Green Dot Corporation
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Good day, and welcome to the Green Dot Corporation Fourth Quarter 2015 Earnings Conference Call. Please note that the contents of this call are being recorded. I would now like to turn the conference over to Derra Stark (00

[Unverified Participant:]

Thank you, and good afternoon, everyone. On today's call, we will discuss 2015's fourth quarter performance and thoughts about 2016. Following these remarks, we will open the call for questions. For those of you who have not yet accessed the earnings press release that accompanies this call and webcast, it can be found at www.ir.greendot.com. Additional operational data has 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 Securities and Exchange Commission, including the most recent Form 10-Q that we filed on November 9, 2015, 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. Quantitative reconciliations of our non-GAAP financial information to their 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 protection. Now, I'd like to turn the call over to Steve.

[Steven W. Streit:]

Thank you, Derra (01

[Mark L. Shifke:]

Thank you, Steve. For the quarter, Green Dot posted $151 million in non-GAAP total operating revenue, $13 million in adjusted EBITDA, and $0.06 in non-GAAP earnings per share. The quarter ended up consistent with our financial guidance. In today's supplemental slides and earnings release, we provided select metrics, including the number of active cards, revenue per active card, processing and settlement revenue, and the number of processing and settlement transactions. As we manage the company today, we really focus on these metrics as primary drivers of revenue and profitability. So, as you can derive from that data, our portfolio of active cards declined by 200,000 cards from the prior year period to 4.5 million cards in the fourth quarter this year. But as forecasted, fourth quarter actives were flat with the third quarter, reflecting signs of portfolio stabilization. You will also notice that processing and settlement services revenue and total transactions also showed sequential stabilization from Q3 to Q4. So, between those two metrics – active cards and reloads – we believe that our customer base has now settled into a more stable position after all the noise from MoneyPak's removal last year. We believe the revenue from those active cards is up on a consolidated basis, because the customers we lost were mostly casual users and the customers that remain are more committed customers who drive more GDV, spend in other revenue-generating activities. Revenue in the quarter was essentially flat year-over-year, but the margin on that revenue was materially lower than a year ago, delivering just $13 million in adjusted EBITDA. Non-GAAP diluted earnings per share was $0.06 for the quarter. These results were consistent with the guidance we provided on the third quarter earnings call. There are two primary reasons for the lower margins in the quarter. First, this year, we had the additional expense of the higher commissions on the MoneyCard program. Second, the composition of the revenue this year is different than last, because our acquisitions accounted for approximately the same amount of revenue that our legacy business lost. So that's how we stayed even on the top line. While the acquired revenue from companies like AccountNow and Achieve (sic) [AchieveCard] (20

[Operator:]

Thank you. We will now begin the question-and-answer session. As a courtesy, we please ask that you limit yourself to one question and a single follow-up. If you have further questions, you may reenter the question queue. At this time, we will pause momentarily to assemble our roster. And our first question will come from Sanjay Sakhrani of KBW. Please go ahead.

[Steven W. Streit:]

Hi, Sanjay. Hello?

[Operator:]

Hi, Mr. Sakhrani. Are you there? Your phone may be muted.

[Sanjay Sakhrani:]

Yeah, I'm sorry. Can you hear me now?

[Steven W. Streit:]

Yeah. Hi, Sanjay.

[Sanjay Sakhrani:]

Right. Okay. Thanks for all the color. I guess, I'm just trying to figure out how we should think about the core growth going forward. I understand 2016 has some headwinds, but maybe as we look out to 2017, how should we think about your revenue growth profile and kind of the EBITDA margins you could achieve?

[Steven W. Streit:]

You mean on the legacy business or the consolidated enterprise?

[Sanjay Sakhrani:]

Consolidated enterprise.

