Green Dot Corporation (GDOT) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Green Dot Corporation Second Quarter 2012 Earnings Conference Call. [Operator Instructions] The contents of this call are being recorded. I would now like to turn the conference over to Mr. Christopher Mammone, Vice President of Investor Relations for Green Dot. Please go ahead, sir.

Thank you, and good afternoon. On today's call, Steve Streit, our Chairman and Chief Executive Officer; and John Keatley, our Chief Financial Officer, will discuss 2012's second quarter performance and updated thoughts regarding our 2012 outlook. Following their remarks, we will open the call for questions. The slides that accompany this call and webcast can be found at ir.greendot.com and will remain available after the call. Additional operational statistics have been provided in a supplemental table within our press release. As a reminder, today's call is being recorded. And our comments include forward-looking statements, including statements about the loss of the TurboTax program to Green Dot and our expectations regarding future results. Please refer to the cautionary language in the earnings release and in Green Dot's filings with the Securities and Exchange Commission, including the 2011 Form 10-K that we filed on February 29, 2012, and our most recent Form 10-Q filed on May 10, 2012, for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During this call, we will make reference to financial measures that do not conform to generally accepted accounting principles. This information may be calculated differently in other companies', similarly titled non-GAAP information. Reconciliations of these 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. All statements made by Green Dot officers on this call are the 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. Now before I hand it over to Steve, just a couple of guidelines for today's Q&A session. [Operator Instructions] Now I'd like to turn the call over to Steve Streit.

Thank you, Chris. And welcome, everyone, to our Q2 earnings call. As always, with me this afternoon is Green Dot's Chief Financial Officer, John Keatley. After my remarks, John will recap the financials for the quarter and will also provide greater detail around our 2012 financial outlook, which we're updating for you all today. So lots of things to discuss and let's get started. We had a good quarter of growth in the core business with non-GAAP revenue up 23% year-over-year, less the TurboTax impact, and non-GAAP earnings per share was up $0.35. Our non-GAAP EPS reflects a $0.01 reduction for a onetime write-off related to IT development for a large partnership that we learned last month will be delayed for the foreseeable future so we took the write-off now. Other highlights of the quarter. Excluding the impact of the discontinued TurboTax program, new card activations were up 18% year-over-year in the quarter and GDV was ahead by 24%. Active cards grew to 4.4 million as of June 30, representing year-over-year growth of 16% excluding the discontinued tax program. John will discuss our Q2 results with a bit more granularity here in just a few minutes. Next, I'd like to let you know that we're going to use the occasion of this earnings call to provide revised guidance for the remainder of this year. We see a greater level of uncertainty going forward in our business as our market and the prepaid industry in general continues to evolve. So we feel the need to be cautious and lower guidance for the remainder of the year and I'd like to walk you through our thinking. There are a number of unknowns in our business that could be headwinds to revenue growth going forward, and these potential headwinds fall into 2 main buckets. Bucket 1 is new competition. After personally meeting with most of our largest retail partners over the past 90 days, we expect that several new competitive products could be on sale next to Green Dot products at many of our current retail distribution locations later this year or next year. Some of our retailers believe that expanding the in-store product selection will increase the overall pie and invite new customers into the category and that this may benefit Green Dot with higher sales but other of our retailers believe the category may well grow but that Green Dot's net unit sales may decline as a result. Frankly, we don't know how this will all play out, and therefore, we think it's most appropriate to take a conservative view and assume that at least at the outset that we lose some portion of our unit sales at most of our major retailers. The second bucket, is around new risk controls which we voluntarily began to put into place in late Q1 and then accelerated into Q2. These new controls are designed to enhance security measures through tighter customer identification protocols and more sophisticated back-end monitoring of accounts. While these new risk controls are, without question, the right thing to do, the short-term effect is that we are seeing our year-over-year growth in new accounts activated being negatively impacted as new customer accounts are now more stringently vetted as part of these new processes. So the updated growth ranges that John will share with you in a minute reflect our best attempt to bake in a conservative view how -- on how these things might play out for the remainder of the year. We also want to use this call to share some very good news with you on a number of fronts. First, our previously discussed strategy to enter new channels and develop new products for new segments is beginning to take shape quite nicely. In particular, we have recently had some very big wins in our revenue division that could potentially provide meaningful tailwinds beginning in 2013 and continuing over time. First, I'm pleased to announce that we have signed a long-term exclusive partnership with a leading provider of financial services for the higher education channel, including student loan disbursements. We cannot disclose the name of the partner right now for competitive reasons but we will before we launch the products. The partnership calls for Green Dot Bank to serve as issuer and Green Dot Corporation to serve as program manager to provide accounts to students for refund disbursements and for their general banking needs. We think that Green Dot is really well positioned to succeed in the higher education channel because we intend to offer feature-rich product with fees that are at the lowest end of the market along with our company policy of never having any type of overdraft or penalty fees ever. So given the nature of distribution partnership of this partnership, combined with Green Dot's pro-consumer products, we believe that Green Dot has a great opportunity to become a leading provider of these types of students' accounts over time. Next, I'm pleased to announce that Green Dot recently entered a multiyear agreement with UniRush, LLC for Green Dot Bank to be the exclusive issuer of the retail version of the RushCard prepaid Visa card, and for Green Dot Corporation to comanage the portfolio with UniRush. Prior to this deal, the RushCard was only available online and over the phone through the RushCard website and service centers, where the UniRush company has made a good deal of business success over the past 8 years or so in building one of the largest and most successful prepaid card program. We believe that joining forces with UniRush and distributing the RushCard at retail will be helpful in expanding our overall category sales by providing our retailers with a differentiated and targeted product that appeals to consumers who relate to Russell Simmons and the brands he has created. The RushCard will be a key component of our new segmented Category of the Stars retail concept, and I'll tell you more about it in a second. And so we welcome this partnership with Russell Simmons and his great team. Next, I'd like to share with you some more details about Category of the Stars, which has the goal of expanding gross unit sales by offering new products for new segments of potential prepaid customers. To begin marketing this new concept to all of our major retail distribution partners starting 3 or 4 months ago and the response has been very positive. Category of the Stars is an exclusive retail merchandising solution geared towards those retailers who are looking to expand their overall prepaid sales with more products on the rack and trended -- intended to attract new incremental buyers to the category. Green Dot's Category of the Stars includes our Green Dot Visa, the nation's #1 selling mass market brand; the AARP MasterCard, the most trusted and recognized name amongst older Americans; the NASCAR Visa card targeted at NASCAR fans looking for a product that reflects their affinity for this massive lifestyle sport; and the RushCard, the prepaid card we just told you about, co-owned and marketed by Russell Simmons. All of these products are retail brands where Green Dot Corporation is the exclusive provider. We expect that many of our major retailers will install the Category of the Stars concept over the next 12 months, leading to greater sell-through for j-hook and higher overall organic same-store sales. Finally, we're pleased to announce that we are seeing some of the fruits of our Loopt acquisition with the technology beta released this week of our new mobile-centric checking account product. All of our technology employees at our facilities here in Monrovia and in Silicon Valley worked hard on this major initiative, and we're very excited to begin the first phase of testing with friends and family. Based on the learnings acquired in this test phase, we will continue to make changes and modifications and prepare for a broader beta rollout in Q4, followed by increasingly broader rollouts in the following months. As a reminder, this is a very modern, engaging and mass appeal checking account that is targeted to the other 99%, if you will, who are looking for a better checking account. We have demoed this product with most of our major retailers and other prospective new distribution partners, and the response to the product and the desire to sell the product has been very strong. In addition to our retail channel, we believe this new checking account product has the potential to be transformative to our business in other channels like the education and online channels, because the usage and retention characteristics we believe will be more akin to a checking account than a prepaid card. So lots of work and discoveries still to go, but we're very pleased with our progress. And I wish to publicly thank and congratulate our incredible banking team led by Lou Goodwin and our fabulous technology team led by our COO, Will Sowell, for their outstanding efforts. So lots of positive and exciting developments with all of this. But the ultimate impact on our business is still unknown because there are -- these are all new and unproven initiatives. And so we haven't modeled any revenue from any of these initiatives into any forecast. So we believe it's fair to say that any one or all of these new opportunities could have the potential to create some material upward performance for our business beginning in 2013, and we'll keep an eye out and keep you posted going forward. Lastly, during my portion of the call today, I want to bring you up-to-date on some previously discussed initiatives. And that is, first, our processing team led by Ralph Calvano, continues to staff up and do great work and make good progress on the development of our new internal processing platform, and we continue to be on track with the expected time line given previously on this initiative. Next, Green Dot Bank continues its successful conversion of accounts off of Synovus Bank. We're also pleased to let you know that starting in June, we began issuing our first Green Dot branded cards from our own Green Dot Bank. So here, too, we remain on track with the time line previously given on this initiative. Finally, I'm pleased to announce that we have named Sam Altman to the position of Chief Technology Officer for Green Dot Corporation. Sam was the Founder and CEO of Loopt, which, as you know, was the Silicon Valley technology company we acquired earlier this year. Sam is a real technology visionary. He's an amazing guy and a fabulous technologist and we're all pleased to have him more and more involved with our technology transformation at Green Dot. Concurrently, I want to let you know that both our previous CTO, Mike Strange, and our CIO, John Macllwaine, have exited the company to pursue other opportunities, and we certainly wish them well. Now I'll hand the call over to John Keatley with more color on our Q2 financial performance and he'll also have updated thoughts on our 2012 guidance. And then, after John's remarks, we'll begin the Q&A session. John?

