Green Dot Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also presents unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Green Dot provides prepaid debit cards, reload services and related products through retail, online and mobile channels. In 2012 it completed the transition of its Green Dot-branded card program to Green Dot Bank; GoBank launched in limited release in January 2013.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Operating revenue | $546.3 million | $467.4 million | +16.9% |
| Operating income | $72.1 million | $83.4 million | -13.6% |
| Net income | $47.2 million | $52.1 million | -9.3% |
| Diluted EPS | $1.07 | $1.19 | -10.1% |
| Operating cash flow | $102.0 million | $94.1 million | +8.5% |
- Operating margin declined to approximately 13.2% from 17.9%; net margin fell to approximately 8.6% from 11.1%.
- Revenue mix: card fees $224.7 million (+7%), cash transfer revenues $165.2 million (+23%), and interchange $164.6 million (+17%). Walmart-related stock-based retailer incentive compensation reduced reported revenue by $8.3 million, versus $17.3 million in 2011.
- Operating expenses rose 23.5% to $474.1 million. Sales and marketing increased 24%, compensation and benefits 31%, processing 9%, and other general and administrative expense 27%.
- Q4 revenue was $137.3 million versus $119.7 million in Q4 2011; operating income was $14.5 million versus $22.3 million, and net income was $10.4 million versus $14.0 million. Q4 operating margin was approximately 10.6%, compared with 18.6% a year earlier.
- At year-end, unrestricted cash and cash equivalents were $293.6 million, federal funds sold $3.0 million, and available-for-sale securities $183.8 million. Total assets were $725.7 million; total liabilities were $398.0 million. The company reported no long-term debt and no outstanding borrowings at year-end.
- Cash used in investing was $210.3 million, including net purchases of investment securities, $40.4 million of property and equipment, and $31.8 million for Loopt. Financing provided $179.5 million, principally from deposits and customer obligations associated with the card-program transition.
- Management said cash, liquid investments and operating cash flow should cover working capital and capital expenditures for at least 12 months. Planned 2013 capital expenditures were expected to be similar to 2012.
Material changes and management outlook
- Business activity grew: 8.07 million GPR cards were activated, 41.79 million cash transfers were sold, active cards reached 4.37 million, gross dollar volume was $17.2 billion, and purchase volume was $12.6 billion. Growth in cash transfer and purchase volumes was partly offset by greater costs and weaker profitability.
- Management attributed lower net income to higher retailer commissions, expanded staffing and marketing, infrastructure and product-development spending, and $5.2 million of Loopt retention incentives. Up to $5.0 million of remaining Loopt retention incentives was expected to be recognized during January–September 2013.
- Competition intensified in the second half of 2012, including new competing products at Walmart and other distributors. Management expected card fees, cash transfer and interchange revenues to remain under pressure in 2013. Voluntary risk controls also reduced legitimate new-card activations; management expected that effect to persist.
- Walmart sales commissions were scheduled to increase by approximately four percentage points in May 2013. The lost/nonrenewed TurboTax relationship also weighed on comparisons. GoBank was expected to become generally available in Q2 or Q3 2013; adoption and commercial success were uncertain.
- Revenue concentration is substantial: Walmart accounted for 64% of total operating revenue and the next three largest distributors collectively 20% in 2012. The Walmart MoneyCard agreement was scheduled to run through May 2015, subject to termination provisions.
- Green Dot is a bank holding company. Management reported the company and its subsidiary bank were well-capitalized; Green Dot Bank was restricted from paying dividends for three years from its acquisition. Regulatory change, interchange pressure, fraud, settlement exposure, data security and dependence on retail, issuing-bank and processing partners are material risks.
Contingencies and unusual items
- In Q4, new settlement controls identified an error in overdrawn-account calculations affecting Q1–Q3 2012. The company concluded the error was not material to any individual prior period, but that correcting the cumulative effect in Q4 would be material; it therefore adjusted the previously presented quarterly information. Q3 net income was reduced by $1.0 million, Q2 by $1.0 million and Q1 by $0.7 million. The adjustments did not affect reported cash flows.
- A consolidated securities class action alleges misleading statements concerning 2012 business and results and IPO disclosures. Green Dot moved to dismiss; the filing says the outcome and potential financial impact could not be determined and no loss reserve was recorded for the proceedings.
- The company acquired Loopt for approximately $33.6 million cash and recorded $16.4 million of goodwill. It also entered a 10-year Pasadena headquarters lease; disclosed operating lease commitments totaled $43.7 million.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Key facts for investors to verify
- Whether 2013 revenue and margins were in fact pressured by Walmart and other competitive offerings, the risk-control measures, and the higher Walmart commission rate.
- Whether active-card retention, purchase volume and reload activity offset fewer legitimate new activations and the TurboTax loss.
- Progress and costs of GoBank, internal processing capabilities and other infrastructure investments, including reliance on TSYS (whose contract was extended through December 31, 2015).
- Subsequent reporting on the overdrawn-account calculation correction, control improvements, and any effects on reserves or customer/card-issuer obligations.
- Developments in the securities litigation, prepaid-card regulation and interchange rules; also monitor Walmart relationship terms and the company’s distributor concentration.
- Liquidity and bank capital after accounting for customer deposits and obligations, restricted funds, required bank support, and planned investment and lease commitments.