[Steven W. Streit:]

Well, so I'll give you our aspirational growth. It's always hard for any CEO to come up with guidance for the long term that's taken specifically. So let me give you our aspiration. The double-digit number, that 10% growth, is what we aspire to. We hit it and exceeded it, as you know, this year despite our legacy business having some challenges, a lot of challenges, but that was through acquisitions. Our macro prepaid our core heritage Green Dot, that macro is not growing as fast as it used to grow. So that means for us to hit that 10% number we have to have other products and services. That's why Green Dot Money is so important. That's why the ability to have credit is so important and some of the other new tactics that we have out there, better merchandising or promotions or marketing. But aspirationally, that 10% number is what we stuck to. We've hit it many years. Some other years we've not. But that still is our aspiration long term.

[Sanjay Sakhrani:]

When we think about the margins of the business?

[Steven W. Streit:]

Well, I've said this for many, many years and I'll say it again because it's true. Anything without a 2 before it is not appropriate for a business. Three of the past four years had a 2 in front of it. 2013 maybe did not. Maybe that was 17% or 18%. But in every other year over the past four years, we've hit it. We hit it again in 2015. We are forecast to easily hit it again in this year for our company in 2017. So we're always looking at that number as a guide and a gauge of our success. We want it to be in the 20%s; and how big in the 20%s, how far up can we go in the 20%s depends on our ability to continue to create efficiencies and grow revenue on our scale platform.

[Sanjay Sakhrani:]

(29

[Mark L. Shifke:]

Hey, Sanjay. It's Mark. I just was going to echo and just further step up (29

[Sanjay Sakhrani:]

Okay, great. And just my follow-up on a unit economic increase that you guys are seeing. It looks like AMEX is retrenching from prepaid and I noticed some of the slides at the back of your deck kind of speak to their spacing relative to yours. Is that allowing you to take up the unit cost and how do you compare relative to your peers in terms of cost for card?

[Steven W. Streit:]

One of the biggest – great question and one that is fun to answer, because I think we've done such a great job here. One of the biggest early strategic concepts we had, going back years ago on the strategic roadmap, was that every business – look, we invented the product, right, but every business at some point commoditizes. Nobody is special forever. So we have to invest in the brand, give Green Dot some star power, make it important so you're not just a piece of plastic hanging on the shelf. We've done that really, really quite well. I don't think anybody questions the power of the brand. And that means, when people go up to the rack, they see value in the Green Dot brand beyond the fact that it's a prepaid card just like you think Kellogg's brand Frosted Flakes may be a better quality than Uncle John's (31

[Sanjay Sakhrani:]

Okay. Thank you.

[Operator:]

Our next question will come from Tien-Tsin Huang of JPMorgan. Please go ahead.

[Tien-Tsin Huang:]

Hi. Thanks for all the details. I guess, my question, kind of, building on what Sanjay was asking about. Just the visibility into some of these things. I guess the cost side, I think it sounds like you have some good visibility there, but just with the price changes and I don't know if the elasticity has changed and then you got MoneyPak 2.0 coming out, a lot of new stuff coming up on the rack (33

[Steven W. Streit:]

Yeah. I think so. Whenever you're launching so many new products, you really have to be thoughtful and careful. Nothing at Green Dot is on a whim or pulled out of your left pocket or something like that, because we're highly regulated enterprise. Everything's got to be thoughtfully worked out. Have a lot of research behind it, a lot of operational dress rehearsal, if you will. And that's no different with these cards. So we've actually been in the market undercover for some time at a large number of 7-Eleven stores and CVS stores with a higher price card to see what would happen. In those cases, we're actually charging a higher fee than we ended up charging, just to see what is the elasticity, how would those play out. We also did a price increase some time ago for other services with a large segment of customers about a year and a half ago. So we've been planning this for a very long time. And we wanted to see what would happen over the course of the year or year and a half if we took the fee from $5.95 to $7 95 and we researched that. So between our actual in-market test for the last number of months and the fee changes we did about a year and a half ago, we have a good sense for what happens with the behavior which the answer is, nothing. It stays exactly the way it is. And so we think we are in good shape there. We've been on sale for about 20 days, something like that at Walmart. And that's been going well also. So we think we have good visibility into what the fee collection will be, how the early acquisition rates will be for these cards. Now, what don't we know? Behavioral curves and retention happens over time. It's just been (35

[Tien-Tsin Huang:]

Okay. That's good to know. Just a quick follow-up there. Just on the sales and marketing front then, just to make sure these things get out there and the education as such, is that budgeted in there and how much flex is there on your sales and marketing for advertising?

