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GDOT > SEC Filings for GDOT > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for GREEN DOT CORP

Form 10-Q for GREEN DOT CORP


9-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical facts are statements that could be deemed to be forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," "continues," "endeavors," "strives," "may" and "assumes," variations of such words and similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under "Part II, Item 1A. Risk Factors," and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
In this Quarterly Report, unless otherwise specified or the context otherwise requires, "Green Dot," "we," "us," and "our" refer to Green Dot Corporation and its consolidated subsidiaries.
Overview
Green Dot is a leading financial services company providing simple, low-cost and convenient money management solutions to a broad base of U.S. consumers. We believe that we are the leading provider of general purpose reloadable, or GPR, prepaid debit cards in the United States and that our Green Dot Network is a leading reload network for prepaid cards in the United States. We sell our cards and offer our reload services nationwide at approximately 60,000 retail store locations, which provide consumers convenient access to our products and services.
Financial Results and Trends
Total operating revenues for the three and nine-month periods ended September 30, 2012 were $134.3 million and $413.4 million, respectively, compared to $115.4 million and $347.7 million for the three and nine-month periods ended September 30, 2011, respectively. Total operating revenues were favorably impacted by increases in card revenues and other fees, cash transfer revenues and interchange revenues and a decrease in the amount of stock-based retailer incentive compensation. These revenues increased primarily due to period-over-period growth in all of our key metrics described below. Our total operating revenues were adversely impacted by the expiration and nonrenewal in October 2011 of our joint marketing and referral agreement with Intuit under which we established our TurboTax program.
Net income for the three and nine-month periods ended September 30, 2012 was $10.6 million and $39.6 million, respectively, compared to $13.3 million and $38.1 million for the three and nine-month periods ended September 30, 2011, respectively. Net income declined in the three months ended September 30, 2012 from the comparable period in 2011 due to increases in sales commissions and costs of manufacturing and distributing card packages and placards, driven by period-over-period growth in all of our key metrics described below, increases in employee headcount, including retention-based incentives for former employees of Loopt, Inc. or Loopt, increases in television and online advertising and associated expenses, and increases in depreciation and amortization of property and equipment as we continue to invest in infrastructure and product development. Net income was also adversely impacted by a higher effective income tax rate. While net income for the nine months ended September 30, 2012 was negatively impacted by the same factors that caused our net income to decline for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011, it increased as compared to the nine months ended September 30, 2011 primarily due to a $6.8 million decline in stock-based retailer incentive compensation.
During the third quarter of 2012, we began facing increased competition within the store locations of some of our largest retail distributors. As we enter the fourth quarter of 2012, we are facing an even more challenging competitive environment with the launch of new competing products at Walmart in October 2012 and at the stores of other retail distributors expected later in the fourth quarter of 2012 or during 2013. Due to the inherent uncertainties of the competitive environment and how it may evolve, we cannot accurately predict the impact of these developments; however, we expect that our card revenues and other fees, cash transfer revenues and interchange revenues will continue to be negatively impacted by increased competition during the fourth quarter of 2012, and believe that sales and marketing expenses could increase in response to this competitive environment. In addition, during the third quarter of 2012, new card activations from legitimate customers were negatively impacted by the voluntary risk control


