Green Dot Corporation
Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Good day, and welcome to the Green Dot Corporation First Quarter 2017 Earnings Conference. Please note that the contents of this call are being recorded. I would now like to turn the conference over to Dara Dierks. Please go ahead.

[Dara Dierks:]

Thank you, and good afternoon, everyone. On today's call, we will discuss 2017 first quarter performance and thoughts about the remainder of the year. Following these remarks, we'll open the call for questions. For those of you who haven't yet accessed the earnings release that accompanies this call and webcast, it could be found at ir.greendot.com. As a reminder, our comments include forward-looking statements about, among other things, our expectations regarding future results and performance. Please refer to the cautionary language in the earnings release and in Green Dot's filings with the Securities and Exchange Commission, including our most recent Form 10-K and 10-Q for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we will make reference to our financial measures that do not conform to generally accepted accounting principles. For the sake of clarity, unless otherwise noted, all numbers we talk about today, including revenue per active card will be on a non-GAAP basis. Information may be calculated differently than similar non-GAAP data presented by other companies. Quantitative reconciliations of our non-GAAP financial information to the most directly comparable GAAP financial information appears in today's press release. The content of this call is property of the Green Dot Corporation, and is subject to copyright protections. Now, I'd like to turn the call over to Steve.

[Steven W. Streit:]

Thank you, Dara and welcome everyone to our first quarter earnings call. Today, we'll review the Q1 performance, we'll share some perspectives on the business and Mark will provide our updated and raised guidance ranges for the full year. Q1 was a fabulous quarter for Green Dot. Fabulous, not just because of the outstanding and record-setting financial results, but fabulous because our hard-working vision to build Green Dot into one of the country's premier financial technology platforms is paying off. Today Green Dot is comprised of six diverse business divisions, each solving a particular customer problem with unique products and services, each with its own business strategy and growth plans, each synergistic to the other, and providing thrust to the consolidated top-line with each operating on top of our high scale enterprise level proprietary technology platform, which allows that top-line growth in the period to fall to the bottom-line at increasingly expensive margins. The proof is in the results. In Q1, total consolidated operating revenue came in at $253.2 million, representing an 11% year-over-year growth rate, as Mark will explain more fully, the quarter benefited from closing the UniRush transaction on February 28th, without UniRush in the quarter, revenue was $241 million, representing year-over-year organic growth of 5.6%. Adjusted EBITDA for the quarter, with a modest contribution from UniRush, was almost $90 million on a consolidated basis, representing year-over-year growth of 14.5%. Consolidated non-GAAP EPS for the quarter was $1, which equates to year-over-year growth of 28.2%, marking the third quarter in a row with year-over-year double-digit non-GAAP EPS growth. We feel like these are terrific results and there are several factors across the consolidated business that help drive the numbers. First, tax season was very strong for our Tax Processing division, Green Dot TPG. Despite the sluggish start to the tax season that the industry was experiencing at the time of our Q4 earnings call, TPG roared with the biggest Q1 tax season, this division has had since we acquired it back in 2014. The reasons were, one, the online tax channel where TPG has a very strong presence, continues to outpace the tax prep ecosystem overall. And two, when we bought the company, we said it was a low grower but believe there could be revenue synergies generated through a variety of Green Dot products and services bundled into TPG's core offerings. Our synergistic growth initiatives began to bear fruit during this season, evidenced by TPG tax prep partners taking out and repaying Green Dot Bank small business loans, then selling Green Dot brand prepaid cards to customers in need of a great bank account in which to receive their tax refund direct deposit and then they provided eligible tax refund recipients the opportunity to apply for a new fast cash advance, consumer friendly loan that allows tax filers to get some of the refund amount on a Green Dot card to spend right away and then have it automatically repaid out of their tax refund when it arrives from the IRS. Based on the success of our cross platform initiatives during this tax season, we believe there is much more room for upside in this division and feel like we're in a very good place for next year. My thanks and great appreciation to the Green Dot TPG team and their fearless leader, Brian Schmidt (04

[Mark L. Shifke:]

