Green Dot Corp (GDOT) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen, thank you for standing by. Welcome to the Green Dot Corporation Third Quarter 2010 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

I would now like to turn the conference over to Ms. [Dara Dirks], an associate from Green Dot Investor Relations. Please go ahead.

Thank you operator. Good afternoon. By now, everyone should have access to our third quarter 2010 press release. It can also be found at www.greendot.com under the investor relations section. During today's call, we will be reviewing a presentation, which is also available on our investor relations website in the financial information section.

Throughout this conference call, we will be presenting non-GAAP financial information including non-GAAP total operating revenues, adjusted EBITDA, non-GAAP net income and non-GAAP diluted earnings per share. This information is not calculated in accordance with GAAP and maybe calculated differently than other company's similarly titled non-GAAP information, quantitative reconciliations of our non-GAAP financial information to their most directly comparable GAAP financial information appears in today's press release and in the appendix of the presentation that accompanies this call.

Also, we are providing 2010 guidance on a non-GAAP basis with a reconciliation to GAAP which also appears in the appendix of the presentation. Finally, before we begin our formal remarks, I need to remind everyone the part of our discussion today will include forward looking statements. These include forward looking statements about our financial guidance and our proposed bank acquisition. They are not guarantees of future performance, and therefore you should not put undue reliance on them.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of those risks are mentioned in today's form 8-K filing with the Securities and Exchange Commission. Others are discussed in the final prospectus for our initial public offering, and our form 10-Q, all of which are available at sec.gov.

With that, I would like to turn the call over to Steve Streit, founder, chairman and CEO of Green Dot Corporation. Steve?

Thank you, [Dara] and welcome everyone for our Q3 earnings call. With me here at our Monrovia, California headquarters is my close partner and Green Dot's CFO, John Keatley. John and I truly enjoy spending time with our investors and others interested in our company, and we hope you'll find today's presentation helpful, educational, and maybe even enjoyable. In addition to discussing our Q3 results, we're going to try something new today that we hope you'll like.

After the formal discussion of our financial results, John and I will kick off a new feature called Green Dot in depth. Each earnings call, John and I will prepare a special in depth look at a particular area of investor interest about our company or maybe even about our industry. Today's in depth presentation will be called Exposing Retention.

But first let's get to our favorite part of the call, which is a recap of our company's performance. As you turn to slide number three on the deck, you'll see that Q3 '10 was another great quarter at Green Dot. Non-GAAP total operating revenues increased 44% and adjusted EBITDA grew 22% driven by strong performance in all of our key metrics.

We activated 1.5 million new cards, a 36% increase over last year. We sold 6.9 million money pack and POS swipe reload transactions, a 53% increase over last year. Active cards reached 3.3 million, a 50% increase over the same period last year, and gross dollar volume was $2.5 billion, a 69% increase year-over-year.

So, what's driving consumers to Green Dot? Well, there's a lot written about the growth of the prepaid industry. We think it's important for investors, analysts and media to understand some of the key differences between Green Dot and some of our competitors. Millions of Americans don't buy Green Dot products just because we're in the prepaid industry. In fact, if you look at growth that other prepaid companies, where information is available, you'll see that Green Dot's revenue growth rate is higher and more consistent than that of our peers.

Consumers buy Green Dot products because we solve an important need in their lives, and we solve that need in a simple, low cost and respectful way. A few weeks back, I was in a conversation with a leading consumer advocate and a comment was made that if all other companies in prepaid acted like Green Dot, there would be a lot less need for regulation.

And of course, I took that as a great compliment, but it also occurred to me that if you're not intimately familiar with all the issues surrounding the prepaid industry, it might be easy to lump all prepaid companies together for better or worse, or more to the point, to the casual observer, it might be easy to assume that all prepaid companies are the same as Green Dot.

While we are excited to be part of a fast growing and vibrant new financial services segment, I do want to point out that it is my belief that Green Dot's success is more about Green Dot than it is about an industry segment. At the heart of our success is that we are a mission driven company, and every department and in the hearts of every Green Dot employee, we wake up in the morning with a mission to provide low cost FDIC insured transactional accounts to Americans earning less than $75,000 a year.

Today, we fulfill that mission to the mass distribution of prepaid MasterCard and Visa debit cards that a customer can purchase and use at their convenience, much in the same way they can use any bank issued debit card account. But the way we think about risk, internal audit, governance, product design, consumer pricing and disclosure is a big part of what makes Green Dot, Green Dot.

When you think about our fee free plans, our large fee-free ATM network, free customer service, free online bill pay, and the fact that we have no overdraft or penalty fees of any kind ever, that's what makes Green Dot, Green Dot. When you think about the way we disclose all of our fees in large font on the outside of our packaging and the homepage of our website before you buy, or when you understand that Green Dot never has and never will offer abusive pay-day loans to our customers, or for that matter that we don't even allow our products to be sold in pay-day lending stores.

These character traits are all part of what makes Green Dot, Green Dot. And of course it's the Green Dot brand name itself that makes us unique in the prepaid industry. With 50,000 retail locations displaying our products, our annual national TV advertising campaigns, the millions of cardholders who carry the Green Dot brand in their wallets, or the millions more who reload their cards on the Green Dot network, the Green Dot brand matters.

A commitment to the customers expensive and time consuming, you just can't just decide the love of customer overnight. Corporate culture and character is a bountiful harvest resulting from years of killing and seeding. The positive brand attributes and positive customer approval scores that we enjoy today are the result of a long term commitment to advocacy on behalf of our customers, and that's what makes Green Dot, Green Dot.

A quick update on our bank acquisition to tell you, we are continuing along the path of acquiring Bonneville Bank of Utah. The application review process continues, and we are hopeful of receiving approval to close the transaction by end of this year. Having said that, we have no assurance of an approval and continue to work actively with our regulators to the review process.

We, by the way are highly appreciative of the hard work and dedication that our regulators have poured into their comprehensive review of our application, and I want to take this opportunity to thank them for their tremendous effort and the large number of hours they have invested in the application review process for Green Dot Bank.