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mechanisms we began implementing in the first half of 2012 and accelerated during the second and third quarters of 2012. We believe it is likely that our risk control mechanisms will continue to adversely affect our new card activations from legitimate customers for the foreseeable future and that our operating revenues, excluding stock-based retailer incentive compensation, will be negatively impacted as a result.
Key Metrics
We review a number of metrics to help us monitor the performance of, and identify trends affecting, our business. We believe the following measures are the primary indicators of our quarterly and annual performance.
Number of GPR Cards Activated - represents the total number of GPR cards sold through our retail and online distribution channels that are activated (and, in the case of our online channel, also funded) by cardholders in a specified period. We activated 2.01 million and 1.96 million GPR cards in the three-month periods ended September 30, 2012 and 2011, respectively, and 6.22 million and 5.99 million GPR cards in the nine-month periods ended September 30, 2012 and 2011, respectively. GPR card activations from repeat customers, or former GPR cardholders, were 0.83 million and 0.68 million in the three-month periods ended September 30, 2012 and 2011, respectively, and 2.47 million and 2.06 million in the nine-month periods ended September 30, 2012 and 2011, respectively. Excluding the impact of the discontinued TurboTax program, the increase was 7% from the three months ended September 30, 2011 to the three months ended September 30, 2012 and 16% from the nine months ended September 30, 2011 to the nine months ended September 30, 2012.
Number of Cash Transfers - represents the total number of MoneyPak and POS swipe reload transactions that we sell through our retail distributors in a specified period. We sold 10.52 million and 8.87 million MoneyPak and POS swipe reload transactions in the three-month periods ended September 30, 2012 and 2011, respectively, and 30.75 million and 25.13 million MoneyPak and POS swipe reload transactions in the nine-month periods ended September 30, 2012 and 2011, respectively.
Number of Active Cards - represents the total number of GPR cards in our portfolio that had a purchase, reload or ATM withdrawal transaction during the previous 90-day period. We had 4.42 million and 4.15 million active cards outstanding as of September 30, 2012 and 2011, respectively. Excluding the impact of the discontinued TurboTax program, the increase was 11% from September 30, 2011 to September 30, 2012.
Gross Dollar Volume - represents the total dollar volume of funds loaded to our GPR card and reload products. Our gross dollar volume was $4.1 billion for each of the three-month periods ended September 30, 2012 and 2011, and $12.9 billion and $12.4 billion for the nine-month periods ended September 30, 2012 and 2011, respectively. Excluding the impact of the discontinued TurboTax program, the increase was 12% from the three months ended September 30, 2011 to the three months ended September 30, 2012 and 23% from the nine months ended September 30, 2011 to the nine months ended September 30, 2012. While management continues to believe that our gross dollar volume is a key metric, management reviews this metric in conjunction with purchase volume and gives greater weight to purchase volume when assessing our operating performance because the growth in gross dollar volume does not correlate with interchange revenues as closely as purchase volume correlates to those revenues.
Purchase Volume - represents the total dollar volume of purchase transactions made by customers using our GPR and gift card products. Our purchase volume was $3.0 billion and $2.7 billion for the three-month periods ended September 30, 2012 and 2011, respectively, and $9.4 billion and $8.3 billion for the nine-month periods ended September 30, 2012 and 2011, respectively. Excluding the impact of the discontinued TurboTax program, the increase was 16% from the three months ended September 30, 2011 to the three months ended September 30, 2012 and 24% from the nine months ended September 30, 2011 to the nine months ended September 30, 2012.
Key components of our results of operations Operating Revenues
We classify our operating revenues into the following four categories:
Card Revenues and Other Fees - Card revenues consist of monthly maintenance fees, ATM fees, new card fees and other revenues. We charge maintenance fees on GPR cards to cardholders on a monthly basis pursuant to the terms and conditions in our cardholder agreements. We charge ATM fees to cardholders when they withdraw money at certain ATMs in accordance with the terms and conditions in our cardholder agreements. We charge new card fees when a consumer purchases a GPR or gift card in a retail store. Other revenues consist primarily of fees associated with optional products or services, which we generally offer to consumers during the card activation process. Optional products and services include providing a second card for an account, expediting delivery of the personalized GPR card that replaces the temporary card obtained at the retail store and upgrading a cardholder account to one of our


