Earnings Labs

Green Dot Corporation (GDOT)

Q4 2016 Earnings Call· Wed, Feb 22, 2017

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Transcript

Operator

Operator

Good day, and welcome to the Green Dot Corporation's Fourth Quarter 2016 Earnings Conference Call. Please note, that the contents of this call are being recorded. Please note this event is being recorded. I would now like to turn the conference over to Dara Dierks. Please go ahead.

Dara Dierks

Management

Thank you, and good afternoon, everyone. On today's call, we will discuss 2016 fourth quarter performance and thoughts about 2017. 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 ir.greendot.com. As a reminder, our comments include forward-looking statements about, among other things, our expectations regarding future results and performance. Please refer to the cautionary language in the earnings release and in Green Dot's filings with the Securities and Exchange Commission, including our most recent Form 10-K and 10-Q for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we will make our reference to financial measures that do not conform to Generally Accepted Accounting Principles. For the sake of clarity, unless otherwise noted, all numbers we talk about today, including revenue per active card will be on a non-GAAP basis. The information may be calculated differently than similar non-GAAP data presented by other companies. Quantitative reconciliations of our non-GAAP financial information to the most directly comparable GAAP financial information appears in today's press release. The content of this call is property of the Green Dot Corporation, and is subject to copyright protection. Now, I'd like to turn the call over to Steve.

Steve Streit

Management

Thank you, Dara and welcome everyone to our fourth quarter earnings call. Today, we will cover a review of the quarter and full year. We will talk about our two reporting segments and our increasingly diversified consolidated enterprise. We will provide some more information on the recently announced pending acquisition of UniRush and we will provide our updated six step plan for 2017. Then, lastly, Mark will provide our financial guidance for 2017 both with and without the UniRush acquisition; you can easily see the guidance in parts and on a consolidated basis. I'm pleased to report that Q4 was a strong quarter for Green Dot with both of our reporting segments and all of our revenue divisions performing within or better than our expectations. Total non-GAAP operating revenue came in at $163.2 million representing a 8% year-over-year growth rate. Adjusted EBITDA for the quarter was $21.8 million representing year-over-year growth of 72% and margin expansion of around 500 basis points year-over-year. And non-GAAP EPS for the quarter was $0.19 which equates to the year-over-year growth of 217% or more than 3x the prior year period. For the full year 2016 total non-GAAP operating revenue came in at $719.7 million representing a year-over-year growth rate of 3%. Remember that we previously reported that we needed to grow by $35 million just to be flat on a year-over-year basis to this result means we generated around $55 million of good margin organic revenue from our new prepaid products and our new initiative. Inclusive of approximately $11 million in usual expenses relating to the launch of our new prepaid products with higher unit economics, adjusted EBITDA for 2016 came in at $156.3 million growing 3% over the prior year with non-GAAP EPS at a $1.46 representing a 8% increase over 2015. The…

Mark Shifke

Management

Thanks, Steve. I'd like to start by providing some insight into our performance in the quarter, followed by commentary on our two business segments and how they each contributed to our results. Of course, I'll also provide our 2017 financial guidance and Q1 soft guidance as we look to the New Year. First, I'm pleased to report that Q4 2016 was another strong quarter for Green Dot delivering $163 million in non-GAAP total operating revenue and almost $720 million for the year, equating to year-over-year non-GAAP revenue growth of 8% in the fourth quarter and 3% year-over-year growth for the full year 2016. Revenue growth in the fourth quarter came from both our reporting segments. First, let's discuss our Account Services segment which includes our Consumer Accounts revenue division and our Green Dot Direct revenue division. Non-GAAP Accounts Services segment revenue grew by 7% year-to-year driven by strong revenue per active account growth of 17% year-over-year. The strong increase in revenue per active is result of the materially better unit economics of our new prepaid products combined with the customer base for those new products loading more money to the cards and spending more money off the cards. You can also see the evidence of improving customer behavior and our long-term direct deposit enrollment trend, which posted another quarter of strong growth with 20% more active cards receiving direct deposit in Q4 2016 than the year ago period. In the case of our Green Dot Direct revenue division, smarter and more efficient online marketing strategies and continued efficiency from ongoing integration of the AccountNow and AchieveCard acquisitions drove expanded margins. Now let's discuss the Processing and Settlement segment which had year-to-year non-GAAP revenue growth of 11%. This segment includes our tax processing business line and our money processing business line.…

Operator

Operator

We'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ramsey El-Assal with Jefferies. Please go ahead.

