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Green Dot Corporation (NYSE:GDOT)

March 12, 2013 5:30 pm ET

Executives

Steven W. Streit - Founder, Chairman, Chief Executive Officer and President

John L. Keatley - Chief Financial Officer

Analysts

Georgios Mihalos - Crédit Suisse AG, Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, so I think we're ready to begin. Our next presenting company is Green Dot. We're going to have a fireside chat. With me here is Steve Streit, Chairman and CEO of Green Dot. And he's also joined by John Keatley, the CFO; and Chris Mammone, who heads the IR effort, is also right over there.

Steven W. Streit

He's in the crowd.

Georgios Mihalos - Crédit Suisse AG, Research Division

Missed him there for a second.

Question-and-Answer Session

Georgios Mihalos - Crédit Suisse AG, Research Division

So why don't we get started. One of the things that we're hearing a lot about is the wonderful tax receipt season and maybe some of the delays that could be going on there. So why don’t we kick it off there?

Steven W. Streit

Yes. John has some good information to share on that. And...

John L. Keatley

Yes. Well, as you know, we don’t share inter-quarter guidance. I can't share information about our results here this tax season. But a few things to keep in mind that are interesting. As we've heard from several companies, tax refund volumes have been lower this year. There's some reasons that tax refunds have been delayed. Walmart announced, I think, just today that for the year-to-date, the tax refund checks cashed at Walmart stores are down by 1/3 year-over-year. And as you know, tax refunds are an important source of income to our customer base. So that's certainly something that we're keeping an eye on. And other things to keep in mind, as you think about our quarter is that, last year, we had a very big year -- a very big quarter with a high tax refund volume. This was before we had implemented some of our new risk controls and before many of our retailers had rolled out some competitive products. So as we mentioned on our Q4 earnings call, we would expect the impact of our new risk controls to be disproportionately impacting Q1. Those are some of the things that were reflected in our guidance and that we're keeping a close eye on here this year.

Georgios Mihalos - Crédit Suisse AG, Research Division

Sure. That actually mirrors what MasterCard was saying earlier.

Steven W. Streit

Yes. H&R Block, MasterCard, all have had similar statements earlier.

Georgios Mihalos - Crédit Suisse AG, Research Division

So to be clear, you see a bit of a push from some of that revenue stream more into 2Q than the traditional 1Q?

Steven W. Streit

Yes. And clearly, there's a delay in tax refunds going out this year. And some of that was related to the fiscal cliff. Some of that has to do with tax changes in many states. California was very late just even in getting tax refund forms out to people, because of changes in the tax law in California. But a number of people are speculating that even beyond the delay, there may just be lower tax refund volumes for the year this year. And there's a -- there was a Goldman report out recently suggesting that the shortfall could be around $20 billion lower tax refunds in 2013 versus 2012. So that's something that we're watching closely.

Georgios Mihalos - Crédit Suisse AG, Research Division

Something to be aware of. Well, thank you for parsing that out. Why don't we go into the competitive environment on the prepaid side? Two areas of focus that keep coming up with investors. Obviously, the impact of non-exclusivity that we're seeing in the retail side. And then just thoughts around longer-term pricing and sustainability there which seems to be a constant concern from investors.

Steven W. Streit

Yes. Well, all of our retail stores now have multiple products on the shelf with the exception of one, which should be arriving. But if you think of all of our larger retailers, all of them today would have multiple products 3, 4, 5; in the case of 7-Eleven, may be even more than that on the rack, in addition to our Green Dot SKUs. So the good news about that is we'll know here in the next -- I would say by mid-year, we will have lapped the full year or something like that of these new competitive products in the shelf and then the genie will be out of the bottle, so to speak. And we'll be able to sort of see what's it's done. And Q4, as you know, we had a good Q4, all things considered, especially on the Green Dot brand side of the house. And we'll see how that turns out in Q1. But the best comfort, or lack of comfort, we can give investors of the fact of how we perform. And so as we roll out for the next 2, 3 quarters, those -- that mystery will become known, and then we'll move on to the next unknown. But that's probably the best thing we can say about competition. Our general belief is, now that it's out there, it's part of life. And we have a lot of confidence in the Green Dot brand as we saw in Q4. And we feel like we have a great product for our customer segment and a very well known brand in that segment, and we'll see how it plays out.

