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Executives

Barrett Garrison

Daniel R. Henry - Chief Executive Officer and Director

George W. Gresham - Chief Financial Officer and Principal Accounting Officer

Analysts

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

Christopher Shutler - William Blair & Company L.L.C., Research Division

Ashwin Shirvaikar - Citigroup Inc, Research Division

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

Gil B. Luria - Wedbush Securities Inc., Research Division

John J. Rowan - Sidoti & Company, LLC

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Netspend Holdings (NTSP) Q4 2012 Earnings Call February 13, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the NetSpend Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Barrett Garrison, Vice President of Finance. Sir, you may begin.

Barrett Garrison

Thank you, operator, and welcome, everyone, to the fourth quarter earnings conference call of NetSpend Holdings Inc. Joining me today on the call are Chief Executive Officer, Dan Henry; and Chief Financial Officer, George Gresham. During the call, Dan will give an overview of the company's business operations, and George will provide more details on our financial performance in the fourth quarter of 2012. Following these comments, we will be happy to take questions.

A few important items before I turn it over to Dan. First, we posted our earnings release to the Investor Relations section of our website at netspend.com for anyone who needs access to that information. Also during this call, we will make reference to certain non-GAAP financial measures. You can find appropriate GAAP financial reconciliations in our earnings release, which is posted on our website. We would also like to remind you that results for the fourth quarter may not be reflective of results for any subsequent periods.

Finally, a replay of today's call will be posted on our website at around 8 p.m. Central Standard Time and will remain there for approximately 1 week. For anyone listening to a taped or webcast replay, a review of a written transcript of today's call, please note that all information presented is currently only as of February 13, 2013, and should be considered valid only as of that date regardless of the date reviewed, read or replayed.

As we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it and is subject to risks and uncertainties. Any such forward-looking statements speak only as of today, and NetSpend disclaims any intention or obligation to revise them as a result of future developments, except as required by law.

For factors that could cause actual results to differ materially from those described in our forward-looking statements, we refer you to our SEC filings, and specifically to our annual report on Form 10-K filed February 24, 2012, and the risk factors set forth therein.

With that, let me now hand it over to Dan.

Daniel R. Henry

Thank you, Barrett. Welcome, everyone, and thank you for joining us today on the call. 2012 was a great year, and I could not be happier with the performance of the NetSpend team. As you all know, it's the quality of the people, at an enterprise, that win in the field of competition. And I can say, without a doubt, that we have the best people in the business. Day in and day out, our people are hard at work building a great company, focused on empowering consumers with the convenience, security and freedom to be self-banked. With our customer service agents providing our cardholders with world-class service, our account managers taking care of our distribution partners, and our product and creative teams building the best product, you would expect growth and success. And I think that is a good way to sum up 2012. It was a year of growth and success.

We announced and/or launched 7-Eleven, Dollar General, Family Dollar, Walgreens, CVS, Regions bank, DolEx Dollar Express, Intuit and several other new partnerships. We surpassed the 1 million mark for direct deposit accounts and ended the year with 1,082,000 direct deposit accounts, up 25% year-over-year.

We had dramatic expansion of our retail distribution. At the end of 2012, our NetSpend- and PayPal-branded prepaid cards were being distributed through more than 50,000 retail locations. This was up from only 8,000 retail locations at the end of 2011.

We had excellent growth in our direct-to-consumer channel and launched new programs with PayPal and BET.

We allocated capital very effectively, reducing our diluted share count 8% by repurchasing approximately 10.3 million shares. And we delivered solid financial results throughout the year, reporting revenue growth of 15% and adjusted earnings per share growth of 23%. And in the fourth quarter in particular, revenues were $89.7 million, up 17% over prior year, having accelerated from 9% in 2011 and from 13% in the first quarter of the year.

Adjusted EBITDA was $23.9 million and adjusted EPS was $0.15.

In the fourth quarter, we had $3.3 billion of GDV also known in the industry as purchase volume. And for the year, we had $13.2 billion of purchase volume. And finally, our total active card base is up 14% from prior year.

In our partner channel, we have successfully launched our program with Intuit, and you can now obtain a NetSpend GPR card while you prepare your taxes using Intuit's flagship TurboTax products. Having won this business in a competitive process, in the fall of 2012, and then launching TurboTax before the critical tax season, we have yet another testament to the power of the talent we have here at NetSpend. And it also clearly illustrates the strong competitive advantage we have at owning and operating our own processing platform. While it's still early, the program appears to be growing very well, and has been active for more than 3 weeks. We're also on track to launch our prepaid payroll solution through Intuit's QuickBooks Small Business platform during the first half of this year. I'm also pleased to announce, in our partner channel, that we have re-signed Advance America with an exclusive multiyear agreement. Advance America has more than 2,350 locations nationwide and has been a partner with NetSpend since 2007. Advance America is one of our top 5 partners.

In the pay-card channel, we signed an agreement with Brink's to sell a branded payroll card to their employer clients. The Brink's money card program will launch late in the first quarter of this year. We also recently signed an agreement with CompuPay Inc., a benefit mall company. It is one of the country's leading providers of payroll and tax filing services for small- and medium-sized businesses. CompuPay processes more than 250,000 payroll transactions each week, tens of thousands of companies ranging in size from 1 to more than 10,000 employees. Overall, our pay card business grew market share in 2012, and we added approximately 200 new corporate clients, bringing our total count to more than 1,400 trusted companies who distribute our pay-card to their employees.