[Steven W. Streit:]

So any marketing expense we plan on spending is part of that adjusted EBITDA forecast that Mark just gave you. And, again, at this point, the company is large enough and our marketing program's flexible enough where there is no incremental marketing needed for it in terms of spend. I mean, Tien-Tsin, to give you a sense and I remember, I think, I had this stat at the investor conference we did together back in December, we have 10 million consumers who come to one of our website properties every month. Whether we want them to or not, they come for various reasons. They saw a TV ad. They're buying the card. They're checking their balance, whatever the case may be. You have 13 million who call our worldwide call centers every year – every month, I'm sorry. So every month, you have 13 million people talking to hopefully an IVR machine, a computer. If they go to a desktop and talk to an operator, they're talking to somebody in the Philippines or one of our remote facilities. And there's an opportunity to inform those people automatedly, in other words on the IVR, interested in a loan, go to greendotmoney.com. So we think that we have plenty of opportunity to get consumers to try our products just with that. And lastly, we have this awesome relationship with Steve Harvey, who has really been a fabulous spokesperson for us in terms of the scores, how it's working, the notoriety. He does a great job with our product. And so there's always an opportunity to have him mention this product or any other. So, between all of our web properties and the size of our company and our installed customer base, we're feeling pretty good that there's no incremental marketing needed.

[Tien-Tsin Huang:]

Okay. That's good to know. Thanks Steve for the update.

[Steven W. Streit:]

You bet.

[Operator:]

Our next question will come from Ramsey El-Assal from Jefferies. Please go ahead.

[Ramsey El-Assal:]

Sure. I guess my first question has to do with Harvest Capital's activist campaign to put new directors on the board. How have you responded to them?

[Steven W. Streit:]

Yeah. Well, it's a good question and I appreciate it, and I guess here – well, let me think how to describe it. Firstly, I'm quite sincere in saying that we appreciate Harvest's activism in our stock and that's not to say I agree with all of Jeff Osher's points or his conclusions. But I suppose the job of the activist is to say and write sensational things of solicited reaction and I actually don't take it personally. Will the Harvest filing make us a better company, will it make me a better CEO? I actually think it will. We're certainly all paying attention, that's for sure. And being open to a wide variety of input, criticism, opinions and perspectives is a really good thing and I've taken the underlying meaning of every one of Harvest comments seriously even if I don't take Jeff's actual words or conclusion seriously. So it any event, Green Dot has a good board. We have some very seasoned folks on the board as you know. And we've talked about the most appropriate things we can do. And here is what we decided. First and foremost, we all agreed that the best thing we can do for ourselves and our shareholders is to continue to execute our plan and grow EPS because nothing succeeds like success. We feel we've done a very good job of strategically guiding our company to a great place over many years and now we are in a position to show Harvest and all of our investors what we can do. Next, from a tactical perspective, we think it's a fair statement that we could benefit from expanding our board and seeking to invite different perspectives. People may not realize this, but we have new faces on the board. In fact, four out of the seven board members besides me are new to the company in just past few years. So it's not an all boys or actually we have a lot of women on the board, so not an all girls club or anything like that. But we do like the idea of having some fresh faces and new perspectives to help guide the ship. And to that end, it's a good time to tell you that we have decided to increase the size of our board and expand its membership. Mary Dent from our non-gov committee did in fact call Jeff Osher at Harvest and then our board also sent Harvest a letter, letting them know that we are expanding our board and that would very much like Harvest to help us recruit new members and for them to suggest some names of candidates who they feel would be great additions to our board. In other words, whether or not there's a proxy fight down the road, if there is great people, let us have the names, we can put them on without a proxy fight and save everyone a lot of money and we can make that as part of a committee selection process. But we also think that many of our top 10 shareholders would also have great ideas for superstar board members for Green Dot. Green Dot is such a cool and important company that I'm sure many talented people would love to serve on our board and so to that end, Mark and I and others from Green Dot's Board will be calling and meeting with our top 10 shareholders to get their thoughts on all of this and to see if they can introduce us to some great board members who would be rock stars and who could add value. So that's sort of where we left it. And beyond that, we're hoping that our performance over time will speak for itself.

