Green Dot Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless otherwise noted. Green Dot is a financial technology company and bank holding company offering consumer banking, payment processing and Banking-as-a-Service (BaaS) through its wholly owned bank and partner distribution channels. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $340.5 million | $320.3 million | +6.3% |
| Operating expenses | $259.1 million | $238.6 million | +8.6% |
| Operating income | $81.4 million | $81.7 million | −0.4% |
| Net income | $64.0 million | $70.0 million | −8.6% |
| Diluted EPS | $1.17 | $1.29 | −9.3% |
| Operating cash flow | $115.4 million | $88.9 million | +$26.5 million |
- Operating margin was approximately 23.9%, down from 25.5%; net margin was approximately 18.8%, down from 21.9%.
- Revenue mix: card revenues and other fees $129.6 million (−0.4%); processing and settlement services $107.6 million (+7%); interchange $92.5 million (+9%); net interest income $10.8 million, more than double the prior-year $5.3 million.
- Account Services revenue was $239.6 million and operating income $62.8 million. Processing and Settlement Services revenue was $110.6 million and operating income $56.1 million; Corporate and Other operating loss was $37.6 million.
- Cash provided by investing activities was negative $40.3 million, mainly investment-security purchases and capital expenditures. Financing activities provided $510.5 million, primarily from a $621.0 million increase in customer deposits.
- At March 31, unrestricted cash and equivalents were $1.676 billion, restricted cash $4.4 million, and available-for-sale securities $225.6 million. Settlement assets were $339.2 million. Deposits were $1.625 billion; these include customer funds and should not be treated as unrestricted corporate liquidity.
- Green Dot prepaid $60 million on its term loan in March and reported no debt outstanding at quarter-end. Its $75 million revolving facility remained available until October 2019; the company reported compliance with its debt covenants.
- Total assets were $3.066 billion and stockholders’ equity $978.7 million at March 31. The company reported $21.8 million of operating lease liabilities following adoption of the new lease standard.
Material changes and management commentary
- Management attributed revenue growth to higher customer engagement, account-holder gross dollar and purchase volumes, cash transfers, tax refunds processed and Simply Paid disbursements. Gross dollar volume rose 11% to $13.0 billion; purchase volume rose 10% to $8.2 billion; active accounts were 6.05 million versus 6.01 million.
- Operating expenses increased faster than revenue. Sales and marketing rose 7%, compensation and benefits 13% (including a $5.5 million increase in stock-based compensation), processing expenses 7%, and general and administrative expenses 8%.
- Net income fell despite revenue growth, in part because of higher expenses and an effective tax rate of 19.9%, versus 12.9% a year earlier. The company cited a $4.9 million decline in the benefit from excess stock-compensation tax benefits and higher state taxes.
- Beginning in Q1 2019, Green Dot classified Green Dot Bank net interest income as operating revenue; prior-year revenue presentation was reclassified, with no effect on prior-year net income or cash flows.
- Management intends to invest an incremental $60 million in the second half of 2019, mainly to market new products expected to launch later in the year and, to a lesser extent, advance BaaS technology. No specific numerical earnings or revenue guidance is provided in the supplied filing text.
- The company stated current unrestricted cash and operating cash flows should be sufficient for working capital, capital expenditures and debt service. It also expects capital expenditures to exceed 2018 levels and may pursue acquisitions or make capital contributions to its bank subsidiary.
Risks, contingencies and unusual items
- Walmart accounted for 30% of Q1 operating revenue, compared with 32% a year earlier. The Walmart MoneyCard agreement was due to expire May 1, 2020 unless renewed under its automatic extension provision; loss or adverse renegotiation of major distribution relationships could materially affect results.
- Results are seasonal, particularly tax-refund processing, which is concentrated in the first half of the year. Other prominent risks include regulatory and bank-capital requirements, fraud and overdraft losses, cybersecurity and service interruptions, competition, partner concentration, and settlement exposure.
- The filing describes ordinary-course litigation and claims; management said it believed reserves were adequate and did not expect known matters to materially adversely affect financial condition or results. Some indemnification obligations have no stated maximum and cannot be reasonably estimated.
- UniRush acquisition contingent consideration was valued at $15.8 million at quarter-end. The acquisition agreement includes a minimum $4 million annual earn-out payment for five years, potentially higher if specified revenue targets are met.
- Adoption of lease accounting on January 1, 2019 recognized approximately $17.9 million of operating lease right-of-use assets and $25.1 million of lease liabilities, with no impact on income or cash flows at adoption.
- Green Dot and Green Dot Bank were reported as well capitalized under regulatory standards. Disclosure controls were deemed effective, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the planned $60 million second-half investment and new product launches deliver growth without further margin pressure.
- Renewal terms and performance of the Walmart MoneyCard relationship, and the company’s exposure to other major retail and tax-preparation partners.
- How much of cash and deposit growth represents customer funds, and the implications for usable corporate liquidity and settlement obligations.
- Trends in stock-based compensation, tax benefits and effective tax rate, which materially affected year-over-year earnings comparability.
- Progress in managing fraud, overdraft reserves, regulatory obligations and the $15.8 million UniRush contingent consideration.