As I mentioned earlier, we significantly grew our retail presence throughout the year, with marquee partners such a 7-Eleven, Walgreens, CVS, Dollar General, Family Dollar, and many other national and regional retail leaders. In 2013, we are completing the rollout of our expansion efforts and focusing on the merchandising, promotions and retention marketing in this space. 2012, the retail channel accounted for only 7% of our overall revenue. Now, with more than 50,000 locations, we are well positioned for strong growth in this channel, in 2013.

Our direct-to-consumer business performed very well in the fourth quarter and had record growth in 2012. I believe NetSpend has the best direct-to-consumer business in the prepaid industry. As I talked about on the last call, we are investing in a new acquisition channel, direct response TV, and we launched 2 spots in time for this tax season. Early results indicate our messaging and brand is attracting the consumers we are trying to reach, self-banked consumers who choose direct deposit. We anticipate steady growth in this channel during 2013.

Overall, 2012 was a game-changing pivotal year for NetSpend. Our strategy of having diversified channels, growing through partnerships and focusing on direct deposit has paid off well and enabled us to achieve strong results. Let me put it in stark terms. We're exiting the year with one of the highest growth rates in the publicly traded payment space; the largest purchase volume in the GPR space; highest average revenue per active account; the highest average purchase volume per active account; and we have a consistent track record of profitable growth, margin expansion and effective capital allocation. Our intense focus on our mission in the market we serve, and on providing a differentiated value-added product, has served us well. We will maintain this focus in 2013. That means continued focus on revenue growth, driving direct deposit acquisition and product innovation. We are well positioned for more growth and expansion of our products in the market for 2013. With the best strategy, partners and employees, our growth potential is greater than ever. I'm very proud of NetSpend and the way we serve the unique needs of the self-banked consumer who is trapped in the expensive cash economy.

I want to thank all the NetSpend employees for their constant dedication to fulfill our mission. We are doing good for our customers, and we're doing very well by our shareholders.

Now I'm going to turn over to George for more discussion of our financial performance in the fourth quarter and our 2013 guidance. After George's update, we'll start taking questions. George?

George W. Gresham

Thank you, Dan. As Dan mentioned, we're very pleased with the way 2012 came together. For the year, we reported 15% revenue growth, up from 11% in the prior year and we reported 23% adjusted earnings per share during the year. And as I will discuss in a few moments, we are expecting 2013 to be even better.

During the fourth quarter, revenue grew 17%. This growth rate represents an acceleration over each of the other quarters reported in 2012, and in fact, is the highest revenue growth reported by the company since its IPO. While we saw growth in all of our channels, our retail channel grew at a particularly strong rate and represented 8% of our total revenue in the fourth quarter of 2012, compared to 5% in the prior year. Growth across all of our channels was driven by the increase in debit-active accounts year-over-year of 14%, and particularly, the increase in those debit-active accounts which are on direct deposit. Direct deposit accounts grew, for the second quarter in a row, by 25%. We exited the year with 2,352,000 total debit-active and 1,082,000 direct deposit-active accounts. Approximately 84% of our total GDV came from our direct deposit accounts during the fourth quarter. We are now starting to see contributions from many of the new partnerships we have announced during the year, including Dollar General, Family Dollar, CVS, Walgreens and Regions bank, to name a few. Each of these partners contributed to our growth in the fourth quarter, which was on top of the continued strong performance of our core business.

Let me leave the discussion on revenue growth by noting that our growth rate has been consistently accelerating in an environment in which we have maintained price discipline, and in an environment in which we have observed other undifferentiated products into the market.

During the fourth quarter our adjusted EBITDA margins were just shy of 27%. As we have long planned, and frequently discussed, after a long period of testing, we modestly increased our investment in DRTV in the third quarter and we further accelerated this investment into the fourth quarter. While the results of this investment will not be realized until 2013, we were very pleased with our preliminary results in this channel, as early indicators are that the accounts we acquired through DRTV experience the highest conversion to direct deposit as compared to any of our other channels, except pay-card. This is yet another testament to the careful, cautious work of our team members and colleagues.

We have also identified mobile acquisition as a very productive channel, and likewise, we have taken advantage of the high returns being offered in the space, as well, and similarly increased our investment during the quarter. Just to remind you, our direct channel has a growth rate second only to our retail channel and represents about 25% of NetSpend's total revenue. It is also helpful to understand that each of our 4 channels have about the same level of profitability. Although the timing of our direct channels investment precedes revenue, this channel, by definition, is engaged in consumer marketing, whereas our other channels incur partner commissions which are typically recognized in a manner consistent with revenue.

We finished the quarter with about $31 million in cash, up slightly from the end of the third quarter. Operations consumed about $7 million in cash flow during the quarter, which included the $24 million payment of the Alexsam settlement. Adjusting for this nonrecurring payment, cash flow from operations was about $17 million in the quarter, free cash flow is just above $14 million.

For the full year 2012, cash flow from operations was approximately $62 million, again adjusted for the Alexsam settlement, up from about $49 million in the prior year.

As we discussed during our third quarter earnings call, we completed our last standing share repurchase authorization during that quarter, having purchased -- repurchased a total of 10.3 million shares during 2012, at an approximate average price of $9 per share. As Dan noted, 2012 was a great year all around and all the hard work our team did last year positioned us for a strong 2013. We entered 2013 with a number of wins that have or will soon be implemented, and our pipeline has only increased in strength. We will continue to place significant focus on top line growth that is not only profitable, but also margin expanding.

In that context, we currently expect revenue for 2013 to go growth to between $414 million and $424 million. Adjusted EBITDA to grow to between $119 million and $125 million, reflecting an adjusted EBITDA margin of about 29%. And we expect adjusted earnings per share to grow to between $0.76 and $0.81 per share.