I'll now hand the call over to John Keatley with more specific Q3 performance details. Then after John's comments, we will bring you our Green Dot in depth feature for today, followed by Q&A. John?

Thanks Steve. As Steve said, we're pleased with our third quarter results. The growth in our key operating metric shows that we are continuing to increase our penetration of a very large market opportunity. And the customers who already use our products are using them more. As you turn to slide four, you can see the trend in some of our key metrics.

As Steve mentioned, we had a 36% increase in new card activations from the prior year. We attribute the growth primarily to sales increases within the distribution channel that we have been in for more than a year. We did some modest advertising in Q3, that essentially all of this growth is organic. We have 3.3 million active cards as of September 30, a 50% increase year-over-year, largely attributable to our growth in new card activation.

We continue to see strong growth in the number of cash transfers on the Green Dot network, which were up 53% year-over-year. Our gross dollar volume growth of 69% continued to outpace our active card growth, which provides evidence of increased average usage of our cards. The improvement in these key business metrics drove year-over-year revenue growth in all categories.

As you turn to slide five, you see that card revenues totaled $40.6 million for the quarter, that's 32% from the comparable period in 2009. The increase was primarily the result of the year-over-year organic growth we just discussed. Cash transfer revenues totaled $26.5 million for the quarter, an increase of 53% from the comparable period in 2009, which was inline with cash transfer sales growth.

Interchanged revenues totaled $27 million for the quarter, an increase of 57% from the comparable period in 2009. The increase was primarily the result of two factors. The increase in the number of active cards in our portfolio and increase transactional volume per customer. Moving down the P&L, sales and marketing expenses totaled $30.3 million for the quarter or 32% of non-GAAP total operating revenues, compared to 26% in the comparable period of 2009.

The increase was primarily the result of higher sales commissions paid to Wal-Mart as a result of our May 2010 renewal agreement and a $1.4 million increase in advertising expenses as we increased our advertising in 2010.

Compensation and benefits expenses totaled $17.6 million for the quarter or $15.9 million if you exclude stock based compensation. This is approximately 17% of non-GAAP total operating revenues, which was down 18% for the same period last year. Processing expenses totaled $14.6 million for the quarter or 54% of inter-changed revenues, which was down from 58% of inter-changed revenues in the comparable period in 2009.

We typically compare our processing expenses as a ratio of interchanged revenue, because it tracks more closely to that line item than to other revenue categories. The improvement reflects the savings that we receive under our processing and bank issuing agreements as our volume increases. Other general and administrative expenses totaled $11 million for the quarter, or 12% of non-GAAP total operating revenues, which was flat year-over-year.

Our income tax expense decreased to $6.5 million for the quarter, compared to $7.5 million for the third quarter of 2009. Our effective tax rate stayed roughly flat at 42%. We typically measure our revenue growth in terms of non-GAAP total operating revenue, which is total operating revenues adjusted for the contra revenues stock based retailer incentive compensation.

As you turn to slide six, you can see that our non-GAAP total operating revenue grew to $94 million and increased to 44% year-over-year. Also, if you exclude our highly seasonal turbo tax refund disbursement product, we experience the high rate of growth sequentially in each quarter from Q1 through Q3. One of the key financial metrics that we use to measure our business is adjusted EBITDA, which excludes the expenses associated with providing stock or options to our employees or to third parties like Wal-Mart.

Q3 adjusted EBITDA was $24 million compared to $20 million in Q3 last year, a year-over-year increase of 22%. However, despite that result, our adjusted EBITDA margin actually declined from 31% in Q3 '09 to 26% this year. The reduction in margin was primarily the result of the higher commission rate that we paid to Wal-Mart under our May 2010 renewal, and a large extent of this is associated with our bank holding company application and our IPO. This was the first full quarter under the new Wal-Mart agreement, and we were certainly pleased with these results.

The other key financial metric that we routinely use to measure our business in non-GAAP net income. Non-GAAP net income is GAAP net income plus the tax effective cost of providing stock and options to employees or to third parties like Wal-Mart. A non-GAAP net income in Q3 was $13 million, which was up 19% year-over-year. The increase was primarily the result of our top-line growth, partially offset by the same factors that negatively impacted EBITDA margin.

In terms of the balance sheet, things continue to look very good. We ended the quarter with approximately $141 million of cash on hand, including $136 million of unrestricted cash and $5 million of restricted cash and no long term debt. Our cash position increased by over $20 million since last quarter. As we look forward, we intend to provide guidance on an annual basis for non-GAAP total operating revenues, adjusted EBITDA and certain key business metrics.

As you turn to slide seven, you'll see that for full year 2010, we continue to expect non-GAAP total operating revenues of between $370 million and $380 million, which implies year-over-year growth of 43% to 47%. This forecast is based upon several assumptions, including GDP growth of approximately 80% year-over-year, growth and cash transfers of approximately 50% and growth in average active cards over the year in excess of 50%.

We also continue to expect adjusted EBITDA of between $92 million and $96 million, implying an adjusted EBITDA margin of 24% to 26%. Based upon this guidance and our strong Q3 result, it will be clear to many of you that in Q4 we're anticipating lower margin. This is due to significant increases in sales and marketing expenses associated with the holiday season and the upcoming tax season.

This time of year creates heavier than usual expenses for package manufacturing and merchandizing, and increased call center staffing in anticipation of volume increases associated with tax season. As I mentioned last quarter, we will provide our outlook for 2011 when we report our Q4 2010 results in February. I would also point out that on a quarter to quarter basis, there will certainly be some events, that make comparability difficult to model. We will provide additional explanation of our Q3 results in the MD&A section of our 10-Q that should help you.

And with that, I'd like to turn the call back to Steve. Steve?

Great, thanks John, and we're now going to present our new future, that depending on how you like it and the feedback we receive, will become a regular part of our conference calls. We call it Green Dot In-Depth, and today's topic is Exposing Retention. So, probably the number one question we get from investors and analysts is about churn. It's well known that average card retention is only about nine months when you blend all the segments together, similar frankly to our competitors, but with a highly segmented customer base, averages across segments can be misleading barometers.

