Green Dot Corporation
Q2 2014 Earnings Call Transcript

Published: 1 Aug 2014

[Operator:]

Good day, and welcome to the Green Dot Corp. Second Quarter 2014 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Steve Streit, Chief Executive Officer. Mr. Streit, please go ahead.

[Christopher Mammone:]

Thank you, and good afternoon, everyone. On today's call, Steve Streit, our Chairman and Chief Executive Officer; and Grace Wang, our Chief Financial Officer, will discuss 2014 second quarter performance and updated thoughts regarding our 2014 outlook. Following these remarks, we will open the call for questions. For those of you that have not yet accessed the earnings press release that accompanies this call and webcast, it can be found at ir.greendot.com. Additional operational data have been provided in the supplemental table within our press release. 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 SEC, including the Q1 Form 10-Q we filed on May 12, 2014, 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 financial measures that do not conform to Generally Accepted Accounting Principles. This information may be calculated differently than similar non-GAAP data presented by other companies. Reconciliations of those non-GAAP financial measures to the most comparable GAAP measures are included as supplemental tables in today's earnings release, and are also available at ir.greendot.com. The content of this call is property of the Green Dot Corporation and subject to copyright protection. Other than the replay noted in our press release, Green Dot has not authorized and disclaims responsibility for any recording, replay or distribution of any transcription of this call. [Operator Instructions] Now I'd like to turn the call over to Steve.

[Steven W. Streit:]