Thanks, Steve. I'd like to start by providing some insight into our performance in the quarter followed by commentary on our two reporting segments, including how the February 28 closing of the UniRush acquisition impacted our Account Services segment. Then, I'll provide our Q2 consolidated directional guidance and an update to our full year 2017 financial guidance. First, I'm pleased to echo Steve's commentary that Q1 2017 was an outstanding quarter for Green Dot delivering $253 million in consolidated total operating revenue, representing a year-over-year growth rate in the quarter of 11%. Excluding UniRush, Green Dot delivered $241 million in total operating revenue, equating to year-over-year organic revenue growth of approximately 6%, I guess the tough comp from last year's strong Q1. Revenue growth in the first quarter came from both our reporting segments. First, let's discuss the Account Services segment, which includes the legacy Green Dot and Walmart prepaid card product lines and our Green Dot Direct division that sells our products through several direct-to-consumer digital and direct mail platforms. The Account Services segment revenue, inclusive of the $12 million generated by UniRush in the quarter, delivered revenue of $167.7 million, representing a year-over-year growth of approximately 16%. Excluding UniRush, segment revenue grew by 7.2% year-over-year despite the number of organic active cards declining by 8% to 4.36 million active cards. This is the third quarter in a row with our active card counts at the level, which may indicate that our active card count is stabilizing after several periods of decline following the discontinuation of the original MoneyPak in Q1 of 2015. Including UniRush, on a consolidated basis, active cards grew by 6% in the quarter to 5.05 million active cards. As Steve mentioned in his prepared remarks, step one of our Six-Step Plan is about improving active card counts through new customer on-boarding and retention initiatives. We appear to be making good progress there and are on track and our plan to return to organic active card growth in 2018. The driver of our organic revenue growth continues to be a more profitable portfolio of active cards, evidenced by average revenue per active card that was up nearly 17% in the quarter, making this the fifth consecutive quarter with double-digit year-over-year revenue per active card growth. Better is that the sequential growth continues to trend upward, expanding by around 6 percentage points since Q1 of 2016. We believe this trend as substantial year-over-year growth in average active card revenue is driven by three main reasons; first, our new products offer more valuable features but also have higher fees than the products they replaced. So as we on-board new active customers using these new products, we are benefiting from higher fee revenue on that portion of the active card segment. Because we sell more new products everyday and approximately half of our active cards are still comprised of our older products, we believe the increasing penetration of our new products as a percentage of the active portfolio will create an ongoing mix benefit to portfolio economics. Second, of those new customers who buy and then reload and retain their cards beyond the first purchase, a high number are enrolling in direct deposit. Our cohort of direct deposit customers generate significantly higher revenue than the cohorts of non-reloaders and cash reloaders. Additionally, these direct deposit customers tend to retain several months longer than non-direct deposit customers. So, to the extent more of our active basis comprised of direct depositors, we would expect the average revenue per active card in that portfolio to improve. We see this steady expansion in customer life-time value as a positive trend that should continue to drive average revenue per active card increases for the foreseeable future because the revenue and profitability impact of direct deposit customers increases with time, both from their increasing card usage, the longer they retain and from above-average retention. The net result is that growth in direct deposit customers both in the absolute number of cards and as a percentage of total active cards results in a more profitable card portfolio with higher lifetime values. A third driver of our average active card revenue growth is the trend of cash reloaders conducting more reload transactions per active card at one of the 100,000 plus retail partner locations in the expansive Green Dot Network. So this cash reloading segment is also propelling our average revenue per active card. Now let me provide a quick update on UniRush. With the acquisition closing on February 28, Green Dot added a little under 700,000 active rush GPR and rapid! PayCard customers to our consolidated active card metrics, and GDV of a little under $700 million to our consolidated GDV number, with nearly all of that UniRush GDV coming from direct deposit. We are thrilled with this acquisition and want to again thank all the many resources at Green Dot and UniRush who work so hard to pull the deal together and get it close as efficiently as possible. And we thank the UniRush team for working so hard to create something special. We are making excellent progress in integrating the UniRush leadership team and operating platform into Green Dot platform. With UniRush becoming integrated into the Green Dot platform, going forward, we intend to report UniRush's financial performance as part of Green Dot's consolidated performance rather than on a standalone basis. Now, let's discuss the Processing and Settlement segment. This segment includes our Tax Refund Processing division and our Money Processing division. Revenue on our Tax Refund Processing division, Green Dot TPG was up 9% year-over-year, primarily due to higher transaction volume and higher revenue from add-on products by Green Dot cards. This is the highest year-over-year growth rate this division has seen in many years. Remember, when we purchased TPG, we said it would be a slow grower, absent revenue synergies and new initiatives. It's so gratifying to see our team's hard work payoff. Our Money Processing division experienced 13% year-over-year growth in revenue per cash transfer as a consequence of the continuing higher average price per reload transaction, which was partially offset by a 4% decline in the total number of cash transfers to prepaid cards. The reason why cash transfers are slightly down is that we have a much higher number of direct deposit customers now as a percentage of the active portfolio than we did a year ago. And direct deposit customers perform fewer cash reloads than non-direct deposit reloading customers. We also have fewer organic actives in the same period last year. Lastly, while not material to our overall results, we are pleased with the growth of the new MoneyPak where increasing distribution and higher unit sales are encouraging. Looking now at the bottom line, it's clear that Green Dot is benefiting from strong margin performance across the consolidated enterprise. Including the modest contribution from UniRush in Q1, adjusted EBITDA was up a robust 14.5% year-over-year in the quarter to $89.6 million, reflecting a margin improvement of 108 basis points on a consolidated year-over-year basis. This margin expansion is a direct result of two key factors. First, excluding employee stock-based compensation and certain severance costs, our organic compensation and benefits expenses decreased year-over-year by approximately $6 million or 17%, reflecting just one example of the greater efficiency in how we operate. And second, we're generating higher revenue across the enterprise that sits on top of that more efficient cost base. That strong EBITDA performance along with higher interest income primarily from returns on deposits at our bank subsidiary and a marginally lower tax rate enabled us to deliver non-GAAP EPS of $1, representing a year-over-year growth rate of 28%. It is worth noting that despite a stock price that has increased substantially over the past year, everything effected increasing (32

[Operator:]

We will now begin the question-and-answer session. And our first question comes from Ramsey El-Assal with Jefferies. Please go ahead.

[Steven W. Streit:]

Hi, Ramsey. Ramsey, are you there? Well, operator, let's go to the next one and then we'll come back and revisit Ramsey.

[Operator:]

Okay. Our next question is from Steven Kwok with KBW. Please go ahead.

[Steven Kwok:]

Hi, guys. Thanks for taking my questions. Just the first one is just around TPG. You mentioned that it's performing better than expected. Can you give us a little bit more sense of what the revenues were this quarter, how much it was up year-over-year and what your outlook is for it? Thanks.