As you know, we do not give quarterly guidance. But let me remind you that the tax season does have a very pronounced impact on our company in the first quarter of each year. In fact, historically, the first quarter has been the strongest revenue quarter of the year due to the tax deposits that our cardholders receive during this period. Given the addition of the TurboTax program this year, we would expect that trend not only to continue, but likely to be more pronounced than in prior years. It is also the case, however, that the IRS delayed the acceptance of electronic returns this year, by about 10 days, compared to 2012. And while we do not believe this delay will, in any way, impact their overall annual expectations related to these tax deposits, it could possibly shift deposits from 1 period to the next.

The other important point to understand about seasonality in our business, that I like to repeat each year around this time, is that tax season not only result in higher cash flow for our existing customers. It is also the time of year that we have the greatest opportunity to acquire new customers, particularly in our partner and direct channels, As many millions of Americans are seeking financial products, such as ours, during the time of year they are preparing their tax returns. Because this is the case, we significantly increased our investment in cardholder acquisition activities, that contribute to revenue in quarters beyond the first quarter of each year. These investments result in both higher marketing spending as well as higher card cost, which show up in direct operating cost. As in prior years, we'll make similar investments during the first quarter of 2013. So while revenues tend to be at their highest in the first quarter, margins tend to be at their lowest relative to other quarters within the year.

With that, let me hand it back to the operator to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Greg Smith of Sterne Agee.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

First question, you had a nice 6% sequential increase in your direct deposit customers. I was just wondering where did that 6% come from? Was it existing customers that you converted to direct deposit or was it mostly new customers you acquired that came on as direct deposit customers pretty quickly?

George W. Gresham

Well, first of all there is one element of seasonality that I omitted in my prepared remarks, Greg, and that has to do with our pay-card business. And in pay-card because many of -- our corporate clients within pay-card has seasonal employees in the fourth quarter, they will ramp, up fairly significantly, their headcount, which increases our Direct Deposit activity on a sequential basis. That is always a factor to consider when you're thinking about Q3 to Q4. But beyond that, we've seen continued success in our direct channel, in particular, in identifying new accounts, new account holders and converting them to direct deposit at very high rates. So the business was strong, across all channels, Q3 to Q4. But we do have that one seasonal factor.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. And then a quick modeling question. It looks like you're looking for, I think, 84 million shares for the year. But it was 80 million in 4Q? Am I missing something there? What's the delta?

George W. Gresham

Well, of course, if you think about the way the stock price trended, one of the most significant variables that drive the share count is the stock price. And stock price, we're exiting the year at a much higher rate than we were at midyear. And so, if we presume that to be persistent or improve over the course of 2013, you're going to see incremental dilution from outstanding options and RSUs. But that would be the only assumption set within the share count, and we're not, of course, presuming any other dilutive activities, any share issuances, of course.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. And then just the last one. With Social Security checks going away later this year, are you seeing any activity or are you stepping up your marketing? Are you seeing more consumers coming over and putting their social security checks in your card? Is there anything going on ahead of this or are we going to see it sort of over the next couple of quarters potentially?

Daniel R. Henry

Greg, this is Dan. We think that, that move by the U.S. Treasury is going to be very beneficial for our industry. And we've already -- out in front of that, we have software loaded at number of our partner locations, where it makes it very easy for -- benefit recipients to enroll on the spot, just with their Social Security number and photo ID, to have their benefits, payments directly deposited onto the NetSpend card. And so you know that we are very well positioned with so many check cashers as our partners, that they obviously see the benefit of getting those customers migrated onto a NetSpend card, receiving direct deposit, by receiving revenue shares through the NetSpend card as opposed to just letting those check cashing fees just evaporate.

Operator

Our next question comes from Andrew Jeffrey of SunTrust.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Could you characterize -- obviously at 8% of revenue, up from 5%, retail is starting to ramp. Could you sort of -- based on your existing distribution, the 50,000 locations, could you characterize sort of at which -- kind of what inning you think you're in, in terms of that ramp? I know one of the things we observed in some of the stores is that the cards, the PayPal cards and the NetSpend cards, had started arriving maybe late in fourth quarter. Is there sort of a ramp that's going to really kick in as we go through '13, at retail?

George W. Gresham

Well, of the names we've announced in 2012, Andrew, I mean, really the only one that went online early in the year was 7-Eleven. Basically everything else, Dollar General, Family Dollars, CVS, Walgreens, et cetera, all launched sometime midyear or later. So, obviously, when were thinking about 2013 we're going to have higher -- we would expect higher growth rates in the first half of 2013, coming out of retail, until we start to have grow-over in the back half of that year. That's a general assumption set, but more specifically, you launch a retailer they might have 5,000, 6,000, 7,000 individual retail locations. We often are not the party responsible for merchandising those locations. And so there is a significant amount of follow-on work associated with ensuring that the merchandising is done properly and effective, it has covered the entire portfolio of stores. So, you might have noted in Dan's prepared remarks, subtly, the important focus of ours in 2013 will be to optimize. Essentially the footprint that we've built. And so, what inning we're in, I think we're a long way from the end of the game here, close to the ninth. We're not anywhere near there. But we have also won most, not quite all, but most of the available retail footprint that is available. And so our focus in 2013 will be optimization and increased effectiveness, primarily. We have a lot of runway there, and we're excited about doing it. But it's a lot of blocking and tackling from here on out. Executional-type work.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

And can you talk a little bit about the challenges around that? Vis-à-vis consumer inertia. One of your large competitors cited on its conference call a couple of weeks ago that activation rates on their cards remained very strong and cited the fact that consumers don't change behavior readily. How do you think about that and what can you do to influence behavior at retail?

