Green Dot Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; filed November 8, 2013. Green Dot is a bank holding company offering prepaid cards, cash-transfer and reload services, and GoBank through retail, online, and mobile channels.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $136.5m | $132.8m | $431.3m | $409.0m |
| Operating income | $8.0m | $14.9m | $48.7m | $57.7m |
| Net income | $6.1m | $9.6m | $33.0m | $36.8m |
| Diluted EPS | $0.13 | $0.22 | $0.74 | $0.84 |
| Operating margin | 5.8% | 11.2% | 11.3% | 14.1% |
- Q3 revenue grew 2.9%, while operating income fell 46% and net income fell 36% year over year. For the first nine months, revenue grew 5.5%, but operating income declined 16% and net income declined 10%.
- Revenue mix shifted toward cash transfers and interchange. Q3 card revenue and fees declined 3% to $51.1m; cash-transfer revenue rose 13% to $47.2m; interchange rose 3% to $40.9m. For nine months, the respective changes were down less than 1%, up 13%, and up 6%.
- Operating expenses rose 9% in Q3 and 9% for the nine-month period. Higher employee costs, processing expenses, technology-related depreciation and amortization, and customer transaction losses weighed on operating results.
- Income tax expense was $2.6m in Q3 and $18.1m for nine months. The effective tax rate was 30.4% and 35.4%, respectively, helped by general business credits; management expected the ongoing rate to exceed Q3’s rate.
Cash, liquidity, and capital
- At September 30, 2013, unrestricted cash and cash equivalents were $328.9m; available-for-sale investment securities totaled $236.2m. Total assets were $803.2m, total liabilities $412.4m, and stockholders’ equity $390.8m.
- Nine-month operating cash flow was $93.0m, versus $83.3m a year earlier. Investing activities used $78.9m, including $26.9m for property and equipment; financing activities provided $19.1m. Unrestricted cash, cash equivalents, and federal funds sold increased $33.2m.
- The balance sheet does not present a separate corporate borrowings balance. Interest expense was $55,000 for the nine months. Customer deposits and obligations are reported as liabilities and should not be confused with corporate debt.
- Management said available cash and operating cash flows should cover working capital and capital expenditure needs for at least 12 months. Green Dot reported that it met the regulatory “well capitalized” category.
Business developments, outlook, and risks
- Management attributed pressure on revenue to greater competition at major retailers and enhanced risk controls. Green Dot declined 10–20% more new card activations in the first nine months than in the comparable period. Active cards were 4.41m, approximately flat year over year.
- Cash transfers sold increased 11% for nine months to 34.0m; gross dollar volume rose to $13.9bn from $12.9bn, and purchase volume rose to $10.1bn from $9.4bn.
- The company planned to expand distribution by more than 27,000 retail locations, including Home Depot, Family Dollar, Dollar General, and Dollar Tree, and expand products at Walmart. It expected additional Q4 sales and marketing costs and continued investment in products and technology. Management expected 2013 capital expenditures to be similar to 2012; no quantified earnings or revenue guidance is provided in the filing text.
- Revenue concentration is substantial: Walmart accounted for 65% of nine-month operating revenue and the next three largest distributors collectively accounted for 22%. Retailer contracts generally expire in 2014–2015, with certain termination rights.
- Regulatory approval remained pending for transferring Walmart MoneyCard customer funds and the program to Green Dot Bank. Management said approval would entail additional bank capital contributions and settlement of certain overdraft-related liabilities.
- Other material risks include interchange-rate or regulatory changes, fraud and disputed transactions, cardholder overdrafts, reliance on third-party banks and processors, and regulation of prepaid products. The company reported no legal proceedings in Part II; it stated ordinary-course matters had no reserves because loss was not considered probable or reasonably estimable.
- Class B common shares automatically converted into Class A shares in August 2013, leaving one common-stock class outstanding. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether competitive pressure and stricter activation controls continue to reduce card sales, active cards, or revenue growth.
- Whether new retail distribution and GoBank initiatives generate sufficient volume to offset higher operating and marketing costs.
- Walmart’s continuing commercial relationship, contract renewal terms, and regulatory approval and timing for the proposed program and funds transition.
- Trends in operating margins, transaction losses, cardholder overdraft recoveries, and the effective tax rate after discrete credits.
- Potential effects of interchange regulation and retailer concentration on future revenue and profitability.