So, we felt we'd make our inaugural edition of Green Dot In-Depth about retention. When you show your products at a very low price, often times cheaper than the cost of a basic gift card, and you sell that product to major retailers all over the country, you will sell a lot of products to all kinds of people, rich and poor, banked and unbanked, short term need customers and long term need customers. In effect, Green Dot throws a live net to acquire its customers and we welcome all passers-by to our products.

This wide net distribution model of mass retail is a good thing for our business, because it allows us to benefit from all customer segments that may wish to use a prepaid card. So, in some ways, our average retention number is a victim of our success. While the wide net catches a lot of long term heavy use customers, it also catches lots of short-term one time need customers, and so the average tends to flatten out.

We actually don't have a problem with this, and in fact we think of it as a benefit of the retail distribution channel. We think of it as a plus to other more narrow distribution channels, because in our case we can sell multiple products across multiple consumer segment as opposed to just one product for one consumer segment, the more the merrier. Of course, we're always working to increase our retention and repeat purchase occasions amongst all user segments and we make great strides in that regard, which we'll share shortly.

But it's important to remember that whether it's a short-term need customer or a long-term need customer, either way we make money from that customer and enjoy serving their needs with our collection of products and services. As you'll see on slide number nine of our presentation, we've broken down our various customer segments into two broad groups. Customers who use the card for short term need and never reload, and those who reload it at least once indicating a desire to use the card beyond the initial purchase to solve some type of longer term need.

So, let's first look at the short-term need customer, why are they buying the card and why are they not reloading? John?

A review of the spend pattern indicates that the top two reasons for purchasing a card for a short term need are immediate bill pay and online shopping. This customer segment loads approximately $200 to the card, and they spend down that money in just a few days on average. Hot merchants where these short term need customers use their card include Verizon Wireless, Direct TV, Dish Network and PayPal cash transfers and similar types merchants.

This gives you a flavor for why this customer is likely buying the card. This statement of one-time need customers has increased as our new card purchase fee has dropped. At $3 or $4.95, we're often the lowest cost prepaid card on the rack, and so millions of new customers have been attracted to our product selection. Today, non-reloaders account for approximately 50% of new card activations.

Some other interesting statistics on our short-term need customer base include average load volume, which has increased approximately 70% over the past year, from $120 a year ago to $200 today. Repeat purchase of our products from short-term need customers has increased dramatically year-over-year, tripling from what it was just one year ago. Both of these metrics indicate an increasingly happy segment of customers who rely on our products to satisfy a short-term need.

What's interestingly about all this is that there's an assumption that people who have never reloaded or people who are somehow dissatisfied with our product, and that is simply not the case, and here's how we know. Nearly 40% of all of our customers are in fact repeat purchasers in just Q3 alone, meaning that these customers have purchased at least one other Green Dot card in the past. The product is cheap and there are basically no fees beyond the purchase price for that short term customers.

So, buying the card and throwing it away is an easy way to accomplish their short term need. Ironically, in our internal customer satisfaction studies, these short term customers are often amongst the most satisfied customers. This customer segment is akin to a business person who, say, rents a Hertz rental car for six hours while on a short business trip to Philadelphia. He flies in, rents the car, drives to his meetings, returns to the airport and flies home. Hertz accomplished his short term need. The customer is happy and he'll (inaudible) happy and he'll like to return to Hertz again the next time he has the need to do so, but there's nothing Hertz can do to encourage that customer to keep his rental care for a week, let's say, or a month.

So, even though Hertz makes way more money on a customer who rents a car for three or four months, such retention promotion will fall on deaf ears for that six hour business traveler in my example. But Hertz makes money on a short-term need rental customer, and Green Dot makes money on a short-term need card customer. It's just the nature of how this customer segment wants to use the product. We welcome this customer with open arms and we respect the way they want to use our product.

But now let's talk about the customer who reloads with the intention of using their card for a longer period of time. This customer segment is clearly our most important segment, and the one where retention efforts, promotions, usage based pricing plans and the like are all key to keeping this customer as active and engaged as possible. Although there is a tremendous amount of room still to grow with this segment, we're thrilled with the progress we've made over the past year or so, and John will give you some color on that.

Here's some stats that are interesting on our reloading customers. Reloading customers also account for approximately 50% of new card activations. Usage metrics in this segment are increasing rapidly. Quarterly gross dollar volume per card in this segment increased 20% year-over-year in Q3. Average purchase transactions per card increased 10%, and average number of reloads per card increased 15%.

We've seen a dramatic increase in customers enrolling in direct deposit as their method of reloading their card. The number of these customers enrolled in direct deposit increased over a 100% compared to a year ago in Q3 to where now approximately 40% of all dollars loaded to a Green Dot card is via direct deposits. Additionally, the number of reloading customers that qualify for the fee free plan has more than doubled in the past year.

Of course we like these trends a whole lot. It shows that we have an attractive, profitable and healthy short term customer segment that nicely compliments our highly profitable and growing long term need customer segment as well. So, both segments are profitable, and we believe over time this large pool of short term customers will create nice conversion opportunities, as these customers become more familiar with our brand and services.

The very positive usage and behavioral trends amongst our reloading segment of customers also shows that our various retention programs, including our fee free plan, our better customer service, which we're constantly working on to improve, easier direct deposit enrolment processes and so forth have all proven very effective, and you can be sure that we will do much more of this going forward.

And that's this quarter's in-depth segment, Retention Exposed. We hope you found it helpful, and now operator, let's go ahead and open the phones for Q&A.

(Operator Instructions) And our first question comes from the line of Adam Frisch with Morgan Stanley. Please go ahead.

