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GDOT > SEC Filings for GDOT > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for GREEN DOT CORP


9-May-2013

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 distribute our products and services nationwide at more than 60,000 retail store locations and on the Internet, which provide consumers convenient access to our products and services. We are also the provider of GoBank, an innovative checking account developed for distribution and use via mobile phones, which is expected to be available to U.S. consumers generally during the second or third quarter of 2013.
Financial Results and Trends
Total operating revenues for the three months ended March 31, 2013 were $154.1 million compared to $141.2 million for the three months ended March 31, 2012. 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. Total operating revenues increased primarily due to period-over-period growth in the number of cash transfers and purchase volume, which are described below. Total operating revenues were adversely impacted by a period-over-period decline in the number of active cards in our portfolio.
Net income for the three months ended March 31, 2013 was $15.6 million, compared to $16.4 million for the three months ended March 31, 2012. Net income declined primarily due to increases in employee headcount, including retention-based incentives for former employees of Loopt, Inc., or Loopt, which we acquired in March 2012. Net income also declined due to increases in depreciation and amortization of property and equipment as we continue to invest in infrastructure and product development. In particular, our product development investments included our investments in GoBank, which is expected to be available to U.S. consumers generally during the second or third quarter of 2013. Net income was positively impacted by a lower effective tax rate driven by the reinstatement of 2012 general business credits in January 2013 as a result of which we recognized a $0.5 million retroactive benefit attributable to 2012 in the first quarter of 2013, the period in which the legislation was enacted. Since the second half of 2012 we have been facing increased competition at most of our largest retail distributors. Although we cannot accurately measure the precise effect of increased competition on results of operations, we believe that it negatively impacted our total operating revenues for the first quarter of 2013. In addition, the number of active cards in our portfolio and the number of cash transfers were negatively impacted during the first quarter of 2013 by voluntary risk controls we began implementing in 2012. For example, we declined approximately 20% of all new card activation attempts during the first quarter of 2013, which was more than double the number of declines during the comparable period in 2012. We believe the increased competition and voluntary risk controls will continue to have an adverse effect on our business, results of operations, and financial condition for the remainder of 2013 and the foreseeable future.


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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 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 11.25 million and 10.09 million MoneyPak and POS swipe reload transactions in the three-month periods ended March 31, 2013 and 2012, 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 4.49 million and 4.69 million active cards outstanding as of March 31, 2013 and 2012, respectively.
Gross Dollar Volume - represents the total dollar volume of funds loaded to our GPR card and reload products. Our gross dollar volume was $5.1 billion and $4.8 billion for the three-month periods ended March 31, 2013 and 2012, respectively. While we continue to view our gross dollar volume as a key metric, we review this metric in conjunction with purchase volume and give greater weight to our purchase volume when assessing our operating performance because we believe it is a better indicator of interchange revenue performance.
Purchase Volume - represents the total dollar volume of purchase transactions made by customers using our GPR and gift card products. This metric excludes the dollar volume of ATM withdrawals. Our purchase volume was $3.6 billion and $3.5 billion for the three-month periods ended March 31, 2013 and 2012, respectively. 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 our premium program - the VIP program - which provide benefits for our more active cardholders. 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 23,000 nationwide ATMs as of December 2012. 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.
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 customers make purchase transactions using our products. 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


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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, 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 and, in certain cases, by the revenue generated from the ongoing use of those cards. 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 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.
Processing Expenses - Processing expenses consist primarily of the fees charged to us by the payment networks, which process transactions for us, the third-party card processor that maintains the records of our customers' accounts and processes transaction authorizations and postings for us, and the third-party banks that issue our prepaid cards. 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, 2012. There have been no changes to our critical accounting policies and estimates during the three months ended March 31, 2013. 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.