Thanks, Steve. As Steve mentioned, our Q2 performance remained solid, particularly when normalizing results for the discontinued tax program, which continued to impact the year-over-year growth of many of our key metrics. However, due to the factors that Steve outlined, we are revising our guidance for the remainder of the year. And I'll share those details with you in a moment. The first topic that I'd like to discuss is our revenue growth in Q2. As you can see on Slide 3, our non-GAAP total operating revenues grew 17% year-over-year in Q2 or 23% year-over-year excluding TurboTax. In terms of the 3 main categories of revenues, cash transfers grew the fastest, up 24% year-over-year; followed by interchange, up 19%; with card revenues ahead by 10%. Of the 3 revenue categories, card revenue growth was impacted most by the discontinued program. Normalizing for this loss, card revenue growth would've been 20%. Slide 5 shows the main categories of operating expenses. Our sales and marketing costs increased more than 200 basis points as a percentage of total revenues, primarily the result of increased advertising and retailer promotions. One driver of the increase was expenses associated with the development of new creative for TV ads for both our Walmart MoneyCard product and Green Dot branded products which will run went through the remainder of the year. Comp and benefits were up 200 basis points as a percentage of our sales due to the addition of the Loopt team. Other G&A also came in higher year-over-year due to higher depreciation and amortization, the onetime write-off that we mentioned earlier, and expenses associated with our headquarter's relocation. So as you can see on Slide 6, our adjusted EBITDA decreased slightly year-over-year and margins were down. We estimate that the previously mentioned onetime write-off of program development equates to about 50 basis points of margin. So if you normalize results for that write-off, EBITDA was up about 1% year-over-year and margins were off by roughly 3 percentage points. Our non-GAAP net income, which is shown on Slide 7, was $15.3 million, down slightly compared to the same quarter last year. Non-GAAP EPS came in at $0.35 or $0.36, if you add back the onetime write-off. In terms of our key operating metrics, we showed strong year-over-year growth, especially when the numbers are adjusted for the discontinued tax program. For the purposes of comparability, all of the following metrics have been normalized by excluding TurboTax. Our active card portfolio grew 16% year-over-year and new card activations increased 18% year-over-year. We saw a modest increase in card revenues per active card driven by higher average card usage. Our GDV grew 24% year-over-year and the volume of direct deposit funds loaded to cards increased 30% year-over-year. Most of the growth came from increased payroll and government benefit direct deposits. This is a positive trend for us as these sources of direct deposit tend to be recurring in nature and correlated with higher lifetime revenue. Cash transfers continue to grow rapidly in Q2, increasing 22% year-over-year, driven by both increase to reloads from our portfolio of cardholders and more reloads from our network partners' portfolios. The portion of cash transfer revenue from the third-party reloads increased to 23% during the quarter versus 17% in the year ago period. Our Walmart revenue concentration declined slightly to 62% of non-GAAP total operating revenues during Q2 versus 64% in Q1. Our balance sheet continues to be very strong. We ended the quarter with $275 million of total cash and investment securities, including $121 million of unrestricted cash and cash equivalents, $141 million of investment securities, $13 million of restricted cash and no debt. We continue to look for opportunities to deploy this cash to create value for our investors. We are seeing some pullback on valuation expectations for private companies in our sector and related industries, and believe that we may soon find some good opportunities for accretive acquisitions. Now I'd like to talk more about our revised expectations for the full year and to provide some more color on the various assumptions underlying those expectations. For 2012, we now expect non-GAAP total operating revenues to grow between 10% and 12% versus the prior range of 20% to 24%. This lower top line growth reduces our expected range for adjusted EBITDA to $104 million to $106 million versus the prior $133 million to $138 million and brings our non-GAAP EPS guidance down to $1.29 to $1.32 versus the prior $1.65 to $1.70 per share for the full year. With respect to our key operating metrics for the full year, we now expect growth in average active cards of approximately 5% and cash transfer growth in excess of 15%. Due to the volatility of the growth of our GDV and the inconsistency of its correlation with interchange revenue, we will no longer be providing guidance on GDV growth, although we'll continue to report GDV on a quarterly basis so that you can track this metric. However, starting with this quarter and going forward, we will share total purchase volume with you as this metric has proved to be somewhat more predictable and is more closely correlated with interchange revenues. Earlier in the call, Steve walked through the main assumptions behind our updated outlook. Now I'd like to take the time to discuss the rationale behind the revised guidance. First, as we previously announced, we have made efforts to strengthen our risk policies and controls to ensure a high-quality and more sustainable business. While these controls have improved the security and quality of our portfolio, they have also impacted the approval rates of customers attempting to activate a new card or attempting to use their card once activated. Taking the combined effect of these various new controls, we estimate that the growth impact to our overall portfolio has been on the order of 5 to 10 percentage points. Second, as Steve mentioned, we recently learned that more of our retailers will begin selling competitive GPR products in addition to our products, in some cases, beginning in late 2012. In our history, we have had only 2 retailers move from an exclusive merchandising display to a nonexclusive display with multiple products. In both cases, results have been that our sales growth decreased year-over-year, but our gross number of active cards from those retailers and the revenue derived from those retailers has continued to grow. Plus, each retailer had different circumstances where pricing of the competitive products or merchandising prominence for Green Dot products changed at the same time. So there were a lot of moving pieces. Though we don't feel like we have enough data or historical experience to accurately predict what will happen to our volumes at other retailers that moved to a nonexclusive format, given this uncertainty, we have taken what we believe to be a conservative view of how sales might be negatively impacted, and you see that view reflected in our re-forecast. Before I conclude my prepared remarks, I wanted to offer some high-level comments on 2013. As you'll notice, our top line growth in the first half of 2012 was 17% and our re-forecast implies top line growth in the second half of 2012 to be in the mid to high single digits. Although we're not yet ready to provide guidance for 2013, as you adjust your models for next year, assuming these trends persist and are not offset by new revenues from the initiatives Steve discussed earlier, our growth in 2013 could more closely resemble our growth in the second half of 2012 than the growth we saw in the first half of 2012. This concludes our prepared remarks. At this point, we're ready to take your questions. Operator?

