Green Dot Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Green Dot provides prepaid debit and gift cards, cash-transfer and reload services, and related financial products through retail and online channels. Unless noted otherwise, financial amounts below are in millions.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating revenue | $142.3 | $117.3 |
| Operating income | $26.9 | $20.5 |
| Operating margin | 18.9% | 17.5% |
| Net income | $17.1 | $12.7 |
| Net margin | 12.0% | 10.8% |
| Net income allocated to common stockholders | $14.3 | $12.7 |
| Diluted EPS, Class A and Class B | $0.39 | $0.29 |
| Cash from operating activities | $37.3 | $40.9 |
| Cash from (used in) investing activities | $(145.4) | $(18.5) |
| Cash from financing activities | $2.4 | $2.9 |
- Revenue grew 21%; operating income grew 31% and net income grew 35%. Card fees and other fees were $62.4 (+15%), cash-transfer revenue $39.6 (+27%), and interchange revenue $43.5 (+15%). Retailer incentive compensation, recorded as contra-revenue, was $3.2 versus $5.9.
- Sales and marketing expense rose 24% to $52.6; compensation and benefits rose 24% to $26.2; processing expense rose 6% to $20.9; and other general and administrative expense rose 19% to $15.9. Processing costs declined as a share of revenue, while total operating expenses also declined as a share of revenue.
- At March 31, unrestricted cash and cash equivalents were $117.6, federal funds sold $2.0, and available-for-sale securities $138.1. Restricted cash was $13.0. Total assets were $473.8 and total liabilities $195.0. No conventional borrowings are listed on the balance sheet; liabilities include settlement obligations, deposits and amounts due to issuing banks.
- Investing cash outflow primarily reflected $106.3 of net investment-security purchases and $32.1 of net cash paid for Loopt. The company reported $37.3 of operating cash flow, below $40.9 a year earlier, despite higher net income.
Material changes and business developments
- Green Dot acquired mobile technology company Loopt in March for approximately $33.6 in cash. The preliminary purchase accounting added $30.7 to goodwill; the allocation remained incomplete at quarter-end. The company also committed up to $9.8 in employee retention incentives, to be recognized from April 2012 through September 2013.
- The company became a bank holding company following its 2011 bank acquisition. It reported that it remained “well capitalized” under regulatory standards at March 31.
- The Intuit joint marketing and referral agreement for the TurboTax program expired and was not renewed in October 2011. Management said this reduced 2012 year-over-year revenue, with the largest effect expected in the first half.
- Operating metrics: 2.23 million GPR cards activated (versus 2.21 million), 10.09 million cash transfers (versus 7.98 million), 4.69 million active cards at quarter-end (versus 4.28 million), and $4.8 billion gross dollar volume (versus $4.6 billion). Management cited stronger growth excluding the discontinued TurboTax program.
Outlook, risks and contingencies
- Management stated that unrestricted cash and operating cash flow should meet working-capital and capital-expenditure needs for at least 12 months. It cautioned that additional financing might be needed thereafter and could be unavailable or dilutive.
- No specific numerical earnings or revenue guidance is provided in this filing. Management expected first-half revenue to benefit from tax-refund seasonality and noted that Loopt retention costs would increase compensation expense. It expected a card-issuing transition to Green Dot Bank to begin in the second half of 2012, but cautioned that timing and cost benefits were uncertain.
- Retailer concentration is significant: Walmart generated 64% of operating revenue and the next three largest distributors together generated 20%. The company also depends on a small number of issuing banks; failure of either of two major banks could disrupt service and impair receivables.
- Key risks include loss or renegotiation of large retail-distributor or bank agreements; regulatory changes affecting prepaid cards, money transmission or interchange; fraud, overdrafts and settlement losses; competition and slowing growth; and execution risks from acquisitions and the planned processing transition.
- Green Dot disclosed patent-infringement lawsuits by Integrated Technological Systems and TQP Development, and an ongoing Florida Attorney General investigation concerning prepaid-card fees and credit-building claims. It had not recorded litigation reserves because losses were not considered probable and/or reasonably estimable.
- Controls and procedures were assessed as effective at period-end, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth reflects continuing customer and transaction trends versus TurboTax comparisons and lower retailer incentive contra-revenue?
- Whether Walmart and other key distributor and issuing-bank relationships remain secure, and whether customer and settlement-fund concentrations change.
- Whether the Loopt purchase-price allocation, integration and retention costs affect future earnings or cash needs materially.
- Progress, timing, cost and potential savings from moving Columbus Bank and Trust card issuance to Green Dot Bank and developing in-house processing.
- Developments in the patent cases, Florida investigation, prepaid-card regulation and interchange rules.
- Whether operating cash generation and liquidity remain adequate as investment purchases, capital expenditures and acquisition activity continue.