Green Dot Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; financial statements are unaudited. Green Dot provides deposit-account and prepaid-card products, cash transfers, wage disbursements and tax-refund processing through its bank, retail network and Banking-as-a-Service partners.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $258.3 million | $222.5 million | $573.3 million | $475.5 million |
| Operating income | $27.2 million | $20.2 million | $103.6 million | $81.6 million |
| Net income | $29.8 million | $19.3 million | $99.9 million | $60.0 million |
| Diluted EPS | $0.55 | $0.37 | $1.84 | $1.14 |
| Operating cash flow | Not separately stated | Not separately stated | $167.7 million | $143.7 million |
- Q2 revenue rose 16.1%; six-month revenue rose 20.6%. Net income increased 54.8% and 66.4%, respectively. Q2 operating margin was approximately 10.5% versus 9.1%; six-month operating margin was approximately 18.1% versus 17.2%.
- Growth reflected 14% more active accounts, greater account usage and higher cash-transfer and tax-refund volumes. At June 30, active accounts were 5.86 million, gross dollar volume was $9.4 billion for Q2, and purchase volume was $6.3 billion for Q2.
- Expenses increased 14.2% in Q2 and 19.2% in the first half. Higher sales commissions, transaction losses, processing activity, staffing and contractor costs contributed. Q2 general and administrative expense also compared against a prior-year $7.5 million favorable contingent-consideration adjustment.
- Effective tax rates were 4.7% in Q2 and 10.6% for the first half, versus 8.2% and 28.2% in 2017. The company cited the lower federal tax rate and excess tax benefits from stock compensation.
- At June 30, unrestricted cash and cash equivalents were $1.118 billion; available-for-sale securities were $191.0 million. These balances should be considered alongside regulated-bank and customer-fund requirements.
- Debt was $69.2 million, net of financing costs; no revolving-facility borrowings were outstanding. The $75 million revolving facility was part of a secured credit agreement, and the term facility matures October 23, 2019. The company was covenant-compliant.
- Cash from investing activities was negative $70.4 million and cash from financing activities was positive $11.3 million for the first half. Capital expenditures were $27.4 million.
Changes, outlook and notable items
- Management reported that new Account Services products carried lower margins than established products, pressuring first-half mix. It expected established-product growth and maturation of new products to offset this effect in the second half; no quantified financial guidance is included in the supplied filing text.
- The 2018 Six Step Plan prioritizes active-account growth and unit economics, MoneyPak and cash-transfer growth, strategic investment, operating efficiencies, acquisition integration and potential acquisitions, and shareholder buybacks.
- Management expected 2018 capital expenditures to exceed 2017 levels, citing investment in products, programs and IT infrastructure. It said current cash, operating cash flow and borrowing capacity should meet expected needs.
- ASC 606 was adopted January 1, 2018. It changed the presentation of certain partner incentive payments from a reduction of revenue to sales and marketing expense; prior-period amounts were not restated. Adoption had no material effect on opening retained earnings or reported financial statements, but affects comparability.
- Walmart represented 37% of Q2 revenue and 35% of first-half revenue. The Walmart MoneyCard agreement was due to expire May 1, 2020, subject to an automatic renewal provision; the filing identifies distributor retention and contract terms as significant risks.
- A potential tax-processing acquisition earn-out of up to $26 million was not accrued; the final calculation was being resolved with a neutral third party. The company also reported ordinary-course legal matters and stated it did not expect them to have a material adverse effect based on its then-current assessment.
- Principal disclosed risks include retailer and tax-partner concentration, regulatory and bank-capital requirements, fraud and overdraft losses, service or data-security disruptions, competition, seasonality, and the possibility that new products or acquisitions fail to deliver expected results.
Investor verification priorities
- Track revenue growth, account activity and unit economics alongside transaction losses and operating margins, including the impact of new-product mix.
- Review Walmart and other major distributor agreements, revenue concentration, renewal terms and any changes in retailer support.
- Confirm the resolution and any payment obligation for the unaccrued tax-processing earn-out of up to $26 million.
- Assess whether planned investment and capital expenditures, debt repayment and any future repurchases remain consistent with liquidity and regulatory-capital needs.
- Evaluate the comparability effect of ASC 606 incentive-payment presentation and the sustainability of unusually low effective tax rates.
- Monitor the filing’s identified fraud, operational, cybersecurity, regulatory and seasonal risks; Green Dot reported that disclosure controls were effective and no material internal-control change occurred during the quarter.