[Operator Instructions] And the first question we have comes from Bryan Keane of Deutsche Bank.

Maybe you can help me a little bit with the EBITDA margins. I think now your guiding for them to be down as the year -- over 500 basis points. And just the controls and the competition, I think you started to give us some details on that. But I'm a little surprised that the magnitude of the downward revision on the EBITDA margins, maybe you can just help us through it.

Sure. Yes, the -- We had several expenses this year we -- that we talked about earlier. We are rolling out our new bank, rolling out our new processing platform. And those initiatives don't really moderate or adjust with revenues. They're not variable expenses. So with the guide down on revenues, a lot of that lost revenue flows more or less directly to margin and disproportionately, impact our margin for the year.

Okay, and -- let me just ask, Steve, a tough question. Obviously, these are disappointing results and guidance. Have you given any thought about bringing in maybe a payment operator to run the company as maybe a CEO, and maybe moving up to more of a Chairman-type role?

That's a good question to ask. And we actually looking at all kinds of things all the time because we're pretty good at self-evaluation, and we tend to be fairly conservative operators, which is why we're giving you such an early warning of what could happen next year with other products on the shelf. So a fair question and one for the board. I'll ask them and get back to you. But it's not something we talk about everyday but I've always been very open as in our board and as all of us, especially with being a senior shareholder that my interest in the company has not only in running it but more importantly in the investment that I and you and everybody else may have in it.

Julio Quinteros, Goldman Sachs.

