Business context and reporting period
Green Dot Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. The company provides prepaid and checking accounts, payroll and disbursement services, cash transfers, and tax refund processing through retail, online, business, and tax-preparation channels.
Results include UniRush from March 1, 2017, following its February 28 acquisition. The preliminary purchase consideration was $163.7 million, including $142.2 million cash and contingent consideration; purchase accounting remains preliminary.
Financial results and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenue | $222.5 million; up 28.3% | $475.5 million; up 18.4% |
| Operating income | $20.2 million; operating margin 9.1% | $81.6 million; operating margin 17.2% |
| Net income | $19.3 million, versus $8.0 million | $60.0 million, versus $40.9 million |
| Diluted EPS | $0.37, versus $0.16 | $1.14, versus $0.79 |
| Operating cash flow | Not presented separately for the quarter | $143.7 million, versus $91.7 million |
Q2 revenue comprised card revenues and other fees of $107.3 million, processing and settlement service revenues of $51.7 million, and interchange revenues of $63.5 million. Q2 net margin was approximately 8.7%, versus 4.6% in Q2 2016. For the first half, net margin was approximately 12.6%, versus 10.2%.
At June 30, unrestricted cash and cash equivalents were $594.5 million, restricted cash $49.4 million, and available-for-sale securities $203.7 million. Total assets were $1.745 billion and stockholders’ equity $718.2 million. Note payable was $90.1 million net of financing costs, with no revolving-facility balance; the term loan carried an effective rate of 4.05% and matures October 2019. The company reported compliance with debt covenants and “well capitalized” regulatory status.
First-half investing cash use was $198.4 million, including $141.5 million for UniRush, $20.9 million in property and equipment, and a $37.3 million increase in restricted cash. Financing cash use was $83.5 million, including $50.0 million of share repurchases, lower customer deposits, and debt repayments. Unrestricted cash declined $138.1 million from year-end 2016.
Material changes versus the prior comparable period
- Revenue grew faster than expenses in both periods: Q2 operating expenses rose 26.0% and first-half expenses 17.9%. Revenue growth reflected UniRush, improved revenue per active card, stronger card usage and unit economics, and higher tax-refund processing revenue.
- UniRush contributed to a 20% year-over-year increase in total active cards to 5.15 million, while the organic active-card portfolio declined 1%. Gross dollar volume rose 43% in Q2 and 29% for the first half; purchase volume rose 35% and 25%, respectively.
- Cash transfers increased 2% in Q2 but declined 1% for the first half. Tax refunds processed increased 11% in Q2 and 6% for the first half.
- Processing expenses increased 69% in Q2 and 56% in the first half, driven by UniRush, greater transaction volumes, and legacy-processor conversion costs. Management reported $4.7 million of incremental Q2 costs and $9.4 million for the first half.
- First-half effective tax rate fell to 28.2% from 37.1%, mainly due to stock-compensation tax benefits and releases of uncertain-tax-position reserves. Q2 effective tax rate was 8.2% versus 38.2%.
Outlook, management commentary, risks, and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management’s 2017 Six Step Plan targets returning organic active cards to growth in 2018, expanding MoneyPak use, investing in growth initiatives, capturing platform and UniRush integration savings, pursuing strategic acquisitions, and returning capital through repurchases. Management said the processor-conversion issue was resolved and expected no material incremental processing costs above normalized rates from Q3; it was discussing recovery of some or all first-half extra costs, with no assurance of recovery.
- A $3.5 million Q2 lawsuit settlement expense was recorded. A separate processor-conversion class-action accrual of approximately $2.3 million was recorded, with the company’s portion expected to be reimbursed by its insurer.
- A $7.5 million Q2 reduction in contingent consideration increased earnings, reflecting management’s view that a prior tax-refund-processing earn-out target would not be achieved.
- The board authorized a further $150 million repurchase program, subject to regulatory approval; approval was expected to be sought in the second half of 2017. A $50 million accelerated repurchase remained subject to final settlement.
- Key exposures include Walmart concentration (40% of Q2 revenue and 38% of first-half revenue), dependence on retail and tax-preparation partners and third-party processors, seasonality, competition, fraud and overdraft losses, cybersecurity and service disruptions, regulation, and variable-rate debt. Most Green Dot Bank deposits could be classified as brokered; loss of “well capitalized” status could constrain deposit-taking.
- Goodwill and intangible assets were $598.7 million after the acquisition, increasing exposure to potential impairment. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth and active-card expansion is attributable to UniRush versus organic performance, and whether organic active cards stabilize or return to growth.
- Whether the company recovers the $9.4 million of first-half incremental processor costs and sustains normalized processing costs from Q3 onward.
- Progress on UniRush integration, earn-out payments, and final purchase-price allocation, including the assumptions supporting acquired goodwill and intangibles.
- Regulatory approval and final settlement of the repurchase program and accelerated share repurchase, alongside capital and liquidity needs.
- Developments in Walmart and other major distribution relationships, tax-preparation partner retention, brokered-deposit status, and regulatory capital requirements.