Okay. Thank you, Chris, and welcome, everyone. Also with me on today's call, as Chris said, is our Chief Financial Officer, Grace Wang. A lot of information, and we'll start with a financial review of the quarter. The high-level summary of the quarter and the first half in general is that Green Dot is way ahead on adjusted EBITDA and will continue to far outpace our initial guidance range for the year. And as a result, we are significantly raising full year adjusted EBITDA guidance today. Grace will provide the new upward guidance shortly. On the revenue side, we're pacing about 1% to 2% softer than we expected through the first half of the year. However, we have a number of catalysts for the revenue growth in the second half of the year that we think can make up for the delta. So for now, our full year guidance range of $640 million to $650 million still feels about right and then we'll see how we're pacing at the end of Q3. So let's get into some of the financial details. Non-GAAP revenue for the second quarter came in at $149 million, representing a year-over-year growth rate of 5%. Adjusted EBITDA came in at $36 million, which represents a year-over-year growth rate of 23% and calculates as an adjusted EBITDA margin of 24%. Non-GAAP diluted earnings per share were $0.41, representing year-over-year growth of 24%. Of course, we're pleased with such strong results, but even better is that we believe these improved margins are the result of real and sustainable factors in the business. In general, there are 3 main drivers of the outperformance. First, active cards are up 7% year-over-year, making this the fifth consecutive quarter of accelerated active card growth. Plus the KPIs for that active card portfolio continue to improve with higher load volume and transactional usage. Of course, it doesn't cost us any more money to sell a card that becomes a reloading active card than it does to sell a card that is used once, and then thrown away. So the more cards sold that ultimately become reloading active cards and the more revenue-generating activity that happens through those active cards, the greater the margin of that incremental revenue. Second, our Green Dot-branded active card portfolio for the past year has been growing at a very high rate achieving among the highest growth rates in our company's history. In fact, at the midway point of the year, our Green Dot brand active cards are up 33% year-over-year. Part of this growth in the Green Dot brand portfolio is the large number of new retail stores that we added last year and our recent entry into the check cashing store vertical. But we are also seeing very strong active card growth from our long-standing Green Dot retailers as well. Having a higher concentration of Green Dot brand cards as a percentage of our overall total active card portfolio is a benefit to overall company margins because the Green Dot brand portfolio contributes higher margins than our non-Green Dot branded programs. Lastly, we continue to make significant strides in our efforts towards improving operational efficiency. Long-term investments are starting to really pay off in many areas of the company's infrastructure. For example, new technology now powers smarter risk decisioning leading to better customer onboarding rates and lower losses from charge-offs. Smarter supply chain processes are allowing us to reduce waste saving us millions of dollars by not overstocking low-selling stores and instead, diverting that money into ensuring better in-stock rates at high-selling stores. Our new agile organizational structure across all of our technology facilities in the U.S., along with the addition of our new China technology development center in Shanghai, is facilitating more prolific technology output at a lower cost. And of course, the investments we have made in our subsidiary bank, Green Dot Bank, and the fact that we now issue all of our own card accounts, has significantly lowered our operating cost base as well. We're still investing heavily in new technology capabilities, in particular, in the areas of risk, mobile banking, transaction processing and advanced data analytic systems, and we expect we'll generate many more millions of dollars in cost savings and new revenue opportunities in the coming years. So not only is Green Dot the largest company in our industry, but we believe we are also the lowest cost provider in the industry with one of the most efficient operating ecosystems in all of financial services. This focus on vertical integration and operational efficiency allows us to deliver profitable growth for investors and low-cost, high-value products for consumers. Okay. Now I'd like to share some updates on our Walmart business. Let's start with news of 3 new business initiatives at Walmart. First, we're pleased to announce that Green Dot and Walmart extended our long-standing open loop gift card contract for another multiyear term. This renewed contract calls for Green Dot to continue to provide and manage the large Visa gift card category at Walmart. Next, Green Dot and Walmart have entered into a new agreement to provide Credit Card Bill Pay services right at the register. We believe many millions of Americans have the need to pay their monthly credit card bill with cash. This new and innovative service gives consumers the ability to make same-day and next-day credit card payments quickly and safely by paying via cash or PIN debit right at the register. Next, in the last week of June, Green Dot and Walmart partnered together to lower the upfront purchase price for the MoneyCard Basic, Plus and Preferred card products. Upfront purchase prices were reduced by $1 to $2 depending on the product. The upfront purchase fee represents a very small part of the card's total economics to Green Dot and yet can act as a nice way to generate additional interest and purchase intent. For example, just for the sake of illustration, let's say an average card sold generates around $60 in lifetime revenue. So lowering the upfront price by $1 brings lifetime revenue down to $59. At a 20% margin to Green Dot, EBITDA on that card goes from, say, $12 to $11.80. In exchange for that small $0.20 adjustment, even a tiny increase in unit sales becomes highly accretive. As a real world example, where Green Dot recently lowered their upfront price from $4.95 down to $2.95 at one of our top 3 pharmacy chains, unit sales increased by at least 20%, helping to generate some of that strong revenue and increased margin from our Green Dot-branded business that you're seeing today. So we see this purchase price reduction as a highly efficient way to increase trial and adoption of these products while increasing overall economic returns. And last, but certainly not least, we're extremely pleased and proud to announce that Walmart has begun selling our Green Dot brand Everyday prepaid card at all 4,200 Walmart stores nationwide. Green Dot brand Everyday went on sale at Walmart stores in late June and in just the last 4 weeks of only a portion of the store fully merchandised, the products so far are selling at rates well above our full chain expectations. Green Dot brand Everyday is the largest selling prepaid debit card brand in America and we are very proud to now be able to offer Green Dot brand products right alongside our Walmart MoneyCard-branded suite of products. We're eternally grateful to Walmart for their support of our brand and our company and we are deeply honored to be able to offer Walmart customers such a wide variety of high-quality and high-value prepaid card choices. Next on the top of the Walmart, as you'll be able to see in our upcoming 10-Q filing, revenue concentration from our Walmart business is now down to 55%, which is materially lower than history. I'd like to provide some color on that topic. First, when we launched the new suite of Walmart MoneyCard products late last year, the fee schedules were designed with a number of financial incentives to promote higher customer satisfaction, usage and retention, with the thought being that it's more important to increase lifetime revenue and customer satisfaction than it is to drive revenue in any one period. That strategy seems to be having some traction. For example in the first half, adoption of the usage-based fee waiver plan is up dramatically year-over-year, meaning more customers are qualifying for the fee waiver and usage of our free ATM network increased significantly as well. In return, active MoneyCard customers are rewarding us with large year-over-year increases in purchase volume, reload volume and direct deposit volume. So a key reason for the lower revenue in this part of our business is that we have cut the cost of ownership for MoneyCard cardholders based on customers qualifying for the fee incentives. While so far the fee incentives have been a negative from a revenue perspective in the first half, we believe it's been quite positive from a customer experience and usage perspective and that the overall portfolio's financial metrics can swing higher if in the second half, the increased usage on the portfolio compounds over time, which we believe it can. We also believe we have some real opportunities to increase active cards dramatically in the second half on the Walmart portfolio through deployment of new, more robust merchandising efforts combined with the more attractive upfront purchase pricing that I mentioned earlier. The reason I mentioned merchandising is because one of the biggest challenges we've historically had at all of our retailers is maintaining an acceptable in-stock rate. These cards sell fast and shelf space is limited. You only have so many on the rack. So keeping them in stock sounds a lot easier than it is in reality. Merchandising improvements are set to be rolled out at Walmart in the second half. And we think better in-stock performance can have a very positive impact on performance in the second half. The cool thing about having the honor to sell products in Walmart is that something like 140 million Americans, most of who are squarely within our customer segment, will shop at Walmart every week. The canvas upon which we can paint by having our products sold in Walmart is simply unparalleled. Given the sheer size of the shopper base, even slight changes in pricing strategy or merchandising processes can facilitate large swings in performance over time. So time will tell how all this balances out as we work to gain more active customers and as the portfolios increase in usage develops over time. But what we do know is that these cards are absolutely the best value in prepaid and that Walmart is absolutely achieving their mission to help Americans save money and live better. Next, I'd like to update you on our progress in the Financial Services Center channel, also known as the check-cashing channel. We're extremely pleased with how things are going in this new channel for us. We now have around 1,500 high-quality check cashers selling our products and services, with nearly 1,200 new locations added in just this past quarter alone. Even better than the rapid increase in store count is that reload rates and lifetime revenue metrics are materially better than many of our traditional retail channel cards and average retention per card is more than double the length of cards acquired via our traditional retail channel. The high-level summary here is that this new channel appears to be a home run for us. So why are we doing so well? The answer is, we have the most trusted and most preferred brand in the industry, and we sell our cards for the lowest prices in the industry. So why would anyone buy RC Cola for $1 a bottle when they could buy a bottle of Coca-Cola for $0.35? It's as simple as that. My congratulations to our FSC sales and management team. We're also deeply grateful to our top-quality FSC partners who care deeply for their customers and want them to have the best for less. We are certainly proud to be partnered with you all and we appreciate the support of the entire FSC industry. Now a quick update on GoBank. The portfolio of active accounts has become big enough and we are pleased to share some early data for you on America's coolest checking account. GoBank is still a small contributor to revenue relative to all of Green Dot and we're still in the early days of customer adoption. But things are progressing quite well and our belief is that GoBank has the potential to become a meaningful contributor for us in the coming years. So with that said, here are some early stats that you may find interesting. Around 75% of new account holders that make up an initial -- or rather that make an initial deposit will make a second deposit. The most popular methods of depositing money are direct deposit, cellphone check deposit, ACH transfer from another bank account and cash deposit at a retailer in that order. Nearly 60% of active account holders say that GoBank is their primary checking account. GoBank active customers deposit an average of $1,000 per month to their account and that amount grows each month. 23% of these customers use GoBank to electronically pay bills and even more use the P2P payment feature. GoBank customers are heavy users of the GoBank debit card racking up approximately 19 transactions per month and around $600 of monthly debit card spend, and this metric has grown more than 12% in just the last 60 days. More than half of GoBank customers are in the [ph] 34 years old and reported being highly satisfied with their account. Okay. So now let's talk about the art of the possible in terms of modeling potential revenue and profit from this product. Today, our average GoBank account holder active longer than 90 days is delivering around $11 per month in revenue, which has been growing month over month as the cohorts age. What's more interesting is that once you get past that 90-day mark, retention looks very encouraging. We're seeing only a small amount of attrition in more mature cohorts. And based on that, it may well be that we find retention rates as high as 3 years or more on these accounts. So as this plays out, it's possible that a GoBank account could deliver, say, $300 to $400 in revenue over its lifetime at a 20% or so margin. So this is why we think that at scale, GoBank could provide a very meaningful expansion of our company's financial outlook. So the summary here is