[Ramsey El-Assal:]

This is kind of a related question. There was some press out recently about you guys potentially exploring strategic alternatives. I guess, I know this is a tough thing to comment on and I have a feeling of what you might say. But can you comment on the validity of reports and is there any kind of formal process in place to look at strategic alternatives for the company?

[Steven W. Streit:]

Well, I kept leaving – I keep leaving post-it notes in Jamie Dimon's bathroom saying, when you get time, call please (42

[Ramsey El-Assal:]

Okay, great. I appreciate your responses.

[Steven W. Streit:]

Sure. You bet.

[Operator:]

Our next question will come from Ashish Sabadra from Deutsche Bank. Please go ahead.

[Ashish Sabadra:]

Steve, thanks for the incremental color. Just quickly, Mark, you talked about revenue for the first quarter, but just as we think about the cadence for the full year, I understand you don't want to give quarterly guidance. But just thinking about the cadence as the headwinds anniversary and new products come on, how should we think about the cadence on the revenue growth side?

[Steven W. Streit:]

On the revenue growth side?

[Ashish Sabadra:]

Yeah.

[Steven W. Streit:]

You mean how we grow through the quarters, you mean?

[Ashish Sabadra:]

Yeah.

[Steven W. Streit:]

Oh, gosh, we're so seasonal. Well, (44

[Mark L. Shifke:]

Look, I think the way we have thought about this is, we were really focusing a little bit on where is the first quarter likely to come out relative to where it did last year and thinking about how tax season is somewhat off this year than it was last year. I think last year, something – a little over 30% of our overall revenue showed up in Q1, and something – over 50% of our EBITDA was in Q1 as well. And I think this year we're seeing, with the delay of tax, that it's going to be more like 30% or less of our revenue and probably 40% to 45% of our EBITDA will be in Q1. And what's not showing up in Q1, we are expecting to show up in Q2. And then, during the course of the year, as Steve was – earlier alluded to, as you see a portfolio build, what you're looking at is a combination of old cards are trading, new cards coming on, the new cards coming on at higher unit economics and the more they season, the greater the revenue and the greater the EBITDA. So you would see that growing and we would expect our exit rate at the end of 2016 to be above our entrance rate.

[Steven W. Streit:]

That's sort of why 2017, the sort of overview color that Mark gave comes together fairly easily when you build your own models and we try to give you all enough information on this call to build your model and follow along at home and this way you can see where we are. At the end of the year, we're cutting expenses, but at the same time increasing the revenue being delivered from the portfolio, so revenue is going up as the year goes on, expenses coming down as the year goes on. During the Detour periods at Green Dot, it was exactly opposite of that and that is expenses are going up as we invested in technology and did all these cool things, but at the same time revenue is going down so we had the worst of both worlds and now we are going back into a more normalized rhythm. If you check in your page, you just (46

[Ashish Sabadra:]

Yeah, no. It does and thanks. That's very helpful. Maybe just a quick follow-up would be the comments on 2017. When you talked about the EPS of $1.75, what were your revenue assumptions around to get to that EPS number? And then if there were any delays in the product launches or anything, could you still make it up through margin expansion? So a two-point question around what's the revenue assumption and then if there is any delays, could you still make up that number?