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Comparison of Three-Month Periods Ended March 31, 2013 and 2012
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 March 31,
                                             2013                                   2012
                                                  % of Total                             % of Total
                                Amount        Operating Revenues       Amount        Operating Revenues
                                                 (In thousands, except percentages)
Operating revenues:
Card revenues and other fees $    64,667              42.0  %       $    61,222              43.4  %
Cash transfer revenues            44,335              28.8               39,643              28.1
Interchange revenues              46,756              30.3               43,506              30.8
Stock-based retailer
incentive compensation            (1,609 )            (1.0 )             (3,190 )            (2.3 )
Total operating revenues     $   154,149             100.0  %       $   141,181             100.0  %

Card Revenues and Other Fees - Card revenues and other fees totaled $64.7 million for the three months ended March 31, 2013, an increase of $3.5 million, or 6%, from the comparable period in 2012. The increase was primarily the result of a $7.9 million increase in other revenues, driven by period-over-period growth in our gift card program and a decrease in customer incentives that we record as a contra-revenue component of card revenues and other fees. This increase was partially offset by decreases in new card fee revenues and ATM fee revenues, which were primarily driven by a period-over-period decline of 4% in the number of active cards in our portfolio. The number of active cards in our portfolio was adversely impacted by increased competition and our implementation of voluntary risk controls, as discussed above under "Financial Results and Trends," which we expect will continue to impact our card revenues and other fees for the remainder of 2013. Additionally, we began offering our Walmart MoneyCard customers access to surcharge-free transactions via the nationwide MoneyPass ATM network in late June 2012, which also contributed to the decrease in ATM fee revenues.
Cash Transfer Revenues - Cash transfer revenues totaled $44.3 million for the three months ended March 31, 2013, an increase of $4.7 million, or 12%, from the comparable period in 2012. The increase was primarily the result of period-over-period growth of 11% in the number of cash transfers sold. The increase in cash transfer volume was driven primarily by growth in cash transfer volume from third-party programs participating in our network, which increased the proportion of total cash transfer revenues represented by third party programs by approximately five percentage points. We believe our cash transfer revenues for the first quarter of 2013 were adversely impacted by increased competition and our implementation of voluntary risk controls, as discussed above under "Financial Results and Trends." We expect these challenges to continue to impact our cash transfer revenues for the remainder of 2013. Interchange Revenues - Interchange revenues totaled $46.8 million for the three months ended March 31, 2013, an increase of $3.3 million, or 8%, from the comparable period in 2012. The increase was primarily the result of period-over-period growth of 3% in purchase volume. We believe our interchange revenues for the first quarter of 2013 were adversely impacted by increased competition and our implementation of voluntary risk controls, as discussed above under "Financial Results and Trends." Although we expect these challenges to continue to impact our interchange revenues for the remainder of 2013, we expect to experience a seasonal pattern in our interchange revenues during 2013 similar to that which we experienced in 2012, as we believe purchase volume will be higher during the first quarter of 2013, as compared to the remaining quarters of 2013, due to taxpayers electing to receive their tax refunds via direct deposit on our cards.
Stock-based Retailer Incentive Compensation - Our right to repurchase lapsed as to 110,430 shares issued to Walmart during the three months ended March 31, 2013. We recognized the fair value of the shares using the then-current fair market value of our Class A common stock, resulting in $1.6 million of stock-based retailer incentive compensation, a decrease of $1.6 million, or 50%, from the comparable period in 2012. The decrease was the result of a lower stock price in the three months ended March 31, 2013 compared with the corresponding period in 2012.


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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 March 31,
                                             2013                                   2012
                                                  % of Total                             % of Total
                                Amount        Operating Revenues       Amount        Operating Revenues
                                                 (In thousands, except percentages)
Operating expenses:
Sales and marketing expenses $    56,177                36.4 %      $    52,572                37.2 %
Compensation and benefits
expenses                          31,754                20.6             26,153                18.5
Processing expenses               21,999                14.3             20,850                14.8
Other general and
administrative expenses           20,880                13.5             15,968                11.3
Total operating expenses     $   130,810                84.9 %      $   115,543                81.8 %