Daniel R. Henry

Andrew, I think it's important to understand, again, as a company, what our mission and approach is around this product. Okay? Where we are and why we're so excited about the timing, if you will, of this explosion of our retail distribution, is that we have always positioned the NetSpend product as a product for the self-banked consumer. Pick it up, sign-up for direct deposit, make it your account. We look at the feature functionality we have on the product, nobody else comes close to the feature functionality that we have on this card. So, as we are launching direct TV advertising, and as we do our focus groups, and we find that the vast majority of our customers have our card because they were referred to it by a friend or family member. What we find so exciting is that, as the awareness of our product grows, as the U.S. Treasury is getting rid of checks, as more and more employers are getting rid of checks and this cash-based consumer starts having a dialogue about what card do I want, we have our consumers touting the benefits of the NetSpend card. Well, we find it great that our current customers will be able to tell their friends and family members, you want a NetSpend card, and they say, where do I get one? Well, they used to have to say, go online or go to a check casher. Now you can say go online, go to a check casher or go to CVS or go to 7-Eleven, and make it very easy for this cardholder to go out and get the card. So we're obviously seeing great growth rate in retail, because we started from a basis of 0. But I think what's more important is that we're seeing higher conversion to direct deposits on the cards, that we sell out of retail, than we had originally anticipated.

Operator

Our next question comes from Tim Willi of Wells Fargo.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

3 or 4 questions here, hopefully get through quickly. First one, Dan or George, you referenced purchase value. Typically you talk about dollar or GDV I guess. Is there anything in terms of the accounting or how you're thinking about that metric or was that just semantics? And then your competitor quotes a GDV number, I'm sort of curious if you're trying to get more apples to apples with them, if there's any reason for whatever your answers around changing the semantics around that metric.

George W. Gresham

Yes, it's that. Obviously we have just 2 notable pure-play GPR-type companies in the market. And some of these definitions can get confusing, and so GDV and our contacts is equivalent to purchase volume. So that is the amount of money that is spent on cards that we issue, either under our own name or under our partners names, that is spent at point-of-sale devices or consumed at ATMs or over-the-counter withdrawals. So that is the actual relevant driver of revenue. And so, because there may be some confusion, in the analyst community, about the fact that 2 metrics are out there, we wanted to make it clear that the appropriate equivalent comparable metric is purchase volume, that we also happen to call GDV.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Okay. And that does not include any reload volume, though I think Green Dot includes reload into their metric that they give out.

George W. Gresham

Yes, that's right. And reload from non-Green Dot partners.

Daniel R. Henry

So, Tim, the reason why we wanted to call it out is if you do dissect, the other numbers are out there. If you actually look into filings of the other player, you'll see it broken it out, GDV, and then you also see the purchase volume. And if you do the analysis, what we're quite pleased with is that our purchase volume has exceeded the other guy's purchase volumes, every quarter, for 2012.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Okay. Okay, that's helpful. Just want to clear that up. A housekeeping question, George. You mentioned the Brink's rollout. I just couldn't write fast enough to get that down. What was the timing on them starting to roll that out?

George W. Gresham

Late Q1.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Late Q1. Okay. And then staying on pay-card, I'm just curious. You've obviously continued to have nice momentum, evidenced by 15% to 20% growth and sort of issuing partners, Brink's, the CompuPay. I probably ask this every other call, I guess, so you're probably sick of the question. But in terms of how you're "merchandising" pay-card to the employee, are you finding improvements in employers' attitudes about that? Are you guys taking a more active role? Just sort of trying to figure out if there's some kind "eh" against sort of marketing merchandising incurred within the pay-card business, as opposed to, obviously, a lot of the work you do around the check cashing and retail.

Daniel R. Henry

Yes, Tim, it's Dan. There's not really kind of marketing merchandise, the pay-card, to the employee. Because we'll "sell" our pay-card solution into the HR department or the treasury house of a given employer. And they see one of the great benefits to their employees of being able to receive the their pay electronically, have online way statements and W-2s. And then, as a company, they also see the added benefit they have in terms of the cost savings of not having to cut paper checks or chase down lost checks and what-have-you. So they don't really market the product to their employee. But I will say that one shift is that, in the past, most typically you would see the employer offer the product to their employee. And with the federal government kind of leading the charge and saying, to a Social Security recipient, sorry, you're not going getting a check anymore. We're seeing more and more of our corporate employer partners mandating, if you will -- or requiring, that their employees are paid electronically. And so we believe that -- well, actually this will be the year where we'll, I think, actually see a real significant benefit in terms of more and more employers are wanting to eradicate paper checks entirely. Which means that instead of suggesting they take a pay-card, they would acquire -- either they have a bank account and get paid electronically or they get paid electronically through a pay-card.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Okay. So employees are definitely going to take a little bit -- it sounds like they're taking a little bit more assertive stance in terms of getting the cards into the hands of the employees, relative to maybe the last couple of years. And then the last question I had, and I'll hop off. If I heard you correctly, you talked about some money being spent around mobile acquisition within the direct channel. Is that correct?

George W. Gresham

That's right.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Okay. And I guess, again, assuming that you're somewhat new into the process but obviously committing money. Can you share with us any differences that you're seeing around, per se, PC-based, internet, direct-to-consumer versus some of your initial tests around mobile, in terms of the type of customer you're picking up, direct deposit, follow-through response? Just anything along those lines that would be a differentiator, first, as a prior direct channel methodologies.