[Steven W. Streit:]

We don't breakup the revenues for that division on a standalone basis, but I do want to say in our disclosures for the Processing and Settlement division, we did give a increased number mark (40

[Mark L. Shifke:]

Yeah.

[Steven W. Streit:]

...TPG, I forget. The number of tax prints (40

[Mark L. Shifke:]

Yeah. They were up 5% year-over-year in number of RT processed.

[Steven Kwok:]

Great. Is that a good way as a proxy around the revenue growth to think about at the 5% up year-over-year?

[Steven W. Streit:]

Say that again, Steven? I'm sorry, it's hard to hear.

[Steven Kwok:]

Yeah. Is that 5% a good proxy for what the revenue growth would have been around the TPG?

[Steven W. Streit:]

Well, I guess, you can think about that. We get paid by RT. The problem is that it's not a perfect match, because we get paid different amounts depending on the channel, whether it's pro or whether it's online, in other words, do it yourself or assisted, but it's not a bad proxy. I don't know that it's exact, but it's not bad. And if you look at our disclosures, when the Q comes out, and then also in the press release, we have the measures for TPG independently where you can see the numbers of RTs processed, and there's probably some good math you can back out using those disclosures as well.

[Steven Kwok:]

Got it. And the second question is just around your active new cards – active cards that you have. It seems like at some point that organic growth rate is going to turn the corner. Like how should we think about it for the rest of the year?

[Steven W. Streit:]

Well, so we expect to be – as Mark said in his prepared remarks, we've been at this negative 8% now for three quarters straight. And so we're not going lower than that, which is a good sign, and shows that we're on track or frankly even a little bit ahead of track to get to organic growth. So, for the rest of this year, I would say, we're going to continue to be down, but then we're looking to return to growth as we get into Q1 of next year, and that's pacing well. I don't want to give guidance beyond what we provided for Q2, but given that we've been flat at negative 8% now for three quarters straight, we wouldn't expect it to go beyond that.

[Steven Kwok:]

Great. Thanks for taking my questions.

[Steven W. Streit:]

You bet. Thank you.

[Operator:]

Our next question is from Tien-Tsin Huang with JPMorgan. Please go ahead.

[Tien-Tsin Huang:]

Hey. Good afternoon. Just – I guess, just wanted to clarify that there would be – the over-performance was $3 million when all was set and done forgetting about timing and in early UniRush contribution, the $3 million, what would you attribute that specifically to? It sounds like just better revenue per performance, and then a little bit on (43

[Steven W. Streit:]

Yeah, two things. By the way, Steven's – our accounting folks were looking at Steven Kwok's question. And the answer is, we said in the prepared remarks, we have 9% year-over-year for revenue at TPG, we did disclose that, then the number of RTs is up 5%, and that's in the disclosure. So, I want to make sure we answered Steven's question. Tien-Tsin, to answer your question, yeah, we had an expectation in the quarter of $238 million (43

[Tien-Tsin Huang:]

Got it. And then, as my single follow-up, (44

[Steven W. Streit:]

Tien-Tsin, you can do as many as you want because you're Tien-Tsin.

[Tien-Tsin Huang:]

No, come on. I don't want to waste everyone's time know, but thanks for that. The reinvestment in new programs have flexibility, is that for discretionary marketing of existing plans or is that potentially launching some new stuff and then did you say that roughly half of the card base is now new versus old? Thanks.

[Mark L. Shifke:]

The answer is, half is new versus old, number one. Number two, the money that we're looking to reinvest for the second half is not marketing, it's more technology build out and other kinds of work that would be reflected in maybe SG&A and some other costs. But it's a general look. We have a lot going on at the company. And as we have these overages, we want to make sure that we have enough leftovers so that we have some leeway to operate in the way we want.

[Tien-Tsin Huang:]

Good. Thank you.

[Mark L. Shifke:]

Yeah, okay. You bet.

[Operator:]

Our next question is from Ramsey El-Assal with Jefferies. Please go ahead.

[Ramsey El-Assal:]

Hi, guys. Forgive me if you already addressed this, I've been hopping from call to call. What kind of the growth profile can we expect now from TPG? I mean, it grew so nicely in the quarter, is this something that we should sort of re-evaluate with the longer-term? It sounds like should we evaluate the longer-term growth profile for the (45

[Steven W. Streit:]

I really, really like TPG. When we bought that division, it had been flat to up 1% or 2% for some time. And when announced the acquisition, this goes back to 2014. We said that it follows the tax macro ecosystem, which it does, which people die and then people come into the system and it stays relatively flat in the U.S. So anything you gained is by gaining share from other competitors in the space or pricing advantage or add-on products. And our theory was that between Green Dot cards and then using some other products from Green Dot Bank that existed with that, we could invent, that will drive more advantage and more revenue and that really happened in this quarter. Oh, gosh, I don't want to cause guidance to change or people to get overly optimistic, but I feel really good about that division because it's such a fertile ground of cross-selling our platform. Everything you need to make that platform sing is something that we have in the consolidated enterprise, whether it's the tax refund advantage loans that we do or small business loans that help these independent pro-channel tax preparers get by signage and they redo the carpet in their office and things that small business do to get ready for tax season. And then the prepaid cards that can be sold to customers who say, hey, I'll take it in cash, I'll come back and pick up a check and the tax preparers able to say, don't do that, we have this Green Dot card over here, and we can put it on this FDIC insured account. And it arrives faster and so forth and so on. And so all those synergies really kicked in. So, there's no way I could give you an accurate forecast of what the percentage of increase would be over year-to-year, but I can tell you generally we feel very good about that division. We have great leadership, a great team, and a pipeline of new products that we think are solid. So we feel really good about that acquisition and feel better year-over-year.