Steve Streit

Management

Hi, Ramsey.

Christen Chen

Analyst

Hi, good evening, this is actually Christen Chen in for Ramsey.

Steve Streit

Management

Hi, Christen.

Christen Chen

Analyst

Thanks for taking my question.

Steve Streit

Management

Sure.

Christen Chen

Analyst

Hi, so just digging a little bit more on RushCard, on the synergy – I mean how much of that is cost versus revenue synergies in your plan and how much of those synergies are factored into guidance? I mean I know you said that without synergies it's $0.04 to $0.05 so it would imply that there is definitely a few sense of that in your guidance. And then just quickly a clarifying question I may have missed it, but did you guys say that your guidance includes $50 million share buyback?

Steve Streit

Management

Sure, let's – good question. The first one is our guidance does not include any potential benefit from the $50 million share buyback, so that's not put into EPS. So when and if we do that, that will be additional. And then the question on Rush, the synergies are mostly cost. The Green Dot Direct division is the amalgamation of all these websites and one of the ways we save money is by combining all the marketing expenses and controlling our ecosystem with online clicks and search marketing and all the things we do to generate online sales. So you can argue that there is some revenue efficiency, but when we think of that in integration, it's almost all cost efficiency certainly for the first year and a half. And the answer is you're right that none of that really is baked into 2017. We're saying $0.04 to $0.05 which is essentially Rush's net income layered on top of Green Dot, so we're not really factoring any kind of synergy for this year.

Christen Chen

Analyst

Okay, perfect. And just quickly, it's good to see that the direct deposit growth continues at that kind of plus 20% range, do you just have any visibility to what an up limit or how high this number could go in the future?

Steve Streit

Management

Oh gosh, what a good question, kind of we look at all the programs that are out there, we bought a number of programs and we look at others and we see what those programs can do. RushCard for example would be on the highest end of the scale of the programs we see on direct deposit. GoBank and our company would be the all time winner. GoBank has the highest direct deposit of any of our products and as a checking account you'd expect that. So we think we have a lot of upside to go because the entire prepaid category just continues to emerge something more mainstream and less niche, and the more mainstream it is and the more the employment picture improves the more people use it for direct deposit, so we think we're certainly nowhere near the top, but it's hard to give you a precise number of what is the top.

Christen Chen

Analyst

Fair enough, thanks for taking my questions.

Steve Streit

Management

You bet, thank you.

Operator

Operator

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

Steve Streit

Management

Hi, Eric. Eric, you there? Maybe you're on mute. Okay, well we can come back to Eric. You want to go, operator to the next name.

Operator

Operator

Eric? Okay, our next question…

Steve Streit

Management

You've had one of those conversations where you're iPhone's on mute and 10 minutes into it, you realized nobody's heard you.

Operator

Operator

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

Steven Kwok

Analyst

Hi guys, good quarter, thanks for taking my questions.

Steve Streit

Management

Thank you.

Steven Kwok

Analyst

So on the first one just going back to the UniRush acquisition, I believe their right now deposits are at MetaBank, are there any plans to move it over to a Green Dot Bank?

Steve Streit

Management

Not on day one, so when we think of the efficiencies and the sequence of how we drive it, back office is the first thing you work on because that's where the biggest savings are, things like risk management or call center or supply chain that type of thing. And then later on in the curve as you get towards the first year of integration, then you work on bank and processing because it's just more difficult and we save money, but it's not a massive amount of money. So we'll get there eventually. Having said that MetaBank is a good partner, we know the folks well, we all sort of know each other in the industry and if they have a reason why they want to keep the deposits and it makes sense for us to do that. We're not against that either, so ultimately in theory everything would be on the Green Dot stack, but not in the first year for the bank we'll probably keep that for a little later.

Steven Kwok

Analyst

Got it. And then just when we look at the revenues per active card and then the revenues per cash transfer that's been continue to increase, at what point does that level out or how should we think about the trajectory and then for the new cards that are coming in, what's the incremental revenues on those cards.