[Grace T. Wang:]

Thank you, Steve. I'll cover 2 primary topics in my prepared remarks today

[Operator:]

[Operator Instructions] And the first question comes from Ramsey El-Assal from Jefferies.

[Ryan Cary:]

This is Ryan Cary for Ramsey. Just a quick question. Is there any pull forward in the metrics from 1Q? I know bad weather was a headwind. I was just hoping you could speak either quantitatively or qualitatively to any impact in the second quarter.

[Steven W. Streit:]

Impact, I'm not sure I understand what you mean. You mean -- when you say a pull forward, you mean any bad weather impacts, you mean, in the second quarter or?

[Ryan Cary:]

Well it seems like in the second quarter we had much better weather across the country. So I was just thinking that maybe because of all those days that the weather was -- we had bad weather in the first quarter that maybe when it got better in the second it's -- we got a little bit of acceleration there.

[Steven W. Streit:]

It's hard to know. We think Q2 was pretty much, in terms of weather and customer behavior, fairly typical quarter. So it's hard to know if there was pent up demand and if so, how that would impact sales. Racked up [ph] cards, kind of a difficult metric to get at. But I don't think there was anything unusual about Q2, I guess.

[Ryan Cary:]

Okay. And then is there any update in terms of getting some reduced processing costs by either negotiating a different contract with TSYS or some other provider or taking the function in-house, is there any movement on that decision-making process?

[Steven W. Streit:]

Yes. Quite a bit in fact. You may have heard in the discussion we had about operating expenses that one of the things where we continue to invest is processing capabilities. And so we expect that there will be significant savings, if you will, on processing coming up starting next year. And without going into further details, I guess it's fair to say that we feel really good about our prospects in reducing the processing costs and having better technology too there as well.

[Operator:]

And the next question comes from Sanjay Sakhrani from KBW.