[Steven W. Streit:]

Yeah. That's a great question. I think the way we're thinking about this is looking at things as if we had a 24-month year in front of us and that 2017 was just a natural progression of where we are exiting 2016 and continuing. So we actually will say, look, to get to $1.75, we're not going to assume anything special happens just because we changed to a new year, but instead we would just continue, as the portfolio ramps. And then, on the margin side, we already have visibility into $20 million of efficiencies in part. We had one-time costs for supply chain launch, and we've paid for that already. We're not looking to pay for that out of future profitability. But as a management team, we've come together and figured out the way to drive efficiencies on the front-end and then realized the benefit, as revenue grows over time.

[Ashish Sabadra:]

No. That's helpful. And maybe then a final question would be on the buyback. You mentioned $50 million of potential buyback this year. Just in terms of the buyback, is it going to be more opportunistic or expecting to spread it out through the year?

[Steven W. Streit:]

Yeah. That's a great question. We intentionally have left our EPS guidance without effect for the buyback, because, of course, you know EPS would be impacted by both the timing of when we bought back shares and the price at which we bought back shares. All things being equal, we would prefer to buy sooner rather than later to have more of an impact on this year and next.

[Ashish Sabadra:]

Okay. Thanks. Thanks for the color.

[Steven W. Streit:]

Sure.

[Operator:]

Our next question will come from Ashwin Shirvaikar of Citigroup. Please go ahead.

[Ashwin Shirvaikar:]

Great. Thanks. So, I guess, the question I had for you was, you have a number of these new initiatives with regards to what the bank side of the enterprise can do. Can you talk a little bit about the capital requirements as well as the cash flow expectations this year and next?

[Steven W. Streit:]

Sure. You mean at the bank itself or the consolidated business?

[Ashwin Shirvaikar:]

Both. I was just kind of wondering with regards to what sort of investments you would need to make in order to launch all of these products and then on (50

[Steven W. Streit:]

Yeah, so, the great news is, any CapEx, and we have Jess Unruh here, who is our Chief Accounting Officer, CapEx peaks, as we start rolling out just these – the process and the other things that have been driving a lot of that. So we already have built into that CapEx the cost of anything we'd need to build for all of our products. And it's very, very little, because that's what we've been doing over the past three years. So we've been working on the processor, the GoBank Product Technology Platform. By the way, let me talk about that, because nobody asked about it, but it's kind of important. The word GoBank is a product. In other words, you sell a product under the GoBank brand name. But it's also the underpinning guts, if you will, the technology platform that allows you to deposit a check or to do person-to-person payments or host an embedded savings account and sweep money back and forth. All of that, right? Now, all of our prepay products sit on that same GoBank platform. If you were to buy a Walmart MoneyCard and download the mobile app, you would be shocked to see the similarities of GoBank, but that's allowed us to shutter, if you will, over time to shutter our old code that's 10 years plus old and retire those legacy processes, so we are saving a lot of money as opposed to spending money in investments. It sort of the opposite of what you think. In other words as we roll out new products, we are saving money, not spending money on the new products. The past three years were the spending years and now we are able to get to some of that money back in terms of ROI. So whatever you see in the plan is already paid for. There is not a lot of incremental spending. We have a lot of technologists. We're able to do Green Dot Money in-house. If we need to bring in an occasional surge resource from a contractor, we do. But I don't think there's anything remarkable. Mark, what...

[Mark L. Shifke:]

In fact – and consistent with that, I think we would expect for next year, our depreciation and amortization will actually be lower than it is for this year, so...

[Steven W. Streit:]

Yeah, (52

[Mark L. Shifke:]

I think that's consistent with the fact that we met our spend as we need to and we are not looking for incremental this year.