[Ramsey El-Assal:]

Okay, great. Follow-up for me is, again, forgive me if you've already addressed this, but reinvesting some of the profit outperformance in the quarter rather than letting it flow-through the full year guide, did you already give any color in terms of what might be motivating you to do that as our particular need for is it just generally being held and reserve opportunistically or can you elaborate a little bit there?

[Steven W. Streit:]

A part of it held in reserve opportunistically. Tien-Tsin asked a similar question.

[Ramsey El-Assal:]

Okay.

[Steven W. Streit:]

There are a few programs we're working on that we want the leeway to invest in, if we need, and we didn't want to be capped, if you will, by accidentally guiding too aggressively. So, we thought it was a good safe guidance that gave us the leeway to invest as we might. And just the pipeline of the business, and you heard it in my prepared remarks, some of the excitement or energy around the business, we work really, really hard to put all these assets together that we think are fairly unique and compelling, especially when they're all combined and integrated. And that means that we've become a company that people want to work with and that we have offerings that make sense in a new economy and in the new America as it relates to banking. And we have a lot of things happening and a lot of activity in the development pipeline. So we wanted to make sure that we didn't overly aggressively guide and then intentionally limit our opportunity to invest in the second half.

[Ramsey El-Assal:]

Got it. Thanks so much.

[Steven W. Streit:]

Sure.

[Operator:]

Our next question is from Ashish Sabadra with Deutsche Bank. Please go ahead.

[Ashish Sabadra:]

Good results. I have a quick question on margins, like guidance for second quarter implies a 50 basis point of margin expansion. How should we think about margins going forward? Is there opportunity for further margin expansion, even with the incremental potential investments?

[Steven W. Streit:]

No question about it. I mean, we've seen a lot of advantage in the market, and actually I shouldn't feel (49

[Mark L. Shifke:]

You're on, go ahead.

[Steven W. Streit:]

Well, look, we've worked really, really hard to build this platform starting with GoBank that has rewritten all of our code and allowed us to be so much more efficient and so much more modern with the way we spend on technology and rollout new products and the way we look at our consolidated enterprise and think about staffing needs and facilities and all the things you do when you try to become more efficient as we re-imagine the machine, I think, was the phraseology I used in my prepared remarks. So, we think there is an opportunity for margin expansion, but these things take some time. So, yes, there's margin expansion if you look at it year-over-year. But we have the UniRush acquisition, which is a lower margin revenue and there is a decent amount of revenue. So we have to overcome that. And we will as that gets integrated, right. We've only owned it for a month-and-a-half or something, so that will take some time to get integrated. And then, we have other new products like secured card where the margins are very, very tiny or maybe even negative depending on the period, but the revenue is growing. And you can very clearly see when you're running that business how that will translate into margin going forward. So, we have sort of the lower margin of the new revenue, the expanding margin of the legacy revenue coming together for healthy margins that will get healthier as time goes by. So the answer is, we think there is continued opportunity for margin expansion. And it's one of the reasons why you're seeing such terrific EPS growth and adjusted EBITDA growth, and that's clearly a big strength for the company right now.

[Ashish Sabadra:]

That's correct. Thanks for the color. And my second follow-up question was around MoneyPak. You mentioned MoneyPak a little out as definitely helping in increased traction there. I was wondering if you can provide some more color on how much of the traction is coming from new locations being rolled out versus even improved awareness at the existing store, the same-store, if I can call it that growing...

[Steven W. Streit:]

Yes.

[Ashish Sabadra:]

...so if you can parse out those details? Thanks.

[Steven W. Streit:]

Sure. I'll give you a high-level, because we don't have the actual numbers in front of me. But just from my memory as I go to through the business divisions, it's both, it's new locations, but most of the growth has been primarily been from same-store sales increasing as word gets around the product is out there. And a lot of the users of the new product have never used it before. In other words, we can look at cell phone numbers and social security numbers and some other data, and look at are these just old MoneyPak customers coming back to rebuy it, now that it's back on the shelf or are these customers who have never used the product before, and a large number of people have just never used the product before. So we think it's been a really good product, and frankly, maybe selling a little bit better than I thought it would, to be honest with you. Helena Mao, who runs that division, she is a GM told me so, I guess. But I'm pleased with the way that's going. And if we can be successful in rolling out this new use case that her team has been working on, then it could sell even better. But so far so good. It's been a nice comeback with a very little of any fraud and the nefarious activity we were worried about is a thing of the distant past. Our new controls are working very, very well. So, I'm pleased with that product, and really satisfied with our team's performance.

[Ashish Sabadra:]

Thanks. Good results.

[Steven W. Streit:]

Sure.

[Operator:]

Our next question is from Oscar Turner with SunTrust. Please go ahead.

[Steven W. Streit:]

Hi, Oscar.

[Oscar Turner:]

Hey. Good afternoon. Thanks for taking my questions.

[Steven W. Streit:]

You bet.