[Steven Kwok:]

This is Steven Kwok filling in for Sanjay. I just have 2 quick questions. I guess, the first one was around the revenue. Can you just talk a little bit about the expected trajectory around revenues? Should we expect like sequential improvements heading into the end of the year? Or is it going to be a sub-function [ph] up and then it will remain that way? Just wanted to see if you could provide any clarity around that.

[Steven W. Streit:]

Yes, you should see steady improvement as the quarters build. And we're seeing that if you look at Q4 of last year, Q1, Q2 and it's our goal and plan to have that in Q3 and Q4 as well. I forget where the conference was, Chris. I want to -- I remember being in New York and I remember being at a hotel. It was KPW, there you go, my apologies. And we showed a deck that had the ramp of what we expect quarter-over-quarter as more active cards build. And that is what you're seeing. The difference is we're slightly softer than where we thought we'd be, but the trajectory is the same and the storyline is the same. So if we have all these active cards continue to build and throw off revenue, and as the portfolios and cohorts mature of cards we've been issuing since January, you should continue to see 3 and 4 increase to make the year. That's right.

[Steven Kwok:]

Got it. And then just around expenses, can you talk about relative to expectations, it seems like expenses came in below our expectations. I'm wondering, is there anything that's driving that given that you're expecting expenses to build up again in the second half of the year. Anything you could point out for this quarter?

[Steven W. Streit:]

Yes. Let's talk about expenses because we've had such a fabulous result. None of which is accidental. We really, really worked quite hard at it. And when we built our full year guidance and announced it, you know what you have in the plan, you know what you think you can achieve, but being that we're somewhat chicken, we never squeeze the lemon all the way to the maximum, if you will, when we look at savings. But as it turns out, the certain line items, especially in processing with Green Dot Bank issuing our card accounts, the fabulous job that our technology leadership has done, Kuan and Steve and Dave and all the folks who run Green Dot's technology stacks around the world and around the country, have really over-delivered where all these fabulous plans are coming together. So you're seeing costs come down materially. Risk management, what an amazing job that Eric Inkrott has done in leading our risk team or Lee Bugasian [ph] in our supply chain team. We are now using better technology, better processes, more thoughtful plans as we spend money more wisely. But to spend the money more wisely, you have to have the technology behind it to better predict certain curves and trends and we're doing just a very good job at it. So that's all come together really quite well and that's why you're seeing the saves increase. We also did a good job with comp and benefits and SG&A, those other things as well. But I think those areas of risk and supply chain and technology have been key contributors to that expansion.

[Steven Kwok:]

Got it. And just as a follow-up, just in terms of when we look out into third and fourth quarter, what are the areas that are sustainable heading there? Is the processing expense level sustainable, or?

[Steven W. Streit:]

Yes. All the operational stuff is sustainable, both at scale and at a unit basis. So we feel good about that. We left ourselves a little bit of room. If you noticed the difference between first half actual returns and second half margin or the implied margins based on our revised guidance, there's about a $12 million gap. And the reason is we wanted to save that $12 million in the second half because we know we're doing additional merchandising. We mentioned some of the new merchandising processes to get more cards and especially the best-selling cards off the shelf at all of our retailers nationwide and maintaining a certain goal for in-stock rates. So that costs money. We know we have more production runs than we had scheduled because, especially on the Green Dot brand, we're just selling so many cards so what happens is, for those of you who are familiar with supply chain, we have this huge process around demand planning. And if you exceed demand you have to go back to the drawing board, and then do make up stock runs, and that's what we're doing there. That's a good thing. In other words, I'll take that problem every day of the week. But nevertheless, it does have an impact to your expenses in a given period. And then we have some growth initiatives that we're not able to announce today, but ones that will require a little bit of investment. So we sort of gave ourselves a $12 million margin, I guess, of spending opportunity in second half that's different from the first half, and that's why you're seeing that delta. By the way, I do want to point out because this is something fascinating that Chris pointed out when we were doing the review of all the metrics, even though we're forecasting second half margins to be a little bit more compressed than what we achieved in the first half, it's still -- even at the implied -- what is the implied range? Like, 18%, 19% of the midrange? And we actually did 23% in real life in the first half. But when you look at that, even with that lower implied guidance range, 43% higher year-over-year and 300 basis points better than last year over the same period. So even though we're being conservative and giving ourselves that $12 million of room to make sure we can afford all the new initiatives and everything at second half, it still is massively better over the same period for last year and I think to your question, that points out some of the confidence we have in the other parts of our business continuing to perform quite well.

[Operator:]

And the next question comes from Glenn Fodor with Autonomous Research.

[Glenn T. Fodor:]

I saw some talk online about GoBank now being available in perhaps select Walmart locations. Could you talk about that a little bit? I think it may tie in well to your comment on scale and ramping up GoBank.

