Green Dot Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; filed November 9, 2012. Green Dot provides prepaid debit cards, cash-transfer and reload services, and related consumer financial products. Figures below are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $134.3 | $115.4 | $413.4 | $347.7 |
| Operating income | $16.5 | $21.3 | $62.2 | $61.2 |
| Net income | $10.6 | $13.3 | $39.6 | $38.1 |
| Net income allocated to common stockholders | $8.9 | $13.3 | $33.2 | $38.1 |
| Diluted EPS | $0.24 | $0.30 | $0.90 | $0.86 |
| Cash from operating activities | — | $83.3 | $76.5 | |
| Cash used in investing activities | — | $(169.4) | $(52.2) |
- Q3 revenue increased 16.4% year over year, but operating income fell 22.4% and net income fell 20.2%. Operating margin was approximately 12.3%, versus 18.5% a year earlier.
- For the first nine months, revenue grew 18.9%, operating income 1.8%, and net income 4.1%. Operating margin was approximately 15.1%, down from 17.6%.
- Q3 revenue growth reflected card fees, cash transfers and interchange; lower Walmart stock-based retailer incentive compensation also reduced the contra-revenue deduction. Nine-month diluted EPS rose despite lower common-stockholder income, alongside a substantially lower diluted weighted-average share count.
- At September 30, cash and cash equivalents were $164.4; federal funds sold were $3.0; and available-for-sale securities totaled $146.4. Operating cash flow was positive, while investing outflow included $115.2 net purchases of securities, $33.4 for Loopt and $23.3 of capital expenditures.
- Total assets were $561.1 and total liabilities $246.8. The balance sheet presents no material borrowings; deposits and customer-related settlement liabilities are not equivalent to conventional corporate debt. Interest expense was $0.1 for the first nine months.
Material changes and operating trends
- Q3 card revenues and other fees rose 8%, cash-transfer revenue 20%, and interchange revenue 16%. For nine months, the respective increases were 11%, 24% and 17%.
- Q3 sales and marketing expense rose 27%, compensation and benefits 33%, and other general and administrative expense 30%. Expense growth outpaced revenue growth, compressing operating margin. Drivers included higher advertising, employee and contractor costs, Loopt retention incentives, infrastructure investment, rent and professional fees.
- Reported GPR activations increased 3% in Q3 and 4% in the first nine months. Excluding the discontinued TurboTax program, management reported increases of 7% and 16%, respectively. The program’s expiration adversely affected results versus 2011.
- Green Dot acquired Loopt in March 2012 for approximately $33.6 cash. The purchase-price allocation remained preliminary and was expected to be finalized in Q4 2012.
- In Q3, customer funds for the Columbus Bank and Trust card program began transitioning to Green Dot Bank. On November 2, approximately $173 million of customer deposits were transferred; the company also reported a roughly $26 million contribution to its subsidiary bank in connection with the transition.
- Management changed its card-lifetime estimate during 2012, shortening the estimate from eight months to seven months in Q3; the reported impact was not material.
Outlook, risks and contingencies
- Management gave no specific numeric financial guidance in this filing. It expected increased competition to pressure card fees, cash-transfer and interchange revenue in Q4 2012, and said sales and marketing expense could increase in response.
- Management said voluntary risk controls introduced and accelerated during 2012 were reducing activations by legitimate customers and likely to continue weighing on activations and revenue, excluding retailer incentive compensation, for the foreseeable future.
- Management expected cash, liquid securities and operating cash flows to cover working capital and capital expenditure needs for at least 12 months. Planned spending included capital investment, in-house processing development, new products and ongoing bank capital contributions.
- Walmart accounted for 63% of nine-month revenue and the three other largest distributors collectively accounted for 21%. The filing identifies distributor concentration, competing products at major retailers, reliance on issuing banks and processors, regulatory change, fraud, overdraft losses, settlement exposure and data-security or operational disruptions as key risks.
- The company reported itself as well capitalized under applicable bank-holding-company regulatory standards. It also disclosed a pending TQP patent lawsuit and a securities class action filed in July 2012; outcomes and potential financial impacts could not be determined. A separate ITS patent suit was settled without material financial impact.
Most important facts for investors to verify
- Whether newly launched competing products at Walmart and other distributors materially reduce activations, usage, pricing or revenue.
- Whether risk-control measures continue to restrict legitimate customer activations and what their effect is on fraud and credit losses.
- Whether rising sales, marketing and personnel costs moderate, and whether margin pressure persists despite revenue growth.
- How the issuing-bank transition, Green Dot Bank’s operating performance and capital needs develop, including the effects of the customer-fund transfer.
- Whether distributor and issuing-bank concentration, pending litigation, regulatory developments or overdraft and settlement exposures result in material losses or business disruption.