It's Roman Leal here for Julio. Maybe you can help us think a little bit through the re-forecast and understand that there's not a lot of historical case studies to base kind of or to try draw conclusions from on the potential impact to your sales. But what do you -- what is implied in your forecast? I mean, are you just taking basically 10%, 20%, 30% decrease to your previous sales forecast in those retailers or...? Just help us -- walk through the thought process there.

Yes. Well, so the -- we mentioned there are 2 main factors driving the re-forecast. One is the impact of our new risk policy and controls. And we've said that we've seen an impact somewhere in the range of 5% to 10% to our active portfolio from those new controls. And then we mentioned the new competition at retail. We've got a better read on the risk policy and controls as that of something that's impacting our results today, whereas the impact of new competition is more forward-looking and it's based on the information we have that we mentioned is limited. So if you think of the guide down being from the midpoint being from 22% revenue growth to now the midpoint is 11%, so you've got about 11% guide down. You can think of roughly half of that coming from the risk policies and controls and roughly half from the new competition. As far as how we modeled the new competition, again, this is the one that's more challenging because we have limited history. But in the handful of retailers, where we've seen new competition in the past, we've seen our new card sales take a significant hit. But our new active cards are -- I'm sorry, our active cards continue to grow but at a much slower rate. So we use that to inform our model and we came up with some high and low case scenario, and then we basically went with one of our lower or lowest case scenarios to build our guidance upon.

Lowest case, being the most severe.

Right. Yes.

Because we just don't know, and that's the key.

Okay. And the commentary on the first half of 2013, is that just the nature of taking the retailers are going to move to nonexclusive retailers during the back half of this year and then annualizing that? Or do you expect additional retailers to move that in that route in early '13?

Yes, we don't know exactly which ones will add competitive products. But one of the things we've learned over the last quarter is that more of them are considering it and considering it more seriously and near-term than we had thought in the past. So the 2013 re-forecast reflects more of our retailers adding competitive products and reflects the full-year impact of that hit to our active card growth over the year.

Jim Kissane, Credit Suisse. James F. Kissane - Crédit Suisse AG, Research Division: John, just following up on that. What portion of your retail distribution today is exclusive and what are you assuming going into '13? What portion of your retail distribution will be exclusive?

Well, the majority of our retailer distribution today is -- a good question because you have some that are contractually exclusive and then others that are not, but they just don't sell anyone else. But let me say -- maybe I should say this, so the majority of our sales come from retailers today where we're the only product on the shelf. And we assume in this re-forecast that most of our retailers would be carrying competitive products going forward. James F. Kissane - Crédit Suisse AG, Research Division: But not -- well, does that include your largest distributor? I mean, will they have multiple?

Well, we've -- well, we're not saying anyone who will or won't because some of these contracts haven't been decided and as we sit here today for this conference call, we're in the middle of at least 2 different deal negotiations at 2 of our top 5 retailers. So it's hard to say. In our forecast, we've assumed that everybody would be doing something that could be injurious to our business and that's the nature of the forecast. It may well be that it doesn't or maybe that somebody including our largest retailer adds a product that may or may not compete. It's really hard for us to know. But in good conscience, as I've talked to a retailers over the past 90 days, and met with them all it's like, "Gosh, you know what, we need to really think through this and come up with a scenario that if everybody sells 4 or 5 competing products, whatever it might be, what could be happen?" And the output of that question is what we're guiding to. It doesn't mean it will be that severe. It doesn't mean that, that may not happen. If everybody rises in sales, we just don't know. But with uncertainty should come caution and I think that's what you're seeing. James F. Kissane - Crédit Suisse AG, Research Division: That's fair. And then -- what's the nature of the competition when you're sitting on the shelf? Is it coming from banks? Is it national competitors? Is it smaller niche players? Who is the most...?

No, so you can take -- there's only one really that -- where we've been exclusive that went nonexclusive in recent years. And that's one of our largest convenience store outlets where for the first -- I will say, 2 years, 2009, 2010, maybe the first 2.5 years, we were the only brand on the shelf and that retailer, over the course of 3 or 4 months, added 4 or 5 other brands beside us. So they added a Western Union product, a NetSpend product and the PayPal product and others, too. You have Incomm, onetime-use type product and so it used to be a fairly limited, say, a 3-foot wide rack is now 6 or 7-foot rack with 3 or 4 or 5 more products besides us. And so that may be -- the other products, by the way, are also at a lower price point than Green Dot, which is something that we may look at and adjust over time. But when I say price point, I mean the headline price, not the all-in price, which is confusing to consumers at times but it's the way it works. So these are things we look at and say, "Okay. This is representing the worst-case scenario because of the suddenness of being alone to being now one of 5 or 6 different products at lower price points. Let's take that sales impact and see what if everyone did that." Having said that, we don't know that everybody will do that and many of the other retailers that were in have already indicated they're not going to go anywhere near that severe and there'd just be 1 other product or 2. But again, in the absence of knowing, the thought was to wait any longer, given that this knowledge is fairly recent in the last say, 60, 90 days without assuming the worst and perhaps, benefiting from the best, we're just being prudent and appropriate and so we've decided to be as conservative and send out an early warning flare as soon as we could.

Sanjay Sakhrani, KBW. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: Going to capital management, you guys talked about M&A...

Operator, I can't hear the questioner. [Technical Difficulty] Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: So just maybe on capital management, you guys talked about M&A potentially but with these weaker earnings, maybe weaker stock price, I mean, why not use some of the excess capital to buy back stock?