Thanks, good afternoon guys, and Steve, glad to see you're still incorporating your radio skills in your (inaudible). It sounded good and I appreciate the segment. A couple of things here, I would like to touch on driving your growth and penetration. On one hand, we have a large percentage of your growth year-to-date, coming from Wal-Mart and maybe a little bit lower growth what was coming from the rest. So, can you talk about your efforts to, one, penetrate Wal-Mart further and continue to harvest that opportunity, while two, planning to elevate growth at the non Wal-Mart channel?

Sure, let me -- Adam, good to talk to you, and let me start with answering the first. I don't think it's true that our growth is primarily coming from Wal-Mart. Our growth is fairly well distributed, and I'll let John answer that first part of that question.

Well, that's right. I mean we're seeing -- our Wal-Mart concentration has not changed a whole lot recently, and yet our revenues have grown substantially. So, you can see we're kind of -- we're seeing similar rates of growth across the Wal-Mart and non Wal-Mart business. But as Wal-Mart is more than half the business, I suppose it's fair to say it (inaudible) more than half of the growth.

Yes. I think a better way to say this is that our Green Dot brand is not growing faster than Wal-Mart, but it's also fair to say it's growing equal to Wal-Mart. So, is the question more about how do we sort of buy down the concentration over time?

Yes, that's kind of the angle I was pursuing.

Yes. So, we're working on a lot of different things, and -- Wal-Mart, it's a fabulous retailer and they have so many Americans that shop there, it's like what is it, 110 million Americans a week, that -- in terms of that one retail channel, they're always going to be a huge part of our business. So, we're looking at other channels and other verticals, and we've made a lot of progress with isolating opportunities where we think we can be effective.

First, of course new products and services and retailers that are not Wal-Mart and channels that are not Wal-Mart, for example the Green Dot online division continues to pump out more and more cards and it's become a very productive channel for us. And you're also going to see us getting into new verticals that have nothing to do with retail altogether, new verticals of distribution through kinds of things that we talked about in the past.

It's a good question. Every time we have these calls, I always have to remind myself what we can and cannot say. But anything that hasn't been announced, I can't say, is that right? My attorney is shaking his head. The answer is, we'll be engaging in other kinds of distribution channels that are not retail and that will also help bite down concentration over time.

But as we also promote on TV and we have more online presence from other kinds of channels, you can see the concentration not moving. In the past year, it's pretty indicative that we're actually getting our arms around that.

Okay, great, thanks a lot for that, a couple more, just on seasonality in fourth quarter. This year, the company is a lot different than it was around the holidays last year, whether it be in distribution, new media campaigns and so forth. So, is there anything seasonally that we should expect in 4Q, either -- that you think is worth calling out here?

Yes. We will see some -- it's a good question. We do expect some increases in a few of our cost line items in Q4. The couple that we mentioned in the call, one of them manufacturing and distribution costs, so we need to get a lot of new packaging out to our retailers in anticipation of the holiday season. And for gift cards that's really a big deal, the gift card program at Wal-Mart.

But also in advance of the tax season that really starts in late January for us at all of our retailers, so we're in the process of getting some big packaging runs now, and we also have to staff up our call centers in advance of our volumes, so we'll see our call center expenses start to ramp up here in Q4, and as a result we're projecting a slight downtick in our margins in Q4 relative to Q3. Also, a big sales quarter for us too.

Certainly the upside benefit of all that scale up is because we have a lot of customers.

That's what I was getting at. Okay, good, so we'll see a little bit more on the south end in the middle of the P&O.

Yes.

Last question I want to get to, and then I'll turn it over. Give us a sense, if you can, of how your new pricing model in that encouraging direct deposit has helped you, if there's anything measurable yet, how has it benefited you in terms of retention usage and any kind of company accounts are using direct deposit or first [card] point in time, anything like that just to give us a better feel on that.

Yes. We'll give you some more flavor. We actually have, Adam, a regulatory meeting coming up here in the next couple of weeks, and we're going to show that data to our regulators first. We want them to have the first look, if you will, and then we'll probably digest it and figure out how to disseminate it to the public markets.

But the answer is, the retention programs have worked extremely well. You heard John give some clue to that in his retention expose if you will, but 40% of all the dollars loaded to Green Dot products are to direct deposit, which is double what it was even a year ago or something like that. So, amazingly you think about that, the number of people enrolling in direct deposit are up a 100% year-over-year.

And then all the usage metrics, dollars loaded and numbers of purchase transactions per card, all those things are indicative of heavier usage and being top of wallet have all skyrocketed. And what I like the most frankly, and we'll give this statistic as soon as we're done with sort of the regulatory preview, is that our fee free plan, which is something that we pushed and advertised heavily -- one of the things that you may know Adam, because you studied the space closer, but not everybody on the call may know, as part of our customer covenant at Green Dot is that on our packaging or website, every fee has to have advertised next to it in the same size font the way to avoid that fee.

In other words, any fee that's there, it also has to say, "And here's how you avoid that fee and get it for free." And in the case of our fee free plan or ATM networks, that's really been beneficial, and we now have a fairly material percentage of our reloading customers, a huge percentage of our direct deposit customers who qualify for that fee free plan, and it's quite serious -- quite a big number, and that's grown dramatically year-over-year, we're really proud of it.

And as soon as we present that sort of in the internal look to our regulators, we'll figure out a way to get that out to the public markets too, but it's been very, very rewarding, and you can see by the growth of active cards and gross dollar volume year-over-year, that we're becoming successful at that.

Okay. Thanks guys, I really appreciate it. Good luck, thanks.

Thank you, and our next question comes from the line of Greg Smith with Duncan Williams. Please go ahead.

Yes, hi guys. Just wondering what the pipeline looks like for -- or I guess the question is, would you do additional private label deals similar to Wal-Mart or are you focused more on the Green Dot brand outside of Wal-Mart?

Wow, good question. The answer is, we would do co-branded programs or private label programs where the opportunity was big enough to be worthwhile, I guess would be the answer. There are some that we're looking at now, that we think would be worthwhile, that we'll discuss when we're allowed to discuss it. But yes -- but we're not in the private label business per se, in other words even Wal-Mart is Wal-Mart, it's not 15 Wal-Marts. They're a very unique retailer, and (inaudible) that would be a great opportunity, and they've been terrific partners in every way.

