Green Dot's (GDOT) CEO Steven Streit on Q2 2017 Results - Earnings Call Transcript

|
About: Green Dot Corporation (GDOT)
by: SA Transcripts

Green Dot Corporation (NYSE:GDOT) Q2 2017 Earnings Conference Call August 8, 2017 5:00 PM ET

Executives

Dara Dierks - ICR LLC

Steven Streit - President and Chief Executive Officer

Mark Shifke - Chief Financial Officer

Analysts

Damian Wille - Jefferies

Steven Kwok - Keefe, Bruyette & Woods, Inc.

Andrew Schmidt - Citigroup

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Jeff Cantwell - Guggenheim Securities

Ashish Sabadra - Deutsche Bank Securities, Inc.

Joseph Vafi - Loop Capital Markets

Vasu Govil - Morgan Stanley & Co. LLC

John Williams - Compass Point

Bob Napoli - William Blair

Josh Elving - Lake Street Capital Markets LLC

Operator

Good day, and welcome to the Green Dot Corp. Second Quarter 2017 Earnings Conference Call. Please note that the contents of this call are being recorded.

I would now like to turn the conference over to Dara Dierks. Please go ahead.

Dara Dierks

Thank you, and good afternoon, everyone. On today’s call, we will discuss 2017 second quarter performance and thoughts about the remainder of the year. Following these remarks, we’ll open the call for questions. For those of you who haven’t yet accessed the earnings release that accompanies this call and webcast, it could 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 reference to our 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. Information may be calculated differently than similar non-GAAP data presented by other companies. Quantitative reconciliations of our non-GAAP financial information to the 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 protections.

Now, I’d like to turn the call over to Steve.

Steven Streit

Thank you, Dara, and welcome, everyone, to our second quarter earnings call. This will be a fun and exciting call to present, because first, we have another strong quarter of growth to report, where all of our revenue and operating divisions are executing their strategic plans beautifully. And as such, delivering far higher than expected levels of growth across our consolidated business.

And second, because this quarter represents the seventh consecutive quarter of better than expected performance, which is illustrative of Green Dot’s successful evolution from a mono-line prepaid card program manager to a diversified and increasingly growing FinTech powerhouse.

In Q2, total consolidated operating revenue came in at $225.5 million, representing a 28% year-over-year growth rate. Excluding UniRush, organic revenue grew 12% year-over-year to $193.6 million, which represented an acceleration from last quarter’s 6% organic growth rate and also marked to return the double-digit organic growth for the first time since Q2 2015.

Adjusted EBITDA for the quarter was $50.1 million on a consolidated basis, representing year-over-year growth of a remarkable 54%. Practically, all of that growth, except for a few million dollars from UniRush, was driven from our organic business.

Consolidated non-GAAP EPS for the quarter was $0.55, which equates to year-over-year growth of 104%. Not only are these results outstanding in their own right, both on a consolidated and organic basis, but the trends are exactly what we would want to see and certainly better than what we had been expecting when we first guided the year.

For example, looking at the last five quarters, starting in Q2 2016, we posted revenue growth of 2% in Q2 of 2016, 6% in Q3, 8% in Q4, 11% in Q1 2017, and now on a consolidated basis 28% in Q2 of this year. The non-GAAP EPS trend is even more encouraging, while we have posted either double or triple-digit year-over-year growth in each of the past four quarters.

All of our revenue and operating divisions contributed to this truly outstanding result. And I want to thank our incredibly talented and dedicated team of Green Dot professionals in all areas of the company. You all worked hard to exceed the respective revenue, expense and operating goals, while maintaining rigor and deep respect for regulation, compliance and risk management.

I also want to thank our worldwide product and technology teams, who bring our ideas to life with best-in-class engineering and software development, quality assurance and technology operations division. You guys are a group of amazingly talented FinTech superstars, and they work under the innovative eye of Green Dot’s COO, Kuan Archer, the architect of Green Dot technology revolution. You’re all my heroes, because without you, we would have nothing to sell and no customers to serve.

As we expect to continue demonstrating in the quarters and years to come, we believe Green Dot’s success is sustainable and attributable to our award-winning products and our increasingly valuable integrated banking and technology platform. It’s that unique combination of products and platform that we believe creates a network effect of driving GDV and transactional growth across the enterprise, leading to more revenue on top of an increasingly efficient operating base leading to compounding EPS growth.

By product, we mean that we have six revenue divisions that offer a diverse set of products and services that solve important customer problem. For example, millions of customers, including millennials and moderate-income consumers are attracted to our prepaid card and checking account, because they’re super easy to get in stores and online. They work like any popular app on your smartphone and can cost hundreds of dollars less per year than traditional bank account.

These are bank accounts you pick up at most any major name retail store with a Green Dot location at practically every street corner coast-to-coast, or download your award-winning bank account on the fly directly from the Green Dot cloud via the app stores any time 24/7.

We also offer several popular B2B products and services like tax refund processing services and payroll card. In all, Green Dot offers over 30 products and services across our six division. By platform, we mean the powerful enterprise scale API-driven vertically integrated banking and technology operating system that sits in the secured Green Dot cloud and makes those products run.

It’s an impressive enterprise level banking and technology platform that powers our products, the cool features within those product, and controls the point-of-sale systems at over 100,000 retailers that are authorized to sell our products and accept cash deposits on behalf of our bank.

The Green Dot platform provides a functionality for our CRM system and mobile apps. It monitors and defense against Internet attacks, and ensures proper enforcement of our AML controls and loss management rule. The platform runs on our website, connects us to the payment networks and third-party transaction process.

It even helps our supply chain group manage the production and inventory levels of packaging on the shelf every neighborhood Green Dot retailer, all while providing the data and reporting that enables us to manage it all as a federally regulated bank holding company that settles many billions of dollars of consumer fund every year.

We believe this powerful and unique platform is our crown jewel. IT took many years to develop and is now ready to propel the convergence of banking and payments into the app age. But here’s a really cool part. Green Dot isn’t the only company that can use our platform to power its product, because the platform is highly flexible, enterprise strength and API-driven, many companies like OneMain can use our platform to distribute loan proceeds. Uber can use our platform to instantly pay its drivers after we tried and create a custom small business version of our GoBank bank checking account.

Walmart can use our platform to build a custom Walmart MoneyCard, with cash back rewards and integrated sweepstakes-based savings account. And as you now know, Apple can use our platform to power Apple Pay Cash peer-to-peer payment.

As we continue to create and sell more of our own products at increasingly appeal to a more committed and more profitable customer base and then continue to open up our Green Dot banking and technology platform to enable large partners to create and sell their own products to an entirely new and more expensive customer base. We believe Green Dot is increasingly well-positioned to deliver compounding growth, driven not only by our own products and services, but by the entire macro of financial technology over the foreseeable future.

Now, let me bring you up-to-date on a couple of topics of interest, including an update on our work with Apple. Apple announced in June on stage and its World Wide Developers Conference that it will bring the ability to make and receive person to person payments with friends and family to Apple Pay users this fall. Green Dot will perform several roles to help facilitate this new capability.

First, Green Dot will serve in the role of merchants of record that accepts credit and debit card using Apple Pay to fund person to person money sending transactions. Then when users receive money in Apple Pay cash, their money is securely kept in a Green Dot bank issued Apple Pay cash account that is then available for the recipient to spend with Apple Pay in stores, in apps and on the web, or they can send it to someone else, or transfer to their bank account.

At a high-level, the business model is that, as the issuing bank for the Apple Pay cash account, Green Dot generates interchange revenue when customers use Apple Pay cash to spend the fund.

On the expense side, we’ll have the merchant processing expenses to accept the Apple Pays, where the merchants on the funding side of the transaction, plus the typical program management expenses we generally incur on any of our private label program. In any event, we do not expect the program to have a material impact on our financial performance for the remainder of this year.

