Green Dot Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are to the same 2016 periods unless noted. Green Dot is a regulated bank holding company offering branded deposit and payment products and banking-as-a-service, alongside processing and settlement services.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $201.6M | $154.5M | $677.2M | $556.0M |
| Operating income (loss) | $13.1M | ($0.5M) | $94.6M | $66.8M |
| Net income | $13.6M | $2.0M | $73.7M | $42.9M |
| Diluted EPS | $0.26 | $0.04 | $1.40 | $0.83 |
- Q3 operating margin was approximately 6.5%, versus negative 0.3%; nine-month operating margin was approximately 14.0%, versus 12.0%. Q3 net margin was approximately 6.8%, versus 1.3%.
- Nine-month operating cash flow was $163.3M, compared with $102.0M. Investing used $209.7M, including $141.5M net cash for the UniRush acquisition; financing provided $21.9M. Unrestricted cash decreased $24.4M to $708.3M.
- At September 30, cash and cash equivalents were $708.3M unrestricted and $62.4M restricted; available-for-sale securities totaled $178.8M. Restricted cash rose largely to collateralize a business-partner prefunding obligation.
- Debt was $84.8M, net of financing costs, with no revolving-facility balance outstanding. The term loan’s effective rate was 3.99% and it matures in October 2019. Green Dot reported compliance with debt covenants and “well capitalized” regulatory status.
- Customer deposits were $834.7M, compared with $737.4M at year-end 2016. These are deposit liabilities, not corporate cash.
Changes versus prior year
- Revenue grew 30.5% in Q3 and 21.8% for the nine-month period. Growth reflected UniRush, improved revenue per active card and customer usage, and higher unit economics in processing and settlement services.
- UniRush, acquired February 28 for preliminary consideration of $163.7M, contributed results from March 1. Active cards increased 28% year over year to 5.23M, driven by the acquisition and 5% organic growth. Reported revenue growth therefore includes acquired business.
- Operating expenses rose 21.6% in Q3 and 19.1% for nine months, slower than revenue growth. Higher processing costs included acquisition-related and transaction-volume effects; sales, compensation, and acquired-intangible amortization also increased.
- The nine-month effective tax rate fell to 24.7% from 33.6%, principally reflecting stock-compensation tax benefits under newly adopted accounting guidance and releases of uncertain-tax-position reserves. Q3 tax expense was $0.7M, with a 4.6% effective rate.
- Q3 interchange revenue increased 41% to $64.2M; it represented 31.8% of Q3 revenue. Nine-month tax refunds processed increased 6% to 11.11M, while cash-transfer transactions increased 1% to 28.65M.
Outlook, commentary, risks and unusual items
- No numerical financial guidance is provided in the filing. Management said it had completed or was on track to complete the 2017 Six Step Plan, including returning the organic active-card portfolio to growth in 2018, integrating UniRush, growing initiatives and pursuing shareholder repurchases.
- Although the 2015 $150M repurchase authorization was used, a further $150M authorization announced in May 2017 was not expected to receive regulatory approval before the latter part of 2018, given planned enterprise programs and capital and liquidity needs. The March 2017 $50M accelerated repurchase remained subject to final settlement.
- Management stated existing unrestricted cash, operating cash flow and borrowing capacity should meet working-capital, capital-expenditure, debt-service and contemplated repurchase needs. It also expected continued investment in products, programs and technology.
- Processor-conversion issues generated approximately $9.4M of incremental expense in the first half of 2017; the issue was described as resolved, and Green Dot received a $6.5M partial recovery in Q3, recorded as an offset to processing expense. The filing also reports $3.5M of lawsuit-settlement expense during the nine months.
- UniRush purchase accounting remained preliminary. Consideration includes a five-year earn-out, with a minimum $4M annual payment and possible additional payments tied to revenue targets.
- Walmart accounted for 41% of Q3 and 39% of nine-month revenue. The filing highlights distributor and tax-partner concentration, regulation and compliance, fraud and overdrafts, data security, vendor and system reliability, interchange-rate changes, seasonality, acquisition integration, and goodwill impairment as material risks.
- A $2.3M estimated company share of a processor-conversion class-action settlement was accrued; the insurer agreed to reimburse the amount. The filing states ordinary-course legal matters were not expected to materially adversely affect results, based on management’s current knowledge.
Most important facts for investors to verify
- How much of revenue and active-card growth is sustainable organic growth versus UniRush contribution, and whether active-card growth continues as targeted.
- Whether improved unit economics and expense discipline persist after the $6.5M processor-cost recovery and as transaction volumes rise.
- Walmart’s continued distribution support and the renewal terms of major distributor and tax-preparation relationships.
- Regulatory capital and liquidity needs, the timing of any new repurchase authorization, and the final March 2017 accelerated-repurchase settlement.
- Final UniRush purchase-price allocation, earn-out exposure, and integration performance; also monitor the material concentration of goodwill and intangible assets.