Green Dot Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Green Dot provides prepaid and deposit-account products, payment processing, cash reloads, and tax refund services through retail, online, payroll, and tax-preparation channels.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $253.0 million | $228.0 million | +11.0% |
| Operating expenses | $191.6 million | $173.5 million | +10.4% |
| Operating income | $61.4 million | $54.5 million | +12.7% |
| Net income | $40.8 million | $32.9 million | +23.9% |
| Diluted EPS | $0.78 | $0.63 | +23.8% |
| Cash from operating activities | $94.9 million | $71.3 million | +$23.6 million |
Revenue comprised card revenues and other fees of $101.0 million (+10%), processing and settlement service revenues of $90.7 million (+12%), and interchange revenues of $61.4 million (+11%). Operating margin was approximately 24.3%, versus 23.9% a year earlier; net margin was approximately 16.1%, versus 14.4%.
At March 31, unrestricted cash and cash equivalents were $785.8 million and available-for-sale securities were $183.8 million. Total assets were $1.88 billion, total liabilities $1.20 billion, and stockholders’ equity $684.0 million. Debt, net of financing costs, was $145.3 million, including $50.0 million drawn on the revolving facility; the effective borrowing rate was 3.90%. The company reported compliance with its debt covenants and described its subsidiary bank as well capitalized.
Investing activities used $135.9 million, including $139.3 million for the UniRush acquisition, net of cash acquired. Financing activities provided $94.2 million, primarily reflecting customer deposit growth and net revolving-facility borrowings, partly offset by a $50.0 million share repurchase. Unrestricted cash increased $53.2 million during the quarter.
Material changes and operating trends
- UniRush was acquired on February 28 for total estimated consideration of $157.9 million, including $139.9 million cash and $18.0 million estimated contingent consideration. UniRush contributed $11.9 million of revenue in March; its reported net income did not significantly affect results. Purchase accounting remains preliminary.
- Revenue growth reflected higher revenue per active card, improved product economics, increased tax refunds processed, and UniRush. Active cards rose 6% year over year to 5.05 million, but organic active cards declined 8% to 4.36 million.
- Cash transfers declined 4% to 9.30 million, while tax refunds processed increased 5% to 8.60 million. Gross dollar volume increased 17% to $7.7 billion; purchase volume increased 17% to $5.5 billion.
- Processing expenses rose 44% to $40.9 million, including $4.7 million of incremental costs to continue processing accounts on a legacy third-party platform and $3.6 million associated with UniRush. Management said it would seek recovery of the legacy-platform costs but gave no assurance of success.
- Walmart accounted for 37% of operating revenue, up from 36% in Q1 2016.
Outlook, risks, contingencies, and unusual items
- The 2017 Six Step Plan targets revenue growth, lower expenses, and EPS growth. Actions include aiming to return organic active-card growth by early 2018, expanding MoneyPak use cases, integrating UniRush, pursuing cost savings, considering strategic acquisitions, and completing a further $50 million share repurchase in 2017. The filing provides no numerical earnings or revenue guidance.
- Management stated that cash, operating cash flow, and available borrowing capacity should be sufficient for working capital, capital expenditures, debt service, and settlement of the repurchase. The $150 million repurchase authorization was fully used, subject to final settlement of the March ASR, expected by September 2017.
- UniRush’s earn-out includes a minimum $4 million annual payment for five years, with possible higher payments tied to revenue performance. The recorded contingent consideration liability was $26.4 million at quarter-end.
- Two putative class actions followed customer service disruptions during a 2016 processor conversion. Green Dot accrued approximately $2.3 million for its share of an estimated settlement; its insurer agreed to reimburse the amount. The filing says other legal matters are not expected to have a material adverse impact, based on current knowledge.
- Key risks include dependence on Walmart and other distributors and tax partners; continued organic active-card declines; competition and interchange-rate changes; fraud, cybersecurity, and third-party processor disruptions; regulatory requirements, including brokered-deposit rules; and seasonality in tax processing. Tax refund activity is concentrated in the first half of the year.
- Green Dot adopted new stock-compensation accounting in 2017, including a $1.8 million reduction to opening retained earnings from recognizing forfeitures as they occur. The effective tax rate was 34.9%, down from 36.8%, partly reflecting the accounting change.
Investor verification priorities
- Track organic active-card counts, retention, and revenue per active card separately from acquisition-driven growth.
- Verify whether management recovers the $4.7 million of legacy processor costs and completes the planned processor transition without further service disruptions.
- Assess UniRush integration, purchase-accounting revisions, realized synergies, and future earn-out payments against stated expectations.
- Monitor Walmart and tax-partner relationships, contract renewals, and revenue concentration.
- Review debt, revolver availability, regulatory capital, and final settlement of the March 2017 accelerated share repurchase.
- Follow the class-action settlement and insurance reimbursement, along with developments in regulatory, fraud, cybersecurity, and brokered-deposit risks.