Green Dot Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. Green Dot provides prepaid debit cards and cash-loading and transfer services through retail and online channels.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $115.0 million | $90.3 million | $232.3 million | $183.1 million |
| Operating income | $19.4 million | $17.2 million | $39.9 million | $41.2 million |
| Net income | $12.1 million | $12.5 million | $24.8 million | $25.3 million |
| Diluted EPS | $0.27 | $0.29 | $0.56 | $0.61 |
| Operating margin | 16.8% | 19.0% | 17.2% | 22.5% |
| Net margin | 10.5% | 13.9% | 10.7% | 13.8% |
- Q2 revenue increased 27%; card revenue rose 28%, cash transfer revenue 33%, and interchange revenue 26%. Six-month revenue increased 27%.
- Operating expenses grew faster than revenue in the first half, increasing 36% to $192.5 million; sales and marketing rose 48% to $85.3 million, largely reflecting higher Walmart commissions and volume.
- Six-month cash from operations was $55.8 million, versus $54.5 million. Investing used $56.5 million, including $40.1 million of securities purchases, $11.2 million of capital expenditures, and a $5.2 million increase in restricted cash. Financing provided $6.1 million. Unrestricted cash ended at $173.0 million.
- At June 30, total assets were $321.9 million and current liabilities $101.0 million. Available-for-sale securities totaled $40.0 million and restricted cash was $10.3 million. The filing does not report outstanding borrowings or identify funded debt; it describes a line of credit with cash collateral.
Material changes and management commentary
- Despite strong revenue growth, Q2 net income declined 3.5% and first-half net income declined 2.2%. Management attributed the pressure primarily to higher Walmart sales commissions; the 2010 Q2 comparison also benefited from discrete tax items.
- Gross dollar volume increased 53% in Q2 and 58% in the first half. Active cards were 4.10 million, up from 3.24 million a year earlier; first-half activated GPR cards were 4.03 million versus 3.27 million.
- Walmart’s amended agreement raised its sales commission rate to an estimated 22% from less than 8%, beginning May 2010. Stock-based retailer incentive compensation, recorded as contra-revenue, was $4.4 million in Q2 and $10.2 million in the first half, versus $2.5 million in each 2010 comparison period.
- Management expected first-half revenue to exceed second-half revenue because of tax-refund direct deposits, and expected Walmart stock-based incentive compensation to decline year over year in Q3 and Q4. No numerical financial guidance is provided in the supplied filing text.
- Management said existing cash and operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months.
- Developments included agreements for AARP Foundation co-branded cards, American Express reload services, and ADP payroll-card funding via MoneyPak. Intuit gave notice it would not renew its joint marketing and referral agreement, but would remain a network acceptance member.
Risks, contingencies, and unusual items
- Retailer concentration is substantial: Walmart accounted for 60% of Q2 operating revenue; the next three largest distributors together accounted for 14%. Management warns that losing a major distributor could materially harm results.
- The company depends on two principal issuing banks and disclosed risks from bank failure, settlement exposure, cardholder overdrafts, fraud, data breaches, and service interruptions. The reserve for uncollectible overdrafts reached $19.0 million, up from $11.8 million at year-end 2010.
- The Florida Attorney General was investigating five prepaid-card providers, including Green Dot, over alleged hidden fees. The company reported providing requested information; the outcome and potential costs were uncertain.
- The proposed $15.7 million Bonneville Bancorp acquisition remained subject to regulatory approval. If completed, Green Dot expected additional bank-holding-company regulation and capital requirements.
- Interchange represented 30.5% of first-half revenue. The filing identifies possible effects from interchange-rate changes and evolving regulation, including Dodd-Frank implementation. The company also cited seasonality, competitive pressure, and uncertainty around growth and margins.
Important facts for investors to verify
- Whether revenue growth can translate into improved operating margins despite higher retailer commissions and operating costs.
- Walmart agreement economics, renewal and termination terms, and the effect of its revenue concentration.
- Overdraft reserve adequacy, recovery trends, and the growth in gross cardholder overdraft balances.
- Regulatory developments affecting interchange, prepaid access, the Florida investigation, and the proposed bank acquisition.
- The pace of second-half seasonality, Intuit’s nonrenewal impact, and execution of the announced AARP, American Express, and ADP programs.