Sales and Marketing Expenses - Sales and marketing expenses totaled $56.2 million for the three months ended March 31, 2013, an increase of $3.6 million, or 7% from the comparable period in 2012. This increase was primarily the result of an increase in the cost of manufacturing and distributing card packages, driven by the transition of our card issuing program with Synovus Bank to our subsidiary bank and the launch of new products, partially offset by decreases in advertising and marketing expenses, as we reduced our television and online advertising. We expect to incur additional sales and marketing expenses as the sales commissions we pay to Walmart for the MoneyCard program are scheduled to increase in May 2013 by approximately four percentage points. We may also incur additional sales and marketing expenses during the remainder of 2013 to support new business initiatives.
Compensation and Benefits Expenses - Compensation and benefits expenses totaled $31.8 million for the three months ended March 31, 2013, an increase of $5.6 million or 21%, from the comparable period in 2012. This increase was primarily the result of a $4.3 million increase in employee compensation and benefits, including the recognition of retention-based-incentives associated with our acquisition of Loopt. This growth was also due to additional employee headcount associated with the Loopt acquisition and our continued expansion of our operations to support the launch of new products and business initiatives. We will continue to incur additional compensation and benefits expense associated with our acquisition of Loopt, including remaining retention-based incentives of up to $3.4 million, which we will recognize on a straight-line basis from April through September 2013.
Processing Expenses - Processing expenses totaled $22.0 million for the three months ended March 31, 2013, an increase of $1.1 million, or 5% from the comparable period in 2012. The increase was primarily the result of period-over-period growth of 3% in purchase volume. Processing expenses were partially offset by a reduction in third-party issuing bank fees as we transitioned our card issuing program with Synovus Bank to our subsidiary bank in November 2012. While processing expenses were favorably impacted by this transition, 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 for the remainder of 2013 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 $20.9 million for the three months ended March 31, 2013, an increase of $4.9 million, or 31%, from the comparable period in 2012. This increase was primarily the result of a $2.7 million increase in depreciation and amortization of property and equipment and a $0.9 million write-off related to internally developed software that we will no longer utilize.


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Income Tax Expense
The following table presents a breakdown of our effective tax rate among
federal, state and other:
                                             Three Months Ended March 31,
                                                 2013               2012
U.S. federal statutory tax rate                  35.0  %              35.0 %
State income taxes, net of federal benefit        1.9                  1.6
General business credits                         (3.4 )                  -
Employee stock-based compensation                 1.8                  1.6
Other                                             0.1                  0.2
Effective tax rate                               35.4  %              38.4 %

Our income tax expense decreased by $1.7 million to $8.6 million in the three months ended March 31, 2013 from the comparable period in 2012 due to a decrease in income before income taxes over those same periods and a decrease in our effective tax rate of 3.0% from 38.4% to 35.4%. This decrease was primarily driven by the reinstatement of 2012 general business credits. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which retroactively extended the general business credits from January 1, 2012 through December 31, 2013. As a result, we recognized the retroactive benefit of the 2012 general business credit of approximately $0.5 million as a discrete item in the first quarter of 2013, the period in which the legislation was enacted. Excluding the impact of this discrete item, our effective tax rate in the three months ended March 31, 2013 would have been 37.5% Liquidity and Capital Resources
The following table summarizes our major sources and uses of cash for the periods presented:

                                                      Three Months Ended
                                                     2013          2012
                                                        (In thousands)
Total cash provided by (used in)
Operating activities                               $ 24,502    $   37,263
Investing activities                                 11,850      (145,447 )
Financing activities                                 40,217         2,371
Increase in unrestricted cash and cash equivalents $ 76,569    $ (105,813 )

In the three-month periods ended March 31, 2013 and 2012, we financed our operations primarily through our cash flows from operations. At March 31, 2013, our primary source of liquidity was unrestricted cash and cash equivalents totaling $370.2 million. We also consider our $163.2 million of investment securities available-for-sale to be highly-liquid instruments. . . .

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