[Steven W. Streit:]

Well, it's very rare that I'm surprised in earnings calls but you have a very astute eyeball, Mr. Fodor. So we've not made any announcement about that, although I think you just kind of did a little bit. But the answer is that we are in pilot in 20 Walmart stores only in the state of Texas and literally those just rolled out Monday. What's today? Thursday. So they rolled out 4 days ago. And so the only thing really, Glenn, all kidding aside, I can confirm is that we are in a small number of Walmart stores in Texas on a pilot basis with a productized version of GoBank and we'll see how that goes, no pun intended.

[Glenn T. Fodor:]

Okay. Yes, we just found it around that small, little ecosystem called Twitter so it's out there somewhere. But...

[Steven W. Streit:]

Yes, you can imagine as a CEO, I have long since canceled my Twitter account, but we've been outed more than a few times on Twitter so maybe I should renew my membership.

[Glenn T. Fodor:]

And then just secondly, if you don't mind. The back end of Walmart, you were talking about more usage and you'll take a little pain now for more usage and more revenues later. Is it safe to say that as we think about the revenue guidance for second half that includes very -- I don't want to put words in your mouth, but does it include very little lift from incremental benefit from the back half or have you assumed some acceleration in Walmart-related spending growth?

[Steven W. Streit:]

I'm trying to think how I want to answer it. The answer is, a lot goes into the guidance and a lot goes into the full year projection, and we always have moving parts that goes into that process. And you're never exact. Historically, we'll guess higher in some and lower than others and it evens out and that's the way it goes. So we probably are assuming that the Walmart portfolios are steady run rate through the second half, but we recognize internally that there's an opportunity for that upside if the extra usage behavior compounds over time. But they're new cohorts, right, these are 9 SKUs, 3 new Walmart MoneyCard products specifically, that have only been on the shelf now, call it, 8 months as of the second half of the year, 7 months, as of the second half of the year. So the cohorts are young, the behavior is young. So we believe that the usage, which is up materially as we pointed out in the prepared remarks, is up, and that's a great sign. Consumers are paying less, using the card more, exactly as designed. So that's a good thing. What that will contribute in terms of actual dollars and cents is a little bit more mysterious. And so we don't really put a lot of that in to the second half. But we do think, as it relates to Walmart in particular, that the smarter merchandising that we're beginning to do there and they've been wonderful partners in driving us to work harder and to work smarter at that. And some of the new upfront pricing initiatives that we made that I discussed in the prepared remarks, we think all of that can come together to increase a more robust result in the second half.

[Operator:]

And the next question comes from Dain Haukos from Piper Jaffray.

[Dain A. Haukos:]

I'm on Mike today. Just a couple of questions. I was curious how -- I noticed in the metrics that the active cards grew about 7% year-over-year, but the cash transfers grew a little bit slower rate at 3%. I'm just curious will we see a pickup in those cash transfers as all these new cards that you're adding kind of season?

[Steven W. Streit:]

Yes. We should. So what happens is when you're selling so many new card accounts and acquiring initially more -- so many card accounts in a small period of time, the half-life is only 90 days old, right? So if you look at the first half of the year as a cohort, let's say, the average half-life of those cards is 3 months. And so that means that they really only have a chance to contribute a small part of their activity in revenue. So in some ways, they're diluted to the average metrics. Okay? So if you have a swimming pool with x parts of chlorine per gallon and you dump in a ton of freshwater overnight, your chlorine particles per gallon, this is a weird analogy, would go down just by a mathematical average. But the same is really true with a pool of active cards. So when you have a group of active cards, some are older than 6 months, some are brand new, and you start acquiring more and more new cards, your average metrics will be watered down a little bit, to keep expanding on that analogy, just because you have so many new customers who haven't yet had enough life in the card account existence to contribute at the rate of an older cardholder. So we think a lot of that is more an artifact of selling and issuing a lot of new cards in a small period of time. And so we would expect that cash transfer revenue to be consistent with the growth over time.

[Dain A. Haukos:]

Okay. And so you think it ramps probably more steeply into 2015 or is it late part of 2014?

[Steven W. Streit:]

Well, the active portfolio has never stopped ramping in theory if you go back even 12 years, I suppose, and look at our business. But, yes, it should ramp and I think historically, I'll go out on a limb because I don't have our FP&A guys in the room but historically, reloads lag new cards issued by approximately 3 months. That's typically the rule of thumb.

[Dain A. Haukos:]

Okay and then just one other quick one. It looks like the check cashing effort has gone well with 1,200 stores added during the quarter. How many cities is that in? And how much bigger do you think that opportunity can get as far as locations is concerned?