At a respect for the highly confidential nature of our work with Apple, we won’t be able to release any more details about the program. Speaking more broadly, the financial results we’re delivering and the growing pipeline of large-scale of FinTech partnerships some of which you know about like our Uber partnership and now our work with Apple and other partnerships, which have not yet been announced are the result of years of targeted investments, strategic acquisitions and an unwavering belief that the future of financial services, emanates from the cloud and sits in your hand.

Of course, there’s always risk and unknowns whatever you launch a new type of program, and it’s not always clear what will work and what won’t. But what is clear is that, we believe Green Dot is well-positioned to benefit from the future of banking and the future of payments as digital natives dominate the world and the cloud in the hand overtakes the teller in the branch.

We believe Green Dot with its increasingly popular and highly unique integrated banking and technology platform has secured its standing as a cornerstone in the foundation of FinTech and has emerged as the go to partner of choice with the worlds biggest and best.

As I said last quarter on this topic, while some FinTech players have one piece of the puzzle and others may have others, to my knowledge, no one FinTech player has it all except for Green Dot.

And now an update of our six step plan. Step one, drive new card acquisition and retention strategies to narrow the year-over-year losses in active card and return to active card growth by 2018. We’re doing extremely well with this step. New card acquisition is responding well, there’s several new omni-channel programs and retention is increasing as a result of a mix shift among active cardholders to a more committed customer.

As a simple point of illustration, our direct deposit active base continues to soar with record year-over-year consolidated growth of whopping 83% in accounts receiving direct deposit, with 75% of all card loads coming from direct deposit in the quarter. The consistent and material improvement in customer quality, since launching our new products in early 2016 and fine tuning many of our direct deposit enrollment processes has been a key ingredient to our active card success.

The portfolio mix shift towards direct deposit customers has positively impacted portfolio retention and profitability, while also positioning Green Dot on the cusp of another meaningful inflection point. With Q2 organic active cards declining by just 1% year-over-year, we believe we’re well on our way to organic active card growth sooner than we have previously forecast. On a consolidated basis, active cards increased by 20%.

Step two, expand MoneyPak distribution by another 20,000 retailers by end of year and develop a compelling new used case for MoneyPak to drive future sale. I’m pleased to report that we have already exceeded our annual target. MoneyPak has now added over 21,000 new selling locations since beginning of the year, bringing the total number of stores selling MoneyPak to over 50,000.

Furthermore, we’re on track for our new used case by Q4. The story here has been very positive with unit sales and month-over-month growth exceeding our expectations. So the new MoneyPak is doing very well and we’re increasingly bullish on MoneyPak’s future.

Step three, make modest investments in high potential initiatives that are aligned with our strategic vision. We continue to selectively use some of our profits to invest in the future of our business. The easiest way to think about Green Dot from a cost perspective is, we’re a mash-up of three core capabilities: technology, banking and consumer marketing, then those areas are divided up into three stages, we call it, design, build and run.

With all the new cool and challenging projects we’ve been working on lately, design and build has been an area of incremental spend that we believe has an identifiable payback. Some of that investment, especially around people will become part of our long-term expense base, while other investments are short-term, primarily around the enablement of a new vendor that provides this service or that function and so forth.

Given that most of the new programs and initiatives we’re working on are potentially significant in size and scale. There are very few small projects we’re working on now nowadays. We’re also investing heavily in Run. Once a baby is born, it takes a village to raise her and keep her on the right track. So think about areas like data analytics and reporting, financial controls, risk and compliance, loss management, network operations, customer service and so on, we’re very pleased with the productivity of the investments we’ve made historically and our financial performance is a testament of their success.

As we shared in the last call, we plan to continue reinvesting some of our profit outperformance back into platform growth and infrastructure initiatives. Mark will shed a little more light on our approach during the guidance section of his commentary.

Step four. Step four is to execute on a series of platform efficiency projects to drive multi-year cost reductions and save $20 million in 2017 in order to achieve, at least, $1.75 in EPS. As Mark will share when discussing our raised guidance for 2017, we expect to significantly exceed our initial 2017 profit forecast.

In fact, the great job our finance and operating team has done on this platform efficiency initiative is what has allowed us to reinvest in such large new programs and initiatives, while still delivering such fabulous bottom line results.

Step five. Step five is about making accretive acquisitions as we can find them. The way this works is that, every divisional GM has a growth roadmap they execute again, that includes both organic initiatives and the opportunity to suggest acquisitions relevant to their division that can drive growth.

For example, UniRush was an acquisition intended for our Green Dot Direct division. While we take a look at a multitude of potential acquisitions every year, our M&A team and Board of Directors will continue to take a disciplined approach when assessing perspective targets.

At this point, I’m pleased to let you know that we have entered into a definitive agreement to acquire a small tuck-in secured credit card portfolio. While the purchase price is immaterial, as is the expected financial impact of this year’s result, it does illustrate our strategic approach to M&A.

When bolted on to our growing Green Dot secured credit card portfolio, which was a new start from scratch organic investment initiative last year, the secured credit card product has the potential to be a solid contributor to revenue and profit as we continue to build scale over the next few years.

I want to thank Green Dot Direct GM, Dave Petrini, who discovered and negotiated the acquisition, which we expect to close in the next 30 days or so pending customary approval. We intend for disciplined strategic M&A to be an ongoing part of our long-term growth strategy.

And step six. During the first quarter, we purchased $50 million of our Class A common stock under an accelerated stock repurchase. This completed our $150 million three-year share repurchase program in just under two years. In total, Green Dot has purchased and retired approximately 6.5 million shares at an average share price of around $23 under that authorization program. And clearly, this allocation of capital accreted meaningful shareholder value.

I’m pleased to share that our Board recently approved an expansion authorization for another $150 million share repurchase program. Any buybacks we might want to execute under this expansion would be subject to regulatory approval. Considering our M&A activity and the $50 million ASR, we did earlier this year, I wouldn’t expect activity on this new buyback, at least, until 2018. We continue to view share buybacks positively and we’ll continue to measure the relative attractiveness of our own stock against other capital deployment option.

So in summary, a terrific quarter top to bottom with a confidence in the future that’s grounded in fact and colored with enthusiasm for what’s to come.

And with that, I’ll hand the call over to Mark Shifke for his CFO report. Mark?

Mark Shifke

Thanks, Steve. I’d like to start by providing some insight into our performance in the quarter followed by commentary on our two reporting segments, then I’ll provide an update to our raised 2017 outlook and directional guidance on our anticipated results for Q3.

First, I’m pleased to echo Steve’s commentary that Q2 2017 was an outstanding quarter for Green Dot, delivering $225.5 million in consolidated total operating revenue, representing a year-over-year growth rate in the quarter of 28%. Along with that robust consolidated growth, we are particularly pleased to point out that we also achieved double-digit organic revenue growth.

As Steve mentioned, it will become more challenging in future periods to break apart organic and inorganic performance, as UniRush becomes more tightly woven into the Green Dot platform. Nonetheless, both organic and consolidated performances were well ahead of our forecast, revenue growth outperformance in the second quarter came from both our reporting segments.

First, let’s discuss the Account Services segment, which includes our card programs offered to our retail distribution arrangements, our owned and operated direct-to-consumer online and direct mail customer acquisition platforms and our relationships with our corporate customers for wage disbursement. The Account Services segment delivered consolidated revenues of $175.1 million, representing year-over-year growth of approximately 30%.

On a consolidated basis, active cards grew by 20% in the quarter to 5.15 million active cards. On an organic basis, actives were down only 1% year-over-year, which is the fifth consecutive quarter, where we’ve seen a flatter improving year-over-year active card comparison. This positive trend and strong Q2 results support our forecast and return to active organic card growth by next year, if not sooner.