Well, so we look at use of capital all the time and the share buyback, especially after this kind of earnings call, could be something we'll look at. But the reality is that we look at the money and we say, "What is the best use of the money for now and in the future? What is highly accretive today but also can produce more benefits for tomorrow?" And the share buyback maybe one of those things but as John mentioned, ironically, a large part due to our own stock's performance over the 1.5 year that the valuation for any number of entities in and around the payment space or card space or prepaid space or whatever you want to call it, has come down quite a bit. And so having a good amount of cash on books and being able to make acquisitions for cash may, in fact, be far more accretive than a share buyback. So we're always looking at our capital position and then discussing what's the best use of that cash as opposed to how do you do a share buyback. And it may well be that at some point the share buyback is the winner in that question but today, it's not. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then just a follow up, when you guys talk about the 2 of the top 5 retailers that you're talking to, are you talking to them in contract period and they're looking for changes to the contract? Or were their contracts up for renewal?

Yes, contracts renew at about various intervals. And so the conversations on what other products on the shelf are always a part of that contract renewal process.

And next we have Ramsey El-Assal with Jefferies. Ramsey El-Assal - Jefferies & Company, Inc., Research Division: In terms of the new risk controls, did the regulators have any say in your decision to implement them? Was it related to the Florida investigation or the Consumer Finance Protection Bureau? Or was it really your own prerogative?

No. Completely unrelated. So Florida AG or CFPB inquiries have to do with consumer affairs and consumer issues. As a bank, a holding company as a provider of these products, we're always reviewing our portfolio and the quality and the security of it, which has more to do with compliance and security and fraud levels. So not anything to do with consumer. Because the consumer themselves wouldn't see the controls unless they were denied the card for some reason with their information. It has really to do with lessons we learned going back to the Intuit tax program that we had a few years back and the equipment and the systems we purchased to better protect ourselves from tax frauds. And as we employed the systems, we realized that there were improvements that we can make company-wide in both our customer identification procedures and also our cash-off procedures that made the card maybe more usable for a guy with bad intentions than not. So by limiting those kinds of controls, 2 things happened: 1 good, 1 not good. The good thing is, the bad guys, to the extent there were any say, "Okay, well, this is not a usable product anymore, stop buying it." So that's good, it helps our company a long term and it's part of what our obligations are. And it's the right thing to do. The bad part of it is that you maybe an otherwise perfectly good customer but because we can't validate the information or you answered neither or [ph] all of the questions incorrectly or there's something about the pattern that you use the card, our systems ensnare you and deny you access to the card. So in any system like that, you're going to have some collateral damage. And what you do is over time, you sort of do the research and you adjust that dial left and right, and you try to get smarter with how you block and how you do your systems. But that's the nature of that. Ramsey El-Assal - Jefferies & Company, Inc., Research Division: Okay. In terms of the way you're thinking about this potential loss of exclusivity in some retailers, and this is related to some prior questions, are you assuming price cuts as a competitive response and that's going to impact your top line as well? Or is it really more about your kind of comfortable with surprising right now, it's really more about lost card sales?

Well, I talked a lot about pricing. Do you want to...

Sure. I mean, it's essentially a combination. I mentioned we've looked at a number of scenarios. Some of those scenarios are more based on loss of market share, those retailers and some are combination of price changes or changes in the retailer commission structure plus retailers. In addition to some loss of share to those new competitors. So we do look at all of those factors as we build our forecast.

And to be clear for about 6 months or so, we've been testing, and I think I talked about this at the last conference call. We've been testing this zero [ph] price card at Walgreens, Rite Aid, and maybe some other chains and we're going to continue to test those, at least it's been in process now for some time because we do want to find a sweet spot of pricing that encourages the most acquisition and retention. But to be fair, we've been doing that, we've been doing that without regard for happened at the one convenience store and that's something that we view as a record and arsenal to keep our company a top choice for consumers. The challenge with pricing is that in this category, and back to earlier question about the CFPB and everything else. It's one of the challenges is that you have the headline price, meaning the price on the package that the consumer may see, the consumer, depending on the brand of product, may not fully understand what the ongoing usage price is on the back of the package or what might I pay from months or what might I pay for an out of network ATM. And knowing price of the products to be the cheapest and we typically get recognition therein, in terms of how you use the product, but the headline price is something that we know consumers are susceptible to and that's why we've been experimenting with this in kind of the fee policies at retail. Ramsey El-Assal - Jefferies & Company, Inc., Research Division: Okay. Last one for me. On the new checking account product. Can you give us any sense of the -- or any kind of more color around the revenue model or the fee structure that...? Where you guys make money there? Is it when consumers load money on? Or how does that work?

It's probably premature to talk about pricing but there's only so many ways to make money off any transactional account. And so the way we make money probably wouldn't be much different than the way other banks make money off of it. I accept that. Our intent is always to be much less expensive, much more efficient and to never have any kind of overdraft or penalty fee of any kind ever. So any product we have always has that customer covenant as part of its design. So -- but when it rolls out, past date, and we're ready to talk about it more publicly, we will. But certainly, it's fair to say that it will be at the lowest end of the market.

Next we have Glenn Fodor, Morgan Stanley.

Just sort of a high-level question. I mean, the story of the IPO and since then of your company and a whole box crux of it was the benefit of your business model and this commission structure and exclusive contracts with retailers. And they want to partner with you and just you because you build up this base of customers and it's like an new stream because they're going to be sharing in the whole revenue model with you, and that seemed to be the case for a while. And now, that seems -- I mean, are you worried that, that entire -- the entire foundation of your business is possibly breaking down?