George W. Gresham

Well, let me put it a little bit more in a broader context. So within our direct-to-consumer channel, we think about that business with about 10 or 12 sub-acquisition channels. So, for example, push-direct where we mail personalized cards to an individual's home or email is a subchannel, our corporate website is a subchannel, DRTV now is a subchannel. In that team, a very sophisticated empirically-driven marketers is constantly testing new ways to reach the consumer with different forms of messaging. And we're not actually new into mobile. We started mobile, I guess, probably a little more than a year ago, and of course, it preceded that with testing, and we're constantly testing, and we found some success in that channel. And so, as things go, the testing moves into different stages, and by the second half of this year, we've increased our investment based on IRR. So our expectations of that channel, that -- all of our 12 sub-channels compete for dollars and the channel that gets the dollars is the one generating IRR, which is driven by direct deposit conversion, which is driven by, of course, the length of the tenure of the account. And so your question kind of then, therefore, answers itself. That we make those investments based on expectations of IRR, and therefore, the mobile has a very high IRR return relative to the channels, and that's why it is successfully competing for financial resources.

Operator

Our next question comes from George Mihalos of Credit Suisse.

Georgios Mihalos - Crédit Suisse AG, Research Division

Just wanted to dig in a little bit on the commentary on the marketing spend. It was obviously up in the back half of last year, with some of the program launches. Now, in Q1, it seems like they'll be stepping up a little bit, again, seasonally. How should we be thinking about that as a percentage of revenue for 2013? It's kind of like the 7% you posted in the fourth quarter, a pretty good run rate.

George W. Gresham

No. I mean, as a percentage of revenue, I wouldn't -- I mean, Q4, we think, as a percentage of revenue, is probably somewhat high. Now, in Q1, I would expect to see fairly high investment in marketing. But then I would expect that to taper off during the year, in Qs 2 through 4. So I won't give you a precise percentage, but for the enterprise, I wouldn't expect, on an annual basis, that percentage to move too materially. Although it may move from quarter to quarter, up and down.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, that's very helpful. And then you had mentioned renewing the contract with Advance America. Anything to call out in terms of any potential changes to the commission structure, anything like that?

George W. Gresham

Nothing material to note. No.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. Just last question for me. The tax business overall. How big of a contributor is that going to be to 2013 revenue?

George W. Gresham

Well, we can't break out any particular sub-element of the business, George. But I would say, even in a normal year, '10, '11, '12, tax is a very important part of the year. And if you look just -- if you compare Q1, relative to any other quarter, you'll see the impact of tax. So that delta in Q1, relative to the rest of the year, is almost exclusively driven by tax acquisition of IRS funds. And so now, this year, we would expect that to grow over the prior year, because we have more accounts. Plus, we're adding the TurboTax program, and so -- I can't quantify it for you, but it is an important contributor to the year and our expectations.

Operator

Next question comes from Chris Shutler of William Blair.

Christopher Shutler - William Blair & Company L.L.C., Research Division

On DRTV, it sounds like you're seeing some pretty good adoption rates there. So maybe just walk us through the timing of those ads. I know that you marketed some in Q3, maybe a little more in Q4. Any kind of metrics you can provide there. And then, what is the typical lag between actually placing the ad on television versus seeing the revenue come through?

George W. Gresham

Well, what you see is an investment, commercial runs and you have some time that goes by between the request for the card and the delivery of the card, and then funding, et cetera. So that's measured in a matter of weeks. But, of course, you have a rolling investment program that's ongoing. Right? And the investment is always ahead of revenue. And then, as that channel grows, right, the investment will temper or level off while the revenue stream builds, and so you're contribution expands over time. And that will take quarters. I mean, it's not weeks. It takes quarters for that to drive expanding margins. Right? It's just a timing difference in the direct-to-consumer business relative to others. And so we would expect -- I mean, those accounts are in our DD number at the end of the year. Obviously, they're in our guidance for 2013. We expect those accounts to continue to grow. So, I guess, I would leave it at that. I mean it's -- back to the IRR comments, I guess, I'll point out that we think the IRR in this particular channel is very high. And as long as the 10-year curves indicate that, then we'll continue to invest and grow the business in that subchannel.

Christopher Shutler - William Blair & Company L.L.C., Research Division

And then I didn't hear you talk much about BET. But when you talk about DRTV advertising, how much of it, so far, has been the NetSpend brand versus BET? Maybe just give us an update on that relationship.

George W. Gresham

The relationship's going well. Most of the spend, in fact, in Q3 and Q4, is BET. We have kind of characterized that activity as DRTV now, because we will also execute DRTV acquisition with our own brand as well. And so we're talking about it more generically on this call, but virtually all the investment, to date, through 12/31 was in BET.

Christopher Shutler - William Blair & Company L.L.C., Research Division

Okay, great. And then the last one for me. Didn't hear you talk about the NCTC deal at all. And it looked like a nice win, maybe just help us understand -- I understand it's going to ramp over a period of years, not even quarters. But just what are the early indications so far in that program? And just help us think about how to quantify it.

George W. Gresham

Yes. So, for those who, maybe on the call, are not familiar with your question and the firm, the VITA tax program, which is a volunteer tax program offered to lower middle income individuals throughout the United States, in most major cities. It is the program that Chris is referring to, of course, that we announced about 2 months ago. Last year, in tax season, we did a pilot with them, a precontract, with I think 1 or 2 branch locations. This year, now we're under contract and that pilot's expanding, but the number of locations is still very, very modest. But the performance indicators amongst those locations are very good. But if we have another successful year, this year we would expect that to roll out across the entire VITA portfolio, or much of it, in 2014. So we wouldn't really expect meaningful contributions from the program for at least a year.

