningful balance sheet to operate the product. But I think more from a macro view and we've kind of touched on this in this conversation is like the high interest rate environment, leading sort of a symptom of the inflation that we're experiencing for the customer and that's sort of a net tailwind for us, both from a growth and engagement perspective. So we feel really well-positioned that this is a time for us to really accelerate.

Is there a point at which you mentioned kind of that spread on deposits, et cetera. What's the point that you're preparing yourself for that you've got to be more competitive on deposit interest rates, et cetera, to be able to continue to attract those and grow that part of the business?

We haven't seen the need to do that yet. Our go-to-market is very much putting people in real situations where they need access to the extra money they need. And as of right now we have not seen anything meaningful to go out and market a large interest rate type product because we know they cross attached to spending with the debit and ultimately using the ExtraCash product is probably going to be pretty low. And so right now it's like nice to have for our members that they can earn additional interest we could pass on if we wanted to, but haven't seen that be a big thing for us yet.

Yes. We're really focused on just the credit-oriented value props. And those seem to resonate a whole lot more with our customers than potentially some sort of yield associated with balances.

Our average customer, they're going to make way more money in interest as they just cut down the bank fees they pay by switching their bank over today. I mean, the average customer, we see they're paying $400 a year in bank fees. And so if they could just come -- start bank with us, save that money, that alone is going to help make a meaningful redemption in people to build it to save and purchase.

So just quickly on industry structure. Like the banking industry in the U.S. has long been defined by very active levels of M&A and consolidation, right? Like that's just kind of the way it's always worked. Now over the last few years, that's been a little bit slower generally and particularly for companies like Dave, there probably has been good reason why if you're an incumbent, you don't go buy a Dave or somebody like that, right? Like the growth opportunities for you have been so good that in incumbents shareholders have preferred that they just buy back their own shares rather than buy something like Dave. But with the world changing and whether it's among neobank competitors or others that are, as you characterize a more super app or incumbent with the availability of capital generally changing, do you see opportunities? And how do you think about what the right moves are strategically vis-a-vis the others? Does it make sense to look at for Dave to look at weaker neobanks or those that are still private aren't functioning as well and vice versa? Does it make sense or would it make sense for Dave to be part of a bigger organization? So how are you thinking about the landscape and potential for reinvigoration of M&A?

I think consolidation from the major incumbents was they probably were staying away just from valuation multiples. It doesn't -- I don't think it really had made sense. Now that valuation multiples have pared back pretty considerably, I think we may actually see one of these guys come in and make a move. I haven't seen it yet. But we're still pretty early into this new downturn cycle. As far as what we would pick up in market, there's probably not a lot we would do right now just given where we are and we want to be protective of our cash position as well. But if the right thing did present itself, it would be something we could either pick up a ton of users for really cheap knowing that it's hard to acquire a ton of users overnight without seeing CAC increase or it would be a technology advantage that we thought that it takes a long time to build or that we could significantly bolster our gross profit on an existing product that could be better for us to own than rent.

Yes. No, that makes sense. I mean you guys are public obviously. But one of the things that we've heard as complaints though is like for those that maybe should be cheap in the private markets, like the realization maybe of their position and the ultimate impact on valuation seems to be slower in the private markets than it has been in the public markets. I mean, is that -- but you think it's coming.

Yes, it's coming. I think that's going to come to roost pretty significantly over the next 6 to 9 months, especially for a lot of these companies out there that were heavy burners really reliant on venture capital to grow their businesses, that offsets off. And I think we're going to see back to the point around consolidation, that'd be a big part of the market where there is some activity.

Yes. I mean I think it's interesting because kind of to your point, Jason, is that there are organizations out there that have a lot of customers. But it's also -- they've kind of started off with a value prop that was reliant, as Kyle was saying, on a lot of BC burn to make it function. And so if that gets cut off, then you've got a user base without really a great path to monetize, right?

That's right. That's right. And so those can be potentially interesting for us or others, right, where we have very solid monetization, very solid unit economics. You plug something like that in with good growth from a UA perspective and it becomes pretty interesting.

Yes, absolutely. So you guys have some basic credit products, et cetera. I mean does it make sense to -- like is the next step just revolving credit? Or do you start to branch into other areas? Like to me, it's been really fascinating to see how some have said, "Well, we don't want to do a revolving credit. We're actually going to start with a personal loan. We may want to do something in auto." And everybody has kind of got their own angle and reasoning.

Yes. I mean it's a little early for us to reveal plans for that right now. I mean, we're looking at a bunch of different things at the moment.

But I think for us, it's very clear that we want to point out that we want to own the customer relationship. Any products for us are more around that daily use case or more sort of frequent orientation as opposed to any sort of marketplace model or something like that, where we're really not controlling the customer relationship. So that's pretty critical to our strategy and how we approach the business.

You won't see Dave owning a lead generation marketplace or anything we're going to be losing control of the customer. I think that's the only way for us to build long-term right kind of values to have people under our roof.

Just in the last minute or so, how does the Dave customer base demographic compared to the population as a whole and maybe what other neobanks have done, is it similar? Is it different? How -- where is it different?

I can't say exactly for other neobanks, but our audience does skew younger. So it's 80% or under the age of 30. And so we feel that that's a great opportunity for us to build a long-term relationship with these members. And starting, like I said, with our ExtraCash product, which is a great way for people to buy the essentials they need without incurring fees and then building credit from there and Dave will be ready and waiting for that person to graduate to the next product and the next product from there until ultimately they -- maybe they buy a house of that they wanted.

Right. Well, that makes sense. Jason, Kyle, that's all the time we have. Really appreciate you taking time to come chat with us about Dave, it's pretty exciting.

Thanks a lot.

Thank you.