[Steven W. Streit:]

Not sure how many cities, to be honest with you. I would guess it's pretty well dispersed. I'm going to say, I'll take a guess and say 20 states, but I couldn't tell you how many cities. But it's fairly well dispersed, number one. And number two, we think it can get a whole lot bigger. We're really very early in that game and the sales funnel has been robust where we have a team of about 15 people within Green Dot on the FSC stack, we call it, that does nothing but on-board new clients. So it's a very, very rapid process and we've been very well received so we think there's a lot of upside still to go.

[Operator:]

And the next question comes from Stephanie Davis of JPMorgan.

[Reginald L. Smith:]

It's actually Reggie filling in for Stephanie. I guess, a few quick questions. I think, my rough math, I was looking at the Walmart concentration, I believe revenues are probably down in the low double-digit range. And I was just curious, I know you called out some pricing differences or revenue per card. Is that like a fair approximation of what the active card basis has been trending like in the Walmart segment?

[Steven W. Streit:]

Yes. It's a fair guess. We don't break those out in terms of a divisional reporting or anything of that nature, but the implied math, and you're very good at math, is what it is so I think that's a fair mathematical calculation. And as I mentioned on the prepared remarks and I'm happy to talk a little bit more about it, there's really 2 reasons. One is, we've traded in longer lifetime revenue per active cardholder for some smaller revenue in the period, and when you have millions of active cards that can be a material amount of money in the course of a quarter. So that's one reason. And that's not a bad reason. That's something that we actually feel good about. If in fact, the portfolios age and compound, like we think they might, but we don't want to predict the future but that's sort of the theory, right, and we'll know more next quarter. But that's one. The other one is that, we're a little bit softer in active cards than we should be just because our merchandising efforts need to be better. Retailing is a very, very difficult task. I don't care if it's Walmart or any retailer you want to pick. It's difficult. You have a lot of facilities, a lot of inventory, a lot of hands touching supply chain, and we need to get better at it and do better at it. And as we do merchandising runs and as we learn new tricks to how to keep the right selling SKUs in stock better, you see sales spike and that has a direct correlation to active cards. So I think that we've done a lot of things right with the new portfolio, and we have some areas of improvement to be fair in the new portfolio. But life is dynamic, and that's why I said in the prepared remarks that we have so many people in so many locations. And one of the things we love about Walmart is that, that means you always have a fluid chance to improve on what you're doing so we have a lot of upside and a lot of opportunity. We've done well but I think we can do better still to improve that active card count as well.

[Reginald L. Smith:]

Got it. And then I guess, just to make sure I'm hearing this correctly. So is it safe to assume -- you talk about a higher lifetime value for the account, are people opting into some of your more premium cards that have higher activation fees and lower ongoing fees? Is that the conclusion that should be drawn?

[Steven W. Streit:]

I can't really comment on that because we don't give SKU-level data. That's really Walmart's proprietary information and so I feel wrong in sharing that. But I think if you look at the portfolio in aggregate, without regard to which particular SKU a customer is buying, all the SKUs were designed to better appeal to the customer who's self-selecting into that product, if you will. And so our ultimate goal would be to see aggregate retention and aggregate lifetime revenue increase. The only way we'll know if that happens is we have to just watch the clock tick and see how that all turns out. But that's the theory, exactly right.

[Reginald L. Smith:]

Got it. And if I could sneak one more in. On the cash transfer side, just curious, is -- so a 3% growth rate this quarter, is that kind of similar for both Green Dot and third party or is there a divergence in kind of growth patterns between the two?

[Steven W. Streit:]

Well it's a bit different. That's an average. Hang on, I'm getting for a piece of paper here, unless, Chris, you have it. What was the -- for example, on the Green Dot brand, we had cash transfers that were up what? 33% on the Green Dot brand. Yes. It was in the release I think, the press release. So it gives you a sense that we're a company of a lot of portfolios. We're a well-diversified company, right? We're in 92,000 retailers, we're in check-cashing locations, we're online, we're in the App Stores. And so the averages sometimes can help or hurt investors' and analysts' understanding of what's happening in a particular part of the company. But if you look at the Green Dot brand year-over-year growth, you'll see that cash transfers mimics closely the growth in active cards. But when you average it all together, it has a lower number. So we think as active cards build, if we do our jobs properly on the Walmart side of the house and if Green Dot's able to continue to grow, you'll see all those metrics improve over time.

[Operator:]

And the next question comes from Tulu Yunus from Nomura Securities.

[Tulu Yunus:]

So just with the -- I wanted to dig into the check-cashing channel once more. Is the ramp in this channel going to look like the retail ramp that you laid out at the conference earlier this year? Is it different? Can you just give us an idea of how to think about that because if I'm not mistaken, the economics from that particular slide I'm referring to referred just to the 27,000 retailers that you added last year, not the check cashers.