Well, I mean, that statement was true in July of 2010. It's true to this day as we have this call. We're talking about things that might happen in the future and -- but here's the challenge that we face as an organization as we respond to new conditions. If you have a large companies offering millions of millions of dollars to get on the rack with the product, I have a couple of choices, I can keep paying higher fees, we can keep trying, in some way, artificially block that or we can say, "Look, let's do the research on the product, let's see what our sell-through would be, let's see what the optimum price is." And then compete in the marketplace and let settle out and move on to the next thing. And that's what we've opted to do because while we're still exclusive with some retailers, in fact, we have exclusive contracts with people like Rite Aid and Kmart and so forth, or some of the dealers we talked about today, it's not clear to me that it's wise to offer all kinds of money in an effort to block somebody from seeing if they have a customer base. If I'm the retailer and I have a company coming in and say, "Look, sell my product and give it a whirl, and I'll pay you a sum of millions of dollars to do it." If I'm that retailer, I may say yes, too. So to me, it really feels like a natural evolution and as we walk through, as you walk through in a drug store or a grocery store or mass outlet, I don't think there's any product category from cereals to hairbrushes that has only 1 brand on the shelf for a decade or, in our case, 12 years. So, no, I don't think it's a crumbling of anything. I think what it is, is the evolution of an industry, where a lot of big players like Amex and others believe there is a lot of fruit to be had on the tree and are going to throw their hat in the ring to see if they can be successful at it. Some will, some won't and only time will tell. We believe we'll be a survivor based on what our sales are. The retailer that has added all these products. And based on what we know our consumer research is on our brand, but it is different. And I think that's the biggest thing and maybe I'm too risk adverse and if I wasn't as risk averse, this conference call may be going entirely differently where we wouldn't be guiding anything. But our feeling is, okay, we have this knowledge. We don't know what's going to happen. I can't say with certainty so we take a risk sensitivity model and dial it back and assume that all bad happens and no good happens, what could it look like. And that's what we're trying to guide for. And it may well be that if things turn out better, but in the lack of precision and knowledge of -- some risk aversion is not necessarily a bad thing, and that's our view.

Okay. That was great color. On the new procedures for boarding accounts. I'm just struggling with your explanation to, I think it was Ramsey's question. I mean, it didn't seem like your business was having an issue with fraud. So your business was growing fine. Fraud obviously is part of it. It just always is in this industry but it was manageable. You don't want any but it was manageable. So it seems like you're fixing something with a hammer that possibly wasn't all that much of a problem unless there was something behind the scenes that we're not seeing.

No. No, I wouldn't say -- well, for one thing, I wouldn't say it's fraud because there's very little financial fraud ever even in the tax program. It's more reputational damage than anything else, and it's also the fact that as the company gets bigger, the industry gets bigger. It not only grows with customers but it grows with crooks and any bank, I don't care if you're us or Chase or anybody else. You have a whole rack of electronics and monitoring gear that's designed to find unusual activity and things that don't add up. And it's just our concern that we see data breaches happen and by the way, to be clear, there's no regulator who tells you to do this, it's something the bank decides to do based on its own beliefs about how it protects its business. And so I want to be clear, this is sort of self-inflicted but still the right thing to do. As the company gets bigger and you see that you can steal anybody's name and social security number off the Internet from any number of data breaches, it doesn't make me feel good as CEO of a bank holding the company that every person who passes an Equifax screen is who they say are because I may have your name and social security number. So that means you have to look further by aggregating back end IP addresses and computer addresses and all kinds of usage behavior, the time and day that you're activating the card, there's 50 different things that go into it. Now maybe it'll be that the systems are dialed up a bit high and we may, in fact, dial them up the other way if we find that we're being overly conservative. But that's what happened in Q1 and Q2. And keep in mind, this system is fairly new. We just started implementing this in Q2. So I'm not saying it will be as severe as it is and it may back up. But it is what happened and we think we caught up some good customers. We think we caught up some customers as we're looking for a way to use the card in a way that we're not intending it to be used. And so we tend to be on the more cautious side of those kinds of issue.

Bob Napoli, William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: I mean, the change in the guidance, the vast majority of it, doesn't it have to be from the change in risk controls because you're saying you're expecting these retailers to start selling the card competitively, possibly by the end of the year. So you don't have anything. I mean there's -- there really can't be much effect in 2012 on the competitive front. So really the vast majority and it's a pretty big change in guidance for 6 months of the year after 2 decent quarters to have that big of a shift. So the downshift in activated cards has to be primarily due to the change in risk controls. Is that not correct? And when in fact, did you [ph] change those?

Well, maybe not. Well, we know that there's 2 retailers, albeit not exclusive, starting in October. So let's called Q4. But you're right. Nothing happening necessary prior to that, that we're aware of. The risk controls are part of it. And the tax, the year-over-year tax comparison is extended in the Q3 as well. So John maybe can dive in deeper in some of your assumptions.

No, that's right. I mean, and as we mentioned before, we've taken a pretty severe view of the impact of those retailers going nonexclusive. So even though, it's a fairly small portion in the year, we assume they -- a pretty dramatic hit just to get a good handle on a conservative view of what the impact could be. So it is both. It is the risk policy and the policy of being a competitive product. Robert P. Napoli - William Blair & Company L.L.C., Research Division: I mean, is one of -- are 1 of those 2 retailers Walmart? And I mean, is American Express expanding or not expanding? Are they -- I mean you see them every day? You're monitoring your competitive environment.

We are. I mean, we would never, of course, as you can imagine, Bob, I appreciate the question. Even if we had precise knowledge, which we don't, we wouldn't comment on anything Walmart's doing with any vendor whether it's Amex or MoneyGram or anyone else. Probably a better question for the companies involved. But we think that generally speaking, we need to be prepared for all kinds of competitive activity, whether it's chasing a retail branch even though they're not a store, in other words, you're going to say retail branch and bank, and I mean a branch. Even if it's not in a retail store, all of these things environmentally affect everything. And because we just don't know, for us to pretend that we'll just be fine because we're optimistic people just feel imprudent. So as your point is, are we guiding down too dramatically or too drastically, I don't know. Time will tell, I guess. But we did want to take the most conservative cut [indiscernible].

Ashwin Shirvaikar, Citibank.

I just wanted to start by asking what's going on with Walmart. it looks like they had a very sizeable deceleration quarter-over-quarter. And does that fall into one of the 2 buckets, the risk controls or the higher level of competition, perhaps related to the prior question there. If you can provide some color in the magnitude of the decline.