Steve Streit

Management

This has been one of the delighting upsides for the model. We knew that the monthly maintenance fees were somewhat higher, but not by a lot, right, the Walmart MoneyCard it's a few dollars and not everybody pays it. So you're not looking at huge differences there. The biggest increases have been in the usage metrics things like the direct deposit as Christian pointed out in the First Call or spend which generates interchange this kind of thing. And there has been this tremendous upside there more than we would have initially modeled which is why we sort of meet and beat throughout the course of the year. And so we don't know what the limit is, we're forecasting conservatively because we don't know I guess is the honest answer. So we're tracking what we have or holding it steady in the model which is why we have that low single-digit growth. But it's been coming in really strong and with some of the new features we have like the savings account, the prize-linked savings which you may have seen in the news is a ton of press coverage on it, NPR did a nice piece and others. People are looking at these products as their bank, not just as something you buy for a few days to do something with it. Certainly we have a still lot of those customers as well. A lot more folks are using them for direct deposit and to pay their bills and for savings accounts and all those types of things. The more our customers do that, the more not only what the revenue continue to grow but the bottom-line just expands exponentially because there is no cost really against that extra usage and that's where you're seeing this tremendous margin expansion. That Q4 over Q4 comparison, while we grew by 500 basis points in margin, even though we still had extra cost that we haven't baked in is indicative of kind of what we're doing with the platform and it's a fairly clean comparison and this shows you the efficiency we're getting for more usage on a per card basis. So we think we had more to go, we're not forecasting more to go, but we think we have more to go and it's been a really good upside for the business.

Steven Kwok

Analyst

Got it. And just as a quick follow-up you mentioned you are holding it and so you are holding at the fourth quarter levels or you're holding it at a year-over-year level?

Steve Streit

Management

Neither in the gigantic black box that Terry Lee and his boss Paul have in the backroom, we sort of take a conservative swag of what we think is likely based on metrics we feel like we can hit or that are already existing or if they're not already existing ones that we think are obviously in the pipeline and we hold it there. So I don't want to imply anything specific about the model except to say that on a dial if all the way up is super, aggressive and all the way down to super conservative we're somewhere in the low middle range of that, we just want to be cautious as we watch and play out.

Steven Kwok

Analyst

Great, thanks for taking my questions.

Steve Streit

Management

You bet, Steven. Thank you.

Operator

Operator

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

Oscar Turner

Analyst

Good afternoon, thanks for taking my question.

Steve Streit

Management

You bet, hi, Oscar.

Oscar Turner

Analyst

Hi, another question on UniRush, it seems like the revenue per card for that portfolio is materially below that for rest of Green Dot, just wondering if there is an opportunity to boost that figure up to the corporate average overtime?

Steve Streit

Management

Well, it's a good question. It maybe hard to determine from the press release because we mixed in pay card numbers which is entirely different usage patterns with their GPR products, and so I don't know that's exactly right, but it could be right. And ultimately what you'll see is all of these things come up to a certain level because as we get them on the same bank or we put in the same features, we obviously want to take the best ideas from the best companies and move those to the most profitable products and we've done that, that's part of the reason why Green Dot Direct has been a growth leader for us. And so we'll look for improvements in cost, we'll look for improvement in revenue, they do some really good things at direct deposit and we'll take those ideas and put it into the overall consolidated enterprise. So anytime you do these acquisitions we want to take the best ideas and put them altogether to benefit the other divisions and I would imagine we'll do the same with RushCard.

Oscar Turner

Analyst

Okay, thanks, that's helpful. And then just on the EBITDA margin, your guide implies almost 100 basis points of margin expansion next year after a pretty strong margin expansion this year especially in the fourth quarter. Can you provide on what's driving that I guess margin expansion upside, how much of that is UniRush synergies versus the more efficient operating platform which seems to have driven margin upside this year.

Mark Shifke

Management

Yes, great question, Oscar. I would say the two drivers are unit economics and are platform efficiencies and in fact on a combined basis taking Rush into account for our consolidated guidance it has somewhat of a dampening effect at the moment on our consolidated margin, but as we indicated we expect that to pick up again as we drive efficiencies into 2018.

Oscar Turner

Analyst

Okay, thank you.

Steve Streit

Management

You bet.

Operator

Operator

[Operator Instructions] Our next question comes from Ashwin Shirvaikar with Citi. Please go ahead.

Steve Streit

Management

Hi, Ashwin.

Ashwin Shirvaikar

Analyst · Citi. Please go ahead.

Hi, Steve. Hi, Mark. Thanks. So, you announced here a number of new initiatives on top of the initiatives that you already had that you made progress on during the course of 2016. And what I was hoping, you could walk through was -- some of these initiatives into your shelf space, rollout trying to increase the number of x cards into 2018. What is the investment needed for some of these and when do you expect to get sort of a revenue boost from those? If you can ballpark late out that would be useful.