[Steven W. Streit:]

Right. Well the answer is, the formulaic mathematical theory would be the same. In other words, you sell a new card, it contributes its lifetime revenue over x number of months. And so as the portfolio grows and the cohorts age you have an ever increasingly highly-producing portfolio. So that is the same without regard to what channel you're in. The absolute dollars in check-cashing will be lower because there's just so many fewer outlets. If you think about what we did in Q4 of last year, oh, my gosh, it was 22,000 dollar stores or something, if my memory is correct. But then we also added Home Depot and a number of other locations as well. So you had just a whole lot more number of buildings and more customers and more units because that size of the add was so much bigger. But the same concept is with the check cashing. But as well-behaved as those cardholders are, they really do contribute much more per unit, the total number of units available in the check-cashing channel will never match the total number of units available in the retail channel. But it can be material and it's a nice add and it becomes a nice contributor to the company overall. But -- so the answer is, yes, the tale is the same but the scale is lower just based on the number of accounts issued. Does that kind of help answer the question?

[Tulu Yunus:]

Yes. It gives me a good color on it. And the -- I mean, just related to that channel again. I mean, as far as because it is a brand new one, I just wanted to spend a little bit of time on it. How are the incentive structures different with your partners there? Because I understand the usage behavior of these cards are quite different, a lot more direct deposit behavior, just in terms of how you incentivize via commissions, et cetera on these cards versus your retail cards?

[Steven W. Streit:]

Well, I don't know that I can get into specifics because as you can imagine, it's competitive and so I wouldn't want to get too specific. But in general, it's not too different than what we do in the retail channel. It may be structured slightly differently. Our retailers have other needs and expenses and types of things that they look for in their overall package, if you will. Our partners in the FSC channel have different needs and different goals. But if you look at the margins of those cards, they certainly have the opportunity to be the same or maybe better if those usage characteristics stay true than our retail cards. So -- but for the purposes of the overall model, I wouldn't bake in anything more in terms of margin, good or bad.

[Operator:]

And the next question comes from David Scharf with JMP Securities.

[David M. Scharf:]

Steve, I guess in the ongoing quest to try to get a handle on what we ought to be thinking about as "normalized margins," I just want to dig into that $12 million gap between first and second half. In particular, understanding how much of it is truly variable, just the cost of growing your business and how much of it is more sort of onetime in nature or associated with specific new initiatives. Because it sounds like things such as additional merchandising or production runs. I mean that sounds more like the cost of doing business, if you will. Can you give us a little handle on how much of that $12 million you would characterize as more onetime or very program-specific in nature?

[Steven W. Streit:]

Sure, happy to help best I can. If I had to give you a good high-level, I would say maybe $4 million to $5 million of it is more timing-based. In other words, if the invoice had arrived differently or if the merchandising run had been hit a month earlier could've been in a different quarter. Let's say, it could've been this quarter. So some of it is, just as those invoices come in, as you cause printing and manufacturing to happen and as you ship it. And on the Green Dot side, we have a new initiative on having better in-stocks at all those locations, which is really, really hard. I can't overstate that because my supply chain team would be angry if I did. It's hard. You're looking at, if you say you have 4,200 Walmarts in 92,000 locations. So think about that

[David M. Scharf:]

Got it, fair enough. And maybe as a follow-up, switching back to Walmart. A couple of things. One, can you talk a little bit about maybe what their rationale was for introducing one of your branded cards and particularly one that's at a higher price point?

[Steven W. Streit:]

Right. Well I think that I can and in fact Walmart has talked about this publicly as well. And that is they really want to have the best products and the best variety of products for their customer. And if you like to use their cereal analogy in their cereal aisle, if you like Post Raisin Bran better than Kellogg's Raisin Bran, they should have both there because overall your overall raisin bran sales should rise. I know that may be a silly analogy, but it's actually the right analogy to have. And I think that Walmart realized that the Green Dot brand was a big seller at our other retailers and the feeling is, "Look, we have a fabulous house-branded portfolio in the Walmart MoneyCard and people who want it are buying it. But let's also make sure that if they want to buy a Green Dot card given that they see it on TV and they see it marketed, well, we should have that brand as well." And as you know they also have the Serve brand from American Express and Amex has invested in that and they may well put on other card brands as well to build out that category, and that's -- to me that's perfectly fine and legitimate. So that's really why. I think you're right that in the old days there was a view maybe that they only want to sell the house brands of this or that. And as Walmart themselves has announced many times in their earnings calls and in other public forums, they really want the best variety for their customer base and the best assortment and I think adding the Green Dot brand is part of that strategy.

[David M. Scharf:]

Is the initial placement on the prepaid rack displacing one of the MoneyCard products or is it additional? Are they looking at growing the entire category?

[Steven W. Streit:]

No, it replaced -- I'm not sure what we replaced. The folks in the room are saying it replaced our AARP SKU so if that's the case, then so be it. I don't know to be honest with you. But it did not replace any of the Walmart-branded SKUs, it would've replaced another Green Dot Bank-issued SKU.

