Green Dot Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Green Dot is a financial technology company and bank holding company, operating a Banking-as-a-Service platform and consumer financial products through its subsidiary bank and broad distribution network. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $278.3 | $263.8 | $618.8 | $584.1 |
| Operating income | $44.0 | $32.6 | $125.3 | $114.3 |
| Net income | $34.7 | $29.8 | $98.7 | $99.9 |
| Diluted EPS | $0.64 | $0.55 | $1.82 | $1.84 |
| Operating margin | 15.8% | 12.4% | 20.3% | 19.6% |
| Net cash from operating activities | — | $167.1 | $167.7 |
Q2 revenue increased 5.5% year over year and net income rose 16.3%. For the first half, revenue grew 5.9%, but net income declined 1.1%, primarily reflecting the higher effective tax rate. Q2 effective tax rate was 20.8%, versus 4.7% a year earlier; first-half rates were 20.2% and 10.6%, respectively. Management attributed the increase chiefly to lower excess tax benefits from stock-based compensation and higher state taxes.
- Revenue mix, Q2: Card revenues and other fees $121.6 million; processing and settlement services $67.1 million; interchange $81.3 million; net interest income $8.3 million. Net interest income increased 54% year over year, mainly from higher rates and, to a lesser extent, higher average balances.
- Cash flow and investment: First-half operating cash flow was $167.1 million; investing cash outflow was $78.8 million, including $37.7 million for property and equipment; financing cash outflow was $82.9 million. Cash, cash equivalents and restricted cash totaled $1.101 billion at June 30. Unrestricted cash was $1.096 billion, with $244.0 million of available-for-sale securities.
- Debt and liquidity: No note payable was outstanding at June 30, following a $60 million voluntary term-loan prepayment in March. The $75 million revolving facility remained available until October 2019; there were no borrowings on it at quarter-end. The company reported compliance with debt covenants and said available liquidity and operating cash flows should meet expected needs.
- Balance sheet: Total assets were $2.502 billion and stockholders’ equity was $921.9 million at June 30. Customer deposits were $1.172 billion. Settlement assets were $334.8 million, with corresponding settlement and customer-related obligations on the balance sheet.
Material changes versus comparable periods
- Revenue growth reflected higher direct-deposit enrollment and associated purchase and gross dollar volume, growth in cash transfers and Simply Paid disbursements, and higher tax-refund processing in the first half. Gross dollar volume rose 6% in Q2 and 9% for the first half; purchase volume rose 2% and 6%, respectively.
- Active accounts fell to 5.66 million from 5.86 million year over year, chiefly due to fewer non-direct-deposit accounts in legacy programs. BaaS programs added approximately 240,000 active accounts, partially offsetting the decline. Management cited competition from largely free account offerings.
- Operating expenses grew 1.4% in Q2 and 5.0% for the first half, slower than revenue growth. Higher sales commissions, transaction processing costs, and depreciation and amortization were partly offset by lower Q2 compensation expense and operational efficiencies.
- First-half financing cash flow included a $100 million share repurchase under an accelerated share repurchase agreement (ASR), the $60 million debt prepayment, and a $140.1 million net increase in deposits. The ASR’s final share settlement was pending, expected by September 2019.
- Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and liabilities; the company reported no material effect on earnings or cash flows. Comparative periods were not restated.
Outlook, risks and contingencies
- Management expected active-account declines to continue through much of 2019, moderate in Q4, and believed the company was positioned to return to active-account and related revenue growth beginning in 2020. These are expectations, not guaranteed results.
- Green Dot intended to allocate up to $60 million in the second half of 2019, primarily to market new products and advance BaaS technology; management expected most of this investment to affect sales and marketing expense.
- Management warned that further Federal Reserve short-term rate cuts could reduce net interest income. This matters as bank-generated net interest income has become a more important revenue source.
- Walmart accounted for 35% of Q2 and 32% of first-half operating revenue. The Walmart MoneyCard agreement was due to expire May 1, 2020 unless automatically renewed; the filing notes termination and renewal risks for major retail distributors. Tax-processing revenue is also concentrated among a relatively small number of partners.
- Key risks include competitive pricing and customer attrition; reliance on distributors, tax partners and third-party vendors; operational outages, fraud and data security breaches; regulatory and compliance requirements; and credit or settlement exposure. Settlement assets totaled $334.8 million, and the filing says these exposures are not insured against settlement losses.
- The company said ordinary-course legal matters were adequately reserved or insured where applicable and did not expect them, individually or collectively, to materially adversely affect results or financial condition. Indemnity obligations may have no stated maximum; a UniRush earn-out liability of $13.2 million remained at June 30.
- Green Dot and Green Dot Bank were categorized as well capitalized. At June 30, their total risk-based capital ratios were 62.6% and 57.4%, respectively. The filing also identifies brokered-deposit restrictions as a potential risk if the bank were to lose well-capitalized status.
The filing presents no specific numerical earnings or revenue guidance. Forward-looking statements are subject to business, competitive, seasonal, economic and regulatory uncertainties. Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the active-account decline moderates as management expected, and whether BaaS growth offsets attrition in legacy accounts.
- Renewal and performance terms for the Walmart MoneyCard agreement and other key distributor and tax-preparation relationships.
- Actual second-half spending against the stated plan of up to $60 million, and its impact on operating expenses and margins.
- Effects of interest-rate changes on net interest income, deposit growth and investment yields.
- Final ASR settlement, remaining repurchase authorization, and the status of the revolving credit facility approaching its October 2019 maturity.
- Developments in fraud, settlement exposures, regulatory compliance, litigation and brokered-deposit requirements.