Georgios Mihalos - Crédit Suisse AG, Research Division

Let's talk a little bit about the key differentiator of the Green Dot product and the Green Dot brand, and you spoke about the union in the fourth quarter. You're having to share shelf space but nevertheless, you're continuing to win a disproportionate amount of the prepaid business. Maybe talk a little bit about [indiscernible].

Steven W. Streit

Well, in Q -- and I don't want to give a preview of Q1. But in Q4, what we announced was that the Green Dot brand side of the house is up in sales, I want to say about 17% of what I recall of unit sales and Walmart...

John L. Keatley

The new card activations.

Steven W. Streit

New card activations, sorry. And then on the Walmart side, we were down 14%. And we talked about the fact that all these retailers now have competition and people say, "Well, gosh, why would you be up to near historic levels in that quarter, given that you had competition?" What we hear from our retailers, what we see in our research is the Green Dot brand has a lot of appeal for consumers. They know the brand. They know how the system works. They've used it for years. Our pricing tends to be at or at the lowest end of the market. And people buy what they're comfortable buying. So when you have a lot of new products on the shelf, especially if they're brands had been resonating with them or that they've never heard of, in many cases, it can actually serve to propel your own brand. In a sea of unknowns, you're the known, if you will. And we see a lot of people selecting the Green Dot brand for that reason. And it's also a good product. And I think people understand that we're not a new commodity in the market. We've been around for 12 to 13 years. And so, we have a lot of folks who've used us and recommend our products.

Georgios Mihalos - Crédit Suisse AG, Research Division

Sure, sure. Any update you can provide on the Walmart relationship and the MoneyCard exclusivity? Or is it just kind of way too early to provide any incremental data point there?

Steven W. Streit

I'm not sure what the...

John L. Keatley

Yes. I'm trying to think if there's anything new to share. Probably not.

Steven W. Streit

Which is no. We'll stop right there.

Georgios Mihalos - Crédit Suisse AG, Research Division

Any update on the average life of a Green Dot user? I think it was 9 months in the prior 10-K that was put out. Is there any sort of update there that we can look at?

Steven W. Streit

Yes. I mean, the -- there are a number of ways we look at the average life of a card. And we typically look at it by segments, and we look at churn by segments. What we've seen over the past several quarters, is improving churn amongst our customers and, particularly, amongst the customers who have done at least one reload. And we believe some of the drivers of that are the improving direct deposit penetration, some of the incentives that we offer around pricing for customers to reload their cards regularly. And you can see the impact of that shift on our average spend volume per card, reloads per card. So you're seeing sort of just an overall improvement in the quality of our portfolio over time.

Georgios Mihalos - Crédit Suisse AG, Research Division

John, maybe you can remind us. What percentage of those reloads are now coming from non-Green Dot cards?

John L. Keatley

Oh, well, it was around 20%. I think it may have been just been over 20% of our cash transfer revenue is coming from what we call third-party reloads. So those are customers who are, maybe they have an H&R Block Emerald Card, maybe they have an American Express prepaid card, maybe they're loading a PayPal account, and they use the Green Dot network as a way to load funds to the account. And that's been a fast-growing segment of our cash transfer volume. In terms of the actual cash transfer unit, it's a bit lower than the revenue number. The average revenue per third-party reload has been higher than the same-store piece. Mostly because the Walmart MoneyCard reloads all happen at the $3 price point. But yes, that's one of the contributors to the growth of our cash transfer volumes.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, great. And then, obviously, other big news in the space is your chief competitor has been acquired. Do you see that changing the competitive landscape in any way? I know they talk a little bit more about international trying to penetrate the bank channel a little bit more, just your thoughts on that.

Steven W. Streit

Well, we don't see it as being -- how do -- first of all, we think it's a great deal. And we hope it turns out to be a fabulous deal for TSYS. We think it's a great deal for NetSpend and their investors. And so we're happy for both the bride and the groom as they come together in this union. What it means for Green Dot is unclear, but we think it's generally neutral to positive. NetSpend has been a competitor for as long as we've been in business or just about. And so I don't think they're any more of a competitor now that they're owned by TSYS. So that's why I'm saying neutral to positive. But we don't think it affects us negatively. On the positive side, we're the only pure-play company, and we're also a bank, which we think further distinguishes us in terms of our ability to roll out certain kinds of programs and do more enterprise-level, nationwide tax programs, whether it's our GoBank checking account or new prepaid program. So -- but we feel great about the transaction. We think it sets the right valuation on what our stock one day could be again. And at the same time, we're very happy for NetSpend and TSYS.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, great. So you started talking about GoBank, and you've got a number of emerging products, emerging services that are coming out. Why don't we start with GoBank, talk a little bit about the target demographic you're going after there. And it definitely seems to go beyond the unbanked or under-banked, some of the broad...

