Green Dot Corporation — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; filing dated February 27, 2017. Green Dot provides prepaid and deposit accounts, cash reload services, 1099 disbursements, and tax refund processing. It operates through Account Services and Processing and Settlement Services and distributes products through approximately 100,000 U.S. locations and digital channels.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Operating revenue | $718.8 million | $694.7 million | +3.5% |
| Operating expenses | $655.5 million | $635.4 million | +3.2% |
| Operating income | $63.3 million | $59.3 million | +6.7% |
| Net income | $41.6 million | $38.4 million | +8.3% |
| Diluted EPS | $0.80 | $0.72 | +$0.08 |
| Operating margin | 8.8% | 8.5% | +0.3 percentage points |
Net margin was approximately 5.8%, versus 5.5% in 2015. FY 2016 revenue comprised $337.8 million in card revenues and fees, $184.3 million in processing and settlement services, and $196.6 million in interchange. Interchange represented 27.4% of total revenue.
Fourth quarter: Revenue was $162.8 million versus $150.9 million in Q4 2015. Operating loss narrowed to $3.5 million from $11.8 million; net loss narrowed to $1.3 million from $6.1 million. Diluted loss per share was $0.03, compared with $0.12.
Cash flow, liquidity and debt
- Cash from operations was $111.5 million, down from $156.7 million. Investing activities used $78.3 million and financing activities used $72.7 million. Unrestricted cash, cash equivalents and federal funds declined by $39.5 million during the year.
- At year-end, unrestricted cash and cash equivalents were $732.7 million; available-for-sale securities totaled $208.4 million. Restricted cash was $12.1 million.
- Long-term debt was reported at $100.7 million net of financing costs; scheduled principal obligations totaled $105.0 million. No revolving-facility borrowings were outstanding. The term loan carried a 3.52% effective rate, matures in 2019, and the company reported compliance with its covenants.
- Total deposits were $737.4 million, largely associated with customer accounts; these are not equivalent to corporate borrowings. Settlement assets were $137.1 million, reflecting funds collected by retailers pending remittance.
- Green Dot and Green Dot Bank were categorized as well-capitalized. The company repurchased $59.0 million of shares in 2016 and had $50 million remaining under its authorization.
Material changes and management commentary
- Management attributed revenue growth to improved unit economics and a portfolio shift toward more engaged, higher-revenue customers, despite active cards declining 8% to 4.13 million. Gross dollar volume increased to $23.0 billion from $22.0 billion; purchase volume rose to $16.3 billion from $16.1 billion.
- Reload transactions declined to 37.79 million from 38.88 million. Tax refunds processed declined to 10.52 million from 10.68 million. Management linked some reload weakness to suspension of the legacy MoneyPak PIN product; a redesigned product began rolling out in April 2016, but was not expected to recover the legacy product’s scale.
- Expenses rose 3.2%. Higher card-package and distribution costs, increased Walmart commissions, and processing costs were partly offset by lower compensation expense under the company’s Six Step cost-reduction plan. Processing expenses also reflected the delayed migration to a new processor; approximately $4.1 million in specified customer credits and transaction losses were reimbursed, while reimbursement of certain later migration costs remained uncertain.
- Walmart generated 45% of 2016 revenue, down from 46% in 2015. Its MoneyCard agreement runs through May 2020, with an automatic renewal provision subject to terms; certain termination rights apply.
- In January 2017, Green Dot agreed to acquire UniRush for approximately $147 million, subject to adjustments, plus an earn-out over five years with a stated minimum total of $20 million. The filing expected closing in Q1 2017 and planned to fund the purchase with cash and borrowings.
- Management said existing liquidity, operating cash flow and borrowing capacity should cover the acquisition and expected working-capital, repurchase and capital expenditure needs for at least 12 months. The filing provides no specific numerical earnings or revenue guidance for 2017.
Risks, contingencies and unusual items
- Key exposures include Walmart and other distributor concentration, concentrated tax-preparation partners, competition, seasonal tax-refund activity, interchange-rate changes, regulatory requirements, fraud and customer losses, cybersecurity, third-party processor dependence, and system interruptions.
- Two putative class actions followed 2016 processor-conversion service disruptions. Green Dot accrued approximately $2.8 million for its estimated share of settlement and legal costs; its insurer agreed to reimburse up to approximately $2.3 million. The filing states Item 3 legal proceedings as none, while the notes describe these pending claims.
- The company recorded a $2.5 million favorable change in contingent consideration fair value and a $0.1 million software impairment charge in 2016. No goodwill or intangible-asset impairment was recorded; goodwill and intangible assets totaled $451.1 million at year-end.
- The 2016 effective tax rate was 32.4%, compared with 33.9% in 2015, partly reflecting reversals of previously accrued uncertain tax positions. The company reported $7.3 million of unrecognized tax benefits.
- Green Dot disclosed executive transitions, including the CFO’s announced intention to step down when a successor is appointed. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether higher revenue per active account can persist while the active-card base and reload transactions decline.
- Walmart agreement renewal and service-level performance, given Walmart’s 45% share of revenue and its contractual termination rights.
- UniRush closing, final consideration and earn-out terms, financing mix, and post-acquisition integration results.
- Completion and cost of the processor migration, reimbursement of remaining costs, and resolution of the related class actions.
- Trends in transaction losses, overdrawn-account reserves, and cash conversion, including the decline in operating cash flow.
- Exposure to interchange revenue, brokered-deposit rules, regulatory changes and seasonality in tax-processing revenue.