Green Dot Corporation — Q2 2013 Form 10-Q
Business context and reporting period. Green Dot is a bank holding company offering prepaid cards, cash-transfer and reload services, gift cards, and the GoBank mobile checking product. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $140.6 | $135.0 | $294.8 | $276.2 |
| Operating income | $17.4 | $17.1 | $40.7 | $42.8 |
| Net income | $11.3 | $10.9 | $26.9 | $27.2 |
| Net income allocated to common stockholders | $9.5 | $9.1 | $22.6 | $22.8 |
| Diluted EPS | $0.25 | $0.25 | $0.61 | $0.62 |
| Operating margin | 12.3% | 12.7% | 13.8% | 15.5% |
| Net margin | 8.0% | 8.0% | 9.1% | 9.9% |
- Q2 revenue grew 4.1%; six-month revenue grew 6.7%. Q2 operating income increased 1.3%, while six-month operating income declined 4.9%. Net income rose 4.0% in Q2 but fell 1.3% for the first half.
- Q2 revenue mix: card revenues and other fees $55.0 (down 5%); cash-transfer revenues $45.6 (up 13%); interchange revenues $41.9 (up 6%). The six-month figures were $119.7 (up 1%), $90.0 (up 13%), and $88.7 (up 7%), respectively. Lower stock-based retailer incentive compensation also lifted reported total revenue.
- Q2 operating expenses rose 4.5% to $123.3; for the first half they rose 8.8% to $254.1. Higher compensation and benefits, depreciation and amortization, and transaction losses contributed to cost growth.
- Six-month operating cash flow was $87.1, versus $56.5 in 2012. Investing used $5.9, versus $158.0, which included the $33.4 Loopt acquisition and greater net securities purchases in 2012. Financing provided $29.2, versus $0.8 used in 2012. Unrestricted cash, cash equivalents, and federal funds sold increased $110.4 to $407.0.
- At June 30, unrestricted cash was $406.1 and available-for-sale securities totaled $172.5. Total assets were $808.5; total liabilities were $440.6; stockholders’ equity was $367.9. The filing reports no material conventional borrowing balance; interest expense was $0.03 for the first half. Customer deposits and obligations are reported as liabilities.
Changes, outlook, and material items
- Growth in cash transfers and purchase volume supported cash-transfer and interchange revenue, while card revenues were pressured by a 1% year-over-year decline in active cards and greater use of fee-free ATMs. Active cards were 4.39 million versus 4.44 million; cash transfers sold rose 12% in both the quarter and first half. Purchase volume rose 10% in Q2 and 6% in the first half.
- Management said competition at major retailers and enhanced risk controls were adversely affecting results and expected those effects to continue through the remainder of 2013 and the foreseeable future. Green Dot declined approximately 20% of new card activation attempts in the first half, more than double the prior-year level.
- The company was rolling out products at approximately 20,000 additional retail locations, including Home Depot, Kroger convenience stores, Save-a-Lot, Dollar General, and Dollar Tree. Management expected added sales and marketing costs during the rest of 2013 and capital expenditures for 2013 to be similar to 2012. It stated current cash and operating cash flows should cover working capital and capital expenditure needs for at least 12 months.
- Management expected stock-based retailer incentive compensation to be significantly higher in the second half of 2013 than in the second half of 2012, reflecting recent share-price appreciation. The first-half effective tax rate was 36.5%, including an approximately $0.5 benefit from retroactively reinstated 2012 general business credits; excluding that item, the rate would have been 37.7%.
- Retailer concentration is substantial: Walmart generated 66% of first-half revenue and the next three largest distributors together generated 22%. The four largest distributors accounted for 84% of GPR card activations and 88% of cash-transfer sales in the first half. Walmart and other major distribution agreements have terms expiring in 2014–2015, with certain termination rights.
- Green Dot was seeking regulatory approval to transition the Walmart MoneyCard program and related customer funds from GE Capital Retail Bank to Green Dot Bank. The filing cites potential additional bank capital contributions and settlement of overdraft-related liabilities if the transition proceeds. The company reported that it remained “well capitalized” under the applicable regulatory framework.
- On July 31, 2013, after quarter-end, a court overturned portions of the Federal Reserve’s interchange-fee and network-exclusivity rules; existing rules remained in place pending replacement. Management warned that future regulation or network changes could affect interchange revenue. A securities class action was dismissed with prejudice on June 19, 2013, with no payment to plaintiffs.
Key investor verification points
- Track active-card trends, activation declines, cash-transfer growth, purchase volume, and whether new retail distribution offsets competitive pressure.
- Assess Walmart and other major retailer relationships, contract renewal and termination terms, and progress and regulatory approval for moving the Walmart program to Green Dot Bank.
- Monitor expense growth, especially compensation, depreciation and amortization, transaction losses, rollout spending, and the anticipated second-half increase in retailer incentive compensation.
- Review interchange regulation and payment-network changes, as well as consumer-financial-services, money-transmission, and compliance developments.
- Evaluate credit and settlement exposure: customer overdrafts, retailer settlement assets of $48.7, and reliance on GE Capital Retail Bank and other financial institutions. Management disclosed no established reserves for ordinary legal proceedings where loss was not considered probable or reasonably estimable.