[Oscar Turner:]

You talked about direct deposit being one of the big drivers of the (52

[Steven W. Streit:]

So, I'll answer is to the upside, while Jess Unruh, our Chief Accounting Officer, leads through paper to find out what we disclose and what we don't. So I'll let him worry about that. I know we get percentages of increases, but I don't know if we give absolute numbers, so he'll help to get that part out. And then, in terms where we can go, the answer is, I think, it will get much better. We've been aided by two things happening at once; one is, the macro of direct deposit users has been increasing because of the employment rate in the service sector which helps right that people don't have jobs, they can get into direct deposit. Number two is that companies more and more offer direct deposit. It used to be where you could only take advantage of direct deposit if you work for a large company. But now with so many automated payroll services and electronic payroll services, even small businesses sign up for cloud-based offerings and SaaS offerings. They almost all offer direct deposit as an automatic tool that your employees can enroll into. So direct deposit has just become bigger as a macro, and so that's helped us, employments become bigger. We've made direct deposit a lot easier to sign-up for. If you're a Green Dot customer, it wasn't always particularly easy frankly, and now we have your direct deposit enrollment information everywhere online. We text it to you, we email it to you, it's on our mobile app, so we've done a lot of things here to make that better and easier as well. And the more millennials we have, better the employment picture in the country. We see that macro increase. So, we think we have a lot of up room (54

[Oscar Turner:]

Okay. Thanks.

[Steven W. Streit:]

Yeah. You bet. Thank you.

[Oscar Turner:]

And then, just on active card growth, you guys sounded pretty confident about active card growth. It's accelerating as we get to layer this year or next year. I guess, what type of visibility do you have into active card growth actually growing next year? And then also, do you expect low return or more new adds to drive most of that growth?

[Steven W. Streit:]

So, it's both. The way we forecasted is, Terry Lee, who is our genius FP&A guy who runs all this stuff and works for Paul Farina and Kevin Manion here at our -in the room with me here. Put together all this data and look at it, and we look at unit sales, and we look at retention of existing cards, and certain usage trends and you can fairly accurately predict where we're going to be. And we got it wrong in 2015, because with MoneyPak going away, all of our models went to hell in a handbasket. We just didn't have a sense of where we were with it and communicated that, that was probably an inelegant way to say it, but that's what it was. But as you stabilize now, you can have a new sort of a look at it and we've been hitting it pretty much on target, (55

[Oscar Turner:]

Okay, great. Thank you.

[Steven W. Streit:]

Sure.

[Operator:]

Our next question comes from Eric Wasserstrom with Guggenheim Securities. Please go ahead.

[Eric Wasserstrom:]

Hi. Thanks very much. Just a couple of follow-ups on the – I think, Steve, you mentioned in your prepared comments, or maybe Mark, it was you, about the bank dividend ending up (56

[Mark L. Shifke:]

Sure. So, our capital ratios of the bank, and you can tell this by looking at our call reports and some other public disclosures, is at around 10%. And I don't imagine would go much below that. So, for example, if your average assets in the bank in a given quarter, let's pretend, were $700 million. That means you want to have $70 million in the bank against that. And you can see where our deposits are, they vary by quarter-by-quarter. In our case, because we don't do significant lending, our deposits or our assets. In a more traditional bank, your assets would be loans and things of that nature. So with dividend so far at $50 million, we're going to do another, I don't know what the number is, maybe $20 million or something like that as our goal. To bring this down to that 10% threshold, we were as high as 17% at one point. And so, once we're done, we're done, and then maybe that if we have a big program launch where our balances increase, where we actually have to take some money downstream from a holding company back to the bank, if we go deposits faster, but that's a good problem to have. In terms of what we've done with the money once it comes back to the holding company, it goes into our general unencumbered funds and that can be used for buying companies in the case of the cash component of the RushCard of the UniRush acquisition. It can be used for share buybacks like we just bought back into the $50 million in March as part of our ASR, and so it just becomes part of our general funds. There is no specific use earmarked for that money so much as the discussions around capital allocation that happens in board meetings and around board meetings, and that just becomes part of our general treasury.

[Eric Wasserstrom:]

And just in terms of your thought process around share repurchase, what is your philosophy about this going forward in terms of sustainable versus opportunistic return?

[Mark L. Shifke:]

Look, I have my own views, but we have a very diverse board and just because I believe something doesn't mean they will. But, look, I like share buybacks as a regular ongoing programmatic way to reinvest in our asset. Because in theory, the stock should always be going up if we're doing our jobs properly. And if we're communicating our vision and story well, then multiple (58

[Eric Wasserstrom:]

Thanks very much.

[Mark L. Shifke:]

Yeah. You bet. Thank you.

[Operator:]

I apologize. Our next question comes from Ashwin Shirvaikar with Citigroup. Please go ahead.

[Ashwin Shirvaikar:]

Thanks. Hi, Steve and Mark. Good quarter here.

[Steven W. Streit:]

Thank you.