Now, let’s discuss the Processing and Settlement segment. This segment includes our Tax Processing and Money Processing divisions. The Processing and Settlement segment delivered revenue of $55.1 million, representing year-over-year growth of approximately 22%.

The strong performance reflects a stronger tax season in Q2 that we anticipated, with revenue on our Tax Processing division up 20% year-over-year in the quarter, primarily due to higher transaction volume. Our Money Processing division outperformed expectations, with revenue up 22%, as a result of year-over-year growth and the total number of cash transfer. And year-over-year growth in revenue per cash transfer driven in part by growth in sales of our new MoneyPak.

The strong revenue performance across the enterprise being delivered on top of our increasingly efficient Green Dot banking and technology platform enabled us to generate profit far beyond our expectation. Adjusted EBITDA came in at $50 million, up 54% year-over-year.

Non-GAAP EPS came in at $0.55 per share, up 104% year-over-year. We achieved this outperformance primarily from a combination of our strong EBITDA performance and a year-over-year decline in depreciation, as we continue to scale revenue faster than costs. We also benefited from modestly higher interest income on cash investments held at our bank subsidiary and from a lower tax rate, driven by the release of reserves on tax credits.

As a testament to our bottom line profit generation, we are pleased to report that we have generated in the first-half of this year more non-GAAP earnings per share than we did for the entirety of 2016. We also continue to generate excellent cash flow with $48.8 million in net cash provided by operating activities during the quarter and $143.7 million year-to-date.

We exited Q2 with nearly $76 million of unencumbered cash on our balance sheet. You’ll notice that our GAAP numbers reflect a year-over-year increase in our compensation and benefits expense and a large year-over-year increase in the processing expense line item. The reason for the higher comp and benefits expense is, because that entry now includes a full quarter of the consolidated expenses from the UniRush acquisition.

The reason for the higher processing expense is that, because of the processor conversion challenges we had last year, we have been incurring incremental charges for processing services over and above what we would expect to be paying as a normalized rate.

The good news is that, we now have resolved this matter and starting in Q3, we are no longer incurring any material incremental processing expense above and beyond our normalized rate.

So now let me talk about guidance for the full-year 2017, a directional guidance for Q3. On the Q1 call, we provided revenue guidance for Q2 of $208 million. We significantly exceeded our guidance and delivered revenue of $222.5 million. So we over-performed our expectations in the quarter by $14.5 million.

We believe the business drivers of our strong momentum will be sustainable for the rest of the year. As such, we’re raising our annual revenue guidance to a new range of $855 million to $865 million, up from the previous range of $830 million to $845 million.

This increase range effectively raises the midpoint by $22.5 million, which is $8 million more than our Q2 outperformance and demonstrates our confidence in the second-half. This new range equates to year-over-year consolidated growth of nearly 20% at the midpoint.

Now, let’s discuss full-year revised EBITDA guidance. On the Q1 call, we provided adjusted EBITDA guidance for Q2 of $40 million. We actually delivered adjusted EBITDA of $50 million, which exceeded guidance by 25% and represented a margin of around 22.5%. So the 14.5 million revenue outperformance results in $10 of EBITDA outperformance and year-over-year margin expansion of 380 basis points.

Although, part of that overperformance was related to the timing of a few million dollars of marketing expenses that shifted out of Q2, and that we believe will fall into Q3. We continue to see strong momentum in our consolidated margins for the rest of the year.

Additionally, we plan to reinvest $6 million of our Q2 overperformance in the second-half to further support the build and design of our new initiatives and to ensure we’re properly staffed to handle the load of the increasing size and scale of our business.

As such, we’re raising our annual adjusted EBITDA guidance to a new range of $194 million to $196 million, up from the previous range of $187 million to $192 million. This increased range effectively raises the midpoint by $5.5 million, which when added to the incremental $6 million of reinvestments implies an adjusted EBITDA of full-year raise, that’s $1.5 million more than our Q2 outperformance.

The new midpoint of $195 million represents year-over-year consolidated growth of approximately 25%. That revised adjusted EBITDA range translates to a raise non-GAAP EPS guidance of $1.99 at the low-end and $2.03 at the high-end, up from the previous EPS range of a $1.89 to a $1.94. At the midpoint, this new EPS range equates to year-over-year growth of approximately 38%.

Now, let’s talk about our expectations for Q3. For revenue, we expect Q3 to deliver approximately $187 million to $189 million. Inclusive of the incremental investments we’re making in the quarter, plus as we mentioned earlier, the timing of a few million dollars of marketing spend that shifted out of Q2 and is expected to come in Q3.

We expect adjusted EBITDA to be in a range of $28 million to $30 million, delivering non-GAAP EPS of approximately $0.25 at the midpoint. We feel very good about our Q2 and first-half results, are pleased with the acceleration in our business and feel confident in the investments we are making for the future.

And with that, I would like to ask the operator to open the phone for questions. Operator?

Question-and-Answer Session

Operator

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

Damian Wille

Hi, good afternoon, great quarter. This is Damian Wille on for Ramsey. So I just wanted to ask on the guidance here. It looks like your Q3 guidance is implying quite a bit of ramp in the fourth quarter. Are you able to give us a little bit of color on what gives you that confidence in the acceleration in Q4?

Steven Streit

Mark?

Mark Shifke

Sure. we think in our – the momentum we’ve been building all the way through the first-half will continue into the second-half. We’re seeing great lift from GDV and from that purchased volume fees, great unit economics. So we feel highly confident about our ability to roll into the second-half at the same pace.

Damian Wille

Okay, great. That’s helpful. And as my follow-up on – you’d asked on the – you had announced the acquisition of the secured credit card portfolio, and so that it could be a contributor to revenue and net income as it ramps up. So are you able to give us kind of a general sense of timing on that? And then is that something that’s into your 2017 guidance, or is this maybe something that we should think about in 2018? Thanks.

Steven Streit

Our pleasure, Damian. So nothing this year, we expect to close in about 30 or 45 days, give-or-take on it. And it’s a smallest bolt-on, let’s call it, 25,000 or so active credit card accounts. But our own organically grown secured card portfolio, which was zero, something we started fresh, but forget it was last year or earlier this year has grown very, very nicely and it’s a product that our customer base really has latched on to, it’s a logical line extension for customers, deepens the relationship of our deposit account holders.

So nothing goes here. But we expect that when we marry our nice acquisition scale of our secured credit cards with this acquired portfolio, it helps us get to bigger margins more quickly. And we would expect that as years go by 2018, 2018 and there out, it’s a really nice add and could become a sizable division. So the acquisition was extraordinarily inexpensive, and at the same time, the value of it we think over time will be very, very strong for us.

Damian Wille

Okay. Got it. Thank you very much. Great quarter.

Steven Streit

You bet. Thank you very much.

Operator

Our next question comes from Steven Kwok of KBW. Please go ahead.

Steven Kwok

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

Steven Streit

Thank you.

Steven Kwok

I just was wondering on the active cards that obviously increased quite significantly year-over-year. As we think about the back-half of the year, how should we think about the trajectory of active cards?

Steven Streit

Well, I mean, if you want to answer it. Well, so we should see good things about it. We have forecasted, oh gosh, going back last year at the JPMorgan conference that we expected active cards to return to growth in early 2018 and flattening maybe a quarter or so before that.

So the fact that we’re essentially flattened out now a negative 1% organically, we’re head, of course, on a consolidated basis, because we purchased UniRush. But on an organic basis, we’re roughly flat down 1%, which has been sequentially improving quarter-over-quarter now for the last four or five quarter.

So it looks pretty good. And we now feel pretty good that we’ll return to active card growth sooner, but certainly on schedule at the worst case. So I would think of second-half as more continuing an improvement or organic active cards. And of course, as you all know, our revenue per active has been doing very well also. So it’s looking good. We’re ahead of plan on that metric.

