Green Dot Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Comparisons are with Q1 2012 unless noted. Green Dot provides prepaid debit and gift cards, cash-transfer and reload services, and was preparing to launch GoBank, a mobile checking account.
Financial results and liquidity
Amounts in millions, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $154.1 | $141.2 | +9.2% |
| Operating income | $23.3 | $25.6 | -9.0% |
| Operating margin | 15.1% | 18.2% | -3.1 percentage points |
| Net income | $15.6 | $16.4 | -4.8% |
| Diluted EPS | $0.35 | $0.37 | -5.4% |
| Operating cash flow | $24.5 | $37.3 | -34.2% |
| Capital expenditures | $8.9 | $7.8 | +$1.1 |
- Revenue grew across card fees, cash transfers, and interchange; lower retailer stock-based incentive compensation also supported reported revenue. Revenue components were $64.7 million card fees and other, $44.3 million cash transfers, and $46.8 million interchange.
- Operating expenses rose 13.2% to $130.8 million. Compensation and benefits increased 21% to $31.8 million, and other general and administrative expenses increased 31% to $20.9 million. Management cited headcount and Loopt retention costs, higher depreciation and amortization, and a $0.9 million software impairment.
- Cash and cash equivalents were $370.2 million at March 31; including federal funds sold, cash totaled $373.2 million. Available-for-sale investments were $163.2 million. The company said cash and operating cash flow should meet working capital and capital spending needs for at least 12 months.
- Total assets were $787.0 million; total liabilities were $438.5 million and equity was $348.5 million. Deposits were $222.0 million. The filing does not report conventional corporate borrowings as a material balance-sheet item; deposits and customer obligations are operating/financial liabilities, not a proxy for funded corporate debt.
- Operating cash flow was lower mainly amid working-capital movements, including a $26.5 million use of cash from accounts receivable. Financing cash flow of $40.2 million was primarily from increases in deposits ($23.6 million) and customer obligations ($16.0 million). Cash and federal funds sold increased $76.6 million over the quarter.
Material changes and business trends
- Cash transfers sold increased 11% to 11.25 million; gross dollar volume rose to $5.1 billion from $4.8 billion; purchase volume increased 3% to $3.6 billion.
- Active cards fell 4% to 4.49 million from 4.69 million. Management attributed pressure to intensified competition and voluntary risk controls; about 20% of new card activation attempts were declined in Q1, more than double the comparable-period rate.
- Walmart generated 67% of revenue, while the next three largest distributors together contributed 21%. The company cautioned that losing a major distributor could materially harm results.
- Net income declined despite revenue growth, reflecting higher operating costs. The effective tax rate fell to 35.4% from 38.4%, including a roughly $0.5 million retroactive tax-credit benefit; excluding it, the Q1 2013 rate would have been 37.5%.
Outlook, risks, and unusual items
- No specific numerical financial guidance is provided in this filing. Management expected competitive pressure and risk controls to weigh on business and results through the remainder of 2013 and the foreseeable future.
- GoBank was expected to become generally available in Q2 or Q3 2013. Management expected 2013 capital expenditure investment to be similar to 2012 and noted that Walmart MoneyCard sales commissions were scheduled to increase by about four percentage points in May 2013.
- Key risks include dependence on Walmart and other major distributors, competition, activation declines from risk controls, interchange-rate and regulatory changes, fraud and overdraft losses, settlement exposure, and reliance on issuing banks and third-party processors. The company reported $48.5 million of settlement assets exposed to retailer settlement risk.
- A securities class action was dismissed without prejudice on May 2, 2013; plaintiffs were permitted to amend by June 17. The company said the outcome and potential financial impact could not be determined. Ordinary-course legal proceedings had no recorded reserve because loss was not considered probable and/or estimable.
- Unrecognized tax benefits were $2.3 million; federal tax returns for several years were under examination. The company reported no material change in contractual obligations. It was categorized as well capitalized under applicable bank regulatory standards.
- After quarter-end, the company completed an employee stock-option exchange: 463,305 eligible options were tendered and 251,427 new options were issued at an $18.56 exercise price.
Investor verification points
- Track active-card counts, activation declines, cash-transfer volume, purchase volume, and the effect of competition at Walmart and other distributors.
- Assess whether revenue growth can offset expense increases, including higher Walmart commissions, Loopt retention costs, infrastructure investment, and GoBank launch spending.
- Review cash-flow quality and working-capital movements, particularly accounts receivable, customer obligations, and deposits. The cash-flow statement reports investing cash flow of $11.9 million provided, while the MD&A describes the same amount as cash used; verify this narrative inconsistency against the filed statements.
- Monitor concentration and counterparty exposure involving Walmart, GE Capital Retail Bank, other issuing banks, and retail distributors, as well as regulatory and litigation developments.