We have some other smaller private label programs and other retailers, but essentially we look at the Green Dot side and various distribution products, channels rather for Green Dot products as being our growth opportunities, in addition to this a continued organic growth. So, we like wide label programs, but they have to be especially unique programs that play to our strength.

Okay. And then can you talk a little, Steve, about the use of your reload network for all the other card programs, the fact that you offer your reload network to them. How is that growing and is that really a worthwhile effort for you guys?

It has been worthwhile. I mean in terms of the size of the company, it's not the biggest size of the company, but it's certainly one of the biggest growth components of our business, and it's going well because it grows in lock step with the growth of the prepaid industry in general since we have, with the exception of one or two companies, almost everybody reloading on the Green Dot network. And John, did we release in this call the percentage of third party reloads? We don't release it.

No, we haven't yet, no.

We talk about POS and swipe transactions of reloads up 50% somewhat.

Right, right. We talked about total cash transfers being up, but just over 50%. And as Steve mentioned, that those reloads -- the third party volume generally grows in lockstep with the industry, and then in some cases that volume grows faster than the industry, because we include some non-reload businesses on our network.

Like PayPal.

Like PayPal.

It's going well. It contributes a good amount of earnings to us, and it's been a high growth component of our business.

Okay. And then just lastly, what's the outlook for any acquisitions, given the cash you've got in your stock as a potential currency? Any chance we're going to see anything?

Now, we're trying. We've had meetings with everybody that makes sense, and we always are looking to make acquisitions, and do things that are helpful and accretive to our position, and we've talked about that historically and our S1 on our previous earnings call. So, it's always something we're looking to do. We're cash strong, if you will. We have an equity that we have to acquire companies as well, and we'd love to do that if we can find the right one.

But at the same time, it's maybe a fault or a quirk where I'm convinced that everything has a dark side, and so we have to find an acquisition that we feel really good about, because our organic growth has been so strong, and other kinds of channels that we can invent on our own, that it's hard to pay, oh in theory, hundreds of millions of dollars for something, that maybe if we spend $10 million on eternally, we can figure out how to do it better.

And so that's why we've historically rolled things out on our own and that's worked very well with leading our online channel and other kinds of things that originally we had looked to acquire a company to help us to do that. So, Greg, we're into acquisitions, we like the feel of it, we have to find the right one, and when we do, you'll be among the first to know.

Okay, great. Thank you.

Okay.

Thank you. And our next question comes from the line of Jason Kupferberg with UBS. Please go ahead.

Hi, this is Ramsey (inaudible) for Jason.

Hi Ramsey.

Hi, how are you? What are your thoughts on medium to long term pricing trends in the prepaid industry in terms of activation reloads and maintenance fees? Do you see stability out there or is it something that -- as increased competition kind of hits, we'll going to see gradual sort of pressure every time?

Well, I guess I can give you a practical answer and then more of a global answer. If you look at any product, I don't care if it's plasma TVs or fishing hooks, when products hit different stages of critical mass, prices tend to stabilize and come down. And you've seen that happen over the years in prepaid. It was two years ago, a Green Dot card was $10 to buy and $5 a month, and ATMs had a price and so forth.

And you've seen us bring down our prices dramatically, and that's helped us a lot. I'd love to continue to bring down prices when we can do it in scale, so that we're able to maintain margins and increase our revenue and earnings, and we've done that masterfully a couple of times, and then maybe some more tricks up our sleeve down the road. But for right now, we see prices stable. We don't see any competition that's meaningfully less in any kind of critical mass way. And when you look at the fees and the people who are qualifying for fee-free plans, we feel really good about our fee structure today.

So, we're always looking for ways to do it better and more cheaply, but we don't feel any market pressure at this point to go below what we've gone. And in fact, if you look at all of the competitors in the public space, fees are considerably higher than where we are, not lower, so we think we're in good shape right now.

Okay, that helps. Thanks. Can you provide a bit of an update on sales through the online channel? Are you still seeing good uptake on our website and other internet channels?

We are. Yes, the website is doing well, GreenDot.com is continuing to pull more than its weight, and our general manager for that channel, a young man in Peter Sinclair has done a heck of a good job, and we're real proud of him, and we think that has a lot of legs and a lot of room to grow. So, we're going to get increasingly bullish on that. But it will never be a replacement for the retail channel, because we just love the mass distribution and what that does for us. And so, we're always going to be a retail company, but the online channel is a great opportunity for us.

Are there card spot on Wal-Mart -- Wal-Mart card spot via Wal-Mart's website?

Yes, yes, we're on WalMart.com now, and that's a fairly new initiative that's maybe barely 30 or 45 days old. And we'll continue to make sure that it's more prominent and work with our partners at Wal-Mart to see how we can make that more appealing and better noticed, if you will, by WalMart.com shoppers. But those -- the Wal-Mart money card is available on Wal-Mart.com.

Okay, and one last quick one. Any update, indication or feel about the FinCen Prepaid Rules, about when they might hit and what they might include?

Well, the answer is yes. I'm just trying to do a quick mental scan -- I'm doing a mental compliance scan. The answer is that there's no official announcement, Ramsey, of when FinCen will release their final rules on the matter. I think the process is that when the rulemaking happens, it has to go through the office of management and budget, the [L&B] before the rule is implemented, and I would imagine that that takes some time and process from the federal government.

So, we're not expecting any announcement certainly in 2010. My guess is it will be some time in the first half of 2011, but it would be hard to hazard a guess. We know that the folks at FinCen have a huge job and a huge responsibility. I think you know we work closely with them on every level. We're proud of our relationship with them and they do an important service for America, so we're very supportive of what they're trying to do. So, we don't have better information for that than what I've been -- that's the best I can share, I guess.

Okay, that's fantastic. Thanks a lot, that's all for me. Thank you.

Sure.

Thank you. And our next question comes from the line of Bob Napoli with Piper Jaffrey. Please go ahead.

Thank you, good afternoon.