Steven Kwok

Got it. And then just around the investment spend you mentioned that fell from the second quarter into the third quarter. Can you just quantify how much it was? And excluding that, what would have been the EBITDA this quarter?

Mark Shifke

Well, I think, what we indicated was, we had some marketing customer acquisition costs that we initially had earmarked for Q2 and it’s spilling over into the next half.

Steven Streit

Yes, not material it’s $2 million.

Mark Shifke

$2 million, yes.

Steven Streit

It wouldn’t – I don’t think it would change any model or any pieces but $2 million that would have been in Q2 that went into Q3.

Steven Kwok

Yes, I’m just looking at the year-over-year improvement in the EBITDA margin. It was up about like 700 basis points this quarter, but then next quarter’s guidance using the midpoint is a around flat. So I’m just wondering like the progression between the two quarters, given this movement?

Mark Shifke

Oh, what he’s talking about the investment versus – he’s talking about consolidated growth versus organic, so that’s where the confusion is.

Steven Streit

Yes, we’re not – I’d like to be up 700 basis points. I don’t think we’re that high. But on a consolidated basis, we might be. So we can maybe after the call, we can take you through the roll up of the numbers. But margins in the second-half are expanded by about 160 basis points over…

Mark Shifke

We’re about 180 basis points for the first-half of the year about 160%, yes.

Steven Streit

Yes. So and – so, yes, so that’s what it is for a second, and then we have that $6 million of investments in second-half.

Mark Shifke

Right.

Steven Streit

And last year, in the second-half, from memory, I want to say, we did about 15.5%, 15.4% in margins. This year, we’re at about the same, but that includes that $6 million of incremental investments and a few million dollars of marketing that fell in the second-half. So it’s – if you took that out, back that out would be an expansion of about 160 basis points.

Steven Kwok

Right. Got it. Great, thanks for taking my questions.

Steven Streit

Sure, you bet.

Operator

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

Steven Streit

Hi, Ashwin.

Andrew Schmidt

Hi, Steve, hi, Mark, this is Andrew Schmidt on for Ashwin.

Steven Streit

Hi, Andrew, how are you?

Andrew Schmidt

Good. Thanks. Nice quarter and thanks for the commentary on organic growth. If you could just dig a little bit more into the organic – the 12% organic growth in the quarter, some of that came from incremental tax processing revenue. But if you don’t mind just give us a little more of a breakdown in terms of just what the other contributors were between maybe – in maybe classified by your six product segments or something like that, I was wondering to get a little bit more color on the drivers here?

Steven Streit

Well, so you’re right about tax, it was a good tax quarter for us, and that’s been a nice driver of growth, both by the way not just with TPG, which is in his own division. But remember, tax is also just folks getting their tax refund that they choose to put on one of our deposit products. So we went on both sides there.

Our revenue per active continues to go up. The new products have been a hit, we rolled them out, and oh, gosh, call it, between February and May of 2016, depending on which brand and what retailer, and they’ve done very well. People use them in a more committed fashion, they enroll direct deposit in the higher numbers, as you’ve heard. And so another reason for the growth would have been revenue per active card.

Our Money Processing division has done extremely well also. MoneyPak has been a nice ad. Our swipe reloads have done well, more begets more. And you’ve heard us say on the prepared remarks section of today’s call that we have this products and platform structure, where we have our own products that continue to have a network effect, because the more deposit products you sell, the more reloads you sell, the more reloads you sell, the more GDV you have, GDV you have, the more interchange, more we spend the card, the more you reload the card. And so what you’re seeing is that network effect tick up, as actives increase in size and scale.

So it’s gone very well. And so if you have a classified, we have six divisions. They all did well, all of them were ahead of plan. A Green Dot Direct consumer accounts, money processing and tax would be the big winners who am I defending.

PayCard and disbursement did very well, smaller base. But that division has grown very, very well for us. Chris Ruppel does a great job with that. And our bank continue to generate more money on the EPS side in interest income. So all the way around a very strong quarter for us.

Andrew Schmidt

Got it. That’s helpful. And then actually, you commented on products versus platforms, and you sort of mentioned that in release as well. At this point and I know you guys are still at sort of investment mode in a lot of these payments platforms. But over time, I mean, how should we think about the mix of products versus platforms going forward? And then just – and then implications for just longer-term revenue growth and margin profile, and just trying to get some color just how to think about the implications of our just platform revenues versus traditional prepaid card revenues?

Mark Shifke

It’s a great question, and it’s hard to say with precision. But in the prepared remarks, we alluded to this opportunity for compounding EPS growth. And the reason we’re saying that is, you have our own products, which are doing quite well and continuing to spin the wheel of synergy and revenue on top of a lower cost base. But then you have all the platform programs that we’ve rolled out that we talked about on the call, and none of these are small partnerships.

They’re all fairly meaningful or most are fairly meaningful, and the one still the launch are potentially meaningful. And so the platform side could end up becoming a larger side of our business, it’s hard to know. But they all power the business, because as you build up the scale of your platform to support larger partners on that side of the business, you’re increasing your functionality and you’re scaling your capability on the product side.

As we invent new things for the products side, you’re inventing new things to resell on the platform side, and it all creates a wonderful synergy. So when we look at a company like this a secured card acquisition, we mentioned, or UniRush, which we purchased a few quarters ago, when was that?

Steven Streit

Last quarter.

Mark Shifke

Last quarter, time flies fast in Green Dot. You’re plugging that acquisition or that new program or the new product in to an ever-increasing base of a platform that has all these features and functions. So you’re able to be more profitable from the get go and all continues to feed on margin expansion.

It doesn’t mean to say, we want to invest money here and there and do things we need to do to grow and keep our sustainability intact, and all the things you need to do when you’re growing the company. But they work very, very well together, and you’re seeing that play out with our EPS expansion primarily and EBITDA.

Andrew Schmidt

Great. Thank you.

Steven Streit

Sure.

Operator

Our next question comes from Andrew Jeffrey of SunTrust. Please go ahead.

Andrew Jeffrey

Hey, good afternoon, guys.

Steven Streit

Hi, Andrew.

Andrew Jeffrey

So, Steve, I’ve heard you talk over the years about the way you think about the size of the GPR market, and I realized, as you mentioned, you have this new platform initiatives as well. I wonder if you can frame up, though, maybe even a little bit beyond the notion of on the bank or own a bank household, just when you think Green Dot’s TAM is and how much you think is actually addressable by the company as you return to growth? I’m just trying to think about for how long you can grow? How penetrated you think you are kind of across products? If there’s a way to frame that, I think you could do that?

Steven Streit

So, Andrew, I remember you visited here or maybe eight, nine months ago at this point, and we had a nice discussion. And at that time and, as you’ve all heard on previous conference calls, we thought our prepaid division would be a low single-digit growth. And that’s what it’s been in the macro short of initiatives or tactics.

In other words, if you win a new client and roll it out, you’re going to grow. But in terms of a steady state year-over-year same-store growth kind of a thing, we thought that the industry was flattening out and it is, but Green Dot’s not, and that’s been a nice surprise.

I’d like to say that, we saw that coming two years ago, but we didn’t. And what’s happened is a couple of things. One is a macro benefit, which we cannot take credit for, but we’re glad, we have it, and one is a product benefit, which we can take credit for. And that is – our products were designed for low income Americans primarily back in the day 16, 17 years ago to be acquired at locations that low and moderate income people would acquire bank accounts at.

We knew they weren’t going into the bank branches, but retail stores, drug stores, mass retail that kind of thing, online came later. But now, as you look back, that’s very hip now. For those of you who have at this point in my 50s and my kids are in their 20s and 30s, but everybody now uses DoorDash and what else, all the insta-cards and all these delivery services.

