Green Dot Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 10, 2011. Green Dot provides prepaid debit cards, reload and cash-transfer services through retail and online distribution channels.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Change |
|---|---|---|---|
| Operating revenue | $115.4 million | $88.9 million | +30% |
| Operating income | $21.3 million | $15.4 million | +38% |
| Net income | $13.3 million | $9.0 million | +48% |
| Diluted EPS | $0.30 | $0.20 | +$0.10 |
| Operating margin | 18.5% | 17.3% | +1.2 percentage points |
| Net margin | 11.5% | 10.1% | +1.4 percentage points |
For the nine months ended September 30, revenue was $347.7 million versus $272.0 million (+28%); operating income was $61.2 million versus $56.7 million (+8%); and net income was $38.1 million versus $34.3 million (+11%). Operating margin declined to 17.6% from 20.8%, while net margin declined to 11.0% from 12.6%. Nine-month diluted EPS was $0.86 versus $0.81.
- Revenue mix, Q3: Card revenue $50.0 million (+23% year over year); cash-transfer revenue $34.7 million (+31%); interchange revenue $34.2 million (+27%). Stock-based retailer incentive compensation reduced revenue by $3.5 million, compared with $5.2 million a year earlier.
- Operating costs: Q3 sales and marketing rose 35% to $40.9 million, compensation and benefits rose 24% to $21.8 million, processing rose 21% to $17.6 million, and other general and administrative costs rose 26% to $13.9 million. Management attributed growth chiefly to higher sales volume, investment in the business, and infrastructure costs; it cited processing and call-center efficiencies.
- Cash flow: Nine-month operating cash flow was $76.5 million, compared with $77.5 million. Investing used $52.2 million, principally for $40.1 million of securities purchases, $17.0 million of property and equipment, and increased restricted cash, partly offset by $10.0 million of security maturities. Financing provided $6.5 million. Unrestricted cash increased $30.8 million to $198.3 million.
- Balance sheet: Total assets were $351.8 million and total liabilities $121.3 million at September 30. Current assets were $296.8 million against current liabilities of $110.9 million. Cash and cash equivalents were $198.3 million; available-for-sale securities totaled $29.9 million, of which $22.2 million were current. The filing does not provide a clear amount of outstanding borrowings; it notes cash collateral requirements on a line of credit and $10.3 million of restricted cash.
- Tax: Q3 effective tax rate was 37.9%, down from 42.2%; the nine-month rate was 38.1%, down from 39.7%. The company attributed the lower 2011 rate partly to California apportionment changes and the prior-year comparison to discrete tax and IPO-related items.
Changes, outlook, and material matters
- Business volumes grew: Q3 GPR activations were 1.96 million versus 1.47 million; active cards reached 4.15 million versus 3.28 million; cash transfers were 8.87 million versus 6.89 million; and gross dollar volume was $4.1 billion versus $2.5 billion.
- Management said Q3 net income growth reflected revenue growth, processing and call-center efficiencies, and a lower effective tax rate, partly offset by a $10.6 million increase in sales and marketing expense. For the nine-month period, sales and marketing expense rose 44%, including higher Walmart commissions under the amended agreement.
- No specific financial guidance is provided in the supplied filing text. Management cautioned that Q4 2011 revenue could be below earlier 2011 quarters because it expected substantially less tax-refund activity. It also noted seasonal and other influences could cause quarterly fluctuations, and expected Walmart-share-based retailer incentive compensation to decline year over year in Q4.
- October developments included agreements to distribute Green Dot cards through Blackhawk’s network, provide reload services for First Data payroll cards, and add three Walmart MoneyCard products, with a nationwide rollout planned for Q4 2011.
- Key exposures include heavy distributor concentration: Walmart represented 61% of Q3 revenue, and the three other largest distributors collectively represented 20%. Substantially all customer funds were held at two issuing banks; failure of either could disrupt service and cause losses. Interchange regulation, competition, fraud, overdraft recoveries, settlement risk, and dependence on third-party processors and issuing banks are also highlighted risks.
- The proposed $15.7 million Bonneville Bancorp acquisition remained subject to regulatory approval. A patent-infringement lawsuit filed by Integrated Technological Systems on October 7, 2011 seeks an injunction and damages; Green Dot said it would defend the case. The filing also describes an ongoing Florida Attorney General investigation into alleged hidden fees involving prepaid cards. No reserves were recorded for legal proceedings because losses were not considered probable and/or reasonably estimable.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and card-volume growth can continue as tax-refund-related activity normalizes, particularly in Q4.
- How higher sales commissions and marketing investment affect margins and returns, including the amended Walmart agreement and the retailer incentive compensation charge.
- Distributor and bank concentration, contract-renewal terms, settlement exposures, and the collectability of overdrafts. The overdraft reserve was $17.4 million against $24.6 million of gross cardholder overdrafts at quarter-end.
- Potential effects of interchange regulation and other regulatory developments on revenue, costs, and product economics.
- Regulatory progress and potential obligations associated with the Bonneville bank acquisition, and developments in the patent lawsuit and Florida investigation.
- Cash deployment, capital expenditure needs, and any use or availability of the line of credit; the filing text does not state a clear outstanding debt balance.