Steven W. Streit

Yes. GoBank has nothing whatsoever to do with the unbanked. So not that somebody who's -- if they're unbanked, it's because they're a college student going to college and this is their first account. But our company mission is to reinvent personal banking for the masses, not just unbanked but to reinvent personal banking for the masses, meaning the other 99%. And prepaid does a great job of that for the under-banked, the unbanked, folks making less than $50,000 a year. But we also recognize that there was an equal or larger segment of Americans who just plain don't like their banks, who are in that mobile phone, mobile app world, who currently maybe have a U.S. Bank or a Wells Fargo Bank or a Chase account, whatever it might be, BofA. And they're looking for something more modern, less expensive, more transportable, if you will. And that was the energy behind GoBank, which is a very entertaining bank app. And the social media on it's been great. As you know, we're in beta today. We have a couple of thousand users actively, and we let more people in through an invitation process to make sure that the IT works properly and all the back-end controls are working properly, which you need to do and be thoughtful about. And we love it. I use it as an exclusive checking account. Many people do it. If you go to our Twitter feed or our Instagram feed or Facebook, you'll see what real users are saying about it. And if you're 25, 28, 24, 32, once you start using this, you don’t put it down. And I'm amazed at how we'll watch friends and folks using it, and they'll go at a stop light or when they're bored, even though you're not supposed to do it in your car. You'll see people just out of boredom go from Instagram to something else, typically Facebook, to GoBank, back to Instagram, back to Yelp, back to text, back to GoBank, back -- it's become one of those apps that you use habitually because everything about your money, from your savings to your checking, to your person-to-person payments, to your bills that are due or that have come in is right there on your mobile phone. And it's quite addictive. So we have high hopes for it. I think we did a great job on the UX, which is what the user experience, what you'd actually see on the screen. The way it moves and the way it acts is pretty compelling. So we think we have a potential hit on our hands. But until you roll it out and you see how people use it and interact with it and what the revenue is from the debit card versus something else, you won't know until you know. So we're trying to be very thoughtful about that guidance. We don't know, but we feel good about our progress so far.

Georgios Mihalos - Crédit Suisse AG, Research Division

And just to be clear, nothing from GoBank is essentially in the guidance right now.

Steven W. Streit

No. It's all -- yes, the -- all you see today is our prepaid business.

Georgios Mihalos - Crédit Suisse AG, Research Division

Great, great. And maybe talk a little bit about the marketing strategy for the rollout for GoBank, what channels you're really going to be focused on and...

Steven W. Streit

Well, GoBank -- I'll give credit to Sam Altman, who is my partner in building it; and Sharon Howell, who runs digital media for GoBank. They told me about this, and I wasn't a believer because I'm 51, not 21. But -- so to me, TV and everything, and they said, "Steve, with all due respect, when you see what we do with social media, you'll never buy another TV ad as long as you live." And I wasn't sure what they meant by that. I get it now. We're up to over 260 million media impressions on GoBank. If you just, for the fun of it, go to Google and type in GoBank, you'll have page after page after page of article, including a new one today that came out of MacWorld and a few others. It's really captured the imagination of the social media set, and word of mouth on it is spectacular. I was telling this to John. I have a daughter who goes to UCLA. She's 24, so she's taking the scenic route through UCLA, but she's there nonetheless. I think she'll be a freshman this year. So anyhow, she's a senior but taking the long way around the block. And she was at the Starbucks near campus and had a GoBank T-shirt on and 3 or 4 people in there said, "Oh, that's a new bank where you pay whatever you want." "Oh, I saw that on Mashable." "Oh, I read about that on CNET." And I can advertise zillions of dollars on Green Dot and not have that kind of word of mouth at a Starbucks at a college campus. So it is -- it has been amazing. And I think as we continue to roll out GoBank, you're going to see the social media component of it take on a more and more important role, including placement in the app stores and other online partnerships.

