Green Dot Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Green Dot is a bank holding company and financial technology provider offering deposit accounts, prepaid and debit cards, cash-transfer, disbursement, tax-processing, and Banking-as-a-Service products through Green Dot Bank and partner channels.
Financial performance
| Metric | Q1 2018 | Q1 2017 or prior date | Change |
|---|---|---|---|
| Operating revenue | $315.0 million | $253.0 million | Up 24.5% |
| Operating income | $76.4 million | $61.4 million | Up 24.4% |
| Net income | $70.0 million | $40.8 million | Up 71.8% |
| Diluted EPS | $1.29 | $0.78 | Up 65.4% |
| Operating margin | 24.2% | 24.3% | Approximately flat |
| Net cash from operating activities | $88.9 million | $94.9 million | Down $6.0 million |
| Unrestricted cash and cash equivalents | $1,268.1 million | $919.2 million at Dec. 31, 2017 | Up $348.9 million |
| Available-for-sale investments | $148.5 million | $153.5 million at Dec. 31, 2017 | Down $5.0 million |
| Note payable, net | $74.4 million | $79.6 million at Dec. 31, 2017 | Down $5.2 million |
| Total deposits | $1,293.3 million | $1,022.2 million at Dec. 31, 2017 | Up $271.1 million |
Revenue growth reflected higher active accounts and customer activity, alongside increased cash-transfer and tax-refund processing volumes. Card revenues and other fees rose 29% to $130.1 million; processing and settlement revenues rose 10% to $100.2 million; interchange revenues rose 38% to $84.7 million. Operating expenses rose 24.5% to $238.6 million, led by sales commissions, compensation, and transaction-related processing costs. Net margin increased to approximately 22.2% from 16.1%, primarily reflecting a lower tax rate.
Operating cash flow was $88.9 million; investing activities used $10.5 million and financing activities provided $266.3 million. The financing inflow primarily reflected increased customer deposits. Cash, cash equivalents, and restricted cash together ended at $1,354.7 million. Restricted cash was $86.6 million. The company reported no revolver borrowings, and stated it had adequate liquidity from cash, operating cash flow, and available borrowing capacity. Term debt bears variable interest; its effective rate was 4.38%, and the facility matures October 23, 2019. The company was in compliance with debt covenants and reported itself and Green Dot Bank as “well capitalized.”
Changes, outlook, and significant matters
- Active accounts increased 19% to 6.01 million; gross dollar volume rose 57% to $11.7 billion and purchase volume rose 36% to $7.5 billion. Cash transfers increased 9% to 10.10 million; tax refunds processed increased 2% to 8.75 million.
- Management said newer Account Services products had lower margins than established offerings, creating first-quarter mix-related margin pressure. It expected established-product growth and maturation of new products to offset the unfavorable mix impact in the second half of 2018.
- The February 2018 Six Step Plan targets active-account growth and improved unit economics, a new MoneyPak use case and more cash transfers, investment in growth initiatives, operating efficiencies and margin expansion, acquisition integration and potential strategic acquisitions, and shareholder repurchases.
- Management expected 2018 capital expenditures to exceed 2017 levels as it invests in products, programs, and technology infrastructure. Although the board authorized a further $150 million repurchase program in May 2017, management did not expect to seek regulatory approval before the latter part of 2018 at the earliest, citing capital and liquidity needs for new enterprise programs. No numerical earnings or revenue guidance is provided in this filing.
- The Tax Act reduced the federal corporate tax rate, and the effective tax rate fell to 12.9% from 34.9%, partly due to stock-compensation tax benefits. The company noted provisional Tax Act accounting could be adjusted as it completes its analysis.
- ASC 606 was adopted January 1, 2018. It did not materially affect results or opening retained earnings, but shifted certain partner incentive payments from revenue reductions to sales and marketing expense; reported incentive payments were $1.8 million in Q1 2018 and $1.1 million in Q1 2017. Prior-period figures were not recast.
- Walmart accounted for 33% of revenue, down from 37% a year earlier. The Walmart MoneyCard agreement expires May 1, 2020, subject to its renewal provision. A loss or renegotiation of major distribution relationships could materially affect results.
- A potential tax-processing acquisition earn-out of up to $26 million was not accrued because Green Dot believed the performance target was not met; the final calculation was being resolved with a neutral third party. An unfavorable resolution could require payment. The company also disclosed ordinary-course litigation and an estimated $2.3 million accrual for its share of a card-processing disruption settlement, with insurance reimbursement agreed.
Key risks and investor verification points
- Verify the sustainability and profitability of growth in active accounts, purchase volume, and BaaS programs, particularly given lower margins on newer products and increased sales, marketing, and processing costs.
- Assess the dependence on Walmart and other distribution partners, including renewal terms, and the concentration of tax-processing revenue among a limited number of partners.
- Monitor the disputed earn-out exposure of up to $26 million, litigation and regulatory matters, fraud and overdraft losses, and the adequacy of related reserves and insurance.
- Track regulatory capital, brokered-deposit requirements, variable-rate debt exposure, covenant compliance, and the planned timing of any share repurchases against the capital needs of new programs.
- Consider tax-season seasonality, possible changes in interchange rates or regulation, cybersecurity and service interruptions, third-party processor reliance, and the company’s ability to manage compliance obligations.