[Ashwin Shirvaikar:]

My first question is with regards to the conversion over from the adhesives (01

[Mark L. Shifke:]

Well, so the first one is the economics. Had TSYS not been willing to work with us and help us revisit the economics of the old TSYS agreement, it would not have been feasible to do what we did or we would have done it, but lost money or spend more money than we had planned. But with the new agreement, we're able to have the advantage of the pricing, still get that platform savings that we hope to get, but we're just getting it despite being on both of those processes. So, from an economic point of view, it's going to cost us a little more than if we had had everything on the PTS platform, but it won't be punishing or penalizing in the way it was for the first half of the year. And we really appreciate TSYS being great partners and very helpful in helping us stabilize that situation. So that's been great. In terms of why it's taken so long is a couple of things. Look, Processing is a tricky business. And our partners at MasterCard are good people, who have done a good job, and we're a large portfolio. Green Dot is a large bank when it comes to the issuance of debit cards. We're not a small company anymore and it's one of the largest debit card portfolio's in the entire country, certainly we're a top – oh, it's got to be at this point at top 15 portfolio out of 17,000 banks and credit union. So it's a large portfolio. And as we've done the transitions, it's gone generally well, but as you know, we had those hiccups in May of last year, almost exactly a year ago when we had 30,000 or 40,000 customers who had issues with their accounts. And that's a really bad thing in our world. On one hand 30,000 people isn't a lot out of 5 million or 4 million, but if you're one of those 30,000 people, it's a really bad day, if you can't access your money. And that was a real concern for Green Dot, it was a really big concern for MasterCard. And as time has gone by as we've continued to invest in building the system and make it more robust to handle our volume and our increasing volume. As time has gone by, there's just been this natural attrition that's happened without us doing anything because all the new issuance is happening on the MasterCard platform, all the legacy cards or some of the legacy cards are still on the TSYS platform. And so if you will, conversion is taking care of itself as older customers attrit off the platform and newer customers come on the MasterCard platform, so it occurred to us, why take the extra risk of what we call a big bang conversion, and God forbid, mess up 2,000 people's cards or 3,000 – why take that risk when nature is taking care of itself if you will. And the MasterCard agreed that was smart, and we agreed it was smart and TSYS was pleased to have the extended business and so it worked for everybody and that's why we're in the position we're in. And we think it's going to be a good thing for us, but ultimately today, oh gosh, it's certainly well over 90% or more of our accounts are already on the MasterCard platform, so it's already largely there anyhow.

[Ashwin Shirvaikar:]

Okay. That's very useful, thanks. My second question is actually less related to the quarter and more to forward potential at Green Dot if you will. I can't remember, I may be mistaken, but I can't remember when you had more initiatives in progress both from a product and efficiency perspective you're trying to do so many things. And so the question really is with regards to management bandwidth and if you could rank order where your focus is because there's a lot of things that obviously go into making the sausage here, compliance, risk management product design, support, distribution.

[Mark L. Shifke:]

Yeah.

[Ashwin Shirvaikar:]

Can you talk about management bandwidth in bank, where your focus is, the top three to five items?

[Mark L. Shifke:]

Sure. So the way we're pulling it off and you're right to notice that. We have never been more prolific. I feel like we're Elton John in the 1970s. We're just writing hit after hit, and it's been a lot of fun. Look I've been at the company for a few years, and never worked longer days and I'm kind of known for that anyhow, and I've just had a blast. It's been so much fun. And the reason is, is because we have a structure now with these six largely independent revenue divisions, all of us get along socially, but every revenue leader whether you're Helena Mao, who runs Money Processing or Dave Petrini Green Dot Direct, or Mike Casella (01

[Ashwin Shirvaikar:]

Thank you for that. Elton John in 1970s was pretty darn good, good news (01

[Steven W. Streit:]

Thank you. Yes, it's been a fun time. We appreciate your comments.

[Ashwin Shirvaikar:]

Yes.

[Steven W. Streit:]

Okay. Great. Next we have Vasu, right?

[Operator:]

And our next question is from Vasu Govil with Morgan Stanley. Please go ahead, ma'am.

[Vasu Govil:]

Hi. Thanks for squeezing me in here. Just two quick questions. I guess starting with UniRush, they contributed about $12 million this month, sort of in the month of March, but guidance for the remaining three quarters suggests about $8 million to $9 million a month, is that mostly tax-related seasonality or anything else that we should be mindful of?

[Mark L. Shifke:]

Yeah, hey. It's Mark. No, that's a right question. The month of March is generally you now the best month of the year, particularly the way the season played out for tax this year. So you had an extraordinarily high result, I think for the rest of the year, you're looking just like you would at Green Dot in terms of the cadence of revenue over the course of the year and seeing how it plays out from you know non-tax season. So we're still – we're still -

[Vasu Govil:]

Understood.

[Mark L. Shifke:]

We're still happy with the – with the guidance we initially suggested for Rush.

[Vasu Govil:]

That's helpful. And just quickly and apologies if I missed this before and you already talked about it. But did you mention the accretion from share buybacks for this year?

[Mark L. Shifke:]

I don't think we specifically called that out in the prepared remarks, it's sort of we're getting some benefit, I think you'd probably want to think a $0.01, as you're thinking about the impact for the year.

[Steven W. Streit:]

It depends on the share price too, right?

[Vasu Govil:]

Understood.

[Mark L. Shifke:]

Yeah. There are couple – as Steve says, there are a couple components to it. One in fact is, look we're still in the middle of executing it and so, depending on where our stock goes for the remainder of the year, you get that $0.01 or you get more or less. So you know, we'll wait and see how it plays out for the rest of the year, but we're hopeful it's at least a $0.01.

[Steven W. Streit:]

It's a better number to provide in arrears, and we'll do that. But I can tell you the first two buy backs we did, worked out remarkably well. We said in the prepared remarks that the average cost basis of that was like $22 a share and we're in the mid-30s as of before the call and that's pretty good, you know it doesn't always work out that well, but it worked out very well.

[Vasu Govil:]

Absolutely. Thanks a lot for the color.

[Mark L. Shifke:]

You bet.

[Steven W. Streit:]

Sure.

[Operator:]

Our next question is from Bob Napoli with William Blair. Please go ahead.