Steve Streit

Management

Yes. Well, the good news is, is that our expense space and CapEx space has been well controlled. CapEx you may have noticed, Mark, I'm sorry, I forgot if you have already said anything in prepared remarks, but that's been down.

Mark Shifke

Management

Our D&A, we are projecting D&A for 2017 to be down from 2016. And I think to your point Steve, our cost structure is not increasing in order to drive these initiatives.

Steve Streit

Management

That's a good news. And what we do is, the number of initiatives are determined by the product roadmaps in each of those six revenue division. And those GNs are in the case of a few of our divisions, divisional CEOs. Come in and they say, hey, here is our initiatives, and here is what we are going to put forth and here is why we think to go do drive revenue or expanded margins or whatever the initiative is and we go through it and once they are locked in, we have to deliver on them. And so there is a lot of initiatives, it sounds like a lot as I read them throughout the entire consolidated company. But, if you are on a particular division, it's not a lot, there only be three or something in your group for the year. And then you focus on them and deliver. And so, kind of hard to go through all of them, it depends on which division and happy to answer those questions now or in the after calls. But, the good news is, that they are all part of that cost basis because I think we have a lot of resources. And even the phrase I use Green Dot Media and I known to be cheap and I don't get offended when people say that. People will speak in front of my car and that kind of thing. But, I do believe in being appropriate with expenses. And so, when people want to spend money, the question is, why is that? And so Green Dot Media is a phrase you heard me use on the prepared remarks. We have millions and millions of people every month who come to our Web sites, our call centers or IVR machines. These kind of thing -- why do we have to pay for marketing when we can get the same impressions if you will by just putting the message on the IVR and putting the banner on our own Web sites. So all the marketing we are doing for the secured credit card or -- it's just on our own media. And so always trying to boot strap and do things efficiently. We do spend money obviously. We have a big expense space. But, what you see is, what you get. Anything new we are doing is within the cost space that we have forecasted.

Ashwin Shirvaikar

Analyst · Citi. Please go ahead.

Okay. Now, I just wanted to explicitly get that out there. With regards to sort of stabilizing active cards, would that mean then that you're roughly going to be 34.1 million through the year or did you mean that some of these initiatives happen, you could be at a higher number by the end of the year?

Steve Streit

Management

Also in the base or likely case, the middle case scenario what everyone call it were forecast to be down and actives, to stabilizing the actives as years goes by. And then, to be up and actives as we get to 2018 and we have actually been incredibly accurate with calculating those card declines and increases over time. So, now, of course you are going to merge in Rush, rightful -- which will be a higher number of cards and that will reset the bar. But, we would expect the active cards to stay roughly where they are, they will come down a little bit in Q1, if our model is accurate. They will stabilize in two; they will come up a little bit in three and four; and then they will start to rise overall in Q1 of 2018. And if we do better, some of the issues that have kicked in, well then that curve will be accelerated if we do worse, the things go south and won't be as strong that we have been fairly accurate with those projections so far.

Ashwin Shirvaikar

Analyst · Citi. Please go ahead.

Okay. And then, last quick clarification question. Has the timing of your platform conversions got pushed out over the last 12 months or so? Has the perspective benefit from it also got spread out, pushed out, obviously, has been pushed out, but has it changed in totality because of the delay. And what the assumptions specific dollars assumption that you are making of this year or for the benefit from a 2Q conversion?

Steve Streit

Management

Yes. But, we haven't disclosed a specific benefit for the processes, but it's been a headwind except for the fact that our processing partners has been a good partner and has helped to make us hold for those issues. But otherwise, it would have been a negative headwind, right? Because we are spending money to run two simultaneous processes each with their own minimums and own pricing and everything else. But, we will get those efficiencies as we successfully rollout Way4 and then will be done with that. And then, you will see that efficiency kick in. But, it's all been helpful. I mean these are -- it's a large company, hence you have lots of different systems and lots of different platforms and every team is always working on what they do. So, we haven't given a specific number of processes but it is going to be part of those saves.

Ashwin Shirvaikar

Analyst · Citi. Please go ahead.

Got it. Okay. Thanks.

Steve Streit

Management

You bet, Ashwin. Operator believe it or not in less -- there is another screen I think, are we done with questions? That was very short.

Operator

Operator

We are done with questions.

Steve Streit

Management

Okay. Well, in that case want to thank everybody for listening today. We appreciate your support over the year. And we hope to do it again in 2017. Thank you everybody. Have a great day.

Operator

Operator

This concludes the conference. Thank you for attending today's presentation. You may now disconnect.