Green Dot Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated results, compared with Q1 2013. Green Dot provides prepaid cards, cash-transfer and reload services, and mobile banking products, including GoBank.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $159.3 million | $154.1 million | +3.3% |
| Operating expenses | $135.6 million | $130.8 million | +3.7% |
| Operating income | $23.7 million | $23.3 million | +1.4% |
| Net income | $15.3 million | $15.6 million | -1.8% |
| Net income allocated to common stockholders | $13.0 million | $13.1 million | -0.5% |
| Diluted EPS | $0.33 | $0.35 | -5.7% |
| Operating cash flow | -$0.2 million | $24.5 million | Down $24.7 million |
Operating margin was approximately 14.9%, versus 15.1% a year earlier; net margin was approximately 9.6%, versus 10.1%. Card fees rose 5% to $68.2 million, cash-transfer revenue rose 5% to $46.3 million, and interchange revenue increased 1% to $47.2 million. Purchase volume increased 8% to $3.9 billion; active cards increased to 4.72 million from 4.49 million.
Expenses rose 3.7% overall. Sales and marketing increased 7% to $60.2 million, while other general and administrative expense increased 26% to $26.3 million, primarily reflecting higher transaction losses and depreciation. Compensation and benefits declined 15% to $27.0 million.
Balance sheet, liquidity and cash flows
- At March 31, unrestricted cash and cash equivalents were $747.6 million, and available-for-sale securities totaled $160.2 million. Total assets were $1.153 billion; total liabilities were $726.6 million; stockholders’ equity was $426.1 million.
- Deposits rose to $526.3 million from $219.6 million at year-end. Green Dot said it completed the transfer of approximately $260 million of GPR customer deposits from GE Capital Retail Bank to Green Dot Bank in February.
- Cash from financing was $295.6 million, principally from a $306.8 million increase in deposits. Investing activities provided $28.8 million, including net proceeds from securities sales and maturities, partly offset by $10.5 million in property and equipment purchases.
- Operating cash flow was slightly negative, primarily because of a $49.8 million payment to GE Capital Retail Bank related to overdrawn cardholder balances. Management said existing unrestricted cash and operating cash flows should meet working-capital and capital-expenditure needs for at least the next year.
- The filing does not identify a material conventional borrowing or debt balance. Green Dot reported that it was well capitalized under the applicable bank-holding-company regulatory framework.
Material changes, outlook and risks
- The GE Capital Retail Bank card-program transition shifted customer deposits to Green Dot Bank and reduced third-party issuing-bank fees. Green Dot also reported a roughly $50 million capital contribution to its bank in connection with the transition.
- Revenue growth reflected, among other factors, $5.6 million of additional fee revenue from removing courtesy fee waivers and higher new-card fees. Management cautioned that it did not expect the same level of benefit from fee changes in future periods.
- Management expected sales and marketing expense to increase year over year, particularly in Q2 and to a lesser extent in the second half of 2014, to support expanded retail distribution, new products and marketing. Planned 2014 capital-expenditure investment was expected to be similar to 2013.
- Transaction losses increased by $5.8 million year over year. The filing also warns that strengthened risk controls may reduce legitimate new-card activations.
- Revenue concentration remained high: Walmart accounted for 61% of operating revenue and the next three largest distributors collectively accounted for 22%. Distributor agreements generally expire in 2014–2015, and losing a major distributor could materially harm results.
- Other principal risks include competition, potential declines in interchange rates, fraud and cardholder overdrafts, regulatory and licensing changes, data-security or processing disruptions, and dependence on third-party vendors. Pending legal matters were not accrued because losses were not considered probable or reasonably estimable; the filing does not provide a clear quantified exposure.
Most important facts for investors to verify
- Whether revenue growth and card usage can offset higher sales, marketing and transaction-loss expenses, and the expected lower contribution from the fee-waiver change.
- Whether the GE program migration produces sustained processing-cost benefits and how bank capital needs and customer-deposit movements affect reported cash flows.
- Walmart and other major distributor contract renewals, sales support and concentration levels.
- Trends in fraud, disputed transactions, overdraft recoveries and the effect of risk controls on legitimate activations.
- Developments in interchange rules, prepaid-product regulation, tax examinations and legal or regulatory matters.