And now instead of going out in a day to a nice restaurant, everybody orders in and they want their food brought to him. And it’s funny, because in my day, we call that a cheap date, now that’s become a fashionable thing for millennials. And our product in the same way has fallen into this suddenly fashionable trend for millennials, why? Because it’s an on the fly checking account if you’re opening up your Uber driver account, or you need a bank account quickly, because you’ve got a job, or you’re moving, or you’re going to school, or whatever the case may be, and there is Green Dot anywhere you go on the app store and online and in every retailer.

And so now you say why would I go wait in the bank lobby and have a cup of coffee and wait for somebody to open my account. When I can get a bank account anywhere? And so we’ve sort of by happenstance and also some very careful planning four, five years ago when we came up with this mindset that we would come hell or high water be a technology and a mobile technology leader, which at the time was not at all highly regarded that philosophy was not particularly well applauded, but it’s worked out very well, and now suddenly we find ourselves where the customers are.

And so what we designed for certain population many years ago has now fallen into a very obvious population for millennialis who think about cards being – bank account being delivered into their house through their online division, or getting a bank account five minutes before you need it at the local writings or Walmart, or whatever the case may be.

So it’s really worked out well. And in fact, part of the reason you’re seeing so much more revenue per card is that people using our products look more and more mainstream and mass appeal, it’s direct deposit and employment wages and larger cash reloads.

And so part of that is, yes. The products are better. They have more functionality all the things we did last year when we rolled out our new products. Part of it is the macro of younger people who are acquiring a bank account, think mobile first, they think app stores first, they think retail first, whereas when I was younger at that age, I thought of bank branch first and that’s just not what’s happening today as much. And so we’ve really benefited from both the macro and the better products.

Andrew Jeffrey

Okay. That’s really helpful, and obviously difficult to quantify, but potentially pretty powerful. And then just looking at that active card number, again, it would appear that perhaps you added maybe a couple hundred thousand UniRush cards in the quarter? And I’m just wondering if that’s the right figure and kind of what’s driving that? and should we think about UniRush as being, as you lap the anniversary deal and so forth, as being part of that return to organic card growth, for example, as we get into the back-half of 2018?

Steven Streit

Well, so that negative 1% number was organic, and on a consolidated basis we’re up 20% in active. And so UniRush was that difference of the 21%. We’re saying the organic alone will return to active. It’s coming up certainly by 2018, which was our goal, it may be a little sooner than that, as Mark pointed out. And UniRush, for the full-year, we announced, we bought the company was about 700,000 or so cards. I can go back and look, so that can help you do the math a little bit, we’re 5.15 actives in total for the quarter.

So it’s going well, we were 4.2, 4.3 something whatever it was in organic. And from Green Dot’s relative history, that’s a good number. We’re getting back to where we were in our height. The difference is, now the customers are not casual one and done customers by and large although, we still have a lot of those. The customers now are people looking to get a checking account and they use it as such, and that’s been the big sea change in revenue per active and the margin expansion.

Andrew Jeffrey

Okay. Thanks.

Operator

Our next question comes from Jeff Cantwell of Guggenheim Securities. Please go ahead.

Steven Streit

Hi, Jeff.

Jeff Cantwell

Hi, good afternoon. Hi, thanks for taking my question. In terms of revenue per active card, can you just expand a little bit on how you’re thinking about that trajectory going forward, as we work through updated guidance framework? And then can you just walk us through where that metric currently stands relative to your own internal models for revenue per active card growth? Thanks.

Steven Streit

Sure. We can’t give you the detail on the models for revenue per active except to say that they’re up. And our overall revenue exceeded expectation, so that may give you some sense of how that’s going. And then Mark, do you want to take the one about our view of how that can grow over time?

Mark Shifke

Yes. So, again, if you’re thinking about the revenue per active and there are a couple of things at play. First, we’re looking at a return to active card growth by next year, if not, later this year. At the same time, you’re looking at very, very high increases in our GDV on a year-over-year basis. So this year, for example, we’re up 43%. And with that you’re seeing a lot of purchase volume and flowing through the interchange and our fees.

In terms of the remainder of the year and on a longer-term basis, what we’re seeing is an opportunity for revenue per active to continue to increase as we continue to sell more of our new products as a percentage of overall, and also as our mix of product shifts more to our direct deposit customers. So on a longer-term basis, we still see plenty of upside in our revenue per active.

Steven Streit

Yes, that’s right. And as some perspective in it, we thought, and you all thought in your models too and it’s a fair assumption that once we lapped the new cards and they made up the majority of the database in the portfolio, which by the way, that still didn’t happen. We still have sometime to go, quite a bit of time to go before we’ve – are all new cards, but they’re all contributing good results.

But we thought that once we lap, the growth would begin to hit a wall, if you will, or begin to flatten out a little bit, because the fees would now be even on all of the cards, and you wouldn’t have the difference of the higher fees on the newer cards replacing the older cards with the lower fees that hasn’t happened.

The reason we’ve had more growth is, because yes, the fee story has been good and maybe the fee portion begins to flatten out as you have all new cards. What we didn’t bet on, although, I’m really glad it’s happened is that the quality of the customer is better. And so there’s more ATM use, and more deposits, and more spend, which means more interchange. And all those goodies that come from people liking the products more and using them as their checking account, as you do yours, and that’s why the growth continues to propel. And we don’t see any reason why that would stop anytime soon.

So we don’t want to overforecast or overhype, we’re always being thoughtful and conservative and cautious with not only our guidance, but with the way we think about all aspects of the business. But that’s in fact, what’s been happening.

Jeff Cantwell

Great. I appreciate that. And then just broadly speaking, I was hoping to get your updated thoughts around M&A, given all the activity thus far in the year?

Steven Streit

Well, we like M&A. You have different ways you can deploy capital, and the goal is to find ways that are most accretive, both for the point in time and longer-term. This year, you’re right, it was unusually active. We did a $50 million share repurchase through an ASR back in March, I guess, it was. And then we bought UniRush, which was not inexpensive for us, it was a good sized transaction.

And now we’ve purchased this little secured card portfolio, but it’s a great portfolio. And the team, by the way we’re inheriting, because those new prospective employees are listening you guys, we haven’t closed yet. We don’t mean little in an insulting way, we mean little relative to scale the company, and we’re very excited about that acquisition. I know it’s going to do well for us. And so we’ve been very, very active this year.

As you look at share purchases versus acquisitions, we look at all of those things and say, how much cash do we have? How much cash do we want to have? And how much can we digest at any one time? And so, we have all these tools in the tool kit. So we like M&A. We like share purchases. The key is not to do too much too quickly, make sure we can digest what we have, and make sure that we have the infrastructure to support it. But I think that, as you look forward to 2018, you can see more acquisitions in our future and more share buybacks in our future is just a question of when and in what sequence and size?

Jeff Cantwell

Great. Thanks very much.

Steven Streit

Yes.

Operator

Our next question comes from Ashish Sabadra of Deutsche Bank. Please go ahead.

Ashish Sabadra

Solid quarter. Congrats and solid results.

Steven Streit

Thank you.

Ashish Sabadra

So my question was on cash transaction. We saw that inflect as well in the quarter going from negative to positive. You talked about MoneyPak being rolled out at 50,000 locations. Just can you give us more color on how that – what kind of traction are you seeing on the cash transfer and money – new MoneyPak products that have been rolled out? And how should we think about this cash transfer transaction growth going forward?

Steven Streit

It’s been a real nice upside to the business is the short answer. Reloads – swipe reloads more money on accounts follows again, the account business and the quality of the customer. We talk about direct deposit, because it’s most easily correlated with customer quality and portfolio quality, and stickiness, and retention.

But our customers who reload cash onto their cards are still very important, because remember, we are unique in that, we own our own reload network. So we get the reload fee and the revenue that’s generated from the card account, and our cash transfers per cash reloading customer has been up as well.

