Green Dot Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. Green Dot provides U.S. prepaid debit cards, cash-transfer and reload services, and related money-management products. It became a bank holding company after acquiring Green Dot Bank in December 2011 and acquired Loopt in March 2012.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $136.7 million | $115.0 million | $279.0 million | $232.3 million |
| Operating income | $18.9 million | $19.4 million | $45.7 million | $39.9 million |
| Operating margin | 13.8% | 16.8% | 16.4% | 17.2% |
| Net income | $11.9 million | $12.1 million | $29.0 million | $24.8 million |
| Basic/diluted EPS, each common class | $0.28 / $0.27 | $0.29 / $0.27 | $0.68 / $0.66 | $0.59 / $0.56 |
| Operating cash flow | Not presented quarterly | $56.5 million | $55.8 million |
Q2 revenue increased about 19%, while net income decreased about 1%; first-half revenue rose about 20% and net income about 17%. First-half effective tax rate was 39.3%, versus 38.2% a year earlier. No gross-margin figure is provided.
At June 30, unrestricted cash and cash equivalents were $121.3 million, federal funds sold $1.8 million, and available-for-sale securities $140.7 million. Cash, cash equivalents and federal funds sold totaled $123.1 million, down from $225.4 million at year-end 2011. Current assets were $308.4 million and current liabilities $175.0 million (current ratio approximately 1.76). Total assets were $490.9 million; total liabilities $191.1 million. The filing reports no conventional borrowings or material debt balance; deposits and settlement obligations are operating/bank-related liabilities. Management said available cash and operating cash flow should cover working capital and capital needs for at least 12 months.
First-half investing cash outflow was $158.0 million, including $109.3 million net purchases of investment securities, $33.4 million for Loopt, and $16.9 million for property and equipment. Financing cash outflow was $0.8 million, including a $6.0 million net decrease in deposits. Capital expenditures are not separately characterized as free cash flow in the filing.
Business trends and changes versus prior period
- Q2 card revenues and other fees rose 10% to $59.5 million; cash-transfer revenue rose 24% to $40.2 million; interchange revenue rose 19% to $39.5 million. Lower Walmart stock-based retailer incentive compensation reduced the contra-revenue charge to $2.6 million from $4.4 million.
- For the first half, cash-transfer revenue rose 26% to $79.9 million and interchange revenue rose 17% to $83.0 million. Reported revenue growth also benefited from a smaller retailer-incentive contra-revenue charge ($5.8 million versus $10.2 million).
- Q2 sales and marketing expense rose 24% to $53.0 million; compensation and benefits rose 29% to $27.9 million; other general and administrative expense rose 29% to $17.9 million. Cost growth outpaced revenue growth, compressing operating margin. Drivers included higher sales commissions, advertising, staffing, infrastructure, and Loopt-related retention costs.
- Key operating measures: 1.98 million GPR cards activated in Q2 versus 1.82 million; 10.14 million cash transfers versus 8.28 million; 4.44 million active cards at quarter-end versus 4.10 million; and purchase volume of $2.9 billion versus $2.5 billion.
- The TurboTax marketing/referral agreement ended in October 2011, removing a prior source of activity and revenue. Excluding that program, management reported stronger growth in several card and volume measures.
Outlook, risks, contingencies and unusual items
- Near-term headwinds: Management expected increased competition in major retail locations from late 2012 and during 2013 to pressure card, cash-transfer and interchange revenue and potentially raise marketing expense. Voluntary fraud controls were already affecting legitimate new-card activations, and management expected that effect to continue for the foreseeable future. The filing provides no quantitative earnings or revenue guidance.
- Costs and investment: Management expected additional advertising and Loopt retention costs, including up to $8.1 million of remaining retention incentives, recognized through September 2013. A $0.8 million IT-development write-off related to a large partnership delayed for the foreseeable future. The company also planned headquarters improvements and continued development of in-house card processing.
- Concentration: Walmart accounted for 62% of Q2 reported operating revenue and the next three largest distributors together 21%; for the first half the figures were 64% and 21%. Loss or reduced support from major retailers could materially affect results. Most underlying customer funds were held at two issuing banks; failure of either could disrupt service and cause losses.
- Regulatory and operating exposure: Green Dot is subject to bank-holding-company, money-transmission, prepaid-product, consumer-protection and payment-network rules. Other disclosed risks include fraud and overdraft losses, settlement exposure to retailers, dependence on issuing banks and processors, and data-security or systems failures.
- Legal matters: A patent case by Integrated Technological Systems was settled and dismissed in July 2012 without material financial impact. A separate patent suit by TQP remained pending; the company said the outcome and potential impact could not be determined. A securities class action filed July 27, 2012 alleged misleading statements concerning risk controls and retailer competition; the company had not yet responded and could not assess the outcome or impact. A Florida Attorney General investigation concerning prepaid-card fees and credit-building claims was also disclosed.
- Other notable items: Loopt’s preliminary purchase-price allocation included $28.7 million goodwill and $3.5 million identified intangibles and was not final. The company reported $310,000 in loan-loss allowance and $1.7 million in nonperforming bank loans. Management said the company was well capitalized under applicable regulatory standards.
Important facts for investors to verify
- Whether competitive products in major retail stores and stricter fraud controls materially reduce activations, usage or revenue, and whether marketing costs rise.
- Renewal terms and continued support from Walmart and other major distributors, plus the concentration of customer funds and receivables at issuing banks.
- Whether operating expenses moderate and margins stabilize as growth initiatives, Loopt retention payments and infrastructure spending continue.
- Final Loopt purchase accounting, future acquisition-related costs, and progress and cost of the transition to Green Dot Bank and in-house processing.
- Developments in the TQP patent case, securities class action and regulatory inquiries; the filing does not provide a clear estimate of potential losses.
- Potential dilution: 6.859 million shares issuable upon conversion of Series A preferred stock were excluded from diluted EPS as anti-dilutive; verify conversion terms and subsequent share counts.