John L. Keatley

And just to clarify, George, there's very little GoBank revenue in the model. But at the high end of our guidance, we do have some GoBank revenues. We'd expect it to be ramping towards the end of the year.

Georgios Mihalos - Crédit Suisse AG, Research Division

Sure, sure, sure. That's fair. Maybe we can move on to some of these other initiatives that you're focused on. You spoke about penetrating the government channel going forward. You have a deal now with Sallie Mae to get into the higher education disbursement side of the market. Maybe talk a little bit about those initiatives. How excited are you about those rolling out later?

John L. Keatley

Well, so we're -- we think that extension is expansion. And we think Sallie Mae will do a good job in the college market. Is it -- I don't know how to describe it. We said this on the earnings call, so this is not incremental information. But we're not expecting this to reinvigorate our world. It's not that kind of thing. But we think it's a good addition to our company. We think the student channel is right for GoBank in particular. And whether it's through Sallie Mae or other kinds of student access portals, we expect to have some activity there because it's just tailor made for that market. So we liked that. Government, we've dabbled in stuff with treasury and we may again, as we look for opportunities. The biggest part of our business is the biggest part of our business, and that is everyday people choosing to use Green Dot as their bank account and enrolling in direct deposit and using it. And that's what's driven our success so far, and we think that's what will continue to drive it. So these are what I would call incremental opportunities, unless you disagree. But I wouldn't model anything material for it, and we certainly not in our guidance.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, great. And what percentage now of your GDV is sourced from direct deposit? I think it was a little over 40%. Am I wrong?

Steven W. Streit

Yes, it's in the 40s, and it's -- kind of bumps around a little bit with seasonality. It tends to be a little bit higher during tax season and lower other times of the year.

Georgios Mihalos - Crédit Suisse AG, Research Division

None of these discussions unfortunately are complete without the requisite regulation question. Anything you can add there in your conversations with the CFPB and the like?

John L. Keatley

So every -- listen, every prepaid company has its own set of challenges. So my answers are about Green Dot. Remember, we're a bank and we have bank regulators who regulate our enterprise, both at a holding company level and at the bank level. We certainly interact with CFPB on a regular basis. And we've always found them to be, even back in the Elizabeth Warren days and still now in the Director Cordray days, a very thoughtful, reasonable and appropriate regulatory body. We've never heard anything out of them that was remotely extreme or some of the things that you read about in other press. So we think they're doing a good job. And the types of things that they propose in what's called the ANPR, which is the announced notice of proposed rulemaking -- or advanced notice of proposed -- yes, of the NPR, is consistent with what Green Dot does today, whether it's Reg E, which is consumer dispute resolution; whether it's FDIC insurance, which we have as our own issuing bank; whether it's other kinds of things that they propose. We are in agreement with those tenants and think they're quite reasonable.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, great. So nothing you'd really report on that front?

Steven W. Streit

No.

Georgios Mihalos - Crédit Suisse AG, Research Division

Great, great. And you guys have spoken about bringing the processing in-house at some point in the future. I believe, it's 2014, if I'm not mistaken. Anything new to report there, taking that in from TSYS and doing it yourselves?

Steven W. Streit

No. We're taking the slow boat on that. And the reason is -- and you saw we renewed. The timing of the renewal was odd, because the 8-K hit. TSYS is considered a material contract for Green Dot, because it's a processing contract. And so there's an 8-K on that, and we extended it for 16 months or something like that. The reason is, we want plenty of tail. We have a tremendous number of accounts on file at TSYS. No customer cares where we process. No retailer cares where we process. And I want to make sure that the optionality of how we transition and when we transition is ours and nobody else's. So we bought ourselves some extra time. And Troy and Phil at TSYS were nice enough to help us with that renewal. And so -- but when the time comes, we'll do that if we can do it in a safe and possible in appropriate way. But I don’t feel any urgency or rush to roll it out to prove a point.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, great. Why don't we shift to the balance sheet? One of the questions that comes off often is, you got, I think, over $4 of unencumbered cash. Why not buy back some stock here? And how do you kind of think through that capital allocation decision versus what may be in the M&A pipeline?