So that’s been a good story. MoneyPak has gone very well, gone off to a slow start, but only for really a month or so, and then began to pick up steam with strong quarter-over-quarter growth. And not only our older MoneyPak customers rediscovering the product, but a lot of our growth has actually been from people who never heard of the product before and are using it again in this newer way, because to use MoneyPak today, you have to be an online or a mobile customer, because you have to validate certain information that we didn’t used to do in the old days.

So it’s gone very well and these things together have come together to produce not only more revenue per reload, or more revenue per money transaction, what do we call, money processing transaction, but the overall volume of those transactions are increasing as well. So it’s been a very nice mix and very nice outcome. And we would expect that as we get more active cards, that again, the wheel of synergy spins and we would expect to be better on that side as well.

Ashish Sabadra

Thanks for the color Steven. Maybe just a quick follow-up on the third quarter guidance. This is particularly on the revenue side, what’s the assumption for organic revenue growth in the third quarter. And the reason for asking that question is, because the guidance implies the year-over-year growth slowing down from 28% in the second quarter to 22% in the third quarter. Is that purely because of the tax season and which give a boost in the second quarter or is that also certain assumption changes around your organic growth?

Steven Streit

No, the organic business is going quite well as for that matter is the acquired business. But you do have the advantage of several million dollars of revenue in Q2 from taxes, not just from TPG, which had a fabulous Q2 and I want to congratulate Brian Schmidt who leads that division for us, and the entire TPG team in San Diego.

But on top of that you have the growth from people who are getting tax refunds, who got them later in the year in April and that generated more GDV and more interchange. So we benefited in Q2 from the tax business in a more – in a larger way that we would have historically. And so what you’re seeing is the raw legacy business in Q3 of reloads and prepaid cards. Whereas in Q2 we had reloads, prepaid cards and a good-size tax overlay as well.

Mark Shifke

Yes and I think that’s exactly right and then just adding to that. We are raising our guidance for the full-year in excess of our outperformance in Q2. So our confidence in the back-half of the year is much stronger than it was before and we’re expecting it to do a very good job.

Steven Streit

Good point.

Ashish Sabadra

Thanks.

Mark Shifke

Yes, you bet.

Operator

Our next question comes from Joseph Vafi of Loop Capital. Please go ahead.

Joseph Vafi

Hey, good afternoon, great results. Joe Vafi here and thanks for taking my questions. I was wondering if you could first start at high level on the guidance methodology itself. Seeing some really good outperformance relative to guidance for the last couple quarters, has there – maybe you could provide where you think some of the upside really came from, and if you’re continuing with what may seem like a potentially conservative guidance methodology for the second-half of the year? And then I have a follow-up.

Steven Streit

Well, we would never be conservative, only prudent, thoughtful and cautious. Mark – the guidance methodology is we track the business and we guide in a way that we think all kidding aside, respects the business and the pace of the business and how the business is going. But the fact that things can go wrong, and you never know and they’re young products and we’re integrating UniRush on the bottom line and we want to be careful about that and not overstress the teams. So all of those things go into guidance.

In terms of where the growth is coming from over the course of the year all six divisions. If you think about where the growth is coming from in second-half, it’s more pure our legacy business, it’s cards and reloads and Go Bank accounts and UniRush that would be a revenue drivers in the second half.

Mark Shifke

Yes. Look, again you think about what we do relative to a consumer product, consumer product how many get bought and that sort of it, that’s the relationship here. A lot of what we have to do is understand consumer behavior after they buy the product. How they use the product and the continuing relationship we have with them.

So in terms of our core products we’ve introduced them in the course of last year, we’ve had about a year of experience with them. We think we’re doing a fairly good job in understanding consumer behavior with them. In Q2 we had a fabulous result across all of our divisions where engagement was fantastic. And we expect that to continue and we think we’re gauging a good sense of where we should be in the back-half of the year.

Joseph Vafi

Okay, that’s helpful. And then if we look at the business and it’s – obviously you’re not talking about 2018, but the setup is looking pretty good with GDV up even with card counts not up or not growing organically yet, and fees on the new cards being good and the like. Just wondering if you could talk about leverage in the business next year across some of the cost items if revenue continues to increase, theoretically at least, do you see leverage across all of those – or across your line items? Or do you think that 2018 is a bigger investment year relative to where the top line may go?

Steven Streit

Yes, maybe if you’re thinking longer term 2018 and beyond it’s a little bit of both and that is as you think of our legacy business lines cards reloads, Go Bank, TPG with taxes money processing so forth. That clearly is the story of more revenue on top of the lower cost infrastructure. But as you know from hearing the script and reading the press releases, we have some fairly sizable programs, potentially sizable certainly rolling out, some we’ve announced that, but others that we’ve not yet announced, that we hope to before the end of the year.

So we have to build the infrastructure for that, so you’re always investing. What we do is and so far we’ve been successful, but it’s not automatic, we have to work on it, and we have to manage it closely is if we’re going to spend a dollar, we have to cut a dollar, it drives people crazy. Those are the meetings that nobody loves to come to, but you have to say listen, if we need to invest X million dollars to support this new infrastructure, or to build out risk in compliance, or to build automation for this or that or the other thing. That’s all fine, we all recognize that we need to do it, because you have to run a company with the right resources to run it sustainably.

But that means that we need to look at our other expenses and say. But if you’re going to do that, you really need this. And what can we do on this process and expense for that ATM network or this or that. And we’re quite detailed with it where we literally go a line item by line item and we’re no longer a small company, and every division leader steps up to the plate and gives a little blood. But the outcome is that you can continue to perform and invest appropriately without blowing your margins. And it’s a process and we do our best to manage it, and we would have to do that again next year and we certainly would plan to do that.

Joseph Vafi

Thanks for the color. Congrats again.

Steven Streit

Thank you.

Mark Shifke

Thanks Joe.

Operator

Our next question comes from Vasu Govil of Morgan Stanley. Please go ahead.

Vasu Govil

Hi, thanks for taking my question and congratulations on a great quarter here.

Steven Streit

Thank you.

Mark Shifke

Thank you.

Vasu Govil

Just on – quickly, first question on just the $6 million investment in the back-half. Could you just elaborate on what those investments are? Are they specific programs that you’ve been talking about, the infrastructure build out or is it more sales and marketing type expense?

Steven Streit

Not sales and marketing, there may – we’re always having talent upgrades and that kind of thing in sales and marketing and doing different initiatives, but that’s fairly flat over time. The two areas we called out in the prepared remarks and I can share a little more detail is, what I call people and things, I guess is the best way to say, people meaning as the company begins to scale and we have more products, it may have surprised our investors to learn in the prepared remarks, we have over 30 products in the company, both acquired – companies we purchased, and ones that we’ve rolled out organically that have worked really well luckily. And you have to manage all those products.

And as they grow, you have to develop new IT to manage them. We’re regulated bank and regulated or not, we have to run our business on top of that to make sure that it’s compliant and safe and stable which means you need more financial controls. You need to even invest in risk and compliance and more automated AML tools and all the things you do to make sure that you’re running your company.

So obvious things take money, so the way we think about the investment is, number one, people more senior talent and we’ve been hiring some more SVP at that level, because that’s where the load of the organization sits, it’s oftentimes at the SVP level, making sure we have more senior executives in our financial division, we have Mark and his team, they keep track of all of it. More automation and different projects along those lines, more technology and making sure that we have the right technology leadership to run all the technology divisions that increasingly rule our world. So all those are investments in people.

And then you have investments in services or things. And what I mean by that is connections and processors and all the things that light to execute your business every day, websites and things that you’re not going to invest on forever, you’re going to invest to roll something out enable it and then after that you’d probably have a fixed expense or a variable cost of transactions after that. So those are the two big buckets, our people and things, our people and services and they’re both about equal, I guess.

