Dave's bank deal frees up cash. Its margins show the cost.
The consumer-finance company raised its annual forecasts, even as bank-funding costs and revised credit-loss expectations weighed on gross margin. The credit risk stays with Dave.
Dave is expanding an arrangement that puts more of its customers' loans on Coastal Community Bank's balance sheet. That frees cash for growth and share repurchases, but the funding also has a cost: it helped pull third-quarter gross margin below the previous quarter.
The consumer-finance company still raised its annual revenue and earnings forecasts. The tension lies in what each profit measure includes, and in a margin outlook that now needs a stronger finish to the year.
More funding, with a different cost
Coastal held $158.8 million of ExtraCash principal at September 30, up from about $93 million at the end of June. On November 3, the partners expanded the arrangement to cover up to $325 million of ExtraCash receivables and another $25 million of card receivables.
Dave pays Coastal for using its balance sheet. Chief Financial Officer and Chief Operating Officer Kyle Beilman attributed about one percentage point of the sequential gross-margin decline to a faster-than-expected transition to that funding model.
The company's non-GAAP gross margin fell to 70% from 72% in Q2, although it remained above the prior year's 69%. The measure is revenue after credit-loss expense, processing and network costs, before other operating expenses.
Credit-loss provision explained most of the remaining sequential decline, Beilman said. Dave had expected a larger improvement in that expense and recalibrated its forecast. The charge also depends on growth and loan mix, so it can rise while the delinquency rate improves.
The earlier margin outlook sets up the Q4 test
Research by Ticker Byline shows that Dave's August outlook described gross margin expanding into the mid-70s during the second half. After Q3 came in at 70%, the latest outlook calls for Q4 margin above Q2's 72%.
The second half is still in progress. Management expects Q4's 28-day past-due rate to be below 2%, versus 2.09% in Q3. That Q3 rate improved from both the preceding quarter and a year earlier, even as ExtraCash originations rose 23% to $2.5 billion.
Why the earnings measures move differently
Revenue rose 31% to $197.7 million, and adjusted EBITDA increased 39% to $81.5 million. Dave now forecasts annual revenue of $746 million to $750 million, up from $725 million to $735 million, and adjusted EBITDA of $327 million to $330 million, up from $315 million to $325 million.
Adjusted EBITDA removes interest, funding costs, tax, depreciation, amortization and selected other items, including stock-based pay. Its growth therefore leaves out the Coastal funding charge that affects gross margin.
Adjusted net income retains funding costs and fell 7% to $60.3 million. Reported net income was $63.8 million, down from $92.1 million a year earlier, when a discrete tax benefit helped profit.
The bank arrangement also leaves credit exposure with Dave. It must buy ExtraCash balances still unpaid after 60 days and maintain collateral for expected losses. Dave keeps the underlying repayment risk while the bank supplies temporary funding.
Our Dave company profile follows that exposure alongside the revised forecasts, cash flow, October debt repayment and remaining convertible notes.