[David M. Scharf:]

Got it, got it. And this is maybe more just a kind of nuanced reporting issue. I mean, as we think about Walmart revenue per se, in future reporting, would sales of Green Dot-branded products inside Walmarts be reported as Walmart revenue? I assume it would be.

[Steven W. Streit:]

I think it is. Yes, I think we do. The short answer is, yes. I think anything we sell inside of a Walmart without regard to the brand comes from Walmart and therefore, under our reporting rigor would be reported as Walmart revenue.

[David M. Scharf:]

Got it, got it. And just lastly, in the same vein, cutting to the chase at the end of the year, another 5, 6 months of seasoning of the newer SKUs at Walmart, are you anticipating exiting the year with year-over-year revenue growth for Walmart?

[Steven W. Streit:]

Well I don't know that I can answer it, not because I don't know or I don't believe in it. It's just a model question that I don't have in front of me and I'd hate to say something on a public forum that after I get off the air, someone tells me it's inaccurate. I think we clearly have a view that we'll exit the year at a higher revenue year-over-year for the company and we're a company with a lot of different retailers and a lot of different products. So I feel confident about that, and that's why we're guiding the way we're guiding. Whether or not that revenue growth comes from Walmart versus Rite Aid versus Walgreens versus Dollar General, I'm probably less inclined to comment on.

[Operator:]

And the next question comes from Smitti Srethapramote from Morgan Stanley.

[Vasundhara Govil:]

This is Vasu Govil for Smitti. Just for quickly a modeling question first. Can you help us think about what line items the expenses related to the new growth initiatives will hit. Will it mostly be sales and marketing?

[Steven W. Streit:]

It would be -- is that where merchandising -- yes, the answer is, the accounting team says, you are correct. You may be filling in for Smitti but you're a fabulous fill-in.

[Vasundhara Govil:]

And then can you maybe -- nobody else asked you about it, so maybe I'll do that. Can you talk about the reload at the register program that you're rolling out at your retailers? Maybe help us with how far you're rolled out already and maybe help us also think about any revenue impact or cost savings that you might be realizing from that? Yes, happy to talk about it and the question was about reload at the register, which is our new SwIT technology, Swipe Interface Technology, S-W-I-T, that we've installed at most all of our retailers nationwide and will have installed at all retailers by the end of the year. And that will facilitate our ability to sunset the MoneyPak product, which maybe many of you have read about and have heard about and MoneyPak will be gone by early first quarter next year and fully replaced by the ability to reload your cards by swiping it at the cash register without having to buy a paper chit or scratch off for a PIN number or do anything else. The benefit of getting rid of MoneyPak is twofold. Number one, reloading at the register by swiping your card is a more intuitive customer behavior, easier to teach for the new customer, easier to train for the cashier and it really completely eliminates the opportunity for this third-party victim-assisted fraud, which I'm sure you've read about in the news quite a bit, has been a real challenge for us with that MoneyPak product. Which is a shame because it's a teeny tiny -- if you look at the nefarious, what I call nefarious, use of the MoneyPak product, it's a tiny piece of that product maybe less than 1% or 0.5% of all transactions. But in terms of -- it's a good product. We sell a lot of them. So in terms of the numbers of human beings that are impacted, it's just too much to deal with and so the answer is get rid of the product, get rid of that fraud and push all reloads to strictly swipe. Today, we're predominantly swipe anyhow, that's already the majority of how all of our reloads get done. And then we'll come up with some other technology to facilitate, for example, PayPal cash reloads and other things that we do with that MoneyPak today that are not related to reloading of cards. So SwIT rolled out first at Walmart about a year ago and the MoneyPak's already been gone from Walmart, Dollar General and some other retailers, Dollar Tree for some time, and then you'll see that product continue to go away, giving way to the swipe technology exclusively. And there are, to your question, good advantages to that. You're not printing gazillion MoneyPak packages, you get rid of all that third-party fraud opportunity, which is really we don't think clearly has helped our brand name because every time you turn on the news you hear about something like that. And so we think it's going to be a good thing for the company. It will save expenses, it will cut down on a lot of refunds and other things we've done to try to make customers whole. We'll protect our brand and our brand image and we'll also facilitate a way easier and more logical method of reloading for our prepaid cardholders. So we think at the end of the day, it's a win. And so that's the story of reload at the register and MoneyPak. I hope I've answered that. Did that all make sense the way I described it?

[Operator:]

And this does conclude our question-and-answer session. So at this time, I would like to turn the call back over to management for any closing comments.

[Steven W. Streit:]

No, that was a fast hour. Thank you all for listening. We appreciate your help and I'm sure we will see you at conferences coming up as Chris advertises, and we appreciate you listening in today.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.