The people expenses would hang on as part of your new SG&A base, the one-time cost for contractors or others to come in and enable something would not. And then as I mentioned to the previous caller, Joe, is you have to then right size your expenses in other areas to make room for the new expenses and life goes on. And if we are successful, we’ll continue to expand margins, but that’s the trick.

Mark Shifke

Yes and just to follow-on the same theme, I mean these investments are all tied to new revenue streams that forthcoming and that were – have line of sight too in 2018, right.

Vasu Govil

That’s great, that’s very helpful color. And then just quick – just two quick other things, on the mix of legacy versus new products in the active card portfolio, can you update us on that, I think last quarter it was roughly half, I think you said – has that number moved?

Steven Streit

We have – yes, it moves every quarter as you can imagine, so I’m going to say the majority, but I don’t know if it’s public or non-public number. I guess I don’t want to have the metric track every quarter, so I think better of it. But more than half of our cards are now the new cards, but as I mentioned earlier, here is the new – the cool thing about it, the old legacy customers who have had the products for years on the old P plans let’s call it, they deliver a lot of revenue, because these are your best customers, right, they have been us for years, so they are heavy direct deposit users and they use our sensitive core bank account.

The new customers, when you track the vintages are doing even better, because not only are they paying higher fees for more services, but they are using those more services, they are riding tax to pay their rent and they are depositing checks using their cellphone camera and they are doing more things with person-to-person payments and they’re using the cashback rewards if they have our 5% cashback Visa product or the new Walmart Money Card and so forth and so on. So, they were replacing the old customers who are our best customers, anyhow they were fabulous and are fabulous customer.

With new cards they not only have the better fees, but are also using the cards more heavily and generating more natural usage revenue and that’s why you are seeing this continuing increased revenue per cardholder. And I think we have a lot of upside there, it’s hard to forecast with precision and we don’t want to get ahead of ourselves, but that’s been a very nice upside to revenue and then that flows down the margin at very high incremental margins because it’s the incremental cost against it, so that extra interchange and ATM usage revenue and that kind of fee revenue is all incremental and does very well for us on the bottom-line.

Vasu Govil

Great and if I can squeeze in a last one, I apologize if you already gave this metric on the call, but what was the direct deposit penetration within the active card base? And then more broadly, you’ve always talked about how direct deposit customers generate more revenue for cards than those who don’t, is there a way to get more granular about – you know sort of put any dimensions around those and do direct deposit customers make twice the revenue that of course those that are not direct deposit or is it less than that or more than that?

Steven Streit

Yes, so we don’t give the exact penetration of all of our portfolios, it may differ by portfolios. But we did say, it was up 83% year-over-year on a consolidated basis, a lot of that was because of UniRush, as you can imagine, but our organic numbers were up double digits as well and very, very strong. We did say that 75% of all dollars deposited to the bank or to our accounts were from direct deposit, which has got to be a new record for the quarter.

And what else – and then the revenue for direct deposit customer, I’m sure at Investor Day at some point we’ve give that metric, but it is many times more than a cash reloading customer. Although the cash loading customers are getting better still, the retention was still I think significantly make the direct deposit customer still far higher in value over their lifetime.

Vasu Govil

Great, thank you very much.

Steven Streit

Thank you.

Mark Shifke

Thank you.

Operator

Our next question comes from John Williams of Compass Point. Please go ahead.

John Williams

Hi there, good evening guys, thanks for taking my question. Two quick things and they are really central to I think the Bank angle of your thesis here. The first one is I noticed just on net interest income, you slightly ticked up the guide there. I was wondering if you could just talk a little bit about the opportunity there for upside? It seems to be a place where you’ll be able to see some additional leverage, not just from a higher rates, not from freeing up cash, but I’m thinking more of deposits flooding under the Apple relationship?

Steven Streit

Right, so net interest margin has or income has risen up the Bank because of the increases in rates from the Fed and the instruments we use in short-term liquidity investments. Most of our investments are short-term, we have some that are longer-term, but most are short-term because we have to service the account base, which is highly liquid and taking money out and putting money in everyday. But that’s been nice upside, to the extent the Fed increases rates, that will be more upside, to the extent we invest in other instruments as more of our deposits are stable core deposit and we have that opportunity, that could be upside.

And to your point, to the extent we have more deposits in the Bank from increasing GBB that are investable that will help too. It’s a really nice gravy if you will on the mashed potatoes, I don’t think in and of itself is the mashed potatoes, but it is certainly some sense worth of EPS in the quarter and that’s been getting better and is a nice upside.

John Williams

Thanks Steve. One other question just on this credit portfolio, number one, did you name the company acquired, I didn’t think you did, but if you could that will be -- ?

Steven Streit

We didn’t, but we will when we close on it. So we didn’t name it and I forget why, but there was a whole bunch of emails as to could not name the name of the company because of A, B, C and D, so we didn’t do it. But…

Mark Shifke

It’s an asset purchase from a bank, so it is pretty simple.

Steven Streit

But it wasn’t anything secret of doing it, but we’ll announce it when we close on.

John Williams

Okay, fair enough. And then when you – at a high level, when you think about this credit business, I know some people might hear, they might get concerned, but it seems like given that it’s securities, it should be reasonably decent in terms of the credit quality, but what kind of loss rates do you typically see in this, both this group of customers and in the fact that it’s secured, does it look more like the unsecured stuff or is it significantly better?

Steven Streit

So, luckily unless we do something wrong, no losses because the deposits are fully securitized by the customers, I’m sorry the credit lines are fully securitized by the customers’ own deposits. So the way secured credit works by the implication of the name is, if I want a $500 credit line on this credit card, I’m going to first deposit $500 in Green Dot Bank and then the credit contract says that the customer, if you don’t pay us back and default, we are going to seize your deposit and pay ourselves back first before refunding any of that money. And so there is not risk to the Bank’s balance sheet and there wouldn’t be a credit write-off in the quarter or that kind of thing from that product. So, I’m glad you asked the question, I hate for anyone to be confused about that and think we’re growing a large unsecured credit card portfolio, that’s not the case at all.

That’s what we like about secured credit cards, because it’s such a helpful product. If you’re a Green Dot account holder, especially from our legacy prepaid products, odds are you have a really better credit rating that’s the reality of it and you need help and you need help building that credit rating in a way that’s responsible, and in a way that is not predatory and in a way that fits your lifestyle and our secured cards are designed that way and if you use them and easily make your deposit at any of our Green Dot retailers and lay down your security deposit and use the card responsibly, not only we have a credit card that you can use to do anything or I would do with it, but as you make your payment back responsibly every month, you’re building that credit file.

Now, your credit rating may not get better if you’re defaulting on the house at the same time, which is something that you have to behave with your credit all over the place, but it’s a wonderful opportunity for that customer looking to get back on the path to better credit to inexpensively and safely rebuild their credit file. So, it’s a great service to the customer, it’s inexpensive relative to anything else that can do that for him, and it matches their deposit account experience with Green Dot Bank.

So if you have a Green Dot Bank prepaid card or checking account or whatever you have, it’s a very logical tying and it deepens that relationship and deepens the contour of your lifetime of revenue and relationship with Green Dot as a company. So we like it, it’s low risk, it’s fairly easy to produce, it’s not a new product certainly. It’s been a product that’s been out there for 30 or 40 years; but for our customer base it really makes a lot of sense whereas for other banks it may not, but we like it and we think it’s a really good product for us long-term.

John Williams

Thank you, Steve, I appreciate it.

Steven Streit

Thank you.

Operator

Our next question comes from Bob Napoli of William Blair. Please go ahead.