[Steven W. Streit:]

Yeah, the last two years has been just so punishing for a number of reasons. We are in this long-term strategic plan. You invest in this technology, you can't stop nor would it be smart to stop halfway through, you assemble teams and you are writing code and you are hitting certain timelines. And then the legacy business hits the skids with MoneyPak coming off the shelf and the private label portfolio with lower fees. So you have your highest level of CapEx spending in history for the company at the same time that you have the lowest level of revenue generation from the legacy business. So it was just the combination of those. We didn't plan it that way. It isn't what we thought would happen, but if you look in rears factually, that's what happened. And so now it's just such a joy to be able to look forward and say, wow, the process will roll out over the next number of months. The new products are all in real life on the GoBank platform. They live, they exist, you can buy them and use them. That's been done. Green Dot Money is under deployment, and people are working at it. I was at our Shanghai tech facility a few weeks back going through what I'd call stack reviews, with all of our leaders out there who were showing me the various products and how it's coming along. So I think we're in better shape than we've been. No guarantees. You never know. I mean, anything can happen, I suppose. But this is certainly one of the better times we've felt in quite a while about the company.

[Ashwin Shirvaikar:]

And when you think of entering into or engaging in consumer lending, a secured credit card seems like an interesting product. What is the risk profile of the consumer that you're targeting? And why would they choose to use Green Dot as opposed to – there are a number of bank and non-bank choices available nowadays. Any thoughts on just the competitive landscape within lending, which seems to be very busy?

[Steven W. Streit:]

Yo, yeah. Well, so, look, as it relates to unsecured lending now, I'll tell you about the secured card in a minute. Unsecured lending, that we don't have plans to do. Look, there is no question that our customers who we love – I mean our customers are our family, but just like maybe your crazy Uncle Bob at home or whatever, everyone (54

[Ashwin Shirvaikar:]

Great. One last quick question. When I look at the Harvest Capital presentation, right, and they obviously – they believe that EPS can get to $2.56 by 2018, which is basically something like $2.5 (58

[Steven W. Streit:]

Yeah. Oh gosh, how do I say this because I want to be respectful and polite. Look, I think if you're the activist and I don't know I've never been an activist, we've been out this 15 years and I've never had anything like had happened, so I can't tell you I'm experienced at it. But my sense is that Harvest's job or any activist is to create excitement and thought around that process. But look, a lot of the things in the bridge slide that they have that shows the way to get to that EPS number, you just can't do. You can't loan 80%, even if you wanted to. You can't loan 80% of your customers unsecured credit without driving the company into insolvency in six months. You can't do that even if your regulators will let you do it, which they never let you do it anyhow. You can't lever up the balance sheet to do things that are not otherwise safe and secure in that way. There's also other math that you'd have to look at and try to figure out the math is accurate. But I think – look, I think directionally what Harvest is saying is a fair point and that is, hey, look at, if you grow revenue and you cut expenses, that you should be able to do a better job at EPS than what you've done so far. And the answer is, they're right. We couldn't necessarily do it in previous years while you're rolling out new technology products and while your legacy business is melting like an ice cube. So you may not be able to do it then, but directionally they are right. But when you see some of the points they make, I'm actually in violent agreement with many of them. And that is roll out new products with better fee schedules, check, they're right. Cut expenses, check, they're right. Use the bank for other kinds of uses besides issuing prepaid cards, and now again, that's a regulated activity and we were lucky and fortunate to get approved by our regulars to lend, but we just can't go off and do that, right? So I don't know what the difference is and it's probably not a great use or an appropriate use of my time to go through and I don't have the deck in front of me, so I forget what they have in there, but many of the objectives were just not things you can do credibly or easily, but forgetting about their number versus our number, the concept that should we be able to make more money and cut more money and therefore cut expenses and therefore deliver wider EPS, the answer is, yes, we should. Yes, we will. And that point is well taken even if the actual recommendations are not plausible. I guess, is that a fair way to answer it?

[Ashwin Shirvaikar:]

Yeah, yeah, I appreciate the detail. Thank you for that.

[Steven W. Streit:]

Sure.

[Steven W. Streit:]

Okay. Folks, I think we're done for the day. I don't have a watch in front of me, but my cell phone says we're done. Thank you all for listening. We appreciate it. We'll see you at shared confidences and one-on-ones coming up. And we look forward to meeting with many of our shareholders to come. Thank you everybody and have a good day.

[Operator:]

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