Sure. Yes, there was no -- you're right. There was no competing product on the shelf in Walmart at all. So there will be no impact. I do think that our fraud systems and our new security protocols maybe impacting Walmart more than others because Walmart is such a big retailer. So any time we have so many names of people coursing through the veins of the store and buying our products, we sell so many products there, that an adjustment in a new way of activation or a new kind of control will always impact a large retailer more so than a smaller retailer. So I do think that they were more impacted than our other stores. And there were also some things we did differently with those cards that we didn't do in other retailers as well. And that maybe one of the reasons the growth in Walmart was weaker than normally has been but the growth of the Green Dot brand actually stayed very, very strong, and had one of its better year-over-year comparisons in some time. I forgot the number. Was it 30%?

Yes, if you'd just -- if you back out the TurboTax and the Walmart revenue, the Green Dot brand grew a little over 30% year-over-year in terms of revenue.

All right. So we think that the impact some of these new risk controls, disproportionately affected Walmart, not because Walmart is in the wrong, just by the nature of the size of the retailer.

Got it. So is this, just going back to the risk controls, then -- are these changes that you now have to make because you're a bank and there are different customer requirements versus -- which you didn't have before and which some of your competitors might not have even now?

No. I think we're doing it because we think it's smart. We may be more responsive and more thoughtful about it because as a bank holding company, we have to have a formal risk enterprise function and formal internal audit function. So it's fair to say that our governance and the way we conduct their companies somewhat more conservative and more formalized than maybe a third-party marketer would have. But the legal obligation, whether it's on Green Dot or NetSpend or Western Union or anybody is identical. To your point, how well you execute it and what your view is of how to run those programs are dependent upon the issuing bank and the program manager and the level of issues they may have. So it really does vary. But the law will apply equally to everybody because all these products are issued by banks. So the bank regulator would not see Green Dot versus corporate or somebody else, it's all the same laws that we're all required to follow.

Tien-Tsin Huang, JPMorgan. Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division: I guess, I just wanted to ask what changed to trigger the guidance cut. We've been -- I mean, Steve and John, you guys have been hearing these competition concerns for quite some time from investors on the risk side. I thought that was appreciated given your pursuit of the bank. I know Ashwin just asked that. But I was just trying to understand what changed? Is it really just the conversation with the retailers? Or is it capitulation and just resetting of expectations? I'm just trying to understand the timing of why this is happening now versus not earlier.

Well, I think, Tien-Tsin, all of -- I think all of that. We've always addressed -- if you look at transcripts of previous calls or public conferences, that we believe competition is coming, that no company in any growing industry stays exclusive forever. There's literally not an example of that anywhere. Even iPods are not exclusive at Best Buy. Everybody has competition. And so we've never thought we'd maintain exclusivity forever. So we've always acknowledged that point. I think what caused the timing of it was that, as you know, we ordered our -- we reorganized our revenue division beginning in January and we've got some pretty great success of that actually, and we're really cooking much better than we were. And that's all good stuff. But part of that reorganization is as I said, "Hey, guys, I want to personally meet with every buyer. I want to personally do what I did a decade ago." And that is, touch the retailers directly for these regular ongoing sales moves. Normally, it'd be trotted out for quarterly reviews or something else. But I really said, "I want to play sales and then talk to the retailers directly." And the flavor that I got was in part what influenced my thinking on this that if I were the retailer, and I had many companies coming to me, paying me millions of dollars to have access to shelf space, what would I say? And my answer in my little mental role play was, "I'll do it." And I think if you think back a year or 2 ago, these contracts which had at that time 2 or 3 years left to go, our retailers are telling us there weren't interested in non-exclusivity. And I think that was the case. By the way, a number of them are still telling us that they're interested in exclusivity and want to continue that. So this all [indiscernible] complete but it -- I did get the feeling and I came back and I said, "Hey, John, we should talk about this because odds are better than not." But not every retailer necessarily. But 2 or 3 big ones could have a PayPal -- what do you call it -- the PayPal card or there could have the Amex card, or they may have these others. And what could that be to our sales if that were to happen. And then we looked at some case studies were rolling out as these things are being discussed. I believe it's all that. Could we have waited a quarter or 2 or 3 more to maybe provide this information? Possibly. But our fear was -- but at that time, it could have been too late because we believe at least one retailer will be out there in October and so we just wanted to give you an early flare. So I think kind of all that. We want to moderate expectations. We want to let people know that this is a risk that could be coming, and we want to be upfront and blunt about it. Hopefully, not overly blunt but that's all part of it.

And the other thing I'd probably add to that is we mentioned when we first provided guidance that we didn't need significant new programs to get to the low end of the range. But to get to the high end of the range, we'd need some significant new announcements. We have a significant announcement, our education channel product, but it really won't have an impact until 2013. Earlier in the year, I would've -- no, expect it to be that but significant new announcement that could actually impact 2012. So the timing of that, the impact of that new announcement has changed as well. Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division: Understood. Okay. That's good. The -- And I guess, as my follow-up, just -- maybe just another high-level strategic question for you, Steve. Just the mobile checking account product, we've heard you say -- talk about that in a lot of different settings. It sounds, obviously, very exciting. But the more I've been thinking about it, is that an offensive move or a defensive move, meaning, do you feel like you need to transition into that to move off your traditionally GPR prepaid or...? I'm just trying to understand sort of the thinking of that transition, what it means for your legacy or traditional business.

