Green Dot Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. Green Dot provides prepaid and checking accounts, payment processing, tax refund processing, cash transfers and Banking-as-a-Service (BaaS) programs through its bank and distribution partners.
Financial performance and position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Operating revenue | $1,041.8 million | $890.2 million | +17.0% |
| Operating income | $106.6 million | $98.3 million | +8.4% |
| Net income | $118.7 million | $85.9 million | +38.2% |
| Diluted EPS | $2.18 | $1.61 | +35.4% |
| Operating cash flow | $251.1 million | $218.3 million | +15.0% |
- Revenue growth reflected higher account activity and increased cash transfers, tax refunds processed and Simply Paid disbursements. Revenue mix: card fees and other fees $482.9 million; processing and settlement services $248.0 million; interchange $310.9 million.
- Operating expenses grew 18.1%, faster than revenue; operating margin was approximately 10.2%, versus 11.0% in 2017. Higher marketing commissions, processing costs, compensation and transaction losses contributed.
- Net income growth benefited from the effective tax rate falling to 4.1% from 17.0%, including the lower federal corporate rate and excess tax benefits from stock-based compensation. The unusually low rate may not be indicative of future periods.
- At year-end, unrestricted cash and cash equivalents were $1,094.7 million, available-for-sale securities were $201.2 million, total assets were $2,287.1 million and stockholders’ equity was $909.8 million. Deposits were $1,005.5 million.
- Debt outstanding was $58.7 million, with no revolving-facility borrowings. The term loan was due October 23, 2019; the company reported covenant compliance. The filing states liquidity is sufficient for at least the next 12 months.
- Fourth-quarter revenue was $237.8 million, operating income $8.1 million, net income $14.3 million and diluted EPS $0.26, compared with $213.0 million, $3.7 million, $12.2 million and $0.23, respectively, in Q4 2017.
Material changes and operating metrics
- Gross dollar volume increased 29% to $40.0 billion; purchase volume increased 20% to $26.0 billion. Active accounts rose to 5.34 million from 5.30 million.
- Cash transfers increased 9% to 42.25 million, while tax refunds processed increased 5% to 11.71 million. Direct-deposit account growth was described as double digit.
- Account Services operating income increased to $178.0 million from $143.7 million. Processing and Settlement Services operating income increased to $72.7 million from $62.0 million.
- Walmart-generated revenue declined to 37% of total from 40% in 2017, but Walmart remained the largest distributor. Its MoneyCard agreement was scheduled to expire May 1, 2020, subject to an automatic two-year renewal provision.
Outlook, risks and unusual items
- No specific numerical financial guidance for 2019 is provided in this filing. Management expected 2019 capital expenditures to exceed 2018’s $61.0 million, citing investment in products, programs and IT infrastructure.
- The business is seasonal: tax refund processing revenue is concentrated in the first half of the year, particularly Q1. Reported annual and quarterly results may therefore fluctuate.
- Key exposures include Walmart and other partner concentration, competition, interchange rates (29.8% of FY2018 revenue), fraud and overdraft losses, service outages and cybersecurity, and extensive banking and consumer-protection regulation. A majority of Green Dot Bank deposits were classified as brokered; maintaining well-capitalized status is important to continued deposit-taking.
- FY2018 included a $13.5 million payment settling the final earn-out for the tax refund processing acquisition and a $3.3 million expense from a change in estimated UniRush contingent consideration fair value. Goodwill and intangible assets totaled $551.1 million; no impairment was recorded.
- Management and the independent auditor reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements. Management did not expect ordinary-course legal matters, individually or collectively, to materially adversely affect results.
Investor verification priorities
- Check the Walmart MoneyCard agreement’s renewal, pricing and service terms, and progress on reducing distributor concentration.
- Assess whether account, purchase-volume and direct-deposit growth can sustain revenue gains while operating expenses and transaction losses are controlled.
- Verify Green Dot Bank’s capital position, brokered-deposit classification and regulatory commitments, including the requirement to hold cash or cash equivalents equal to insured GPR deposits.
- Review the October 2019 term-loan maturity and refinancing or repayment plans, plus planned capital spending and remaining UniRush earn-out payments.
- Evaluate the sustainability of the 4.1% effective tax rate and the recoverability of goodwill and intangible assets.