[Robert Paul Napoli:]

Thank you very much. Just on the M&A front, the – how do you look at your dry powder today, and then what else is out there, we've made – I mean you've consolidated a lot of the players in the U.S. industry, you've entered some different areas, you have a number of different segments. What is out there from an M&A perspective, what do you view as your dry powder today to execute on that? And would you look outside of the areas you're in currently, other related payment areas you're interested in?

[Steven W. Streit:]

Well. So, Mark can talk about the dry powder thing which becomes a challenge at some point, because we're a good size company, but everyone has their limits in their appetite for what they can eat, but luckily we do generate a lot of cash, and as long we're in our various covenants with the regulators and there are Tier I ratios, we can absorb acquisitions and Mark can speak to that in a second. In terms of, Bob, how we think about what to buy. As I mentioned in one of the previous questions, we have these six division leaders, and all of them have a fairly unique list of companies that they may find interested in buying. And then ones that I may have not always heard off, frankly when I get to hear about them. And but that's okay, I never heard of TPG before we bought them. So you get to learn from each expert who runs their own division, and so they can be in the areas of money processing or tax refund processing, it can be in the areas of other consumer account companies or portfolio's while there may not be actual companies to buy that are in the prepaid portfolio business, there are other prepaid portfolios that there could be out there to buy that companies are trying to shed or for whatever reason are looking to sell, and so we're still looking at those, and there maybe some that come up. And every division has their thing, the bank could even look at other credit portfolios, secured portfolios, all kinds of things. So, it's really enjoyable to sit down with our division leaders as they come in, and point out things that we may be able to buy, and if the price is right or we can bring a unique benefit to that acquisition that makes it unusually accretive or there's something about our platform that makes it worth far more than it is on its own, well then it peaks our curiosity and we look at it. But to your point we can't buy a mammoth organization, unless we did a big equity deal, which is something that I'm not likely to want to do anytime soon. But you're right, there's always a limit of what you can absorb, and Mark can share a little bit about that.

[Mark L. Shifke:]

I think you've covered most of it, the question would be, right now, we still have dry powder at a certain point we'd have to think about changing our capital structure and moving from bank financing to alternative forms of financing as we think about alternative transactions. We have steady cash flow that is very, very helpful, and as a company, I think we're somewhat under-levered. So there's still, there is still room to grow through acquisitions.

[Steven W. Streit:]

Yeah.

[Robert Paul Napoli:]

And then I just to – I mean the increase in revenue per card is one of the more interesting things I've seen over the years, that's an amazing improvement that you've made. And if you think about the business, the model that you have today, Steve, versus the model that you had several years ago, going back to 2011, 2012, so we need to – how is the profitability of the adjustments you made, as this all flows through compared to what we saw in the past, how has it changed the model.

[Steven W. Streit:]

Yeah.

[Robert Paul Napoli:]

And the model that you had years ago?

[Steven W. Streit:]

So couple of things have really benefited us, clearly the new products worked out well, and look, I've designed a lot of consumer products in my days, more than I can remember, in this industry and in other industry that I was in before starting Green Dot. And you don't always know what's going work. You think you know, you do research, you have a gut feel for it. But I've had some products I'm sure would be huge and they turn not to be dogs and I've have some products that they were stupid, that turned out to be huge. MoneyPak is one of them, but I thought it was a really stupid product and it just happen to sell really well. So you never know, in consumer products anyone to gets it right all that time is a liar. But in this case we did get it right and they've done very-very well because the people who buy them recognize that they're real bank accounts that do real things and we got rid of the element that was using it for sort of nonsense and then throwing the card away, and now we're dealing with the better set of serious customers. So that worked out well, and that's one advantage because we're able to have a higher fee base of more serious customer. So that worked out. But at the same time, we really have worked incredibly hard to completely reengineer the infrastructure of Green Dot. There's a joke at Green Dot, but it's true that you can leave the company, but the company never leaves you, meaning that we have a lot of returning employees, who go to leave and then they six months later they say I can't believe left, can I please come back and many times we hire them back. And when they come back, they go, oh my god, in only six months it's already changed that much. They don't recognize the company. And the reason is, is because we're always trying to make sure our core infrastructure, really the technology base evolves with the time. And today, everything we do is about mobile technology and internet technology, and digital acquisition and what would it look like on the app store and what would look – I mean, that wasn't even a discussion two years ago, Bob, it wasn't even – I don't think, we had an app you could download two years ago. So as you look at the changes and how the company has been to put together and how we sort of designed it, it feels and looks like a Silicon Valley technology company that all by the way is a bank charter that has capital and can do things only a bank can do. And I think, that all that coming together is what has really made us on one hand way more efficient in terms of how we operate, the people we have, the numbers of people we have, whatever statistic you want to use, revenue to SG&A cost, whatever efficiency metric you want to look at. And our products are just more relevant. The other thing that is maybe more luck than skill, but I'll take it either way, is that our distribution model when I came up with the idea to sell these prepaid cards at retail stores, it was really because I thought okay, low income people are not going to walk in to a bank, but they will walk into a Walmart or Rite Aid or whatever the case may be, and it was really viewed as, oh, a low income person – a poor person buys a bank account at a Walgreens, I would never do that, she'd never do them, my boyfriend would never do that, you know, that kind of thing. But as the world has turned in the world of DoorDash, where my kids all – I don't think we've gone out to a restaurant ever. Everyone comes to your house, delivering a smoothie from Juice It Up or something as preposterous, but that's what people do now a days. I don't know if they do that at the Napoli house, but they do at the Streit house. And everything now is on-demand, right now when you want it, nobody watches network TV. Bob, we're roughly the same age and he didn't have – you wouldn't have to think, we're way older. But you wouldn't have to think too many years back when everybody knew what TV show is on CBS, or I watch the NBC Nightly News or I like The Bob Newhart Show on CBS. Whatever the case maybe, nobody knows anymore. So you get your video on demand. You watch it from Apple TV or from Netflix, nobody knows what network it's on, they wouldn't have a clue. Nobody knows what radio station that DJ works for, that one or they just know the songs they like and they typically got the song from SoundCloud or somewhere like that when they download it on demand. We live in an on-demand world, and certainly this distribution channel which is everywhere, right, the app store, five or six different consumer-facing websites, pretty much every retail store and every strip shopping center in every state and every district and every county in America, including Alaska, Hawaii, and Puerto Rico, you can find Green Dot products and services. And suddenly now the distribution that was designed for low income people, now is just incredibly relevant to people, because the concept of wanting things, when you want it without a lot of fuss, if you will, has become very modern and very fashionable and we just find ourselves in the middle of all that and we're attracting customers that frankly, we'd never designed the product to attract. But the combination of better products that do things like any other bank account, combined with that distribution seems to be helping and we're going to try to help that along further, making sure that our products are very modern and do everything that people in the 30s want them to do.