Hi Bob.

Hey, Bob.

I vote for keeping your presentation at the end of each call. That was very helpful.

Great.

Within that presentation, the one number that did jump out at me was the 40% of all of your GDV is from direct deposits. I mean that is a surprisingly high number. And what was that number a year ago, and how are you driving that business?

The answer is, a year ago Bob, the number was in the mid to low 20s as a percentage of reload GDV was through direct deposit and so they were at about 40%. So, it's been terrific growth, and that's not accidental. I mean we've been really pushing our fee-free plan, our free ATM -- think about this, if you're a direct deposit customer on a Green Dot card, you're not paying monthly fee, odds are because you're probably direct depositing at least a $1000 a month.

So, you're not paying the monthly fee, your ATMs are free, your cash back at the point of sale is free, your customer service is free. What else? Your online bill pay is free, if you're using the Green Dot online banking portal. And so there's very little reason for you to get rid of the card (inaudible) the usage and the adoption of direct (technical difficulty). And so, that's come a long way.

Just to provide a little more color on the ATMs, Steve mentioned that the ATMs are free to the extent they're on our fee-free ATM network. We've also seen a real increase in the usage of that fee-free ATM network too. So, we're seeing that people are really increasingly taking advantage of that benefit as well, but not all the ATMs are free.

I mean could you touch on strategically -- I mean I know that one of your competitors paid a lot of money to buy a company that focused on direct deposit. There are companies in the prepaid space that focus on the payroll space. And I mean the growth you're getting organically is impressive. I was just -- I mean can you touch on that strategy?

Yes. Look, we like other verticals, and you'll see us get into other verticals that make sense, but there's an old expression that you're going to laugh at, but it's one that I used over the years, and "The best helping hand you have is the one that God put at the end of your arm." And so, we sort of like to look at our own ability to grow the company based on a customer base. Today, we have millions of customers. You have a Green Dot account, that you can do bill pay, you can do direct deposit. You can use it as you would a checking account, let's say, without the paper checks.

And we think that that base account is what all good things should spring from. If you go to chase or to Bank of America, you don't say, "I'd like to open up a payroll checking account. I'd like to open up a online checking account," you'll open up a checking account. And then that becomes your core account, you use it for all kinds of things, including for the depositing of your payroll check for government benefits.

And that's kind of how we've positioned the Green Dot card. This is your account, just like it's your bank account and you'll use it for all kinds of things, and now let us tell you why it's really great to use this to house your payroll and your government benefits. Here's your direct deposit for it. If you do it, all these things are free. Here's where you can usually check your balance, here's where you can get cash for free. And we think those messages are beginning to pay off.

And then a question on the active cards, I'm just trying to -- I mean this is seasonality, I think I understand it, but your active cards had a very large jump up, and the first quarter of the year has been kind of flat, the last two quarters -- and I know you have the tax business running off of -- is there a sequential growth in the active cards [XE] turbo tax, and you expect active cards to jump up for the holidays in the fourth quarter, and then for tax season in the first quarter, is that kind of something we would expect to see and then kind of flatten out until the next fourth quarter?

Yes, I guess so two points on that question. One thing that we provided in the PowerPoint presentation is the break out of the revenues by the turbo tax program and the rest of our business. It's on page seven of the PowerPoint. So, you could see how well our adjusted revenues have been, essentially flat over the last three quarters. When you've adjusted for that tax disbursement -- tax refund disbursement product, we've actually seen good sequential quarter over quarter growth the last couple of quarters.

The growth in active cards has followed a similar trend, so we are seeing good sequential growth and our active cards weren't adjusted for that one program. And we expect to see a similar seasonal pattern next year. The big step would be in Q1 as we move into the tax season. We do see increased activity in Q4, but we don't see nearly the kind of step up that we do with tax season in Q1.

Thank you.

Sure.

Thank you, and our next question comes from the line of [Xinjiang Wang] with JP Morgan. Please go ahead.

Hi, thanks so much. Looks like a good, clean quarter. I like the exposing the segments section, actually triggered my first question. I wanted to ask if we should expect a higher mix of non-reloaders in the fourth quarter due to the holidays. I ask because I'm curious on your revenue visibility into achieving the high end versus the low end of the revenue guidance. I'm just trying to understand what's driving the spread there. Thanks.

Sure. On the first part of the question, yes, I mean particularly right around the holiday, we do see a high mix of non-reloaders. I guess I want to point out that those card sales have come right at the end of the year, aren't real big contributors to revenue in Q4 when we amortize a new card fee over the expected life of the card. So, most of that new card fee actually ends up in 2011.

So, even if we do see a big spike in card sales right at the end of December, it won't have a huge impact on Q4 revenue. And actually I'm not sure I fully caught the second part of your question about the range on the revenues there.

No problem, John. I was trying to understand the variants there, between the low end and the high end of the guidance and what the visibility is there into achieving either side here with just a couple of months left in the year?

Yes. No, that's fair. Yes, we didn't -- we didn't update the guidance, so I guess it's a fairly broad range for a single quarter.

I think the answer is -- and that's a good catch, that we have an update to the guidance. We obviously have some pretty good visibility.

Yes. We think the high -- the higher end is a lot more probable than the lower end, I think it's fair to say, but we left ourselves some -- a little bit of buffer and didn't update the guidance. We also forecast around the holidays with a dose of conservatism, because we see a lot of sales around the holidays and a bad weather spell or something to throw us one way or the other.

Got it, good. That makes sense. A couple of more if you don't mind, just relative to our model, the cash transfers look like it produced the biggest upside to our models, so I'm curious what's driving the acceleration there. Is it coming from third party reloads like PayPal or are you just seeing better activity amongst your own cards including Wal-Mart?

I think it's all that, isn't it?

Yes, it's [actually] the biggest driver. If you look at page 10, and the two customer segments, amongst the customers doing reloads, we saw a really nice pickup year-over-year in reloads per active customer. So, the guys...

Right.

