Green Dot Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Dollar amounts below are in millions unless noted. Green Dot provides prepaid and checking accounts, cash reload and transfer services, and tax refund processing through retail, online and tax-preparation channels. Its network includes more than 100,000 U.S. locations. Results include acquisitions, including AccountNow (acquired January 2015) and TPG (acquired in October 2014).
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $146.4 | $144.7 | $543.8 | $450.9 |
| Operating income (loss) | $(1.7) | $13.3 | $71.1 | $58.7 |
| Net income | $0.2 | $13.9 | $44.5 | $43.5 |
| Net income available to common stockholders | $0.2 | $12.3 | $43.2 | $38.0 |
| Basic / diluted EPS | Reported as “—” | $0.30 / $0.30 | $0.84 / $0.83 | $0.96 / $0.95 |
- Revenue mix: Q3 card revenues and other fees were $71.9 (+22% year over year); processing and settlement revenues were $28.5 (−35%); interchange revenues were $46.0 (+5%). Nine-month revenue rose 20.6%.
- Profitability: Q3 operating margin was approximately −1.2%, versus 9.2% a year earlier; nine-month operating margin was approximately 13.1%, broadly level with the prior-year period. Q3 pretax loss was $2.0 and tax benefit was $2.2. Nine-month effective tax rate was 36.6%.
- Cash flow: Nine-month operating cash flow was $113.7, compared with $46.8 in 2014. Investing used $197.8 and financing used $33.4. Unrestricted cash, cash equivalents and federal funds sold declined $117.5 to $607.2.
- Liquidity and balance sheet: At September 30, unrestricted cash was $606.7 and available-for-sale securities totaled $213.9. Total assets were $1,521.3; current assets were $798.6 and current liabilities $705.2. Customer deposits were $500.0 and are operating obligations, not corporate borrowings.
- Debt: Notes payable totaled $133.1, down from $150.0 at year-end 2014; the revolving facility was undrawn. The term loan carried an effective 2.94% rate and matures in October 2019. Green Dot reported compliance with covenants.
- Other metrics: Active cards were 4.51 million versus 4.63 million a year earlier. Gross dollar volume rose to $5.0 billion in Q3 from $4.6 billion; purchase volume rose to $3.7 billion from $3.4 billion. Q3 cash transfers fell to 9.53 million from 12.49 million.
Material changes versus prior periods
- Q3 revenue increased only 1.2%, while expenses rose 12.7%, producing an operating loss versus operating income in Q3 2014. Nine-month revenue and operating income increased, but net income was nearly flat.
- Management attributed Q3 card-fee and interchange growth mainly to acquired online and direct-to-consumer programs. Processing and settlement revenue fell primarily after Green Dot discontinued its MoneyPak PIN product in Q1 2015.
- Management reported a 6% decline in active cards since June 30, 2015, which affected fee and interchange revenue; it expected the decline to largely stabilize through the rest of 2015. Walmart MoneyCard revenue also faced pressure from lower-fee products and fewer active cards.
- Operating expenses increased with acquisition-related staffing, acquired-intangible amortization, higher processing costs and software impairment. Nine-month software impairment was $5.7; acquired-intangible amortization was a significant expense.
- Green Dot renewed its Walmart MoneyCard agreement in June 2015 through May 2020, with a possible two-year automatic renewal. The sales commission rate increased, although Q3 sales and marketing expense declined due to lower card activity and cash-transfer revenue.
Outlook, risks and unusual items
- No specific quantified earnings or revenue guidance is provided in this filing. Management said available cash, operating cash flow and borrowing capacity should cover working capital, capital expenditures, debt service and remaining repurchases for at least 12 months. It expected higher 2015 compensation, facilities, amortization and technology-related costs.
- Management identified concentration risk: Walmart products generated 50% of Q3 revenue and 44% of nine-month revenue. Tax-refund processing is seasonal and depends on a relatively small number of tax-preparation partners.
- Other principal risks include regulation of banking, prepaid products and tax services; fraud, overdrafts and data security; reliance on third-party processors and distributors; competition and interchange-rate changes; and execution and impairment risks from acquisitions and technology investment.
- The company authorized a $150 million share-repurchase program and paid $40 million under an accelerated repurchase agreement for an initial delivery of about 1.8 million shares. Final settlement was scheduled for Q1 2016; approximately $110 million remained authorized as of September 30.
- Contingent consideration liability was $14.8, down from $23.2 at year-end, including a $7.5 fair-value gain for the first nine months. The filing reports $5.7 of software impairment. Legal proceedings had no recorded reserves because losses were not considered probable and/or reasonably estimable. Federal tax returns for 2009–2012 were under IRS examination; unrecognized tax benefits were $7.3.
- Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter. The filing identifies Mark Shifke as interim CFO; a November 9, 2015 agreement set out the former CFO’s transition arrangements.
Most important facts for investors to verify
- Whether active-card levels and cash-transfer activity stabilize after the MoneyPak PIN discontinuation, and whether migration to swipe reloads offsets lost volume.
- The revenue, margin and customer-retention effects of the higher Walmart commission rate and the renewed Walmart agreement.
- How much acquired-business growth is recurring and profitable after integration costs, amortization and potential impairment charges.
- Whether operating cash flow remains strong while Green Dot funds capital investment, debt service and the remaining share-repurchase authorization.
- Developments in tax-preparation partner retention, regulatory requirements, IRS examinations and other legal or regulatory matters.