Green Dot Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. Dollar amounts are in millions unless otherwise stated.
Business context
Green Dot operates as a bank holding company offering prepaid debit cards, reload services through the Green Dot Network, gift cards and GoBank mobile checking accounts. Products are distributed through more than 90,000 retail locations and online. The company reports one operating segment. In February 2014, it completed the transition of its card issuing program from GE Capital Retail Bank to Green Dot Bank.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Total operating revenue | $573.6 | $546.3 | +5.0% |
| Operating income | $49.1 | $72.1 | -31.9% |
| Net income | $34.0 | $47.2 | -27.9% |
| Diluted EPS | $0.76 | $1.07 | -29.0% |
| Cash provided by operating activities | $122.5 | $102.0 | +$20.5 |
- Revenue mix: card fees $227.2 (+1%); cash transfer revenue $183.4 (+11%); interchange revenue $171.8 (+4%). Interchange represented 29.9% of revenue.
- Operating expenses rose 10.6% to $524.5, outpacing revenue growth. Operating margin declined to 8.6% from 13.2%; net margin was 5.9% versus 8.6%.
- Expenses included $5.2 of software impairment charges, up from $1.0 in 2012, and higher disputed-transaction losses. Sales and marketing expense included a higher Walmart commission rate, increased in May 2013 by about four percentage points.
- At December 31, unrestricted cash and cash equivalents were $423.5; available-for-sale investment securities were $198.7. Total assets were $875.5, liabilities $473.2 and stockholders’ equity $402.2. Long-term debt was zero.
- Operating cash flow was $122.5; investing activities used $53.4 and financing activities provided $57.9. Capital expenditures were $35.7. Reported cash flow benefited in part from a $26.9 increase in accounts payable and accrued liabilities.
- Quarterly results weakened sharply late in the year: Q4 revenue was $142.3 versus $137.3 in Q4 2012, while Q4 operating income fell to $0.5 from $14.5 and net income to $1.0 from $10.4. Q4 diluted EPS was $0.02 versus $0.24.
Material changes and management commentary
- Cash transfers sold increased 9% to 45.44 million; active cards increased to 4.49 million from 4.37 million; purchase volume rose 6% to $13.4 billion.
- Management attributed lower new-card activations and pressure on revenue to stronger competition at major retailers and enhanced risk controls. Green Dot declined approximately two million new card activations during 2013 and said these effects were expected to persist.
- Walmart accounted for 64% of total revenue; the three other largest retailers together accounted for 22%. The top four represented 82% of GPR activations and 87% of cash-transfer product sales.
- Management expected 2014 sales and marketing expense to increase year over year, both in dollars and as a percentage of revenue, reflecting expanded retail distribution and product initiatives. Planned 2014 capital expenditure investment was expected to be similar to 2013. No numeric earnings or revenue guidance is provided in the filing.
- Following the February 2014 card-issuer transition, approximately $260 million of customer funds moved to Green Dot Bank. Green Dot paid GE Capital Retail Bank about $50 million to settle its overdrawn-account liability and contributed about $50 million in capital to Green Dot Bank.
Outlook, risks and contingencies
- Key risks include reliance on Walmart and a small number of retailers; retailer contract renewal, pricing and shelf-space risks; intensifying competition; and exposure to interchange-rate changes.
- Green Dot is subject to extensive banking, money-transmission, anti-money-laundering and consumer-protection regulation. Potential rule changes could increase costs or constrain fees, products or distribution. The company and its bank were reported well-capitalized at year-end; the bank was restricted from paying dividends for three years from its acquisition.
- Other material risks include fraud and disputed transactions, data security, operational dependence on third-party processors and service providers, settlement exposure to retailers, and execution risk for GoBank and other new products.
- Operating lease and purchase obligations totaled $74.4, including $39.0 of operating leases and $35.4 of purchase commitments. The filing identifies ordinary-course legal proceedings but states that no loss accrual was recorded because a loss was not considered probable and/or could not be reasonably estimated. Item 3 reports no legal proceedings.
- The company paid no common-stock dividends and did not expect to do so for the foreseeable future. Management and the independent auditor concluded internal control over financial reporting was effective; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether revenue growth can translate into earnings recovery, given the Q4 margin collapse and faster expense growth.
- Whether enhanced risk controls and retailer competition continue to reduce activations, and whether expanded distribution offsets that pressure.
- Walmart’s contract terms, commission economics and the company’s ability to diversify revenue away from its largest retail partners.
- The effects of the issuer transition and $50 million bank capital contribution on processing costs, liquidity and regulatory capital.
- Future interchange economics, regulatory changes, fraud and disputed-transaction losses, and the performance and investment needs of GoBank.