Bob Napoli

Thank you and nice job again on the quarter, really – really impressive performance. Just on the MoneyPak. What is the run rate currently on the revenue from MoneyPak? I think you said you would replace the $50 million to $60 million of revenue that you had lost?

Steven Streit

We never said that Bob. You are the Peter Columbo – I know the when you say Columbo, you are the Columbo of analysts. Steve, about that $60 million, in fact we specifically said we did not expect it to be as big as the original; but it has been a very nice add and is getting bigger by the quarter. And you know it’s a high-margin product and one that certainly we know how to do and spin very safe without any of the fraud or mischief we’ve had in the first version, so it’s been a very nice comeback. But we haven’t announced a run rate revenue for it.

We do announce a runrate or rather not a runrate, but a revenue for the money; the settlement processing in settlement segment, which includes only two visions, money processing which houses MoneyPak and our tax division. To the extent there is really solely some but not tons of taxes in Q2 and very little of any taxes in Q3 and Q4, next quarter you’ll be able to dissect and slice and dice and get a better picture of it; but we don’t breakout that product specifically.

Bob Napoli

Okay, thanks. And then any update on the CFO search and what you’re going to do with that, with Mark going back?

Steven Streit

Yes. Well, we’ve made – look actually I’ll use this as a recruiting pitch. Mark, tell you wife I’m working at it, and we’ll try to get you out of here. So we’ve had a hell of a tough time to be honest with you recruiting and I’ll tell you why? We have very high standards despite having Mark. No, we have very high – thank you. So I’ll be playing in the conference call room all day. We have high standards, because Green Dot is not a simple business. We have a lot of divisions, we’re highly regulated, not just public, but as a bank holding company. And we take the regulatory aspects of what we do for a living incredibly seriously, it’s very, very important to us and it’s a complex business.

You have different products, you have different segments. All of our – not all, many of our partners on the platform side of our business are literally the biggest companies in the world who have expectations of us outsized from what our market cap would otherwise indicate and you need to have sophisticated people running the shop.

And we’ve had a lot of candidates that are from smaller companies who want to come to Green Dot who are very, very talented people and good executives. But we’re worried don’t have the band with or the experience to dive into something this big and complex. And then you have other folks, who we’ve gone after who are working at companies that are $10 billion and $15 billion in market cap and reviewGreen Dot as too small for them to want to leave their current job, despite what they may see as the upside in RCU value. And so it’s been a tough recruit. I don’t think I would have imagined it being this tough.

So part of it maybe is, we’re being too picky, although, I don’t think so. I think we’re being appropriately picky. But that’s the reality of it. Luckily, Mark’s desire to step out is a lifestyle decision as much as anything else. And I kid him on it, but I do appreciate the patience of Pat his wife and his family, because he lives in New York who were in Pasadena Los Angeles.

So it’s not an easy commute roughly the time it takes you to get from Connecticut to New York City I think in fact. And so we’re still looking and if you know of any great folks send him along or anyone listening to us send him a long, it’s a great company to work at. And we hope lots of upside, but we’ve not been successful yet.

Bob Napoli

And I apologize. I mean, the M&A talks around additional M&A from here in types of …

Steven Streit

Yes.

Bob Napoli

…businesses you would look to acquire and what is it is out there?

Steven Streit

So every division leader in the company has a mandate annually to grow their revenue by either organic initiatives or acquired growth and they can all suggest both organic. We all meet with and we build our plan and then it sits on top of the same expense platform, right? But – and we have those initiatives.

So we’ve acquired businesses, I guess, that Dave has been the most aggressive maybe because he used to be a CFO. But Dave Petrini in our direct division helped us run UniRush. He was the guy who found this credit card portfolio. But all of our division leaders have that opportunity and we’re always working on something.

But look, we have to make sure they’re highly accretive. They have to pass the sniff test in terms of the kind of business, the risk we think it may bring to the company. We’re freaks about InfoSec, as you’d imagine, and the nature of the products they sell and all that.

But there are great companies out there, but they’re not always obvious and you have to look for them and we’ve had, oh, gosh, five, six, seven a year, we bought one or two this year. But I would expect, going forward, we’ll continue to look for companies to buy and we’ll continue to look for investments in our own stock to ASRs and do our best to choose the right vehicles to return the most accretion to investors.

Bob Napoli

Great. Thank you very much. I appreciate it.

Steven Streit

Thank you, Bob. We have time for one more and last we’ll get Josh in from Lake Street Capital, then we’ll call it a day.

Josh Elving

Hey, thanks for squeezing me in.

Steven Streit

Sure.

Josh Elving

So just a couple of clarifications. One, on the growth in GDV and purchase volume, I know you touched on it a few times. I just wanted to double-check. Is that primarily being driven by an increasing percentage of direct deposit?

Steven Streit

Yes.

Josh Elving

Because it appears the ramp kind of overlaps with Rush, and I just want to see if there’s any influence there, obviously, I guess, maybe referring more directly to GDV per average card is being up pretty significantly on a year-over-year basis as well?

Steven Streit

Right. Yes, direct deposit is a great step propellant of the business. But the way to think of it is just deposits GDV gross dollar value. Volume is important to driving the business forward, and we’re doing it on both sides to more direct deposit and more cash loads, and that generates more revenue.

So, yes, but it’s not wrong for you to think direct deposit, but all deposits are good deposits and we’ve been getting more about it.

Josh Elving

Okay. And then I was just wondering if you could kind of simplify or maybe identify what it is about the new products that is seemingly more appealing to consumers, especially given the higher fee structure?

Steven Streit

Well, a couple of things and I’m trying to think what I want to say publicly, because competitors listen as well and there’s some secret sauce stuff. I would say…

Josh Elving

[Multiple Speakers] and a couple other?

Steven Streit

Yes, yes. Well, a couple of things. Number one is the channels we sell to a good channel, meaning that, we attract customers who want to use them as real products. Our Internet sites are increasingly productive, because young people, young meaning, under 40, let’s say, go to the Internet first to find a bank account in my day, you didn’t when you were that age.

So – and we have a lot of websites that sell cards, a lot of branded websites, and so that’s been helpful. And the products are designed to be more mainstream. So things like writing checks and depositing checks and person to person payments and budgeting tools, if you have gold bank, or savings account, if you have the Walmart MoneyCard cash-back rewards.

These are things that aren’t really about low income anything, they’re just about people. And the products also have a technology angle they never had before, where they assume that the user conducts life off their mobile phone, and that also appeals to people who once they have it, it works like they would expect it to work.

So I think, we’ve got a lot of things right. There are things we’ve learned that we will do more right going forward. But it’s been a good product evolution force, and we’ve made some thoughtful improvements and will continue to try to do that.

Josh Elving

So I know you touched on it. Does that suggest then that, I guess, maybe some of the under – outperformance of your actives versus, at least, what we’re kind of considering is being driven by millennials versus just a general improvement of the kind of legacy business?

Steven Streit

I think that the millennials have been a really big push, because they’re more likely to be employed, they’re more likely to enroll in direct deposit, they’re more likely to trust an account that they buy off the shelf of a retail store, or get online or download it from an app store. There was sort of a taint for lack of a better word to our products back in the day that, well, who would use a bank account that he got at a Walgreens, that kind of thing?

You don’t – you just don’t hear that anymore, because increasingly people are likely – young people are more likely to trust the Internet, or a blog, or an app store than they may be likely to trust the bank down the corner. So it’s just a different mindset of consumer expectation, and we are, in fact, an on-demand bank for an on-demand world and you’re seeing some of that growth. Hard to know what that means long-term, but it certainly feels like it’s been a nice upswing to the model.

Josh Elving

Appreciate it. Thank you.

Steven Streit

Thank you. Well, thank you, everybody. I think we went probably about 20 minutes long today. But well worth it, and we’re happy to answer your questions, and we’ll see you soon. Thank you very much. Bye-bye.

Operator

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