Green Dot Corporation — Q3 2014 Form 10-Q
Business context and reporting period. Green Dot is a bank holding company offering prepaid cards, cash reload and transfer services, gift cards, and GoBank mobile checking through retail and online channels. This unaudited filing covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $144.7 million | $136.5 million | $450.9 million | $431.3 million |
| Operating income | $13.3 million | $8.0 million | $58.7 million | $48.7 million |
| Net income | $13.9 million | $6.1 million | $43.5 million | $33.0 million |
| Diluted EPS | $0.30 | $0.13 | $0.95 | $0.74 |
| Operating cash flow | Not presented quarterly | $46.8 million | $93.0 million |
- Operating margins were approximately 9.2% in Q3 2014 versus 5.8% in Q3 2013, and 13.0% versus 11.3% for the nine-month periods. Net income included a $6.4 million net lawsuit-settlement gain in Q3 2014, recorded as other income; without it, reported income would have been lower.
- At September 30, unrestricted cash and cash equivalents were $632.6 million; available-for-sale securities totaled $213.5 million. Total assets were $1.12 billion and total liabilities $640.9 million. Deposits were $441.9 million, up from $219.6 million at year-end, largely reflecting the transfer of customer deposits from GE Capital Retail Bank to Green Dot Bank. No funded credit-facility debt was reported at quarter-end.
- Nine-month operating cash flow fell to $46.8 million from $93.0 million. The filing attributes the 2014 cash flow in part to a $49.1 million payment to GE Capital Retail Bank related to cardholder overdrafts. Financing cash flow of $217.3 million was primarily driven by increased customer deposits; investing cash use was $54.6 million, including $23.8 million in property and equipment and a $14.9 million acquisition.
Changes versus the prior period
- Q3 revenue increased 5.9%; nine-month revenue increased 4.6%. Growth in card fees and interchange was partly offset by lower cash transfer revenue.
- Card revenues and other fees rose 15.3% in Q3 and 10.1% year to date, supported by active-card growth, maintenance fees and new-card fees. Interchange revenue increased 7.4% in Q3 and 3.2% year to date.
- Cash transfer revenue declined 6.6% in Q3 and 0.9% year to date despite more transactions. Green Dot cited fee-free transfers, a shift toward lower-priced products and the planned phase-out of MoneyPak PIN reloads.
- Operating expenses increased 2.1% in Q3 and 2.5% year to date. Higher sales and marketing and general and administrative costs were partly offset by lower compensation and processing expense, including savings after moving the GE Capital card program to Green Dot Bank.
Outlook, risks and unusual items
- Management expected Q4 2014 sales and marketing expense to rise year over year, in absolute dollars and as a share of revenue, due to new-product distribution, GoBank’s Walmart rollout and seasonal gift-card sales. It also expected roughly $4 million of TPG transaction costs and about $6 million of TPG operating expenses in Q4. The filing provides no specific earnings or revenue guidance.
- MoneyPak PIN reloads were expected to be fully replaced by other reload methods by the end of Q1 2015. Management said it could not predict the long-term effect on reload behavior and revenue.
- After quarter-end, Green Dot acquired Santa Barbara Tax Products Group (TPG) on October 23, 2014, for approximately $339.1 million in cash and stock, with a possible $80 million cash earn-out tied to performance. It drew a $150 million five-year term loan under a $225 million credit agreement to help finance the acquisition. The agreement includes financial covenants and quarterly principal payments of $5.625 million. Management said available cash, operating cash flow and the revolving facility should cover needs for at least the next year.
- Management identified significant exposure to major retail distributors: Walmart generated 51% of Q3 and 55% of nine-month revenue; the next three largest distributors together accounted for 24% and 22%, respectively. The filing warns that losing a major distributor could materially harm results.
- Other key risks include regulation of prepaid and money-transfer products, competition and interchange-rate changes, fraud and overdraft losses, third-party processing dependence, settlement exposure to retailers, and execution and seasonal risks from integrating TPG. The IRS was examining federal returns for 2009–2011; the filing did not record reserves for pending legal proceedings because losses were not considered probable or reasonably estimable. Disclosure controls were assessed as effective, with no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether growth in card and interchange revenue can offset lower cash-transfer pricing and the MoneyPak PIN phase-out.
- TPG’s post-acquisition performance, integration costs, seasonal revenue pattern and any earn-out obligation; also the impact of the new debt and covenant compliance.
- Ongoing Walmart and other distributor concentration, contract renewals and the extent to which TPG diversifies revenue sources.
- Cash-flow sustainability apart from customer-deposit movements and the one-time overdraft-related payment; monitor transaction losses, fraud and overdrawn-account reserves.
- Developments in prepaid-card regulation, interchange rules, IRS examinations and any material changes in legal contingencies.