Well, we've -- yes, I did follow you. No, it's offensive and it's something that, as you know, we've been planning now for 2 years, and nothing that's come out of the woodwork recently. But it's a completely new product and the IT and the engineering floor is completely from scratch. It doesn't use many of the same components that our prepaid card does. So it's been a long-term project and, as you know, it's one of the drivers we published earlier this year, and some others to kind of beef up our U.S. technology and our mobile technology. So, no, I think it's offensive, meaning that there's a lot of customers out there that we believe like prepaid but a lot of others in the household under $75,000 a year market segment that would think of themselves as more a checking account customers as opposed to prepaid customers. So we think is an important product, and 1 that could yield opportunity for us. So I would say it's more about expanding our products to new customer segments within our target demographics. And that's what it's always been about and so it is.

Greg Smith, Sterne Agee. Gregory Smith - Sterne Agee & Leach Inc., Research Division: On the competitive front, are you seeing any of the banks that have come out, the GPR card looking for retail distribution? Or is it just the same cast of characters, Western Union, Incomm, NetSpend? Can you go in there a little bit?

Yes, to use your phrase, it would be the same cast of characters. The Chase product is very new and the benefit of the Chase product from the way you described it is in their branch infrastructure. So they have moved that benefit in pricing scale by going out, but you never know I suppose. But we've not seen Chase or U.S. Bank or regions or any of the other number banks that are doing this in retail. But certainly, we see PayPal, which is a process by NetSpend. And now retailers are potentially coming to retailers. 7-Eleven today, for example, and maybe elsewhere. Western Union also had 7-Eleven. It's hard to tell. We -- at Blackhawk, we -- there are already 3 or 4 products I guess. And we are one of the latecomers there. And sales there did pretty well, but we were -- already have other products before they stocked, so I don't have any good research for you there. But I'd say the same cast of characters that you mentioned. Gregory Smith - Sterne Agee & Leach Inc., Research Division: Okay. And then looking at Walmart specifically, you obviously have the tighter controls which is probably impacting your forecast at Walmart. But are you making other -- it sounded like you're making assumptions that Walmart may even test other competitive products. Did I hear that right? Or what are your assumptions for Walmart through the terms of your contract?

Well, no, I never -- to be clear, I never said anything about that. Walmart has a fabulously run financial services division that we work with and they represent lots of product and lots of companies, MoneyGram and CheckFree, and our products, and GE credit cards and all kinds of financial service providers. So they obviously have their own business to run and we respect that. And so I've not made any comment about what Walmart may or may not do. We have no direct expectation. So I'll just say, it's just globally. As you think about market altogether, if someone were to say to me, "Hey, is there more competition in the future or less?" The answer is more. Will they all be on every retail shelf you have? Impossible to say. Some may be here, others not there and what -- we need to see how it plays out. Well, gosh, as you look forward in the next year, what should the most conservative investor be prepared for? And the answer is this re-guidance, this re-forecast. I think that's the way we're looking at it. It may turn out to be much better, unlikely to be much worse. But we just don't know. And so uncertainty breeds conservatism and that's what we're trying to signal. Gregory Smith - Sterne Agee & Leach Inc., Research Division: Okay. And then Steve, can you provide a little more color on the RushCard deal? It seems like that could have potentially been an acquisition, why sort of the distribution deal there? Why did that make the most sense?

Well, because it allows us to see how the product does in retail. We believe it will do well. It allows us to form a good, solid joint partnership together and see how the venture does. I suppose that there's always time to discuss acquisition if that ever came to pass. And we can figure that out down the road, but we think the brand has a lot of appeal. We think it's expansive to the Green Dot category. And we can offer a lot of synergies and opportunities for the RushCard business, the UniRush company. And in exchange, we have an opportunity to market a product that we think has a targeted appeal. So I think it's a win-win for both of us. And I think we both are able to get the fruit, if you will, without either one of us as buy ourself a tree, and that makes sense for right now.

John Kraft, D. A. Davidson. John Kraft - D.A. Davidson & Co., Research Division: I had a question about the new regulatory risk controls and I guess really on a logistical basis, the process by which a customer might see that change. You still see the retailers selling the card for the activation fee and the initial load, right? And then when they come home and try to set it up or activate it officially, then that's when they'll be declined on your automated system?

Yes. But to be fair, that's how it's been for 12 years or so. And that's the way it would have to be for any company out there doing what we do today. So you're right, that's the process but nothing novel about that. And we've always, by the way, had a fairly high rejection rate for cards that didn't match our customer identification processes. You just ratchet it up a few notches. And that's what you're seeing here. But it isn't like we have no controls before now. We do -- I want to be clear about that. But it's always been regulated business. It's always been a bank-issue business, and we've always been obligated to follow on various regulations surrounding our risk parameters. I think what we're saying here is that it wasn't just ID verification, it's also just how people use the card and trying to spot usage that later can come back to show that it was you used improperly used it for something that we don't want it used for. And so it's a combination of many systems and controls, not one. John Kraft - D.A. Davidson & Co., Research Division: Right. So just to be clear though, those declined, I guess, customers would still have a single use card going forward just as they would've before?

Yes. They're offered a -- our policy has always been they're offered a refund check that they can spend along with a reloadable temporary card in the packaging and that has not changed. John Kraft - D.A. Davidson & Co., Research Division: So would that increase in declines essentially show up as churn? I mean, are those customers treated -- counted in the active card count?

No, if they don't successfully pass the activation process, then we don't count them as an activation and -- the spend that they do in that card is really not very material as those initial loads are pretty small compared to all the ongoing loads from our active customers. John Kraft - D.A. Davidson & Co., Research Division: Got you. Okay. And then just 1 clarification on the RushCard. Your new partnership is specific with the retail launch of that card not across the board of all the new RushCards, correct?

Yes. That's right. Although we had a partnership with them prior to this where we reload all of their cards and that will continue. But this new announcement is specific to the retail channel.

Well, that's all the time that we have for questions today. We thank you all for attending today's conference call. At this time you may disconnect your line. Thank you, and have a great day.