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premium programs - the VIP program or Premier Card program - which provide benefits for our more active cardholders.
Our aggregate new card fee revenues vary based upon the number of GPR cards activated and the average new card fee. The average new card fee depends primarily upon the mix of products that we sell since there are variations in new card fees among Green Dot-branded and co-branded products and between GPR cards and gift cards. Our aggregate monthly maintenance fee revenues vary primarily based upon the number of active cards in our portfolio and the average fee assessed per account. Our average monthly maintenance fee per active account depends upon the mix of Green Dot-branded and co-branded cards in our portfolio and upon the extent to which fees are waived based on significant usage. Our aggregate ATM fee revenues vary based upon the number of cardholder ATM transactions and the average fee per ATM transaction. The average fee per ATM transaction depends upon the mix of Green Dot-branded and co-branded active cards in our portfolio and the extent to which cardholders enroll in our VIP program, which has no ATM fees, or conduct ATM transactions on our fee-free ATM network, consisting of more than 22,000 nationwide ATMs as of September 2012. Cash Transfer Revenues - We earn cash transfer revenues when consumers purchase and use a MoneyPak or fund their cards through a POS swipe reload transaction in a retail store. Our aggregate cash transfer revenues vary based upon the total number of MoneyPak and POS swipe reload transactions and the average price per MoneyPak or POS swipe reload transaction. The average price per MoneyPak or POS swipe reload transaction depends upon the relative numbers of cash transfer sales at our different retail distributors and on the mix of MoneyPak and POS swipe reload transactions at certain retailers that have different fees for the two types of reload transactions.
Interchange Revenues - We earn interchange revenues from fees remitted by the merchant's bank, which are based on rates established by the payment networks, when cardholders make purchase transactions using our cards. Our aggregate interchange revenues vary based primarily on the number of active cards in our portfolio, the average transactional volume of the active cards in our portfolio and on the mix of cardholder purchases between those using signature identification technologies and those using personal identification numbers. Stock-based retailer incentive compensation - In May 2010, we issued to Walmart 2,208,552 shares of our Class A common stock, subject to our right to repurchase them at $0.01 per share upon a qualifying termination of our prepaid card program agreement with Walmart and GE Capital Retail Bank, formerly GE Money Bank. We recognize each month the fair value of the 36,810 shares issued to Walmart for which our right to repurchase has lapsed using the then-current fair market value of our Class A common stock (and we would be required to recognize the fair value of all shares still subject to repurchase if there were an early expiration of our right to repurchase, which could occur if we experienced certain changes in our control or under certain other limited circumstances, such as a termination of our commercial agreement with Walmart and GE Capital Retail Bank). We record the fair value recognized as stock-based retailer incentive compensation, a contra-revenue component of our total operating revenues.
Operating Expenses
We classify our operating expenses into the following four categories:
Sales and Marketing Expenses - Sales and marketing expenses consist primarily of the sales commissions we pay to our retail distributors and brokers for sales of our GPR and gift cards and reload services in their stores, advertising and marketing expenses, and the costs of manufacturing and distributing card packages, placards and promotional materials to our retail distributors and personalized GPR cards to consumers who have activated their cards. We generally establish sales commission percentages in long-term distribution agreements with our retail distributors, and aggregate sales commissions are determined by the number of prepaid cards and cash transfers sold at their respective retail stores. We incur advertising and marketing expenses for television, online and in-store promotions. Advertising and marketing expenses are recognized as incurred and typically deliver a benefit over an extended period of time. For this reason, these expenses do not always track changes in our operating revenues. Our manufacturing and distribution costs vary primarily based on the number of GPR cards activated.
Compensation and Benefits Expenses - Compensation and benefits expenses represent the compensation and benefits that we provide to our employees and the payments we make to third-party contractors. While we have an in-house customer service function, we employ third-party contractors to conduct all call center operations, handle routine customer service inquiries and provide consulting support in the area of IT operations and elsewhere. Compensation and benefits expenses associated with our customer service and loss management functions generally vary in line with the size of our active card portfolio, while the expenses associated with other functions do not.