(Inaudible) reloads are just doing more of them. And then as Steve mentioned, we saw a nice growth on our third party business as well. So, we saw a lot of those cash transfers going to third party programs like PayPal or other prepaid card issuers.

Good, good. Okay, last one for me, just the sales and marketing and the investment in advertising. It looks like the incremental spend there was a little bit lower this quarter than the second quarter. I'm just curious what the outlook is there for spending on ad and marketing, and if you're satisfied, Steve and John, with the returns you're seeing with the advertising so far?

Yes, we have been when we're on, and we sort of have a model that we use that we advertise heavier at the times when we think we'll have the most efficient acquisition. So, historically you'll see that first quarter in tax time and so forth to produce our TV spots. And as we head towards April and so forth, you typically see a lot of TV for Green Dot, and I don't think next year will be a whole lot different.

We try not to tinge and give in to too many specific comments about our advertising schedule, because our competitors listening and on top of our analysts, and so marketing schedule and so forth tend to be proprietary. But we have a pattern that seems to work for us, and there's times when we're developing new creative and there are times that we're airing new creative, so it's fairly routine for us. So, I wouldn't say we're out of routine at the moment.

Okay, great. It's good stuff. Thanks a lot.

Thank you.

Thanks.

Thank you, and our next question comes from the line of Gil Luria with Wedbush Securities. Please go ahead.

Yes, thanks for taking my question. Could you update us what percent of revenue was from Wal-Mart, and then is there anything that Wal-Mart is doing to help accelerate the growth of the category, more in-store displays, more money centers? I know they talked about opening some urban stores. Would your product be featured there? Are they doing any advertising? What's Wal-Mart doing to accelerate this category?

So, let John tell you the concentration.

Sure.

Or if you want, I can answer the other question first.

No, Wal-Mart accounted for 63% of our gap revenue or 65% of revenue when you've adjusted for the stock based retailer incentive compensation.

So, that's the first part of the question. The second part of the question is, we're always working with all of our retailers by the way, including Wal-Mart, to feature the product in a way that's more appealing to customers, and to come up with different ways to find more longer retaining customers, and to promote the products in every way we can.

So, we're working on that with all of our retailers, not just Wal-Mart. And at the same time, Wal-Mart has a terrific team, and their financial services division headed by Jane Thompson, where they are very serious about this category, and while they continue to expand and roll it out. So, I think that you can look for all kinds of cool things coming our way from that account, and we work with all of them and are excited about our promotional plans next year for all of the accounts.

So, talking of -- speaking of other distribution channels and other large retailers, Wal-Mart -- some do more with this category than others. Obviously Wal-Mart features it at the money center, allows you to deposit checks into these cards, Safeway has started doing the same. Is there a land-grab opportunity here with other merchants that are currently only displaying the cards on a [J-Hook] to become more active in promoting the category? Is this something that you're competing now with some of the other program managers to expand the category through other retailers?

No, we're competing with ourselves, I guess. In other words, one of the things that we do in our client services team, and some of these meetings I get to go on here and there, and I really enjoy it, I love the sales process and I love meeting with our retailers. And we're always trying to figure out, how can we expand Green Dot's presence, how can Green Dot help that retailer become a real financial services destination as we develop new products and services?

It's very, very rare. In fact I'm not sure that I've ever been in a meeting in years where they've look -- where a retailer is looking to expand the category by bringing in a competitor to Green Dot or those kinds of things. Generally what they're looking for is to have Green Dot help advice them on how they can make the category a larger destination category, and we're excited and happy to do that, and we work with our retailers in doing that.

So, I think I've given your question a half answer, which is yes, we want to work with our retailers to expand the category and retailers look to us for that annual growth as they make their plans year-over-year. No, it's very rarely about bringing in a competitor.

And last question to John. What can we do to get you to not round numbers to $1.5 million and give us a couple of more decimal points?

I've heard the request and...

Have other people asked that?

No, I just heard it now.

Because I've never heard that before.

[We'll] certainly consider it for next time.

Thank you so much.

It will be -- Gil, it will be a private meeting just with you where we'll share that.

Thank you.

Thank you. Good talking to you.

Thank you, and our next question comes from the line of Chris Mammone with Deutsche Bank. Please go ahead.

Thanks. Hi guys. I guess first off in the spirit of mid-term elections, allow me to add my affirmative vote for keeping the Green Dot In-Depth section in the calls. But on that, I guess could you give us any sense for the margin differential between sort of the short term need and the long term need customers?

Maybe that's a good one for the next (inaudible).

Next we will be exposing the margins of the short-term need customer.

Yes, in generally, but I mean the guys who -- I mean obviously the guys who keep the card a long time are much more -- are more profitable in absolute terms than on a margin basis, than the short term ones. I guess we're not going to provide any numbers behind that right now, but...

Yes, but intuitively alright, because you're paying the same acquisition cost whether the guy uses the car for two days or two years, so we'd love to have them use it for two years. So, the longer they stay on, the incremental margin is obviously better.

Right, I mean should we be thinking (inaudible) as a factor of 2x, 3x or I mean...?

Well, in absolute dollars, the difference is really quite dramatic. I mean a guy -- even if you look at it in average life of nine months and you consider the monthly maintenance fees and the interchange over nine months compared to some of the other cards for a week, it's actually even bigger than the multiples you were just throwing out there.

Sure. Yes, we love our long term customers. That was kind of the point though, it's that when people say, "Well, gosh, is there a problem, you have these one-term customers and one-time, or what do we call them, short term need customers?" And we don't see that as a problem. In effect, it's kind of like getting those guys for free, because really what you're doing is marketing to the long term customers, and if we did 1.5 million cards on average or 1.499974, Gill.

But no, if we did 1.5 million cards in the last quarter, and half of those were short-term need customers, that means half were long-term need customers, and that's a lot of long-term need customers. So, (inaudible) the short term guys are almost a bonus. It's a new category of sales we're getting just for the price of admission, so we don't make as much money on those guys, but they're a nice contributor to the business and we're profitable on them, and that was kind of the point of exposing that segment.