Daniel R. Henry

Chris, I think a real important point on that is not so much the volume of cards we get out of that, but the testimony that we have from being chosen by VITA to be their card of choice that they give to the low income consumers, where they do free tax prep work for. And so that's really is what we're very proud of, is when they scrub the market and look for what is the best and most consumer-friendly product for the customer that they're serving, they chose us. We heard a story just the other day, where they had a client and the winter office, I think, is in the Chicago area, and this client already was a NetSpend customer. Pretty much right there, on prompt, he give a testimony to anybody who listened, how great the NetSpend product is. So it's always rewarding to, one, be chosen by such great organizations and then you hear stories of our customers endorsing us on the spot is great.

Operator

Our next question comes from Ashwin Shirvaikar of Citi.

Ashwin Shirvaikar - Citigroup Inc, Research Division

I guess, a couple of questions on cash flow. First of all, George, I may have missed it, but could you go through your cash flow expectations for 2013? And in particular with your reference to the direct channel and the timing difference there. Does that have an impact on cash flow?

George W. Gresham

To the first part of your question, we didn't give specific cash flow guidance for '13. But you can infer it with some of the data points we did provide, that I didn't highlight in the script. Obviously, you can and start with EBITDA and adjust it for the tax considerations, the tax rate we provided, CapEx of about $11 million. We're not expecting any other unusual items. So if you're expecting a 33% or 34% growth in EBITDA, which roughly -- or EPS, which is roughly our guidance, at the midpoint, you can solve for the cash flow out of that. Now there is a timing difference in cash flow, because in Q1, of course, what I'm saying is higher revenue in Q1 relative to other quarters, lower margins in Q1 relative to other quarters, therefore, lower net cash flow in Q1 relative to other quarters. So I don't know if that got to your question or not.

Ashwin Shirvaikar - Citigroup Inc, Research Division

It did. The second part of the cash flow is sort of use of cash. Are we going to see a re-upping of the buyback? Any acquisitions? What's your pipeline look like?

George W. Gresham

I don't think our perspective changed. I think we've done 3 separate share repurchase authorizations since we became a public company. So obviously we have an appetite for that sort of deployment. Our view hasn't changed. We discuss the issue, as you would expect, every time we meet with the board, on these sorts of topics. Our current position is to take a breather, but we'll be reevaluating that as time goes by. On the acquisition side, again, our eyes are open. We keep apprized of what's going out there. We look at different opportunities. Obviously, we're highly focused on GPR in the United States, with differentiated product, direct deposit. And if we could find an asset that helps us do that better, we would certainly consider deploying some capital towards it. But we're unlikely to get very far afield from that focus.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Okay. Last question for me is on sort of revenue-per-card trends. What should we expect? Because the second half of last year you ramped, or are in the process of ramping, a lot of partners. And how does that sort of affect overall revenue-per-card trends?

George W. Gresham

Well, as you maybe have already run the math, you can see that in Q4 we had a very nice average revenue per card, up by a couple of dollars per card relative to Q4 of '11, up sequentially by $0.60 or $0.70 for the quarter. Now the trends affecting all of our metrics would include -- if we're amazingly successful, which we hope to be, retail cards, although they are converting to DD at a higher rate than we expected, their conversion is relatively low compared to the other channels. As is the case in all retail. So, if retail really just absolutely hit the ball out of the park, we may have the unfortunate side effect of having a slightly lower average revenue per account. And then tax has peculiar characteristics that are unique to tax, that could shift average revenue metrics from quarter to quarter. So I would leave my comments at that. In general, though, we're not expecting any material changes, by channel, in the average revenue or average GDV per account kind of metrics.

Operator

Our next question comes from Ramsey El-Assal of Jefferies.

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

A quick clarification on the press release. And forgive me if you commented on this and I didn't catch it. You mentioned that Q4 revenue growth was driven, in part, by an expansion of product features across the direct deposit customer base. What is that referring to exactly?

George W. Gresham

The main driver is the 25% growth in direct deposit. But when you also go on direct deposit, you avail yourself of other product features. And we've announced a few products over the course of the year, but it also includes overdraft. So, overdraft is within that context as well as other products that we've announced during the course of the year.

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

Okay, I see. So it's not like you're rolling out new features, it's like people are utilizing the existing features more basically.

George W. Gresham

Yes. In that particular example, yes, that's right.

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

My next question has to do with kind of the competitive environment, in a sense. So Green Dot obviously recently launched GoBank, American Express has Bluebird which is kind of mobile-based and powered by the Serve platform, kind of mobile app-based. What are your thoughts on NetSpend, in terms of potentially needing to field a similar offering? Or does that factor into your strategic plans at some point or...

Daniel R. Henry

No. We often get the question about, gee, the competition is doing that, are you responding accordingly and such. But as we said on this call, we think our strategy is quite clear, just continuing to focus in executing our revenue growth, focus on direct deposit. We feel really good about the guidance we gave of 19% revenue growth and 36% adjusted EPS growth. So we, really, are very clear and confident that we're focusing on the right strategy. And we don't really see the need to kind of follow what others are doing.

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

Okay, great. Last question for me, can you give us any additional -- you mentioned, last quarter, the mobile top-up program. I guess, first, any sense of timing there, in terms of rolling that out? And wondering, also, if there was any contribution there factored into your '13 guidance.

Daniel R. Henry

The contribution and guidance for '13 would be quite a nominal number. But we have completed our beta testing on that product, and it is operational. I personally tested it numerous times, it works great. And we're going to be, I think, doing a launch and rolling that out, here, in pretty short order.

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

My last sort of follow-up. Basically you become a reseller of the top-up, where you guys are capturing kind of the spread between a wholesale and a retail price on the top-ups that you push through. And I'm assuming are not carrying any inventory, it's just a realtime sort of tie-in to whoever is provide you with the minutes or the top-ups?