John L. Keatley

Well, we think we have 2 compelling uses of cash right now that we're prioritizing. And one would be acquisitions that are either immediately accretive or accretive in the very near term and would potentially diversify revenue streams, give us access to new channels, acquire products and peripheral verticals, that sort of thing. And then the other one is just to support the organic growth of our business, as GoBank -- if GoBank grows very quickly or the Sallie Mae program or other programs in our portfolio. We may need to have additional capital available to capitalize our bank, and we want to make sure we have plenty of capital to support that growth. And those are really our 2 priorities right now.

Steven W. Streit

And the return of that capital is quite good. I think people look at the bank and oftentimes, we'll get a phrase like, "Well, how much capital do you have to throw down to the bank or lock up?" I don't think there's a full appreciation that the ability to put capital in your bank and, therefore, lie out and roll out new programs had other retailers and new verticals or get involved with new products like GoBank and get that app approved by regulators, which is in an arduous and very specific process. Having the capital is what allows you to do that. So the return on capital is actually very respectable when you use it for purposes of efficiency, issuing your own products and everything else. So it's not a bad return at all on that capital, but it's why we want to make sure that we never run out of headroom. I never want to be in a situation where we say, "Gosh, let's pretend GoBank is growing like a weed. Well, pull it off the market and stop your social media outreach. You ran out of capital." You just don't want to be in that position. And there's always time to buy companies, if that's what you decide to do. And as the industry consolidates and the regulation gets more tight on third-party banks and all the things that we see happening in our industry, the opportunity to buy only gets better, not worse. And so we feel good about holding on to the cash. We -- listen, as a large shareholder of the company, I totally respect the desire to return capital to investors. It would generate a very healthy return for me personally, as a 5-million shareholder investor. But we think the decision is the right one, to make sure we have the right resources to grow our company and do the right thing.

Georgios Mihalos - Crédit Suisse AG, Research Division

Why don’t we pause there for a moment and see if there are any questions in the audience before we continue?

Okay, so more for me. Why don't we talk -- go back to competition and are you seeing anything coming out of some of the large banks trying to roll out some of their prepaid products? Chase Liquid, other products like that.

Steven W. Streit

Well, we think every bank -- of size, will have a prepaid program. U.S. Bank -- to be fair to U.S. Bank, I think, they always feel overshadowed by Chase in this regard. U.S. Bank actually has, I think, the largest prepaid program, and they've had it for a couple of years. And I forget the name of the card, but they've had it in their lobby and they've done a very good job with it for a long time. A fellow named Kevin Morrison, is a friend, runs that portfolio. The Chase Liquid product is, in my years in banking, the best rolled out retail bank product I've ever seen. I mean, the TV advertising, bus boards, bus benches, billboards in lower-income neighborhoods. I mean, really, the training of the tellers that when you meet and they coach you on getting the product, they have done a spectacular job. Chase has an amazing retail machine. And it's unknown how effective that's been or not, but it's been out there now for -- oh, we're in March, so let's call it 6, 7 months, in a very major way. What I like about all -- and BofA I'm sure will have one and SunTrust and everybody else will have one. What I like about these major banks is doing it is that for Green Dot, just speaking in terms of the stock price itself, the fears have been more, in many cases, real than the reality. And so the more we have these mystery programs become known and the more they roll out, they will -- and in 6 months' time, or as we roll it a few quarters, everybody can look and say, "Okay. Instead of guessing what happened with Chase, we know. Instead of wondering what Bluebird does or doesn't do, and we don't know, we watch it like you do. We'll know." And as the fears become known, our senses will move on to the next set of issues or questions or overhangs. A year ago, there had been announced competition. But as we continue to roll past that, we think it's good that everybody rolls it out, because known is better than unknown. Markets hate uncertainly. And so we welcome the competition and see where it ends up. If Green Dot continues, and we're not saying it will or won't, but if we're 2 or 3 quarters down the road and Green Dot's market share has held or has gotten better, then I would imagine that, that will be viewed as quite a powerful feat and the -- given the competition from banks with deep pockets like Chase and American Express and U.S. Bank and everybody else, right? So -- well, let's let it happen and see where we are in 6 months.

Georgios Mihalos - Crédit Suisse AG, Research Division

Great. So I think we'll have to stop there. Thank you, John.

John L. Keatley

You bet.

Steven W. Streit

Thank you.

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