[Robert Paul Napoli:]

Great. Appreciate it. Appreciate the comments. Thank you.

[Steven W. Streit:]

Yep, you bet, Bob. Thank you. And we have one more call and then Joe, since you've hung on for so long, let's entertain your question as well. Thank you for waiting.

[Operator:]

Joseph, I have opened your line, you may go ahead with your question.

[Joseph A. Vafi:]

Great. Thanks. Joe Vafi from Loop Capital. Just one, one quick question on the active revenue per active card. Are you still seeing growth at this point in revenue per active cards from the legacy or is revenue per active card growth only coming from the new products now? Thanks.

[Steven W. Streit:]

So the answer is – it's hard to say that, because part of it is a question of the mathematics. In our legacy portfolio, these are customers that in many cases, your five, six, seven years old, direct-to-positive customers to heavy cash re-loaders and they deliver a lot of revenue because just like your bank account, you use it for everything and this has become their bank account. So it is in that, they're necessarily growing organically, but as older accounts die off, the ones remaining by definition have a higher revenue per active, because your universe shrinks. Your denominator changes, if you will, but numerator stays the same. So, the answer is yes, it's improving, but not in the way you're asking, I don't think. The real action is on the newer cards that start off from day one, being better customers, paying a higher fee schedule, using more features, who are using the card more seriously from day one and that's where I think you're seeing the, the push if you will or the growth in the overall active cards. I think that's a question, you're asking.

[Joseph A. Vafi:]

Yeah, it is. Thank you. And that just brings up one little quick follow-up, which is the kind of pace of growth and what are the new proactive cards you're seeing with the new cards. What does it look like, what kind of color can you provide there, because obviously, because they've got more fee – checking fees (01

[Steven W. Streit:]

We think so, yeah. I mean listen, we are way ahead of our models for per card revenue per active growth. I don't think we originally forecast this and we first rolled up the new products by a mile. So that's been a pleasant upside to the model frankly. Can it go higher? We think it can. In our models, we don't really rely on that, because we're little bit chicken to do that, because we're in somewhat new territory there, but we do know that the longer a direct to deposit customer uses the card, the more that they deposit as time goes by, because they get more comfortable with the account, just like you would with new bank account you opened. And the so the older the customer as they season they get better, an old customer is our best customer. And so to the extent they hang on to their cards and use them more, well they'll continue to generate more revenue from usage and interchange in ATMs and all of the good things that happen when you use your card. But we're learning more with each cohort. And as you look at every 90-day quarter that we pile on, remember it's only been not even five quarters right, it's been like four quarters and a month or something and even that's for the Walmart side, the Green Dot products did rollout till April or May really.

[Mark L. Shifke:]

Year half (01

[Steven W. Streit:]

So with this now hitting a 12 month number, so I think we're still learning as we're going, it's one of the reasons why we try to be moderate with our guidance and our increases in guidance, because we don't have 10 years of data, right, this is when the new world order here and again the employment picture has been helping just as a macro in the country and the kinds of customers who buy our products has been helping. So we think there's upside but that's not guidance or forward-looking statement, it's the CEO's opinion and I wouldn't take it for more than that, we'll see as it happens.

[Mark L. Shifke:]

Look, the other piece that I find as or more interesting, is the profitability of that revenue. I think if you look at revenue in 2014 and 2015, you saw pretty much flat EPS and then with modest growth in revenue in 2016 and again growth in 2017, you're seeing materially higher flow through of that revenue to EPS. If you look at our guidance on a full year basis at the midpoint, we're looking at sort of a 16% pickup in revenue year-over-year but a 31% pickup on EPS. So, I do like the revenue aspects but the flow through to profitability is what I get more excited about.

[Joseph A. Vafi:]

Thanks very much.

[Steven W. Streit:]

You bet. Thank you. Okay. I think we've – I know it's been a longer call we went over about 25 minutes, but we had so many questions we wanted to entertain them all. Thank you all for listening in. We know it's late on the East Coast, have a good night and hopefully we'll see you at a conference soon.

[Mark L. Shifke:]

Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.