Green Dot Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Green Dot is a financial technology company and bank holding company operating Account Services and Processing and Settlement Services businesses, including its Banking-as-a-Service platform.
Financial results and liquidity
Amounts in millions, except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $362.2 | $340.5 | +6.4% |
| Operating expenses | $303.3 | $259.1 | +17.1% |
| Operating income | $58.8 | $81.4 | -27.7% |
| Net income | $46.8 | $64.0 | -26.9% |
| Diluted EPS | $0.87 | $1.17 | -25.6% |
| Operating cash flow | $104.1 | $115.4 | -9.8% |
- Operating margin fell to approximately 16.3% from 23.9%; net margin fell to approximately 12.9% from 18.8%.
- Revenue by category: card revenues and other fees rose 9.1% to $141.4 million; processing and settlement service revenue rose 14% to $123.1 million; interchange revenue declined 2% to $90.9 million; net interest income fell 37% to $6.8 million.
- Account Services revenue was $245.4 million, with operating income of $33.8 million, down from $62.8 million. Processing and Settlement Services revenue was $125.6 million, with operating income of $58.3 million, up from $56.1 million.
- Key operating measures: gross dollar volume rose 10.1% to $14.3 billion; direct-deposit active accounts rose 4.2% to 2.99 million, while total active accounts fell 5.1% to 5.74 million. Purchase volume increased 1.0%, cash transfers 10.5%, and tax refunds processed 3.3%.
- At March 31, unrestricted cash and cash equivalents were $1.564 billion and available-for-sale securities were $307.5 million. Deposits were $1.616 billion; these are customer deposits and should not be viewed as unrestricted corporate liquidity.
- The company drew the full $100 million revolving credit facility in March as a precaution; the balance was $100 million versus $35 million at year-end, at a 2.00% interest rate. It reported compliance with debt covenants. Total assets were $3.046 billion and stockholders’ equity was $988.0 million.
- Cash used in investing was $73.9 million, including a $35 million TailFin Labs contribution and $15.7 million of property and equipment purchases. Financing cash flow was $469.9 million, principally reflecting a $442.0 million increase in customer deposits and $65.0 million of net revolver borrowings.
Material changes and management commentary
- Revenue grew, but expenses rose faster, compressing operating profitability. Management attributed expense growth to BaaS processing costs, lower expected payment-network incentives, higher partner commissions and marketing, and increased dispute losses and depreciation. Lower bonuses and performance-award compensation partly offset these increases.
- Management said COVID-19 disrupted retail and partner activity, reduced retail-channel acquisition and certain transaction volumes, and contributed to higher call-center costs and transaction losses. It also cited lower Federal Reserve rates as a source of reduced investment yields and expected lower interest income for the remainder of 2020.
- Online sales were strong during the quarter, and gross dollar volume increased. After quarter-end, Green Dot reported a surge in gross dollar volume from government stimulus deposits, but said mixed March and April trends made future results difficult to forecast.
- The company withdrew its 2020 guidance due to uncertainty around COVID-19. It said current cash, operating cash flows and the revolver were expected to meet working-capital, capital-expenditure and other commitments for at least 12 months. The CARES Act payroll-tax deferral was expected to provide approximately $6 million of additional liquidity during 2020.
- Green Dot renewed its Walmart MoneyCard agreement through January 2027, with an automatic one-year renewal provision. The higher commission rate under the new agreement is expected to weigh on 2020 sales and marketing expenses. Walmart-related products generated 25% of Q1 revenue, down from 30% a year earlier.
- Green Dot owns 20% of TailFin Labs, a fintech venture majority-owned by Walmart, and committed to contribute $35 million annually for five years. The first $35 million contribution was made in Q1.
Risks, contingencies and unusual items
- The filing identifies COVID-19 uncertainty as a major risk to customer activity, transaction and interchange volumes, partner operations, costs, investment yields, and financial-market access. The duration and financial effects were not yet predictable.
- Two related securities and shareholder lawsuits filed in 2019 and 2020 allege misleading statements concerning business strategy and related fiduciary-duty matters. The company could not predict the outcome or determine whether the litigation would materially affect results, financial condition or cash flows.
- Customer, regulatory and settlement risks remain relevant. The filing cites dependence on retail distributors, tax-preparation partners and third-party service providers; Walmart concentration; potential fraud and dispute losses; and regulatory requirements affecting the bank and payments businesses.
- Management reported that the company and Green Dot Bank were categorized as “well capitalized” at quarter-end. The company adopted the expected-credit-loss standard (CECL), recording an approximately $0.3 million after-tax reduction to beginning retained earnings; management said the effect was not material.
Important facts for investors to verify
- Whether post-quarter stimulus and unemployment-benefit deposits translate into sustained active accounts, purchase activity, interchange revenue and customer retention.
- Whether COVID-19-related disruptions, call-center costs, dispute losses and lower interest yields continue, and how these affect profitability and cash generation.
- Whether revenue growth can outpace operating expense growth, particularly processing costs and Walmart-related commissions.
- How much reported cash and deposit growth is operationally available to the company, given customer deposit obligations, and how liquidity evolves after the full revolver draw.
- Developments in the related litigation, Walmart relationship, TailFin Labs commitments, and applicable bank regulatory and capital requirements.