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Processing Expenses - Processing expenses consist primarily of the fees charged to us by the banks that issue our prepaid cards, the third-party card processor that maintains the records of our customers' accounts and processes transaction authorizations and postings for us, and the payment networks, which process transactions for us. These costs generally vary based on the total number of active cards in our portfolio and gross dollar volume.
Other General and Administrative Expenses - Other general and administrative expenses consist primarily of professional service fees, telephone and communication costs, depreciation and amortization of our property and equipment, transaction losses (losses from customer disputed transactions, unrecovered customer purchase transaction overdrafts and fraud), rent and utilities, and insurance. We incur telephone and communication costs primarily from customers contacting us through our toll-free telephone numbers. These costs vary with the total number of active cards in our portfolio as do losses from customer disputed transactions, unrecovered customer purchase transaction overdrafts and fraud. Costs associated with professional services, depreciation and amortization of our property and equipment, and rent and utilities vary based upon our investment in infrastructure, business development, risk management and internal controls and are generally not correlated with our operating revenues or other transaction metrics. Income Tax Expense
Our income tax expense consists of the federal and state corporate income taxes accrued on income resulting from the sale of our products and services. Since the majority of our operations are based in California, most of our state taxes are paid to that state.
Critical Accounting Policies and Estimates Reference is made to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no changes to our critical accounting policies and estimates during the nine months ended September 30, 2012, except as noted in Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements included herein. Recent Accounting Pronouncements
Reference is made to the recent accounting pronouncements disclosed in Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements included herein.
Comparison of Three-Month Periods September 30, 2012 and 2011 Operating Revenues
The following table presents a breakdown of our operating revenues among card revenues and other fees, cash transfer revenues and interchange revenues as well as contra-revenue items:

                                               Three Months Ended September 30,
                                             2012                            2011
                                                  % of Total                      % of Total
                                                   Operating                       Operating
                                    Amount         Revenues         Amount         Revenues
                                              (in thousands, except percentages)
Operating revenues:
Card revenues and other fees     $    54,138           40.3  %   $    49,966           43.3  %
Cash transfer revenues                41,832           31.1           34,724           30.1
Interchange revenues                  39,581           29.5           34,246           29.7
Stock-based retailer incentive

compensation (1,202 ) (0.9 ) (3,549 ) (3.1 ) Total operating revenues $ 134,349 100.0 % $ 115,387 100.0 %

Card Revenues and Other Fees - Card revenues and other fees totaled $54.1 million for the three months ended September 30, 2012, an increase of $4.1 million, or 8%, from the comparable period in 2011. The increase was primarily the result of an increase in monthly maintenance fee revenues, driven by period-over-period growth of 7% in the number of active cards in our portfolio. Card revenues and other fees also increased as a result of growth in new card fee revenues, which was driven by higher numbers of card activations from distribution channels in which we assess new card fees. The increases in card revenues and other fees were negatively impacted by a decrease in ATM fee revenues. This decrease was primarily driven by the discontinuation of the TurboTax program, as cardholders under this program typically performed more ATM transactions than the rest of our active card base. Additionally, we began


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offering our Walmart MoneyCard customers access to surcharge-free transactions anytime via the nationwide MoneyPass ATM network in late June 2012, which also contributed to the decrease in ATM fee revenues during the third quarter of 2012.
Cash Transfer Revenues - Cash transfer revenues totaled $41.8 million for the three months ended September 30, 2012, an increase of $7.1 million, or 20%, from the comparable period in 2011. The increase was primarily the result of period-over-period growth of 19% in the number of cash transfers sold. The increase in cash transfer volume was driven both by growth in our active card base and growth in cash transfer volume from third-party programs participating in our network.
Interchange Revenues - Interchange revenues totaled $39.6 million for the three months ended September 30, 2012, an increase of $5.4 million, or 16%, from the comparable period in 2011. The increase was primarily the result of period-over-period growth of 7% in the number of active cards in our portfolio and an 8% increase in purchase volume, which was driven by the factors discussed above under "Card Revenues and Other Fees." The increase in interchange revenues was negatively impacted by the discontinuation of the TurboTax program, as the program had a favorable impact in the third quarter of 2011 but did not have an impact in the third quarter of 2012 in any material respect.
Stock-based Retailer Incentive Compensation - Our right to repurchase lapsed as to 110,430 shares issued to Walmart during the three months ended September 30, 2012. We recognized the fair value of the shares using the then-current fair market value of our Class A common stock, resulting in $1.2 million of stock-based retailer incentive compensation, a decrease of $2.3 million, or 66%, from the comparable period in 2011. The decrease was the result of a lower stock price in the three months ended September 30, 2012 compared with the corresponding period in 2011.
Operating Expenses
The following table presents a breakdown of our operating expenses among sales and marketing, compensation and benefits, processing, and other general and administrative expenses:

                                                 Three Months Ended September 30,
                                               2012                              2011
                                                      % of Total                      % of Total
                                                       Operating                       Operating
                                      Amount           Revenues         Amount         Revenues
                                                (in thousands, except percentages)
Operating expenses:
Sales and marketing expenses     $     51,930              38.7 %    $    40,851           35.4 %
Compensation and benefits
expenses                               29,041              21.6           21,763           18.9
Processing expenses                    18,802              14.0           17,576           15.2
Other general and administrative
expenses                               18,050              13.4           13,889           12.0
Total operating expenses         $    117,823              87.7 %    $    94,079           81.5 %

Sales and Marketing Expenses - Sales and marketing expenses totaled $51.9 million for the three months ended September 30, 2012, an increase of $11.0 million, or 27%, from the comparable period in 2011. The increase was primarily the result of period-over-period growth of 19% in the number of cash transfers sold and 3% in the number of GPR cards activated. The increase in sales and marketing expenses was also due to a $2.8 million increase in advertising and marketing expenses, as we invested in our brand by running increased television and online advertising. We expect to incur additional advertising expenses throughout the remainder of the year as we continue to make these brand investments via television and online advertisements.
Compensation and Benefits Expenses - Compensation and benefits expenses totaled $29.0 million for the three months ended September 30, 2012, an increase of $7.2 million, or 33%, from the comparable period in 2011. This increase was primarily the result of a $4.8 million increase in employee compensation and benefits, which included $1.7 million of retention-based cash incentive payments associated with our acquisition of Loopt. The period-over-period growth in employee compensation and benefits is due to additional employee headcount as we continued to expand our operations to support key growth initiatives, new product development and new sales efforts, and growth in our IT infrastructure and risk operations. The increase in employee compensation and benefits was also due to a $2.4 million increase in third-party contractor expenses. During the remainder of 2012, we expect to incur additional compensation and benefits expense associated with our acquisition of Loopt, including remaining retention-based incentives of up to $6.0 million, which we will recognize on a straight-line basis through September 2013.


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Processing Expenses - Processing expenses totaled $18.8 million for the three months ended September 30, 2012, an increase of $1.2 million, or 7%, from the comparable period in 2011. The increase was primarily the result of period-over-period growth of 7% in the number of active cards in our portfolio. Processing expenses were partially offset by an increase in volume incentives from the payment networks. While we expect processing expenses to be favorably impacted by the November 2012 transition of our card issuing program with Columbus Bank and Trust Company to our subsidiary bank, there can be no assurance that our processing expenses will decline on a year-over-year basis in absolute dollars or as percentage of total operating revenues in 2012 or in future years because these expenses are subject to a variety of factors, many of which are outside our control.
Other General and Administrative Expenses - Other general and administrative expenses totaled $18.1 million for the three months ended September 30, 2012, an increase of $4.2 million, or 30%, from the comparable period in 2011. The increase in other general and administrative expenses was primarily the result of a $1.5 million increase in depreciation and amortization of property and equipment, a $1.0 million increase in rent expense, and a $0.9 million increase in professional service fees. The increase in depreciation and amortization is primarily associated with investments in infrastructure and product development. The increase in rent expense was primarily due to additional rent expense . . .

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