Daniel R. Henry

Yes, exactly. We've actually become a distributor of airtime. Do not carry any inventory. And if you think about our customer base -- imagine, we've got a pretty high percentage of our cardholders who are users of prepaid mobile phones and prepaid mobile devices. And so, by setting up, in the system -- it's very like our P2P. You set up once and you can send funds, from one cardholder to another, with a simple text message. So you set up onetime, with what your mobile phone number is, and then with a simple text message, you type refill25 and then -- with whatever acronym you set up for your mobile phone, and send that text message to us. And literally within 30 seconds, 60 seconds at the most, you got a text message from us saying, confirm you want to load this dollars on your phone, you type okay. Another 30 seconds, you probably have a message on your phone that you've got airtime just added to your phone. And you have another message confirming the transaction, from us, saying what your current balance is on your card now that you've purchase $25 of airtime. And then we also -- you're right, Ramsay, we do receive a commission on that distribution of airtime. So what we're doing is we are giving back a larger percentage of that commission to our consumer. So we're offering them to -- not only is this a much, much more convenient way to add minutes to your phone, because you're not having to go to a store and buy a prepaid top-up card. You can do that from wherever you are with a text message. But for every $25 of airtime you purchase through our solution, we're going to credit your NetSpend account $1. It's just an example of the types of feature functionality that we put out there, like free P2P transfer, super-friendly consumer overdraft. That fits within our mission of -- we are trying to build long-term retentive solutions this consumer because we look at lifetime value per customer and account. And anything we can do to get the consumer to embrace our product and keep them for years rather than months, are things that we are developing.

Operator

Our next question comes from Gil Luria of Wedbush Securities.

Gil B. Luria - Wedbush Securities Inc., Research Division

So, Intuit, on their conference call a couple of quarters ago, said that the business that they're handing over to you is about $19 million last year and growing very fast. If I take that out of your guidance, it sounds like you're guiding for, in the midpoint, around 12% growth. And that's in a year where you're really ramping up your retail presence. How does that affect your view on the long-term growth of this industry and your ability to grow within the industry?

George W. Gresham

Well, we did grow at 17%, Gil, in the fourth quarter and 15% last year. So I hope that, at some level, that speaks for itself. Now, we manage a portfolio of partners and a portfolio of channels, a portfolio of risks and opportunities. And so we think, carefully, about the right balance to apply to our guidance. We give enterprise-level guidance. We can't comment on Intuit's comments. And so our guidance of 19% revenue and 34% earnings growth represents those considerations. So we can't really break out individual partners for you or individual channels.

Gil B. Luria - Wedbush Securities Inc., Research Division

Got it. And then in terms of how you're going to count those cards. I know Green Dot, at the time, counted them as a direct deposit card. The ones that came from the TurboTax products. But it seems like that's not a recurring type of card, necessarily, and the deposit isn't made on a recurring basis. Not by an employer, not by a regular payee. Are you going to count them as direct deposit cards?

George W. Gresham

Yes. So all tax deposits that come via ACH, that is -- ACH deposits are the way we identify and define that metric. And so that has historically been the case for us, and others in the industry. All members of the industry that I'm aware of.

Daniel R. Henry

And, Gil, if you look at our historic years, we always have a spike up in our direct deposit numbers when we report our Q1 numbers. We always let people know, expect that, that direct deposit will drop, as many of the cards that benefited from tax refunds, we counted. But we love the tax season because it's a great way for us to acquire new customers. And, yes, there'll be a good percentage of customers that will get the card get the tax refund on it, and that's all they do. But it's always a great quarter of acquisition for us because we always keep a large percentage of these customers and we market to them, during the season, to get the card, get your tax refund, now sign up for direct deposit for your other sources of income.

Gil B. Luria - Wedbush Securities Inc., Research Division

Got it. And then last part on that. Green Dot also talked about the fact that these cards were particularly prone to fraud. Are you going to have to ramp up your fraud capabilities to handle this surge of higher risk cards?

George W. Gresham

Well, I guess, I'd say that we've been in the business of accepting U.S. Treasury deposits for 12 years. And there's nothing particularly special about the fact that the treasury is making deposit to a card acquired via Intuit. And so our fraud management capabilities, which are necessary to be very capable if you're going to be a prepaid card program manager, have been well-tested over many years. And we also have very specific and transparent insight into what's happened with the Intuit program over the last few years. And so, as you would expect, we've tailored our internal controls and our fraud management systems in order to deal with any issues that might have been particular or unique to the Intuit program.

Daniel R. Henry

If I just may add to that, I think that, as George said, for 12-plus years, we've been taking these sort of loads. With being deep in the check cashing channel, you can understand that. It's always been a big season for us because people would use a check cashing channel, check cashers, as a way to get their cards for tax season. I think it also should show kind of the strength that we have, across organization, and our effectiveness of being able to run and operate a very strong and profitable pay-card business. Probably the biggest and fastest-growing direct-to-consumer business. Then running this Intuit tax business really flows into the expertise that we have. And I think that maybe one of the challenges that Green Dot has, is they have, for their entire livelihood, been focused exclusively on retail, and retail is unique. And, obviously, the challenges that they probably experience with Intuit is that Intuit's an entirely different business than they're used to running. We are quite comfortable with running that business with Intuit. And we also are benefiting from the fact that Intuit did this for 3 years, 2 years with Green Dot and 1 year on their own with Visa TPS running as their processor. So when they sat down with us and they shared the experiences that they had, and we showed them what we do in order to get in front of any sort of fraud. One, most importantly they very much embraced everything that we brought to them, because they were very open to making sure they had a great season this year.

Operator

Our next question comes from John Rowan of Sidoti & Company.

