Green Dot Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited consolidated results; financial amounts below are in U.S. dollars unless stated otherwise. Green Dot operates a Banking-as-a-Service platform and consumer financial products through Account Services and Processing and Settlement Services.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $230.6m | $201.6m | $803.9m | $677.2m |
| Operating income (loss) | ($5.1m) | $13.1m | $98.5m | $94.6m |
| Net income | $4.6m | $13.6m | $104.4m | $73.7m |
| Diluted EPS | $0.08 | $0.26 | $1.92 | $1.40 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $214.3m | $163.3m |
Q3 revenue grew 14.4%, but operating expenses rose 25.0% to $235.7m, exceeding revenue and producing an operating loss. Nine-month revenue increased 18.7%; expenses rose 21.1%. Operating margin was approximately -2.2% for Q3 and 12.2% for the nine months, versus 6.5% and 14.0%, respectively, in the comparable 2017 periods.
Q3 revenue comprised card fees and other fees of $113.5m, processing and settlement services of $43.0m, and interchange of $74.1m. For the nine months, these were $364.3m, $203.9m, and $235.7m, respectively. Management attributed growth to active-account growth and engagement, higher purchase and reload activity, new product lines, and higher cash-transfer and tax-processing volumes.
Q3 net income included a $4.9m income tax benefit despite a pretax loss of $0.3m, primarily due to excess tax benefits on vested stock awards. The nine-month effective tax rate was 6.3%, compared with 24.7% in 2017, reflecting the lower federal statutory rate and stock-compensation tax benefits.
Cash, debt, and liquidity
- At September 30, 2018, unrestricted cash and cash equivalents were $1,037.6m; restricted cash was $0.6m. Available-for-sale investments totaled $223.9m. Settlement assets were $291.1m.
- Current liabilities were $1,374.5m, including $1,006.2m in deposits, $144.3m in obligations to customers, and $14.9m in settlement obligations. Cash and settlement balances support regulated banking, customer, and settlement activities and should not be viewed as wholly discretionary corporate cash.
- Net notes payable were $63.9m, down from $79.6m at year-end 2017; there were no revolving-facility borrowings. The term loan carried a 4.81% effective rate and matures October 23, 2019. The company reported compliance with its credit covenants.
- Nine-month investing cash outflow was $121.1m, including $43.4m for property and equipment and net purchases of investment securities. Financing cash outflow was $65.2m, including $16.9m of debt repayments, $33.2m of taxes paid for net share settlement of equity awards, and decreases in deposits and customer obligations.
- Management said cash, operating cash flows, and borrowing capacity were expected to be sufficient for working capital, capital expenditures, and debt service. The company expected capital expenditures to exceed 2017 levels as it invested in products and technology infrastructure.
Material changes and unusual items
- Q3 other general and administrative expense rose 49% to $62.2m. This included a $13.5m accrual resolving the final earn-out calculation for the tax refund processing acquisition; it was paid in October 2018. The comparable 2017 period included a $7.5m favorable reduction in contingent consideration, amplifying the year-over-year expense increase.
- Compensation expense rose 21% in Q3, including higher stock-based compensation. Nine-month stock-based compensation was $37.4m versus $27.4m in 2017; the company also adopted a retirement-eligibility policy that accelerated expense for certain awards.
- Transaction losses and processing costs increased with purchase and transaction volumes. Q3 processing expenses also compared against a prior-year period that benefited from a $6.5m net repayment of incremental legacy-processor costs.
- ASC 606 was adopted January 1, 2018. It moved certain partner incentive payments from revenue reductions to sales and marketing expense; prior periods were not recast. The company said adoption had no material effect on retained earnings or overall financial results, but presentation affects comparisons.
- Gross dollar volume increased 18% in Q3 and 33% year to date; purchase volume increased 13% and 23%, respectively. Active accounts rose 3% to 5.43m; cash-transfer transactions increased 9% in both periods. Nine-month tax refunds processed rose 5% to 11.64m.
Outlook, commentary, and risks
The filing describes the 2018 Six Step Plan: grow active accounts and improve unit economics; expand MoneyPak use and cash transfers; invest in promising initiatives; improve operating efficiencies and margins; integrate acquisitions and consider strategic acquisitions; and return capital through share repurchases. The filing does not provide a new numerical earnings or revenue forecast.
- Walmart-related products generated 38% of Q3 revenue and 36% for the first nine months. The Walmart MoneyCard agreement was set to expire May 1, 2020, subject to an automatic two-year renewal provision. The filing identifies loss or renegotiation of major distributor relationships as a material risk.
- Other risks include intense competition, changes in interchange rates or regulation, fraud and unrecovered overdrafts, third-party processor or system outages, data-security incidents, seasonal tax-processing activity, and dependence on tax-preparation partners.
- Green Dot Bank and the holding company were categorized as well capitalized at September 30, 2018. The filing notes that a substantial portion of bank deposits are classified as brokered, making continued well-capitalized status important to deposit-taking activities.
- Ordinary-course litigation and claims were disclosed; management stated it did not expect their outcomes, individually or collectively, to materially adversely affect financial condition or results. Certain indemnification obligations have no reasonably estimable maximum amount.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether revenue and usage growth can translate into improved operating margins given expense growth and Q3’s operating loss.
- Review the $13.5m earn-out charge, its October payment, and other elevated transaction-loss and stock-compensation costs when evaluating underlying earnings.
- Monitor Walmart contract renewal and concentration, along with the terms and durability of other major retailer and tax-preparation relationships.
- Evaluate the October 2019 term-loan maturity, variable-rate exposure, covenant compliance, and regulatory capital requirements.
- Reconcile reported cash with customer deposits, obligations, and settlement assets, and evaluate whether planned higher investment spending remains consistent with liquidity needs.
- Consider the presentation impact of ASC 606 and the seasonality of tax refunds when comparing periods and assessing the outlook.