Green Dot Corporation (NYSE: GDOT) — Q3 2019 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2019. Green Dot is a bank holding company and financial technology provider operating consumer account programs and a Banking-as-a-Service platform, alongside processing and settlement services.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $240.4 million | $236.3 million | $859.3 million | $820.5 million |
| Operating income (loss) | ($2.2 million) | $0.7 million | $123.2 million | $115.0 million |
| Net income (loss) | ($0.5 million) | $4.6 million | $98.2 million | $104.4 million |
| Diluted EPS | ($0.01) | $0.08 | $1.84 | $1.92 |
| Operating cash flow | Not separately provided | Not separately provided | $204.7 million | $214.3 million |
- Revenue mix: Q3 card revenues and other fees fell 10% to $102.2 million; processing and settlement revenues rose 27% to $54.6 million; interchange increased 4% to $77.1 million; and net interest income increased 12% to $6.5 million.
- Margins and costs: Q3 operating expenses rose 3% to $242.6 million, exceeding revenue and producing an operating loss. Nine-month operating margin was approximately 14.3%, versus 14.0% in 2018. Q3 sales and marketing costs rose 35%, including $17.9 million of additional advertising for Green Dot Unlimited.
- Cash flows: Nine-month investing cash outflow was $100.1 million and financing cash outflow was $335.4 million. Financing uses included $100 million of share repurchases, $60 million of debt repayment, and reductions in customer deposits and customer obligations.
- Liquidity and balance sheet: At September 30, unrestricted cash and equivalents were $861.3 million; available-for-sale securities totaled $245.2 million. Total assets were $2.13 billion and total liabilities $1.20 billion. Deposits, which are customer balances, were $888.9 million. Cash, cash equivalents and restricted cash together were $864.4 million, down from $1.095 billion at year-end 2018.
- Debt: Notes payable were zero at quarter-end after the company repaid $60 million of term debt in March. In October 2019, it entered a new $100 million, five-year revolving facility; the filing does not report a subsequent draw.
Material changes versus prior comparable periods
- Q3 revenue grew 1.7%, but net income moved from $4.6 million profit to a $0.5 million loss. Nine-month revenue increased 4.7%, while net income declined 6.0%.
- Account Services revenue declined 4% in Q3, with active accounts down 4.6% year over year to 5.18 million. Direct-deposit active accounts rose 4.4% to 2.14 million; gross dollar volume increased 8.1% and purchase volume 2.2%.
- Processing and Settlement Services benefited from higher cash transfer and Simply Paid activity. Q3 cash transfers increased 9.8%; nine-month tax refunds processed increased 3.3%.
- Quarterly sales and marketing spending increased substantially, while compensation expense fell partly because of changes to performance-based stock awards. The prior-year quarter also included a $13.5 million tax-processing earn-out expense that did not recur.
- The company repurchased $100 million of stock through an accelerated share repurchase, receiving approximately 2.1 million shares at an average $48.26 per share. Approximately $50 million remained authorized.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management said it planned to allocate up to $60 million in the second half of 2019, primarily for product marketing and BaaS platform development, with effects expected to continue for the rest of the year.
- Management expected declining active-account trends to continue through the remainder of 2019, citing competition from free or low-cost bank accounts. It also warned that further short-term rate cuts could reduce net interest income.
- The renewed Walmart MoneyCard agreement runs from January 2020 through January 2027, subject to its terms. Management expects a higher Walmart sales commission rate to pressure sales and marketing expenses in 2020. Walmart represented 35% of Q3 revenue and 33% of nine-month revenue.
- After quarter-end, Green Dot agreed to issue Walmart 975,000 restricted Class A shares, expected on January 2, 2020 and vesting monthly through December 2022. Green Dot also agreed to fund a 20% interest in the Walmart-majority-owned TailFin Labs over five years.
- Key risks include reliance on Walmart and other distributors, competition and customer retention, regulation and bank capital requirements, fraud and overdraft losses, cybersecurity and service interruptions, settlement exposure, interest-rate sensitivity, and seasonal tax-processing revenue. Management said litigation reserves were provided where necessary and it did not expect current proceedings to materially adversely affect results; outcomes remain uncertain.
- Green Dot reported that it was categorized as well capitalized at September 30, 2019. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether active-account declines stabilize and whether growth in direct-deposit accounts and BaaS offsets weaker consumer programs.
- The profitability and customer uptake of Green Dot Unlimited relative to its marketing and revenue-sharing costs.
- The impact of Walmart’s higher commission rate, the renewed program terms, and the restricted-share issuance on future margins and dilution.
- How rate changes affect bank net interest income, and whether cash generation remains sufficient alongside investment, repurchases and customer-fund movements.
- Credit, fraud, overdraft and settlement exposures, including the significance of Walmart and other concentrated distribution relationships.