Good, yes, and that's helpful. And I guess on the bank acquisition, I mean I know it's obviously impossible to predict the timing on these things, but I mean is there any reason to -- is there any reason to feel any less optimistic that that -- you actually received the approval whenever it happens? And I guess the second part of that question is, I know that one of the key reasons for vertically integrating is to reduce the reliance on third parties for mission critical tasks, and I know that your major competitor had some issues with their main issuer recently. Could you maybe talk about have you in the past explored working with that issue and sort of your decisioning process on whether or not to partner with them?

Well, we've never -- MetaBank is a -- has a lot of programs that reload on the Green Dot network, and we've known Brad Hanson for years, and he's a fine gentlemen, and I know they work hard over there at their business. We've never looked to use MetaBank as an issuer of our cards, we've never used them as an issuer of our cards, and part of that is just historically when we started, they were not in that business and we started with another bank and stayed with that bank. So, we don't use them as an issuer. But clearly if anybody was questioning why it was so important for us to get a bank and control our destiny and to have regulatory clarity, that's a good example as to why that is. So, you're right.

And then the first part of that question, any reason to be any less optimistic that you'll get the approval?

No, we remain optimistic. It's always a difficult thing. I'll tell you something, I've been so impressed with the work that the regulatory community puts into an application. We've had -- Chris, no kidding, we've had conference call that are 6'o clock here in Los Angeles, so 9'o clock on the East Coast, where there will be 10 or 12 members of the Federal Reserve Board in Washington DC, 9'o clock at night still working on the application and participating in conference calls on top of the 6'o clock here in the west with the Federal Reserve Bank of San Francisco, the FDIC and the state of Utah.

And these ladies and gentlemen are earning their salaries. We've been really impressed and rewarded with the experience we've had with our regulators, and we feel good that they're going to do a great job reviewing the application, but as anybody in banking will tell you, the certainty will come when there's certainty, and we would never be so bold or disrespectful as to try to second guess it, but we feel good that they're giving us a fair shake, if you will, that they're doing a good job for the banking industry for all the safety and [soundness] issues that the FDIC has to work through, all the policy decisions. And we feel good that they're taking the application seriously and doing their job very well.

Alright, great. That's it for me. Thanks.

Thank you. And our last question comes from the line of John Kraft with DA Davidson. Please go ahead.

Hey guys, under the wire I guess, huh?

Right. Hey, John.

Hi, just a couple of follow ups or housekeeping I guess. Steve, you mentioned that a larger chunk of your customers now are taking advantage of the fee-free option. I guess my question is, is that typically because of the minimum balance or because of the number of purchases per month, and how has that been trending?

Well, we don't have a minimum balance requirement, but I think what you mean to say is, if they loaded at least a $1000 over the course of a month...

Right.

Then they get -- yes, I think more people qualify under the $1000 than they do the usage, but the usage is aspirational. In other words, somebody will say, "Well, gosh, I don't make a lot of money or I only can put on -- I'm working part time, I'm only getting $500 a month," but they know if they just want to get a cup of coffee or buy a pack of gum, it doesn't matter. Over the course of time, they'll still get the fee waived, and so we have people to do that. But I think that more people are qualifying as the $1000 plan.

And what percent? I mean is this a -- fees at 40% of your dollar loads now are coming from direct deposits. Now, what percentage of your customers are...?

It's a lot. When you look at our segments and if you separate out the guys who buy the card once and use it for a bill pay on Verizon or something, those guys don't count, right, because they don't have the card long enough to pay a fee. So, really, when you sort of look at our segments and say, "Well, what percentage of reloading customers are qualifying for the fee-free plan?" It's significant. And as I mentioned earlier, I don't want to give the number out just yet, because we want to do a private review with our regulators, but we're going to see how we package that and present it for public disclosure, because it's actually a really cool number and something we're very proud of.

Okay, that's fair. And then I guess second or lastly, what percent of your potential customers are declined at the enrolment process simply for not passing your security tests?

It's a good question though -- it used to be about 9%, and I don't know if it's turned it downward or upward. You know, John?

Yes, it's typically between 5% and 10%, so it's a meaningful number, but we're just not able to verify to our standard. As Steve has mentioned before, we require a social security number.

Yes, I don't know if you're aware of that. One of the things we do, for better, for worse, and we think it's for better. We have a fairly conservative internal governance policy and a very conservative D&A on money laundering issues and fraud issues. And customer identification is a huge part of that, because if you're cautious about who you let into the club, so to speak, you have fewer problems down the road.

And so we have that dial turned up pretty high in terms of conservatism. Under law, under Patriot Act, you can have a person come into play without a social security number I suppose, because there was a loophole at one time for a particular [consular] and different kinds of things. And we've opted never to do that. Our feeling has been, look, we need to have a verifiable social security number on top of verifying the other information you have.

And on one hand, we turned down a lot of customers, on other hand our fraud has really plummeted over the years if you look at where we were in basis points of last five years ago, let's say, or six years ago. So, we don't want to make the screen so tight that you leave good customers on the sidelines. At the same time, I hate to say this, but it's true that I keep leaning more conservative as time goes on, and we keep making the screen a little bit tighter as we get smarter.

So, even now we're looking at things like out of wallet questions, and things to even verify our customer base more closer than what we're verifying today. But we have our dial turned to the most conservative side of that, I guess, and so we are rejecting upwards as many as 9% or 10% on the worst case, and as little as 5% or 6% on the best case.

Okay, thanks guys. Thanks, it's helpful. It's all I got.

Sure.

Sure.

And there are no further questions in the queue. Mr. Streit, please continue.

I think that's it. That wraps up our conference call, there's no other questions, and we'll do this again, I suppose, in early February sometime, I suppose. And until then, I'm sure we'll talk to many of you at various conferences and other events throughout the country. So, thank you all for joining in today, we appreciate your support and your investment. Have a great day.

Ladies and gentlemen, this concludes the Green Dot Corporation Third Quarter 2010 Earnings Conference Call. Thank you for your participation. You may now disconnect.