John J. Rowan - Sidoti & Company, LLC

Just one quick question. Not to belabor the point on competition, but I'm just curious, strategically, how you look at some of the products or the features that are being offered on other prepaid cards. Is there anything specific that you would look to add to your cards or are you really going to focus on products that are not necessarily widely available on other GPR cards?

Daniel R. Henry

John, I don't know what features you might be referring to.

John J. Rowan - Sidoti & Company, LLC

Well, like remote capture, some of these other features. And I'm not saying that you guys don't have a feature-rich card, because you do, but there are obviously differences between you and your competitors as far as what features you offer.

Daniel R. Henry

Well, I mean, I think remote deposit capture might be the only one. And they already see that's easy. So that's our product roadmap and we'll roll that out this year. And so I don't really see that as a huge differentiator, if you will. But nobody out there has mobile top-up, nobody out there has our super-friendly overdraft products. You add our P2P, you add our instant wireless alerts, nobody has our level of detail that you get with an instant wireless alert. Get paid 2 days faster. Nobody offers 5%, or so on savings account. So our strategy of understanding this consumer -- and this is probably the biggest challenge we have in terms of our investment audience. No offense, John, and I don't know you that well personally, so I might be wrong here. But you probably don't have a real great understanding of how our customer lives their life, nor do most of the folks at Wall Street that I talk to about our business. We understand this cash-based consumer and they're pain points. And so it's not effective for us to just go out and copy what Chase bank is putting on their card. And that's why we also find ourselves constantly saying, it's not about price, it's not about no-monthly-fees. It's about things that make this consumer's life dramatically better. I spoke to 1 of the 2 money transfer agents, Western Union and MoneyGram, I spoke to one of their largest agents a couple of years ago. And this agent told me that 70% of their money transfers are domestic, and many of them across town. And that's because a cash-based consumer doesn't have a checkbook, and therefore, when they want to send money to a friend or family member, they can't write them check. They've got to go somewhere, stand in line, and spend $15 to $30 in money transfer. That's why our text-based free P2P transfer is such a dramatic and wonderful benefit for our customer. 5% or so on savings, our instant wireless alert. That customer always knows how much they have in their account is a huge benefit. Remote deposit capture is going to be helpful to them, but it's only going to be really helpful to them if those funds are instantly available. We talk to our customers, many of them who use check cashers, many of these customers have bank accounts, and they still use a check casher. The reason they go to a check casher is they need instant access to those funds. They take that check to their bank, they know that, that bank will sit on that check for 3 or 4 days until it clears. So I don't mean to jump all over you, John. But I just want to make the point that we are very, very thoughtful in terms of the products and the features that we rollout. And I can assure you that there hasn't been any feature, product or functionality that's been rolled out by any of our competitors that we haven't looked at, vetted. And for one reason or another, either decided it's not worth it or we've got other more important products, more beneficial products, that we'll roll out first, and then we'll get to remote deposit capture, as an example, in due course.

Operator

Our final question will come from Tom McCrohan of Janney.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

I had a question on operating leverage. And I'm just trying to figure out your guidance. So, in 2012 you had really solid positive operating leverage, and your 2013 guidance implies not only a continuation of positive operating leverage, but a significant improvement. And so, in other words, the incremental revenues you're going to get in your guidance is assuming a margin that's like 500 basis points above what you posted last year. So, given that you're getting into retail and retail has some challenges as far as some of which you described, George, as far as the kind of upfront customer acquisition cost, it doesn't feel like it's a channel, although it's incremental, that drives better operating margins, right, than by your operating leverage. I know you had a lot of things going on, Intuit and other stuff, but is there a way to kind of describe why your operating leverage, this year, is not only continuing but improving dramatically? Where is that coming from?

Daniel R. Henry

Tom, you really put me in a tough spot because we haven't had our company-wide meeting yet, to tell everybody that they're not getting a raise this year. Just kidding. But, as George will expand, I mean, this is a business where we'll continue to grow this top line. But if you just look at simple metrics of our headcount and our SG&A expenses, we're able to -- and we own and operate our own processing platform. So that's a fixed cost for us, not a variable cost. And so, yes, you would expect to foresee this leverage to continue. George, for some more detail.

George W. Gresham

Yes. I mean the way I think about it -- I'm not sure if I'm using the precise same metric you are. But if I think about it in the context of EBITDA, adjusted EBITDA margins, and maybe you're looking at operating income GAAP margins, but we exited 2011 Q4, if I recall, at about 30%. Maybe just barely shy of 30% adjusted EBITDA margins. And then the guidance we gave in 2012, which of course evolved over the year, we increased it in the second quarter, but guided to slightly more conservative margins than we exited 2011, and by about 200 basis points or 250, I think, was the exact number. That 250 basis points was specifically quantified and called out as the marketing investment that we just spoke about. That took our margins, for the year, of about 28% to 27%, roughly, in Q4, all accounted for by the incremental marketing investment. And that was anticipated in our plan and we talked about that each quarter. So that took us from '11 to '12. And now '13 we're roughly in the high 27s, 28% range now and we're guiding to around 29%, plus or minus. And that margin will be accounted for by driving our channels, which I mentioned in our script, have roughly the same profitability. Okay, that profitability is before shared services like the IT infrastructure that Dan just mentioned. And so, as those channels grow and grow profitability, on a blended basis of 19%, we're expecting the shared services organizations to grow at a much more modest rate than the channels' profitability. And so, I mean, that's the quick kind of roadmap to how we see it.

Daniel R. Henry

Well, I think that concludes all the questions and concludes this call. So, thank you, everyone, and we'll talk to you after the first quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

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