Green Dot Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Green Dot provides prepaid and checking accounts, reload and cash-transfer services, and tax-refund processing through a network of more than 100,000 U.S. locations, retail partners, and digital channels.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $227.2 million | $159.3 million | +42.6% |
| Operating income | $65.9 million | $23.7 million | +178% |
| Operating margin | 29.0% | 14.9% | +14.1 percentage points |
| Net income | $40.8 million | $15.3 million | +167% |
| Diluted EPS | $0.76 | $0.33 | +$0.43 |
| Operating cash flow | $84.3 million | $(0.2) million | Improved |
- Revenue by category: card revenues and other fees were $87.2 million (+27.9%); processing and settlement services were $87.1 million (+88.1%); interchange was $54.7 million (+15.9%). The $1.9 million retailer incentive compensation item reduced reported revenue.
- Gross dollar volume was $6.4 billion versus $5.3 billion; purchase volume was $4.7 billion versus $3.9 billion. Active cards totaled 5.38 million versus 4.74 million.
- At March 31, unrestricted cash and cash equivalents were $878.2 million; available-for-sale securities were $120.3 million. Total assets were $1.724 billion and stockholders’ equity was $687.4 million.
- Notes payable were $144.4 million, down from $150.0 million at year-end; the variable-rate term loan carried a 2.93% effective rate. The $75 million revolver had no outstanding balance. Green Dot reported compliance with credit covenants.
- Operating cash flow benefited from net income and a $24.1 million decrease in income-tax receivable. Investing cash flow was $(81.0) million, including $65.2 million for an acquisition and $14.1 million for property and equipment. Financing cash flow was $150.7 million, mainly from increases in customer deposits and obligations to customers; these are operating-related customer balances, not simply corporate borrowings.
- Management said available cash, operating cash flow, and borrowing capacity were expected to cover working capital, capital expenditure, and debt-service needs for at least 12 months.
Material changes and unusual items
- October 2014’s TPG acquisition contributed $56.1 million of tax-refund processing revenue in Q1 2015; there was no comparable TPG revenue in Q1 2014. Tax-refund activity is highly seasonal. The January 2015 AccountNow acquisition was included from its closing date; management said its effect was not material and did not provide pro forma results.
- MoneyPak PIN was discontinued and replaced by POS swipe reload during Q1. Cash-transfer revenue fell $15.2 million, and reload transactions declined to 10.09 million from 12.60 million. Management warned that the transition could also weigh on active cards, purchase activity, and related fee and interchange revenue.
- Walmart represented 40% of Q1 revenue, down from 61%; Walmart MoneyCard alone represented 29%, versus 44%. Green Dot disclosed a one-year Walmart contract pending renewal discussions. Revenue from the program had been declining.
- Operating expenses rose to $161.3 million from $135.6 million. Compensation and benefits increased 53.3%, including $10.3 million of incremental costs from recent acquisitions. Other general and administrative expenses included $2.7 million of estimated charges for fraud losses outside the normal course of business and $5.3 million of acquired-intangible amortization.
- A $7.6 million gain from remeasuring contingent consideration reduced reported operating expenses. The liability’s fair value fell to $15.4 million from $23.2 million; valuation depends on unobservable assumptions.
- Effective tax rate was 38.0%, slightly above 37.8%, primarily reflecting lower state business tax credits. The company reported $6.9 million of unrecognized tax benefits and ongoing IRS examinations of specified federal tax years.
Outlook, risks, and contingencies
- Management expected recent acquisitions to support revenue for the remainder of 2015, but anticipated lower tax-refund revenue in the second half due to seasonality and lower cash-transfer revenue year over year following MoneyPak PIN’s discontinuation. It also warned that Walmart MoneyCard revenue could decline during 2015.
- Management expected total operating expenses to increase in 2015, citing acquired headcount and facilities, acquired-intangible amortization, and technology investment. The filing provides no clear numerical full-year revenue or earnings guidance.
- Key exposures include dependence on Walmart and other distributors, tax-preparation partners and third-party processors; competition and interchange-rate changes; fraud and unrecovered card overdrafts; regulatory changes affecting prepaid products and tax-refund services; settlement exposure to retailers; and execution and integration risks from acquisitions.
- Green Dot noted $45.9 million of settlement assets exposed to retailer settlement risk. It also disclosed ordinary-course legal proceedings but did not record reserves because loss was not considered probable and/or amounts were not reasonably estimable. Maximum exposure under certain indemnification arrangements could not be reasonably estimated.
- The subsidiary bank was categorized as “well capitalized” under regulatory standards. Basel III requirements became effective for the company and its bank on January 1, 2015. Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and economics of the MoneyPak-to-POS reload transition, including its effects on reload volume, active cards, and customer usage.
- Walmart contract renewal outcome, program revenue trends, and whether customer and revenue concentration continues to decline.
- How much reported growth and operating income depends on TPG’s seasonal tax-refund business and the contingent-consideration fair-value gain.
- Integration costs and performance of TPG and AccountNow, and whether expense growth and technology investment deliver expected returns.
- Fraud-loss trends, cardholder overdraft reserve adequacy, retailer settlement exposures, tax examinations, and developments in relevant regulation or litigation.
- Debt repayment and variable-rate exposure, covenant headroom, and the composition and availability of cash given customer deposit and settlement obligations.